Item 1. Financial Statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Organization and Business Description
These financial statements reflect the consolidated operations of Select Interior Concepts, Inc. (“SIC” or the “Company”).
SIC is a Delaware corporation that was restructured in November 2017 to be a holding company through which to consolidate diversified building products and services companies. Through its primary operating subsidiary, Architectural Surfaces Group (“ASG”), the Company imports and distributes natural and engineered stone slabs for kitchen and bathroom countertops. The Company has operations in the Northeast, Southeast, Southwest, Midwest, Mountain West, and West Coast regions of the United States.
The Company sold its former operating subsidiary Residential Design Services (“RDS”) in a transaction that closed June 30, 2021. See further discussion in Note 3 – Discontinued Operations.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in these unaudited interim financial statements and condensed notes should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The condensed consolidated balance sheet as of December 31, 2020 included herein has been derived from the Company’s audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The condensed consolidated financial statements include the accounts of SIC and its wholly owned subsidiary ASG, and its respective wholly-owned subsidiaries, and are presented in accordance with GAAP. The Company sold the operations of its formerly wholly-owned subsidiary RDS in a transaction that closed in June 2021. The results of RDS and its wholly-owned subsidiaries have been presented in discontinued operations in the accompanying consolidated financial statements. References to the “ASC” hereafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2021.
There have been no changes to our significant accounting policies described in our consolidated financial statements and related disclosures as of December 31, 2020 that have had a material impact on our condensed consolidated financial statements and related notes. There is no longer segment reporting presented under ASC 280 as only one operating segment remains as of June 30, 2021 due to the sale and discontinued operations of the RDS business.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified in these financial statements to adjust amounts for reporting under continuing and discontinued operations (see Note 3).
5
Earnings (Loss) per Share of Common Stock
Basic earnings (loss) per share for the three and six months ended June 30, 2021 and 2020, are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share for common stock is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding plus the dilutive effect of restricted stock-based awards using the treasury stock method. The following table sets forth the computation of basic and diluted earnings/(loss) per share for the three and six months ended June 30, 2021 and 2020:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
(in thousands, except share and per share data)
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Net income (loss) from continuing operations
|
|
$
|
2,516
|
|
|
$
|
(250
|
)
|
Net income (loss) from discontinued operations
|
|
|
55,597
|
|
|
|
(2,929
|
)
|
Net income (loss)
|
|
$
|
58,113
|
|
|
$
|
(3,179
|
)
|
Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic common stock
|
|
|
25,591,118
|
|
|
|
25,328,649
|
|
Diluted common stock
|
|
|
27,172,043
|
|
|
|
25,328,649
|
|
Basic earnings (loss) per share of common stock
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.10
|
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
|
2.17
|
|
|
|
(0.12
|
)
|
Net income (loss)
|
|
$
|
2.27
|
|
|
$
|
(0.13
|
)
|
Diluted earnings (loss) per share of common stock
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.09
|
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
|
2.05
|
|
|
|
(0.12
|
)
|
Net income (loss)
|
|
$
|
2.14
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
(in thousands, except share and per share data)
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Net income from continuing operations
|
|
$
|
3,336
|
|
|
$
|
7
|
|
Net income (loss) from discontinued operations
|
|
|
52,972
|
|
|
|
(7,188
|
)
|
Net income (loss)
|
|
$
|
56,308
|
|
|
$
|
(7,181
|
)
|
Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic common stock
|
|
|
25,543,031
|
|
|
|
25,260,425
|
|
Diluted common stock
|
|
|
27,019,433
|
|
|
|
25,267,083
|
|
Basic earnings (loss) per share of common stock
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.13
|
|
|
$
|
0.00
|
|
Discontinued operations
|
|
|
2.07
|
|
|
|
(0.28
|
)
|
Net income (loss)
|
|
$
|
2.20
|
|
|
$
|
(0.28
|
)
|
Diluted earnings (loss) per share of common stock
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.12
|
|
|
$
|
0.00
|
|
Discontinued operations
|
|
|
1.96
|
|
|
|
(0.28
|
)
|
Net income (loss)
|
|
$
|
2.08
|
|
|
$
|
(0.28
|
)
|
Restricted stock awards outstanding totaling 2,067,202 were excluded from the computation of diluted earnings per share for the three months ended June 30, 2020, because the Company reported a net loss from continuing operations.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingencies, and reported revenues and expenses as of and for periods ended on the date of the consolidated financial statements. Actual results may vary materially from the estimates that were used. The Company’s significant accounting estimates include the determination of allowances for doubtful accounts, the lives and methods for recording depreciation and amortization on property and equipment, the fair value of reporting units and indefinite life intangible assets, deferred income taxes and the purchase price allocations used in the Company’s acquisitions.
6
Restricted Cash
At June 30, 2021, the Company had restricted cash of $5.0 million. The restricted cash is funds held in escrow related to the sale of the RDS business. See further discussion in Note 3 – Discontinued Operations.
Fair Value Measurement
ASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The three levels of the fair value hierarchy are as follows:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2—Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3—Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The level of the fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fair value measurement.
At June 30, 2021 and December 31, 2020, the carrying value of the Company’s cash, accounts receivable, accounts payable, and short-term obligations approximate their respective fair values because of the short maturities of these instruments. The recorded values of the line of credit, term loans, and notes payable approximate their fair values, as interest rates approximate market rates. There were no transfers within Level 3 fair value measurements during the six months ended June 30, 2021.
