What changed in this filing

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Item 1. Financial Statements

2020-08-04 compared with 2020-05-27 · 341 added, 244 removed, 857 unchanged (41% of the section changed)

4 unchanged sentences

December 31, 2019

March 31, 2020

June 30, 2020

Current assets:

6 unchanged sentences

Preneed cemetery receivables, net

Receivables from preneed trusts

Receivables from preneed trusts, net

Property, plant and equipment, net

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Common stock, $.01 par value;

80,000,000 shares authorized and 25,880,362 and 25,934,103 shares issued at December 31, 2019 and March 31, 2020, respectively

80,000,000 shares authorized and 25,880,362 and 25,959,257 shares issued at December 31, 2019 and June 30, 2020, respectively

Additional paid-in capital

1 unchanged sentence

Treasury stock, at cost;

8,025,339 at both December 31, 2019 and March 31, 2020

8,025,339 at both December 31, 2019 and June 30, 2020

Total stockholders’ equity

4 unchanged sentences

(unaudited and in thousands, except per share data)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

Service revenue

15 unchanged sentences

Accretion of discount on convertible subordinated notes

Income (loss) before income taxes

Benefit (expense) for income taxes

Income before income taxes

Expense for income taxes

Tax adjustment related to discrete items

Total benefit (expense) for income taxes

Net income (loss)

Basic earnings (loss) per common share:

Diluted earnings (loss) per common share:

Total expense for income taxes

Basic earnings per common share:

Diluted earnings per common share:

Dividends declared per common share:

4 unchanged sentences

(unaudited and in thousands)

Three months ended March 31,

Six months ended June 30,

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income to net cash provided by operating activities:

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Accretion of debt discount, net of debt premium on senior notes

Net loss on sale of businesses and disposal of other assets

Goodwill and other impairments

Net loss on sale and disposal of other assets

Goodwill and other intangible asset impairments

Changes in operating assets and liabilities that provided (required) cash:

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Payments against the credit facility

Redemption of the 2.75% convertible subordinated notes

Payments of debt issuance costs related to the 6.625% senior notes

4 unchanged sentences

Dividends paid on common stock

Purchase of treasury stock

Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

4 unchanged sentences

(unaudited and in thousands)

Three months ended June 30, 2019

Balance – March 31, 2019

Issuance of common stock

Cancellation and retirement of restricted common stock and stock options

Stock-based compensation expense

Dividends on common stock

Treasury stock acquired

Balance – June 30, 2019

Three months ended June 30, 2020

Balance – March 31, 2020

Issuance of common stock to employees

Issuance of common stock to directors

Stock-based compensation expense

Dividends on common stock

Balance – June 30, 2020

The accompanying notes are an integral part of these Consolidated Financial Statements.

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited and in thousands)

Six months ended June 30, 2019

Balance – December 31, 2018

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Dividends on common stock

Balance – March 31, 2019

Treasury stock acquired

Balance – June 30, 2019

Six months ended June 30, 2020

Balance – December 31, 2019

Issuance of common stock

Issuance of common stock to employees

Issuance of common stock to directors

Issuance of restricted common stock

2 unchanged sentences

Dividends on common stock

Balance – March 31, 2020

Balance – June 30, 2020

The accompanying notes are an integral part of these Consolidated Financial Statements.

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(“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of funeral and cemetery services and merchandise in the United States.

As of March 31, 2020 , we operated 186 funeral homes in 29 states and 32 cemeteries in 11 states.

As of June 30, 2020 , we operated 186 funeral homes in 29 states and 32 cemeteries in 11 states.

Our operations are reported in two business segments:

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On March 11, 2020, the World Health Organization declared the 2019 novel coronavirus disease (“COVID-19”), to be a pandemic, which has spread across the globe and is impacting worldwide economic activity.

In light of recent developments relating to COVID-19, the Company has evaluated the impact of COVID-19 on our Consolidated Financial Statements and related disclosures.

Reclassifications

Certain reclassifications have been made to prior period amounts on our statement of cash flows and consolidated financial position to conform to the current period financial statement presentation with no impact on our previously reported results of operations, total assets and total liabilities or operating cash flows.

In light of the recent developments relating to COVID-19, the Company has evaluated the impact of COVID-19 on our Consolidated Financial Statements and related disclosures .

Cash and Cash Equivalents

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On our atneed contracts, we generally deliver the merchandise and perform the services at the time of need.

Due to limitations on gatherings imposed to mitigate the spread of COVID-19, some customers have requested that we delay the memorial service until after the limitations have been lifted.

Memorial services frequently include performance obligations to direct the service, provide facilities and motor vehicles, catering, flowers, and stationary products.

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Personalized marker merchandise and marker installation services sold on atneed contracts are recognized when control is transferred to the customer, generally when the marker is delivered and installed in the cemetery.

Due to limitations on gatherings imposed to mitigate the spread of COVID-19, some customers have requested that we delay the memorial service until after the limitations have been lifted.

Ancillary funeral service revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation business and online cremation business in Texas .

The earnings from our preneed trust investments, as well as trust management fees charged by our wholly-owned registered investment advisory firm (“CSV RIA”) are recorded in Other revenue .

As of March 31, 2020 , CSV RIA provided investment management and advisory services to approximately 73% of our trust assets, for a fee based on the market value of trust assets.

As of June 30, 2020 , CSV RIA provided investment management and advisory services to approximately 80 % of our trust assets, for a fee based on the market value of trust assets.

Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.

Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet of $8.9 million and $8.7 million at December 31, 2019 and March 31, 2020 , respectively.

Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet of $ 8.9 million and $ 8.6 million at December 31, 2019 and June 30, 2020 , respectively.

As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods.

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Balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance Sheet.

The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled were $4.8 million and $5.8 million at December 31, 2019 and March 31, 2020 , respectively.

The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled were $ 4.8 million and $ 6.7 million at December 31, 2019 and June 30, 2020 , respectively.

As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods.

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Our future obligations to deliver merchandise and services are reported at estimated settlement amounts.

Preneed funeral and cemetery trust investments

are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity.

Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity.

These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.

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For our preneed cemetery receivables, we have a collections policy where past due notification letters are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Financial Instruments – Credit Losses:

Measurement of Credit Losses on Financial Instruments and subsequent amendments collectively known as (“Topic 326”).

Prior to adoption of Topic 326 , we provided allowances for bad debt and contract cancellations on our receivables based on an analysis of historical trends of collection activity.

For both funeral and cemetery receivables, we determine our allowance for credit losses by using a loss-rate methodology, in which we assess our historical write-off of receivables against our total receivables over several years.

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We will also monitor any change in our historical write-off of receivables utilized in our loss-rate methodology and assess forecasted changes in market conditions within our credit reserve.

In the first quarter of 2020, we increased our allowance for credit losses on our receivables as a result of the economic impact of COVID-19.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Financial Instruments – Credit Losses:

Measurement of Credit Losses on Financial Instruments and subsequent amendments collectively known as (“Topic 326”).

Prior to adoption of Topic 326 , we provided allowances for bad debt and contract cancellations on our receivables based on an analysis of historical trends of collection activity.

In the first six months of 2020, we increased our allowance for credit losses on our receivables by $0.6 million as a result of the economic impact of COVID-19.

See Notes 2 and 5 to the Consolidated Financial Statements herein for additional information related the adoption of Topic 326 on January 1, 2020 and the additional disclosures required.

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Factors that could trigger an interim impairment review include, but are not limited to, significant negative industry or economic trends and significant adverse changes in the business climate, which may be indicated by a decline in our market capitalization or decline in operating results.

