OneWater Marine Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk Our Inventory Financing Facility exposes us to risks caused by fluctuations in interest rates. As of September 30, 2022, the interest rate on our Inventory Financing Facility for major unit inventory is calculated using SOFR plus an applicable margin. Based on an outstanding balance of $267.1 million as of September 30, 2022, a change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $2.7 million. We do not currently hedge our interest rate exposure. This hypothetical increase does not take into account a corresponding increase to the programs that we may receive from our manufacturers or management’s ability to curtail inventory and related floor plan balances, both of which would reduce the impact of the interest rate increase. Our A&R Credit Facility exposes us to risks caused by fluctuations in interest rates. The interest rate on our A&R Credit Facility is calculated using Term SOFR (with a 0.00% floor) plus an applicable margin. Based on an outstanding balance of $445.0 million and Term SOFR as of September 30, 2022, a change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $4.5 million. We do not currently hedge our interest rate exposure. 78 Table of Contents Foreign Currency Risk We purchase certain of our new boat and parts inventories from foreign manufacturers and some of these transactions are denominated in a currency other than the U.S. dollar. Our business is subject to foreign exchange rate risk that may influence manufacturers’ ability to provide their products at competitive prices in the United States. From time to time we may enter into foreign currency forward contracts to hedge certain foreign currency exposures to lessen, but not completely eliminate, the effects of foreign currency fluctuations on our financial results. To the extent that we cannot recapture this volatility in prices charged to customers or if this volatility negatively impacts consumer demand for our products, this volatility could adversely affect our future operating results. Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS OneWater Marine Inc. Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 80 Consolidated Balance Sheets as of September 30, 2022 and 2021 81 Consolidated Statements of Operations for the Years Ended September 30, 2022, 2021, and 2020 82 Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2022, 2021, and 2020 83 Consolidated Statements of Stockholders’ and Members’ Equity for the Years Ended September 30, 2022, 2021, and 2020 84 Consolidated Statements of Cash Flows for the Years Ended September 30, 2022, 2021 and 2020 85 Notes to the Consolidated Financial Statements 86 79 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders OneWater Marine Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of OneWater Marine Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in stockholders’ and members’ equity, and cash flows for each of the three years in the period ended September 30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated December 15, 2022 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of developed technologies, trade names and customer relationship intangible assets acquired for Distribution segment acquisitions As described further in Note 4 to the consolidated financial statements, during the year ended September 30, 2022, the Company acquired T-H Marine Supplies, LLC and Ocean Bio-Chem, Inc. for total purchase consideration of $318.9 million. As part of these acquisitions, the Company acquired $164.8 million of identified intangible assets, including developed technologies ($13.5 million for T-H Marine Supplies, LLC), trade names ($26.8 million and $18.3 million, respectively) and customer relationships ($65.2 million and $39.6 million, respectively). We identified the assumptions used in the valuation of developed technologies and tradenames (specifically revenue growth rates, royalty rates and discount rates), and the assumptions used in the valuation of customer relationships (specifically revenue growth rates, customer attrition rates, EBITDA and discount rates) acquired in the T-H Marine Supplies, LLC and Ocean Bio-Chem, Inc. acquisitions as a critical audit matter. The principal consideration for our determination that the valuation of developed technologies, trade names and customer relationship intangible assets acquired is a critical audit matter is the high degree of auditor judgment necessary in evaluating certain inputs and assumptions made by management in the valuation models used to determine fair value. Those key assumptions include revenue growth rates, royalty rates, customer attrition rates, EBITDA and discount rates. Our audit procedures related to the Company’s valuation of developed technologies, trade names and customer relationship intangible assets related to the T-H Marine Supplies, LLC and Ocean Bio-Chem, Inc. acquisitions included the following, among others: • We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s relevant controls to value acquired intangible assets, including the Company’s controls over the selection and review of the appropriateness of revenue growth rates, royalty rates, customer attrition rates, EBITDA and discount rates used in determining fair value. • We evaluated the appropriateness of the Company’s forecasted revenue growth rates used to value developed technologies, trade names and customer relationship intangible assets by (1) comparing forecasted revenue growth rates to forecasted industry growth rates and available market data and (2) comparing forecasted revenue growth rates to historical growth rates of the acquired entity. • We evaluated the appropriateness of the Company’s forecasted EBITDA used to value customer relationship intangible assets by (1) comparing forecasted EBITDA margin to historical EBITDA margin and (2) comparing forecasted EBITDA margin to available industry and market data. • We utilized a specialist to evaluate key inputs and assumptions used to determine fair value. Our specialist compared the estimated customer attrition rates used to value the customer relationship intangible assets to historical customer retention data of the acquired companies, compared the discount rates used to value the developed technologies, trade names and customer relationship intangible assets to independently developed discount rates derived from publicly available data for comparable companies, and compared the royalty rates used to value the developed technologies and trade names to royalty rates derived from publicly available data for comparable companies. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2017. Atlanta, Georgia December 15, 2022 80 Table of Contents ONEWATER MARINE INC. CONSOLIDATED BALANCE SHEETS ($ in thousands, except par value and share data) September 30, 2022 September 30, 2021 Assets Current assets: Cash $ 42,071 $ 62,606 Restricted cash 18,876 11,343 Accounts receivable, net 57,960 28,529 Inventories, net 372,959 143,880 Prepaid expenses and other current assets 75,024 34,580 Total current assets 566,890 280,938 Property and equipment, net 109,713 67,114 Operating lease right-of-use assets 123,955 89,141 Other assets: Other assets 3,378 526 Deferred tax assets, net 8,433 29,110 Intangible assets, net 306,471 85,294 Goodwill 378,588 168,491 Total other assets 696,870 283,421 Total assets $ 1,497,428 $ 720,614 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 27,306 $ 18,114 Other payables and accrued expenses 55,237 27,665 Customer deposits 65,460 46,610 Notes payable – floor plan 267,108 114,234 Current portion of operating lease liabilities 12,981 9,159 Current portion of long-term debt, net 21,642 11,366 Current portion of tax receivable agreement liability 2,363 482 Total current liabilities 452,097 227,630 Long-term Liabilities: Other long-term liabilities 23,174 14,991 Tax receivable agreement liability 43,991 39,622 Noncurrent operating lease liabilities 112,127 80,464 Long-term debt, net 421,162 103,074 Total liabilities 1,052,551 465,781 Stockholders’ Equity: Preferred stock, $ 0.01 par value, 1,000,000 shares authorized, none issued and outstanding as of September 30, 2022 and September 30, 2021 - - Class A common stock, $ 0.01 par value, 40,000,000 shares authorized, 14,211,621 shares issued and outstanding as of September 30, 2022 and 13,276,538 shares issued and outstanding as of September 30, 2021 142 133 Class B common stock, $ 0.01 par value, 10,000,000 shares authorized, 1,429,940 shares issued and outstanding as of September 30, 2022 and 1,819,112 shares issued and outstanding as of September 30, 2021 14 18 Additional paid-in capital 180,296 150,825 Retained earnings 204,880 74,952 Accumulated other comprehensive loss ( 7 ) - Total stockholders’ equity attributable to OneWater Marine Inc. 385,325 225,928 Equity attributable to non-controlling interests 59,552 28,905 Total stockholders’ equity 444,877 254,833 Total liabilities and stockholders’ equity $ 1,497,428 $ 720,614 81 Table of Contents ONEWATER MARINE INC. CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands except per share data) For the Years Ended September 30, 2022 2021 2020 Revenues: New boat $ 1,139,331 $ 872,680 $ 717,093 Pre-owned boat 294,832 216,416 205,650 Finance & insurance income 55,977 42,668 36,792 Service, parts & other 254,682 96,442 63,435 Total revenues 1,744,822 1,228,206 1,022,970 Cost of sales (exclusive of depreciation and amortization shown separately below): New boat 834,026 661,764 585,720 Pre-owned boat 213,167 162,278 168,261 Service, parts & other 143,974 46,709 33,465 Total cost of sales 1,191,167 870,751 787,446 Selling, general and administrative expenses 302,113 199,049 143,575 Depreciation and amortization 15,605 5,411 3,249 Transaction costs 7,724 869 3,648 Change in fair value of contingent consideration 10,380 3,249 6,762 Income from operations 217,833 148,877 78,290 Other expense (income): Interest expense – floor plan 4,647 2,566 8,861 Interest expense – other 13,201 4,344 8,828 Change in fair value of warrant liability - - ( 771 ) Loss on extinguishment of debt 356 - 6,559 Other expense (income), net 3,793 ( 248 ) ( 24 ) Total other expense (income), net 21,997 6,662 23,453 Income before income tax expense 195,836 142,215 54,837 Income tax expense 43,225 25,802 6,329 Net income 152,611 116,413 48,508 Less: Net income attributable to non-controlling interests ( 2,998 ) - ( 350 ) Less: Net income attributable to non-controlling interests of One Water Marine Holdings, LLC ( 18,669 ) ( 37,354 ) ( 30,733 ) Net income attributable to OneWater Marine Inc. $ 130,944 $ 79,059 $ 17,425 Earnings per share of Class A common stock – basic (1) $ 9.44 $ 7.13 $ 2.79 Earnings per share of Class A common stock – diluted (1) $ 9.13 $ 6.96 $ 2.77 Basic weighted-average shares of Class A common stock outstanding (1) 13,877 11,087 6,243 Diluted weighted-average shares of Class A common stock outstanding (1) 14,337 11,359 6,287 (1) For the fiscal year ended September 30, 2020, represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period from February 11, 2020 through September 30, 2020, the period following OneWater Marine Inc.’s initial public offering. See Note 1. 