Intangible Assets
Intangible assets consist of customer relationships, trade names and non-compete agreements. The Company considers all its intangible assets to have definite lives, and such intangible assets are being amortized on the straight-line method over the estimated useful lives of the respective assets or on an accelerated basis based on the expected cash flows generated by the existing customers as follows:
|
|
Range of estimated
useful lives
|
|
Weighted average
useful life
|
Customer relationships
|
|
6 years – 10 years
|
|
10 years
|
Trade names
|
|
5 years – 11 years
|
|
10 years
|
Non-compete agreements
|
|
Life of agreement
|
|
4 years
|
7
Business Combinations
The Company records business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities. Measurement period adjustments are reflected in the period in which they occur.
Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets, such as property and equipment and intangible assets, whenever events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable, or at least annually. The assessment for possible impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future undiscounted cash flows of the related operations. If the aggregate of these cash flows is less than the carrying value of such assets, an impairment loss is recognized for the difference between the estimated fair value and the carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. There were no impairment losses on long-lived assets for the six month period ended June 30, 2021 or the year ended December 31, 2020.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets, including intangible assets. Goodwill is tested annually for impairment as of December 31, and whenever events or circumstances arise that indicate impairment may have occurred. No events or circumstances occurred during the interim period ending June 30, 2021, that required interim testing of goodwill.
Revenue Recognition
The Company’s revenue derived from the sale of imported granite, marble, and related items is recognized at a point in time when control over a product is transferred to a customer. This transfer occurs primarily when goods are picked up by a customer at the branch or when goods are delivered to a customer location.
Revenue is measured at the transaction price, which is based on the amount of consideration the Company expects to receive in exchange for transferring the promised goods or services to the customer. The transaction price includes estimates of variable consideration, such as any returns and sales incentives. Applicable customer sales taxes, when remitted, are recorded as a liability and excluded from revenue on a net basis. Customer payments may be due in advance of contract work performed, at the time the performance obligation is completed, or with payment terms following performance completion of generally 30-60 days.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of product are included in revenues. The costs for shipping and handling of product are recorded as a component of cost of revenue. Additionally, we consider shipping and handling costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred.
Equity-based Compensation
The Company accounts for equity-based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an expense using either straight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service period, which is usually equivalent to the vesting period. See Note 12 for further discussion.
Recently Issued and Adopted Accounting Pronouncements
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 107 of the JOBS Act. This election allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use
8
software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for fiscal years beginning after December 15, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Accounting Pronouncements Issued but Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous standards. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of asset not to recognize lease assets and lease liabilities. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and in June 2020, the FASB issued ASU No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, to defer the effective date of ASU No.2016-02 for certain entities. For the Company, the new standard is effective for the annual period beginning January 1, 2022. The Company is currently evaluating the impact of the provisions of ASU 2016-02 on the presentation of its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” (ASU 2016-03) which amends ASC 326 “Financial Instruments—Credit Losses.” Subsequent to the issuance of ASU 2016-13, ASC 326 was amended by various updates that amend and clarify the impact and implementation of the aforementioned update. The new guidance introduces the current expected credit loss (CECL) model, which will require an entity to record an allowance for credit losses for certain financial instruments and financial assets, including trade receivables, based on expected losses rather than incurred losses. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates which delays the effective date of ASU 2016-13 until fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the provisions of ASU 2016-13 on the presentation of its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the goodwill impairment test by eliminating the step 2 requirement to determine the fair value of its assets and liabilities at the impairment testing date. ASU 2017-04 is effective for annual periods beginning after December 15, 2021. The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which amends ASC 740 “Income Taxes” (ASC 740). This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update is effective for fiscal years beginning after December 15, 2021. The guidance in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application permitted. The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.
Note 3. Discontinued Operations
On May 9, 2021, the Company announced it had entered into an Equity Purchase Agreement, dated May 9, 2021 (the “Purchase Agreement”), with Signal Holdco, LP, the parent of Interior Logic Group and a portfolio company of Blackstone (“Signal”). Pursuant to the Purchase Agreement, Signal agreed to purchase from Residential Design Services, LLC (“Seller”) all of the issued and outstanding shares of common stock of L.A.R.K. Industries, Inc. (the “RDS Divestiture”). L.A.R.K. Industries, Inc., together with its subsidiaries, operates the Company’s Residential Design Services business (the “RDS Business”).
On June 7, 2021, Signal assigned all of its rights, title and interest in and to the Purchase Agreement to its affiliate, Interior Logic Group Holdings IV, LLC, a Delaware limited liability company (“Purchaser”). On June 30, 2021, the Company and Seller completed the RDS Divestiture. Pursuant to the Purchase Agreement, Purchaser acquired the RDS Business for a purchase price of $215 million in cash, subject to customary purchase price adjustments. Pursuant to the Transition Services Agreement within the Purchase Agreement, the Company will provide certain transition services for finance, accounting, and tax for specified periods extending up to the filing of the 2021 income tax returns for no additional consideration. Additionally, information technology services will be provided as requested for a term of up to three months after closing for estimated fair value consideration. Reciprocal services will be provided by the Purchaser for no consideration for periods also extending through the filing of the 2021 income tax returns. The value of these services are not estimated to be material and are reciprocal in nature and accordingly, no fair value has been assigned to these services.
Proceeds received from the transaction include $5.0 million of cash that was put into an escrow account subject to the settlement of working capital adjustments within 75 days of the closing on June 30, 2021. This cash is included within Restricted Cash in the accompanying condensed consolidated financial statements.
9
The Company recorded an estimated pre-tax gain on the RDS Divestiture of $63.1 million in the second quarter of 2021, which is inclusive of transaction and closing costs. Final working capital adjustments provided within 75 days of close of the transaction may impact the final gain calculation. The Company recognized income tax expense associated with the gain on disposal of $4.31 million during the second quarter of 2021, which included the impact of the disposal of non-deductible goodwill.