As a result of economic conditions caused by the response to COVID-19, we performed a quantitative assessment of our goodwill at March 31, 2020 .

Based on the quantitative assessment conducted at March 31, 2020 , we recorded an impairment for goodwill of $13.6 million during the quarter ended March 31, 2020 , as the carrying amount of our funeral homes in the Eastern Reporting Unit exceeded the fair value.

As a result of economic conditions caused by the response to COVID-19, we performed a quantitative assessment of our goodwill at March 31, 2020 and we recorded an impairment for goodwill of $ 13.6 million during the quarter ended March 31, 2020, as the carrying amount of our funeral homes in the Eastern Reporting Unit exceeded the fair value.

The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows.

During the three months ended June 30, 2020 , we did not identify any new factors or events that would trigger us to perform an additional interim assessment of our goodwill.

We will perform our annual goodwill impairment test as of August 31, 2020.

See Note 4 to the Consolidated Financial Statements included herein for additional information related to our goodwill.

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Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends.

As a result of economic conditions caused by the response to COVID-19, we performed a quantitative assessment of our tradenames at March 31, 2020 .

Based on the quantitative assessment conducted at March 31, 2020 , we recorded an impairment for certain of our tradenames of $1.1 million during the quarter ended March 31, 2020 as the carrying amount of these tradenames exceeded the fair value.

As a result of economic conditions caused by the response to COVID-19, we performed a quantitative assessment of our tradenames at March 31, 2020 and we recorded an impairment for certain of our tradenames of $ 1.1 million during the quarter ended March 31, 2020 as the carrying amount of these tradenames exceeded the fair value.

In determining the fair value of the tradenames, we used the relief from royalty method whereby we determine the fair value of the assets by discounting the cash flows that represent a savings over having to pay a royalty fee for use of the tradenames.

During the three months ended June 30, 2020 , we did not identify any new factors or events that would trigger us to perform an additional interim assessment of our tradenames.

We will perform our annual intangible assets impairment test as of August 31, 2020.

See Note 9 to the Consolidated Financial Statements included herein for additional information related to our intangible assets.

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In connection with the goodwill and intangible impairment tests performed at March 31, 2020, we also evaluated the operating and finance leases of our funeral homes in the Eastern Reporting Unit and concluded that there was no impairment to our operating and finance lease assets.

During the three months ended June 30, 2020 , we did not identify any new factors or events that would trigger us to perform an additional assessment of our operating and finance leases.

See Notes 13 to the Consolidated Financial Statements included herein for additional information related to our leases.

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Depreciation of property, plant and equipment (including equipment under finance leases) is computed based on the straight-line method over the estimated useful lives of the assets.

Property, plant and equipment is comprised of the following at December 31, 2019 and March 31, 2020 (in thousands):

Property, plant and equipment is comprised of the following at December 31, 2019 and June 30, 2020 (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Buildings and improvements

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Property, plant and equipment, net

During the three months ended March 31, 2020 , we acquired $1.7 million of property, plant and equipment related to our acquisition described in Note 3 to the Consolidated Financial Statements included herein.

We recorded depreciation expense of $3.5 million and $3.6 million for the three months ended March 31, 2019 and 2020 , respectively.

During the six months ended June 30, 2020 , we acquired $ 1.7 million of property, plant and equipment related to our acquisition described in Note 3 to the Consolidated Financial Statements included herein.

In addition, our growth and maintenance capital expenditures totaled $ 5.8 million for the six months ended June 30, 2020 , for property, plant, equipment and cemetery development.

We recorded depreciation expense of $ 3.4 million and $ 3.6 million for the three months ended June 30, 2019 and 2020 , respectively and $ 6.9 million and $ 7.2 million for the six months ended June 30, 2019 and 2020 , respectively.

Long-lived assets, such as property, plant and equipment subject to depreciation and amortization, are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the Property, Plant and Equipment topic of the Accounting Standards Codification (“ASC”) 360.

In connection with the goodwill and intangible impairment tests performed at March 31, 2020, we also evaluated the long-lived assets of our funeral homes in the Eastern Reporting Unit and concluded that there was no impairment to our long-lived assets.

During the three months ended June 30, 2020 , we did not identify any new factors or events that would trigger us to perform an additional assessment of our long-lived assets.

Cemetery Property

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Through this thorough internal process, the Company is able to identify viable costs of property based on historical experience, particular markets and demographics, reasonable margins, practical retail prices and park infrastructure and condition.

Cemetery property was $87.0 million and $101.8 million , net of accumulated amortization of $41.7 million and $42.5 million at December 31, 2019 and March 31, 2020 , respectively.

Cemetery property was $ 87.0 million and $ 101.5 million , net of accumulated amortization of $ 41.7 million and $ 43.6 million at December 31, 2019 and June 30, 2020 , respectively.

When cemetery property is sold, the value of the cemetery property (interment right costs) is expensed as amortization using the specific identification method in the period in which the sale of the interment right is recognized as revenue.

We recorded amortization expense for cemetery interment rights of $0.8 million and $0.9 million for the three months ended March 31, 2019 and 2020 .

We recorded amortization expense for cemetery interment rights of $ 1.2 million and $ 1.1 million for the three months ended June 30, 2019 and 2020 , respectively and $ 2.0 million for both the six months ended June 30, 2019 and 2020 .

Fair Value Measurements

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We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period.

We recognize the effect of forfeitures in compensation cost when they occur and any previously recognized compensation cost for an award is reversed in the period that the award is forfeited.

Fair value is determined on the date of the grant.

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and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheet.

The Company’s unrecognized tax benefits reserve for uncertain tax positions primarily relates to pending accounting method changes filed for the tax year ended December 31, 2018 .

During 2020 , the Company plans to modify the proposed accounting method filed to exclude the tax position that resulted in the need for an uncertain tax position reserve.

Our unrecognized tax benefits reserve for uncertain tax positions primarily relates to pending accounting method changes filed for the tax year ended December 31, 2018 .

During the latter half of 2020 , we

plan to modify the proposed accounting method filed to exclude the tax position that resulted in the need for an uncertain tax position reserve.

The recently passed Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) has certain provisions that are applicable to the Company as follows:

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Although the CARES Act allows for a carryback of the net operating losses generated in 2018 and 2019, due to uncertainty in the timing of receiving Internal Revenue Service approval for non-automatic accounting method changes, a reserve has been recorded against the benefit derived from this carrying back that the net operating losses generated;

therefore, for the three months ended March 31, 2020 , the reserve for uncertain tax positions was $2.9 million .

There is no reserve recorded at March 31, 2019 .

Income tax expense (benefit) during interim periods is based on our forecasted annual effective tax rate plus any discrete items, which are recorded in the period in which they occur.

therefore, for the six months ended June 30, 2020 , the reserve for uncertain tax positions was $ 2.9 million .

The 2018 refund claim was filed June 30, 2020 .

There is no reserve recorded at June 30, 2019 .

Although we expect to take advantage of certain tax relief provisions of the CARES Act, we do not believe it will have a significant impact on our short-term or long-term liquidity position.

Income tax expense during interim periods is based on our forecasted annual effective tax rate plus any discrete items, which are recorded in the period in which they occur.

Discrete items include, but are not limited to, such events as changes in estimates due to finalization of income tax returns, tax audit settlements, tax effects of exercised or vested stock-based awards and increases or decreases in valuation allowances on deferred tax assets.

Our income tax benefit was $2.2 million for the three months ended March 31, 2020 compared to an income tax expense of $2.7 million , which includes a $0.1 million of discrete tax expense for the three months ended March 31, 2019 .

