| 9. | Stockholders’ and Members’ Equity |
Initial Public Offering and Organizational Transactions
Immediately prior to the Offering, OneWater Inc amended and restated its certificate of incorporation and bylaws to, among other things, authorize (i) 40,000,000 shares of Class A common stock, par value $0.01 per share, (ii) 10,000,000 shares of Class B common stock, par value $0.01 per share, and (iii) 1,000,000 shares of Preferred stock, par value $0.01 per share. Shares of Class A common stock have one vote per share and have economic rights. Shares of Class B common stock have no economic rights, but have one vote per share.
As described in Note 1, on February 11, 2020, OneWater Inc completed its Offering of 5,307,693 of Class A common stock, which includes the exercise in full of the underwriters’ option to purchase up to 692,308 additional shares of Class A common stock pursuant to the Underwriting Agreement, at a price to the public of $12.00 per share. OneWater Inc received net proceeds of approximately $59.2 million after deducting underwriting discounts and commissions. In addition, certain Legacy Owners contributed, directly or indirectly, their OneWater LLC Units to OneWater Inc in exchange for 780,213 shares of Class A common stock. Additionally, as part of the Organizational Transactions, OneWater Inc issued approximately 8.5 million shares of Class B common stock to LLC Unitholders. No additional shares were issued or exchanged subsequent to the Organizational Transactions and the Offering for the three months ended March 31, 2020. Total outstanding shares of Class A common stock and Class B common stock at March 31, 2020 were approximately 6.1 million and 8.5 million, respectively.
The Company incurred approximately $4.9 million of legal, accounting, printing and other professional fees directly related to the Offering through March 31, 2020, including $2.6 million incurred during fiscal year 2019, of which $1.1 million were paid during fiscal year 2019. The Company accrued an additional $0.6 million at March 31, 2020 for expenses that have not yet been invoiced. Upon completion of the Offering, the $5.5 million in total costs incurred for the Offering were charged against additional paid-in capital.
Equity-Based Compensation
As part of the Organizational Transactions, previously issued Profit in Interests awards to select members of executive management for Class B units, which represented non-voting units fully and immediately vested and were exchanged for 32,754 OneWater LLC Units.
In connection withWe maintain the Offering, the Board adopted an LTIPOneWater Marine Inc. Omnibus Incentive Plan (the “LTIP”) to incentivize individuals providing services to OneWater IncInc. and its subsidiaries and affiliates. The LTIP provides for the grant, from time to time, at the discretion of the Boardboard of directors of OneWater Marine Inc. (the “Board”) or a committee thereof, of (1) stock options, (2) stock appreciation rights, (3) restricted stock, (4) restricted stock units, (5) stock awards, (6) dividend equivalents, (7) other stock-based awards, (8) cash awards, (9) substitute awards and (10) performance awards. The total number of shares reserved for issuance under the LTIP that may be issued pursuant to incentive stock options (which generally are stock options that meet the requirements of Section 422 of the Code) is 1,385,799.1,503,902. The LTIP is and will continue to be administered by the Board, except to the extent the Board elects a committee of directors to administer the LTIP. Class A common stock subject to an award that expires or is cancelled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares (including forfeiture of restricted stock awards) and shares withheld to pay the exercise price of, or to satisfy the withholding obligations with respect to, an award will again be available for delivery pursuant to other awards under the LTIP.
In connection withDuring the consummationsix months ended March 31, 2021, the Board approved the grant of the Offering, OneWater Inc granted to its named executive officers equity-based awards under the LTIP, which consist of (i) 17,33358,566 performance-based restricted stock units, subjectwhich represents 100% of the target award. Performance-based restricted stock units provide an opportunity for the recipient to receive a number of shares of our common stock based on our performance during fiscal year 2021 as measured against objective performance goals as determined by the Board. The actual number of units earned may range from 0% to 200% of the target number of units depending upon achievement of the performance goals. Performance-based restricted stock units vest in three equal annual installments, commencing on October 1, 2022. Upon vesting, each performance-based restricted stock unit equals one share of common stock of the Company. Compensation cost for performance-based restricted stock units is based on the closing price of our common stock on the date immediately preceding the grant and the Company’s assessment of the probability and level of performance achievement, and is recognized on a graded basis over the three-year vesting period. As of March 31, 2021, the Company estimated achievement of the performance targets at 150% and therefore $0.2 million and $0.3 million of expense related to the performance awards was recorded in the three and six months ended March 31, 2021, respectively.
During the six months ended March 31, 2021, the Board approved the grant of 114,665 time-based vesting (“RSUs”) for each of Messrs. Singleton (Chief Executive Officer)restricted stock units. 25,622 restricted stock units fully vest on October 1, 2021 and Aisquith (Chief Operating Officer), and (ii) 10,000 RSUs for Mr. Ezzell (Chief Financial Officer). Thethe remaining 89,043 restricted stock units vest in four equal annual installments commencing on February 7,September 30, 2021.
DuringThe following table further summarizes activity related to restricted stock units for the threesix months ended March 31, 2020, the Board of Directors approved the grant of an additional 137,500 time-based vesting restricted stock units. 37,500 restricted stock units fully vest on February 7, 2021. The remaining 100,000 restricted stock units vest in four equal annual installments commencing on February 7, 2021. 2021:
| | | Restricted Stock Unit Awards | |
| | | Number of Shares | | | Weighted Average Grant Date Fair Value ($) | |
| Unvested at September 30, 2020 | | | 301,643 | | | $ | 15.78 | |
| Awarded | | | 202,514 | | | | 23.43 | |
| Vested | | | (75,895 | ) | | | 15.70 | |
| Forfeited | | | - | | | | - | |
| Unvested at March 31, 2021 | | | 428,262 | | | $ | 19.41 | |
Compensation cost for restricted stock units is based on the closing price of our common stock on the date immediately preceding the grant and is recognized on a straight-line basis over the applicable vesting periods.
During the three months ended March 31, 2020, the Board of Directors approved the grant of 67,000 performance share units, which represents 100% of the target award. Performance share units provide an opportunity for the recipient to receive a number of shares of our common stock based on our performance during fiscal year 2020 as measured against objective performance goals as determined by the Board of Directors. The actual number of units earned may range from 0% to 175% of the target number of units depending upon achievement of the performance goals. Performance share units vest in four equal annual installments. Upon vesting, each performance share unit equals one share of common stock of the Company. Compensation cost for performance share units is based on the closing price of our common stock on the date immediately preceding the grant and the ultimate performance level achieved, and is recognized on a graded basis over the four-year vesting period. As of March 31, 2020, the Company did not expect the performance targets to be met and therefore no expense related to the performance awards were recorded in the three months ended March 31, 2020.
The following table further summarizes activity related to restricted stock units for the six months ended March 31, 2020:
| | | Restricted Stock Unit Awards | |
| | | Number of Shares | | | Weighted Average Grant Date Fair Value ($) | |
| Issued on February 11, 2020 | | | 44,666 | | | $ | 14.61 | |
| Awarded | | | 204,500 | | | | 16.01 | |
| Vested | | | - | | | | - | |
| Forfeited | | | - | | | | - | |
| Unvested at March 31, 2020 | | | 249,166 | | | $ | 15.76 | |
For the three and six months ended March 31, 2020,2021, the Company recognized $0.2$1.1 million and $2.2 million of compensation expense, related to the grant of restricted stock units.respectively. As of March 31, 2020,2021, the total unrecognized compensation expense related to outstanding equity awards was approximately $2.7$5.7 million, which the Company expects to recognize over a weighted-average period of approximately 1.6 years.
We issue shares of our Class A common stock upon the vesting of performance-based restricted stock units and time-based restricted stock units. These shares are issued from our authorized and not outstanding common stock. In addition, in connection with the vesting of restricted stock units, we repurchase a portion of shares issued equal to the amount of employee income tax withholding.
Investor Voting Warrants
On October 28, 2016, the Company issued 25,000 OneWater LLC common unit warrants in exchange for $1.0 million. The common unit warrants had a ten-year life from the date of issuance and provided the holders with a put right after 5five years, or potentially earlier, under certain circumstances. The holders of the warrants maintained full voting rights in OneWater LLC. The common unit warrants were exercised for $0.0001 per unit in exchange for cash or common units of OneWater LLC. As the common unit warrants maycould be settled in cash at the election of the holder, the fair value of the common unit warrants have beenwas included in warrant liability in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2019.liability. In connection with the Offering, Goldman Sachs & Co. LLC and certain of its affiliates (“Goldman”) and The Beekman Group (“Beekman”) received 2,148,806 OneWater LLC units upon exercise of the warrants.
OneWater LLC Preferred Distribution
As of September 30, 2019, the unpaid balanceThe Company engaged a third-party valuation specialist to assist management in performing a valuation of the preferred distributionfair value of the common unit warrants. Accordingly, the warrant liability was $3.2 million.accounted for based on inputs that were unobservable and significant to the overall fair value measurement (Level 3). The 5% cumulative interest onvaluation considered both a market and a discounted cash flows approach in arriving at the preferred distribution was recognized as a distribution when declared byfair value of the Board of Directors.common unit warrants. As of September 30, 2019, unpaid cumulative interest onpreviously noted, the preferred distribution was zero. On February 11, 2020,common unit warrants were exercised in connection with the Offering thefor common units of OneWater LLC and therefore no warrant liability existed as of September 30, 2020 and March 31, 2021. The Company paid $3.2recognized income of $0.8 million in exchange for the surrendersix months ended March 31, 2020, and this change in the fair value was recorded as a change in the fair value of warrant liability in the preferred distribution right.accompanying unaudited condensed consolidated statements of operations.
Non-Controlling Interest
On June 1, 2018, the Company purchased Bosun’s Marine, a Massachusetts based boat retailer through its subsidiary Bosun’s Assets and Operations (“BAO”). The former owner of Bosun’s Marine invested $2.5 million of the purchase price to obtain a 25.0% ownership interest in BAO, with no voting rights in the subsidiary BAO. The results of operations for Bosun’s Marine have been included in the Company’s consolidated financial statements through the date of the Offering and the former owner’s minority interest in the subsidiary BAO has been recorded accordingly through the date of the Offering.
On August 1, 2017, the Company purchased South Shore Marine, an Ohio based boat retailer through its subsidiary South Shore Assets and Operations (“SSAO”). The former owner of South Shore Marine invested $1.8 million of the purchase price to obtain a 25.0% ownership interest in SSAO, with no voting rights in the subsidiary SSAO. The results of operations for South Shore Marine have been included in the Company’s consolidated financial statements through the date of the Offering and the former owner’s minority interest in the subsidiary SSAO has been recorded accordingly through the date of the Offering.
In connection with the Offering, the former owners of BAOBosun’s Assets and SSAOOperations and South Shore Assets and Operations received 290,466 and 306,199 shares of Class A common stock, respectively, for the surrender of their respective 25.0% ownership interests. Accordingly, the former owners’ minority interests have been recorded as a non-controlling interest from October 1, 2019 through February 10, 2020, the period prior to the Offering.
As discussed in Note 1, OneWater IncInc. consolidates the financial results of OneWater LLC and its subsidiaries and reports a non-controlling interest related to the portion of OneWater LLC owned by the holders of OneWater LLC Unitholders.Units (the “OneWater Unit Holders”). Changes in ownership interest in OneWater LLC, while OneWater IncInc. retains its controlling interest, will be accounted for as equity transactions. Future direct exchanges of OneWater LLC units will result in a change in ownership and reduce the amount recorded as a non-controlling interest and increase additional paid-in-capital. As of March 31, 2020,2021, OneWater IncInc. owned approximately 41.8%72.9% of the economic interest of OneWater LLC with the LLC UnitholdersOneWater Unit Holders owning the remaining 58.2%27.1%.
Distributions
Dividend Restrictions
UnderDuring the Term and Revolver Credit Facility,six months ended March 31, 2021, the Company and its subsidiaries are generally restricted from making cash dividends ormade distributions and are required to obtain consent from Goldman prior to the payment of dividends, excluding distributions related to the payment of taxes by members. These restrictions apply to all income and net assets of the Company and its consolidated subsidiaries. Additionally,OneWater Unit Holders for certain of the Company’s subsidiaries designated as ‘‘Dealers’’ under its inventory financing program are generally restricted from incurring indebtedness, including certain restrictions on intercompany loans or advances.permitted tax payments.
Earnings (Loss) Per Share
Basic and diluted earnings per share of Class A common stock is computed by dividing net income attributable to OneWater IncInc. by the weighted-average number of Class A common stock outstanding during the period. For the three and six months ended March 31, 2020, earnings per share is calculated for the period from February 11, 2020 through March 31, 2020, the period following the Organizational Transactions and the Offering, by the weighted-average number of shares of Class A common stock outstanding during the same period. There were no adjustments to the denominator necessary to compute diluted earnings per share.Offering. Diluted earnings per share is computed by giving effect to all potentially dilutive shares.
There were no shares of Class A or Class B common stock outstanding prior to February 11, 2020, therefore no earnings per share information has been presented for any period prior to that date.
The following table sets forth the calculation of earnings per share for the three and six months ended March 31, 2021 and 2020 (in thousands, except per share data):
Earnings per share: | | Three Months Ended March 31, 2020 | | | Six Months Ended March 31, 2020 | | | Three Months
Ended March 31, 2021 | | | Three Months Ended March 31, 2020 | |
| Numerator: | | | | | | | | | | | | |
| Net income attributable to OneWater Inc | | $ | 1,085 | | | $ | 1,085 | | | $ | 20,475 | | | $ | 1,085 | |
| | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| Weighted-average number of unrestricted outstanding common shares used to calculate basic net income per share | | | 6,088 | | | | 6,088 | | | 10,901 | | | 6,088 | |
| Effect of dilutive securities: | | | | | | | |
| Restricted stock units | | | | 270 | | | | - | |
| Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted earnings per share | | | | 11,171 | | | | 6,088 | |
| | | | | | | | | | | | | |
| Earnings per share of Class A common stock – basic | | $ | 0.18 | | | $ | 0.18 | | | $ | 1.88 | | | $ | 0.18 | |
| Earnings per share of Class A common stock – diluted | | $ | 0.18 | | | $ | 0.18 | | | $ | 1.83 | | | $ | 0.18 | |
The following table sets forth the calculation of earnings per share for the six months ended March 31, 2021 and 2020 (in thousands, except per share data):
Earnings per share: | | Six Months Ended March 31, 2021 | | | Six Months Ended March 31, 2020 | |
| Numerator: | | | | | | |
| Net income attributable to OneWater Inc | | $ | 28,263 | | | $ | 1,085 | |
| | | | | | | | | |
| Denominator: | | | | | | | | |
| Weighted-average number of unrestricted outstanding common shares used to calculate basic net income per share | | | 10,838 | | | | 6,088 | |
| Effect of dilutive securities: | | | | | | | | |
| Restricted stock units | | | 245 | | | | - | |
| Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted earnings per share | | | 11,083 | | | | 6,088 | |
| | | | | | | | | |
| Earnings per share of Class A common stock – basic | | $ | 2.61 | | | $ | 0.18 | |
| Earnings per share of Class A common stock – diluted | | $ | 2.55 | | | $ | 0.18 | |
Shares of Class B common stock do not share in the income (losses) of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted lossearnings per share because the effect of including such potentially dilutive shares would have been antidilutive upon conversion (in thousands):
| | | Three Months Ended March 31, 2021 | | | Three Months Ended March 31, 2020 | |
| Class B common stock | | | 4,108 | | | | 8,462 | |
| Restricted Stock Units | | | 143 | | | | 127 | |
| | | | 4,251 | | | | 8,589 | |
| | | Three Months Ended March 31, 2020 | | | Six Months Ended March 31, 2020 | | | Six Months Ended March 31, 2021 | | Six Months Ended March 31, 2020 | |
| Class B common stock | | 8,462 | | | 8,462 | | | | 4,154 | | | | 8,462 | |
| Restricted Stock Units | | | 127 | | | | 127 | | | | 173 | | | | 127 | |
| | | | 8,589 | | | | 8,589 | | | | 4,327 | | | | 8,589 | |
Employee Stock Purchase Plan
At the Company's 2021 Annual Meeting of Stockholders (the "Annual Meeting"), held on February 23, 2021, the Company’s stockholders approved the OneWater Marine Inc. 2021 Employee Stock Purchase Plan (the “ESPP”), which was approved and adopted by the Board as of January 13, 2021 (the “Adoption Date”), subject to stockholder approval at the Annual Meeting. The effective date of the ESPP is February 23, 2021, and, unless earlier terminated, the ESPP will expire on the twentieth anniversary of the Adoption Date. The ESPP will be administered by the Board or by one or more committees to which the Board delegates such administration.
The ESPP enables eligible employees to purchase shares of the Company’s Class A common stock at a discount through participation in discrete offering periods. The ESPP is intended to qualify as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986, as amended. Up to a maximum of 299,505 shares of the Company’s Class A common stock may be issued under the ESPP, subject to certain adjustments as set forth in the ESPP. On the first day of each fiscal year during the term of the ESPP, beginning on October 1, and ending on (and including) September 30, the number of shares of Class A common stock that may be issued under the ESPP will increase by a number of shares equal to the least of (i) 1% of the outstanding shares on the Adoption Date, or (ii) such lesser number of shares (including zero) that the administrator determines for purposes of the annual increase for that fiscal year. The number of shares of Class A common stock that may be granted to any single participant in any single option period will be subject to certain limitations set forth in the plan. As of March 31, 2021, there has not yet been an offering period under the ESPP.
| 10. | Redeemable Preferred Interest in Subsidiary |
On September 1, 2016, the Company organized OWAO. As of September 30, 2016, OWAO was not funded. In conjunction with Goldman and Beekman, OneWater LLC contributed a majority of its assets, including subsidiaries operating all of its retail operations, to OWAO in return for 100,000 common units. Additionally, as a part of the transaction, OWAO issued 68,000 preferred units in OWAO to Goldman and Beekman. The preferred interest had a stated 10.0% rate of return and there was no allocation of profits in excess of the stated return. The preferred interests were not convertible but may have been redeemed by the holder after 5five years or upon certain triggering events at face value plus accrued interest.
The Company had classified the redeemable preferred interest as temporary equity in the consolidated balance sheets. The discount on the issuance of the redeemable preferred interest was being accreted to retained common interests as a dividend from the date of issuance through the fifth anniversary of the issuance date. On February 11, 2020, in connection with the Offering, OWAO used $89.2 million in cash to fully redeem the preferred interest in subsidiary held by Goldman and Beekman. For the three months ended March 31, 2020, the Company recorded $1.1 million in accretion of the discount and amortization of the issuance costs associated with redeemable preferred interest in subsidiary, which includes an acceleration of the remaining discount and issuance costs balances outstanding at the redemption date.
AsThe Company is a corporation and, as a result of the Offering and Organizational Transactions, OneWater Inc owns a portion of the LLC Units of OneWater LLC, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, OneWater LLC is not subject to U.S. federal, and certain state and local income taxes. Any taxable income or loss generated by OneWater LLC is passed through to and included in the taxable income or loss of its members, including OneWater Inc, in accordance with the terms of the LLC Agreement. OneWater Inc is subject totreated as a pass-through entity for U.S. federal income taxes,tax purposes and in addition tomost state and local jurisdictions. As such, OneWater LLC’s members, including the Company, are liable for federal and state income taxes with respect to the allocable share of any taxable incomeon their respective shares of OneWater LLC.LLC’s taxable income.
Our effective tax rate of 13.7%17.6% for each of the three months ending March 31, 2020 and 19.8% for the six months ending March 31, 20202021 differs from statutory rates primarily due to earnings allocated to non-controlling interests.
The Company recognizes deferred tax assets to the extent it believes these assets are more-likely-than-not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. Based on our cumulative earnings history and forecasted future sources of taxable income, we believe that we will fully realize our deferred tax asset in the future. The Company has not recorded a valuation allowance.
As of March 31, 2021, the Company had not recognized any uncertain tax positions, penalties, or interest as management has concluded that no such positions exist. The Company has recognized no uncertainis not currently subject to income tax positions. Although the Company has not filed a corporateaudits in any U.S. or state jurisdiction for any tax return, the basis of tax positions applied to our tax provisions substantially comply with applicable federal and state tax regulations, and we acknowledge the respective taxing authorities may take contrary positions based on their interpretation of the law. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision or benefit for income taxes in the period in which a final determination is made.year.
Tax Receivable Agreement
OneWater Inc expects to obtain an increase in its share of the tax basis in the net assets of OneWater LLC when LLC Units are exchanged by the LLC Unitholders. Each exchange for outstanding shares of Class A common stock results in a corresponding increase in OneWater Inc’s ownership of LLC Units. These increases in tax basis may reduce the amounts that OneWater Inc would otherwise pay in the future to various taxing authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
In connection with the Offering, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with certain of the owners of OneWater LLC. As of March 31, 2021 and September 30, 2020, our liability under the Tax Receivable Agreement with certain of the Legacy Owners that will continue to be LLC Unitholders. The Tax Receivable Agreement generally provides for the payment by OneWater Inc to such LLC Unitholders ofwas $17.9 million and $15.6 million, respectively, representing 85% of the calculated net cash savings if any, in U.S. federal, state and local income tax and franchise tax (computed using the estimated impact of state and local taxes) that OneWater Inc actually realizes (or is deemed to realizeInc. anticipates realizing in certain circumstances) in periods afterfuture years from the Offering as a result of as applicable to each such LLC Unitholder, (i) certain increases in tax basis that occurand certain tax benefits attributable to imputed interest as a result of OneWater Inc’sInc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such LLC Unitholder’sOneWater LLC Units pursuant to thean exercise of the Redemption Right or the Call Right (each as defined in the Tax Receivable Agreement) or that relate to prior transfersamended and restated limited liability company agreement of suchOneWater LLC Units that will be available to OneWater Inc as a result(the “OneWater LLC Agreement”)).
The projection of its acquisitions of those units and (ii) imputed interest deemed to be paid by OneWater Inc as a result of, and additional tax basis arisingfuture taxable income involves significant judgment. Actual taxable income may differ from any payments OneWater Inc makesour estimates, which could significantly impact our ability under the Tax Receivable Agreement. OneWater IncWe have determined it is more-likely-than-not that we will retainbe able to utilize all of our deferred tax assets subject to the benefit of the remaining 15% of these net cash savings.
If the Internal Revenue Service orTax Receivable Agreement; therefore, we have recorded a state or local taxing authority challenges the tax basis adjustments that give rise to paymentsliability under the Tax Receivable Agreement andrelated to the tax savings we may realize from certain increases in tax basis adjustments are subsequently disallowed,and certain tax benefits attributable to imputed interest as a result of OneWater Inc.’s acquisition of OneWater LLC Units pursuant to an exercise of the recipientsRedemption Right or Call Right (each as defined in the OneWater LLC Agreement). If we determine the utilization of payments underthese deferred tax assets is not more-likely-than-not in the agreement will not reimburse the Company for any payments the Company previously madefuture, our estimate of amounts to them. Any such disallowance would be taken into account in determining future paymentspaid under the Tax Receivable Agreement and would therefore, reducebe reduced. In this scenario, the amountreduction of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments are disallowed, the Company’s paymentsliability under the Tax Receivable Agreement could exceed its actual tax savings, and the Company may not be ablewould result in a benefit to recoup payments under the Tax Receivable Agreement that were calculated on the assumption that the disallowed tax savings were available.
The Tax Receivable Agreement provides that if (i) certain mergers, asset sales, other formsour consolidated statements of business combinations, or other changes of control were to occur, (ii) there is a material breach of material obligations under the Tax Receivable Agreement, or (iii) it elects an early termination of the Tax Receivable Agreement, then the Tax Receivable Agreement will terminate and the Company’s obligations, or the Company’s successor’s obligations, under the Tax Receivable Agreement will accelerate and become due and payable, based on certain assumptions, including an assumption that the Company would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement, to the extent applicable, that any LLC Units that have not been exchanged are deemed exchanged for the fair market value of the Company’s Class A common stock at the time of termination.
As of March 31, 2020 , there have been no exchanges of LLC Units and as a result, the Company has not recorded a liability related to the Tax Receivable Agreement.operations.
| 12. | Contingencies and Commitments |
Operating Leases
The Company recorded rent expense of $3.1$3.9 million and $2.4$3.1 million during the three months ended March 31, 20202021 and 2019,2020, respectively, and $6.1$7.0 million and $4.6$6.1 million during the six months ended March 31, 20202021 and 2019,2020, respectively. The Company leases certain facilities and equipment under noncancelable operating lease agreements having terms in excess of one year, which expire at various dates through 2037.
Acquisition Contingent Consideration
As of March 31, 2021, the Company has recorded an estimate of contingent consideration for a fiscal year 2021 acquisition in the amount of $5.5 million. The acquisition contingent consideration liability is accounted for based on inputs that are unobservable and significant to the overall fair value measurement (Level 3). The estimated contingent consideration balance at March 31, 2021 is recorded in other long-term liabilities in the unaudited condensed consolidated balance sheets.
As of September 30, 2020, the Company recorded an estimate of contingent consideration for a fiscal year 2019 acquisition in the amount of $5.5 million. The acquisition contingent consideration liability had been accounted for based on inputs that were unobservable and significant to the overall fair value measurement (Level 3). The contingency period closed on December 1, 2020 and a final payout in the amount of $5.9 million was made on December 29, 2020. The estimated contingent consideration balance at September 30, 2020 was recorded in Other payables and accrued expenses in the unaudited condensed consolidated balance sheets. For the six months ended March 31, 2021, a $0.4 million expense is recorded in the unaudited condensed consolidated statements of operations for the adjustment to the contingent consideration. Claims and Litigation
The Company is involved in various legal proceedings as either the defendant or plaintiff. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between the affected parties and other actions. Management assesses the probability of losses or gains for such contingencies and accrues a liability and/or discloses the relevant circumstances as appropriate. In the opinion of management, it is not reasonably probable that the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, results of operations or cash flows. Additionally, based on the Company’s review of the various types of claims currently known, there is no indication of a material reasonably possible loss in excess of amounts accrued. The Company currently does not anticipate that any known claim will materially adversely affect our financial condition, liquidity, or results of operations. However, the outcome of any matter cannot be predicted with certainty, and an unfavorable resolution of one or more matters presently known or arising in the future could have a material adverse effect on the Company’s financial condition, liquidity or results of operations.
| 13. | Related Party Transactions |
In accordance with agreements approved by the Board, of Directors of the Company, we purchased inventory, in conjunction with our retail sale of the products, from certain entities affiliated with common members of the Company. Total purchases incurred under these arrangements were $8.7$21.3 million and $8.4$8.7 million for the three months ended March 31, 20202021 and 2019,2020, respectively, and $19.5$36.4 million and $14.9$19.5 million for the six months ended March 31, 2021 and 2020, and 2019, respectively. A subsidiary of the Company holds a warrant to purchase one such entity for equity in inventory plus $1, which approximates fair value, that expires on March 1, 2021.
In accordance with agreements approved by the Board, of Directors of the Company, certain entities affiliated with common members of the Company receive fees for rent of commercial property. Total expenses incurred under these arrangements were $0.4$0.5 million and $0.6$0.4 million for the three months ended March 31, 20202021 and 2019,2020, respectively, and $1.0$1.1 million and $1.1$1.0 million for the six months ended March 31, 20202021 and 2019,2020, respectively.
In accordance with agreements approved by the Board, of Directors of the Company, the Company received fees from certain entities and individuals affiliated with common members of the Company for goods and services. Total fees recorded under these arrangements were $0.3$1.3 million and $1.2$0.3 million for the three months ended March 31, 20202021 and 2019,2020, respectively, and $0.4$1.4 million and $1.3$0.4 million for the six months ended March 31, 20202021 and 2019,2020, respectively.
In accordance with agreements approved by the Board, of Directors of the Company, the Company made payments to certain entities and individuals affiliated with common members of the Company for goods and services. Total payments recorded under these arrangements were $0.2$0.1 million and $0.3$0.2 million for the three months ended March 31, 20202021 and 2019,2020, respectively, and $0.4$0.1 million and $0.5$0.4 million for the six months ended March 31, 20202021 and 2019,2020, respectively. Included in these amounts and in connection with our notes payable floor plan financing, our Chief Executive Officer was paid a guarantee fee of $0.1 million for each of the three months ended March 31, 2020 and 2019 and $0.3 million for each of the three and six months ended March 31, 2020, and 2019,respectively, for his personal guarantee associated with this arrangement.
In connection with transactions noted above, the Company was due certain amounts$5,851 and $0.1 million as recorded within accounts receivable as of March 31, 20202021 and September 30, 2019, of $0.2 and $0.1 million,2020, respectively.
All related party transactions are immaterial and have not been shown separately on the face of the consolidated financial statements.
In March 2020, the Company began seeing the impact of the COVID-19 global pandemic on its business. The Company is monitoring the situation closely and making any necessary adjustments in operations to ensure compliance with guidelines issued by the World Health Organization (WHO), the Centers for Disease Control and Prevention (CDC) and federal, state or local authorities. Based on the guidance received, the Company has temporarily closed certain departments and locations. In an effort to protect its business and enhance its financial flexibility, the Company has taken actions to reduce costs, including certain executive salary reductions, discretionary expense reductions, limiting capital expenses for non-essential projects and workforce furloughs and/or reduction. Management expects its business will continue to be impacted to some degree, but the significance and the duration of the impact cannot be determined at this time.
Between April 20, 2020 and April 22, 2020, certain subsidiaries of the Company entered into separate promissory notes with Hancock Whitney Bank providing for loans under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (each, an “SBA Loan” and collectively, the “SBA Loans”). Total amounts received were approximately $14.1 million in the aggregate.
Based on its operating results through April 30, 2020, the Company determined that the impact of COVID-19 was not affecting its performance to the extent expected. While the future impact of COVID-19 remains unknown, initial sales trends suggest the impact will not be as severe as initially believed at this time. Accordingly, the Company elected to return the money received under the CARES Act on May 6, 2020.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to the “Company,” “we,” “us,”"Company," "we," "us," and “our”"our" refer to OneWater Marine Inc. and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors discussed above in “Cautionary Statement Regarding Forward-Looking Statements” and described under the heading “Risk Factors” included in our Annual Report on Form 10-K for the Final Prospectusyear ended September 30, 2020, filed by OneWater Marine Inc. and in the other related OneWater Marine Inc. filings with the SEC,U.S. Securities and Exchange Commission (the “SEC”) on December 3, 2020, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Overview
We believe that we are one of the largest and one of the fastest-growing premium recreational boat retailers in the United States with 6369 stores comprising 2124 dealer groups in 1110 states. Our dealer groups are located in highly attractive markets throughout the Southeast, Gulf Coast, Mid-Atlantic and Northeast, including Texas, Florida, Alabama, North Carolina, South Carolina, Georgia Ohio and New York,Ohio, which collectively comprise eightseven of the top twenty states for marine retail expenditures. We believe that we are a market leader by volume in sales of premium boats in 12 out of the 1715 markets in which we operate. In fiscal year 2019,2020, we sold over 8,50010,100 new and pre-owned boats, of which we believe approximately 40% were sold to customers who had a trade-in or with whom we had otherwise established relationships. The combination of our significant scale, diverse inventory, access to premium boat brands and meaningful dealer group brand equity enable us to provide a consistently professional experience as reflected in the number of our repeat customers and same-store sales growth.
We were formed in 2014 as One Water Marine Holdings, LLC (“OneWater LLC”) through the combination of Singleton Marine and Legendary Marine, which created a marine retail platform that collectively owned and operated 19 stores. Since the combination in 2014, we have acquired a total of 4049 additional stores through 1720 acquisitions. Our current portfolio as of March 31, 2020 consists2021 consisted of 2124 different local and regional dealer groups. Because of this, we believe we are one of the largest and one of the fastest-growing premium recreational boat retailers in the United States based on number of stores and total boats sold. While we have opportunistically opened new stores in select markets, we believe that it is generally more effective economically and operationally to acquire existing stores with experienced staff and established reputations.
The boat dealer market is highly fragmented and is comprised of over 4,000 stores nationwide. Most competing boat retailers are operated by local business owners who own three or fewer stores. We are one of the largest and fastest-growing premium recreational boat retailers in the United States. Despite our size, we comprise less than 2% of total industry sales. Our scale and business model allow us to leverage our extensive inventory to provide consumers with the ability to find a boat that matches their preferences (e.g., make, model, color, configuration and other options) and to deliver the boat within days while providing a personalized sales experience. We are able to operate with a comparatively higher degree of profitability than other independent retailers because we allocate support resources across our store base, focus on high-margin products and services, utilize floor plan financing and provide core back-office functions on a scale that many independent retailers are unable to match. We seek to be the leading boat retailer by total market share within each boating market and within the product segments in which we participate. To the extent that we are not, we will evaluate acquiring other local retailers in order to increase our sales, to add additional brands or to provide us with additional high-quality personnel.
Impact of COVID-19
The COVID-19 pandemic and its related effects, including restraints on U.S. economic and leisure activities, have had and may continue to have a significant impact on our business for the threeoperations and six months ended March 31, 2020. Same-store sales through mid-March outpaced the prior year, delivering approximately 10% growth year-over-year, but slowed significantly in the last two weeks of March as the COVID-19 pandemic spread across the U.S.financial condition. We place the utmost importance on the safety and well-being of our employees and in compliance with guidelines issued by the World Health Organization (WHO), the Centers for Disease Control and Prevention (CDC) and federal, state or local authorities, we closed or reduced staffing at certain locations.locations during portions of the fiscal year ended September 30, 2020. We have implemented cleaning and social distancing techniques at each of our locations. In light of the current environment, our sales team members are fully engaged with customers and are providing them with virtual walkthroughs of inventory and/or private, at home or on water, showings, while our service departments are working hard to deliver boats and keep customers on the water.
The COVID-19 pandemic and its related effects may continue to interfere with the ability of our employees, contractors, customers, suppliers, and other business partners to perform our and their respective responsibilities and obligations with respect to the operation of our business. Additionally, current economic conditions andTo date, we have not experienced any significant shortages of inventory, but due to the COVID-19 outbreak maypandemic and increased sales generally across the industry, there has been industry-wide supply chain constraints. It is possible that a significant shortage could occur as a result of the COVID-19 pandemic and its effects on, among other things, supply chains, operations and consumer demand.
On April 1, 2020, our executive management team elected to undertake salary cuts in response to the impacts of COVID-19. Additionally, the Board elected to forgo their cash compensation for a period of six months. However, given trends in demand, the cash compensation and salaries of our directors and executive management team, as applicable, were restored to their pre-COVID levels as of July 3, 2020, and our directors and executive management team received a one-time cash payment equal to their reduction in compensation.
While we continue to monitor the impact of the COVID-19 pandemic on our business and operations, our financial results for the three and six months ended March 31, 2021 suggest that spending in all our regions and across product lines has proven remarkably resilient despite the challenges posed by the pandemic as families have increasingly focused on socially-distanced, outdoor recreation, driving a material increase in sales.
Though the COVID-19 pandemic did not adversely affect our financial position for the purchasing decisionsthree and six months ended March 31, 2021 relative to the three and six months ended March 31, 2020, the ultimate impact of our customers. The extent of this impactthe COVID-19 pandemic on our business remains uncertain.uncertain and dependent on various factors, including the existence and extent of a prolonged economic downturn, the resurgence of COVID19 in certain geographic areas, emergence of new strain variants thereof, consumer demand and the ability to safely and legally operate our stores.
Trends and Other Factors Impacting Our Performance
Acquisitions
We are a highly acquisitive company. Since the combination of Singleton Marine and Legendary Marine in 2014, we have acquired 4049 additional stores through 1720 dealer group acquisitions. Our team remains focused on expanding our dealership in regions with strong boating cultures, enhancing the customer experience, and generating value for our shareholders. With that in mind, we expect to take a temporary pause on acquisitions until the current macro-economic environment stabilizes. We are using this time to better evaluate targets. We have not seen any significant change to the acquisition pipeline at this time.
We have an extensive acquisition track record within the boating industry and believe we have developed a reputation for treating sellers and their staff in an honest and fair manner. We typically retain the management team and name of the acquired dealerships. We believe this practice preserves the acquired dealer’s customer relationships and goodwill in the local marketplace. We believe our reputation and scale have positioned us as a buyer of choice for boat dealers who want to sell their businesses. To date, 100% of our acquisitions have been sourced from inbound inquiries, and the number of annual inquiries we receive has consistently increased over time. Our strategy is to acquire stores at attractive EBITDA multiples and then grow same-store sales while benefitting from cost-reducing synergies. Historically, we have typically acquired dealer groups for less than 4.0x EBITDA on a trailing twelve monthstwelve-month basis and believe that we will be able to continue to make attractive acquisitions within this range.
In the six months ended March 31, 2021, we completed the following transactions:
On December 1, 2020, Tom George Yacht Group with two locations in Florida
On December 31, 2020, Walker Marine Group with five locations in Florida
On December 31, 2020, Roscioli Yachting Center with one location in Florida
Total purchase price of the acquisitions during the six months ended March 31, 2021 was $93.0 million and was paid with $85.5 million in cash, and the remaining $7.5 million was financed with $5.5 million estimated acquisition contingent consideration and a $2.1 million seller notes payable. The acquisitions contributed $30.7 million to our consolidated revenue and $3.3 million to our income before income tax expense for the three months ended March 31, 2021. Included in our results for the six months ended March 31, 2021, the acquisitions contributed $32.8 million to our consolidated revenue and $3.4 million to our income before income tax expense. Costs related to acquisitions are included in transaction costs and primarily relate to legal, accounting, and valuation fees, which are charged directly to operations in the consolidated statements of operations as incurred in the amount of $0.4 million and $0.6 million for the three and six months ended March 31, 2021, respectively.
General Economic Conditions
General economic conditions and consumer spending patterns can negatively impact our operating results. Unfavorable local, regional, national, or global economic developments or uncertainties, including the adverse economic effects of the COVID-19 pandemic or a prolonged economic downturn, could reduce consumer spending and adversely affect our business. Consumer spending on discretionary goods may also decline as a result of lower consumer confidence levels, even if prevailing economic conditions are otherwise favorable. Economic conditions in areas in which we operate stores, particularly in the Southeast, can have a major impact on our overall results of operations. Local influences, such as corporate downsizing and inclement weather such as hurricanes and other storms, environmental conditions, global public health concerns and events could adversely affect our operations in certain markets and in certain periods. Any extended period of adverse economic conditions or low consumer confidence is likely to have a negative effect on our business.
Our business was significantly impacted during the recessionary period that began in 2007. This period of weakness in consumer spending and depressed economic conditions had a substantial negative effect on our operating results. In response to these conditions we reduced our inventory purchases, closed certain stores and reduced headcount. Additionally, in an effort to counteract the downturn, we increased our focus on pre-owned sales, parts and repair services, and finance and insurance services. As a result, we surpassed our pre-recession sales levels in less than 24 months. While we believe the measures we took significantly reduced the impact of the downturn on the business, we cannot guarantee similar results in the event of a future downturn. Additionally, we cannot predict the timing or length of unfavorable economic or industry conditions, including the downturn as a result of the COVID-19 pandemic, or the extent to which they could adversely affect our operating results.
Although past economic conditions have adversely affected our operating results, we believe we are capable of responding in a manner that allows us to substantially outperform the industry and gain market share. We believe our ability to capture such market share enables us to align our retail strategies with the desires of customers. We expect our core strengths, including retail and acquisition strategies, will allow us to capitalize on growth opportunities as they occur, despite market conditions.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (‘‘GAAP’’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of the financial statements, and revenues and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions, and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements. Set forth below are the policies and estimates that we have identified as critical to our business operations and understanding our results of operations, based on the high degree of judgment or complexity in their application.
Revenue Recognition
Revenue is recognized from the sale of products and commissions earned on new and pre-owned boats (including used, brokerage, consignment and wholesale) when ownership is transferred to the customer. We are the principal with respect to revenue from new, used and consignment sales and such revenue is recorded at the gross sales price. With respect to brokerage transactions, we are acting as an agent in the transaction, and therefore the fee or commission is recorded on a net basis.
Revenue from parts and service operations (boat maintenance and repairs) is recorded over time as services are performed. Each boat maintenance and repair service is a single performance obligation that includes both the parts and labor associated with the service. Payment for boat maintenance and repairs is typically due upon the completion of the service, which is generally completed within a period of one year or less from contract inception. Prior to the adoption of ASU 2014-09 (as defined below), revenue from parts and service operations were recognized when the customer took delivery of the part or serviced boat. Due to the short period of time from contract inception to completion, the impact of recording labor and parts incurred but not billed at the end of the reporting period in accordance with the standard adoption was de minimis.
Deferred revenue from storage and marina operations is recognized on a straight-line basis over the term of the contract as services are completed. Revenue from arranging financing, insurance and extended warranty contracts to customers through various third-party financial institutions and insurance companies is recognized when the related boats are sold. We do not directly finance our customers’ boat, motor or trailer purchases. Subject to our agreements and in the event of early cancellation of such loans or insurance contracts by the customer, we may be assessed a charge back for a portion of the transaction price by the third-party financial institutions and insurance companies. We constrain our estimate of variable consideration associated with chargebacks based on our historical experience with repayments or defaults. Chargebacks were not material to the unaudited condensed consolidated financial statements for the three and six months ended March 31, 2020 and March 31, 2019.
Vendor Consideration Received
Consideration received from vendors is accounted for in accordance with FASB Accounting Standards Codification 330, ‘‘Inventory’’ (‘‘ASC 330’’). Pursuant to ASC 330, manufacturer incentives based upon cumulative volume of sales and purchases are recorded as a reduction of inventory cost and related cost of sales when the amounts are probable and reasonably estimable.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of new and pre-owned boat inventory is determined using the specific identification method. New and pre-owned boat sales histories indicated that the overwhelming majority of such boats are sold for, or in excess of, the cost to purchase those boats. In assessing the lower of cost or net realizable value, we consider the aging of the boats, historical sales of a particular product and current market conditions. Therefore, we generally do not maintain a reserve for boat inventory. The cost of parts and accessories is determined using the weighted average cost method. Inventory is reported net of write downs for obsolete and slow moving items of approximately $0.5 million at both March 31, 2020 and September 30, 2019.
Goodwill and Other Intangible Assets
Goodwill and intangible assets are accounted for in accordance with FASB Accounting Standards Codification 350, ‘‘Intangibles — Goodwill and Other’’ (‘‘ASC 350’’), which provides that the excess of cost over the fair value of the net assets of businesses acquired, including other identifiable intangible assets, is recorded as goodwill. ASC 350 also states that if an entity determines, based on an assessment of certain qualitative factors, that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative goodwill impairment test is unnecessary. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. In accordance with ASC 350, goodwill is tested for impairment at least annually, or more frequently when events or circumstances indicate that impairment might have occurred.
In accordance with ASC 350, we review goodwill for impairment annually in the fourth fiscal quarter, or more often if events or circumstances indicate that impairment may have occurred. When evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, the difference would represent the amount of required goodwill impairment in accordance with ASC 350. To the extent the reporting unit’s earnings decline significantly or there are changes in one or more of these inputs that would result in a lower valuation, it could cause the carrying value of the reporting unit to exceed its fair value and thus require the Company to record goodwill impairment. We elected to perform a quantitative assessment for our March 31, 2020 goodwill impairment testing due to the decline in our market capitalization and possible reductions in cash flow as a result of COVID-19. Based on our interim impairment assessment, as of March 31, 2020, we have determined that our goodwill is not impaired. However, we are unable to predict how long these current conditions will persist and the impact any potential additional measures, including prolonged shelter in place orders, would have on our business.
We performed a qualitative assessment as of September 30, 2019, and we determined that it was not more likely than not that the fair value of our reporting unit was less than its carrying amount.
Identifiable intangible assets consist of trade names related to the acquisitions we have completed. We have determined that trade names have an indefinite life, as there is no economic, contractual or other factors that limit their useful lives and they are expected to generate value as long as the trade name is utilized by the dealer group, and therefore, are not subject to amortization. Financial statement risk exists to the extent identifiable intangibles become impaired due to the decrease in the fair value of the identifiable assets. We elected to perform a quantitative assessment for our March 31, 2020 trade names impairment testing due to the decline in our market capitalization and possible reductions in cash flow as a result of COVID-19. Based on our interim impairment assessments as of March 31, 2020, we have determined that our trade names are not impaired. However, we are unable to predict how long these current conditions will persist and the impact any potential additional measures, including prolonged shelter in place orders, would have on our business.
We performed a qualitative assessment as of September 30, 2019, and we determined that it was not more likely than not that the fair value of our reporting units was less than its carrying amount.
Impairment of Long-Lived Assets
FASB ASC 360-10-40, “Property, Plant, and Equipment – Impairment or Disposal of Long-Lived Assets” (‘‘ASC 360-10-40’’), requires that long-lived assets, such as property, equipment and purchased intangibles subject to amortization, be reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such an indication is present, the carrying amount of the asset is compared to the estimated undiscounted cash flows related to that asset. We would conclude that an asset is impaired if the sum of such expected future cash flows is less than the carrying amount of the related asset. If an asset is impaired, the impairment loss would be the amount by which the carrying amount of the related asset exceeds its fair value. Based upon our most recent analysis, we believe no impairment of long-lived assets existed as of March 31, 2020. We do not believe there is a reasonable likelihood that there will be a change in the future estimates or assumptions used to test for recoverability which would result in a material effect on our operating results.
Fair Value of Financial Instruments
In determining fair value, we use various valuation approaches including market, income and cost approaches. FASB Topic 820, Fair Value Measurements, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from independent sources. Unobservable inputs are those that reflect our expectation of the assumptions that market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
The grant date fair value of equity-based compensation and the fair value of certain warrants previously held by affiliates of Goldman Sachs & Co. LLC and certain of its affiliates (collectively, “Goldman”) and affiliates of The Beekman Group (“Beekman”) (such warrants, the “LLC Warrants”) were both based upon inputs that are unobservable and significant to the overall fair value measurement. Our valuation considered both a market approach and an income approach in determining fair value. While both approaches resulted in similar values, the market approach was weighted 25% and the income approach was weighted 75% since there are very few comparable marine related market participants. For the income approach, we projected long-term growth rates and cash flows and then discounted such values using a weighted average cost of capital. Such fair value measurements are highly complex and subjective in nature. Accordingly, a significant degree of judgment is required to estimate these fair value measurements.
Post-Offering Taxation and Public Company Costs
One Water Marine Holdings, LLC (“OneWater LLC”) is and has been organized as a pass-through entity for U.S. federal income tax purposes and is therefore not subject to entity-level U.S. federal income taxes. OneWater Marine Inc. (“OneWater Inc”) was incorporated as a Delaware corporation on April 3, 2019 and therefore, after the consummation of the initial public offering (the “Offering”), is subject to U.S. federal income taxes and additional state and local taxes with respect to its allocable share of any taxable income of OneWater LLC and will be taxed at the prevailing corporate tax rates. In addition to tax expenses, OneWater Inc also will incur expenses related to its operations, plus payment obligations under the Tax Receivable Agreement, which are expected to be significant. To the extent OneWater LLC has available cash and subject to the terms of any current or future debt instruments, the Amended and Restated Limited Liability Company Agreement of OneWater LLC (the ‘‘OneWater LLC Agreement’’) will require OneWater LLC to make pro rata cash distributions to OneWater Unit Holders (as defined below), including OneWater Inc, in an amount sufficient to allow OneWater Inc to pay its taxes and to make payments under the Tax Receivable Agreement. In addition, the OneWater LLC Agreement will require OneWater LLC to make non-pro rata payments to OneWater Inc to reimburse it for its corporate and other overhead expenses, which payments are not treated as distributions under the OneWater LLC Agreement. See ‘‘—Tax Receivable Agreement’’ and ‘‘Certain Relationships and Related Party Transactions—Tax Receivable Agreement’’ in our Final Prospectus.
In addition, we expect to incur incremental, non-recurring costs related to our transition to a publicly traded corporation, including the costs of the Offering and the costs associated with the initial implementation of our internal control reviews and testing pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the ‘‘Sarbanes-Oxley Act’’). We also expect to incur additional significant and recurring expenses as a publicly traded corporation, including costs associated with compliance under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), annual and quarterly reports to common stockholders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation.
How We Evaluate Our Operations
Revenue
We have a diversified revenue profile that is comprised of new boat sales, pre-owned boat sales, F&I products, repair and maintenance services, and parts and accessories. Although non-boat sales contributed approximately 10.0%10.3% and 9.8%10.0% to revenue in the three months ended March 31, 20202021 and 2019,2020, respectively, and 10.7%10.6% and 11.8%10.7% in the six months ended March 31, 20202021 and 2019,2020, respectively, due to the higher gross margin on these product and service lines, non-boat sales contributed 29.8%25.6% and 28.7%29.8% to gross profit in the three months ended March 31, 20202021 and 2019,2020, respectively, and 30.4%26.7% and 30.8%30.4% to gross profit in the six months ended March 31, 20202021 and 2019,2020, respectively. During different phases of the economic cycle, consumer behavior may shift away from new boats; however, we are well-positioned to benefit from revenue from pre-owned boats, repair and maintenance services, and parts and accessories, which have all historically increased during periods of economic uncertainty. We generate pre-owned sales from boats traded-in for new and pre-owned boats, boats purchased from consumers, brokerage transactions, consignment sales and wholesale sales. We have also diversified our business across geographies and dealership types (e.g., fresh water and salt water) in order to reduce the effects of seasonality. In addition to seasonality, revenue and operating results may also be significantly affected by quarter-to-quarter changes in economic conditions, manufacturer incentive programs, adverse weather conditions and other developments outside of our control.
Gross Profit
We calculate gross profit as revenue less cost of sales. Cost of sales consists of actual amounts paid for products, costs of services (primarily labor), transportation costs from manufacturers to our retail stores and vendor consideration. Gross profit excludes depreciation and amortization, which is presented separately in our consolidated statements of operations.
Gross Profit Margin
Our overall gross profit margin varies with our revenue mix. Sales of new and pre-owned boats, which have comparable margins, generally result in a lower gross profit margin than our non-boat sales. As a result, when revenue from non-boat sales increases as a percentage of total revenue, we expect our overall gross profit margin to increase.
Selling, General and Administrative Expenses
Selling, general, and administrative (‘‘SG&A’’) expenses consist primarily of salaries and incentive-based compensation, advertising, rent, insurance, utilities, and other customary operating expenses. A portion of our cost structure is variable (such as sales commissions and incentive compensation), or controllable (such as advertising), which we believe allows us to adapt to changes in the retail environment over the long term. We typically evaluate our variable expenses, selling expenses and all other SG&A expenses in the aggregate as a percentage of total revenue.
Same-Store Sales
We assess the organic growth of our revenue on a same-store basis. We believe that our assessment on a same-store basis represents an important indicator of comparative financial results and provides relevant information to assess our performance. New and acquired stores become eligible for inclusion in the comparable store base at the end of the store’s thirteenth month of operations under our ownership and revenues are only included for identical months in the same-store base periods. Stores relocated within an existing market remain in the comparable store base for all periods. Additionally, amounts related to closed stores are excluded from each comparative base period. Because same-store sales may be defined differently by other companies in our industry, our definition of this measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense – other, income taxes,tax expense, depreciation and amortization and other (income) expense, (income), further adjusted to eliminate the effects of items such as the change in the fair value of warrants, gain (loss)warrant liability, loss on contingent consideration, loss on extinguishment of debt and transaction costs. See ‘‘—Comparison of Non-GAAP Financial Measure’’ for more information and a reconciliation of Adjusted EBITDA to net income, (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Summary of Acquisitions
The comparability of our results of operations between the periods discussed below is naturally affected by the acquisitions we have completed during such periods. We are also continuously evaluating and pursuing acquisitions on an ongoing basis, and such acquisitions, if completed, will continue to impact the comparability of our financial results. While we expect continued growth and strategic acquisitions in the future, our acquisitions may have materially different characteristics than our historical results, and such differences in economics may impact the comparability of our future results of operations to our historical results.
Fiscal Year 20192021 Acquisitions
Effective December 1, 2018, OneWater LLC2020, we acquired substantially all of the assets of The Slalom Shop, LLC,Tom George Yacht Sales, Inc., a dealer groupfull-service marine retailer based in TexasFlorida with two stores.
Effective February 1, 2019, OneWater LLCDecember 31, 2020, we acquired substantially all of the assets of Ray Clepper,Walker Marine Group, Inc., d/b/a Ray Clepper Boat Center, a dealer group based in South Carolina with one store.
Effective February 1, 2019, OneWater LLC acquired substantially all of the assets of Ocean Blue Yacht Sales, LLC, a dealer groupfull-service marine retailer based in Florida with threefive stores.
Effective May 1, 2019, OneWater LLCDecember 31, 2020, we acquired substantially all of the assets of Caribee Boat Sales and Marina,Roscioli Yachting Center, Inc., a dealer group basedfull-service marina and yachting facility located in Florida, with one store.
Effective August 1, 2019, OneWater LLC acquired substantially all ofincluding the assets of Central Marine, a dealer group based in Florida with three stores.related real estate and in-water slips.
We refer to the fiscal year 20192021 acquisitions described above collectively as the ‘‘20192021 Acquisitions.’’ The 2019 Acquisitions2021 acquisitions are fully reflected in our unaudited condensed consolidated financial statementsCondensed Consolidated Statements of Operations for the three and six months ended March 31, 2020 and will be fully reflected in our consolidated financial statements for2021 from the fiscal year ending September 30, 2020 but are only partially reflected in our unaudited condensed consolidated financial statements for the three and six months ending March 31, 2019.date of acquisition forward.
Other Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations
Our historical financial results discussed below may not be comparable to our future financial results for the reasons described below.
OneWater IncInc. is subject to U.S. federal, state and local income taxes as a corporation. Our accounting predecessor, OneWater LLC, was and is treated as a partnership for U.S. federal income tax purposes, and as such, was generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to its taxable income is passed through to its members. Accordingly, the financial data attributable to our predecessor contains no provision for U.S. federal income taxes or income taxes in any state or locality. We currently estimate that OneWater Inc will beInc. was subject to U.S. federal, state and local taxes at aan estimated blended statutory rate of 24.6% of pre-tax earnings for periods after the Offering.
As of September 30, 2019, the outstanding balance of the preferred units in One Water Assets & Operations, LLC (“Opco”) held by Goldman and Beekman in the aggregate was $87.3 million, exclusive of $1.3 million in issuance costs. In connection with the Offering, we used the net proceeds therefrom, together with cash on hand and borrowings under the Amended and Restated Credit and Guaranty Agreement (the “Term and Revolver Credit Facility”) by and among OneWater Inc, OneWater LLC and its subsidiaries, with Goldman Sachs Specialty Lending Group, L.P., to fully redeem these preferred units, which eliminates the amount recorded as Redeemable Preferred Interest in Subsidiary in our balance sheet and also eliminates any future dividends related to the preferred units for all periods after the Offering.
As of September 30, 2019, Goldman and Beekman held the LLC Warrants, which contained conversion features that caused them to be accounted for as a liability on our balance sheet. Changes in this liability were recognized as income or expense on our statements of operations and increased or reduced our net income in historical periods. In connection with the Offering, Goldman and Beekman exercised all of the LLC Warrants for common units of OneWater LLC. Giving effect to the Offering and the exercise of the LLC Warrants for common units of OneWater LLC held by Goldman and Beekman, we have eliminated the fair value adjustment24.1% for the LLC Warrants for all periods aftersix months ended March 31, 2021. OneWater Inc. was subject to U.S. federal, state and local taxes at an estimated blended statutory rate of 24.3% from February 11, 2020 through March 31, 2020, the Offering, which eliminatesperiod following the corresponding impact on our statements of operations.Offering.
As we further implement controls, processes and infrastructure applicable to companies with publicly traded equity securities, it is likely that we will incur additional SG&A expenses relative to historical periods. See ‘‘—Post-Offering Taxation and Public Company Costs.’’
Our future results will depend on our ability to efficiently manage our combined operations and execute our business strategy.
Results of Operations
Three Months Ended March 31, 2020,2021, Compared to Three Months Ended March 31, 20192020
| | | For the three months ended March 31, 2020 | | | For the three months ended March 31, 2019 | | | | | | | |
| | | Amount | | | % of Revenue | | | Amount | | | % of Revenue | | | $ Change | | | % Change | |
| | | ($ in thousands) | |
| Revenues | | | | | | | | | | | | | | | | | | |
| New boat sales | | $ | 127,913 | | | | 67.3 | % | | $ | 126,928 | | | | 70.2 | % | | $ | 985 | | | | 0.8 | % |
| Pre-owned boat sales | | | 42,992 | | | | 22.6 | % | | | 36,015 | | | | 19.9 | % | | | 6,977 | | | | 19.4 | % |
| Finance & insurance income | | | 8,083 | | | | 4.3 | % | | | 6,354 | | | | 3.5 | % | | | 1,729 | | | | 27.2 | % |
| Service, parts and other sales | | | 10,975 | | | | 5.8 | % | | | 11,474 | | | | 6.3 | % | | | (499 | ) | | | -4.3 | % |
| Total revenues | | | 189,963 | | | | 100.0 | % | | | 180,771 | | | | 100.0 | % | | | 9,192 | | | | 5.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | |
| New boat gross profit | | | 24,125 | | | | 12.7 | % | | | 22,148 | | | | 12.3 | % | | | 1,977 | | | | 8.9 | % |
| Pre-owned boat gross profit | | | 7,183 | | | | 3.8 | % | | | 6,177 | | | | 3.4 | % | | | 1,006 | | | | 16.3 | % |
| Finance & insurance gross profit | | | 8,083 | | | | 4.3 | % | | | 6,354 | | | | 3.5 | % | | | 1,729 | | | | 27.2 | % |
| Service, parts & other gross profit | | | 5,193 | | | | 2.7 | % | | | 5,046 | | | | 2.8 | % | | | 147 | | | | 2.9 | % |
| Gross profit | | | 44,584 | | | | 23.5 | % | | | 39,725 | | | | 22.0 | % | | | 4,859 | | | | 12.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 32,146 | | | | 16.9 | % | | | 27,548 | | | | 15.2 | % | | | 4,598 | | | | 16.7 | % |
| Depreciation and amortization | | | 791 | | | | 0.4 | % | | | 585 | | | | 0.3 | % | | | 206 | | | | 35.2 | % |
| Transaction costs | | | 2,925 | | | | 1.5 | % | | | 444 | | | | 0.2 | % | | | 2,481 | | | | 558.8 | % |
| Gain on settlement of contingent consideration | | | - | | | | 0.0 | % | | | (1,655 | ) | | | -0.9 | % | | | 1,655 | | | | -100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | | 8,722 | | | | 4.6 | % | | | 12,803 | | | | 7.1 | % | | | (4,081 | ) | | | -31.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense - floor plan | | | 2,525 | | | | 1.3 | % | | | 2,210 | | | | 1.2 | % | | | 315 | | | | 14.3 | % |
| Interest expense - other | | | 2,457 | | | | 1.3 | % | | | 1,294 | | | | 0.7 | % | | | 1,163 | | | | 89.9 | % |
| Change in fair value of warrant liability | | | - | | | | 0.0 | % | | | 12,295 | | | | 6.8 | % | | | (12,295 | ) | | | -100.0 | % |
| Other expense (income), net | | | 289 | | | | 0.2 | % | | | (45 | ) | | | 0.0 | % | | | 334 | | | | -742.2 | % |
| Pretax income (loss) | | | 3,451 | | | | 1.8 | % | | | (2,951 | ) | | | -1.6 | % | | | 6,402 | | | | -216.9 | % |
| Income taxes | | | 472 | | | | 0.2 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % |
| Net income (loss) | | | 2,979 | | | | 1.6 | % | | | (2,951 | ) | | | -1.6 | % | | | 5,930 | | | | -200.9 | % |
| Less: Net income attributable to non-controlling interest | | | (103 | ) | | | | | | | (270 | ) | | | | | | | 167 | | | | -61.9 | % |
| Net loss attributable to One Water Marine Holdings, LLC | | | | | | | | | | $ | (3,221 | ) | | | | | | | | | | | | |
| Less: Net loss attributable to non-controlling interests of One Water Marine Holdings, LLC | | | (1,791 | ) | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to One Water Marine Inc. | | $ | 1,085 | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, 2021 | | | For the Three Months Ended March 31, 2020 | | | | | | | |
| | | Amount | | | % of Revenue | | | Amount | | | % of Revenue | | | $ Change | | | % Change | |
| | | ($ in thousands) | |
| Revenues | | | | | | | | | | | | | | | | | | |
| New boat | | $ | 239,654 | | | | 72.7 | % | | $ | 132,719 | | | | 69.9 | % | | $ | 106,935 | | | | 80.6 | % |
| Pre-owned boat | | | 56,082 | | | | 17.0 | % | | | 38,186 | | | | 20.1 | % | | | 17,896 | | | | 46.9 | % |
| Finance & insurance income | | | 11,789 | | | | 3.6 | % | | | 8,083 | | | | 4.3 | % | | | 3,706 | | | | 45.8 | % |
| Service, parts and other | | | 22,086 | | | | 6.7 | % | | | 10,975 | | | | 5.8 | % | | | 11,111 | | | | 101.2 | % |
| Total revenues | | | 329,611 | | | | 100.0 | % | | | 189,963 | | | | 100.0 | % | | | 139,648 | | | | 73.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | |
| New boat | | | 52,507 | | | | 15.9 | % | | | 24,465 | | | | 12.9 | % | | | 28,042 | | | | 114.6 | % |
| Pre-owned boat | | | 13,534 | | | | 4.1 | % | | | 6,843 | | | | 3.6 | % | | | 6,691 | | | | 97.8 | % |
| Finance & insurance | | | 11,789 | | | | 3.6 | % | | | 8,083 | | | | 4.3 | % | | | 3,706 | | | | 45.8 | % |
| Service, parts & other | | | 10,956 | | | | 3.3 | % | | | 5,193 | | | | 2.7 | % | | | 5,763 | | | | 111.0 | % |
| | | 88,786 | | | | 26.9 | % | | | 44,584 | | | | 23.5 | % | | | 44,202 | | | | 99.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 48,348 | | | | 14.7 | % | | | 32,383 | | | | 17.0 | % | | | 15,965 | | | | 49.3 | % |
| Depreciation and amortization | | | 1,378 | | | | 0.4 | % | | | 791 | | | | 0.4 | % | | | 587 | | | | 74.2 | % |
| Transaction costs | | | 368 | | | | 0.1 | % | | | 2,925 | | | | 1.5 | % | | | (2,557 | ) | | | -87.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | | 38,692 | | | | 11.7 | % | | | 8,485 | | | | 4.5 | % | | | 30,207 | | | | 356.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense - floor plan | | | 330 | | | | 0.1 | % | | | 2,525 | | | | 1.3 | % | | | (2,195 | ) | | | -86.9 | % |
| Interest expense - other | | | 1,215 | | | | 0.4 | % | | | 2,457 | | | | 1.3 | % | | | (1,242 | ) | | | -50.5 | % |
| Other expense (income), net | | | 5 | | | | 0.0 | % | | | 52 | | | | 0.0 | % | | | (47 | ) | | | -90.4 | % |
| Income before income tax expense | | | 37,142 | | | | 11.3 | % | | | 3,451 | | | | 1.8 | % | | | 33,691 | | | | 976.3 | % |
| Income tax expense | | | 6,550 | | | | 2.0 | % | | | 472 | | | | 0.2 | % | | | 6,078 | | | | 1287.7 | % |
| Net income | | | 30,592 | | | | 9.3 | % | | | 2,979 | | | | 1.6 | % | | | 27,613 | | | | 926.9 | % |
| Less: Net income attributable to non-controlling interest | | | - | | | | | | | | 103 | | | | | | | | (103 | ) | | | -100.0 | % |
| Less: Net income attributable to non-controlling interests of One Water Marine Holdings, LLC | | | 10,117 | | | | | | | | 1,791 | | | | | | | | 8,326 | | | | 464.9 | % |
| Net income attributable to One Water Marine Inc. | | $ | 20,475 | | | | | | | $ | 1,085 | | | | | | | $ | 19,390 | | | | 1787.1 | % |
Revenue
Overall, revenue increased by $9.2$139.6 million, or 5.1%73.5%, to approximately$329.6 million for the three months ended March 31, 2021 from $190.0 million for the three months ended March 31, 20202020. Revenue generated from $180.8 millionsame-store sales increased 57.4% for the three months ended March 31, 2019. Revenue generated from same-store sales decreased 2.7% for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019, primarily due to decreased2020, driven by an increase in sales due to the uncertaintyacross all boating categories and impact on the macroeconomic environment of the COVID-19 pandemic.higher finance & insurance and service, parts and other sales. The decreaseincrease in revenue was primarily driven by a reductionan increase in both the number of boats sold partially offset by an increase inand the average selling price of new and pre-owned boats. Overall revenue increased by $9.2$139.6 million as a result of a $13.9$108.3 million increase in same-store sales and a $31.4 million increase from stores not eligible for inclusion in the same-store sales base, partially offset by a $4.7 million dollar decrease in same-store sales.base. New and acquired stores become eligible for inclusion in the comparable store base at the end of the store’s thirteenth month of operations under our ownership and revenues are only included for identical months in the same-store base periods. During theAs of March 31, 2021, we had acquired eight stores in fiscal year ended September 30, 2019, we acquired 10 stores.2021. We havedid not mademake any acquisitions in fiscal year 2020.
New Boat Sales
New boat salesrevenue increased by $1$106.9 million, or 0.8%80.6%, to approximately $127.9$239.7 million for the three months ended March 31, 20202021 from $126.9$132.7 for the three months ended March 31, 2019.2020. The increase was primarily attributable to the 2019 Acquisitions.our robust same-store sales growth. During the three months ended March 31, 20202021 we experienced a decreasean increase in unit sales of approximately 4.9%26.4% and an increase in average unit prices of approximately 7.0%42.9% over the three months ended March 31, 2019.2020. We believe the decreaseincrease in units sold was primarily due to the uncertainty and impact on the macroeconomic environment ofshift towards outdoor leisure activity during the COVID-19 pandemic.pandemic as well as the continued execution of operational improvements on previously acquired dealers. The increase in average sales price was due in part to the mix of boat brands and models sold and product improvements in the functionality and technology of boats, which continues to be a driver of consumer demand.
demand, as well as supply and demand forces as manufacturer replenishments have been slowed by the COVID-19 pandemic providing us increased leverage in the sales cycle.
Pre-owned Boat Sales
Pre-owned boat salesrevenue increased by $7.0$17.9 million, or 19.4%46.9%, to approximately $43.0$56.1 million for the three months ended March 31, 20202021 from $36.0$38.2 million for the three months ended March 31, 2019.2020. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consigned and wholesale), which causes periodic and seasonal fluctuations in the average sales price. Pre-owned boat sales for the three months ended March 31, 2020 benefited from2021 experienced a 6.2% increase2.7% decrease in the number of units sold anddue to industry-wide supply constraints. We benefited from a 25.9%39.4% increase in average unit price largely due to the mix of pre-owned products, and the composition of the brands and models sold during the period. Pre-owned boat sales forperiod as well as the three months ended March 31, 2020 were less impacted by the COVID-19 pandemic, as consumers tend to shift to the more affordable pre-owned boat market in times of uncertainty.industry-wide supply restrictions driving prices higher.
Finance & Insurance Income
We generate revenue from arranging finance & insurance products, including financing, insurance and extended warranty contracts, to customers through various third-party financial institutions and insurance companies. Finance & insurance income increased by $1.7$3.7 million, or 27.2%45.8%, to approximately$11.8 million for the three months ended March 31, 2021 from $8.1 million for the three months ended March 31, 2020 from $6.4 million for the three months ended March 31, 2019.2020. The increase was primarily due to process improvements and the additional new and pre-owned sales revenue,boat revenues, which were primarily attributable to our same-store sales growth and the fiscal year 20192021 Acquisitions. We remain very focused on improving sales of finance & insurance products throughout our dealer network and implementing best practices at acquired dealer groups and existing stores. Finance & insurance products increaseddecreased as a percentage of total revenue to 4.3%3.6% in the three months ended March 31, 20202021 from 3.5%4.3% for the three months ended March 31, 2019.2020, primarily due to the 2021 Acquisitions as well as the increase in service, parts and other revenue as a portion of our total revenue. Since finance & insurance income is fee-based, we do not incur any related cost of sale. Finance & insurance income is recorded net of related fees, including fees charged back due to any early cancellation of loan or insurance contracts by a customer.
Service, Parts & Other Sales
Service, parts & other sales decreasedrevenue increased by $0.5$11.1 million, or 4.3%101.2%, to approximately$22.1 million for the three months ended March 31, 2021 from $11.0 million for the three months ended March 31, 2020 from $11.5 million for the three months ended March 31, 2019. The decrease was2020. This increase in service, parts & other revenue is primarily due to lower volumes relatedancillary sales generated from our increase in new and pre-owned boat sales, sales attributable to our same-store sales growth and the uncertainty surroundingimpact of the COVID-19 pandemic as volume dropped and we experienced partial store closures in the latter half of March 2020.2021 Acquisitions.
Gross Profit
Overall, gross profit increased by $4.9$44.2 million, or 12.2%99.1%, to approximately$88.8 million for the three months ended March 31, 2021 from $44.6 million for the three months ended March 31, 2020 from $39.7 million for the three months ended March 31, 2019.2020. This increase was primarily due to our overall increase in newsame-store sales, a shift in the mix and pre-ownedsize of boat models sold, the Company’s focus on dynamic pricing, an increase in service, parts & other sales, as well as higher finance & insurance, income.and the emphasis on meeting customer demand. Overall gross margins increased 150340 basis points to 26.9% for the three months ended March 31, 2021 from 23.5% for the three months ended March 31, 2020 from 22.0% for the three months ended March 31, 2019 due to the factors noted below.
New Boat Gross Profit
New boat gross profit increased by $2.0$28.0 million, or 8.9%114.6%, to approximately $24.1$52.5 million for the three months ended March 31, 20202021 from $22.1$24.5 million for the three months ended March 31, 2019.2020. New boat gross profit as a percentage of new boat revenue was 18.9%21.9% for the three months ended March 31, 20202021 as compared to 17.4%18.4% in the three months ended March 31, 2019.2020. The increase in new boat gross profit and gross profit margin is due primarily to a shift in the mix and size of boat models sold, the margin profile of recently acquired locations and our emphasis on expandingthe expansion of new boat gross profit margins while continuing to leveragecreated by a lower supply of new boat inventory in the progress we have made in previous quarters on finance and insurance.three months ended March 31, 2021.
Pre-owned Boat Gross Profit
Pre-owned boat gross profit increased by $1.0$6.7 million, or 16.3%97.8%, to approximately $7.2$13.5 million for the three months ended March 31, 20202021 from $6.2$6.8 million for the three months ended March 31, 2019.2020. The increase in pre-owned gross profit was driven by the increase in pre-owned revenue.revenue primarily as a result of our same-store sales growth and the 2021 Acquisitions. Pre-owned boat gross profit as a percentage of pre-owned boat revenue was 16.7%24.1% and 17.2%17.9% for the three months ended March 31, 20202021 and 2019,2020, respectively. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consignment and wholesale), which may cause periodic and seasonal fluctuations in pre-owned boat gross profit as a percentage of revenue. In the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, we experienced an increase in our gross profit on boats purchased or traded-in and wholesale sales. This was offsetpre-owned sales for each of the different sales arrangements. Margins were also driven higher by a shiftlower supply of pre-owned inventory in sales mix due in part to an increase in wholesale sales, which have a lower profit margin and a decrease in brokerage sales.the market for the three months ended March 31, 2021.
Finance & Insurance Gross Profit
Finance & insurance gross profit increased by $1.7$3.7 million, or 27.2%45.8%, to approximately$11.8 million for the three months ended March 31, 2021 from $8.1 million for the three months ended March 31, 2020 from $6.4 million for the three months ended March 31, 2019.2020. Finance & insurance income is fee-based revenue for which we do not recognize incremental cost of sale.
Service, Parts & Other Gross Profit
Service, parts & other gross profit increased by $0.1$5.8 million, or 2.9%111.0%, to approximately$11.0 million for the three months ended March 31, 2021 from $5.2 million for the three months ended March 31, 2020 from $5.0 million for2020. The increase in service, parts & other gross profit was primarily driven by our same-store sales growth as well as the three months ended March 31, 2019.impact of the 2021 Acquisitions. Service, parts & other gross profit as a percentage of service, parts & other revenue was 47.3%49.6% and 44.0%47.3% for the three months ended March 31, 20202021 and 2019,2020, respectively. This increase in gross profit margin was the result of increases in partsthe mix of products sold and services provided as the gross profit margin and storage and other gross profit margin, partially offset byshifted more towards service work, which has a decreasehigher margin. Additionally, due to the increased demand, we experienced an increase in utilization of our service gross profit margin.technicians which drove margins higher.
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased by $4.6$16.0 million, or 16.7%49.3%, to approximately $32.1$48.3 million for the three months ended March 31, 20202021 from $27.5$32.4 million for the three months ended March 31, 2019.2020. This increase was primarily due to the impact of acquisitions and expenses incurred to support the overall increase in revenues and gross profit. The increase consisted of $3.2Selling, general & administrative expenses experienced a $15.3 million related to an increase in personnel expenses, $0.2a $0.5 million related to an increasedecrease in selling and administrative expenses and a $1.2 million related to an increase in fixed expenses. Selling, general & administrative expenses as a percentage of revenue increaseddecreased to 16.9%14.7% from 15.2%17.0% for the three months ended March 31, 20202021 and 2019,2020, respectively. The increasereduction in selling, general & administrative expenses as a percentage of revenue was primarily related to higher personnel costs, as a result of increased headcount due to the 2019 Acquisitions and a rise in commissionsCompany’s ability to leverage its existing expense duestructure to support the increase in gross profit margin. Selling, general & administrativerevenue, as well as a reduction in selling expenses for the three months ended March 31, 2020 were not significantly reduced in the second quarter by the quick and decisive actions we took to reduce costs across the Company in responserelated to the COVID-19 global pandemic.cancellation of boat shows.
Depreciation and Amortization
Depreciation and amortization expense increased $0.2$0.6 million, or 35.2%74.2%, to $1.4 million for the three months ended March 31, 2021 compared to $0.8 million for the three months ended March 31, 2020 compared to $0.6 million for the three months ended March 31, 2019.2020. The increase in depreciation and amortization expense for the three months ended March 31, 20202021 compared to the three months ended March 31, 20192020 was primarily attributable to an increase in property and equipment with shorter useful lives.from our 2021 Acquisitions.
Transaction Costs
The increasedecrease in transaction costs of $2.5$2.6 million, or 558.8%87.4%, to $0.4 million for the three months ended March 31, 2021 compared to $2.9 million for the three months ended March 31, 2020 compared to $0.4 million for the three months ended March 31, 2019 was primarily attributable to $2.3 million of expenses recognized in conjunction with the Offering that were not able to be capitalized.
Gain on Settlement of Contingent Considerationcapitalized for the three months ended March 31, 2020.
Income from Operations
Gain on settlement of contingent consideration of $1.7
Income from operations increased $30.2 million, or 356.0%, to $38.7 million for the three months ended March 31, 2019 was due2021 compared to an adjustment of the acquisition contingent consideration arising from the 2019 Acquisitions, as the performance target to receive the full payout were not fully achieved. There was no gain/(loss) on settlement of contingent consideration$8.5 million for the three months ended March 31, 2020.
Operating Income
Operating income decreased $4.1 The increase was primarily attributable to the $44.2 million or 31.9%, to $8.7 millionincrease in gross profit for the three months ended March 31, 2020 compared to $12.8 million for the three months ended March 31, 2019. The decrease was primarily attributable to the $2.5 million increase in transaction costs for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019 as well as the $1.7 million gain on settlement of contingent consideration recorded in the three months ended March 31, 2019. The increase in gross profit for the quarter ended March 31, 2020, waspartially offset by the increasesa $16.0 million increase in selling, general & administrative expenses and depreciation and amortization expenses during the same period.periods.
Interest Expense – Floor Plan
Interest expense – floor plan increaseddecreased $2.2 million, or 86.9%, to $0.3 million for the three months ended March 31, 2021 compared to $2.5 million for the three months ended March 31, 2020. This decrease was primarily attributable to falling interest rates, an increase in interest assistance received from our manufacturers and bank, as well as a $110.5 million decrease in the outstanding borrowings on our Sixth Amended and Restated Inventory Financing Agreement (the “Inventory Financing Facility”) as of March 31, 2021 compared to March 31, 2020.
Interest Expense – Other
The decrease in interest expense – other of $1.2 million, or 14.3%50.5%, to $1.2 million for the three months ended March 31, 2021 compared to $2.5 million for the three months ended March 31, 2020 was primarily attributable to the July 22, 2020 payoff of our Term and Revolver Credit Facility (as defined below) and entry into the Refinanced Credit Facility (as defined below), which offers a more favorable interest rate.
Other Expense (Income), Net
Other expense decreased to $4,881 during the three months ended March 31, 2021 as compared to $2.2 million$51,492 for the three months ended March 31, 2019 and was primarily attributable to a $31.0 million increase in the outstanding borrowings on our sixth amended and restated Inventory Financing Agreement (the “Inventory Financing Facility”) as of March 31, 2020 compared to March 31, 2019.
Interest Expense – Other
The increase in interest expense – other of $1.2 million, or 89.9%, to $2.5 million for the three months ended March 31, 2020 compared to $1.3 million for the three months ended March 31, 2019 was primarily attributable to a $49.7 million increase in our long-term debt which was primarily increased to fully redeem the preferred interest in subsidiary.
Change in Fair Value of Warrant Liability
The change in fair value of warrant liability of $12.3 million for the three months ended March 31, 2019 was attributable to an overall change in the enterprise value of the Company. No charge was recorded for the three months ended March 31, 2020 as the warrants were exercised in conjunction with the Offering.
Other Expense (Income), Net
The decrease in other income of $0.3 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily attributable to a $0.3 million increase in loss related to the disposal of property and equipment during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.2020.
Income Tax Expense
The $0.5$6.1 million increase in income tax expense for the three months ended March 31, 20202021 as compared to the three months ended March 31, 20192020 was primarily the result of the $33.7 million increase in income before income tax expense, the Offering and the taxability of OneWater IncInc. as a corporation.corporation for the full three months ended March 31, 2021 versus only the period subsequent to the Offering for the three months ended March 31, 2020. Additionally, as Class B common stock was exchanged for Class A common stock (in accordance with the terms of the OneWater LLC Agreement), the proportion of consolidated income before income tax expense allocated to OneWater Inc. increased, yielding higher income tax expense.
Net Income (Loss)
Net income increased by $5.9$27.6 million to $30.6 million for the three months ended March 31, 2021 compared to a $3.0 million for the three months ended March 31, 2020 compared2020. The increase was primarily attributable to a net loss of $3.0the $44.2 million increase in gross profit for the three months ended March 31, 2019. The increase was primarily attributable2021 compared to the $12.3 million charge for the change in fair value of warrant liability for the three months ended March 31, 2019 compared to the three months ended March 31, 2020, in which no charge was taken.2020. The increase was partially offset by the $2.5$16.0 million increase in transaction costsselling, general & administrative expenses and a $1.2the $6.1 million increase in interest expense – other for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. Additionally, we recorded $0.5 million in income tax expense for the three months ended March 31, 2020, our first period with taxability as a corporation.2021 compared to the three months ended March 31, 2020.
Six Months Ended March 31, 2020,2021, Compared to Six Months Ended March 31, 2019
| | | For the six months
ended March 31, 2020 | | | For the six months ended March 31, 2019 | | | | | | | |
| | | Amount | | | % of Revenue | | | Amount | | | % of Revenue | | | $ Change | | | % Change | |
| | | ($ in thousands) | |
| Revenues | | | | | | | | | | | | | | | | | | |
| New boat sales | | $ | 226,015 | | | | 65.8 | % | | $ | 194,492 | | | | 68.5 | % | | $ | 31,523 | | | | 16.2 | % |
| Pre-owned boat sales | | | 80,813 | | | | 23.5 | % | | | 55,929 | | | | 19.7 | % | | | 24,884 | | | | 44.5 | % |
| Finance & insurance income | | | 12,408 | | | | 3.6 | % | | | 8,518 | | | | 3.0 | % | | | 3,890 | | | | 45.7 | % |
| Service, parts and other sales | | | 24,425 | | | | 7.1 | % | | | 25,110 | | | | 8.8 | % | | | (685 | ) | | | -2.7 | % |
| Total revenues | | | 343,661 | | | | 100.0 | % | | | 284,049 | | | | 100.0 | % | | | 59,612 | | | | 21.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | |
| New boat gross profit | | | 40,626 | | | | 11.8 | % | | | 34,390 | | | | 12.1 | % | | | 6,236 | | | | 18.1 | % |
| Pre-owned boat gross profit | | | 12,784 | | | | 3.7 | % | | | 9,210 | | | | 3.2 | % | | | 3,574 | | | | 38.8 | % |
| Finance & insurance gross profit | | | 12,408 | | | | 3.6 | % | | | 8,518 | | | | 3.0 | % | | | 3,890 | | | | 45.7 | % |
| Service, parts & other gross profit | | | 10,955 | | | | 3.2 | % | | | 10,926 | | | | 3.8 | % | | | 29 | | | | 0.3 | % |
| Gross profit | | | 76,773 | | | | 22.3 | % | | | 63,044 | | | | 22.2 | % | | | 13,729 | | | | 21.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 60,586 | | | | 17.6 | % | | | 49,177 | | | | 17.3 | % | | | 11,409 | | | | 23.2 | % |
| Depreciation and amortization | | | 1,551 | | | | 0.5 | % | | | 1,192 | | | | 0.4 | % | | | 359 | | | | 30.1 | % |
| Transaction costs | | | 3,362 | | | | 1.0 | % | | | 742 | | | | 0.3 | % | | | 2,620 | | | | 353.1 | % |
| Gain on settlement of contingent consideration | | | - | | | | 0.0 | % | | | (1,655 | ) | | | -0.6 | % | | | 1,655 | | | | -100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | | 11,274 | | | | 3.3 | % | | | 13,588 | | | | 4.8 | % | | | (2,314 | ) | | | -17.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense - floor plan | | | 5,184 | | | | 1.5 | % | | | 3,997 | | | | 1.4 | % | | | 1,187 | | | | 29.7 | % |
| Interest expense - other | | | 4,310 | | | | 1.3 | % | | | 2,522 | | | | 0.9 | % | | | 1,788 | | | | 70.9 | % |
| Change in fair value of warrant liability | | | (771 | ) | | | -0.2 | % | | | 7,600 | | | | 2.7 | % | | | (8,371 | ) | | | -110.1 | % |
| Other expense (income), net | | | 167 | | | | 0.0 | % | | | (90 | ) | | | 0.0 | % | | | 257 | | | | -285.6 | % |
| Pretax income (loss) | | | 2,384 | | | | 0.7 | % | | | (441 | ) | | | -0.2 | % | | | 2,825 | | | | -640.6 | % |
| Income taxes | | | 472 | | | | 0.1 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % |
| Net income (loss) | | | 1,912 | | | | 0.6 | % | | | (441 | ) | | | -0.2 | % | | | 2,353 | | | | -533.6 | % |
| Less: Net income attributable to non-controlling interest | | | (350 | ) | | | | | | | (546 | ) | | | | | | | 196 | | | | -35.9 | % |
| Net loss attributable to One Water Marine Holdings, LLC | | | | | | | | | | $ | (987 | ) | | | | | | | | | | | | |
| Less: Net loss attributable to non-controlling interests of One Water Marine Holdings, LLC | | | (477 | ) | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to One Water Marine Inc. | | $ | 1,085 | | | | | | | | | | | | | | | | | | | | | |
| | | For the Six Months Ended March 31, 2021 | | | For the Six Months Ended March 31, 2020 | | | | | | | |
| | | Amount | | | % of Revenue | | | Amount | | | % of Revenue | | | $ Change | | | % Change | |
| | | ($ in thousands) | |
| Revenues | | | | | | | | | | | | | | | | | | |
| New boat | | $ | 391,482 | | | | 72.0 | % | | $ | 235,571 | | | | 68.5 | % | | $ | 155,911 | | | | 66.2 | % |
| Pre-owned boat | | | 94,662 | | | | 17.4 | % | | | 71,257 | | | | 20.7 | % | | | 23,405 | | | | 32.8 | % |
| Finance & insurance income | | | 17,752 | | | | 3.3 | % | | | 12,408 | | | | 3.6 | % | | | 5,344 | | | | 43.1 | % |
| Service, parts and other | | | 39,798 | | | | 7.3 | % | | | 24,425 | | | | 7.1 | % | | | 15,373 | | | | 62.9 | % |
| Total revenues | | | 543,694 | | | | 100.0 | % | | | 343,661 | | | | 100.0 | % | | | 200,033 | | | | 58.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | |
| New boat | | | 81,803 | | | | 15.0 | % | | | 41,362 | | | | 12.0 | % | | | 40,441 | | | | 97.8 | % |
| Pre-owned boat | | | 21,662 | | | | 4.0 | % | | | 12,048 | | | | 3.5 | % | | | 9,614 | | | | 79.8 | % |
| Finance & insurance | | | 17,752 | | | | 3.3 | % | | | 12,408 | | | | 3.6 | % | | | 5,344 | | | | 43.1 | % |
| Service, parts & other | | | 20,005 | | | | 3.7 | % | | | 10,955 | | | | 3.2 | % | | | 9,050 | | | | 82.6 | % |
| Total gross profit | | | 141,222 | | | | 26.0 | % | | | 76,773 | | | | 22.3 | % | | | 64,449 | | | | 83.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 83,208 | | | | 15.3 | % | | | 60,688 | | | | 17.7 | % | | | 22,520 | | | | 37.1 | % |
| Depreciation and amortization | | | 2,341 | | | | 0.4 | % | | | 1,551 | | | | 0.5 | % | | | 790 | | | | 50.9 | % |
| Transaction costs | | | 568 | | | | 0.1 | % | | | 3,362 | | | | 1.0 | % | | | (2,794 | ) | | | -83.1 | % |
| Loss on contingent consideration | | | 377 | | | | 0.1 | % | | | - | | | | 0.0 | % | | | 377 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | | 54,728 | | | | 10.1 | % | | | 11,172 | | | | 3.3 | % | | | 43,556 | | | | 389.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense - floor plan | | | 1,250 | | | | 0.2 | % | | | 5,184 | | | | 1.5 | % | | | (3,934 | ) | | | -75.9 | % |
| Interest expense - other | | | 2,139 | | | | 0.4 | % | | | 4,310 | | | | 1.3 | % | | | (2,171 | ) | | | -50.4 | % |
| Change in fair value of warrant liability | | | - | | | | 0.0 | % | | | (771 | ) | | | -0.2 | % | | | 771 | | | | -100.0 | % |
| Other (income) expense, net | | | (89 | ) | | | 0.0 | % | | | 65 | | | | 0.0 | % | | | (154 | ) | | | -236.9 | % |
| Income before income tax expense | | | 51,428 | | | | 9.5 | % | | | 2,384 | | | | 0.7 | % | | | 49,044 | | | | 2057.2 | % |
| Income tax expense | | | 9,061 | | | | 1.7 | % | | | 472 | | | | 0.1 | % | | | 8,589 | | | | 1819.7 | % |
| Net income | | | 42,367 | | | | 7.8 | % | | | 1,912 | | | | 0.6 | % | | | 40,455 | | | | 2115.8 | % |
| Less: Net income attributable to non-controlling interest | | | - | | | | | | | | 350 | | | | | | | | (350 | ) | | | -100.0 | % |
| Less: Net income attributable to non-controlling interests of One Water Marine Holdings, LLC | | | 14,104 | | | | | | | | 477 | | | | | | | | 13,627 | | | | 2856.8 | % |
| Net income attributable to One Water Marine Inc. | | $ | 28,263 | | | | | | | $ | 1,085 | | | | | | | $ | 27,178 | | | | 2504.9 | % |
Revenue
Overall, revenue increased by $59.6$200.0 million, or 21.0%58.2%, to approximately$543.7 million for the six months ended March 31, 2021 from $343.7 million for the six months ended March 31, 20202020. Revenue generated from $284.0 millionsame-store sales increased 48.7% for the six months ended March 31, 2019. Revenue generated from same-store sales increased 4.7% for the six months ended March 31, 20202021 as compared to the six months ended March 31, 2019,2020, primarily due to an increase in the average selling price of new and pre-owned boats, the model mix of boats sold and an increase in the number of new and pre-owned boats sold. Overall revenue increased by $13.2$166.1 million as a result of our increase in same-store sales and $46.4$33.9 million from stores not eligible for inclusion in the same-store sales base. New and acquired stores become eligible for inclusion in the comparable store base at the end of the store’s thirteenth month of operations under our ownership, and revenues are only included for identical months in the same-store base periods. During theAs of March 31, 2021, we had acquired eight stores in fiscal year ended September 30, 2019, we acquired 10 stores.2021. We havedid not mademake any acquisitions in fiscal year 2020.
New Boat Sales
New boat salesrevenue increased by $31.5$155.9 million, or 16.2%66.2%, to approximately $226.0$391.5 million for the six months ended March 31, 20202021 from $194.5$235.6 for the six months ended March 31, 2019.2020. The increase was the result of our same-store sales growth during the twelve month period and the increased unit sales attributable to the 20192021 Acquisitions. During the six months ended March 31, 2020,2021, we experienced an increase in unit sales of approximately 4.1%27.9% and an increase in average unit prices of approximately 13.5%29.9% over the six months ended March 31, 2019.2020. We believe the increase in units sold was primarily due to the shift towards outdoor leisure activity during the COVID-19 pandemic as well as the continued execution of operational improvements on previously acquired dealers. The increase in both units sold and average sales price was due in part to the mix of boat brands and models sold and product improvements in the functionality and technology of boats, which continues to be a driver of consumer demand.demand, as well as supply and demand forces as manufacturer replenishments have been slowed by the COVID-19 pandemic providing us increased leverage in the sales cycle.
Pre-owned Boat Sales
Pre-owned boat salesrevenue increased by $24.9$23.4 million, or 44.5%32.8%, to approximately $80.8$94.7 million for the six months ended March 31, 20202021 from $55.9$71.3 million for the six months ended March 31, 2019.2020. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consigned and wholesale), which causes periodic and seasonal fluctuations in the average sales price. Pre-owned boat sales for the six months ended March 31, 2020 benefited from2021 experienced a 20.4% increase4.8% decrease in the number of units sold due to the increase in same-store sales and the impact of the fiscal year 2019 Acquisitions.industry-wide supply constraints. The average sales price per pre-owned unit in the six months ended March 31, 20202021 increased 24.6%33.8% largely due to the mix of pre-owned products and the composition of the brands and models sold during the period.period as well as the industry-wide supply restrictions driving prices higher.
Finance & Insurance Income
We generate revenue from arranging finance & insurance products, including financing, insurance and extended warranty contracts, to customers through various third-party financial institutions and insurance companies. Finance & insurance income increased by $3.9$5.3 million, or 45.7%43.1%, to approximately$17.8 million for the six months ended March 31, 2021 from $12.4 million for the six months ended March 31, 2020 from $8.5 million for the six months ended March 31, 2019.2020. The increase was primarily a result of the increase in same-store sales process improvements and additional revenue attributable to the fiscal year 20192021 Acquisitions. We remain very focused on improving sales of finance & insurance products throughout our dealer network and implementing best practices at acquired dealer groups and existing stores. Finance & insurance products increasedslightly decreased as a percentage of total revenue to 3.6%3.3% in the six months ended March 31, 20202021 from 3.0%3.6% for the six months ended March 31, 2019.2020. Since finance & insurance income is fee-based, we do not incur any related cost of sale. Finance & insurance income is recorded net of related fees, including fees charged back due to any early cancellation of loan or insurance contracts by a customer.
Service, Parts & Other Sales
Service, parts & other sales decreasedrevenue increased by $0.7$15.4 million, or 2.7%62.9%, to approximately$39.8 million for the six months ended March 31, 2021 from $24.4 million for the six months ended March 31, 20202020. This increase in service, parts & other revenue is primarily due to ancillary sales generated from $25.1our increase in new and pre-owned boat sales and the impact of our 2021 Acquisitions.
Gross Profit
Overall, gross profit increased by $64.4 million, or 83.9%, to $141.2 million for the six months ended March 31, 2019. The decrease was primarily due to a decrease in labor sales which was driven by the uncertainty surrounding the COVID-19 pandemic as volume dropped and we experienced partial store closures in the latter half of March 2020.
Gross Profit
Overall, gross profit increased by $13.7 million, or 21.8%, to approximately2021 from $76.8 million for the six months ended March 31, 2020 from $63.0 million for the six months ended March 31, 2019.2020. This increase was mainlyprimarily due to our overall increase in same-store sales, primarily driven by an increase in new boat sales, as well as higherand pre-owned boat sales, service, parts and other sales, the Company’s focus on dynamic pricing and the increase in finance & insurance income. The increase in gross profit was also a result of an increase in the number of stores due to the fiscal year 20192021 Acquisitions. Overall gross margins remained relatively flat, increasing 10increased 370 basis points to 26.0% for the six months ended March 31, 2021 from 22.3% for the six months ended March 31, 2020 from 22.2% for the six months ended March 31, 2019 due to the factors noted below.
New Boat Gross Profit
New boat gross profit increased by $6.2$40.4 million, or 18.1%97.8%, to approximately $40.6$81.8 million for the six months ended March 31, 20202021 from $34.4$41.4 million for the six months ended March 31, 2019. This increase was due to our overall increase in same-store sales and acquired stores during fiscal year 2019.2020. New boat gross profit as a percentage of new boat revenue was 18.0%20.9% for the six months ended March 31, 20202021 as compared to 17.7%17.6% in the six months ended March 31, 2019.2020. The increase in new boat gross profit and gross profit margin is due primarily to a shift in the mix and size of boat models sold, the margin profile of recently acquired locations and our emphasis on expandingthe expansion of new boat gross profit margins while continuing to leveragecreated by a lower supply of new boat inventory in the progress we have made in previous quarters on finance and insurance.six months ended March 31, 2021.
Pre-owned Boat Gross Profit
Pre-owned boat gross profit increased by $3.6$9.6 million, or 38.8%79.8%, to approximately $12.8$21.7 million for the six months ended March 31, 20202021 from $9.2$12.0 million for the six months ended March 31, 2019. This2020. The increase in pre-owned gross profit was primarily due to an overalldriven by the increase in pre-owned revenue primarily as a result of our same-store sales growth and acquired stores during fiscal year 2019.our 2021 Acquisitions. Pre-owned boat gross profit as a percentage of pre-owned boat revenue was 15.8%22.9% and 16.5%16.9% for the six months ended March 31, 20202021 and 2019,2020, respectively. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consignment and wholesale), which may cause periodic and seasonal fluctuations in pre-owned boat gross profit as a percentage of revenue. In the six months ended March 31, 2021 as compared to the six months ended March 31, 2020, we experienced a declinean increase in our gross profit margin on boats purchased or traded-in as well as consignment sales. This was partially offsetpre-owned sales for each of the different sales arrangements. Margins were also driven higher by an increasea lower supply of pre-owned inventory in gross profit margin on wholesale sales and a shift in product mix due in part to an increase in brokerage sales.the market for the six months ended March 31, 2021.
Finance & Insurance Gross Profit
Finance & insurance gross profit increased by $3.9$5.3 million, or 45.7%43.1%, to approximately$17.8 million for the six months ended March 31, 2021 from $12.4 million for the six months ended March 31, 2020 from $8.5 million for the six months ended March 31, 2019.2020. Finance & insurance income is fee-based revenue for which we do not recognize incremental expense.cost of sale.
Service, Parts & Other Gross Profit
Service, parts & other gross profit remained relatively flat atincreased by $9.1 million, or 82.6%, to $20.0 million for the six months ended March 31, 2021 from $11.0 million for the six months ended March 31, 20202020. The increase in service, parts & other gross profit was primarily driven by our same-store sales growth as compared to $10.9 million forwell as the six months ended March 31, 2019.impact of the 2021 Acquisitions. Service, parts & other gross profit as a percentage of service, parts & other revenue was 44.9%50.3% and 43.5%44.9% for the six months ended March 31, 20202021 and 2019,2020, respectively. This increase in gross profit margin was the result of increases in partsthe mix of products sold and services provided as the gross profit margin and storage and other gross profit margin, partially offset byshifted more towards service work, which has a decreasehigher margin. Additionally, due to the increased demand, we experienced an increase in utilization of our service gross profit margin.technicians which drove margins higher.
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased by $11.4$22.5 million, or 23.2%37.1%, to approximately $60.6$83.2 million for the six months ended March 31, 20202021 from $49.2$60.7 million for the six months ended March 31, 2019.2020. This increase was primarily due to the impact of acquisitions and expenses incurred to support the overall increase in same-store sales. Selling, general & administrative expenses consisted of a $7.5$21.9 million increase in personnel expenses, $1.6a $1.2 million increasedecrease in selling and administrative expenses, and $2.3$1.8 million increase in fixed expenses. Selling, general & administrative expenses as a percentage of revenue increaseddecreased to 17.6%15.3% from 17.3%17.7% for the six months ended March 31, 20202021 and 2019,2020, respectively. The increasereduction in selling, general & administrative expenses as a percentage of revenue was primarily due to increased personnelthe Company’s ability to leverage its existing expense structure to support the increase in revenue, as well as a reduction in selling expenses duerelated to the companies acquired in the second halfcancellation of 2019 and commission expense, which rose with an increase in gross profit margin for the six months ended March 31, 2020 as compared to March 31, 2019. Selling, general & administrative expenses for the six months ended March 31, 2020 were not significantly reduced by the quick and decisive actions we took to reduce costs across the Company in response to the COVID-19 global pandemic.boat shows.
Depreciation and Amortization
Depreciation and amortization expense increased $0.4$0.8 million, or 30.1%50.9%, to $2.3 million for the six months ended March 31, 2021 compared to $1.6 million for the six months ended March 31, 2020 compared to $1.2 million for the six months ended March 31, 2019.2020. The increase in depreciation and amortization expense for the six months ended March 31, 20202021 compared to the six months ended March 31, 20192020 was primarily attributable to an increase in property and equipment with shorter useful lives.from our 2021 Acquisitions.
Transaction Costs
The increasedecrease in transaction costs of $2.6$2.8 million, or 353.1%83.1%, to $0.6 million for the six months ended March 31, 2021 compared to $3.4 million for the six months ended March 31, 2020 compared to $0.7 million for the six months ended March 31, 2019 was primarily attributable to $2.3 million of expenses recognized for the six months ended March 31, 2020 in conjunction with the Offering that were not able to be capitalized.
GainLoss on Settlement of Contingent Consideration
Gain on settlement of contingent consideration of $1.7 million forDuring the six months ended March 31, 2019 was due to2021, we incurred an adjustmentexpense of $0.4 million on the acquisition contingent consideration arising from a 2019 acquisition, as the performance target to receive the full payout was not fully achieved. There was no gain/(loss) on settlement of a contingent payment related to a fiscal year 2019 acquisition. There were no adjustments to contingent consideration for the six months ended March 31, 2020.
Operating Income from Operations
Operating income decreased $2.3Income from operations increased $43.6 million, or 17.0%389.9%, to $11.3$54.7 million for the six months ended March 31, 20202021 compared to $13.6$11.2 million for the six months ended March 31, 2019.2020. The decreaseincrease was primarily attributable to a $2.6the $64.4 million increase in transaction costsgross profit for the six months ended March 31, 2021 as compared to the six months ended March 31, 2020, partially offset by our overall growth due to both increasesa $22.5 million increase in same-store sales andselling, general & administrative expenses during the fiscal year 2019 Acquisitions.same periods.
Interest Expense – Floor Plan
Interest expense – floor plan increased $1.2decreased $3.9 million, or 29.7%75.9%, to $1.3 million for the six months ended March 31, 2021 compared to $5.2 million for the six months ended March 31, 2020 compared to $4.0 million for the six months ended March 31, 2019 and2020. This decrease was primarily attributable to falling interest rates, an increase in interest assistance received from our manufacturers and bank as well as a $31.0$110.5 million increasedecrease in the outstanding borrowings on our Inventory Financing Facility as of March 31, 20202021 compared to March 31, 2019 as a result of our same-store sales growth and stores acquired in fiscal year 2019.2020.
Interest Expense – Other
The increasedecrease in interest expense – other of $1.8$2.2 million, or 70.9%50.4%, to $2.1 million for the six months ended March 31, 2021 compared to $4.3 million for the six months ended March 31, 2020 compared to $2.5 million for the six months ended March 31, 2019 was primarily attributable to the payoff of our Term and Revolver Credit Facility (as defined below) and entry into the Refinanced Credit Facility (as defined below), which offers a $49.7 million increase in our long-term debt which was primarily increased to fully redeem the preferredmore favorable interest in subsidiary.rate.
Change in Fair Value of Warrant Liability
The decrease in change in fair value of warrant liability of $8.4$0.7 million or 110.1%, to $(0.8) million income for the six months ended March 31, 2020 compared to $7.6 million expense for the six months ended March 31, 2019 was primarily attributable to an overall change in the enterprise value of the Company due to a decline in the implied value of other market participants.
Other Expense (Income), Net
The decrease in other income of $0.3 millionCompany. No charge was recorded for the six months ended March 31, 2020 compared to2021 as the six months ended March 31, 2019warrants were exercised in conjunction with the Offering.
Other Expense (Income), Net
Other expense (income), net was primarily attributable to a $0.2 million increase in loss on disposalincome of property and equipmentapproximately $89,000 for the six months ended March 31, 2020 as compared to2021 and expense of approximately $65,000 for the six months ended March 31, 2019.2020.
Income Tax Expense
The $0.5$8.6 million increase in income tax expense for the six months ended March 31, 20202021 as compared to the six months ended March 31, 20192020 was primarily the result of the $49.0 million increase in income before income tax expense and the Offering and the taxability of OneWater IncInc. as a corporation.corporation for the full six months ended March 31, 2021 versus only the period subsequent to the offering for the six months ended March 31, 2020. Additionally, as Class B common stock was exchanged for Class A common stock (in accordance with the terms of the OneWater LLC Agreement), the proportion of consolidated income before income tax expense allocated to OneWater Inc. increased, yielding higher income tax expense.
Net Income (Loss)
Net income increased by $2.4$40.5 million to net income of$42.4 million for the six months ended March 31, 2021 compared to $1.9 million for the six months ended March 31, 2020 compared2020. The increase was primarily attributable to a net loss of $(0.4)the $64.5 million increase in gross profit for the six months ended March 31, 2019. The increase was primarily attributable2021 compared to the $8.4 million decrease in change in fair value of the warrant liability in the six months ended March 31, 2020 compared to the six months ended March 31, 2019.2020. The increase was partially offset by increasesthe $22.5 million increase in interest expense – floor plan, interest expense-otherselling, general & administrative expenses and transactions costs. Additionally, we recorded $0.5the $8.6 million increase in income tax expense for the six months ended March 31, 2020, our first period with taxability as a corporation.2021 compared to the six months ended March 31, 2020.
Comparison of Non-GAAP Financial Measure
We view Adjusted EBITDA as an important indicator of performance. We define Adjusted EBITDA as net income (loss) before interest expense – other, income taxes,tax expense, depreciation and amortization and other (income) expense, further adjusted to eliminate the effects of items such as the change in the fair value of warrants,warrant liability, gain (loss) on settlementcontingent consideration, loss on extinguishment of contingent considerationdebt and transaction costs.
Our board of directors,Board, management team and lenders use Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense)expense and debt extinguishment charges), asset base (such as depreciation and amortization) and other items (such as the fair value adjustment of the warrants, gain (loss) on contingent consideration and transaction costs) that impact the comparability of financial results from period to period. We present Adjusted EBITDA because we believe it provides useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. Adjusted EBITDA is not a financial measure presented in accordance with GAAP. We believe that the presentation of this non-GAAP financial measure will provide useful information to investors and analysts in assessing our financial performance and results of operations across reporting periods by excluding items we do not believe are indicative of our core operating performance. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Our non-GAAP financial measure should not be considered as an alternative to the most directly comparable GAAP financial measure. You are encouraged to evaluate each of these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in such presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in the future, and any such modification may be material. Adjusted EBITDA has important limitations as an analytical tool and you should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of this non-GAAP financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
The following tables present a reconciliation of net income (loss) to Adjusted EBITDA, which is the most directly comparable GAAP measure for the periods presented.
Three Months Ended March 31, 2020,2021, Compared to Three Months Ended March 31, 20192020
| | | Three months ended March 31 | |
| Description | | 2020 | | | 2019 | |
| | | ($ in thousands) | |
| Net income (loss) | | $ | 2,979 | | | $ | (2,951 | ) |
| Interest expense – other | | | 2,457 | | | | 1,294 | |
| Income taxes | | | 472 | | | | - | |
| Depreciation and amortization | | | 791 | | | | 585 | |
| Gain on settlement of contingent consideration | | | - | | | | (1,655 | ) |
| Transaction costs (1) | | | 2,925 | | | | 444 | |
| Change in fair value of warrant liability (2) | | | - | | | | 12,295 | |
| Other expense (income), net | | | 289 | | | | (45 | ) |
| Adjusted EBITDA | | $ | 9,913 | | | $ | 9,967 | |
| (1) | Consists of transaction costs related to the fiscal year 2019 Acquisitions and costs related to the Offering. |
| (2) | Represents the non-cash expense recognized during the period for the change in the fair value of the LLC Warrants, which were accounted for as a liability on our balance sheets. |
| | | Three Months Ended March 31 | |
| Description | | 2021 | | | 2020 | |
| | | ($ in thousands) | |
| Net income | | $ | 30,592 | | | $ | 2,979 | |
| Interest expense – other | | | 1,215 | | | | 2,457 | |
| Income tax expense | | | 6,550 | | | | 472 | |
| Depreciation and amortization | | | 1,378 | | | | 791 | |
| Transaction costs | | | 368 | | | | 2,925 | |
| Other expense, net | | | 5 | | | | 52 | |
| Adjusted EBITDA | | $ | 40,108 | | | $ | 9,676 | |
Adjusted EBITDA remained relatively flat at $9.9increased $30.4 million or 314.5% to $40.1 million for the three months ended March 31, 20202021 compared to $10.0$9.7 million for the three months ended March 31, 2019.2020. The decreaseincrease in Adjusted EBITDA resulted primarily from an increase in gross profit due to our same-store sales growth, partially offset by an increase in selling, general & administrative expense and interest expense – floor plan, partially offset by an increase in gross profit.expense.
Six Months Ended March 31, 2020,2021, Compared to Six Months Ended March 31, 20192020
| | | Six months ended March 31 | |
| Description | | 2020 | | | 2019 | |
| | | ($ in thousands) | |
| Net income (loss) | | $ | 1,912 | | | $ | (441 | ) |
| Interest expense – other | | | 4,310 | | | | 2,522 | |
| Income taxes | | | 472 | | | | - | |
| Depreciation and amortization | | | 1,551 | | | | 1,192 | |
| Gain on settlement of contingent consideration | | | - | | | | (1,655 | ) |
| Transaction costs (1) | | | 3,362 | | | | 742 | |
| Change in fair value of warrant liability (2) | | | (771 | ) | | | 7,600 | |
| Other expense (income), net | | | 167 | | | | (90 | ) |
| Adjusted EBITDA | | $ | 11,003 | | | $ | 9,870 | |
| (1) | Consists of transaction costs related to the fiscal year 2019 Acquisitions and costs related to the Offering. |
| (2) | Represents the non-cash expense recognized during the period for the change in the fair value of the LLC Warrants, which were accounted for as a liability on our balance sheets. |
| | | Six Months Ended March 31 | |
| Description | | 2021 | | | 2020 | |
| | | ($ in thousands) | |
| Net income | | $ | 42,367 | | | $ | 1,912 | |
| Interest expense – other | | | 2,139 | | | | 4,310 | |
| Income tax expense | | | 9,061 | | | | 472 | |
| Depreciation and amortization | | | 2,341 | | | | 1,551 | |
| Loss on contingent consideration | | | 377 | | | | - | |
| Transaction costs | | | 568 | | | | 3,362 | |
| Change in fair value of warrant liability | | | - | | | | (771 | ) |
| Other (income) expense, net | | | (89 | ) | | | 65 | |
| Adjusted EBITDA | | $ | 56,764 | | | $ | 10,901 | |
Adjusted EBITDA was $11.0increased $45.9 million or 420.7% to $56.8 million for the six months ended March 31, 20202021 compared to $9.9$10.9 million for the six months ended March 31, 2019.2020. The increase in Adjusted EBITDA resulted primarily from our 4.7%an increase in gross profit due to our same-store sales growth, for the six months ended March 31, 2020 as compared to the six months ended March 31, 2019, combined with the results of the fiscal year 2019 Acquisitions.partially offset by an increase in selling, general & administrative expense.
Seasonality
Our business, along with the entire recreational boating industry, is highly seasonal, and such seasonality varies by geographic market. With the exception of Florida, we generally realize significantly lower sales and higher levels of inventories, and related floor plan borrowings, in the quarterly periods ending December 31 and March 31. Revenue generated from our stores in Florida serves to offset generally lower winter revenue in our other states and enables us to maintain a more consistent revenue stream. The onset of the public boat and recreation shows in January stimulates boat sales and typically allows us to reduce our inventory levels and related floor plan borrowings throughout the remainder of the fiscal year. The impact of seasonality on our results of operations could be materially impacted based on the location of our acquisitions. For example, our operations could be substantially more seasonal if we acquire dealer groups that operate in colder regions of the United States. Our business is also subject to weather patterns, which may adversely affect our results of operations. For example, prolonged winter conditions, reduced rainfall levels or excessive rain, may limit access to boating locations or render boating dangerous or inconvenient, thereby curtailing customer demand for our products and services. In addition, unseasonably cool weather and prolonged winter conditions may lead to a shorter selling season in certain locations. Hurricanes and other storms could result in disruptions of our operations or damage to our boat inventories and facilities, as has been the case when Florida and other markets were affected by hurricanes. We believe our geographic diversity is likely to reduce the overall impact to us of adverse weather conditions in any one market area.
Liquidity and Capital Resources
Overview
Our cash needs are primarily for growth through acquisitions and working capital to support our retail operations, including new and pre-owned boat and related parts inventories and off-season liquidity. We routinely monitor our cash flow to determine the amount of cash available to complete acquisitions of dealer groups and stores. We monitor our inventories, inventory aging and current market trends to determine our current and future inventory and related floorplan financing needs. We expect to take a temporary pause on acquisitions until the current macroeconomic environment stabilizes. Additionally, we are temporarily pausing any non-essential capital expenditures. Based on current facts and circumstances, we believe we will have adequate cash flow coupled with available borrowing capacity,from operations, borrowings under our Credit Facilities and proceeds from any future issuances of debt or equity, to fund our current operations and essential capital expenditures for the next twelve months.
Cash needs for acquisitions have historically been financed with our Term and Revolver Credit FacilityFacilities and cash generated from operations. Our ability to utilize the Term and RevolverRefinanced Credit Facility (as defined below) to fund operations depends upon Adjusted EBITDA and compliance with covenants of the Term and Revolver Credit Facility. We expect to continue to be subject to financial covenants under the Term and RevolverRefinanced Credit Facility. Cash needs for inventory have historically been financed with our Inventory Financing Facility. Our ability to fund inventory purchases and operations depends on the collateral levels and our compliance with the covenants of the Inventory Financing Facility. As of March 31, 2020,2021, we were in compliance with all covenants under the Term and RevolverRefinanced Credit Facility and the Inventory Financing Facility.
Cash Flows
Analysis of Cash Flow Changes Between the Six Months Ended March 31, 20202021 and 20192020
The following table summarizes our cash flows for the periods indicated:
| Description | | Six Months ended March 31, | | |
| | Six Months Ended March 31, | |
| Description | | 2020 | | | 2019 | | | Change | | | 2021 | | | 2020 | | | Change | |
| ($ in thousands) | | ($ in thousands) | |
| Net cash used in operating activities | | $ | (47,080 | ) | | $ | (78,470 | ) | | $ | 31,390 | | |
| Net cash provided by (used) in operating activities | | | $ | 30,581 | | | $ | (47,080 | ) | | $ | 77,661 | |
| Net cash used in investing activities | | (1,818 | ) | | (5,573 | ) | | 3,755 | | | (90,507 | ) | | (1,818 | ) | | (88,689 | ) |
| Net cash provided by financing activities | | | 58,374 | | | | 85,307 | | | | (26,933 | ) | | | 79,255 | | | | 58,374 | | | | 20,881 | |
| Net change in cash | | $ | 9,476 | | | $ | 1,264 | | | $ | 8,212 | | | $ | 19,329 | | | $ | 9,476 | | | $ | 9,853 | |
Operating Activities. Net cash provided by operating activities was $30.6 million for the six months ended March 31, 2021 compared to net cash used in operating activities wasof $47.1 million for the six months ended March 31, 2020 compared to $78.52020. The $77.7 million for the six months ended March 31, 2019. The $31.4 million decreaseincrease in cash used inprovided by operating activities was primarily attributable to a $30.8$40.5 million increase in net income, a $25.5 million decrease in the change in inventory and a $10.4$12.2 million decreaseincrease in the change in customer deposits for the six months ended March 31, 2021 as compared to the six months ended March 31, 2020. These amounts were partially offset by a $17.9 million increase in the change in accounts receivable for the six months ended March 31, 20202021 as compared to the six months ended March 31, 2019. These amounts were partially offset by an $8.42020.
Investing Activities. Net cash used in investing activities was $90.5 million decrease in the change in fair value of the warrant liability for the six months ended March 31, 2020 as2021 compared to the six months ended March 31, 2019.
Investing Activities. Net cash used in investing activities was $1.8 million for the six months ended March 31, 2020 compared to $5.62020. The $88.7 million for the six months ended March 31, 2019. The $3.8 million decreaseincrease in cash used for investing activities was primarily attributable to a $2.1$85.5 million decrease inof cash used in acquisitions and a $1.5 million increase in proceeds on disposal of property and equipment for the six months ended March 31, 20202021 as compared to none for the six months ended March 31, 2019.2020.
Financing Activities. Net cash provided by financing activities was $79.3 million for the six months ended March 31, 2021 compared to $58.4 million for the six months ended March 31, 2020 compared to $85.32020. The $20.9 million for the six months ended March 31, 2019. The $26.9 million decreaseincrease in financing cash flow was primarily attributable to an $89.7a $90.5 million increasedecrease in the distributions to redeemable preferred interest members, andpartially offset by a $12.4$59.2 million decrease in net borrowings on our Inventory Financing Facility, partially offset by $59.2 million in proceeds from the issuance of Class A common stock sold in the Offering, net of offering costs, and a $28.2$13.1 million increasedecrease in proceeds on long-term debtnet borrowings from floor plan for the six months ended March 31, 20202021 as compared to the six months ended March 31, 2019.2020.
Debt Agreements
Term and Revolver Credit Facility
On October 28, 2016, OneWater LLC and certain of our subsidiaries entered into a Credit and Guaranty Agreement with OWM BIP Investor, LLC, as a lender, Goldman Sachs Specialty Lending Group, L.P., as a lender, administrative agent and collateral agent, and various lender parties thereto (as amended, the “GS/BIP Credit Facility”). The as amended terms of the GS/BIP Credit Facility immediately preceding the Offering consisted of an up to $60.0 million multi-draw term loan facility (the “Multi-Draw Term Loan”) and a $5.0 million revolving line of credit.credit (the “Revolving Facility”).
On February 11, 2020, in connection with the Offering, OneWater IncInc. entered into the Terman Amended and Restated Credit and Guaranty Agreement (the “Term and Revolver Credit FacilityFacility”), which, among other things, modified the terms of the GS/BIP Credit Facility to (i) increase the Revolving Facility from $5.0 million to $10.0 million, (ii) increase the maximum available under the Multi-Draw Term Loan from $60.0 million to $100.0 million, (iii) provide an uncommitted and discretionary multi-draw term loan accordion feature of up to $20.0 million, (iv) amend the repayment schedule of the Multi-Draw Term Loan to commence on March 31, 2022, (v) amend the scheduled maturity date of the Revolving Facility and Multi-Draw Term Loan to be February 11, 2025 and (vi) remove OWM BIP Investor, LLC as a lender. The Term and Revolver Credit Facility will bearbore interest at a rate that iswas equal to, at OneWater Inc’sInc.’s option, (a) LIBOR for such interest period (subject to a 1.50% floor) plus an applicable margin of up to 7.00%, subject to step-downs to be determined based on certain financial leverage ratio measures, or (b) a base rate (subject to a 4.50% floor) plus an applicable margin of up to 6.00%, subject to step-downs to be determined based on certain financial leverage ratio measures. Interest will bewas payable quarterly for base rate borrowings and up to quarterly for LIBOR borrowings. The Term and Revolver Credit Facility includesincluded the option for the Company to defer cash payments of interest for twelve months and add the accrued interest to the outstanding principal of the note payable. The election of this feature was made forduring the periodthree months ended March 31, 2020, and as a result,the interest rate will be increased by 2.0% for the corresponding twelve months.
The Company immediately upon closing of the agreement borrowed an additional $35.3 million on the Multi-Draw Term Loan immediately upon closing of the agreement to bring our total indebtedness to $100 million. Additionally, during the three months ended March 31, 2020, the Company elected the option to defer cash interest payments for twelve months. As of March 31,
On July 22, 2020, the Company repaid in full all indebtedness outstanding under the then-existing credit facility evidenced by the Term and Revolver Credit Facility, and in connection with such repayment, all commitments thereunder were terminated and all guarantees and security interests granted in connection therewith were released. See “—Refinanced Credit Facility” for additional information.
Refinanced Credit Facility
Effective July 22, 2020, we had not drawn down onand certain of our Revolving Facility. We were in compliance withsubsidiaries terminated and repaid all covenantsindebtedness outstanding under the Term and Revolver Credit Facility and entered into the Credit Agreement (the “Refinanced Credit Facility”) with Truist Bank as administrative agent, collateral agent, swingline lender and issuing bank, SunTrust Robinson Humphrey, Inc. and Synovus Bank as joint lead arrangers and joint bookrunners, Synovus Bank as documentation agent, and the lenders from time to time party thereto (collectively, the “Refinancing”). The Refinanced Credit Facility provides for a $30.0 million revolving credit facility that may be used for revolving credit loans (including up to $5.0 million in swingline loans) and up to $5.0 million in letters of credit from time to time, and a $80.0 million term loan, which was advanced in full on July 22, 2020. Subject to certain conditions, the available amount under the revolving credit facility and the term loans may be increased by $50.0 million in the aggregate. The revolving credit facility matures on July 22, 2025. The term loan is repayable in installments beginning on March 31, 2021, with the remainder due on July 22, 2025.
On February 2, 2021, we entered into the Incremental Amendment No. 1 (the “First Incremental Amendment”) to the Refinanced Credit Facility to provide for, among other things, an incremental term loan (the “Incremental Term Loan”) to OWAO in an aggregate principal amount equal to $30.0 million, which was added to, and constitutes a part of, the existing $80.0 million term loan. As provided for by the First Incremental Amendment, the proceeds of the Incremental Term Loan were used to pay off the balance of the revolving credit facility, under which an aggregate of $30.0 million was outstanding as of March 31, 2020.February 1, 2021.
Borrowings under the Refinanced Credit Facility bear interest, at the Company’s option, at either (a) a base rate (the “Base Rate”) equal to the highest of (i) the prime rate (as announced by Truist Bank from time to time), (ii) the Federal Funds Rate, as in effect from time to time, plus 0.50%, (iii) the Adjusted LIBO Rate (defined below) determined on a daily basis for an interest period of one month, plus 1.00%, or (iv) 1.75%, plus an applicable margin of up to 2.00%, or (b) the rate per annum obtained by dividing (i) the London Inter-Bank Offered Rate for such interest period by (ii) a percentage equal to 1.00 minus the Eurodollar Reserve Percentage (the “Adjusted LIBO Rate”) plus an applicable margin of up to 3.00%. Interest on swingline loans shall be the Base Rate plus an applicable margin of up to 2.00%. All applicable interest margins are subject to stepdowns based on certain consolidated leverage ratio measures.
The Refinanced Credit Facility is subject to certain financial covenants related to the maintenance of a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio.
Inventory Financing Facility
On June 14, 2018, OneWater LLC and certain of our subsidiaries entered into the Fourth Amended and Restated Inventory Financing Agreement with Wells Fargo Commercial Distribution Finance, LLC and various lender parties thereto (“Wells Fargo”) (as subsequently amended and restated, the ‘‘Inventory Financing Facility’’ and, together with the Term and Revolver Credit Facility, the ‘‘Credit Facilities’’). On September 21, 2018, OneWater LLC and certain of our subsidiaries entered into the First Amendment to the Fourth Amended and Restated Inventory Financing Agreement which, among other things, increased the maximum amount of borrowing available under the Inventory Financing Facility from $200.0 million to $275.0 million. On April 5, 2019, OneWater LLC and certain of its subsidiaries further amended the Inventory Financing Facility to, among other things, increase the maximum amount of borrowing available under the Inventory Financing Facility from $275.0 million to $292.5 million. On November 26, 2019, OneWater LLC and certain of its subsidiaries entered into the Fifth Amended and Restated Inventory Financing Agreement with Wells Fargo to, among other things, increase the maximum amount of borrowing available under the Inventory Financing Facility from $292.5 million to $392.5 million.
Effective February 11, 2020, in connection with the Offering, the Company and certain of its subsidiaries entered into the Sixth Amended and Restated Inventory Financing FacilityAgreement with Wells Fargo, which amended and restated the Fifth Amended and Restated Inventory Financing Agreement, dated as of November 26, 2019, to, among other things, permit certain payments and transactions contemplated by or in connection with the Offering, including payments under the Tax Receivable Agreement. The maximum amount of borrowing available, interest rates and the termination date of the Inventory Financing Facility remained unchanged.
On July 22, 2020, the Company and certain of its subsidiaries entered into the First Amendment (the “First Amendment”) to the Inventory Financing Facility. The First Amendment amended the Inventory Financing Facility, to, among other things, address the Refinancing, permit the amount of indebtedness allowed under the Refinanced Credit Facility to be $160.0 million (which includes the potential for a $50.0 million increase under the Refinanced Credit Facility), permit the payment of fees and expenses in connection with the termination of the Term and Revolver Credit Facility and the payment of present and future transaction costs incurred in connection with the negotiation, closing and ongoing administration of the Refinanced Credit Facility.
On December 10, 2020, the Company and certain of its subsidiaries entered into the Second Amendment to the Sixth Amended and Restated Inventory Financing Agreement to change certain compliance reporting from weekly to monthly. The maximum borrowing amount available, interest rates and the termination date of the agreement remained unchanged.
The interest rate for amounts outstanding under the Inventory Financing Facility is calculated using the one month LIBOR plus an applicable margin of 2.75% to 5.00% for new boats and at the new boat rate plus 0.25% for pre-owned boats. Loans will be extended from time to time to enable us to purchase inventory from certain manufacturers and to lease certain boats and related parts to customers. The applicable financial terms, curtailment schedule and maturity for each loan will be set forth in separate program terms letters entered into from time to time. The collateral for the Inventory Financing Facility consists primarily of our inventory that is financed through the Inventory Financing Facility and related assets, including accounts receivable, bank accounts, and proceeds of the foregoing, and excludes the collateral that underlies the Term and RevolverRefinanced Credit Facility.
49We are required to comply with certain financial and non-financial covenants under the Inventory Financing Facility, including provisions that the Funded Debt to EBITDA Ratio (as defined in the Inventory Financing Facility) of OneWater LLC must not exceed 2.00 to 1.00, and that our Fixed Charge Coverage Ratio (as defined in the Inventory Financing Facility) on a consolidated basis must be at least 1.50 to 1.00. We are also subject to additional restrictive covenants, including restrictions on our ability to (i) use, sell, rent or otherwise dispose of any collateral underlying the Inventory Financing Facility except for the sale of inventory in the ordinary course of business, (ii) incur certain liens, (iii) engage in any material transaction not in the ordinary course of business, (iv) change our business in any material manner or our organizational structure, other than as otherwise provided for in the Inventory Financing Facility, (v) engage in certain mergers or consolidations, (vi) acquire certain assets or ownership interest of any other person or entities, except for certain permitted acquisitions, (vii) guarantee or indemnify or otherwise become in any way liable with respect to certain obligations of any other person or entity, except as provided by the Inventory Financing Facility, (viii) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of the equity of our acquired dealer groups, (ix) make any change in any of our dealer groups’ capital structure or in any of its business objectives or operations which might in any way adversely affect the ability of such dealer group to repay its obligations under the Inventory Financing Facility, (x) incur, create, assume, guarantee or otherwise become or remain liable with respect to certain indebtedness, and (xi) make certain payments of subordinated debt. OneWater LLC and its subsidiaries are generally restricted from making cash dividends or distributions, except for certain dividends or distributions to OneWater LLC’s members made during specified time frames and in an amount not to exceed 50% of OneWater LLC’s consolidated net cash flow after taxes for the preceding fiscal year, provided that such dividend or distribution would not result in a default under the Inventory Financing Facility. Additionally, among other exceptions, OneWater LLC may make distributions to its members for certain permitted tax payments subject to certain financial ratios, may make scheduled payments on certain subordinated debt and is permitted to make pro rata distributions to the OneWater Unit Holders, including OneWater Inc., in an amount sufficient to allow OneWater Inc. to pay its taxes and to make payments under the Tax Receivable Agreement. OneWater LLC’s subsidiaries are generally restricted from making loans or advances to OneWater LLC. Our Chief Executive Officer, Philip Austin Singleton, Jr., and our Chief Operating Officer, Anthony Aisquith, provide certain personal guarantees of the Inventory Financing Facility.
As of March 31, 20202021 and September 30, 2019,2020, our indebtedness associated with financing our inventory under the Inventory Financing Facility totaled approximately $294.3$183.8 million and $225.4$124.0 million, respectively. Certain of our manufacturers enter into independent agreements with the lenders to the Inventory Financing Facility, which results in a lower effective interest rate charged to us for borrowings related to the products by such manufacturer. As of March 31, 20202021 and September 30, 2019,2020, the effective interest rate on the outstanding short-term borrowings under the Inventory Financing Facility was approximately 3.5%0.7% and 4.9%4.0%, respectively. As of March 31, 20202021 and September 30, 2019,2020, our additional available borrowings under our Inventory Financing Facility were approximately $98.2$208.7 million and $67.1$268.5 million, respectively, based upon the outstanding borrowings and the maximum facility amount. The aging of our inventory limits our borrowing capacity as defined curtailments reduce the allowable advance rate as our inventory ages. As of March 31, 2020,2021, we were in compliance with all covenants under the Inventory Financing Facility.
OpcoOWAO Preferred Units
On October 28, 2016, Goldman and Beekman entered into a Subscription Agreement with us and certain of our subsidiaries, pursuant to which Goldman and Beekman purchased preferred units in OpcoOWAO (“OpcoOWAO Preferred Units”).
Goldman and Beekman purchased 45,000 and 23,000 OpcoOWAO Preferred Units, representing 66.2% and 33.8% of the total OpcoOWAO Preferred Units outstanding for purchase prices of approximately $44.4 million and $22.7 million, respectively. The holders of the OpcoOWAO Preferred Units (“OpcoOWAO Preferred Holders”) were entitled to (i) a ‘‘preferred return’’ at a rate of 10% per annum, compounded quarterly, on (a) the aggregate amount of capital contributions made, minus any prior distributions (the ‘‘unreturned preferred amount’’), plus (b) any unpaid preferred returns for prior periods, and (ii) a ‘‘preferred target distribution’’ at a rate of 10% per annum on the unreturned preferred amount multiplied by (a) 40% for the calendar quarters ending December 31, 2018, March 31, 2019, June 30, 2019 and September 30, 2019, (b) 60% for each calendar quartersquarter ending December 31, 2019, March 31, 2020, June 30, 2020 and September 30, 2020, and (c) 80% for each calendar quarter thereafter. The preferred target distribution proportionally adjusts the amount of capital contribution of each OpcoOWAO Preferred Holder. OpcoOWAO and certain affiliates were required to meet certain financial covenants, including maintenance of certain leverage ratios. Failure by OpcoOWAO to pay the preferred return and preferred target distribution, failure to meet certain financial covenants, or repayment in full or acceleration of the obligations under the GS/BIP Credit Facility would permit a majority of the OpcoOWAO Preferred Holders to require us to purchase all OpcoOWAO Preferred Units equal to the unreturned preferred amount plus any unpaid preferred returns (the ‘‘redemption amount’’). As of September 30, 2019, the redemption amount of the OpcoOWAO Preferred Units held by Goldman and Beekman in the aggregate was $87.3 million, exclusive of $1.3 million in issuance costs.