82 Table of Contents ONEWATER MARINE INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ($ in thousands) For the Years Ended September 30, 2022 2021 2020 Net income $ 152,611 $ 116,413 $ 48,508 Other comprehensive loss: Foreign currency translation adjustment ( 8 ) - - Comprehensive income 152,603 116,413 48,508 Less: Net income attributable to non-controlling interests ( 2,998 ) - ( 350 ) Less: Net income attributable to non-controlling interests of One Water Marine Holdings, LLC ( 18,669 ) ( 37,354 ) ( 30,733 ) Foreign currency translation adjustment attributable to non-controlling interest of One Water Marine Holdings, LLC 1 - - Comprehensive income attributable to One Water Marine Holdings, Inc. $ 130,937 $ 79,059 $ 17,425 83 Table of Contents ONEWATER MARINE INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ AND MEMBERS’ EQUITY ($ in thousands) Class A Common Stock Class B Common Stock Redeemable Preferred Interest in Subsidiary Members’ Equity Shares Amount Shares Amount Additional Paid-in Capital Retained Earnings Non- controlling Interest Accumulated Other Comprehensive Loss Total Stockholders’ and Members’ Equity Balance at September 30, 2019 $ 86,018 $ 31,770 - $ - - $ - $ - $ - $ 6,199 $ - $ 37,969 Net (loss) income prior to the initial public offering - ( 1,394 ) - - - - - - 350 - ( 1,044 ) Distributions to members prior to the initial public offering ( 1,310 ) ( 310 ) - - - - - - ( 732 ) - ( 1,042 ) Accumulated unpaid preferred returns prior to the initial public offering 3,187 ( 3,187 ) - - - - - - - - ( 3,187 ) Accretion of redeemable preferred and issuance costs prior to the initial public offering 236 ( 236 ) - - - - - - - - ( 236 ) Equity-based compensation prior to the initial public offering - 655 - - - - - - - - 655 Effect of the initial public offering and related transactions ( 88,131 ) ( 27,298 ) 6,088 61 8,462 85 55,740 - 73,017 - 101,605 Effect of September Offering - - 3,979 40 ( 3,554 ) ( 36 ) 50,465 - ( 43,254 ) - 7,215 Exchange of B shares for A shares - - 325 3 ( 325 ) ( 3 ) 3,253 ( 3,253 ) - - Distributions subsequent to the initial public offering - - - - - - - ( 668 ) ( 14,021 ) - ( 14,689 ) Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis - - - - - - ( 5,069 ) - - - ( 5,069 ) Equity-based compensation subsequent to the initial public offering - - - - - - 1,558 - - - 1,558 Net income subsequent to the initial public offering - - - - - - - 17,425 32,127 - 49,552 Balance at September 30, 2020 - - 10,392 104 4,583 46 105,947 16,757 50,433 - 173,287 Net income - - - - - - - 79,059 37,354 - 116,413 Distributions to members - - - - - - - ( 1,160 ) ( 8,813 ) - ( 9,973 ) Dividends and distributions - - - - - - - ( 20,777 ) ( 7,328 ) - ( 28,105 ) Effect of September Offering, including underwriter exercise of option to purchase shares - - 387 4 ( 387 ) ( 4 ) 4,146 - ( 4,256 ) - ( 110 ) Exchange of B shares for A shares - - 2,377 24 ( 2,377 ) ( 24 ) 38,485 - ( 38,485 ) - - Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis - - - - - - ( 4,186 ) - - - ( 4,186 ) Shares issued upon vesting of equity-based awards, net of tax withholding - - 85 1 - - ( 803 ) - - - ( 802 ) Shares issued in connection with a business combination - - 36 - - - 1,495 - - - 1,495 Adjustment to adopt Topic 842 - - - - - - - 1,073 - - 1,073 Equity-based compensation - - - - - - 5,741 - - - 5,741 Balance at September 30, 2021 - - 13,277 133 1,819 18 150,825 74,952 28,905 - 254,833 Net Income - - - - - - 130,944 21,667 - 152,611 Distributions to members - - - - - - ( 784 ) ( 3,497 ) - ( 4,281 ) Exchange of B shares for A shares - - 389 4 ( 389 ) ( 4 ) 6,833 - ( 6,833 ) - - Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increase in tax basis - - - - - - ( 247 ) - - - ( 247 ) Shares issued upon vesting of equity-based awards, net of tax withholding - - 169 1 - - ( 1,629 ) - - - ( 1,628 ) Shares issued in connection with business combinations - - 387 4 - - 14,623 - - - 14,627 Non-controlling interest in subsidiary - - - - - - - - 19,311 19,311 Equity-based compensation - - - - - - 10,013 - - - 10,013 Repurchase and retirement of Class A common stock - - ( 10 ) - - - ( 122 ) ( 232 ) - - ( 354 ) Currency Translation Adjustment - - - - - - - ( 1 ) ( 7 ) ( 8 ) Balance at September 30, 2022 $ - $ - 14,212 $ 142 1,430 $ 14 $ 180,296 $ 204,880 $ 59,552 $ ( 7 ) $ 444,877 84 Table of Contents ONEWATER MARINE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) For the Years Ended September 30, 2022 2021 2020 Cash flows from operating activities Net income $ 152,611 $ 116,413 $ 48,508 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,296 5,411 3,249 Equity-based compensation 10,013 5,741 2,213 (Gain) loss on asset disposals ( 135 ) ( 94 ) 10 Change in fair value of warrant liability - - ( 771 ) Loss on extinguishment of debt 356 - 6,559 Non-cash interest expense 3,250 659 477 Deferred income tax provision 5,741 3,728 509 Change in fair value of contingent consideration 10,380 2,872 5,520 Loss on equity investments 1,228 - - (Increase) decrease in assets: Accounts receivable ( 3,711 ) ( 9,531 ) ( 3,185 ) Inventories ( 167,183 ) 25,289 127,214 Prepaid expenses and other current assets ( 34,357 ) ( 18,924 ) ( 7,984 ) Other assets ( 1,940 ) ( 173 ) ( 5 ) Increase (decrease) in liabilities: Accounts payable 6,424 ( 26 ) 7,235 Other payables and accrued expenses 4,140 4,010 10,528 Tax receivable agreement liability ( 67 ) - - Customer deposits 4,401 24,048 12,400 Net cash provided by operating activities 7,447 159,423 212,477 Cash flows from investing activities Purchases of property and equipment ( 11,403 ) ( 9,896 ) ( 6,309 ) Proceeds from disposal of property and equipment 345 233 1,637 Purchases of equity investments ( 2,000 ) - - Cash used for additions to intangible assets ( 4,246 ) - - Cash used in acquisitions ( 459,540 ) ( 107,467 ) - Net cash used in investing activities ( 476,844 ) ( 117,130 ) ( 4,672 ) Cash flows from financing activities Net borrowings (payments) from floor plan 152,874 ( 23,497 ) ( 101,342 ) Proceeds from long-term debt 412,492 30,000 129,306 Payments on long-term debt ( 88,033 ) ( 8,878 ) ( 121,800 ) Payments of debt issuance costs ( 9,095 ) ( 701 ) ( 3,910 ) Payments of debt extinguishment costs - - ( 4,207 ) Payments of initial public offering costs - - ( 5,646 ) Payments of September Offering costs - ( 540 ) - Payments of contingent consideration ( 371 ) - ( 1,456 ) Distributions to redeemable preferred interest members and redemption of redeemable preferred interest - - ( 90,503 ) Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discounts and commissions - - 59,234 Proceeds from issuance of Class A common stock sold in September Offering, net of underwriting discounts and commissions - - 8,075 Payments of tax withholdings for equity-based awards ( 1,628 ) ( 802 ) - Dividends and distributions - ( 27,070 ) - Distributions to members ( 9,482 ) ( 5,009 ) ( 18,895 ) Repurchase and retirement of Class A common stock ( 354 ) - - Net cash provided by (used in) financing activities 456,403 ( 36,497 ) ( 151,144 ) Effect of exchange rate changes on cash and restricted cash ( 8 ) - - Net change in cash ( 13,002 ) 5,796 56,661 Cash and restricted cash at beginning of period 73,949 68,153 11,492 Cash and restricted cash at end of period $ 60,947 $ 73,949 $ 68,153 Supplemental cash flow disclosures Cash paid for interest $ 14,598 $ 6,251 $ 17,212 Cash paid for income taxes 35,229 28,537 246 Noncash items Acquisition purchase price funded by seller notes payable $ 1,126 $ 2,056 $ - Acquisition purchase price funded by contingent consideration 15,321 9,200 - Acquisition purchase price funded by issuance of Class A common stock 14,627 1,495 - Accrued purchase consideration - 1,889 - Purchase of property and equipment funded by long-term debt 2,087 1,820 1,190 Dividends payable - 1,035 - Distributions payable - 4,964 - Offering costs, accrued not yet paid - - 430 Initial operating lease right-of-use-assets for adoption of Topic 842 - 71,823 - 85 Table of Contents OneWater Marine Inc. and Subsidiaries Notes to the Consolidated Financial Statements 1. Description of Company and Basis of Presentation Description of the Business OneWater Marine Inc. (“OneWater Inc”) was incorporated in Delaware on April 3, 2019 and was a wholly-owned subsidiary of One Water Marine Holdings, LLC (“OneWater LLC”). Pursuant to a reorganization on February 11, 2020 into a holding company structure for the purpose of facilitating an initial public offering (the “IPO”) and related transactions in order to carry on the business of OneWater LLC and its subsidiaries (together with OneWater Inc, the “Company”), OneWater Inc is the holding company and its sole material asset is the equity interest in OneWater LLC. OneWater LLC was organized as a limited liability company under the law of the State of Delaware in 2014 and is the parent company of One Water Assets & Operations (“OWAO”), and its wholly-owned subsidiaries. The Company is one of the largest recreational marine retailers in the United States. The Company engages primarily in the retail sale, brokerage, and service of new and pre-owned boats, motors, trailers, the sale of marine parts and accessories, and offers slip and storage accommodations in certain locations. The Company also arranges related boat financing, insurance, and extended service contracts for customers with third-party lenders and insurance companies. As of September 30, 2022, the Company operates a total of 96 retail locations, 12 distribution centers/warehouses and multiple online marketplaces in 19 states, several of which are in the top twenty states for marine retail expenditures. Operating results are generally subject to seasonal variations. Demand for products is generally highest during the third and fourth quarters of the fiscal year and, accordingly, revenues are generally expected to be higher during these periods. General economic conditions and consumer spending patterns can negatively impact the Company’s operating results. Unfavorable local, regional, national, or global economic developments, global public health concerns, including the COVID-19 pandemic, or uncertainties could reduce consumer spending and adversely affect the Company’s business. Consumer spending on discretionary goods may also decline as a result of lower consumer confidence levels, even if prevailing economic conditions are otherwise favorable. Economic conditions in areas in which the Company operates, particularly in the Southeast, can have a major impact on the Company’s overall results of operations. Local influences such as corporate downsizing, inclement weather such as hurricanes and other storms, environmental conditions, and other events could adversely affect the Company’s operations in certain markets and in certain periods. Any extended period of adverse economic conditions or low consumer confidence is likely to have a negative effect on the Company’s business. Sales of new boats from the Company’s top ten brands represent approximately 41.8 %, 42.9 % and 41.1 % of total sales for the years ended September 30, 2022, 2021 and 2020, respectively, making them major suppliers of the Company. Of this amount, Malibu Boats, Inc, including its brands Malibu, Axis, Cobalt, Pursuit, Maverick, Hewes, Cobia and Pathfinder accounted for 15.6 %, 17.0 % and 17.0 % of our consolidated revenue for the years ended September 30, 2022, 2021 and 2020, respectively. As is typical in the industry, the Company contracts with most manufacturers under renewable annual dealer agreements, each of which provides the right to sell various makes and models of boats within a given geographic region. Any change or termination of these agreements, or the agreements discussed above, for any reason, or changes in competitive, regulatory, or marketing practices, including rebate or incentive programs, could adversely affect results of operations. Pre-owned boats are usually trade-ins from retail customers who are purchasing a boat from the Company. 86 Table of Contents Initial Public Offering On February 11, 2020, OneWater Inc completed its IPO of 5,307,693 shares of Class A common stock, par value $ 0.01 per share (the “Class A common stock”), which includes the exercise in full of the underwriters’ option to purchase up to 692,308 additional shares of Class A common stock pursuant to the Underwriting Agreement, at a price to the public of $ 12.00 per share. After deducting underwriting discounts and commissions, OneWater Inc received net proceeds of $ 59.2 million. OneWater Inc contributed all of the net proceeds of the IPO received to OneWater LLC in exchange for limited liability company interests in OneWater LLC (“LLC Units”). OneWater LLC used the net proceeds, cash on hand and borrowings under its Amended and Restated Credit and Guaranty Agreement by and among OneWater Inc, OneWater LLC and its subsidiaries, with Goldman Sachs Specialty Lending Group, L.P. (i) to pay $ 3.2 million to one Legacy Owner in exchange for the surrender of a preferred distribution right and (ii) to contribute cash to OWAO in exchange for additional units therein, and OWAO used such cash to fully redeem the preferred interest in subsidiary held by Goldman Sachs & Co. LLC and certain of its affiliates (collectively, “Goldman”) and affiliates of The Beekman Group (“Beekman”). Additionally, the Company provided certain of the existing owners of OneWater LLC, including Goldman and Beekman and certain members of the Company’s management team, the right to receive a tax distribution to cover taxable income arising as a result of OneWater LLC’s operating income through the period ending on the date of the closing of the IPO. September Offering On September 22, 2020, OneWater Inc completed an underwritten public offering (the “September Offering”) of 3,170,868 shares of Class A common stock, at a public offering price of $ 20.00 per share, less underwriting discounts and commissions. OneWater Inc sold 425,000 shares of Class A common stock, and certain stockholders of the Company (the “Selling Stockholders”) sold 2,745,868 shares of Class A common stock. In connection with the September Offering, Goldman granted the underwriters a 30-day option to purchase up to an additional 475,630 shares of the Company’s Class A common stock (the “Optional Shares”). On September 29, 2020, the underwriters notified OneWater Inc and Goldman of their intent to purchase an additional 387,458 Optional Shares. The sale of the Optional Shares closed