ONEWATER MARINE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to the
"Company," "we," "us," and "our" refer to One Water Marine Holdings, LLC and its
consolidated subsidiaries prior to the initial public offering (the "Offering")
completed by OneWater Marine Inc. The following discussion and analysis should
be read in conjunction with the accompanying financial statements and related
notes. The following discussion contains forward-looking statements that reflect
our future plans, estimates, beliefs and expected performance. The
forward-looking statements are dependent upon events, risks and uncertainties
that may be outside our control. Our actual results could differ materially from
those discussed in these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those factors
discussed above in "Cautionary Statement Regarding Forward-Looking Statements"
and described under the heading "Risk Factors" included in the Final Prospectus
filed by OneWater Marine Inc. and in the other related OneWater Marine Inc.
filings with the SEC , all of which are difficult to predict. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed may
not occur. We do not undertake any obligation to publicly update any
forward-looking statements except as otherwise required by applicable law.
Overview
We believe that we are the largest and one of the fastest-growing premium recreational boat retailers inthe United States with 63 stores comprising 21 dealer groups in 11 states. Our dealer groups are located in highly attractive markets throughout the Southeast,Gulf Coast , Mid-Atlantic and Northeast, includingTexas ,Florida ,Alabama ,North Carolina ,South Carolina ,Georgia ,Ohio andNew York , which collectively comprise eight of the top twenty states for marine retail expenditures. We believe that we are a market leader by volume in sales of premium boats in 12 out of the 17 markets in which we operate. In fiscal year 2019, we sold over 8,500 new and pre-owned boats, of which we believe approximately 40% were sold to customers who had a trade-in or with whom we had otherwise established relationships. The combination of our significant scale, diverse inventory, access to premium boat brands and meaningful dealer group brand equity enable us to provide a consistently professional experience as reflected in the number of our repeat customers and same-store sales growth. We were formed in 2014 asOne Water Marine Holdings, LLC ("OneWater LLC ") through the combination ofSingleton Marine and Legendary Marine, which created a marine retail platform that collectively owned and operated 19 stores. Since the combination in 2014, we have acquired a total of 40 additional stores through 17 acquisitions. Our current portfolio as ofDecember 31, 2019 consists of 21 different local and regional dealer groups. Because of this, we believe we are the largest and one of the fastest-growing premium recreational boat retailers inthe United States based on number of stores and total boats sold. While we have opportunistically opened new stores in select markets, we believe that it is generally more effective economically and operationally to acquire existing stores with experienced staff and established reputations. The boat dealer market is highly fragmented and is comprised of over 4,000 stores nationwide. Most competing boat retailers are operated by local business owners who own three or fewer stores. We are one of the largest and fastest-growing premium recreational boat retailers inthe United States . Despite our size, we comprise less than 2% of total industry sales. Our scale and business model allow us to leverage our extensive inventory to provide consumers with the ability to find a boat that matches their preferences (e.g., make, model color, configuration and other options) and to deliver the boat within days while providing a personalized sales experience. We are able to operate with a comparatively higher degree of profitability than other independent retailers because we allocate support resources across our store base, focus on high-margin products and services, utilize floor plan financing and provide core back-office functions on a scale that many independent retailers are unable to match. We seek to be the leading boat retailer by total market share within each boating market and within the product segments in which we participate. To the extent that we are not, we will evaluate acquiring other local retailers in order to increase our sales, to add additional brands or to provide us with additional high-quality personnel. 27 -------------------------------------------------------------------------------- Table of Contents Trends and Other Factors Impacting Our Performance
Acquisitions
We are a highly acquisitive company. Since the combination ofSingleton Marine and Legendary Marine in 2014, we have acquired 40 additional stores through 17 dealer group acquisitions. We plan to continue to aggressively pursue acquisitions going forward. We actively evaluate and pursue acquisitions on an ongoing basis, and our pipeline of potential acquisitions over the next 24 months currently includes four to eight dealer groups. We have an extensive acquisition track record within the boating industry and believe we have developed a reputation for treating sellers and their staff in an honest and fair manner. We typically retain the management team and name of the acquired dealerships. We believe this practice preserves the acquired dealer's customer relationships and goodwill in the local marketplace. We believe our reputation and scale have positioned us as a buyer of choice for boat dealers who want to sell their businesses. To date, 100% of our acquisitions have been sourced from inbound inquiries, and the number of annual inquiries we receive has consistently increased over time. Our strategy is to acquire stores at attractive EBITDA multiples and then grow same-store sales while benefitting from cost-reducing synergies. Historically, we have typically acquired dealer groups for less than 4.0x EBITDA on a trailing twelve months basis and believe that we will be able to continue to make attractive acquisitions within this range.
General Economic Conditions
General economic conditions and consumer spending patterns can negatively impact
our operating results. Unfavorable local, regional, national, or global economic
developments or uncertainties could reduce consumer spending and adversely
affect our business. Consumer spending on discretionary goods may also decline
as a result of lower consumer confidence levels, even if prevailing economic
conditions are otherwise favorable. Economic conditions in areas in which we
operate stores, particularly in the Southeast, can have a major impact on our
overall results of operations. Local influences, such as corporate downsizing
and inclement weather such as hurricanes and other storms, environmental
conditions, global public health concerns and events could adversely affect our
operations in certain markets and in certain periods. Any extended period of
adverse economic conditions or low consumer confidence is likely to have a
negative effect on our business.
Our business was significantly impacted during the recessionary period that
began in 2007. This period of weakness in consumer spending and depressed
economic conditions had a substantial negative effect on our operating results.
In response to these conditions we reduced our inventory purchases, closed
certain stores and reduced headcount. Additionally, in an effort to counteract
the downturn, we increased our focus on pre-owned sales, parts and repair
services, and finance and insurance services. As a result, we surpassed our
pre-recession sales levels in less than 24 months. While we believe the measures
we took significantly reduced the impact of the downturn on the business, we
cannot guarantee similar results in the event of a future downturn.
Additionally, we cannot predict the timing or length of unfavorable economic or
industry conditions or the extent to which they could adversely affect our
operating results.
The current coronavirus ("COVID-19") outbreak did not impact our results for the
three months ended December 31, 2019 . However, it may interfere with the
ability of our employees, contractors, customers, suppliers, and other business
partners to perform our and their respective responsibilities and obligations
with respect to the conduct of our business. Additionally, current economic
conditions and the COVID-19 outbreak may affect the purchasing decisions of our
customers. The extent of this impact on our business remains uncertain.
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Although past economic conditions have adversely affected our operating results,
we believe we are capable of responding in a manner that allows us to
substantially outperform the industry, resulting in market share gains. We
believe our ability to capture such market share enables us to align our retail
strategies with the desires of customers. We expect our core strengths,
including retail and acquisition strategies, will allow us to capitalize on
growth opportunities as they occur, despite market conditions.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States (''GAAP'') requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of the financial statements, and revenues and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions, and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements. Set forth below are the policies and estimates that we have identified as critical to our business operations and understanding our results of operations, based on the high degree of judgment or complexity in their application.
Revenue Recognition
Revenue is recognized from the sale of products and commissions earned on new and pre-owned boats (including used, brokerage, consignment and wholesale) when ownership is transferred to the customer. We are the principal with respect to revenue from new, used and consignment sales and such revenue is recorded at the gross sales price. With respect to brokerage transactions, we are acting as an agent in the transaction, therefore the fee or commission is recorded on a net basis. Revenue from parts and service operations (boat maintenance and repairs) are recorded over time as services are performed. Each boat maintenance and repair service is a single performance obligation that includes both the parts and labor associated with the service. Payment for boat maintenance and repairs is typically due upon the completion of the service, which is generally completed within a period of one year or less from contract inception. Prior to the adoption of ASU 2014-09 (as defined below), revenue from parts and service operations were recognized when the customer took delivery of the part or serviced boat. Due to the short period of time from contract inception to completion, the impact of recording labor and parts incurred but not billed at the end of the reporting period in accordance with the standard adoption was de minimis. Deferred revenue from storage and marina operations is recognized on a straight-line basis over the term of the contract as services are completed. Revenue from arranging financing, insurance and extended warranty contracts to customers through various third-party financial institutions and insurance companies is recognized when the related boats are sold. We do not directly finance our customers' boat, motor or trailer purchases. Subject to our agreements and in the event of early cancellation of such loans or insurance contracts by the customer, we may be assessed a charge back for a portion of the transaction price by the third-party financial institutions and insurance companies. We constrain our estimate of variable consideration associated with chargebacks based on our historical experience with repayments or defaults. Chargebacks were not material to the unaudited condensed consolidated financial statements for the three months endedDecember 31, 2019 andDecember 31, 2018 .
Vendor Consideration Received
Consideration received from vendors is accounted for in accordance with the ASU
2014-09, "Revenue from Contracts with Customers (Topic 606)." Pursuant to ASC
606, manufacturer incentives based upon cumulative volume of sales and purchases
are recorded as a reduction of inventory cost and related cost of sales when the
amounts are probable and reasonably estimable.
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Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of
new and pre-owned boat inventory is determined using the specific identification
method. New and pre-owned boat sales histories indicated that the overwhelming
majority of such boats are sold for, or in excess of, the cost to purchase those
boats. In assessing the lower of cost or net realizable value, we consider the
aging of the boats, historical sales of a particular product and current market
conditions. Therefore, we generally do not maintain a reserve for boat
inventory. The cost of parts and accessories is determined using the weighted
average cost method. Inventory is reported net of write downs for obsolete and
slow moving items of approximately $0.5 million at both December 31, 2019 and
September 30, 2019 .
Goodwill and intangible assets are accounted for in accordance with FASB Accounting Standards Codification 350, ''Intangibles -Goodwill and Other'' (''ASC 350''), which provides that the excess of cost over the fair value of the net assets of businesses acquired, including other identifiable intangible assets, is recorded as goodwill. ASC 350 also states that if an entity determines, based on an assessment of certain qualitative factors, that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative goodwill impairment test is unnecessary.Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. In accordance with ASC 350, goodwill is tested for impairment at least annually, or more frequently when events or circumstances indicate that impairment might have occurred. In accordance with ASC 350, we review goodwill for impairment annually in the fourth fiscal quarter, or more often if events or circumstances indicate that impairment may have occurred. When evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, the difference would represent the amount of required goodwill impairment in accordance with ASC 350. To the extent the reporting unit's earnings decline significantly or there are changes in one or more of these inputs that would result in a lower valuation, it could cause the carrying value of the reporting unit to exceed its fair value and thus requireOneWater LLC to record goodwill impairment. As ofDecember 31, 2019 , and based upon our most recent analysis, we determined through our qualitative assessment that it is not "more likely than not" that the fair that the fair value of our reporting unit is less than its carrying value. As a result, we were not required to perform a quantitative goodwill impairment test. The qualitative assessment requires us to make judgments and assumptions regarding macroeconomic and industry conditions, our financial performance, and other factors. We do not believe there is a reasonable likelihood that there will be a change in the judgments and assumptions used in our qualitative assessment which would result in a material effect on our operating results. Identifiable intangible assets consist of trade names related to the acquisitions we have completed. We have determined that trade names have an indefinite life, as there is no economic, contractual or other factors that limit their useful lives and they are expected to generate value as long as the trade name is utilized by the dealer group, and therefore, are not subject to amortization. Financial statement risk exists to the extent identifiable intangibles become impaired due to the decrease in the fair value of the identifiable assets. As ofDecember 31, 2019 , and based upon our most recent analysis, we determined through our qualitative assessment that it is not "more likely than not" that the fair values of our identifiable intangible assets are less than their carrying values. As a result, we were not required to perform a quantitative intangible asset impairment test.
Impairment of Long-Lived Assets
FASB ASC 360-10-40, Property, Plant, and Equipment - Impairment or Disposal of
Long-Lived Assets (''ASC 360-10-40''), requires that long-lived assets, such as
property, equipment and purchased intangibles subject to amortization, be
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If such an indication is
present, the carrying amount of the asset is compared to the estimated
undiscounted cash flows related to that asset. We would conclude that an asset
is impaired if the sum of such expected future cash flows is less than the
carrying amount of the related asset. If an asset is impaired, the impairment
loss would be the amount by which the carrying amount of the related asset
exceeds its fair value. Based upon our most recent analysis, we believe no
impairment of long-lived assets existed as of December 31, 2019 . We do not
believe there is a reasonable likelihood that there will be a change in the
future estimates or assumptions used to test for recoverability which would
result in a material effect on our operating results.
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Fair Value of Financial Instruments
In determining fair value, we use various valuation approaches including market,
income and cost approaches. FASB Topic 820, Fair Value Measurements, establishes
a hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs
that market participants would use in pricing the asset or liability, developed
based on market data obtained from independent sources. Unobservable inputs are
those that reflect our expectation of the assumptions that market participants
would use in pricing the asset or liability, developed based on the best
information available in the circumstances.
The grant date fair value of equity-based compensation and the fair value of
certain warrants previously held by affiliates of Goldman Sachs & Co. LLC and
certain of its affiliates (collectively, "Goldman") and affiliates of The
Beekman Group ("Beekman") (such warrants, the "LLC Warrants") were both based
upon inputs that are unobservable and significant to the overall fair value
measurement. Our valuation considered both a market approach and an income
approach in determining fair value. While both approaches resulted in similar
values, the market approach was weighted 25% and the income approach was
weighted 75% since there are very few comparable marine related market
participants. For the income approach, we projected long-term growth rates and
cash flows and then discounted such values using a weighted average cost of
capital. Such fair value measurements are highly complex and subjective in
nature. Accordingly, a significant degree of judgment is required to estimate
these fair value measurements.
Post-Offering Taxation and Public Company Costs
OneWater LLC is and has been organized as a pass-through entity forU.S. federal income tax purposes and is therefore not subject to entity-levelU.S. federal income taxes.OneWater Marine Inc. ("OneWater Inc. ) was incorporated as aDelaware corporation onApril 3, 2019 and therefore, after the consummation of the Offering, will be subject toU.S. federal income taxes and additional state and local taxes with respect to its allocable share of any taxable income ofOneWater LLC and will be taxed at the prevailing corporate tax rates. In addition to tax expenses,OneWater Inc. also will incur expenses related to its operations, plus payment obligations under the Tax Receivable Agreement, which are expected to be significant. To the extentOneWater LLC has available cash and subject to the terms of any current or future debt instruments, the Amended and Restated Limited Liability Company Agreement ofOneWater LLC (the ''OneWater LLC Agreement'') will requireOneWater LLC to make pro rata cash distributions to OneWater Unit Holders (as defined below), includingOneWater Inc. , in an amount sufficient to allowOneWater Inc. to pay its taxes and to make payments under the Tax Receivable Agreement. In addition, the OneWater LLC Agreement will requireOneWater LLC to make non-pro rata payments toOneWater Inc. to reimburse it for its corporate and other overhead expenses, which payments are not treated as distributions under the OneWater LLC Agreement. See ''-Tax Receivable Agreement'' and ''Certain Relationships and Related Party Transactions-Tax Receivable Agreement'' in our Final Prospectus. In addition, we expect to incur incremental, non-recurring costs related to our transition to a publicly traded corporation, including the costs of the Offering and the costs associated with the initial implementation of our internal control reviews and testing pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the ''Sarbanes-Oxley Act''). We also expect to incur additional significant and recurring expenses as a publicly traded corporation, including costs associated with compliance under the Securities Exchange Act of 1934, as amended (the ''Exchange Act''), annual and quarterly reports to common stockholders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation. Our financial statements following the Offering will reflect the impact of these expenses. 31 -------------------------------------------------------------------------------- Table of Contents How We Evaluate Our Operations
Revenue
We have a diversified revenue profile that is comprised of new boat sales, pre-owned boat sales, F&I products, repair and maintenance services, and parts and accessories. Although non-boat sales contributed approximately 11.6% and 15.3% to revenue in the three months endedDecember 31, 2019 and 2018, respectively, due to the higher gross margin on these product and service lines, non-boat sales contributed 31.3% and 34.5% to gross profit in the three months endedDecember 31, 2019 and 2018, respectively. During different phases of the economic cycle, consumer behavior may shift away from new boats; however, we are well-positioned to benefit from revenue from pre-owned boats, repair and maintenance services, and parts and accessories, which have all historically increased during periods of economic uncertainty. We generate pre-owned sales from boats traded-in for new and pre-owned boats, boats purchased from consumers, brokerage transactions, consignment sales and wholesale sales. We have also diversified our business across geographies and dealership types (e.g., fresh water and salt water) in order to reduce the effects of seasonality. In addition to seasonality, revenue and operating results may also be significantly affected by quarter-to-quarter changes in economic conditions, manufacturer incentive programs, adverse weather conditions and other developments outside of our control.
Gross Profit
We calculate gross profit as revenue less cost of sales. Cost of sales consists of actual amounts paid for products, costs of services (primarily labor), transportation costs from manufacturers to our retail stores and vendor consideration. Gross profit excludes depreciation and amortization, which is presented separately in our consolidated statements of operations.
Gross Profit Margin
Our overall gross profit margin varies with our revenue mix. Sales of new and pre-owned boats, which have comparable margins, generally result in a lower gross profit margin than our non-boat sales. As a result, when revenue from non-boat sales increases as a percentage of total revenue, we expect our overall gross profit margin to increase.
Selling, General and Administrative Expenses
Selling, general, and administrative (''SG&A'') expenses consist primarily of
salaries and incentive-based compensation, advertising, rent, insurance,
utilities, and other customary operating expenses. A portion of our cost
structure is variable (such as sales commissions and incentive compensation), or
controllable (such as advertising), which we believe allows us to adapt to
changes in the retail environment over the long term. We typically evaluate our
variable expenses, selling expenses and all other SG&A expenses in the aggregate
as a percentage of total revenue.
Same-Store Sales
We assess the organic growth of our revenue on a same-store basis. We believe
that our assessment on a same-store basis represents an important indicator of
comparative financial results and provides relevant information to assess our
performance. New and acquired stores become eligible for inclusion in the
comparable store base at the end of the store's thirteenth month of operations
under our ownership and revenues are only included for identical months in the
same-store base periods. Stores relocated within an existing market remain in
the comparable store base for all periods. Additionally, amounts related to
closed stores are excluded from each comparative base period. Because same-store
sales may be defined differently by other companies in our industry, our
definition of this measure may not be comparable to similarly titled measures of
other companies, thereby diminishing its utility.
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Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense - other,
income taxes, depreciation and amortization and other expense (income), further
adjusted to eliminate the effects of items such as the change in the fair value
of warrants, and transaction costs. See ''-Comparison of Non-GAAP Financial
Measure'' for more information and a reconciliation of Adjusted EBITDA to net
income (loss), the most directly comparable financial measure calculated and
presented in accordance with GAAP.
Summary of Acquisitions
The comparability of our results of operations between the periods discussed below is naturally affected by the acquisitions we have completed during such periods. We are also continuously evaluating and pursuing acquisitions on an ongoing basis, and such acquisitions, if completed, will continue to impact the comparability of our financial results. While we expect continued growth and strategic acquisitions in the future, our acquisitions may have materially different characteristics than our historical results, and such differences in economics may impact the comparability of our future results of operations to our historical results. Fiscal Year 2019 Acquisitions
• Effective
assets of
• Effective
assets of
based in
• Effective
assets of
three stores.
• Effective
store.
• Effective
of Central Marine, a dealer group based in
We refer to the fiscal year 2019 acquisitions described above collectively as the ''2019 Acquisitions.'' The 2019 Acquisitions are fully reflected in our unaudited condensed consolidated financial statements for the three months endedDecember 31, 2019 and will be fully reflected in our consolidated financial statements for the fiscal year endingSeptember 30, 2020 but are only partially reflected in our unaudited condensed consolidated financial statements for the three months endingDecember 31, 2018 .
Other Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations
Our historical financial results discussed below may not be comparable to our future financial results for the reasons described below.
•
corporation. Our accounting predecessor,
partnership for
not subject to
liability with respect to its taxable income is passed through to its members.
Accordingly, the financial data attributable to our predecessor contains no
provision for
locality. We currently estimate that
federal, state and local taxes at a blended statutory rate of 24.6% of pre-tax
earnings for periods after the Offering.
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• As of
aggregate was
pro forma basis giving effect to the Offering and the use of net proceeds
therefrom, together with cash on hand and borrowings under the Term and
Revolver Credit Facility, to fully redeem these preferred units, we expect to
eliminate the amount recorded as Redeemable Preferred Interest in Subsidiary in
our balance sheet and eliminate any future dividends related to the preferred
units for all periods after the Offering.
