UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
Commission File Number: 001-38632
SELECT INTERIOR CONCEPTS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
400 Galleria Parkway, Suite 1760
Atlanta, Georgia
(Address of principal executive offices)
47-4640296
(I.R.S. Employer
Identification No.)
30339
(Zip Code)
Registrant’s telephone number, including area code: (888) 701-4737
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, par value $0.01 per share
Trading
Symbol(s)
SIC
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☐
☐
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Accelerated filer
Smaller reporting company
☒
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The
Nasdaq Stock Market on June 30, 2019, was $285.7 million.
The number of shares of Registrant’s Common Stock outstanding as of March 1, 2020 was 25,181,857.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant’s Definitive Proxy Statement relating to its 2020 Annual Meeting of Stockholders (to be filed with the U.S. Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Annual Report) are incorporated by reference into Part III of this Annual Report on Form 10-K, as indicated herein.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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Special Note Regarding Forward-Looking Statements and Information
This Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (which we refer to as this “Annual Report”) contains forward-
looking statements and cautionary statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs,
projections, forecasts, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical
facts. Some of the forward-looking statements can be identified by the use of terms such as “may,” “intend,” “might,” “plan,” “can,” “will,” “should,”
“could,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “goal,” “predict,” “project,” “potential,” or the negative of these terms, and
similar expressions. These forward-looking statements are subject to risks, contingencies, and uncertainties that are beyond our control. Further, new
factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that
may cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the
following:
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the cyclical nature of our businesses and the seasonality of the building products supply and services industry;
our dependency upon the homebuilding industry, repair and remodel activity, the economy, the credit markets, and other important factors;
general economic and financial conditions;
competition in our highly fragmented industry and the markets in which we operate;
exposure to warranty, casualty, construction defect and various other claims and litigation;
product shortages, loss of key suppliers, our dependence on third-party suppliers and manufacturers, and the development of alternatives to
distributors in the supply chain;
changes in the costs of the products we install;
ability to implement our business strategies and achieve our growth objectives;
acquisition and integration risks;
increased operating costs;
the impact of inflation and deflation;
our inability to attract and retain highly skilled employees;
adverse credit and financial markets events and conditions;
credit sale risks;
retention of key personnel;
performance of individual locations;
environmental, health and safety laws and regulations;
the impact of federal, state and local regulations;
computer data processing systems;
our inability to cancel before the end of the term or renew many of the leases for our facilities;
the loss of our significant customers or a reduction in the quantity of products they purchase;
requirements of being a public company;
risks related to our internal controls;
the possibility of securities litigation;
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restrictions relating to our operations in our current and future financing arrangements;
our inability to obtain additional capital on acceptable terms, if at all;
increases in interest rates; and
risks related to other factors discussed under “Risk Factors” and elsewhere in this Annual Report.
You should read this Annual Report completely and with the understanding that actual future results may be materially different from expectations
expressed in any forward-looking statements. All forward-looking statements made in this Annual Report are qualified by these cautionary statements.
These forward-looking statements are made only as of the date of this Annual Report, and we do not undertake any obligation, other than as may be
required by law, to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise,
or changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends, or provide indications of future performance,
and should only be viewed as historical data.
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Item 1. Business.
Company Overview
PART I
Select Interior Concepts, Inc. (collectively with all of its subsidiaries, “SIC,” the “Company,” “we,” “us” and “our”) is an installer and nationwide
distributor of interior building products with market positions in residential interior design services.
Through our Residential Design Services (which we refer to as “RDS”) operating segment, we serve national and regional homebuilders by
providing an integrated, outsourced solution for the design, consultation, sourcing, distribution and installation needs of their homebuyer customers.
Through our 18 design centers, our designers work closely with homebuyers in the selection of a broad array of interior products and finishes, including
flooring, cabinets, countertops, wall tile, and related interior items, primarily for newly constructed homes. We then coordinate the ordering, fulfillment and
installation of many of these interior products to provide a streamlined experience for the homebuyer. With our design centers and our product sourcing and
installation capabilities, we enable our homebuilder customers to outsource critical aspects of their business to us, thereby increasing their sales,
profitability, and return on capital.
We also have leading market positions in the selection and importation of natural and engineered stone slabs for kitchen and bathroom countertops
and specialty tiles through our Architectural Surfaces Group (which we refer to as “ASG”) operating segment. ASG sources natural and engineered stone
from a global supply base, and markets these materials through a national network of distribution centers and showrooms at 23 different locations. In
addition to serving the new residential and commercial construction markets with these materials, we also distribute them to the repair and remodel (which
we refer to as “R&R”) market.
Our History
The SIC platform originated in September 2014, when affiliates of Trive Capital Management LLC (which we refer to as “Trive Capital”) acquired
RDS, which in turn acquired the assets of PT Tile Holdings, LP (which we refer to as “Pinnacle”) in February 2015, and 100% of the equity interests in
Greencraft Holdings, LLC (which we refer to as “Greencraft”) in December 2017. RDS then acquired the assets of Summit Stoneworks, LLC (which we
refer to as “Summit”) in August 2018, 100% of the equity interests in T.A.C. Ceramic Tile Co. (which we refer to as “TAC”) in December 2018, and
acquired the assets of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively, “Intown”) in March 2019.
Affiliates of Trive Capital also formed a consolidation platform in the stone countertop market by acquiring 100% of the equity interests in
Architectural Granite & Marble, LLC in June 2015, which in turn acquired the assets of Bermuda Import-Export, Inc. (which we refer to as “Modul”) in
July 2016, 100% of the equity interests in Pental Granite and Marble, LLC (which we refer to as “Pental”) in February 2017, and the assets of Cosmic
Stone & Tile Distributors, Inc. (which we refer to as “Cosmic”) in October 2017, and these acquired businesses were combined to form ASG. ASG then
acquired the assets of Elegant Home Design, LLC (which we refer to as “Bedrock”) in January 2018, the assets of NSI, LLC (which we refer to as “NSI”)
in March 2018, and the assets of The Tuscany Collection, LLC (which we refer to as “Tuscany”) in August 2018.
November 2017 Restructuring Transactions
In November 2017, Select Interior Concepts, Inc. and the former equity holders of RDS and ASG completed a series of restructuring transactions
(collectively, the “November 2017 restructuring transactions”) pursuant to which Select Interior Concepts, Inc. acquired all of the outstanding equity
interests in each of RDS and ASG, including all of their respective wholly-owned subsidiaries. Following the November 2017 restructuring transactions,
Select Interior Concepts, Inc. became a holding company that wholly owns RDS and ASG.
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Residential Design Services
RDS enters into exclusive service agreements with homebuilders at the beginning of certain new community development projects to provide them
with a single-source solution for the design center operations, consultation, sourcing, fulfillment, and installation phases of the homebuilding process. At
our design centers, our design staff work directly with homebuyers to help them achieve their design, styling, and product needs, leveraging our web-based
preference analysis and proprietary software system to enable real-time pricing of interior options.
During the initial design phase of a new residential development, RDS often assists builders with upfront planning of design elements and interior
options. These alternatives then become the standard packages and design options which are the basis from which the new homebuyer makes upgrade
selections. During the initial construction phase, RDS offers a full suite of interior customization options to homebuyers in its design centers, providing the
opportunity to upgrade to higher priced options that are not part of the homebuilder’s standard package. These upgrades result in higher revenue and
profitability for both RDS and the homebuilder, who shares in the incremental revenue from any upgrades. RDS also provides installation services,
ensuring that the finished product meets the homebuyer’s specifications.
RDS’ collection of design options enables homebuyers to customize their homes with high quality interior finishes and provides homebuilders with
a single partner to handle the majority of the interior design elements in a new home. RDS offers numerous interior surface categories which includes
flooring, cabinets, countertops and wall tile.
Architectural Surfaces Group
Our ASG segment imports and distributes natural and engineered stone slabs, as well as tile, through 23 strategically positioned showrooms and
warehouse locations across the United States. Our stone slabs include marble, granite, porcelain and quartz, for use as kitchen and bathroom countertops,
and our tiles consist of ceramic and porcelain for flooring, backsplash, and wall tile applications. We provide our services throughout markets in the
Northeast, Southeast, Southwest, Midwest, Mountain West, and West Coast regions of the United States and offer a targeted merchandising strategy,
including displaying our products in customer-oriented showrooms that cater to professional interior designers and architects as well as homeowners. Our
product lines are tailored to the specific geographic regions that we serve.
We have relationships with a wide array of stone slab quarries, manufacturers and distributors around the world and offer our customers a broad
and consistent selection of high-quality stone slabs from a global supply chain.
Competition
Our markets are highly fragmented and competitive. We face competition from large home improvement stores, national and regional interior
surface retailers and distributors, and independent design centers. Some of our competitors are organizations that are larger, are better capitalized, have
operated longer, have product offerings that extend beyond our product suite, and have a more established market presence with substantially greater
financial, marketing, personnel, and other resources than we have. In addition, while we believe that there is a relatively low threat of new internet-only
entrants due to the nature of our products, the growth opportunities presented by e-commerce could outweigh these challenges and result in increased
competition.
Suppliers
We purchase materials from both domestic and foreign suppliers. We have relationships with qualified suppliers who allow us to access products
in a timely and efficient manner and have not historically experienced significant disruption in supply of the products we purchase. In some instances, we
have agreements with our suppliers, but these agreements are generally terminable by either party without notice or on limited notice. Many of our
suppliers also offer us favorable terms based on the volume of our purchases.
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Backlog
Backlog represents the transaction price for contracts for which work has not been performed and excludes unexercised contract options and
potential modifications. Backlog is not a guarantee of future revenues as contractual commitments may change. There can be no assurance that backlog will
result in revenues within the expected timeframe, if at all. We estimate backlog was $574.3 million as of December 31, 2019 and $409.1 million as of
December 31, 2018.
Customer Concentration
For the years ended December 31, 2018, and 2017, the Company recognized revenue from one customer which accounted for 11.4% and 12.6% of
total revenue, respectively. There was no customer that accounted for over 10% of total revenue for the year ended December 31, 2019. There were no
customers that accounted for 10% or more of total accounts receivable, as of December 31, 2019 and 2018.
Cyclicality and Seasonality
Our businesses are both cyclical and seasonal based on the homebuilding industry in the markets we serve. Because of the timing of installation of
our major product lines, which are mainly installed near the end of the construction process, as well as overall housing seasonality for our RDS segment,
our sales activity for the RDS segment is normally weighted toward the second half of the calendar year.
Homebuilding-based businesses are also generally cyclical. Our financial performance will be impacted by economic changes nationally and
locally in the markets we serve. The building products supply industry is dependent on new home construction and subject to cyclical market pressures.
Our operations are subject to fluctuations arising from changes in supply and demand, national and international economic conditions, labor costs,
competition, government regulation, trade policies, and other factors that affect the homebuilding industry such as demographic trends, interest rates,
single-family housing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors and homeowners.
After the dramatic recession that ran from 2007 to 2009, there have been ten straight years of relatively steady growth. While we believe that the
underlying fundamentals of demand for new housing units and residential investment are indicative of continued growth into the future, there can be no
assurance that macroeconomic or other factors will not change unexpectedly and cause a downturn in housing construction.
Employees
As of December 31, 2019, we employed a total of approximately 1,850 employees. None of these employees is a party to a collective bargaining
agreement.
Executive Officers
See Item 10. Directors, Executive Officers of the Registrant, and Corporate Governance.
Government Regulation
We are subject to various federal, state and local laws and regulations applicable to our businesses generally in the jurisdictions in which we
operate, including those relating to employment, import and export, public health and safety, work place safety, product safety, transportation, zoning, and
the environment. We operate our businesses in accordance with standards and procedures designed to comply with applicable laws and regulations, and we
believe that we are in compliance in all material respects with such laws and regulations.
Insurance and Risk Management
We use a combination of insurance policies specific to particular purposes to provide us with protection against potential liability for workers’
compensation, general liability, product liability, director and officers’ liability, employer’s liability, property damage, auto liability, and other casualty and
property risks. Changes in legal
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trends and interpretations, variability in inflation rates, changes in workers’ compensation and general liability premiums and deductibles, changes in the
nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and changes in discount
rates could all affect ultimate settlements of claims. We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of
coverage.
Legal Proceedings
From time to time, we are involved in various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While the
outcomes of these matters are generally not presently determinable, we do not believe that any of these proceedings, individually or in the aggregate, would
be expected to have a material adverse effect on our financial position, results of operations or cash flows.
Intellectual Property
We possess proprietary knowledge and software programs, as well as registered trademarks that are important to our businesses. We make, and will
continue to make, efforts to protect our intellectual property rights; however, the actions taken by us may be inadequate to prevent others from using similar
intellectual property. In addition, third parties may assert claims against our use of intellectual property and we may be unable to successfully resolve such
claims.
Available information
Our internet website address is www.selectinteriorconcepts.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge
through our website as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Our Code of Business Conduct and
Ethics and the charters of the Audit, Compensation, and Nominating and Corporate Governance Committees of our Board of Directors are also posted on
our website. Each of these documents is also available in print to any stockholder who requests it.
Item 1A. Risk Factors.
Risks Related to Our Business and Industry
The industry in which we operate is dependent upon the U.S. residential homebuilding industry, repair and remodel activity, the economy, the credit
markets, and other important factors, many of which are beyond our control.
The building products supply and services industry in the United States is highly dependent on new home construction and the R&R market, which
in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates, wage rates, foreclosure rates, housing
inventory levels, housing demand, the availability of land, local zoning and permitting processes, the availability of construction financing and the health of
the economy and mortgage markets. Unfavorable changes in demographics, credit markets, consumer confidence, health care costs, housing affordability,
housing inventory levels, a weakening of the national economy or of any regional or local economy in which we operate and other factors beyond our
control could adversely affect consumer spending, result in decreased demand for homes and adversely affect our businesses.
The U.S. homebuilding industry underwent a significant downturn that began in mid-2006 and began to stabilize in late 2011. The downturn in the
homebuilding industry resulted in a substantial reduction in demand for our products and services, which in turn had a significant adverse effect on our
businesses during that time. There is significant uncertainty regarding the timing and extent of recovery in home construction and R&R activity and
resulting product demand levels, and any decline may materially adversely affect our businesses, financial condition, operating results, and cash flows. For
example, some analysts project that the demand for residential construction may be negatively impacted as the number of renting households has increased
in recent years and a shortage in the
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supply of affordable housing is expected to result in lower home ownership rates. Further, even if homebuilding activity fully recovers, the impact of such
recovery on our businesses may be dampened if the average selling price or average size of new single-family homes decreases, which could cause
homebuilders to decrease spending on our products and services.
We also rely on home R&R activity. High unemployment levels, high mortgage delinquency and foreclosure rates, lower home prices, limited
availability of mortgage and home improvement financing, and significantly lower housing turnover may restrict consumer spending, particularly on
discretionary items such as home improvement projects, and affect consumer confidence levels leading to reduced spending in the R&R end market.
Furthermore, with even a slight decline in the economy, nationally or in any of the markets in which we operate, consumer preferences and purchasing
practices and the strategies of our customers may adjust in a manner that could result in changes to the nature and prices of products demanded by the end
consumer and our customers and could adversely affect our businesses and results of operations.
In addition, beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of credit
quality deterioration. The disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to a
tighter credit market and stricter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders, as well as for the
development of new residential lots, continue to be constrained compared to pre-2007 levels. As the housing industry is dependent upon the economy as
well as potential homebuyers’ access to mortgage financing and homebuilders’ access to commercial credit, the housing industry may not fully recover to
pre-2007 levels. Prolonged weakness or another downturn in the homebuilding industry would have a significant adverse effect on our businesses, financial
condition, and results of operations.
A significant portion of our, and in particular RDS’s, business is in the state of California. A slowdown in the economy or a decline in homebuilding
activity in California, or the occurrence of a natural disaster, could have a disproportionately negative effect on our business, financial condition,
operating results, and cash flows.
A significant portion of RDS’s business is in the state of California. In 2019 and 2018, we derived approximately 39% and 51%, respectively, of
our consolidated net revenue, and RDS derived approximately 52% and 78%, respectively, of its net revenue, from customers in California. We expect that
a significant portion of our and RDS’s revenue will continue to depend on sales within the State of California for the foreseeable future. As such, we are
more susceptible to adverse developments in California than competitors with more diversified operations or if RDS had a more geographically diverse
business. A slowdown in the economy, or a decline in homebuilding activity, in California could have a disproportionately negative effect on our business,
financial condition, operating results and cash flows. In addition, California has historically been at greater risk of certain natural disasters and other risks,
such as earthquakes, wildfires, droughts, mudslides, and civil disturbances. At times, these events have disrupted parts or all of the California economy.
A significant decline in the general economy or the new home construction or R&R markets, and/or a deterioration in expectations regarding the
homebuilding market, could cause us to record significant non-cash impairment charges, which could negatively affect our earnings and reduce
stockholders’ equity.
A significant decline in the general economy or the new home construction or R&R markets, and/or a deterioration in expectations regarding the
homebuilding market, could cause us to record significant non-cash, pre-tax impairment charges for goodwill or other long-lived assets, which are not
determinable at this time and which could negatively affect our earnings and reduce stockholders’ equity. In addition, as a result of our acquisition strategy,
we have recorded goodwill and may incur impairment charges in connection with prior and future acquisitions. If the value of goodwill or other intangible
assets is impaired, our earnings and stockholders’ equity would be adversely affected.
Our businesses are cyclical and significantly affected by changes in general and local economic conditions.
The building products supply and services industry is subject to cyclical market pressures. Demand for our products and services is highly sensitive
to general and local economic conditions over which we have no control, including changes in:
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the number of new home and commercial building construction starts;
the production schedules of our homebuilder customers;
short- and long-term interest rates;
inflation;
employment levels and job and personal income growth;
housing demand from population growth, household formation and other demographic changes;
availability and pricing of mortgage financing for homebuyers and commercial financing for developers of multi-family homes and
subcontractors;
consumer confidence generally and the confidence of potential homebuyers in particular;
U.S. and global financial and political system and credit market stability;
private party and government mortgage loan programs and federal and state regulation, oversight and legal action regarding lending,
appraisal, foreclosure and short sale practices;
federal and state personal income tax rates and provisions, including provisions for the deduction of mortgage loan interest payments, real
estate taxes and other expenses;
federal, state and local energy efficiency programs, regulations, codes and standards; and
general economic conditions in the markets in which we compete.
Unfavorable changes in these conditions could adversely affect consumer spending, result in decreased demand for homes, and adversely affect our
businesses generally. Any deterioration in economic conditions or increased uncertainty regarding economic conditions could have a material adverse effect
on our businesses, financial condition, results of operations, and prospects.
The building products supply and services industry is seasonal and affected by weather-related conditions.
Our industry is seasonal. Seasonal changes and other weather-related conditions can adversely affect our businesses and operations through a
decline in both the use of our products and demand for our services. Although weather patterns affect our operating results throughout the year, our first
and fourth quarters have historically been, and are generally expected to continue to be, the most adversely affected by weather patterns in some of our
markets, causing reduced construction activity. To the extent that severe weather conditions, such as unusually prolonged cold conditions, hurricanes,
severe storms, earthquakes, floods, fires, droughts, other natural disasters or similar events occur in the markets in which we operate, construction or
installation activity could be reduced, delayed or halted and our businesses may be adversely affected.
In addition, the levels of fabrication, distribution, and installation of our products generally follow activity in the construction industry, which
typically occurs in the spring, summer and fall. Warmer and drier weather during the second and third quarters typically result in higher activity and
revenue levels during those quarters. Markets in which we operate that are impacted by winter weather, such as snow storms and extended periods of rain,
experience a slowdown in construction activity during the beginning and the end of each calendar year, and this winter slowdown contributes to
traditionally lower sales in our first and fourth quarters.
Our industry and the markets in which we operate are highly fragmented and competitive, and increased competitive pressure may adversely affect our
businesses, financial condition, results of operations, and cash flows.
The building products supply and services industry is highly fragmented and competitive. We face significant competition from local, regional and
national building materials chains, design centers, fabricators, and subcontractors, as well as from privately-owned single-site enterprises. Competition
varies depending on product line, type of customer and geographic area. Any of these competitors may (i) foresee the course of market development more
accurately than we do, (ii) offer products and services that are deemed superior to ours, (iii) have
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the ability to produce or supply similar products and services at a lower cost, (iv) install building products at a lower cost, (v) develop stronger relationships
with suppliers, fabricators, homebuilders, and other customers in our markets, (vi) develop a superior network of distribution centers in our markets,
(vii) adapt more quickly to new technologies, new installation techniques, or evolving customer requirements, or (viii) have access to financing on more
favorable terms than we can obtain. As a result, we may not be able to compete successfully with our competitors. In addition, home center retailers, which
have historically concentrated their sales efforts on retail consumers and small contractors, may in the future intensify their marketing efforts to
professional homebuilders. Furthermore, certain product manufacturers sell and distribute their products directly to production homebuilders. The volume
of such direct sales could increase in the future. Additionally, manufacturers and specialty distributors who sell products to us may elect to sell and
distribute directly to homebuilders in the future or enter into exclusive supplier arrangements with other distributors. Consolidation of production
homebuilders may result in increased competition for their business. Finally, we may not be able to maintain our operating costs or product prices at a level
sufficiently low for us to compete effectively. If we are unable to compete effectively, our financial condition, results of operations, and cash flows may be
adversely affected.
Our customers consider the performance and quality of the products we distribute, our customer service and price when deciding whether to use
our services or purchase the products we distribute. Excess industry capacity for certain products in several geographic markets could lead to increased
price competition. We may be unable to maintain our operating costs or product prices at a level that is sufficiently low for us to compete effectively. If we
are unable to compete effectively with our existing competitors or new competitors enter the markets in which we operate, our financial condition, results
of operations, and cash flows may be adversely affected.
Furthermore, in the event that increased demand leads to higher costs for the products we install, we may have limited, if any, ability to pass on
cost increases in a timely manner or at all due to the fragmented and competitive nature of our industry, which may lead to an adverse effect on our
financial condition, results of operations, and cash flows.
We are exposed to warranty, casualty, construction defect, contract, tort, employment and other claims, and legal proceedings related to our businesses,
the products we distribute, the services we provide, and services provided for us by third parties.
In the ordinary course of business, we are subject to various claims and litigation. Any such claims, whether with or without merit, could be time
consuming and expensive to defend and could divert management’s attention and resources. As a subcontractor, we are regularly subject to construction
defects claims on various housing tracts. We may not always be able to successfully defend or be excused from the lawsuits related to these claims and
could be subject to substantial losses.
We are also from time to time subject to casualty, contract, tort and other claims relating to our businesses, the products we have distributed in the
past or may in the future distribute, and the services we have provided in the past or may in the future provide, either directly or through third parties. If any
such claim were adversely determined, our financial condition, results of operations, and cash flows could be adversely affected if we were unable to seek
indemnification for such claims or were not adequately insured for such claims. We rely on manufacturers and other suppliers to provide us with the
products we sell or distribute. Since we do not have direct control over the quality of products that are manufactured or supplied to us by third-parties, we
are particularly vulnerable to risks relating to the quality of such products.
In addition, we are exposed to potential claims arising from the conduct of our employees, builders and their subcontractors, and third-party
installers for which we may be liable. We and they are subject to regulatory requirements and risks applicable to general contractors, which include
management of licensing, permitting and quality of third-party installers. As they apply to our businesses, if we fail to manage these processes effectively
or provide proper oversight of these services, we could suffer lost sales, fines and lawsuits, as well as damage to our reputation, which could adversely
affect our businesses and results of operations.
9
Product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, our dependence on third-party suppliers and
manufacturers, or the development of alternatives to distributors in the supply chain, could adversely affect our businesses, financial condition, results
of operations, and cash flows.
Our ability to offer a wide variety of products to our customers is dependent upon our ability to obtain adequate product supply from manufacturers
and other suppliers. Generally, our products are obtainable from various sources and in sufficient quantities to meet our operating needs. However, the loss
of, or a substantial decrease in the availability of, products from our suppliers or the loss of key supplier arrangements could adversely impact our
businesses, financial condition, results of operations, and cash flows. In prior downturns in the housing industry, manufacturers have reduced capacity by
closing plants and production lines within plants. Even if such capacity reductions are not permanent, there may be a delay in manufacturers’ ability to
increase capacity in times of rising demand. If the demand for products from manufacturers and other suppliers exceeds the available supply, we may be
unable to source additional products in sufficient quantity or quality in a timely manner and the prices for the products that we install could rise. These
developments could affect our ability to take advantage of market opportunities and limit our growth prospects.
Our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and our need to
access products in a timely and efficient manner is a significant challenge. Our ability to access products also can be adversely affected by the financial
instability of suppliers, suppliers’ non-compliance with applicable laws, tariffs and import duties, supply disruptions, shipping interruptions or costs, and
other factors beyond our control, including disruptions related to the coronavirus. The loss of, or a substantial decrease in the availability of, products from
our suppliers or the loss of key supplier arrangements could adversely impact our financial condition, results of operations, and cash flows.
Although in some instances we have agreements with our suppliers, these agreements are generally terminable by either party without notice or on
limited notice. Many of our suppliers also offer us favorable terms based on the volume of our purchases. If market conditions change, suppliers may stop
offering us favorable terms. Failure by our suppliers to continue to supply us with products on favorable terms, commercially reasonable terms, or at all,
could put pressure on our operating margins or have a material adverse effect on our financial condition, results of operations, and cash flows.
In addition, our larger customers, such as homebuilders, fabricators, and dealers, could begin purchasing more of their product needs directly from
manufacturers, which would result in decreases in our net sales and earnings. Our suppliers could invest in infrastructure to expand their own sales forces
and sell more products directly to our customers, which also would negatively impact our businesses. These changes in the supply chain could adversely
affect our financial condition, results of operations, and cash flows.
A material disruption at one of our suppliers’ facilities or loss of a supplier relationship could prevent us from meeting customer demand, reduce our
sales and negatively affect our overall financial results.
Any of the following events could cease or limit our or our suppliers’ operations unexpectedly: fires, floods, earthquakes, hurricanes, on-site or off-
site environmental incidents or other catastrophes; utility and transportation infrastructure disruptions; labor difficulties; other operational problems; war,
and acts of terrorism; pandemics and other global health crises; or other unexpected events. Any downtime or facility damage at our suppliers could prevent
us from meeting customer demand for our products or require us to make more expensive purchases from a competing supplier. If our suppliers were to
incur significant downtime, our ability to satisfy customer requirements could be impaired, resulting in customers seeking products from other distributors
as well as decreased customer satisfaction and lower sales and operating income. In addition, a loss of a supplier relationship could harm our operations.
Because we purchase from a limited number of suppliers, the effects of any particular shutdown or facility damage or loss of a supplier relationship could
be significant to our operations.
In addition, our suppliers’ inability to produce or procure the necessary raw materials to supply finished goods to us may adversely impact our
results of operations, cash flows, and financial position.
10
If we fail to qualify for supplier rebates or are unable to maintain or adequately renegotiate our rebate arrangements, our gross margins and income
could be adversely affected.
Many of our products, such as flooring, tile and finish carpentry, are purchased pursuant to rebate arrangements that entitle us to receive a rebate
based on the volume of our purchases. Such arrangements generally require us to purchase minimum quantities in certain geographies or product categories
and result in higher rebates with increased quantities of purchases. These rebates effectively reduce the costs of our products and we manage our businesses
to take advantage of these programs. When assessing the desirability of acquisitions, we consider the effects of such acquisitions on our ability to qualify
for rebates. Rebate arrangements are subject to renegotiation with our suppliers from time to time. In addition, consolidation of suppliers may result in the
reduction or elimination of rebate programs in which we participate. If we are unable to qualify for these rebates, are unable to renew rebate programs on
desirable terms or are unable to obtain the expected rebate benefits of our acquisitions, or a supplier materially reduces or stops offering rebates, our costs
could increase and our gross margins and income could be adversely affected.
Changes in product mix or the costs of the products we install can decrease our profit margins.
The principal building products that we distribute and install have been subject to price changes in the past, some of which have been significant.
Our operating results for individual quarterly periods can be, and have been, adversely affected by a delay between when building product cost increases
are implemented and when we are able to increase prices for our products and services, if at all. Our supplier purchase prices often depend on volume
requirements. If we do not meet these volume requirements, our costs could increase and our margins may be adversely affected. In addition, while we
have been able to achieve cost savings through volume purchasing and our relationships with suppliers, we may not be able to continue to receive
advantageous pricing for the products that we supply, which could have a material adverse effect on our financial condition, results of operations, and cash
flows.
Our profitability is also impacted by the mix of products that we install. Recent trends indicate more of our homebuilder customers are moving to
entry- to mid-level homes with less upgrades. There can be no assurance that the current product mix will continue, and any shift to options with lower
profit margin could adversely impact our businesses, financial condition, results of operations, and cash flows.
Political and economic uncertainty and unrest in foreign countries where our suppliers are located could adversely affect our operating results.
In 2019, approximately 43% and 1% of ASG’s purchased goods came from products that were obtained directly from suppliers located in Vietnam
and China, respectively. We are subject to risks and uncertainties associated with changing economic and political conditions in these or other foreign
countries in which we source, or in the future may source, any of our products, such as:
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increased import duties, tariffs, trade restrictions, and quotas;
work stoppages;
economic uncertainties (including inflation);
adverse foreign government regulations, government control, or sudden changes in laws and regulations;
wars, fears of war, and terrorist attacks;
pandemics and other global crises; and
organizing activities and political unrest.
We cannot predict if, when, or the extent to which, the countries in which we source our products will experience any of the above events. Any
event causing a disruption, delay or cessation of imports from foreign locations would likely increase the cost or reduce the supply of products available to
us, and cause us to seek alternative sources for our products, which may only be available on less advantageous terms, and would adversely affect our
operating results.
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The importation of building materials into the United States could expose us to additional risk.
A significant portion of the building materials that we distribute and/or install come from foreign jurisdictions outside North America. Such
materials may be imported because they may not be available for domestic purchase in the United States or because there may be a shortfall of inventory
available locally. Despite our efforts to ensure the merchantability of these products, such products may not adhere to U.S. standards or laws. In addition,
pricing of these products can be impacted by changes to the relative value of the U.S. dollar over the applicable foreign currency in the long-term, which
could negatively impact our margins. Importation of such building materials could subject us to greater risk, including currency risk, and lawsuits by
customers or governmental entities.
We may be unable to effectively manage our inventory and working capital as our sales volume increases or the prices of the products we distribute
fluctuate, which could have a material adverse effect on our businesses, financial condition, and results of operations.
We purchase certain materials, including wood and laminate flooring, natural and engineered stone, and tile for wall and flooring applications, from
manufacturers or quarries, which are then sold to customers as an installed product or as a prefabricated and installed product. We must maintain and have
adequate working capital to purchase sufficient inventory to meet customer demand. Due to the lead times required by our suppliers, we order products in
advance of expected sales. As a result, we are required to forecast our sales and purchase accordingly. In periods characterized by significant changes in
economic growth and activity in the commercial and residential construction and home R&R end markets, it can be especially difficult to forecast our sales
accurately. We must also manage our working capital to fund our inventory purchases. Excessive increases in the market prices of certain products can put
negative pressure on our operating cash flows by requiring us to invest more in inventory. In the future, if we are unable to effectively manage our
inventory and working capital as we attempt to expand our businesses, or if we make changes to how we manage our payments to suppliers, our cash flows
may be negatively affected, which could have a material adverse effect on our businesses, financial condition, and results of operations.
We are subject to significant pricing pressures from homebuilders, contractors, fabricators, dealers and other customers.
Large homebuilders, contractors, fabricators, and dealers have historically been able to exert significant pressure on their outside suppliers and
distributors to keep prices low in the highly fragmented building products supply and services industry. In addition, continued consolidation in the
residential homebuilding industry and changes in builders’ purchasing policies and payment practices could result in even further pricing pressure. For
example, there has been a recent trend of large publicly-traded homebuilders acquiring other large homebuilders, which increases their market share and
buying power. Our homebuilder customers may be acquired by other homebuilders that we do not currently have relationships with, which may make it
difficult for us to maintain our current market share and margins. A decline in the selling prices of the products we distribute and the services we provide
could adversely impact our operating results. To the extent that our inventory at the time was purchased at higher costs, this could result in lower margins.
Alternatively, due to the rising market price environment, our suppliers may increase prices or reduce discounts on the products we distribute and we may
be unable to pass on any cost increase to our customers, thereby resulting in reduced margins and profits. Overall, these pricing pressures may adversely
affect our results of operations, and cash flows.
The loss of any of our significant customers or a reduction in the quantity of products they purchase could affect our financial health.
Our ten largest customers generated approximately 31% of our consolidated revenue for the year ended December 31, 2019. No one customer
generated more than 10% of our consolidated revenue for the year ended December 31, 2019. We cannot guarantee that we will maintain or improve our
relationships with these customers or that we will continue to supply these customers at historical levels. Due to the weak housing market over the past
several years relative to long-term averages, many of our homebuilder and fabricator customers substantially reduced their construction activity. Some
homebuilder customers exited or severely curtailed building activity in certain of our markets. In the future, additional homebuilder customers may exit or
decrease their building activity in one or more of our markets.
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Continued consolidation among homebuilders could also result in a loss of some of our present customers to our competitors. The loss of one or
more of our significant customers or deterioration in our existing relationships with any of our customers could adversely affect our financial condition,
results of operations, and cash flows.
Furthermore, our customers are not required to purchase any minimum amount of product from us. Should our customers purchase the products we
distribute or install in significantly lower quantities than they have in the past, or should the customers of any business that we acquire purchase products
from us in significantly lower quantities than they had prior to our acquisition of such business, such decreased purchases could have a material adverse
effect on our financial condition, results of operations, and cash flows.
In an attempt to diversify and expand its customer base, RDS may target smaller homebuilders. This exposes RDS to additional risks, such as
increased non-payment risk of those customers, especially during times of economic uncertainty and tight credit markets.
RDS’s customers may be affected by shortages in labor supply, increased labor costs or labor disruptions, which could have a material adverse effect on
our financial condition, results of operations, and cash flows.
Our customers require a qualified labor force to build homes and communities, and we require a qualified labor force to install our products in
those homes. Access to qualified labor and subcontractors by our customers and us may be affected by circumstances beyond their or our control,
including:
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shortages of qualified trades people, such as flooring, tile and cabinet installers, carpenters, roofers, electricians and plumbers, especially in
key markets;
changes in immigration laws and trends in labor force migration; and
increases in subcontractor and professional services costs.
Labor shortages can be further exacerbated if demand for housing increases. Any of these circumstances could also give rise to delays in the start
or completion of, or could increase the cost of, building homes. Such delays and cost increases would also have an effect on our ability to generate sales
from homebuyers and could have a material adverse effect on our businesses, financial condition, results of operations, and cash flows.
Our backlog estimates for our RDS segment may not be accurate and may not generate expected levels of future revenues or translate into profits.
Estimates of future financial results are inherently unreliable. Our backlog estimates of potential future revenue for our RDS segment require
substantial judgment and are based on a number of assumptions, including management’s current assessment of customer contracts that exist as of the date
the estimates are made and the expected revenue to be derived from sales related to remaining housing lots to be fulfilled under existing service agreements
for active residential developments. A number of factors could result in actual revenue being less than the amounts reflected in our estimates, such as
upgrade rates or upgrade amounts being lower than expected, or modification or cancellation of contracts by homebuilders. Actual rates and amounts may
differ from historical experiences used to estimate potential future revenue. Accordingly, there can be no assurance that we will actually generate the
specified revenue or that the actual revenue will be generated within the estimated period. If such revenue fails to materialize, we could experience a
reduction in revenue and a decline in profitability, which could result in a deterioration of our financial position and liquidity.
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We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect our relationship with
customers, the demand for our products and services and our market share.
It is difficult to predict successfully the products and services our customers will demand. The success of our businesses depends in part on our
ability to identify and respond promptly to changes in demographics, consumer preferences, expectations, needs and weather conditions, while also
managing inventory levels. For example, a significant portion of the product that we distribute is natural stone. If a natural stone product becomes
unavailable for any reason or the color and quality changes within the quarry we purchase from, we may not be able to replace that particular color or
quality with an acceptable alternative. In general, the products we sell are affected by style trends, customer preferences and changes thereto. Failure to
identify timely or effectively respond to changing consumer preferences, expectations, and building product needs could possibly result in obsolete or
devalued inventory, and adversely affect our relationship with customers, the demand for our products and services, and our market share.
The success of our businesses depends, in part, on our ability to execute on our growth strategy, which includes opening new branches and pursuing
strategic acquisitions.
Our long-term business strategy depends in part on increasing our sales and growing our market share through opening new branches, including
through our greenfield initiatives, and strategic acquisitions. A significant portion of our historical growth has occurred through acquisitions, and our
business plan provides for continued growth through acquisitions in the future. We are presently evaluating, and we expect to continue to evaluate on an
ongoing basis, a variety of possible acquisition transactions, including both smaller acquisitions and larger acquisitions that would be material. We cannot
predict the timing of any contemplated transactions, and there can be no assurances that we will identify suitable acquisition opportunities or, if we do
identify such opportunities, that any transaction can be consummated on acceptable terms. We may be unable to continue to grow our businesses through
acquisitions. Our recent growth and our acquisition strategy have placed, and will continue to place, significant demands on our management’s time, which
may divert their attention from our businesses, and may lead to significant due diligence and other expenses regardless of whether we pursue or
consummate any acquisition. Failure to identify suitable transaction partners and to consummate transactions on acceptable terms, as well as the
commitment of time and resources in connection with such transactions, could have a material adverse effect on our businesses, financial condition, and
results of operations. Additionally, we may not be able to finance acquisitions through acceptable financing terms or at all.
To a large extent, our growth strategy depends on RDS and ASG forming a strong, scalable platform. Our platform was formed in November 2017
and continues to be developed. There can be no assurance that we will be able to implement this platform across all, if any, markets, products and services
where we currently plan to grow.
Any inability to successfully integrate our recent or future acquisitions could have a material adverse effect on us.
Acquisitions typically require integration of the acquired companies’ sales and marketing, distribution, purchasing, finance and administrative
functions, as well as exposure to different legal and regulatory regimes in jurisdictions in which we have not previously operated. We may not be able to
integrate successfully any business we acquire into our existing business or may not be able to do so in a timely, efficient and cost-effective manner. Our
inability to complete the integration of new businesses in a timely and orderly manner could increase costs and lower profits. Factors affecting the
successful integration of acquired businesses include, but are not limited to, the following:
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our inability to manage acquired businesses or control integration costs and other costs relating to acquisitions;
diverting the attention of our management and that of the acquired business;
merging or linking different accounting and financial reporting systems and systems of internal controls;
merging computer, technology and other information networks and systems;
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assimilating personnel, human resources and other administrative departments and potentially contrasting corporate cultures;
failure to retain existing key personnel of the acquired businesses and recruit qualified new employees at new locations;
disrupting our relationship with, or loss of, key customers or suppliers;
incurring or guaranteeing additional indebtedness;
interfering with, or loss of momentum in, our ongoing business or that of the acquired company; and
delays or cost-overruns in the integration process.
Any of these acquisition or other integration-related issues could divert management’s attention and resources from our day-to-day operations,
cause significant disruption to our businesses, and lead to substantial additional costs. Our inability to realize the anticipated benefits of an acquisition or to
successfully integrate acquired companies as well as other transaction-related issues could have a material adverse effect on our businesses, financial
condition, and results of operations.
We may not be able to expand into new geographic markets, which may impact our ability to grow our businesses.
We intend to continue to pursue our growth strategy to expand into new geographic markets for the foreseeable future. Our expansion into new
geographic markets may present competitive, distribution and other challenges that differ from the challenges we currently face. In addition, we may be
less familiar with the customers in these markets and may ultimately face different or additional risks, as well as increased or unexpected costs, compared
to those we experience in our existing markets. We may also be unfamiliar with the labor force in these markets and may have difficulty finding and
retaining necessary skilled or qualified workers on acceptable terms, or at all. Expansion into new geographic markets may also expose us to direct
competition with companies with whom we have limited or no past experience as competitors. Furthermore, some of our customer and supplier agreements
may restrict the markets where we are able to distribute certain products, and these limitations could negatively impact our ability to achieve success in new
markets. To the extent we rely upon expanding into new geographic markets and do not meet, or are unprepared for, any new challenges posed by such
expansion, our future sales growth could be negatively impacted, our operating costs could increase, and our businesses, operations, and financial results
could be negatively affected.
We occupy many of our facilities under long-term non-cancellable leases, and we may be unable to renew our leases at the end of their terms.
Many of our facilities and distribution centers are located on leased premises. Many of our current leases are non-cancellable and typically have
initial terms ranging from one to 12 years, and most provide options to renew for specified periods of time. We believe that leases we enter into in the
future will likely be long-term and non-cancellable and have similar renewal options. If we close or idle a facility, we would most likely remain committed
to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent, insurance, taxes and other
expenses on the leased property for the balance of the lease term. The inability to terminate leases when idling a facility or exiting a geographic market can
have a significant adverse impact on our financial condition, results of operations, and cash flows.
In addition, at the end of the lease term and any renewal period for a facility, we may be unable to renew the lease without substantial additional
cost, if at all. If we are unable to renew our facility leases, we may close or relocate a facility, which could subject us to construction and other costs and
risks, which in turn could have a material adverse effect on our businesses and results of operations. In addition, we may not be able to secure a
replacement facility in a location that is as commercially viable, including easy access to transportation and shipping, as the lease we are unable to renew.
For example, closing a facility, even during the time of relocation, will reduce the sales that the facility would have contributed to our net revenue.
Additionally, the net revenue and profit, if any, generated at a relocated facility may not equal the net revenue and profit generated at the existing one.
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Natural or man-made disruptions to our facilities may adversely affect our businesses and operations.