on October 2, 2020. The Company did not receive any proceeds from the sale of the Optional Shares or the Class A common stock sold by Selling Stockholders. After deducting underwriting discounts and commissions, OneWater Inc received net proceeds of $ 8.1 million. OneWater Inc contributed all of the net proceeds of the September Offering received to OneWater LLC in exchange for LLC Units. OneWater LLC used the net proceeds for general corporate purposes. Principles of Consolidation As the sole managing member of OneWater LLC, OneWater Inc operates and controls all of the businesses and affairs of OneWater LLC, and through OneWater LLC and its wholly-owned subsidiaries, as well as majority-owned subsidiaries over which the Company exercises control, conducts its business. As a result, OneWater Inc consolidates the financial results of OneWater LLC and its subsidiaries and reports non-controlling interests related to the portion of units of OneWater LLC (the “OneWater LLC Units”) not owned by OneWater Inc, which will reduce net income attributable to OneWater Inc’s Class A stockholders. As of September 30, 2022, OneWater Inc owned 90.9 % of the economic interest of OneWater LLC. Commencing December 31, 2021, the Company owns 80 % of the economic interest of Quality Assets and Operations, over which the Company exercises control and the minority interest in this subsidiary has been recorded accordingly. See note 4 for additional information regarding the acquisition. Basis of Financial Statement Preparation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All adjustments, consisting of only normal recurring adjustments considered necessary for fair presentation, have been reflected in these consolidated financial statements. All intercompany transactions have been eliminated in consolidation. The Company operates on a fiscal year basis with the first day of the fiscal year being October 1, and the last day of the fiscal year ending on September 30. 87 Table of Contents COVID-19 Pandemic The duration and related impact on the Company’s consolidated financial statements is currently uncertain, and it is possible that the pandemic, including the resurgence of COVID-19 in certain geographic areas or the emergence of variant strains of the virus, may negatively impact the Company’s future results of operations. The impact of COVID-19 on our suppliers and the recent increase in demand for marine retail products has led to industry-wide supply chain constraints. The Company is monitoring and assessing the situation and preparing for implications to the business, including the ability to safely operate its locations, access to inventory and customer demand. 2. Summary of Significant Accounting Policies Cash At times the amount of cash on deposit may exceed the federally insured limit of the bank. Deposit accounts at each of the institutions are insured up to $ 250,000 by the Federal Deposit Insurance Corporation (FDIC). At September 30, 2022 and 2021, the Company exceeded FDIC limits at various institutions. The Company has not experienced any losses in such accounts and believes there is little to no exposure to any significant credit risk. Restricted Cash Restricted cash relates to amounts collected for pre-owned sales, in certain states, which are held in escrow on behalf of the respective buyers and sellers for future purchases of boats. Total customers deposits are shown as a liability on the consolidated balance sheets. These liabilities may be more than the applicable restricted cash balances and fluctuate due to timing differences and because in certain states the deposits are not restricted from use. Inventories Inventories are stated at the lower of cost or net realizable value. The cost of the new and pre-owned boat inventory is determined using the specific identification method. In assessing lower of cost or net realizable value the Company considers the aging of the boats, historical sales of a brand and current market conditions. The cost of acquired, manufactured and assembled parts and accessories is determined using methods which vary by subsidiary and include both the average cost method and first-in, first-out (“FIFO”). Vendor Consideration Received Consideration received from vendors is accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 330, ‘‘Inventory’’ (‘‘ASC 330’’). Pursuant to ASC 330, manufacturer incentives based upon cumulative volume of sales and purchases are recorded as a reduction of inventory cost and related cost of sales when the amounts are probable and reasonably estimable. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives. Leasehold improvements are amortized over the shorter of the lease period or the estimated useful lives. The estimated useful lives of assets are as follows: Years Company vehicles 5 Buildings and improvements 10 - 39 Machinery and equipment 5 - 7 Office equipment 5 - 7 Expenditures for major improvements that extend the useful life of assets are capitalized. Minor replacements, maintenance and repairs which do not extend the useful life of an asset are expensed as incurred. The carrying value of property and equipment and other long-term assets (other than goodwill and indefinite life intangible assets) is evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If such an indication is present, the carrying amount of the asset is compared to the estimated undiscounted cash flows related to that asset. The Company would conclude that an asset may be impaired if the sum of such undiscounted expected future cash flows is less than the carrying amount of the related asset. If an asset is impaired, the impairment loss would be the amount by which the carrying amount of the related asset exceeds its fair value. We did no t record an impairment of our property and equipment in fiscal years 2022, 2021 or 2020. 88 Table of Contents Goodwill and Other Identifiable Intangible Assets Goodwill and intangible assets are accounted for in accordance with FASB ASC 350, ‘‘ Intangibles - Goodwill and Other ’’ (‘‘ASC 350’’), which provides that the excess of cost over the fair value of the net assets of businesses acquired, including other identifiable intangible assets, is recorded as goodwill. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. In accordance with ASC 350, Goodwill is tested for impairment at least annually, or more frequently when events or circumstances indicate that impairment might have occurred. ASC 350 also states that if an entity determines, based on an assessment of certain qualitative factors, that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative goodwill impairment test is unnecessary. In evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, the difference would represent the amount of required goodwill impairment. To the extent the reporting unit’s earnings decline significantly or there are changes in one or more of these inputs that would result in a lower valuation, it could cause the carrying value of the reporting unit to exceed its fair value and thus require the Company to record goodwill impairment. The Company elected a qualitative assessment for our September 30, 2022 and 2021 goodwill impairment testing and determined for both assessments as of September 30, 2022 and 2021, that it was more likely than not that the fair value of the reporting units were greater than their carrying amounts, and as a result, no impairment for goodwill was required for the years then ended. Identifiable intangible assets consist of trade names, developed technologies, including design libraries, and customer relationships related to the acquisitions the Company has completed. The Company has determined that trade names have an indefinite life, as there are no economic, contractual or other factors that limit their useful lives and they are expected to generate value as long as the trade name is utilized by the Company, and therefore, are not subject to amortization. Developed technologies and customer relationships are amortized over their estimated useful lives of ten years and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Financial statement risk exists to the extent identifiable intangibles become impaired due to the decrease in the fair value of the identifiable assets. The Company elected qualitative assessments for our September 30, 2022 and 2021 identifiable intangible assets impairment testing and determined for both assessments as of September 30, 2022 and 2021, that it was more likely than not that the fair values of the Company’s identifiable intangible assets were greater than their carrying amounts, and as a result, no impairment for identifiable intangible assets was required for the years then ended. Software Development and Cloud Computing Arrangement Implementation Costs The Company capitalizes cost for software developed or obtained for internal use, including domain names and internally developed software, and amortizes them over their estimated useful life, which is generally three to five years . The Company begins to capitalize costs incurred for computer software during the application development stage, as long as it is probable that the project will be completed and the software will be used for its intended purpose. Capitalization ceases when a software project is substantially complete and ready for its intended use. The Company capitalizes qualifying implementation costs under cloud computing arrangements (“CCA”). Capitalization ceases once the software is ready for its intended use. The capitalized CCA implementation cost is allocated between current and long term based on the expected amortization to be recognized within one year . There was no current balance as of September 30, 2022. The long-term balance of the CCA implementation costs was $ 1.7 million as of September 30, 2022 and is included in other assets on the accompanying consolidated balance sheets. There were no capitalized CCA implementation costs as of September 30, 2021. Sales Tax The Company collects sales tax on all of the Company’s sales to nonexempt customers and remits the entire amount to the states that imposed the sales tax. The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenues and cost of sales. 89 Table of Contents Revenue Recognition Revenue is recognized from the sale of products and commissions earned on new and pre-owned boats (including used, brokerage, consignment and wholesale) when ownership is transferred to the customer, which is generally upon acceptance or delivery. At the time of acceptance or delivery, the customer is able to direct the use of, and obtain substantially all of the benefits of the asset. We are the principal with respect to revenue from new, pre-owned and consignment sales and such revenue is recorded at the gross sales price. With respect to brokerage transactions, we are acting as an agent in the transaction, therefore the fee or commission is recorded on a net basis. Revenue from parts and accessories sold directly to a customer (not on a repair order) are recognized when control of the item is transferred to the customer, which is typically upon shipment. Revenue from parts and service operations (boat maintenance and repairs) are recorded over time as services are performed. Satisfaction of this performance obligation creates an asset with no alternative use for which an enforceable right to payment for performance to date exists within our contractual agreements. Each boat maintenance and repair service is a single performance obligation that includes both the parts and labor associated with the service. Payment for boat maintenance and repairs is typically due upon the completion of the service, which is generally completed within a period of one year or less from contract inception. The Company recorded contract assets in prepaid expenses and other current assets of $ 3.7 million and $ 2.3 million as of September 30, 2022 and 2021, respectively. Certain parts and service transactions require the Company to perform shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to delivery). They are considered fulfillment activities and are included in selling, general, and administrative expenses . Revenue from storage and marina operations is recognized on a straight-line basis over the term of the contract as services are completed. Revenue from arranging financing, insurance and extended warranty contracts to customers through various third-party financial institutions and insurance companies is recognized when the related boats are sold. We do not directly finance our customers’ boat, motor or trailer purchases. We are acting as an agent in the transaction, therefore the commissions are recorded on a net basis. Subject to our agreements and in the event of early cancellation, prepayment or default of such loans or insurance contracts by the customer, we