Information related to the RDS Divestiture has been reflected in the accompanying condensed consolidated financial statements as follows:
|
•
|
Balance sheets - As a result of the sale of the RDS business on June 30, 2021, there are no remaining RDS business assets and liabilities on the balance sheet as of June 30, 2021. RDS’ business assets and liabilities as of December 31, 2020 have been presented as discontinued operations.
|
|
•
|
Statements of operations - The RDS business results of operations for the three and six months ended June 30, 2021 and 2020 have been presented as discontinued operations.
|
|
•
|
Statements of cash flows - The RDS business cash flows prior to its sale have been included in the consolidated statement of cash flows. The consolidated statement of cash flows for the six months ended June 30, 2021 also includes the effects of the sale of the RDS business.
|
In accordance with the provisions of ASC 205-20, Presentation of Financial Statements, the assets and liabilities of the RDS business have been separately presented in discontinued operations in the consolidated balance sheet as of December 31, 2020. The following table presents the components of the RDS business assets and liabilities as of December 31, 2020:
(in thousands)
|
|
December 31, 2020
|
|
Cash
|
|
$
|
1,380
|
|
Accounts receivable
|
|
|
50,136
|
|
Inventories
|
|
|
14,817
|
|
Prepaid expenses and other current assets
|
|
|
15,060
|
|
Current assets of discontinued operations
|
|
$
|
81,393
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
14,343
|
|
Goodwill
|
|
|
54,224
|
|
Customer relationships, net
|
|
|
28,068
|
|
Other intangible assets, net
|
|
|
10,696
|
|
Other assets
|
|
|
4,690
|
|
Non-current assets of discontinued operations
|
|
$
|
112,021
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
21,386
|
|
Accrued expenses and other current liabilities
|
|
|
9,782
|
|
Customer deposits
|
|
|
3,055
|
|
Current portion of long-term debt
|
|
|
141
|
|
Current portion of capital lease obligations
|
|
|
2,461
|
|
Current liabilities of discontinued operations
|
|
$
|
36,825
|
|
|
|
|
|
|
Long-term capital lease obligations
|
|
$
|
3,633
|
|
Deferred income taxes
|
|
|
6,028
|
|
Other long-term liabilities
|
|
|
5,264
|
|
Non-current liabilities of discontinued operations
|
|
$
|
14,925
|
|
10
The following table presents the results of discontinued operations related to the RDS business and the gain on disposal:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue, net
|
|
$
|
90,270
|
|
|
$
|
73,448
|
|
|
$
|
170,681
|
|
|
$
|
152,798
|
|
Cost of revenue
|
|
|
71,108
|
|
|
|
55,942
|
|
|
|
132,984
|
|
|
|
117,826
|
|
Gross profit
|
|
|
19,162
|
|
|
|
17,506
|
|
|
|
37,697
|
|
|
|
34,972
|
|
Selling, general and administrative expenses
|
|
|
19,905
|
|
|
|
17,499
|
|
|
|
40,069
|
|
|
|
37,008
|
|
Income (loss) from operations
|
|
|
(743
|
)
|
|
|
7
|
|
|
|
(2,372
|
)
|
|
|
(2,036
|
)
|
Interest expense
|
|
|
3,206
|
|
|
|
3,584
|
|
|
|
6,590
|
|
|
|
7,428
|
|
Other (income) expense, net
|
|
|
(108
|
)
|
|
|
(34
|
)
|
|
|
2,003
|
|
|
|
1,343
|
|
Loss from discontinued operations before income
taxes
|
|
|
(3,841
|
)
|
|
|
(3,543
|
)
|
|
|
(10,965
|
)
|
|
|
(10,807
|
)
|
Benefit from income taxes
|
|
|
(642
|
)
|
|
|
(614
|
)
|
|
|
(5,141
|
)
|
|
|
(3,619
|
)
|
Loss from discontinued operations, net of tax
|
|
|
(3,199
|
)
|
|
|
(2,929
|
)
|
|
|
(5,824
|
)
|
|
|
(7,188
|
)
|
Gain on disposal of discontinued operations
before income taxes
|
|
|
63,107
|
|
|
|
—
|
|
|
|
63,107
|
|
|
|
—
|
|
Provision for income taxes on gain on disposal
|
|
|
4,311
|
|
|
|
—
|
|
|
|
4,311
|
|
|
|
—
|
|
Gain on disposal of discontinued operations
net of income taxes
|
|
|
58,796
|
|
|
|
—
|
|
|
|
58,796
|
|
|
|
—
|
|
Net income (loss) from discontinued operations
|
|
$
|
55,597
|
|
|
$
|
(2,929
|
)
|
|
$
|
52,972
|
|
|
$
|
(7,188
|
)
|
Selling, general and administrative expenses of discontinued operations include certain corporate costs incurred directly related to the RDS business, including equity-based compensation expense for RDS employees and professional fees incurred directly in support of the RDS business. All other corporate costs are classified within the results of continuing operations. The sale of the RDS business required the Company to settle the outstanding balances on the line of credit (see Note 9) and the Term Loan Facility (see Note 10). In accordance with ASC 205, Presentation of Financial Statements, interest expense associated with these debt instruments are allocated to discontinued operations.
