CARRIAGE SERVICES INC 10-Q

Item 1. Financial Statements. CARRIAGE SERVICES, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share data) (unaudited) December 31, 2019 September 30, 2020 ASSETS Current assets: Cash and cash equivalents $ 716 $ 725 Accounts receivable, net 21,478 22,277 Inventories 6,989 7,382 Prepaid and other current assets 10,667 2,253 Total current assets 39,850 32,637 Preneed cemetery trust investments 72,382 75,580 Preneed funeral trust investments 96,335 92,823 Preneed cemetery receivables, net 20,173 20,324 Receivables from preneed trusts, net 18,024 17,794 Property, plant and equipment, net 279,200 270,371 Cemetery property, net 87,032 101,333 Goodwill 398,292 394,483 Intangible and other non-current assets, net 32,116 29,634 Operating lease right-of-use assets 22,304 20,846 Cemetery perpetual care trust investments 64,047 64,824 Total assets $ 1,129,755 $ 1,120,649 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of debt and lease obligations $ 3,150 $ 3,540 Accounts payable 8,413 9,713 Accrued and other liabilities 24,026 32,651 Convertible subordinated notes due 2021 — 2,522 Total current liabilities 35,589 48,426 Acquisition debt, net of current portion 5,658 4,957 Credit facility 82,182 54,745 Convertible subordinated notes due 2021 5,971 — Senior notes due 2026 395,447 395,816 Obligations under finance leases, net of current portion 5,854 5,615 Obligations under operating leases, net of current portion 21,533 19,952 Deferred preneed cemetery revenue 46,569 47,666 Deferred preneed funeral revenue 29,145 28,900 Deferred tax liability 41,368 46,628 Other long-term liabilities 1,737 2,125 Deferred preneed cemetery receipts held in trust 72,382 75,580 Deferred preneed funeral receipts held in trust 96,335 92,823 Care trusts’ corpus 63,416 64,620 Total liabilities 903,186 887,853 Commitments and contingencies: Stockholders’ equity: Common stock, $ 0.01 par value; 80,000,000 shares authorized and 25,880,362 and 25,995,167 shares issued at December 31, 2019 and September 30, 2020, respectively 259 260 Additional paid-in capital 242,147 240,648 Retained earnings 86,213 93,938 Treasury stock, at cost; 8,025,339 at both December 31, 2019 and September 30, 2020 ( 102,050 ) ( 102,050 ) Total stockholders’ equity 226,569 232,796 Total liabilities and stockholders’ equity $ 1,129,755 $ 1,120,649 The accompanying condensed notes are an integral part of these Consolidated Financial Statements. - 3 - CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited and in thousands, except per share data) Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Revenue: Service revenue $ 34,133 $ 41,218 $ 105,444 $ 120,830 Property and merchandise revenue 28,002 36,298 85,458 100,211 Other revenue 3,990 6,877 12,056 18,319 66,125 84,393 202,958 239,360 Field costs and expenses: Cost of service 18,011 19,945 54,062 59,624 Cost of merchandise 21,972 25,886 66,544 75,561 Cemetery property amortization 972 1,471 2,990 3,445 Field depreciation expense 3,106 3,233 9,250 9,770 Regional and unallocated funeral and cemetery costs 3,597 4,731 10,008 11,204 Other expenses 411 1,253 1,197 3,551 48,069 56,519 144,051 163,155 Gross profit 18,056 27,874 58,907 76,205 Corporate costs and expenses: General, administrative and other 5,755 6,134 17,059 18,620 Home office depreciation and amortization 357 329 1,115 1,065 Net loss on divestitures and impairments charges 4,593 4,917 4,604 19,610 Operating income 7,351 16,494 36,129 36,910 Interest expense ( 6,283 ) ( 8,007 ) ( 18,907 ) ( 24,787 ) Accretion of discount on convertible subordinated notes ( 61 ) ( 69 ) ( 178 ) ( 200 ) Net loss on early extinguishment of debt — ( 6 ) — ( 6 ) Other, net 517 ( 28 ) 690 ( 34 ) Income before income taxes 1,524 8,384 17,734 11,883 Expense for income taxes ( 930 ) ( 2,851 ) ( 5,551 ) ( 4,014 ) Tax adjustment related to discrete items ( 17 ) ( 8 ) ( 219 ) ( 144 ) Total expense for income taxes ( 947 ) ( 2,859 ) ( 5,770 ) ( 4,158 ) Net income $ 577 $ 5,525 $ 11,964 $ 7,725 Basic earnings per common share: $ 0.03 $ 0.31 $ 0.66 $ 0.43 Diluted earnings per common share: $ 0.03 $ 0.31 $ 0.66 $ 0.43 Dividends declared per common share: $ 0.075 $ 0.0875 $ 0.225 $ 0.2375 Weighted average number of common and common equivalent shares outstanding: Basic 17,737 17,895 17,917 17,853 Diluted 17,768 17,932 17,951 17,893 The accompanying condensed notes are an integral part of these Consolidated Financial Statements. - 4 - CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands) Nine months ended September 30, 2019 2020 Cash flows from operating activities: Net income $ 11,964 $ 7,725 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,355 14,280 Provision for bad debt and credit losses 1,188 1,837 Stock-based compensation expense 1,616 2,473 Deferred income tax expense 1,270 4,750 Amortization of deferred financing costs 289 592 Amortization of capitalized commissions on preneed contracts 417 430 Accretion of discount on convertible subordinated notes 178 200 Accretion of debt discount, net of debt premium on senior notes 366 228 Net loss on divestitures and impairments charges 4,604 19,610 Net loss on sale of other assets 193 245 Gain on insurance reimbursements ( 638 ) ( 54 ) Net loss on extinguishment of debt — 6 Other 121 19 Changes in operating assets and liabilities that provided (required) cash: Accounts and preneed receivables ( 2,495 ) ( 436 ) Inventories, prepaid and other current assets 1,138 3,241 Intangible and other non-current assets ( 241 ) ( 225 ) Preneed funeral and cemetery trust investments ( 4,376 ) ( 2,781 ) Accounts payable ( 3,852 ) 1,155 Accrued and other liabilities 6,749 9,770 Deferred preneed funeral and cemetery revenue 804 1,319 Deferred preneed funeral and cemetery receipts held in trust 3,411 3,438 Net cash provided by operating activities 36,061 67,822 Cash flows from investing activities: Acquisitions — ( 28,011 ) Proceeds from insurance reimbursements 1,247 97 Proceeds from divestitures and sale of other assets 967 7,416 Capital expenditures ( 11,479 ) ( 10,034 ) Net cash used in investing activities ( 9,265 ) ( 30,532 ) Cash flows from financing activities: Borrowings from the credit facility 28,200 89,300 Payments against the credit facility ( 37,300 ) ( 117,100 ) Payment of debt issuance costs related to long-term debt ( 113 ) — Repurchase of the 2.75 % convertible subordinated notes ( 27 ) ( 4,563 ) Payment of transaction costs related to the repurchase of the 2.75 % convertible subordinated notes — ( 12 ) Payments of debt issuance costs related to the 6.625 % senior notes — ( 66 ) Payments on acquisition debt and obligations under finance leases ( 1,370 ) ( 1,060 ) Payments on contingent consideration recorded at acquisition date ( 162 ) ( 169 ) Proceeds from the exercise of stock options and employee stock purchase plan contributions 1,155 921 Taxes paid on restricted stock vestings and exercise of non-qualified options ( 194 ) ( 281 ) Dividends paid on common stock ( 4,061 ) ( 4,251 ) Purchase of treasury stock ( 7,756 ) — Net cash used in financing activities ( 21,628 ) ( 37,281 ) Net increase in cash and cash equivalents 5,168 9 Cash and cash equivalents at beginning of period 644 716 Cash and cash equivalents at end of period $ 5,812 $ 725 The accompanying condensed notes are an integral part of these Consolidated Financial Statements. - 5 - CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited and in thousands) Three months ended September 30, 2019 Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Balance – June 30, 2019 17,812 $ 258 $ 243,285 $ 83,067 $ ( 102,050 ) $ 224,560 Net income — — — 577 — 577 Issuance of common stock 18 1 211 — — 212 Cancellation and retirement of restricted common stock and stock options ( 4 ) — ( 16 ) — — ( 16 ) Stock-based compensation expense — — 513 — — 513 Dividends on common stock — — ( 1,336 ) — — ( 1,336 ) Balance – September 30, 2019 17,826 $ 259 $ 242,657 $ 83,644 $ ( 102,050 ) $ 224,510 Three months ended September 30, 2020 Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Balance – June 30, 2020 17,934 $ 260 $ 241,868 $ 88,413 $ ( 102,050 ) $ 228,491 Net income — — — 5,525 — 5,525 Issuance of common stock to employees 16 — 297 — — 297 Issuance of common stock to directors 9 — 197 — — 197 Exercise of stock options 12 — ( 31 ) — — ( 31 ) Cancellation and retirement of restricted common stock and stock options ( 1 ) — ( 16 ) — — ( 16 ) Stock-based compensation expense — — 730 — — 730 Dividends on common stock — — ( 1,569 ) — — ( 1,569 ) Convertible notes repurchase — — ( 828 ) — — ( 828 ) Balance – September 30, 2020 17,970 $ 260 $ 240,648 $ 93,938 $ ( 102,050 ) $ 232,796 The accompanying notes are an integral part of these Consolidated Financial Statements. - 6 - CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited and in thousands) Nine months ended September 30, 2019 Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Balance – December 31, 2018 18,078 $ 257 $ 243,849 $ 71,680 $ ( 94,294 ) $ 221,492 Net income — — — 11,964 — 11,964 Issuance of common stock 58 1 683 — — 684 Exercise of stock options 71 1 471 — — 472 Issuance of restricted common stock 25 — — — — — Cancellation and retirement of restricted common stock and stock options ( 21 ) — ( 195 ) — — ( 195 ) Stock-based compensation expense — — 1,616 — — 1,616 Dividends on common stock — — ( 4,061 ) — — ( 4,061 ) Treasury stock acquired ( 400 ) — — — ( 7,756 ) ( 7,756 ) Other 15 — 294 — — 294 Balance – September 30, 2019 17,826 $ 259 $ 242,657 $ 83,644 $ ( 102,050 ) $ 224,510 Nine months ended September 30, 2020 Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Balance – December 31, 2019 17,855 $ 259 $ 242,147 $ 86,213 $ ( 102,050 ) $ 226,569 Net income — — — 7,725 — 7,725 Issuance of common stock to employees 60 1 920 — — 921 Issuance of common stock to directors 26 — 491 — — 491 Exercise of stock options 12 — ( 31 ) — — ( 31 ) Issuance of restricted common stock 10 — — — — — Cancellation and retirement of restricted common stock and stock options ( 11 ) — ( 250 ) — — ( 250 ) Stock-based compensation expense — — 1,982 — — 1,982 Dividends on common stock — — ( 4,251 ) — — ( 4,251 ) Convertible notes repurchase — — ( 828 ) — — ( 828 ) Other 18 — 468 — — 468 Balance – September 30, 2020 17,970 $ 260 $ 240,648 $ 93,938 $ ( 102,050 ) $ 232,796 The accompanying notes are an integral part of these Consolidated Financial Statements. - 7 - CARRIAGE SERVICES, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of funeral and cemetery services and merchandise in the United States. As of September 30, 2020, we operated 180 funeral homes in 27 states and 32 cemeteries in 12 states. Our operations are reported in two business segments: Funeral Home Operations, which currently account for approximately 75 % of our revenue and Cemetery Operations, which currently account for approximately 25 % of our revenue. Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and remembrance services and transportation services. We provide funeral services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis. Our cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis. Principles of Consolidation and Interim Condensed Disclosures Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 2019 unless otherwise disclosed herein, and should be read in conjunction therewith. 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 the 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 to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows. Use of Estimates The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenue and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year. Cash and Cash Equivalents We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. - 8 - Funeral and Cemetery Receivables Our funeral receivables are recorded in Accounts Receivable, net and primarily consist of amounts due for funeral services already performed. Our cemetery receivables generally consist of preneed sales of cemetery interment rights and related products and services, which are typically financed through interest-bearing installment sales contracts, generally with terms of up to five years , with such interest income reflected as Other revenue . In substantially all cases, we receive an initial down payment at the time the contract is signed. We do not accrue interest on preneed receivables if they are not paid in accordance with the contractual payment terms given the nature of our merchandise and services, the nature of our contracts with customers and the timing of the delivery of our services. Atneed cemetery receivables and preneed cemetery receivables with payments expected to be received within one year from the balance sheet date are recorded in Accounts receivable, net. Preneed cemetery receivables with payments expected to be received beyond one year from the balance sheet date are recorded in Preneed cemetery receivables, net. For our funeral receivables, we have a collections policy where statements are sent to the customer at 30 days past due. Past due notification letters are sent at 45 days and continue until payment is received or the contract is placed with a third-party collections agency. 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”). Topic 326 applies to all entities holding financial assets measured at amortized cost, including loans, trade and financed receivables and other financial instruments. The guidance introduces a new credit reserving model known as Current Expected Credit Loss (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model requires all expected credit losses to be measured based on historical experience, current conditions and reasonable and supportable forecasts about collectability. 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. From this historical loss-rate approach, we also consider the current and forecasted economic conditions expected to be in place over the life of our receivables. These estimates are impacted by a number of factors, including changes in the economy, demographics and competition in our local communities. We monitor our ongoing credit exposure through an active review of our customers’ receivables balance against contract terms and due dates. Our activities include timely performance of our accounts receivable reconciliations, assessment of our aging of receivables, dispute resolution and payment confirmation. 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. Due to the economic impact of COVID-19, we decreased our allowance for credit losses on our receivables by $ 0.1 million during the three months ended September 30, 2020 and increased our allowance for credit losses on our receivables by $ 0.5 million during the nine months ended September 30, 2020. See Notes 2 and 6 to the Consolidated Financial Statements herein for additional information related the adoption of Topic 326 on January 1, 2020 and the additional disclosures required. Inventory Inventory consists primarily of caskets, outer burial containers and cemetery monuments and markers and is recorded at the lower of its cost basis (determined by the specific identification method) or net realizable value. Business Combinations Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition. See Note 3 to the Consolidated Financial Statements herein for further information related to our acquisitions. - 9 - Divested Operations Prior to divesting a funeral home or cemetery, we first determine whether the sale of the net assets and activities (together referred to as a “set”) qualifies as a business. First, we perform a screen test to determine if the set is not a business. The principle of the screen is that a set is not a business if substantially all of the fair value of the gross assets sold resides in a single asset or group of similar assets. If the screen is not met then we evaluate whether the set has both inputs and a substantive process that together significantly contribute to the ability to create outputs. When both inputs and a substantive process are present then the set is determined to be a business and we apply the guidance in ASC 350 – Intangibles – Goodwill and Other to determine the accounting treatment of goodwill for that set (see discussion of Goodwill below). Goodwill is not allocated to the sale if the set is not considered to be a business. During the three months ended September 30, 2020, we sold six funeral homes for $ 7.3 million. During 2019, we ceased to operate a funeral home whose lease expired and sold a funeral home for $ 0.9 million. The operating results of these divested funeral homes are reflected in our Consolidated Statements of Operations. We continually review our businesses to optimize the sustainable earning power and return on our invested capital. See Notes 4, 5 and 10 to the Consolidated Financial Statements herein for additional information concerning our divestitures. Goodwill The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses and cemeteries acquired is recorded as goodwill. Goodwill has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis as of August 31 st each year. In addition to our annual test, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. 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 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 Region 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. We performed our annual goodwill impairment test as of August 31, 2020. Under current guidance,we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. For our 2020 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform an additional quantitative goodwill impairment test. We concluded that it is more-likely-than not that the fair value of our reporting units is greater than their carrying value and thus there was no additional impairment to goodwill. When we divest a portion of a reporting unit that constitutes a business in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we allocate goodwill associated with that business to be included in the gain or loss on divestiture. When divesting a business, goodwill is allocated based on the relative fair values of the business being divested and the portion of the reporting unit that will be retained. Additionally, after each divestiture, we will test the goodwill remaining in the portion of the reporting unit to be retained for impairment using a qualitative assessment unless we deem a quantitative assessment to be appropriate. Subsequent to our divestitures during the three months ended September 30, 2020, we performed a qualitative assessment on the goodwill retained in our Reporting Units and concluded that is more-likely-than not that the fair value of our reporting units is greater than their carrying value and thus there was no additional impairment to goodwill. See Note 4 to the Consolidated Financial Statements included herein for additional information related to our goodwill. Intangible Assets Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets, net on our Consolidated Balance Sheet. Our tradenames are considered to have an indefinite life and are not subject to amortization. As such, we test our intangible assets for impairment on an annual basis as of August 31 st each year. In addition to our annual test, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment - 10 - 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 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. 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 and the determination and application of an appropriate royalty rate and discount rate. We performed our annual intangible assets impairment test as of August 31, 2020. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of the tradename is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. For our 2020 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform an additional quantitative impairment test. We concluded that it is more-likely-than not that the fair value of our intangible assets is greater than its carrying value and thus there was no additional impairment to our intangible assets. See Note 10 to the Consolidated Financial Statements included herein for additional information related to our intangible assets. Preneed and Perpetual Care Trust Funds Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIEs”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. We have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus . The fixed income investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheet. Topic 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not will be required to sell. 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. 