may be assessed a chargeback for a portion of the commission paid by the third-party financial institutions and insurance companies. We reserve for these chargebacks based on our historical experience with repayments or defaults. Chargebacks were not material to the consolidated financial statements for the years ended September 30, 2022, 2021 and 2020. Contract liabilities consist of deferred revenues from marina and storage operations and customer deposits and are classified in customer deposits in the Company’s consolidated balance sheets. Deposits received from customers are recorded as a liability until the related sales orders have been fulfilled by us and control of the vessel is transferred to the customer. The activity in customer deposits for the years ended September 30, 2022 and 2021 is as follows: ($ in thousands) 2022 2021 Beginning contract liability $ 46,610 $ 17,280 Revenue recognized from contract liabilities included in the beginning balance ( 43,777 ) ( 16,873 ) Increases due to business combinations and cash received, net of amounts recognized in revenue during the period 62,627 46,203 Ending contract liability $ 65,460 $ 46,610 The following table sets forth percentages on the timing of revenue recognition for the years ended September 30, 2022, 2021 and 2020: 2022 2021 2020 Goods and services transferred at a point in time 94.4 % 93.9 % 95.5 % Goods and services transferred over time 5.6 % 6.1 % 4.5 % Total Revenue 100.0 % 100.0 % 100.0 % 90 Table of Contents Advertising Costs We expense advertising and promotional costs as incurred and include them in selling, general, and administrative expenses in the accompanying consolidated statements of operations. Pursuant to ASC 606, we net amounts received under our co-op assistance programs from our manufacturers against the related advertising expenses. Total advertising costs for the years ended September 30, 2022, 2021 and 2020, were $ 13.4 million, $ 4.5 million and $ 5.4 million, which are net of related co-op assistance of $ 1.8 million, $ 0.7 million and $ 0.7 million, respectively. Equity-Based Compensation Equity-based compensation plans are accounted for following the provisions of FASB Accounting Standards Codification 718, ‘‘ Compensation — Stock Compensation ’’ (‘‘ASC 718’’). Equity-based awards are designed to reward employees for their long-term contributions to the Company and to provide incentives for them to remain with the Company. Valuation models and the quoted market price of our common stock are used to value all equity-based compensation. Compensation for awards is measured at fair value on the grant date based on the number of shares expected to vest. The Company recognizes compensation cost for all awards on a graded basis over the requisite service period of the award. Income Taxes OneWater Inc is a corporation and as a result, is subject to U.S. federal, state and local income taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the consolidated financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the book value and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the enactment date occurs. We recognize deferred tax assets to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. OneWater LLC is treated as a partnership for U.S. federal income tax purposes and therefore does not pay U.S. federal income tax on its taxable income. Instead, the OneWater LLC members are liable for U.S. federal income tax on their respective shares of the Company’s taxable income reported on the members’ U.S. federal income tax returns. When there are situations with uncertainty as to the timing of the deduction, the amount of the deduction, or the validity of the deduction, the Company adjusts the financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Positions that meet this criterion are measured using the largest benefit that is more than 50% likely to be realized. Interest and penalties related to income taxes are included in the benefit (provision) for income taxes in the consolidated statements of operations. Loan costs The Company accounts for its loan costs in accordance with FASB Accounting Standards Update (“ASU”) No. 2015-03, ‘‘ Interest-Imputation Subtopic (835-30): Simplifying the Presentation of Debt Issuance Costs ’’, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction of the carrying amount of that debt liability. Loan costs are amortized to interest expense on a straight-line basis over the life of the loan, which approximates the effective interest method. 91 Table of Contents Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ materially from these estimates. Estimates and assumptions are reviewed periodically, and the effects of any revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, those relating to inventory mark downs, certain assumptions related to intangible and long-lived assets and valuation of contingent consideration. Segment Information Effective August 9, 2022, our reportable segments changed as a result of the Company’s acquisition of Ocean Bio-Chem, Inc., and Star Brite Europe, Inc (collectively “Ocean Bio-Chem”), which changed management’s reporting structure and operating activities. We now report our operations through two new reportable segments: Dealerships and Distribution. The Dealership segment engages in the sale of new and pre-owned boats, arranges financing and insurance products, performs repairs and maintenance services, offers marine related parts and accessories and offers slip and storage accommodations in certain locations. The Distribution segment engages in the manufacturing, assembly and distribution primarily of marine related products to distributors, big box retailers and online retailers through a network of warehouse and distribution centers. Each reporting segment has discrete financial information and is regularly reviewed by the Company’s chief operating decision maker (“CODM”) to assess performance and allocate resources. The Company has identified its Chief Executive Officer as its CODM. The change in reportable segments had no impact on the Company’s previously reported historical consolidated financial statements. 3. Recently Adopted Accounting Standards In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes” . The pronouncement is effective for a public company’s annual reporting periods beginning after December 15, 2020, and interim periods within those annual periods. The Company adopted the new guidance as of October 1, 2021. The adoption of the guidance did not have an impact on the consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform” , which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. The guidance is effective upon issuance and expires on December 31, 2022. The Company has assessed the transactions involving LIBOR and has transitioned away from LIBOR as part of our agreements. Standards Issued But Not Yet Adopted In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” , which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The pronouncement is effective for a public company’s annual reporting periods beginning after December 15, 2022, and interim periods within those annual periods. The Company is currently evaluating the impact that this standard will have on the consolidated financial statements. The Company plans to adopt the pronouncement in fiscal year 2024. Other than as noted above, there are no new accounting pronouncements that are expected to have a material effect on our consolidated financial statements. 92 Table of Contents 4. Acquisitions In the years ended September 30, 2022 and 2021, the Company completed acquisitions of multiple businesses in the United States. No acquisitions were completed during the year ended September 30, 2020. The results of operations of acquisitions are included in the accompanying consolidated financial statements from the acquisition date. The purchase price of acquisitions was allocated to identifiable tangible assets and intangible assets acquired based on their estimated fair values at the acquisition date, with the excess being allocated to goodwill. Under the acquisition method of accounting, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on the information currently available. Any changes to the value of identifiable intangible assets will be reclassified from goodwill upon the completion of the valuations. Fiscal Year 2022 For the year ended September 30, 2022, the Company completed the following transactions: • On October 1, 2021, Naples Boat Mart, a retail marine dealership with one location in Florida • On November 30, 2021, T-H Marine Supplies, LLC (“T-H Marine”), a leading provider of branded marine parts and accessories for original equipment manufacturers (“OEMs”) and the aftermarket, with locations in Alabama, Florida, Illinois, Indiana, Oklahoma and Texas • On December 1, 2021, Norfolk Marine Company, a retail marine dealership with one location in Virginia • On December 31, 2021, a majority interest in Quality Boats, a retail marine dealership with three locations in Florida. The sellers retained a 20 % economic interest in Quality Boats. The Company has the exclusive right, but not obligation, to acquire the remaining 20 % interest at any time before January 1, 2027. • On February 1, 2022, JIF Marine, a leading supplier of stainless steel ladders, dock products and other accessories which is based in Tennessee • On March 1, 2022, YakGear, a leading supplier of kayak equipment, paddle sports accessories and boat mounting accessories which is based in Texas • On April 1, 2022, Denison Yachting, a leader in yacht and superyacht sales as well as ancillary yacht services, with 20 retail locations in 7 states • On August 9, 2022, Ocean Bio-Chem, a leading supplier and distributor of appearance, cleaning, and maintenance products for the marine industry and the automotive, powersports, recreational vehicles, and outdoor power equipment markets with locations in Alabama and Florida. Consideration paid for the consummated acquisitions was $ 490.6 million with $ 459.5 million paid at closing (net of cash acquired), $ 1.1 million financed through a note payable to the sellers bearing interest at a rate of 4.0 % per year, estimated payments of $ 15.3 million in contingent consideration and the remaining $ 14.6 million with the issuance of shares of Class A common stock. The notes are payable in one lump sum on December 1, 2024, with interest payments due quarterly. The estimated payments of contingent consideration are part of multiple earnouts varying from the achievement of certain post-acquisition increases in adjusted EBITDA to the generation of acquisition leads for the Company. The acquisition contingent consideration was developed using weighted average projections based on the Company’s historical experience, current forecasts for the industry and current expectations of the ability to generate viable acquisition leads. The minimum payout on acquisition contingent consideration is $ 5.9 million and the maximum payout is $ 24.7 million. The table below summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, including the goodwill recorded as a result of the transactions: Fiscal year 2022 Acquisitions: Summary of Assets Acquired and Liabilities Assumed ($ in thousands) T-H Marine Quality Boats Denison Yachting Ocean Bio-Chem Other Acquisitions Total Acquisitions Accounts receivable $ 8,955 $ - $ 654 $ 14,989 $ 1,123 $ 25,721 Inventories 19,856 5,937 1,981 24,362 9,618 61,754 Prepaid expenses 1,547 47 2,053 1,431 338 5,416 Property and equipment 3,896 803 293 32,037 1,227 38,256 Deposits - - 126 - 13 139 Operating lease right-of-use assets 5,960 11,877 1,221 762 7,375 27,195 Identifiable intangible assets 105,500 31,700 16,600 59,300 11,332 224,432 Goodwill 51,694 78,682 29,144 35,270 15,307 210,097 Accounts payable ( 3,876 ) - ( 80 ) ( 3,654 ) ( 471 ) ( 8,081 ) Accrued expenses ( 1,697 ) - ( 252 ) ( 1,817 ) ( 553 ) ( 4,319 ) Customer deposits ( 394 ) ( 5,047 ) ( 5,524 ) ( 176 ) ( 3,307 ) ( 14,448 ) Deferred tax liabilities - - - ( 20,141 ) ( 751 ) ( 20,892 ) Long-term debt - - - ( 8,150 ) - ( 8,150 ) Operating lease liabilities ( 5,960 ) ( 11,877 ) ( 1,221 ) ( 762 ) ( 7,375 ) ( 27,195 ) Aggregate acquisition date fair value $ 185,481 $ 112,122 $ 44,995 $ 133,451 $ 33,876 $ 509,925 Consideration transferred 185,481 92,811 44,995 135,281 33,876 492,444 Cash acquired - - - ( 1,829 ) - ( 1,829 ) Fair value of non-controlling interests - 19,311 - - - 19,311 Aggregate acquisition date fair values $ 185,481 $ 112,122 $ 44,995 $ 133,451 $ 33,876 $ 509,925 93 Table of Contents The fair value of the non-controlling interest of Quality Boats as of the acquisition date was estimated using the discounted cash flow method and market multiple method. Significant inputs to the discounted cash flows included estimated future revenues and