On February 11, 2020, in connection with the Offering, we used the net proceeds from the Offering, together with cash on hand and borrowings under the Term and Revolver Credit Facility, to redeem all of the shares of OpcoOWAO Preferred Units held by Goldman and Beekman for $89.2 million.For the three months ended March 31, 2020, we recorded $1.1 million in accretion of the discount and amortization of the issuance costs associated with redeemable preferred interest in subsidiary, which includes an acceleration of the remaining discount and issuance costs balances outstanding at the redemption date.
Notes Payable
Acquisition Notes Payable. In connection with certain of our acquisitions of dealer groups, we have entered into notes payable agreements with the acquired entities to finance these acquisitions. As of March 31, 2020,2021, our indebtedness associated with our 96 acquisition notes payable totaled an aggregate of $13.9$9.6 million with a weighted average interest rate of 5.7%5.2% per annum. As of March 31, 2020,2021, the principal amount outstanding under these acquisition notes payable ranged from $0.8$1.0 million to $3.1$2.2 million, and the maturity dates ranged from JuneApril 1, 20202021 to FebruaryDecember 1, 2022.2023.
Commercial Vehicles Notes Payable. Since 2015, we have entered into multiple notes payable with various commercial lenders in connection with our acquisition of certain vehicles utilized in our retail operations. Such notes bear interest ranging from 0.0% to 8.9% per annum, require monthly payments of approximately $77,000,$105,000, and mature on dates betweenranging from April 2020 to February 2025.March 2027. As of March 31, 2020,2021, we had $2.3$3.3 million outstanding under the commercial vehicles notes payable.
SBA Loans
Between April 20, 2020 and April 22, 2020, certain subsidiaries of the Company entered into separate promissory notes with Hancock Whitney Bank providing for loans under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (each, an “SBA Loan” and collectively, the “SBA Loans”). Total amounts received were approximately $14.1 million in the aggregate.
Based on its operating results through April 30, 2020, the Company determined that the impact of COVID-19 was not affecting its performance to the extent expected. While the future impact of COVID-19 remains unknown, initial sales trends suggest the impact will not be as severe as initially believed at this time. Accordingly, the Company elected to return the money received under the CARES Act on May 6, 2020.
Tax Receivable Agreement
The Tax Receivable Agreement generally provides for the payment by OneWater IncInc. to certain of the OneWater Unit Holders (as defined below) of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax (computed using the estimated impact of state and local taxes) that OneWater IncInc. actually realizes (or is deemed to realize in certain circumstances) in periods after the Offering as a result of certain tax basis increases and certain tax benefits attributable to imputed interest. OneWater IncInc. will retain the benefit of the remaining 15% of these net cash savings. To the extent OneWater LLC has available cash and subject to the terms of any current or future debt or other agreements, the OneWater LLC Agreement will require OneWater LLC to make pro rata cash distributions to OneWater Unit Holders, including OneWater Inc,Inc., in an amount sufficient to allow OneWater IncInc. to pay its taxes and to make payments under the Tax Receivable Agreement. We generally expect OneWater LLC to fund such distributions out of available cash. However, except in cases where OneWater IncInc. elects to terminate the Tax Receivable Agreement early, the Tax Receivable Agreement is terminated early due to certain mergers or other changes of control or OneWater IncInc. has available cash but fails to make payments when due, generally OneWater IncInc. may elect to defer payments due under the Tax Receivable Agreement if it does not have available cash to satisfy its payment obligations under the Tax Receivable Agreement or if its contractual obligations limit its ability to make these payments. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest. In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits, if any, OneWater IncInc. realizes in respect of the tax attributes subject to the Tax Receivable Agreement. In the case of such an acceleration, where applicable, we generally expect the accelerated payments due under the Tax Receivable Agreement to be funded out of the proceeds of the change of control transaction giving rise to such acceleration. OneWater IncInc. intends to account for any amounts payable under the Tax Receivable Agreement in accordance with ASC Topic 450, Contingencies.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements, except for operating leases and purchase commitments under supply agreements entered into in the normal course of business.
Recent Accounting Pronouncements
As an ‘‘emerging growth company’’ (‘‘EGC’’), the Jumpstart Our Business Startups Act (‘‘JOBS Act’’) allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.
In May 2014, the FASB issued Accounting Standards Update (‘‘ASU’’) No. 2014-09, ‘‘Revenue from Contracts with Customers (Topic 606)’’ (‘‘ASU 2014-09’’), as subsequently amended, a converged standard on revenue recognition. The new pronouncement requires revenue recognitionRefer to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for some costs to obtain or fulfil a contract with a customer, as well as enhanced disclosure requirements. ASU 2014-09 is effective for a public company’s annual reporting periods beginning after December 15, 2017. As an EGC the Company has elected to adopt ASU 2014-09 following the effective dates for private companies beginning with annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company adopted this update on October 1, 2019 using the modified retrospective approach applied only to contracts not completed asNote 3 of the dateNotes to Unaudited Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for recently adopted and issued accounting pronouncements including the expected dates of adoption with no restatement of comparative periods. No adjustment was made to retained earnings as of the adoption date and no adjustments were made to the Company’s condensed consolidated financial statements as the adoption of the update did not have a material impact.
In August 2016, the FASB issued ASU 2016-15, ‘‘Statement of Cash Flows (Topic 230)’’ (‘‘ASU 2016-15’’). Additionally, in November 2016, the FASB issued ASU 2016-18, ‘‘Statement of Cash Flows (Topic 230)’’ (‘‘ASU 2016-18’’). These updates require organizations to reclassify certain cash receipts and cash payments within the Statement of Cash Flows and modify the classification and presentation of restricted cash. These ASU’s are effective for a public company’s annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. As an EGC, the Company has elected to adopt these ASU’s following the effective dates for private companies beginning with annual reporting periods beginning after December 15, 2018, including interim reporting periods within fiscal years beginning after December 15, 2019. The Company adopted this updateestimated effects, if any, on October 1, 2019 and it did not have a material impact on theour consolidated financial statements.
In January 2017,Critical Accounting Policies and Significant Estimates
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the FASB issued ASU 2017-01, ‘‘Business Combinations (Topic 805)’’ (‘‘ASU 2017-01’’). This update clarifiesU.S. for interim financial information. The preparation of our financial statements requires the definitionapplication of a businessthese accounting principles in addition to certain estimates and judgments based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. Actual results could differ from these estimates. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Estimates” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the objectiveSEC on December 3, 2020, for further information regarding our critical accounting policies and significant estimates. As of adding guidance to assist entities with evaluating whether transactions should be accountedMarch 31, 2021, there were no changes in our critical accounting policies or the application of those policies from those reported in our Annual Report on Form 10-K for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. As an EGC the Company has elected to adopt ASU 2017-01 following the effective dates for private companies beginning with annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company adopted this update on October 1, 2019 and it did not impact the consolidated financial statements.fiscal year ended September 30, 2020.
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| Item 3. | Quantitative and Qualitative Disclosure about Market Risk |
Interest Rate Risk
Our Inventory Financing Facility exposes us to risks caused by fluctuations in interest rates. The interest rate on our Inventory Financing Facility for new boats is calculated using the one-month LIBOR rate plus an applicable margin. Based on an outstanding balance of $294.3$183.8 million as of March 31, 2020,2021, a change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $2.9 million.$1.8 million for the fiscal period. We do not currently hedge our interest rate exposure. This hypothetical increase does not take into account a corresponding increase to the programs that we may receive from our manufacturers or management’s ability to curtail inventory and related floor plan balances, both of which would reduce the impact of the interest rate increase.
Our Refinanced Credit Facility exposes us to risks caused by fluctuations in interest rates. The interest rate on our Refinanced Credit Facility is calculated using the one-month LIBOR (with a 0.75% floor) plus an applicable margin. Based on an outstanding balance of $108.6 million and the one-month LIBOR as of March 31, 2021, an increase of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $0.4 million for the fiscal period. A basis points reduction in the underlying interest rate would not have caused a change in interest expense. We do not currently hedge our interest rate exposure.
Foreign Currency Risk
We purchase certain of our new boat and parts inventories from foreign manufacturers. Although we purchase our inventories in U.S. dollars, our business is subject to foreign exchange rate risk that may influence manufacturers’ ability to provide their products at competitive prices in the United States. To the extent that we cannot recapture this volatility in prices charged to customers or if this volatility negatively impacts consumer demand for our products, this volatility could adversely affect our future operating results.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) during the three months ended March 31, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Due to the nature of our business, we are, from time to time, involved in other routine litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment related disputes. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. In the opinion of our management, none of the pending litigation, disputes or claims against us, if decided adversely, would have a material adverse effect on our financial condition, cash flows or results of operations.
In addition to the risks discussed below and other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Final Prospectus,Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC on December 3, 2020, which could materially affect our businesses, financial condition, or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results. There have been no material changes in our risk factors from those described in our Annual Report on Form 10-K for the Final Prospectus,fiscal year ended September 30, 2020, filed with the SEC on December 3, 2020 other than as discussed below.described below.
The ongoing COVID-19 pandemic may adversely affect our revenues, results of operations and financial condition.
Our business could be materially adversely affected by the widespread outbreak of a contagious disease, including the recent COVID-19 pandemic. COVID-19 has spread in many of the geographic areas in which we operate. National, state and local governments in affected regions have implemented and may continue to implement safety precautions, including shelter in place orders, travel restrictions, business closures, cancellations of public gatherings, including boat shows, and other measures. These measures have affected our ability to sell and service boats, required us to temporarytemporarily close or partially close certain locations and may require additional closures in the future. Organizations and individuals are also taking additional steps to avoid or reduce infection, including limiting travel, staying home, working from home and limiting participation in certain leisure activities.
We continue to monitor federal, state and local government recommendations and have made modifications to our normal operations as a result of COVID-19. If the negative economic effects of COVID-19 continue for a prolonged period of time, it could lead to a reduction in demand for our products, which would adversely affect our results of operations. Additionally, disruptions in the capital markets, as a result of the pandemic, may also adversely affect our ability to access capital and additional liquidity. The COVID-19 pandemic may also lead to disruptions in our supply chain, including our ability to obtain boats and parts from our suppliers, and labor shortages. DueTo date, we have not experienced any significant shortages of inventory, but due to the current macroeconomic environment, we are temporarily pausing acquisitionsCOVID-19 pandemic and non-essential capital expenditures.increased sales generally across the industry, there has been industry-wide supply chain constraints. It is possible that a significant shortage could occur as a result of the COVID-19 pandemic and its effects on, among other things, supply chains, operations and consumer demand. These measures are disrupting normal business operations and have had, and may continue to have, significant negative impacts on our business other businesses and financial markets worldwide.in the future. While we are implementing changes to mitigate the impact of COVID-19 on our business, it is not possible, at this time, to estimate the entirety of the effect that COVID-19 will have on our business, customers, suppliers or other business partners.
While we previously announced our decision to pause our acquisition strategy due to the COVID-19 pandemic, given our financial results for the year ended September 30, 2020, we are recommencing our acquisition strategy and opportunistically evaluating future acquisitions. See “Risk Factors—Our success depends, in part, on our ability to continue to make successful acquisitions at attractive or fair prices and to integrate the operations of acquired dealer groups and each dealer group we acquire in the future.”
Our failure to successfully order and manage our inventory to reflect consumer demand and to anticipate changing consumer preferences and buying trends, or the lack of inventory generally in the industry, could have a material adverse effect on our business, financial condition and results of operations.
Our success depends upon our ability to procure sufficient inventory for our needs and to successfully manage our inventory and to anticipate and respond to product trends and consumer demands in a timely manner. Our products appeal to consumers across a number of states who are, or could become, boat owners. The preferences of these consumers cannot be predicted with certainty and are subject to change. Further, the retail consumer industry, by its nature, is volatile and sensitive to numerous economic factors, including consumer preferences, competition, market conditions, general economic conditions and other factors outside of our control. For example, the recent increase in demand for marine retail products has led to industry-wide supply chain constraints. It is possible that a significant shortage could occur. We cannot predict consumer preferences with certainty, and consumer preferences often change over time. We typically order product several months in advance, although such orders are not binding until the merchandise is delivered to our stores. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends, increases or decreases in consumer demand or changes in prices. If we misjudge either the market for our products or our consumers’ purchasing habits in the future, our revenues may decline significantly and we may not have sufficient quantities of product to satisfy consumer demand or sales orders or we may be required to discount excess inventory, either of which could have a material adverse effect on our business, financial condition and results of operations.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| Item 3. | Defaults Upon Senior Securities |
None.
Not Applicable.
None.
EXHIBIT INDEX
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| Master Reorganization Agreement, dated as of February 11, 2020, by and among One Water Marine Holdings, LLC, One Water Assets & Operations, LLC, OneWater Marine Inc. and the other parties thereto (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| Amended and Restated Certificate of Incorporation of OneWater Marine Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020). |
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| Amended and Restated Bylaws of OneWater Marine Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020). |
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| Registration Rights Agreement,Incremental Amendment No. 1, dated as of February 11, 2020,2, 2021, by and among One Water Assets & Operations, LLC, One Water Marine Holdings, LLC, OneWater Marine Inc. , each of the other Guarantors from time to time party thereto, the Lenders party thereto and the stockholders named therein (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020). |
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| Indemnification Agreement (Austin Singleton)Administrative Agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 10, 2020)2, 2021). |
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| Indemnification Agreement (Anthony Aisquith)OneWater Marine Inc. 2021 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2Appendix A to the Registrant’s Current Report on Form 8-K,Company’s Proxy Statement, File No. 001-39213, filed with the Commission on February 10, 2020)January 13, 2021). |
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| Indemnification Agreement (Jack Ezzell) (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 10, 2020).
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| Indemnification Agreement (Christopher W. Bodine) (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 10, 2020).
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| Indemnification Agreement (Jeffrey B. Lamkin) (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 10, 2020).
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| Indemnification Agreement (Mitchell W. Legler) (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 10, 2020).
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| Indemnification Agreement (John F. Schraudenbach) (incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 10, 2020).
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| | Indemnification Agreement (Keith R. Style) (incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 10, 2020).
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| | Indemnification Agreement (John G. Troiano) (incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 10, 2020).
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| | Tax Receivable Agreement, dated as of February 11, 2020, by and among OneWater Marine Inc. and the TRA Holders and the Agents named therein (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| | Fourth Amended and Restated Limited Liability Company Agreement of One Water Marine Holdings, LLC, dated as of February 11, 2020 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| | Amended and Restated Credit and Guaranty Agreement, dated as of February 11, 2020, by and among the Company, certain of its subsidiaries, the various lenders from time to time party thereto and Goldman Sachs Specialty Lending Group, L.P., as administrative agent, collateral agent, syndication agent, documentation agent and lead arranger (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| | Sixth Amended and Restated Inventory Financing Agreement, dated as of February 11, 2020, by and among the Company, certain of its subsidiaries, the lenders party thereto from time to time and Wells Fargo Commercial Distribution Finance, LLC, in its individual capacity and as agent for the lenders and for itself (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| | OneWater Marine Inc. 2020 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| | Employment Agreement, dated as of February 11, 2020, between One Water Marine Holdings, LLC and Philip A. Singleton, Jr. (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| | Employment Agreement, dated as of February 11, 2020, between One Water Marine Holdings, LLC and Anthony Aisquith (incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| | Employment Agreement, dated as of February 11, 2020, between One Water Marine Holdings, LLC and Jack Ezzell (incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on February 18, 2020).
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| | Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.19 to the amendment to the Registrant’s Form S-1 Registration Statement (File No. 333-232639), originally filed with the Commission on July 12, 2019).
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| | Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.20 to the amendment to the Registrant’s Form S-1 Registration Statement (File No. 333-232639), originally filed with the Commission on July 12, 2019).
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| | Promissory Note, dated as of April 20, 2020, by and between One Water Assets & Operations, LLC and Hancock Whitney Bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on April 29, 2020).
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| | Promissory Note, dated as of April 20, 2020, by and between Bosun’s Assets & Operations, LLC and Hancock Whitney Bank (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on April 29, 2020).
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| | Promissory Note, dated as of April 21, 2020, by and between Midwest Assets & Operations, LLC and Hancock Whitney Bank (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on April 29, 2020).
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| | Promissory Note, dated as of April 22, 2020, by and between Singleton Assets & Operations, LLC and Hancock Whitney Bank (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on April 29, 2020).
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| | Promissory Note, dated as of April 22, 2020, by and between Legendary Assets & Operations, LLC and Hancock Whitney Bank (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on April 29, 2020).
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| | Promissory Note, dated as of April 22, 2020, by and between South Shore Lake Erie Assets & Operations, LLC and Hancock Whitney Bank (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on April 29, 2020).
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| | Promissory Note, dated as of April 22, 2020, by and between South Florida Assets & Operation, LLC and Hancock Whitney Bank (incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, File No. 001-39213, filed with the Commission on April 29, 2020).
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| | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
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| | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
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| | Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. |
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| | Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. |
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| | XBRL Calculation Linkbase Document. |
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| | XBRL Definition Linkbase Document. |
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| | XBRL Labels Linkbase Document. |
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| | XBRL Presentation Linkbase Document. |
| † | Compensatory plan or arrangement. |
# | Specific terms in this exhibit (indicated therein by asterisks) have been omitted because such terms are both not material and would likely cause competitive harm to the Company if publicly disclosed.
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¥ | Certain schedules and exhibits to this agreement have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission on request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ONEWATER MARINE INC. |
| (Registrant) |
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| By: | /s/ Philip Austin Singleton, Jr. |
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| Philip Austin Singleton, Jr. |
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| Chief Executive Officer |
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| By: | /s/ Jack Ezzell |
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| Jack Ezzell |
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| Chief Financial Officer |
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Date: May 13, 20207, 2021
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