Our operating tax rate before discrete items was 28.0% and 33.6% for the three months ended March 31, 2019 and 2020 , respectively.

We recorded $0.7 million of additional tax expense in the three months ended March 31, 2020 related to the impairment of goodwill and other intangibles for businesses that were previously acquired as a stock acquisition, which caused an increase of 3.6% in our operating tax rate.

Computation of Earnings (Loss) Per Common Share

Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period.

Our income tax expense was $ 2.1 million and $ 3.4 million for the three months ended June 30, 2019 and 2020 , respectively and $ 4.8 million and $ 1.3 million for the six months ended June 30, 2019 and 2020 , respectively.

Our operating tax rate before discrete items was 29.2 % and 33.5 % for the three months ended June 30, 2019 and 2020 , respectively and 28.5 % and 33.3 % for the six months ended June 30, 2019 and 2020 , respectively.

The increase in our overall effective tax rate is due to the unfavorable tax impact of impairment of goodwill and other intangibles recorded in the first quarter of 2020 for businesses that were previously acquired through stock acquisitions.

Computation of Earnings Per Common Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period.

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Subsequent Events

We have evaluated events and transactions during the period subsequent to March 31, 2020 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.

We have evaluated events and transactions during the period subsequent to June 30, 2020 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.

See Note 19 to the Consolidated Financial Statements included herein for additional information related to our subsequent events.

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These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

We are currently evaluating our contracts and the optional expedients provided by the new standard.

On January 3, 2020 , we acquired one funeral home and cemetery combination business in Lafayette, California for $33.0 million in cash, of which $5.0 million was deposited in escrow in 2019 and $28.0 million was paid in 2020 .

The Company did not utilize the optional expedients and exceptions provided by this ASU during the six months ended June 30, 2020 .

On January 3, 2020 , we acquired one funeral home and cemetery combination business in Lafayette, California for $ 33.0 million in cash, of which $ 5.0 million was deposited in escrow in 2019 and $ 28.0 million was paid at closing in 2020 .

We acquired substantially all of the assets and assumed certain operating liabilities of these businesses.

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The results of the acquired business is reflected in our Consolidated Statements of Operations from the date of acquisition.

The following table summarizes the breakdown of the purchase price allocation for the businesses described above (in thousands):

Purchase Price Allocation

During the three months ended June 30, 2020 , we recorded adjustments to the purchase price allocation for our acquisition made during the first quarter of 2020 .

The following table summarizes the breakdown of the purchase price allocation for these businesses and the subsequent adjustments made based on additional information which became available prior to June 30, 2020 (in thousands):

Initial Purchase Price Allocation

Adjusted Purchase Price Allocation

Current assets

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The assumed liabilities primarily relate to the obligations associated with delivered preneed merchandise that was not paid for prior to acquisition.

As of March 31, 2020 , our accounting for this acquisition was not complete.

We recorded adjustments to the purchase price allocation for our 2019 acquisitions during the three months ended March 31, 2020 .

As of June 30, 2020 , our accounting for cemetery receivables, cemetery property, deferred revenue and deferred tax liabilities for this acquisition has not been finalized.

During the six months ended June 30, 2020 , we recorded adjustments to the purchase price allocation for three acquisitions closed in the fourth quarter of 2019 .

Initial Purchase Price Allocation

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Purchase price

As of March 31, 2020 , our accounting for our 2019 acquisitions was not complete.

The following table presents changes in goodwill in the accompanying Consolidated Balance Sheet for the year ended December 31, 2019 and the three months ended March 31, 2020 (in thousands):

During the three months ended June 30, 2020 , we paid an additional $ 164,000 for our acquisition of the cemetery business in Fairfax, Virginia to reimburse the sellers for certain incremental taxes resulting from the 338(h)(10) election under the Internal Revenue Code.

We also received $153,000 in cash, recorded in Current assets, related to the closing of all operating bank accounts in place prior to the acquisition.

As of June 30, 2020 , our accounting for cemetery receivables, cemetery property, deferred revenue and deferred tax liabilities for our 2019 acquisitions has not been finalized.

The following table presents changes in goodwill in the accompanying Consolidated Balance Sheet for the year ended December 31, 2019 and the six months ended June 30, 2020 (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Goodwill at the beginning of the period

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Accounts Receivable

Accounts receivable is comprised of the following at December 31, 2019 and March 31, 2020 (in thousands):

March 31, 2020

Accounts receivable is comprised of the following at December 31, 2019 and June 30, 2020 (in thousands):

December 31, 2019

Trade and financed receivables

Other receivables

Allowance for credit losses

Allowance for bad debt and contract cancellation

Accounts receivable, net

December 31, 2019

June 30, 2020

Trade and financed receivables

Other receivables

Allowance for bad debt and contract cancellation

Allowance for credit losses

Accounts receivable, net

During the six months ended June 30, 2020 , we increased our allowance for credit losses on our Accounts Receivables by $ 0.2 million as a result of the economic impact of COVID-19.

Other receivables include supplier rebates, commissions due from third party insurance companies and perpetual care income receivables.

We do not provide an allowance for credit losses for these receivables as we have historically not had any collectability issues nor do we expect any in the foreseeable future.

The following table summarizes the activity in our allowance for credit losses by portfolio segment for three months ended March 31, 2020 (in thousands):

The following table summarizes the activity in our allowance for credit losses by portfolio segment for six months ended June 30, 2020 (in thousands):

January 1, 2020

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Allowance Recorded at Acquisition

March 31, 2020

June 30, 2020

Trade and financed receivables:

Total allowance for credit losses on Trade and financed receivables

As noted in Note 3, we acquired preneed cemetery receivables in connection with the business acquired during the three months ended March 31, 2020 .

As noted in Note 3, we acquired preneed cemetery receivables in connection with the funeral home and cemetery combination business in Lafayette, California acquired on January 3, 2020.

We recorded an allowance for credit losses of $ 0.6 million on these acquired receivables ( $ 0.2 million current portion shown above in Accounts Receivable, net and $ 0.4 million non-current portion shown below in Preneed Cemetery Receivables, net ).

We accounted for the allowance for credit losses on these purchased financed assets using specific identification as these assets have a unique set of risk characteristics.

Bad debt expense for accounts receivable totaled $0.2 million for the three months ended March 31, 2019 .

We accounted for the allowance for credit losses on these purchased financed

assets using specific identification as these assets have a unique set of risk characteristics.

For these specifically identified receivables, we determined the allowance to be 100% of the face value.

Bad debt expense for accounts receivable totaled $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2019 .

Preneed Cemetery Receivables

Our preneed cemetery receivables are comprised of the following at December 31, 2019 and March 31, 2020 (in thousands):

Our preneed cemetery receivables are comprised of the following at December 31, 2019 and June 30, 2020 (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Cemetery interment rights

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Preneed cemetery receivables

The components of our preneed cemetery receivables at December 31, 2019 and March 31, 2020 are as follows (in thousands):

The components of our preneed cemetery receivables at December 31, 2019 and June 30, 2020 are as follows (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Preneed cemetery receivables

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Preneed cemetery receivables, net

The following table summarizes the activity in our allowance for credit losses for Preneed cemetery receivables, net for three months ended March 31, 2020 (in thousands):

The following table summarizes the activity in our allowance for credit losses for Preneed cemetery receivables, net for the six months ended June 30, 2020 (in thousands):

January 1, 2020

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Allowance Recorded at Acquisition

March 31, 2020

June 30, 2020

Total allowance for credit losses on Preneed cemetery receivables, net

Bad debt expense for our preneed cemetery receivables totaled $0.2 million for the three months ended March 31, 2019 .