We currently maintain a broad network of distribution facilities throughout the United States. Any widespread disruption to our facilities or those
of our suppliers resulting from fire, earthquake, weather-related events, an act of terrorism or any other cause could damage a significant portion of our
facilities and inventory and could materially impair our ability to distribute our products to customers. We could incur significantly higher costs and longer
lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a damaged facility. In addition,
any shortages of fuel or significant fuel cost increases could disrupt our ability to distribute products to our customers. Disruptions to the national or local
transportation infrastructure systems, including those related to a domestic terrorist attack, may also affect our ability to keep our operations and services
functioning properly. If any of these events were to occur, our financial condition, results of operations, and cash flows could be materially adversely
affected.
The implementation of new initiatives related to our operating software systems and related technology could disrupt our operations, and these
initiatives might not provide the anticipated benefits or might fail.
We have made, and we plan to continue to make, significant investments in our operating software systems and related technology. These
initiatives are designed to streamline our operations to allow our employees to continue to provide high quality service to our customers, while simplifying
customer interaction and providing our customers with a more interconnected purchasing experience. The cost and potential problems and interruptions
associated with the implementation of these initiatives, including those associated with managing third-party service providers and employing new web-
based tools and services, could disrupt or reduce the efficiency of our operations. In the event that we grow very rapidly, there can be no assurance that we
will be able to keep up, expand or adapt our IT infrastructure to meet evolving demand on a timely basis and at a commercially reasonable cost, or at all. In
addition, our new and upgraded technology might cost more than anticipated or might not provide the anticipated benefits, or it might take longer than
expected to realize the anticipated benefits or the initiatives might fail altogether. Because the success of our growth strategy depends in part on our IT
infrastructure, problems with any related initiatives may adversely affect our businesses, operations, and results of operations.
We are subject to cybersecurity risks, and a disruption or breach of our IT systems could adversely impact our businesses and operations.
We rely on the accuracy, capacity and security of our IT systems, some of which are managed or hosted by third parties, and our ability to
continually update these systems in response to the changing needs of our businesses. We have incurred costs and may incur significant additional costs in
order to implement security measures that we feel are appropriate to protect our IT systems. Our security measures are focused on the prevention, detection
and remediation of damage from computer viruses, natural or man-made disasters, unauthorized access, cyberattacks and other similar disruptions. Despite
our security measures, our IT systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other
disruptions. Any attacks on our IT systems could result in our systems or data being breached or damaged by computer viruses or unauthorized physical or
electronic access, which could lead to delays in receiving inventory and supplies or filling customer orders, and adversely affect our customer service and
relationships. Such a breach could result in not only business disruption, but also theft of our intellectual property or other competitive information or
unauthorized access to controlled data and any personal information stored in our IT systems. To the extent that any data is lost or destroyed, or any
confidential information is inappropriately disclosed or used, it could adversely affect our competitive position or customer relationships. In addition, any
such access, disclosure or other loss of information could result in legal claims or proceedings, damage our reputation, and cause a loss of confidence in our
businesses, products and services, which could adversely affect our businesses, financial condition, profitability, and cash flows.
To date, we do not believe we have experienced a material breach of our IT systems. As cyber-attacks become more sophisticated generally, we
may be required to incur significant costs to strengthen our systems from outside intrusions and/or maintain insurance coverage related to the threat of such
attacks. While we have implemented administrative and technical controls and taken other preventive actions to reduce the risk of cyber incidents and
protect our IT, they may be insufficient to prevent physical and electronic break-ins, cyber-attacks, or other security breaches to our computer systems.
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We depend on key personnel.
Our success depends to a significant degree upon the contributions of certain key personnel and other members of our management team, each of
whom would be difficult to replace. If any of our key personnel were to cease employment with us, our operating results could suffer. Further, the process
of attracting and retaining suitable replacements for key personnel whose services we may lose would result in transition costs and would divert the
attention of other members of our senior management from our existing operations. The loss of services from key personnel or a limitation in their
availability could materially and adversely impact our businesses, prospects, liquidity, financial condition and results of operations. Further, such a loss
could be negatively perceived in the capital markets. We have not obtained and do not expect to obtain key man life insurance that would provide us with
proceeds in the event of death or disability of any of our key personnel.
An inability to attract and retain highly skilled employees could adversely affect our businesses.
To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense. We have, from time
to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications, such as build
tradesmen for finish carpentry and for installation of tile, flooring and cabinets. Many of the companies with which we compete for experienced personnel
have greater resources than us. If we hire employees from competitors or other companies, their former employers may attempt to assert that these
employees or we have breached their legal obligations, resulting in a diversion of our time and resources. If we fail to attract new personnel or fail to retain
and motivate our current personnel, our businesses and future growth prospects could be adversely affected.
RDS’s business and results of operations are significantly dependent on the availability and skill of subcontractors.
We engage subcontractors to perform the installation of the products that we sell to our customers. Accordingly, the timing and quality of our
installations depends on the availability and skill of our subcontractors. While we believe that our relationships with subcontractors are good, we generally
do not have long-term contractual commitments with any subcontractors, and we can provide no assurance that skilled subcontractors will continue to be
available at reasonable rates and in our markets. Competition for skilled contractors can be significant in our markets. The inability to contract with skilled
subcontractors at reasonable rates and on a timely basis could have a material adverse effect on our business, results of operations, and financial condition.
Despite our quality control efforts, we may discover that our subcontractors have failed to adhere to proper construction practices or improperly
installed materials in the homes of our customers. The adverse costs of satisfying our warranty and other legal obligations in these instances may be
significant and we may be unable to recover the costs of warranty-related repairs from subcontractors, suppliers and insurers, which could have a material
impact on our business, results of operations, and financial condition.
If any of RDS’s subcontractors are characterized as employees, we would be subject to employment and withholding liabilities.
We structure our relationships with our subcontractors in a manner that we believe results in an independent contractor relationship, not an
employee relationship. An independent contractor is generally distinguished from an employee by his or her degree of autonomy and independence in
providing services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control is
generally indicative of an employment relationship. Although we believe that our subcontractors are properly characterized as independent contractors, tax
or other regulatory authorities may in the future challenge our characterization of these relationships. If such regulatory authorities or state, federal or
foreign courts were to determine that our subcontractors are employees, and not independent contractors, we would be required to withhold income taxes,
to withhold and pay social security, Medicare and similar taxes, and to pay unemployment and other related payroll taxes. We would also be liable for
unpaid past taxes and subject to penalties. As a result, any determination that these subcontractors are employees could have a material adverse effect on
our business, financial condition, and results of operations.
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Changes in employment laws may adversely affect our businesses.
Various states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and, from time to
time, the U.S. Congress and Department of Homeland Security consider and implement changes to federal immigration laws, regulations or enforcement
programs. These changes may increase our compliance and oversight obligations, which could subject us to additional costs and make our hiring process
more cumbersome or reduce the availability of potential employees. Although we take steps to verify the employment eligibility status of all our
employees, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to deportation and may
subject us to fines or penalties and, if any of our workers are found to be unauthorized, we could experience adverse publicity that negatively impacts our
brand and may make it more difficult to hire and retain qualified employees. Termination of a significant number of employees who were unauthorized
employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity.
We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal
and state immigration laws. These factors could have a material adverse effect on our businesses, financial condition, and results of operations.
Changes in legislation and government policy may have a material adverse effect on our businesses in the future.
Dynamic changes in legislation and government policy may have a material adverse effect on our business. Specifically, with an upcoming
presidential election in November 2020, proposed legislation and regulatory changes discussed during and after the election could have a material impact
on us including, but not limited to, modifications to international trade policy and increased regulation. Furthermore, existing tariffs imposed on goods
imported from abroad that are used in our businesses are likely to remain in place through November 2020, however, those tariffs may be removed by
executive order or expanded based upon the outcome of the presidential election. One of the Company’s subsidiaries, Architectural Granite & Marble,
LLC, imports quartz surface products, and its operations are subject to interruption due to increases or expansion in duties and tariffs. For the year ended
December 31, 2019, we purchased an estimated $121.8 million of material sourced from outside the United States. Similarly, currently unknown future
geopolitical events between the United States and other countries, including India, Turkey, Spain, Vietnam, the European Union, and China could result in
additional disruptions impacting the operations of the Company.
In addition, actions before the U.S. Department of Commerce (which we refer to as the “DOC”) and the U.S. International Trade Commission
(which we refer to as the “ITC”) continue to present risk to the operations of the Company. For example, in May 2019, Cambria Company LLC – a
domestic producer of slab quartz - filed a petition seeking imposition of antidumping and countervailing duties against quartz surface products imported
from India and Turkey. A risk exists that additional future actions before the ITC and DOC could disrupt the operations of the Company.
We are currently unable to predict the extent of the changes to existing legislative and regulatory environments relevant to our businesses, or how
those and potential future changes would impact our businesses. To the extent that such changes have a negative impact on us or the industries we serve,
including the imposition of additional duties or tariffs discussed above or otherwise, these changes may materially and adversely impact our businesses,
financial condition, results of operations, and cash flows.
18
Risks Related to Our Indebtedness
We may use additional leverage in executing our business strategy, which may adversely affect our businesses.
As of December 31, 2019, the principal amount of our total indebtedness was approximately $186.2 million, consisting of (i) $22.2 million under
the SIC revolving credit facility, (ii) $153.8 million under the ASG term loan, and (iii) $10.2 million of vehicle and equipment loans, capital leases, and
other term debt. Additionally, as of December 31, 2019, there was also $0.4 million of outstanding letters of credit. We had the ability to access
approximately $75.6 million of unused borrowings available under the SIC revolving credit facility as of December 31, 2019, and, as part of our growth
strategy, we may incur a significant amount of additional debt in the future. Our existing indebtedness is recourse to us and we anticipate that future
indebtedness will likewise be recourse. If new debt is added to our current debt levels, the related risk that we now face could intensify.
Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the
incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the
ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. As a means of sustaining our long-term
financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively
capitalized; however, our charter does not contain a limitation on the amount of debt we may incur and our board of directors may change our target debt
levels at any time without the approval of our stockholders.
Incurring a substantial amount of debt could have important consequences for our businesses, including:
•
•
•
•
•
•
making it more difficult for us to satisfy our obligations with respect to our debt or to our trade or other creditors;
increasing our vulnerability to adverse economic or industry conditions;
limiting our ability to obtain additional financing on acceptable terms, or at all, to fund capital expenditures and acquisitions, particularly
when the availability of financing in the capital markets is limited;
requiring a substantial portion of our cash flows from operations for the payment of interest on our debt and reducing our ability to use our
cash flows to fund working capital, capital expenditures, acquisitions, and general corporate requirements;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
placing us at a competitive disadvantage to less leveraged competitors.
We cannot assure you that our businesses will generate sufficient cash flow from operations or that future borrowings will be available to us
through capital markets financings or under our credit facilities or otherwise in an amount sufficient to enable us to pay our indebtedness, or to fund our
other liquidity needs. We cannot assure you that we will be able to refinance any of the indebtedness that we will incur on commercially reasonable terms,
or at all. In addition, we may incur additional indebtedness in order to finance our operations or to repay our indebtedness. If we cannot service our
indebtedness, we may have to take actions such as selling assets, seeking additional debt or equity or reducing or delaying capital expenditures, strategic
acquisitions, investments and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms, or at
all, or on terms that would be advantageous to our stockholders or on terms that would not require us to breach the terms and conditions of our existing or
future financing arrangements.
19
Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive covenants relating to our
operations.
Our current financing arrangements contain, and the financing arrangements we enter into in the future likely will contain, covenants (financial and
otherwise) affecting our ability to incur additional debt, incur liens, make certain investments, sell our shares, reduce liquidity below certain levels, make
distributions to our stockholders and otherwise affect our operating policies. The restrictions contained in our financing arrangements could also limit our
ability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans. If we fail to
meet or satisfy any of these covenants in our financing arrangements, we would be in default under these arrangements, and our lenders could elect to
declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective
interests against existing collateral. In addition, our financing arrangements may contain cross-default provisions. As a result, if we default in our payment
or performance obligations under one of our financing arrangements and, in some cases, if the amount due thereunder is accelerated, other financing
arrangements, if any, may be declared in default and accelerated even though we are meeting payment and performance obligations on those other
arrangements. If this occurs, we may not have sufficient available cash to pay all amounts that are then due and payable under our financing arrangements,
and we may have to seek additional debt or equity financing, which may not be available on acceptable terms. If alternative financing is not available, we
may have to curtail our investment activities and/or sell assets in order to obtain the funds required to make the accelerated payments or seek ways to
restructure the loan obligations. If we default on several of our financing arrangements or any single significant financing arrangement, it could have a
material adverse effect on our businesses, prospects, liquidity, financial condition, and results of operations.
Interest expense on debt we will incur may limit our cash available to fund our growth strategies.
Our current financing arrangements have, and any additional debt we subsequently incur may have, a floating rate of interest. Higher interest rates
could increase debt service requirements on our current floating rate debt and on any floating rate debt we subsequently incur, and could reduce funds
available for operations, future business opportunities or other purposes. If we need to repay debt during periods of rising interest rates, we could be
required to refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times which may not permit
realization of the maximum return on such assets and could result in a loss. The occurrence of either or both of such events could materially and adversely
affect our cash flows and results of operations.
We may require additional capital in the future and may not be able to secure adequate funds on terms acceptable to us.
The expansion and development of our businesses may require significant capital, which we may be unable to obtain, to fund our capital
expenditures, operating expenses, working capital needs, and potential strategic acquisitions. In accordance with our growth strategy, we may
opportunistically raise additional debt capital to help fund the growth of our businesses, subject to market and other conditions, but such debt capital may
not be available to us on a timely basis, or at all, to meet our cash requirements. Further, our capital requirements may vary materially from those currently
planned if, for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain
our competitive position. If this is the case, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of
our development and expansion plans or otherwise forego market opportunities.
To a large extent, our cash flow generation ability is subject to general economic, financial, competitive, legislative and regulatory factors and other
factors that are beyond our control. We cannot assure you that our businesses will generate cash flow from operations in an amount sufficient to enable us
to fund our liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before its maturity or obtain additional equity or debt
financing. We cannot assure you that we will be able to do so on favorable terms, if at all. Any inability to generate sufficient cash flow, refinance our debt
or incur additional debt on favorable terms could adversely affect our financial condition and could cause us to be unable to service our debt and may delay
or prevent the expansion of our businesses.
20
Risks Related to Our Organization and Structure
Certain anti-takeover defenses and applicable law may limit the ability of a third party to acquire control of us.
Our amended and restated certificate of incorporation (which we refer to as our “charter”), our amended and restated bylaws (which we refer to as
our “bylaws”), and Delaware law contain provisions that may delay or prevent a transaction or a change in control of our Company that might involve a
premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our
common stock. Certain of these provisions are described below.
Selected provisions of our charter and bylaws. Our charter and/or bylaws contain anti-takeover provisions that:
•
•
•
•
•
•
•
•
•
authorize our board of directors, without further action by the stockholders, to issue up to 50,000,000 shares of preferred stock in one or
more series, and with respect to each such series, to fix the number of shares constituting that series, the powers, rights and preferences of
the shares of that series, and the qualifications, limitations and restrictions of that series;
require that, subject to the express rights, if any, of the holders of any series of preferred stock, actions to be taken by our stockholders may
be taken only at an annual or special meeting of our stockholders and not by written consent;
specify that special meetings of our stockholders can be called only by the chairman of our board of directors, our chief executive officer,
our president, or the majority of our board of directors;
provide that our bylaws may be amended by our board of directors without stockholder approval;
provide that, subject to the express rights, if any, of the holders of any series of preferred stock, directors may be removed from office only
by the affirmative vote of the holders of at least a majority of the voting power of our capital stock entitled to vote generally in the election
of directors;
provide that vacancies on our board of directors or newly created directorships resulting from an increase in the number of our directors
may be filled only by a vote of a majority of directors then in office, although less than a quorum;
provide that, subject to the express rights, if any, of the holders of any series of preferred stock, any amendment, alteration or repeal of our
charter provisions, or the adoption of any new or additional provision, inconsistent with our charter provisions relating to the management
of our Company by our board of directors, the calling of special meetings of our stockholders, the prohibition against stockholder action by
written consent, and amendment of our charter, requires the affirmative vote of the holders of at least 66 2⁄3% of the voting power of our
capital stock entitled to vote generally in the election of directors;
provide that the stockholders may amend, alter or repeal our bylaws, or adopt new or additional provisions of our bylaws, only with the
affirmative vote of at least 66 2⁄3% of the voting power of our capital stock entitled to vote generally; and
establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of directors and other
proposals to be brought before a stockholders meeting.
Selected provisions of Delaware law. We are a Delaware corporation, and we have elected to be subject to Section 203 of the General Corporation
Law of the State of Delaware (which we refer to as the “DGCL”) by provision of our charter. In general, Section 203 of the DGCL prevents an “interested
stockholder” (as defined in the DGCL) from engaging in a “business combination” (as defined in the DGCL) with us for three years following the date that
person becomes an interested stockholder unless one or more of the following occurs:
•
before that person became an interested stockholder, our board of directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination;
21
•
•
upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of
determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) stock held by directors
who are also officers of our Company and by employee stock plans that do not provide employees with the right to determine
confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or
following the transaction in which that person became an interested stockholder, the business combination is approved by our board of
directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66 2/3% of our outstanding voting
stock not owned by the interested stockholder.
The DGCL generally defines “interested stockholder” as any person who, together with affiliates and associates, is the owner of 15% or more of
our outstanding voting stock or is our affiliate or associate and was the owner of 15% or more of our outstanding voting stock at any time within the three-
year period immediately before the date of determination.
Termination of the employment agreements with the members of our management team could be costly and prevent a change in control of the
Company.
The employment agreements we have entered into with Tyrone Johnson, Nadeem Moiz, Kendall Hoyd and Shawn Baldwin, our Chief Executive
Officer, Chief Financial Officer, President—RDS, and General Counsel and Secretary, respectively, each provide that if their employment with us
terminates under certain circumstances, we may be required to pay them significant amounts of severance compensation, thereby making it costly to
terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of the Company that might involve a
premium paid for shares of our Class A Common Stock or otherwise be in the best interests of our stockholders, which could adversely affect the market
price of our Class A Common Stock.
Our bylaws provide that the state and federal courts located within the State of Delaware will be the exclusive forum for substantially all disputes
between us and our stockholders, and further provide that the federal district courts of the United States of America will be the exclusive forum for
resolving any complaint asserting a cause of action arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us or our directors, officers, or employees.
Our bylaws provide that the state or federal courts located within the State of Delaware will be the exclusive forum for:
•
•
•
•
•
any derivative action or proceeding brought on our behalf;
any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our
stockholders;
any action asserting a claim arising pursuant to any provision of the DGCL;
any civil action to interpret, apply, enforce or determine the validity of the provisions of our charter or our bylaws; and
any action asserting a claim governed by the internal affairs doctrine.
Our bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any
complaint asserting a cause of action arising under the Securities Act. Furthermore, our bylaws provide that any person or entity purchasing or otherwise
acquiring any interest in any of our securities will be deemed to have notice of and consented to the choice of forum provisions of our bylaws described
above.
22
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that such stockholder finds favorable for
disputes with us or any of our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other
employees. The enforceability of similar choice of forum provisions in other companies’ bylaws has been challenged in legal proceedings, and it is possible
that, in connection with one or more actions or proceedings described above, a court could find the choice of forum provisions contained in our bylaws to
be inapplicable or unenforceable. If a court were to find either choice of forum provision in our bylaws to be inapplicable or unenforceable in an action, we
may incur additional costs associated with resolving such dispute in other jurisdictions, which could seriously harm our business and financial condition.
We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth
companies, our Class A Common Stock may be less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (which we refer to as the “JOBS Act”), and
we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging
growth companies, including, but not limited to, a requirement to present only two years of audited financial statements in the registration statement for the
emerging growth company’s initial public offering of common equity securities, an exemption from the auditor attestation requirement of Section 404 of
the Sarbanes-Oxley Act of 2002 (which we refer to as the “Sarbanes-Oxley Act”), reduced disclosure about executive compensation arrangements pursuant
to the rules applicable to smaller reporting companies, no requirement to seek non-binding advisory votes on executive compensation or golden parachute
arrangements and not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding a
supplement to the auditor’s report providing additional information about the audit and the financial statements. We have elected to adopt these reduced
disclosure requirements.
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of
securities registered under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”)) are required to comply with the
new or revised financial accounting standards. In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage
of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards. An
emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private
companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the
JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private
companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with
public company effective dates.
If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our
financial reports, which could adversely affect the market price of our Class A Common Stock.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal
control. We continue to take advantage of the exemptions contained in the JOBS Act, and our independent registered public accounting firm is not required
to report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act until the later of the year
following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act
and we are an accelerated filer or large accelerated filer within the meaning of Section 12b-2 of the Exchange Act. At such time, our independent registered
public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or
operating.
23
If we are unable to maintain effective internal control over financial reporting or if, in the future, we identify other control deficiencies or material
weaknesses in our accounting and financial reporting processes, or if our independent registered public accounting firm is unable to express an opinion as
to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports
and the market price of our Class A Common Stock could be negatively affected, and we could become subject to litigations or investigations by the SEC,
the Nasdaq Stock Market or other regulatory authorities, or derivative or securities lawsuits from shareholders, which could require additional financial and
management resources.
Operation on multiple Enterprise Resource Planning (which we refer to as “ERP”) information systems may negatively impact our operations.
We are highly dependent on our information systems infrastructure to process orders, purchase materials, track inventory, ship products in a timely
manner, prepare invoices to our customers, maintain internal controls, produce financial data, and otherwise carry on our businesses in the ordinary course.
Our RDS segment is implementing a system in early 2020 that will enhance its ability to scale rapidly. Our ASG segment has significant operations on two
different ERP platforms that are migrating to one ERP platform in 2020. While we believe we have the experience, skill and management abilities, as well
as access to the necessary experts and consultants, to plan and execute these projects without significant disruption to our businesses, ERP implementations
and conversions are very complex and inherently subject to risks and uncertainty. There is no assurance that the projects will succeed or that failures in the
design, programming, software or implementation of these projects will not cause significant disruption to our businesses. Such a disruption could cause
project cost overruns, which may be significant, losses in revenue, increases in operating costs, and reduced customer satisfaction, all of which would lead
to a decline in profitability over the short term and possibly the long term.
We are a holding company and conduct all of our operations through our subsidiaries.
We are a holding company and substantially all of our businesses are conducted through our direct and indirect subsidiaries. We derive all of our
operating income from RDS, ASG, and their respective subsidiaries. Other than any cash we may retain, substantially all of our assets will be held by our
direct and indirect subsidiaries. We will rely on the earnings and cash flows of RDS, ASG, and their respective subsidiaries.
We rely on the earnings and cash flows of our subsidiaries, which are paid to us by our subsidiaries in the form of dividends and other payments or
distributions, to meet our debt service and other obligations. The ability of our subsidiaries to pay dividends or make other payments or distributions to us
will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may
limit the amount of funds available for the payment of dividends and other distributions to us), the terms of existing and future indebtedness and other
agreements of our subsidiaries and the covenants of any future outstanding indebtedness that our subsidiaries incur.
Risks Related to the Ownership of our Class A Common Stock
A trading market for our Class A Common Stock may not be sustained and our Class A Common Stock prices could decline.
Although our Class A Common Stock is currently listed for trading on the Nasdaq Capital Market under the symbol “SIC,” an active trading
market for the shares of our Class A Common Stock may not be sustained. Accordingly, no assurance can be given as to the following:
•
•
•
•
the likelihood that an active trading market for shares of our Class A Common Stock will be sustained;
the liquidity of any such market;
the ability of our stockholders to sell their shares of Class A Common Stock; or
the price that our stockholders may obtain for their Class A Common Stock.
24
In addition, the securities markets in general and our Class A Common Stock have experienced price and volume volatility over the past year. The
market price and volume of our Class A Common Stock may continue to experience fluctuations not only due to general stock market conditions but also
due to government regulatory action, tax laws, interest rates and a change in sentiment in the market regarding our industry, operations or business
prospects. In addition to the other risk factors discussed in this section, the price and volume volatility of our Class A Common Stock may be affected by:
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated variations in our quarterly operating results;
changes in market valuations of similar companies;
adverse market reaction to the level of our indebtedness;
additions or departures of key personnel;
actions by stockholders;
speculation in the press or investment community;
negative publicity regarding us specifically or our businesses generally;
general market, economic and political conditions, including an economic slowdown or dislocation in the global credit markets;
our operating performance and the performance of other similar companies;
changes in accounting principles; and
passage of legislation or other regulatory developments that adversely affect us or the building products supply and services industry.
If an active market is not maintained, or if our Class A Common Stock continues to experience price and volume volatility, the market price of our
Class A Common Stock may decline.
In May 2019, the Company announced that its Board of Directors had initiated a comprehensive review of strategic, operational and financial
alternatives to enhance shareholder value. The Board of Directors continues its ongoing review of strategic alternatives and expects to conclude its review
within the next several months. There can be no assurance that the review of strategic alternatives will result in a transaction or other outcome.
If securities analysts do not publish research or reports about our Company, or if they downgrade our Class A Common Stock, the price of our Class A
Common Stock could decline.
The trading market for our Class A Common Stock could be influenced by any research and reports that securities or industry analysts publish
about us or our Company. We currently have limited research coverage by securities and industry analysts, with only one analyst covering us. If no other
securities or industry analysts commence coverage of our Company, the trading price for our Class A Common Stock could be negatively impacted. In the
event one or more securities or industry analysts covering our Company downgrade our Class A Common Stock or publish inaccurate or unfavorable
research about our Company, our Class A Common Stock price would likely decline. If any of these analysts ceases coverage of our Company or fails to
publish reports on us regularly, demand for our Class A Common Stock could decrease, which could cause our Class A Common Stock price and trading
volume to decline.
We do not intend to pay dividends on our common stock for the foreseeable future.
We currently intend to retain our future earnings, if any, to finance the development and expansion of our businesses and, therefore, do not intend
to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and
such other factors as our board of directors deems relevant in its discretion. Accordingly, you may need to sell your shares of our Class A Common Stock to
realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them, or at all for an indefinite period of
time, except as permitted under the Securities Act and the applicable securities laws of any other jurisdiction.
25
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We have 59 distinct locations, each of which is leased. Our corporate headquarters are located at 400 Galleria Parkway, Suite 1760, Atlanta,
Georgia 30339.
The locations and uses of our top 20 branches, which comprise approximately 81% of our revenue, are as follows:
Location
Anaheim, CA (East Hunter Avenue)
Anaheim, CA (Blue Gum Street)
Atlanta, GA
Austin, TX
Buda, TX
Denver, CO
Escondido, CA
Fairfield, CA
Lenexa, KS
La Mirada, CA
Livermore, CA
Manassas, VA
Oklahoma City, OK
Phoenix, AZ
Portland, OR
Seattle, WA
Simi Valley, CA (Agate Court)
Sun Valley, CA
Tacoma, WA
Van Nuys, CA
Item 3. Legal Proceedings.
Segment
RDS
RDS
RDS
ASG
RDS
ASG
RDS
RDS
ASG
RDS
RDS
RDS
ASG
RDS
ASG
ASG
RDS
ASG
ASG
ASG
Purpose
Design Center / Office / Warehouse
Distribution / Office / Warehouse
Office / Fabrication / Warehouse
Showroom / Distribution / Office / Warehouse
Office / Fabrication / Warehouse
Showroom / Distribution / Office / Warehouse
Design Center / Distribution / Office / Warehouse
Office / Warehouse
Showroom / Distribution / Office / Warehouse
Design Center / Distribution / Office / Warehouse
Design Center / Distribution / Office / Warehouse
Design Center / Office / Warehouse
Showroom / Distribution / Office / Warehouse
Design Center / Office / Warehouse
Showroom / Distribution / Office / Warehouse
Showroom / Distribution / Office / Warehouse
Office / Warehouse
Showroom / Distribution / Office / Warehouse
Showroom / Distribution / Office / Warehouse
Showroom / Distribution / Office / Warehouse
From time to time, we are involved in various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While the
outcomes of these matters are generally not presently determinable, we do not believe that any of these proceedings, individually or in the aggregate, would
be expected to have a material adverse effect on our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
26
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A Common Stock is traded on the Nasdaq Capital Market under the ticker symbol “SIC.” The range of high and low sale prices of our
common stock as reported by the Nasdaq is set forth in the table below:
PART II
Fiscal Year 2019
High
Low
Fiscal Year 2018 (1)
High
Low
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
$
$
$
$
14.73 $
7.25 $
14.00 $
9.95 $
- $
- $
- $
- $
13.76 $
10.57 $
13.00 $
9.65 $
13.10
8.80
10.92
5.94
(1)
Class A Common Stock did not begin trading until August 2018, which is in the third quarter of fiscal year 2018.
Holders
On March 1, 2020, there were 263 stockholders of record of our Class A Common Stock.
Dividends
We have never paid any cash dividends on our capital stock and have no current plans to pay any cash dividends. Our current policy is to retain any
future earnings for use in our business.
Securities Authorized for Issuance Under Equity Compensation Plans
The information regarding securities authorized for issuance under equity compensation plans will be set forth in our 2020 Proxy Statement under
the heading “Securities Authorized for Issuance under Equity Compensation,” which is incorporated herein by reference.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding the repurchase of our common stock for the three months ended December 31, 2019:
Period
October 1, 2019 — October 31, 2019
November 1, 2019 — November 30, 2019
December 1, 2019 — December 31, 2019
Total
Total
Number of
Shares
Purchased(1)
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares That May
Yet be Purchased
Under the Plans
or Programs
$
7,526
7,479
—
15,005 $
11.59
10.28
—
10.94
—
—
—
—
—
—
—
—
(1)
Represents shares surrendered to the Company by employees to satisfy tax withholding obligations arising in connection with the vesting of 50,147
shares of restricted stock awarded under our 2017 Plan.
27
The Company repurchased 800,000 shares of Class A Common Stock at a price of $0.01 per share in April 2019 as part of a repurchase agreement
with affiliates of Trive Capital Management LLC. These shares were subsequently retired during the three months ended June 30, 2019.
Performance Graph
The graph below compares the cumulative total returns of our Class A Common Stock with that of the Nasdaq Composite Index, Russell 2000
Index and the S&P Small Cap 600 Index, for the period commencing on August 16, 2018 (the date our Class A Common Stock commenced trading on the
Nasdaq Capital Market) and ending on December 31, 2019. All values assume an initial investment of $100 on August 16, 2018 and reinvestment of
dividends. Following the commencement period of August 16, 2018, the data on the graph represents month-end values based on the last trading day of
each month. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our Class A
Common Stock.
Comparison of Cumulative Total Return
among Select Interior Concepts, Inc., Nasdaq Composite Index, Russell 2000 Index,
and S&P Small Cap 600 Index
28
Item 6. Selected Financial Data.
The following table summarizes certain financial data for the periods presented:
(in thousands, except share data)
Statements of Operations Data:
Total revenue
Gross profit
Gross margin
Income from operations
Total other expense, net
Income (loss) before provision for income
taxes
Provision for income taxes
Net income (loss)
Balance Sheet Data (end of year):
Cash, cash equivalents and restricted cash
Accounts receivable, net
Inventory
Total assets
Accounts payable
Accrued expenses and other current liabilities
Line of credit
Long-term debt, net of current portion and
financing fees
Total liabilities
Stockholders' equity
Supplemental Financial Data:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net income (loss) per common share:
Basic
Diluted
Weighted average number of common shares
outstanding:
Basic
Diluted
2019
Year Ended December 31,
2018
2017
610,373
164,074
$
26.9%
$
19,258
10,753
$
$
$
8,505
1,521
6,984
5,002
63,419
104,741
420,275
42,734
16,661
21,871
141,299
259,000
161,275
489,757
133,454
$
27.2%
$
12,097
13,583
(1,486) $
989
(2,475) $
$
6,362
63,601
108,270
416,014
37,265
27,620
36,706
142,442
267,320
148,694
352,952
103,889
29.4%
6,162
14,189
(8,026)
3,320
(11,346)
5,547
45,284
87,629
320,246
38,491
19,840
19,269
86,897
172,159
148,088
$
30,955
(24,641)
(10,674)
12,212
$
(80,624)
72,227
(8,367)
(118,836)
128,024
0.28
0.27
$
$
(0.10) $
(0.10) $
(0.22)
(0.22)
$
$
$
$
$
$
$
$
25,296,955
25,431,677
25,634,342
25,634,342
25,614,626
25,614,626
Basic and Diluted EPS and weighted average shares outstanding includes both Class A Common Stock and Class B Common Stock for the year
ended December 31, 2017. In August 2018, each then-remaining share of Class B Common Stock was automatically converted into one share of Class A
Common Stock, resulting in no shares of Class B Common Stock left outstanding.
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with Item 6. “Selected Financial Data” above and the accompanying consolidated
financial statements and related notes included in this Annual Report.
The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ
materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors
discussed below and elsewhere in this Annual Report, particularly in the sections entitled “Special Note Regarding Forward-Looking Statements and
Information” and “Risk Factors” included elsewhere in this Annual Report.
Overview
Select Interior Concepts, Inc. (collectively with all of its subsidiaries, “SIC,” the “Company,” “we,” “us” and “our”) is an installer and nationwide
distributor of interior building products with market positions in residential interior design services. Through our Residential Design Services (which we
refer to as “RDS”) operating segment, we serve national and regional homebuilders by providing an integrated, outsourced solution for the design,
consultation, sourcing, distribution and installation needs of their homebuyer customers. Through our 18 design centers, our designers work closely with
homebuyers in the selection of a broad array of interior products and finishes, including flooring, cabinets, countertops, wall tile, and related interior items,
primarily for newly constructed homes. We then coordinate the ordering, fulfillment and installation of many of these interior product categories to provide
for the homebuyer. With our design centers and our product sourcing and installation capabilities, we enable our homebuilder customers to outsource
critical aspects of their business to us, thereby increasing their sales, profitability, and return on capital. We also have leading market positions in the
selection and importation of natural and engineered stone slabs for kitchen and bathroom countertops and specialty tiles through our other operating
segment, Architectural Surfaces Group (which we refer to as “ASG”). ASG sources natural and engineered stone from a global supply base and markets
these materials through a national network of 23 distribution centers and showrooms. In addition to serving the new residential and commercial
construction markets with these materials, we also distribute them to the repair and remodel (which we refer to as “R&R”) market.
Operating Segments
We have defined each of our operating segments based on the nature of its operations and its management structure and product offerings. Our
management decisions are made by our Chief Executive Officer, whom we have determined to be our Chief Operating Decision Maker. Our two reportable
segments are described below.
Residential Design Services
RDS, our interior design and installation segment, is a service business that provides design center operation, interior design, product sourcing, and
installation services to homebuilders, homeowners, general contractors and property managers. Products sold and installed by RDS include flooring,
countertops, cabinets, and wall tile. New single-family and multi-family construction are the primary end markets, although we intend to explore growth
opportunities in other markets, such as the R&R market.
Architectural Surfaces Group
ASG, our natural and engineered stone countertop distribution segment, distributes granite, marble, porcelain and quartz slabs for countertop and
other uses, and ceramic and porcelain tile for flooring and backsplash and wall tile applications. Primary end markets are new residential and commercial
construction and the R&R market.
30
Key Factors Affecting Operating Results
Our operating results are impacted by changes in the levels of new residential construction and of the demand for products and services in the R&R
market. These are in turn affected by a broad range of macroeconomic factors including the rate of economic growth, unemployment, job and wage growth,
interest rates, multi-family project financing, and residential mortgage lending conditions. Other important underlying factors include demographic
variables such as household formation, immigration and aging trends, housing stock and vacant inventory levels, changes in the labor force, raw materials
prices, the legal environment, and local and regional development and construction regulation.
Material Costs
The materials that we distribute and install are sourced through a wide array of quarries, manufacturers, and distributors located in North America,
South America, Europe, Africa and Asia. As demand for these products continues to grow with housing demand, we expect that we may be subject to cost
increases from time to time. There is no guarantee that our relationships with our customers will be such that we can pass these increases on to our
customers. Affordability issues in new residential construction could temper our homebuilder customers’ ability to raise their prices, which could in turn
limit our ability to increase prices to compensate for increases in our costs of materials. We believe, however, that over the long term, these same forces
affecting housing prices would also limit our suppliers’ ability to increase prices, which would help us maintain our margins.
Labor Costs
Installation labor is a significant component of our aggregate labor force of approximately 1,850 employees. With the unemployment rate at 3.5%
in December 2019 according to the U.S. Bureau of Labor Statistics, there is no guarantee that we will be able to attract the type and quality of skilled labor
that we need in sufficient quantities to accomplish our growth plans. Correspondingly, we expect that tight labor markets will continue to lead to upward
pressure on wages and could impact our gross profit margin and overall profitability negatively.
We believe, however, that our scale will continue to give us the ability to provide steady work, an attractive benefits package, and a beneficial work
environment, particularly as compared to our smaller competitors. Over time, we expect that the combination of these factors will gradually increase our
relative advantage over smaller and less sophisticated competitors.
Operating and Administrative Costs
We incur costs related to the operation and administration of our businesses that are reported as period expenses separately from Cost of Goods
Sold. These expenses include, but are not limited to, project management, customer service, human resources, accounting, information technology, general
management, public company costs, and others. These costs will likely continue to grow as our businesses grow, but we believe that, overall, they will
grow more slowly than the rate at which our gross profit grows due to improved utilization rates of these resources and the fact that we have implemented
and intend to continue to implement scalable technology and process improvements that increase the efficiency of our operations.
Non-GAAP Measures
In addition to the results reported in accordance with United States generally accepted accounting principles (which we refer to as “GAAP”), we
have provided information in this Report relating to EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin. We have provided definitions below for
these non-GAAP financial measures and have provided the tables above reconciling these non-GAAP financial measures to the comparable GAAP
financial measures.
We believe that these non-GAAP financial measures provide valuable information regarding our earnings and business trends by excluding specific
items that we believe are not indicative of the ongoing operating results of our businesses, providing a useful way for investors to make a comparison of
our performance over time and against other companies in our industry.
31
We have provided these non-GAAP financial measures as supplemental information to our GAAP financial measures and believe these non-GAAP
measures provide investors with additional meaningful financial information regarding our operating performance and cash flows. Our management and
board of directors also use these non-GAAP measures as supplemental measures to evaluate our businesses and the performance of management, including
the determination of performance-based compensation, to make operating and strategic decisions, and to allocate financial resources. We believe that these
non-GAAP measures also provide meaningful information for investors and securities analysts to evaluate our historical and prospective financial
performance. These non-GAAP measures should not be considered a substitute for or superior to GAAP results. Furthermore, the non-GAAP measures
presented by us may not be comparable to similarly titled measures of other companies.
EBITDA is defined as consolidated net income before interest, taxes and depreciation and amortization. Adjusted EBITDA is defined as
consolidated net income before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization expense, (iv) stock compensation expense,
and (v) adjustments for costs that are deemed to be transitional in nature or not related to our core operations, such as severance and employee related
reorganization costs, purchase accounting fair value adjustments, strategic alternatives costs, facility closure costs, and professional, financing and legal
fees related to business acquisitions, or similar transitional costs and expenses related to business investments, greenfield investments, and integrating
acquired businesses into our Company. Adjusted EBITDA margin is calculated as a percentage of our net revenue. EBITDA, Adjusted EBITDA, and
Adjusted EBITDA margin are non-GAAP financial measures used by us as supplemental measures in evaluating our operating performance.
Key Components of Results of Operations
Net Revenue. Revenue at our RDS segment is recognized on a percentage of completion basis over the terms of the performance obligation with
the homebuilder or other contracted customer. In our ASG segment, net revenue is derived from the sale of stone products and is recognized at a point in
time when such products have been accepted at the customer’s designated location and the performance obligation is completed.
Cost of Revenue. Cost of revenue consists of the direct costs associated with revenue earned by the sale and installation of our interior products in
the case of our RDS segment, or by delivering product in the case of our ASG segment. In our RDS segment, cost of revenue includes direct material costs
associated with each project, the direct labor costs associated with installation (including taxes, benefits and insurance), rent, utilities and other period costs
associated with warehouses and fabrication shops, depreciation associated with warehouses, material handling, fabrication and delivery costs, and other
costs directly associated with delivering and installing product in our customers’ projects, offset by vendor rebates. In our ASG segment, cost of revenue
includes direct material costs, inbound and outbound freight costs, overhead (such as rent, utilities and other period costs associated with product
warehouses), depreciation associated with fixed assets used in warehousing, material handling and warehousing activities, warehouse labor, taxes, benefits
and other costs directly associated with receiving, storing, handling and delivering product to customers in revenue earning transactions.
Gross Profit and Gross Margin. Gross profit is revenue less the associated cost of revenue. Gross margin is gross profit divided by revenue.
Operating Expenses. Operating expenses include overhead costs such as general management, project management, purchasing, sales, customer
service, accounting, human resources, depreciation and amortization, information technology, public company costs and all other forms of wage and salary
cost associated with operating our businesses, and the taxes and benefits associated with those costs. We also include other general-purpose expenses,
including, but not limited to, office supplies, office rents, legal, consulting, insurance, and non-cash stock compensation costs. Professional services
expenses, including audit and legal, and transaction costs are also included in operating expenses.
Depreciation and Amortization. Depreciation and amortization expenses represent the estimated decline over time of the value of tangible assets
such as vehicles, equipment and tenant improvements, and intangible assets such as customer lists and trade names. We recognize the expenses on a
straight-line basis over the estimated economic life of the asset in question.
32
Interest Expense. Interest expense represents amounts paid to or which have become due during the period to lenders and lessors under credit
agreements and capital leases, as well as the amortization of debt issuance costs.
Income Taxes. Income taxes are recorded using the asset and liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.
Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net Revenue. For the year ended December 31, 2019, net revenue increased by $120.6 million, or 24.6%, to $610.4 million, from $489.8 million
for the year ended December 31, 2018. Net revenue for the years ended December 31, 2019 and 2018 is adjusted for the elimination of intercompany sales
of $3.0 million and $2.6 million, respectively.