discount rates. Significant inputs to the market multiple method include the peer public company group and the financial performance of reporting units related to the peer public company group. The fair values of the developed technology and trade name intangible assets as of the acquisition date were determined using the relief from royalty model. The fair values of the customer relationship intangible assets as of the acquisition date were determined using the discounted cash flow method. The acquisitions of Denison Yachting, Ocean Bio-Chem., and Star Brite Europe, Inc. are preliminary. The valuation of the identifiable intangible assets for Ocean Bio-Chem. and Star Brite Europe, Inc. are preliminary pending receipt of final valuation analyses. The valuation of tangible assets and assumed liabilities are preliminary for Denison Yachting, Ocean Bio-Chem., and Star Brite Europe, Inc. as the acquisitions are subject to certain customary closing and post-closing adjustments. Included in our results for the year ended September 30, 2022, the acquisitions contributed $ 275.3 million to our consolidated revenue and $ 41.1 million to our income before income tax expense. Costs related to acquisitions are included in transaction costs and primarily relate to legal, accounting, and valuation fees, which are charged directly to operations in the accompanying consolidated statements of operations as incurred in the amount of $ 7.5 million for the year ended September 30, 2022. Fiscal Year 2021 For the year ended September 30, 2021, the Company completed the following transactions: • On December 1, 2020, Tom George Yacht Group a retail marine dealership with two locations in Florida • December 31, 2020, Walker Marine Group a retail marine dealership with five locations in Florida. • On December 31, 2020, Rosioli Yachting Center, a full-service marina and yachting facility, with one location in Florida • On August 1, 2021, Stone Harbor Marina a retail marine dealership with one location in New Jersey • On September 1, 2021, PartsVu, an online marketplace for OEM marine parts, electronics and accessories with a warehouse in Florida Consideration paid for the consummated acquisitions was $ 122.1 million with $ 107.5 million paid at closing (net of cash acquired), $ 2.1 million financed through a note payable to the sellers, estimated payments of $ 9.2 million in contingent consideration, $ 1.9 million in accrued purchase consideration and the remaining $ 1.5 million with the issuance of shares of Class A common stock. The estimated payments of contingent consideration are part of multiple earnouts subject to the achievement of certain post-acquisition increases in adjusted EBITDA. The acquisition contingent consideration was developed using weighted average projections based on the Company’s historical experience with acquisitions as well as current forecasts for the industry. The minimum payout on acquisition contingent consideration is $ 0.2 million and the maximum payout is unlimited. The table below summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, including the goodwill recorded as a result of the transactions: Fiscal year 2021 Acquisitions: ($ in thousands) Walker Marine Group Roscioli Yachting Center Other Acquisitions Total Acquisitions Accounts receivable $ 129 $ - $ 390 $ 519 Inventories 8,481 87 10,476 19,044 Prepaid expenses 39 1 180 220 Property and equipment 503 41,300 700 42,503 Identifiable intangible assets 8,520 1,530 13,940 23,990 Goodwill 26,927 2,993 25,512 55,432 Accounts payable ( 213 ) ( 180 ) - ( 393 ) Accrued expenses - ( 185 ) ( 47 ) ( 232 ) Customer deposits ( 3,033 ) - ( 2,248 ) ( 5,281 ) Notes payable – floor plan ( 7,563 ) - ( 6,134 ) ( 13,697 ) Aggregate acquisition date fair value $ 33,790 $ 45,546 $ 42,769 $ 122,105 Consideration transferred 33,790 45,546 42,769 122,105 Aggregate acquisition date fair values $ 33,790 $ 45,546 $ 42,769 $ 122,105 The 2022 and 2021 acquisitions have resulted in the recording of goodwill that is expected to be deductible for tax purposes of $ 144.0 million and $ 55.4 million for the years ended September 30, 2022 and 2021, respectively. The following unaudited pro forma results of operations for the years ended September 30, 2022, 2021 and 2020 assumes that all acquisitions were completed on October 1, 2019. ($ in thousands) 2022 2021 2020 Pro forma revenues $ 1,885,896 $ 1,755,678 $ 1,514,417 Pro forma net income $ 161,902 $ 165,198 $ 80,866 94 Table of Contents 5. Accounts Receivable Accounts receivable primarily consists of trade accounts receivable, contracts in transit and manufacturer receivables. Trade receivables include amounts due from customers on the sale of boats, parts, service, and storage. Contracts in transit represent anticipated funding from the loan agreement customers execute at the dealership when they purchase their new or pre-owned boat. These finance contracts are typically funded within 30 days. Amounts due from manufacturers represent receivables for various manufacturer incentive programs and parts and service work performed pursuant to the manufacturers’ warranties. The allowance for credit losses is estimated based on past collection experience, current conditions and reasonable and supportable forecasts. The annual activity for charges and subsequent recoveries is immaterial. Accounts receivable consisted of the following: ($ in thousands) September 30, 2022 September 30, 2021 Trade accounts receivable $ 37,359 $ 6,083 Contracts in transit 14,543 16,666 Manufacturer receivable 7,224 5,887 Total accounts receivable 59,126 28,636 Less – allowance for credit losses ( 1,166 ) ( 107 ) Total accounts receivable, net $ 57,960 $ 28,529 6. Inventories Inventories consisted of the following at: ($ in thousands) September 30, 2022 September 30, 2021 New vessels $ 243,090 $ 105,625 Pre-owned vessels 51,607 22,906 Parts and accessories, work in process, net 78,262 15,349 Total inventories, net $ 372,959 $ 143,880 7. Property and Equipment Property and equipment, net consisted of the following: ($ in thousands) September 30, 2022 September 30, 2021 Land $ 17,668 $ 16,027 Buildings and improvements 42,957 21,379 Leasehold improvements 19,738 14,157 Machinery and equipment 22,418 8,868 Office equipment 12,129 8,540 Company vehicles 12,902 8,107 Construction in progress 4,020 3,767 Total property and equipment 131,832 80,845 Less accumulated depreciation ( 22,119 ) ( 13,731 ) Total property and equipment, net $ 109,713 $ 67,114 For the years ended September 30, 2022, 2021 and 2020, depreciation expense totaled $ 8.8 million, $ 5.4 million and $ 3.2 million, respectively. 95 Table of Contents 8. Goodwill and Intangible Assets Our acquisitions have resulted in the recording of goodwill and other identifiable intangible assets. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible assets consist of internally developed software, domain names and other identifiable intangible assets such as, trade names, developed technologies, including design libraries, and customer relationships related to the acquisitions the Company has completed. The changes in goodwill and intangible assets are as follows: ($ in thousands) Goodwill Trade Names Developed technologies Customer Relationships Domain Names Internally Developed Software Total Intangible Assets, net Unamortized Unamortized Amortized Amortized Amortized Amortized Net balance as of September 30, 2020 $ 113,059 $ 61,304 $ - $ - $ - $ - $ 61,304 Acquisitions during the year ended September 30, 2021 55,432 23,990 - - - - 23,990 Net balance as of September 30, 2021 168,491 85,294 - - - - 85,294 Acquisitions during the year ended September 30, 2022 210,097 101,485 15,457 107,490 2,074 2,301 228,807 Accumulated amortization for the year ended September 30, 2022 - - ( 1,183 ) ( 6,260 ) ( 104 ) ( 83 ) ( 7,630 ) Net balance as of September 30, 2022 $ 378,588 186,779 $ 14,274 $ 101,230 $ 1,970 $ 2,218 $ 306,471 Amortization expense was $ 7.6 million for the year ended September 30, 2022 and is recorded in depreciation and amortization expense in the consolidated statements of operations. No amortization expense was recorded for the years ended September 30, 2021 and 2020. For acquisitions during the year ended September 30, 2022, the weighted average useful lives of developed technologies and customer relationships are 10 years and domain names and internally developed software are 5 years. The following table summarizes the expected amortization expense for the fiscal years 2023 through 2027 and thereafter ($ in thousands): 2023 $ 13,170 2024 13,170 2025 13,170 2026 13,170 2027 12,951 Thereafter 54,061 $ 119,692 As of September 30, 2022, the carrying value of goodwill totaled approximately $ 378.6 million, of which $ 280.0 million was related to our Dealerships reporting segment and $ 98.6 million was related to our Distribution reporting segment. See Note 2 for more information about our annual impairment tests of goodwill and identifiable intangible assets. 9. Other Payables and Accrued Expenses Other payables and accrued expenses consisted of the following: ($ in thousands) September 30, 2022 September 30, 2021 Payroll accrual $ 20,273 $ 17,699 Sales tax payable 4,456 4,251 Other payables and accrued expenses 12,467 5,194 Acquisition contingent consideration 15,897 344 Accrued interest 2,144 177 Total other payables and accrued expenses $ 55,237 $ 27,665 10. Notes Payable — Floor Plan The Company maintains an ongoing wholesale marine products inventory financing program with a syndicate of banks. The program is administered by Wells Fargo Commercial Distribution Finance, LLC (“Wells Fargo”). On December 29, 2021, the Company and certain of its subsidiaries entered into the Seventh Amended and Restated Inventory Financing Agreement (as amended, the “Inventory Financing Facility) with Wells Fargo and the other financial institutions party thereto to increase the maximum borrowing amount available to $ 500.0 million. The Inventory Financing Facility expires on December 1, 2023. The outstanding balance of the facility was $ 267.1 million and $ 114.2 million, as of September 30, 2022 and 2021, respectively. 96 Table of Contents Effective October 1, 2021, interest on new boats and for rental units is calculated using the Adjusted 30-Day Average SOFR (as defined in the Inventory Financing Facility) (“SOFR”) plus an applicable margin of 2.75 % to 5.00 % depending on the age of the inventory. Interest on pre-owned boats in calculated at the new boat rate plus 0.25 %. Wells Fargo will finance 100.0 % of the vendor invoice price for new boats, engines, and trailers. As of September 30, 2022 the interest rate on the Inventory Financing Facility ranged from 5.33 % to 7.58 % for new inventory and 5.58 % to 7.83 % for pre-owned inventory. As of September 30, 2021 the interest rate on the Inventory Financing Facility was calculated under the legacy London Inter-Bank Offering Rate and ranged from 3.08 % to 5.33 % for new inventory and 3.33 % to 5.58 % for pre-owned inventory. Borrowing capacity available at September 30, 2022 and September 30, 2021 was $ 232.9 million and $ 278.3 million, respectively. The Inventory Financing Facility has certain financial and non-financial covenants as specified in the agreement. The financial covenants include requirements to comply with a maximum funded debt to EBITDA ratio (as defined in the Inventory Financing Facility). In addition, certain non-financial covenants could restrict the Company’s ability to sell assets (excluding inventory in the normal course of business), engage in certain mergers and acquisitions, incur additional debt and pay cash dividends or distributions, among others. The Company was in compliance with all covenants at September 30, 2022. The collateral for the Inventory Financing Facility consists primarily of our inventory that is financed through the Inventory Financing Facility and related assets, including accounts receivable, bank accounts and proceeds of the foregoing, and excludes the collateral that underlies the term note payable to Truist Bank. 11. Long-term Debt and Line of Credit On August 9, 2022, the Company and certain of its subsidiaries entered into the Amended and Restated Credit Agreement (the “A&R Credit Facility”) with Truist Bank. The A&R Credit Facility provides for a $ 65.0 million revolving credit facility (the “A&R Revolving Facility”) that may be used for revolving credit loans (including up to $ 5.0 million in swingline loans and up to $ 5.0 million in letters of credit) and a $ 445.0 million term loan (the “A&R Term Loan”). Subject to certain conditions, the available amount under the revolving credit facility and term loans may be increased by $ 125.0 million in the aggregate. The A&R Credit Facility bears interest at a rate that is equal to Term SOFR plus an applicable margin ranging from 1.75 % to 2.75 % based on certain consolidated leverage ratio measures. The A&R Revolving Facility matures on August 9, 2027 . The A&R Term Loan is repayable in installments beginning December 31, 2022, with the remainder due on August 9, 2027 . The A&R Credit Facility is collateralized by certain real and personal property (including certain capital stock) of the Company and its subsidiaries. The collateral does not include inventory and certain other assets of the Company’s subsidiaries financed under the Inventory Financing Facility. The A&R Credit Facility is subject to certain financial covenants related to the maintenance of a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio. The A&R Credit Facility also contains non-financial covenants and restrictive provisions that, among other things, limit the ability of the Company to incur additional debt, transfer or dispose of all of its assets, make certain investments, loans or payments and engage in certain transactions with affiliates. The Company was in compliance with all covenants at September 30, 2022. On November 30, 2021, the Company and certain of its subsidiaries entered into Incremental Amendment No. 2 (the “Second Amendment”) to the Credit Facility (as defined below) with Truist Bank. The Second Amendment amends the Credit Facility to, among other things, provide for an incremental term loan (the “Incremental Term Loan”) in an aggregate principal amount equal to $ 200.0 million which will be added to, and constitute part of, the existing $ 110.0 million term loan and will be on the same terms applicable to the existing term loan under the Credit Facility. Additionally, the Second Amendment further provides a $ 20.0 million increase in the revolving commitment, which will be added to, and constitute part of, the existing $ 30.0 revolving commitment. On February 2, 2021, the Company entered into Incremental Amendment No. 1 (the “First Amendment”) to Amend the Credit Facility (as defined below), to among other things, provide for an incremental term loan in an aggregate principal amount equal to $ 30.0 million, which will be added to, and constitute a part of, the existing $ 80.0 million term loan. The First Amendment was on the same terms applicable to the existing term loan. On July 22, 2020, the Company entered into a Credit Agreement (the “Credit Facility”), with Truist Bank. The Credit Facility provides for a $ 30.0 million revolving credit facility that may be used for revolving credit loans (including up to $ 5.0 million in swingline loans) and up to $ 5.0 million in letters of credit from time to time, and a $ 80.0 million term loan. Subject to certain conditions, the available amount under the revolving credit facility and the term loans may be increased by $ 50.0 million in the aggregate. The Credit Facility bears interest at a rate that is equal to LIBOR for such interest period plus an applicable margin of up to 3.00 %, subject to step-downs to be determined based on the consolidated leverage ratio. The revolving credit facility is subject to an unused line fee of up to 0.40 %, subject to step-downs to be determined based on the consolidated leverage ratio. 97 Table of Contents Long-term debt consisted of the following at: ($ in thousands) September 30, 2022 September 30, 2021 Term note payable to Truist Bank, secured and bearing interest at 5.31 % at September 30, 2022 and 2.75 % at September 30, 2021. The note requires quarterly principal payments commencing on December 31, 2022 and maturing with a full repayment on August 9, 2027 $ 445,000 $ 105,875 Revolving note payable for an amount up to $ 65.0 million to Truist Bank - - Notes payable to commercial vehicle lenders secured by the value of the vehicles bearing interest at rates ranging from 0.0 % to 8.9 % per annum. The notes require monthly installment payments of principal and interest ranging from $ 100 to $ 5,600 through October 2028 4,173 3,248 Note payable to Tom George Yacht Group, unsecured and bearing interest at 5.5 % per annum. The note requires monthly interest payments, with a balloon payment of principal due on December 1, 2023 2,056 2,056 Note payable to Norfolk Marine Company, unsecured and bearing interest at 4.0 % per annum. The note requires quarterly interest payments, with a balloon payment of principal due on December 1, 2024 . 1,126 - Note payable to Central Marine Services, Inc., unsecured and bearing interest at 5.5 % per annum. The note was repaid in full on February 1, 2022 . - 2,164 Note payable to Ocean Blue Yacht Sales, unsecured and bearing interest at 5.0 % per annum. The note was repaid in full on February 1, 2022 . - 1,920 Note payable to Slalom Shop, LLC, unsecured and bearing interest at 5.0 % per annum. The note was repaid in full on December 1, 2021 . - 1,271 Total debt outstanding 452,355 116,534 Less current portion (net of current debt issuance costs) ( 21,642 ) ( 11,366 ) Less unamortized portion of debt issuance costs ( 9,551 ) ( 2,094 ) Long-term debt, net of current portion and unamortized debt issuance costs $ 421,162 $ 103,074 98 Table of Contents Principal repayment requirements of long-term debt at September 30, 2022 are as follows (in thousands): Year ending September 30, 2023 $ 23,671 2024 25,506 2025 35,433 2026 45,014 2027 322,731 Total principal payments $ 452,355 Debt issuance costs are amortized on a straight-line basis over the life of the loan, which approximates the effective interest method. During the fiscal year ended 2022 and 2021, the Company capitalized loan costs of $ 9.1 million and $ 0.7 million, respectively, and had accumulated amortization of $ 1.9 million and $ 0.8 million as of September 30, 2022 and 2021, respectively. In connection with entering into the A&R Credit Facility, the Company wrote off unamortized debt issuance cost of $ 0.4 million which was included in loss on extinguishment of debt in the Consolidated Statements of Operations for the year ended September 30, 2022. In connection with the prepayment of the Term and Revolver Credit Facility with Goldman Sachs Specialty Lending Group, L.P., the Company wrote off unamortized debt issuance costs of $ 2.4 million which was included in loss on extinguishment of debt in the Consolidated Statement of Operations for the year ended September 30, 2020. Amortization for the years ended September 30, 2022, 2021 and 2020 amounted to $ 1.3 million, $ 0.7 million and $ 0.4 million, respectively, and is included in interest expense. As of September 30, 2022, the Company had $ 0.4 million in letters of credit outstanding under the A&R Revolving Facility. 12. Stockholders’ Equity Equity-Based Compensation We maintain the OneWater Marine Inc. Omnibus Incentive Plan (the “LTIP”) to incentivize individuals providing services to OneWater Inc and its subsidiaries and affiliates. The LTIP provides for the grant, from time to time, at the discretion of the board of directors of OneWater Marine Inc. (the “Board”) or a committee thereof, of (1) stock options, (2) stock appreciation rights, (3) restricted stock, (4) restricted stock units, (5) stock awards, (6) dividend equivalents, (7) other stock-based awards, (8) cash awards, (9) substitute awards and (10) performance awards. The total number of shares reserved for issuance under the LTIP that may be issued pursuant to incentive stock options (which generally are stock options that meet the requirements of Section 422 of the Code) is 1,564,156 . The LTIP is and will continue to be administered by the Board, except to the extent the Board elects a committee of directors to administer the LTIP. Class A common stock subject to an award that expires or is cancelled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares (including forfeiture of restricted stock awards) and shares withheld to pay the exercise price of, or to satisfy the withholding obligations with respect to, an award will again be available for delivery pursuant to other awards under the LTIP. 2022 Awards During the fiscal year ended September 30, 2022, the Board approved the grant of 121,470 time-based restricted stock units. Of this amount, 14,186 restricted stock units fully vested on September 30, 2022, 12,000 restricted stock units fully vest on April 20, 2023 and the remaining 95,284 restricted stock units vest in three equal annual installments commencing on September 30, 2022. During the fiscal year ended September 30, 2022, the Board approved the grant of 52,227 performance-based restricted stock units, which represents 100 % of the target award. Performance-based restricted stock units provide an opportunity for the recipient to receive a number of shares of our common stock based on our performance goals. A performance-based restricted stock unit equals one share of common stock to the Company. As of September 30, 2022, the Company fully achieved the performance targets at 200 % for the 2022 awards. 99 Table of Contents Compensation cost for time-based restricted stock units is based on the closing price of our common stock on the date immediately preceding the grant and is recognized on a graded basis over the applicable vesting periods. Compensation cost for performance share units is based on the closing price of our common stock on the date immediately preceding the grant and the ultimate performance level achieved and is recognized on a graded basis over the three-year vesting period. The Company recognized $ 9.8 million, $ 5.7 million and $ 1.6 million of compensation expense for the fiscal years ended September 30, 2022, 2021 and 2020, respectively, which includes $ 5.4 million, $ 2.6 million, and $ 0.5 million of compensation expense for the fiscal years ended September 30, 2022, 2021 and 2020, respectively, for performance share units . The following table further summarizes activity related to restricted stock units for the years ended September 30, 2022 and 2021: Restricted Stock Unit Awards Number of Shares Weighted Average Grant Date Fair Value ($) Unvested at September 30, 2020 301,643 $ 15.78 Awarded 348,927 27.37 Vested ( 105,476 ) 18.47 Forfeited - - Unvested at September 30, 2021 545,094 22.68 Awarded 225,924 40.01 Vested ( 211,225 ) 27.10 Forfeited - - Unvested at September 30, 2022 559,793 $ 28.01 As of September 30, 2022, the total unrecognized compensation expense related to outstanding equity awards was $ 6.3 million, which the Company expects to recognize over a weighted-average period of 1.3 years. We issue shares of our Class A common stock upon the vesting of performance-based restricted stock units and time-based restricted stock units. These shares are issued from our authorized and not outstanding common stock. In addition, in connection with the vesting of restricted stock units, we repurchase a portion of shares equal to the amount of employee income tax withholding. Earnings Per Share Basic and diluted earnings per share of Class A common stock is computed by dividing net income attributable to OneWater Inc by the weighted-average number of shares of Class A common stock outstanding during the same period. For the year ended September 30, 2020, earnings per share is calculated for the period from February 11, 2020 through September 30, 2020, the period following the IPO. Diluted earnings per share is computed by giving effect to all potentially dilutive shares. There were no shares of Class A or Class B common stock outstanding prior to February 11, 2020, therefore no earnings per share information has been presented for any period prior to that date. 100 Table of Contents The following table sets forth the calculation of earnings per share for the years ended September 30, 2022, 2021, and 2020 (in thousands, except per share data): Earnings per share: 2022 2021 2020 Numerator: Net income attributable to OneWater Inc $ 130,944 $ 79,059 $ 17,425 Denominator: Weighted-average number of unrestricted outstanding common shares used to calculate basic net income per share 13,877 11,087 6,243 Effect of dilutive securities: Restricted stock units 457 272 44 Employee Stock Purchase Plan 3 - - Diluted weighted-average shares of Class A common stock outstanding used to calculate diluted net income per share 14,337 11,359 6,287 Earnings per share of Class A common stock – basic $ 9.44 $ 7.13 $ 2.79 Earnings per share of Class A common stock – diluted $ 9.13 $ 6.96 $ 2.77 On March 30, 2022, the Board approved an up to $ 50 million share repurchase program. During the year ended September 30, 2022, the Company repurchased and retired 10,134 shares of Class A common stock under the repurchase program for a purchase price of approximately $ 0.4 million. As of September 30, 2022, approximately $ 49.6 million remained available for future purchase under the repurchase program. The repurchase program does not have a predetermined expiration date. Shares of Class B common stock and unvested restricted stock units do not share in the income (losses) of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted earnings per share because the effect of including such potentially dilutive shares would have been antidilutive upon conversion (in thousands): Year Ended September 30, 2022 Year Ended September 30, 2021 Year Ended September 30, 2020 Class B common stock 1,527 3,931 8,324 Restricted stock units 219 232 220 1,746 4,163 8,544 Employee Stock Purchase Plan At the Company’s 2021 Annual Meeting of Stockholders (the “Annual Meeting”), held on February 23, 2021, the Company’s stockholders approved the OneWater Marine Inc. 2021 Employee Stock Purchase Plan (the “ESPP”), which was approved and adopted by the Board as of January 13, 2021 (the “Adoption Date”), subject to stockholder approval at the Annual Meeting. The effective date of the ESPP is February 23, 2021, and, unless earlier terminated, the ESPP will expire on the twentieth anniversary of the Adoption Date. The ESPP will be administered by the Board or by one or more committees to which the Board delegates such administration. 