The amortized cost basis of our preneed cemetery receivables by year of origination as of March 31, 2020 is as follows (in thousands):

During the six months ended June 30, 2020 , we increased our allowance for credit losses on our Preneed cemetery receivables, net by $ 0.4 million as a result of the economic impact of COVID-19.

Bad debt expense for our preneed cemetery receivables totaled $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2019 .

The amortized cost basis of our preneed cemetery receivables by year of origination as of June 30, 2020 is as follows (in thousands):

Total preneed cemetery receivables, at amortized cost

The aging of past due preneed cemetery receivables as of March 31, 2020 is as follows (in thousands):

The aging of past due preneed cemetery receivables as of June 30, 2020 is as follows (in thousands):

Recognized revenue

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See Note 8 to the Consolidated Financial Statements included herein for further information of the fair value measurement.

As of March 31, 2020, we have net unrealized losses of $45.1 million in our trusts.

At March 31, 2020, these net unrealized losses represented 18% of our original cost basis of $245.2 million .

As of June 30, 2020 , we have net unrealized losses of $ 10.8 million in our trusts.

At June 30, 2020 , these net unrealized losses represented 4% of our original cost basis of $ 242.1 million .

The decline in fair value is largely due to changes in interest rates and other market conditions.

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In addition, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery.

Changes in unrealized gains and/or losses related to these securities are reflected in Other comprehensive income (loss) and offset by the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus interests in those unrealized gains and/or losses.

Changes in unrealized gains and/or losses related to these securities are reflected in Other comprehensive income and offset by the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus interests in those unrealized gains and/or losses.

There is no impact on earnings until such time that the loss is realized in the trusts, allocated to the preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.

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If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded

through an allowance for credit losses is recognized in other comprehensive income.

Any unrealized loss that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

We rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts.

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Preneed Cemetery Trust Investments

The components of Preneed cemetery trust investments on our Consolidated Balance Sheet at December 31, 2019 and March 31, 2020 are as follows (in thousands):

The components of Preneed cemetery trust investments on our Consolidated Balance Sheet at December 31, 2019 and June 30, 2020 are as follows (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Preneed cemetery trust investments, at market value

allowance for contract cancellation

Preneed cemetery trust investments, net

The cost and market values associated with preneed cemetery trust investments at March 31, 2020 are detailed below (in thousands):

Preneed cemetery trust investments

The cost and market values associated with preneed cemetery trust investments at June 30, 2020 are detailed below (in thousands):

Fair Value Hierarchy Level

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Market value as a percentage of cost

The following table summarized our fixed income securities within our preneed cemetery trust investment in an unrealized loss position at March 31, 2020 , aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

March 31, 2020

The following table summarized our fixed income securities within our preneed cemetery trust investments in an unrealized loss position at June 30, 2020 , aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

June 30, 2020

In Loss Position Less than 12 months

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Total fixed income securities with an unrealized loss

Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three months ended March 31, 2019 and 2020 are as follows (in thousands):

Three Months Ended March 31,

Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Investment income

3 unchanged sentences

Net change in deferred preneed cemetery receipts held in trust

Purchases and sales of investments in the preneed cemetery trusts for the three months ended March 31, 2019 and 2020 are as follows (in thousands):

Three Months Ended March 31,

Purchases and sales of investments in the preneed cemetery trusts for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Preneed Funeral Trust Investments

The components of Preneed funeral trust investments on our Consolidated Balance Sheet at December 31, 2019 and March 31, 2020 are as follows (in thousands):

The components of Preneed funeral trust investments on our Consolidated Balance Sheet at December 31, 2019 and June 30, 2020 are as follows (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Preneed funeral trust investments, at market value

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Preneed funeral trust investments

The cost and market values associated with preneed funeral trust investments at March 31, 2020 are detailed below (in thousands):

The cost and market values associated with preneed funeral trust investments at June 30, 2020 are detailed below (in thousands):

Fair Value Hierarchy Level

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Market value as a percentage of cost

The following table summarized our fixed income securities within our preneed funeral trust investment in an unrealized loss position at March 31, 2020 , aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

March 31, 2020

The following table summarized our fixed income securities within our preneed funeral trust investment in an unrealized loss position at June 30, 2020 , aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

June 30, 2020

In Loss Position Less than 12 months

25 unchanged sentences

Total fixed income securities with an unrealized loss

Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three months ended March 31, 2019 and 2020 are as follows (in thousands):

Three Months Ended March 31,

Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Investment income

3 unchanged sentences

Net change in deferred preneed funeral receipts held in trust

Purchases and sales of investments in the preneed funeral trusts for the three months ended March 31, 2019 and 2020 are as follows (in thousands):

Three Months Ended March 31,

Purchases and sales of investments in the preneed funeral trusts for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Cemetery Perpetual Care Trust Investments

Care trusts’ corpus on our Consolidated Balance Sheet represent the corpus of those trusts plus undistributed income.

The components of Care trusts’ corpus as of December 31, 2019 and March 31, 2020 are as follows (in thousands):

The components of Care trusts’ corpus as of December 31, 2019 and June 30, 2020 are as follows (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Cemetery perpetual care trust investments, at market value

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Care trusts’ corpus

The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at March 31, 2020 (in thousands):

The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at June 30, 2020 (in thousands):

Fair Value Hierarchy Level

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Market value as a percentage of cost

The following table summarized our fixed income securities within our perpetual care trust investment in an unrealized loss position at March 31, 2020 , aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

March 31, 2020

The following table summarized our fixed income securities within our perpetual care trust investment in an unrealized loss position at June 30, 2020 , aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

June 30, 2020

In Loss Position Less than 12 months

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Total fixed income securities with an unrealized loss

Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three months ended March 31, 2019 and 2020 are as follows (in thousands):

Three Months Ended March 31,

Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Realized gains

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Net change in Care trusts’ corpus

Perpetual care trust investment security transactions recorded in Other revenue for the three months ended March 31, 2019 and 2020 are as follows (in thousands):

Three Months Ended March 31,

Perpetual care trust investment security transactions recorded in Other revenue on our Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Investment income

Realized losses, net

Purchases and sales of investments in the perpetual care trusts for the three months ended March 31, 2019 and 2020 are as follows (in thousands):

Three Months Ended March 31,

Realized gain (losses), net

Purchases and sales of investments in the perpetual care trusts for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

RECEIVABLES FROM PRENEED TRUSTS

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We account for these investments at cost.

As of December 31, 2019 and March 31, 2020 , receivables from preneed trusts are as follows (in thousands):

As of December 31, 2019 and June 30, 2020 , receivables from preneed trusts are as follows (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Preneed trust funds, at cost

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Receivables from preneed trusts, net

The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at March 31, 2020 and December 31, 2019 .

The cost basis includes reinvested interest and dividends that have been earned on the trust assets.

Fair value includes unrealized gains and losses on trust assets.

The composition of the preneed trust funds at March 31, 2020 is as follows (in thousands):

The composition of the preneed trust funds at December 31, 2019 is as follows (in thousands):

Cash and cash equivalents

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Mutual funds and common stocks

The composition of the preneed trust funds at December 31, 2019 is as follows (in thousands):

The composition of the preneed trust funds at June 30, 2020 is as follows (in thousands):

Cash and cash equivalents

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Treasury yield curves.

The fair value of the Convertible Notes (as defined in Note 11) was approximately $6.4 million at March 31, 2020 based on the last traded or broker quoted price.