In our RDS segment, net revenue increased by $100.2 million, or 37.3%, to $368.6 million for the year ended December 31, 2019, from $268.4
million for the year ended December 31, 2018. The increase was primarily due to the acquisitions of Summit, TAC, and Intown, which accounted for
$104.1 million of the growth in RDS revenues. During the period, revenues from organic sales decreased $3.9 million as we continue to face softening in
the Southern California housing market of the Western region, which is our largest market.
In our ASG segment, net revenue increased by $20.8 million, or 9.3%, to $244.8 million for the year ended December 31, 2019, from $224.0
million for the year ended December 31, 2018. The increase was due to the acquisitions of Bedrock, NSI, and Tuscany, which collectively accounted for
$8.0 million of ASG growth, with the remainder of the growth of $12.8 million in our ASG segment attributable to increased revenue from organic volume,
price and product mix and new locations started in 2018.
Cost of Revenue. For the year ended December 31, 2019, cost of revenue increased by $90.0 million, or 25.3%, to $446.3 million, from $356.3
million for the year ended December 31, 2018. Cost of revenue for the year ended December 31, 2019 and 2018 is adjusted for the elimination of
intercompany sales of $3.1 million and $2.5 million, respectively.
In our RDS segment, cost of revenue increased by $75.3 million, or 38.8%, to $269.8 million for the year ended December 31, 2019, from $194.5
million for the year ended December 31, 2018. The acquisitions of Summit, TAC and Intown were primarily responsible for this increase, contributing
$74.6 million. The remaining increase of $0.8 million is due to additional costs in the organic business.
In our ASG segment, cost of revenue increased by $15.2 million, or 9.2%, to $179.5 million for the year ended December 31, 2019, from $164.3
million for the year ended December 31, 2018. This was partially due to the acquisitions of Bedrock, NSI, and Tuscany, which contributed $5.8 million of
the increase, with the remaining increase due to costs associated with organic growth.
Gross Profit and Margin. For the year ended December 31, 2019, gross profit increased by $30.6 million, or 22.9%, to $164.1 million, from
$133.5 million for the year ended December 31, 2018. For the year ended December 31, 2019, gross margin decreased by 0.3% to 26.9%, from 27.2% for
the year ended December 31, 2018.
In our RDS segment, gross margin decreased by 0.7% to 26.8% for the year ended December 31, 2019, from 27.5% for the year ended
December 31, 2018. This decrease is due to an unfavorable product mix primarily due to entry- to mid-level homebuilding comprising a larger share of
project activity in our markets.
In our ASG segment, gross margin remained consistent, increasing by only 0.1% to 26.7% for the year ended December 31, 2019, from 26.6% for
the year ended December 31, 2018, due to the non-recurrence of non-cash inventory expenses that were recorded in the prior year, offset by higher supply
chain related costs and lower margin sales in the full year 2019.
33
Operating Expense. For the year ended December 31, 2019, operating expenses increased by $23.5 million, or 19.3%, to $144.8 million, from
$121.4 million for the year ended December 31, 2018.
In our RDS segment, operating expenses increased by $21.6 million to $81.2 million for the year ended December 31, 2019, from $59.6 million for
the year ended December 31, 2018. This increase was primarily related to the acquisitions of Summit, TAC, and Intown.
In our ASG segment, operating expenses decreased by $2.3 million to $45.4 million for the year ended December 31, 2019, from $47.7 million for
the year ended December 31, 2018. This decrease was due to one-time non-recurring expenses related to the Bedrock and Tuscany acquisitions, and
expenses related to the opening of new locations incurred during the year ended December 31, 2018.
The remaining $4.2 million of the increase in operating expenses was related to an increase in the amount of equity-based compensation awarded
in 2019 in the amount of $3.1 million, as well as other overhead costs at the corporate level that were in place for a full year in 2019 compared to only a
partial year in 2018.
Depreciation and Amortization. For the year ended December 31, 2019, depreciation and amortization expenses increased by $3.7 million, or
17.9%, to $24.2 million, from $20.5 million for the year ended December 31, 2018.
In our RDS segment, depreciation and amortization expenses increased by $3.3 million, or 33.9%, to $12.9 million for the year ended
December 31, 2019, from $9.6 million for the year ended December 31, 2018, which was primarily due to depreciation and amortization associated with
the assets acquired in the Summit, TAC, and Intown acquisitions.
In our ASG segment, depreciation and amortization expenses increased by $0.3 million, or 3.0%, to $11.2 million for the year ended December 31,
2019 from $10.8 million for the year ended December 31, 2018, which is primarily due to amortization associated with the Tuscany acquisition.
Interest Expense. For the year ended December 31, 2019, interest expense increased by $5.8 million, or 50.7%, to $17.2 million, from $11.4
million for the year ended December 31, 2018. This increase is primarily due to the borrowings associated with funding the TAC and Intown acquisitions
offset by lower interest rates.
Income Taxes. For the year ended December 31, 2019, we recognized income tax expense of $1.5 million, an increase of $0.5 million from income
tax expense of $1.0 million for the year ended December 31, 2018. The increase in income taxes is due primarily to the increase in pre-tax income in 2019
compared to 2018.
Net (Loss) Income. For the year ended December 31, 2019, net income increased by $9.5 million to $7.0 million, from a net loss of $2.5 million
for the year ended December 31, 2018.
Adjusted EBITDA. For the year ended December 31, 2019, Adjusted EBITDA increased by $5.5 million to $59.9 million from $54.4 million for
the year ended December 31, 2018, primarily as a result of the factors discussed above.
34
(in thousands)
Consolidated net income (loss)
Income tax expense
Interest expense
Depreciation and amortization
EBITDA
Equity-based compensation
Purchase accounting fair value adjustments
Acquisition and integration related costs
Employee related reorganization costs
Other non-recurring costs
IPO and public readiness costs
Strategic alternatives costs
Adjusted EBITDA
For the Year Ended December 31,
2019
2018
$
$
6,984 $
1,521
17,220
24,157
49,882
5,740
(6,029)
2,862
1,762
2,776
—
2,880
59,873 $
(2,475)
989
11,468
20,487
30,469
2,626
2,109
5,018
1,807
8,326
4,066
—
54,421
Adjusted EBITDA Margin. For the year ended December 31, 2019, Adjusted EBITDA margin decreased to 9.8%, from 11.1% for the year ended
December 31, 2018, primarily as a result of the factors discussed above.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Net Revenue. For the year ended December 31, 2018, net revenue increased by $136.8 million, or 38.8%, to $489.8 million, from $353.0 million
for the year ended December 31, 2017. Net revenue for the year ended December 31, 2018 and 2017 is adjusted for the elimination of intercompany sales
of $2.6 million and $1.4 million, respectively.
In our RDS segment, revenue increased by $75.2 million, or 38.9%, to $268.4 million for the year ended December 31, 2018, from $193.2 million
for the year ended December 31, 2017. This increase was largely due to the acquisitions of Greencraft and Summit Stoneworks, which accounted for $55.6
million of the RDS growth. Additionally, organic revenue increased $19.6 million through continued expansion of share in new geographies, increased
product offerings, and price/mix.
In our ASG segment, net revenue increased by $62.9 million, or 39.0%, to $224.0 million for the year ended December 31, 2018, from $161.1
million for the year ended December 31, 2017. This increase was largely due to the acquisitions of Cosmic, Bedrock, NSI, Pental and Tuscany which
accounted for $52.5 million of the growth. Additionally, organic revenue increased $10.4 million due to volume increases, greenfield expansion, and
price/mix.
Cost of Revenue. For the year ended December 31, 2018, cost of revenue increased by $107.2 million, or 43.0%, to $356.3 million, from $249.1
million for the year ended December 31, 2017. Cost of revenue for the year ended December 31, 2018 and 2017 is adjusted for the elimination of
intercompany sales of $2.5 million and $1.3 million, respectively.
In our RDS segment, cost of revenue increased by $54.3 million, or 38.7%, to $194.5 million for the year ended December 31, 2018, from $140.2
million for the year ended December 31, 2017. The acquisitions of Greencraft and Summit drove $37.8 million of the year over year increase. The
remaining $16.5 million increase in cost of revenues was substantially driven by an increase in sales in the legacy RDS business.
In our ASG segment, cost of revenue increased by $54.2 million, or 49.2%, to $164.3 million for the year ended December 31, 2018, from $110.1
million for the year ended December 31, 2017. This increase was primarily due to the acquisitions of Cosmic, Bedrock, NSI, Pental and Tuscany
contributing $41.1 million, as well as a $13.1 million increase in cost of revenue in the legacy ASG business.
Gross Profit and Margin. For the year ended December 31, 2018, gross profit increased by $29.6 million, or 28.5%, to $133.5 million, from
$103.9 million for the year ended December 31, 2017. For the year ended December 31, 2018, gross margin decreased by 2.2% to 27.2%, from 29.4% for
the year ended December 31, 2017.
35
In our RDS segment, gross margin increased by 0.1% to 27.5% for the year ended December 31, 2018, from 27.4% for the year ended
December 31, 2017. This increase was the result of improved margins from acquisitions and a slight shift in product and customer mix, partially offset by
higher depreciation in cost of revenue.
In our ASG segment, gross margin decreased by 5.0% to 26.6% for the year ended December 31, 2018, from 31.6% for the year ended
December 31, 2017. This decrease in margin was driven by the ramp up of our greenfield sites that delivered lower contribution margin than the base
business as anticipated, lower margin from the opportunistic acquisitions of Cosmic, NSI and Bedrock, one-time non-cash charges, and higher depreciation
in cost of revenue.
Operating Expenses. For the year ended December 31, 2018, operating expenses increased by $23.7 million, or 24.3%, to $121.4 million, from
$97.7 million for the year ended December 31, 2017. This increase in operating expenses was primarily due to selling, general, and administrative expenses
from acquired businesses, non-cash long-term incentive plan expenses, one-time nonrecurring costs for completed acquisitions, the opening of greenfield
locations, investments in SIC infrastructure as a new public company, the addition of M&A resources, and higher depreciation and amortization.
In our RDS segment, operating expenses increased by $6.5 million to $59.6 million for the year ended December 31, 2018, from $53.1 million for
the year ended December 31, 2017. This increase was related to the Greencraft and Summit acquisitions, sales and marketing expenses to support increased
revenues, and other expenses related to the growth of the business.
In our ASG segment, operating expenses increased by $4.7 million to $47.7 million for the year ended December 31, 2018, from $43.0 million for
the year ended December 31, 2017. This increase was related to the Cosmic, Bedrock, NSI, Pental and Tuscany acquisitions, and expenses related to the
opening of greenfield locations.
The remaining $14.0 million of the increase in operating expenses was related to costs for developing public company infrastructure, mergers and
acquisitions resources, and stock-based compensation accrual expense incurred by the SIC parent company.
Depreciation and Amortization. For the year ended December 31, 2018, depreciation and amortization expenses increased by $5.7 million, or
38.5%, to $20.5 million, from $14.8 million for the year ended December 31, 2017.
In our RDS segment, depreciation and amortization expenses increased by $2.7 million, or 39.1%, to $9.6 million for the year ended December 31,
2018, from $6.9 million for the year ended December 31, 2017. This was primarily due to the depreciation associated with the acquired Greencraft and
Summit assets and amortization related to intangible assets recognized in the purchase accounting for the Greencraft and Summit acquisitions.
In our ASG segment, depreciation and amortization expenses increased by $2.8 million, or 35.0%, to $10.8 million for the year ended
December 31, 2018 from $8.0 million for the year ended December 31, 2017. Amortization of intangible assets acquired in the Bedrock and Tuscany
acquisitions accounted for the majority of this increase with the remaining increase due to the depreciation of additional assets from new locations.
Interest Expense. For the year ended December 31, 2018, interest expense decreased by $2.3 million, or 16.8%, to $11.4 million, from $13.7
million for the year ended December 31, 2017. Our interest expense was reduced because we decreased our borrowing significantly by paying off our RDS
term loan and repaying a significant amount of our ASG term debt with proceeds from the November 2017 private offering and private placement. We
offset this decrease by increasing our long-term debt to finance the Greencraft, Bedrock, Tuscany, Summit and TAC acquisitions.
Income Taxes. For the year ended December 31, 2018, we recognized income tax expense of $1.0 million, a decrease of $2.3 million from income
tax expense of $3.3 million for the year ended December 31, 2017. Our deferred tax assets were revalued as a result of the Tax Cuts and Jobs Act in
December 2017, which resulted in a $5.3 million increase to income tax expense in 2017.
36
Net (Loss) Income. For the year ended December 31, 2018, net loss decreased by $8.8 million to $2.5 million, from $11.3 million for the year
ended December 31, 2017.
Adjusted EBITDA. For the year ended December 31, 2018, Adjusted EBITDA increased to $54.4 million, from $47.0 million for the year ended
December 31, 2017, as a result of $7.7 million in organic growth and $13.7 million of incremental operating profit from acquisitions, partially offset
by $14.0 million of additional cost and investments in SIC infrastructure as a new public company, establishing M&A resources, and increased cost of
revenue and operating expenses in both operating segments.
(in thousands)
Consolidated net (loss) income
Income tax expense
Interest expense
Depreciation and amortization
EBITDA
Equity-based compensation
Purchase accounting fair value adjustments
Acquisition and integration related costs
Employee related reorganization costs
Other non-recurring costs
IPO and public readiness costs
Consulting fees to Trive Capital
Adjusted EBITDA
For the Year Ended December 31,
2018
2017
(2,475) $
989
11,468
20,487
30,469
2,626
2,109
5,018
1,807
8,326
4,066
—
54,421 $
(11,346)
3,320
13,749
14,816
20,539
16,794
—
695
1,176
61
6,724
1,008
46,997
$
$
Adjusted EBITDA Margin. For the year ended December 31, 2018, Adjusted EBITDA margin decreased to 11.1%, from 13.3% for the year ended
December 31, 2017. The decrease in the Adjusted EBITDA margin was primarily due to investments in SIC for public company infrastructure, establishing
a business development function, certain acquisitions by ASG that have slightly lower margins than ASG’s legacy business, and increased costs of revenue
and operating expenses in both operating segments.
Liquidity and Capital Resources
Working capital is the largest element of our capital needs, as inventory and receivables are our most significant investments. We also require
funding for acquisitions, to cover ongoing operating expenses, and to meet required obligations related to financing, such as lease payments and principal
and interest payments.
Our capital resources primarily consist of cash from operations and borrowings under our revolving credit facilities, capital equipment leases, and
operating leases. As our revenue and profitability have improved during the recovery of the housing market, we have used increased borrowing capacity
under our revolving credit facilities to fund working capital needs. We have utilized capital leases and secured equipment loans to finance our vehicles and
equipment needed for both replacement and expansion purposes.
As of December 31, 2019, we had $5.0 million of cash and cash equivalents and $75.6 million of available borrowing capacity under our revolving
credit facilities. Based on our positive cash flow, our ability to effectively manage working capital needs, and available borrowing capacity, we believe that
we have sufficient funding available to finance our operations.
Financing Sources; Debt
SIC Credit Facility
In June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as of
June 28, 2018, which was amended on December 11, 2018, July 23, 2019 and August 19, 2019 (which we refer to as the “SIC Credit Facility”), with Bank
of America, N.A. The SIC Credit Facility is used by the Company, including both RDS and ASG, for operational purposes. Pursuant to the SIC Credit
37
Facility, the Company has a borrowing-base-governed revolving credit facility that provides for borrowings of up to an aggregate of $100 million (after it
was increased by $10 million through the amendment entered into on August 19, 2019).
All revolving loans under the SIC Credit Facility are due and payable in full on June 28, 2023, subject to acceleration upon certain conditions.
The Company is required to meet certain financial and nonfinancial covenants pursuant to the SIC Credit Facility. The Company was in
compliance with all financial and nonfinancial covenants as of December 31, 2019.
As of December 31, 2019, $22.2 million of indebtedness was outstanding under the SIC Credit Facility. The Company also had $0.4 million of
outstanding letters of credit under the SIC Credit Facility at December 31, 2019.
Term Loan Facility
On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with third party lenders (which we
refer to as the “Term Loan Facility”), which initially provided for a $105.0 million term loan facility. The Term Loan Facility was amended in June 2018 to
define the borrowers as Select Interior Concepts, Inc. and its subsidiaries. The Term Loan Facility was subsequently amended in December 2018 to
increase the borrowing capacity to $174.2 million and in July 2019 to amend certain covenants. On August 19, 2019, the Term Loan Facility was further
amended, resulting in an adjusted rate of interest payable on borrowings under the Term Loan Facility. Additionally, the August 19, 2019 amendment
imposes a prepayment premium with respect to an optional prepayment of the term loans under the Financing Agreement occurring within fifteen months
of August 19, 2019 (other than prepayments in connection with a change of control) in an amount equal to 1.50% of any such principal amount prepaid.
All term loans under the Term Loan Facility are due and payable in full on February 28, 2023, subject to acceleration upon certain conditions.
The Company is required to meet certain financial and nonfinancial covenants pursuant to the Term Loan Facility. The Company was in
compliance with all financial and nonfinancial covenants as of December 31, 2019.
As of December 31, 2019, approximately $153.8 million of indebtedness was outstanding under the Term Loan Facility.
Vehicle and Equipment Financing
We have used various secured loans and leases to finance our acquisition of vehicles and equipment. As of December 31, 2019, approximately
$10.2 million of indebtedness was outstanding under vehicle and equipment loans and capital leases.
Historical Cash Flow Information
Working Capital
Inventory and accounts receivable represent approximately 75% of our tangible assets as of December 31, 2019, and accordingly, management of
working capital is important to our businesses. Working capital (defined as current assets less current liabilities, excluding debt and cash) totaled $113.4
million at December 31, 2019, compared to $100.2 million at December 31, 2018. Working capital levels have increased primarily due to the Intown
acquisition and the decrease in earn-out liabilities.
In our RDS segment, for the year ended December 31, 2019, working capital increased by $17.8 million to $34.7 million, compared to $16.9
million for the year ended December 31, 2018. This increase is primarily due to the decrease in accrued liabilities related to earn-out obligations and an
increase in working capital due to the acquisition of Intown.
38
In our ASG segment, for the year ended December 31, 2019, working capital decreased by $5.2 million to $79.7 million, compared to $84.9
million for the year ended December 31, 2018. This decrease was largely due to accounts receivable decreases and an increase in accounts payable due to
timing of payments.
Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $31.0 million and $12.2 million for the years ended December 31, 2019 and 2018, respectively. Net
income (loss) was $7.0 million and $(2.5) million for the years ended December 31, 2019 and 2018, respectively.
Adjustments for noncash expenses included in the calculation of net cash provided by operating activities, including amortization and depreciation,
changes in deferred income taxes and other noncash items, totaled $23.1 and $21.8 million for the years ended December 31, 2019 and 2018,
respectively. Changes in operating assets and liabilities resulted in net cash provided (used) of $0.9 million and $(7.1) million for the years ended
December 31, 2019 and 2018, respectively.
Cash Flows Used in Investing Activities
For the year ended December 31, 2019, cash flow used in investing activities was $24.7 million, with $11.5 million resulting from our investments
in acquisitions, $1.0 million for the indemnity payment related to the Bedrock acquisition, and $3.0 million for the escrow payment related to the
Greencraft acquisition. Capital expenditures for property and equipment, net of proceeds from disposals, totaled $9.1 million. For the year ended December
31, 2018, cash flow used in investing activities was $80.6 million, with $72.1 million resulting from our investments in acquisitions. Capital expenditures
for property and equipment, net of proceeds from disposals, totaled $8.5 million.
Cash Flows (Used in) / Provided by Financing Activities
Net cash (used) provided by financing activities was $(10.7) million and $72.2 million for the years ended December 31, 2019 and 2018,
respectively. Cash flows used in financing activities supported our acquisition strategies.
For the year ended December 31, 2019, we borrowed an additional $11.5 million in term debt to fund the Intown acquisition and made principal
payments of $1.9 million, for a net increase in term debt of $9.6 million. We also received $2.7 million in an ERP financing transaction. During the year
ended December 31, 2019, aggregate net payments on the SIC Credit Facility were $14.9 million and payments on notes payable were $1.9 million. We
also classified $5.8 million of the total $8.0 million Greencraft earn-out payment as a financing activity, as this was the fair value of the contingent liability
accrued at purchase.
For the year ended December 31, 2018, we borrowed an additional $57.2 million in term debt, with debt issuance costs of $0.5 million, and made
principal payments of $2.5 million. Aggregate net borrowings on the SIC Credit Facility were $17.9 million, with issuance costs of $0.5 million. Proceeds
from employee stock purchases were $0.6 million.
Contractual Obligations
In the table below, we set forth our enforceable and legally binding obligations as of December 31, 2019. Some of the amounts included in the table
are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by
third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in
the table.
39
(in thousands)
Long-Term Debt Obligations(1)
Capital Lease Obligations(2)
Operating Lease Obligations(3)
Purchase Obligations(4)
Total
Total
154,666 $
10,241
54,732
41,417
261,056 $
$
$
Less than 1
year
Payments due by period
1 to 3
years
3 - 5
years
More than 5
years
12,260 $
2,752
15,241
39,417
69,670 $
2,303 $
5,054
24,941
2,000
34,298 $
140,103
1,971
9,627
—
151,701 $
—
464
4,923
—
5,387
(1)
(2)
(3)
(4)
Long-term debt obligations include principal payments on our term loans as well as our notes payable. Long-term debt obligations do not include
interest or fees on the unused portion of our revolving letters of credit or financing fees associated with the issuance of debt.
Capital lease obligations include minimum lease payments on capital leases for vehicles and equipment purchased.
We lease certain locations, including, but not limited to, corporate offices, warehouses, fabrication shops, and design centers. For additional
information, see Note 11—Commitments and Contingencies to our consolidated financial statements included in this Annual Report.
These amounts take into account a contract with a supplier of engineered stone on an exclusive basis in certain states within the United States. As
part of the terms of the exclusive right to distribute the products provided under the contract, we are obligated to take delivery of a certain
minimum amount of product from this supplier. If we fall short of these minimum purchase requirements in any given calendar year, we have
agreed to negotiate with the supplier to arrive at a mutually acceptable resolution. There are no financial penalties to us if such commitments are
not met; however, in such a case, the supplier has reserved the right, under the contract, to withdraw the exclusive distribution rights granted to us.
The amount of the payment is estimated by multiplying the minimum quantity required under the contract by the average price paid in 2019. This
amounts to approximately $37.4 million in 2020.
In February 2020, a new exclusive rights agreement was entered into with the same vendor under similar terms, but with increased purchase
obligation amounts through December 31, 2025. The total purchase obligation payments for less than 1 year increases from $39.4 million to $73.7
million and the obligations for 1-3 years increases from $2 million to $199.5 million as a result of the new agreement. The additional purchase
obligation amount under the new agreement for 3-5 years is $282.7 million and more than 5 years is $184.6 million. For additional information, see
Note 11—Commitments and Contingencies to our consolidated financial statements included in this Annual Report.
In addition to the contractual obligations set forth above, as of December 31, 2019, we had an aggregate of approximately $22.2 million of
indebtedness outstanding under the SIC Credit Facility.
Off-Balance Sheet Arrangements
As of December 31, 2019, with the exception of operating leases that we typically use in the ordinary course of business, we were not party to any
material off-balance sheet financial arrangements that are reasonably likely to have a current or future effect on our financial condition or operating results.
We do not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for
other contractually narrow or limited purposes.
40
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain
accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have
been reported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our
estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates and assumptions used in preparation of our consolidated financial statements.
Revenue Recognition
The Company’s revenue derived from the sale of imported granite, marble, and related items, primarily in our ASG operating segment, is
recognized at a point in time when control over a product is transferred to a customer. This transfer occurs primarily when goods are picked up by a
customer at the branch or when goods are delivered to a customer location.
The Company’s contracts with its home builder customers within our RDS operating segment are usually short-term in nature and will generally
range in length from several days to several weeks. The Company’s contracts related to multi-family and commercial projects are generally long-term in
nature. We recognize revenue from both short-term and long-term contracts for each distinct performance obligation identified over time on a percentage-
of-completion basis of accounting, utilizing the output method as a measure of progress, as we believe this represents the best measure of when goods and
services are transferred to the customer.
Revenue is measured at the transaction price, which is based on the amount of consideration the Company expects to receive in exchange for
transferring the promised goods or services to the customer. The transaction price will include estimates of variable consideration, such as any returns and
sales incentives. Applicable customer sales taxes, when remitted, are recorded as a liability and excluded from revenue on a net basis.
In the fourth quarter of 2019, the Company adopted ASU 2014-09, the new accounting standard under ASC Topic 606, using the modified
retrospective method as of January 1, 2019.
Cost of Revenue
RDS’s cost of revenue is comprised of the costs of materials and labor to purchase and install products for our customers.
ASG’s cost of revenue primarily consists of purchased materials, sourcing fees for inventory procurement, and freight costs.
RDS and ASG also include payroll taxes and benefits, workers’ compensation insurance, vehicle-related expenses and overhead costs, including
rent, depreciation, utilities, property taxes, repairs and maintenance costs in the cost of revenue.
Our cost of revenue is reduced by rebates provided by suppliers in the period the rebate is earned.
41
Accounts Receivable
Accounts receivable are recorded at net realizable value. We continually assess the collectability of outstanding customer invoices; and if deemed
necessary, maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we consider
factors such as: historical collection experience, a customer’s current creditworthiness, customer concentrations, personal guarantees, credit insurance, age
of the receivable balance both individually and in the aggregate and general economic conditions that may affect a customer’s ability to pay. We have the
ability to place liens against the significant amount of RDS customers in order to secure receivables. Actual customer collections could differ from our
estimates. At December 31, 2019 and 2018, the allowance for doubtful accounts was $0.8 million and $0.5 million, respectively.
Inventories
Inventories consist of stone slabs, tile and sinks, and include the costs to acquire the inventories and bring them to their existing location and
condition. Inventory also includes flooring, cabinets, doors and trim, glass, and countertops, which have not yet been installed, as well as labor and related
costs for installations in process. Inventory is valued at the lower of cost (using the specific identification and first-in, first-out methods) or net realizable
value.
Intangible Assets
Intangible assets consist of customer relationships, trade names and non-compete agreements. We consider all our intangible assets to have definite
lives and such intangible assets are amortized on the straight-line method over the estimated useful lives of the respective assets or on an accelerated basis
based on the expected cash flows generated by the existing customers as follows:
Customer relationships
Trade names
Non-compete agreements
Business Combinations
Range of estimated
useful lives
2 years – 15 years
3 years – 11 years
Life of agreement
Weighted average
useful life
10 years
8 years
4 years
We record business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiable assets
acquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value is recorded
as goodwill. Changes in the estimated fair values of net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed
one year from the date of acquisition, will adjust the amount of the purchase price allocable to goodwill. Measurement period adjustments are reflected in
the period in which they occur.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We account for goodwill in
accordance with FASB ASC topic 350, Intangibles-Goodwill and Other Intangible Assets, which among other things, addresses financial accounting and
reporting requirements for acquired goodwill and other intangible assets having indefinite useful lives. ASC topic 350 requires goodwill to be carried at
cost, prohibits the amortization of goodwill and requires us to test goodwill for impairment at least annually. We test for impairment of goodwill annually
during the fourth quarter or more frequently if events or changes in circumstances indicate that the goodwill may be impaired. Events or changes in
circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action
or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the
strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or
projected future results of operations. We identified RDS and ASG as reporting units and determined each reporting unit’s fair value substantially exceeded
such reporting unit’s carrying value. There were no impairment charges related to goodwill for the years ended December 31, 2019 and 2018.
42
Equity-based compensation
We account for equity-based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an expense using
either straight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service or performance period,
which is usually equivalent to the vesting period.
Income Taxes
The provision for income taxes is accounted for under the asset and liability method prescribed by ASC 740 (Topic 740, Income Taxes). Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the tax rate changes are enacted.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
On December 22, 2017, the Tax Cuts and Jobs Act (which we refer to as the “Tax Act”) was adopted into law. The Tax Act makes broad and
complex changes to the Internal Revenue Code of 1986, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35% to 21%;
(ii) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits are realized; (iii) creating a new limitation on
deductible interest expense; and (iv) changing rules related to uses and limitation of net operating loss carryforwards created in tax years beginning after
December 31, 2017.
Our policy is to recognize interest and/or penalties related to all tax positions as income tax expense. To the extent that accrued interest and
penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period
that such determination is made. We have recognized $0.4 million and $0.5 million in combined interest and penalties related to uncertain tax positions for
the years ended December 31, 2019 and 2018, respectively.
Recent Accounting Pronouncements
See Note 1 – Organization and Business Description to our audited consolidated financial statements included in this Annual Report for a
description of recent accounting pronouncements issued.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We borrow from lenders using financial instruments such as revolving lines of credit, term loans, and notes payable. In many cases, the interest
costs we incur under these agreements is calculated using a variable rate that will fluctuate with changes in a published short-term market interest rate
index, such as LIBOR. Accordingly, there is no guarantee as to what our interest payments and expense will be in the future. In an economic environment
where short term rates (under one year) may increase or continue to increase at any time, there can be no assurance that interest rates will not be higher in
the future and have an adverse effect on our financial soundness. At December 31, 2019, we had outstanding variable rate borrowings of approximately
$176.0 million. Assuming the current level of borrowing under the variable rate debt facilities, a hypothetical one-percentage point increase (decrease) in
interest rates on our variable rate debt would increase (decrease) our annual interest expense by approximately $1.8 million.
For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash
flows, assuming other factors are held constant. We did not utilize swaps, forward or option contracts on interest rates or commodities, or other types of
derivative financial instruments during the
43
years ended December 31, 2019, 2018, and 2017. We have not entered into and currently do not hold derivatives for trading or speculative purposes.
The United Kingdom’s Financial Conduct Authority has announced the intent to phase out the use of LIBOR by the end of 2021. If LIBOR is
discontinued, we may need to renegotiate the terms of certain of credit instruments which utilize LIBOR as a benchmark in determining the interest rate, to
replace LIBOR with the new standard that is established. As a result, we may incur incremental costs in transitioning to a new standard, and interest rates
on our current or future indebtedness may be adversely affected by the new standard. There is currently no definitive information regarding the future
utilization of LIBOR or any particular replacement rate. As such, the potential effect of any such event on our cost of capital cannot yet be determined, but
we do not expect it to have a material impact on our consolidated financial condition, results of operations, or cash flows.
Foreign Currency Exchange Rate Risk
We purchase materials from both domestic and foreign suppliers. While predominantly all of the suppliers receive payments in U.S. dollars and, as
such, we are not currently exposed to any foreign currency exchange rate risk, there can be no assurance that the payments to suppliers in the future will not
be affected by exchange fluctuations between the U.S. dollar and the local currencies of these foreign suppliers.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is incorporated herein by reference to the financial statements set forth in Item 15 (Exhibits, Financial
Statement Schedules) of Part IV of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer (which we refer to as, together, the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures, as defined by
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2019. Based on the evaluation of our disclosure controls and procedures, our
Certifying Officers concluded that our disclosure controls and procedures were effective as of December 31, 2019
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and
15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
44
Management’s Report on Internal Controls Over Financial Reporting
We are responsible for establishing and maintaining internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or detected. Our management, including our Certifying Officers, conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on their assessment, our Certifying Officers concluded that our internal
control over financial reporting was effective as of December 31, 2019 to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to an exemption established
by rules of the SEC for emerging growth companies as defined in the JOBS Act.
Item 9B. Other Information
None.
45
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
The information required by this Item will be set forth in our definitive proxy statement (which we refer to as our “2020 Proxy Statement”) to be
filed in connection with our 2020 Annual Meeting of Stockholders (which Proxy Statement will be filed with the SEC within 120 days of December 31,
2019). The information required by this Item to be contained in our 2020 Proxy Statement under the headings “Election of Directors,” “Executive
Compensation” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
Our Code of Business Conduct and Ethics is available in the “Investors—Corporate Governance—Governance Highlights—Governance
Documents” section of our website located at www.selectinteriorconcepts.com. To the extent required by applicable rules of the SEC and the Nasdaq Stock
Market, we intend to disclose on our website any amendments to, or waivers from, any provision of our Code of Business Conduct and Ethics that apply to
our Company's directors and executive officers, including our principal executive officer, principal financial officer or controller, or persons performing
similar functions.
Item 11. Executive Compensation
The information required by this Item will be set forth in our 2020 Proxy Statement under the heading “Executive Compensation,” which
information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be set forth in our 2020 Proxy Statement under the heading “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters” and “Equity Compensation Plan Information,” which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be set forth in our 2020 Proxy Statement under the heading “Related Transactions and Director
Independence” which information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be set forth in our 2020 Proxy Statement under the heading “Fees Paid to Our Independent Registered
Accounting Firm,” which information is incorporated herein by reference.
46
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report on Form 10-K: Exhibits.
PART IV
1. Financial Statements. The following financial statements of the Company are included in a separate section of this Annual Report on Form
10-K commencing on the page numbers specified below:
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
2. Financial Statements Schedules. See “Schedule I – SIC’s Condensed Parent Company Only Financial Statements” beginning on page F-
50.
3. Exhibits. The following exhibits are either filed herewith or incorporated herein by reference:
Exhibit
Number
3.1
3.2
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the initial filing of the
Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 9, 2018).
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Company’s
Registration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 25, 2018).
Description
4.1*
Description of Securities
10.1 †
10.2 †
10.3 †
10.4 †
10.5 †
2017 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the initial filing of the Company’s Registration Statement
on Form S-1 (File No. 333-226101), filed with the SEC on July 9, 2018).
2019 Incentive Compensation Plan (incorporated by reference to Appendix A of the Company’s Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934 filed with the SEC on April 5, 2019).
Employment Agreement, dated as of November 22, 2017, as amended by the Amendment to Employment Agreement, dated as of May 1,
2018, each by and between the Company and Tyrone Johnson (incorporated by reference to Exhibit 10.4 to the initial filing of the
Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 9, 2018).
Employment Agreement, dated as of August 17, 2018, by and between the Company and Nadeem Moiz (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the SEC on August 17, 2018).
Employment Agreement, dated as of November 22, 2017, by and between the Company and Kendall R. Hoyd (incorporated by reference to
Exhibit 10.5 to the initial filing of the Registration Statement on Form S-1 of the Company (File No. 333-226101), filed with the SEC on
July 9, 2018).
10.6 †
Amendment to Employment Agreement, dated as of August 17, 2018, by and between the Company and Kendall R. Hoyd (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on August 17, 2018).
47
10.7 †
Form of Indemnification Agreement between the Company and each of its directors and executive officers (incorporated by reference to
Exhibit 10.7 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 9,
2018).
10.8 †*
Employment Agreement, dated as of October 22, 2018, each by and between the Company and Shawn Baldwin
10.9 †
10.10 †
10.11 †
10.12 †
10.13
10.14
10.15
10.16
10.17
10.18
Amendment to Employment Agreement, dated as of July 12, 2019, by and between the Company and Kendall R. Hoyd (incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, filed with the SEC
on August 8, 2019).
Amendment to Employment Agreement, dated as of July 12, 2019, by and between the Company and Tyrone Johnson (incorporated by
reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, filed with the SEC
on August 8, 2019).
Amendment to Employment Agreement, dated as of July 12, 2019, by and between the Company and Nadeem Moiz (incorporated by
reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, filed with the SEC
on August 8, 2019).
Amendment to Employment Agreement, dated as of July 12, 2019, by and between the Company and Shawn Baldwin (incorporated by
reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, filed with the SEC
on August 8, 2019).
Amended and Restated Loan, Security and Guaranty Agreement, dated as of June 28, 2018, by and among the Company and the Company’s
subsidiaries party thereto, as borrowers and obligors, as applicable, and Bank of America, N.A., as lender (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, filed with the SEC on
September 6, 2018).
Financing Agreement, dated as of February 28, 2017, among Architectural Granite & Marble, LLC and Pental Granite and Marble, LLC, as
borrowers, the financial institutions party thereto as lenders, and Cerberus Business Finance, LLC, as agent for the lenders (incorporated by
reference to Exhibit 10.14 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the
SEC on July 9, 2018).
First Amendment to Financing Agreement, dated as of November 22, 2017, among Architectural Granite & Marble, LLC and Pental Granite
and Marble, LLC, as borrowers, the financial institutions party thereto as lenders, and Cerberus Business Finance, LLC, as agent for the
lenders (incorporated by reference to Exhibit 10.15 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-
26101), filed with the SEC on July 9, 2018).
Second Amendment to Financing Agreement, dated as of December 29, 2017, by and among Architectural Granite & Marble, LLC and
Pental Granite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as
agent for the lenders (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2018, filed with the SEC on September 6, 2018).
Third Amendment to Financing Agreement, dated as of June 28, 2018, by and among Architectural Granite & Marble, LLC and Pental
Granite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for
the lenders (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2018, filed with the SEC on September 6, 2018).
Fourth Amendment to Financing Agreement, dated as of August 31, 2018, by and among Architectural Granite & Marble, LLC and Pental
Granite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for
the lenders (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on September 7,
2018).
48
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Fifth Amendment to Financing Agreement, dated as of December 31, 2018, by and among Architectural Granite & Marble, LLC and Pental
Granite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for
the lenders (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on January 4,
2019).
Sixth Amendment to Financing Agreement, dated as of July 15, 2019, by and among Architectural Granite & Marble, LLC and Pental
Granite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for
the lenders (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2019, filed with the SEC on August 8, 2019).
Second Amendment to Amended and Restated Loan, Security, and Guaranty Agreement, dated as of July 23, 2019, by Select Interior
Concepts, Inc., and subsidiaries, as borrowers, and Bank of America, N.A. as lenders (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, filed with the SEC on August 8, 2019).
Seventh Amendment to Financing Agreement, dated as of August 19, 2019, by and among Architectural Granite & Marble, LLC and Pental
Granite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for
the lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on August 21,
2019).
Third Amendment to Amended and Restated Loan, Security and Guaranty Agreement, dated as of August 19, 2019, by and among Select
Interior Concepts, Inc. and each of its subsidiaries, as obligors, and Bank of America, N.A., as lender (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on August 21, 2019).
Asset Purchase Agreement dated March 1, 2019 by and among L.A.R.K. Industries, Inc., Intown Design, Inc., Intown Granite of Charlotte,
Inc., Granitec, LLC, and Don Zahnle (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with
the SEC on March 6, 2019).
Board Designee Agreement dated November 21, 2019 by and between Select Interior Concepts, Inc. and B. Riley Financial, Inc.
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on November 22, 2019).
Form of Performance-Based Restricted Stock Unit Agreement for use with the 2017 Incentive Compensation Plan (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended on March 31, 2019, filed with the
SEC on May 10, 2019).
Form of Time-Based Restricted Stock Unit Agreement for use with the 2017 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended on March 31, 2019, filed with the SEC on
May 10, 2019).
10.28*
Retention Agreement, dated as of July 12, 2019, by and between the Company and Tyrone Johnson.
10.29*
Retention Agreement, dated as of July 12, 2019, by and between the Company and Nadeem Moiz.
10.30*
Retention Agreement, dated as of July 12, 2019, by and between the Company and Kendall R. Hoyd.
10.31*
Retention Agreement, dated as of July 12, 2019, by and between the Company and Shawn K. Baldwin.
21.1*
23.1*
31.1*
31.2*
32.1*
Subsidiaries of Select Interior Concepts, Inc.
Consent of Independent Registered Public Accounting Firm
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
49
32.2*
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
*
†
Filed herewith.
Management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary
None.
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SELECT INTERIOR CONCEPTS, INC.
SIGNATURES
Date: March 12, 2020
By:
/s/ Tyrone Johnson
Tyrone Johnson
Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Signature
/s/ Tyrone Johnson
Tyrone Johnson
/s/ Nadeem Moiz
Nadeem Moiz
/s/ J. David Smith
J. David Smith
/s/ Donald F. McAleenan
Donald F. McAleenan
/s/ Robert Scott Vansant
Robert Scott Vansant
/s/ S. Tracy Coster
S. Tracy Coster
/s/ Brett G. Wyard
Brett G. Wyard
/s/ Bryant Riley
Bryant Riley
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date
March 12, 2020
March 12, 2020
Chairman of the Board of Directors
March 12, 2020
Director
Director
Director
Director
Director
51
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
Index to Consolidated Financial Statements
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule I – SIC’s Condensed Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Select Interior Concepts, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Select Interior Concepts, Inc. (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule included under Item 15(a) (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2017.
Los Angeles, California
March 12, 2020
F-2
Select Interior Concepts Consolidated Financial Statements
Select Interior Concepts, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2019 and 2018
(in thousands, except share data)
Assets
Current assets
Cash
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $849 and $500 at
December 31, 2019 and 2018, respectively
Inventories
Prepaid expenses and other current assets
Income taxes receivable
Total current assets
Property and equipment, net of accumulated depreciation of $21,020 and $13,038 at
December 31, 2019 and 2018, respectively
Deferred tax assets, net
Goodwill
Customer relationships, net of accumulated amortization of $48,251 and $35,877
at December 31, 2019 and 2018, respectively
Intangible assets, net of accumulated amortization of $7,471 and $4,068
at December 31, 2019 and 2018, respectively
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt, net of financing fees of $511
at December 31, 2019 and 2018, respectively
Current portion of capital lease obligations
Accounts payable
Income taxes payable
Accrued expenses and other current liabilities
Customer deposits
Total current liabilities
Line of credit
Long-term debt, net of current portion and financing fees of $1,107 and $1,618 at
December 31, 2019 and 2018, respectively
Long-term capital lease obligations
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders' equity
Class A common stock, par value $0.01 per share; 100,000,000 shares authorized;
25,139,542 shares issued and 25,106,402 outstanding at
December 31, 2019 and 25,682,669 issued and outstanding at December 31, 2018
Treasury stock, 33,140 shares at December 31, 2019, at cost
Additional paid-in capital
Retained earnings (accumulated deficit)
Total stockholders’ equity
Total liabilities and stockholders' equity
As of December 31,
2019
2018
$
5,002 $
—
63,419
104,741
11,083
2,184
186,429
26,494
10,550
99,789
71,989
18,759
6,265
420,275 $
11,749 $
2,395
42,734
—
16,661
8,627
82,166
21,871
141,299
6,907
6,757
259,000
—
251
(391)
161,396
19
161,275
420,275 $
$
$
$
6,362
3,000
63,601
108,270
2,809
1,263
185,305
19,798
9,355
94,593
79,843
20,872
6,248
416,014
1,368
500
37,265
984
27,620
9,908
77,645
36,706
142,442
1,544
8,983
267,320
—
257
—
156,601
(8,164)
148,694
416,014
See accompanying notes to consolidated financial statements.
F-3
Select Interior Concepts, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2019, 2018 and 2017
(in thousands, except share data)
Revenue, net
Cost of revenue
Gross profit
Selling, general and administrative expenses
Income from operations
Other expense:
Interest expense
Loss on extinguishments of debt
Other (income) expense, net
Total other expense, net
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Less: net loss attributable to Predecessor
Net income (loss) attributable to Select Interior Concepts, Inc.
Income (loss) per basic and diluted share of common stock
Basic Class A Common Stock
Basic Class B Common Stock
Diluted Class A Common Stock
Diluted Class B Common Stock
Weighted average shares outstanding
Basic Class A Common Stock
Basic Class B Common Stock
Diluted Class A Common Stock
Diluted Class B Common Stock
2019
Year Ended December 31,
2018
2017
$
$
$
$
$
610,373 $
446,299
164,074
144,816
19,258
17,220
—
(6,467)
10,753
8,505
1,521
6,984 $
—
6,984 $
0.28 $
—
0.27 $
—
489,757 $
356,303
133,454
121,357
12,097
11,426
42
2,115
13,583
(1,486)
989
(2,475) $
—
(2,475) $
(0.10) $
— $
(0.10) $
— $
352,952
249,063
103,889
97,727
6,162
12,761
988
439
14,188
(8,026)
3,320
(11,346)
(5,657)
(5,689)
(0.22)
(0.22)
(0.22)
(0.22)
25,296,955
—
25,431,677
—
25,634,342
—
25,634,342
—
19,650,000
5,964,626
19,650,000
5,964,626
See accompanying notes to consolidated financial statements.
F-4
(in thousands, except share data)
Balance as of January 1, 2017
Issuance of Class E-1 Units to existing members
Issuance of Class E-2 Units to Aquarius Seller, Inc.
and an
existing member
Dividends issued
Equity-based compensation (See Note 12)
Net loss prior to November 2017 Restructuring
Transactions and November 2017 Private Offering
and
Private Placement
Balance prior to November 2017 Restructuring
Transactions and November 2017 Private
Offering
and Private Placement
Contribution of member units for Class B Common
Stock
Repurchase of member units
Repurchase and retirement of Class B Common
Stock
Sale of Class A Common Stock in November 2017
Private
Offering and Private Placement, including follow-
on
offering of 3,000,000 shares of Class A Common
Stock
Deferred tax asset adjustment
Balance subsequent to November 2017
Restructuring
Transactions and November 2017 Private
Offering
and Private Placement
Equity-based compensation
Net loss subsequent to November 2017
Restructuring
Transactions and November 2017 Private Offering
and
Private Placement
Balance as of December 31, 2017
Equity-based compensation
Issuances of Class A and Class B Stock
Special stock dividend and Class B cancellation
Conversion of Class B Stock to Class A Stock
Net loss
Balance as of December 31, 2018
Cumulative effect adjustment (Note 3)
Equity-based compensation
Issuance of Class A common stock due to restricted
stock vesting
Repurchase of Class A common stock
Retirement of Class A common stock
Net income
Balance as of December 31, 2019
Select Interior Concepts, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2019, 2018 and 2017
Predecessor
Class A Stockholders
Class B Stockholders
Member
Units
Members’
Capital
55,920,939
21,736,168
$
39,741
—
Class A
Common
Stock Shares
—
—
$
7,156,106
—
4,175,844
10,030
(35,421 )
7,345
—
(5,657 )
88,989,057
16,038
(57,361,484 )
(31,627,573 )
(10,264 )
(5,774 )
—
—
—
—
—
—
—
—
—
—
Class A
Common
Stock
—
—
—
—
—
—
—
—
—
—
Class B
Common
Stock Shares
—
—
—
—
—
—
—
9,244,112
—
(5,379,486 )
(53 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
21,750,000
—
217
—
—
—
—
—
21,750,000
—
217
—
3,864,626
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21,750,000
27,646
752
226,511
3,677,760
—
25,682,669
—
—
256,873
—
(800,000 )
—
25,139,542
$
—
217
—
1
2
37
—
257
—
—
2
—
(8 )
—
251
—
3,864,626
39,645
(226,511 )
(3,677,760 )
—
—
—
—
—
—
—
—
—
$
See accompanying notes to consolidated financial statements.
F-5
Class B
Common
Stock
Treasury
Stock,
at Cost
Total
Additional
Paid-in
Capital
Total
Retained
Earnings
(Accumulated
Deficit)
$
$
—
—
$
—
—
$
—
—
—
—
—
—
—
92
—
—
—
39
—
—
39
—
(2 )
(37 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,172
(56,952 )
(59,981 )
—
153,520
2,528
553
—
—
—
156,601
—
4,797
—
—
—
—
—
—
(391 )
—
—
$
(391 ) $
(2 )
—
—
—
161,396
$
Total
$ 39,741
—
10,030
(35,421 )
7,345
—
—
—
—
—
—
(5,657 )
—
—
—
—
16,038
-
(62,726 )
(60,034 )
(5,689 )
(5,689 )
—
—
—
—
(2,475 )
(8,164 )
1,199
—
(5,689 )
148,087
2,528
554
—
—
(2,475 )
148,694
1,199
4,797
—
—
—
6,984
19
—
(391 )
(8 )
6,984
$ 161,275
240,284
19,845
—
—
240,501
19,845
153,368
152
—
—
153,624
152
Select Interior Concepts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019, 2018 and 2017
(in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net provided by cash (used in) operating activities:
2019
Year Ended December 31,
2018
2017
$
6,984
$
(2,475 )
$
(11,346 )
Depreciation and amortization
Change in fair value of earn-out liabilities
Equity-based compensation
Deferred (benefit from) provision for income taxes
Amortized interest on deferred debt issuance costs
Loss on extinguishment of debt
Increase (decrease) in allowance for doubtful accounts
(Gain) loss on disposal of property and equipment, net
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other current liabilities
Income taxes payable / receivable
Customer deposit
Other long-term liabilities
Net cash provided by (used in) operating activities
Cash flows used in investing activities
Purchase of property and equipment
Proceeds from disposal of property and equipment
Acquisition of T.A.C. Ceramic Tile Co., net of cash acquired
Acquisition of Summit Stoneworks, LLC
Acquisition of The Tuscany Collection, LLC
Acquisition of NSI, LLC
Acquisition of Elegant Home Design, LLC (Indemnity payment in 2019)
Acquisition of Pental Granite and Marble, LLC, net of cash acquired
Acquisition of Greencraft Holdings, LLC, net of cash acquired (Escrow release payment in 2019)
Acquisition of Intown Design, Inc.
Net cash used in investing activities
Cash flows provided by (used in) financing activities
Dividends issued
Repurchase of member units
Repurchase and retirement of Class B Common Stock
Proceeds from November 2017 Private Offering and Private Placement, net of issuance costs of
$18.0 million
Payment of Greencraft Holdings, LLC earn-out liability
Proceeds from ERP financing
Proceeds from issuance of equity
Proceeds from (payments on) line of credit, net
Proceeds from term loan
Term loan deferred issuance costs
Purchase of treasury stock
Payments on notes payable and capital leases
Principal payments on long-term debt
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and restricted cash
Cash and restricted cash, beginning of period
Cash and restricted cash, end of period
Supplemental disclosures of cash flow information
Cash paid for interest
Cash paid for income taxes, net of refunds
Supplemental disclosures of non-cash investing and financing activities
Deferred tax asset adjustment related to November 2017 Restructuring Transactions
Acquisition of Pental Granite and Marble, LLC, Rollover Equity
Contribution of 57,361,484 member units for 9,244,112 shares of Class B Common Stock
Measurement period adjustment related to acquisition of Greencraft Holdings, LLC
Measurement period adjustment related to acquisition of T.A.C. Ceramic Tile Co.
Earn-out purchase price adjustment for Summit Stoneworks, LLC
Earn-out purchase price adjustment for T.A.C. Ceramic Tile Co.
Earn-out purchase price adjustment for Intown Design, Inc.
Acquisition of Elegant Home Design, LLC, indemnity holdback
Acquisition of equipment and vehicles with long-term debt and capital leases
24,157
(6,029 )
5,740
(1,494 )
610
—
349
(223 )
1,225
979
(3,012 )
(12 )
5,194
(2,212 )
(1,905 )
(1,281 )
1,885
30,955
(9,169 )
65
—
—
—
—
(1,000 )
—
(3,000 )
(11,537 )
(24,641 )
—
—
—
—
(5,794 )
2,725
—
(14,934 )
11,500
—
(399 )
(1,921 )
(1,851 )
(10,674 )
(4,360 )
9,362
5,002
16,411
4,899
—
—
—
—
498
—
—
2,010
—
8,251
$
$
$
$
$
$
$
$
$
$
$
$
$
20,487
2,109
2,528
(4,186 )
663
42
283
(139 )
(4,370 )
1,209
151
(174 )
(11,891 )
3,847
1,240
2,888
—
12,212
(8,507 )
6
(40,189 )
(16,000 )
(4,152 )
(290 )
(11,492 )
—
—
—
(80,624 )
—
—
—
—
—
—
553
17,886
57,250
(958 )
—
(1,454 )
(1,050 )
72,227
3,815
5,547
9,362
10,445
3,845
—
—
—
317
—
1,851
2,265
—
1,000
1,804
$
$
$
$
$
$
$
$
$
$
$
$
$
$
14,816
—
7,497
2,929
558
988
(127 )
57
(8,784 )
(24,024 )
(1,616 )
(110 )
9,166
2,965
(2,405 )
1,069
—
(8,367 )
(4,218 )
144
—
—
—
—
—
(88,001 )
(26,762 )
—
(118,837 )
(35,421 )
(62,725 )
(60,035 )
240,501
—
—
30
8,242
130,000
(2,952 )
—
(667 )
(88,949 )
128,024
820
4,727
5,547
12,146
2,762
19,845
10,000
10,264
—
—
—
—
—
—
1,270
$
$
$
$
$
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-6
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Business Description
Organization and Nature of Operations
These financial statements reflect the consolidated operations of Select Interior Concepts, Inc. (“SIC” or the “Company”).
SIC is a Delaware corporation that was restructured in November 2017 to be a holding company on which to consolidate diversified building
products and services companies with a primary focus on providing products and services related to the interior of all types of buildings. Through its two
primary operating subsidiaries and segments, Residential Design Services, LLC (f/k/a TCFI LARK LLC) (“RDS”) and Architectural Surfaces Group, LLC
(f/k/a TCFI G&M LLC) (“ASG”), SIC imports and distributes natural and engineered stone slabs for kitchen and bathroom countertops, operates design
centers that merchandise interior products, and provides installation services. SIC’s interior product offerings include flooring, cabinets, countertops, and
wall tile. RDS operates throughout California, Reno, Nevada, Phoenix, Arizona, Austin, Texas, Manassas, Virginia, Elkridge, Maryland, Atlanta, Georgia,
and Charlotte, North Carolina. ASG has operations in the Northeast, Southeast, Southwest, Midwest, Mountain West, and West Coast regions of the United
States.
The SIC platform originated in September 2014, when affiliates of Trive Capital Management LLC (“Trive Capital”) acquired RDS, which in turn
acquired the assets of PT Tile Holdings, LP (“Pinnacle”) in February 2015, and 100% of the equity interests in Greencraft Holdings, LLC (“Greencraft”) in
December 2017. RDS then acquired the assets of Summit Stoneworks, LLC (“Summit”) in August 2018, 100% of the equity interests in T.A.C. Ceramic
Tile Co. (which we refer to as “TAC”) in December 2018, and acquired the assets of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec,
LLC, (collectively, “Intown”) in March 2019.
Affiliates of Trive Capital also formed a consolidation platform in the stone countertop market by establishing TCFI G&M LLC, a Delaware
limited liability company formed on May 26, 2015. TCFI G&M LLC acquired 100% of the equity interests in Architectural Granite & Marble, LLC in June
2015, which in turn acquired the assets of Bermuda Import-Export, Inc. (“Modul”) in July 2016, 100% of the equity interests in Pental Granite and Marble,
LLC (“Pental”) in February 2017, and the assets of Cosmic Stone & Tile Distributors, Inc. (“Cosmic”) in October 2017. On January 17, 2018, TCFI G&M
LLC changed its name to Architectural Surfaces Group, LLC (a/k/a ASG). ASG then acquired the assets of Elegant Home Design, LLC (Bedrock”) in
January 2018, the assets of NSI, LLC (“NSI”) in March 2018, and the assets of The Tuscany Collection, LLC (“Tuscany”) in August 2018.
Reorganization
On November 22, 2017, SIC and the former equity holders of RDS and ASG completed a series of restructuring transactions (collectively, the
“November 2017 Restructuring Transactions”) whereby (i) certain former equity holders of RDS and ASG (collectively referred to as the “Rollover
Stockholders”) contributed a certain amount of equity interests in RDS and ASG to SIC in exchange for shares of Class B common stock, par value $0.01
per share, of SIC (“Class B Common Stock”) (such transaction referred to as the “Contribution and Exchange”), (ii) SIC used a certain amount of proceeds
from the November 2017 Private Offering and Private Placement (described below) to purchase from certain former equity holders of RDS and ASG the
remaining equity interests in each of RDS and ASG (that were not initially contributed to SIC as part of the Contribution and Exchange), and (iii) after the
preceding transactions, RDS and ASG became wholly-owned subsidiaries of SIC. SIC was wholly owned by Trive Capital and was inactive until the
November 2017 Restructuring Transactions. Prior to the November 2017 Restructuring Transactions, SIC, RDS, and ASG were all under the common
control of Trive Capital.
F-7
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Business Description (Continued)
Concurrent with the November 2017 Restructuring Transactions, SIC completed a private offering and private placement of 18,750,000 shares of
its Class A common stock, par value $0.01 per share (“Class A Common Stock”), to new investors, at a public offering price of $12.00 per share for gross
proceeds of approximately $225 million (prior to payment of discounts and fees to the initial purchaser and placement agent and offering expenses) (the
“November 2017 Private Offering and Private Placement”). The net proceeds from the November 2017 Private Offering and Private Placement were
primarily used by SIC to (i) repurchase 2,379,486 shares of Class B Common Stock from Trive Capital for approximately $26.6 million, (ii) purchase, from
certain Rollover Stockholders, the remaining outstanding equity interests in each of RDS and ASG (that were not initially contributed to SIC as part of the
Contribution and Exchange) for approximately $62.7 million, and (iii) repay outstanding indebtedness totaling $112.8 million to third-party lenders and pay
$0.3 million of lending related fees. The remainder of the net proceeds was used by SIC for transaction expenses related to the November 2017 Private
Offering and Private Placement, working capital and general corporate purposes.
In accordance with the terms of the November 2017 Private Offering and Private Placement, in December 2017, SIC completed an additional sale
of 3,000,000 shares of Class A Common Stock to new investors at an offering price of $12.00 per share for total gross proceeds of approximately $36.0
million (prior to payment of discounts and fees to the initial purchaser and placement agent and offering expenses). These net proceeds were used by SIC to
repurchase an additional 3,000,000 shares of Class B Common Stock from certain Rollover Stockholders.
The reorganization transactions were treated as a combination of entities under common control with assets and liabilities transferred at their
carrying amounts in a manner similar to a pooling of interests. Accordingly, the 2017 consolidated historical results of SIC includes the results under the
“as if pooling” method.
Transition to Public Company
On August 13, 2018, the SEC declared effective the Company’s Registration Statement on Form S-1, which contained a prospectus pursuant to
which certain selling stockholders of the Company may offer and sell shares of Class A Common Stock. On August 16, 2018, the Company’s Class A
Common Stock commenced trading on the Nasdaq Capital Market under the ticker symbol “SIC.”
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the accounts of SIC, its wholly owned subsidiaries RDS and ASG, and their wholly
owned subsidiaries, and are presented using the accrual basis of accounting in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated in combination. References to the “ASC”
hereafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative
U.S. GAAP.
The November 2017 Restructuring Transactions resulting in the transfer of RDS and ASG to subsidiaries of SIC was determined to be a
combination of interests between commonly controlled entities and, as such, the Company accounted for the transactions using “as if pooling” accounting.
Accordingly, the consolidated and results of SIC includes the results of both RDS and ASG for all of 2017 under the “as if pooling” method. The assets and
liabilities of RDS and ASG will also be reflected at their historical cost, as determined in accordance with the requirements of ASC 805 when consolidated
into the accounts of SIC in a manner similar to a pooling of interests.
F-8
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
Earnings (Loss) per Common Share
For the years ended December 31, 2019 and 2018, basic earnings per share for common stock is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. For the years ended December 31, 2019 and 2018, common stock consists of only Class
A Common Stock, since in August 2018, each then remaining share of Class B Common Stock was automatically converted into one share of Class A
Common Stock, resulting in no shares of Class B Common Stock left outstanding. Diluted earnings per share for common stock is computed by dividing
net income (loss) plus the dilutive effect of restricted stock-based awards using the treasury stock method.
For the period between the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement and
December 31, 2017, the basic earnings per share for both Class A and Class B Common Stock is computed by dividing net income (loss) for the period
subsequent to the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement by the weighted average
number of shares of common stock outstanding during the period subsequent to the November 2017 Restructuring Transactions and the November 2017
Private Offering and Private Placement. Diluted earnings per share for both Class A and Class B Common Stock is computed by dividing net income for
the period subsequent to the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement by the weighted
average number of shares of common stock outstanding during the period subsequent to the November 2017 Restructuring Transactions and the November
2017 Private Offering and Private Placement, plus the dilutive effect of restricted stock-based awards using the treasury stock method. Income (loss) earned
prior to the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement is attributable to the LLC members
and, as such, is not reflected in earnings per share.
The following table sets forth the computation of basic and diluted loss per share for the years ended December 31, 2019 and 2018, and the period
between the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement and December 31, 2017:
(in thousands, except share and per share data)
Net income (loss)
Weighted average shares of common stock
outstanding:
Basic common stock outstanding
Dilutive common stock outstanding
Earnings per share of common stock:
Basic common stock outstanding
Dilutive common stock outstanding
Year Ended
December 31, 2019
Year Ended
December 31, 2018
(2,475)
Period Ended
December 31, 2017
(5,689)
$
6,984 $
25,296,955
25,431,677
25,634,342
25,634,342
25,614,626
25,614,626
0.28 $
0.27 $
(0.10)
(0.10)
$
$
(0.22)
(0.22)
$
$
$
All restricted stock awards outstanding totaling 825,976 at December 31, 2018, and 356,368 at December 31, 2017, were excluded from the
computation of diluted earnings per share in 2018 and 2017 because the Company reported a net loss and the effect of inclusion would have been
antidilutive.
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and contingencies at the date of the consolidated financial statements and the reported revenues and
expenses. Actual results may vary materially from the estimates that were used. The Company’s significant accounting estimates include the determination
of allowances for doubtful accounts, inventory reserves, the lives and methods for recording depreciation and amortization on property and equipment, the
fair value of reporting units and indefinite life intangible assets, deferred income taxes, revenue recognition, warranties, returns and the purchase price
allocations used in the Company’s acquisitions.
F-9
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
Restricted Cash
At December 31, 2018, the Company had restricted cash of $3.0 million. The restricted cash consisted of funds held in escrow related to the
Greencraft acquisition. Upon release and payment of these funds in 2019, no amount of restricted cash is held as of December 31, 2019.
Fair Value Measurement
ASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the
balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The three levels of the fair value hierarchy are as follows:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to
access.
Level 2—Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3—Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
The level of the fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fair
value measurement.
The Company records contingent consideration, or earn-outs, associated with certain acquisitions. These earn-outs are adjusted to fair value at
each reporting period and any change to fair value based on a change in certain factors, such as the risk adjusted rate or estimates for the outcome of
specified milestone goals, will result in an adjustment to the fair value of the liability. These adjustments are recorded to income/expense as a measurement
period adjustment.
There is no earn-out liability recorded as of December 31, 2019 associated with the acquisition of Summit Stoneworks, LLC (“Summit”) in August
2018. The recorded fair value liability for the earn-out as of December 31, 2018 was $1.9 million. This liability was classified as a Level 3 fair value
estimate at December 31, 2018 and is no longer a Level 3 fair value estimate as of December 31, 2019 as the underlying inputs are now known and the
earn-out target criteria was not met. Adjustments reducing the fair value of the earn-out liability by $1.9 million were recorded within other (income)
expense for the year ended December 31, 2019.
There is no earn-out liability recorded as of December 31, 2019 associated with the acquisition of T.A.C. Ceramic Tile Co, LLC (“TAC”) in
December 2018. The recorded fair value liability for the earn-out as of December 31, 2018 was $2.3 million. This liability was classified as a Level 3 fair
value estimate at December 31, 2018 and is no longer a Level 3 fair value estimate as of December 31, 2019 as the underlying inputs are now known and
the earn-out target criteria was not met. Adjustments reducing the fair value of the earn-out liability by $2.3 million were recorded within other (income)
expense for the year ended December 31, 2019.
The earn-out liability associated with the acquisition of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively,
“Intown”) in March 2019 is classified as Level 3 and is valued using an option pricing model. The allocated fair value of this liability was estimated at
$2.0 million at acquisition. The fair value of this earn-out liability was reduced to zero as of December 31, 2019. The assumptions used in preparing the
option pricing model include estimates for future earnings from Intown products and services, a volatility factor of 25%, and a risk adjusted rate of 12% at
December 31, 2019. An adjustment decreasing the fair value of the earn-out liability by $2.0 million was recorded within other (income) expense for the
year ended December 31, 2019.
F-10
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
The earn-out liability associated with the acquisition of Greencraft Holdings, LLC (“Greencraft”) in December 2017 was paid to the former owners
in May 2019 in the amount of $8.0 million. As of December 31, 2018, the fair value of this earn-out was recorded as $7.9 million.
At December 31, 2019 and December 31, 2018, the carrying value of the Company’s cash, accounts receivable, accounts payable, and short-term
obligations approximate their respective fair values because of the short maturities of these instruments. The recorded values of the line of credit, term
loans, and notes payable approximate their fair values, as interest rates approximate market rates. The Company recognizes transfers between levels at the
end of the reporting period as if the transfers occurred on the last day of the reporting period. There were no transfers during 2019 or 2018, other than the
Summit and TAC earn-out liabilities from Level 3 during 2019 and the Greencraft earn-out liability from Level 3 during 2018 due to the availability of
observable and known inputs to calculate the fair value of the liabilities as of December 31, 2019 and 2018, respectively.
Accounts Receivable
Accounts receivable are recorded at net realizable value. The Company continually assesses the collectability of outstanding customer invoices;
and if deemed necessary, maintains an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this
allowance, the Company considers factors such as: historical collection experience, a customer’s current creditworthiness, customer concentrations,
personal guarantees, credit insurance, age of the receivable balance both individually and in the aggregate and general economic conditions that may affect
a customer’s ability to pay. The Company also has the ability to place liens against the significant amount of RDS customers in order to secure
receivables. Actual customer collections could differ from the Company’s estimates. At December 31, 2019 and 2018, the Company’s allowance for
doubtful accounts was $0.8 million and $0.5 million, respectively.
Inventories
Inventories consist of stone slabs, tile and sinks, and include the costs to acquire the inventories and bring them to their existing location and
condition. Inventory also includes flooring, cabinets, doors and trim, glass, and countertops, which have not yet been installed, as well as labor and related
costs for installations in process. Inventory is valued at the lower of cost (using the specific identification and first-in, first-out methods) or net realizable
value.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The Company capitalizes internal-use software as
property and equipment under ASC 350-40, Internal-Use Software. Depreciation and amortization are provided for on a straight-line basis over the
estimated useful lives of the related assets as follows:
Machinery and equipment
Vehicles
Furniture and fixtures
Computer equipment
Leasehold improvements
Range of estimated
useful lives
5 - 7 years
3 - 5 years
3 - 7 years
3 - 5 years
Shorter of 15 years or the remaining
lease term
F-11
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
Intangible Assets
Intangible assets consist of customer relationships, trade names and non-compete agreements. The Company considers all its intangible assets to
have definite lives and are being amortized on the straight-line method over the estimated useful lives of the respective assets or on an accelerated basis
based on the expected cash flows generated by the existing customers as follows:
Customer relationships
Trade names
Non-compete agreements
Business Combinations
Range of estimated
useful lives
2 years – 15 years
3 years – 11 years
Life of agreement
Weighted average
useful life
10 years
8 years
4 years
The Company records business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiable
assets acquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value is
recorded as goodwill. Changes in the estimated fair values of net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not
to exceed one year from the date of acquisition, will adjust the amount of the purchase price allocable to goodwill. Measurement period adjustments are
reflected in the period in which they occur.
Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets, such as property and equipment and intangible assets, whenever events or changes
in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable, or at least annually. The assessment for possible
impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future undiscounted cash flows of
the related operations. If the aggregate of these cash flows is less than the carrying value of such assets, an impairment loss is recognized for the difference
between the estimated fair value and the carrying value. The measurement of impairment requires management to estimate future cash flows and the fair
value of long-lived assets. There were no impairment losses on long-lived assets for the years ended December 31, 2019 and 2018.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company accounts for goodwill
in accordance with FASB ASC topic 350, Intangibles-Goodwill and Other Intangible Assets, which among other things, addresses financial accounting and
reporting requirements for acquired goodwill and other intangible assets having indefinite useful lives. ASC topic 350 requires goodwill to be carried at
cost, prohibits the amortization of goodwill and requires the Company to test goodwill for impairment at least annually. The Company tests for impairment
of goodwill annually during the fourth quarter or more frequently if events or changes in circumstances indicate that the goodwill may be impaired. Events
or changes in circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an
adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company’s use of
the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends, or significant underperformance
relative to expected historical or projected future results of operations. The Company identified RDS and ASG as reporting units and determined each
reporting unit’s fair value substantially exceeded such reporting unit’s carrying value. There were no impairment charges related to goodwill for the years
ended December 31, 2019 and 2018. (See Note 8).
F-12
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
Debt Issuance Costs
Debt issuance costs related to a recognized debt liability are deferred and amortized over the related term of the debt as non-cash interest expense
and are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. Debt issuance costs are
amortized using the effective interest method or on a straight-line basis when it approximates the effective interest method.
Sales Tax
The Company’s policy is to present taxes collected from customers and remitted to governmental authorities on a net basis. The Company records
the amounts collected as a current liability and relieves such liability upon remittance to the taxing authority without impacting revenues or expenses.
Warranty Obligations
The Company offers supplier-specific product warranties to its customers. In estimating future warranty obligations, the Company considers
various relevant factors, including its warranty policies and practices and those of its suppliers, the historical frequency of claims, the cost to replace
products under warranty, and the amounts expected to be reimbursed by suppliers. On certain products, customer warranty claims are covered directly by
the manufacturer of the product. Management estimates its warranty obligation at December 31, 2019 and 2018, to be minimal, and therefore, the Company
has not recorded a significant provision for accrued warranty costs.
Operating Leases
The Company accounts for rent expense for its operating leases on a straight-line basis in accordance with authoritative guidance on accounting for
leases. The Company leases its corporate, administrative, retail and manufacturing facilities over terms expiring between 2020 and 2029. The Company
also leases certain office and warehouse equipment over terms expiring between 2020 and 2023. The term of the lease is considered its initial obligation
period, which does not include option periods. The leases may have renewal clauses exercisable at the option of the Company and contain rent holidays
and/or rent escalation clauses. The Company includes scheduled rent holidays and rent escalation clauses for the purposes of recognizing straight-line rent
over the lease term.
Capital Leases
The Company finances the acquisition of certain vehicles and equipment with capital leases. The acquisition costs are recognized as property, plant
and equipment (“PP&E”) on the consolidated balance sheets at fair value at the inception of the lease, or, if lower, at the present value of the minimum
lease payments as determined at the inception of the lease. The acquisition costs are amortized over the useful life on the same basis as owned vehicles or,
where shorter, the term of the capital lease. Amortization expense is recorded as accumulated amortization on the consolidated balance sheets. The capital
lease liability owed to the lessor is included in the consolidated balance sheets as a capital lease obligation. Lease payments are apportioned between
interest expense and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability.
Revenue Recognition
The Company’s revenue derived from the sale of imported granite, marble, and related items, primarily in our ASG operating segment, is
recognized at a point in time when control over a product is transferred to a customer. This transfer occurs primarily when goods are picked up by a
customer at the branch or when goods are delivered to a customer location.
The Company’s contracts with its home builder customers within our RDS operating segment are usually short-term in nature and will generally
range in length from several days to several weeks. The Company’s contracts related to multi-family and commercial projects are generally long-term in
nature. We recognize revenue from both short-term and long-term contracts for each distinct performance obligation identified over time on a percentage-
of-completion basis of accounting, utilizing the output method as a measure of progress, as we believe this represents the best measure of when goods and
services are transferred to the customer.
F-13
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
Revenue is measured at the transaction price, which is based on the amount of consideration the Company expects to receive in exchange for
transferring the promised goods or services to the customer. The transaction price will include estimates of variable consideration, such as any returns and
sales incentives. Applicable customer sales taxes, when remitted, are recorded as a liability and excluded from revenue on a net basis.
In the fourth quarter of 2019, the Company adopted ASU 2014-09, the new accounting standard under ASC Topic 606, using the modified
retrospective method as of January 1, 2019. (See Note 3)
Cost of Revenue
RDS’ cost of revenue is comprised of the costs of materials and labor to purchase and install products for the Company’s customers.
ASG’s cost of revenue primarily consists of purchased materials, sourcing fees for inventory procurement, and freight costs.
RDS and ASG also include payroll taxes and benefits, workers’ compensation insurance, vehicle-related expenses and overhead costs, including
rent, depreciation, utilities, property taxes, repairs and maintenance costs in the cost of revenue.
The Company’s cost of revenue is reduced by rebates provided by suppliers in the period the rebate is earned.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of product are included in revenues. The costs for shipping and handling of product are
recorded as a component of cost of revenue. Additionally, we consider shipping and handling costs charged to a customer as a fulfillment cost rather than a
promised service and expense as incurred.
Advertising
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2019, 2018, and 2017 totaled $1.2
million, $2.5 million and $1.4 million, respectively.
Equity based compensation
The Company accounts for equity based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an
expense using either straight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service or
performance period, which is usually equivalent to the vesting period. Forfeitures are recognized as they occur. (See Note 12)
Income Taxes
The provision for income taxes is accounted for under the asset and liability method prescribed by ASC 740 (Topic 740, Income Taxes). Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the tax rate changes are enacted.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such
positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
F-14
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was adopted into law. The Tax Act makes broad and complex changes to the
Internal Revenue Code of 1986, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) eliminating the
corporate alternative minimum tax (“AMT”) and changing how existing AMT credits are realized; (iii) creating a new limitation on deductible interest
expense; and (iv) changing rules related to uses and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The Company’s policy is to recognize interest and/or penalties related to all tax positions as income tax expense. To the extent that accrued interest
and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the
period that such determination is made. The Company has recognized $0.4 and $0.5 million in combined interest and penalties related to uncertain tax
positions for the year ended December 31, 2019 and 2018, respectively.
Segment Reporting
In accordance with ASC 280-10-50-1, an operating segment is a component of an entity that has all the following characteristics:
a.
b.
c.
It engages in business activities from which it may earn revenues and incur expenses.
Its discrete financial information is available.
Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance.
The Company has identified two operating segments that meet all three of the criteria, RDS and ASG. Each of these operating segments provides
products and services that generate revenue and incur expenses as they engage in business activities and maintains discrete financial information.
Additionally, the Company’s chief operating decision maker, the Chief Executive Officer, reviews financial performance, approves budgets and allocates
resources at the RDS and ASG operating segment level.
Recently Issued and Adopted Accounting Pronouncements
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply
with new or revised accounting standards applicable to public companies. The Company has elected to use the extended transition period for complying
with new or revised accounting standards under Section 107 of the JOBS Act. This election allows the Company to delay the adoption of new or revised
accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU
establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-
specific guidance, such as the real estate, construction, and software industries. The ASU core principal is to recognize revenue to depict the transfer of
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. During 2014-2016, the FASB issued various amendments to this topic and the amendments clarified certain positions and extended the
implementation date until annual periods beginning after December 15, 2018. During the quarter ended December 31, 2019, the Company adopted this
guidance on a modified retrospective basis. For contracts which were not completed as of January 1, 2019, revenue related to our short-term contracts with
homebuilder customers, primarily in our RDS operating segment, are now recognized over time based on the extent of progress towards completion of the
individual performance obligations, instead of under the completed contract method, because of continuous transfer of control to the customer. There was
no material impact on our revenue recognition for our multi-family contracts that are currently recognized under the existing percentage-of-completion
method of accounting, due to the comparable methodology of revenue recognition under the updated guidance. There was also no material impact from
adoption related to our sales of imported granite, marble, and related items of our ASG operating segment, as the Company has concluded that it has
substantially similar performance obligations and recognition timing under the amended guidance. We recognized the cumulative effect of initially
applying the standard as an adjustment to the opening balance of retained earnings on January 1, 2019 of approximately $1.2 million. (See Note 3).
F-15
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
In August 2016, the FASB issued ASU 2016–15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments (a consensus of the Emerging Issues Task Force), which provides specific guidance on eight cash flow classification and presentation issues
arising from certain cash receipts and cash payments that currently result in diverse practices. The amendments provide guidance in the presentation and
classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement
of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims,
proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. As an emerging growth
company utilizing the extended transition period for new accounting pronouncements, ASU 2016-15 is effective for annual reporting periods beginning
after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU are applied using a
retrospective approach. The adoption did not have a significant effect on the Company’s consolidated financial position or results of operations.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. ASU 2016-18 is intended to reduce the diversity in practice around how
restricted cash is classified within the statement of cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period, with early adoption permitted. The Company has evaluated the impact of ASU 2016-18, and,
adopted the new standard, and the Company will not present the release of restricted cash as an investing activity cash inflow. Instead, restricted cash
balances have been and will be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805)—Clarifying the Definition of a Business. This ASU provides
additional guidance in regards to evaluating whether a transaction should be treated as an asset acquisition (or disposal) or a business
combination. Particularly, the amendments to this ASU provide that when substantially all of the fair value of the gross assets acquired (or disposed of) is
concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This clarification reduces the number of
transactions that needs further evaluation for business combination. The Company adopted this standard on January 1, 2019 in evaluating acquisitions.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which
permits reclassification of the income tax effects of the Tax Act on other accumulated comprehensive income (“AOCI”) to retained earnings. This guidance
may be adopted retrospectively to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in AOCI are
recognized, or at the beginning of the period of adoption. The guidance became effective for annual periods beginning after December 15, 2018, including
interim periods within those annual periods, with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s
consolidated financial statements and related disclosures.
Accounting Pronouncements Issued but Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees
for those leases classified as operating leases under previous standards. For leases with a term of 12 months or less, a lessee is permitted to make an
accounting policy election by class of asset not to recognize lease assets and lease liabilities. In November 2019, the FASB issued ASU 2019-10, Financial
Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates which delays the effective date of
ASU 2016-02 until fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The
Company is currently evaluating the impact of the provisions of ASU 2016-02 on the presentation of its consolidated financial statements and related
disclosures.
F-16
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” (ASU 2016-03) which amends ASC 326
“Financial Instruments—Credit Losses.” Subsequent to the issuance of ASU 2016-13, ASC 326 was amended by various updates that amend and clarify
the impact and implementation of the aforementioned update. The new guidance introduces the current expected credit loss (CECL) model, which will
require an entity to record an allowance for credit losses for certain financial instruments and financial assets, including trade receivables, based on
expected losses rather than incurred losses. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an
allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. In November 2019, the
FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective
Dates which delays the effective date of ASU 2016-13 until fiscal years beginning after December 15, 2021. The Company is currently evaluating the
impact of the provisions of ASU 2016-13 on the presentation of its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, which simplifies the goodwill impairment test by eliminating the step 2 requirement to determine the fair value of its assets and liabilities at
the impairment testing date. ASU 2017-04 is effective for annual periods beginning after December 15, 2021. The Company is currently evaluating the
effect of this ASU on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework (ASU 2018-13). The updated
guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently
assessing the impact of adopting the updated provisions.
Also, in August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) No. 2018-15
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2018-15
provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service
contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that
include an internal use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature
of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15
is effective for fiscal years beginning after December 15, 2020. Early adoption of the amendments in ASU 2018-15 is permitted, including adoption in any
interim period, for all entities. The amendments in ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs
incurred after the date of adoption. The Company is currently assessing the effect this guidance may have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which amends ASC 740 “Income Taxes” (ASC
740). This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending
existing guidance to improve consistent application of ASC 740. This update is effective for fiscal years beginning after December 15, 2021. The guidance
in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application permitted.
The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.
F-17
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Revenue
In the fourth quarter of 2019, the Company adopted ASU 2014-09, the new accounting standard under ASC Topic 606, using the modified
retrospective method as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 606, while prior period
amounts are not adjusted and continue to be reported in accordance with the previous standard, Topic 605.
The Company recorded a $1.2 million cumulative effect adjustment as an increase to opening retained earnings due to the impact of adopting Topic
606, with the impact primarily related to the change in accounting for certain of the RDS short-term home builder contracts that were previously accounted
for on a completed contract basis, whereas, under ASC 606, the Company now recognizes revenue associated with these contracts for the individual
performance obligations over time as the service is performed and the transfer of control occurs. There was no impact upon adoption on long-term multi-
family or commercial contracts that were already recognized under the percentage-of-completion method of accounting under Topic 605. Additionally,
there was no material impact related to the sales of imported granite, marble, and related items of the ASG operating segment, due to similar performance
obligations and recognition timing under the amended guidance.
The cumulative effect of the changes made to the Consolidated Balance Sheet as of January 1, 2019 for the adoption of Topic 606 was as follows
(in thousands):
Consolidated Balance Sheet
Assets
Prepaid expenses and other current assets
Deferred tax assets, net
Inventory
Liabilities
Accrued expenses and other current liabilities
Equity
Accumulated deficit
Balance at
December 31, 2018
Adjustments due
to 606 Adoption
Balance at
January 1, 2019
2,809 $
9,355
108,270
5,261 $
(409)
(3,455)
8,070
8,946
104,815
27,620 $
198 $
27,818
(8,164) $
1,199 $
(6,965)
$
$
$
F-18
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Revenue (Continued)
Impact of Topic 606 Revenue Recognition Standard on 2019 Financial Statement Line Items
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s Consolidated Statement of
Operations and Consolidated Balance Sheet was as follows (in thousands):
Consolidated Statement of Operations
Revenue, net
Cost of revenue
Selling, general, and administrative expenses
Provision for income taxes
Net income
Consolidated Balance Sheet
Assets
Prepaid expenses and other current assets
Income taxes receivable
Inventory
Deferred tax assets, net
Liabilities
Accrued expenses and other current liabilities
Equity
Retained earnings (accumulated deficit)
Contract Balances
As Reported
For the year ended December 31, 2019
Balances without
Adoption
Impact of
Adoption
610,373 $
446,299
144,816
1,521
6,984
609,899 $
445,890
144,832
1,500
6,924
474
409
(16)
21
60
As Reported
As of December 31, 2019
Balances without
Adoption
Impact of
Adoption
11,083 $
2,184
104,741
10,550
5,348 $
1,561
108,605
11,603
5,735
623
(3,864)
(1,053)
16,661 $
16,479 $
182
19 $
(1,240) $
1,259
$
$
$
$
The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, revenue in excess of billings, customer
deposits, and billings in excess of revenue recognized in the Company’s Consolidated Balance Sheets.
Contract assets
The Company’s contract assets consist of unbilled amounts typically resulting from sales under contracts when the revenue recognized exceeds the
amount billed to the customer, generally in the RDS operating segment revenues derived from homebuilders and commercial and multifamily projects.
Contract assets are recorded in other current assets in the Company’s Consolidated Balance Sheets. The Company had contract assets of $5.7 million as
of December 31, 2019. For comparative purposes, the contract assets as of January 1, 2019 that reflect the adoption of ASC 606 are $5.3 million. The
Company’s contract assets generally become unconditional and are reclassified to receivables in the quarter subsequent to each balance sheet date.
Contract liabilities
The Company records contract liabilities when it receives payment prior to fulfilling a performance obligation or has billings in excess of revenue
recognized. Contract liabilities related to revenues are recorded in customer deposits in the Company’s Consolidated Balance Sheets. The Company had
total contract liabilities of $8.6 million and $9.9 million as of December 31, 2019 and 2018, respectively. Contract liabilities are normally recognized to net
sales within three to six months subsequent to each balance sheet date.
F-19
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Revenue (Continued)
Remaining Performance Obligations
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an
original contract term greater than one year which are fully or partially unsatisfied at the end of the period, and relate primarily to multi-family or
commercial revenue. For the years ended December 31, 2019 and 2018, multi-family and commercial projects accounted for approximately 3% and 2% of
the Company’s combined revenues, respectively. As of December 31, 2019, the aggregate amount of the transaction price allocated to remaining
uncompleted contracts was $4.5 million. The Company expects to satisfy remaining performance obligations and recognize revenue on substantially all of
these uncompleted contracts over the next 12 months. The Company does not disclose the value of unsatisfied performance obligations for contracts with
an original expected length of one year or less.
Revenue from contracts with customers is disaggregated differently for each reporting segment as this is how management evaluates the nature,
amount, timing and uncertainty of revenue and cash flows as affected by economic factors. RDS operating segment revenues are disaggregated by
geographic area within the United States. ASG operating segment revenues are disaggregated by product category.
The following table presents net revenue for the RDS operating segment disaggregated by geographical area for the year ended December 31,
2019:
RDS
(in thousands)
East
Central
West
2019
%
$
$
93,274
17,100
258,200
368,574
25%
5%
70%
100%
The East consists of Virginia, Maryland, North Carolina and Georgia; the Central consists of Texas, and the West consists of California, Nevada
and Arizona.
The following table presents net revenue for the ASG operating segment disaggregated by product category for the year ended December 31, 2019:
(in thousands)
Quartz
Stone
Tile
Other
ASG
2019
%
$
$
138,500
75,511
20,211
10,567
244,789
57%
31%
8%
4%
100%
4. Concentrations, Risks and Uncertainties
The Company maintains cash balances primarily at one commercial bank per legal entity. The accounts are insured by the Federal Deposit
Insurance Corporation up to $250,000. The amounts held in financial institutions periodically exceed the federally insured limit. Management believes that
the financial institutions are financially sound and the risk of loss is minimal.
Credit is extended for some customers and is based on financial condition, and generally, collateral is not required. Credit losses are provided for in
the consolidated financial statements and consistently have been within management’s expectations.
For the years ended December 31, 2018 and 2017, the Company recognized revenue from one customer which accounted for 11.4% and 12.6% of
total revenue, respectively. The Company did not have any one customer which accounted for more than 10% of total revenues during the year ended
December 31, 2019. There were no customers which accounted for 10% or more of total accounts receivable, as of December 31, 2019 and 2018.
F-20
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions
Intown Acquisition
On March 1, 2019, RDS acquired the assets of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively, “Intown”),
an installer of residential and light commercial countertops and cabinets, for total cash consideration of $10.7 million at closing and an additional $0.8
million of purchase price adjustments that were funded in June 2019. The purchase agreement also provides for potential earn-out consideration to the
former shareholders of Intown in connection with the achievement of certain 2019 and 2020 financial milestones. The final earn-out payment has no
maximum limit, but if certain targets are not met, there may be no earn-out payment. The contingent earn-out consideration had an estimated purchase price
fair value of $2.0 million as of March 31, 2019. As of December 31, 2019, the fair value of the earn-out was reduced to zero. This adjustment of $2.0
million was recorded within other (income) expense as of December 31, 2019.
The upfront cash paid for the Intown acquisition was financed with additional borrowings from the Company’s third-party financing agreement
described in Note 10. The Intown acquisition was accounted for under the acquisition method of accounting, and the assets acquired and liabilities
assumed, including identifiable intangible assets, were recorded based on their respective fair values as of the acquisition date. The total purchase price
consisted of the following:
(in thousands)
Cash consideration
Fair value of earn-out
Amount
11,537
2,010
13,547
$
$
RDS acquired Intown to further diversify RDS’ geographic mix and channel strength. The goodwill recorded reflects the strategic value of the
acquisition beyond the net value of its assets acquired less liabilities assumed. Goodwill of $0.1 million is deductible for tax purposes.
The Company incurred approximately $0.4 million in direct acquisition costs, all of which were expensed as incurred, and are included in general
and administrative expenses in the consolidated statements of operations. The Company has performed a valuation of the acquired assets and assumed
liabilities of Intown. Using the total consideration for the acquisition, the Company has estimated the allocations to such assets and liabilities. The
following table summarizes the allocation of the purchase price as of the transaction’s closing date.
(in thousands)
Accounts receivable
Inventory
Property and equipment
Goodwill
Other intangible assets
Total assets acquired
Total liabilities
Total consideration
Amount
1,392
1,155
1,092
4,698
5,310
13,647
100
13,547
$
$
$
An adjustment of approximately $0.8 million was recorded in the fourth quarter of 2019 to reduce the fair value of inventory and to increase the
value of goodwill. From the date of acquisition to December 31, 2019, Intown generated revenue of $17.8 million and net income of $2.2 million, which
are included in the Company’s Condensed consolidated statements of operations.
Pro Forma Results
The following unaudited pro forma information for the year ended December 31, 2019 and 2018 has been prepared to give effect to the acquisition
of Intown as if the acquisition had occurred on January 1, 2018. The pro forma information takes into account the preliminary purchase price allocation.
The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. This pro forma information does not purport
to represent what the actual results of operations of the Company would have been had the Intown acquisition occurred on such date, nor does it purport to
predict the results of operations for future periods.
F-21
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
(in thousands)
Pro Forma:
Total revenue
Net income (loss)
Our pro forma assumptions are as follows:
Year Ended December 31,
2019
2018
(unaudited)
$
$
613,225 $
6,787 $
510,465
(1,736)
•
•
•
•
Revenues and costs of sales were based on actual results for the years ended December 31, 2019 and 2018.
General and administrative expenses were based on actual results adjusted by $0.1 million and $0.7 million for the years ended December
31, 2019 and 2018, respectively, for the impact of the amortization expense of the intangible assets acquired with the acquisition.
Actual interest expense was adjusted by $0.2 million and $1.1 million for the years ended December 31, 2019 and 2018, respectively, for
the imputed interest on the acquired debt issued to fund the acquisition.
Income taxes were adjusted to impute the Company’s corporate rate during the period on the pro forma income before taxes.
Bedrock Acquisition
On January 31, 2018, ASG acquired the assets of a slab and tile distributor, Elegant Home Design, LLC (“Bedrock”), for total consideration of
$12.5 million with cash consideration of $11.5 million and $1.0 million accrued liability recorded as security for and source of payment of sellers’
obligations that occur within one year subsequent to the acquisition. The outstanding balance remaining of $1.0 million was paid in cash to the sellers in
2019. In addition to the consideration paid for Bedrock, the Company agreed to pay up to an additional $3.0 million to be allocated among three
individuals, subject to Bedrock meeting certain financial conditions defined in the purchase agreement and such individuals maintaining continuous
employment with the Company through January 31, 2019. These financial conditions were not met and accordingly, no payout was made to these
individuals. The Company did not record any compensation expense associated with this provision in 2019 or 2018.
The Bedrock acquisition was financed with $6.25 million of borrowing from the Company’s term loan described in Note 10 and the remainder
from ASG’s line of credit described in Note 9. The Bedrock acquisition was accounted for under the acquisition method of accounting, and the assets
acquired and liabilities assumed, including identifiable intangible assets, were recorded based on their respective estimated fair values as of the acquisition
date.
ASG acquired Bedrock to further expand its distribution presence in the Midwest, and to gain access to new geographies, supply chains, products,
and distribution rights. The goodwill recorded reflects the strategic value of the acquisition beyond the net value of its assets acquired less liability
assumed. The goodwill is deductible for tax purposes.
The Company incurred approximately $0.1 million in direct acquisition costs, all of which were expensed as incurred, and are included in general
and administrative expenses in the consolidated statements of operations. The Company has performed a valuation of the acquired assets and assumed
liabilities of Bedrock. The following table summarizes the allocation of the purchase price as of the transaction’s closing date:
F-22
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
(in thousands)
Accounts receivable
Inventory
Other current assets
Property and equipment
Goodwill
Other intangible assets
Other assets
Total assets acquired
Total liabilities
Total consideration
Amount
2,543
13,425
163
374
381
1,505
60
18,451
5,959
12,492
$
$
$
From the date of the Bedrock acquisition to December 31, 2018, Bedrock generated revenue of $27.7 million and net income of $1.9 million,
which are included in the Company’s consolidated statements of operations.
Pro Forma Results
The following unaudited pro forma information for the years ended December 31, 2018 and 2017 has been prepared to give effect to the acquisition
of Bedrock as if the acquisition had occurred on January 1, 2017. The pro forma information takes into account the purchase price allocation. This pro
forma information does not purport to represent what the actual results of operations of the Company would have been had the Bedrock acquisition
occurred on such date, nor does it purport to predict the results of operations for future periods.
(in thousands)
Pro Forma:
Total revenue
Net (loss)
Pro forma assumptions are as follows:
Year Ended December 31,
2017
2018
(unaudited)
$
$
491,984 $
(2,445) $
381,231
(10,568)
•
•
•
•
Revenues and costs of sales were based on actual results for the years ended December 31, 2018 and 2017.
Selling, general and administrative expenses were based on actual results adjusted by $0.02 million and $0.3 million for the years ended
December 31, 2018 and 2017, respectively, for the impact of the amortization expense of the intangible assets acquired with the
acquisition.
Actual interest expense was adjusted by $0.05 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively, for
the imputed interest on the acquired debt issued to fund the acquisition.
Income taxes were adjusted to impute the Company’s corporate effective rate during the period on the pro forma income before taxes.
NSI Acquisition
On March 19, 2018, ASG acquired the assets of NSI, LLC, a Maryland limited liability company (“NSI”), for approximately $0.3 million in cash.
The NSI acquisition and related transaction costs were financed by ASG’s line of credit described in Note 9. The NSI acquisition was accounted for under
the acquisition method of accounting, and the assets acquired and liabilities assumed, including identifiable intangible assets, were recorded based on their
respective estimated fair values as of the acquisition date.
F-23
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
The Company performed a valuation of the acquired assets and assumed liabilities of NSI. The goodwill is deductible for tax purposes. The
following table summarizes the estimated allocation of the preliminary purchase price as of the transaction’s closing date:
(in thousands)
Accounts receivable
Inventory
Goodwill
Total assets acquired
Total liabilities
Total consideration
Amount
251
689
390
1,330
1,040
290
$
$
$
From the date of the NSI acquisition to December 31, 2018, revenue and net income generated by NSI was not significant. Pro forma revenues and
net income for the years ended December 31, 2018 and 2017, respectively, were not significant. There were no significant direct acquisition costs
associated with the NSI acquisition.
Tuscany Acquisition
On August 22, 2018, ASG acquired the assets of The Tuscany Collection, LLC (“Tuscany”), a distributor of natural stone, quartz and tile in Las
Vegas, Nevada, for approximately $4.2 million in cash. The Tuscany acquisition and related transaction costs were financed by the Company’s line of
credit described in Note 9. The Tuscany acquisition was accounted for under the acquisition method of accounting and the assets acquired and liabilities
assumed, including identifiable intangible assets, were recorded based on their respective estimated fair values as of the acquisition date.
The Company incurred approximately $0.1 million in direct acquisition costs, all of which were expensed as incurred, and are included in general
and administrative expenses in the consolidated statements of operations. The Company has performed a valuation of the acquired assets and assumed
liabilities of Tuscany. The following table summarizes the estimated allocation of the purchase price as of the transaction’s closing date:
(in thousands)
Accounts receivable
Inventory
Goodwill
Other intangible assets
Other current assets
Total assets acquired
Total liabilities
Total consideration
Amount
167
2,258
1,081
2,685
161
6,352
2,200
4,152
$
$
$
Total goodwill deductible for tax purposes is $1.1 million. From the date of the Tuscany acquisition to December 31, 2018, revenue and net
income generated by Tuscany was not significant. Pro forma revenues and net income for the periods ended December 31, 2018 and 2017, respectively,
were not significant.
Summit Acquisition
On August 31, 2018, RDS acquired the assets of Summit Stoneworks, LLC (“Summit”), which is located in Austin, Texas, and is engaged in
builder design services and the fabrication and installation of stone products for commercial and residential applications, for $16 million in cash. The
agreement also provides for potential earn-out consideration of up to $3.5 million to the former shareholders of Summit for the achievement of certain 2018
and 2019 financial milestones. The contingent earn-out consideration had an estimated fair value of $1.9 million at the date of acquisition and at December
31, 2018, which was subsequently reduced to zero during 2019. During the year ended December 31, 2019, no payments were made on the earn-out as the
financial milestones were not met. An adjustment of $1.9 million was recorded within other (income) expense as of December 31, 2019. The Summit
acquisition was financed from the Company’s term loan described in Note 10. The Summit acquisition was accounted for under the acquisition method of
accounting and the assets acquired and liabilities assumed, including identifiable intangible assets, were recorded based on their respective fair values as of
the acquisition date.
F-24
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
The total purchase price consisted of the following:
(in thousands)
Cash consideration
Fair value of earn-out
Amount
16,000
1,851
17,851
$
$
The Company incurred approximately $0.3 million in direct acquisition costs, all of which were expensed as incurred, and are included in general
and administrative expenses in the consolidated statements of operations. The Company performed a valuation of the acquired assets and assumed
liabilities of Summit.
The acquisition expands the scale of the RDS segment into Austin and San Antonio, Texas markets. The goodwill recorded reflects the strategic
value of the acquisition beyond the net value of its assets acquired less liability assumed.
The following table summarizes the allocation of the purchase price as of the transaction’s closing date:
(in thousands)
Accounts receivable
Inventory
Property and equipment
Goodwill
Other intangible assets
Other assets
Total assets acquired
Total liabilities
Total consideration
Amount
1,249
1,059
1,042
8,304
8,280
14
19,948
2,097
17,851
$
$
$
Total goodwill deductible for tax purposes is $6.4 million. From the date of the Summit acquisition to December 31, 2018, Summit generated
revenue of $5.8 million and net income of $0.4 million, which are included in the Company’s consolidated statements of operations.
Pro Forma Results
The following unaudited pro forma information for the year ended December 31, 2018 and 2017 has been prepared to give effect to the acquisition
of Summit as if the acquisition had occurred on January 1, 2017. The pro forma information takes into account the purchase price allocation. This pro
forma information does not purport to represent what the actual results of operations of the Company would have been had the Summit acquisition
occurred on such date, nor does it purport to predict the results of operations for future periods.
(in thousands)
Pro Forma:
Total revenue
Net (loss)
Year Ended December 31,
2017
2018
(unaudited)
$
$
500,785 $
(3,954) $
370,645
(12,205)
F-25
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
Pro forma assumptions are as follows:
•
•
•
•
Revenues and costs of sales were based on actual results for the years ended December 31, 2018 and 2017.
Selling, general and administrative expenses were based on actual results adjusted by $0.8 million and $1.1 million for the years ended
December 31, 2018 and 2017, respectively, for the impact of the amortization expense of the intangible assets acquired with the
acquisition.
Actual interest expense was adjusted by $0.6 million and $0.9 million for the years ended December 31, 2018 and 2017, respectively, for
the imputed interest on the acquired debt issued to fund the acquisition.
Income taxes were adjusted to impute the Company’s corporate effective rate during the period on the pro forma income before taxes.
TAC Acquisition
On December 31, 2018, RDS purchased 100% of the issued and outstanding equity interests of T.A.C. Ceramic Tile Co. (“TAC”), which is located
in Manassas, Virginia, and specializes in design center selections and installation of all types of interior flooring surfaces, including tile, hardwood and
carpet, for cash consideration of $41.2 million.
The agreement also provides for potential earn-out consideration to the former shareholders of TAC for the achievement of certain 2019 financial
milestones. The contingent earn-out consideration had an estimated fair value of $2.3 million at the date of acquisition which was reduced to zero as of
December 31, 2019. During the year ended December 31, 2019, no payments were made on the earn-out as the financial milestones were not met. This
adjustment of $2.3 million was recorded within other (income) expense for the year ended December 31, 2019. The TAC acquisition was financed from
the Company’s term loan described in Note 10. The TAC acquisition was accounted for under the acquisition method of accounting and the assets acquired
and liabilities assumed, including identifiable intangible assets, were recorded based on their respective fair values as of the acquisition date.
The total purchase price consisted of the following:
(in thousands)
Cash consideration
Fair value of earn-out
Amount
41,210
2,265
43,475
$
$
The Company incurred approximately $0.7 million in direct acquisition costs, all of which were expensed as incurred, and are included in general
and administrative expenses in the consolidated statements of operations. Additionally, $0.4 million of deferred issuance costs incurred were capitalized.
The Company has performed a valuation of the acquired assets and assumed liabilities of TAC. Using the total consideration for the TAC acquisition, the
Company has estimated the allocations to such assets and liabilities.
The acquisition expands the scale of the RDS and diversifies RDS across geography, channel and product line, including the East region. The
acquisition will also assist in introducing a range of additional products to customers, including countertops and cabinets. These factors are the basis for
the excess purchase price paid over the value of the assets acquired and liabilities assumed, resulting in goodwill.
F-26
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
The following table summarizes the estimated allocation of the purchase price as of the transaction’s closing date:
(in thousands)
Cash
Accounts receivable
Inventory
Other current assets
Property and equipment
Goodwill
Other intangible assets
Other assets
Total assets acquired
Current liabilities
Deferred income taxes
Other long-term liabilities
Total liabilities
Total consideration
Amount
1,217
6,966
4,093
87
943
18,292
19,865
4,873
56,336
1,895
6,099
4,867
12,861
43,475
$
$
$
$
A purchase price adjustment of approximately $0.5 million was recorded in the fourth quarter of 2019 to reduce the fair value of inventory and
fixed assets and to increase the value of goodwill. Included in other long-term liabilities at the date of acquisition is an estimated uncertain tax position of
$4.4 million, as well as $0.5 million of combined interest and penalties, which is offset by a corresponding indemnification receivable recorded in other
assets, as all tax liabilities pre-acquisition are indemnified by the former owners. As TAC was acquired on December 31, 2018, no revenue or net income
generated by TAC was included in the Company’s 2018 consolidated statements of operations.
Pro Forma Results
The following unaudited pro forma information for the years ended December 31, 2018 and 2017 has been prepared to give effect to the acquisition
of TAC as if the acquisition had occurred on January 1, 2017. The pro forma information takes into account the preliminary purchase price allocation. This
pro forma information does not purport to represent what the actual results of operations of the Company would have been had the TAC acquisition
occurred on such date, nor does it purport to predict the results of operations for future periods.
(in thousands)
Pro Forma:
Total revenue
Net (loss)
Pro forma assumptions are as follows:
Year Ended December 31,
2017
2018
(unaudited)
$
$
562,219 $
(2,793) $
413,584
(12,308)
•
•
•
•
Revenues and costs of sales were based on actual results for the years ended December 31, 2018 and 2017
Selling, general and administrative expenses were based on actual results adjusted by $1.8 million and $1.8 million for the years ended
December 31, 2018 and 2017, respectively, for the impact of the amortization expense of the intangible assets acquired with the acquisition.
Selling, general and administrative expenses were also adjusted by $4.4 million and $3.7 million for the years ended December 31, 2018
and 2017, respectively, for the impact of significant nonrecurring charges.
Actual interest expense was adjusted by $0.6 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively, for
the imputed interest on the acquired debt issued to fund the acquisition.
Income taxes were adjusted to impute the Company’s corporate effective rate during the period on the pro forma income before taxes.
F-27
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
Pental Acquisition
On February 28, 2017, ASG executed an agreement to purchase 100% of the equity interests of Aquarius Seller, Inc., a company incorporated in
the state of Washington. Aquarius Seller, Inc. held 100% of the equity interests of Pental Granite and Marble, LLC (“Pental”), a Washington limited
liability company engaged in the selling of granite, marble and related products. Total consideration for the purchase of Aquarius Seller, Inc. was $88.6
million in cash, and 7,134,701.65 Class E2 Units of ASG with an estimated fair value of $10.0 million. Total capitalization changes due to the acquisition
resulted in the issuance of 21,736,168 Class E-1 Units, 7,156,104 Class E-2 Units and 568,435 Class C Units of G&M.
Also on February 28, 2017, ASG entered into a financing agreement with a third-party lender to borrow amounts up to $105.0 million to be used
for purposes of refinancing ASG’s existing debt, funding a portion of the purchase price for the acquisition of Aquarius Seller, Inc. and funding other
amounts defined in the financing agreement. In conjunction with the acquisition of Aquarius Seller, Inc., availability under ASG’s line of credit was
increased to $40.0 million.
The total purchase price consisted of the following:
(in thousands)
Cash consideration
Rollover equity
Amount
88,638
10,000
98,638
$
$
The acquisition was accounted for under the acquisition method of accounting and the assets acquired and liabilities assumed, including
identifiable intangible assets, were recorded based on their respective preliminary estimated fair values as of the acquisition date. The excess of purchase
price consideration over the estimated net fair value of assets acquired has been allocated to goodwill. Any change in the estimated fair value of the assets
acquired, liabilities assumed and rollover equity subsequent to the closing date, including changes from events after the closing date, will be recognized in
earnings in the period the estimated fair value changes.
ASG incurred approximately $3.4 million in direct acquisition costs, all of which were expensed as incurred, and are included in general and
administrative expenses in the consolidated statements of operations.
Management believes the acquisition creates a stronger combined entity primarily due to the increased geographic markets the combined entity will
service and the broadening of the company’s product offering. These two factors are the basis for the excess purchase price paid over the value of the assets
acquired and liabilities assumed, resulting in goodwill.
The following is a summary of the purchase price allocation for the Company’s acquisition of Pental:
(in thousands)
Cash
Accounts receivable
Inventory
Property and equipment
Intangible assets subject to amortization
Goodwill
Other assets
Total assets acquired
Total liabilities
Total consideration
Amount
637
5,389
30,694
2,306
43,800
25,388
412
108,626
9,988
98,638
$
$
$
From the date of the Pental acquisition to December 31, 2017, Pental generated net revenue of $84.7 million and a net income of $16.2 million,
which are included in the consolidated statements of operations.
F-28
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
Pro Forma Results
The following unaudited pro forma information for the period ended December 31, 2017, has been prepared to give effect to the acquisition of
Pental as if the acquisition had occurred on January 1, 2017. This pro forma information does not purport to represent what the actual results of operations
of the Company would have been had this acquisition occurred on such date, nor does it purport to predict the results of operations for future periods.
(in thousands)
Pro Forma:
Total revenue
Net (loss) income
Pro forma assumptions are as follows:
Year Ended
December 31,
2017
(unaudited)
$
$
367,013
(11,263)
•
•
•
•
Revenues and costs of sales were based on actual results adjusted for intercompany eliminations for the year ended December 31, 2017.
General and administrative expenses were based on actual results adjusted by $0.7 million for the year ended December 31, 2017, for the
impact of the amortization expense of the intangible assets acquired with the acquisition.
Actual interest expense was adjusted by $1.2 million for the year ended December 31, 2017, for the imputed interest on the acquired debt
issued to fund the acquisition.
Income taxes were adjusted to impute the Company’s corporate rate on the pro forma income before taxes.
Cosmic Acquisition
On October 2, 2017, ASG executed an asset purchase agreement with Cosmic Stone & Tile Distributors, Inc. (“Cosmic”), a New Jersey
corporation. Cosmic was established in 1993 and is a slab and tile distributor serving the Tri-State area and most Mid-Atlantic States. The total purchase
price was $2.0 million in cash and a $0.2 accrued liability recorded as security for and source of payment of seller’s obligations as defined in the purchase
agreement that occur within one year subsequent to the acquisition. The outstanding balance remaining of $0.2 million was paid in cash to the sellers in
October 2018. The purchase price was allocated as $2.0 million in inventory and $0.2 in property and equipment. From the date of the Cosmic acquisition
to December 31, 2017, net revenue and net income generated by Cosmic was not significant. Pro forma revenue and net income for the period ended
December 31, 2017 was not significant.
Management believes the Cosmic acquisition created a stronger combined entity through expansion into the Tri-State and Mid-Atlantic regions.
F-29
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
Greencraft Acquisition
On December 29, 2017, RDS executed an agreement to purchase 100% of the equity interests of Greencraft Holdings, LLC (“Greencraft”), an
Arizona limited liability company, which provides full-service as a general contractor, performing installations and renovation-based construction services
with revenues generated largely from cabinet and flooring installations. Greencraft wholly owns Casa Verde, Stone and Tile, and Greencraft Interiors. Total
consideration for the acquisition was $33.0 million with cash consideration of $24.2 million, $3.0 million cash placed in escrow, and an earn-out with an
acquisition date fair value of $5.8 million. The agreement provides for the amount in escrow as security for and source of payment of seller’s obligations as
defined in the purchase agreement that occur within one year subsequent to the acquisition. An adjustment to the total consideration of $0.3 million was
recorded during 2018. The balance remaining in escrow at December 31, 2018 was released to the sellers in January 2019. The Company has included the
$3.0 million placed in escrow as restricted cash on the consolidated balance sheets and has included a liability in accrued expenses and other current
liabilities for $3.0 million, the fair value of the liability due to the sellers at the release date. The agreement also provided for potential earn-out
consideration of up to $8.0 million to the former shareholders of Greencraft for the achievement of certain 2018 financial milestones. The earn-out
estimated fair value was $7.9 million as of December 31, 2018 and was recorded in accrued expenses and other current liabilities. The fair value at
December 31, 2018, was calculated using the actual results achieved on the 2018 financial milestones. The earn-out was paid to the former owners in May
2019 in the amount of $8.0 million. The change in the fair value of the earn-out of $0.1 million and $2.1 million was recorded as other (income) expense
for the years ended December 31, 2019 and 2018, respectively. The acquisition was financed with $13.5 million of long-term debt and the remaining with
funds from the line of credit.
The total purchase price consisted of the following:
(in thousands)
Cash consideration
Fair value of earn-out
Amount
27,218
5,794
33,012
$
$
The acquisition was accounted for under the acquisition method of accounting and the assets acquired and liabilities assumed, including
identifiable intangible assets, were recorded based on their respective preliminary estimated fair values as of the acquisition date. The excess of purchase
price consideration over the estimated net fair value of assets acquired has been allocated to goodwill. Any change in the estimated fair value of the assets
acquired and liabilities assumed subsequent to the closing date, including changes from events after the closing date, will be recognized in earnings in the
period the estimated fair value changes.
RDS incurred approximately $0.4 million in direct acquisition costs, all of which were expensed as incurred, and are included in general and
administrative expenses in the consolidated statements of operations.
Management believes the Greencraft acquisition created a stronger combined entity due to Greencraft’s presence and reputation in Arizona as well
as its expertise with cabinets installation and renovation-based construction services. These two factors are the basis for the excess purchase price paid over
the value of the assets acquired and liabilities assumed, resulting in goodwill.
F-30
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions (Continued)
The following is a summary of the purchase price allocation for the Company’s acquisition of Greencraft:
(in thousands)
Cash
Accounts receivable
Inventory
Property and equipment
Intangible assets subject to amortization
Goodwill
Other assets
Total assets acquired
Total liabilities
Total consideration
Amount
191
2,606
1,259
676
18,285
10,702
433
34,152
1,140
33,012
$
$
$
During the two days from the date of acquisition to December 31, 2017, Greencraft did not generate any net revenue or net income.
Pro Forma Results
The following unaudited pro forma information for the period ended December 31, 2017, has been prepared to give effect to the acquisition of
Greencraft as if the acquisition had occurred on January 1, 2017. This pro forma information does not purport to represent what the actual results of
operations of the Company would have been had this acquisition occurred on such date, nor does it purport to predict the results of operations for future
periods.
(in thousands)
Pro Forma:
Total revenue
Net (loss) income
Pro forma assumptions are as follows:
Year Ended
December 31,
2017
(unaudited)
$
$
386,873
(9,861)
•
•
•
•
Revenues and costs of sales were based on actual results for the year ended December 31, 2017.
General and administrative expenses were based on actual results adjusted by $1.9 million for the year ended December 31, 2017, for the
impact of the amortization expense of the intangible assets acquired with the acquisition.
Actual interest expense was adjusted by $1.4 million for the year ended December 31, 2017, for the imputed interest on the acquired debt
issued to fund the acquisition.
Income taxes were adjusted to impute the Company’s corporate rate on the pro forma income before taxes.
6. Inventories
Inventories are valued at the lower of cost (using specific identification and first-in first-out methods) or net realizable value. The significant
components of inventory consisted of the following at December 31:
(in thousands)
Raw materials
Installations in process
2019
2018
102,438 $
2,303
104,741 $
103,193
5,077
108,270
$
$
F-31
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Property and equipment, net
Property and equipment consisted of the following at December 31:
(in thousands)
Vehicles
Machinery and equipment
Leasehold improvements
Furniture and fixtures
Computer equipment and internal-use software
Other
Less: accumulated depreciation and amortization
Property and equipment, net
2019
2018
10,759 $
9,672
8,962
6,906
10,167
1,048
47,514 $
(21,020)
26,494 $
8,553
4,513
7,992
7,058
4,194
526
32,836
(13,038)
19,798
$
$
$
Depreciation and amortization expense of property and equipment totaled $8.4 million, $6.6 million and $3.9 million for the years ended
December 31, 2019, 2018, and 2017, respectively. For the year ended December 31, 2019, $3.7 million and $4.7 million of depreciation and amortization
expense was included in cost of goods sold and general and administrative expense, respectively. For the year ended December 31, 2018, $3.7 million and
$2.9 million of depreciation and amortization expense was included in cost of goods sold and general and administrative expense, respectively. For the year
ended December 31, 2017, $2.1 million and $1.8 million of depreciation and amortization expense was included in cost of goods sold and general and
administrative expense, respectively.
8. Goodwill and Intangible Assets
Goodwill
The change in carrying amount of goodwill by reporting unit was as follows:
(in thousands)
December 31, 2017
NSI Acquisition
Bedrock Acquisition
Tuscany Acquisition
Summit Acquisition
TAC Acquisition
Greencraft measurement period adjustment
December 31, 2018
Intown Acquisition
TAC measurement period adjustment
December 31, 2019
ASG
RDS
Total Goodwill
$
$
$
43,712 $
390
381
1,081
—
—
—
45,564 $
—
—
45,564 $
22,614 $
—
—
—
8,304
17,794
317
49,029 $
4,698
498
54,225 $
66,326
390
381
1,081
8,304
17,794
317
94,593
4,698
498
99,789
F-32
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Goodwill and Intangible Assets (Continued)
Intangibles Assets
The following table provides the gross carrying amount, accumulated amortization and net book value for each class of intangible assets by
reporting unit as of December 31, 2019:
(in thousands)
Customer relationships
Trade names
Non-Compete agreements
(in thousands)
Customer relationships
Trade names
Non-Compete agreements
(in thousands)
Customer relationships
Trade names
Non-Compete agreements
Gross Carrying
Amount
ASG
RDS
Total Gross
Carrying
Amount
$
$
60,180 $
7,740
50
67,970 $
60,060 $
18,090
350
78,500 $
120,240
25,830
400
146,470
Accumulated
Amortization
$
$
$
$
Net Book
Value
ASG
RDS
(19,410) $
(2,300)
(21)
(21,731) $
(28,841) $
(5,013)
(137)
(33,991) $
ASG
RDS
40,770 $
5,440
29
46,239 $
31,219 $
13,077
213
44,509 $
Total
Accumulated
Amortization
(48,251)
(7,313)
(158)
(55,722)
Total
Net Book
Value
71,989
18,517
242
90,748
The following table provides the gross carrying amount, accumulated amortization and net book value for each class of intangible assets by
reporting unit as of December 31, 2018:
(in thousands)
Customer relationships
Trade names
Non-Compete agreements
(in thousands)
Customer relationships
Trade names
Non-Compete agreements
(in thousands)
Customer relationships
Trade names
Non-Compete agreements
Gross Carrying
Amount
ASG
RDS
Total Gross
Carrying
Amount
$
$
60,180 $
7,740
50
67,970 $
55,540 $
16,800
350
72,690 $
115,720
24,540
400
140,660
Accumulated
Amortization
$
$
$
$
Net Book
Value
ASG
RDS
(13,268) $
(1,457)
(9)
(14,734) $
(22,609) $
(2,543)
(59)
(25,211) $
ASG
RDS
Total
Accumulated
Amortization
(35,877)
(4,000)
(68)
(39,945)
Total
Net Book
Value
46,912 $
6,283
41
53,236 $
32,931 $
14,257
291
47,479 $
79,843
20,540
332
100,715
F-33
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Goodwill and Intangible Assets (Continued)
Amortization expense on intangible assets totaled $15.8 million, $13.9 million, and $10.9 million during the years ended December 31, 2019, 2018,
and 2017, respectively.
The estimated annual amortization expense for the next five years and thereafter is as follows:
Year Ending December 31:
2020
2021
2022
2023
2024
Thereafter
9. Lines of Credit
SIC Credit Facility
$
$
12,734
12,603
12,402
12,038
10,313
30,658
90,748
In June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as of
June 28, 2018, which was amended on December 11, 2018, July 23, 2019 and August 19, 2019 (“SIC Credit Facility”), with a commercial bank, which
amended and restated each of the RDS credit agreement and the ASG credit agreement in their entirety. The SIC Credit Facility will be used by the
Company, including both RDS and ASG, for operational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed
revolving credit facility that provides for borrowings up to an aggregate of $90 million, which was increased to $100 million through amendment entered
into on August 19, 2019.
Under the terms of the SIC Credit Facility, the Company has the ability to request the issuance of letters of credit up to a maximum aggregate
stated amount of $15 million. The ability to borrow revolving loans under the SIC Credit Facility is reduced on a dollar-for-dollar basis by the aggregate
stated amount of all outstanding letters of credit. The indebtedness outstanding under the SIC Credit Facility is secured by substantially all of the assets of
the Company and its subsidiaries.
The revolving loans under the SIC Credit Facility bear interest at a floating rate equal to an index rate (which the Company can elect between an
index based on a LIBOR based rate or an index based on a Prime, Federal Funds or LIBOR based rate) plus an applicable margin. The applicable margin is
determined quarterly based on the borrowers’ average daily availability (calculated by reference to their accounts receivable and inventory that comprise
their borrowing base) during the immediately preceding fiscal quarter. Upon the occurrence of certain events of default under the SIC Credit Facility, the
interest rate applicable to the obligations thereunder may be increased by two hundred basis points (2.00%). All revolving loans under the SIC Credit
Facility are due and payable in full on June 28, 2023, subject to earlier acceleration upon certain conditions. Letter of credit obligations under the SIC
Credit Facility are due and payable on the date set forth in the respective loan documents or upon demand by the lender.
Under the SIC Credit Facility, the Company and its subsidiaries are required to comply with certain customary restrictive covenants that, among
other things and with certain exceptions, limit the ability of the Company and its subsidiaries, as applicable, to (i) incur additional indebtedness and liens in
connection therewith, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with
affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business.
As of December 31, 2019, $22.2 million was outstanding under the SIC Credit Facility. The Company also has $0.4 million in letters of credit
outstanding at December 31, 2019. The SIC Credit Facility is subject to certain financial covenants. At December 31, 2019, the Company was in
compliance with the financial covenants.
F-34
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Lines of Credit (Continued)
The Company incurred debt issuance costs of $0.5 million in connection with the SIC Credit Facility. These costs will be amortized to non-cash
interest expense over the term of the agreement on a straight-line basis which approximates the effective interest method. Non-cash interest expense related
to these costs was $0.1 million and $0.05 million for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, SIC had
$0.3 million and $0.4 million, respectively, of unamortized debt issuance costs related to the SIC Credit Facility. These costs are shown as a direct
deduction of the line of credit liability in the accompanying Company’s consolidated balance sheets.
10. Long-Term Debt
Long-term debt consisted of the following at December 31:
(in thousands)
RDS equipment and vehicle notes
ASG term loans
Unamortized debt issuance costs
Total long-term debt
Current portion of long-term debt, net of
financing fees
Long-term debt, net of current portion and
financing fees
2019
2018
$
489 $
154,177
154,666
(1,618)
153,048
956
144,983
145,939
(2,129)
143,810
$
$
11,749 $
1,368
141,299 $
142,442
RDS Equipment and Vehicle Notes
RDS has financed the acquisition of certain vehicles, property, and equipment with notes payable that mature at various times through May 2023.
As of December 31, 2019 and 2018, the outstanding balance on equipment and vehicle notes payable, totaled $0.5 million and $1.0 million, respectively.
These notes are secured by the vehicles and equipment that were financed and require monthly interest and principal payments. The aggregate of the
monthly payments was approximately $0.03 million and $0.05 million at December 31, 2019 and 2018, respectively. The interest rates on the notes ranged
from 0% to 8.85% per annum for 2019 and 2018, and the weighted-average interest rate on the outstanding balances at December 31, 2019 and 2018, was
5.12% and 4.85% respectively.
ASG Term Loans
In December 2015, ASG entered into a loan agreement with a financial institution offering a term loan in the aggregate amount of $1.7 million to
finance the purchase of equipment. Amounts due under the term loan bear interest at 3.75% per annum with interest payable monthly. Principal payments
are due in monthly installments beginning April 8, 2016 through maturity (March 8, 2021). At December 31, 2019 and 2018, ASG had $0.4 million and
$0.7 million outstanding on this loan, respectively.
On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with the lenders party thereto and
Cerberus Business Finance, LLC, as the agent for the lenders (“Term Loan Facility”), which initially provided for a $105.0 million term loan facility. The
Term Loan Facility was amended in June 2018 to define the borrowers as Select Interior Concepts, Inc. and its subsidiaries, was amended in August 2018
to adjust the borrowing capacity to $101.4 million, and was amended in December 2018 to increase the borrowing capacity to $174.2 million. The
Company borrowed an additional $11.5 million under the Term Loan Facility to fund the acquisition of Intown on March 1, 2019. In July 2019, the
agreement was amended to revise certain covenants. On August 19, 2019, the Term Loan Facility was further amended, resulting in an adjusted rate of
interest payable on borrowings under the Term Loan Facility. Additionally, the August 19, 2019 amendment imposes a prepayment premium with respect
to an optional prepayment of the term loans under the Financing Agreement occurring within fifteen months of August 19, 2019 (other than prepayments in
connection with a change of control) in an amount equal to 1.50% of any such principal amount prepaid.
F-35
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Long-Term Debt (Continued)
Subsequent to the August 2019 amendment, borrowings under the Term Loan Facility bear interest per year equal to either: (i) the base rate plus
4.75% for a base rate loan, or (ii) the LIBOR rate plus 6.75% for a LIBOR loan in the event the Leverage Ratio is greater than 2.40 to 1:00. In the event
the leverage ratio is less than 2.40 to 1.00, the rates decrease to either (i) the base rate plus 4.25% for a base rate loan, or (ii) the LIBOR rate plus 6.25% for
a LIBOR loan. The base rate is the greater of the publicly announced interest rate by the reference bank as its reference rate, the base commercial lending
rate or prime rate, and 3.5% per annum. The interest rate assessed as of December 31, 2019 was 8.45%. Interest is payable monthly with principal
payments due in quarterly installments beginning July 1, 2017 through maturity (February 28, 2023).
Following the delivery of audited annual financial statements for each fiscal year, the Term Loan Facility requires the Company to prepay amounts
outstanding under the Term Loan Facility with (i) 75% of the excess cash flow of the Company minus the aggregate principal amount of all optional
prepayments made in such preceding fiscal year, if the leverage ratio is greater than 3.25:1.00, or (ii) 50% of the excess cash flow of the Company minus
the aggregate principal amount of all optional prepayments made in such preceding fiscal year, if the leverage ratio is less than or equal to 3.25:1.00.
In addition, the Term Loan Facility also requires the Company to prepay amounts outstanding, subject to certain exceptions (and, with respect to
clauses (i) and (ii) below, certain limited reinvestment rights), with: (i) 100% of the net proceeds of any asset disposition in excess of $0.75 million in any
fiscal year, (ii) 100% of any insurance or condemnation awards that are greater than $2.5 million, (iii) 100% of the net proceeds of any equity issuances,
(iv) 100% of the net proceeds of any issuance of indebtedness (other than certain permitted indebtedness), and (v) 100% of any net cash proceeds received
outside the ordinary course of business. The estimated prepayment amount due under the terms of the agreement in 2020 is $10.6 million, which is
classified within the current portion of long-term debt on the consolidated balance sheet as of December 31, 2019.
All term loans under the Term Loan Facility are due and payable in full on February 28, 2023, subject to earlier acceleration upon certain
conditions.
Under the Term Loan Facility, the Company is required to comply with certain customary restrictive covenants that, among other things and with
certain exceptions, limit the ability of the Company to (i) incur additional indebtedness and liens, (ii) pay dividends and make certain other distributions,
(iii) sell or dispose of property or assets, (iv) make loans, (v) make payment of certain debt, (vi) make fundamental changes, (vii) enter into transactions
with affiliates, and (viii) engage in any new businesses. The Term Loan Facility also contains certain customary representations and warranties, affirmative
covenants, and reporting obligations.
As of December 31, 2019 and 2018, the Company had $153.8 million and $144.2 million outstanding, respectively, under the Term Loan Facility.
Substantially all of the Company’s assets are collateral for these loans except assets collateralized by the SIC Credit Facility which hold a senior
position. These assets include all of the Company’s accounts receivable and inventory. The Company is also restricted from paying dividends to its
stockholders. Additionally, substantially all of the net assets of the Company’s subsidiaries are restricted by the Term Loan Facility from providing loans,
advances and dividends to the SIC parent company. The Company is required to meet certain financial and nonfinancial covenants pursuant to these term
loans. The Company was in compliance with all financial and nonfinancial covenants as of December 31, 2019.
ASG incurred debt issuance costs in connection with its term loans. These costs are being amortized to non-cash interest expense over the terms of
the related notes on a straight-line basis, which approximates the effective interest rate method. Non-cash interest expense related to these costs was $0.5
million for each of the years ended December 31, 2019, 2018 and 2017. Additionally, ASG expensed the remaining unamortized debt issuance costs for the
refinanced debt of $0.6 million as extinguishment of debt in February 2017. At December 31, 2019 and 2018, the unamortized debt issuance costs related
to the term loans totaled $1.6 million and $2.1 million, respectively, and are shown as a direct deduction from the liability on the accompanying
consolidated balance sheets.
F-36
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Long-Term Debt (Continued)
Future Maturities
At December 31, 2019, the future maturities of the Company’s long-term debt for each of the next five years and thereafter are as follow:
2020
2021
2022
2023
Unamortized balance remaining of financing fees
Total long-term debt net of financing fees
Current portion of long-term debt net of financing fees
Long term debt net of financing fees
$
$
$
12,260
1,191
1,112
140,103
154,666
(1,618)
153,048
(11,749)
141,299
11. Commitments and Contingencies
Equity Tracking Incentive Plan
RDS granted exit payments under the Equity Tracking Incentive Program during 2015 to four executives. The executives were eligible to receive
an exit payment if certain equity targets are met upon an Exit event. The amount of the Exit Payment would be based on the additional equity value
achieved by the Company above the initial equity investment by TCFI LARK, LLC, net of all of the anticipated Exit Payments, on the first to occur of the
following events: (i) RDS’ initial public offering, (ii) the sale of all or substantially all of the assets of RDS to an unrelated person or entity, or (iii) any
other similar transaction in which Trive Capital sells or transfers all of its ownership to an unrelated third party. The Exit Payment shall vest according to
the vesting scheduled denoted in the arrangement and will be settled in cash. If the executive ceases to be employed by RDS and its subsidiaries for any or
no reason (other than termination for cause) prior to an Exit, the executive may become vested up to a maximum of 50% of the Exit Payment depending on
the length of continued employment. The remaining 50% of the Exit Payment will vest only if the executive is employed through the date of the Exit. The
Company did not recognize a liability on the date of grant or at December 31, 2016 as the relevant event had not occurred. With the November 2017
Private Offering and Private Placement item (iii) above triggered the payment under the Equity Tracking Incentive Plan to the four executives. For the year
ended December 31, 2017, RDS recognized $3.5 million of general and administrative expense on the consolidated statements of operations related to these
payments.
Leases
The Company leases certain vehicles and equipment under leases classified as capital leases. The leased vehicles are included as property, plant
and equipment and amortized to accumulated amortization on a straight line basis over the life of the lease, typically four years. The total acquisition cost
included in PP&E related to the leased vehicles is $11.2 million and $2.7 million at December 31, 2019 and 2018, respectively. Total accumulated
amortization related to the leased vehicles is $1.6 million and $0.5 million at December 31, 2019 and 2018, respectively, with amortization expense totaling
$1.1 million, $0.5 million and $0.05 million for the years ended December 31, 2019, 2018 and 2017, respectively. Included in the capital lease balances is
approximately $2.7 million of assets that were sold and subsequently leased back during 2019 related to certain ERP software and equipment. The
transaction did not qualify for sale-leaseback accounting and no sale was recognized. Proceeds from the transaction were reported as a financing activity in
the statement of cash flows for the year ended December 31, 2019.
RDS leases its corporate, administrative, fabrication and warehousing facilities under long-term non-cancelable operating lease agreements expiring at
various dates through December 2023. The monthly rents are subject to annual increases and generally require the payment of utilities, real estate taxes,
insurance and repairs. Three of RDS’ facility leases are with a company owned by a stockholder of SIC and six of RDS’ facility leases are with employees
or contractors of RDS.
F-37
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Commitments and Contingencies (Continued)
RDS also has operating leases for certain office equipment and vehicles under long-term lease agreements expiring at various dates through 2022.
ASG leases its facilities and equipment under long-term non-cancellable operating lease agreements expiring at various dates through October
2029. The facility leases contain predetermined fixed escalations of the minimum rentals. One of ASG’s facility leases are with companies owned by a
related party.
SIC leases its corporate facilities under a long-term non-cancelable operating lease through October 2022.
The Company recognizes rent expense on a straight-line basis and records the difference between the recognized rent expense and amounts payable
under the lease as deferred rent. Aggregate deferred rent at December 31, 2019 and 2018 was $2.2 million and $1.9 million, respectively. Aggregate rent
expense for the years ended December 31, 2019, 2018, and 2017 totaled $19.1 million, $14.3 million and $7.5 million, respectively.
Aggregate future minimum payments under capital leases and noncancelable operating leases at December 31, 2019 are as follows:
(in thousands)
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of net minimum lease payments
Less: current maturities of capital lease obligations
Long-term capital lease obligations
Net Lease
Commitments
17,993
16,358
13,637
8,249
3,349
5,387
64,973
12,792 $
11,237
9,289
5,856
2,489
4,923
46,586 $
Capital
Lease
Obligations
Related
Party
Operating
Lease
Obligations
Third
Party
Operating
Lease
Obligations
2,449 $
2,385
2,030
1,282
-
-
8,146 $
2,752 $
2,736
2,318
1,111
860
464
10,241 $
939
9,302
2,395
6,907
$
$
$
F-38
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Commitments and Contingencies (Continued)
Litigation
The Company experiences routine litigation in the normal course of its business. Production residential builders in California are primarily sued for
alleged construction defects. As a practice, residential builders name all subcontractors in the lawsuit whether or not the subcontractor has any connection,
direct or indirect, with the alleged defect. The Company, as a subcontractor, is involved in these lawsuits as a result. The Company generally has no or
minimal liability in the majority of these lawsuits. The Company’s insurance policies’ self-insured retention (“SIR”) or/deductible typically ranges from
$0.01 million to $0.02 million. In the event that the Company has exposure beyond its SIR/deductible, the Company’s general liability policy is triggered
and the general liability insurance and the insurance carrier defends the Company in the lawsuit and is responsible for additional exposure up to policy
limits. The Company has consistently maintained general liability insurance with $2.0 million aggregate and $1.0 million per occurrence limits.
Management does not believe that any pending or threatened litigation will have a material adverse effect on the Company’s combined business, financial
condition, results of operations, and/or cash flows.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and
provide for general indemnifications, including to lessors of office and warehouse space for certain actions arising during the Company’s tenancy and to the
Company’s customers. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in
the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification
obligations. However, the Company may record charges in the future as a result of these indemnification obligations.
Exclusive Distributor Rights
Pental’s main supplier has agreed to allow Pental exclusive distribution rights in 23 states in the United States. To maintain these rights, Pental
must meet certain minimum purchase requirements. Purchase volumes through December 31, 2020 must be a minimum purchase of 90 containers per
month. Using an estimated price per container based on the 2019 average price per container the future minimum purchases to maintain the exclusive rights
as of December 31, 2019 are as follows:
(in thousands)
2020
Amount
$
37,417
An updated exclusive distributor rights agreement with Pental’s main supplier was entered into in February 2020 and supersedes the arrangement in
place at December 31, 2019. The new agreement now encompasses all of the ASG segment and not only Pental. The updated minimum purchase volumes
agreed to, using an estimated price per container based on the 2019 average price per container, through December 31, 2025 are as follows:
(in thousands)
2020
2021
2022
2023
2024
2025
Amount
71,715
89,384
108,093
128,880
153,824
184,589
736,485
$
$
F-39
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Commitments and Contingencies (Continued)
If the Company falls short of these minimum requirements in any given calendar year, the Company has agreed to negotiate with the supplier to
arrive at a mutually acceptable resolution. There are no financial penalties to the Company if such commitments are not met; however, the supplier reserves
the right to remove exclusive distribution rights privileges.
Purchase Commitments
The Company also has contracted to minimum purchase commitments with certain suppliers. RDS has committed to purchase $2 million in
products annually for each of the calendar years 2020 and 2021 with a certain supplier. Financial penalties for not achieving the minimum purchase
commitment amount are equal to 15% of the shortfall amount.
12. Stock Compensation
On November 22, 2017, the Company adopted the Select Interior Concepts, Inc. 2017 Incentive Compensation Plan (the “2017 Plan”). Upon the
adoption of the 2017 Plan, the maximum aggregate number of shares issuable thereunder was 2,561,463 shares. As of December 31, 2019, there were
approximately 1,825,123 shares of the Company’s common stock subject to outstanding awards and approximately 411,426 shares of the Company’s common
stock were reserved and available for future awards under the 2017 Plan.
On March 26, 2019, the board of directors adopted the Select Interior Concepts, Inc. 2019 Long-Term Incentive Plan (the “2019 Incentive Plan”),
which was approved at the 2019 Annual Meeting of Stockholders on May 15, 2019. The 2019 Incentive Plan serves as the successor to the 2017 Plan;
however, shares continue to be available for award grants under the 2017 plan following the effectiveness of the 2019 plan. The maximum aggregate number
of shares issuable under the 2019 plan is 1,700,000. No awards had been issued under the 2019 Incentive Plan as of December 31, 2019.
The 2017 Plan and the 2019 Incentive Plan (collectively, “the Plans”), permit the grant of incentive stock options to employees and the grant of
nonstatutory stock options, performance awards, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards to the
Company’s employees, directors and consultants at the sole discretion of the Company’s board of directors.
Stock Options
The Company’s board of directors administers the Plans, selects the individuals to whom options will be granted, and determines the number of
options to be granted and the term and exercise price of each option. Incentive stock options granted pursuant to the terms of the Plans cannot be granted
with an exercise price of less than 100% of the fair market value of the underlying stock on the date of grant (110% if the award is issued to a 10% or more
stockholder of the Company). The term of the options granted under the Plan cannot be greater than ten years; five years for incentive stock options granted
to optionees who have a greater than 10% ownership interest in the Company.
If an option expires under the Plans, such as upon termination of employment, becomes unexercisable without having been exercised in full, is
surrendered pursuant to an option exchange program, or settled in a manner that does not result in the issuance of shares, the unpurchased shares will
become available for future grant or sale under the Plans. If the employee does not exercise vested options upon termination, these options will expire and
revert back to the option pool of the Plans. The Company’s policy is to issue new shares of common stock upon the exercise of stock options.
The Company’s has not had any stock option activity under the Plans for the years ended December 31, 2019, 2018 and 2017.
F-40
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. Stock Compensation (Continued)
Restricted Stock
Restricted stock awards and restricted stock unit awards are grants of shares of the Company’s common stock or rights to receive shares of the
Company’s common stock that are subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Recipients of
restricted stock awards generally will have voting and dividend rights with respect to such shares prior to vesting, subject to such awards’ forfeiture
provisions, unless the board of directors provides otherwise. Recipients of restricted stock unit awards generally will not have voting and dividend rights
unless and until shares of common stock are issued with respect to such awards. Shares of restricted stock that do not vest for any reason will be forfeited
by the recipient and will revert to the Company.
For the year ended December 31, 2019, 1,453,205 restricted stock units were granted to certain directors, executives, and key employees, and such
awards are subject to vesting over a period ranging from one to three years, and certain other conditions, including continuous service to the Company,
following the date of the restricted stock unit agreement. The shares vest ratably on an annual basis. Additionally, restricted stock units were granted to
certain executives and include both a service and a performance condition. The performance condition is achievement of a 2021 earnings target and the
level of achievement of the earnings target determines the number of shares that will be issued. The number of shares to be issued at achievement of 100%
of the earnings target is 573,824, and up to 1,147,648 shares will be issued upon achievement of 200% of the earnings target. The 200% target share
amount of 1,147,648 is included as granted in the table below of nonvested shares outstanding.
The Company estimated the fair value of these shares on the date the shares were granted and recognizes the resulting fair value over the requisite
service period. The grant date fair value for the restricted stock units during the years ended December 31, 2019, 2018 and 2017 was determined using the
closing share price on the date of grant.
A summary of the restricted stock activity for the Plans for the years ended December 31, 2019, 2018 and 2017 is as follows:
(in thousands)
Nonvested shares at January 1, 2017
Granted
Forfeited
Vested
Nonvested shares at December 31, 2017
Granted
Forfeited
Vested
Nonvested shares at December 31, 2018
Granted
Forfeited
Vested
Nonvested shares at December 31, 2019
Nonvested
Shares
Outstanding
Weighted
Average
Grant
Date Fair
Value
—
356,368 $
—
—
356,368 $
779,016 $
(281,762)
(27,646)
825,976 $
1,453,205 $
(197,185)
(256,873)
1,825,123 $
—
12.00
—
—
12.00
11.83
12.00
12.00
11.84
12.99
12.00
11.79
12.75
As of December 31, 2019, total remaining equity-based compensation expense for unvested restricted stock is $10.6 million, which is expected to
be recognized over a weighted average remaining period of 2.1 years. Equity -based compensation expense recognized for restricted stock for the years
ended December 31, 2019, 2018 and 2017 was $4.7 million, $2.5 million and $0.2, respectively. The recognized tax benefit for stock compensation
expense for the year ended December 31, 2019 and 2018 was $0.4 million and $1.0 million, respectively. There was no significant tax benefit recorded for
stock compensation expense in 2017.
F-41
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. Stock Compensation (Continued)
In addition to the 1,825,123 nonvested shares outstanding, management awarded 2019 annual compensation bonuses in equity shares instead of
cash. These bonuses are estimated to be settled in the first quarter of 2020 and will be settled at fixed amounts using the stock price on or around the date
of settlement. The estimated number of shares to be awarded to executives upon settlement in 2020 is approximately 108,726 shares, using the estimated
annual compensation cost and closing stock price at December 31, 2019. The compensation expense associated with these awards is $1.0 million for the
year ended December 31, 2019. The related liability associated with these bonuses is recorded in accrued expenses and other current liabilities as of
December 31, 2019.
Phantom Stock
Phantom stock awards are grants of shares of the Company’s common stock that are settled in cash and subject to various restrictions, including
restrictions on transferability, vesting and forfeiture provisions. Recipients of phantom stock awards generally will not have voting and dividend rights with
respect to such shares upon grant without regard to vesting, unless the Company’s board of directors provides otherwise. Shares of phantom stock that do
not vest for any reason will be forfeited by the recipient and will revert to the Company.
On November 22, 2017, concurrent with November 2017 Private Offering and Private Placement, 356,368 shares of phantom stock were granted to
certain members of the executive management team and members of the Company’s board of directors subject to certain vesting conditions including
continuous service to the Company and meeting other Company performance conditions, following the date of the phantom stock agreement. As a result of
the cash-settlement feature of these awards, the Company considers these awards to be liability awards, which are measured at fair value at each reporting
date and the pro-rata vested portion of the award is recognized as a liability to the extent that the performance condition is deemed probable. The fair value
for the shares of phantom stock granted on November 22, 2017 was estimated using the most current price paid for Class A Common Stock traded between
a buyer and a seller.
The Company recorded phantom stock-based compensation expense of $0.01 million, $0.01 million and $0.8 million related to these shares for the
years ended December 31, 2019, 2018 and 2017, respectively.
A summary of the phantom stock activity for the years ended December 31, 2019, 2018 and 2017 is as follows:
(in thousands)
Nonvested shares at January 1, 2017
Granted
Forfeited
Vested
Nonvested shares at December 31, 2017
Granted
Forfeited
Vested
Nonvested shares at December 31, 2018
Granted
Forfeited
Vested
Nonvested shares at December 31, 2019
Number of
Phantom
Restricted
Outstanding
—
356,368
—
(70,440)
285,928
—
(281,762)
(1,389)
2,777
—
(1,389)
(694)
694
As of December 31, 2019, total remaining equity-based compensation expense for unvested phantom stock is less than $0.01 million, which is
expected to be recognized over a weighted average remaining period of less than 1 year.
F-42
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Provision for Income Taxes
At December 31, 2019, 2018 and 2017, the components of the provision for income taxes reflected on the consolidated statements of operations are
as follows:
(in thousands)
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Provision for income taxes
2019
2018
2017
$
$
1,728 $
1,287
3,015
618
(2,112)
(1,494)
1,521 $
3,604 $
1,571
5,175
(2,871)
(1,315)
(4,186)
989 $
17
374
391
3,712
(783)
2,929
3,320
The following is a reconciliation of expected income tax expense (computed by applying the federal statutory income tax rate to income before
taxes) to actual income tax expense.
(in thousands)
Income taxes at federal statutory rate
State income taxes, net of federal benefit
Transaction costs
TAC earn-out
Equity-based compensation
Permanent items
State rate changes
162(m) limitation
Other, net
Domestic production activities deductions
Tax Cuts and Jobs Act
2015 IRS audit
Flow-through income
Provision for income taxes
2019
2018
2017
$
$
1,786 $
(651)
—
(476)
134
298
(293)
345
378
—
—
—
—
1,521 $
(280) $
148
968
—
—
294
(27)
—
(114)
—
—
—
—
989 $
(2,756)
(248)
64
—
—
1,729
(140)
—
124
(97)
5,372
228
(956)
3,320
At December 31, 2019, the Company's effective income tax rate is different from what would be expected if the federal statutory rate were applied
to net income before taxes primarily due to permanent adjustments, equity-based compensation, uncertain tax positions related to TAC provision, and state
income taxes. At December 31, 2018, the Company’s effective income tax rate is different from what would be expected if the federal statutory rate were
applied to net income before taxes primarily due to permanent adjustments, capitalized transaction costs, and state income taxes. At December 31, 2017,
the Company’s effective income tax rate is different from the federal statutory rate primarily due to the impact of the Tax Act noted below. The equity
holders of ASG, prior to the November 2017 Restructuring Transactions, separately accounted for their share of ASG’s income, deduction and losses on
their income tax returns. In addition, the effective rate differed from the statutory rate for RDS as a result of permanent favorable adjustments and state
income taxes. The November 2017 Restructuring Transaction was treated as a combination of entities under common control, which resulted in a higher
basis for tax vs. book. This resulted in the recognition of deferred tax assets totaling approximately $19.7 million (tax effected) which is recognized as
contributed capital.
F-43
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Provision for Income Taxes (Continued)
The components of deferred tax assets and liabilities are as follows as of December 31, 2019 and 2018:
(in thousands)
Deferred tax assets
Accrued liabilities
State income taxes
Intangible assets
Net operating loss
Inventory
Equity-based compensation
Other, net
Interest limitation
Total deferred tax assets
Deferred tax liabilities
Property and equipment
Prepaids
ASC 606 method change
Total deferred tax liabilities
Net deferred tax assets (liabilities)
2019
2018
$
$
1,555 $
103
4,919
994
4,351
999
902
676
14,499
(2,562)
(370)
(1,017)
(3,949)
10,550 $
682
208
5,396
—
3,228
659
558
—
10,731
(1,376)
—
—
(1,376)
9,355
Deferred income taxes reflect the net effects of temporary differences between the amounts of assets and liabilities for financial reporting purposes.
The Company has not provided for a valuation allowance against any of its deferred tax assets, as management has determined it is more likely than not
that these deferred tax assets will be realized. In assessing the realization of deferred tax assets, management considers whether it is more likely than not
that all or some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred
tax liabilities and projected future taxable income in making this assessment.
On December 22, 2017, the President of the United States signed into law the Tax Act. The Tax Act amends the Internal Revenue Code to reduce
tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduced the corporate tax rate from a
maximum of 35% to a flat 21% rate. The rate reduction was effective on January 1, 2018. Because of the rate reduction, the Company reduced the deferred
tax asset balance as of December 31, 2017 by $5.3 million. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which
provides guidance on accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one
year from the Tax Act enactment date for companies to complete the accounting relating to the Tax Act under Accounting Standards Codification Topic
740. Income Taxes (ASC 740). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the
accounting under ASC 740 is complete. To the extent that a company’s accounting for Tax Act-related income tax effects is incomplete, but the company is
able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional
estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect
immediately before the enactment of the Tax Act. The Company completed its evaluation of the Act of 2017 on its December 31, 2018 financial statements
and adjusted its provision for the year ended December 31, 2018 accordingly.
As of December 31, 2019, the Company had gross state net operating loss carryforwards of $21.9 million, carrying forward indefinitely. As of
December 31, 2019, unrecognized tax benefits relate entirely to pre-acquisition TAC tax returns. Assessments related to TAC for tax years through the
December 31, 2018 transaction date are the responsibility of former TAC management. The Company is fully indemnified for income taxes prior to the
acquisition, as well as any related interest and penalties. The Company does not expect any significant increases or decreases to the Company’s
unrecognized tax benefits within the next 12 months. The Company is subject to examinations by federal taxing authorities for the tax years 2016 – 2019
and by state taxing authorities for the tax years 2015—2019. The Company is not currently under any tax examinations. The Company analyzes filing
positions in all of the federal and state jurisdictions where it is required to file income tax returns, and all open tax years in these jurisdictions to determine
if there are any uncertain tax positions on its tax returns.
F-44
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Provision for Income Taxes (Continued)
A reconciliation of the beginning and ending amounts of unrecognized tax positions are as follows:
(in thousands)
Unrecognized tax positions, beginning of year
Gross increase - current period tax positions
Gross decrease - current period tax positions
Gross increase - prior period tax positions
Gross decrease - prior period tax positions
Expiration of statute of limitations
Unrecognized tax positions, end of year
2019
2018
4,364 $
—
—
298
(395)
(269)
3,998 $
—
—
—
4,364
—
—
4,364
$
$
Of the Company’s total unrecognized tax benefits of $4.0 million, there would be no impact to the annual effective tax rate if recognized as the
uncertain tax positions are fully indemnified. The Company’s policy is to recognize interest and/or penalties related to all tax positions as income tax
expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction
of the overall income tax provision in the period that such determination is made. Accrued interest and penalties were $0.9 million and $0.5 million as of
December 31, 2019 and 2018, respectively. The Company recognized $0.2 million in interest and $0.2 million in penalties related to uncertain tax positions
for the year ended December 31, 2019. If recognized, there would be no impact to the effective tax rate as the interest and penalties are fully indemnified.
For the year ended December 31, 2018, the Company recognized $0.2 million in interest and $0.3 million in penalties related to uncertain tax positions. No
interest or penalties were accrued as of December 31, 2017.
Pursuant of Internal Revenue Code Sections 382, annual use of the Company’s net operating loss carryforwards may be limited in the event a
cumulative change in ownership of more than 50% occurs within a three-year period.
14. Employee Benefit Plan
The Company maintains a qualified 401(k) plan for the benefit of its employees. Substantially all employees are eligible to participate in the plan.
Under the plan, eligible participants are permitted to make salary deferral contributions to the plan. In addition, the plan provides for employer matching.
During the years ended December 31, 2019, 2018 and 2017, the Company contributed $1.5 million, $0.9 million, and $0.6 million to the plan, respectively.
15. Related Party Transactions
Consulting Agreement
During the year ended December 31, 2017, both RDS and ASG had a consulting agreement with Trive Capital (former affiliates of which
collectively held more than 5% of the Company’s common stock and are affiliated with Christopher Zugaro, the former chairman of the Company’s board
of directors). Under each such respective agreement, RDS and ASG were each required to pay Trive Capital an annual nonrefundable consulting fee of $0.4
million, payable in four quarterly installments of $0.1 million each, plus the reimbursement of expenses. Each consulting agreement also allowed for
additional consulting work outside of the scope of the agreement to be provided by Trive Capital and billed separately to each company. The agreement
was terminated at the time of the November 2017 Restructuring Transaction. Consulting fees plus expenses that were expensed to Trive Capital during the
year ended December 31, 2017 totaled $2.8 million. There was no outstanding balance due to Trive Capital at December 31, 2019 or 2018.
F-45
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
15. Related Party Transactions (Continued)
Facility Rent
RDS leases three of its facilities from a trust affiliated with a stockholder of the Company. Additionally, as a result of recent acquisitions, RDS also
leased seven of its facilities during 2019 from current employees, contractors, or former owners of acquired businesses. Rent expense under all these leases
totaled $2.2 million during the year ended December 31, 2019, and $0.8 million during the years ended December 31, 2018 and 2017. No amounts were
unpaid at December 31, 2019 and 2018. (See Note 11).
ASG leases office space from 521 Digiulian Boulevard, LLC, a company owned by a current employee and former owner of NSI. Rent expense
under this lease was $0.1 million for the years ended December 31, 2019 and 2018. There was no expense under this lease during the year ended
December 31, 2017. No amounts were unpaid under this lease at December 31, 2019 and 2018. (See Note 11).
ASG leases office space in New Jersey that was owned by a former employee (who is no longer employed by the Company in 2019). Rent
expense under this lease was $0.3 million, $0.4 million, and $0.2 million for the years ended December 31, 2019, 2018, and 2017, respectively. No amounts
were unpaid at December 31, 2019 and 2018. (See Note 11).
Subcontractors and Suppliers
Two of RDS employees have family members that have an ownership interest in flooring subcontracting companies that do business with RDS.
During the years ended December 31, 2019, 2018, and 2017, these companies performed a total of $1.2 million, $1.6 million, and $3.2 million in
subcontract work for RDS, respectively. Amounts due and recorded as accounts payable at December 31, 2019 and 2018 were $0.1 million and $0.01
million, respectively.
Design services were also provided to RDS by designers affiliated with current Greencraft employees beginning in 2018. During the years ended
December 31, 2019 and 2018, expenses incurred with this design company were $0.1 million and $0.08 million, respectively. No amounts were unpaid at
December 31, 2019 and 2018.
Other Consulting Services
A consulting firm affiliated with an officer of the Company has performed various consulting services for the Company related to human resources,
accounting, and project management. During the years ended December 31, 2019, 2018, and 2017, the Company incurred approximately $0.3 million, $0.2
million, and $0.3 million of costs with this consulting firm, respectively. No amounts were unpaid at December 31, 2019. Amounts due and recorded as
accounts payable at December 31, 2018 were $0.01 million.
An ASG executive and a stockholder of the Company terminated employment with ASG as of June 30, 2017. The stockholder continued to provide
business consulting services for ASG through June 30, 2018. During the years ended December 31, 2018 and 2017, ASG incurred $0.05 million and $0.06
million, respectively, of consulting costs with this stockholder. There were no consulting costs associated with this stockholder during 2019. No amounts
were unpaid at December 31, 2019 and 2018.
F-46
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
16. Segment Information
The Company’s operations are classified into two operating segments: RDS and ASG. Under RDS, the Company offers interior design and
installation services, and under ASG, the Company performs natural and engineered surfaces distribution. These operating segments represent strategic
business areas which, although they operate separately and provide their own distinctive services, enables the Company to more effectively offer the
complete line of interior design and selection services, merchandising, and complex supply chain management. While individual acquisitions, for a time,
may have discrete financial information before being fully integrated, RDS and ASG are the only operating and reporting segments for which both discrete
financial information is available and is reviewed by management for the purpose of making operating decisions and assessing financial performance.
Inter-segment eliminations result primarily from the sale of ASG inventory to the RDS segment, including the related profit margin, as well as
some intercompany borrowings recorded in the form of intercompany payables and receivables.
In addition, certain corporate-level costs incurred at a corporate level or at the reporting unit level that benefit the segments are not allocated. These
costs include: corporate payroll costs, legal, professional service fees, interest expense, including amortization of deferred financing costs, and taxes and
equity-based compensation.
F-47
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
16. Segment Information (Continued)
The Company evaluates performance of the respective segments based upon revenue and operating income. Information for the years presented is
provided below:
(in thousands)
Net revenue:
RDS
ASG
Elimination of intercompany sales
Consolidated total
Operating income (loss):
RDS
ASG
Elimination of intercompany activity
Unallocated corporate operating loss
Consolidated total
Capital expenditures:
RDS
ASG
Unallocated corporate capital expenditures
Consolidated total
Depreciation and amortization:
RDS
ASG
Unallocated corporate depreciation and
amortization
Consolidated total
(in thousands)
Goodwill:
RDS
ASG
Consolidated total
Other intangible assets, net:
RDS
ASG
Consolidated total
Total assets:
RDS
ASG
Consolidation entries
Unallocated assets, including corporate
Consolidated total
For the Years Ended December 31,
2018
2019
2017
368,574 $
244,789
(2,990)
610,373 $
268,362 $
223,971
(2,576)
489,757 $
193,204
161,114
(1,366)
352,952
(161)
7,966
(74)
(1,569)
6,162
1,289
2,793
-
4,082
6,853
7,963
-
14,816
17,544 $
19,860
96
(18,242)
19,258 $
14,252 $
11,925
(46)
(14,034)
12,097 $
7,155 $
1,986
28
9,169 $
1,684 $
6,539
284
8,507 $
12,896 $
11,159
9,634 $
10,833
102
24,157 $
20
$
20,487
As of December 31,
2019
2018
54,225 $
45,564
99,789 $
49,029
45,564
94,593
44,509 $
46,239
90,748 $
47,479
53,236
100,715
182,754 $
217,655
36
19,830
420,275 $
170,724
230,505
(1,016)
15,801
416,014
$
$
$
$
$
$
$
$
$
$
$
$
$
$
F-48
Select Interior Concepts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
17. Selected Quarterly Financial Data (Unaudited)
Selected summarized quarterly financial information is as follows for the periods presented:
(In thousands, except per share data)
Fiscal 2019 (a)
Total revenue
Gross profit
Income from operations
Net income
Basic EPS
Diluted EPS
Fiscal 2018 (b)
Total revenue
Gross profit
Income from operations
Net (loss) income
Basic EPS
Diluted EPS
December 31
September 30
June 30
March 31
Quarter Ended
$
$
$
$
$
$
155,242 $
38,770
2,952
3,177
0.13 $
0.13 $
132,957 $
34,628
3,533
(1,833)
(0.07) $
(0.07) $
159,395 $
42,338
6,209
2,458
0.10 $
0.10 $
127,553 $
36,470
4,004
753
0.03 $
0.03 $
158,342 $
44,168
6,750
1,162
0.05 $
0.05 $
124,861 $
34,406
3,610
(86)
— $
— $
136,920
38,733
3,266
127
0.00
0.00
104,386
27,950
950
(1,309)
(0.05)
(0.05)
(a)
(b)
The 2019 quarterly results presented will not sum to 2019 annual results due to the adoption of ASU 2014-19 during the quarter ended
December 31, 2019. The quarter ended December 31, 2019 is presented under the previous standard, ASC Topic 605.
Basic and Diluted EPS includes both Class A Common Stock and Class B Common Stock for the quarters ended June 30, 2018 and March
30, 2018. In August 2018, each then remaining share of Class B Common Stock was automatically converted into one share of Class A
Common Stock, resulting in no shares of Class B Common Stock left outstanding.
18. Subsequent Events
Events occurring after December 31, 2019, have been evaluated for possible adjustment to the consolidated financial statements or disclosure as of
March 12, 2020, which is the date the consolidated financial statements were available to be issued. No subsequent events were identified for adjustment
or disclosure in the consolidated financial statements other than the disclosure of a new distributor agreement entered into by the ASG segment in February
2020 (See Note 11—Commitments and Contingencies).
F-49
Schedule I – SIC’s Condensed Parent Company Only Financial Statements
Select Interior Concepts, Inc.
Parent Company Only
Condensed Balance Sheets
(in thousands, except share data)
Assets
Investment in wholly owned subsidiaries
Other assets
Total assets
Liabilities and stockholders' equity
Due to subsidiaries
Accrueds and other liabilities
Total liabilities
Stockholders' equity:
Class A common stock, par value $0.01 per share; 100,000,000 shares
authorized; 25,139,542 shares issued and 25,106,402 outstanding
at December 31, 2019 and 25,682,669 issued and outstanding
at December 31, 2018
Treasury stock, 33,140 shares at December 31, 2019, at cost
Additional paid in capital
Retained earnings (accumulated deficit)
Total stockholders' equity
Total liabilities and stockholders' equity
As of
December 31,
2019
As of
December 31,
2018
187,571 $
397
187,968 $
23,466 $
3,227
26,693
251
(391)
161,396
19
161,275
187,968 $
161,145
468
161,613
11,183
1,736
12,919
257
—
156,601
(8,164)
148,694
161,613
$
$
$
$
See Notes to Condensed Parent Company Only Financial Statements
F-50
Select Interior Concepts, Inc.
Parent Company Only
Condensed Statements of Operations
(in thousands)
Equity in net income (loss) of subsidiaries
Operating expenses
Net income (loss)
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Period Ended
December 31,
2017
$
$
25,226
(18,242)
6,984
$
$
11,559 $
(14,034)
(2,475) $
(4,120)
(1,569)
(5,689)
See Notes to Condensed Parent Company Only Financial Statements
F-51
Select Interior Concepts, Inc.
Parent Company Only
Condensed Statements of Cash Flows
(in thousands)
Cash flows used in operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiaries
Depreciation and amortization
Equity-based compensation
Changes in assets and liabilities:
Changes in operating assets
Changes in accrued expenses
Net cash used in operating activities
Cash flows used in investing activities:
Purchase of equipment
Investment in subsidiaries
Net cash used in investing activities
Cash flows provided by financing activities:
Repurchase and retirement of Class B Common Stock
Repurchase of member units
Contributions
Purchase of treasury stock
Borrowings from subsidiaries
Proceeds from issuance of equity
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents:
Beginning
Ending
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Period Ended
December 31,
2017
$
6,984
$
(2,475)
$
(5,689)
(25,226)
102
5,740
(3)
547
(11,856)
(28)
—
(28)
—
—
—
(399)
12,283
—
11,884
—
$
$
$
(11,559)
21
2,528
(204)
677
(11,012)
(284)
—
(284)
—
—
—
—
10,743
553
11,296
—
$
$
$
—
—
$
—
—
$
4,120
—
152
—
976
(441)
—
(117,741)
(117,741)
(60,035)
(62,725)
240,501
—
441
—
118,182
—
—
—
$
$
$
$
See Notes to Condensed Parent Company Only Financial Statements
F-52
Notes to Condensed Parent Company Only Financial Statements
Note 1. Description of Select Interior Concepts Inc.
These financial statements reflect the consolidated operations of Select Interior Concepts, Inc. (“SIC”). SIC is a Delaware corporation that was
restructured in November 2017 to be a holding company on which to consolidate diversified building products and services companies with a primary
focus on the interiors of all types of buildings. SIC owns 100% of its two primary operating subsidiaries and segments, Residential Design Services and
Architectural Surfaces Group. SIC has no significant operations or assets other than its ownership in Residential Design Services and Architectural
Surfaces Group. Accordingly, SIC is dependent upon its subsidiaries to fund its obligations.
Note 2. Basis of Presentation
The accompanying Condensed Parent Only Financial Statements include the amounts of SIC and its investment in its subsidiaries under the equity
method, and do not present the financial statements of SIC and its subsidiaries on a consolidated basis. Under the equity method, investments in
subsidiaries are stated at cost plus contributions and equity in undistributed income (loss) of subsidiaries less distributions received since the date of
acquisition. There have been no distributions in 2019, 2018 and 2017. Income tax considerations were evaluated under the separate return method,
resulting in no net tax benefits for SIC as a separate entity. The period ended December 31, 2017 represents the period between the November 2017
Restructuring Transactions and the November 2017 Private Offering and Private Placement and December 31, 2017. These Condensed Parent Company
Only Financial Statements should be read in conjunction with the consolidated financial statements of Select Interior Concepts, Inc. and subsidiaries and
the accompanying Notes to the consolidated financial statements.
F-53
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
Exhibit 4.1
As of December 31, 2019, Select Interior Concepts, Inc. (“we,” “our,” “us,” or the “Company”) has one class of securities registered under Section 12 of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”): our Class A common stock. There are no Class B Common Stock or Preferred
Shares issued or outstanding.
General
The following description summarizes information about our capital stock. You can obtain more comprehensive information about our capital
stock by consulting our amended and restated certificate of incorporation (which we refer to as our “charter”) and our amended and restated bylaws (which
we refer to as our “bylaws”), as well as the General Corporation Law of the State of Delaware (which we refer to as the “DGCL”). Under our charter, our
authorized capital stock consists of 100,000,000 shares of Class A Common Stock, par value $0.01 per share, 15,000,000 shares of Class B Common Stock,
par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share.
Class A Common Stock
Dividend Rights. Holders of shares of our Class A Common Stock and Class B Common Stock are entitled to ratably receive dividends when
and if declared by our board of
directors out of funds legally available for that purpose, subject to any statutory or contractual restrictions on the payment of dividends and to any prior
rights and preferences that may be applicable to any outstanding preferred stock.
Voting Rights. Holders of shares of our Class A Common Stock are entitled to one vote per share held of record on all matters to be voted upon
by our stockholders. Holders of shares of our Class A Common Stock do not have cumulative voting rights in the election of directors. Holders of shares of
our Class A Common Stock and Class B Common Stock vote together as a single class on all matters presented to our stockholders for their vote or
approval, except with respect to the amendment of certain provisions of our charter that would alter or change the powers, preferences or special rights of
holders of our Class A Common Stock so as to affect them adversely, which amendments must be approved by holders of at least 80% of the issued and
outstanding shares of our Class A Common Stock, voting as a separate class, or as otherwise required by applicable law.
Liquidation Rights. Upon our liquidation, dissolution, distribution of assets or other winding up, holders of shares of our Class A Common Stock
and Class B Common Stock are entitled to receive ratably the assets available for distribution to the stockholders after payment of liabilities and any
liquidation preference of any outstanding preferred stock.
Other Matters. The shares of our Class A Common Stock have no preemptive rights and are not subject to further calls or assessment by us.
There are no redemption or sinking fund provisions applicable to our Class A Common Stock. All outstanding shares of our Class A Common Stock are
fully paid and non-assessable.
Listing. Our Class A Common Stock is currently listed on the NASDAQ Capital Market under the symbol “SIC.”
Class B Common Stock
Dividend Rights. Holders of shares of our Class B Common Stock and Class A Common Stock are entitled to ratably receive dividends when
and if declared by our board of directors out of funds legally available for that purpose, subject to any statutory or contractual restrictions on the payment of
dividends and to any prior rights and preferences that may be applicable to any outstanding preferred stock.
Voting Rights. Holders of shares of our Class B Common Stock are entitled to one vote per share held of record on all matters to be voted upon
by the stockholders. Holders of shares of our Class B Common Stock do not have cumulative voting rights in the election of directors. Holders of shares of
our Class B Common Stock and Class A Common Stock vote together as a single class on all matters presented to our stockholders for their vote or
approval, except with respect to the amendment of certain provisions of our charter that would alter or change the powers, preferences or special rights of
holders of our Class A Common Stock so as to affect them adversely, which amendments must be approved by holders of at least 80% of the issued and
outstanding shares of our Class A Common Stock, voting as a separate class, or as otherwise required by applicable law.
Liquidation Rights. Upon our liquidation, dissolution, distribution of assets or other winding up, holders of shares of our Class B Common Stock
and Class A Common Stock are entitled to receive ratably the assets available for distribution to the stockholders after payment of liabilities and any
liquidation preference of any outstanding preferred stock.
Conversion. All of the then outstanding shares of Class B Common Stock were converted into shares of Class A Common Stock, based on the
registration statement having been declared effective by the SEC on August 13, 2018, and the shares of our Class A Common Stock being listed on the
NASDAQ Capital Market on August 16, 2018.
Other Matters. The shares of our Class B Common Stock have no preemptive or conversion rights and are not subject to further calls or
assessment by us. There are no redemption or sinking fund provisions applicable to our Class B Common Stock. All outstanding shares of our Class B
Common Stock are fully paid and non-assessable.
Preferred Stock
Our charter provides that our board of directors is expressly authorized to provide for the issuance of shares of preferred stock in one or more
series, and to fix the number of shares constituting such series, the designation of such series, the powers (including voting powers), if any, of the shares of
such series, the preferences and relative, participating, optional, special or other rights, if any, of the shares of such series, and the qualifications, limitations
or restrictions, if any, of the shares of such series, as shall be stated and expressed in the resolution or resolutions of our board of directors providing for the
issuance of such series and as may be permitted by the DGCL.
Certain Provisions of Delaware Law and of our Charter and Bylaws
The following summary of certain provisions of the DGCL and of our charter and bylaws does not purport to be complete and is subject to and
qualified in its entirety by reference to the DGCL and our charter and bylaws, copies of which have been filed as exhibits to our Annual Report on Form
10-K.
Our Board of Directors
Our charter and bylaws provide that our board of directors shall consist of not less than three nor more than 12 members, the exact number of
which shall be fixed from time to time exclusively by action of our board of directors. Our bylaws provide that, unless otherwise required by applicable law
and subject to the rights, if any, of holders of any series of our preferred stock, any vacancy arising through death, resignation, removal, or an increase in
the number of directors constituting our board of directors may only be filled by the majority vote of the remaining directors in office, even if less than a
quorum is present, or by the sole remaining director.
Pursuant to our bylaws, each member of our board of directors who is elected at our annual meeting of our stockholders, and each director who is
elected in the interim to fill vacancies and newly created directorships, will hold office for a one (1) year term or until the next annual meeting of our
stockholders, and until his or her successor is elected and qualified, or until their earlier death, resignation or removal. Pursuant to our bylaws, directors
will be elected by a plurality of votes cast by the shares present in person or by proxy at a meeting of stockholders and entitled to vote thereon, a quorum
being present at such meeting.
Removal of Directors
Our bylaws provide that, subject to the rights, if any, of holders of Class A common stock, and unless otherwise required by applicable law, any
director may be removed from office, but only for cause, and by the affirmative vote of the holders of at least a majority of the voting power of our capital
stock entitled to vote generally in the election of directors. This provision, when coupled with the exclusive power of our board of directors to fill vacant
directorships, precludes stockholders from removing incumbent directors except with the affirmative vote of the holders of at least a majority of the voting
power of our capital stock entitled to vote generally in the election of directors and from filling the vacancies created by such removal.
Meetings of Stockholders
Pursuant to our bylaws, an annual meeting of our stockholders for the purpose of the election of directors and the transaction of any other
business will be held on a date and at the time and place, if any, determined by our board of directors. Each of our directors is elected by our stockholders
to serve for a one (1) year term or until the next annual meeting, and until his or her successor is duly elected and qualified, or until their earlier death,
resignation or removal. In addition, the chairman of our board of directors, our chief executive officer, our president, or a majority of our board of directors
may call a special meeting of our stockholders for any purpose, but business transacted at any special meeting of our stockholders shall be limited to the
purposes stated in the notice of such meeting.
Elimination of Stockholder Action by Written Consent
Pursuant to Section 228 of the DGCL, any action required to be taken at any annual or special meeting of the stockholders may be taken without a
meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares of stock
entitled to vote thereon were present and voted, unless the company’s certificate of incorporation provides otherwise. Our charter expressly eliminates the
right of our stockholders to act by written consent. Stockholder action must take place at the annual or a special meeting of our stockholders.
Charter Amendments
Unless a higher vote is required by its certificate of incorporation, the affirmative vote of a majority of the outstanding stock entitled to vote is
required to amend a Delaware corporation’s certificate of incorporation. However, amendments which make changes relating to the capital stock by
increasing or decreasing the par value or the aggregate number of authorized shares of a class, or by altering or changing the powers, preferences or special
rights of a class so as to affect them adversely, also require the affirmative vote of a majority of the outstanding shares of such class, even though such class
would not otherwise have voting rights.
Pursuant to our charter, in addition to any votes required by applicable law and subject to the express rights, if any, of the holders of any series of
preferred stock, the affirmative vote of the holders of at least 66 2/3 % of the voting power of our capital stock entitled to vote generally in the election of
directors shall be required to amend, alter or repeal any provision, or adopt any new or additional provision, in a manner inconsistent with our charter
provisions relating to the management of our Company by our board of directors, the calling of special meetings of our stockholders, the prohibition
against stockholder action by written consent, and amendment of our charter. In addition, pursuant to our charter, we reserve the right at any time and from
time to time to amend, alter, change or repeal any provision contained in our charter, and any other provision authorized by Delaware law in force at such
time may be added in the manner prescribed by our charter or by applicable law, and all rights, preferences and privileges conferred upon stockholders,
directors or any other persons pursuant to the charter are granted subject to the foregoing reservation of rights. Notwithstanding the foregoing, no
amendment, alteration or repeal to our charter provisions relating to indemnification or the exculpation of directors shall adversely affect any right or
protection existing under our charter immediately prior to such amendment, modification or repeal.
Bylaw Amendments
Our board of directors has the power to alter, amend, or repeal our bylaws or adopt any new provision authorized by the laws of the State of
Delaware in force at such time. Under our charter, the stockholders have the power to amend, alter or repeal our bylaws, or adopt any new provision
authorized by the laws of the State of Delaware in force at such time, at a duly called meeting of the stockholders, solely with, notwithstanding any other
provisions of our bylaws or any provision of law which might otherwise permit a lesser vote or no vote, the affirmative vote of at least 66 2/3 % of the
voting power of our capital stock enabled to vote thereon.
Advance Notice of Director Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of stockholders, the proposal of any business to be considered by our stockholders at
an annual meeting of stockholders (other than nominations for election to the board of directors) may be made only (i) pursuant to the notice of the meeting
(or any supplement thereto) given by or at the direction of our board of directors (or any duly authorized committee thereof), (ii) otherwise properly
brought before an annual meeting of stockholders by or at the direction of our board of directors (or any duly authorized committee thereof), or
(iii) otherwise properly brought before an annual meeting of stockholders by a stockholder who is a stockholder of record on the date of the giving of such
notice and who is entitled to vote at such meeting and who complies with the notice procedures set forth in our bylaws, including a requirement to provide
certain information about the stockholder and its affiliates and the business proposal.
With respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting.
Nominations of persons for election to our board of directors may be made at an annual or special meeting of stockholders at which directors are to be
elected only (i) pursuant to our notice of the meeting (or any supplement thereto), provided, however, that reference in our notice of meeting to the election
of directors or the election of members of the board of directors shall not include or be deemed to include nominations for election to the board of directors,
(ii) by or at the direction of our board of directors (or any duly authorized committee thereof), or (iii) by a stockholder who is a stockholder of record on the
date of the giving of such notice and who is entitled to vote at such meeting and who complies with the notice procedures set forth in our bylaws, including
a requirement to provide certain information about the stockholder and its affiliates and the nominee.
Anti-Takeover Provisions
Our charter and bylaws and Delaware law contain provisions that may delay or prevent a transaction or a change in control of our Company that
might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the
market price of our common stock. Certain of these provisions are described below.
Selected Provisions of our Charter and Bylaws. Our charter and/or bylaws contain anti-takeover provisions that:
•
•
•
•
authorize our board of directors, without further action by the stockholders, to issue up to 50,000,000 shares of preferred stock in one or
more series, and with respect to each such series, to fix the number of shares constituting that series, the powers, rights and preferences of
the shares of that series, and the qualifications, limitations and restrictions of that series;
require that, subject to the express rights, if any, of the holders of any series of preferred stock, actions to be taken by our stockholders
may be taken only at an annual or special meeting of our stockholders and not by written consent;
specify that special meetings of our stockholders can be called only by the chairman of our board of directors, our chief executive officer,
our president, or the majority of our board of directors;
provide that our bylaws may be amended by our board of directors without stockholder approval;
•
•
•
•
•
provide that, subject to the express rights, if any, of the holders of any series of preferred stock, directors may be removed from office
only by the affirmative vote of the holders of at least a majority of the voting power of our capital stock entitled to vote generally in the
election of directors;
provide that vacancies on our board of directors or newly created directorships resulting from an increase in the number of our directors
may be filled only by a vote of a majority of directors then in office, even though less than a quorum;
provide that, subject to the express rights, if any, of the holders of any series of preferred stock, any amendment, alteration or repeal of
our charter provisions, or the adoption of any new or additional provision, inconsistent with our charter provisions relating to the
management of our Company by our board of directors, the calling of special meetings of our stockholders, the prohibition against
stockholder action by written consent, and amendment of our charter, requires the affirmative vote of the holders of at least 66 2/3 % of
the voting power of our capital stock entitled to vote generally in the election of directors;
provide that the stockholders may amend, alter or repeal our bylaws, or adopt new or additional provisions of our bylaws, only with the
affirmative vote of at least 66 2/3 % of the voting power of our capital stock entitled to vote generally; and
establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of directors and other
proposals to be brought before a stockholders meeting.
Delaware Anti-Takeover Statute. In our charter we elected to be subject to Section 203 of the DGCL, an anti-takeover statute. In general,
Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a
period of three years following the time the person became an interested stockholder, unless the business combination or the acquisition of shares that
resulted in a stockholder becoming an interested stockholder is approved in a prescribed manner. Generally, a “business combination” includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an “interested stockholder” is a person who,
together with affiliates and associates, owns 15% or more of a corporation’s voting stock or is our affiliate or associate and was the owner of 15% or more
of our outstanding voting stock at any time within the three-year period immediately before the date of determination. The existence of this provision
would be expected to have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging
attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
Choice of Forum
Our bylaws provide that the state or federal courts located within the State of Delaware will be the exclusive forum for: (i) any derivative action
or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other
employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, (iv) any civil action to interpret,
apply, enforce or determine the validity of the provisions of our charter or our bylaws, or (v) any action asserting a claim governed by the internal affairs
doctrine. Our bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any
complaint asserting a cause of action arising under the Securities Act. Furthermore, our bylaws provide that any person or entity purchasing or otherwise
acquiring any interest in any of our securities will be deemed to have notice of and consented to the choice of forum provisions of our bylaws described
above. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that such stockholder finds favorable for
disputes with us or any of our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other
employees. The enforceability of similar choice of forum provisions in other companies’ bylaws has been challenged in legal proceedings, and it is possible
that, in connection with one or more actions or proceedings described above, a court could find the choice of forum provisions contained in our bylaws to
be inapplicable or unenforceable.
Limitations on Liability, Indemnification of Directors and Officers, and Insurance
The DGCL authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary
damages for breaches of directors’ fiduciary duties as directors, subject to certain exceptions, by provision of the corporation’s certificate of incorporation.
Our charter contains a provision eliminating the personal liability of our directors to the fullest extent permitted by the DGCL. In addition, our bylaws
include provisions that require us to indemnify, to the fullest extent allowable under the DGCL, our directors and officers for monetary damages for actions
taken as our director or officer, or for serving at our request as a director or officer or another position at another corporation or enterprise, as the case may
be. Our bylaws also provide that we must advance reasonable expenses to our directors and officers, subject to our receipt of an undertaking from the
indemnified party as may be required under the DGCL.
We are also expressly authorized by the DGCL to carry directors’ and officers’ insurance to protect us, our directors, officers and certain
employees for some liabilities. The limitation of liability and indemnification and advancements provisions in our charter and bylaws, respectively, may
discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also have the effect of reducing
the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our
stockholders. However, our charter provision eliminating the personal liability of our directors to the fullest extent permitted by the DGCL does not limit or
eliminate our rights, or those of any stockholder, to seek non-monetary relief such as injunction or rescission in the event of a breach of a director’s
fiduciary duties, including the duty of care. The indemnification provisions will not alter the liability of directors under the federal securities laws. In
addition, your investment may be adversely affected to the extent that, in a derivative or direct suit, we pay the litigation costs of our directors and officers
and the costs of settlement and damage awards against directors and officers pursuant to these indemnification and advancements provisions. There is
currently no pending material litigation or proceeding against any of our directors, officers or employees for which indemnification or advancement is
sought.
We maintain standard policies of insurance that provide coverage (i) to our directors and officers against losses arising from claims made by
reason of breach of duty or other wrongful act, and (ii) to us with respect to indemnification and advancement payments that we may make to such
directors and officers.
We have entered into indemnification agreements with each of our directors and executive officers. These indemnification agreements will require
us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to
advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We believe that the limitation of liability
provision in our charter and the indemnification agreements will facilitate our ability to continue to attract and retain qualified individuals to serve as
directors and officers.
Insofar as the above described indemnification provisions permit indemnification of directors, officers or persons controlling us for liability
arising under the Securities Act, we understand that in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Authorized but Unissued Shares
Our authorized but unissued shares of common stock will be available for future issuance without your approval. We may use additional shares
for a variety of purposes, including future offerings to raise additional capital, to fund acquisitions and as employee compensation. The existence of
authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC is the transfer agent and registrar for our common stock.
EMPLOYMENT AGREEMENT
Exhibit 10.8
THIS EMPLOYMENT AGREEMENT (this “Agreement”), dated as of October 22, 2018 (the “Effective Date”), is
entered into by and between Select Interior Concepts, Inc., a Delaware corporation (the “Company”), and Shawn Baldwin (the
“Executive”).
WHEREAS, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such
employment; and
WHEREAS, the Executive desires to accept employment with the Company, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein, and for other good and valuable
consideration, the parties agree as follows:
1.
Employment, Duties and Agreements
(a)
The Company hereby agrees to employ the Executive as its General Counsel, and
the Executive hereby accepts such position and agrees to serve the Company in such capacity on a full-time basis during the
employment period fixed by Section 3 hereof (the “Employment Period”). The Executive shall report to the Company’s Board of
Directors (the “Board”). The Executive shall have such duties and responsibilities as are consistent with the Executive’s position
and as may be reasonably assigned by the Board from time to time. During the Employment Period, the Executive shall be
subject to, and shall act in accordance with, all reasonable instructions and directions of the Board and all applicable policies and
rules of the Company.
During the Employment Period, excluding any periods of vacation and sick leave to
which the Executive is entitled, the Executive shall devote his full working time and efforts to the performance of his duties and
responsibilities hereunder and shall endeavor to promote the business and best interests of the Company.
(b)
(c)
During the Employment Period, the Executive shall not engage in any business
activity other than the Company without the express prior written approval of the Board. Notwithstanding the foregoing, during
the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or
charitable boards or committees consistent with the Company's conflicts of interests policies and corporate governance guidelines
in effect from time to time, (B) deliver lectures or fulfill speaking engagements or (C) manage his personal investments, so long
as such activities do not interfere with the performance of the Executive’s responsibilities as an executive officer of the Company.
2.
Compensation
During the Employment Period:
Base Salary. As compensation for the agreements made by the Executive herein and
the performance by the Executive of his obligations hereunder, during the Employment Period, the Company shall pay the
Executive, pursuant to the Company’s normal and customary
(a)
payroll procedures, a base salary at the rate of $350,000 per annum, (the “Base Salary”). During the Employment Period, the
Base Salary shall be reviewed at least annually for possible increase (but not decrease) in the Company's sole discretion, as
determined by the compensation committee of the Board (the “Compensation Committee”); provided, however, that the
Executive shall be entitled to any annual cost-of-living increases in Base Salary that are granted to senior executives of the
Company generally. Any increase in Base Salary shall not serve to limit or reduce any other obligation to the Executive under
this Agreement. The term “Base Salary” as utilized in this Agreement shall refer to Base Salary as so adjusted.
(b)
Annual Bonus. In addition to the Base Salary, the Executive shall be eligible,
through participation in the Company’s annual bonus plan or other similar plan to the extent then in effect, to earn an annual
bonus (the “Annual Bonus”) in each fiscal year during the Employment Period, with a target Annual Bonus of seventy five
percent (75%) of Base Salary (the “Target Bonus”), with the actual payout based on the achievement of annual individual and
Company performance objectives established by the Compensation Committee. Any Annual Bonus earned in the first year of the
Employment Period shall be pro-rated for the number of days of the year that the Executive is employed by the Company;
provided, however, that the Annual Bonus earned in the first year of the Employment Period shall not be less than
$100,000. Any Annual Bonus shall be paid on or before March 15th of each calendar year immediately following the year in
which compensation is earned in accordance with the applicable plan (except as otherwise provided herein).
(c)
Long Term Incentive Award. Pursuant to the Company’s 2017 Long-Term Incentive
Plan, as may be amended from time to time (the “Incentive Plan”), as soon as administratively practicable on or after the
Effective Date, the Executive shall be eligible to receive 75,000 restricted shares of the common stock of the Company (such
shares, the “Restricted Stock”). The terms and conditions of the Restricted Stock shall be set forth in a restricted stock award
agreement to be entered into by and between the Company and the Executive in the form adopted by the Board or the
Compensation Committee, as applicable (the “Equity Agreement”).
(d)
Benefit Plans. In addition, (i) the Executive shall be eligible to participate in all
other incentive plans, practices, policies and programs, and all savings and retirement plans, policies and programs, in each case
that are applicable generally to senior executives of the Company; (ii) the Executive and the Executive’s eligible family members
shall be eligible for participation in the welfare benefit plans, practices, policies and programs (including, if applicable, medical,
dental, vision, disability, employee life, group life and accidental death insurance plans and programs) maintained by the
Company for its senior executives; (iii) the Executive shall be entitled to receive prompt reimbursement for all reasonable
business expenses incurred by the Executive in accordance with subsection (g) below and the policies, practices, and procedures
of the Company provided to senior executives of the Company; and (iv) the Executive shall be entitled to such fringe benefits and
perquisites as are provided by the Company to its senior executives from time to time, in accordance with the policies, practices,
and procedures of the Company.
Vacation. The Executive shall be entitled to twenty (20) days paid vacation per year
(prorated for partial years), and to such paid holidays as are observed by the Company from time to time, all in accordance with
the Company’s policies and practices that are applicable
(e)
to the Company’s senior executives. Unused vacation will be carried over from year to year and/or paid out as provided in the
Company’s vacation plans and polices in effect as of the Effective Date.
(f)
Insurance. The Company shall maintain (i) a directors’ and officers’ liability
insurance policy, or an equivalent errors and omissions liability insurance policy and (ii) an employment practices liability
insurance policy. Each such policy shall cover the Executive with scope, exclusions, amounts and deductibles no less favorable
to the insured than those applicable to the Company’s senior executive officers and directors on the Effective Date, or any more
favorable as may be available to any other director or senior executive officer of the Company, while the Executive is employed
with the Company and thereafter until the sixth anniversary of the Executive’s Scheduled Termination Date (as defined below).
(g)
Business Expenses. The Company shall reimburse the Executive for all reasonable
business expenses upon the presentation of statements of such expenses in accordance with the Company’s policies and
procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the
Company.
3.
Employment Period
The Employment Period shall commence on the Effective Date and shall terminate on the third (3rd) anniversary of the
Effective Date, provided that on the third (3rd) anniversary of the Effective Date and on each anniversary thereafter, the
Employment Period shall automatically be extended for additional one (1)-year periods unless either party provides the other
party with notice of non-renewal at least ninety (90) days before any such anniversary (the anniversary date on which the
Employment Period terminates shall be referred to herein as the “Scheduled Termination Date”). Notwithstanding the foregoing,
the Executive’s employment hereunder may be terminated during the Employment Period prior to the Scheduled Termination
Date upon the earliest to occur of any one of the following events (at which time the Employment Period shall be terminated):
(a)
Death. The Executive’s employment hereunder shall terminate upon his death.
(b)
Disability. The Company shall be entitled to terminate the Executive’s employment
hereunder for Disability. For purposes of this Agreement, “Disability” means the Executive’s inability by reason of physical or
mental illness to fulfill his obligations hereunder for ninety (90) consecutive days or a total of one hundred eighty (180) days in
any twelve (12)-month period which, in the reasonable opinion of an independent physician selected by the Company or its
insurers and reasonably acceptable to the Executive or the Executive’s legal representative, renders the Executive unable to
perform the essential functions of his job, even after reasonable accommodations are made by the Company.
Cause. For purposes of this Agreement, the term “Cause” shall mean:
(c)
Cause. The Company may terminate the Executive’s employment hereunder for
felony or a crime involving dishonesty;
(i)
conviction (or a plea of nolo contendere) by the Executive to a
Executive and intended to result in substantial personal enrichment at the expense of the Company;
(ii)
acts of fraud, dishonesty or misappropriation committed by the
willful misconduct by the Executive in the performance of the
Executive’s duties required by this Agreement which is likely to materially damage the financial position or reputation of the
Company;
(iii)
a material breach of this Agreement by the Executive which is not
cured within thirty (30) days following receipt by the Executive of a Notice of Termination (as defined under Section 4 below)
from the Company; or
(iv)
acknowledges cannot be cured within the meaning of subsection (iv) above.
(v)
a breach of Section 7 of this Agreement, which the Executive
The foregoing is an exclusive list of the acts or omissions that shall be considered Cause. Notwithstanding the foregoing, the
termination of the Executive shall not be deemed to be for Cause unless and until (A) the Board shall have provided the
Executive with a Notice of Termination (as defined in Section 4 below) specifying in detail the basis for the termination of
employment for Cause and the provision(s) under this Agreement on which such termination is based, and (B) in the case of
subsection (iv) above, the Executive shall have had the opportunity to cure such breach with the time period specified, and (C) in
all cases where Cause is alleged, the Executive shall have had a reasonable opportunity to prepare and present his case to the full
Board (with the assistance of his own counsel) before any termination for Cause is finalized by a vote of a majority of the Board,
including a majority of independent directors (not including the vote of the Executive).
For purposes of this Agreement, no act or failure to act of the Executive shall be willful or intentional if performed in good faith
with the reasonable belief that the action or inaction was in the best interest of the Company. In addition, nothing herein shall
limit or otherwise prevent the Executive from challenging judicially any determination of Cause as made by the Board hereunder.
Without Cause. The Company may terminate the Executive’s employment
hereunder during the Employment Period without Cause. For purposes of this Agreement, a notice of non-renewal given by the
Company as provided in Section 3 herein shall be treated as a termination of employment by the Company without Cause.
(d)
Good Reason. For purposes of this Agreement, “Good Reason” shall mean:
(e)
For Good Reason. The Executive may terminate his employment hereunder for
Company’s withholding or failure to pay compensation when due to the Executive);
(i)
a material breach of this Agreement by the Company (including the
a material reduction in the Executive’s titles, duties, authority, or
responsibilities, or the assignment to the Executive of any duties materially inconsistent with the Executive’s position, authority,
duties, or responsibilities without the written consent of the Executive; or
(ii)
a reduction in the Executive’s annual Base Salary or Annual
Bonus opportunity, as currently in effect or as may be increased from time to time, including, but not limited to, elimination or
reduction in the Executive’s participation in the Incentive Plan for reasons other than those specified in such plan.
(iii)
With respect to the acts or omissions set forth in this subsection (e), (A) the Executive shall provide the Board with a Notice of
Termination (as defined in Section 4 below) specifying in detail the basis for the termination of employment for Good Reason
and the provision(s) under this Agreement on which such termination is based, (B) the Company shall have thirty (30) days to
cure the matters specified in the notice delivered, and (C) if uncured, the Executive must terminate his employment with the
Company within ninety (90) days after the initial existence of the circumstances constituting Good Reason in order for such
termination to be considered to be for Good Reason.
Voluntarily. The Executive may voluntarily terminate his employment hereunder,
without Good Reason, provided that the Executive provides the Company with notice of his intent to terminate his employment at
least thirty (30) days in advance of the Date of Termination (as defined in Section 4 below).
(f)
4.
Termination Procedure
Notice of Termination. Any termination of the Executive’s employment by the
Company or by the Executive during the Employment Period (other than a termination on account of the death of the Executive)
shall be communicated by a written “Notice of Termination” to the other party hereto in accordance with Section 8(a).
(a)
(b)
Date of Termination. “Date of Termination” shall mean (i) if the Executive’s
employment is terminated by his death, the date of his death, (ii) if the Executive’s employment is terminated pursuant to Section
3(b), on the date the Executive receives Notice of Termination from the Company, (iii) if the Executive voluntarily terminates his
employment (whether or not for Good Reason), the date specified in the notice given pursuant to Section 3(e) or 3(f) herein
which shall not be less than thirty (30) days after the Notice of Termination, and (iv) if the Executive’s employment is terminated
for any other reason, the date on which a Notice of Termination is given or any later date (within thirty (30) days, or any
alternative time period agreed upon by the parties, after the giving of such notice) set forth in such Notice of Termination.
5.
Termination Payments
Without Cause or for Good Reason. In the event the Employment Period terminates
under this Agreement as a result of the Company terminating the Executive’s employment without Cause (other than pursuant to
Sections 3(a) or (b)) or the Executive terminating his employment for Good Reason:
(a)
following the Date of Termination (or on such other schedule as may be provided below):
(i)
The Company shall pay to the Executive, within thirty (30) days
unreimbursed business expenses and Base Salary through the Date of Termination (to the extent
A.
(A) the Executive’s accrued but unused vacation,
not theretofore paid) (the “Accrued Benefits”), and (B) one (1) times the Executive’s Base Salary, in each case payable in a lump
sum (the “Base Severance”).
B.
In lieu of any Annual Bonus under Section 2(b)
for the fiscal year in which Executive’s employment terminates, a lump sum amount equal to the Annual Bonus that would have
become payable in cash to Executive for that fiscal year if his employment had not terminated, based on performance actually
achieved in that year (determined by the Board following completion of the performance year and paid at the time specified in
the applicable plan), multiplied by a fraction, the numerator of which is the number of days Executive was employed in the fiscal
year of termination and the denominator of which is the total number of days in the fiscal year of termination.
The Company shall provide to the Executive an additional
amount, each month for twelve (12) months after the Date of Termination, equal to the amount the Company would have paid for
its share of the premiums for the Executive and his dependents coverage under the Company’s medical plan as if the Executive’s
employment had not terminated.
(ii)
(iii)
All outstanding and then unvested stock options, restricted stock
and other equity awards granted to the Executive under any of the Company’s equity incentive plans (or awards substituted
therefore covering the securities of a successor company) (each, an “Equity Award”) shall be modified to provide that the portion
of such awards that would otherwise become vested during the twelve (12) months following the Date of Termination based on
Executive’s continued employment with the Company shall become fully vested as of the Date of Termination.
To the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any vested benefits and other amounts or benefits required to be paid or provided or which
the Executive is eligible to receive as of the Termination Date under any plan, program, policy, practice, contract, or agreement of
the Company and its affiliates (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).
(iv)
(v)
If the Date of Termination under this Section 5(a) occurs within
the twelve (12)-month period following a Change in Control, in addition to the other payments provided for in this Section 5(a),
the Company shall pay the Executive an amount equal to one (1) times the Base Severance and Target Bonus for the current
fiscal year, in a lump sum cash payment, upon the Date of Termination, and all outstanding and then unvested Equity Awards (to
the extent not forfeited due to the failure to meet the performance-based vesting schedules, if any, thereunder) granted to the
Executive shall accelerate and become fully vested. For purposes of this Agreement, “Change in Control” shall have the
meaning specified on Exhibit A attached hereto.
(vi)
For the avoidance of doubt, upon termination of the Employment
Period without Cause or as a result of Good Reason, the Executive shall not be entitled to any other compensation or benefits not
expressly provided for in this Section 5(a), regardless of the time that would otherwise remain in the Employment Period had the
Employment Period not been terminated without Cause or for Good Reason, except any benefits or compensation provided under
the Equity Agreements which shall be paid in accordance with such agreements. Except as provided in this Section 5(a), any
vested benefits under any tax qualified pension plans of the
Company, and continuation of health insurance benefits on the terms and to the extent required by Section 4980B of the Internal
Revenue Code of 1986, as amended (the “Code”) and Section 601 of the Employee Retirement Income Security Act of 1974, as
amended (which provisions are commonly known as “COBRA”) or such other analogous legislation as may be applicable to the
Executive, the Company shall have no additional obligations under this Agreement.
(vii)
The payments and benefits provided under this Section 5(a) are
subject to and conditioned upon: (A) the Executive executing a timely and valid release of claims (“Release”) in the form
attached hereto as Exhibit B, waiving all claims the Executive may have against the Company, its successors, assigns, affiliates,
executives, officers and directors, (B) the Executive delivering the executed Release to the Company within twenty-one (21) days
following the Date of Termination, (C) such Release and the waiver contained therein becoming effective and not revoked. In the
event that payments are made hereunder prior to the execution of the Release and the Executive does not execute the Release in
the time and manner set forth herein, the Executive shall promptly pay to the Company such amounts or the value of such
benefits so received.
(b)
Cause or Voluntarily Other than for Good Reason. If the Executive’s employment is
terminated during the Employment Period by the Company for Cause or voluntarily by the Executive other than for Good
Reason, the Company shall pay the Executive upon the Date of Termination the Accrued Benefits and the Other Benefits and any
benefits or compensation provided under the Equity Agreements which shall be paid in accordance with such
agreements. Except as provided in this Section 5(b) or with respect to any vested benefits under any tax qualified pension plans
of the Company and the continuation of health insurance benefits on the terms and to the extent required by COBRA or any other
analogous legislation as may be applicable to the Executive, the Company shall have no additional obligations under this
Agreement.
(c)
Disability or Death. If the Executive’s employment is terminated during the
Employment Period as a result of the Executive’s death or Disability, the Company shall pay the Executive or the Executive’s
estate, as the case may be, within thirty (30) days following the Date of Termination, the Accrued Benefits and Other Benefits
and any benefits or compensation to be paid under the Equity Agreements. Except as provided in this Section 5(c), or pursuant to
the terms of the Equity Agreements, and except for any vested benefits under any tax qualified pension plans of the Company,
and continuation of health insurance benefits on the terms and to the extent required by COBRA or any other analogous
legislation as may be applicable to the Executive, the Company shall have no additional obligations under this Agreement.
6.
Compliance with Section 409(A)
This Agreement is intended to either comply with, or fall within an exemption to, the requirements of Section 409A of
the Code, and shall be interpreted and construed consistently with such intent. To the maximum extent possible, the payments to
the Executive pursuant to this Agreement are also intended to be exempt from Section 409A of the Code under either the
separation pay exemption pursuant to Treasury regulation § 1.409A-1(b)(9)(iii) or as short-term deferrals pursuant to Treasury
regulation § 1.409A-1(b)(4). In the event the terms of this Agreement would subject the Executive to taxes or penalties under
Section 409A of the Code
(“409A Penalties”), the Company and Executive shall cooperate diligently to amend the terms of this Agreement to avoid such
409A Penalties, to the extent possible; provided that such amendment shall not increase or reduce (in the aggregate) the amounts
payable to the Executive hereunder. Any taxable reimbursement payable to the Executive pursuant to this Agreement shall be
paid to the Executive no later than the last day of the calendar year following the calendar year in which the Executive incurred
the reimbursable expense. Any amount of expenses eligible for taxable reimbursement, or such in-kind benefit provided, during
a calendar year shall not affect the amount of such expenses eligible for reimbursement, or such in-kind benefit to be provided,
during any other calendar year. The right to such reimbursement or such in-kind benefits pursuant to this Agreement shall not be
subject to liquidation or exchange for any other benefit. Any right to a series of installment payments pursuant to this Agreement
is to be treated as a right to a series of separate payments. If, as of the Date of Termination, the Executive is a “specified
employee”, then no payment or benefit that is payable on account of the Executive’s “separation from service”, as that term is
defined for purposes of Section 409A of the Code, shall be made before the date that is six (6) months after the Executive’s
“separation from service” (or, if earlier, the date of the Executive’s death) if and to the extent that such payment or benefit
constitutes deferred compensation (or may be nonqualified deferred compensation) under Section 409A of the Code and such
deferral is required to comply with the requirements of Section 409A of the Code. Any payment or benefit delayed by reason of
the prior sentence shall be paid out or provided in a single lump sum at the end of such required delay period in order to catch up
to the original payment schedule. For purposes of this provision, the Executive shall be considered to be a “specified employee”
if, at the time of his “separation from service”, the Executive is a “key employee”, within the meaning of Section 416(i) of the
Code, of the Company (or any person or entity with whom the Company would be considered a single employer under Section
414(b) or Section 414(c) of the Code) any stock of which is publicly traded on an established securities market or otherwise.
7.
Protection of Trade Secrets and Confidential Information.
(a)
Acknowledgments Regarding “Confidential Information”. In performing his duties
as an executive of the Company, the Executive acknowledges that he will have access to documents, trade secrets, and other
confidential and proprietary information which consists of information known by the Executive as a consequence of his
employment with the Company (including information originated, discovered and/or developed by the Executive). The Executive
acknowledges that all of the Confidential Information, as defined below, made accessible to the Executive shall be provided only
in strict confidence; that unauthorized disclosure of Confidential Information may damage the Company’s business; that
Confidential Information could be susceptible to immediate competitive application by a competitor of the Company; that the
Company’s business is substantially dependent on access to and the continuing secrecy of Confidential Information; that
Confidential Information is novel, unique to the Company and known only to the Executive, the Company and certain key
employees and contractors of the Company; that the Company shall at all times retain ownership and control of all Confidential
Information; and that the restrictions contained in this Agreement are reasonable and necessary for the protection of the
Company’s legitimate business interests.
confidential and proprietary information of the Company, including, but not
(b)
Definition of Confidential Information. The term “Confidential Information” means
limited to: (i) information not generally known outside the Company such as information which is unique to the Company, (ii)
information about the Company’s projects, developments, business plans, financial plans, products, processes and services,
research and development activities, client lists, vendor lists, inventories, marketing techniques, pricing policies, financial targets,
financial information and projections, and (iii) any trade secret information as that term is defined in the California Uniform
Trade Secrets Act. However, the term Confidential Information shall not include information that: (1) becomes generally
available to and known by the public; (2) was available to the Executive on a non-confidential basis prior to its disclosure; (3)
becomes available to the Executive from a source other than the Company, provided that the Executive has no knowledge that
such source is prohibited from disclosing such information to the Executive by a contractual, legal or fiduciary obligation to the
Company; or (4) the Executive has independently developed with no reliance on or access to any of the information provided
directly or indirectly by the Company.
(c)
The Executive’s Use of Confidential Information. Except in connection with and in
furtherance of the Executive’s work on the Company’s behalf, the Executive shall not, without the Company’s prior written
consent, at any time, directly or indirectly: (i) use any Confidential Information for any purpose; (ii) disclose or otherwise
communicate any Confidential Information to any person or entity; or (iii) accept or participate in any employment, consulting
engagement or other business opportunity that inevitably will result in the disclosure or use of any Confidential Information.
(d)
Third-Parties’ Confidential Information. The Executive acknowledges that the
Company has received, and in the future will receive, from third parties confidential or proprietary information, and that the
Company must maintain the confidentiality of such information and use it only for authorized purposes. The Executive shall not
use or disclose any such information except as authorized by the Company or the third party to whom the information belongs.
(e)
Ownership of Works. The Executive agrees to promptly disclose in writing to the
Company all inventions, discoveries, developments, improvements and innovations (collectively referred to as “Inventions”) that
the Executive has conceived or made during his employment with the Company; provided, however, that in this context,
“Inventions” are limited to those which (i) relate in any manner to the existing or contemplated business or research activities of
the Company and its affiliates; (ii) are suggested by or result from the Executive’s work at the Company; or (iii) result from the
use of the time, materials or facilities of the Company and its affiliates. All Inventions will be the Company’s property rather
than the Executive’s. Should the Company request it, the Executive agrees to sign any document that the Company may
reasonably require to establish ownership in any Invention.
8.
Miscellaneous
(a)
Notices. Any notice or other communication required or permitted under this
Agreement shall be effective only if it is in writing and shall be deemed to be given when delivered personally or four (4) days
after it is mailed by registered or certified mail, postage prepaid, return receipt requested or one (1) day after it is sent by a
reputable overnight courier
service and, in each case, addressed as follows (or if it is sent through any other method agreed upon by the parties):
If to the Company:
With a copy to (which shall not
constitute notice):
Select Interior Concepts, Inc.
4900 East Hunter Avenue
Anaheim, CA 92807
Attn: Secretary
Greenberg Traurig, LLP
1840 Century Park East
Suite 1900
Los Angeles, CA 90067
Attn: Mark Kelson
If to the Executive:
Shawn Baldwin
or to such other address as any party hereto may designate by notice to the others.
(b)
Arbitration. To the fullest extent allowed by law, any controversy, claim or dispute
between the Executive and the Company (and/or any of its owners, directors, officers, employees, affiliates, or agents) relating to
or arising out of the Executive’s employment or the cessation of that employment will be submitted to final and binding
arbitration in the county in which the Executive work(ed) for determination in accordance with the American Arbitration
Association’s (“AAA”) National Rules for
the Resolution of Employment Disputes (which may be found at
https://www.adr.org/sites/default/files/Employment%20Rules.pdf), as the exclusive remedy for such controversy, claim or
dispute. In any such arbitration, the parties may conduct discovery in accordance with the Federal Rules of Civil Procedure,
except that the arbitrator shall have the authority to order and permit discovery as the arbitrator may deem necessary and
appropriate in accordance with applicable state or federal discovery statutes. The arbitrator shall issue a reasoned, written
decision, and shall have full authority to award all remedies which would be available in court. The arbitrators’ fees and expenses
and all administrative fees and expenses associated with the filing of the arbitration shall be borne by Company; provided
however, that at Executive’s option, Executive may voluntarily pay up to one-half the costs and fees. Any judgment upon the
award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Possible disputes covered by the
above include (but are not limited to) unpaid wages, breach of contract, torts, violation of public policy, discrimination,
harassment, or any other employment-related claims under laws including but not limited to, Title VII of the Civil Rights Act of
1964, the Americans With Disabilities Act, the Age Discrimination in Employment Act, the California Fair Employment and
Housing Act, the California Labor Code, and any other statutes or laws relating to an employee’s relationship with his/her
employer, regardless of whether such dispute is initiated by the employee or the Company. Thus, this bilateral arbitration
provision applies to any and all claims that the Company may have against the Executive, including, but not limited to, claims for
misappropriation of Company property, disclosure of proprietary information or trade secrets, interference with contract, trade
libel, gross negligence, or any other claim for
alleged wrongful conduct or breach of the duty of loyalty by the Executive. However, nothing herein shall prevent Executive
from filing and pursuing proceedings before the California Department of Fair Employment and Housing, or the United States
Equal Employment Opportunity Commission (although if Executive chooses to pursue a claim following the exhaustion of such
administrative remedies, that claim would be subject to the provisions of this Agreement). Notwithstanding anything to the
contrary contained herein, the Company and the Executive shall have their respective rights to seek and obtain injunctive relief
with respect to any controversy, claim or dispute to the extent permitted by law. BY AGREEING TO THIS BINDING
ARBITRATION PROVISION, BOTH EXECUTIVE AND THE COMPANY GIVE UP ALL RIGHTS TO TRIAL BY JURY.
This arbitration provision is to be construed as broadly as is permissible under applicable law. Executive and Company
acknowledge and agree that their obligations to arbitrate under this Agreement survive the termination of this Agreement and
continue after the termination of the employment relationship between Executive and Company.
(c)
Entire Agreement. As of the Effective Date, this Agreement, and the Release, each
of which is being entered into between the parties concurrently herewith, constitute the final, complete and exclusive agreement
between the Executive and the Company with respect to the subject matter hereof (it being understood that any Equity Awards
shall be governed by the relevant Equity Agreements). Such agreements replace and supersede any and all other agreements,
offers or promises, whether oral or written, if any, made to the Executive by the Company.
(d)
Amendments; No Waiver. This Agreement may be amended only by an instrument
in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the
party or parties against whom or which enforcement of such waiver is sought. The failure of any party hereto at any time to
require the performance by any other party hereto of any provision hereof shall in no way affect the full right to require such
performance at any time thereafter, nor shall the waiver by any party hereto of a breach of any provision hereof be taken or held
to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of
this Agreement.
parties hereto shall be governed by and construed under and in accordance with the laws of the State of California.
(e)
Choice of Law. This Agreement and the legal relations thus created between the
(f)
Agreement Negotiated. The parties hereto acknowledge and agree that each party
has reviewed and negotiated the terms and provisions of this Agreement and has had the opportunity to contribute to its
revision. Accordingly, the rule of construction to the effect that ambiguities are resolved against the drafting party shall not be
employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall be construed fairly as to both parties
hereto and not in favor or against either party.
(g)
Representations. The parties hereto hereby represent that they each have the
authority to enter into this Agreement, and the Executive hereby represents to the Company that the execution of, and
performance of duties under, this Agreement shall not constitute a breach of or otherwise violate any other agreement to which
the Executive is a party. The Executive hereby further represents to the Company that he will not utilize or disclose any
confidential
information obtained by the Executive in connection with any former employment with respect to his duties and responsibilities
hereunder.
(h)
Consultation with Counsel. The Executive acknowledges that he has had a full and
complete opportunity to consult with counsel and other advisors of his own choosing concerning the terms, enforceability and
implications of this Agreement, and that the Company has not made any representations or warranties to the Executive
concerning the terms, enforceability or implications of this Agreement other than as reflected in this Agreement.
Binding Agreement; Assignment. This Agreement is binding on and is for the
benefit of the parties hereto and their respective successors, assigns, heirs, executors, administrators and other legal
representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Executive.
(i)
(j)
Successors and Assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the
Company to assume this Agreement in the same manner and to the same extent that the Company would have been required to
perform it if no such succession had taken place. As used in this Agreement, the “Company” shall mean both the Company as
defined above and any such successor that assumes this Agreement, by operation of law or otherwise.
(k)
Severability. Any provision of this Agreement (or portion thereof) which is deemed
invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this Section 8(k), be ineffective to
the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering any other provisions of this Agreement invalid, illegal, or unenforceable in any other jurisdiction.
(l)
Withholding. The Company may withhold from any amounts payable to the
Executive hereunder all federal, state, city or other taxes that the Company may reasonably determine are required to be withheld
pursuant to any applicable law or regulation (it being understood that the Executive shall be responsible for payment of all taxes
in respect of the payments and benefits provided herein).
Counterparts. This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but all of which shall constitute one and the same instrument. A facsimile or PDF of a
signature shall be deemed to be and have the effect of an original signature.
(m)
reference only and shall not be a part of or control or affect the meaning of any provision hereof.
(n)
Headings. The headings in this Agreement are inserted for convenience of
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
EXECUTIVE:
/s/ Shawn Baldwin
Shawn Baldwin
COMPANY:
SELECT INTERIOR CONCEPTS, INC.
By:
Name:
Title:
/s/ Tyrone Johnson
Tyrone Johnson
Chief Executive Officer
For purposes of this Agreement, “Change in Control” shall mean the occurrence of any of the following events:
EXHIBIT A
(a)
(b)
(i)
(ii)
(iii)
(i)
(ii)
Any transaction or event resulting in the beneficial ownership of voting securities, directly or
indirectly, by any “person” or “group” (as those terms are defined in Sections 3(a)(9), 13(d), and 14(d) of the
Securities Exchange Act of 1934 (the “Exchange Act”) and the rules thereunder) having “beneficial
ownership” (as determined pursuant to Rule 13d 3 under the Exchange Act) of securities entitled to vote
generally in the election of directors (“voting securities”) of the Company that represent greater than 35% of
the combined voting power of the Company’s then outstanding voting securities (unless the Executive has
beneficial ownership of at least 35% of such voting securities), other than any transaction or event resulting in
the beneficial ownership of securities:
by a trustee or other fiduciary holding securities under any employee benefit
plan (or related trust) sponsored or maintained by the Company or any person controlled by the
Company or by any employee benefit plan (or related trust) sponsored or maintained by the
Company or any person controlled by the Company, or
by the Company or a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their ownership of the stock
of the Company, or
Change in Control under clause (b);
pursuant to a transaction described in clause (b) below that would not be a
The consummation by the Company (whether directly involving the Company or indirectly
involving the Company through one or more intermediaries) of (i) a merger, consolidation, reorganization, or
business combination, (ii) a sale or other disposition of all or substantially all of the Company’s assets, or (iii)
the acquisition of assets or stock of another entity, in each case, other than a transaction
which results in the Company’s voting securities outstanding immediately
before the transaction continuing to represent (either by remaining outstanding or by being
converted into voting securities of the Company or the person that, as a result of the transaction,
controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all
of the Company’s assets or otherwise succeeds to the business of the Company (the Company or
such person, the “Successor Entity”)) directly or indirectly, greater than 25% of the combined
voting power of the Successor Entity’s outstanding voting securities immediately after the
transaction, and
after which no person or group beneficially owns voting securities
representing greater than 50% of the combined voting power of the Successor Entity; provided,
however, that no person or group shall be treated for purposes of this clause as beneficially owning
greater than 50% of the combined voting power of the Successor Entity solely as a result of the
voting power held in the Company prior to the consummation of the transaction; or
(c)
The approval by the Company’s stockholders of a liquidation or dissolution of the Company.
For purposes of clause (a) above, the calculation of voting power shall be made as if the date of the acquisition were a
record date for a vote of the Company’s stockholders, and for purposes of clause (b) above, the calculation of voting power shall
be made as if the date of the consummation of the transaction were a record date for a vote of the Company’s stockholders.
RELEASE AGREEMENT
EXHIBIT B
This RELEASE AGREEMENT (this “Agreement”) is made by and between Select Interior Concepts, Inc., a Delaware
corporation (the “Company”), and Shawn Baldwin (“you” or “Executive”). You and the Company entered into an Employment
Agreement dated as of October 22, 2018 (the “Employment Agreement”). You and the Company hereby agree as follows:
1)
A blank copy of this Agreement was attached to the Employment Agreement as Exhibit B thereto.
2)
Termination Payments. If your employment is terminated by the Company without Cause or if you
resign for Good Reason (each, as defined in the Employment Agreement), then, in consideration for your execution, delivery and
non-revocation of this Agreement, following the Release Date (as defined in Section 3 below), the Company will provide the
termination payments and benefits (the “Termination Payments”) to you as provided in Section 5 of the Employment Agreement.
3)
Release by You. In exchange for the payments and other consideration under this Agreement, to
which you would not otherwise be entitled, and except as otherwise set forth in this Agreement, you hereby generally and
completely release, acquit and forever discharge, and covenant not to sue, the Company, its respective subsidiaries, affiliates,
predecessors, current and former directors, members, officers, employees, agents, stockholders, heirs, beneficiaries, its successors
and assigns (both individually and in their official capacities), its parents and subsidiaries, and its officers, directors, managers,
partners, agents, servants, employees, attorneys, shareholders, successors, assigns and affiliates (the “Releasees”), of and from
any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys’ fees, damages, indemnities and obligations
of every kind and nature, in law, equity, or otherwise, both known and unknown, suspected and unsuspected, disclosed and
undisclosed, arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the
execution date of this Agreement, including, but not limited to: all such claims and demands directly or indirectly arising out of
or in any way connected with your employment with the Company or the termination of that employment; claims or demands
related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay,
fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state
or local law, statute, or cause of action; tort law; or contract law. The claims and causes of action you are releasing and waiving in
this Agreement include, but are not limited to, any and all claims and causes of action that any of the Company, its parents and
subsidiaries, or their respective officers, directors, agents, servants, employees, attorneys, shareholders, successors, assigns or
affiliates:
(a)
(b)
has violated its personnel policies, handbooks, contracts of employment, or covenants of good faith
and fair dealing;
has discriminated against you on the basis of age, race, color, sex (including sexual harassment),
national origin, ancestry, disability, religion, sexual
orientation, marital status, parental status, source of income, entitlement to benefits, any union
activities or other protected category in violation of any local, state or federal law, constitution,
ordinance, or regulation, including but not limited to: the Age Discrimination in Employment Act,
as amended (“ADEA”); Title VII of the Civil Rights Act of 1964, as amended; 42 U.S.C. § 1981, as
amended; the Civil Rights Act of 1866; the California Fair Employment and Housing Act; the
Worker Adjustment Retraining and Notification Act; the Equal Pay Act; the Americans With
Disabilities Act; the Genetic Information Non-Discrimination Act; the Family Medical Leave Act;
the Occupational Safety and Health Act; the Immigration Reform and Control Act; the Uniform
Services Employment and Reemployment Rights Act of 1994, as amended; Section 510 of the
Employee Retirement Income Security Act; and the National Labor Relations Act; and
(c)
has violated any statute, public policy or common law (including, but not limited to claims for
retaliatory discharge; negligent hiring, retention or supervision; defamation; intentional or negligent
infliction of emotional distress and/or mental anguish; intentional interference with contract;
negligence; detrimental reliance; loss of consortium to you or any member of your family and/or
promissory estoppel).
Notwithstanding the foregoing, you are not releasing (x) any right of indemnification you may have for any liabilities arising
from your actions within the course and scope of your employment with the Company or within the course and scope of your role
as an officer and/ or director of the Company, and (y) any right to receive and to enforce the Company’s obligation to pay any
Termination Payments due and payable to you. Also excluded from this Agreement are any claims which cannot be waived by
law. You are waiving, however, your right to any monetary recovery should any governmental agency or entity, such as the
EEOC or the DOL, pursue any claims on your behalf. You acknowledge that you are knowingly and voluntarily waiving and
releasing any rights you may have under the ADEA. You also acknowledge that (i) the consideration given to you in exchange
for the waiver and release in this Agreement is in addition to anything of value to which you were already entitled, and (ii) that
you have been paid for all time worked, have received all the leave, leaves of absence and leave benefits and protections for
which you are eligible, and have not suffered any on-the-job injury for which you have not already filed a claim. You further
acknowledge that you have been advised by this writing that: (a) your waiver and release do not apply to any rights or claims that
may arise after the execution date of this Agreement; (b) you have been advised hereby that you have the right to consult with an
attorney prior to executing this Agreement; (c) you have twenty-one (21) days to consider this Agreement (although you may
choose to voluntarily execute this Agreement earlier); (d) you have seven (7) days following your execution of this Agreement to
revoke the Agreement; and (e) this Agreement shall not be effective until the date upon which the revocation period has expired
unexercised, which shall be the eighth (8th) day after this Agreement is executed by you provided the Company has also executed
the Release on or before that date (the “Release Date”).
4)
Return of Company Property. Within ten (10) days of the effective date of the termination of
employment, you agree to return to the Company all Company documents (and all
copies thereof) and other Company property then in existence that you have had in your possession at any time, including, but not
limited to, Company files, notes, drawings, records, business plans and forecasts, financial information, specifications, computer-
recorded information, tangible property (including, but not limited to, computers), credit cards, entry cards, identification badges
and keys; and, any materials of any kind that contain or embody any proprietary or confidential information of the Company (and
all reproductions thereof) (“Company Property”). Receipt of the Termination Payments described in Section 2 of this
Agreement is expressly conditioned upon return of all such Company Property.
5)
Confidentiality. The provisions of this Agreement will be held in strictest confidence by you and will
not be publicized or disclosed in any manner whatsoever; provided, however, that: (a) you may disclose this Agreement in
confidence to your immediate family; (b) you may disclose this Agreement in confidence to your attorney, accountant, auditor,
tax preparer, and financial advisor; and (c) you may disclose this Agreement insofar as such disclosure may be required by law.
6)
Non-Disparagement. You and the Company, acting through its executive officers, agree not to
disparage the other party, and in addition with respect to the Company, you agree not to disparage the Company’s officers,
directors, employees, shareholders and agents, in each case in any manner likely to be harmful to them or their business, business
reputation or personal reputation; provided, that both you and the Company will respond accurately and fully to any question,
inquiry or request for information when required by legal process.
7)
No Admission. This Agreement does not constitute an admission by the Company of any wrongful
action or violation of any federal, state, or local statute, or common law rights, including those relating to the provisions of any
law or statute concerning employment actions, or of any other possible or claimed violation of law or rights.
8)
Breach. You agree that upon any material breach of this Agreement, you will forfeit all amounts paid
or owing to you under this Agreement. Further, you acknowledge that it may be impossible to assess the damages caused by
your material violation of the terms of Sections 4, 5, and 6 of this Agreement and further agree that any threatened or actual
material violation or breach of those sections of this Agreement will constitute immediate and irreparable injury to the
Company. You therefore agree that any such breach of this Agreement is a material breach of this Agreement, and, in addition to
any and all other damages and remedies available to the Company upon your breach of this Agreement, the Company shall be
entitled to injunctive relief to prevent you from violating or breaching this Agreement.
9)
California Civil Code § 1542. You hereby represent and warrant to the Releasees that you knowingly
and intentionally have waived any protection afforded to you by California Civil Code § 1542, which provides:
A general release does not extend to claims which the creditor does not know or suspect to exist
in his or her favor at the time of executing the release, which if known by him or her must have
materially affected his or her settlement with the debtor.
You further represent and warrant that this Agreement is intended to cover all claims, whether the same are known, unknown or
hereafter discovered or ascertained, and the provisions of § 1542 of the California Civil Code are hereby expressly waived.
10)
Non-Assignment of Claims. You represent and warrant that you have not heretofore assigned or transferred
any matter released by this Agreement or any part or portion thereof. You agree to indemnify and hold harmless the Company
from any claims resulting from any such assignment or transfer by you, or asserted by any assignee or transferee.
11)
Miscellaneous. This Agreement constitutes the complete, final and exclusive embodiment of the
entire agreement between you and the Company with regard to this subject matter. It is entered into without reliance on any
promise or representation, written or oral, other than those expressly contained herein, and it supersedes any other such promises,
warranties or representations. This Agreement may not be modified or amended except in a writing signed by both you and a
duly authorized officer of the Company. This Agreement will bind the heirs, personal representatives, successors and assigns of
both you and the Company, and inure to the benefit of both you and the Company, their heirs, successors and assigns. If any
provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination will not affect
any other provision of this Agreement and the provision in question will be modified by the court so as to be rendered
enforceable. This Agreement will be deemed to have been entered into and will be construed and enforced in accordance with
the laws of the State of California as applied to contracts made and performed entirely within California.
SELECT INTERIOR CONCEPTS, INC.
EXECUTIVE
By: /s/ Tyrone Johnson
Name: Tyrone Johnson
Title: Chief Executive Officer
/s/ Shawn Baldwin
Shawn Baldwin
RETENTION AGREEMENT
Exhibit 10.28
THIS RETENTION AGREEMENT (this “Agreement”) is made and entered into this 12th day of July, 2019 by and between
Select Interior Concepts, Inc., a Delaware corporation (the “Company”) and Tyrone Johnson (“Executive”).
1.
Retention Payment. Subject to the terms and conditions of this Agreement, the Company shall pay to Executive the
Retention Payment, less withholding for all applicable taxes, in a single lump sum within thirty (30) days following the Retention Date,
provided that, except as otherwise provided in Section 2 and Section 3 hereof, Executive is employed by the Company on the Retention
Date.
2.
Termination of Employment. Notwithstanding the anything in this agreement to the contrary, if Executive incurs a
Qualifying Termination prior to the Retention Date, then the Company shall pay to Executive the Retention Payment, less withholdings for
all applicable taxes, in a single lump sum within thirty (30) days following the date of Executive’s Qualifying Termination, provided that (i)
Executive executes a Release Agreement within the time period specified in the Release Agreement and does not revoke such Release
Agreement within any revocation period specified in the Release Agreement. If Executive’s employment with the Company is terminated for
any reason other than by reason of a Qualifying Termination prior to the Retention Date, then Executive shall not be entitled to the Retention
Payment.
3.
Change in Control. Notwithstanding the anything in this agreement to the contrary, in the event of a Change in Control,
prior to the Retention Date, then the Company shall pay to Executive the Retention Payment, less withholdings for all applicable taxes, in a
single lump sum within thirty (30) days following the date of Executive’s Qualifying Termination.
4.
Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
(a)
(b)
“Cause” shall have the meaning set forth in the Employment Agreement.
“Change in Control” shall have the meaning set forth in the Employment Agreement.
“Code” means the Internal Revenue Code of 1986, as amended from time to time. For purposes of this
Agreement, references to sections of the Code shall be deemed to include references to any applicable regulations thereunder and any
successor or similar provision.
(c)
(d)
“Disability” has the meaning set forth in the Employment Agreement.
(e)
by and between the Company and Executive.
“Employment Agreement” means the Employment Agreement, dated as of November 22, 2017, as amended,
(f)
“Good Reason” has the meaning set forth in the Employment Agreement.
(g)
“Qualifying Termination” means Executive’s termination of employment with the Company by the
Company without Cause or by Executive for Good Reason. For the avoidance of doubt, in no event shall Executive be deemed to have
experienced a Qualifying Termination as a result of (i) Executive’s death or Disability, (ii) Executive’s resignation from employment with the
Company for any reason other than for Good Reason, or (iii) Executive’s termination of employment by the Company for Cause.
(h)
not to sue in the form provided by the Company.
“Release Agreement” means a separation agreement containing a full general release of claims and covenant
(i)
(j)
($312,500).
“Retention Date” means May 15, 2020.
“Retention Payment” means an amount equal to Three Hundred Twelve Thousand Five Hundred Dollars
5.
Full Settlement; No Mitigation. The Company’s obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or
action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take
any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not Executive obtains other employment.
6.
Successors.
benefit of and be enforceable by Executive’s legal representatives.
(a)This Agreement is one for personal services and may not be assigned by Executive. This Agreement shall inure to the
(b)This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c)
This Agreement shall bind any successor of or to the Company, its assets or its businesses (whether direct or
indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated
under this Agreement if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing
provision or by operation of law be bound by this Agreement, the Company shall require such successor expressly and unconditionally to
assume and agree to perform the Company’s obligations under this Agreement, in the same manner and to the same extent that the Company
would be required to perform if no such succession had taken place. The term “Company,” as used in this Agreement, shall mean the
Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this
Agreement.
7.
Code Section 409A.
(a)
This Agreement shall be interpreted and administered in a manner so that any amount payable hereunder
shall be paid or provided in a manner that is either exempt from or compliant with the requirements of Section 409A of the Code and
applicable Internal Revenue Service guidance and Treasury Regulations issued thereunder. Nevertheless, the tax treatment of the benefits
provided under the Agreement is not warranted or guaranteed. Neither the Company nor its directors, officers, employees or advisers shall
be held liable for any taxes, interest, penalties or other monetary amounts owed by Executive as a result of the application of Section 409A of
the Code.
(b)
Notwithstanding anything in this Agreement to the contrary, to the extent that any amount that would
constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code (“Non-Exempt Deferred Compensation”) would
otherwise be payable hereunder by reason of Executive’s termination of employment, such Non-Exempt Deferred Compensation will not be
payable to Executive by reason of such circumstance unless the circumstances giving rise to such termination of employment meet any
description or definition of “separation from service” in Section 409A of the Code
2
and applicable regulations (without giving effect to any elective provisions that may be available under such definition). If this provision
prevents the payment of any Non-Exempt Deferred Compensation, such payment shall be made on the date, if any, on which an event occurs
that constitutes a Section 409A-compliant “separation from service”, or such later date as may be required by Section 10(c) hereof.
(c)
Notwithstanding anything in this Agreement to the contrary, if any Non-Exempt Deferred Compensation
would otherwise be payable under this Agreement by reason of Executive’s separation from service during a period in which Executive is a
Specified Executive (as defined below), then, subject to any permissible acceleration of payment by the Company under Treas. Reg. Section
1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes), Executive’s right
to receive payment of such Non-Exempt Deferred Compensation will be delayed until the earlier of Executive’s death or the first day of the
seventh month following Executive’s separation from service. For purposes of this Agreement, the term “Specified Executive” has the
meaning given such term in Code Section 409A.
(d)
Whenever in this Agreement a payment is conditioned on Executive’s execution of a release of claims, such
release must be executed and all revocation periods shall have expired within 60 days after the date of termination; failing which such
payment or benefit shall be forfeited. If such payment constitutes Non-Exempt Deferred Compensation, then such payment that would have
otherwise been payable during such 60-day period shall be accumulated and paid on the 60th day after the date of termination provided such
release shall have been executed and such revocation periods shall have expired. If such payment or benefit is exempt from Section 409A of
the Code, then the Company may elect to make or commence payment at any time during such period.
8.
Miscellaneous.
in accordance with the laws of the State of California without giving effect to its conflicts of law principles.
(a)
The Company and Executive agree that this Agreement shall be governed by and construed and interpreted
parties hereto or their respective successors and legal representatives.
(c)
This Agreement may not be amended or modified otherwise than by a written agreement executed by the
other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
(d)
All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the
If to Executive:
On file with the Company
If to the Company:
Select Interior Concepts, Inc.
400 Galleria Parkway, Suite 1760
Atlanta, Georgia 30339
Attention:
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall
be effective when actually received by the addressee.
enforceability of any other provision of this Agreement.
(e)
The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or
3
foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(f)
The Company may withhold from any amounts payable under this Agreement such federal, state, local or
(g)
Failure of either party to insist, in one or more instances, on performance by the other in strict accordance
with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of
the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in
a writing signed by the party making the waiver.
This Agreement, together with the Employment Agreement, contains the entire agreement between the
Company and Executive with respect to the subject matter hereof and, from and after the date hereof, this Agreement shall supersede any
other agreement, written or oral, between the parties relating to the subject matter of this Agreement.
(h)
(i)
The parties understand and agree that because they both have been given the opportunity to have counsel
review and revise this Agreement, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement shall be construed as
a whole, and according to its fair meaning, and not strictly for or against either of the parties.
but all of which taken together shall constitute one and the same instrument.
(j)
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original,
(Signatures on following page)
4
IN WITNESS WHEREOF, Executive has hereunto set Executive’s hand and the Company has caused these presents to be executed in its
name on its behalf, all as of the day and year first above written.
/s/ Tyrone Johnson
Tyrone Johnson
SELECT INTERIOR CONCEPTS, INC.
By:
Name:
Title:
/s/ Shawn Baldwin
Shawn K. Baldwin
General Counsel & Secretary
5
RETENTION AGREEMENT
Exhibit 10.29
THIS RETENTION AGREEMENT (this “Agreement”) is made and entered into this 12th day of July, 2019 by and between
Select Interior Concepts, Inc., a Delaware corporation (the “Company”) and Nadeem Moiz (“Executive”).
1.
Retention Payment. Subject to the terms and conditions of this Agreement, the Company shall pay to Executive the
Retention Payment, less withholding for all applicable taxes, in a single lump sum within thirty (30) days following the Retention Date,
provided that, except as otherwise provided in Section 2 and Section 3 hereof, Executive is employed by the Company on the Retention
Date.
2.
Termination of Employment. Notwithstanding the anything in this agreement to the contrary, if Executive incurs a
Qualifying Termination prior to the Retention Date, then the Company shall pay to Executive the Retention Payment, less withholdings for
all applicable taxes, in a single lump sum within thirty (30) days following the date of Executive’s Qualifying Termination, provided that (i)
Executive executes a Release Agreement within the time period specified in the Release Agreement and does not revoke such Release
Agreement within any revocation period specified in the Release Agreement. If Executive’s employment with the Company is terminated for
any reason other than by reason of a Qualifying Termination prior to the Retention Date, then Executive shall not be entitled to the Retention
Payment.
3.
Change in Control. Notwithstanding the anything in this agreement to the contrary, in the event of a Change in Control,
prior to the Retention Date, then the Company shall pay to Executive the Retention Payment, less withholdings for all applicable taxes, in a
single lump sum within thirty (30) days following the date of Executive’s Qualifying Termination.
4.
Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
(a)
(b)
“Cause” shall have the meaning set forth in the Employment Agreement.
“Change in Control” shall have the meaning set forth in the Employment Agreement.
“Code” means the Internal Revenue Code of 1986, as amended from time to time. For purposes of this
Agreement, references to sections of the Code shall be deemed to include references to any applicable regulations thereunder and any
successor or similar provision.
(c)
(d)
“Disability” has the meaning set forth in the Employment Agreement.
(e)
by and between the Company and Executive.
“Employment Agreement” means the Employment Agreement, dated as of October 22, 2018, as amended,
(f)
“Good Reason” has the meaning set forth in the Employment Agreement.
(g)
“Qualifying Termination” means Executive’s termination of employment with the Company by the
Company without Cause or by Executive for Good Reason. For the avoidance of doubt, in no event shall Executive be deemed to have
experienced a Qualifying Termination as a result of (i) Executive’s death or Disability, (ii) Executive’s resignation from employment with the
Company for any reason other than for Good Reason, or (iii) Executive’s termination of employment by the Company for Cause.
(h)
not to sue in the form provided by the Company.
“Release Agreement” means a separation agreement containing a full general release of claims and covenant
(i)
(j)
“Retention Date” means May 15, 2020.
“Retention Payment” means an amount equal to Two Hundred Six Thousand Dollars ($206,000).
5.
Full Settlement; No Mitigation. The Company’s obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or
action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take
any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not Executive obtains other employment.
6.
Successors.
benefit of and be enforceable by Executive’s legal representatives.
(a)This Agreement is one for personal services and may not be assigned by Executive. This Agreement shall inure to the
(b)This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c)
This Agreement shall bind any successor of or to the Company, its assets or its businesses (whether direct or
indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated
under this Agreement if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing
provision or by operation of law be bound by this Agreement, the Company shall require such successor expressly and unconditionally to
assume and agree to perform the Company’s obligations under this Agreement, in the same manner and to the same extent that the Company
would be required to perform if no such succession had taken place. The term “Company,” as used in this Agreement, shall mean the
Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this
Agreement.
7.
Code Section 409A.
(a)
This Agreement shall be interpreted and administered in a manner so that any amount payable hereunder
shall be paid or provided in a manner that is either exempt from or compliant with the requirements of Section 409A of the Code and
applicable Internal Revenue Service guidance and Treasury Regulations issued thereunder. Nevertheless, the tax treatment of the benefits
provided under the Agreement is not warranted or guaranteed. Neither the Company nor its directors, officers, employees or advisers shall
be held liable for any taxes, interest, penalties or other monetary amounts owed by Executive as a result of the application of Section 409A of
the Code.
(b)
Notwithstanding anything in this Agreement to the contrary, to the extent that any amount that would
constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code (“Non-Exempt Deferred Compensation”) would
otherwise be payable hereunder by reason of Executive’s termination of employment, such Non-Exempt Deferred Compensation will not be
payable to Executive by reason of such circumstance unless the circumstances giving rise to such termination of employment meet any
description or definition of “separation from service” in Section 409A of the Code
2
and applicable regulations (without giving effect to any elective provisions that may be available under such definition). If this provision
prevents the payment of any Non-Exempt Deferred Compensation, such payment shall be made on the date, if any, on which an event occurs
that constitutes a Section 409A-compliant “separation from service”, or such later date as may be required by Section 10(c) hereof.
(c)
Notwithstanding anything in this Agreement to the contrary, if any Non-Exempt Deferred Compensation
would otherwise be payable under this Agreement by reason of Executive’s separation from service during a period in which Executive is a
Specified Executive (as defined below), then, subject to any permissible acceleration of payment by the Company under Treas. Reg. Section
1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes), Executive’s right
to receive payment of such Non-Exempt Deferred Compensation will be delayed until the earlier of Executive’s death or the first day of the
seventh month following Executive’s separation from service. For purposes of this Agreement, the term “Specified Executive” has the
meaning given such term in Code Section 409A.
(d)
Whenever in this Agreement a payment is conditioned on Executive’s execution of a release of claims, such
release must be executed and all revocation periods shall have expired within 60 days after the date of termination; failing which such
payment or benefit shall be forfeited. If such payment constitutes Non-Exempt Deferred Compensation, then such payment that would have
otherwise been payable during such 60-day period shall be accumulated and paid on the 60th day after the date of termination provided such
release shall have been executed and such revocation periods shall have expired. If such payment or benefit is exempt from Section 409A of
the Code, then the Company may elect to make or commence payment at any time during such period.
8.
Miscellaneous.
in accordance with the laws of the State of California without giving effect to its conflicts of law principles.
(a)
The Company and Executive agree that this Agreement shall be governed by and construed and interpreted
parties hereto or their respective successors and legal representatives.
(c)
This Agreement may not be amended or modified otherwise than by a written agreement executed by the
other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
(d)
All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the
If to Executive:
On file with the Company
If to the Company:
Select Interior Concepts, Inc.
400 Galleria Parkway, Suite 1760
Atlanta, Georgia 30339
Attention:
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall
be effective when actually received by the addressee.
enforceability of any other provision of this Agreement.
(e)
The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or
3
foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(f)
The Company may withhold from any amounts payable under this Agreement such federal, state, local or
(g)
Failure of either party to insist, in one or more instances, on performance by the other in strict accordance
with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of
the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in
a writing signed by the party making the waiver.
This Agreement, together with the Employment Agreement, contains the entire agreement between the
Company and Executive with respect to the subject matter hereof and, from and after the date hereof, this Agreement shall supersede any
other agreement, written or oral, between the parties relating to the subject matter of this Agreement.
(h)
(i)
The parties understand and agree that because they both have been given the opportunity to have counsel
review and revise this Agreement, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement shall be construed as
a whole, and according to its fair meaning, and not strictly for or against either of the parties.
but all of which taken together shall constitute one and the same instrument.
(j)
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original,
(Signatures on following page)
4
IN WITNESS WHEREOF, Executive has hereunto set Executive’s hand and the Company has caused these presents to be executed in its
name on its behalf, all as of the day and year first above written.
/s/ Nadeem Moiz
Nadeem Moiz
SELECT INTERIOR CONCEPTS, INC.
By:
Name:
Title:
/s/ Tyrone Johnson
Tyrone Johnson
CEO
5
RETENTION AGREEMENT
Exhibit 10.30
THIS RETENTION AGREEMENT (this “Agreement”) is made and entered into this 12th day of July, 2019 by and between
Select Interior Concepts, Inc., a Delaware corporation (the “Company”) and Kendall Hoyd (“Executive”).
1.
Retention Payment. Subject to the terms and conditions of this Agreement, the Company shall pay to Executive the
Retention Payment, less withholding for all applicable taxes, in a single lump sum within thirty (30) days following the Retention Date,
provided that, except as otherwise provided in Section 2 and Section 3 hereof, Executive is employed by the Company on the Retention
Date.
2.
Termination of Employment. Notwithstanding the anything in this agreement to the contrary, if Executive incurs a
Qualifying Termination prior to the Retention Date, then the Company shall pay to Executive the Retention Payment, less withholdings for
all applicable taxes, in a single lump sum within thirty (30) days following the date of Executive’s Qualifying Termination, provided that (i)
Executive executes a Release Agreement within the time period specified in the Release Agreement and does not revoke such Release
Agreement within any revocation period specified in the Release Agreement. If Executive’s employment with the Company is terminated for
any reason other than by reason of a Qualifying Termination prior to the Retention Date, then Executive shall not be entitled to the Retention
Payment.
3.
Change in Control. Notwithstanding the anything in this agreement to the contrary, in the event of a Change in Control,
prior to the Retention Date, then the Company shall pay to Executive the Retention Payment, less withholdings for all applicable taxes, in a
single lump sum within thirty (30) days following the date of Executive’s Qualifying Termination.
4.
Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
(a)
(b)
“Cause” shall have the meaning set forth in the Employment Agreement.
“Change in Control” shall have the meaning set forth in the Employment Agreement.
“Code” means the Internal Revenue Code of 1986, as amended from time to time. For purposes of this
Agreement, references to sections of the Code shall be deemed to include references to any applicable regulations thereunder and any
successor or similar provision.
(c)
(d)
“Disability” has the meaning set forth in the Employment Agreement.
(e)
by and between the Company and Executive.
“Employment Agreement” means the Employment Agreement, dated as of November 22, 2017, as amended,
(f)
“Good Reason” has the meaning set forth in the Employment Agreement.
(g)
“Qualifying Termination” means Executive’s termination of employment with the Company by the
Company without Cause or by Executive for Good Reason. For the avoidance of doubt, in no event shall Executive be deemed to have
experienced a Qualifying Termination as a result of (i) Executive’s death or Disability, (ii) Executive’s resignation from employment with the
Company for any reason other than for Good Reason, or (iii) Executive’s termination of employment by the Company for Cause.
(h)
not to sue in the form provided by the Company.
“Release Agreement” means a separation agreement containing a full general release of claims and covenant
(i)
(j)
Dollars ($182,500).
“Retention Date” means May 15, 2020.
“Retention Payment” means an amount equal to One Hundred Eighty Two Thousand and Five Hundred
5.
Full Settlement; No Mitigation. The Company’s obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or
action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take
any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not Executive obtains other employment.
6.
Successors.
benefit of and be enforceable by Executive’s legal representatives.
(a)This Agreement is one for personal services and may not be assigned by Executive. This Agreement shall inure to the
(b)This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c)
This Agreement shall bind any successor of or to the Company, its assets or its businesses (whether direct or
indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated
under this Agreement if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing
provision or by operation of law be bound by this Agreement, the Company shall require such successor expressly and unconditionally to
assume and agree to perform the Company’s obligations under this Agreement, in the same manner and to the same extent that the Company
would be required to perform if no such succession had taken place. The term “Company,” as used in this Agreement, shall mean the
Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this
Agreement.
7.
Code Section 409A.
(a)
This Agreement shall be interpreted and administered in a manner so that any amount payable hereunder
shall be paid or provided in a manner that is either exempt from or compliant with the requirements of Section 409A of the Code and
applicable Internal Revenue Service guidance and Treasury Regulations issued thereunder. Nevertheless, the tax treatment of the benefits
provided under the Agreement is not warranted or guaranteed. Neither the Company nor its directors, officers, employees or advisers shall
be held liable for any taxes, interest, penalties or other monetary amounts owed by Executive as a result of the application of Section 409A of
the Code.
(b)
Notwithstanding anything in this Agreement to the contrary, to the extent that any amount that would
constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code (“Non-Exempt Deferred Compensation”) would
otherwise be payable hereunder by reason of Executive’s termination of employment, such Non-Exempt Deferred Compensation will not be
payable to Executive by reason of such circumstance unless the circumstances giving rise to such termination of employment meet any
description or definition of “separation from service” in Section 409A of the Code
2
and applicable regulations (without giving effect to any elective provisions that may be available under such definition). If this provision
prevents the payment of any Non-Exempt Deferred Compensation, such payment shall be made on the date, if any, on which an event occurs
that constitutes a Section 409A-compliant “separation from service”, or such later date as may be required by Section 10(c) hereof.
(c)
Notwithstanding anything in this Agreement to the contrary, if any Non-Exempt Deferred Compensation
would otherwise be payable under this Agreement by reason of Executive’s separation from service during a period in which Executive is a
Specified Executive (as defined below), then, subject to any permissible acceleration of payment by the Company under Treas. Reg. Section
1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes), Executive’s right
to receive payment of such Non-Exempt Deferred Compensation will be delayed until the earlier of Executive’s death or the first day of the
seventh month following Executive’s separation from service. For purposes of this Agreement, the term “Specified Executive” has the
meaning given such term in Code Section 409A.
(d)
Whenever in this Agreement a payment is conditioned on Executive’s execution of a release of claims, such
release must be executed and all revocation periods shall have expired within 60 days after the date of termination; failing which such
payment or benefit shall be forfeited. If such payment constitutes Non-Exempt Deferred Compensation, then such payment that would have
otherwise been payable during such 60-day period shall be accumulated and paid on the 60th day after the date of termination provided such
release shall have been executed and such revocation periods shall have expired. If such payment or benefit is exempt from Section 409A of
the Code, then the Company may elect to make or commence payment at any time during such period.
8.
Miscellaneous.
in accordance with the laws of the State of California without giving effect to its conflicts of law principles.
(a)
The Company and Executive agree that this Agreement shall be governed by and construed and interpreted
parties hereto or their respective successors and legal representatives.
(c)
This Agreement may not be amended or modified otherwise than by a written agreement executed by the
other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
(d)
All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the
If to Executive:
On file with the Company
If to the Company:
Select Interior Concepts, Inc.
400 Galleria Parkway, Suite 1760
Atlanta, Georgia 30339
Attention:
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall
be effective when actually received by the addressee.
enforceability of any other provision of this Agreement.
(e)
The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or
3
foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(f)
The Company may withhold from any amounts payable under this Agreement such federal, state, local or
(g)
Failure of either party to insist, in one or more instances, on performance by the other in strict accordance
with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of
the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in
a writing signed by the party making the waiver.
This Agreement, together with the Employment Agreement, contains the entire agreement between the
Company and Executive with respect to the subject matter hereof and, from and after the date hereof, this Agreement shall supersede any
other agreement, written or oral, between the parties relating to the subject matter of this Agreement.
(h)
(i)
The parties understand and agree that because they both have been given the opportunity to have counsel
review and revise this Agreement, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement shall be construed as
a whole, and according to its fair meaning, and not strictly for or against either of the parties.
but all of which taken together shall constitute one and the same instrument.
(j)
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original,
(Signatures on following page)
4
IN WITNESS WHEREOF, Executive has hereunto set Executive’s hand and the Company has caused these presents to be executed in its
name on its behalf, all as of the day and year first above written.
/s/ Kendall Hoyd
Kendall Hoyd
SELECT INTERIOR CONCEPTS, INC.
By:
Name:
Title:
/s/ Tyrone Johnson
Tyrone Johnson
CEO
5
RETENTION AGREEMENT
Exhibit 10.31
THIS RETENTION AGREEMENT (this “Agreement”) is made and entered into this 12th day of July, 2019 by and between
Select Interior Concepts, Inc., a Delaware corporation (the “Company”) and Shawn Baldwin (“Executive”).
1.
Retention Payment. Subject to the terms and conditions of this Agreement, the Company shall pay to Executive the
Retention Payment, less withholding for all applicable taxes, in a single lump sum within thirty (30) days following the Retention Date,
provided that, except as otherwise provided in Section 2 and Section 3 hereof, Executive is employed by the Company on the Retention
Date.
2.
Termination of Employment. Notwithstanding the anything in this agreement to the contrary, if Executive incurs a
Qualifying Termination prior to the Retention Date, then the Company shall pay to Executive the Retention Payment, less withholdings for
all applicable taxes, in a single lump sum within thirty (30) days following the date of Executive’s Qualifying Termination, provided that (i)
Executive executes a Release Agreement within the time period specified in the Release Agreement and does not revoke such Release
Agreement within any revocation period specified in the Release Agreement. If Executive’s employment with the Company is terminated for
any reason other than by reason of a Qualifying Termination prior to the Retention Date, then Executive shall not be entitled to the Retention
Payment.
3.
Change in Control. Notwithstanding the anything in this agreement to the contrary, in the event of a Change in Control,
prior to the Retention Date, then the Company shall pay to Executive the Retention Payment, less withholdings for all applicable taxes, in a
single lump sum within thirty (30) days following the date of Executive’s Qualifying Termination.
4.
Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
(a)
(b)
“Cause” shall have the meaning set forth in the Employment Agreement.
“Change in Control” shall have the meaning set forth in the Employment Agreement.
“Code” means the Internal Revenue Code of 1986, as amended from time to time. For purposes of this
Agreement, references to sections of the Code shall be deemed to include references to any applicable regulations thereunder and any
successor or similar provision.
(c)
(d)
“Disability” has the meaning set forth in the Employment Agreement.
(e)
by and between the Company and Executive.
“Employment Agreement” means the Employment Agreement, dated as of October 22, 2018, as amended,
(f)
“Good Reason” has the meaning set forth in the Employment Agreement.
(g)
“Qualifying Termination” means Executive’s termination of employment with the Company by the
Company without Cause or by Executive for Good Reason. For the avoidance of doubt, in no event shall Executive be deemed to have
experienced a Qualifying Termination as a result of (i) Executive’s death or Disability, (ii) Executive’s resignation from employment with the
Company for any reason other than for Good Reason, or (iii) Executive’s termination of employment by the Company for Cause.
(h)
not to sue in the form provided by the Company.
“Release Agreement” means a separation agreement containing a full general release of claims and covenant
(i)
(j)
“Retention Date” means May 15, 2020.
“Retention Payment” means an amount equal to One Hundred Seventy Five Thousand Dollars ($175,000).
5.
Full Settlement; No Mitigation. The Company’s obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or
action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take
any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not Executive obtains other employment.
6.
Successors.
benefit of and be enforceable by Executive’s legal representatives.
(a)This Agreement is one for personal services and may not be assigned by Executive. This Agreement shall inure to the
(b)This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c)
This Agreement shall bind any successor of or to the Company, its assets or its businesses (whether direct or
indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated
under this Agreement if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing
provision or by operation of law be bound by this Agreement, the Company shall require such successor expressly and unconditionally to
assume and agree to perform the Company’s obligations under this Agreement, in the same manner and to the same extent that the Company
would be required to perform if no such succession had taken place. The term “Company,” as used in this Agreement, shall mean the
Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this
Agreement.
7.
Code Section 409A.
(a)
This Agreement shall be interpreted and administered in a manner so that any amount payable hereunder
shall be paid or provided in a manner that is either exempt from or compliant with the requirements of Section 409A of the Code and
applicable Internal Revenue Service guidance and Treasury Regulations issued thereunder. Nevertheless, the tax treatment of the benefits
provided under the Agreement is not warranted or guaranteed. Neither the Company nor its directors, officers, employees or advisers shall
be held liable for any taxes, interest, penalties or other monetary amounts owed by Executive as a result of the application of Section 409A of
the Code.
(b)
Notwithstanding anything in this Agreement to the contrary, to the extent that any amount that would
constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code (“Non-Exempt Deferred Compensation”) would
otherwise be payable hereunder by reason of Executive’s termination of employment, such Non-Exempt Deferred Compensation will not be
payable to Executive by reason of such circumstance unless the circumstances giving rise to such termination of employment meet any
description or definition of “separation from service” in Section 409A of the Code
2
and applicable regulations (without giving effect to any elective provisions that may be available under such definition). If this provision
prevents the payment of any Non-Exempt Deferred Compensation, such payment shall be made on the date, if any, on which an event occurs
that constitutes a Section 409A-compliant “separation from service”, or such later date as may be required by Section 10(c) hereof.
(c)
Notwithstanding anything in this Agreement to the contrary, if any Non-Exempt Deferred Compensation
would otherwise be payable under this Agreement by reason of Executive’s separation from service during a period in which Executive is a
Specified Executive (as defined below), then, subject to any permissible acceleration of payment by the Company under Treas. Reg. Section
1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes), Executive’s right
to receive payment of such Non-Exempt Deferred Compensation will be delayed until the earlier of Executive’s death or the first day of the
seventh month following Executive’s separation from service. For purposes of this Agreement, the term “Specified Executive” has the
meaning given such term in Code Section 409A.
(d)
Whenever in this Agreement a payment is conditioned on Executive’s execution of a release of claims, such
release must be executed and all revocation periods shall have expired within 60 days after the date of termination; failing which such
payment or benefit shall be forfeited. If such payment constitutes Non-Exempt Deferred Compensation, then such payment that would have
otherwise been payable during such 60-day period shall be accumulated and paid on the 60th day after the date of termination provided such
release shall have been executed and such revocation periods shall have expired. If such payment or benefit is exempt from Section 409A of
the Code, then the Company may elect to make or commence payment at any time during such period.
8.
Miscellaneous.
in accordance with the laws of the State of California without giving effect to its conflicts of law principles.
(a)
The Company and Executive agree that this Agreement shall be governed by and construed and interpreted
parties hereto or their respective successors and legal representatives.
(c)
This Agreement may not be amended or modified otherwise than by a written agreement executed by the
other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
(d)
All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the
If to Executive:
On file with the Company
If to the Company:
Select Interior Concepts, Inc.
400 Galleria Parkway, Suite 1760
Atlanta, Georgia 30339
Attention:
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall
be effective when actually received by the addressee.
enforceability of any other provision of this Agreement.
(e)
The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or
3
foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(f)
The Company may withhold from any amounts payable under this Agreement such federal, state, local or
(g)
Failure of either party to insist, in one or more instances, on performance by the other in strict accordance
with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of
the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in
a writing signed by the party making the waiver.
This Agreement, together with the Employment Agreement, contains the entire agreement between the
Company and Executive with respect to the subject matter hereof and, from and after the date hereof, this Agreement shall supersede any
other agreement, written or oral, between the parties relating to the subject matter of this Agreement.
(h)
(i)
The parties understand and agree that because they both have been given the opportunity to have counsel
review and revise this Agreement, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement shall be construed as
a whole, and according to its fair meaning, and not strictly for or against either of the parties.
but all of which taken together shall constitute one and the same instrument.
(j)
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original,
(Signatures on following page)
4
IN WITNESS WHEREOF, Executive has hereunto set Executive’s hand and the Company has caused these presents to be executed in its
name on its behalf, all as of the day and year first above written.
/s/ Shawn Baldwin
Shawn Baldwin
SELECT INTERIOR CONCEPTS, INC.
By:
Name:
Title:
/s/ Tyrone Johnson
Tyrone Johnson
CEO
5
SELECT INTERIOR CONCEPTS, INC.
List of Subsidiaries
Exhibit 21.1
Name of Subsidiary
AG Holdco (SPV) LLC
Architectural Granite & Marble, LLC
Architectural Surfaces Group, LLC
Casa Verde Services, LLC
Greencraft Holdings, LLC
Greencraft Interiors, LLC
Greencraft Stone and Tile, LLC
L.A.R.K. Industries, Inc.
Pental Granite and Marble, LLC
Residential Design Services, LLC
SIC Intermediate, Inc.
T.A.C. Ceramic Tile Co.
State of Formation,
Organization, or
Incorporation
Delaware
Delaware
Delaware
Delaware
Arizona
Arizona
Arizona
California
Washington
Delaware
Delaware
Virginia
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 12, 2020 with respect to the consolidated financial statements and financial statement schedules included in the
Annual Report of Select Interior Concepts, Inc. on Form 10-K for the year ended December 31, 2019. We consent to the incorporation by reference of said
report in the Registration Statement of Select Interior Concepts, Inc. on Form S-8 (File No. 333-227510).
Exhibit 23.1
/s/ GRANT THORNTON LLP
Los Angeles, California
March 12, 2020
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Tyrone Johnson, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Select Interior Concepts, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: March 12, 2020
/s/ Tyrone Johnson
Tyrone Johnson
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Nadeem Moiz, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Select Interior Concepts, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: March 12, 2020
/s/ Nadeem Moiz
Nadeem Moiz
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Select Interior Concepts, Inc. (the “Company”) for the fiscal year ended December 31,
2019, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Annual Report”), I, Tyrone Johnson, Chief Executive Officer
(Principal Executive Officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge:
1.
2.
the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: March 12, 2020
/s/ Tyrone Johnson
Tyrone Johnson
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Select Interior Concepts, Inc. (the “Company”) for the fiscal year ended December 31,
2019, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Annual Report”), I, Nadeem Moiz, Chief Financial Officer
(Principal Financial Officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge:
1.
2.
the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: March 12, 2020
/s/ Nadeem Moiz
Nadeem Moiz
Chief Financial Officer
(Principal Financial Officer)