101 Table of Contents The ESPP enables eligible employees to purchase shares of the Company’s Class A common stock at a discount through participation in discrete offering periods. The ESPP is intended to qualify as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986, as amended. Up to a maximum of 299,505 shares of the Company’s Class A common stock may be issued under the ESPP, subject to certain adjustments as set forth in the ESPP. On the first day of each fiscal year during the term of the ESPP, beginning on October 1, and ending on (and including) September 30, the number of shares of Class A common stock that may be issued under the ESPP will increase by a number of shares equal to the least of (i) 1 % of the outstanding shares on the Adoption Date, or (ii) such lesser number of shares (including zero) that the administrator determines for purposes of the annual increase for that fiscal year. The number of shares of Class A common stock that may be granted to any single participant in any single option period will be subject to certain limitations set forth in the plan. The first offering period began on July 1, 2022 and the Company recorded equity-based compensation of $ 0.2 million during the year ended September 30, 2022. As of September 30, 2022, we had current liabilities of $ 0.5 million for future purchases of shares under the ESPP. No purchases have been made under the ESPP as of September 30, 2022. We used a Black-Scholes model to estimate the fair value of the options granted to purchase shares issued pursuant to the ESPP. Volatility is based on the historical volatility in our common stock. The risk-free rate for periods within the contractual term of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The following are the weighted-average assumptions used for the fiscal year ended September 30, 2022: 2022 Dividend yield 0.0 % Risk-free interest rate 2.5 % Volatility 57.4 % Expected life Six months Distributions During the fiscal years ended September 30, 2022, 2021 and 2020, the Company made distributions to OneWater Unit Holders for certain permitted tax payments. Dividends Dividends paid to holders of Class A common stock, distributions paid to OneWater Unit Holders and dividends payable to restricted stock unit holders are referred to herein collectively as “dividends”. Dividends declared are reported as a reduction of retained earnings. Dividends paid to OneWater Unit Holders are recorded as a reduction in non-controlling interest. On June 17, 2021, the Board declared a special cash dividend of $ 1.80 per share. The cash dividend of approximately $ 27.1 million was paid on July 19, 2021 to holders of Class A common stock and OneWater Unit Holders. Additionally, a $ 1.0 million cash dividend for restricted stock unit holders was accrued for payment to holders upon future vesting of restricted stock unit awards outstanding on the date the dividend was declared. During the year ended September 30, 2022, $ 0.2 million of the previously accrued balance was paid to restricted stock unit holders. The remaining $ 0.8 million is recorded in other payables and accrued expenses in the consolidated balance sheet as of September 30, 2022. Non-Controlling Interest In connection with the IPO, the former owners of Bosun’s Assets and Operations (“BAO”) and South Shore Assets and Operations (“SSAO”) received 290,466 and 306,199 shares of Class A common stock, respectively, for the surrender of their respective 25.0 % ownership interests. The results of operations for BAO and SSAO have been included in the Company’s consolidated financial statements and the former owners’ minority interests have been recorded, accordingly, through the date of the IPO. 102 Table of Contents As discussed in Note 1, OneWater Inc consolidates the financial results of OneWater LLC and its subsidiaries and reports a non-controlling interest related to the portion of OneWater LLC owned by the holders of OneWater LLC Units (the “OneWater Unit Holders”). OneWater Unit Holders may exchange their LLC Units, together with an equal number of shares of Class B common stock of OneWater Inc, for shares of Class A common Stock of OneWater Inc on a one -for- one basis or, at OneWater LLC’s election, cash. Changes in ownership interest in OneWater LLC, while OneWater Inc retains its controlling interest, will be accounted for as equity transactions. Future direct exchanges of OneWater LLC units will result in a change in ownership and reduce the amount recorded as a non-controlling interest and increase additional paid-in-capital. As of September 30, 2022, OneWater Inc owned 90.9 % of the economic interest of OneWater LLC with the OneWater Unit Holders owning the remaining 9.1 %. As discussed in Note 4, the Company acquired an 80 % economic interest in Quality Boats during the year ended September 30, 2022. The Company has the exclusive right, but not obligation, to acquire the remaining 20 % economic interest at any time before January 1, 2027. As of September 30, 2022, the Company has not exercised the right and maintains control of 80 % of the economic interest of Quality Boats. 13. Redeemable Preferred Interest in Subsidiary On September 1, 2016, the Company organized OWAO. As of September 30, 2016, OWAO was not funded. In conjunction with Goldman and Beekman, OneWater LLC contributed a majority of its assets, including subsidiaries operating all of its retail operations, to OWAO in return for 100,000 common units. Additionally, as a part of the transaction, OWAO issued 68,000 preferred units in OWAO to Goldman and Beekman. The preferred interest had a stated 10.0 % rate of return and there was no allocation of profits in excess of the stated return. The preferred interests were not convertible but may have been redeemed by the holder after 5 years or upon certain triggering events at face value plus accrued interest. The Company had classified the redeemable preferred interest as temporary equity in the consolidated balance sheets. The discount on the issuance of the redeemable preferred interest was being accreted to retained common interests as a dividend from the date of issuance through the fifth anniversary of the issuance date. On February 11, 2020, in connection with the IPO, OWAO used $ 89.2 million in cash to fully redeem the preferred interest in subsidiary held by Goldman and Beekman. 14. Retirement Plan The Company offers a 401(k) retirement plan to its full-time employees over the age of 21 . The Company currently makes discretionary matching contributions of 50.0 % for the first 4.0 % of employee salary deferrals. The Company made discretionary contributions of $ 2.2 million, $ 1.5 million and $ 0.8 million for the years ended September 30, 2022, 2021 and 2020, respectively. 15. Fair Value Measurements In determining fair value, the Company uses various valuation approaches including market, income and/or cost approaches. FASB standard ‘‘ Fair Value Measurements ’’ (Topic 820) establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are those that reflect the Company’s expectation of the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Assets utilizing Level 1 inputs include marketable securities that are actively traded. Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating fair value of non-financial assets and non-financial liabilities in purchase acquisitions, those used in assessing impairment of property, plant and equipment and other intangibles and those used in the reporting unit valuation in the annual goodwill impairment evaluation , contingent consideration and those used in the valuation of the warrant liability. 103 Table of Contents The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required in determining fair value is greatest for assets and liabilities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement. Fair value measurements can be volatile based on various factors that may or may not be within the Company’s control . The following tables summarize the Company’s financial assets and liabilities measured at fair value in the accompanying Consolidated Balance Sheets as of September 30, 2022 Level 1 Level 2 Level 3 Total ($ in thousands) Assets: Investment in Equity Securities $ 772 $ - $ - $ 772 Liabilities: Contingent Consideration - - 37,402 37,402 2021 Level 1 Level 2 Level 3 Total ($ in thousands) Liabilities: Contingent Consideration $ - $ - $ 12,072 $ 12,072 There were no transfers between the valuation hierarchy Levels 1, 2, and 3 for the fiscal years ended September 30, 2022, and 2021. We measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with the change in fair value included in other expense (income), net, in the Consolidated Statements of Operations. The fair value of equity investments is measured using quoted prices in its active markets. The investment in equity securities balance is recorded in other assets in the Consolidated Balance Sheets and consists of a $ 0.8 million investment in Forza X1, Inc. The portion of unrealized losses recognized related to equity securities still held as of September 30 consists of the following: ($ in thousands) Year Ended September 30, 2022 Net losses recognized during the period on equity securities $ 1,228 Less: net losses recognized during the period on equity securities sold during the period - Unrealized losses recognized during the reporting period on equity securities still held at the reporting date $ 1,228 There were no unrealized losses (gains) recognized during the years ended September 30, 2021 and 2020. 104 Table of Contents We estimate the fair value of contingent consideration using a probability-weighted discounted cash flow model based on forecasted future earnings or forecasted probabilities of producing acquisition leads. The acquisition contingent consideration liability has been accounted for based on inputs that are unobservable and significant to the overall fair value measurement (Level 3). The contingent consideration balance is recorded in other payables and accrued expenses and other long-term liabilities in the Consolidated Balance Sheets. Changes in fair value and net present value of contingent consideration are included in change in fair value of contingent consideration in the Consolidated Statements of Operations. The fair value of contingent consideration is reassessed on a quarterly basis. The following table sets forth the changes in fair value of our contingent consideration for the fiscal years ended September 30, 2022 and 2021: ($ in thousands) Contingent Consideration Balance as of September 30, 2020 $ 5,520 Additions from acquisitions 9,200 Settlement of contingent consideration ( 5,897 ) Change in fair value, including accretion 3,249 Balance as of September 30, 2021 12,072 Additions from acquisitions 15,321 Settlement of contingent consideration ( 371 ) Change in fair value, including accretion 10,380 Balance as of September 30, 2022 $ 37,402 We determined the carrying value of our cash and cash equivalents, accounts receivable, accounts payable, other payables and accrued expenses, floor plan notes payable, term note payable with Truist Bank, seller notes payable and company vehicle notes payable approximate their fair values because of the nature of their terms and current market rates of these instruments. 16. Income Taxes The Company is a corporation and, as a result is subject to U.S. federal, state and local income taxes. OneWater LLC is treated as a pass-through entity for U.S. federal tax purposes and in most state and local jurisdictions. As such, OneWater LLC’s members, including the Company, are liable for federal and state income taxes on their respective shares of OneWater LLC’s taxable income. The components of income tax expense are: ($ in thousands) Year Ended September 30, 2022 Year Ended September 30, 2021 Year Ended September 30, 2020 Current: Federal $ 31,986 $ 18,966 $ 4,384 State 5,492 3,108 1,436 Foreign 6 - - 37,484 22,074 5,820 Deferred: Federal 5,376 3,341 395 State 365 387 114 Foreign - - - 5,741 3,728 509 Income tax expense $ 43,225 $ 25,802 $ 6,329 105 Table of Contents A reconciliation of the United States statutory income tax rate to the Company’s effective income tax rate is as follows: For the Years Ended September 30, 2022 2021 2020 Statutory federal tax rate 21.0 % 21.0 % 21.0 % Income attributable to non-controlling interests and nontaxable income ( 2.3 ) ( 5.5 ) ( 12.4 ) State income taxes, net of federal benefit 2.9 2.4 2.3 Other 0.4 0.8 0.6 Effective income tax rate 22.0 % 18.7 % 11.5 % Details of the Company’s deferred tax assets and liabilities are as follows: ($ in thousands) September 30, 2022 September 30, 2021 Deferred tax assets: Investment in partnerships $ - $ 19,293 Tax receivable agreement 11,609 9,817 Other 3 - Total 11,612 29,110 Valuation allowance - - Total deferred tax assets 11,612 29,110 Deferred tax liabilities: Investment in partnerships $ 2,410 $ - Fixed assets 66 - Intangibles 703 - Total deferred tax liabilities 3,179 - Deferred tax assets, net $ 8,433 $ 29,110 The Company recognizes deferred tax assets to the extent it believes these assets are more-likely-than-not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax planning strategies and recent results of operations. Based on our cumulative earnings history and forecasted future sources of taxable income, we believe that we will fully realize our deferred tax assets in the future. The Company has not recorded a valuation allowance. As of September 30, 2022 and 2021, the Company has not recognized any uncertain tax positions, penalties, or interest as management has concluded that no such positions exist. The Company is subject to examination in the US Federal and certain state tax jurisdictions for the tax years beginning with the year ended September 30, 2020. In November 2022, the Company received notification that the IRS intends to commence an audit of the federal income tax return of OneWater LLC’s partnership for the tax year ended December 31, 2020. Audit outcomes and the timing of settlements of asserted income tax liabilities, if any, are subject to significant uncertainty. 106 Table of Contents Tax Receivable Agreement In connection with the IPO, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with certain of the owners of OneWater LLC. As of September 30, 2022 and 2021, our liability under the Tax Receivable Agreement was $ 46.4 million and $ 40.1 million, respectively, representing 85 % of the calculated net cash savings in U.S. federal, state and local income tax and franchise tax that OneWater Inc anticipates realizing in future years from the result of certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of OneWater Inc’s acquisition of OneWater LLC Units pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the amended and restated limited liability company agreement of OneWater LLC (the “OneWater LLC Agreement”)). The projection of future taxable income involves significant judgment. Actual taxable income may differ from our estimates, which could significantly impact our ability to make payments under the Tax Receivable Agreement. We have determined it is more-likely-than-not that we will be able to utilize all of our deferred tax assets subject to the Tax Receivable Agreement; therefore, we have recorded a liability under the Tax Receivable Agreement related to the tax savings we may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of OneWater Inc’s acquisition of OneWater LLC Units pursuant to an exercise of the Redemption Right or Call Right (each as defined in the OneWater LLC Agreement). If we determine the utilization of these deferred tax assets is not more-likely-than-not in the future, our estimate of amounts to be paid under the Tax Receivable Agreement would be reduced. In this scenario, the reduction of the liability under the Tax Receivable Agreement would result in a benefit to our consolidated statements of operations. 17. Contingencies and Commitments Employment Agreements The Company is party to employment agreements with certain executives, which provide for compensation, other benefits and severance payments under certain circumstances. The Company also has consulting and noncompete agreements in place with previous owners of acquired companies. Claims and Litigation The Company is involved in various legal proceedings as either the defendant or plaintiff. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between the affected parties and other actions. Management assesses the probability of losses or gains for such contingencies and accrues a liability and/or discloses the relevant circumstances as appropriate. In the opinion of management, it is not reasonably probable that the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, results of operations or cash flows. Additionally, based on the Company’s review of the various types of claims currently known, there is no indication of a material reasonably possible loss in excess of amounts accrued. The Company currently does not anticipate that any known claim will materially adversely affect our financial condition, liquidity, or results of operations. However, the outcome of any matter cannot be predicted with certainty, and an unfavorable resolution of one or more matters presently known or arising in the future could have a material adverse effect on the Company’s financial condition, liquidity or results of operations. Risk Management The Company is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions and natural disasters for which the Company carries commercial insurance. There have been no significant reductions in coverage from the prior year and settlements have not exceeded coverage in the past years. 107 Table of Contents 18. Leases The Company leases real estate and equipment under operating lease agreements. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. For leases with terms in excess of 12 months, we record a right-of-use (“ROU”) asset and lease liability based on the present value of lease payments over the lease term. We do not have any significant leases that have not yet commenced that create significant rights and obligations for us. The Company has elected the practical expedient not to separate lease and non- lease components for all leases that qualify. Our real estate and equipment leases often require payment of maintenance, real estate taxes and insurance. These costs are generally variable and based on actual costs incurred by the lessor. These amounts are not included in the consideration of the contract when determining the ROU asset and lease liability but are reflected as variable lease payments. Most leases include one or more options to renew, with renewal terms that can extend the lease from one to ten or more years. The exercise of the lease renewal option is typically at our sole discretion. If it is reasonably certain that we will exercise the option to renew, the period covered by the options are included in the lease term and are recognized as part of our ROU assets and lease liabilities. Certain leases include the option to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, which includes renewal options reasonably certain to be exercised. As of September 30, 2022, our weighted-average lease term on operating leases was 9.9 years. Certain of our lease agreements include rental payments based on percentage of retail sales over contractual levels and others include rental payments adjusted periodically based on index rates. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. When available, the implicit rate is utilized to discount lease payments to present value; however, none of our leases provide a readily determinable implicit rate, therefore we use our incremental borrowing rate to discount the lease payments based on information available at lease commencement. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. As of September 30, 2022, our weighted average discount rate on operating leases was 4.8 %. We adopted Topic 842 effective October 1, 2020. Prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under ASC 840. The Company recorded rent expense of $ 12.4 million during the year ended September 30, 2020. The following table provides certain information related to lease costs for operating leases: ($ in thousands) For the Year Ended September 30, 2022 For the Year Ended September 30, 2021 Operating lease cost $ 18,092 $ 12,059 Short-term and variable lease cost 4,466 3,002 $ 22,558 $ 15,061 The following table presents supplemental cash flow information for leases: ($ in thousands) For the Year Ended September 30, 2022 For the Year Ended September 30, 2021 Supplemental Cash Flow: Cash paid for amounts included in measurement of lease liabilities: Operating cash flows from operating leases $ 17,436 $ 11,905 Right-of-use assets obtained in exchange for new operating lease liabilities $ 48,310 $ 25,555 108 Table of Contents The following table provides the maturities of our operating lease liabilities as of September 30, 2022: ($ in thousands) Operating Leases Year ending September 30, 2023 $ 18,746 2024 17,984 2025 17,287 2026 15,905 2027 14,489 Thereafter 74,498 Total minimum lease payments 158,909 Less: Present value adjustment ( 33,801 ) Operating lease liabilities $ 125,108 19. Related Party Transactions In accordance with agreements approved by the Board, we purchased inventory, in conjunction with our retail sale of the products, from certain entities affiliated with common members of the Company. For the years ended September 30, 2022, 2021 and 2020, $ 84.2 million, $ 78.4 million and $ 60.8 million, respectively, in total purchases were incurred under these arrangements. In accordance with agreements approved by the Board, certain entities affiliated with common members of the Company receive fees for rent of commercial property. For the years ended September 30, 2022, 2021 and 2020, $ 2.8 million, $ 2.3 million and $ 2.2 million, respectively, in total expenses were incurred under these arrangements. In accordance with agreements approved by the Board, the Company received fees from certain entities and individuals affiliated with common members of the Company for goods and services. For the years ended September 30, 2022, 2021 and 2020, $ 6.3 million, $ 1.9 million and $ 4.1 million, respectively, were recorded under these arrangements. In accordance with agreements approved by the Board, the Company made payments to certain entities and individuals affiliated with common members of the Company for goods and services. For the years ended September 30, 2022, 2021 and 2020, $ 0.2 million, $ 0.2 million and $ 0.5 million, respectively, were recorded under these arrangements. In connection with transactions noted above, the Company was due $ 2.0 million and $ 0.1 million, respectively, as recorded within accounts receivable as of both September 30, 2022 and 2021. Additionally, the Company owed $ 0.2 million and $ 1.0 million as recorded within accounts payable at September 30, 2022 and 2021, respectively. 109 Table of Contents 20. Segment Information Effective August 9, 2022, our reportable segments changed as a result of the Company’s acquisition of Ocean Bio-Chem, which changed managements reporting structure and operating activities. We now report our operations through two reportable segments: (1) Dealerships and (2) Distribution. See Note 2 for more information about our segments. Reportable segment financial information for the year ended September 30, 2022 are as follows: As of and for the Year Ended September 30, 2022 ($ in thousands) Dealerships Distribution Total Revenue $ 1,608,972 $ 135,850 $ 1,744,822 Income from Operations 211,401 6,432 217,833 Depreciation and amortization 7,628 8,668 16,296 Transaction costs 5,347 2,377 7,724 Change in fair value of contingent consideration 10,189 191 10,380 Total assets 1,078,457 418,971 1,497,428 21. Subsequent events Management evaluated events occurring subsequent to September 30, 2022 and other than as noted below determined that no material recognizable subsequent events occurred. On October 1, 2022, the Company completed the acquisition of Taylor Marine Centers pursuant to the terms of the purchase agreement. The aggregate consideration is subject to customary post-closing adjustments and is not individually significant. On December 1, 2022, the Company completed the acquisition of Harbor View Marine pursuant to the terms of the purchase agreement. The aggregate consideration is subject to customary post-closing adjustments and is not individually significant. 110 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.