The fair value of the Senior Notes (as defined in Note 12) was approximately $432.3 million at March 31, 2020 based on the last traded or broker quoted price.

The fair value of the Convertible Notes (as defined in Note 11) was approximately $ 6.4 million at June 30, 2020 based on the last traded or broker quoted price.

The fair value of the Senior Notes (as defined in Note 12) was approximately $ 419.9 million at June 30, 2020 based on the last traded or broker quoted price.

We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investments categories on our Consolidated Balance Sheet as having met the criteria for fair value measurement.

As of December 31, 2019 and March 31, 2020 , we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.

As of December 31, 2019 and June 30, 2020 , we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.

We account for our investments as available-for-sale and measure them at fair value under standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities.

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INTANGIBLE AND OTHER NON-CURRENT ASSETS

Intangible and other non-current assets at December 31, 2019 and March 31, 2020 are as follows (in thousands):

Intangible and other non-current assets at December 31, 2019 and June 30, 2020 are as follows (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Prepaid agreements not-to-compete, net of accumulated amortization of $7,195 and $7,548, respectively

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Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from one to ten years .

Amortization expense was $168,000 and $187,000 for the three months ended March 31, 2019 and 2020 , respectively.

Amortization expense related to capitalized commissions totaled $138,000 and $141,000 for the three months ended March 31, 2019 and 2020 , respectively.

Amortization expense was $ 168,000 and $ 166,000 for the three months ended June 30, 2019 and 2020 , respectively and $ 336,000 and $ 353,000 for the six months ended June 30, 2019 and 2020 , respectively.

Amortization expense related to capitalized commissions totaled $ 139,000 and $ 144,000 for the three months ended June 30, 2019 and 2020 , respectively and $ 277,000 and $ 285,000 for the six months ended June 30, 2019 and 2020 , respectively.

See Notes 1 and 3 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our indefinite-lived intangible asset impairment test and discussion of our acquisitions, respectively.

CREDIT FACILITY AND ACQUISITION DEBT

At December 31, 2019 and March 31, 2020 , our Credit Facility was comprised of:

(i) a $190.0 million revolving credit facility, which includes a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans.

At June 30, 2020 , our Credit Facility was comprised of:

(i) a $ 190.0 million revolving credit facility, including a $ 15.0 million subfacility for letters of credit and a $ 10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $ 75.0 million in the form of increased revolving commitments or incremental term loans.

The final maturity of the Credit Facility will occur on May 31, 2023 .

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In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and its subsidiaries and party thereto as guarantors (the “Credit Facility Guarantors”) to incur additional indebtedness, grant liens on assets, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial covenants.

As of March 31, 2020 , we were subject to the following financial covenant under our Credit Facility:

As of June 30, 2020 , we were subject to the following financial covenants under our Credit Facility:

(A) a Total Leverage Ratio not to exceed, (i) 5.75 to 1.00 for the quarters ended March 31, 2020 , June 30, 2020 and September 30, 2020 and (ii) 5.50 to 1.00 for the quarter ended December 31, 2020 and each quarter ended thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit Facility) not to exceed 2.00 to 1.00 as of the end of any period of four consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters.

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As more fully described below, we were not in compliance with the Total Leverage Ratio covenant for the quarter ended March 31, 2020.

As of March 31, 2020 , the Company was not in compliance with the then current Total Leverage Ratio covenant as noted above.

On May 18, 2020, we received a waiver under our Credit Facility for the failure to comply with such Total Leverage Ratio and the Credit Facility was also amended whereby the interest rate margin applicable to borrowings was increased at each pricing level.

See Note 19 for additional information related to our debt covenant limited waiver and fourth amendment to our Credit Facility.

We are in compliance with the fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility as of March 31, 2020 .

Our Credit Facility and Acquisition debt consisted of the following at December 31, 2019 and March 31, 2020 (in thousands):

On May 18, 2020, we received a waiver under our Credit Facility for the failure to comply with the Total Leverage Ratio covenant for the fiscal quarter ended March 31, 2020.

In connection with the waiver, the Credit Facility was also amended to increase the interest rate margin applicable to borrowings by up to 0.625% at each pricing level based on the Total Leverage Ratio.

We were in compliance with the total leverage ratio, fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility as of June 30, 2020 .

Our Credit Facility and Acquisition debt consisted of the following at December 31, 2019 and June 30, 2020 (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Credit Facility

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Total acquisition debt, net of current portion

We had one letter of credit issued on November 30, 2019 and outstanding under the Credit Facility for approximately $2.0 million , which bears interest at 2.125% and will expire on November 25, 2020 .

We have one letter of credit outstanding under the Credit Facility issued on November 30, 2019 for approximately $ 2.0 million , which bears interest at 2.125 % and will expire on November 25, 2020 .

The letter of credit automatically renews annually and secures our obligations under our various self-insured policies.

Outstanding borrowings under our Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio.

As of March 31, 2020 , the prime rate margin was equivalent to 1.50% and the LIBOR rate margin was 2.50% .

The weighted average interest rate on our Credit Facility for the three months ended March 31, 2019 and 2020 was 4.1% and 4.3% , respectively.

Interest expense related to our Credit Facility was $0.4 million and $1.2 million for the three months ended March 31, 2019 and 2020 , respectively.

Amortization of debt issuance costs related to our Credit Facility was $0.1 million for both the three months ended March 31, 2019 and 2020 .

As of June 30, 2020 , the prime rate margin was equivalent to 2.00 % and the LIBOR rate margin was 3.00 % .

The weighted average interest rate on our Credit Facility was 3.6 % and 3.9 % for the three and six months ended June 30, 2020 , respectively.

The weighted average interest rate on our Credit Facility was 3.9 % and 4.0 % for the three and six months ended June 30, 2019 , respectively.

The interest expense and amortization of debt issuance costs related to our Credit Facility during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Credit Facility interest expense

Credit Facility amortization of debt issuance costs

Acquisition debt consists of deferred purchase price and promissory notes payable to sellers.

1 unchanged sentence

Original maturities range from five to twenty years .

Imputed interest expense related to our acquisition debt was $0.2 million and $0.1 million for the three months ended March 31, 2019 and 2020 , respectively.

The imputed interest expense related to our acquisition debt during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Acquisition debt imputed interest expense

CONVERTIBLE SUBORDINATED NOTES

The carrying values of the liability and equity components of our 2.75% convertible subordinated notes due 2021 (the “Convertible Notes”) at December 31, 2019 and March 31, 2020 are reflected on our Consolidated Balance Sheet as follows (in thousands):

The carrying values of the liability and equity components of our 2.75 % convertible subordinated notes due 2021 (the “Convertible Notes”) at December 31, 2019 and June 30, 2020 are reflected on our Consolidated Balance Sheet as follows (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Current liabilities:

4 unchanged sentences

Carrying value of the equity component

The carrying value of the liability component and the carrying value of the equity component are recorded in Convertible subordinated notes due 2021 and Additional paid-in capital , respectively, on our Consolidated Balance Sheet at December 31, 2019 and March 31, 2020 .

The balance of our deferred tax liability related to our Convertible Notes was $0.1 million at March 31, 2020 .

The fair value of the Convertible Notes, which are Level 2 measurements, was $6.4 million at March 31, 2020 .

The fair value of the Convertible Notes, which are Level 2 measurements, was $ 6.4 million at June 30, 2020 .

The Convertible Notes are due in March 2021 and bear interest at 2.75 % per year, which is payable semi-annually in arrears on March 15 and September 15 of each year.