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. In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds. An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in the majority of our funeral and cemetery trust funds. See Notes 7 and 8 to the Consolidated Financial Statements herein for additional information related to our preneed and perpetual care trust funds. - 11 - Fair Value Measurements In August 2018, the FASB amended “Fair Value Measurements” to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in Level 3 measurements. It clarifies that the narrative disclosure of the effect of changes in Level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of the significant unobservable inputs used in Level 3 measurements. We adopted the new standard as of January 1, 2020 and it had no impact on our consolidated results of operations, consolidated financial position, and cash flows . See Notes 7 and 9 to the Consolidated Financial Statements herein for additional required disclosures related to our fair value measurement of our financial assets and liabilities. Capitalized Commissions on Preneed Contracts We capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of obtaining a contract with a customer. Our capitalized commissions on preneed contracts are amortized on a straight-line basis over the average maturity period for our preneed cemetery merchandise and services contracts and preneed funeral trust contracts, of eight and ten years , respectively. The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheet. See Note 10 to the Consolidated Financial Statements herein for additional information related to our capitalized commissions on preneed contracts. Property, Plant and Equipment Property, plant and equipment (including equipment under finance leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. 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 September 30, 2020 (in thousands): December 31, 2019 September 30, 2020 Land $ 84,608 $ 83,328 Buildings and improvements 242,641 240,516 Furniture, equipment and automobiles 88,046 90,125 Property, plant and equipment, at cost 415,295 413,969 Less: accumulated depreciation ( 136,095 ) ( 143,598 ) Property, plant and equipment, net $ 279,200 $ 270,371 We acquired $ 1.7 million of property, plant and equipment related to our acquisition that closed on January 3, 2020, described in Note 3 to the Consolidated Financial Statements included herein. During the three months ended September 30, 2020, we divested six funeral homes that had a carrying value of property, plant and equipment of $ 6.5 million, which was included in the gain or loss on the sale of divestitures and recorded in Net loss on divestitures and impairment charges on our Consolidated Statements of Operations, described in Note 5 to the Consolidated Financial Statements included herein. In addition, our growth and maintenance capital expenditures totaled $ 10.0 million for the nine months ended September 30, 2020, for property, plant, equipment and cemetery development. We recorded depreciation expense of $ 3.5 million for both the three months ended September 30, 2019 and 2020 and $ 10.4 million and $ 10.8 million for the nine months ended September 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 ASC 360 – Property, Plant and Equipment. In connection with the goodwill impairment recorded for the Eastern Region Reporting Unit during the quarter ended March 31, 2020, we also evaluated the long-lived assets of our funeral homes in the Eastern Region Reporting Unit and concluded that there was no impairment to our long-lived - 12 - assets. Subsequent to our impairment tests performed at March 31, 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 When we acquire a cemetery, we utilize an internal and external approach to determine the fair value of the cemetery property. From an external perspective, we obtain an accredited appraisal to provide reasonable assurance for property existence, property availability (unrestricted) for development, property lines, available spaces to sell, identifiable obstacles or easements and general valuation inclusive of known variables in that market. From an internal perspective, we conduct a detailed analysis of the acquired cemetery property using other cemeteries in our portfolio as a benchmark. This provides the added benefit of relevant data that is not available to third party appraisers. 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 $ 101.3 million, net of accumulated amortization of $ 41.7 million and $ 45.1 million at December 31, 2019 and September 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 $ 1.0 million and $ 1.5 million for the three months ended September 30, 2019 and 2020, respectively and $ 3.0 million and $ 3.4 million for the nine months ended September 30, 2019 and 2020, respectively. Leases We have operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to nineteen years . Many leases include one or more options to renew, some of which include options to extend the leases for up to 26 years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years . As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We do not have lease agreements with residual value guarantees, sale-leaseback terms, material restrictive covenants or related parties. We do not have any material sublease arrangements. We determine if an arrangement is a lease at inception based on the facts and circumstances of the agreement. A right-of-use (“ROU”) asset represents our right to use the underlying asset for the lease term and the lease liability represents our obligation to make lease payments arising from the lease. Operating lease ROU assets are included in Operating lease right-of-use assets and operating lease liabilities are included in Current portion of operating lease obligations and Obligations under operating leases, net of current portion on our Consolidated Balance Sheet. Finance lease ROU assets are included in Property, plant and equipment, net and finance lease liabilities are included in Current portion of finance lease obligations and Obligations under finance leases, net of current portion on our Consolidated Balance Sheet. 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. Subsequent to our impairment tests performed at March 31, 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 14 to the Consolidated Financial Statements included herein for additional information related to our leases. Equity Plans and Stock-Based Compensation We have equity-based employee and director compensation plans under which we have granted stock, stock options and performance awards. We also have an employee stock purchase plan (the “ESPP”). 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. The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance conditions is determined using a Monte-Carlo simulation pricing model. The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model. See Note 15 to the Consolidated Financial Statements included herein for additional information related to our equity plans and stock-based compensation. - 13 - Revenue Recognition Funeral and Cemetery Operations Revenue is recognized when control of the merchandise or services is transferred to the customer. Our performance obligations include the delivery of funeral and cemetery merchandise and services and cemetery property interment rights. Control transfers when merchandise is delivered or services are performed. For cemetery property interment rights, control transfers to the customer when the property is developed and the interment right has been sold and can no longer be marketed or sold to another customer. Sales taxes collected are recognized on a net basis in our consolidated financial statements. On our atneed contracts, we generally deliver the merchandise and perform the services at the time of need. Memorial services frequently include performance obligations to direct the service, provide facilities and motor vehicles, catering, flowers, and stationary products. All other performance obligations on these contracts, including arrangement, removal, preparation, embalming, cremation, interment, and delivery of urns and caskets and related memorialization merchandise are fulfilled at the time of need. 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. Some of our contracts with customers include multiple performance obligations. For these contracts, we allocate the transaction price to each performance obligation based on its relative standalone selling price, which is based on prices charged to customers per our general price list. Packages for service and ancillary items are offered to help the customer make decisions during emotional and stressful times. Package discounts are reflected net in Revenue . We recognize revenue when the merchandise is transferred or the service is performed, in satisfaction of the corresponding performance obligation. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements. Ancillary funeral service revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses 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 September 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 $ 8.0 million at December 31, 2019 and September 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. However, we estimate an average maturity period of ten years for preneed funeral contracts. Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable, net and Preneed cemetery receivables, net on our Consolidated Balance Sheet. 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 $ 7.2 million at December 31, 2019 and September 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. However, we estimate an average maturity period of eight years for preneed cemetery contracts. See Notes 17 to the Consolidated Financial Statements herein for additional information related to revenue. Income Taxes We and our subsidiaries file a consolidated U. S. federal income tax return, separate income tax returns in 15 states in which we operate and combined or unitary income tax returns in 14 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. We classify our deferred tax liabilities and assets as non-current on our Consolidated Balance Sheet. We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized. We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in the financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheet. - 14 - The recently passed Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) has certain provisions that are applicable to the Company as follows: (i) allowing net operating losses (“NOLs”) arising in 2018, 2019 and 2020 to be carried back five years; (ii) increasing the taxable income threshold on the interest deduction from 30% to 50% for tax years beginning in 2019 and 2020; (iii) suspending payment requirements for the 6.2% employer portion of Social Security taxes from the date of enactment through the end of 2020, with half the balance due by the end of 2021, and the other half due by the end of 2022; and (iv) our ability to receive employee retention credits up to $5,000 for paying wages to employees who are unable to work, while business operations are suspended. In connection with the CARES Act, we filed a claim for a refund on June 30, 2020, to carryback the net operating losses generated in the tax year ending December 31, 2018. The refund claim from the 2018 tax year was received on August 7, 2020, and we have included the impact in our current provision. In an effort to maximize the expected benefits afforded by the CARES Act, we plan to amend our 2018 tax return to include the additional first year depreciation deduction for qualified improvement property. The majority of the net operating losses generated in 2018 are the result of filing non-automatic accounting method changes relating to the recognition of revenue from our cemetery property and merchandise and services sales. Due to the uncertainty of the timing of receiving Internal Revenue Service (“IRS”) 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 nine months ended September 30, 2020, the reserve for uncertain tax positions was $ 2.9 million. There was no reserve recorded at September 30, 2019. Additionally, we plan to file a claim for a refund for the net operating losses generated in the tax year ending December 31, 2019, in the fourth quarter of 2020. 