Docoh
Loading...

STON StoneMor

Filed: 24 Mar 21, 8:00pm

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     .

Commission File Number: 001-39172

STONEMOR INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

80-0103152

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3331 Street Road, Suite 200

Bensalem, Pennsylvania

 

19020

(Address of principal executive offices)

 

(Zip Code)

 

(Registrant’s telephone number, including area code): (215) 826-2800

__________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value per share

 

STON

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

As of June 30, 2020, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the common equity held by non-affiliates was approximately $27.7 million based on $0.78, the closing price per common share as reported on the New York Stock Exchange on June 30, 2020.

At March 19, 2021, the registrant had outstanding 117,918,016 shares of Common Stock, par value $.01 per share.

 

 


Table of Contents

 

FORM 10-K OF STONEMOR INC.

TABLE OF CONTENTS

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Business

 

3

 

 

 

 

 

Item 1A.

 

Risk Factors

 

12

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

23

 

 

 

 

 

Item 2.

 

Properties

 

24

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

26

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

26

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

26

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

26

 

 

 

 

 

Item 7.

 

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

 

27

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

44

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

46

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

98

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

98

 

 

 

 

 

Item 9B.

 

Other Information

 

102

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

103

 

 

 

 

 

Item 11.

 

Executive Compensation

 

109

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

117

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

118

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

120

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

121

 

 

 

 

 

Item 16.

 

Form 10-K Summary

 

126

 

 

 

 

 

 

 

Signatures

 

127

 

 

 

 


 

Table of Contents

 

PART I

ITEM 1.

BUSINESS

OVERVIEW

Our History

As used in this Annual Report on Form 10-K (the “Annual Report”), unless the context otherwise requires, references to the terms the “Company,” “StoneMor,” “we,” “us,” and “our” refer to StoneMor Inc. and its consolidated subsidiaries for all periods from and after the Merger, as defined below, and to StoneMor Partners L.P. and its consolidated subsidiaries for all periods prior to the Merger.

We were formed as a Delaware limited partnership in April 2004 and our general partner had been StoneMor GP LLC, a Delaware limited liability company (“StoneMor GP”). From May 2014 until December 31, 2019, the sole member of StoneMor GP was StoneMor GP Holdings LLC, a Delaware limited liability company (“GP Holdings”). Effective as of December 31, 2019, pursuant to that certain Merger and Reorganization Agreement (as amended, the “Merger Agreement”) by and among StoneMor GP, StoneMor Partners L.P., a Delaware limited partnership (the “Partnership”), and Hans Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of StoneMor GP (“Merger Sub”), StoneMor GP converted from a Delaware limited liability company into a Delaware corporation named StoneMor Inc. (the “Company”) and Merger Sub was merged with and into the Partnership (the “Merger”).

On December 31, 2019, pursuant to the terms of the Merger Agreement, we completed the following series of reorganization transactions (which we sometimes refer to collectively as the “C-Corporation Conversion”):

 

GP Holdings contributed its entire equity interest in the Partnership to StoneMor GP and, in exchange, ultimately received an aggregate of 5,099,969 shares of our common stock;

 

StoneMor GP contributed the common units in the Partnership it received from GP Holdings to StoneMor LP Holdings, LLC, a Delaware limited liability company and wholly-owned subsidiary of StoneMor GP (“LP Sub”);

 

Merger Sub merged with and into the Partnership, with the Partnership surviving as a Delaware limited partnership, and pursuant to which each outstanding Series A Convertible Preferred Unit (defined below) and Common Unit (other than the common units held by LP Sub) was converted into the right to receive one share of our common stock; and

 

StoneMor GP converted from a Delaware limited liability company to a Delaware corporation called StoneMor Inc.

As a result of the C-Corporation Conversion, the Company remains the general partner of the Partnership and LP Sub is the sole limited partner of the Partnership such that, directly or indirectly, the Company owns 100% of the interests in the Partnership.

In addition, as used in this Annual Report, unless the context otherwise requires, references to (i) the term “Cornerstone” refers to Cornerstone Family Services, Inc.; (ii) the term “CFSI” refers to CFSI LLC; (iii) the term “CFS” refers to Cornerstone Family Services LLC; (iv) the term “CFS West Virginia” refers to Cornerstone Family Services of West Virginia Subsidiary, Inc.; (v) the term “ACII” refers to American Cemeteries Infrastructure Investors, LLC; (vi) the term “AUH” refers to AIM Universal Holdings, LLC; (vii) the term “AIM” refers to American Infrastructure MLP Funds; (vii) the term “AIM II” refers to American Infrastructure MLP Fund II, L.P.; (ix) the term AIM FFII refers to American Infrastructure MLP Founders Fund II, L.P.; (x) the term “AIM II StoneMor” refers to AIM II Delaware StoneMor, Inc.; (xi) the term AIM Management II refers to American Infrastructure MLP Management II, L.L.C.; and (xii) the term AIM II Offshore refers to AIM II Offshore, L.P.

We are filing as a smaller reporting company within the meaning of Rule 12b-2 under the Exchange Act. As a smaller reporting company, we have chosen to comply with certain scaled or non-scaled financial and non-financial disclosure requirements on an item by item basis.

Recent Developments

COVID-19 Pandemic

In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) spread worldwide posing public health risks that reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a threat to the health and economic wellbeing of our employees, customers and vendors. Our operations are deemed essential by the state and local

3


 

Table of Contents

governments in which we operate, with the exception of Puerto Rico, and we have been working with federal, state and local government officials to ensure that we continue to satisfy their requirements for offering our essential services.

Our top priority is the health and safety of our employees and the families we serve. Since the start of the outbreak in the U.S., our Company’s senior management team has taken actions to protect our employees and families served, and to support our field locations as they adapt and adjust to the circumstances resulting from the COVID-19 Pandemic. The operation of all of our facilities is critically dependent on our employees who staff these locations. To ensure the wellbeing of our employees and their families, we provided all of our employees with detailed health and safety literature on COVID-19, such as the Centers for Disease Control and Prevention (the “CDC”)’s industry-specific guidelines for working with the deceased who were or may have been infected with COVID-19. In addition, our procurement and safety teams have consistently secured and distributed supplies to ensure that our locations have appropriate personal protective equipment (“PPE”) and cleaning supplies to provide our essential services, as well as updated and developed new safety-oriented guidelines to support daily field operations. These guidelines include reducing the number of staff present for a service and restricting the size and number of attendees. We also implemented additional safety and precautionary measures as it concerns our businesses’ day-to-day interaction with the families and communities we serve. Our corporate office employees began working from home in March 2020 consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting our field operations. We have not experienced any significant disruptions to our business as a result of the work from home policies in our corporate office. We monitor the CDC guidance on a regular basis, continually review and update our processes and procedures and provide updates to our employees as needed to comply with regulatory guidelines.

Our marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a variety of web-based tools to ensure that we can continue to connect with and meet our customers’ needs in a safe, effective and productive manner. Some of our locations provide live video streaming of their funeral and burial services to customers or providing other alternatives that respect social distancing, so that family and friends can connect during their time of grief. 

Like most businesses world-wide, the COVID-19 Pandemic has impacted us financially. During the last two weeks of the first quarter and into beginning of the second quarter of 2020, we saw our pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. However, during the last two months of the second quarter and the second half of the year, we experienced at-need sales growth. While we expect that our pre-need sales could continue to be challenged during the continued COVID-19 Pandemic, we believe the implementation of our virtual meeting tools is one of several key steps to mitigate this disruption. Throughout this disruption our cemeteries and funeral homes have largely remained open and available to serve our families in all the locations in which we operate to the extent permitted by local authorities, with the exception of Puerto Rico, and we expect that this will continue. However, we have experienced limited location closures due to COVID-19 cases, required quarantines and cleanings. In addition, during the year ended December 31, 2020, we incurred costs of approximately $1.0 million related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic.

We expect the COVID-19 Pandemic could have an adverse effect on our future results of operations and cash flows, however we cannot presently predict, with certainty, the scope and severity of that impact. We may incur additional costs related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic. In the event there are confirmed diagnoses of COVID-19 within a significant number of our facilities, we may incur additional costs related to the closing and subsequent cleaning of these facilities and the ability to adequately staff the impacted sites. In addition, our pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic. As a result of the implications of COVID-19, we assessed long-lived assets for impairment and concluded no assets were impaired as of December 31, 2020.

On May 5, 2020, our Board of Directors, at the recommendation of its Compensation, Nominating and Governance Committee (the “CNG Committee”), approved certain voluntary temporary reductions in base salaries implemented by our senior management as part of measures being taken to reduce expenses given the uncertainty regarding the extent and potential duration of the COVID-19 Pandemic and its impact on our financial condition. These voluntary base salary reductions, which began on April 20, 2020 and continued for ten weeks, did not modify other rights under any agreements or employee benefits that are determined by reference to base salary and did not give rise to any “good reason” resignation rights or any breach under the affected employees’ applicable arrangements with us. At the CNG Committee’s recommendation, the Board also approved reductions of 50% of the quarterly retainer fee and additional Board committee chair fees payable to non-employee directors for a ten-week period of the third quarter of 2020.

4


 

Table of Contents

Divestitures and Early Debt Redemptions

On January 3, 2020, we sold substantially all of the assets of Oakmont Memorial Park, Oakmont Funeral Home, Redwood Chapel, Inspiration Chapel and Oakmont Crematory located in California pursuant to the terms of an asset sale agreement (the “Oakmont Agreement”) with Carriage Funeral Holdings, Inc. for an aggregate cash purchase price of $33.0 million (the “Oakmont Sale”). The divested assets consisted of one cemetery, one funeral home and certain related assets. On April 7, 2020, we completed the sale of substantially all of the assets of the cemetery, funeral establishment and crematory commonly known as Olivet Memorial Park, Olivet Funeral and Cremation Services and Olivet Memorial Park & Crematory pursuant to the terms of an asset sale agreement (the “Olivet Agreement”) with Cypress Lawn Cemetery Association for an aggregate cash purchase price of $25.0 million, subject to certain adjustments (the “Olivet Sale”), and the assumption of certain liabilities, including $17.1 million in land purchase obligations. On November 3, 2020, we sold substantially all of our remaining California properties, consisting of five cemeteries, six funeral establishments and four crematories (the “Remaining California Assets”) pursuant to an asset sale agreement (the “California Agreement”) with certain entities owned by John Yeatman and Guy Saxton for a cash purchase price of $7.1 million, subject to certain closing adjustments (the “Remaining California Sale”). In addition, on November 6, 2020, we entered into an asset sale agreement (the “Clearstone Agreement”) with Clearstone Memorial Partners, LLC to sell substantially all of our assets in Oregon and Washington, consisting of nine cemeteries, ten funeral establishments and four crematories (the “Clearstone Assets”) for a net cash purchase price of $6.2 million, subject to certain adjustments (the “Clearstone Sale”). We anticipate that this transaction will close in the first half of 2021.

During 2020, we redeemed an aggregate $60.0 million of principal of our 9.875%/11.500% Senior Secured PIK Toggle Notes due 2024 (the “Senior Secured Notes”), primarily using the net proceeds from the divestitures discussed above. Per the indenture dated June 27, 2019 by and among the Partnership, CFS of West Virginia, certain direct and indirect subsidiaries of the Company, the initial purchasers party thereto and Wilmington Trust, National Association, as trustee and as collateral agent (as amended from time to time, the “Indenture”), we anticipate using 80% of the net proceeds from the Clearstone Sale to redeem additional portions of the outstanding Senior Secured Notes.

The Clearstone Agreement to sell the Clearstone Assets, together with the other divestitures completed in 2020 described above, represents a strategic exit from the West Coast. Therefore, the results of operations of the Clearstone Assets, and of the businesses sold in 2020 for the period before their respective sales, have been presented as discontinued operations on the accompanying consolidated statements of operations for the year ended December 31, 2020, and the prior period has been reclassified. Additionally, all of the assets and liabilities associated with the Clearstone Assets have been classified as held for sale on the accompanying consolidated balance sheet at December 31, 2020, and the prior period has been reclassified. The assets and liabilities of the businesses sold in 2020 have been presented as held for sale on the accompanying balance sheet at December 31, 2019.

Amendment to the Indenture and Capital Raise

On April 1, 2020, the Partnership and CFS West Virginia (collectively, the “Issuers”) and Wilmington Trust, National Association, as trustee, entered into the Third Supplemental Indenture (the “Supplemental Indenture”) to the Indenture. Pursuant to the terms of the Supplemental Indenture, the following financial covenants were amended:

 

a.

The Interest Coverage Ratio measurements at March 31, June 30 and September 30, 2020 were eliminated and replaced with a Minimum Operating Cash Flow covenant of $(25.0 million), $(35.0 million) and $(35.0 million), respectively;

 

b.

The required Interest Coverage Ratios at December 31, 2020, March 31, 2021 and June 30, 2021 were reduced to 0.00x, 0.75x and 1.10x, respectively, from 1.15x, 1.25x and 1.30x; and

 

c.

The Asset Coverage tests at March 31, June 30, September 30 and December 31, 2020 were reduced to 1.40x from 1.60x;

In addition, the premium payable upon voluntary redemption of the Senior Secured Notes on or after June 27, 2021 and before June 27, 2022 was increased from 4.0% to 5.0% and the premium payable upon any such voluntary redemption on or after June 27, 2022 and before June 27, 2023 was increased from 2.0% to 3.0%.

The Issuers also agreed in the Supplemental Indenture to use their best efforts to cause us to effectuate a rights offering on the terms described below as promptly as practicable with an expiration date no later than July 24, 2020 and to receive proceeds of not less than $8.2 million therefrom (in addition to the $8.8 million capital raise described below).

Concurrently with the execution of the Supplemental Indenture, we entered into a letter agreement (the “Axar Commitment”) with Axar Capital Management L.P. (“Axar”) pursuant to which Axar committed to (a) purchase shares of our Series A Preferred Stock with an aggregate purchase price of $8.8 million on April 3, 2020, (b) exercise its basic rights in the rights

5


 

Table of Contents

offering by tendering the shares of Series A Preferred Stock so purchased for shares of Common Stock and (c) purchasing any shares offered in the rights offering for which other stockholders do not exercise their rights, up to a maximum of an additional $8.2 million of such shares. We did not pay Axar any commitment, backstop or other fees in connection with the Axar Commitment.

On April 3, 2020, as contemplated by the Axar Commitment, the Company and Axar CL SPV LLC, Star V Partners LLC and Blackwell Partners LLC –Series E. (the “2020 Purchasers”) entered into a Series A Preferred Stock Purchase Agreement (the “2020 Preferred Purchase Agreement”) pursuant to which we sold 176 shares of our Series A Preferred Stock, par value $0.01 per share (the “Preferred Shares”), for a cash price of $50,000 per share, an aggregate of $8.8 million. We offered and sold the Preferred Shares in reliance upon the exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof. We relied on this exemption from registration based in part on representations made by the 2020 Purchasers in the 2020 Preferred Purchase Agreement.

Under the terms of the Supplemental Indenture and the Axar Commitment, we agreed to undertake an offering to holders of our Common Stock of transferable rights to purchase their pro rata share of shares of Common Stock with an aggregate exercise price of at least $17.0 million at a price of $0.73 per share. The rights offering period, during which the rights were to have been transferable, was to have been no less than 20 calendar days and no more than 45 calendar days. We agreed to use our best efforts to complete the rights offering with an expiration date no later than July 24, 2020.

On May 27, 2020, we entered into a Common Stock Purchase Agreement (the “Common Stock Purchase Agreement”) with Axar, the accounts managed by Axar set forth on Schedule B thereto and one or more accounts managed by Axar to be designated by it (collectively, the “Purchasers”) pursuant to which we agreed to sell an aggregate of 23,287,672 shares of our Common Stock, par value $0.01 per share to the Purchasers at a price of $0.73 per share, an aggregate of $17.0 million. Because our common stock had been trading at a price less than the $0.73 subscription price for the rights offering described above and that under similar circumstances our previous rights offering received only 10% participation, our Board of Directors determined and Axar agreed in the Common Stock Purchase Agreement to amend the Axar Commitment to provide for a direct purchase of the 23,287,672 shares of common stock and avoid the expense of proceeding with the rights offering while obtaining the same per share and aggregate purchase price contemplated by the Axar Commitment.

On June 19, 2020, we completed the sale of the aggregate of 23,287,672 shares of our Common Stock (the “New Common Shares”) as contemplated by the Common Stock Purchase Agreement. We issued and sold to the Purchasers, and the Purchasers acquired and purchased from us, (a) 12,054,795 New Common Shares in exchange for the surrender of 176 shares of Preferred Shares of the Company purchased on April 3, 2020, with a stated value of $8.8 million (an exchange ratio of 68,493.15 New Common Shares for each share of Series A Preferred Stock surrendered), and (b) 11,232,877 New Common Shares for a cash purchase price of $0.73 per share, an aggregate of $8.2 million. We offered and sold the New Common Shares in reliance upon the exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof. We relied on this exemption from registration based in part on representations made by the Purchasers in the Purchase Agreement.

Strategic Partnership Agreement

On April 2, 2020, we entered into two multi-year Master Services Agreements (the “MSAs”) with Moon Landscaping, Inc. and its affiliate, Rickert Landscaping, Inc. (collectively “Moon”). Under the terms of the MSAs, Moon provides all grounds and maintenance services at most of the funeral homes, cemeteries and other properties we own or manage including, but not limited to, landscaping, openings and closings, burials, installations, routine maintenance and janitorial services. Moon hired all of our grounds and maintenance employees at the serviced locations and performs all functions that were handled by those employees.

We agreed to pay a total of approximately $241.0 million over the term of the contracts, which run through December 31, 2024, based upon an initial annual cost of approximately $49.0 million and annual increases of 2%. The first year costs were prorated based upon exact implementation and roll-out schedule for each location. As part of the MSAs, we subleased to Moon the landscaping and maintenance equipment that we lease and to lease the landscaping and maintenance equipment to Moon that we own for the duration of the agreements. We agreed to transfer title to any such equipment we own at the end of the term to Moon, in each case without any additional payment by Moon. As of December 31, 2020, the net book value of the equipment we lease to Moon was approximately $4.6 million.

Each party has the right to terminate the MSAs at any time on six months’ prior written notice, provided that if we terminate the MSAs without cause, we will be obligated to pay Moon an equipment credit fee in the amount of $1.0 million for each year remaining in the term, prorated for the portion of the year in which any such termination occurs. The MSAs also contain representations, covenants and indemnity provisions that are customary for agreements of this nature.

6


 

Table of Contents

Axar Proposal

On May 27, 2020, we announced that we had received an unsolicited proposal letter (the “Proposal”), dated May 24, 2020, from Axar proposing to acquire all of the outstanding shares of common stock of the Company not owned by Axar or its affiliates for $0.67 per share in cash, subject to certain conditions. On May 26, 2020, our Board of Directors formed a special committee (the “Special Committee”) consisting of independent directors to consider and evaluate the transaction contemplated by the Proposal. The Special Committee retained independent legal and financial advisors to assist in its review and evaluation of the proposed transaction and had been authorized by the Board to reject the proposed transaction or to recommend that the Board of Directors approve the terms of the proposed transaction. On June 16, 2020, we announced that the Special Committee sent a letter to Axar informing it that, after reviewing the Proposal, it had rejected the price proposed by Axar as inadequate.

On July 31, 2020, we announced that the Special Committee had received an amended proposal (the “Amended Proposal”) from Axar proposing to acquire all of the outstanding shares of common stock of the Company not owned by Axar or its affiliates for $0.80 per share in cash, subject to certain conditions. The key terms of the Amended Proposal were set forth in a letter dated July 28, 2020. On September 8, 2020, we announced that Axar, after determining that it would not be able to reach an agreement with the Special Committee on terms that would be satisfactory to Axar, had withdrawn its proposal to acquire all of the outstanding shares of common stock of the Company not owned by Axar or its affiliates. Axar currently owns approximately 70.5% of the Company’s outstanding common stock.

NYSE Delisting Notification

On April 14, 2020, we received notice from the New York Stock Exchange (the “NYSE”) stating that upon its review of our financial condition, the NYSE had concluded that we were not in compliance with the NYSE’s continued listing requirements (the “NYSE Notification”), since as of April 13, 2020, the 30-trading day average closing price of our Common Stock had fallen below $1.00 per share over a consecutive 30 trading-day period, which is the minimum average share price for continued listing on the NYSE under Rule 802.01C of the NYSE Listed Company Manual (the “NYSE Listed Manual”). As of April 13, 2020, our 30 trading-day average closing share price of its security was $0.97.

We had a period of six months following the receipt of the NYSE Notification to regain compliance with the minimum share price requirement, which was tolled from April 21, 2020 through June 30, 2020. In order to regain compliance, on the last trading day of any calendar month during the cure period or at the end of the cure period, the Common Stock was required to have (i) a closing price of at least $1.00 per share and (ii) an average closing price of at least $1.00 per share over the 30-trading day period ending on the last trading day of such month or the end of the cure period. As required, we notified the NYSE, within 10 business days of receipt of the NYSE Notification, of its intent to cure this deficiency in order to avoid immediate suspension and delisting procedures. On December 23, 2020, we received notification from the NYSE that we had regained compliance with the minimum share price requirement. We also remain in compliance with all other NYSE continued listing standard rules.

Recapitalization Transactions in 2019

On June 27, 2019, we closed a $447.5 million recapitalization transaction, consisting of (i) the sale of an aggregate of 52,083,333 of the Partnership’s Series A Convertible Preferred Units representing limited partner interests in the Partnership at a purchase price of $1.1040 per Preferred Unit, reflecting an 8% discount to the liquidation preference of each Preferred Unit, for an aggregate purchase price of $57.5 million (the “Preferred Offering”) and (ii) a concurrent private placement of $385.0 million of Senior Secured Notes to certain financial institutions (collectively with the Preferred Offering, the “Recapitalization Transactions”). The net proceeds of the Recapitalization Transactions were used to fully repay our then-outstanding senior notes due in June 2021 and retire the revolving credit facility due in May 2020, as well as for associated transaction expenses, cash collateralization of existing letters of credit and other needs under the former credit facility, with the balance available for general corporate purposes.

Products and Service Offerings

We are currently one of the largest owners and operators of cemeteries and funeral homes in the U.S. As of December 31, 2020, we operated 313 cemeteries in 26 states and Puerto Rico. We own 283 of these cemeteries and we manage or operate the remaining 30 under lease, management or operating agreements with the nonprofit cemetery companies that own the cemeteries. As of December 31, 2020, we also owned, operated or managed 80 funeral homes, including 37 located on the grounds of cemetery properties that we own, in 16 states and Puerto Rico.

7


 

Table of Contents

The cemetery products and services that we sell include the following:

Interment Rights

 

Merchandise

 

Services

burial lots

 

burial vaults

 

installation of burial vaults

lawn crypts

 

caskets

 

installation of caskets

mausoleum crypts

 

grave markers and grave marker bases

 

installation of other cemetery merchandise

cremation niches

 

memorials

 

other service items

perpetual care rights

 

 

 

 

We sell these products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. In 2020, we performed 53,309 burials and sold 26,735 interment rights (net of cancellations), excluding divested locations. Based on our sales of interment spaces in 2020, our cemeteries have an aggregate average remaining sales life of 272 years.

Our cemetery properties are located in Alabama, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Virginia, Washington, West Virginia and Wisconsin. Our cemetery operations accounted for approximately 85% and 84% of our revenues in 2020 and 2019, respectively.

The funeral home products and services that we sell include the following:

Merchandise

 

Services

caskets and related items

 

family consultation

 

 

removal and preparation of remains

 

 

insurance products

 

 

use of funeral home facilities for visitation and prayer services

 

Our funeral homes are located in Alabama, Florida, Illinois, Indiana, Kansas, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Virginia and West Virginia. Our funeral home operations accounted for approximately 15% and 16% of our consolidated revenues in 2020 and 2019, respectively.

OPERATIONS

Segment Reporting and Related Information

We have two distinct reportable segments, which are classified as Cemetery Operations and Funeral Home Operations segments, both of which are supported by corporate costs and expenses.

We have chosen this level of organization and disaggregation of reportable segments because: (a) each reportable segment has unique characteristics that set it apart from the other segment; (b) we have organized our management personnel at these two operational levels; and (c) it is the level at which our chief decision makers evaluates performance.

Cemetery Operations

As of December 31, 2020, we operated 313 cemeteries. Our Cemetery Operations include sales of cemetery interment rights, merchandise and services and the performance of cemetery maintenance and other services. An interment right entitles a customer to a burial space in one of our cemeteries and the perpetual care of that burial space. Burial spaces, or lots, are parcels of property that hold interred human remains. A burial vault is a rectangular container, usually made of concrete but can also be made of steel or plastic, which sits in the burial lot and in which the casket is placed. The top of the burial vault is buried approximately 18 to 24 inches below the surface of the ground, and the casket is placed inside the vault. Burial vaults prevent ground settling that may create uneven ground surfaces. Ground settling typically results in higher maintenance costs and potential exposure for accidents on the property. Lawn crypts are a series of closely spaced burial lots with preinstalled vaults and may include other improvements, such as landscaping, sprinkler systems and drainage. A mausoleum crypt is an above ground structure that may be designed for a particular customer, which we refer to as a private mausoleum or it may be a larger building that serves multiple customers, which we refer to as a community mausoleum. Cremation niches are spaces in which the ashes remaining after cremation are stored. Cremation niches are often part of community mausoleums; although we sell a variety of cremation niches to accommodate our customers’ preferences.

Grave markers, monuments and memorials are above ground products that serve as memorials by showing who is remembered, the dates of birth and death and other pertinent information. These markers, monuments and memorials include simple plates,

8


 

Table of Contents

such as those used in a community mausoleum or cremation niche, flush-to-the-ground granite or bronze markers, headstones or large stone obelisks.

One of the principal services we provide at our cemeteries is an "opening and closing," which is the digging and refilling of burial spaces to install the vault and place the casket into the vault. With pre-need sales, there are usually two openings and closings, where permitted by applicable law. During the initial opening and closing, we install the burial vault in the burial space. Where permitted by applicable law, we usually perform this service shortly after the customer signs a pre-need contract. Advance installation allows us to withdraw the related funds from our merchandise trusts, making the amount in excess of our cost to purchase and install the vault available to us for other uses and eliminates future merchandise trusting requirements for the burial vault and its installation. During the final opening and closing, we remove the dirt above the vault, open the lid of the vault, place the casket into the vault, close the vault lid and replace the ground cover. With at-need sales, we typically perform the initial opening and closing at the time we perform the final opening and closing. Our other services include the installation of other cemetery merchandise and the perpetual care related to interment rights.

Funeral Home Operations

As of December 31, 2020, we owned, operated or managed 80 funeral homes, 37 of which are located on the grounds of cemetery properties that we own. Our funeral homes offer a range of services to meet a family’s funeral needs, including family consultation, final expense insurance products, the removal and preparation of remains, provision of caskets and related funeral merchandise, the use of funeral home facilities for visitation, worship and performance of funeral services and transportation services. Funeral Home Operations primarily generate revenues from at-need sales.

Cremation Products and Services

We operate crematories at some of our cemeteries or funeral homes, but our primary crematory operations are sales of receptacles for cremated remains, such as urns, and the inurnment of cremated remains in niches or scattering gardens. Cremation products and services usually cost less than traditional burial products and services and take up less space than burials. We sell cremation products and services on both a pre-need and an at-need basis.

Seasonality

Although the death care business is relatively stable and predictable, our results of operations may be subject to seasonal fluctuations in deaths due to weather conditions, illness and public health crises, such as the COVID-19 Pandemic. Generally, more deaths occur during the winter months, primarily resulting from pneumonia and influenza. In addition, we generally perform fewer initial openings and closings in the winter, as the ground is frozen in many of the areas in which we operate. We may also experience declines in contracts written during the winter months due to increased inclement weather during which our sales staff would be unable to meet with customers.

Sales Contracts

Pre-need products and services are typically sold on an installment basis. At-need products and services are generally required to be paid for in full in cash by the customer at the time of sale. As a result of our pre-need sales, the backlog of unfulfilled pre-need performance obligations recorded in deferred revenues was $949.2 million and $900.0 million at December 31, 2020 and 2019, respectively, excluding amounts classified as held for sale.

Trusts

Sales of cemetery products and services are subject to a variety of state regulations. In accordance with these regulations, we are required to establish and fund two types of trusts: merchandise trusts and perpetual care trusts, to ensure that we can meet our future obligations. Our funding obligations are generally equal to a percentage of the sales proceeds or costs of the products and services we sell.

Human Capital

As of December 31, 2020, we employed 1,476 full-time, 175 part-time and 5 seasonal employees. 22 of these full-time employees are represented by unions in New Jersey and are subject to collective bargaining agreements that have expiration dates ranging up to September 2024. We believe that our relationship with our employees is generally favorable.

We recognize that our success depends upon the services and capabilities of our executive officers. Our current CEO has been in place since July 2018 and our current CFO has been in place since September 2019, following several years of frequent

9


 

Table of Contents

changes in these positions. Our compensation programs are designed to attract, motivate and retain high quality executive officers who will advance our overall business strategies and goals to create and return value to our stockholders. Our compensation programs include short-term elements, such as annual base salaries and cash bonuses, as well as longer term elements such as equity based awards. We have designed our compensation programs to align the interests of our management and our stockholders.

Our ability to attract and retain a qualified sales force and other personnel is also an important factor in achieving future success. Buying cemetery and funeral home products and services, especially at-need products and services, is very emotional for most customers, so our sales force must be particularly sensitive to our customers’ needs.

As of December 31, 2020, we employed 375 full-time commissioned salespeople, 51 sales trainees, six part-time commissioned salespeople, 78 salaried sales managers, 20 commission-only sales managers, 37 outside sales counselors and two full-time sales support employees. We had two divisional sales vice presidents who report directly to our two divisional presidents. Individual salespersons are typically located at the cemeteries they serve and report directly to the cemetery sales manager. Our compensation programs for sales staff are comprised of various plans designed to motivate through a variety of compensation components including base wages, commissions, bonuses and overrides. Depending on sales role, sales personnel are either incentivized to achieve or exceed budget while others are paid based on sales made. Performance is evaluated according to location budget or individual quotas.

We have made a commitment to the ongoing education and training of our sales force and to salesperson retention in order to provide our customers high quality customer service and in an effort to comply with all applicable laws and requirements. Our salespeople are trained to prioritize our customers’ needs and sell merchandise and services that are in our customers’ best interests. Our training program includes classroom training at regional training locations, field training, periodically updated training materials that utilize media, such as web based modules, for interactive training and participation in industry seminars. Additionally, we place special emphasis on training property sales managers, who are key elements to a successful pre-need sales program.

Marketing

We generate sales leads through various methods including digital marketing, direct mail, websites, funeral follow-up and sales force cold calling, with the assistance of database mining and other marketing resources. Our marketing department provides sophisticated marketing techniques to focus more effectively on our lead generation and to direct sales efforts. Sales leads are referred to the sales force to schedule an appointment, either at the customer’s home or at the cemetery location. In addition, our marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a variety of web-based tools to ensure that we can continue to connect with and meet our customers’ needs in a safe, effective and productive manner. Some of our locations are providing live video streaming of their funeral and burial services to customers or providing other alternatives that respect social distancing, so that family and friends can connect during their time of grief.

Competition

Our cemeteries and funeral homes generally serve customers that live within a 10 to 15-mile radius of a property’s location. We face competition from other cemeteries and funeral homes located within this localized area. Most of these cemeteries and funeral homes are independently owned and operated, and most of these owners and operators are smaller than we are and have fewer resources than we do. We have historically faced limited competition from the two larger publicly held death care companies that have U.S. operations — Service Corporation International and Carriage Services, Inc. — as they do not directly operate cemeteries in the same local geographic areas in which we operate. Furthermore, these companies have historically generated the majority of their revenues from funeral home operations. Based on the relative levels of cemetery and funeral home operations of these publicly traded death care companies, which are disclosed in their filings with the Securities and Exchange Commission (the “SEC”), we believe that we are the only publicly held death care company that focuses a majority of its efforts on Cemetery Operations.

Within a localized area of competition, we compete primarily for at-need sales, because, in general, many of the independently owned, local competitors may not have pre-need sales programs. Most of these competitors do not have as many of the resources that are available to us to launch and grow a substantial pre-need sales program. The number of customers that cemeteries and funeral homes are able to attract is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important factors. The sale of cemetery and funeral home products and services on a pre-need basis has increasingly been used by many companies as an important marketing tool. Due to the importance of reputation and heritage, increases in customer base are usually gained over a long period of time.

10


 

Table of Contents

Competitors within a localized area have an advantage over us if a potential customer’s family members are already buried in the competitor’s cemetery. If either of the two publicly held death care companies identified above operated, or in the future were to operate, cemeteries within close proximity of our cemeteries, they may offer more competition than independent cemeteries and may have a competitive advantage over us to the extent they have greater financial resources available to them due to their size and access to the capital markets.

REGULATION

Our funeral operations are regulated by the Federal Trade Commission (the “FTC”) under Section 5 of the Federal Trade Commission Act and a trade regulation rule for the funeral industry promulgated thereunder referred to as the “Funeral Rule.” The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized price information and various other disclosures about funeral merchandise and services and prohibit a funeral provider from: (i) misrepresenting legal, crematory and cemetery requirements; (ii) embalming for a fee without permission; (iii) requiring the purchase of a casket for direct cremation; (iv) requiring consumers to buy certain funeral merchandise or services as a condition for furnishing other funeral merchandise or services; (v) misrepresenting state and local requirements for an outer burial container; and (vi) representing that funeral merchandise and services have preservative and protective value. Additionally, the Funeral Rule requires the disclosure of mark-ups, commissions, additional charges and rebates related to cash advance items. Our operations are also subject to regulation, supervision and licensing under numerous federal, state and local laws and regulations, including those that impose trusting requirements

Our operations are subject to federal, regional, state and local laws and regulations related to environmental protection, such as the federal Clean Air Act, Clean Water Act, Emergency Planning and Community Right-to-Know Act and Comprehensive Environmental Response (“EPCRA”), Compensation, and Liability Act, that impose legal requirements governing air emissions, waste management and disposal and wastewater discharges.

We are subject to the requirements of the Occupational Safety and Health Act (“OSHA”) and comparable state statutes. OSHA’s regulatory requirement, known as the Hazard Communication Standard, and similar state statutes require us to provide information and training to our employees about hazardous materials used or maintained for our operations. We may also be subject to Tier 1 or Tier 2 Emergency and Hazardous Chemical Inventory reporting requirements under the EPCRA, depending on the amount of hazardous materials maintained on-site at a particular facility. We are also subject to the federal Americans with Disabilities Act and similar laws, which, among other things, may require that we modify our facilities to comply with minimum accessibility requirements for disabled persons.

We take various measures to comply with the Funeral Rule and all other laws and regulations to which we are subject, and we believe we are substantially in compliance with these existing laws and regulations.

Federal, state and local legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which could have a material effect on our operations and on the deathcare industry in general. We cannot accurately predict the outcome of any proposed legislation or regulation or the effect that any such legislation or regulation might have on us.

Available Information

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including us.

We maintain an Internet website with the address of http://www.stonemor.com. The information on this website is not, and should not be considered, part of this Annual Report and is not incorporated by reference into this Annual Report. This website address is only intended to be an inactive textual reference. Copies of our reports filed with, or furnished to, the SEC on Forms 10-K, 10-Q and 8-K, and any amendments to such reports, are available for viewing and copying at such Internet website, free of charge, as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC.

11


 

Table of Contents

ITEM 1A.

RISK FACTORS

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions that we believe are reasonable regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. All statements, other than statements of historical information, should be deemed to be forward-looking statements. The words “may,” “will,” “estimate,” “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements.

Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the risks set forth below. The risks described below are those that we have identified as material and is not an exhaustive list of all the risks we face. There may be others that we have not identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below. If any events occur that give rise to the following risks, our business, financial condition or results of operations could be materially and adversely impacted. These risk factors, some of which are beyond our control or not readily predictable, should be read in conjunction with other information set forth in this Annual Report, including our consolidated financial statements and the related notes. Investors are cautioned not to put undue reliance on our forward-looking statements.

RISKS RELATED TO OUR INDEBTEDNESS

Our level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.

As of December 31, 2020, we had $345.2 million of total debt (not including original issue discounts, debt issuance costs, and capital lease obligations), consisting of $344.8 million of the Senior Secured Notes and $0.4 million of financed vehicles and insurance. Our indebtedness requires significant interest and principal payments. Since January 1, 2020, we have redeemed an aggregate of $60.0 million of principal on the Senior Secured Notes with net proceeds from divestitures, and we anticipate using 80% of the net proceeds from the Clearstone Sale to redeem additional portions of the outstanding Senior Secured Notes. Under the Indenture, we are obligated to pay a 2.0% premium for future redemptions of the principal of the Senior Secured Notes with divestiture proceeds. We have the right to pay quarterly interest at a fixed rate of 7.50% per annum in cash plus a fixed rate of 4.00% per annum payable in kind through January 30, 2022. The Senior Secured Notes will require cash interest payments at 9.875% for all interest periods after January 30, 2022.

Our level of indebtedness could have important consequences to us, including:

 

continuing to require us to dedicate a substantial portion of our cash flow from operations to the payment of the principal of and interest on our indebtedness, thereby reducing the funds available for operations and any future business opportunities;

 

limiting flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;

 

placing us at a competitive disadvantage compared to our competitors that have less indebtedness;

 

increasing our vulnerability to adverse general economic or industry conditions; and

 

limiting our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing.

In addition, the Indenture prohibits us from incurring additional debt or liens for working capital expenditures, acquisitions or other purposes (subject to very limited exceptions), requires us to maintain a minimum liquidity level on a rolling ten business day basis and requires us to meet minimum interest and asset coverage ratios as of the end of each fiscal quarter. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to repay our indebtedness and comply with the restrictive and financial maintenance covenants will be dependent on, among other things, the successful execution of our strategic plans. If we require additional capacity under the restrictive covenants to successfully execute our strategic plans or if we are unable to comply with the financial maintenance covenants, we will need to seek an amendment from a majority of the holders of the Senior Secured Notes. No assurances can be given that we will be successful in obtaining such an amendment, and any failure to obtain such an amendment will have a material adverse effect on our business operations and our financial results.

12


 

Table of Contents

Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take certain actions, including reducing spending on day-to-day operations, reducing future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. The trustee or holders of our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our debt.

In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired, and our leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged, as these competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the economy in general.

We must comply with covenants in the Indenture. Failure to comply with these covenants, which may result from events that are not within our control, may result in an event of default under the Indenture, which would have a material adverse effect on our business and financial condition and on the trading price of our common shares.

The operating and financial restrictions and covenants in the Indenture restrict our ability to finance future operations or capital needs, including working capital and other liquidity, or to expand or pursue our business activities. For example, the Indenture requires us to comply with various affirmative covenants regarding, among other matters, maintenance and investment of trust funds and trust accounts into which certain sales proceeds are required by law to be deposited. The Indenture also includes other restrictive and financial maintenance covenants including, but not limited to:

 

covenants that, subject to certain exceptions, limit our ability to:

 

incur additional indebtedness, including entering into a working capital facility;

 

grant liens;

 

engage in certain sale/leaseback, merger, consolidation or asset sale transactions;

 

make certain investments;

 

pay dividends or make distributions;

 

engage in affiliate transactions;

 

amend our organizational documents; and

 

make capital expenditures; and

 

covenants that require us to maintain:

 

a minimum liquidity level on a rolling ten business day basis;

 

a minimum interest coverage ratio on a trailing twelve month basis as of each fiscal quarter end; and

 

a minimum asset coverage ratio as of each fiscal quarter end.

The Indenture also provides for certain events of default, the occurrence and continuation of which could, subject to certain conditions, cause all amounts owing under the Senior Secured Notes to become due and payable, including but not limited to the following:

 

our failure to pay any interest on any senior secured note when it becomes due and payable that remains uncured for five business days;

 

our failure to pay the principal on any of the senior secured notes when it becomes due and payable, whether at the due date thereof, at a date fixed for redemption, by acceleration or otherwise;

 

our failure to comply with the agreements and covenants relating to maintenance of our legal existence, providing notice of any default or event of default or use of proceeds from the sale of the Senior Secured Notes or any of the restrictive or financial maintenance covenants in the Indenture;

 

our failure to comply with any other agreements or covenants contained in the Indenture or certain other agreements executed in connection with the Indenture that remains uncured for a period of 15 days after the earlier of written notice and request for cure from the Trustee or holders of at least 25% of the aggregate principal amount of the Senior Secured Notes;

 

the acceleration of, or the failure, to pay at final maturity indebtedness (other than the Senior Secured Notes) in a principal amount exceeding $5.0 million;

13


 

Table of Contents

 

the occurrence of a Change in Control (as defined in the Indenture);

 

certain bankruptcy or insolvency proceedings involving an Issuer or any subsidiary; and

 

our failure to maintain one or more licenses, permits or similar approvals for the conduct of our business where the sum of the revenue associated therewith represents the lesser of (i) 15% of the Partnership’s and its subsidiaries’ consolidated revenue and (ii) $30.0 million, and such breach is not cured within 30 days.

At the option of holders holding a majority of the outstanding principal amount of the Senior Secured Notes (and automatically upon any default for failure to pay principal of the Senior Secured Notes when due and payable or certain bankruptcy or insolvency proceedings involving an Issuer), the interest rate on the Senior Secured Notes will increase to 13.50% per annum, payable in cash.

Our ability to comply with the covenants and restrictions contained in the Indenture may be affected by events beyond our control, including prevailing economic, financial and industry conditions and global health concerns. As a result of changes in market or other economic conditions, our ability to comply with these covenants may be impaired. For example, we entered into the Supplemental Indenture in April 2020 primarily to gain greater flexibility under certain of the financial covenants contained in the Indenture.

If we violate any of the restrictions, covenants, ratios or tests in the Indenture, or fail to pay amounts thereunder when due, the trustee or the holders of at least 25% of the outstanding principal amount of our Senior Secured Notes will be able to accelerate the maturity of all amounts due under the Senior Secured Notes and demand repayment of amounts outstanding. We might not have, or be able to obtain, sufficient funds to make these accelerated payments, and the failure to make such payments would have a material adverse effect on our business operations and our financial results. Additionally, any subsequent replacement of our debt obligations or any new indebtedness could have similar or greater restrictions.

OTHER FINANCIAL RISKS

Pre-need sales typically generate low or negative cash flow in the periods immediately following sales, which could adversely affect our liquidity and cash flow.

When we sell cemetery merchandise and services on a pre-need basis, upon cash collection, we pay commissions on the sale to our salespeople and are required by state law to deposit a portion of the sales proceeds into a merchandise trust. In addition, most of our customers finance their pre-need purchases under installment contracts payable over a number of years. Depending on the trusting requirements of the states in which we operate, the applicable sales commission rates and the amount of the down payment, our cash flow from sales to customers through installment contracts is typically negative until we have collected the related receivable or until we purchase the products or perform the services and are permitted to withdraw funds we have deposited in the merchandise trust. To the extent we increase pre-need sales, state trusting requirements are increased or we delay the performance of the services or delivery of merchandise we sell on a pre-need basis, our cash flow from pre-need sales may be further reduced, and our liquidity could be adversely affected.

We have a history of operating losses and may not achieve or maintain profitability and positive cash flow.

We have incurred net losses for several years and had negative cash flows from operations for the year ended December 31, 2019 and an accumulated deficit as of December 31, 2020, primarily due to greater than expected costs to integrate prior acquired businesses, increased expenses due to the C-Corporation Conversion and increases in professional fees and compliance costs. To the extent that we continue to have negative operating cash flow in future periods, we may not have sufficient liquidity and we may not be able to successfully implement our turnaround strategy. We cannot predict if or when we will operate profitably or if we will be able to continue to generate positive cash flows.

We have identified material weaknesses in our internal control over financial reporting and determined that our disclosure controls and procedures were not effective which could, if not remediated, result in additional material misstatements in our financial statements and may adversely affect our liquidity, the market for our common shares and our business.

Our management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over our financial reporting, as defined in Rules 13a- 15(e) and 13a-15(f), respectively, under the Exchange Act. Effective internal controls are necessary for us to provide timely, reliable and accurate financial reports, identify and proactively correct any deficiencies, material weaknesses or fraud and meet our reporting obligations. As disclosed in Part II, Item 9A. Controls and Procedures of this Annual Report, management identified material weaknesses in our internal control over financial reporting and concluded our disclosure controls and procedures were not effective as of December 31, 2018. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such

14


 

Table of Contents

that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our independent registered public accounting firm also expressed an adverse opinion on the effectiveness of our internal control over financial reporting.

As discussed in Part II, Item 9A. Controls and Procedures of this Annual Report, our remediation efforts to address the material weaknesses in internal control over financial reporting and ineffective disclosure controls and procedures are ongoing and had been delayed primarily due to management turnover and the impact of COVID-19. We currently expect the remediation of the identified material weaknesses to be completed during 2021. If our planned remediation actions are not successfully implemented or we encounter other difficulties, we might incur significant unexpected expenses in order to perform the Section 404 evaluation and our ability to file timely with the SEC may be adversely impacted. In addition, if our remedial measures are insufficient, or if additional material weaknesses or significant deficiencies in our internal controls occur in the future, we could be required to further restate our financial results, which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the material weaknesses or deficiencies, harm our reputation or otherwise cause a decline in investor confidence.

The financial condition of third-party insurance companies that fund our pre-need funeral contracts and the amount of benefits those policies ultimately pay may impact our financial condition, results of operations or cash flows.

Where permitted, customers may arrange their pre-need funeral contract by purchasing a life insurance or annuity policy from third-party insurance companies. The customer/policy holder assigns the policy benefits to our funeral home to pay for the pre-need funeral contract at the time of need. For the sales of pre-need funeral contracts funded through life insurance policies, we receive commissions from third-party insurance companies. Additionally, there is a death benefit associated with the contract that may vary over the contract life. There is no guarantee that the value of the death benefit will increase or cover future increases in the cost of providing a funeral service. If the financial condition of the third-party insurance companies were to deteriorate materially because of market conditions or otherwise, there could be an adverse effect on our ability to collect all or part of the proceeds of the life insurance or annuity policy, including any increase in the death benefit. Failure to collect such proceeds could have a material adverse effect on our financial condition, results of operations or cash flows.

Our liquidity may be impacted by our ability to negotiate bonding arrangements with third-party insurance companies.

Where permitted, we have entered into and may continue to enter into bonding arrangements with insurance companies, whereby pre-need performance obligations otherwise required to be trusted may be insured through a process called bonding. In the event that we are unable to deliver on bonded pre-need contract sales at the time of need, the insurance company will provide cash sufficient to deliver goods for the respective pre-need sale item. On an ongoing basis, we must negotiate acceptable terms of these various bonding arrangements, and the insurance companies have required us to provide cash collateral from time to time under certain circumstances. To the extent we are unable to negotiate acceptable terms for such arrangements and thus are no longer able to maintain existing bonds, we would need to deposit the corresponding amounts in the merchandise trusts. We may be required to provide additional cash collateral from time to time under certain circumstances. Any of these actions would have an adverse impact on our liquidity.

Our ability to use our Net Operating Losses and other tax assets is uncertain.

As of December 31, 2020, we had net operating loss (“NOL”) carryforwards of approximately $413.0 million for U.S. federal income tax purposes and substantially similar tax assets at the federal and state levels. Along with other previous transfers of our interests, we believe the Recapitalization Transactions caused a “change of control” for income tax purposes, which may significantly limit our ability to use NOLs and certain other tax assets to offset future taxable income, possibly reducing the amount of cash available to us to satisfy our obligations. The “change of control” rules limit the annual net operating loss deduction in a given year to an amount based on the value of the Company on the change date multiplied by the federal tax exempt bond rate. This makes it more likely for the Company to pay some amount of income tax in the years it has positive taxable income. This limitation also makes it more likely for NOL carryovers to expire unutilized.

If the IRS makes audit adjustments to the Partnership’s income tax returns for 2018 or 2019 tax years, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us, in which case our financial condition could be adversely affected.

Pursuant to the Bipartisan Budget Act of 2015, for our 2018 and 2019 tax years, if the IRS makes audit adjustments to the Partnership’s income tax returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us. To the extent possible under the new rules, we may elect to either pay the taxes (including any applicable penalties and interest) directly to the IRS or, if we are eligible, issue a revised

15


 

Table of Contents

Schedule K-1 to each holder of the Partnership’s common units during the applicable year with respect to an unaudited and adjusted return. Although we may elect to have such unitholders take such audit adjustment into account in accordance with their interests in the Partnership during the tax year under audit, there can be no assurance the election will be practical, permissible or effective in all circumstances. As a result, StoneMor Inc. may be required to pay the necessary taxes, which would mean that our current stockholders may indirectly bear some or all of the impact of the tax liability resulting from such audit adjustment, even if they did not own units in us during the tax year under audit. If, as a result of any such audit adjustment, we are required to make payments of taxes, penalties and/or interest, our financial condition could be adversely affected. These rules were not applicable for tax years beginning on or prior to December 31, 2017.

Because fixed costs are inherent in our business, a decrease in our revenues can have a disproportionate effect on our cash flow and profits.

Our business requires us to incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on our cemetery properties and funeral homes regardless of the number of interments or funeral services we perform. If we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause our margins, profits and cash flow to decline at a greater rate than the decline in our revenues.

Economic, financial and stock market fluctuations could affect future potential earnings and cash flows and could result in future intangible asset and long-lived asset impairments.

In addition to an annual review, we assess the impairment of our intangible assets and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may be greater than fair value and therefore not fully recoverable. Recoverability of these assets is measured by a comparison of the carrying amount of the assets to the future net cash flow, undiscounted and without interest, expected to be generated by the assets. Factors that could trigger an interim impairment review include, but are not limited to, a significant decline in the market value of our stock or debt values, significant under-performance relative to historical or projected future operating results, and significant negative industry or economic trends. In 2019, we determined that the continued decline of our sales during 2019 was a triggering event that warranted an impairment assessment of our definite-lived and long-lived intangible assets. Based on the results of our interim goodwill impairment assessment for the third quarter of 2019, we concluded our goodwill was fully impaired as of September 30, 2019, and recorded a loss on goodwill impairment of $24.9 million in the consolidated statement of operations for the year ended December 31, 2019. Based on the results of our impairment tests of our long-lived assets throughout 2020, we concluded that none of our long-lived assets were impaired.

OPERATIONAL RISKS

Cemetery burial practice claims could have a material adverse impact on our financial results, and unfavorable publicity resulting from claims, or otherwise, could affect our reputation and business.

Our cemetery practices have evolved and improved over time. Most of our cemeteries have been operating for decades and some have in the past used practices and procedures that are outdated in comparison to today’s standards. When cemetery disputes occur, we have in the past been, and may in the future be, subject to litigation and liability for improper burial practices, including:

 

burial practices of a different era that are judged today in hindsight as being outdated; and

 

alleged violations of our practices and procedures by one or more of our associates.

In addition, since we acquired most of our cemeteries from third parties, we have in the past been, and may in the future be, subject to litigation and liability based upon actions or events that occurred before we acquired or managed the cemeteries. Claims or litigation based upon our cemetery burial practices could have a material adverse impact on our financial condition, results of operations and cash flows.

Since our operations relate to life events that are emotionally stressful for our client families, our business is dependent on customer trust and confidence. Unfavorable publicity about our business generally or in relation to any specific location could affect our reputation and customers’ trust and confidence in our products and services, thereby having an adverse impact upon our sales and financial results.

16


 

Table of Contents

Our ability to generate pre-need sales depends on a number of factors, including sales incentives and local and general economic conditions.

Significant declines in pre-need sales would reduce our backlog and revenue and could reduce our future market share. On the other hand, a significant increase in pre-need sales could have a negative impact on cash flow as a result of commissions and other costs incurred initially without corresponding revenue.

We are continuing to refine the mix of service and product offerings in both our funeral and cemetery segments, including changes in our sales commission and incentive structure. These changes could cause us to experience declines in pre-need sales in the short-run. In addition, economic conditions at the local or national level could cause declines in pre-need sales either as a result of less discretionary income or lower consumer confidence. Declines in pre-need cemetery property sales reduce current revenue, and declines in other pre-need sales would reduce our backlog and future revenue and could reduce future market share.

Our failure to attract and retain qualified sales personnel and management could have an adverse effect on our business and financial condition.

Our ability to attract and retain a qualified sales force and other personnel is an important factor in achieving future success. Buying cemetery and funeral home products and services, especially at-need products and services, is very emotional for most customers, so our sales force must be particularly sensitive to our customers’ needs. We cannot assure our stockholders that we will be successful in our efforts to attract and retain a skilled sales force. If we are unable to maintain a qualified and productive sales force, our revenues may decline and our cash available for distribution may decrease.

Our success also depends upon the services and capabilities of our management team. Management establishes the "tone at the top" by which an environment of ethical values, operating style and management philosophy is fostered. The inability of our senior management team to maintain a proper "tone at the top" or the loss of services of one or more members of senior management, as well as the inability to attract qualified managers or other personnel could have a material adverse effect on our business, financial condition and results of operations. We may not be able to locate or employ on acceptable terms qualified replacements for senior management or key employees if their services were no longer available. We do not maintain key employee insurance on any of our executive officers.

We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.

Our ability to manage and maintain our internal reports effectively and integrate new business acquisitions depends significantly on our operational technology platform and other information systems. Some of our information technology systems may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems and corruption of data. The failure of our systems to operate effectively or to integrate with other systems or a breach in security or other unauthorized access of these systems may also result in reduced efficiency of our operations and could require significant capital investments to remediate any such failure, problem or breach and to comply with applicable regulations, all of which could adversely affect our business, financial condition and results of operations.

Any failure to maintain the security of the information relating to our customers, their loved ones, our employees and our vendors could damage our reputation, cause us to incur substantial additional costs and make us subject to litigation, all of which could adversely affect our operating results, financial condition or cash flow.

In the ordinary course of our business, we receive certain personal information, in both physical and electronic formats, about our customers, their loved ones, our employees and our vendors. In addition, our online operations depend upon the secure transmission of confidential information over public networks, including information permitting electronic payments. We maintain security measures and data backup systems to protect, store and prevent unauthorized access to such information. However, it is possible that computer hackers and others (through cyberattacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means) might defeat our security measures in the future and obtain the personal information of customers, their loved ones, our employees and our vendors that we hold. In addition, our employees, contractors or third parties with whom we do business may attempt to circumvent our security measures to misappropriate such information and may purposefully or inadvertently cause a breach, corruption or data loss involving such information. A breach of our security measures or failure in our backup systems could adversely affect our reputation with our customers and their loved ones, our employees and our vendors, as well as our operations, results of operations, financial condition and cash flow.

17


 

Table of Contents

It could also result in litigation against us or the imposition of penalties. Moreover, a security breach could require that we expend significant additional resources to upgrade further the security measures that we employ to guard such important personal information against cyberattacks and other attempts to access such information and could result in a disruption of our operations.

Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.

From time to time, we are party to various claims and legal proceedings, including, but not limited to, claims and proceedings regarding employment, cemetery or burial practices and other litigation. As set forth more fully in Part I, Item 3. Legal Proceedings and Part II, Item 8. Financial Statements and Supplementary Data, Note 15 Commitments and Contingencies of this Annual Report, we are currently subject to state law claims that certain of our officers and directors breached their fiduciary duty to the Company. We could also become subject to additional claims and legal proceedings relating to the factual allegations made in these actions. We are also subject to class or collective actions under the wage and hours provisions of the Fair Labor Standards Act and state wage and hour laws, including, but not limited to, national and state class or collective actions, or putative class or collective actions.

Adverse outcomes in some or all of our pending cases may result in significant monetary damages or injunctive relief against us, as litigation and other claims are subject to inherent uncertainties. Any such adverse outcomes, in pending cases or other lawsuits that may arise in the future, could have a material adverse impact on our financial position, results of operations and cash flow. While we hold insurance policies that may reduce cash outflows with respect to adverse outcomes of certain litigation matters, these insurance policies exclude certain claims, such as claims arising under the Fair Labor Standards Act.

In addition, litigation claims and legal proceedings could demand substantial amounts of our management’s time, resulting in the diversion of our management resources from effectively managing our business operations, and costs to defend litigation claims and legal proceedings could be material. Any adverse publicity resulting from allegations made in litigation claims or legal proceedings may also adversely affect our reputation. All these factors could negatively affect our business and results of operations.

Broad-based business or economic disruptions caused by global health concerns, including the COVID-19 Pandemic, and other crises could adversely affect our business, financial condition, profitability or cash flows.

Global health concerns, such as the COVID-19 Pandemic, could result in social, economic and labor instability that adversely affect our employee and customer relationships, pre-need sales activity, the value of our trust investments and associated funding obligations, and in so doing adversely affect our business, financial condition, results of operations and cash flows. For example, governmental actions restricting public gatherings and interaction may result in our customers deferring making purchase decisions regarding pre-need arrangements or delay holding funeral services and may result in our inability to operate our cemeteries and funeral homes, which would have an adverse impact on our business, financial condition, results of operations and cash flows. Although our cemeteries and funeral homes have largely remained open and available to serve our families in all the locations in which we operate to the extent permitted by local authorities, with the exception of Puerto Rico, throughout the COVID-19 Pandemic, this may not continue. We have experienced limited location closures due to COVID-19 cases, required quarantines and cleanings. In addition, our pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic. Having to adjust our policies and practices to respond to global health concerns could also result in increased operating expenses. For example, during the year ended December 31, 2020, we incurred costs of approximately $1.0 million related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic. We continue to monitor this public health crisis and its impact on our employees, customers and vendors and the overall economic environment within the U.S. and worldwide, but we cannot presently predict the full scope and severity of the disruptions caused by the COVID-19 Pandemic on our business, financial condition, results of operations and cash flows.

We depend on one vendor to provide substantially all of our grounds and maintenance services.

We have outsourced all of the grounds and maintenance services at most of the funeral homes and cemeteries we own or manage to Moon. Because we are dependent on Moon to provide these services, disruptions in the supply of these services may be beyond our control. We cannot be certain of Moon’s financial viability. If Moon fails to meet its obligations or provides poor or inadequate service, our ability to serve our customers and to operate our business may be adversely affected.  Under such circumstances, there is no assurance that we will be able to make alternative arrangements in a timely manner without an adverse effect on our business, and we would likely incur additional costs in order to obtain replacement services, which could materially and adversely affect our business and financial results.

18


 

Table of Contents

We are subject to legal restrictions on our marketing practices that could reduce the volume of our sales, which could have an adverse effect on our business, operations and financial condition.

The enactment or amendment of legislation or regulations relating to marketing activities may make it more difficult for us to sell our products and services. For example, the federal "do not call" legislation has adversely affected our ability to market our products and services using telephone solicitation, by limiting whom we may call and increasing our costs of compliance. As a result, we rely heavily on direct mail marketing and telephone follow-up with existing contacts. Additional laws or regulations limiting our ability to market through direct mail, over the telephone, through Internet and e-mail advertising or door-to-door may make it difficult to identify potential customers, which could increase our costs of marketing. Both increases in marketing costs and restrictions on our ability to market effectively could reduce our revenues and could have an adverse effect on our business, operations and financial condition, as well as our ability to make cash distributions to our stockholders.

STRATEGIC RISKS

Our ability to execute our strategic plans depends on many factors, some of which are beyond our control.

Our strategic plans are focused on efforts to revitalize the business, grow our revenue and manage our operating and non-recurring operating expenses. Many of the factors that impact our ability to execute our strategic plans, such as the number of deaths and general economic conditions, are beyond our control. Changes in operating conditions, such as supply disruptions and labor disputes, could negatively impact our operations. If we are unable to leverage scale to drive cost savings, productivity improvements, pre-need production or anticipated earnings growth, or if we are unable to deploy capital to maximize stockholder value, our financial performance could be affected. If we are unable to identify acquisitions and/or divestitures as planned or to realize expected synergies and strategic benefits, our financial performance could also be affected. We cannot give assurance that we will be able to execute any or all of our strategic plans. Failure to execute any or all of our strategic plans could have a material adverse effect on our financial condition, results of operations, and cash flows. Refer to “General Trends and Outlook” of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of our business strategies.

Failure to effectively identify and manage divestitures and acquisitions could have an adverse effect on our results of operations.

During 2020, we completed the Oakmont Sale, the Olivet Sale and the Remaining California Sale. We expect to close the Clearstone Sale in the first half of 2021. However, we may not be successful in identifying additional divestiture opportunities on terms acceptable to us and the gains or losses on the divestiture of, or lost operating income from, such assets may affect our earnings.

In addition, we continue to evaluate acquisition opportunities that could strategically fit our business objectives. However, we may not be successful in identifying and acquiring cemeteries or funeral homes on terms favorable to us or at all and may face competition from other death care companies in making acquisitions. In addition, if we complete acquisitions, we may encounter various associated risks, including the inability to integrate an acquired business into our operations, diversion of management’s attention and unanticipated problems or liabilities, some or all of which could have a material adverse effect on our operations and financial performance. Moreover, if we acquire cemeteries that do not have an existing pre-need sales program or a significant amount of pre-need products and services that have been sold but not yet purchased or performed, the operation of the cemetery and implementation of a pre-need sales program after acquisition may require significant amounts of working capital.

We are also limited by our Indenture, which prohibits us from incurring additional debt or liens for acquisitions and engaging in certain asset sale transactions (subject to very limited exceptions), as well as restricts our use of proceeds from asset sale transactions.

If our execution and implementation of divestitures and acquisitions is unsuccessful, our financial condition, results of operations and cash flow could be adversely affected. We may also incur asset impairment charges related to divestitures or acquisitions that would reduce our earnings.

19


 

Table of Contents

RISKS RELATED TO TRUST FUNDS

Our merchandise and perpetual care trust funds own investments in equity securities, fixed income securities, mutual funds and master limited partnerships, which are affected by financial market conditions that are beyond our control.

Pursuant to state law, a portion of the proceeds from pre-need sales of merchandise and services is put into merchandise trusts until such time that we meet the requirements for releasing trust principal, which is generally delivery of merchandise or performance of services. In addition, the Indenture also provides certain limitations on how the assets in the merchandise trusts may be invested. Generally, a majority of the investment earnings generated by the assets in the merchandise trusts, including realized gains and losses, are deferred until the associated merchandise is delivered or the services are performed.

Also, pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. The perpetual care trust principal does not belong to us and must remain in this trust in perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs.

These trust assets are managed by a trustee, which is advised by Cornerstone, our registered investment adviser subsidiary, all under the oversight of the Trust and Compliance Committee of our Board. Cornerstone has engaged two outside sub-advisers to assist Cornerstone in providing investment recommendations with respect to certain trust assets, and on February 1, 2021 engaged Axar as an additional sub-advisor to provide certain services with respect to the trust assets. There is no guarantee that the trustee will achieve its objectives and deliver adequate returns, and the trustee’s investment choices may result in losses. In addition our returns on these investments are affected by financial market conditions that are beyond our control. If the investments in our trust funds experience significant declines, there could be insufficient funds in the trusts to cover the costs of delivering services and merchandise. Pursuant to state law, we may be required to cover any such shortfall in merchandise trusts with cash flows from operations, which could have a material adverse effect on our financial condition, results of operations or cash flows. A substantial portion of our revenue is generated from investment returns that we realize from merchandise and perpetual care trusts. Unstable economic conditions have, at times, caused us to experience declines in the fair value of the assets held in these trusts. Moreover future cash flows could be negatively impacted if we are forced to liquidate any such investments that are in an impaired position.

If the fair market value of these trusts, plus any other amount due to us upon delivery of the associated contracts, were to decline below the estimated costs to deliver the underlying products and services, we would be required to record a charge to earnings to record a liability for the expected losses on the delivery of the associated contracts.

For more information related to our trust investments, see Note 7, Merchandise Trusts and Note 8, Perpetual Trusts to our consolidated financial statements in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report.

We may be required to replenish our funeral and cemetery trust funds in order to meet minimum funding requirements, which would have a negative effect on our earnings and cash flow.

In certain states, we have withdrawn allowable distributable earnings from our merchandise trusts, including gains prior to the maturity or cancellation of the related contract. Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions on withdrawals of future earnings when trust fund values drop below certain prescribed amounts. In the event of realized losses or market declines, we may be required to deposit portions or all of these amounts into the respective trusts in some future period. As of December 31, 2020, we had unrealized losses of approximately $1.3 million in the various trusts within these states, of which $1.1 million were in merchandise trust accounts and $0.2 million were in perpetual care trust accounts. To date, we have not been required to make such deposits; however one state has restricted us from withdrawing otherwise distributable earnings from the perpetual care trust until the accounts recover from losses.

Any reductions in the earnings of the investments held in merchandise and perpetual care trusts could adversely affect our revenues and cash flow.

We invest our trust assets primarily for generation of realized income. We rely on the earnings, interest and dividends paid by the assets in our trusts to provide both revenue and cash flow. Interest income from fixed-income securities is particularly susceptible to changes in interest rates and declines in credit worthiness while dividends from equity securities are susceptible to the issuer’s ability to make such payments. Declines in earnings from perpetual care trust funds would cause a decline in current revenue, while declines in earnings from other trust funds could cause a decline in future cash flows and revenue.

20


 

Table of Contents

COMPETITIVE AND MARKET RISKS IN THE DEATHCARE INDUSTRY

The cemetery and funeral home industry continues to be competitive, and if we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.

Our ability to compete successfully depends on our management’s forward vision, timely responses to changes in the business environment and the ability of our cemeteries and funeral homes to maintain a good reputation and high professional standards as well as offer products and services at competitive prices. If we are unable to compete successfully, our financial condition, results of operations and cash flows could be materially adversely affected.

We experience price competition from independent funeral service location and cemetery operators, monument dealers, casket retailers, low-cost funeral providers and other nontraditional providers of merchandise and services. New market entrants tend to attempt to build market share by offering lower cost alternatives. In the past, this price competition has resulted in our losing market share in some markets. In other markets, we have had to reduce prices or offer discounts, thereby reducing profit margins in order to retain or recapture market share. Independent competitors tend to be aggressive in distinguishing themselves by their independent ownership, and they promote their independence through television, radio and print advertising, direct mailings and personal contact. Increasing pressures from new market entrants and continued advertising and marketing by competitors in local markets could cause us to lose market share and revenue. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue as well as to incur costs in response to this competition. Increased use of the internet by customers to research and/or purchase products and services could also have an adverse impact upon our sales and financial results.

Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences ahead of and/or better than our competitors. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.

If the trend toward cremation in the U.S. continues, our revenues may decline, which could have an adverse effect on our business and financial condition.

We and other deathcare companies that focus on traditional methods of interment face competition from the increasing number of cremations in the U.S. Industry studies1 indicate that the percentage of cremations has steadily increased. In 2019, the U.S. cremation rate was 54.6%, with an annual growth rate per year over 2014 to 2019 of 1.52%. This percentage is expected to increase to 59% by 2023. Because the products and services associated with cremations, such as niches and urns, produce lower revenues than the products and services associated with traditional interments, a continuing trend toward cremation may reduce our revenues. For the years ended December 31, 2020 and 2019, sales related to cremations represented approximately 7% of our consolidated revenues.

Declines in the number of deaths in our markets can cause a decrease in revenues.

Declines in the number of deaths could cause at-need sales of cemetery and funeral home merchandise and services to decline and could cause a decline in the number of pre-need sales, both of which could decrease revenues. Changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. Generally, the number of deaths may fluctuate depending on weather conditions and illness.

Regulation and compliance could have a material adverse impact on our financial results.

Our operations are subject to regulation, supervision and licensing under numerous federal, state and local laws, ordinances and regulations, including extensive regulations concerning trusts/escrows, pre-need sales, cemetery ownership, funeral home ownership, marketing practices, crematories, environmental matters and various other aspects of our business. For example, the funeral industry is regulated at the federal level by the FTC, which requires funeral service locations to take actions designed to protect consumers. Our facilities are also subject to stringent health, safety, and environmental regulations. Our pay practices, including wage and hour overtime pay, are also subject to federal and state regulations. Violations of applicable laws could result in fines or sanctions against us. We may experience significant increases in costs as a result of business regulations and laws, which are beyond our control, including increases in the cost of health care. Although we seek to control increases in these costs, continued upward pressure on costs could reduce the profitability of our business.

 

1 

Industry statistics were compiled by the Cremation Association of North America.

21


 

Table of Contents

 

State laws impose licensing requirements and regulate pre-need sales. As such, we are subject to state trust fund and pre-need sales practice audits, which could result in audit adjustments as a result of non-compliance. In addition, we assume the liability for any audit adjustments for our acquired businesses for periods under audit prior to our ownership of these acquired businesses. These audit adjustments could have a material adverse impact on our financial condition, results of operations and cash flow.

In addition, from time to time, governments and agencies propose to amend or add regulations or reinterpret existing regulations, which could increase costs and decrease cash flows. For example, foreign, federal, state, local, and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the deathcare industry. These include regulations that require more liberal refund and cancellation policies for pre-need sales of products and services, limit or eliminate our ability to use surety bonding, require the escheatment of trust funds, increase trust requirements, require the deposit of funds or collateral to offset unrealized losses of trusts, and/or prohibit the common ownership of funeral service locations and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on our financial condition, results of operations, and cash flows.

Compliance with laws, regulations, industry standards, and customs concerning burial procedures and the handling and care of human remains is critical to the continued success of our business. We continually monitor and review our operations in an effort to ensure that we take the right actions necessary to remaining in compliance with these laws, regulations and standards. However, litigation and regulatory proceedings regarding these issues could have a material adverse effect on our financial condition, results of operations and cash flow.

For additional information regarding the regulation of the funeral and cemetery industry, see Part I, Item 1. Business, Regulation of this Annual Report.

RISKS RELATED TO OUR COMMON STOCK

Axar holds a majority of the voting power of our common stock.

Axar beneficially owns approximately 70.5% of our outstanding common stock and as a result, has the ability, subject to certain restrictions in a voting agreement, to elect all of the members of our Board of Directors other than one director whose nomination and election is the subject of that voting agreement. In addition, subject to certain restrictions in that voting agreement, it will be able to determine the outcome of all other matters requiring stockholder approval, including certain mergers and other material transactions, and will be able to cause or prevent a change in the composition of our Board of Directors or a change in control of our Company that could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our Company. So long as Axar continues to own a significant amount of our outstanding shares, even if such amount is less than 50%, it will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other stockholders believe that the transaction is in their own best interests. Axar’s ownership interest also makes us a “controlled company” within the meaning of the New York Stock Exchange (the “NYSE”) listing standards. Our Corporate Governance Guidelines, consistent with the listing standards applicable to companies that are not controlled companies, require that a majority of our directors and all of the members of our Compensation, Nominating and Governance Committee be independent within the meaning of those standards. However, we can amend our Corporate Governance Guidelines in our Board’s discretion, and as a controlled company, we are not subject to the requirement that a majority of our directors and all of the members of our Compensation, Nominating and Governance Committee be independent.

We do not expect to pay dividends on our common stock for the foreseeable future.

Due to our continued high level of indebtedness and limited liquidity, we do not expect to pay dividends for the foreseeable future. In addition, the Indenture governing our Senior Secured Notes prohibits us from paying any dividends with limited exceptions.

The prohibition on incurring additional debt in the Indenture for the Senior Secured Notes, as well as future operating results, may require us to issue additional equity securities to finance our working capital and capital expenditure needs. Any such equity issuance may be at a price less than the then-current market price, which would result in dilution to our stockholders’ interest in us.

The Indenture prohibits us from incurring additional debt, including to fund working capital and capital expenditures, subject to very limited exceptions. This prohibition may require us to issue additional equity securities in order to provide us with sufficient cash to fund our working capital, liquidity and capital expenditure needs. There can be no assurance as to the price

22


 

Table of Contents

and terms on which such equity securities may be issued, and our stockholders’ equity interest in us may be materially diluted. For example, on June 19, 2020, we sold an aggregate of 23,287,672 shares of our Common Stock, par value $0.01 per share to accounts managed by Axar at a price of $0.73 per share, an aggregate of $17.0 million. There can be no assurances that we will be able to issue additional equity on any terms, in which case we may not have sufficient cash to fund our working capital, liquidity and capital expenditure needs and we may be unable to comply with one or more of the financial maintenance covenants in the Indenture.

GENERAL RISKS

A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.

We are subject to federal income tax laws and state tax laws. The number of tax years open to audit varies depending on the tax jurisdiction. The federal statutes of limitations have expired for all tax years prior to 2016, and we are not currently under audit by the Internal Revenue Service (“IRS”). Various state jurisdictions are conducting sales tax audits from years 2015 to 2019 and escheat audits from year 2005 to present day. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our accruals reflect the probable outcome of known tax contingencies. However, unfavorable settlement of any particular issue may reduce a deferred tax asset or require the use of cash, which may have a material adverse impact to our financial statements. Favorable resolution could result in reduced income tax expense reported in the financial statements in the future. For further details, see Part II, Item 8. Financial Statements and Supplementary Data, Note 12 Income Taxes of this Annual Report.

Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could have a material adverse effect on the results of our operations, financial condition, or cash flows.

We make judgments regarding the utilization of existing income tax credits and the potential tax effects of various financial transactions and results of operations to estimate our obligations to taxing authorities. Tax obligations include income, franchise, real estate, sales and use and employment-related taxes. These judgments include reserves for potential adverse outcomes regarding tax positions that have been taken. Changes in federal, state, or local tax laws, adverse tax audit results, or adverse tax rulings on positions taken could have a material adverse effect on the results of our operations, financial condition or cash flow.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

23


 

Table of Contents

ITEM 2.

PROPERTIES

CEMETERIES AND FUNERAL HOMES

The following table summarizes the distribution of our cemetery and funeral home properties by state as of December 31, 2020 as well as the average estimated remaining sales life in years for our cemeteries based upon the number of interment spaces sold during the most recent three years:

 

 

Cemeteries

 

 

Funeral

Homes

 

 

Cemetery

Net Acres

 

 

Average

Estimated Net

Sales Life

in Years

 

 

Number

of Interment

Spaces Sold

in 2020

 

Alabama

 

 

9

 

 

 

6

 

 

 

305

 

 

 

201

 

 

 

1,048

 

California

 

 

 

 

 

 

 

 

 

 

 

 

 

 

558

 

Colorado

 

 

2

 

 

 

 

 

 

12

 

 

 

483

 

 

 

23

 

Delaware

 

 

1

 

 

 

 

 

 

12

 

 

 

299

 

 

 

9

 

Florida

 

 

9

 

 

 

25

 

 

 

278

 

 

 

107

 

 

 

799

 

Georgia

 

 

7

 

 

 

 

 

 

135

 

 

 

147

 

 

 

601

 

Illinois

 

 

11

 

 

 

2

 

 

 

438

 

 

 

62

 

 

 

1,044

 

Indiana

 

 

11

 

 

 

5

 

 

 

1,013

 

 

 

264

 

 

 

1,012

 

Iowa

 

 

1

 

 

 

 

 

 

89

 

 

 

686

 

 

 

69

 

Kansas

 

 

3

 

 

 

2

 

 

 

84

 

 

 

175

 

 

 

231

 

Kentucky

 

 

2

 

 

 

 

 

 

59

 

 

 

139

 

 

 

157

 

Maryland

 

 

10

 

 

 

1

 

 

 

716

 

 

 

226

 

 

 

1,043

 

Michigan

 

 

13

 

 

 

 

 

 

818

 

 

 

378

 

 

 

841

 

Mississippi

 

 

2

 

 

 

1

 

 

 

44

 

 

 

369

 

 

 

35

 

Missouri

 

 

6

 

 

 

3

 

 

 

277

 

 

 

292

 

 

 

457

 

New Jersey

 

 

6

 

 

 

 

 

 

341

 

 

 

86

 

 

 

861

 

North Carolina

 

 

19

 

 

 

2

 

 

 

619

 

 

 

212

 

 

 

1,505

 

Ohio

 

 

13

 

 

 

2

 

 

 

627

 

 

 

387

 

 

 

922

 

Oregon

 

 

7

 

 

 

10

 

 

 

162

 

 

 

273

 

 

 

382

 

Pennsylvania

 

 

68

 

 

 

8

 

 

 

5,319

 

 

 

380

 

 

 

5,480

 

Puerto Rico

 

 

7

 

 

 

4

 

 

 

209

 

 

 

85

 

 

 

600

 

Rhode Island

 

 

2

 

 

 

 

 

 

70

 

 

 

225

 

 

 

20

 

South Carolina

 

 

8

 

 

 

1

 

 

 

395

 

 

 

377

 

 

 

256

 

Tennessee

 

 

11

 

 

 

4

 

 

 

657

 

 

 

188

 

 

 

1,372

 

Virginia

 

 

34

 

 

 

2

 

 

 

1,183

 

 

 

280

 

 

 

2,008

 

Washington

 

 

2

 

 

 

 

 

 

14

 

 

 

32

 

 

 

66

 

West Virginia

 

 

33

 

 

 

2

 

 

 

1,404

 

 

 

684

 

 

 

876

 

Wisconsin

 

 

16

 

 

 

 

 

 

533

 

 

 

214

 

 

 

634

 

Total

 

 

313

 

 

 

80

 

 

 

15,813

 

 

 

272

 

 

 

22,909

 

We calculated estimated remaining sales life for each of our cemeteries by dividing the number of unsold interment spaces as of December 31, 2020 by the average number of interment spaces sold at that cemetery in the three most recent fiscal years. For purposes of estimating remaining sales life, we defined unsold interment spaces as unsold burial lots and unsold spaces in existing mausoleum crypts as of December 31, 2020. We defined interment spaces sold in the three most recent fiscal years as:

 

the number of burial lots sold, net of cancellations, over such period;

 

the number of spaces sold over such period in existing mausoleum crypts, net of cancellations; and

 

the number of spaces sold over such period in mausoleum crypts that we have not yet built, net of cancellations.

We count the sale of a double-depth burial lot as the sale of two interment spaces since a double-depth burial lot includes two interment rights. For the same reason we count an unsold double-depth burial lot as two unsold interment spaces. Because our sales of cremation niches were immaterial, we did not include cremation niches in the calculation of estimated remaining sales life. When calculating estimated remaining sales life, we did not take into account any future cemetery expansion. In addition, sales of an unusually high or low number of interment spaces in a particular year affect our calculation of estimated remaining sales life. Future sales may differ from previous years’ sales, and actual remaining sales life may differ from our estimates. We calculated the average estimated remaining sales life by aggregating unsold interment spaces and interment spaces sold on a

24


 

Table of Contents

state-by-state or company-wide basis. Based on the average number of interment spaces sold in the last three fiscal years, we estimate that our cemeteries have an aggregate average remaining sales life of 272 years.

The following table shows the cemetery properties that we owned or operated as of December 31, 2020, grouped by estimated remaining sales life:

 

 

0 - 25

years

 

 

26 - 49

years

 

 

50 - 100

years

 

 

101 - 150

years

 

 

151 - 200

years

 

 

Over 200

years

 

Alabama

 

 

 

 

 

 

 

 

1

 

 

 

3

 

 

 

3

 

 

 

2

 

Colorado

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Delaware

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Florida

 

 

1

 

 

 

1

 

 

 

2

 

 

 

3

 

 

 

1

 

 

 

1

 

Georgia

 

 

 

 

 

1

 

 

 

2

 

 

 

 

 

 

1

 

 

 

3

 

Illinois

 

 

1

 

 

 

3

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

4

 

Indiana

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

3

 

 

 

6

 

Iowa

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Kansas

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Kentucky

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Maryland

 

 

2

 

 

 

 

 

 

 

 

 

2

 

 

 

1

 

 

 

5

 

Michigan

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

10

 

Mississippi

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Missouri

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

3

 

New Jersey

 

 

2

 

 

 

 

 

 

2

 

 

 

1

 

 

 

1

 

 

 

 

North Carolina

 

 

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

13

 

Ohio

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

10

 

Oregon

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

5

 

Pennsylvania

 

 

9

 

 

 

1

 

 

 

6

 

 

 

5

 

 

 

1

 

 

 

46

 

Puerto Rico

 

 

 

 

 

1

 

 

 

3

 

 

 

2

 

 

 

1

 

 

 

 

Rhode Island

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

South Carolina

 

 

 

 

 

 

 

 

2

 

 

 

1

 

 

 

 

 

 

5

 

Tennessee

 

 

 

 

 

1

 

 

 

 

 

 

3

 

 

 

 

 

 

7

 

Virginia

 

 

4

 

 

 

 

 

 

1

 

 

 

4

 

 

 

2

 

 

 

23

 

Washington

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

West Virginia

 

 

5

 

 

 

 

 

 

2

 

 

 

1

 

 

 

4

 

 

 

21

 

Wisconsin

 

 

1

 

 

 

 

 

 

1

 

 

 

1

 

 

 

2

 

 

 

11

 

Total

 

 

25

 

 

 

13

 

 

 

30

 

 

 

37

 

 

 

25

 

 

 

183

 

We believe that we have either satisfactory title to or valid rights to use all of our cemetery properties. The 30 cemetery properties that we manage or operate under long-term lease, operating or management agreements have nonprofit owners. We believe that these cemeteries have either satisfactory title to or valid rights to use these cemetery properties and that we have valid rights to use these properties under the long-term agreements. Although title to the cemetery properties is subject to encumbrances, such as liens for taxes, encumbrances securing payment obligations, easements, restrictions and immaterial encumbrances, we do not believe that any of these burdens should materially detract from the value of these properties or from our interest in these properties nor should these burdens materially interfere with the use of our cemetery properties in the operation of our business as described above. Many of our cemetery properties are located in zoned regions, and we believe that cemetery use is permitted for those cemeteries: (i) as expressly permitted under applicable zoning ordinances; (ii) through a special exception to applicable zoning designations; or (iii) as an existing non-conforming use.

OTHER

In November 2020, we terminated the lease of 57,000 square feet for our corporate office in Trevose, PA. Simultaneously, we executed a new lease of approximately 16,000 square feet for our corporate office in Bensalem PA, with a new landlord for an eight year term commencing April 1, 2021. In the interim, the new landlord provided a temporary office space at the same location of approximately 5,500 square feet to use during the buildout of the new office space.

We are also tenants under various leases covering office spaces other than our corporate headquarters.

25


 

Table of Contents

ITEM 3.

LEGAL PROCEEDINGS

For information regarding our significant pending administrative and judicial proceedings involving regulatory, operating, transactional, environmental, and other matters, see Part II, Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 15 Commitments and Contingencies.

We and certain of our subsidiaries are parties to legal proceedings that have arisen in the ordinary course of business. We do not expect such matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows. We carry insurance with coverage and coverage limits that we believe to be customary in the cemetery and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect us against such contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock is listed on the NYSE under the symbol “STON”.

HOLDERS

As of March 19, 2021, there were approximately 23 holders of record of our common stock. The number of record holders does not include persons who held our common stock in nominee or “street name” accounts through brokers.

EQUITY COMPENSATION PLAN

For equity compensation plan information, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Annual Report.

PERFORMANCE GRAPH

As a smaller reporting company, we have elected not to provide the performance graph otherwise required by this Item.

ITEM 6.

SELECTED FINANCIAL DATA

As a smaller reporting company, we have elected not to provide the disclosure otherwise required under this Item.

 

26


 

Table of Contents

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis presented below provides information to assist in understanding the Company’s financial condition and results of operations and should be read in conjunction with the Company’s consolidated financial statements included in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report.

Certain statements contained in this Annual Report, including, but not limited to, information regarding our operating activities, the plans and objectives of our management and assumptions regarding our future performance and plans are forward-looking statements. When used in this Annual Report, the words “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on management’s expectations and estimates. These statements are neither promises nor guarantees and are made subject to certain risks and uncertainties that could cause actual results to differ materially from the results stated or implied in this Annual Report. We believe the assumptions underlying the consolidated financial statements are reasonable.

Our risks and uncertainties are more particularly described in Part I, Item 1A. Risk Factors of this Annual Report. You should not place undue reliance on forward-looking statements included in this Annual Report, which speak only as of the date the statements were made. Except as required by applicable laws, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

BUSINESS OVERVIEW

We are one of the leading providers of funeral and cemetery products and services in the death care industry in the United States (“U.S.”). As of December 31, 2020, we operated 313 cemeteries in 26 states and Puerto Rico, of which 283 were owned and 30 were operated under leases, operating agreements or management agreements. We also owned, operated or managed 80 funeral homes in 16 states and Puerto Rico. On December 31, 2019, we consummated the C-Corporation Conversion for the purpose of transitioning the Partnership and its affiliates from a master limited partnership structure to a corporate form. See Part II. Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 1 General of this Annual Report for further information related to the C-Corporation Conversion.

Our revenue is derived from our Cemetery Operations and Funeral Home Operations segments. Our Cemetery Operations segment principally generates revenue from sales of interment rights, cemetery merchandise, which includes markers, bases, vaults, caskets and cremation niches and our cemetery services, which include opening and closing (“O&C”) services, cremation services and fees for the installation of cemetery merchandise. Our Funeral Home Operations segment principally generates revenue from sales of funeral home merchandise, which includes caskets and other funeral related items and service revenues, which include services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation and prayer services. These sales occur both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Our Funeral Home Operations segment also include revenues related to the sale of term and whole life insurance on an agency basis, in which we earn a commission from the sales of these insurance policies.

The pre-need sales enhance our financial position by providing a backlog of future revenue from both trust and insurance-funded pre-need funeral and cemetery sales. We believe pre-need sales add to the stability and predictability of our revenues and cash flows. Pre-need sales are typically sold on an installment plan. While revenue on the majority of pre-need funeral sales is deferred until the time of need, sales of pre-need cemetery property interment rights provide opportunities for full current revenue recognition when the property is available for use by the customer.

We also earn investment income on certain payments received from customers on pre-need contracts, which are required by law to be deposited into the merchandise and service trusts. Amounts are withdrawn from the merchandise and service trusts when we fulfill the performance obligations. Earnings on these trust funds, which are specifically identifiable for each performance obligation, are also included in the total transaction price. For sales of interment rights, a portion of the cash proceeds received are required to be deposited into a perpetual care trust. While the principal balance of the perpetual care trust must remain in the trust in perpetuity, we recognize investment income on such assets as revenue, excluding realized gains and losses from the sale of trust assets. Pre-need contracts are subject to financing arrangements on an installment basis, with a contractual term not to exceed 60 months. Interest income is recognized utilizing the effective interest method. For those contracts that do not bear a market rate of interest, we impute such interest based upon the prime rate at the time of origination plus 150 basis points in order to segregate the principal and interest components of the total contract value.

27


 

Table of Contents

Our revenue depends upon the demand for funeral and cemetery services and merchandise, which can be influenced by a variety of factors, some of which are beyond our control including demographic trends, such as population growth, average age, death rates and number of deaths. Our operating results and cash flows could also be influenced by our ability to remain relevant to the customers. We provide a variety of unique product and service offerings to meet the needs of our customers’ families. The mix of services could influence operating results, as it influences the average revenue per contract. Expense management, which includes controlling salaries, merchandise costs, corporate overhead and other expense categories, could also impact operating results and cash flows. Lastly, economic conditions, legislative and regulatory changes and tax law changes, all of which are beyond our control, could impact our operating results and cash flows.

For further discussion of our key operating metrics, see our Results of Operations and Liquidity and Capital Resources sections below.

RECENT EVENTS

The following are key events and transactions that have occurred since January 1, 2020 that were material to us and/or facilitate an understanding of our consolidated financial statements contained in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report:

 

COVID-19 Pandemic. See the following section “General Trends and Outlook” of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion on the impact we have seen on our business as a result of the COVID-19 Pandemic.

 

Divestitures and Debt Redemptions. On January 3, 2020, we consummated the Oakmont Sale for an aggregate cash purchase price of $33.0 million. On April 7, 2020, we completed the Olivet Sale for an aggregate cash purchase price of $25.0 million, subject to certain adjustments, and the assumption of certain liabilities, including $17.1 million in land purchase obligations. On November 3, 2020, we completed the Remaining California Sale for a cash purchase price of $7.1 million, subject to certain closing adjustments. In addition, on November 6, 2020, we entered into the Clearstone Agreement with Clearstone Memorial Partners, LLC to sell substantially all of our assets in Oregon and Washington, consisting of nine cemeteries, ten funeral establishments and four crematories for a net cash purchase price of $6.2 million, subject to certain adjustments. We anticipate that this transaction will close in the first half of 2021. During 2020, we redeemed an aggregate $60.0 million of principal of Senior Secured Notes, primarily using the net proceeds from the divestitures discussed above. Additionally, per the Indenture, we anticipate using 80% of the net proceeds from the Clearstone Sale to redeem additional portions of the outstanding Senior Secured Notes.

The Clearstone Agreement to sell the Clearstone Assets, together with the other divestitures completed in 2020 described above, represents a strategic exit from the West Coast. Therefore, the results of operations of the Clearstone Assets, and of the businesses sold in 2020 for the period before their respective sales, have been presented as discontinued operations on the accompanying consolidated statements of operations for the year ended December 31, 2020, and the prior period has been reclassified. Additionally, all of the assets and liabilities associated with the Clearstone Assets have been classified as held for sale on the accompanying consolidated balance sheet at December 31, 2020, and the prior period has been reclassified. The assets and liabilities of the businesses sold in 2020 have been presented as held for sale on the accompanying balance sheet at December 31, 2019.

 

Amendment to Indenture and Capital Raise. On April 1, 2020, the Partnership, CFS West Virginia and Wilmington Trust, National Association, as trustee, entered into the Supplemental Indenture. Pursuant to the terms of the Supplemental Indenture, several financial covenants were amended. Concurrently with the execution of the Supplemental Indenture, we entered the Axar Commitment pursuant to which Axar committed to (a) purchase shares of our Series A Preferred Stock with an aggregate purchase price of $8.8 million on April 3, 2020, (b) exercise its basic rights in the rights offering by tendering the shares of Series A Preferred Stock so purchased for shares of Common Stock and (c) purchase any shares offered in the rights offering for which other stockholders do not exercise their rights, up to a maximum of an additional $8.2 million of such shares. We did not pay Axar any commitment, backstop or other fees in connection with the Axar Commitment. As contemplated by the Axar Commitment, on April 3, 2020, we sold an aggregate of 176 shares of our Series A Preferred Stock to the 2020 Purchasers for an aggregate purchase price of $8.8 million. Under the terms of the Supplemental Indenture and the Axar Commitment, we agreed to undertake an offering to holders of our Common Stock of transferable rights to purchase their pro rata share of shares of Common Stock with an aggregate exercise price of at least $17.0 million at a price of $0.73 per share.

On May 27, 2020, we entered into a Common Stock Purchase Agreement (the “Common Stock Purchase Agreement”) with Axar, the accounts managed by Axar set forth on Schedule B thereto and one or more accounts managed by Axar to be designated by it (collectively, the “Purchasers”) pursuant to which we agreed to sell an aggregate of 23,287,672 shares of our Common Stock, par value $0.01 per share to the Purchasers at a price of $0.73 per share, an aggregate of $17.0 million. Because our common stock had been trading at a price less than the $0.73 subscription price for the

28


 

Table of Contents

rights offering described above and that under similar circumstances our previous rights offering received only 10% participation, our Board of Directors determined and Axar agreed in the Common Stock Purchase Agreement to amend the Axar Commitment to provide for a direct purchase of the 23,287,672 shares of common stock and avoid the expense of proceeding with the rights offering while obtaining the same per share and aggregate purchase price contemplated by the Axar Commitment.

On June 19, 2020, we completed the sale of the aggregate of 23,287,672 shares of our Common Stock (the “New Common Shares”) as contemplated by the Common Stock Purchase Agreement. We issued and sold to the Purchasers, and the Purchasers acquired and purchased from us, (a) 12,054,795 New Common Shares in exchange for the surrender of 176 shares of Preferred Shares purchased on April 3, 2020, with a stated value of $8.8 million (an exchange ratio of 68,493.15 New Common Shares for each share of Series A Preferred Stock surrendered), and (b) 11,232,877 New Common Shares for a cash purchase price of $0.73 per share, an aggregate of $8.2 million. We offered and sold the New Common Shares in reliance upon the exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof. We relied on this exemption from registration based in part on representations made by the Purchasers in the Purchase Agreement.

 

Strategic Partnership Agreement. On April 2, 2020, we entered into two multi-year MSAs with Moon. Under the terms of the MSAs, Moon provides all grounds and maintenance services at most of the funeral homes, cemeteries and other properties we own or manage including, but not limited to, landscaping, openings and closings, burials, installations, routine maintenance and janitorial services. Moon hired all of our grounds and maintenance employees at the serviced locations upon transition and performs all functions handled by those employees.

We agreed to pay a total of approximately $241.0 million over the term of the contracts, which run through December 31, 2024, based upon an initial annual cost of approximately $49.0 million and annual increases of 2%. The first year costs were prorated based upon exact implementation and roll-out schedule for each location. As part of the MSAs, we subleased to Moon the landscaping and maintenance equipment that we lease and to lease the landscaping and maintenance equipment to Moon that we own for the duration of the agreements. We agreed to transfer title to any such equipment we own at the end of the term to Moon, in each case without any additional payment by Moon. As of December 31, 2020, the net book value of the equipment we lease to Moon was approximately $4.6 million.

Each party has the right to terminate the MSAs at any time on six months’ prior written notice, provided that if we terminate the MSAs without cause, we will be obligated to pay Moon an equipment credit fee in the amount of $1.0 million for each year remaining in the term, prorated for the portion of the year in which any such termination occurs. The MSAs also contain representations, covenants and indemnity provisions that are customary for agreements of this nature.

 

Axar Proposal. On May 27, 2020, we announced that we received the Proposal, dated May 24, 2020, from Axar proposing to acquire all of our outstanding shares of common stock not owned by Axar or its affiliates for $0.67 per share in cash, subject to certain conditions. On May 26, 2020, our Board of Directors formed the Special Committee consisting of independent directors to consider and evaluate the transaction contemplated by the Proposal. The Special Committee retained independent legal and financial advisors to assist in its review and evaluation of the proposed transaction and had been authorized by the Board to reject the proposed transaction or to recommend that the Board of Directors approve the terms of the proposed transaction. On June 16, 2020, we announced that the Special Committee sent a letter to Axar informing it that, after reviewing the Proposal, it had rejected the price proposed by Axar as inadequate. On July 31, 2020, we announced that the Special Committee of the board of directors had received an Amended Proposal from Axar proposing to acquire all of the outstanding shares of common stock of the Company not owned by Axar or its affiliates for $0.80 per share in cash, subject to certain conditions. On September 8, 2020, we announced that Axar, after determining that it would not be able to reach an agreement with the Special Committee on terms that would be satisfactory to Axar, had withdrawn its proposal to acquire all of the outstanding shares of common stock of the Company not owned by Axar or its affiliates. Axar currently owns approximately 70.5% of our outstanding common stock.

 

NYSE Delisting Notification.  On April 14, 2020, we received notice from the NYSE stating that we were not in compliance with the NYSE’s continued listing requirements because the 30-trading day average closing price of our Common Stock had fallen below $1.00 per share over a consecutive 30 trading-day period, which is the minimum average share price for continued listing on the NYSE. On December 23, 2020, we received notification from the NYSE that we had regained compliance with the minimum share price requirement. We also remain in compliance with all other NYSE continued listing standard rules.

29


 

Table of Contents

GENERAL TRENDS AND OUTLOOK

We expect our business to be affected by key trends in the deathcare industry, based upon assumptions made by us and information currently available. Deathcare industry factors affecting our financial position and results of operations include, but are not limited to, death rates, the ongoing COVID-19 Pandemic, per capita disposable income, demographic trends in terms of number of adults aged 65 and older, cremation rates and trends and e-commerce sales. The number of deaths which is related to the age structure of the population, mortality rates, disease prevalence, natural disasters, sudden accidents, suicides and other causes drives industry revenue. With the aging of the U.S. population, the number of deaths is expected to increase over the next several years.

Cremations typically cost significantly less than traditional burial services and bring in significantly less revenue and profit for cemeteries and funeral homes. The rising demand for cremations due to cost considerations, increased mobility of the population, environmental reasons, religious considerations and changing consumer preferences present a potential threat to the cemetery services and funeral homes industries. According to the National Funeral Directors Association’s 2020 Cremation & Burial Report, in 2020, the projected burial rate is 37.5% (down 7.7% from 2015) and projected cremation rate is 56.0% (up 8.1% from 2015). Over that same time period, we have seen a shift from traditional burial services to cremations, with a 44.5% burial rate for funeral home calls in 2020 compared to 48.2% for 2015.

Funeral homes have traditionally benefited from limited competition for industry products, such as caskets and urns; however, online retailers are beginning to encroach on this market sector by offering these products to consumers at more cost-effective prices.

In addition, we are subject to fluctuations in the fair value of equity and fixed-maturity debt securities held in our trusts. These values can be negatively impacted by contractions in the credit market and overall downturns in economic activity. Our ability to make payments on our debt depends on our success at managing operations with respect to these industry trends. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results.

30


 

Table of Contents

COVID-19 Pandemic

The COVID-19 Pandemic poses a significant threat to the health and economic wellbeing of our employees, customers and vendors. Our operations are deemed essential by the state and local governments in which we operate, with the exception of Puerto Rico, and we have been working with federal, state and local government officials to ensure that we continue to satisfy their requirements for offering our essential services.

Our top priority is the health and safety of our employees and the families we serve. Since the start of the outbreak in the U.S., our Company’s senior management team has taken actions to protect our employees and the families served, and to support our field locations as they adapt and adjust to the circumstances resulting from the COVID-19 Pandemic. The operation of all of our facilities is critically dependent on the employees who staff these locations. To ensure the wellbeing of our employees and their families, we provided all of our employees with detailed health and safety literature on COVID-19, such as the CDC’s industry-specific guidelines for working with the deceased who were or may have been infected with COVID-19. In addition, our procurement and safety teams have consistently secured and distributed supplies to ensure that our locations have appropriate personal protective equipment (“PPE”) and cleaning supplies to provide our essential services, as well as updated and developed new safety-oriented guidelines to support daily field operations. These guidelines include reducing the number of staff present for a service and restricting the size and number of attendees. We also implemented additional safety and precautionary measures as it concerns our businesses’ day-to-day interaction with the families and communities we serve. Our corporate office employees began working from home in March 2020 consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting our field operations. We have not experienced any significant disruptions to our business as a result of the work from home policies in our corporate office. We monitor the CDC guidance on a regular basis, continually review and update our processes and procedures and provide updates to our employees as needed to comply with regulatory guidelines.

Our marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a variety of web-based tools to ensure that we can continue to connect with and meet our customers’ needs in a safe, effective and productive manner. Some of our locations provide live video streaming of their funeral and burial services to our customers or providing other alternatives that respect social distancing, so that family and friends can connect during their time of grief.

Like most businesses world-wide, the COVID-19 Pandemic has impacted us financially. During the last two weeks of the first quarter and into beginning of the second quarter of 2020, we saw our pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. However, during the last two months of the second quarter and the second half of the year, we experienced at-need sales growth. While we expect that our pre-need sales could continue to be challenged during the continued COVID-19 Pandemic, we believe the implementation of our virtual meeting tools is one of several key steps to mitigate this disruption. Throughout this disruption our cemeteries and funeral homes have largely remained open and available to serve our families in all the locations in which we operate to the extent permitted by local authorities, with the exception of Puerto Rico, and we expect that this will continue. However, we have experienced limited location closures due to COVID-19 cases, required quarantines and cleanings. In addition, during the year ended December 31, 2020, we incurred costs of approximately $1.0 million related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic.

We expect the COVID-19 Pandemic could have an adverse effect on our future results of operations and cash flows, however we cannot presently predict, with certainty, the scope and severity of that impact. We may incur additional costs related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic. In the event there are confirmed diagnoses of COVID-19 within a significant number of our facilities, we may incur additional costs related to the closing and subsequent cleaning of these facilities and the ability to adequately staff the impacted sites. In addition, our pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic. As a result of the implications of COVID-19, we assessed long-lived assets for impairment and concluded no assets were impaired as of December 31, 2020.

On May 5, 2020, our Board of Directors, at the recommendation of its Compensation, Nominating and Governance Committee (the “CNG Committee”), approved certain voluntary temporary reductions in base salaries implemented by our senior management as part of measures being taken to reduce expenses given the uncertainty regarding the extent and potential duration of the COVID-19 Pandemic and its impact on our financial condition. These voluntary base salary reductions, which began on April 20, 2020 and continued for ten weeks, did not modify other rights under any agreements or employee benefits that are determined by reference to base salary and did not give rise to any “good reason” resignation rights or any breach under the affected employees’ applicable arrangements with us. At the CNG Committee’s recommendation, the Board also approved reductions of 50% of the quarterly retainer fee and additional Board committee chair fees payable to non-employee directors for a ten-week period of the third quarter of 2020.

31


 

Table of Contents

Business Strategies

We believe that the implementation of the key strategic initiatives in our turnaround plan allowed us to succeed during the tumultuous environment associated with the COVID-19 Pandemic. The Recapitalization Transactions completed in 2019 provided the financial footing to execute upon these strategic initiatives, including:

 

Strategic Evaluation of Asset Base. We completed a thorough financial and operational review of all of our assets. The assets were stratified into three tiers of properties that allowed our management to focus on the top tier, which included our largest and most strategic properties, and define the appropriate steps forward for each location to deliver optimized results. The divestiture program that will result in the sale and exit of our West Coast operations in California, Oregon and Washington, was a direct result of this strategic review.

 

Decentralized Operating Structure. We implemented a decentralized operating model with general managers overseeing regionally clustered properties, leading to an increased focus and alignment of resources, which in turn created efficiencies and reduced friction across the platform. General Managers are accountable for full results of operations activity, including both sales and EBITDA targets, resulting in a unified goal for both sales and operations team members.

 

Sales Productivity and Profitable Sales Growth. We completed an extensive analysis of our sales productivity across our tenure bands to drive targeted training and increased sales. We revised the sales compensation program to align resources for our top sales members, which included the elimination of the lowest tier of sales performers, who carried significant fixed costs without the supporting sales volume. We developed and implemented a new regionally-based recruiting and on-boarding plan to increase retention and increase sales production among our lowest tenured sales members.

 

Significant Expense Reductions. Through a series of actions, we have significantly reduced both our corporate and field office expenditures. In our corporate office, we have executed on reductions in force that have reduced our corporate headcount by nearly 50% since the beginning of 2019. Through strategic hiring efforts, we have reduced our reliance upon expensive third-party professionals and consultants. Additionally, we integrated our new procurement software, reduced field headcount, outsourced maintenance, relocated and downsized our corporate headquarters and implemented new technology and expense saving measures.

Our future success will be supported by these key strategic initiatives. As we look ahead, there are new challenges and initiatives that will supplement this core and enhance our position going forward:

 

Refinancing. While the Recapitalization Transactions in 2019 provided the necessary financial foothold to execute on our turnaround strategies, we have begun the process of refinancing our Senior Secured Notes. We expect that any such refinancing will include a significant reduction in interest rates while providing a new source of capital and added financial flexibility, in order to execute on the growth and refinement strategies detailed below.

 

 

Strategic Growth.  We expect our growth to be generated through both organic and inorganic growth initiatives.  

 

 

o

Organic Growth Strategies. A key component of our long-term growth plan is same-store sales growth through the following:

 

Strategic development of new product inventory, including cremation gardens and mausoleums, to generate new revenue opportunities, and target stagnant inventory for liquidation through pricing discounts and incentives;

 

Review of pricing metrics within local communities to determine pricing opportunities to drive additional revenue, and decrease reliance on discounts to drive sales through enhanced training;

 

Continued enhancement of training modules to deliver selling skills opportunities to sales managers and team members and empower sales managers and leaders to run business and encourage sales culture; and

 

Focus on 4-Wall EBITDA growth through detailed analytics of pricing and expenses and incentives on higher margin merchandise and services.

 

 

o

Inorganic Growth Strategies. We are focused on expansion opportunities beyond our current portfolio of assets through the pursuit of accretive acquisitions within our new geographic footprint that will leverage our existing synergies.

 

32


 

Table of Contents

 

Building a World Class Operator. We continue to develop and refine each of the foundation projects that standardized and modernized the Company during 2019 and 2020, leading to new, complementary projects that will further those goals.

RESULTS OF OPERATIONS

We have two distinct reportable segments, Cemetery Operations and Funeral Home Operations, which are supported by corporate costs and expenses.

Cemetery Operations

Overview

We are currently one of the largest owners and operators of cemeteries in the United States of America. As of December 31, 2020, we operated 313 cemeteries in 26 states and Puerto Rico. We own 283 of these cemeteries, and we manage or operate the remaining 30 under leases, operating agreements or management agreements. Revenues from our Cemetery Operations segment accounted for approximately 85% and 84% of our consolidated revenues during the years ended December 31, 2020 and 2019, respectively.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

The following table presents operating results for our Cemetery Operations segment for the years ended December 31, 2020 and 2019 (in thousands):

 

 

Year Ended December 31,

 

 

 

 

 

 

Variance

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Interments

 

$

67,853

 

 

$

57,010

 

 

$

10,843

 

 

 

19

%

Merchandise

 

 

60,600

 

 

 

59,938

 

 

 

662

 

 

 

1

%

Services

 

 

65,701

 

 

 

62,676

 

 

 

3,025

 

 

 

5

%

Interest income

 

 

7,763

 

 

 

7,608

 

 

 

155

 

 

 

2

%

Investment and other

 

 

35,969

 

 

 

29,390

 

 

 

6,579

 

 

 

22

%

Total revenues

 

 

237,886

 

 

 

216,622

 

 

 

21,264

 

 

 

10

%

Cost of goods sold

 

 

40,119

 

 

 

37,088

 

 

 

3,031

 

 

 

8

%

Cemetery expense

 

 

68,654

 

 

 

69,828

 

 

 

(1,174

)

 

 

(2

%)

Selling expense

 

 

49,668

 

 

 

53,710

 

 

 

(4,042

)

 

 

(8

%)

General and administrative expense

 

 

37,970

 

 

 

40,830

 

 

 

(2,860

)

 

 

(7

%)

Depreciation and amortization

 

 

6,474

 

 

 

7,122

 

 

 

(648

)

 

 

(9

%)

Total costs and expenses

 

 

202,885

 

 

 

208,578

 

 

 

(5,693

)

 

 

(3

%)

Segment operating profit

 

$

35,001

 

 

$

8,044

 

 

$

26,957

 

 

 

335

%

The following table presents supplemental operating data for the years ended December 31, 2020 and 2019:

 

 

Year Ended December 31,

 

 

 

 

 

 

Variance

 

 

 

2020

 

 

2019

 

 

#

 

 

%

 

SUPPLEMENTAL DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interments performed

 

 

53,309

 

 

 

49,462

 

 

 

3,847

 

 

 

8

%

Net interment rights sold (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lots

 

 

23,270

 

 

 

24,754

 

 

 

(1,484

)

 

 

(6

%)

Mausoleum crypts (including pre-construction)

 

 

1,667

 

 

 

1,479

 

 

 

188

 

 

 

13

%

Niches

 

 

1,798

 

 

 

1,796

 

 

 

2

 

 

 

0

%

Total net interment rights sold (1)

 

 

26,735

 

 

 

28,029

 

 

 

(1,294

)

 

 

(5

%)

______________________________

 

(1)

Net of cancellations. Sales of double-depth burial lots and tandem mausoleum crypts are counted as one sale.

Total interments performed increased 8% for the year ended December 31, 2020 as compared to the year ended December 31, 2019. At-need interments performed comprised 51% of the total interments performed, up from 49% in 2019. The increase in at-need interments performed, which grew 12.3% year over year, can largely be attributed to the COVID-19 Pandemic. We saw an increase in pre-need turned at-need interments of 3.4% year over year.

33


 

Table of Contents

Cemetery interments revenues were $67.9 million for the year ended December 31, 2020, an increase of $10.8 million and 19% from $57.0 million for the year ended December 31, 2019. The increase in cemetery interments revenues was primarily due to an increase of $4.8 million in at-need interments performed and increasing prices, as at-need cemetery interments revenue increased 30%, as well as an increase of $3.6 million in pre-need interment revenues, which represents an increase of 9.0% due to strong pre-need sales production during 2020. Lastly, 2019 cemetery interments revenue were negatively impacted by a $2.2 million true-up related to the implementation of Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”).

Cemetery merchandise revenues were $60.6 million for the year ended December 31, 2020, an increase of $0.7 million and 1% from $59.9 million for the year ended December 31, 2019. The increase in cemetery merchandise revenues was primarily due to a $1.5 million or 5.2% increase in at-need cemetery merchandise revenues resulting from the higher at-need interments performed noted above. This increase was offset by a $2.3 million or 6.9% decrease in pre-need cemetery merchandise revenues, net of cancellations, as the rise in at-need interments decreased our capacity to deliver and service certain pre-need merchandise. 2019 cemetery merchandise revenues were positively impacted by a $1.5 million true-up related to the implementation of ASC 606.

Cemetery services revenues were $65.7 million for the year ended December 31, 2020, an increase of $3.0 million and 5% from $62.7 million for the year ended December 31, 2019. The increase in cemetery services revenues was primarily due to a $4.3 million or 10.0% increase in at-need cemetery services revenues associated with the increased number of at-need interments performed. This increase included a $1.3 million decrease in marker installation, which typically occurs after the interment and has been delayed by both the increased at-need activity and longer lead-times from our suppliers. Pre-need cemetery services revenues declined by $2.2 million or 10.6%, driven largely by a significant reduction in the number of pre-installed vaults, which declined as a result of increased at-need activity.  2019 cemetery revenues were negatively impacted by a $1.0 million true-up related to the implementation of ASC 606.

Investment and other income was $36.0 million for the year ended December 31, 2020, an increase of $6.6 million and 22% from $29.4 million for the year ended December 31, 2019. An increase of $7.5 million was primarily due to strong investment returns on the perpetual care trusts, which was partially offset by a decrease of $0.8 million resulting from a decrease in the revenue recognized on the merchandise trusts directly associated with the declines in pre-need cemetery merchandise revenues noted above.

Cost of goods sold was $40.1 million for the year ended December 31, 2020, an increase of $3.0 million and 8% from $37.1 million for the year ended December 31, 2019, as revenues recognized increased. Cost of goods sold, as a percentage of cemetery interments, merchandise and services revenues, remained consistent at 20.7% for the year ended December 31, 2020 compared to 20.6% for the year ended December 31, 2019.

Cemetery expenses, which include maintenance and landscaping costs as well as certain facility related expenses, were $68.7 million for the year ended December 31, 2020, a decrease of $1.2 million and 2% from $69.8 million for the year ended December 31, 2019. The change was due to savings generated through transformation initiatives focused on cost controls and expense management. Savings are largely attributable to the outsourcing program we launched during 2020 for maintenance and landscaping services at most of our cemetery locations, which minimized additional costs associated with the increased interments performed.

Selling expenses were $49.7 million for the year ended December 31, 2020, a decrease of $4.0 million and 8% from $53.7 million for the year ended December 31, 2019. Selling expenses as a percentage of cemetery interments, merchandise and services revenues decreased to 25.6% for the year ended December 31, 2020, compared to 29.9% for the year ended December 31, 2019. This improvement was driven by a restructured and simplified commission and bonus structure, as well as a reduction in the overall sales force, resulting in better commission programs for top performers. Additionally, there was a $3.8 million savings associated with marketing and advertising, driven by a refinement in digital advertising with an improved focus on the most impactful spend.

General and administrative expenses were $38.0 million for the year ended December 31, 2020, a decrease of $2.9 million and 7% from $40.8 million for the year ended December 31, 2019. The entire decrease was due to savings generated from a reduction in the overall payroll expense associated with the administrative functions in our cemeteries, particularly in response to the COVID-19 Pandemic, and overall transformation initiatives focused on cost controls and expense management.

Depreciation and amortization expenses were $6.5 million for the year ended December 31, 2020, a decrease of $0.6 million and 9% from $7.1 million for the year ended December 31, 2019. The change was due to routine depreciation and amortization of the associated asset base.

34


 

Table of Contents

Funeral Home Operations

Overview

As of December 31, 2020, we owned, operated or managed 80 funeral homes located in 16 states and Puerto Rico. Revenues from Funeral Home Operations accounted for approximately 15% and 16% of our consolidated revenues during the years ended December 31, 2020 and 2019, respectively.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

The following table presents operating results for our Funeral Home Operations for the years ended December 31, 2020 and 2019 (in thousands):

 

 

Year Ended December 31,

 

 

 

 

 

 

Variance

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Merchandise

 

$

21,637

 

 

$

19,682

 

 

$

1,955

 

 

 

10

%

Services

 

 

20,016

 

 

 

20,938

 

 

 

(922

)

 

 

(4

%)

Total revenues

 

 

41,653

 

 

 

40,620

 

 

 

1,033

 

 

 

3

%

Merchandise

 

 

5,872

 

 

 

5,725

 

 

 

147

 

 

 

3

%

Services

 

 

18,078

 

 

 

17,144

 

 

 

934

 

 

 

5

%

Depreciation and amortization

 

 

1,824

 

 

 

2,046

 

 

 

(222

)

 

 

(11

%)

Other

 

 

10,839

 

 

 

11,671

 

 

 

(832

)

 

 

(7

%)

Total expenses

 

 

36,613

 

 

 

36,586

 

 

 

27

 

 

 

0

%

Segment operating profit

 

$

5,040

 

 

$

4,034

 

 

$

1,006

 

 

 

25

%

Funeral home merchandise revenues were $21.6 million for the year ended December 31, 2020, an increase of $2.0 million and 10% from $19.7 million for the year ended December 31, 2019. The change was due to increases in at-need funeral home merchandise revenue, which grew $1.3 million or 10.7%, and growth in pre-need funeral home merchandise revenue, which grew $0.6 million or 8.1%.

Funeral home services revenues were $20.0 million for the year ended December 31, 2020, a decrease of $0.9 million and 4% from $20.9 million for the year ended December 31, 2019. The decrease was primarily due to lower pre-need funeral home service revenues of $2.8 million, partially offset by increases in at-need funeral home service revenues of $0.6 million and other revenues of $1.3 million. As a percentage of total funeral home revenues, funeral home services revenues represented 48.1% for the year ended December 31, 2020, compared to 51.5% for the year ended December 31, 2019, as services were limited in many states by restrictions related to the COVID-19 Pandemic.

Funeral home total expenses remained flat for the year ended December 31, 2020 as compared to the year ended December 31, 2019. Funeral home service costs increased $0.9 million or 5%, despite the reduction in funeral home service revenues, driven by a 5% increase in number of calls and associated costs, resulting in lower margins as the corresponding services were limited in many states by COVID-19 Pandemic related restrictions. This was offset by decreased facility expenses and savings associated with the transformation initiatives focused on cost controls and expense management.

35


 

Table of Contents

Corporate

Operating Results

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Corporate Overhead

The following table summarizes our corporate overhead by expense category for the years ended December 31, 2020 and 2019 (in thousands):

 

 

Year Ended December 31,

 

 

 

 

 

 

Variance

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Corporate overhead

 

$

35,975

 

 

$

51,107

 

 

$

(15,132

)

 

 

(30

%)

Non-recurring adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance

 

 

201

 

 

 

1,459

 

 

 

(1,258

)

 

 

(86

%)

C-Corporation Conversion fees

 

 

75

 

 

 

2,378

 

 

 

(2,303

)

 

 

(97

%)

Other professional fees

 

 

748

 

 

 

5,641

 

 

 

(4,893

)

 

 

(87

%)

Total non-recurring adjustments

 

 

1,024

 

 

 

9,478

 

 

 

(8,454

)

 

 

(89

%)

Corporate overhead, adjusted

 

$

34,951

 

 

$

41,629

 

 

$

(6,678

)

 

 

(16

%)

Corporate overhead expense was $36.0 million for the year ended December 31, 2020, a decrease of $15.1 million and 30% from $51.1 million for the year ended December 31, 2019. The change was due to the following:

 

a reduction in professional fees of $8.4 million resulting from roll-off of financial advisory and consulting fees, the completion of the C-Corporation conversion, a change in auditors and a decrease in legal fees;

 

savings in payroll and benefits of $3.2 million resulting from reductions in workforce in 2019 and early 2020 and a roll-off of the related severance;

 

a decrease in non-cash stock compensation expense of $2.1 million; and

 

a decrease of $1.4 million resulting from targeted transformation initiatives with a focus on cost controls and expense management coupled with savings brought about by COVID-19 restrictions.

Other Gains (Losses), Net

Other gains, net were $0.1 million for the year ended December 31, 2020, an improvement of $8.0 million and 102% from other losses, net of $7.9 million for the year ended December 31, 2019. Other losses, net for the year ended December 31, 2019 consisted of a $2.8 million impairment of cemetery property, a $2.4 million impairment charge related to damaged and excess inventory and damaged allocated merchandise, a $2.1 million loss on the termination of a management agreement and $0.6 million related to other loss events.

Interest Expense

Interest expense was $45.5 million for the year ended December 31, 2020, an increase of $0.3 million and 1% from $45.2 million for the year ended December 31, 2019. The change was primarily due to the following:

 

an increase of $11.9 million related to a higher interest rate and principal on the 9.875% Senior Secured PIK Toggle Notes compared to the interest rate and principal of the 7.875% Senior Notes;

 

a decrease of $8.1 million related to the payoff of the revolving credit facility in the prior year; and

 

a decrease of $3.5 million resulting from the write-off and amortization of deferred financing fees and discount accretion

Loss on Debt Extinguishment

There was no loss on debt extinguishment for the year ended December 31, 2020. For the year ended December 31, 2019, loss on debt extinguishment was $8.5 million and related to the write-off of deferred financing fees of $6.9 million and original issue discounts of $1.6 million associated with the refinancing of the senior notes and revolving credit facilities.

36


 

Table of Contents

Loss on Goodwill Impairment

There was no loss on goodwill impairment for the year ended December 31, 2020. For the year ended December 31, 2019, we recorded a loss on goodwill impairment of $24.9 million related to our Cemetery Operations reporting unit. For further information, see Part II, Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 9 Goodwill and Intangible Assets of this Annual Report.

Income Tax Benefit (Expense)

Income tax benefit was $4.9 million for the year ended December 31, 2020 compared to $28.2 million income tax expense for the year ended December 31, 2019. The income tax benefit for the year ended December 31, 2020 was primarily related to changes in projected federal deferred tax savings related to filing a consolidated federal return. The provision for the year ended December 31, 2019 was primarily due to IRC Section 382 limitations created in connection with the Recapitalization Transactions, which took place in June 2019, on our ability to generate taxable income to use our net operating loss carryovers to offset existing deferred tax liabilities.

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of liquidity are cash generated from operations and proceeds from asset sales. Our primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust funds and debt service. Amounts contributed to the merchandise trust funds will be withdrawn at the time of the delivery of the product or service sold to which the contribution related, which will reduce the amount of additional borrowings or asset sales needed.

While we rely heavily on our available cash and cash flows from operating activities to execute our operational strategy and meet our financial commitments and other short-term financial needs, we cannot be certain that sufficient capital will be generated through operations or be available to us to the extent required and on acceptable terms. We have experienced negative financial trends, including net losses and use of cash in operating activities, which, when considered in the aggregate, raise substantial doubt about our ability to continue as a going concern.

During 2019 and 2020, we implemented various actions to improve profitability and cash flows to fund operations. A summary of these actions is as follows:

2019

 

sold an aggregate of 52,083,333 of the Partnership’s Preferred Units for an aggregate purchase price of $57.5 million and completed a private placement of $385.0 million of the Senior Secured Notes. The net proceeds of both transactions were used to fully repay the then-outstanding senior notes due in June 2021 and retire our revolving credit facility that was due in May 2020;

 

managed recurring operating expenses and sought to limit non-recurring operating expenses; and

 

identified sales of select assets to de-leverage the balance sheet.

 

2020

 

completed certain asset sales previously identified in 2019;

 

on April 1, 2020, entered into the Third Supplemental Indenture to the Indenture to amend certain financial covenants;

 

on April 3, 2020, sold 176 shares of Series A Preferred Stock to Axar for a cash price of $50,000 per share, an aggregate of $8.8 million;

 

on June 19, 2020, issued 12,054,795 share of Common Stock in exchange for the 176 shares of Series A Preferred Stock and sold an additional 11,232,877 shares of Common Stock for a cash purchase price of $0.73 per share, an aggregate of $8.2 million; and

 

implemented cost reduction initiatives specifically to minimize the impact of the COVID-19 Pandemic on us, including streamlining corporate staff, consolidating field positions to reduce redundancies and implementing executive level salary reductions.

37


 

Table of Contents

There is no certainty that our actual operating performance and cash flows will not be substantially different from forecasted results or that we will not need amendments to the Indenture in the future or that any such amendments will be available on terms acceptable to us or at all. Factors that could impact the assumptions used by us in assessing our ability to satisfy our financial covenants include the following:

 

operating performance not meeting reasonably expected forecasts, including the effects of the COVID-19 Pandemic on our operations;

 

failing to generate profitable sales;

 

investments in our trust funds experiencing significant declines due to factors outside our control;

 

being unable to compete successfully with other cemeteries and funeral homes in our markets;

 

the number of deaths in our markets declining; and

 

an adverse change in the mix of funeral and cemetery revenues between burials and cremations.

If our planned, implemented and not yet implemented actions are not successful in generating sustainable cash savings for us, or we fail to improve our operating performance and cash flows or we are not able to comply with the covenants under the Indenture, we may be forced to limit our business activities, limit our ability to implement further modifications to our operations or limit the effectiveness of some actions that are included in our forecasts, amend the Indenture and/or seek other sources of capital, and we may be unable to continue as a going concern. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Any of these events may have a material adverse effect on our results of operations and financial condition, and limit our ability to continue as a going concern.

Based on our forecasted operating performance, planned actions to improve our profitability and cash flows, the execution of the Supplemental Indenture and the Axar Commitment and the completion of the transactions contemplated thereby, including receipt of $17.0 million in proceeds from equity sales, together with plans to file financial statements on a timely basis consistent with the debt covenants, we do not believe it is probable that we will breach the covenants under the Indenture or be unable to continue as a going concern for the next twelve-month period. As such, the consolidated financial statements for the years ended December 31, 2020 and 2019 were prepared on the basis of a going concern, which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments, if any, that would be necessary should we be required to liquidate our assets.

Cash Flows

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

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Net cash provided by (used in) operating activities

 

$

1,360

 

 

$

(37,986

)

Net cash provided by (used in) investing activities

 

 

50,983

 

 

 

(163

)

Net cash (used in) provided by financing activities

 

 

(49,020

)

 

 

76,769

 

Significant sources and uses of cash during the Years Ended December 31, 2020 and 2019

Operating Activities

Net cash provided by operating activities was $1.4 million for the year ended December 31, 2020 compared to $38.0 million of net cash used in operating activities of continuing operations during the year ended December 31, 2019. The $39.3 million change in operating cash flow was primarily due to the following:

 

Net income adjusted for non-cash items increased $66.3 million primarily due to increased sales coupled with expense management efforts during the year ended December 31, 2020.

 

Our operating cash flows were negatively impacted by other working capital items which resulted in a net decrease in operating cash inflows of $27.0 million.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2020 was $51.0 million compared to net cash used in investing activities of $0.2 million the for the year ended December 31, 2019. The cash provided by investing activities for the year ended December 31, 2020 was attributable to proceeds from the divestitures of discontinued operations of $57.3 million, offset in part by capital expenditures of $6.4 million. Net cash used in investing activities during the year ended December 31,

38


 

Table of Contents

2019 consisted of $6.4 million used for capital expenditures, offset by proceeds from divestitures of $6.3 million, which consisted of a $5.0 million deposit we received in connection with the Oakmont Sale and $1.3 million from the termination of one of our management agreements.

Financing Activities

Net cash used in financing activities for the year ended December 31, 2020 was $49.0 million, a decrease of $125.8 million from net cash provided by financing activities of $76.8 million for the year ended December 31, 2019, primarily due to the redemption of $60.0 million of Senior Secured Notes, using proceeds from the Oakmont Sale, the Olivet Sale and the Remaining California Sale, financing costs of $4.2 million related to the debt amendment in April 2020 and principal payments of $1.6 million on our finance leases. This was offset in part by $17.0 million of proceeds from the issuance of equity in connection with the Axar Commitment. Net cash provided by financing activities for the year ended December 31, 2019 consisted of the impact of the Recapitalization Transactions in June 2019, which resulted in proceeds of $371.5 million from the issuance of the Senior Secured Notes and $57.5 million from the issuance of redeemable convertible preferred units. Proceeds from borrowings also included $34.6 million of borrowings under the existing revolving credit facility. These proceeds were offset partially by the repayment in full of the Senior Notes and revolving credit facility totaling $366.9 million and the payment of $18.0 million in related financing costs, as well as principal payments of $1.5 million on our finance leases.

Capital Expenditures

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

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Maintenance capital expenditures

 

$

2,268

 

 

$

1,590

 

Expansion capital expenditures

 

 

4,092

 

 

 

4,828

 

Total capital expenditures

 

$

6,360

 

 

$

6,418

 

Contractual Obligations

In the normal course of business, we enter into various contractual and contingent obligations that impact or could impact our liquidity. We have contractual obligations requiring future cash payments related to debt maturities, interest on debt, operating lease and finance lease agreements, liabilities to purchase merchandise related to our pre-need sales contracts and capital commitments to private credit funds. A summary of our total contractual and contingent obligations as of December 31, 2020 is presented in the table below (in thousands):

 

 

Total

 

 

Less than 1 year

 

 

1-3 years

 

 

3-5 years

 

 

More than 5 years

 

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt(1)

 

$

464,359

 

 

$

34,376

 

 

$

68,147

 

 

$

361,836

 

 

$

 

Operating leases

 

 

6,071

 

 

 

1,615

 

 

 

2,067

 

 

 

1,297

 

 

 

1,092

 

Finance leases

 

 

4,513

 

 

 

1,791

 

 

 

2,582

 

 

 

140

 

 

 

 

Lease and management agreements(2)

 

 

37,507

 

 

 

 

 

 

 

 

 

8,257

 

 

 

29,250

 

Deferred revenues(3)

 

 

949,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Master services agreements(4)

 

 

206,521

 

 

 

50,107

 

 

 

103,240

 

 

 

53,174

 

 

 

 

Self-insurance-related liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workers compensation

 

 

9,852

 

 

 

3,631

 

 

 

3,488

 

 

 

1,163

 

 

 

1,570

 

General liability

 

 

6,861

 

 

 

2,517

 

 

 

2,920

 

 

 

758

 

 

 

666

 

Medical

 

 

2,532

 

 

 

2,532

 

 

 

 

 

 

 

 

 

 

Total contractual obligations

 

 

1,687,380

 

 

 

96,569

 

 

 

182,444

 

 

 

426,625

 

 

 

32,578

 

Contingent Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investment funds(5)

 

 

88,811

 

 

 

88,811

 

 

 

 

 

 

 

 

 

 

Total contingent obligations

 

 

88,811

 

 

 

88,811

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,776,191

 

 

$

185,380

 

 

$

182,444

 

 

$

426,625

 

 

$

32,578

 

 

(1)

Represents the face value of and interest payable on our Senior Secured Notes and our financed vehicles outstanding as of December 31, 2020, exclusive of the unamortized debt discounts and unamortized deferred financing fees as of December 31, 2020 of $9.5 million and $14.7 million, respectively. This table assumes that we pay the fixed rate 9.875% cash interest and that current principal amounts outstanding under the Senior Secured Notes are not repaid until the maturity date of June 30, 2024. In the event of certain optional redemptions prior to maturity, we are required

39


 

Table of Contents

 

to pay a declining redemption premium, which would have been approximately $26.0 million if the outstanding Senior Secured Notes had been redeemed on December 31, 2020. Per the Indenture, we anticipate using 80% of the net proceeds from the Clearstone Sale to redeem portions of the outstanding Senior Secured Notes.

 

(2)

Represents the aggregate rent payments pertaining to our lease and management agreements with the Archdiocese of Philadelphia. This table assumes that we defer the rent payments, together with accrued interest compounded quarterly, that are related to the periods from June 1, 2019 through May 31, 2025. This table does not include any associated unamortized discount. For further details, see "Agreements with the Archdiocese of Philadelphia" section below.

 

(3)

Total cannot be separated into periods, because we are unable to anticipate when the merchandise and services will be delivered. This balance represents the revenues to be recognized from the total performance obligations on our customer contracts.

 

(4)

Represents the contractual fees due under the MSAs with Moon entered into in April 2020. Each party has the right to terminate the MSAs at any time on six months’ prior written notice, provided that if we terminate the MSAs without cause, we will be obligated to pay Moon an equipment credit fee in the amount of $1.0 million for each year remaining in the term, prorated for the portion of the year in which any such termination occurs.

 

(5)

Represents unfunded capital commitments to private credit funds that are callable at any time during the lockup periods, which range from zero to six years with three potential one year extensions at the discretion of the funds’ general partners and which will be funded using existing trust assets.

Not included in the above table are potential funding obligations related to our merchandise and service trusts. In certain states, we have withdrawn allowable distributable earnings including unrealized gains prior to the maturity or cancellation of the related contract. In the event that our trust investments do not recover from market declines, we may be required to deposit portions or all of these amounts into the respective trusts in some future period. Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions when trust fund values drop below certain prescribed amounts. As of December 31, 2020, we had unrealized losses of $1.3 million in the various trusts within these states.

Agreements with the Archdiocese of Philadelphia

In accordance with the lease and management agreements with the Archdiocese of Philadelphia, we have agreed to pay to the Archdiocese aggregate fixed rent of $36.0 million in the following amounts:

 

Lease Years 1-5 (May 28, 2014-May 31, 2019)

 

None

Lease Years 6-20 (June 1, 2019-May 31, 2034)

 

$1,000,000 per Lease Year

Lease Years 21-25 (June 1, 2034-May 31, 2039)

 

$1,200,000 per Lease Year

Lease Years 26-35 (June 1, 2039-May 31, 2049)

 

$1,500,000 per Lease Year

Lease Years 36-60 (June 1, 2049-May 31, 2074)

 

None

 

The fixed rent for lease years 6 through 11, an aggregate of $6.0 million is deferred. If prior to May 31, 2025, the Archdiocese terminates the agreements pursuant to its terms during lease year 11 or we terminate the agreements as a result of a default by the Archdiocese, we are entitled to retain the deferred fixed rent. If the agreements are not terminated, the deferred fixed rent will become due and payable on or before June 30, 2025.

Long-Term Debt

Senior Secured Notes

On June 27, 2019, the Partnership, CFS West and, collectively with the Partnership, certain direct and indirect subsidiaries of the Partnership, the initial purchasers party thereto and Wilmington Trust, National Association, as trustee and as collateral agent, entered into an indenture with respect to the 9.875%/11.500% Senior Secured PIK Toggle Notes due 2024.

For further detail on our Senior Secured Notes, see Note 10 Long-Term Debt of Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report.

Surety Bonds

We have entered into arrangements with certain surety companies, whereby such companies agree to issue surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various

40


 

Table of Contents

business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our pre-need sales activities.

When selling pre-need contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. If we were not able to renew or replace any such surety bond, we would be required to fund the trust only for the portion of the applicable pre-need contracts for which we have received payments from the customers, less any applicable retainage, in accordance with state law. We have provided cash collateral to secure these surety bond obligations and may be required to provide additional cash collateral in the future under certain circumstances.

For the years ended December 31, 2020 and 2019, we had $97.5 million and $92.3 million, respectively, of cash receipts from sales attributable to related bond contracts. These amounts do not consider reductions associated with taxes, obtaining costs or other costs.

Surety bond premiums are paid annually and the bonds are automatically renewable until maturity of the underlying pre-need contracts, unless we are given prior notice of cancellation. Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, we would be required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. We do not expect that we will be required to fund material future amounts related to these surety bonds due to a lack of surety capacity or surety company non-performance.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our consolidated financial statements and related notes included within Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report in conformity with general accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and disclosure of contingent assets and liabilities that arose during the reporting period and through the date our financial statements are filed with the SEC. Although we base our estimates on historical experience and various other assumptions we believe to be reasonable, actual results may differ from these estimates.

A critical accounting estimate or policy is one that requires a high level of subjective judgement by management and could have a material impact on our financial position, results of operations or cash flows if actual results vary significantly from our estimates.

Revenue Recognition

We recognize revenue in an amount that reflects the consideration to which we expect to be entitled for the transfer of goods and services to our customers. We account for individual products and services separately as distinct performance obligations. Our performance obligations include the delivery of funeral and cemetery merchandise and services and cemetery property interment rights. Revenue is measured based on the consideration specified in a contract with a customer and is net of any sales incentives and amounts collected on behalf of third parties. The consideration (including any discounts) is allocated among separate products and services in a package based on their relative stand-alone selling prices. The stand-alone selling price is determined by management based upon local market conditions and reasonable ranges for both merchandise and services, which is the best estimate of the stand-alone price. For items that are not sold separately (e.g., second interment rights), we estimate stand-alone selling prices using the best estimate of market value, using inputs such as average selling price and list price broken down by each geographic location. Additionally, we consider typical sales promotions that could impact the stand-alone selling price estimates.

Pursuant to state law, all or a portion of the proceeds from funeral and cemetery merchandise or services sold on a pre-need basis may be required to be paid into trust funds. We defer investment earnings related to these merchandise and service trusts until the associated merchandise is delivered or services are performed. A portion of the proceeds from the sale of cemetery property interment rights is required by state law to be paid by us into perpetual care trust funds to maintain the cemetery. The portion of these proceeds are not recognized as revenue. Investment earnings from these trusts are distributed to us regularly and recognized in current cemetery revenue.

Inaccuracies in our records of the timing of physical delivery of our merchandise and services can have a material impact on our financial position, results of operations or cash flows.

Deferred Revenues

41


 

Table of Contents

Revenues from the sale of services and merchandise, as well as any investment income from the merchandise trusts, are deferred until such time as the services are performed or the merchandise is delivered. In addition to amounts deferred on new contracts, investment income and unrealized gains and losses on our merchandise trusts are recognized as deferred revenues. Deferred revenues also include deferred revenues from pre-need sales that we acquired through our various acquisitions, and we provide a profit margin for these deferred revenues to account for the projected future costs of delivering products and providing services on these acquired pre-need contracts.

Inaccuracies in our records of the timing of physical delivery of our merchandise and services can have a material impact on our financial position, results of operations or cash flows.

For further details on our deferred revenues, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General and Note 13 Deferred Revenues and Costs.

Allowance for Doubtful Accounts

Accounts receivable is presented net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined by applying a cancellation rate to amounts included in accounts receivable. The cancellation rate is based upon a five year average rate by each specific location.

Inaccuracies in the judgements made in determining the cancelation rate can have a material impact on our financial position, results of operations or cash flows.

For further details on our allowance for doubtful accounts, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General and Note 4 Accounts Receivable, Net of Allowance.

Other-Than-Temporary Impairment of Trust Assets

Assets held in our merchandise trusts are carried at fair value. Any change in unrealized gains and losses is reflected in the carrying value of the assets and is recognized as deferred revenue. Any and all investment income streams, including interest, dividends or gains and losses from the sale of trust assets, are offset against deferred revenue until such time that we deliver the underlying merchandise. Investment income generated from our merchandise trust is included in "Cemetery investment and other revenues".

Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. All principal must remain in this trust in perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred. Assets in our perpetual care trusts are carried at fair value. Any change in unrealized gains and losses is reflected in the carrying value of the assets and is offset against perpetual care trust corpus.

We evaluate whether or not the assets in our merchandise and perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. We determine whether or not the impairment of a fixed maturity debt security is other-than-temporary by evaluating each of the following:

 

Whether it is our intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary.

 

If there is no intent to sell, we evaluate whether it is not more likely than not we will be required to sell the debt security before its anticipated recovery. If we determine that it is more likely than not that we will be required to sell an impaired investment before its anticipated recovery, the impairment is considered to be other-than-temporary.

42


 

Table of Contents

We further evaluate whether or not all assets in the trusts have other-than-temporary impairments based upon a number of criteria including the severity of the impairment, length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer.

If an impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value. For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings. For assets held in the merchandise trusts, any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.

Inaccuracies in the judgements made in assessing our intent to sell and severity of impairment and in analyzing the changes in market conditions and concerns related to an asset’s issuer can have a material impact on our financial position, results of operations or cash flows.

For further details on our other-than-temporary impairment of our trust assets, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General, Note 7 Merchandise Trusts and Note 8 Perpetual Care Trusts.

Valuation of long-lived assets

We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We do not have indefinite-lived assets. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings.

We apply various valuation techniques, such as the income approach or sales comparison approach, to determine the fair values of our long-lived assets. In evaluating our long-lived assets for recoverability, we consider current market conditions and our intent with respect to holding or disposing of the assets. The factors used in our evaluations for recoverability and the inputs we use in applying the valuation technique we select are highly subjective and very sensitive to changes in the underlying assumptions. Changes in economic and operating conditions or our intent with regard to our long-lived assets that occurs subsequent to our impairment analyses could impact these assumptions and result in future impairments of our long-lived assets.

Inaccuracies made in the judgements discussed above in determining the fair value of long-lived assets can have a material impact on our financial position, results of operations or cash flows.

For further details on our intangible assets see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General.

Income Taxes

We are subject to both federal and state income taxes. We record deferred tax assets and liabilities to recognize temporary differences between the bases of assets and liabilities in our tax and GAAP balance sheets and for federal and state NOL carryforwards and alternative minimum tax credits. We record a valuation allowance against our deferred tax assets, if we deem that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realizable in future periods.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions regarding the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make significant judgments about our forecasts of our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

As of December 31, 2020, we had federal and state NOL carryforwards of approximately $413.0 million and $540.0 million, respectively, a portion of which expires annually. We believe the Recapitalization Transactions caused a “change of control” for income tax purposes under the applicable provisions of the Internal Revenue Code of 1986, as amended, which may significantly limit our ability to use such federal NOL carryforwards to offset future taxable income. The “change of control” rules limit the annual net operating loss deduction in a given year to an amount based on the value of the Company on the change date multiplied by the federal tax exempt bond rate. This makes it more likely for the Company to pay some amount of income tax in the years it has positive taxable income. This limitation also makes it more likely for NOL carryovers to expire unutilized. The C-Corporation Conversion did not impact our ability to use existing NOLs.

43


 

Table of Contents

For further details on our income taxes, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General and Note 12 Income Taxes.

Contingencies

We are party to various legal proceedings in the ordinary course of our business, as well as class and collective actions under the Exchange Act and for related state law claims that certain of our officers and directors breached their fiduciary duty to the Partnership and its unitholders. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The accuracy of the estimates used to determine probability and amount of a potential future liability is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform.

Differences between the actual settlement costs, final judgments or fines and our estimates could have a material impact on our financial position, results of operations or cash flows.

For further details on our contingencies, see Part II, Item 8. Financial Statements and Supplementary Data–Note 15 Commitments and Contingencies.

Insurance loss reserves

We purchase comprehensive general liability, professional liability, automobile liability and workers’ compensation insurance coverages structured with high deductibles. This high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. Historical insurance industry experience indicates a high degree of inherent variability in assessing the ultimate amount of losses associated with casualty insurance claims. This is especially true with respect to liability and workers’ compensation exposures due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, which is often many years. We continually evaluate loss estimates associated with claims and losses related to these insurance coverages falling within the deductible of each coverage.

We analyze and adjust our insurance loss reserve, using assumptions based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness that impact our analysis and determination of the “best estimate” of the projected ultimate claim losses.

Differences between actual insurance loss settlements and our insurance loss reserves could have a material impact on our financial position, results of operations or cash flows.

Recent Accounting Pronouncements and Accounting Changes

 

For discussion of recent accounting pronouncements and accounting changes, see Part II, Item 8. Financial Statements and Supplementary Data–Note 1 General.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market" risk refers to the risk of gains or losses arising from changes in interest rates and prices of marketable securities. The disclosures are not meant to be precise indicators of expected future gains or losses, but rather indicators of reasonably possible gains or losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk-sensitive instruments were entered into for purposes other than trading.

The trusts are invested in assets with the primary objective of maximizing income and distributable cash flow for trust distributions, while maintaining an acceptable level of risk. Certain asset classes in which we invest for the purpose of maximizing yield are subject to an increased market risk. This increased market risk will create volatility in the unrealized gains and losses of the trust assets from period to period.

For additional information on the investments in our merchandise trusts and perpetual trusts, see Part II, Item 8. Financial Statements and Supplementary Data – Note 7 Merchandise Trusts and Note 8 Perpetual Care Trusts of this Annual Report.

44


 

Table of Contents

INTEREST-BEARING INVESTMENTS

The interest-bearing investments in our merchandise trusts and perpetual care trusts that are subject to interest rate sensitivity consist of fixed-income securities, money market investments and other short-term investments. As of December 31, 2020, the accumulated fair value of the interest-bearing investments in our merchandise trusts and perpetual care trusts was $67.9 million and $22.2 million, respectively, or 13.2% and 7.0% of the fair value of our total trust assets, respectively.

MARKETABLE EQUITY SECURITIES

The marketable equity securities in our merchandise trusts and perpetual care trusts that are subject to market price sensitivity consist of individual equity securities as well as closed and open-ended mutual funds. As of December 31, 2020, the accumulated fair value of the marketable equity securities in our merchandise trusts and perpetual care trusts was $40.6 million and $22.6 million, respectively, or 7.9% and 7.1% of the fair value of our total trust assets, respectively.

OTHER INVESTMENT FUNDS

Other investment funds are measured at fair value using the net asset value per share practical expedient. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from zero to six years with three potential one year extensions at the discretion of the funds’ general partners. This asset class has an inherent valuation risk as the values provided by investment fund managers may not represent the liquidation values obtained by the trusts upon redemption or liquidation of the fund assets. As of December 31, 2020, the fair value of other investment funds in our merchandise trusts and perpetual care trusts represented 70.0% and 81.8%, respectively, of the fair value of total trust assets. The fair market value of the holdings in these funds was $361.2 million and $259.0 million in our merchandise trusts and perpetual care trusts, respectively, as of December 31, 2020, based on net asset value quotes.

 

45


 

Table of Contents

 

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

STONEMOR INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

46


 

Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

StoneMor Inc.

 

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of StoneMor Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in owners’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

 

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2018.

Philadelphia, Pennsylvania

March 25, 2021

 

47


 

Table of Contents

 

 

48


 

Table of Contents

STONEMOR INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents, excluding restricted cash

 

$

39,244

 

 

$

34,867

 

Restricted cash

 

 

20,846

 

 

 

21,900

 

Accounts receivable, net of allowance

 

 

57,869

 

 

 

54,014

 

Prepaid expenses

 

 

5,290

 

 

 

4,619

 

Assets held for sale

 

 

28,575

 

 

 

136,695

 

Other current assets

 

 

16,884

 

 

 

16,882

 

Total current assets

 

 

168,708

 

 

 

268,977

 

 

 

 

 

 

 

 

 

 

Long-term accounts receivable, net of allowance

 

 

75,301

 

 

 

72,808

 

Cemetery property

 

 

299,526

 

 

 

300,486

 

Property and equipment, net of accumulated depreciation

 

 

83,496

 

 

 

91,611

 

Merchandise trusts, restricted, at fair value

 

 

501,453

 

 

 

477,165

 

Perpetual care trusts, restricted, at fair value

 

 

312,228

 

 

 

314,400

 

Deferred selling and obtaining costs

 

 

116,900

 

 

 

110,684

 

Deferred tax assets

 

 

9

 

 

 

81

 

Intangible assets, net

 

 

55,094

 

 

 

56,246

 

Other assets

 

 

22,248

 

 

 

26,910

 

Total assets

 

$

1,634,963

 

 

$

1,719,368

 

 

 

 

 

 

 

 

 

 

Liabilities and Owners' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

51,718

 

 

$

54,854

 

Liabilities held for sale

 

 

23,406

 

 

 

101,704

 

Accrued interest

 

 

95

 

 

 

125

 

Current portion, long-term debt

 

 

317

 

 

 

374

 

Total current liabilities

 

 

75,536

 

 

 

157,057

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of deferred financing costs

 

 

320,715

 

 

 

367,963

 

Deferred revenues

 

 

949,164

 

 

 

899,989

 

Deferred tax liabilities

 

 

29,652

 

 

 

34,613

 

Perpetual care trust corpus

 

 

312,228

 

 

 

314,400

 

Other long-term liabilities

 

 

40,081

 

 

 

47,836

 

Total liabilities

 

 

1,727,376

 

 

 

1,821,858

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owners' equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 200,000,000 shares authorized, 117,871,141 and 94,447,356 shares issued and outstanding, respectively

 

 

1,178

 

 

 

944

 

Paid-in capital in excess of par value

 

 

(85,232

)

 

 

(103,434

)

Accumulated deficit

 

 

(8,359

)

 

 

 

Total owners' equity

 

 

(92,413

)

 

 

(102,490

)

Total liabilities and owners' equity

 

$

1,634,963

 

 

$

1,719,368

 

See Accompanying Notes to the Consolidated Financial Statements.

49


 

Table of Contents

STONEMOR INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Cemetery:

 

 

 

 

 

 

 

 

Interments

 

$

67,853

 

 

$

57,010

 

Merchandise

 

 

60,600

 

 

 

59,938

 

Services

 

 

65,701

 

 

 

62,676

 

Investment and other

 

 

43,732

 

 

 

36,998

 

Funeral home:

 

 

 

 

 

 

 

 

Merchandise

 

 

21,637

 

 

 

19,682

 

Services

 

 

20,016

 

 

 

20,938

 

Total revenues

 

 

279,539

 

 

 

257,242

 

Costs and Expenses:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

40,119

 

 

 

37,088

 

Cemetery expense

 

 

68,654

 

 

 

69,828

 

Selling expense

 

 

49,668

 

 

 

53,710

 

General and administrative expense

 

 

37,970

 

 

 

40,830

 

Corporate overhead

 

 

35,975

 

 

 

51,107

 

Depreciation and amortization

 

 

9,152

 

 

 

10,154

 

Funeral home expenses:

 

 

 

 

 

 

 

 

Merchandise

 

 

5,872

 

 

 

5,725

 

Services

 

 

18,078

 

 

 

17,144

 

Other

 

 

10,839

 

 

 

11,671

 

Total costs and expenses

 

 

276,327

 

 

 

297,257

 

 

 

 

 

 

 

 

 

 

Other gains (losses), net

 

 

129

 

 

 

(7,913

)

Operating income (loss)

 

 

3,341

 

 

 

(47,928

)

Interest expense

 

 

(45,537

)

 

 

(45,246

)

Loss on debt extinguishment

 

 

 

 

 

(8,478

)

Loss on goodwill impairment

 

 

 

 

 

(24,862

)

Loss from continuing operations before income taxes

 

 

(42,196

)

 

 

(126,514

)

Income tax benefit (expense)

 

 

4,855

 

 

 

(28,204

)

Net loss from continuing operations

 

 

(37,341

)

 

 

(154,718

)

Discontinued operations (Note 2):

 

 

 

 

 

 

 

 

Income from operations of discontinued businesses

 

 

28,982

 

 

 

2,776

 

Income tax expense

 

 

 

 

 

 

Net income from discontinued operations

 

 

28,982

 

 

 

2,776

 

Net loss

 

$

(8,359

)

 

$

(151,942

)

 

 

 

 

 

 

 

 

 

Net loss from continuing operations per common share (basic)

 

$

(0.35

)

 

$

(3.91

)

Net income from discontinued operations per common share (basic)

 

 

0.27

 

 

 

0.07

 

Net loss per common share (basic)

 

$

(0.08

)

 

$

(3.84

)

 

 

 

 

 

 

 

 

 

Net loss from continuing operations per common share (diluted)

 

$

(0.35

)

 

$

(3.90

)

Net income from discontinued operations per common share (diluted)

 

 

0.27

 

 

 

0.07

 

Net loss per common share (diluted)

 

$

(0.08

)

 

$

(3.83

)

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

 

106,991

 

 

 

39,614

 

Weighted average number of common shares outstanding - diluted

 

 

106,991

 

 

 

39,677

 

 

See Accompanying Notes to the Consolidated Financial Statements.

50


 

Table of Contents

STONEMOR INC.

CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS’ EQUITY

(dollars in thousands, except units and shares)

 

 

 

Redeemable Convertible

Preferred Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

 

Partners' Deficit

 

 

Series A Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

Outstanding

Preferred

Units

 

 

Value of

Outstanding

Preferred

Units

 

 

Outstanding

Common

Units

 

 

Members' Equity

 

 

Number of Series A Preferred Shares

 

 

Par Value of Series A Preferred Shares

 

 

Number of Common Shares

 

 

Par Value of Common Shares

 

 

Paid-in Capital in Excess of Par Value

 

 

Accumulated  Deficit

 

 

Total

 

December 31, 2018

 

 

 

 

$

 

 

 

37,958,645

 

 

$

(10,618

)

 

 

 

 

$

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

(10,618

)

Issuance of Series A Preferred Units

 

 

11,322,465

 

 

 

12,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,500

 

Issuance of Series A Preferred Units - related party

 

 

40,760,868

 

 

 

45,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45,000

 

Rights offering - related party

 

 

(3,039,380

)

 

 

(3,647

)

 

 

3,039,380

 

 

 

3,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GP Holdings' Merger consideration

 

 

 

 

 

 

 

 

2,950,000

 

 

 

4,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,032

)

 

 

 

 

 

 

Reduction to GP Holdings' Merger consideration related to SEC settlement - related party

 

 

 

 

 

 

 

 

 

(182,909

)

 

 

(250

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(250

)

Unit-based compensation

 

 

 

 

 

 

 

 

 

2,067,088

 

 

 

3,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,623

 

Units repurchased related to unit-based compensation

 

 

 

 

 

 

 

 

 

(428,802

)

 

 

(803

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(803

)

Net loss prior to C-Corporation Conversion (predecessor)

 

 

 

 

 

 

 

 

 

 

 

 

(151,942

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(151,942

)

Effect of the C-Corporation Conversion on owners' equity

 

 

(49,043,953

)

 

 

(53,853

)

 

 

(45,403,402

)

 

 

152,311

 

 

 

 

 

 

 

 

 

94,447,356

 

 

 

944

 

 

 

(99,402

)

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

94,447,356

 

 

 

944

 

 

 

(103,434

)

 

 

 

 

 

(102,490

)

Issuance of Series A Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

176

 

 

 

 

 

 

 

 

 

 

 

 

8,800

 

 

 

 

 

 

8,800

 

Exchange of Series A Preferred Stock for Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(176

)

 

 

 

 

 

12,054,795

 

 

 

121

 

 

 

(121

)

 

 

 

 

 

 

Issuance of Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,232,877

 

 

 

112

 

 

 

8,088

 

 

 

 

 

 

8,200

 

Common stock awards under incentive plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

136,113

 

 

 

1

 

 

 

1,435

 

 

 

 

 

 

1,436

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,359

)

 

 

(8,359

)

December 31, 2020

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

117,871,141

 

 

$

1,178

 

 

$

(85,232

)

 

$

(8,359

)

 

$

(92,413

)

 

 

See Accompanying Notes to the Consolidated Financial Statements.

 

 

51


 

Table of Contents

STONEMOR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,359

)

 

$

(151,942

)

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

 

 

 

 

 

 

 

 

Cost of lots sold

 

 

5,796

 

 

 

7,027

 

Depreciation and amortization

 

 

9,395

 

 

 

10,782

 

Provision for bad debt

 

 

6,275

 

 

 

7,559

 

Non-cash compensation expense

 

 

1,481

 

 

 

3,623

 

Loss on debt extinguishment

 

 

 

 

 

8,478

 

Loss on goodwill impairment

 

 

 

 

 

24,862

 

Non-cash interest expense

 

 

17,884

 

 

 

18,095

 

Gain on sale of businesses

 

 

(29,429

)

 

 

 

Other (gains) losses, net

 

 

(129

)

 

 

8,106

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

 

(20,453

)

 

 

(8,633

)

Merchandise trust fund

 

 

(25,988

)

 

 

(17,916

)

Other assets

 

 

1,675

 

 

 

(56

)

Deferred selling and obtaining costs

 

 

(6,376

)

 

 

(3,598

)

Deferred revenues

 

 

61,611

 

 

 

36,656

 

Deferred taxes, net

 

 

(4,888

)

 

 

27,943

 

Payables and other liabilities

 

 

(7,135

)

 

 

(8,972

)

Net cash provided by (used in) operating activities

 

 

1,360

 

 

 

(37,986

)

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Cash paid for capital expenditures

 

 

(6,360

)

 

 

(6,418

)

Proceeds from divestitures

 

 

57,343

 

 

 

6,255

 

Net cash provided by (used in) investing activities

 

 

50,983

 

 

 

(163

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of Series A Preferred Stock - related party

 

 

8,800

 

 

 

 

Proceeds from issuance of Common Stock - related party

 

 

8,200

 

 

 

 

Proceeds from issuance of redeemable convertible preferred units

 

 

 

 

 

12,500

 

Proceeds from issuance of redeemable convertible preferred units - related party

 

 

 

 

 

45,000

 

Proceeds from borrowings

 

 

3,672

 

 

 

406,087

 

Repayments of debt

 

 

(63,915

)

 

 

(366,905

)

Principal payment on finance leases

 

 

(1,561

)

 

 

(1,464

)

Cost of financing activities

 

 

(4,170

)

 

 

(17,396

)

Reduction to GP Holdings' Merger consideration due to SEC settlement - related party

 

 

 

 

 

(250

)

Units repurchased related to unit-based compensation

 

 

(46

)

 

 

(803

)

Net cash (used in) provided by financing activities

 

 

(49,020

)

 

 

76,769

 

Net increase in cash, cash equivalents and restricted cash

 

 

3,323

 

 

 

38,620

 

Cash, cash equivalents and restricted cash—Beginning of period

 

 

56,767

 

 

 

18,147

 

Cash, cash equivalents and restricted cash—End of period

 

$

60,090

 

 

$

56,767

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

29,212

 

 

$

32,239

 

Cash paid during the period for income taxes

 

 

1,154

 

 

 

1,419

 

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

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

3,187

 

 

$

3,638

 

Operating cash flows from finance leases

 

 

421

 

 

 

495

 

Financing cash flows from finance leases

 

 

1,561

 

 

 

1,464

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Acquisition of assets by financing

 

$

62

 

 

$

2,277

 

Accrued paid-in-kind interest on Senior Secured Notes (defined within)

 

 

10,572

 

 

 

7,867

 

See Accompanying Notes to the Consolidated Financial Statements.

52


 

Table of Contents

STONEMOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

GENERAL

As used in this Annual Report on Form 10-K (the “Annual Report”), unless the context otherwise requires, references to the terms the “Company,” “StoneMor,” “we,” “us,” and “our” refer to StoneMor Inc. and its consolidated subsidiaries for all periods from and after the Merger and to StoneMor Partners L.P. and its consolidated subsidiaries for all periods prior to the Merger.

StoneMor was formed as a Delaware limited partnership in April 2004 and its general partner had been StoneMor GP LLC, a Delaware limited liability company (“StoneMor GP”). From May 2014 until December 31, 2019, the sole member of StoneMor GP was StoneMor GP Holdings LLC, a Delaware limited liability company (“GP Holdings”). Effective as of December 31, 2019, pursuant to that certain Merger and Reorganization Agreement (as amended, the “Merger Agreement”) by and among StoneMor GP, StoneMor Partners L.P., a Delaware limited partnership (the “Partnership”), and Hans Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of StoneMor GP (“Merger Sub”), StoneMor GP converted from a Delaware limited liability company into a Delaware corporation named StoneMor Inc. (the “Company”) and Merger Sub was merged with and into the Partnership (the “Merger”).

In addition, as used in this Annual Report, unless the context otherwise requires, references to (i) the term “Cornerstone” refers to Cornerstone Family Services, Inc.; (ii) the term “CFSI” refers to CFSI LLC; (iii) the term “CFS” refers to Cornerstone Family Services LLC; (iv) the term “CFS West Virginia” refers to Cornerstone Family Services of West Virginia Subsidiary, Inc.; (v) the term “LP Sub” refers to StoneMor LP Holdings, LLC; (vi) the term “ACII” refers to American Cemeteries Infrastructure Investors, LLC; (vii) the term “AUH” refers to AIM Universal Holdings, LLC; (viii) the term “AIM” refers to American Infrastructure MLP Funds; (ix) the term “AIM II” refers to American Infrastructure MLP Fund II, L.P.; (x) the term AIM FFII refers to American Infrastructure MLP Founders Fund II, L.P.; (xi) the term “AIM II StoneMor” refers to AIM II Delaware StoneMor, Inc.; (xii) the term AIM Management II refers to American Infrastructure MLP Management II, L.L.C.; and (xiii) the term AIM II Offshore refers to AIM II Offshore, L.P.

Nature of Operations

StoneMor Inc. is a leading provider of funeral and cemetery products and services in the death care industry in the U.S. As of December 31, 2020, the Company operated 313 cemeteries in 26 states and Puerto Rico, of which 291 were owned and 30 were operated under lease, management or operating agreements. The Company also owned and operated 80 funeral homes, including 42 located on the grounds of cemetery properties that the Company owns, in 16 states and Puerto Rico.

The Company’s cemeteries provide cemetery property interment rights, such as burial lots, lawn and mausoleum crypts, and cremation niches. Cemetery merchandise is comprised of burial vaults, caskets, grave markers and memorials and cemetery services, which include the installation of this merchandise and other service items. The Company sells these products and services both at the time of death, which is referred to as at-need, and prior to the time of death, which is referred to as pre-need.

The Company’s funeral home services include family consultation, the removal and preparation of remains, insurance products and the use of funeral home facilities for visitation and memorial services.

C-Corporation Conversion

On December 31, 2019, pursuant to the terms of the Merger Agreement, the Company completed the following series of reorganization transactions (which the Company sometimes refer to collectively as the “C-Corporation Conversion”):

 

GP Holdings contributed its entire equity interest in the Partnership to StoneMor GP and, in exchange, ultimately received an aggregate of 5,099,969 shares of the Company’s common stock;

 

StoneMor GP contributed the common units in the Partnership it received from GP Holdings to LP Sub, a Delaware limited liability company and wholly-owned subsidiary of StoneMor GP;

 

Merger Sub merged with and into the Partnership, with the Partnership surviving as a Delaware limited partnership, and pursuant to which each outstanding Series A Convertible Preferred Unit (defined within) and Common Unit

53


 

Table of Contents

 

(defined within) (other than the common units held by LP Sub) was converted into the right to receive one share of the Company’s common stock; and

 

StoneMor GP converted from a Delaware limited liability company to a Delaware corporation called StoneMor Inc.

As a result of the C-Corporation Conversion, the Company remains the general partner of the Partnership and LP Sub is the sole limited partner of the Partnership such that, directly or indirectly, the Company owns 100% of the interests in the Partnership.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements included in this Annual Report have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). All intercompany transactions and balances have been eliminated.

The consolidated financial statements include the accounts of each of the Company’s 100% owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 30 cemeteries under long-term leases, operating agreements and management agreements. The operations of 16 of these managed cemeteries have been consolidated. On May 10, 2019, the Company terminated one of the management agreements and recorded a $2.1 million loss upon the termination, which is included in Other losses, net in the accompanying consolidated statements of operations for the year ended December 31, 2019.

The Company operates 14 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities, since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under the long-term leases and other agreements associated with these properties, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services and interment rights and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these agreements, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the agreement period. The Company has also recognized the existing customer contract-related performance obligations that it assumed as part of these agreements.

COVID-19 Pandemic

The COVID-19 Pandemic poses a significant threat to the health and economic wellbeing of the Company’s employees, customers and vendors. The Company’s operations are deemed essential by the state and local governments in which it operates, with the exception of Puerto Rico, and the Company has been working with federal, state and local government officials to ensure that it continues to satisfy their requirements for offering the Company’s essential services.

The Company’s top priority is the health and safety of its employees and the families it serves. Since the start of the outbreak in the U.S., the Company’s senior management team has taken actions to protect its employees and the families it serves, and to support its field locations as they adapt and adjust to the circumstances resulting from the COVID-19 Pandemic. The operation of all of the Company’s facilities is critically dependent on the employees who staff these locations. To ensure the wellbeing of the Company’s employees and their families, the Company provided all of its employees with detailed health and safety literature on COVID-19, such as the CDC’s industry-specific guidelines for working with the deceased who were or may have been infected with COVID-19. In addition, the Company’s procurement and safety teams have consistently secured and distributed supplies to ensure that the Company’s locations have appropriate personal protective equipment (“PPE”) and cleaning supplies to provide its essential services, as well as updated and developed new safety-oriented guidelines to support daily field operations. These guidelines include reducing the number of staff present for a service and restricting the size and number of attendees. The Company also implemented additional safety and precautionary measures as it concerns the businesses’ day-to-day interaction with the families and communities it serves. The Company’s corporate office employees began working from home in March 2020 consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting the field operations. The Company has not experienced any significant disruptions to its business as a result of the work from home policies in its corporate office. The Company monitors the CDC guidance on a regular basis, continually reviews and updates its processes and procedures and provides updates to its employees as needed to comply with regulatory guidelines.

The Company’s marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a variety of web-based tools to ensure that the Company can continue to connect with and meet its customers’ needs in a safe, effective and productive manner. Some of the Company’s locations provide live

54


 

Table of Contents

video streaming of their funeral and burial services to its customers or provide other alternatives that respect social distancing, so that family and friends can connect during their time of grief.

Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially. During the last two weeks of the first quarter and into beginning of the second quarter of 2020, the Company saw its pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. However, during the last two months of the second quarter and the second half of the year, the Company experienced at-need sales growth. While the Company expects that its pre-need sales could continue to be challenged during the continued COVID-19 Pandemic, the Company believes the implementation of its virtual meeting tools is one of several key steps to mitigate this disruption. Throughout this disruption the Company’s cemeteries and funeral homes have largely remained open and available to serve its families in all the locations in which it operates to the extent permitted by local authorities, with the exception of Puerto Rico, and the Company expects that this will continue. However, the Company has experienced limited location closures due to COVID-19 cases, required quarantines and cleanings. In addition, during the year ended December 31, 2020, the Company incurred costs of approximately $1.0 million related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic.

The Company expects the COVID-19 Pandemic could have an adverse effect on its future results of operations and cash flows, however the Company cannot presently predict, with certainty, the scope and severity of that impact. The Company may incur additional costs related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic. In the event there are confirmed diagnoses of COVID-19 within a significant number of its facilities, the Company may incur additional costs related to the closing and subsequent cleaning of these facilities and the ability to adequately staff the impacted sites. In addition, the Company’s pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic. As a result of the implications of COVID-19, the Company assessed long-lived assets for impairment and concluded no assets were impaired as of December 31, 2020.

On May 5, 2020, the Company’s Board of Directors, at the recommendation of its Compensation, Nominating and Governance Committee (the “CNG Committee”), approved certain voluntary temporary reductions in base salaries implemented by the Company’s senior management as part of measures being taken to reduce expenses given the uncertainty regarding the extent and potential duration of the COVID-19 Pandemic and its impact on the Company’s financial condition. These voluntary base salary reductions, which began on April 20, 2020 and continued for ten weeks, did not modify other rights under any agreements or employee benefits that are determined by reference to base salary and did not give rise to any “good reason” resignation rights or any breach under the affected employees’ applicable arrangements with the Company. At the CNG Committee’s recommendation, the Board also approved reductions of 50% of the quarterly retainer fee and additional Board committee chair fees payable to non-employee directors for a ten-week period of the third quarter of 2020.

 

Recapitalization Transactions in 2019

On June 27, 2019, funds and accounts affiliated with Axar Capital and certain other investors and the Company entered into the Series A Purchase Agreement pursuant to which the Partnership sold to the Purchasers an aggregate of 52,083,333 of the Partnership’s Series A Convertible Preferred Units representing limited partner interests in the Partnership at a purchase price of $1.1040 per Preferred Unit, reflecting an 8% discount to the liquidation preference of each Preferred Unit, for an aggregate purchase price of $57.5 million (the “Preferred Offering”). Concurrently with the closing of the Preferred Offering, the Company completed a private placement of $385.0 million of 9.875%/11.500% Senior Secured Notes (the “Senior Secured Notes”) to certain financial institutions (collectively with the Preferred Offering, the “Recapitalization Transactions”). The net proceeds of the Recapitalization Transactions were used to fully repay the then-outstanding senior notes due in June 2021, retire the Company’s revolving credit facility due in May 2020 and pay the associated transaction expenses, with the remaining balance reserved for general corporate purposes.

Sources and Uses of Liquidity

The Company’s primary sources of liquidity are cash generated from operations and proceeds from asset sales. The Company’s primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust funds and debt service. Amounts contributed to the merchandise trust funds will be withdrawn at the time of the delivery of the product or service sold to which the contribution related (see "Summary of Significant Accounting Policies" section below regarding revenue recognition), which will reduce the amount of additional borrowings or asset sales needed.

55


 

Table of Contents

While the Company relies heavily on its available cash and cash flows from operating activities to execute its operational strategy and meet its financial commitments and other short-term financial needs, the Company cannot be certain that sufficient capital will be generated through operations or be available to the Company to the extent required and on acceptable terms. The Company has experienced negative financial trends, including net losses and use of cash in operating activities, which, when considered in the aggregate, could raise substantial doubt about the Company’s ability to continue as a going concern.

During 2019 and 2020, the Company implemented various actions to improve profitability and cash flows to fund operations. A summary of these actions is as follows:

2019

 

sold an aggregate of 52,083,333 Preferred Units for an aggregate purchase price of $57.5 million and completed a private placement of $385.0 million of the Senior Secured Notes. The net proceeds of both transactions were used to fully repay the then-outstanding senior notes due in June 2021 and retire the Company’s revolving credit facility due in May 2020;

 

managed recurring operating expenses and sought to limit non-recurring operating expenses; and

 

identified sales of select assets to de-leverage the balance sheet.

2020

 

completed certain asset sales previously identified in 2019;

 

on April 1, 2020, entered into the Third Supplemental Indenture to the Indenture to amend certain financial covenants;

 

on April 3, 2020, sold 176 shares of Series A Preferred Stock to Axar for a cash price of $50,000 per share, an aggregate of $8.8 million;

 

on June 19, 2020, issued 12,054,795 share of Common Stock in exchange for the 176 shares of Series A Preferred Stock and sold an additional 11,232,877 shares of Common Stock for a cash purchase price of $0.73 per share, an aggregate of $8.2 million; and

 

implemented cost reduction initiatives to minimize the impact of the COVID-19 Pandemic on the Company, including streamlining corporate staff, consolidations of field positions to reduce redundancies and implement executive level salary reductions.

There is no certainty that the Company's actual operating performance and cash flows will not be substantially different from forecasted results and no certainty the Company will not need amendments to the Indenture in the future or that any such amendments will be available on terms acceptable to us or at all. Factors that could impact the assumptions used by the Company in assessing its ability to satisfy its financial covenants include the following:

 

operating performance not meeting reasonably expected forecasts, including the effects of the COVID-19 Pandemic on the Company’s operations;

 

failing to generate profitable sales;

 

investments in the Company's trust funds experiencing significant declines due to factors outside its control;

 

being unable to compete successfully with other cemeteries and funeral homes in the Company's markets;

 

the number of deaths in the Company's markets declining; and

 

an adverse change in the mix of funeral and cemetery revenues between burials and cremations.

If the Company's planned, implemented and not yet implemented actions are not successful in generating sustainable cash savings for the Company, or the Company fails to improve its operating performance and cash flows or the Company is not able to comply with the covenants under the Indenture, the Company may be forced to limit its business activities, limit its ability to implement further modifications to its operations or limit the effectiveness of some actions that are included in its forecasts, amend its Indenture and/or seek other sources of capital, and the Company may be unable to continue as a going concern. Additionally, a failure to generate additional liquidity could negatively impact the Company's access to inventory or services that are important to the operation of the Company's business. Any of these events may have a material adverse effect on the Company's results of operations and financial condition, and limit the Company’s ability to continue as a going concern.

Based on the Company's forecasted operating performance, planned actions to improve the Company’s profitability and cash flows, the execution of the Supplemental Indenture and the Axar Commitment and the completion of the transactions contemplated thereby, including receipt of $17.0 million in proceeds from equity sales, together with plans to file its financial statements on a timely basis consistent with the debt covenants, the Company does not believe it is probable that it will breach the covenants under the Indenture or be unable to continue as a going concern for the next twelve-month period. As such, the consolidated financial statements for the years ended December 31, 2020 and 2019 were prepared on the basis of a going

56


 

Table of Contents

concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments, if any, that would be necessary should the Company be required to liquidate its assets.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions as described in this Annual Report. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents. Cash and Cash Equivalents was $39.2 million and $34.9 million as of December 31, 2020 and December 31, 2019, respectively.

Restricted Cash

Cash that is restricted from withdrawal or use under the terms of certain contractual agreements is recorded as restricted cash. Restricted Cash was $20.8 million and $21.9 million as of December 31, 2020 and 2019, respectively, which primarily related to cash collateralization of the Company’s letters of credit and surety bonds, and at December 31, 2019 also included a $5.0 million refundable deposit the Company received in connection with the sale of one of its properties.

Revenues

The Company’s revenues are derived from contracts with customers through sale and delivery of death care products and services. Primary sources of revenue are derived from (1) cemetery and funeral home operations generated both at-need and pre-need, which are classified on the consolidated statements of operations as Interments, Merchandise and Services, (2) investment income, which includes income earned on assets maintained in perpetual care and merchandise trusts related to pre-need sales of cemetery and funeral home merchandise and services that are required to be maintained in the trust by state law and (3) interest earned on pre-need installment contracts. Investment income is presented within Investment and other for Cemetery revenue and Services for Funeral home revenue. Revenue is measured based on the consideration specified in a contract with a customer and is net of any sales incentives and amounts collected on behalf of third parties. Pre-need contracts are price guaranteed, providing for future merchandise and services at prices prevailing when the agreements are signed.

Investment income is earned on certain payments received from customers on pre-need contracts, which are required by law to be deposited into the merchandise and service trusts. Amounts are withdrawn from the merchandise trusts when the Company fulfills the performance obligations. Earnings on these trust funds, which are specifically identifiable for each performance obligation, are also included in total transaction price. Pre-need contracts are generally subject to financing arrangements on an installment basis, with a contractual term not to exceed 60 months. Interest income is recognized utilizing the effective interest method. For those contracts that do not bear a market rate of interest, the Company imputes such interest based upon the prime rate at the time of origination plus 375 basis points in order to segregate the principal and interest component of the total contract value.  The Company has elected to not adjust the transaction price for the effects of a significant financing component for contracts that have payment terms under one year.

 

At the time of a non-cancellable pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income and any cash deposit paid. The revenue from both the sales and interest income from trusted funds are deferred until the merchandise is delivered or the services are performed. For a sale in a cancellable state, an account receivable is only recorded to the extent control has transferred to the customer for interment rights, merchandise or services for which the Company has not collected cash. The amounts collected from customers in states in which pre-need contracts are cancellable may be subject to refund provisions. The Company estimates the fair value of its refund obligation under such contracts on a quarterly basis and records such obligations within other long-term liabilities line item on its consolidated balance sheets.

In accordance with ASC 606, the Company recognizes revenue in the amount to which the Company expect to be entitled to when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company only

57


 

Table of Contents

recognizes amounts due from a customer for unfulfilled performance obligations on a cancellable pre-need contract to the extent that control has transferred to the customer for interments, merchandise or services for which the Company has not collected cash. The Company defers the recognition of any nonrefundable up-front fees and incremental direct selling costs associated with its sales contracts with a customer (i.e., commissions and bonuses) until the underlying goods or services have been delivered to the customer if the amortization period associated with the deferred nonrefundable up-front fees and incremental direct selling is greater than a year; otherwise, these nonrefundable up-front fees and incremental direct selling costs are expensed immediately. Incremental direct selling costs are recognized by specific identification. The Company calculates the deferred selling costs asset by dividing total deferred selling and obtaining expenses by total deferrable revenues and multiplying such percentage by the periodic change in gross deferred revenues. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in deferred revenues. All other selling costs are expensed as incurred.

In addition, the Company maintains a reserve representing the fair value of the refund obligation that may arise due to state law provisions that include a guarantee of customer funds collected on unfulfilled performance obligations and maintained in trust to the extent that the funds are refundable upon a customer’s exercise of any cancellation rights.

Sales taxes assessed by governmental authorities are excluded from revenue. Any shipping and handling costs that are incurred after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

Nature of Goods and Services

The following is a description of the principal activities within the Company’s two reportable segments from which the Company generates its revenue.

Cemetery Operations

The Company generates revenues in its Cemetery Operations segment principally from (1) providing rights to inter remains in a specific cemetery property inventory space such as burial lots and constructed mausoleum crypts (“Interments”), (2) sales of cemetery merchandise which includes markers (i.e., method of identifying a deceased person in a burial space, crypt or niche), base (i.e., the substrate upon which a marker is placed), vault (i.e., a container installed in the burial lot in which the casket is placed), caskets, cremation niches and other cemetery related items and (3) service revenues, including opening and closing, a service of digging and refilling burial spaces to install the burial vault and place the casket into the vault, cremation services and fees for installation of cemetery merchandise. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services in a package based on their relative stand-alone selling prices.  The stand-alone selling price is determined by management based upon local market conditions and reasonable ranges for both merchandise and services which is the best estimate of the stand-alone price.  For items that are not sold separately (e.g., second interment rights), the Company estimates stand-alone selling prices using the best estimate of market value, using inputs such as average selling price and list price broken down by each geographic location. Additionally, the Company considers typical sales promotions that could have impacted the stand-alone selling price estimates.

Interments revenue is recognized when control transfers, which is when the property is available for use by the customer. For pre-construction mausoleum contracts, the Company will only recognize revenue once the property is constructed and the customer has obtained substantially all of the remaining benefits of the property.

Merchandise revenue and deferred investment earnings on merchandise trusts are recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to the Company). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligation. The estimate of the refund obligation is reevaluated on a quarterly basis. In addition, the Company is entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a pre-need contract; these amounts are also recognized in revenue at the time the contract is cancelled.

Service revenue is recognized when the services are performed and the performance obligation is thereby satisfied.

58


 

Table of Contents

The cost of goods sold related to merchandise and services reflects the actual cost of purchasing products and performing services and the value of cemetery property depleted through the recognized sales of interment rights. The costs related to the sales of lots and crypts are determined systematically using a specific identification method under which the total value of the underlying cemetery property and the lots available to be sold at the location are used to determine the cost per lot.

Funeral Home Operations

The Company generates revenues in its Funeral Home Operations segment principally generates revenue from (1) sales of funeral home merchandise which includes caskets and other funeral related items and (2) service revenues, including services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation and services of remembrance. The Funeral Home Operations segment also include revenues related to the sale of term and whole life insurance on an agency basis, in which the Company earns a commission from the sales of these policies. Insurance commission revenue is reported within service revenues. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services based on their relative stand-alone selling prices. The relative stand-alone selling price is determined by management's best estimate of the stand-alone price based upon the list price at each location. The revenue generated by the Company through its Funeral Home Operations segment is principally derived from at-need sales.

Merchandise revenue is recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligations. The estimate of the refund obligation is reevaluated on a quarterly basis.

Service revenue is recognized when the services are performed and the performance obligation is thereby satisfied.

Costs related to the delivery or performance of merchandise and services are charged to expense when merchandise is delivered or services are performed.

Deferred Revenues

Revenues from the sale of services and merchandise as well as any investment income from the merchandise trusts is deferred until such time that the services are performed or the merchandise is delivered. In addition, for amounts deferred on new contracts and investment income and unrealized gains on the Company’s merchandise trusts, deferred revenues include deferred revenues from pre-need sales that were entered into by entities prior to the Company’s acquisition of the assets of those entities. The Company provides for a profit margin for these deferred revenues to account for the projected future costs of delivering products and providing services on pre-need contracts that the Company acquired through acquisition. These revenues and their associated costs are recognized when the related merchandise is delivered or services are performed and are presented on a gross basis on the consolidated statements of operations.

Accounts Receivable, Net of Allowance

The Company sells pre-need cemetery contracts whereby the customer enters into arrangements for future pre-need merchandise and services. These sales are usually made using interest-bearing installment contracts not to exceed 60 months. The interest income is recorded as revenue when the interest amount is considered realizable and collectible, which typically coincides with cash payment. Interest income is not recognized until payments are collected in accordance with the contract. At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income, unfulfilled performance obligations on cancellable contracts, and any cash deposit paid. The Company recognizes an allowance for doubtful accounts by applying a cancellation rate to amounts included in accounts receivable, which is recorded as a reduction in accounts receivable and a corresponding offset to deferred revenues. The cancellation rate is based on a five year average rate by each specific location. Management evaluates customer receivables for impairment based upon its historical experience, including the age of the receivables and the customers’ payment histories.

Cemetery Property

Cemetery property consists of developed and undeveloped cemetery land, constructed mausoleum crypts and lawn crypts and other cemetery property. Cemetery property is stated at cost or, upon acquisition of a business, at the fair value of the assets acquired.

59


 

Table of Contents

Property and Equipment

Property and equipment is stated at cost or, upon acquisition of a business, at the fair value of the assets acquired and depreciated on a straight-line basis. Maintenance and repairs are charged to expense as incurred, whereas additions and major replacements are capitalized and depreciation is recorded over their estimated useful lives. Major classifications of property and equipment and their respective useful lives are as follows:

Buildings and improvements

 

10 to 40 years

Software and computer hardware

 

3 years

Furniture and equipment

 

3 to 10 years

Leasehold improvements

 

over the shorter of the term of the lease or the life of the asset

 

Assets Held for Sale and Discontinued Operations

For a long-lived asset or disposal group to be classified as held for sale all of the following criteria must be met

 

Management, having authority to approve the action, commits to a plan to sell the long-lived asset or disposal group;

 

The long-lived asset or disposal group is available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such long-lived assets (disposal groups);

 

An active program to locate a buyer(s) and other actions required to complete the plan to sell the long-lived asset (disposal group) have been initiated;

 

The sale of the long-lived asset (disposal group) is probable and transfer of the long-lived asset (disposal group) is expected to qualify for recognition as a completed sale within one year;

 

The long-lived asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

 

Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

The determination to classify a site (or group of sites) as an asset held for sale requires estimates by the Company about the site and the level of market activity in which the site is based. Such estimates are based on factors that include recent sales of comparable sites, the extent of buyers’ interest in the site and the site’s condition. Based on these factors, the Company assesses the probability of divesting of the site under current market conditions at an acceptable price within one year. After the Company identifies a site to be held for sale, the Company discontinues depreciating the long-lived assets associated with the site and estimates the assets’ fair value, net of selling costs. If the carrying value of the assets to be classified as held for sale exceeds the Company’s estimated net fair value, the Company writes the assets down to the estimated net fair value. Assets and liabilities associated with the site to be classified as held for sale are presented separately in the Company’s consolidated balance sheets beginning with the period in which the Company decided to classify the site as held for sale.

A component of an entity that is disposed of by sale or abandonment is reported as discontinued operations if the transaction represents a strategic shift that will have a major effect on an entity's operations and financial results. The results of discontinued operations are aggregated and presented separately in the Company’s consolidated statement of operations. Assets and liabilities of the discontinued operations are aggregated and reported separately as assets and liabilities held for sale in the Company’s consolidated balance sheet, including the comparative prior year period.

Amounts presented in discontinued operations are from the consolidated financial statements and accounting records using the historical basis of assets, liabilities, and historical results of the discontinued operations and exclude general corporate allocations.

For further details of the Company’s assets held for sale and discontinued operations, see Note 2 Divestitures of this Annual Report.

Merchandise Trusts

Pursuant to state law, a portion of the proceeds from pre-need sales of merchandise and services is put into trust (the "merchandise trust") until such time that the Company meets the requirements for releasing trust principal, which is generally delivery of merchandise or performance of services. All investment earnings generated by the assets in the merchandise trusts (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed. For further details of the Company’s merchandise trusts, see Note 7 Merchandise Trusts of this Annual Report.

60


 

Table of Contents

Perpetual Care Trusts

Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. The perpetual care trust principal does not belong to the Company and must remain in this trust in perpetuity, while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred. The Company consolidates the trust into its financial statements because the trust is considered a variable interest entity for which the Company is the primary beneficiary. Earnings from the perpetual care trusts are recognized in current cemetery revenues. For further details of the Company’s perpetual care trusts, see Note 8 Perpetual Care Trusts of this Annual Report.

Fair Value Measurements

The Company measures the available-for-sale securities held by its merchandise and perpetual care trusts at fair value on a recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of the asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

 

Level 2 – inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

 

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The categorization of the asset or liability within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. For additional disclosures on the Company’s available-for-sale securities, refer to Note 7 Merchandise Trusts and Note 8 Perpetual Care Trusts.

Inventories

Inventories are classified within Other current assets on the Company’s consolidated balance sheets and include cemetery and funeral home merchandise valued at the lower of cost or net realizable value. Cost is determined primarily on a specific identification basis using a first-in, first-out method. Inventories were approximately $6.0 million and $5.9 million at December 31, 2020 and 2019, respectively. For further details of the Company’s impairment of inventories, see Note 3 Impairment and Other Losses.

Impairment of Long-Lived Assets

The Company monitors the recoverability of long-lived assets, including cemetery property, property and equipment and other assets, based on estimates using factors such as current market value, future asset utilization, business and regulatory climate and future undiscounted cash flows expected to result from the use of the related assets, at a location level. The Company’s policy is to perform step 1 of the long-lived asset impairment test prescribed by ASC 360, Property, Plant and Equipment (the “ASC 360 Asset Impairment Test”) every reporting period for all of its cemetery property and funeral home locations; for any location that has an operating loss for the current reporting period, a trend of operating losses over the current fiscal year and/or a trend of operating losses over the previous five fiscal years, the Company then performs step 2 of the ASC 360 Asset Impairment Test. If step 2 indicates the carrying value of any of the Company’s locations is not recoverable, as a result of the sum of expected future undiscounted cash flows for the location being less than the carrying value of the location, the Company records an impairment charge to write-down the location to its fair value.

Other-Than-Temporary Impairment of Trust Assets

The Company determines whether or not the impairment of a fixed maturity debt security is other-than-temporary by evaluating each of the following:

 

Whether it is the Company’s intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary.

 

If there is no intent to sell, the Company evaluates if it is not more likely than not that it will be required to sell the debt security before its anticipated recovery. If the Company determines that it is more likely than not that it will be required to sell an impaired investment before its anticipated recovery, the impairment is considered to be other-than-temporary.

61


 

Table of Contents

The Company further evaluates whether or not all assets in the trusts have other-than-temporary impairments based upon a number of criteria including the severity of the impairment, length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If an impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value.

For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings.

For assets held in the merchandise trusts, any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.

Goodwill

The Company tested goodwill for impairment at least annually or if impairment indicators arose by comparing its reporting units’ estimated fair values to carrying values. Because quoted market prices for the reporting units were not available, the Company’s management had to apply judgment in determining the estimated fair value of its reporting units.

Management used all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the Company’s assets and the available market data of the industry group. A key component of these fair value determinations was a reconciliation of the sum of the fair value calculations to the Company’s market capitalization. The observed market prices of individual trades of an entity’s equity securities (and thus its computed market capitalization) may not be representative of the fair value of the entity as a whole.

Due to a decline in the market value of the Company’s unit values and the Company’s significant under-performance relative to historical or projected future operating results noted during the nine months ended September 30, 2019, management conducted an interim goodwill impairment assessment as of September 30, 2019. As a result of such assessment, management concluded on November 4, 2019 that the carrying value of the only reporting unit to which the Company allocated its goodwill, Cemetery Operations, exceeded its fair value, and the Company’s goodwill was fully impaired as of September 30, 2019. For further details of the Company’s impairment of its goodwill, see Note 3 Impairment and Other Losses and Note 9 Goodwill and Intangible Assets of this Annual Report.

Intangible Assets

The Company has other acquired intangible assets, most of which have been recognized as a result of acquisitions and long-term lease, management and operating agreements. The Company amortizes these intangible assets over their estimated useful lives and periodically tests them for impairment.

Taxes

The Company is subject to U.S. federal income taxes, and a provision for U.S. federal income tax has been provided in the consolidated statements of operations for the years ended December 31, 2020 and 2019. The Company is also responsible for certain state income and franchise taxes in the states in which it operates.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense in the consolidated statements of operations. For further details of the Company’s income taxes, see Note 12 Income Taxes of this Annual Report.

Stock-Based Compensation

The Company has a long-term incentive plan under which it is authorized to grant stock-based compensation awards, such as restricted stock or restricted units to be settled in common stock and non-qualified stock options (“stock options”). The Company recognizes compensation expense in an amount equal to the fair value of the stock-based awards on the date of grant over the requisite service period. The fair value of restricted stock awards and restricted stock unit awards is determined based on the number of restricted stock or restricted stock units granted and the closing price of the Company’s common stock on the

62


 

Table of Contents

date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common stock of the Company. The Company has elected to recognize forfeiture credits for these stock-based compensation awards as they are incurred, as this method best reflects actual stock-based compensation expense.

Tax deductions on the stock-based compensation awards are not realized until the stock-based compensation awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based compensation award is greater than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for a stock-based compensation award is less than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the Company’s consolidated statements of cash flows.

The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted stock-based compensation awards by the Company withholding stock equal to such income tax obligations. Stock acquired from employees in connection with the settlement of the employees’ income tax obligations on these stock-based compensation awards are accounted for as treasury shares that are subsequently retired. Restricted stock awards, restricted stock units and stock options are not considered issued and outstanding for purposes of earnings per share calculations until vested.

For further details of the Company’s stock-based compensation plans, see Note 14 Long-Term Incentive Plan of this Annual Report.

Leases

The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. The Company has both operating and finance leases. The Company’s operating leases primarily include office space, funeral homes and equipment. The Company’s finance leases primarily consist of vehicles and certain IT equipment. The Company determines whether an arrangement is or contains a lease at the inception of the arrangement based on the facts and circumstances in each contract. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term in excess of 12 months, the Company records the lease liability and Right of Use (“ROU”) asset at commencement date based upon the present value of the sum of the remaining minimum rental payments, which exclude executory costs. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.

Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from 1 to 30 years. Where leases contain escalation clauses, rent abatements and/or concessions, the Company applies them in the determination of lease expense. The exercise of lease renewal options is at the Company’s sole discretion, and the Company only includes the renewal option in the lease term when the Company can be reasonably certain that it will exercise the additional options.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company evaluates the term of the lease, type of asset and its weighted average cost of capital to determine its incremental borrowing rate used to measure the ROU asset and lease liability.

The Company calculates operating lease expense ratably over the lease term plus any reasonably assured renewal periods. The Company considers reasonably assured renewal options, fixed escalation provisions and residual value guarantees in its calculation. Leasehold improvements are amortized over the shorter of the lease term or asset life, which may include renewal periods where the renewal is reasonably assured, and are included in the determination of straight-line rent expense. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.

The Company’s leases also typically have lease and non-lease components, which are generally accounted for separately and not included in the measurement of the ROU asset and lease liability.

63


 

Table of Contents

Net Loss per Common Share (Basic and Diluted)

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is calculated by dividing net loss attributable to common shares by the sum of the weighted-average number of outstanding common shares and the dilutive effect of share-based awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common shares that are contingently issuable upon the satisfaction of certain vesting conditions for stock awards granted under the Company’s long-term incentive plan.

The following table sets forth the reconciliation of the Company’s weighted-average number of outstanding common shares as of December 31, 2020 and 2019 used to compute basic net loss attributable to common shares with those used to compute diluted net loss per common share, (in thousands):

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Weighted average number of outstanding common shares—basic

 

 

106,991

 

 

 

39,614

 

Plus effect of dilutive incentive awards(1)

 

 

 

 

 

 

 

 

Restricted shares

 

 

 

 

 

 

Stock options

 

 

 

 

 

63

 

Weighted average number of outstanding common shares—diluted

 

 

106,991

 

 

 

39,677

 

 

(1)

For the year ended December 31, 2020, the diluted weighted-average number of outstanding common shares does not include 3,577,850 shares issuable upon the exercise of outstanding options and 338,345 restricted common shares as their effects would have been anti-dilutive. For the year ended December 31, 2019, the diluted weighted-average number of outstanding common shares does not include 515,625 restricted common shares as their effects would have been anti-dilutive.

Advertising Costs

Advertising costs are expensed as incurred. For the years ended December 31, 2020 and 2019, advertising costs were $6.3 million and $9.2 million, respectively.

Recently Adopted Accounting Standards

Variable Interest Entities

In October 2018, FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”). The core principle of ASU 2018-17 is that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. ASU 2018-17 is effective for fiscal years beginning after December 15, 2019. The Company adopted the requirements of this amendment upon its effective date of January 1, 2020 retrospectively. The adoption of this standard did not impact the Company’s consolidated financial statements or related disclosures upon adoption, because the Company did not, and currently does not, have any indirect interests through related parties under common control for which it receives decision-making fees.

Fair Value Measurement

In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This standard removed, modified and added disclosure requirements from ASC 820, Fair Value Measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2020, as this standard primarily addresses disclosure requirements for Level 3 fair value measurements. Currently, the Company does not have any fair value instruments that would be classified as Level 3 on the fair value hierarchy.

64


 

Table of Contents

Internal-Use Software

In August 2018, FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU No. 2018-15 is effective for annual periods beginning after December 15, 2019. The Company adopted the requirements of this amendment upon its effective date of January 1, 2020, prospectively.

Taxes

In December 2019, FASB issued ASU No. 2019-12, Income Taxes (Topic 340) (“ASU 2019-12”), with the intent to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation when there is a loss from continuing operations and income from other items such as discontinued operations, and calculating income taxes in interim periods. ASU 2019-12 also adds guidance to reduce complexity in certain tax accounting areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual periods beginning after December 15, 2021. The Company has early adopted all of the requirements of this amendment as of January 1, 2020, prospectively. The adoption of this standard resulted in no tax provision allocated to discontinued operations for the years ended December 31, 2020 and 2019, and the adoption of the remaining requirements did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Standard Updates - Not Yet Effective

Credit Losses

In June 2016, FASB issued ASU No. 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). The core principle of ASU 2016-13 is that all assets measured at amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions and reasonable and supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. In November 2018, FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2018-09”), which clarified that receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, and should be accounted for in accordance with ASC 842, Leases. In April 2019, FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which includes clarifications to the amendments issued in ASU 2016-13. In May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326), which provides entities that have certain instruments within the scope of ASC 326-20 with an option to irrevocably elect the fair value option in ASC 825, Financial Instruments, upon adoption of ASU 2016-13. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which modifies the effective dates for ASU 2016-13, ASU 2017-12 and ASU 2016-02 to reflect the FASB’s new policy of staggering effective dates between larger public companies and all other companies. With the issuance of ASU 2019-10, the Company’s effective date for adopting all amendments related to the new credit loss standard has been extended to January 1, 2023. In November 2019, FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2019-11”), which includes clarifications to and addresses specific stakeholders’ issues concerning the amendments issued in ASU 2016-13. In February 2020, FASB issued ASU No, 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) and in March 2020 issued ASU No. 2020-03, Codification Improvements to Financial Instruments, both of which also provide updates and clarification. The Company plans to adopt the requirements of these amendments upon their effective date of January 1, 2023, using the modified-retrospective method and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.

Reference Rate Reform

In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). In order to ease the potential burden in accounting for reference rate reform, ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The

65


 

Table of Contents

amendment is effective upon issuance and may be applied prospectively through December 31, 2022. The Company does not expect ASU 2020-04 to have a material effect on the Company’s financial position, results of operations and related disclosures.

2.

DIVESTITURES

In the fourth quarter of 2019, the Company launched an asset sale program designed to divest assets at attractive multiples, reduce debt levels and improve cash flow and liquidity. The following divestitures have resulted from this program.

On January 3, 2020, the Company sold substantially all of the assets of Oakmont Memorial Park, Oakmont Funeral Home, Redwood Chapel, Inspiration Chapel and Oakmont Crematory located in California pursuant to the terms of an asset sale agreement (the “Oakmont Agreement”) with Carriage Funeral Holdings, Inc. for an aggregate cash purchase price of $33.0 million (the “Oakmont Sale”). The divested assets consisted of one cemetery, one funeral home and certain related assets. The Oakmont Sale resulted in a gain of $24.4 million for the Company, which is included in the accompanying consolidated statement of operations for the year ended December 31, 2020. Net proceeds from the sale were used to redeem an aggregate $30.3 million principal amount of the Senior Secured Notes as required by the Indenture.

On April 7, 2020, the Company completed the sale of substantially all of the assets of the cemetery, funeral establishment and crematory commonly known as Olivet Memorial Park, Olivet Funeral and Cremation Services and Olivet Memorial Park & Crematory pursuant to the terms of an asset sale agreement (the “Olivet Agreement”) with Cypress Lawn Cemetery Association for an aggregate cash purchase price of $25.0 million, subject to certain adjustments (the “Olivet Sale”), and the assumption of certain liabilities, including $17.1 million in land purchase obligations. The Olivet Sale resulted in a gain of $7.2 million for the Company, which is included in the accompanying statements of operations for the year ended December 31, 2020. The Company used net proceeds of $20.5 million to redeem additional Senior Secured Notes as required by the Indenture.

On November 3, 2020, the Company completed the sale of substantially all of the Company’s remaining California properties, consisting of five cemeteries, six funeral establishments and four crematories (the “Remaining California Assets”) pursuant to the terms of an asset sale agreement (the “California Agreement”) with certain entities owned by John Yeatman and Guy Saxton for a cash purchase price of $7.1 million, subject to certain closing adjustments (the “Remaining California Sale” and together with the Olivet Sale, the “Total California Sale”). The Company used net proceeds of $5.7 million to redeem $5.6 million in principal amount of additional Senior Secured Notes as required by the Indenture. During the year ended December 31, 2020, the Company recorded an impairment charge of $2.2 million to reduce the carrying value of the Remaining California Assets to their fair value, which is presented in Net gain on sale of businesses in the accompanying consolidated statement of operations.

On November 6, 2020, the Company entered into an asset sale agreement (the “Clearstone Agreement”) with Clearstone Memorial Partners, LLC to sell substantially all of the Company’s assets in Oregon and Washington, consisting of nine cemeteries, ten funeral establishments and four crematories for a net cash purchase price of $6.2 million, subject to certain adjustments (the “Clearstone Sale”).

The Clearstone Agreement to sell the Clearstone Assets, together with the other divestitures completed in 2020 described above, represents a strategic exit from the West Coast. Therefore, the results of operations of the Clearstone Assets, and of the businesses sold in 2020 for the period before their respective sales, have been presented as discontinued operations on the accompanying consolidated statements of operations for the year ended December 31, 2020, and the prior period has been reclassified. Additionally, all of the assets and liabilities associated with the Clearstone Assets have been classified as held for sale on the accompanying consolidated balance sheet at December 31, 2020, and the prior period has been reclassified. The assets and liabilities of the businesses sold in 2020 have been presented as held for sale on the accompanying balance sheet at December 31, 2019.