At March 31, 2020 , the adjusted conversion rate of the Convertible Notes is 45.5554 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of $21.95 per share of common stock.

Interest expense on the Convertible Notes included contractual coupon interest expense of $44,000 and $43,000 for the three months ended March 31, 2019 and 2020 , respectively.

Accretion of the discount on the Convertible Notes was $57,000 and $65,000 for the three months ended March 31, 2019 and 2020 , respectively.

Amortization of debt issuance costs related to our Convertible Notes was $6,000 for both the three months ended March 31, 2019 and 2020 .

The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 11 months of the Convertible Notes.

The effective interest rate on the unamortized debt discount for both the three months ended March 31, 2019 and 2020 was 11.4% .

The effective interest rate on the debt issuance costs for both three months ended March 31, 2019 and 2020 was 3.2% .

The carrying value of our 6.625% Senior Notes due 2026 (the “Senior Notes”) at December 31, 2019 and March 31, 2020 is reflected on our Consolidated Balance Sheet as follows (in thousands):

At June 30, 2020 , the adjusted conversion rate of the Convertible Notes was 45.7053 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of $21.88 per share of common stock.

The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Convertible Notes interest expense

Convertible Notes accretion of debt discount

Convertible Notes amortization of debt issuance costs

The effective interest rate on the unamortized debt discount for both the three and six months ended June 30, 2019 and 2020 was 11.4 % .

The effective interest rate on the debt issuance costs for both the three and six months ended June 30, 2019 and 2020 was 3.2 % .

The carrying value of our 6.625 % Senior Notes due 2026 (the “Senior Notes”) at December 31, 2019 and June 30, 2020 is reflected on our Consolidated Balance Sheet as follows (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Long-term liabilities:

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Carrying value of the Senior Notes

The fair value of the Senior Notes, which are Level 2 measurements, was $432.3 million at March 31, 2020 .

The fair value of the Senior Notes, which are Level 2 measurements, was $ 419.9 million at June 30, 2020 .

The Senior Notes are due on June 1, 2026 and bear interest at 6.625 % per year which is payable semi-annually in arrears on June 1 and December 1 of each year.

Interest expense on the Senior Notes included contractual coupon interest expense of $5.4 million and $6.6 million for the three months ended March 31, 2019 and 2020 , respectively.

Amortization of the debt discount on the Senior Notes was $120,000 and $129,000 for the three months ended March 31, 2019 and 2020 , respectively and amortization of the debt premium was $54,000 for the three months ended March 31, 2020 .

Amortization of debt issuance costs on the Senior Notes was $34,000 and $67,000 for the three months ended March 31, 2019 and 2020 , respectively.

The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Senior Notes interest expense

Senior Notes amortization of debt discount

Senior Notes amortization of debt premium

Senior Notes amortization of debt issuance costs

The debt discount, the debt premium and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 71 months of the Senior Notes.

The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the initial Senior Notes, which were issued in May 2018, for the three months ended March 31, 2020 was 6.87% and 6.69% , respectively.

The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the additional Senior Notes, which were issued in December 2019, for the three months ended March 31, 2020 was 6.20% and 6.88% , respectively.

The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the initial Senior Notes, which were issued in May 2018, for both the three and six months ended June 30, 2020 was 6.87 % and 6.69 % , respectively.

The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the additional Senior Notes, which were issued in December 2019, for both the three and six months ended June 30, 2020 was 6.20 % and 6.90 % , respectively.

Our lease obligations consist of operating and finance leases related to real estate and equipment.

The components of lease cost for the three months ended March 31, 2019 and 2020 are as follows (in thousands):

Three months ended March 31,

The components of lease cost for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

Income Statement Classification

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Depreciation and amortization expense is included within Field depreciation and Home office depreciation and amortization on our Consolidated Statements of Operations.

Variable lease expense was immaterial for the three months ended March 31, 2019 and 2020 .

Supplemental cash flow information related to our leases for the three months ended March 31, 2019 and 2020 is as follows (in thousands):

Three months ended March 31,

Variable lease expense was immaterial for the three and six months ended June 30, 2019 and 2020 .

Supplemental cash flow information related to our leases for the six months ended June 30, 2019 and 2020 is as follows (in thousands):

Six months ended June 30,

Cash paid for operating leases included in operating activities

Cash paid for finance leases included in financing activities

Right-of-use assets obtained in exchange for new leases for the three months ended March 31, 2019 and 2020 is as follows (in thousands):

Three months ended March 31,

Right-of-use assets obtained in exchange for new leases for the six months ended June 30, 2019 and 2020 is as follows (in thousands):

Six months ended June 30,

Right-of-use assets obtained in exchange for new operating lease liabilities

Right-of-use assets obtained in exchange for new finance lease liabilities

Supplemental balance sheet information related to finance lease right-of-use assets recorded in Property, plant and equipment, net as of December 31, 2019 and March 31, 2020 is as follows (in thousands):

Supplemental balance sheet information related to leases as of December 31, 2019 and June 30, 2020 is as follows (in thousands):

Balance Sheet Classification

December 31, 2019

March 31, 2020

June 30, 2020

Operating lease right-of-use assets

Finance lease right-of-use assets

Property, plant and equipment, net

Accumulated depreciation

Property, plant and equipment, net

Finance lease right-of-use assets, net

The average lease terms and discount rates as of March 31, 2020 are as follows:

Operating lease current liabilities

Current portion of operating lease obligations

Finance lease current liabilities

Current portion of finance lease obligations

Total current lease liabilities

Operating lease non-current liabilities

Obligations under operating leases, net of current portion

Finance lease non-current liabilities

Obligations under finance leases, net of current portion

Total non-current lease liabilities

Total lease liabilities

The average lease terms and discount rates as of June 30, 2020 are as follows:

Weighted-average remaining lease term (years)

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Finance leases

The aggregate future lease payments for operating and finance leases as of March 31, 2020 are as follows (in thousands):

The aggregate future lease payments for operating and finance leases as of June 30, 2020 are as follows (in thousands):

Lease payments due:

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Present value of lease liabilities

As of March 31, 2020 , we had no additional significant operating or finance leases that had not yet commenced.

As of June 30, 2020 , we had no additional significant operating or finance leases that had not yet commenced.

COMMITMENTS AND CONTINGENCIES

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Carriage Funeral Holdings, Inc., Superior Court of California, Contra Costa County, Case No.

On March 26, 2018, six Plaintiffs filed a putative class action against Carriage Funeral Holdings, Inc., our subsidiary, their alleged

employer, on behalf of themselves and all similarly situated current and former employees.

On March 26, 2018, six Plaintiffs filed a putative class action against Carriage Funeral Holdings, Inc., our subsidiary, their alleged employer, on behalf of themselves and all similarly situated current and former employees.

Plaintiffs seek monetary damages and claim that Carriage Funeral Holdings, Inc.

failed to pay minimum wages, provide meal and rest breaks, provide accurately itemized wage statements, reimburse employees for required expenses, and provide wages when due.

failed to pay minimum wages, provide meal and rest breaks, provide accurately itemized

wage statements, reimburse employees for required expenses, and provide wages when due.

Plaintiffs also claim that Carriage Funeral Holdings, Inc.

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We paid $ 0.7 million under the settlement agreement in November 2019.

We anticipate the case to formally close in 2020.

This case was formally closed on May 25, 2020.

STOCKHOLDERS ’ EQUITY

Restricted Stock

During the three months ended March 31, 2020 , we issued restricted stock to certain employees totaling 10,200 shares that vest over a three -year period and had an aggregate grant date market value of approximately $0.3 million at a weighted average stock price of $25.00 .