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 expense was $ 0.9 million and $ 2.9 million for the three months ended September 30, 2019 and 2020, respectively and $ 5.8 million and $ 4.2 million for the nine months ended September 30, 2019 and 2020, respectively. Our operating tax rate before discrete items was 61.0 % and 34.0 % for the three months ended September 30, 2019 and 2020, respectively and 31.3 % and 33.8 % for the nine months ended September 30, 2019 and 2020, respectively. The increase in our overall effective tax rate for the nine months ended September 30, 2019 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. Dilutive common equivalent shares consist of stock options. Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation. See Note 16 to the Consolidated Financial Statements included herein for the additional information related to computation of earnings per share. Subsequent Events We have evaluated events and transactions during the period subsequent to September 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. - 15 - 2. RECENTLY ISSUED ACCOUNTING STANDARDS Financial Instruments - Credit Losses On January 1, 2020, we adopted Topic 326 using the modified retrospective method and the impact was not material to our Consolidated Financial Statements. See Notes 6 and 7 to the Consolidated Financial Statements herein for additional disclosures required by Topic 326. Income Taxes In December 2019, the FASB issued ASU, Income Taxes (“Topic 740”), to simplify the accounting for income taxes. The amendments in this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. On January 1, 2020, we early adopted the provisions of this ASU using the prospective method and the impact was not material to our Consolidated Financial Statements. Accounting Pronouncements Not Yet Adopted Reference Rate Reform In March 2020, the FASB issued ASU, Reference Rate Reform (“Topic 848”) to provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London InterBank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. 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. The Company did not utilize the optional expedients and exceptions provided by this ASU during the nine months ended September 30, 2020. 3. ACQUISITIONS 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. The pro forma impact of this acquisition on prior periods is not presented, as the impact is not significant to our reported results. The results of the acquired business is reflected in our Consolidated Statements of Operations from the date of acquisition. Subsequent to our initial purchase price allocation for this acquisition made during the first quarter of 2020, we have adjusted our purchase price allocation based on additional information which became available prior to September 30, 2020. The following table summarizes the breakdown of the purchase price allocation for these businesses (in thousands): Initial Purchase Price Allocation Adjustments Adjusted Purchase Price Allocation Current assets $ 2,662 $ ( 107 ) $ 2,555 Preneed trust assets 9,089 — 9,089 Property, plant & equipment 1,720 — 1,720 Cemetery property 14,753 82 14,835 Goodwill 12,916 656 13,572 Intangible and other non-current assets 2,506 ( 628 ) 1,878 Assumed liabilities ( 489 ) — ( 489 ) Deferred tax liability ( 527 ) ( 3 ) ( 530 ) Preneed trust liabilities ( 9,089 ) — ( 9,089 ) Deferred revenue ( 541 ) — ( 541 ) Purchase price $ 33,000 $ — $ 33,000 The current assets primarily relate to preneed cemetery receivables. The intangible and other non-current assets relate to the fair value of tradenames. The assumed liabilities primarily relate to the obligations associated with delivered preneed - 16 - merchandise that was not paid for prior to acquisition. As of September 30, 2020, our accounting for cemetery receivables, cemetery property, deferred revenue and deferred tax liabilities for this acquisition has not been finalized. During the nine months ended September 30, 2020, we also recorded adjustments to the purchase price allocation for three acquisitions closed in the fourth quarter of 2019. 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 September 30, 2020 (in thousands): Initial Purchase Price Allocation Adjustments Adjusted Purchase Price Allocation Current assets $ 1,482 $ 204 $ 1,686 Preneed trust assets 15,891 — 15,891 Property, plant & equipment 21,680 — 21,680 Cemetery property 11,994 ( 45 ) 11,949 Goodwill 99,344 638 99,982 Intangible and other non-current assets 8,269 ( 1,480 ) 6,789 Assumed liabilities ( 657 ) ( 145 ) ( 802 ) Preneed trust liabilities ( 15,463 ) — ( 15,463 ) Deferred revenue ( 1,633 ) 992 ( 641 ) Purchase price $ 140,907 $ 164 $ 141,071 During the nine months ended September 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 September 30, 2020, our accounting for our 2019 acquisitions is complete. 4. GOODWILL The following table presents changes in goodwill in the accompanying Consolidated Balance Sheet for the year ended December 31, 2019 and the nine months ended September 30, 2020 (in thousands): December 31, 2019 September 30, 2020 Goodwill at the beginning of the period $ 303,887 $ 398,292 Net increase in goodwill related to acquisitions 99,344 14,210 Decrease in goodwill related to divestitures ( 4,939 ) ( 4,387 ) Decrease in goodwill related to impairments — ( 13,632 ) Goodwill at the end of the period $ 398,292 $ 394,483 See Notes 1, 3 and 5 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our goodwill impairment test and a discussion of our acquisitions and divestitures, respectively. 5. DIVESTED OPERATIONS During the three months ended September 30, 2020, we sold six funeral homes for $ 7.3 million. During 2019, we ceased to operate a funeral home whose lease expired and sold a funeral home for $ 0.9 million. In addition, we merged a funeral home in an existing market. The operating results of these divested funeral homes are reflected in our Consolidated Statements of Operations as shown in the table below (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Revenue $ 108 $ 144 $ 471 $ 1,829 Operating income (loss) ( 31 ) ( 112 ) 4 70 Net loss on divestitures (1) ( 3,863 ) ( 4,917 ) ( 3,874 ) ( 4,917 ) Income tax benefit 1,149 1,710 1,211 1,638 Net loss from divested operations, after tax $ ( 2,745 ) $ ( 3,319 ) $ ( 2,659 ) $ ( 3,209 ) (1) Net loss on divestitures is recorded in Net loss on divestitures and impairment charges on our Consolidated Statements of Operations. - 17 - 6. RECEIVABLES Accounts Receivable Accounts receivable is comprised of the following at December 31, 2019 and September 30, 2020 (in thousands): December 31, 2019 Funeral Cemetery Corporate Total Trade and financed receivables $ 10,046 $ 10,508 $ — $ 20,554 Other receivables 935 157 681 1,773 Allowance for bad debt and contract cancellation ( 223 ) ( 626 ) — ( 849 ) Accounts receivable, net $ 10,758 $ 10,039 $ 681 $ 21,478 September 30, 2020 Funeral Cemetery Corporate Total Trade and financed receivables $ 9,364 $ 11,726 $ — $ 21,090 Other receivables 351 1,886 180 2,417 Allowance for credit losses ( 269 ) ( 961 ) — ( 1,230 ) Accounts receivable, net $ 9,446 $ 12,651 $ 180 $ 22,277 During the nine months ended September 30, 2020, we increased our allowance for credit losses on our Accounts Receivables by $ 0.1 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 nine months ended September 30, 2020 (in thousands): January 1, 2020 Provision for Credit Losses Allowance Recorded at Acquisition Write Offs Recoveries September 30, 2020 Trade and financed receivables: Funeral $ ( 223 ) $ ( 880 ) $ — $ 1,611 $ ( 777 ) $ ( 269 ) Cemetery ( 626 ) ( 386 ) ( 287 ) 338 — ( 961 ) Total allowance for credit losses on Trade and financed receivables $ ( 849 ) $ ( 1,266 ) $ ( 287 ) $ 1,949 $ ( 777 ) $ ( 1,230 ) 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 ($ 0.3 million current portion shown above in Accounts Receivable, net and $ 0.3 million non-current portion shown below in Preneed Cemetery Receivables, net as noted in the respective allowance rollforward tables under Allowance Recorded at Acquisition). 