66


 

Table of Contents

The following table summarizes the results of discontinued operations for the years ended December 31, 2020 and 2019 (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Cemetery revenues

 

$

8,551

 

 

$

21,265

 

Funeral home revenues

 

 

8,277

 

 

 

11,015

 

Cost of goods sold

 

 

(1,425

)

 

 

(3,086

)

Cemetery expense

 

 

(2,478

)

 

 

(4,511

)

Selling expense

 

 

(2,416

)

 

 

(5,637

)

General and administrative expense

 

 

(2,274

)

 

 

(3,401

)

Depreciation and amortization

 

 

(243

)

 

 

(628

)

Funeral home expenses

 

 

(6,565

)

 

 

(8,775

)

Other gains (losses), net

 

 

 

 

 

(193

)

Interest expense

 

 

(1,874

)

 

 

(3,273

)

(Loss) income from discontinued operations before income taxes

 

 

(447

)

 

 

2,776

 

Net gain on sale of businesses

 

 

29,429

 

 

 

 

Income tax expense

 

 

 

 

 

 

Net income from discontinued operations

 

$

28,982

 

 

$

2,776

 

 

The following table summarizes the major classes of assets and liabilities that have been classified as held for sale in the consolidated balance sheets as of December 31, 2020 and 2019 (in thousands):

 

 

December 31, 2020

 

 

December 31, 2019

 

 

Clearstone

 

 

Other

 

 

Total

 

 

Clearstone

 

 

Total California

 

 

Oakmont

 

 

Other

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

$

230

 

 

$

 

 

$

230

 

 

$

123

 

 

$

1,657

 

 

$

580

 

 

$

 

 

$

2,360

 

Prepaid expenses

 

 

 

 

 

 

 

 

 

 

41

 

 

 

118

 

 

 

34

 

 

 

 

 

 

193

 

Other current assets

 

104

 

 

 

 

 

 

104

 

 

 

98

 

 

 

162

 

 

 

35

 

 

 

 

 

 

295

 

Total current assets held for sale

 

334

 

 

 

 

 

 

334

 

 

 

262

 

 

 

1,937

 

 

 

649

 

 

 

 

 

 

2,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term accounts receivable, net of

  allowance

 

193

 

 

 

 

 

 

193

 

 

 

211

 

 

 

2,530

 

 

 

3,194

 

 

 

 

 

 

5,935

 

Cemetery property

 

3,492

 

 

 

350

 

 

 

3,842

 

 

 

4,601

 

 

 

15,518

 

 

 

5,811

 

 

 

350

 

 

 

26,280

 

Property and equipment, net of

  accumulated depreciation

 

2,529

 

 

 

 

 

 

2,529

 

 

 

9,215

 

 

 

2,574

 

 

 

2,762

 

 

 

150

 

 

 

14,701

 

Merchandise trusts, restricted,

  at fair value

 

14,831

 

 

 

 

 

 

14,831

 

 

 

15,587

 

 

 

24,440

 

 

 

6,673

 

 

 

 

 

 

46,700

 

Perpetual care trusts, restricted,

  at fair value

 

4,518

 

 

 

 

 

 

4,518

 

 

 

5,238

 

 

 

23,981

 

 

 

2,470

 

 

 

 

 

 

31,689

 

Deferred selling and obtaining costs

 

1,865

 

 

 

 

 

 

1,865

 

 

 

1,926

 

 

 

2,334

 

 

 

1,388

 

 

 

 

 

 

5,648

 

Other assets

 

463

 

 

 

 

 

 

463

 

 

 

505

 

 

 

1,978

 

 

 

411

 

 

 

 

 

 

2,894

 

Total assets held for sale

$

28,225

 

 

$

350

 

 

$

28,575

 

 

$

37,545

 

 

$

75,292

 

 

$

23,358

 

 

$

500

 

 

$

136,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued

  liabilities

$

51

 

 

$

 

 

$

51

 

 

$

42

 

 

$

238

 

 

$

102

 

 

$

 

 

$

382

 

Current portion, long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

 

 

 

36

 

Other current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

 

 

 

5,000

 

Total current liabilities held for sale

 

51

 

 

 

 

 

 

51

 

 

 

42

 

 

 

238

 

 

 

5,138

 

 

 

 

 

 

5,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenues

 

18,456

 

 

 

 

 

 

18,456

 

 

 

18,961

 

 

 

30,425

 

 

 

12,856

 

 

 

 

 

 

62,242

 

Perpetual care trust corpus

 

4,518

 

 

 

 

 

 

4,518

 

 

 

5,238

 

 

 

23,981

 

 

 

2,470

 

 

 

 

 

 

31,689

 

Other long-term liabilities

 

381

 

 

 

 

 

 

381

 

 

 

383

 

 

 

1,768

 

 

 

204

 

 

 

 

 

 

2,355

 

Total liabilities held for sale

$

23,406

 

 

$

 

 

$

23,406

 

 

$

24,624

 

 

$

56,412

 

 

$

20,668

 

 

$

 

 

$

101,704

 

 

67


 

Table of Contents

The following table presents the depreciation and amortization, capital expenditures, sale proceeds and significant operating noncash items of the discontinued operations as of December 31, 2020 and 2019 (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Cash flows from discontinued operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

243

 

 

$

628

 

Gains on sales of discontinued operations businesses

 

 

29,429

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from discontinued investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

$

51

 

 

$

3,860

 

Proceeds from sales of discontinued businesses

 

 

57,342

 

 

 

 

 

3.

IMPAIRMENT AND OTHER LOSSES

Goodwill Impairment Assessment

The Company recognized a $24.9 million goodwill impairment charge for the year ended December 31, 2019 to fully impair its goodwill following its interim goodwill impairment assessment as of September 30, 2019. As a result of such assessment, management concluded that the carrying value of the only reporting unit to which the Company allocated its goodwill, Cemetery Operations, exceeded its fair value, and the Company’s goodwill was fully impaired as of September 30, 2019. Refer to Note 9 Goodwill and Intangible Assets for further details.

Impairment of Long-Lived Assets

During each reporting period for the years ended December 31, 2020 and 2019, the Company performed step 1 of the ASC 360 Asset Impairment Test and identified all cemetery property and funeral home locations with an operating loss for the current reporting period, a trend of operating losses over the current fiscal year and/or a trend of operating losses over the previous five fiscal years. Of those locations identified during step 1, the Company recorded impairments for those locations for which step 2 of the ASC 360 Asset Impairment Test indicated the locations’ carrying values may not be recoverable. As a result of performing step 1 and step 2 of the ASC 360 Asset Impairment Test, the Company did not record an impairment for the year ended December 31, 2020, and recorded a $2.8 million impairment charge for certain cemetery property locations, which is included in Other losses, net in the accompanying consolidated statement of operations for the year ended December 31, 2019.

Termination of Management Agreement

The Company operates certain of its cemeteries under long-term leases, operating agreements and management agreements. On May 10, 2019, the Company terminated one of the management agreements and recorded a $2.1 million loss, which is included in Other losses, net in the accompanying consolidated statement of operations for the year ended December 31, 2019. 

Inventory

Merchandise is sold to both at-need and pre-need customers. Merchandise allocated to service pre-need contractual obligations is recorded at cost and managed and stored by the Company until the Company services the underlying customer contract. Due to enhanced inventory control procedures implemented in late 2018, the Company determined that certain merchandise inventory allocated to pre-need customers had been damaged due to weather related deterioration occurring over a number of years or had otherwise been deemed impractical for use by management as a result of past operating practices relating to inventory. During 2019, the Company recorded estimated impairment losses of approximately $2.6 million related to this damaged and unusable merchandise. The impairment losses are included in Other losses in the accompanying consolidated statements of operations for the year ended December 31, 2019. The losses recorded represent management’s best estimate, and were based on estimates and assumptions that have been deemed reasonable by management and included percentages of merchandise deemed unusable. Management’s assessment process relied on estimates and assumptions that are inherently uncertain, and unanticipated events or circumstances may occur that might cause the Company to change those estimates and assumptions.

68


 

Table of Contents

4.

ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

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

 

 

December 31, 2020

 

 

December 31, 2019

 

Customer receivables

 

$

154,903

 

 

$

147,557

 

Unearned finance income

 

 

(16,022

)

 

 

(15,327

)

Allowance for doubtful accounts

 

 

(5,711

)

 

 

(5,408

)

Accounts receivable, net of allowance

 

 

133,170

 

 

 

126,822

 

Less: Current portion, net of allowance

 

 

57,869

 

 

 

54,014

 

Long-term portion, net of allowance

 

$

75,301

 

 

$

72,808

 

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

 

 

December 31, 2020

 

 

December 31, 2019

 

Balance, beginning of period

 

$

5,884

 

 

$

4,941

 

Provision for doubtful accounts

 

 

6,275

 

 

 

7,559

 

Charge-offs, net

 

 

(6,267

)

 

 

(6,616

)

Amounts related to assets held for sale

 

 

(181

)

 

 

(476

)

Balance, end of period

 

$

5,711

 

 

$

5,408

 

 

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

5.

CEMETERY PROPERTY

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

 

 

December 31, 2020

 

 

December 31, 2019

 

Cemetery land

 

$

232,548

 

 

$

228,887

 

Mausoleum crypts and lawn crypts

 

 

66,978

 

 

 

71,599

 

Cemetery property

 

$

299,526

 

 

$

300,486

 

The Company recorded an impairment of cemetery property during the year ended December 31, 2019. For further details see Note 3 Impairment and Other Losses.

6.

PROPERTY AND EQUIPMENT

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

 

 

December 31, 2020

 

 

December 31, 2019

 

Buildings and improvements

 

$

112,345

 

 

$

115,404

 

Furniture and equipment

 

 

53,199

 

 

 

54,143

 

Funeral home land

 

 

11,005

 

 

 

11,005

 

Property and equipment, gross

 

 

176,549

 

 

 

180,552

 

Less: Accumulated depreciation

 

 

(93,053

)

 

 

(88,941

)

Property and equipment, net of accumulated depreciation

 

$

83,496

 

 

$

91,611

 

Depreciation expense was $8.2 million and $9.4 million for the years ended December 31, 2020 and 2019, respectively.

69


 

Table of Contents

7.

MERCHANDISE TRUSTS

At December 31, 2020 and 2019 the Company’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly and through mutual and investment funds. All of these investments are carried at fair value. All of these investments are subject to the fair value hierarchy and considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 18 Fair Value. There were no Level 3 assets in the Company’s merchandise trusts. When the Company receives a payment from a pre-need customer, the Company deposits the amount required by law into the merchandise trusts that may be subject to cancellation on demand by the pre-need customer. The Company’s merchandise trusts related to states in which pre-need customers may cancel contracts with the Company comprises 45.4% of the total merchandise trust as of December 31, 2020. The merchandise trusts are variable interest entities (“VIE”) of which the Company is deemed the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and providing such services, the Company may be required to fund this shortfall.

The Company included $10.0 million and $9.7 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at December 31, 2020 and 2019, respectively, in its merchandise trust assets. These trusts are recognized at their account value, which approximates fair value.

A reconciliation of the Company’s merchandise trust activities for the years ended December 31, 2020 and 2019 is presented below (in thousands):

 

 

Year ended December 31,

 

 

 

2020

 

 

2019

 

Balance—beginning of period

 

$

523,865

 

 

$

488,248

 

Contributions

 

 

51,409

 

 

 

54,742

 

Distributions

 

 

(82,059

)

 

 

(59,776

)

Interest and dividends

 

 

34,232

 

 

 

29,367

 

Capital gain distributions

 

 

2,330

 

 

 

1,699

 

Realized gains and losses, net

 

 

(1,232

)

 

 

3,246

 

Other than temporary impairment

 

 

(26,714

)

 

 

(6,056

)

Taxes

 

 

(408

)

 

 

(556

)

Fees

 

 

(7,077

)

 

 

(4,268

)

Unrealized change in fair value

 

 

21,938

 

 

 

17,219

 

  Total

 

 

516,284

 

 

 

523,865

 

Less: Assets held for sale

 

 

(14,831

)

 

 

(46,700

)

Balance—end of period

 

$

501,453

 

 

$

477,165

 

During the years ended December 31, 2020 and 2019, purchases of available for sale securities were approximately $52.9 million and $54.4 million, respectively. During the years ended December 31, 2020 and 2019, sales, maturities and paydowns of available for sale securities were approximately $56.4 million and $38.1 million, respectively. Cash flows from pre-need contracts are presented as operating cash flows in the Company’s consolidated statement of cash flows.

70


 

Table of Contents

The cost and market value associated with the assets held in the merchandise trusts as of December 31, 2020 and 2019 were as follows (in thousands):

December 31, 2020

 

Fair Value

Hierarchy

Level

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Short-term investments

 

1

 

$

41,039

 

 

$

12

 

 

$

 

 

$

41,051

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

2

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Corporate debt securities

 

2

 

 

2,818

 

 

 

638

 

 

 

 

 

 

3,456

 

Other debt securities

 

2

 

 

23,165

 

 

 

1,578

 

 

 

(1,332

)

 

 

23,411

 

Total fixed maturities

 

 

 

 

25,984

 

 

 

2,216

 

 

 

(1,332

)

 

 

26,868

 

Mutual funds—debt securities

 

1

 

 

6,097

 

 

 

306

 

 

 

 

 

 

6,403

 

Mutual funds—equity securities

 

1

 

 

26,356

 

 

 

43

 

 

 

(154

)

 

 

26,245

 

Other investment funds(1)

 

 

 

 

337,565

 

 

 

32,461

 

 

 

(8,812

)

 

 

361,214

 

Equity securities

 

1

 

 

35,055

 

 

 

5,544

 

 

 

(19

)

 

 

40,580

 

Other invested assets

 

2

 

 

3,875

 

 

 

79

 

 

 

 

 

 

3,954

 

Total investments

 

 

 

 

475,971

 

 

 

40,661

 

 

 

(10,317

)

 

 

506,315

 

West Virginia Trust Receivable

 

 

 

 

10,190

 

 

 

 

 

 

(221

)

 

 

9,969

 

Total

 

 

 

$

486,161

 

 

$

40,661

 

 

$

(10,538

)

 

$

516,284

 

Less: Assets held for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,831

)

Total

 

 

 

$

486,161

 

 

$

40,661

 

 

$

(10,538

)

 

$

501,453

 

 

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Company’s consolidated balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to five years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2020, there were $47.8 million in unfunded investment commitments to the private credit funds, which are callable at any time.

December 31, 2019

 

Fair Value

Hierarchy

Level

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Short-term investments

 

1

 

$

144,610

 

 

$

 

 

$

 

 

$

144,610

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

2

 

 

456

 

 

 

6

 

 

 

(65

)

 

 

397

 

Corporate debt securities

 

2

 

 

783

 

 

 

14

 

 

 

(133

)

 

 

664

 

Total fixed maturities

 

 

 

 

1,239

 

 

 

20

 

 

 

(198

)

 

 

1,061

 

Mutual funds—debt securities

 

1

 

 

67,801

 

 

 

1,857

 

 

 

(6

)

 

 

69,652

 

Mutual funds—equity securities

 

1

 

 

46,609

 

 

 

1,744

 

 

 

-

 

 

 

48,353

 

Other investment funds(1)

 

 

 

 

213,024

 

 

 

6,366

 

 

 

(2,953

)

 

 

216,437

 

Equity securities

 

1

 

 

24,386

 

 

 

1,327

 

 

 

(4

)

 

 

25,709

 

Other invested assets

 

2

 

 

8,360

 

 

 

32

 

 

 

 

 

 

8,392

 

Total investments

 

 

 

 

506,029

 

 

 

11,346

 

 

 

(3,161

)

 

 

514,214

 

West Virginia Trust Receivable

 

 

 

 

9,651

 

 

 

 

 

 

 

 

 

9,651

 

Total

 

 

 

$

515,680

 

 

$

11,346

 

 

$

(3,161

)

 

$

523,865

 

Less: Assets held for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,700

)

Total

 

 

 

$

515,680

 

 

$

11,346

 

 

$

(3,161

)

 

$

477,165

 

 

 

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Company’s consolidated balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of one to six years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2019, there were $57.3 million in unfunded investment commitments to the private credit funds, which are callable at any time.

71


 

Table of Contents

The contractual maturities of debt securities as of December 31, 2020 and 2019 were as follows (in thousands):

December 31, 2020

 

Less than

1 year

 

 

1 year

through

5 years

 

 

6 years

through

10 years

 

 

More than

10 years

 

U.S. governmental securities

 

$

 

 

$

1

 

 

$

 

 

$

 

Corporate debt securities

 

 

 

 

 

3,456

 

 

 

 

 

 

 

Other debt securities

 

 

18,392

 

 

 

5,019

 

 

 

 

 

 

 

Total fixed maturities

 

$

18,392

 

 

$

8,476

 

 

$

 

 

$

 

 

December 31, 2019

 

Less than

1 year

 

 

1 year

through

5 years

 

 

6 years

through

10 years

 

 

More than

10 years

 

U.S. governmental securities

 

$

112

 

 

$

78

 

 

$

193

 

 

$

13

 

Corporate debt securities

 

 

101

 

 

 

546

 

 

 

16

 

 

 

 

Total fixed maturities

 

$

213

 

 

$

624

 

 

$

209

 

 

$

13

 

Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in debt and equity securities within the merchandise trusts as of December 31, 2020 and 2019 is presented below (in thousands):

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2020

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

 

18,392

 

 

 

1,332

 

 

 

 

 

 

 

 

 

18,392

 

 

 

1,332

 

Total fixed maturities

 

 

18,392

 

 

 

1,332

 

 

 

 

 

 

 

 

 

18,392

 

 

 

1,332

 

Mutual funds—debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds—equity securities

 

 

128

 

 

 

154

 

 

 

 

 

 

 

 

 

128

 

 

 

154

 

Other investment funds

 

 

75,799

 

 

 

8,812

 

 

 

 

 

 

 

 

 

75,799

 

 

 

8,812

 

Equity securities

 

 

82

 

 

 

19

 

 

 

 

 

 

 

 

 

82

 

 

 

19

 

Total

 

$

94,401

 

 

$

10,317

 

 

$

 

 

$

 

 

$

94,401

 

 

$

10,317

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2019

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

$

90

 

 

$

1

 

 

$

397

 

 

$

64

 

 

$

487

 

 

$

65

 

Corporate debt securities

 

 

198

 

 

 

29

 

 

 

424

 

 

 

104

 

 

 

622

 

 

 

133

 

Total fixed maturities

 

 

288

 

 

 

30

 

 

 

821

 

 

 

168

 

 

 

1,109

 

 

 

198

 

Mutual funds—debt securities

 

 

241

 

 

 

6

 

 

 

 

 

 

 

 

 

241

 

 

 

6

 

Mutual funds—equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investment funds

 

 

54,782

 

 

 

2,953

 

 

 

 

 

 

 

 

 

54,782

 

 

 

2,953

 

Equity securities

 

 

3

 

 

 

4

 

 

 

 

 

 

 

 

 

3

 

 

 

4

 

Total

 

$

55,314

 

 

$

2,993

 

 

$

821

 

 

$

168

 

 

$

56,135

 

 

$

3,161

 

For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

72


 

Table of Contents

Other-Than-Temporary Impairment of Trust Assets

The Company assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the year ended December 31, 2020, the Company determined, based on its review, that there were 57 securities with an aggregate cost basis of approximately $106.4 million and an aggregate fair value of approximately $79.7 million, resulting in an impairment of $26.7 million, with such impairment considered to be other-than-temporary due to credit indicators. During the year ended December 31, 2019, the Company determined, based on its review, that there were 102 securities with an aggregate cost basis of approximately $178.2 million and an aggregate fair value of approximately $172.2 million, resulting in an impairment of $6.1 million, with such impairment considered to be other-than-temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset these changes against deferred merchandise trust revenue. These adjustments to deferred revenue will be reflected within the Company’s consolidated statements of operations in future periods as the underlying merchandise is delivered or the underlying service is performed.

8.

PERPETUAL CARE TRUSTS

At December 31, 2020 and 2019 the Company’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds.

All of these investments are carried at fair value. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 18 Fair Value. There were no Level 3 assets in the Company’s perpetual care trusts. The perpetual care trusts are VIEs for which the Company is the primary beneficiary.

A reconciliation of the Company’s perpetual care trust activities for the year ended December 31, 2020 and 2019 is presented below (in thousands):

 

 

Year ended December 31,

 

 

 

2020

 

 

2019

 

Balance—beginning of period

 

$

346,089

 

 

$

330,562

 

Contributions

 

 

8,500

 

 

 

7,575

 

Distributions

 

 

(48,820

)

 

 

(20,598

)

Interest and dividends

 

 

24,746

 

 

 

20,201

 

Capital gain distributions

 

 

844

 

 

 

2,112

 

Realized gains and losses, net

 

 

(301

)

 

 

3,121

 

Other than temporary impairment

 

 

(14,710

)

 

 

(3,941

)

Taxes

 

 

(616

)

 

 

(547

)

Fees

 

 

(3,161

)

 

 

(3,176

)

Unrealized change in fair value

 

 

4,175

 

 

 

10,780

 

  Total

 

 

316,746

 

 

 

346,089

 

Less: Assets held for sale

 

 

(4,518

)

 

 

(31,689

)

Balance—end of period

 

$

312,228

 

 

$

314,400

 

 

During the year ended December 31, 2020 and 2019, purchases of available for sale securities were approximately $16.1 million and $46.4 million, respectively. During the year ended December 31, 2020 and 2019, sales, maturities and paydowns of available for sale securities were approximately $42.1 million and $29.0 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in the Company’s consolidated statements of cash flows.

73


 

Table of Contents

The cost and market value associated with the assets held in the perpetual care trusts as of December 31, 2020 and 2019 were as follows (in thousands):

December 31, 2020

 

Fair Value

Hierarchy

Level

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Short-term investments

 

1

 

$

21,217

 

 

$

 

 

$

 

 

$

21,217

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

2

 

 

48

 

 

 

4

 

 

 

 

 

 

52

 

Corporate debt securities

 

2

 

 

505

 

 

 

92

 

 

 

(44

)

 

 

553

 

Other debt securities

 

2

 

 

433

 

 

 

 

 

 

(28

)

 

 

405

 

Total fixed maturities

 

 

 

 

986

 

 

 

96

 

 

 

(72

)

 

 

1,010

 

Mutual funds—debt securities

 

1

 

 

2,386

 

 

 

62

 

 

 

(9

)

 

 

2,439

 

Mutual funds—equity securities

 

1

 

 

9,240

 

 

 

1,244

 

 

 

(7

)

 

 

10,477

 

Other investment funds(1)

 

 

 

 

247,845

 

 

 

21,952

 

 

 

(10,813

)

 

 

258,984

 

Equity securities

 

1

 

 

21,748

 

 

 

873

 

 

 

(19

)

 

 

22,602

 

Other invested assets

 

2

 

 

16

 

 

 

1

 

 

 

 

 

 

17

 

Total investments

 

 

 

$

303,438

 

 

$

24,228

 

 

$

(10,920

)

 

$

316,746

 

Less: Assets held for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,518

)

Total

 

 

 

$

303,438

 

 

$

24,228

 

 

$

(10,920

)

 

$

312,228

 

 

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Company’s consolidated balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from zero to six years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2020 there were $41.1 million in unfunded investment commitments to the private credit funds, which are callable at any time.

 

December 31, 2019

 

Fair Value

Hierarchy

Level

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Short-term investments

 

1

 

$

50,358

 

 

$

 

 

$

 

 

$

50,358

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

2

 

 

1,069

 

 

 

32

 

 

 

(52

)

 

 

1,049

 

Corporate debt securities

 

2

 

 

2,020

 

 

 

22

 

 

 

(142

)

 

 

1,900

 

Total fixed maturities

 

 

 

 

3,089

 

 

 

54

 

 

 

(194

)

 

 

2,949

 

Mutual funds—debt securities

 

1

 

 

49,963

 

 

 

1,439

 

 

 

(38

)

 

 

51,364

 

Mutual funds—equity securities

 

1

 

 

16,698

 

 

 

1,617

 

 

 

(66

)

 

 

18,249

 

Other investment funds(1)

 

 

 

 

186,355

 

 

 

10,526

 

 

 

(5,472

)

 

 

191,409

 

Equity securities

 

1

 

 

30,423

 

 

 

1,333

 

 

 

(12

)

 

 

31,744

 

Other invested assets

 

2

 

 

16

 

 

 

 

 

 

 

 

 

16

 

Total investments

 

 

 

$

336,902

 

 

$

14,969

 

 

$

(5,782

)

 

$

346,089

 

Less: Assets held for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,689

)

Total

 

 

 

$

336,902

 

 

$

14,969

 

 

$

(5,782

)

 

$

314,400

 

 

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Company’s consolidated balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from one to seven years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2019 there were $62.4 million in unfunded investment commitments to the private credit funds, which are callable at any time.

 

74


 

Table of Contents

The contractual maturities of debt securities as of December 31, 2020 and 2019, were as follows (in thousands):

December 31, 2020

 

Less than

1 year

 

 

1 year through

5 years

 

 

6 years through

10 years

 

 

More than

10 years

 

U.S. governmental securities

 

$

25

 

 

$

6

 

 

$

 

 

$

21

 

Corporate debt securities

 

 

 

 

 

553

 

 

 

 

 

 

 

Other debt securities

 

 

405

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

$

430

 

 

$

559

 

 

$

 

 

$

21

 

 

December 31, 2019

 

Less than

1 year

 

 

1 year through

5 years

 

 

6 years through

10 years

 

 

More than

10 years

 

U.S. governmental securities

 

$

60

 

 

$

192

 

 

$

684

 

 

$

114

 

Corporate debt securities

 

 

294

 

 

 

1,522

 

 

 

84

 

 

 

-

 

Total fixed maturities

 

$

354

 

 

$

1,714

 

 

$

768

 

 

$

114

 

Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in debt and equity securities within the perpetual care trusts as of December 31, 2020 and 2019 is presented below (in thousands):

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2020

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

$

 

 

$

 

 

$

990

 

 

$

 

 

$

990

 

 

$

 

Corporate debt securities

 

 

 

 

 

 

 

 

1,959

 

 

 

44

 

 

 

1,959

 

 

 

44

 

Other debt securities

 

 

405

 

 

 

28

 

 

 

 

 

 

 

 

 

405

 

 

 

28

 

Total fixed maturities

 

 

405

 

 

 

28

 

 

 

2,949

 

 

 

44

 

 

 

3,354

 

 

 

72

 

Mutual funds—debt securities

 

 

600

 

 

 

9

 

 

 

 

 

 

 

 

 

600

 

 

 

9

 

Mutual funds—equity securities

 

 

288

 

 

 

7

 

 

 

 

 

 

 

 

 

288

 

 

 

7

 

Other investment funds

 

 

74,885

 

 

 

10,813

 

 

 

 

 

 

 

 

 

74,885

 

 

 

10,813

 

Equity securities

 

 

45

 

 

 

4

 

 

 

19

 

 

 

15

 

 

 

64

 

 

 

19

 

Total

 

$

76,223

 

 

$

10,861

 

 

$

2,968

 

 

$

59

 

 

$

79,191

 

 

$

10,920

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2019

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

$

291

 

 

$

4

 

 

$

942

 

 

$

48

 

 

$

1,233

 

 

$

52

 

Corporate debt securities

 

 

463

 

 

 

46

 

 

 

1,887

 

 

 

96

 

 

 

2,350

 

 

 

142

 

Total fixed maturities

 

 

754

 

 

 

50

 

 

 

2,829

 

 

 

144

 

 

 

3,583

 

 

 

194

 

Mutual funds—debt securities

 

 

2,856

 

 

 

38

 

 

 

-

 

 

 

-

 

 

 

2,856

 

 

 

38

 

Mutual funds—equity securities

 

 

566

 

 

 

66

 

 

 

 

 

 

-

 

 

 

566

 

 

 

66

 

Other investment funds

 

 

53,426

 

 

 

5,472

 

 

 

 

 

 

 

 

 

53,426

 

 

 

5,472

 

Equity securities

 

 

121

 

 

 

12

 

 

 

-

 

 

 

-

 

 

 

121

 

 

 

12

 

Total

 

$

57,723

 

 

$

5,638

 

 

$

2,829

 

 

$

144

 

 

$

60,552

 

 

$

5,782

 

 

For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

75