The following table presents significant non-cash items and capital expenditures of discontinued operations:
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Depreciation and amortization
|
|
$
|
5,720
|
|
|
$
|
5,787
|
|
Stock compensation expense
|
|
$
|
1,397
|
|
|
$
|
486
|
|
Capital expenditures
|
|
$
|
1,099
|
|
|
$
|
1,470
|
|
Acquisition of equipment and vehicles with long-term debt and capital leases
|
|
$
|
158
|
|
|
$
|
596
|
|
The following table summarizes the gain on the disposal of the RDS business, which has been included in discontinued operations for the three and six months ended June 30, 2021:
(in thousands)
|
|
|
|
|
Proceeds from sale (a)
|
|
$
|
204,332
|
|
Less net assets of RDS Business (b)
|
|
|
139,407
|
|
Plus estimated net working capital adjustment
|
|
|
460
|
|
Gain on disposal before transaction costs paid by Company
|
|
|
65,385
|
|
Less transaction costs paid by Company
|
|
|
2,278
|
|
Gain on disposal of discontinued operations before income taxes
|
|
|
63,107
|
|
Provision for income taxes
|
|
|
(4,311
|
)
|
Gain on disposal of discontinued operations, net of income taxes
|
|
$
|
58,796
|
|
|
(a)
|
Represents net proceeds received, which includes the purchase price of $215 million less net purchase price adjustments and transaction closing costs paid directly by the Purchaser on the Company’s behalf.
|
|
(b)
|
Represents net assets of the RDS business on the date of sale, less cash on hand at RDS of $2.9 million, which was netted within proceeds from the sale.
|
11
Note 4. Revenue
The timing of revenue recognition, billings, and cash collections generally results in billed accounts receivable and customer deposits in the Company’s Consolidated Balance Sheets.
The Company records customer deposits, which represent contract liabilities, when it receives payment prior to fulfilling a performance obligation or has billings in excess of revenue recognized. Contract liabilities related to revenues are recorded in customer deposits in the Company’s Consolidated Balance Sheets. The Company had total contract liabilities of $6.6 million and $5.1 million as of June 30, 2021 and December 31, 2020, respectively. Contract liabilities are normally recognized to net revenue within three to six months subsequent to each balance sheet date. The Company does not have any material performance obligations for contracts that extend beyond one year. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Revenue from contracts with customers is disaggregated by product category as this is how management evaluates the nature, amount, timing and uncertainty of revenue and cash flows as affected by economic factors.
The following table presents net revenue disaggregated by product category for the three and six months ended June 30, 2021 and 2020, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Three Months Ended June 30, 2021
|
|
|
%
|
|
|
For the Three Months Ended June 30, 2020
|
|
|
%
|
|
Quartz
|
|
$
|
44,442
|
|
|
|
66
|
%
|
|
$
|
30,427
|
|
|
|
59
|
%
|
Stone
|
|
|
18,950
|
|
|
|
29
|
%
|
|
|
15,898
|
|
|
|
31
|
%
|
Tile
|
|
|
2,901
|
|
|
|
4
|
%
|
|
|
3,766
|
|
|
|
7
|
%
|
Other
|
|
|
893
|
|
|
|
1
|
%
|
|
|
1,903
|
|
|
|
3
|
%
|
|
|
$
|
67,186
|
|
|
|
100
|
%
|
|
$
|
51,994
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Six Months Ended June 30, 2021
|
|
|
%
|
|
|
For the Six Months Ended June 30, 2020
|
|
|
%
|
|
Quartz
|
|
$
|
80,634
|
|
|
|
65
|
%
|
|
$
|
62,821
|
|
|
|
59
|
%
|
Stone
|
|
|
34,648
|
|
|
|
28
|
%
|
|
|
32,720
|
|
|
|
30
|
%
|
Tile
|
|
|
6,056
|
|
|
|
5
|
%
|
|
|
7,526
|
|
|
|
7
|
%
|
Other
|
|
|
3,225
|
|
|
|
2
|
%
|
|
|
3,954
|
|
|
|
4
|
%
|
|
|
$
|
124,563
|
|
|
|
100
|
%
|
|
$
|
107,021
|
|
|
|
100
|
%
|
12
Note 5. Concentrations, Risks and Uncertainties
The Company maintains cash balances primarily at one commercial bank. The accounts are insured by the Federal Deposit Insurance Corporation up to $0.25 million. The amounts held at this financial institution generally exceed the federally insured limit. Management believes that this financial institution is financially sound and the risk of loss is minimal.
Credit is extended for some customers and is based on financial condition, and generally, collateral is not required. Credit losses are included in the consolidated financial statements and consistently have been within management’s expectations.
For the three and six months ended June 30, 2021 and 2020, there were no customers which accounted for 10.0% or more of the Company’s total revenues. There were no customers which accounted for 10.0% or more of total accounts receivable as of June 30, 2021 or December 31, 2020.
Note 6. Inventories
Inventories are valued at the lower of cost (using specific identification and first-in first-out methods) or net realizable value. Inventory consisted of raw materials as follows:
(in thousands)
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Raw materials
|
|
$
|
90,988
|
|
|
$
|
84,165
|
|
Note 7. Property and Equipment, net
Property and equipment consisted of the following at:
(in thousands)
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Vehicles
|
|
$
|
5,011
|
|
|
$
|
4,746
|
|
Machinery and equipment
|
|
|
2,652
|
|
|
|
2,582
|
|
Leasehold improvements
|
|
|
4,727
|
|
|
|
4,638
|
|
Furniture and fixtures
|
|
|
7,663
|
|
|
|
7,382
|
|
Computer equipment and internal-use software
|
|
|
1,889
|
|
|
|
1,763
|
|
Other
|
|
|
1,616
|
|
|
|
1,532
|
|
|
|
|
23,558
|
|
|
|
22,643
|
|
Less: accumulated depreciation and amortization
|
|
|
(17,487
|
)
|
|
|
(15,930
|
)
|
Property and equipment, net
|
|
$
|
6,071
|
|
|
$
|
6,713
|
|
Depreciation and amortization expense of property and equipment totaled $0.8 million and $1.0 million for the three months ended June 30, 2021 and 2020, respectively. For the three months ended June 30, 2021, $0.3 million and $0.5 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively. For the three months ended June 30, 2020, $0.5 million and $0.5 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively. Depreciation and amortization expense of property and equipment for discontinued operations totaled $1.4 million and $1.5 million for the three months ended June 30, 2021 and 2020, respectively.
Depreciation and amortization expense of property and equipment totaled $1.7 million and $2.1 million for the six months ended June 30, 2021 and 2020, respectively. For six months ended June 30, 2021, $0.6 million and $1.1 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively. For six months ended June 30, 2020, $1.0 million and $1.1 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively. Depreciation and amortization expense of property and equipment for discontinued operations totaled $2.9 million and $2.9 million for the six months ended June 30, 2021 and 2020, respectively.
13
Note 8. Goodwill and Intangible Assets
Goodwill
The carrying amount of goodwill was $45.6 million as of June 30, 2021 and December 31, 2020.
Intangible Assets
The following table provides the gross carrying amount, accumulated amortization and net book value for each class of intangible assets as of June 30, 2021:
(in thousands)
|
Total Gross
Carrying
Amount
|
|
Gross Carrying Amount
|
|
|
|
Customer relationships
|
$
|
60,180
|
|
Trade names
|
|
7,740
|
|
Non-compete agreements
|
|
50
|
|
|
$
|
67,970
|
|
|
|
|
|
(in thousands)
|
Total
Accumulated
Amortization
|
|
Accumulated Amortization
|
|
|
|
Customer relationships
|
$
|
(28,616
|
)
|
Trade names
|
|
(3,555
|
)
|
Non-compete agreements
|
|
(34
|
)
|
|
$
|
(32,205
|
)
|
|
|
|
|
(in thousands)
|
Total Net
Book
Value
|
|
Net Book Value
|
|
|
|
Customer relationships
|
$
|
31,564
|
|
Trade names
|
|
4,185
|
|
Non-compete agreements
|
|
16
|
|
|
$
|
35,765
|
|
14
The following table provides the gross carrying amount, accumulated amortization and net book value for each class of intangible assets as of December 31, 2020:
(in thousands)
|
Total Gross
Carrying
Amount
|
|
Gross Carrying Amount
|
|
|
|
Customer relationships
|
$
|
60,180
|
|
Trade names
|
|
7,740
|
|
Non-compete agreements
|
|
50
|
|
|
$
|
67,970
|
|
|
|
|
|
(in thousands)
|
Total
Accumulated
Amortization
|
|
Accumulated Amortization
|
|
|
|
Customer relationships
|
$
|
(25,548
|
)
|
Trade names
|
|
(3,139
|
)
|
Non-compete agreements
|
|
(33
|
)
|
|
$
|
(28,720
|
)
|
|
|
|
|
(in thousands)
|
Total Net
Book
Value
|
|
Net Book Value
|
|
|
|
Customer relationships
|
$
|
34,632
|
|
Trade names
|
|
4,601
|
|
Non-compete agreements
|
|
17
|
|
|
$
|
39,250
|
|
Amortization expense on intangible assets from continuing operations totaled $1.7 million and $3.5 million during the three and six months ended June 30, 2021, respectively. Amortization expense on intangible assets from discontinued operations totaled $1.4 million and $2.9 million during the three and six months ended June 30, 2021, respectively.
Amortization expense on intangible assets from continuing operations totaled $1.7 million and $3.5 million during the three and six months ended June 30, 2020, respectively. Amortization expense on intangible assets from discontinued operations totaled $1.4 million and $2.9 million during the three and six months ended June 30, 2020, respectively.
The estimated annual amortization expense for the next five years and thereafter is as follows:
(in thousands)
|
|
|
|
|
2021 Remaining
|
|
$
|
3,491
|
|
2022
|
|
|
6,964
|
|
2023
|
|
|
6,840
|
|
2024
|
|
|
6,563
|
|
2025
|
|
|
5,873
|
|
Thereafter
|
|
|
6,034
|
|
|
|
$
|
35,765
|
|
Note 9. Line of Credit
SIC Line of Credit
In June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as of June 28, 2018, which was amended on December 11, 2018, July 23, 2019 and August 19, 2019 (“SIC Credit Facility”), with a commercial bank, which amended and restated each of the RDS credit agreement and the ASG credit agreement in their entirety. The SIC Credit Facility is primarily used by the Company for operational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility that provides for borrowings in an initial amount up to an aggregate of $90 million, which was increased to $100 million through the amendment entered into on August 19, 2019.
15
Under the terms of the SIC Credit Facility, the Company has the ability to request the issuance of letters of credit up to a maximum aggregate stated amount of $15 million. The ability to borrow revolving loans under the SIC Credit Facility is reduced on a dollar-for-dollar basis by the aggregate stated amount of all outstanding letters of credit. The indebtedness outstanding under the SIC Credit Facility is secured by substantially all of the assets of the Company and its subsidiaries.
The revolving loans under the SIC Credit Facility bear interest at a floating rate, which the Company can elect between a LIBOR based rate plus an applicable margin varying from one hundred twenty five basis points (1.25%) to one hundred seventy five basis points (1.75%) based on the borrowers’ average daily availability determined quarterly, or a base rate (determined as the greatest of the Prime rate, the Federal Funds rate plus a fifty basis point (0.50%) margin, or the LIBOR rate with a 30 day interest period plus a two hundred basis point (2.00%) margin) plus an applicable margin varying from twenty five basis points (0.25%) to seventy five basis points (0.75%) based on the borrowers’ average daily availability determined quarterly. Upon the occurrence of certain events of default under the SIC Credit Facility, the interest rate applicable to the obligations thereunder may be increased by two hundred basis points (2.00%). The weighted average interest rate assessed during the three and six months ended June 30, 2021 on the SIC Credit Facility was 1.8% and 1.74%, respectively. Letter of credit obligations under the SIC Credit Facility are due and payable on the date set forth in the respective loan documents or upon demand by the lender.
On June 30, 2021 and in connection with the closing of the RDS Divestiture, the Company and certain of its subsidiaries (together, the “Obligors”), entered into an amendment of the SIC Credit Facility. The amendment, among other things, (i) extends the maturity date of the ABL Agreement from June 28, 2023 to June 28, 2024 and (ii) amends the ABL Agreement to permit the RDS Divestiture.
Under the SIC Credit Facility, the Company and its subsidiaries are required to comply with certain customary restrictive covenants that, among other things and with certain exceptions, limit the ability of the Company and its subsidiaries, as applicable, to (i) incur additional indebtedness and liens in connection therewith, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business.
As of June 30, 2021 and December 31, 2020, $0 and $9.9 million, respectively, were outstanding under the SIC Credit Facility. The Company also has $0.6 million in letters of credit outstanding at June 30, 2021. The SIC Credit Facility is subject to certain financial covenants. At June 30, 2021, the Company was in compliance with the financial covenants.
The Company incurred debt issuance costs of $0.6 million in connection with the SIC Credit Facility. These costs are amortized to non-cash interest expense over the term of the agreement on a straight-line basis which approximates the effective interest method. Non-cash interest expense related to these costs were less than $0.1 million for the three and six months ended June 30, 2021 and 2020. At June 30, 2021 and December 31, 2020, SIC had $0.3 million and $0.2 million, respectively, of unamortized debt issuance costs related to the SIC Credit Facility. These costs are shown as a direct deduction of the line of credit liability as of December 31, 2020 and within other assets as of June 30, 2021 in the accompanying condensed consolidated balance sheets.
Note 10. Long-Term Debt
Term Loan
On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with third party lenders (the “Term Loan Facility”), which initially provided for a $105.0 million term loan facility. The Term Loan Facility was amended in June 2018 to define the borrowers as Select Interior Concepts, Inc. and its subsidiaries, was further amended in August 2018 to adjust the borrowing capacity to $101.4 million and was further amended in December 2018 to increase the borrowing capacity to $174.2 million. On February 7, 2020, the Term Loan Facility was amended to revise certain leverage ratio covenant requirements. The required leverage ratio measured as of the end of each fiscal quarter ending on March 31, 2020, and each fiscal quarter thereafter to (and including) the fiscal quarter ending December 31, 2020, was increased to 3.90:1.00, after which it would be reduced to 3.75:1.00 for the fiscal quarter ending March 31, 2021, and each fiscal quarter ending thereafter. On March 10, 2021, the Term Loan Facility was further amended to adjust the required leverage ratio (as defined in the Term Loan Facility). The required leverage ratio as of March 31, 2021, and each fiscal quarter ending thereafter was increased from 3.75:1.00 to 4.00:1.00.
On April 8, 2020, the Term Loan Facility was further amended, which amendment, among other things, (i) waived the requirement that the Company prepay the Term Loans with Excess Cash Flow (as defined in the Term Loan Facility) then due for payment in respect of the fiscal year ending December 31, 2019, (ii) amended the Fixed Charge Coverage Ratio (as defined in the Term Loan Facility) covenant applicable to the fiscal year ending December 31, 2020, to be tested on a monthly basis and requires the Company and its subsidiaries to maintain a reduced Fixed Charge Coverage Ratio (as defined in the Term Loan Facility) of not less than 1.00:1.00 for each month during such fiscal year, and (iii) does not require the Company to test the Total Leverage (as defined in the Term Loan Facility) covenant effective as of the execution date of April 8, 2020, through and including December 31, 2020, for
16
any fiscal quarter end during such period, for so long as the Company and its subsidiaries maintain Financial Covenant Availability (as defined in the Term Loan Facility) of not less than $35 million at all times during such fiscal quarter.
Borrowings under the Term Loan Facility bear interest per year equal to either: (i) the base rate plus 4.75% for a base rate loan, or (ii) the LIBOR rate plus 6.75% for a LIBOR loan in the event the leverage ratio is greater than 2.40:1.00. In the event the leverage ratio is less than 2.40:1.00, the rates decrease to either (i) the base rate plus 4.25% for a base rate loan or (ii) the LIBOR rate plus 6.25% for a LIBOR loan. The base rate is the greater of (i) the publicly announced interest rate by the reference bank as its reference rate, the base commercial lending rate or prime rate, and (ii) 3.5% per annum.
As of December 31, 2020, the Company had $152.8 million outstanding under the Term Loan Facility. In conjunction with the RDS Divestiture as discussed in Note 3 – Discontinued Operations, the Company repaid the term loan in full. No balance remains on the term loan as of June 30, 2021.
Debt issuance costs in connection with the Term Loan Facility were expensed upon repayment on June 30, 2021. Total expense recorded related to loss on the extinguishment of debt was $2.4 million for the three and six month period ended June 30, 2021.
Note 11. Commitments and Contingencies
Leases
The Company leases certain vehicles under leases classified as capital leases. The leased vehicles are included as property and equipment (“PP&E”) and amortized to accumulated amortization on a straight-line basis over the life of the lease, which is typically six years. The total acquisition cost included in PP&E related to the leased vehicles was $2.5 million and $2.1 million at June 30, 2021 and December 31, 2020, respectively. Total accumulated amortization related to the leased vehicles was $0.5 million and $0.3 million at June 30, 2021 and December 31, 2020, respectively. Amortization expense was $0.1 million and $0.2 million for the three and six months ended June 30, 2021. Amortization expense was $0.1 million and $0.1 million for the three and six months ended June 30, 2020.
ASG leases its facilities and equipment under long-term non-cancellable operating lease agreements expiring at various dates through December 2029. The facility leases contain predetermined fixed escalations of the minimum rentals. One of ASG’s facility leases is with a related party.
SIC leases its corporate facility under a long-term non-cancelable operating lease through October 2022.
The Company recognizes rent expense on a straight-line basis and records the difference between the recognized rent expense and amounts payable under the lease as deferred rent. Aggregate deferred rent at June 30, 2021 and December 31, 2020 was $1.3 million and $1.4 million, respectively. Aggregate rent expense for the three and six months ended June 30, 2021 totaled $3.3 million and $6.5 million, respectively. Aggregate rent expense for the three and six months ended June 30, 2020 totaled $3.4 million and $6.6 million, respectively.
Litigation
The Company experiences routine litigation in the normal course of its business, which typically concern warranty or contractual claims concerning the Company’s products and employment-related matters. The Company has consistently maintained general liability insurance with $2.0 million aggregate and $1.0 million per occurrence limits which may be implicated in litigated matters. Management does not believe that any pending or threatened litigation will have a material adverse effect on the Company’s combined business, financial condition, results of operations, and/or cash flows.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications, including to lessors of office and warehouse space for certain actions arising during the Company’s tenancy and to the Company’s customers. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.
Exclusive Distributor Rights
A main quartz supplier of ASG’s Pental business has granted ASG exclusive distribution rights in 23 states in the United States. To maintain these rights, ASG must meet certain minimum purchase requirements. ASG was required to purchase between 480 and 540 containers during the year ended December 31, 2020. Minimum purchase volumes then increase to 645 containers per quarter during 2021 up to 1,332 containers per quarter during 2025.
17
Using an estimated price per container based on the average price per container in 2020, the future minimum purchases to maintain the exclusive rights as of June 30, 2021 are as follows:
(in thousands)
|
|
Amount
|
|
Remaining in 2021
|
|
$
|
50,274
|
|
2022
|
|
|
102,186
|
|
2023
|
|
|
121,837
|
|
2024
|
|
|
145,419
|
|
2025
|
|
|
174,502
|
|
|
|
$
|
594,218
|
|
If ASG does not purchase at least eighty percent (80%) of the minimum purchase volumes for two consecutive quarters, or at least ninety percent (90%) of the minimum purchase volumes in any calendar year, the supplier has the right to terminate ASG’s exclusive distribution rights, but there are no financial penalties to ASG if such commitments are not met. For the year ended December 31, 2020, ASG did not meet the eighty percent (80%) minimum purchase volume threshold primarily as a result of the challenging economic and business environment resulting from COVID-19 during 2020. ASG and the supplier have discussed the impact of the current economic environment on the minimum purchase volumes and have reached an informal understanding around reduced purchase volumes. The supplier must give 60 days notice to terminate this exclusivity arrangement, which has not been received by the Company. While ASG maintains good relationships with this supplier and believes that it would be unlikely that such supplier would terminate the exclusive relationship, there is no guarantee that such supplier will not terminate the exclusive relationship in the future due to ASG’s failure to purchase the minimum volumes. As part of our supply chain management program, we routinely identify, evaluate and purchase from alternative sources of quartz products; however, depending on factors such as timing, notice, and industry capacity, in the event the supplier were to terminate ASG’s distribution rights it could have a material impact on ASG’s supply chain and ASG may be unable to find an alternative source for quartz in a timely manner or on favorable terms.
Note 12. Stock Compensation
On November 22, 2017, the Company adopted the Select Interior Concepts, Inc. 2017 Incentive Compensation Plan (the “2017 Plan”). Upon the adoption of the 2017 Plan, the maximum aggregate number of shares issuable thereunder was 2,561,463 shares. As of June 30, 2021, there were 1,249,842 shares of the Company’s common stock subject to outstanding awards and 120,616 shares of the Company’s common stock were reserved and available for future awards under the 2017 Plan.
On March 26, 2019, the board of directors adopted the Select Interior Concepts, Inc. 2019 Long-Term Incentive Plan (the “2019 Incentive Plan”), which was approved at the 2019 Annual Meeting of Stockholders on May 15, 2019. The 2019 Incentive Plan serves as the successor to the 2017 Plan; however, shares continued to be available for award grants under the 2017 Plan following the effectiveness of the 2019 Incentive Plan. The maximum aggregate number of shares issuable under the 2019 Incentive Plan is 1,700,000. As of June 30, 2021, there were 138,445 shares of the Company’s common stock subject to outstanding awards and 1,561,555 shares of the Company’s common stock were reserved and available for future awards under the 2019 Plan.
The 2017 Plan and the 2019 Incentive Plan (collectively, “the Plans”), permit the grant of incentive stock options to employees and the grant of nonstatutory stock options, performance awards, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards to the Company’s employees, directors and consultants at the sole discretion of the Company’s Compensation Committee of the board of directors.
Stock Options
The Company has not granted any stock options under the Plans.
18
Restricted Stock and Restricted Stock Units
Restricted stock awards and restricted stock unit awards are grants of shares of the Company’s common stock or rights to receive shares of the Company’s common stock that are subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Recipients of restricted stock awards generally will have voting and dividend rights with respect to such shares prior to vesting, subject to such awards’ forfeiture provisions, unless the board of directors provides otherwise. Recipients of restricted stock unit awards generally will not have voting and dividend rights unless and until shares of common stock are issued with respect to such awards. Shares of restricted stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company.
For the six months ended June 30, 2021, 646,445 restricted stock units were granted under the Plans to certain directors, executives, and key employees. Certain of these restricted stock units included a market condition under ASC 718 “Compensation – Stock Compensation.”
During the three months ended March 31, 2019, restricted stock units were granted to certain executives and included both a service and a performance condition. The performance condition was achievement of a 2021 earnings target and the level of achievement of the earnings target would determine the number of shares to be issued. In the first quarter of 2020, the performance condition for these shares that was deemed probable of vesting as of December 31, 2019, was determined to be no longer probable of vesting. This resulted in a reversal of stock compensation expense of approximately $1.6 million recorded during the three months ended March 31, 2020. In the third quarter of 2020, the majority of these performance awards were cancelled, with the remainder being cancelled during the fourth quarter of 2020.