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 $ 0.8 million for the three and nine months ended September 30, 2019. - 18 - Preneed Cemetery Receivables Our preneed cemetery receivables are comprised of the following at December 31, 2019 and September 30, 2020 (in thousands): December 31, 2019 September 30, 2020 Cemetery interment rights $ 31,366 $ 35,084 Cemetery merchandise and services 9,950 10,255 Preneed cemetery receivables $ 41,316 $ 45,339 The components of our preneed cemetery receivables at December 31, 2019 and September 30, 2020 are as follows (in thousands): December 31, 2019 September 30, 2020 Preneed cemetery receivables $ 41,316 $ 45,339 Less: unearned finance charges ( 4,522 ) ( 4,166 ) Preneed cemetery receivables, at amortized cost $ 36,794 $ 41,173 Less: allowance for contract cancellation and credit losses ( 1,916 ) ( 2,925 ) Less: balances due on undelivered cemetery preneed contracts ( 4,823 ) ( 7,159 ) Less: amounts in accounts receivable ( 9,882 ) ( 10,765 ) Preneed cemetery receivables, net $ 20,173 $ 20,324 The following table summarizes the activity in our allowance for credit losses for Preneed cemetery receivables, net for the nine months ended September 30, 2020 (in thousands): January 1, 2020 Provision for Credit Losses Allowance Recorded at Acquisition Write Offs September 30, 2020 Total allowance for credit losses on Preneed cemetery receivables, net $ ( 1,290 ) $ ( 571 ) $ ( 318 ) $ 215 $ ( 1,964 ) During the nine months ended September 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 $ 0.2 million and $ 0.4 million for the three and nine months ended September 30, 2019. The amortized cost basis of our preneed cemetery receivables by year of origination as of September 30, 2020 is as follows (in thousands): 2020 2019 2018 2017 2016 Prior Total Total preneed cemetery receivables, at amortized cost $ 14,933 $ 11,853 $ 6,576 $ 3,953 $ 1,894 $ 1,964 $ 41,173 The aging of past due preneed cemetery receivables as of September 30, 2020 is as follows (in thousands): 31-60 Past Due 61-90 Past Due 91-120 Past Due >120 Past Due Total Past Due Current Total Recognized revenue $ 599 $ 281 $ 193 $ 2,090 $ 3,163 $ 31,191 $ 34,354 Deferred revenue 312 105 49 167 633 10,352 10,985 Total contracts $ 911 $ 386 $ 242 $ 2,257 $ 3,796 $ 41,543 $ 45,339 7. TRUST INVESTMENTS Preneed trust investments represent trust fund assets that we are generally permitted to withdraw as the services and merchandise are provided to customers. Preneed funeral and cemetery contracts are secured by payments from customers, less amounts not required by law to be deposited into trust. Preneed trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance. These earnings are recognized as earned, in Other revenue , when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included as revenue in the period in which they are earned. Cemetery perpetual care trust investments represent a portion of the proceeds from the sale of cemetery property interment rights which we are required by various state laws to deposit into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in Other revenue. - 19 - Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt, common stock and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. See Note 9 to the Consolidated Financial Statements included herein for further information of the fair value measurement. As of September 30, 2020, we have net unrealized losses of $ 7.3 million in our trusts. At September 30, 2020, these net unrealized losses represented 3 % of our original cost basis of $ 245.8 million. Our trusts have been and continue to be impacted by current market conditions in the U.S. and global financial markets. The decline in fair value is largely due to changes in interest rates and other market conditions. Our investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. 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 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. For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If our assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. 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 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. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations. Preneed Cemetery Trust Investments The components of Preneed cemetery trust investments on our Consolidated Balance Sheet at December 31, 2019 and September 30, 2020 are as follows (in thousands): December 31, 2019 September 30, 2020 Preneed cemetery trust investments, at market value $ 74,572 $ 77,968 Less: allowance for contract cancellation ( 2,190 ) ( 2,388 ) Preneed cemetery trust investments $ 72,382 $ 75,580 - 20 - The cost and market values associated with preneed cemetery trust investments at September 30, 2020 are detailed below (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 1,332 $ — $ — $ 1,332 Fixed income securities: Foreign debt 2 15,664 1,148 ( 1,162 ) 15,650 Corporate debt 2 16,594 1,188 ( 813 ) 16,969 Preferred stock 2 12,526 523 ( 927 ) 12,122 Mortgage-backed securities 2 323 — ( 189 ) 134 Common stock 1 26,137 4,729 ( 7,701 ) 23,165 Mutual funds: Fixed Income 2 7,024 728 ( 250 ) 7,502 Trust securities $ 79,600 $ 8,316 $ ( 11,042 ) $ 76,874 Accrued investment income $ 1,094 $ 1,094 Preneed cemetery trust investments $ 77,968 Market value as a percentage of cost 96.6 % The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands): Due in one year or less $ — Due in one to five years 12,456 Due in five to ten years 9,244 Thereafter 23,175 Total fixed income securities $ 44,875 The cost and market values associated with preneed cemetery trust investments at December 31, 2019 are detailed below (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 5,729 $ — $ — $ 5,729 Fixed income securities: Foreign debt 2 5,609 312 ( 243 ) 5,678 Corporate debt 2 16,916 1,044 ( 649 ) 17,311 Preferred stock 2 14,206 904 ( 164 ) 14,946 Mortgage-backed securities 2 517 — ( 114 ) 403 Common stock 1 28,569 2,766 ( 3,017 ) 28,318 Mutual funds: Fixed income 2 1,463 72 ( 85 ) 1,450 Trust Securities $ 73,009 $ 5,098 $ ( 4,272 ) $ 73,835 Accrued investment income $ 737 $ 737 Preneed cemetery trust investments $ 74,572 Market value as a percentage of cost 101.1 % - 21 - The following table summarized our fixed income securities within our preneed cemetery trust investments in an unrealized loss position at September 30, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): September 30, 2020 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair market value Unrealized Losses Fair market value Unrealized Losses Fair market value Unrealized Losses Fixed income securities: Foreign debt $ 3,048 $ ( 309 ) $ 144 $ ( 853 ) $ 3,192 $ ( 1,162 ) Corporate debt 4,073 ( 330 ) 1,363 ( 483 ) 5,436 ( 813 ) Preferred stock 5,022 ( 711 ) 441 ( 216 ) 5,463 ( 927 ) Mortgage-backed securities — — 134 ( 189 ) 134 ( 189 ) Total fixed income securities with an unrealized loss $ 12,143 $ ( 1,350 ) $ 2,082 $ ( 1,741 ) $ 14,225 $ ( 3,091 ) December 31, 2019 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair market value Unrealized Losses Fair market value Unrealized Losses Fair market value Unrealized Losses Fixed income securities: Foreign debt $ 268 $ ( 42 ) $ 758 $ ( 201 ) $ 1,026 $ ( 243 ) Corporate debt 1,368 ( 168 ) 4,520 ( 481 ) 5,888 ( 649 ) Preferred stock 4,135 ( 164 ) — — 4,135 ( 164 ) Mortgage-backed securities — — 402 ( 114 ) 402 ( 114 ) Total fixed income securities with an unrealized loss $ 5,771 $ ( 374 ) $ 5,680 $ ( 796 ) $ 11,451 $ ( 1,170 ) Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Investment income $ 323 $ 449 $ 1,308 $ 1,421 Realized gains 1,180 2,857 5,001 6,392 Realized losses ( 1,527 ) ( 918 ) ( 3,163 ) ( 4,490 ) Expenses and taxes ( 396 ) ( 357 ) ( 1,081 ) ( 982 ) Net change in deferred preneed cemetery receipts held in trust 420 ( 2,031 ) ( 2,065 ) ( 2,341 ) $ — $ — $ — $ — Purchases and sales of investments in the preneed cemetery trusts for the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Purchases $ ( 13,488 ) $ ( 10,297 ) $ ( 33,299 ) $ ( 42,750 ) Sales 11,672 9,200 24,690 34,566 - 22 - Preneed Funeral Trust Investments The components of Preneed funeral trust investments on our Consolidated Balance Sheet at December 31, 2019 and September 30, 2020 are as follows (in thousands): December 31, 2019 September 30, 2020 Preneed funeral trust investments, at market value $ 99,246 $ 95,730 Less: allowance for contract cancellation ( 2,911 ) ( 2,907 ) Preneed funeral trust investments $ 96,335 $ 92,823 The cost and market values associated with preneed funeral trust investments at September 30, 2020 are detailed below (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 18,546 $ — $ — $ 18,546 Fixed income securities: U.S treasury debt 1 819 10 — 829 Foreign debt 2 15,132 1,133 ( 1,083 ) 15,182 Corporate debt 2 15,258 1,086 ( 766 ) 15,578 Preferred stock 2 11,772 484 ( 858 ) 11,398 Mortgage-backed securities 2 351 — ( 187 ) 164 Common stock 1 24,925 4,659 ( 7,171 ) 22,413 Mutual funds: Fixed income 2 6,128 678 ( 173 ) 6,633 Other investments 2 3,943 — — 3,943 Trust securities $ 96,874 $ 8,050 $ ( 10,238 ) $ 94,686 Accrued investment income $ 1,044 $ 1,044 Preneed funeral trust investments $ 95,730 Market value as a percentage of cost 97.7 % The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands): Due in one year or less $ 829 Due in one to five years 12,042 Due in five to ten years 8,234 Thereafter 22,046 Total fixed income securities $ 43,151 - 23 - The cost and market values associated with preneed funeral trust investments at December 31, 2019 are detailed below (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 24,160 $ — $ — $ 24,160 Fixed income securities: U.S. treasury debt 1 822 — — 822 Foreign debt 2 5,587 309 ( 232 ) 5,664 Corporate debt 2 16,109 992 ( 646 ) 16,455 Preferred stock 2 14,094 874 ( 198 ) 14,770 Mortgage-backed securities 2 585 — ( 117 ) 468 Common stock 1 27,652 2,773 ( 2,869 ) 27,556 Mutual funds: Equity 1 772 617 ( 4 ) 1,385 Fixed income 2 4,364 107 ( 107 ) 4,364 Other investments 2 2,902 — — 2,902 Trust securities $ 97,047 $ 5,672 $ ( 4,173 ) $ 98,546 Accrued investment income $ 700 $ 700 Preneed funeral trust investments $ 99,246 Market value as a percentage of cost 101.5 % The following table summarized our fixed income securities within our preneed funeral trust investment in an unrealized loss position at September 30, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): September 30, 2020 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair market value Unrealized Losses Fair market value Unrealized Losses Fair market value Unrealized Losses Fixed income securities: Foreign debt $ 2,753 $ ( 302 ) $ 133 $ ( 781 ) $ 2,886 $ ( 1,083 ) Corporate debt 4,038 ( 327 ) 1,298 ( 439 ) 5,336 ( 766 ) Preferred stock 4,716 ( 644 ) 438 ( 214 ) 5,154 ( 858 ) Mortgage-backed securities — — 137 ( 187 ) 137 ( 187 ) Total fixed income securities with an unrealized loss $ 11,507 $ ( 1,273 ) $ 2,006 $ ( 1,621 ) $ 13,513 $ ( 2,894 ) December 31, 2019 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair market value Unrealized Losses Fair market value Unrealized Losses Fair market value Unrealized Losses Fixed income securities: Foreign debt $ 274 $ ( 43 ) $ 723 $ ( 189 ) $ 997 $ ( 232 ) Corporate debt 1,403 ( 172 ) 4,433 ( 474 ) 5,836 ( 646 ) Preferred stock 4,412 ( 198 ) — — 4,412 ( 198 ) Mortgage-backed securities — — 439 ( 117 ) 439 ( 117 ) Total fixed income securities with an unrealized loss $ 6,089 $ ( 413 ) $ 5,595 $ ( 780 ) $ 11,684 $ ( 1,193 ) - 24 - Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Investment income $ 328 $ 373 $ 1,310 $ 1,235 Realized gains 1,114 2,821 4,920 6,978 Realized losses ( 1,540 ) ( 911 ) ( 1,964 ) ( 4,093 ) Expenses and taxes ( 226 ) ( 296 ) ( 511 ) ( 646 ) Net change in deferred preneed funeral receipts held in trust 324 ( 1,987 ) ( 3,755 ) ( 3,474 ) $ — $ — $ — $ — Purchases and sales of investments in the preneed funeral trusts for the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Purchases $ ( 12,129 ) $ ( 9,869 ) $ ( 31,325 ) $ ( 41,560 ) Sales 11,393 8,975 24,994 36,831 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 September 30, 2020 are as follows (in thousands): December 31, 2019 September 30, 2020 Cemetery perpetual care trust investments, at market value $ 64,047 $ 64,824 Obligations due to (from) trust ( 631 ) ( 204 ) Care trusts’ corpus $ 63,416 $ 64,620 The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at September 30, 2020 (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 348 $ — $ — $ 348 Fixed income securities: Foreign debt 2 12,880 929 ( 986 ) 12,823 Corporate debt 2 13,563 1,041 ( 617 ) 13,987 Preferred stock 2 11,354 471 ( 951 ) 10,874 Mortgage-backed securities 2 256 — ( 150 ) 106 Common stock 1 21,535 3,984 ( 6,365 ) 19,154 Mutual funds: Fixed Income 2 6,316 587 ( 292 ) 6,611 Trust securities $ 66,252 $ 7,012 $ ( 9,361 ) $ 63,903 Accrued investment income $ 921 $ 921 Cemetery perpetual care investments $ 64,824 Market value as a percentage of cost 96.5 % - 25 - The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands): Due in one year or less $ — Due in one to five years 9,819 Due in five to ten years 7,657 Thereafter 20,314 Total fixed income securities $ 37,790 The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2019 (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 4,624 $ — $ — $ 4,624 Fixed income securities: Foreign debt 2 4,200 238 ( 175 ) 4,263 Corporate debt 2 11,658 802 ( 534 ) 11,926 Preferred stock 2 10,782 666 ( 106 ) 11,342 Mortgage-backed securities 2 324 — ( 71 ) 253 Common stock 1 21,594 3,399 ( 1,911 ) 23,082 Mutual funds: Equity 1 233 146 ( 1 ) 378 Fixed income 2 7,156 618 ( 107 ) 7,667 Trust securities $ 60,571 $ 5,869 $ ( 2,905 ) $ 63,535 Accrued investment income $ 512 $ 512 Cemetery perpetual care investments $ 64,047 Market value as a percentage of cost 104.9 % The following table summarized our fixed income securities within our perpetual care trust investment in an unrealized loss position at September 30, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): September 30, 2020 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair market value Unrealized Losses Fair market value Unrealized Losses Fair market value Unrealized Losses Fixed income securities: Foreign debt $ 2,307 $ ( 242 ) $ 126 $ ( 745 ) $ 2,433 $ ( 987 ) Corporate debt 3,553 ( 263 ) 1,299 ( 354 ) 4,852 ( 617 ) Preferred stock 4,639 ( 780 ) 350 ( 171 ) 4,989 ( 951 ) Mortgage-backed securities — — 106 ( 149 ) 106 ( 149 ) Total fixed income securities with an unrealized loss $ 10,499 $ ( 1,285 ) $ 1,881 $ ( 1,419 ) $ 12,380 $ ( 2,704 ) - 26 - December 31, 2019 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair market value Unrealized Losses Fair market value Unrealized Losses Fair market value Unrealized Losses Fixed income securities: Foreign debt $ 168 $ ( 26 ) $ 549 $ ( 149 ) $ 717 $ ( 175 ) Corporate debt 1,057 ( 196 ) 3,253 ( 338 ) 4,310 ( 534 ) Preferred stock 2,989 ( 106 ) — — 2,989 ( 106 ) Mortgage-backed securities — — 252 ( 71 ) 252 ( 71 ) Total fixed income securities with an unrealized loss $ 4,214 $ ( 328 ) $ 4,054 $ ( 558 ) $ 8,268 $ ( 886 ) Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Realized gains $ 291 $ 773 $ 1,315 $ 1,921 Realized losses ( 414 ) ( 249 ) ( 855 ) ( 1,534 ) Net change in Care trusts’ corpus 123 ( 524 ) ( 460 ) ( 387 ) Total $ — $ — $ — $ — Perpetual care trust investment security transactions recorded in Other revenue on our Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Investment income $ 1,220 $ 2,531 $ 3,414 $ 5,879 Realized gains (losses), net ( 232 ) 63 ( 512 ) 53 Total $ 988 $ 2,594 $ 2,902 $ 5,932 Purchases and sales of investments in the perpetual care trusts for the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Purchases $ ( 7,680 ) $ ( 7,960 ) $ ( 21,954 ) $ ( 33,638 ) Sales 6,599 7,168 14,578 29,319 8. RECEIVABLES FROM PRENEED TRUSTS Our Receivables from preneed trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest ( less than 50% ) in the trust assets. We account for these investments at cost. As of December 31, 2019 and September 30, 2020, receivables from preneed trusts are as follows (in thousands): December 31, 2019 September 30, 2020 Preneed trust funds, at cost $ 18,581 $ 18,345 Less: allowance for contract cancellation ( 557 ) ( 551 ) Receivables from preneed trusts, net $ 18,024 $ 17,794 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 September 30, 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. - 27 - The composition of the preneed trust funds at September 30, 2020 is as follows (in thousands): Historical Cost Basis Fair Value Cash and cash equivalents $ 4,465 $ 4,465 Fixed income investments 11,390 11,390 Mutual funds and common stocks 2,486 2,639 Annuities 4 4 Total $ 18,345 $ 18,498 The composition of the preneed trust funds at December 31, 2019 is as follows (in thousands): Historical Cost Basis Fair Value Cash and cash equivalents $ 4,533 $ 4,533 Fixed income investments 11,603 11,603 Mutual funds and common stocks 2,440 2,518 Annuities 5 5 Total $ 18,581 $ 18,659 9. FAIR VALUE MEASUREMENTS We evaluated our financial assets and liabilities for those financial assets and liabilities that met the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our acquisition debt and Credit Facility (as defined in Note 11) are classified within Level 2 of the Fair Value Measurements hierarchy. The fair values of the acquisition debt and Credit Facility approximate the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. The fair value of the Convertible Notes (as defined in Note 12) was approximately $ 2.9 million at September 30, 2020 based on the last traded or broker quoted price. The fair value of the Senior Notes (as defined in Note 13) was approximately $ 422.3 million at September 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 September 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. See Note 7 to our Consolidated Financial Statements herein for the fair value hierarchy levels of our trust investments. 10. INTANGIBLE AND OTHER NON-CURRENT ASSETS Intangible and other non-current assets at December 31, 2019 and September 30, 2020 are as follows (in thousands): December 31, 2019 September 30, 2020 Tradenames $ 25,233 $ 23,565 Prepaid agreements not-to-compete, net of accumulated amortization of $ 7,195 and $ 7,528 , respectively 3,915 2,915 Capitalized commissions on preneed contracts, net of accumulated amortization of $ 1,127 and $ 1,144 , respectively 2,818 3,085 Other 150 69 Intangible and other non-current assets, net $ 32,116 $ 29,634 During the three months ended September 30, 2020, we divested four funeral homes that had a carrying value of Tradenames of $ 1.0 million, which was included in the gain or loss on the sale of divestitures and recorded in Net loss on divestitures and impairment charges on our Consolidated Statements of Operations. See Notes 1, 3 and 5 to the Consolidated - 28 - Financial Statements included herein, for a discussion of the methodology used for our indefinite-lived intangible asset impairment test and discussion of our acquisitions and divestitures, respectively. Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from one to ten years . Amortization expense was $ 177,000 and $ 175,000 for the three months ended September 30, 2019 and 2020, respectively and $ 513,000 and $ 551,000 for the nine months ended September 30, 2019 and 2020, respectively. During the three months ended September 30, 2020, we divested three funeral homes that had a carrying value of Prepaid agreements not-to-compete of $ 0.5 million, which was included in the gain or loss on the sale of divestitures and recorded in Net loss on divestitures and impairment charges on our Consolidated Statements of Operations. See Note 5 to the Consolidated Financial Statements included herein, for a discussion of our divestitures. Amortization expense related to capitalized commissions totaled $ 140,000 and $ 145,000 for the three months ended September 30, 2019 and 2020, respectively and $ 417,000 and $ 430,000 for the nine months ended September 30, 2019 and 2020, respectively. The aggregate amortization expense for our intangible assets subject to amortization as of September 30, 2020 is as follows (in thousands): Non-Compete Agreements Capitalized Commissions Years ending December 31, Remainder of 2020 $ 160 $ 149 2021 588 565 2022 481 519 2023 434 464 2024 380 401 Thereafter 872 987 Total amortization expense $ 2,915 $ 3,085 11. CREDIT FACILITY AND ACQUISITION DEBT At September 30, 2020, our senior secured revolving credit facility (“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. The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations, continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, amongst others. 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 September 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. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. On August 7, 2020, we obtained a limited consent from the lenders under our Credit Facility in connection with our privately-negotiated repurchases of our 2.75 % convertible subordinated notes due 2021 (the “Convertible Notes”). See Note 12 to the Consolidated Financial Statements included herein, for a discussion of our privately-negotiated repurchases. 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 September 30, 2020. - 29 - Our Credit Facility and Acquisition debt consisted of the following at December 31, 2019 and September 30, 2020 (in thousands): December 31, 2019 September 30, 2020 Credit Facility $ 83,800 $ 56,000 Debt issuance costs, net of accumulated amortization of $ 337 and $ 700 , respectively ( 1,618 ) ( 1,255 ) Total Credit Facility $ 82,182 $ 54,745 Acquisition debt $ 6,964 $ 6,119 Less: current portion ( 1,306 ) ( 1,162 ) Total acquisition debt, net of current portion $ 5,658 $ 4,957 We have one letter of credit outstanding under the Credit Facility issued on November 30, 2019 for approximately $ 2.0 million, which was increased to $ 2.1 million on September 29, 2020. The letter of credit bears interest at 3.125 % 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 September 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 3.9 % for both the three months ended September 30, 2019 and 2020 and 3.9 % and 4.0 % for the nine months ended September 30, 2019 and 2020, respectively. T he interest expense and amortization of debt issuance costs related to our Credit Facility during the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Credit Facility interest expense $ 350 $ 828 $ 1,090 $ 3,164 Credit Facility amortization of debt issuance costs 59 118 167 363 Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3 % to 10.0 %. Original maturities range from five to twenty years . The imputed interest expense related to our acquisition debt during the three and nine months ended September 30, 2019 and 2020 is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Acquisition debt imputed interest expense $ 152 $ 122 $ 481 $ 373 12. CONVERTIBLE SUBORDINATED NOTES On September 9, 2020, we completed privately-negotiated repurchases (the “Repurchases”) of $ 3.8 million in aggregate principal amount of the Convertible Notes for $ 4.5 million in cash (plus accrued interest of $ 0.1 million totaling $ 4.6 million) and recorded $ 0.8 million for the reacquisition of the equity component. The Repurchases represented approximately 60 % of the aggregate principal amount of Convertible Notes then outstanding. Following the settlement of the Repurchases, the aggregate principal amount of the Convertible Notes was reduced to approximately $ 2.6 million. - 30 - The carrying values of the liability and equity components of our Convertible Notes at December 31, 2019 and September 30, 2020 are reflected on our Consolidated Balance Sheet as follows (in thousands): December 31, 2019 September 30, 2020 Current liabilities: Principal amount $ 6,319 $ 2,559 Unamortized discount of liability component ( 319 ) ( 35 ) Convertible Notes issuance costs, net of accumulated amortization of $ 130 and $ 63 , respectively ( 29 ) ( 2 ) Carrying value of the liability component $ 5,971 $ 2,522 Carrying value of the equity component $ 789 $ 319 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 September 30, 2020. The fair value of the Convertible Notes, which are Level 2 measurements, was $ 2.9 million at September 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 September 30, 2020, the adjusted conversion rate of the Convertible Notes was 45.8380 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of $ 21.82 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 nine months ended September 30, 2019 and 2020 is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Convertible Notes interest expense $ 43 $ 43 $ 131 $ 130 Convertible Notes accretion of debt discount 61 69 178 200 Convertible Notes amortization of debt issuance costs 6 9 19 21 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 five months of the Convertible Notes. The effective interest rate on the unamortized debt discount for both the three and nine months ended September 30, 2019 and 2020 was 11.4 %. The effective interest rate on the debt issuance costs for both the three months ended September 30, 2019 and 2020 was 3.2 % and for the nine months ended September 30, 2019 and 2020 was 3.2 % and 3.1 % , respectively. 13. SENIOR NOTES The carrying value of our 6.625 % Senior Notes due 2026 (the “Senior Notes”) at December 31, 2019 and September 30, 2020 is reflected on our Consolidated Balance Sheet as follows (in thousands): December 31, 2019 September 30, 2020 Long-term liabilities: Principal amount $ 400,000 $ 400,000 Debt premium, net of accumulated amortization of $ 0 and $ 165 , respectively 1,688 1,523 Debt discount, net of accumulated amortization of $ 765 and $ 1,158 , respectively ( 4,110 ) ( 3,717 ) Debt issuance costs, net of accumulated amortization of $ 216 and $ 424 , respectively ( 2,131 ) ( 1,990 ) Carrying value of the Senior Notes $ 395,447 $ 395,816 The fair value of the Senior Notes, which are Level 2 measurements, was $ 422.3 million at September 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. - 31 - The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes during the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Senior Notes interest expense $ 5,383 $ 6,625 $ 16,148 $ 19,875 Senior Notes amortization of debt discount 124 133 367 393 Senior Notes amortization of debt premium — 56 — 165 Senior Notes amortization of debt issuance costs 35 72 103 208 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 68 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 both the three and nine months ended September 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 nine months ended September 30, 2020 was 6.20 % and 6.90 %, respectively. We may redeem all or part of the Senior Notes at any time prior to June 1, 2021 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed, plus a “make whole” premium, and accrued and unpaid interest, if any, to the date of redemption. 14. LEASES Our lease obligations consist of operating and finance leases related to real estate and equipment. The components of lease cost for the three and nine months ended September 30, 2019 and 2020 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, Income Statement Classification 2019 2020 2019 2020 Operating lease cost Facilities and grounds expense (1) $ 899 $ 927 $ 2,762 $ 2,838 Short-term lease cost Facilities and grounds expense (1) 73 52 206 148 Finance lease cost: Depreciation of leased assets Depreciation and amortization (2) $ 131 $ 111 $ 395 $ 329 Interest on lease liabilities Interest expense 129 123 392 374 Total finance lease cost 260 234 787 703 Total lease cost $ 1,232 $ 1,213 $ 3,755 $ 3,689 (1) Facilities and grounds expense is included within Cost of service and General, administrative and other on our Consolidated Statements of Operations. (2) 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 and nine months ended September 30, 2019 and 2020. Supplemental cash flow information related to our leases for the nine months ended September 30, 2019 and 2020 is as follows (in thousands): Nine months ended September 30, 2019 2020 Cash paid for operating leases included in operating activities $ 2,921 $ 2,470 Cash paid for finance leases included in financing activities 669 621 Right-of-use assets obtained in exchange for new leases for the nine months ended September 30, 2019 and 2020 is as follows (in thousands): Nine months ended September 30, 2019 2020 Right-of-use assets obtained in exchange for new operating lease liabilities $ 8,175 $ 75 Right-of-use assets obtained in exchange for new finance lease liabilities — — - 32 - Supplemental balance sheet information related to leases as of December 31, 2019 and September 30, 2020 is as follows (in thousands): Lease Type Balance Sheet Classification December 31, 2019 September 30, 2020 Operating lease right-of-use assets Operating lease right-of-use assets $ 22,304 $ 20,846 Finance lease right-of-use assets Property, plant and equipment, net $ 6,770 $ 6,770 Accumulated depreciation Property, plant and equipment, net ( 1,566 ) ( 1,895 ) Finance lease right-of-use assets, net 5,204 4,875 Operating lease current liabilities Current portion of operating lease obligations $ 1,554 $ 2,064 Finance lease current liabilities Current portion of finance lease obligations 290 314 Total current lease liabilities 1,844 2,378 Operating lease non-current liabilities Obligations under operating leases, net of current portion 21,533 19,952 Finance lease non-current liabilities Obligations under finance leases, net of current portion 5,854 5,615 Total non-current lease liabilities 27,387 25,567 Total lease liabilities $ 29,231 $ 27,945 The average lease terms and discount rates as of September 30, 2020 are as follows: Weighted-average remaining lease term (years) Weighted-average discount rate Operating leases 10.3 8.1 % Finance leases 6.1 8.2 % The aggregate future lease payments for operating and finance leases as of September 30, 2020 are as follows (in thousands): Operating Finance Lease payments due: Remainder of 2020 $ 938 $ 208 2021 3,729 836 2022 3,348 860 2023 3,226 860 2024 3,215 791 Thereafter 17,777 6,291 Total lease payments 32,233 9,846 Less: Interest ( 10,217 ) ( 3,917 ) Present value of lease liabilities $ 22,016 $ 5,929 As of September 30, 2020, we had no additional significant operating or finance leases that had not yet commenced. 15. STOCKHOLDERS ’ EQUITY Restricted Stock During the three months ended September 30, 2020, we did not issue restricted stock. During the nine months ended September 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 $ 196,000 and $ 183,000 , for the three months ended September 30, 2019 and 2020, respectively and $ 624,000 and $ 551,000 for the nine months ended September 30, 2019 and 2020, respectively. As of September 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 1.2 years. - 33 - Stock Options During the three months ended September 30, 2020, we did not issue stock options. During the nine months ended September 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: Grant date June 25, 2020 Dividend yield 1.67 % Expected volatility 38.54 % Risk-free interest rate 0.25 % Expected holding period (years) 3.74 Black-Scholes value $ 4.61 We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for stock options of $ 160,000 and $ 165,000 , for the three months ended September 30, 2019 and 2020, respectively and $ 513,000 and $ 502,000 for the nine months ended September 30, 2019 and 2020, respectively. Performance Awards 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 51 months. On June 26, 2020, we cancelled 33,538 performance awards in connection with the resignation of our President and Chief Operating Officer. The following table reflects the performance awards granted during the nine months ended September 30, 2020, their respective fair values and the assumptions utilized in the Monte-Carlo simulation pricing model: Grant date May 19, 2020 June 25, 2020 July 30, 2020 August 31, 2020 Performance period May 19, 2020 - December 31, 2024 June 25, 2020 - December 31, 2024 July 30, 2020 - December 31, 2024 August 31, 2020 - December 31, 2024 Awards granted 368,921 13,974 2,795 6,987 Fair value (in millions) $ 3.6 $ 0.2 $ 0.1 $ 0.2 Simulation period (years) 4.62 4.52 4.42 4.33 Share price at grant date $ 15.79 $ 18.02 $ 23.10 $ 22.14 Expected volatility 34.54 % 36.24 % 37.43 % 37.71 % Risk-free interest rate 0.33 % 0.29 % 0.20 % 0.24 % We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for performance awards of $ 61,000 and $ 286,000 for the three months ended September 30, 2019 and 2020, respectively and $ 138,000 and $ 589,000 for the nine months ended September 30, 2019 and 2020, respectively. - 34 - Employee Stock Purchase Plan During the three months ended September 30, 2020, employees purchased a total of 15,706 at a weighted average price of $ 18.96 per share. During the nine months ended September 30, 2020, employees purchased a total of 59,020 shares at a weighted average price of $ 15.6 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: Dividend yield 0.01 % Expected volatility 48.63 % Risk-free interest rate 1.54 %, 1.57 %, 1.57 %, 1.56 % Expected life (years) 0.25 , 0.50 , 0.75 , 1.00 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 $ 58,000 and $ 95,000 for the three months ended September 30, 2019 and 2020, respectively and $ 224,000 and $ 339,000 for the nine months ended September 30, 2019 and 2020, respectively. Good to Great Incentive Program On February 19, 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 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. During the three months ended September 30, 2020, we granted 8,540 shares of our common stock to six of our non-employee directors, which were valued at $ 0.2 million at a weighted average stock price of $ 22.41 . For the nine months ended September 30, 2020, we granted an aggregate of 25,220 shares of our common stock to six of our non-employee directors, which were valued at $ 0.5 million at a weighted average stock price of $ 18.88 . 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 $ 250,000 for the three months ended September 30, 2019 and 2020, respectively and $ 341,000 and $ 653,000 for the nine months ended September 30, 2019 and 2020, respectively. Share Repurchase During the three and nine months ended September 30, 2020, we did not repurchase any shares of our common stock pursuant to our share repurchase program. At September 30, 2020, we had approximately $ 25.6 million available for repurchases under our share repurchase program. Cash Dividends On May 19, 2020, the Board approved an increase of $ 0.05 to our annual dividend beginning with the dividend declaration in the third quarter of 2020. During the nine months ended September 30, 2020 and 2019, our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2020 Per Share Dollar Value March 1 st $ 0.0750 $ 1,339 June 1 st $ 0.0750 $ 1,343 September 1 st $ 0.0875 $ 1,569 2019 Per Share Dollar Value March 1 st $ 0.0750 $ 1,360 June 1 st $ 0.0750 $ 1,365 September 1 st $ 0.0750 $ 1,336 See Note 19 to the Consolidated Financial Statements included herein for additional information related to our dividends. - 35 - Accumulated other comprehensive income Our components of accumulated other comprehensive income are as follows (in thousands): Three months ended September 30, 2020 Accumulated Other Comprehensive Income June 30, 2020 $ — Net unrealized gains associated with available-for-sale securities of the trusts 3,540 Reclassification of net unrealized gains activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus ( 3,540 ) Balance at September 30, 2020 $ — Nine months ended September 30, 2020 Accumulated Other Comprehensive Income Balance at December 31, 2019 $ — Net unrealized losses associated with available-for-sale securities of the trusts ( 7,263 ) Reclassification of net unrealized losses activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus 7,263 Balance at September 30, 2020 $ — 16. EARNINGS PER SHARE The following table sets forth the computation of the basic and diluted earnings per share for the three and nine months ended September 30, 2019 and 2020 (in thousands, except per share data): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Numerator for basic and diluted earnings per share: Net income $ 577 $ 5,525 $ 11,964 $ 7,725 Less: Earnings allocated to unvested restricted stock ( 3 ) ( 14 ) ( 52 ) ( 23 ) Income attributable to common stockholders $ 574 $ 5,511 $ 11,912 $ 7,702 Denominator: Denominator for basic earnings per common share - weighted average shares outstanding 17,737 17,895 17,917 17,853 Effect of dilutive securities: Stock options 31 34 34 39 Convertible Notes — 3 — 1 Denominator for diluted earnings per common share - weighted average shares outstanding 17,768 17,932 17,951 17,893 Basic earnings per common share: $ 0.03 $ 0.31 $ 0.66 $ 0.43 Diluted earnings per common share: $ 0.03 $ 0.31 $ 0.66 $ 0.43 For the three and nine months ended September 30, 2019 and 2020, there were 3,000 and 1,000 shares, respectively 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 September 30, 2019 and 2020, there were 900,856 and 765,722 stock options, respectively and 974,290 and 848,513 for the nine months ended September 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 both the three and nine months ended September 30, 2020, 359,137 performance awards have been excluded from the computation of diluted earnings per share as the performance criteria have not been met. - 36 - 17. SEGMENT REPORTING Revenue, disaggregated by major source for each of our reportable segments was as follows (in thousands): Three months ended September 30, 2020 Funeral Cemetery Total Services $ 36,987 $ 4,231 $ 41,218 Merchandise 20,846 3,019 23,865 Cemetery property — 12,433 12,433 Other revenue 3,601 3,276 6,877 Total $ 61,434 $ 22,959 $ 84,393 Three months ended September 30, 2019 Funeral Cemetery Total Services $ 31,400 $ 2,733 $ 34,133 Merchandise 17,918 2,060 19,978 Cemetery property — 8,024 8,024 Other revenue 2,199 1,791 3,990 Total $ 51,517 $ 14,608 $ 66,125 Nine months ended September 30, 2020 Funeral Cemetery Total Services $ 110,199 $ 10,631 $ 120,830 Merchandise 61,667 7,817 69,484 Cemetery property — 30,727 30,727 Other revenue 10,431 7,888 18,319 Total $ 182,297 $ 57,063 $ 239,360 Nine months ended September 30, 2019 Funeral Cemetery Total Services $ 97,308 $ 8,136 $ 105,444 Merchandise 56,261 5,791 62,052 Cemetery property — 23,406 23,406 Other revenue 6,618 5,438 12,056 Total $ 160,187 $ 42,771 $ 202,958 We conduct funeral and cemetery operations only in the United States. The following table presents Operating income (loss), Income (loss) before income taxes and Total assets by segment (in thousands): Funeral Cemetery Corporate Consolidated Operating income (loss): Three months ended September 30, 2020 $ 13,975 $ 8,982 $ ( 6,463 ) $ 16,494 Three months ended September 30, 2019 9,531 3,932 ( 6,112 ) 7,351 Nine months ended September 30, 2020 $ 38,155 $ 18,440 $ ( 19,685 ) $ 36,910 Nine months ended September 30, 2019 42,220 12,083 ( 18,174 ) 36,129 Income (loss) before income taxes: Three months ended September 30, 2020 $ 13,753 $ 9,024 $ ( 14,393 ) $ 8,384 Three months ended September 30, 2019 9,312 3,885 ( 11,673 ) 1,524 Nine months ended September 30, 2020 $ 37,481 $ 18,538 $ ( 44,136 ) $ 11,883 Nine months ended September 30, 2019 41,591 12,324 ( 36,181 ) 17,734 Total assets: September 30, 2020 $ 758,088 $ 348,288 $ 14,273 $ 1,120,649 December 31, 2019 790,459 314,413 24,883 1,129,755 - 37 - 18. SUPPLEMENTARY DATA Balance Sheet The following table presents t he detail of certain balance sheet accounts as of December 31, 2019 and September 30, 2020 (in thousands): December 31, 2019 September 30, 2020 Prepaid and other current assets: Prepaid expenses $ 1,596 $ 1,486 Deposit on pending acquisition 5,000 — Federal income taxes receivable 2,973 649 State income taxes receivable 986 — Other current assets 112 118 Total prepaid and other current assets $ 10,667 $ 2,253 Current portion of debt and lease obligations: Current portion of acquisition debt $ 1,306 $ 1,162 Current portion of finance lease obligations 290 314 Current portion of operating lease obligations 1,554 2,064 Total current portion of debt and lease obligations $ 3,150 $ 3,540 Accrued and other liabilities: Accrued salaries and wages $ 4,323 $ 2,593 Accrued incentive compensation 9,199 6,187 Accrued vacation 2,880 3,071 Accrued insurance 2,329 2,376 Accrued interest 2,299 8,924 Accrued ad valorem and franchise taxes 678 2,125 Employer payroll tax deferral — 2,106 Accrued commissions 560 791 Perpetual care trust payable 401 88 Income tax payable — 53 Other accrued liabilities 1,357 1,477 Unrecognized tax benefit — 2,860 Total accrued and other liabilities $ 24,026 $ 32,651 Other long-term liabilities: Incentive compensation $ 1,267 $ 2,125 Contingent consideration 470 — Total other long-term liabilities $ 1,737 $ 2,125 19. SUBSEQUENT EVENTS October 27, 2020, the Board approved an increase to its quarterly dividend of $ 0.10 per share and subsequently declared a quarterly dividend payable on December 1, 2020 to common share record holders as of November 9, 2020. In connection with the increased dividend, the Board withdrew and cancelled its previous dividend declaration on October 21, 2020. On October 30, 2020, we sold one funeral home for $ 0.5 million in West Virginia. Upon divesting this business, we no longer have operations in that state. - 38 - CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report on Form 10-Q contains certain statements and information that may constitute forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical information, should be deemed to be forward-looking statements. These statements include, but are not limited to, statements regarding any projections of earnings, revenue, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. The words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions are intended to identify forward-looking statements, which are generally not historical in nature. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below: • our ability to find and retain skilled personnel; • our ability to execute our growth strategy; • 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; • changes in consumer preferences; • our ability to generate preneed sales; • the investment performance of our funeral and cemetery trust funds; • fluctuations in interest rates; • 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, 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; • the financial condition of third-party insurance companies that fund our preneed funeral contracts; • increased or unanticipated costs, such as insurance or taxes; • our level of indebtedness and the cash required to service our indebtedness; • changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service; • 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 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; and • other factors and uncertainties inherent in the funeral and cemetery industry. For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (i) Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. - 39 -