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for restricted stock awards of $217,000 and $184,000 , for the three months ended March 31, 2019 and 2020 , respectively.

As of March 31, 2020 , we had $1.1 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.7 years.

During the six months ended June 30, 2020 , we issued restricted stock to certain employees totaling 10,200 shares that vest over a three-year period and had an aggregate grant date market value of approximately $ 0.3 million at a weighted average stock price of $ 25.00 .

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for restricted stock awards of $ 211,000 and $ 183,000 , for the three months ended June 30, 2019 and 2020 , respectively and $ 428,000 and $ 368,000 for the six months ended June 30, 2019 and 2020 , respectively.

As of June 30, 2020 , we had $ 1.1 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.4 years.

Stock Options

During the three months ended March 31, 2020 , we did not grant any stock options.

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for stock options of $204,000 and $215,000 , for the three months ended March 31, 2019 and 2020 , respectively.

During the six months ended June 30, 2020 , we granted 20,000 options to a certain key employee at a weighted average price of $ 18.02 .

These options will vest in one-third increments over a three-year period and have a ten-year term.

The fair value of these options was $ 0.1 million .

On June 26, 2020, we cancelled 100,000 options in connection with the resignation of our President and Chief Operating Officer.

The fair value of the options granted were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

Dividend yield

Expected volatility

Risk-free interest rate

Expected holding period (years)

Black-Scholes value

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for stock options of $ 149,000 and $ 122,000 , for the three months ended June 30, 2019 and 2020 , respectively and $ 353,000 and $ 337,000 for the six months ended June 30, 2019 and 2020 , respectively.

Performance Awards

During the three months ended March 31, 2020 , we granted 237,500 performance awards to our leadership team and certain key employees, payable in shares.

These awards will vest (if at all) during 2024, provided that certain criteria surrounding our common stock price is achieved and the employee has remained continuously employed with the Company through such date.

The fair value of these performance awards was $2.8 million and was determined by using the Monte-Carlo simulation pricing model with the following assumptions:

February 19, 2020

On May 19, 2020, we cancelled all Performance Award Agreements previously awarded to all individuals in 2019 and 2020.

Concurrently with the cancellation, the Compensation Committee of the Board of Directors (the “Board”) approved a new performance award to be issued to certain employees.

We granted 368,921 performance awards to certain eligible employees, payable in shares.

These awards will vest (if at all) on December 31, 2024 provided that the Company’s common stock reaches one of five pre-determined growth targets for a sustained period beginning on the grant date of May 19, 2020 and ending on December 31, 2024.

The new performance award was treated as a modification of the cancelled awards and resulted in an additional $ 1.7 million of incremental compensation costs, which are expected to be recognized over the remaining term of 54 months.

On June 25, 2020, we granted an additional 13,974 performance awards to our Vice-President of Cemetery Sales and Marketing with the same vesting criteria described above with a fair value of $ 0.2 million .

On June 26, 2020, we cancelled 33,538 performance awards in connection with the resignation of our President and Chief Operating Officer.

The fair values of the performance awards granted during the three months ended June 30, 2020 were determined by using the Monte-Carlo simulation pricing model with the following assumptions:

June 25, 2020

Performance period

February 19, 2020 - December 31, 2024

May 19, 2020 - December 31, 2024

June 25, 2020 - December 31, 2024

Simulation period (years)

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Risk-free interest rate

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for performance awards of $19,000 and $121,000 for the three months ended March 31, 2019 and 2020 , respectively.

See Note 19 to the Consolidated Financial Statements herein for additional information related to our performance awards.

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for performance awards of $ 58,000 and $ 182,000 for the three months ended June 30, 2019 and 2020 , respectively and $ 77,000 and $ 303,000 for the six months ended June 30, 2019 and 2020 , respectively.

Employee Stock Purchase Plan

During the three months ended March 31, 2020 , employees purchased a total of 26,294 shares at a weighted average price of $13.73 per share.

During the six months ended June 30, 2020 , employees purchased a total of 43,314 shares at a weighted average price of $ 14.39 per share.

The fair value of the right (option) to purchase shares under the ESPP is estimated at the date of purchase with the four quarterly purchase dates using the following assumptions:

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0.25, 0.50, 0.75, 1.00

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for the ESPP totaling $105,000 and $163,000 for the three months ended March 31, 2019 and 2020 , respectively.

We recorded stock-based compensation expense, which is included in General, administrative and other expenses and Regional and unallocated funeral and cemetery costs , for the ESPP totaling $ 61,000 and $ 80,000 for the three months ended June 30, 2019 and 2020 , respectively and $ 166,000 and $ 244,000 for the six months ended June 30, 2019 and 2020 , respectively.

Good to Great Incentive Program

During the three months ended March 31, 2020 , we issued 17,991 shares of our common stock to certain employees, which were valued at approximately $449,000 at a grant date stock price of $25.00 .

During the six months ended June 30, 2020 , we issued 17,991 shares of our common stock to certain employees, which were valued at approximately $ 0.4 million at a grant date stock price of $ 25.00 .

Non-Employee Director Compensation

We compensate our non-employee directors through cash payments or unrestricted shares of common stock, payable in quarterly installments, as elected by the non-employee director.

On February 19, 2020, our Board of Directors (the “Board”) revised the Director Compensation Policy to provide that each independent director is entitled to a quarterly retainer of $35,000 , payable at the end of the quarter.

Committee Chairs and Lead Director payments remain unchanged.

For the three months ended March 31, 2020 , we granted an aggregate of 8,821 shares of our common stock to five of our non-employee directors, which were valued at $0.1 million at a weighted average stock price of $16.15 .

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , related to annual retainers and common stock awards of $114,000 and $201,000 for the three months ended March 31, 2019 and 2020 , respectively.

See Note 19 to the Consolidated Financial Statements herein for additional information related to our Director Compensation Policy.

On February 19, 2020, our Board revised the Director Compensation Policy to provide that each independent director is entitled to a quarterly retainer of $ 35,000 , payable at the end of the quarter.

On April 23, 2020, as part of our broad-based effort to respond to COVID-19, the Board approved a temporary reduction of the quarterly retainer for our non-employee directors from $ 35,000 per quarter to $ 29,750 per quarter (or 15 % ) effective April 19, 2020.

On June 26, 2020, the Board voted to reinstate the quarterly retainer back to 100 % effective as of June 28, 2020.

For the six months ended June 30, 2020 , we granted an aggregate of 16,680 shares of our common stock to five of our non-employee directors, which were valued at $ 0.3 million at a weighted average stock price of $ 17.08 .

We recorded stock-based compensation expense, which is included in General, administrative and other expenses , related to annual retainers and common stock awards of $ 114,000 and $ 201,000 for the three months ended June 30, 2019 and 2020 , respectively and $ 228,000 and $ 402,000 for the six months ended June 30, 2019 and 2020 , respectively.

Share Repurchase

During the three months ended March 31, 2020 , we did not repurchase any shares of our common stock pursuant to our share repurchase program.

At March 31, 2020 , we had approximately $25.6 million available for repurchases under our share repurchase program.

During the six months ended June 30, 2020 , we did not repurchase any shares of our common stock pursuant to our share repurchase program.

At June 30, 2020 , we had approximately $ 25.6 million available for repurchases under our share repurchase program.

Cash Dividends

During the three months ended March 31, 2019 and 2020 , our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):

On May 19, 2020, the Board approved an increase of $ 0.05 to our annual dividend beginning with the next dividend declaration in the third quarter of 2020.