In connection with the appointment of certain executive officers in 2020, the Company awarded 675,000 time-based restricted stock units and 675,000 performance-based restricted stock units in total to the new executive officers. All of these restricted stock units were granted to these new executives as inducement awards in accordance with NASDAQ Listing Rule 5635(c)(4) and were not granted under the Plans. The time-based restricted stock units vest in equal annual installments over four years, subject to continued employment with the Company. The performance-based restricted stock units contain market conditions based on the closing price of the Company’s common stock exceeding specific price hurdles for 20 consecutive trading days, and subject to continued employment with the Company. Total outstanding inducement awards as of June 30, 2021, and December 31, 2020, were 1,071,875 and 1,350,000, respectively. These inducement awards are not included in the table below.
The Company estimated the fair value of all shares granted on the date the shares were granted and recognizes the resulting fair value over the requisite service period. The grant date fair value for the restricted stock units issued during the three months ended June 30, 2021 was determined using the closing share price on the date of grant. For shares issued with a market condition, the Monte Carlo simulation model was used to determine the fair value of the award.
A summary of the Company’s restricted stock activity for the Plans for the six months ended June 30, 2021 is as follows:
|
|
Nonvested
Shares
Outstanding
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested shares at January 1, 2021
|
|
|
1,447,419
|
|
|
$
|
5.33
|
|
Granted
|
|
|
646,445
|
|
|
$
|
9.23
|
|
Forfeited
|
|
|
302,699
|
|
|
$
|
10.69
|
|
Vested
|
|
|
402,878
|
|
|
$
|
7.80
|
|
Nonvested shares at June 30, 2021
|
|
|
1,388,287
|
|
|
$
|
6.07
|
|
As of June 30, 2021, total remaining stock-based compensation expense for nonvested restricted stock units is $10.4 million, which is expected to be recognized over a weighted average remaining period of 2.8 years.
Total stock-based compensation expense recognized for continuing operations for restricted stock units for the three and six months ended June 30, 2021 was $1.1 million and $2.2 million, respectively. Total stock-based compensation expense recognized for discontinued operations for restricted stock units for the three and six months ended June 30, 2021 was $1.3 million and $1.4 million, respectively.
Total stock-based compensation expense recognized for continuing operations for restricted stock units for the three and six months ended June 30, 2020 was $0.9 million and $0.1 million, respectively. Total stock-based compensation expense recognized for
19
discontinued operations for restricted stock units for the three and six months ended June 30, 2020 was $0.4 million and $0.5 million, respectively.
Phantom Stock
Phantom stock awards are grants of phantom stock with respect to shares of the Company’s common stock that are settled in cash and subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Shares of phantom stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company. All shares of phantom stock have vested and there are no outstanding shares of phantom stock. As a result of the cash-settlement feature of these awards, the Company considers these awards to be liability awards, which are measured at fair value at each reporting date and the pro-rata vested portion of the award is recognized as a liability.
The Company did not record any phantom stock-based compensation expense during the three or six months ended June 30, 2021, respectively. The Company recorded phantom stock-based compensation expense of less than $0.01 million during the three and six months ended June 30, 2020. There were no outstanding phantom shares as of December 31, 2020.
Note 13. Provision for Income Taxes
The Company determines its periodic income tax benefit or expense based upon the current period income and the annual estimated tax rate for the Company adjusted for discrete items. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to the Company’s current annual estimated tax rate.
For the six months ended June 30, 2021, the effective tax rate of 11.91% decreased compared to the effective tax rate of 109.96% for the six months ended June 30, 2020, due to the impact of discrete items in relation to the amount of the Company’s pre-tax earnings. Pre-tax earnings for the six months ended June 30, 2021 and 2020 were $3.8 million and ($0.1 million), respectively. The discrete items include adjustments resulting from ASU 2016-09, which requires excess tax benefits and deficiencies related to stock compensation to be recognized as a component of income tax expense rather than stockholders’ equity, and permanent items.
In response to the global impacts of COVID-19 on U.S. companies and citizens, the federal government enacted the CARES Act on March 27, 2020. The CARES Act included several temporary tax relief provisions for companies, including modifications to the interest deduction limitation and a five-year net operating loss carryback. In response to these tax relief provisions, the Company adjusted its deferred tax asset related to the interest limitation and anticipates carrying back any net operating loss generated in 2020 to prior tax periods.
Note 14. Related Party Transactions
Facility Rent
ASG leases office space from 521 Digiulian Boulevard, LLC, a company owned by a current employee. Rent expense under this lease was $0.04 million and $0.07 million for the three and six months ended June 30, 2021, respectively. Rent expense under this lease was $0.03 million and $0.06 million for the three and six months ended June 30, 2020, respectively. No amounts were unpaid under this lease at June 30, 2021 and December 31, 2020. See Note 11.
Note 15. Subsequent Events
Events occurring after June 30, 2021, have been evaluated for possible adjustment to the condensed consolidated financial statements or disclosure as of August 9, 2021, which is the date the condensed consolidated financial statements were available to be issued. The Company continues to evaluate the impact of COVID-19 on its operations, although the ultimate extent to which COVID-19 impacts our business, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain.
On August 8, 2021, the Company entered into a definitive agreement under which an affiliate of Sun Capital Partners, Inc., a private equity firm, will acquire SIC for approximately $411 million in an all-cash transaction. Under the terms of the agreement, each share of SIC common stock issued and outstanding immediately prior to the transaction will be entitled to receive $14.50 per share in cash. The closing of this transaction is subject to shareholder approval and customary closing conditions, including the receipt of required regulatory approvals. Upon the completion of the transaction, SIC would become a privately held company and shares of SIC common stock would no longer be listed on any public markets.
20