• As of
contain conversion features that cause them to be accounted for as a liability
on our balance sheet. Changes in this liability are recognized as income or
expense on our statements of operations and increase or reduce our net income
in historical periods. In connection with the Offering, Goldman and Beekman
exercised all of the LLC Warrants for common units of
forma basis giving effect to the Offering and the exercise of the LLC Warrants
for common units of
eliminate the fair value adjustment for the LLC Warrants for all periods after
the Offering, which will eliminate the corresponding impact on our statements
of operations.
• As we further implement controls, processes and infrastructure applicable to
companies with publicly traded equity securities, it is likely that we will
incur additional SG&A expenses relative to historical periods. See ''-Post-Offering Taxation and Public Company Costs.''
Our future results will depend on our ability to efficiently manage our combined operations and execute our business strategy.
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Results of Operations
Three Months Ended December 31, 2019 , Compared to Three Months Ended December
31, 2018
For the three months For the three months
ended December 31, ended September 30,
2019 2019
Amount % of Revenue Amount % of Revenue $ Change % Change
Revenues
New boat sales $ 98,102 63.8 % $ 67,564 65.4 % $ 30,538 45.2 %
Pre-owned boat sales 37,821 24.6 % 19,914 19.3 % 17,907 89.9 %
Finance & insurance
income 4,325 2.8 % 2,164 2.1 % 2,161 99.9 %
Service, parts and other
sales 13,450 8.8 % 13,636 13.2 % (186 ) -1.4 %
Total revenues 153,698 100.0 % 103,278 100.0 % 50,420 48.8 %
Gross Profit
New boat gross profit 16,501 10.7 % 12,242 11.9 % 4,259 34.8 %
Pre-owned boat gross
profit 5,601 3.6 % 3,033 2.9 % 2,568 84.7 %
Finance & insurance gross
profit 4,325 2.8 % 2,164 2.1 % 2,161 99.9 %
Service, parts & other
gross profit 5,762 3.7 % 5,880 5.7 % (118 ) -2.0 %
Gross profit 32,189 20.9 % 23,319 22.6 % 8,870 38.0 %
Selling, general and
administrative expenses 28,440 18.5 % 21,629 20.9 % 6,811 31.5 %
Depreciation and
amortization 760 0.5 % 607 0.6 % 153 25.2 %
Income from operations 2,989 1.9 % 1,083 1.0 % 1,906 176.0 %
Interest expense - floor
plan 2,659 1.7 % 1,787 1.7 % 872 48.8 %
Interest expense - other 1,853 1.2 % 1,228 1.2 % 625 50.9 %
Transaction costs 437 0.3 % 298 0.3 % 139 46.6 %
Change in fair value of
warrant liability (771 ) -0.5 % (4,695 ) -4.5 % 3,924 -83.6 %
Other income, net (122 ) -0.1 % (45 ) 0.0 % (77 ) 171.1 %
Pretax (loss) income (1,067 ) -0.7 % 2,510 2.4 % (3,577 ) -142.5 %
Income taxes - 0.0 % - 0.0 % - 0.0 %
Net (loss) income (1,067 ) -0.7 % 2,510 2.4 % (3,577 ) -142.5 %
Less: Net income
attributable to
non-controlling interest 247 0.2 % 277 0.3 % (30 ) -10.8 %
Net (loss) income
attributable to OneWater
Marine Holdings, LLC $ (1,314 ) -0.9 % $ 2,233 2.2 % $ (3,547 ) -158.8 %
Revenue
Overall, revenue increased by $50.4 million , or 48.8%, to approximately $153.7
million for the three months ended December 31, 2019 from $103.3 million for the
three months ended December 31, 2018 . Revenue generated from same-store sales
increased 17.4% for the three months ended December 31, 2019 as compared to the
three months ended December 31, 2018 , primarily due to an increase in the
average selling price of new and pre-owned boats, the model mix of boats sold
and an increase in the number of new and pre-owned boats sold. Overall revenue
increased by $18.0 million as a result of our increase in same-store sales and
$32.4 million from stores not eligible for inclusion in the same-store sales
base. New and acquired stores become eligible for inclusion in the comparable
store base at the end of the store's thirteenth month of operations under our
ownership and revenues are only included for identical months in the same-store
base periods. During the fiscal year ended September 30, 2019 , we acquired 10
stores.
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New Boat Sales
New boat sales increased by $30.5 million , or 45.2%, to approximately $98.1
million for the three months ended December, 2019 from $67.6 for the three
months ended December 31, 2018 . The increase was the result of our same-store
sales growth during the twelve month period and the increased unit sales
attributable to the 2019 Acquisitions. During the three months ended December
31, 2019 we experienced an increase in unit sales of approximately 27.8% and an
increase in average unit prices of approximately 16.6% over the three months
ended December 31, 2018 . The increase in both units sold and average sales price
was due in part to the mix of boat brands and models sold and product
improvements in the functionality and technology of boats, which continues to be
a driver of consumer demand.
Pre-owned Boat Sales
Pre-owned boat sales increased by $17.9 million , or 89.9%, to approximately
$37.8 million for the three months ended December 31, 2019 from $19.9 million
for the three months ended December 31, 2018 . We sell a wide range of brands and
sizes of pre-owned boats under different types of sales arrangements (e.g.,
trade-ins, brokerage, consigned and wholesale), which causes periodic and
seasonal fluctuations in the average sales price. Pre-owned boat sales for the
three months ended December 31, 2019 benefited from a 53.4% increase in the
number of units sold due to the increase in same-store sales and the impact of
the fiscal year 2019 Acquisitions. The average sales price per pre-owned unit in
the three months ended December 31, 2019 increased 14.7% largely due to the mix
of pre-owned products and the composition of the brands and models sold during
the period.
Finance & Insurance Income
Finance & insurance income increased by $2.1 million , or 99.9%, to approximately
$4.3 million for the three months ended December 31, 2019 from $2.2 million for
the three months ended December 31, 2018 . The revenue from arranging finance &
insurance products, including financing, insurance and extended warranty
contracts, to customers through various third-party financial institutions and
insurance companies increased as the result of the increase in same-store sales,
process improvements and with the additional revenue attributable to the fiscal
year 2019 Acquisitions. We remain very focused on improving sales of finance &
insurance products throughout our dealer network and implementing best practices
at acquired dealer groups and existing stores. Finance & insurance products
increased as a percentage of total revenue to 2.8% in the three months ended
December 31, 2019 from 2.1% for the three months ended December 31, 2018 . Since
finance & insurance income is fee-based, we do not incur any related cost of
sale. Finance & insurance income is recorded net of related fees, including fees
charged back due to any early cancellation of loan or insurance contracts by a
customer.
Service, Parts & Other Sales
Service, parts & other sales remained relatively flat at approximately$13.5 million for the three months endedDecember 31, 2019 . During the fiscal first quarter, we saw improvement in parts and accessory sales as customers continued to use their boats late into the year, given the unseasonably warm weather; however, this was offset by the closure and relocation of a service operation in southeastFlorida and a reduction in routine maintenance services.
Gross Profit
Overall, gross profit increased by$8.9 million , or 38.0%, to approximately$32.2 million for the three months endedDecember 31, 2019 from$23.3 million for the three months endedDecember 31, 2018 . This increase was primarily due to our overall increase in same-store sales, primarily driven by an increase in new boat sales, as well as higher pre-owned boat sales and finance & insurance income. The increase in gross profit was also a result of an increase in the number of stores due to the fiscal year 2019 Acquisitions. Overall gross margins decreased 170 basis points to 20.9% for the three months endedDecember 31, 2019 from 22.6% for the three months endedDecember 31, 2018 and was due to the factors noted below. 36 -------------------------------------------------------------------------------- Table of Contents New Boat Gross Profit New boat gross profit increased by$4.3 million , or 34.8%, to approximately$16.5 million for the three months endedDecember 31, 2019 from$12.2 million for the three months endedDecember 31, 2018 . This increase was due to our overall increase in same-store sales and acquired stores during fiscal year 2019. New boat gross profit as a percentage of new boat revenue was 16.8% for the three months endedDecember 31, 2019 as compared to 18.1% in the three months endedDecember 31, 2018 . The decrease in new boat gross profit margin is due primarily to a shift in the mix and size of boat models sold, the margin profile of recently acquired locations and our emphasis on generating strong same-store sales. Pre-owned Boat Gross Profit Pre-owned boat gross profit increased by$2.6 million , or 84.7%, to approximately$5.6 million for the three months endedDecember 31, 2019 from$3.0 million for the three months endedDecember 31, 2018 . This increase was primarily due to an overall increase in our same-store sales and acquired stores during fiscal year 2019, while average unit prices remained constant. Pre-owned boat gross profit as a percentage of pre-owned boat revenue was 14.8% and 15.2% for the three months endedDecember 31, 2019 and 2018, respectively. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consignment and wholesale), which may cause periodic and seasonal fluctuations in pre-owned gross profit as a percentage of revenue. In the three months endedDecember 31, 2019 , we experienced a decline in our gross profit margin on boats purchased or traded-in as well as consignment sales. This was partially offset by an increase in gross profit margin in wholesale sales and shift in product mix due in part to an increase in brokerage sales.
Finance & Insurance Gross Profit
Finance & insurance gross profit increased by$2.2 million , or 99.9%, to approximately$4.3 million for the three months endedDecember 31, 2019 from$2.2 million for the three months endedDecember 31, 2018 . Finance & insurance income is fee-based revenue for which we do not recognize incremental expense.
Service, Parts & Other Gross Profit
Service, parts & other gross profit remained flat, decreasing by 2.0%, to approximately$5.8 million for the three months endedDecember 31, 2019 . Service, parts & other gross profit as a percentage of service, parts & other revenue was 42.8% and 43.1% for the three months endedDecember 31, 2019 and 2018, respectively. This decrease in gross profit margin was the result of decreases in parts gross profit margin and service gross profit margin, partially offset by an increase in storage and other gross profit margin.
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased by$6.8 million , or 31.5%, to approximately$28.4 million for the three months endedDecember 31, 2019 from$21.6 million for the three months endedDecember 31, 2018 . This increase was primarily due to the impact of acquisitions and expenses incurred to support the overall increase in same-store sales and consisted of$4.3 million related to an increase in personnel expenses,$1.4 million related to an increase in selling and administrative expenses, and$1.1 million related to an increase in fixed expenses. Selling, general & administrative expenses as a percentage of revenue decreased to 18.5% from 20.9% for the three months endedDecember 31, 2019 and 2018, respectively. The reduction in selling, general & administrative expenses as a percentage of revenue was due to leverage from the incremental same-store sales increase.
Depreciation and Amortization
Depreciation and amortization expense increased$0.2 million , or 25.2%, to$0.8 million for the three months endedDecember 31, 2019 compared to$0.6 million for the three months endedDecember 31, 2018 . Gross fixed asset remained relatively constant for the three months endedDecember 31, 2019 and 2018, but the increase in depreciation and amortization expense for the three months endedDecember 31, 2019 compared to the three months endedDecember 31, 2018 was primarily attributable to an increase in assets with shorter useful lives. 37 -------------------------------------------------------------------------------- Table of Contents Operating Income Operating income increased$1.9 million , or 176.0%, to$3.0 million for the three months endedDecember 31, 2019 compared to$1.1 million for the three months endedDecember 31, 2018 . The increase was primarily attributable to our overall growth due to increases in same-store sales and the fiscal year 2019 Acquisitions.
Interest Expense - Floor Plan
Interest expense - floor plan increased$0.9 million , or 48.8%, to$2.7 million for the three months endedDecember 31, 2019 compared to$1.8 million for the three months endedDecember 31, 2018 and was primarily attributable to a$46.1 million increase in the outstanding borrowings on our Inventory Financing Facility as ofDecember 31, 2019 compared toDecember 31, 2018 as a result of our same-store sales growth and stores acquired in fiscal year 2019.
Interest Expense - Other
The increase in interest expense - other of$0.6 million , or 50.9%, to$1.9 million for the three months endedDecember 31, 2019 compared to$1.2 million for the three months endedDecember 31, 2018 was primarily attributable to a$22.4 million increase in our long-term debt primarily used to fund our 2019 Acquisitions. Transaction Costs The increase in transaction costs of$0.1 million , or 46.6%, to$0.4 million for the three months endedDecember 31, 2019 compared to$0.3 million for the three months endedDecember 31, 2018 was primarily attributable to the costs of our 2019 and 2018 acquisitions.
Change in Fair Value of Warrant Liability
The decrease in change in fair value of warrant liability of$3.9 million , or 83.6%, to$(0.8) million for the three months endedDecember 31, 2019 compared to$(4.7) million for the three months endedDecember 31, 2018 was primarily attributable to an overall change in the enterprise value of the Company due to our increase in sales offset by a decline in our earnings and a decline in the implied value of other market participants.
Other Income
The increase in other income of$0.1 million , or 171.1%, to$0.1 million for the three months endedDecember 31, 2019 compared to$45,356 for the three months endedDecember 31, 2018 was primarily attributable to$0.1 million in income related to the disposal of property and equipment.
Net (Loss) Income
Net income decreased by$3.6 million to a net loss of$(1.1) million for the three months endedDecember 31, 2019 compared to net income of$2.5 million for the three months endedDecember 31, 2018 . The decrease was primarily attributable to the non-cash change in fair value of the warrant liability to income of$0.8 million in the three months endedDecember 31, 2019 from income of$4.7 million in the three months endedDecember 31, 2018 . 38 -------------------------------------------------------------------------------- Table of Contents Comparison of Non-GAAP Financial Measure We view Adjusted EBITDA as an important indicator of performance. We define Adjusted EBITDA as net income (loss) before interest expense - other, income taxes, depreciation and amortization and other (income) expense, further adjusted to eliminate the effects of items such as the change in the fair value of warrants and transaction costs. Our board of directors, management team and lenders use Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and other items (such as the fair value adjustment of the warrants and transaction costs) that impact the comparability of financial results from period to period. We present Adjusted EBITDA because we believe it provides useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. Adjusted EBITDA is not a financial measure presented in accordance with GAAP. We believe that the presentation of this non-GAAP financial measure will provide useful information to investors and analysts in assessing our financial performance and results of operations across reporting periods by excluding items we do not believe are indicative of our core operating performance. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Our non-GAAP financial measure should not be considered as an alternative to the most directly comparable GAAP financial measure. You are encouraged to evaluate each of these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in such presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in the future, and any such modification may be material. Adjusted EBITDA has important limitations as an analytical tool and you should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of this non-GAAP financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
The following tables present a reconciliation of Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented.
Three Months EndedDecember 31, 2019 , Compared to Three Months EndedDecember 31, 2018 Three months ended December 31 Description 2019 2018 ($ in thousands) Net (loss) income$ (1,067 ) $ 2,510 Interest expense - other 1,853 1,228 Income taxes - - Depreciation and amortization 760 607 Gain on settlement of contingent consideration - - Transaction costs (1) 437 298 Change in fair value of warrant liability (2) (771 ) (4,695 ) Other income, net (122 ) (45 ) Adjusted EBITDA$ 1,090 $ (97 )
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(1) Consists of transaction costs related to the fiscal year 2019 Acquisitions.
(2) Represents the non-cash expense recognized during the period for the change
in the fair value of the LLC Warrants held by Goldman and Beekman, which are
accounted for as a liability on our balance sheets.
39-------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA was$1.1 million for the three months endedDecember 31, 2019 compared to$(0.1) million for the three months endedDecember 31, 2018 . The increase in Adjusted EBITDA resulted from our 17.4% increase in same-store sales growth for the three months endedDecember 31, 2019 as compared to the three months endedDecember 31, 2018 , combined with the results of the fiscal year 2019 Acquisitions. This increase in Adjusted EBITDA as a result of increased sales was partially offset by a reduction in our gross profit percentage.
Seasonality
Our business, along with the entire recreational boating industry, is highly seasonal, and such seasonality varies by geographic market. With the exception ofFlorida , we generally realize significantly lower sales and higher levels of inventories, and related floor plan borrowings, in the quarterly periods endingDecember 31 andMarch 31 . Revenue generated from our stores inFlorida serves to offset generally lower winter revenue in our other states and enables us to maintain a more consistent revenue stream. The onset of the public boat and recreation shows in January stimulates boat sales and typically allows us to reduce our inventory levels and related floor plan borrowings throughout the remainder of the fiscal year. The impact of seasonality on our results of operations could be materially impacted based on the location of our acquisitions. For example, our operations could be substantially more seasonal if we acquire dealer groups that operate in colder regions ofthe United States . Our business is also subject to weather patterns, which may adversely affect our results of operations. For example, prolonged winter conditions, reduced rainfall levels or excessive rain, may limit access to boating locations or render boating dangerous or inconvenient, thereby curtailing customer demand for our products and services. In addition, unseasonably cool weather and prolonged winter conditions may lead to a shorter selling season in certain locations. Hurricanes and other storms could result in disruptions of our operations or damage to our boat inventories and facilities, as has been the case whenFlorida and other markets were affected by hurricanes. We believe our geographic diversity is likely to reduce the overall impact to us of adverse weather conditions in any one market area.
Liquidity and Capital Resources
Overview
Our cash needs are primarily for growth through acquisitions and working capital to support our retail operations, including new and pre-owned boat and related parts inventories and off-season liquidity. We routinely monitor our cash flow to determine the amount of cash available to complete acquisitions of dealer groups and stores. We monitor our inventories, inventory aging and current market trends to determine our current and future inventory and related floorplan financing needs. Based on current facts and circumstances, we believe we will have adequate cash flow, coupled with available borrowing capacity, to fund our current operations, capital expenditures and acquisitions for the next twelve months. Cash needs for acquisitions have historically been financed with our Credit and Guaranty Agreement withOWM BIP Investor, LLC , as a lender,Goldman Sachs Specialty Lending Group, L.P. , as a lender, administrative agent and collateral agent, and various lender parties thereto (as amended, the "GS/BIP Credit Facility") and cash generated from operations. Our ability to utilize the GS/BIP Credit Facility to fund operations depends upon Adjusted EBITDA and compliance with covenants of the GS/BIP Credit Facility. We expect to continue to be subject to financial covenants under the Term and Revolver Credit Facility. Cash needs for inventory have historically been financed with our Inventory Financing Facility. Our ability to fund inventory purchases and operations depends on the collateral levels and our compliance with the covenants of the Inventory Financing Facility. As ofDecember 31, 2019 , we were in compliance with all covenants under the GS/BIP Credit Facility and the Inventory Financing Facility. 40 -------------------------------------------------------------------------------- Table of Contents Cash Flows
Analysis of Cash Flow Changes Between the Three Months Ended
The following table summarizes our cash flows for the periods indicated:
Three Months ended December 31,
Description 2019 2018 Change
($ in thousands)
Net cash used in operating activities
(1,762 ) (3,519 ) 1,757
Net cash provided by financing activities 29,704 57,152
(27,448 ) Net change in cash$ (781 ) $ (8,099 ) $ 7,318 Operating Activities. Net cash used in operating activities was$28.7 million for the three months endedDecember 31, 2019 compared to$61.7 million for the three months endedDecember 31, 2018 . The$33.0 million increase in operating cash flow was primarily attributable to a$23.7 million decrease in the change in inventory, a$4.1 million decrease in the change in accounts receivable, a$3.9 million decrease in the change in fair value of the long-term warrant liability and a$2.1 million increase in the change in accounts payable for the first quarter of fiscal 2019, each as compared to the first quarter of fiscal 2018. These amounts were partially offset by a decrease in net income for the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018. Investing Activities. Net cash used in investing activities was$1.8 million for the three months endedDecember 31, 2019 compared to$3.5 million for the three months endedDecember 31, 2018 . The$1.8 million increase in investing cash flow was primarily attributable to a$1.6 million decrease in cash used in acquisitions and a$0.2 million increase in proceeds on disposal of property and equipment for the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018. Financing Activities. Net cash provided by financing activities was$29.7 million for the three months endedDecember 31, 2019 compared to$57.2 million for the three months endedDecember 31, 2018 . The$27.4 million decrease in financing cash flow was primarily attributable to a decrease in the change in net borrowings on our Inventory Financing Facility, an increase in payments of deferred offering costs, an increase in payments on long-term debt and an increase in distributions to members for the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018.
Debt Agreements
GS/BIP Credit Facility
OnOctober 28, 2016 ,OneWater LLC and certain of our subsidiaries entered into the GS/BIP Credit Facility. The current GS/BIP Credit Facility consists of an up to$60.0 million multi-draw term loan facility and a$5.0 million revolving line of credit. The GS/BIP Credit Facility matures onOctober 28, 2021 . Payment under each term loan is due in installments commencing onDecember 31, 2019 . As ofDecember 31, 2019 , we had$57.2 million outstanding under the multi-draw term loan and no amount outstanding under the revolving line of credit. As ofSeptember 30, 2019 , we had$58.0 million outstanding under the multi-draw term loan and no amount outstanding under the revolving line of credit. All amounts owed are guaranteed by us and certain of our subsidiaries. The multi-draw term loan may be used to fund certain Permitted Acquisitions (as defined in the GS/BIP Credit Facility), and the revolving line of credit may be used for working capital and general corporate matters. As ofDecember 31, 2019 , we were in compliance with all covenants under the GS/BIP Credit Facility. 41 -------------------------------------------------------------------------------- Table of Contents The annual interest rate on the GS/BIP Credit Facility is equal to (i) the Applicable Cash Rate (as defined in the GS/BIP Credit Facility), which is payable in cash, plus (ii) the Applicable PIK Rate (as defined in the GS/BIP Credit Facility), which is payable in kind by increasing the principal amount of the underlying loan, which rates are set forth below. Additionally, we pay a commitment fee calculated based on the unused amount under the multi-draw term loan facility and revolving line of credit, times 0.50% per annum. Applicable
Applicable
Cash Rate PIK Rate
October 28, 2016 through October 31, 2018 0.00 % 10.00 %
November 1, 2018 through October 31, 2019 4.00 % 6.00 %
November 1, 2019 through October 31, 2020 6.00 % 4.00 %
November 1, 2020 through the maturity date and thereafter 8.00 % 2.00 %
OnFebruary 11, 2020 , in connection with the Offering,OneWater Inc. entered into an Amended and Restated Credit and Guaranty Agreement (the "Term and Revolver Credit Facility") by and amongOneWater Inc. ,OneWater LLC and its subsidiaries, withGoldman Sachs Specialty Lending Group, L.P. The amendment, among other things, modified the terms to (i) increase the Revolving Facility from$5.0 million to$10.0 million , (ii) increase the maximum available under the Multi-Draw Term Loan from$60.0 Million to$100.0 million , (iii) provide an uncommitted and discretionary multi-draw term loan accordion feature of up to$20.0 million , (iv) amend the repayment schedule of the Multi-Draw Term Loan to commence onMarch 31, 2022 and (iv) amend the scheduled maturity date of the Revolving Facility and Multi-Draw Term Loan to beFebruary 11, 2025 . The Term and Revolver Credit Facility will bear interest at a rate that is equal to, at OneWater's option, (a) LIBOR for such interest period (subject to a 1.50% floor) plus an applicable margin of up to 7.00%, subject to step-downs to be determined based on certain financial leverage ratio measures, or (b) a base rate (subject to a 4.50% floor) plus an applicable margin of up to 6.00%, subject to step-downs to be determined based on certain financial leverage ratio measures. Interest will be payable quarterly for base rate borrowings and up to quarterly for LIBOR borrowings. The Company immediately upon closing of the agreement borrowed an additional$35.3 million on the Multi-Draw Term Loan.
Inventory Financing Facility
OnJune 14, 2018 ,OneWater LLC and certain of our subsidiaries entered into the Fourth Amended and Restated Inventory Financing Agreement withWells Fargo Commercial Distribution Finance, LLC and various lender parties thereto ("WellsFargo ") (as subsequently amended and restated, the ''Inventory Financing Facility'' and, together with the GS/BIP Credit Facility, the ''Credit Facilities''). OnSeptember 21, 2018 ,OneWater LLC and certain of our subsidiaries entered into the First Amendment to the Fourth Amended and Restated Inventory Financing Agreement which, among other things, increased the maximum amount of borrowing available under the Inventory Financing Facility from$200.0 million to$275.0 million . OnApril 5, 2019 ,OneWater LLC and certain of its subsidiaries further amended the Inventory Financing Facility to, among other things, increase the maximum amount of borrowing available under the Inventory Financing Facility from$275.0 million to$292.5 million . OnNovember 26, 2019 ,OneWater LLC and certain of its subsidiaries entered into the Fifth Amended and Restated Inventory Financing Agreement with Wells Fargo to, among other things, increase the maximum amount of borrowing available under the Inventory Financing Facility from$292.5 million to$392.5 million . 42 -------------------------------------------------------------------------------- Table of Contents The interest rate for amounts outstanding under the Inventory Financing Facility is calculated using the one month LIBOR plus an applicable margin of 2.75% to 5.00% for new boats and at the new boat rate plus 0.25% for pre-owned boats. Loans will be extended from time to time to enable us to purchase inventory from certain manufacturers and to lease certain boats and related parts to customers. The applicable financial terms, curtailment schedule and maturity for each loan will be set forth in separate program terms letters entered into from time to time. The collateral for the Inventory Financing Facility consists primarily of our inventory that is financed through the Inventory Financing Facility and related assets, including accounts receivable, bank accounts, and proceeds of the foregoing, and excludes the collateral that underlies the GS/BIP Credit Facility. As ofDecember 31, 2019 andSeptember 30, 2019 , our indebtedness associated with financing our inventory under the Inventory Financing Facility totaled approximately$264.5 million and$225.4 million , respectively. Certain of our manufacturers enter into independent agreements with the lenders to the Inventory Financing Facility, which results in a lower effective interest rate charged to us for borrowings related to the products by such manufacturer. As ofDecember 31, 2019 andSeptember 30, 2019 , the effective interest rate on the outstanding short-term borrowings under the Inventory Financing Facility was approximately 4.9% and 4.2%, respectively. As ofDecember 31, 2019 andSeptember 30, 2019 , our additional available borrowings under our Inventory Financing Facility were approximately$128.0 million and$67.1 million , respectively, based upon the outstanding borrowings and the maximum facility amount. The aging of our inventory limits our borrowing capacity as defined curtailments reduce the allowable advance rate as our inventory ages. As ofDecember 31, 2019 , we were in compliance with all covenants under the Inventory Financing Facility. EffectiveFebruary 11, 2020 , the Company and certain of its subsidiaries entered into the Sixth Amended and Restated Inventory Financing Facility with Wells Fargo. The Inventory Financing Facility amends and restates the Fifth Amended and Restated Inventory Financing Agreement, dated as ofNovember 26, 2019 , to, among other things, permit certain payments and transactions contemplated by or in connection with the Offering, including payments under the Tax Receivable Agreement. The maximum amount of borrowing available, interest rates and the termination date of the agreement remained unchanged.
Opco Preferred Units
OnOctober 28, 2016 , Goldman and Beekman entered into a Subscription Agreement with us and certain of our subsidiaries, pursuant to which Goldman and Beekman purchased preferred units in Opco ("Opco Preferred Units"). Goldman and Beekman purchased 45,000 and 23,000 Opco Preferred Units, representing 66.2% and 33.8% of the total Opco Preferred Units outstanding for purchase prices of approximately$44.4 million and$22.7 million , respectively. The holders of the Opco Preferred Units ("Opco Preferred Holders") are entitled to (i) a ''preferred return'' at a rate of 10% per annum, compounded quarterly, on (a) the aggregate amount of capital contributions made, minus any prior distributions (the ''unreturned preferred amount''), plus (b) any unpaid preferred returns for prior periods, and (ii) a ''preferred target distribution'' at a rate of 10% per annum on the unreturned preferred amount multiplied by (a) 40% for the calendar quarters endingDecember 31, 2018 ,March 31, 2019 ,June 30, 2019 andSeptember 30, 2019 , (b) 60% for each calendar quarters endingDecember 31, 2019 ,March 31, 2020 ,June 30, 2020 andSeptember 30, 2020 , and (c) 80% for each calendar quarter thereafter. The preferred target distribution proportionally adjusts the amount of capital contribution of each Opco Preferred Holder. Opco and certain affiliates are required to meet certain financial covenants, including maintenance of certain leverage ratios. Failure by Opco to pay the preferred return and preferred target distribution, failure to meet certain financial covenants, or repayment in full or acceleration of the obligations under the GS/BIP Credit Facility will permit a majority of the Opco Preferred Holders to require us to purchase all Opco Preferred Units equal to the unreturned preferred amount plus any unpaid preferred returns (the ''redemption amount''). As ofDecember 31, 2019 andSeptember 30, 2019 , the redemption amount of the Opco Preferred Units held by Goldman and Beekman in the aggregate was$88.2 million and$87.3 million , exclusive of$1.1 million and$1.3 million in issuance costs, respectively. 43 -------------------------------------------------------------------------------- Table of Contents OnFebruary 11, 2020 , in connection with the Offering, we used the net proceeds from the Offering, together with cash on hand and borrowings under the Term and Revolver Credit Facility, to redeem all of the shares of Opco Preferred Units held by Goldman and Beekman.
Notes Payable
Acquisition Notes Payable. In connection with certain of our acquisitions of dealer groups, we have entered into notes payable agreements with the acquired entities to finance these acquisitions. As ofDecember 31, 2019 , our indebtedness associated with our 9 acquisition notes payable totaled an aggregate of$15.2 million with a weighted average interest rate of 5.7% per annum. As ofDecember 31, 2019 , the principal amount outstanding under these acquisition notes payable ranged from$0.8 million to$3.1 million , and the maturity dates ranged fromJune 1, 2020 toFebruary 1, 2022 . Commercial Vehicles Notes Payable. Since 2015, we have entered into multiple notes payable with various commercial lenders in connection with our acquisition of certain vehicles utilized in our retail operations. Such notes bear interest ranging from 0.0% to 8.9% per annum, require monthly payments of approximately$73,000 , and mature on dates betweenMarch 2020 toJuly 2025 . As ofDecember 31, 2019 , we had$2.5 million outstanding under the commercial vehicles notes payable.
Tax Receivable Agreement
The Tax Receivable Agreement generally provides for the payment byOneWater Inc. to certain of the OneWater Unit Holders (as defined below) of 85% of the net cash savings, if any, inU.S. federal, state and local income tax and franchise tax (computed using the estimated impact of state and local taxes) thatOneWater Inc. actually realizes (or is deemed to realize in certain circumstances) in periods after this Offering as a result of certain tax basis increases and certain tax benefits attributable to imputed interest.OneWater Inc. will retain the benefit of the remaining 15% of these net cash savings. To the extentOneWater LLC has available cash and subject to the terms of any current or future debt or other agreements, the OneWater LLC Agreement will requireOneWater LLC to make pro rata cash distributions to OneWater Unit Holders, includingOneWater Inc. , in an amount sufficient to allowOneWater Inc. to pay its taxes and to make payments under the Tax Receivable Agreement. We generally expectOneWater LLC to fund such distributions out of available cash. However, except in cases whereOneWater Inc. elects to terminate the Tax Receivable Agreement early, the Tax Receivable Agreement is terminated early due to certain mergers or other changes of control orOneWater Inc. has available cash but fails to make payments when due, generallyOneWater Inc. may elect to defer payments due under the Tax Receivable Agreement if it does not have available cash to satisfy its payment obligations under the Tax Receivable Agreement or if its contractual obligations limit its ability to make these payments. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest. In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits, if any,OneWater Inc. realizes in respect of the tax attributes subject to the Tax Receivable Agreement. In the case of such an acceleration, where applicable, we generally expect the accelerated payments due under the Tax Receivable Agreement to be funded out of the proceeds of the change of control transaction giving rise to such acceleration.OneWater Inc. intends to account for any amounts payable under the Tax Receivable Agreement in accordance with ASC Topic 450, Contingent Consideration.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements, except for operating leases and purchase commitments under supply agreements entered into in the normal course of business.
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Recent Accounting Pronouncements
As an ''emerging growth company'' (''EGC''), the Jumpstart Our Business Startups
Act (''JOBS Act'') allows us to delay adoption of new or revised accounting
pronouncements applicable to public companies until such pronouncements are made
applicable to private companies. We have elected to use this extended transition
period under the JOBS Act. The adoption dates discussed below reflect this
election.
In May 2014 , the FASB issued Accounting Standards Update (''ASU'') No. 2014-09,
''Revenue from Contracts with Customers (Topic 606)'' (''ASU 2014-09''), as
subsequently amended, a converged standard on revenue recognition. The new
pronouncement requires revenue recognition to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services.
The guidance also specifies the accounting for some costs to obtain or fulfil a
contract with a customer, as well as enhanced disclosure requirements. ASU
2014-09 is effective for a public company's annual reporting periods beginning
after December 15, 2017 . As an EGC the Company has elected to adopt ASU 2014-09
following the effective dates for private companies beginning with annual
reporting periods beginning after December 15, 2018 , and interim reporting
periods within annual reporting periods beginning after December 15, 2019 . The
Company adopted this update on October 1, 2019 using the modified retrospective
approach applied only to contracts not completed as of the date of adoption,
with no restatement of comparative periods. No adjustment was made to retained
earnings as of the adoption date and no adjustments were made to the Company's
condensed consolidated financial statements as the adoption of the update did
not have a material impact.
In August 2016 , the FASB issued ASU 2016-15, ''Statement of Cash Flows (Topic
230)'' (''ASU 2016-15''). Additionally, in November 2016 , the FASB issued ASU
2016-18, ''Statement of Cash Flows (Topic 230)'' (''ASU 2016-18''). These
updates require organizations to reclassify certain cash receipts and cash
payments within the Statement of Cash Flows and modify the classification and
presentation of restricted cash. These ASU's are effective for a public
company's annual reporting periods beginning after December 15, 2017 , and
interim periods within those annual periods. As an EGC, the Company has elected
to adopt these ASU's following the effective dates for private companies
beginning with annual reporting periods beginning after December 15, 2018 ,
including interim reporting periods within fiscal years beginning after December
15, 2019 . The Company adopted this update on October 1, 2019 and it did not have
a material impact on the consolidated financial statements.
In January 2017 , the FASB issued ASU 2017-01, ''Business Combinations (Topic
805)'' (''ASU 2017-01''). This update clarifies the definition of a business
with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or
businesses. The definition of a business affects many areas of accounting
including acquisitions, disposals, goodwill, and consolidation. As an EGC the
Company has elected to adopt ASU 2017-01 following the effective dates for
private companies beginning with annual reporting periods beginning after
December 15, 2018 , and interim periods within annual periods beginning after
December 15, 2019 . The Company adopted this update on October 1, 2019 and it did
not impact the consolidated financial statements.
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