During the six months ended June 30, 2019 and 2020 , our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):

Accumulated other comprehensive income

Our components of accumulated other comprehensive income are as follows (in thousands):

Three months ended June 30, 2020

Accumulated Other Comprehensive Income

March 31, 2020

Net unrealized gains associated with available-for-sale securities of the trusts

Reclassification of net unrealized gains activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus

Balance at June 30, 2020

Six months ended June 30, 2020

Accumulated Other Comprehensive Income

Balance at December 31, 2019

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Reclassification of net unrealized losses activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus

Balance at March 31, 2020

EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of the basic and diluted earnings (loss) per share for the three months ended March 31, 2019 and 2020 (in thousands, except per share data):

Three Months Ended March 31,

Balance at June 30, 2020

EARNINGS PER SHARE

The following table sets forth the computation of the basic and diluted earnings per share for the three and six months ended June 30, 2019 and 2020 (in thousands, except per share data):

Three months ended June 30,

Six months ended June 30,

Numerator for basic and diluted earnings per share:

Net income (loss)

Loss (earnings) allocated to unvested restricted stock

Income (loss) attributable to common stockholders

Denominator for basic earnings per common share - weighted average shares outstanding

Earnings allocated to unvested restricted stock

Income attributable to common stockholders

Denominator for basic earnings per common share -

weighted average shares outstanding

Effect of dilutive securities:

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Denominator for diluted earnings per common share - weighted average shares outstanding

Basic earnings (loss) per common share:

Diluted earnings (loss) per common share:

For the three months ended March 31, 2019 and 2020 , there were no shares that would have been issued upon conversion of our Convertible Notes as a result of the application under the if-converted method prescribed by the FASB ASC 260, Earnings Per Share for the fully diluted weighted average shares outstanding and the corresponding calculation of fully diluted earnings per share.

For the three months ended March 31, 2019 and 2020 , there were 1,307,000 and 1,034,000 stock options, respectively, excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect.

For the three months ended March 31, 2020 , 27,000 shares were excluded from the computation of diluted per share amounts because the loss attributable to common stockholders was a loss, not income.

Basic earnings per common share:

Diluted earnings per common share:

For the three and six months ended June 30, 2019 and 2020 , there were no shares that would have been issued upon conversion of our Convertible Notes as a result of the application under the if-converted method prescribed by the FASB ASC 260, Earnings Per Share for the fully diluted weighted average shares outstanding and the corresponding calculation of fully diluted earnings per share.

For the three months ended June 30, 2019 and 2020 , there were 1,094,070 and 1,017,383 stock options, respectively and 1,200,404 and 1,025,734 for the six months ended June 30, 2019 and 2020 , respectively, excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect.

For the three and six months ended June 30, 2020 , 349,357 performance awards have been excluded from the computation of diluted earnings per share as the performance criteria have not been met.

SEGMENT REPORTING

Revenue, disaggregated by major source for each of our reportable segments was as follows (in thousands):

Three Months Ended March 31, 2020

Three months ended June 30, 2020

Cemetery property

Other revenue

Three Months Ended March 31, 2019

Three months ended June 30, 2019

Cemetery property

Other revenue

Six months ended June 30, 2020

Cemetery property

Other revenue

Six months ended June 30, 2019

Cemetery property

Other revenue

We conduct funeral and cemetery operations only in the United States.

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Operating income (loss):

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Three months ended June 30, 2020

Three months ended June 30, 2019

Six months ended June 30, 2020

Six months ended June 30, 2019

Income (loss) before income taxes:

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Three months ended June 30, 2020

Three months ended June 30, 2019

Six months ended June 30, 2020

Six months ended June 30, 2019

Total assets:

March 31, 2020

June 30, 2020

December 31, 2019

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Balance Sheet

The following table presents the detail of certain balance sheet accounts as of December 31, 2019 and March 31, 2020 (in thousands):

The following table presents t he detail of certain balance sheet accounts as of December 31, 2019 and June 30, 2020 (in thousands):

December 31, 2019

March 31, 2020

June 30, 2020

Prepaid and other current assets:

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Accrued ad valorem and franchise taxes

Employer payroll tax deferral

Accrued commissions

8 unchanged sentences

SUBSEQUENT EVENTS

On April 23, 2020, as part of our broad-based effort to respond to COVID-19, the Compensation Committee of the Board approved, with the agreement of the impacted executive officers, temporary salary reductions to the base salary of our Chief Executive Officer by 15% , the base salary of our President and Chief Operating Officer by 10% and the base salaries of the Company’s other Executive Officers by 7.5% , along with a temporary reduction of the quarterly retainer for our non-employee directors from $35,000 per quarter to $29,750 per quarter (or 15% ) effective April 19, 2020.

With respect to the Director Compensation Policy, all other provisions of the policy remain unchanged, including the lead director and chairmanship fees.

The Company will reevaluate these temporary reductions of compensation on a monthly basis

On April 29, 2020, we filed a Current Report on Form 8-K giving notice that the Company intends to avail itself of an extension to file its Quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2020.

The Company is relying on the Securities and Exchange Commission’s (the “SEC”) Orders under Section 36 of the Securities and Exchange Act of 1934 (the “Exchange Act”), as amended (Release Nos.

34-88318 and 34-88465), to delay the filing of its Quarterly Report.

On May 18 2020, we received a waiver under our Credit Facility for the failure to comply with the Total Leverage Ratio covenant for the fiscal quarter ended March 31, 2020.

Immediately following the effectiveness of the limited waiver and fourth amendment, $74.0 million remained available for borrowing under the Credit Facility.

On May 19, 2020, the Board approved an increase of $0.05 to our annual dividend beginning with the next dividend declaration in the third quarter.

On May 19, 2020 Compensation Committee of the Board approved a new Performance Award Agreement (the “New Agreement”) for certain eligible employees.

Pursuant to the New Agreement, the target share awards for each of the eligible employees will vest on December 31, 2024 if the Company’s common stock reaches one of five pre-determined growth targets for a sustained period beginning on the grant date of May 19, 2020 and ending on December 31, 2024.

On July 2, 2020, we sold one funeral home business in Florida for $ 0.8 million .

On July 10, 2020, we sold two funeral home businesses in Colorado for $ 3.2 million .

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

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our ability to execute our growth strategy;

the execution of our Standards Operating, 4E Leadership and Standard Acquisition Models;

the effects of competition;

the execution of our Standards Operating, 4E Leadership and Standard Acquisition Models;

changes in the number of deaths in our markets;

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our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;

our ability to meet the timing, objectives and cost saving expectations related to anticipated financing activities

our ability to meet the timing, objectives and cost saving expectations related to anticipated financing activities, including our deleveraging program, forecasts and planned uses of free cash flow, expected plans for refinancing our senior notes, and future capital allocation;

the timely and full payment of death benefits related to preneed funeral contracts funded through life insurance contracts;

3 unchanged sentences

changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service;

effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;

the potential impact of epidemics and pandemics, including the COVID-19 coronavirus (“COVID-19”), on customer preferences and on our business;

effects of litigation and burial practice claims;

effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;

consolidation of the funeral and cemetery industry;

our ability to integrate acquired businesses with our existing businesses;

our ability to consummate the divestiture of low performing businesses as currently expected, if at all, including expected use of proceeds related thereto;

our ability to integrate acquired businesses with our existing businesses, including expected performance and financial improvements related thereto;

other factors and uncertainties inherent in the funeral and cemetery industry.

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements