# Carriage Services Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 16:35 ET
- Period: 2023-09-30
- Accession: 0001016281-23-000132
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628123000132/csv-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628123000132/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $90.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $283.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $63.1m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $194.0m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $27.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $89.7m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $15.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $57.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $9.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $27.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $2.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $8.9m | us-gaap:IncomeTaxExpenseBenefit |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 15,514,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 15,480,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $61.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $13.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $5.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $1.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $40.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $1.26bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $53.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $1.09bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $3.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $589.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $161.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,705 characters.

### OVERVIEW

### General

Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading provider of funeral and cemetery services and merchandise in the United States. We operate in two business segments: Funeral Home operations, which currently accounts for approximately 70% of our total revenue, and Cemetery operations, which currently accounts for approximately 30% of our total revenue.

At September 30, 2023, we operated 171 funeral homes in 26 states and 32 cemeteries in 11 states. We compete with other publicly held, privately held and independent operators of funeral and cemetery companies.

### Funeral Home and Cemetery Operations

Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and memorial services and transportation services. We provide funeral services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.

Our cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as memorial markers, outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis.

### Recent Developments

#### Board of Directors - Resignation and Election

On July 5, 2023, the Board of Directors (the “Board”) elected Somer Webb to serve as a Class I Director until the Company’s 2024 annual meeting of shareholders. Ms. Webb was appointed to serve as the Chair of the Compensation Committee and a member of the Audit and Corporate Governance Committees.

On July 24, 2023, Barry Fingerhut, a member of the Board, provided notice of his resignation from the Board, effective on that date. Mr. Fingerhut’s resignation was not a result of any disagreement with the Company on any matter related to its operations, policies or practices.

On July 25, 2023, our Board elected Julie Sanders to serve as a Class II Director until the Company’s 2025 annual meeting of shareholders. Ms. Sanders was appointed to serve on each of the Audit, Compensation and Corporate Governance Committees.

#### Inflationary and Macroeconomic Trends

During the third quarter of 2023, we continued to experience cost increases and surcharges from our vendors and suppliers on merchandise and goods due to increases in the cost of raw materials, as well as inflationary impacts and rising interest rates. For example, we experienced higher costs related to full-time hourly base rates, utilities, funeral supplies, merchandise costs, insurance, and increased borrowing costs due to higher variable interest rates under our Credit Facility. Although we have taken steps to mitigate these cost increases and we expect these impacts to continue throughout the current year, the ultimate scope and duration of these impacts are unknown at this time. More broadly, the U.S. economy continues to experience higher rates of inflation, which has impacted a wide variety of industries and sectors, with consumers facing rising prices. Such inflation may negatively impact consumer discretionary spending, including the amount that consumers are able to spend on our services, although we have not experienced any material impacts to date and our industry has been largely resilient to similar adverse economic and market environments in the past. Although we expect these trends to continue throughout the current year, we will continue to assess these impacts and take the appropriate steps, if necessary, to mitigate these cost increases, if possible.

During the third quarter of 2023, we experienced lower volumes as compared to prior quarters due to fluctuations in the death rate, although overall financial performance remains at or above prior reporting periods. Although we expect fluctuations in the death rate to continue, we are unable to predict or forecast the duration or variation of the death rate with any certainty. Regardless of these fluctuations in the death rate, we continue to focus on expanding market share, cost management and executing on our strategic operational plans.

\- 35 -

### LIQUIDITY AND CAPITAL RESOURCES

#### Overview

Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility (defined below).

We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets or seek further borrowing capacity from our lenders to obtain additional funding and we may not be able to obtain such funding on terms and conditions that are acceptable to us. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. For additional information regarding known material factors that could cause cash flow or access to and cost of finance sources to differ from our expectations, please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Our plan remains focused on integrating our recently acquired businesses and prioritizing our capital allocation for debt repayments, the payment of dividends and debt obligations and internal growth capital expenditures, which we expect to fund using cash on hand and borrowings under our Credit Facility, along with general corporate purposes, as allowed under our Credit Facility. We believe that our existing and anticipated cash resources, including, as needed, additional borrowings or other financings that we may be able to obtain, will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months, as well as our long-term financial obligations.

#### Cash Flows

We began 2023 with $1.2 million in cash and ended the third quarter with $1.7 million in cash. At September 30, 2023, we had borrowings of $187.3 million outstanding on our Credit Facility compared to $190.7 million at December 31, 2022.

The following table sets forth the elements of cash flow (in thousands):

|  | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: |
| Cash at beginning of the year | $1,148 | $1,170 |
| Net cash provided by operating activities | 50,046 | 61,849 |
| Acquisitions of businesses and real property | (8,876) | (44,000) |
| Proceeds from divestitures and sale of other assets | 4,313 | 2,296 |
| Proceeds from insurance claims | 2,209 | 1,388 |
| Capital expenditures | (20,346) | (13,069) |
| Net cash used in investing activities | (22,700) | (53,385) |
| Net borrowings (payments) on our Credit Facility, acquisition debt and finance lease obligations | 13,286 | (3,891) |
| Payment of debt issuance costs for the Credit Facility and Senior Notes | (339) | — |
| Net proceeds from employee equity plans | 1,151 | 955 |
| Dividends paid on common stock | (5,108) | (5,023) |
| Purchase of treasury stock | (36,663) | — |
| Net cash used in financing activities | (27,673) | (7,959) |
| Cash at end of the period | $821 | $1,675 |

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#### Operating Activities

For the nine months ended September 30, 2023, cash provided by operating activities was $61.8 million compared to $50.0 million for the nine months ended September 30, 2022. The increase of $11.8 million is primarily due to an $8.6 million withdrawal of realized capital gains and earnings from our preneed funeral and cemetery trust investments and receiving a $6.0 million incentive payment from a vendor related to a strategic partnership agreement to market and sell prearranged funeral services, partially offset by unfavorable working capital changes in income tax receivables.

#### Investing Activities

Our investing activities, resulted in a net cash outflow of $53.4 million for the nine months ended September 30, 2023 compared to $22.7 million for the nine months ended September 30, 2022, an increase of $30.7 million.

#### Acquisition and Divestiture Activity

During the nine months ended September 30, 2023, we acquired a business consisting of three funeral homes, two cemeteries and one cremation focused business for $44.0 million. In addition, we sold two funeral homes and two cemeteries for an aggregate of $1.1 million and real property for $1.2 million.

We also received proceeds of $1.4 million from our property insurance policy for the reimbursement of renovation costs for certain of our funeral businesses damaged by Hurricane Ian that occurred during the third quarter of 2022 and a fire that occurred during the first quarter of 2023.

During the nine months ended September 30, 2022, we acquired a business consisting of two funeral homes for $6.3 million in cash and we purchased real property for $2.6 million. In addition, we sold two funeral homes for an aggregate of $0.9 million and real property for $3.3 million.

#### Capital Expenditures

For the nine months ended September 30, 2023, capital expenditures (comprised of growth and maintenance spend) totaled $13.1 million compared to $20.3 million for the nine months ended September 30, 2022, a decrease of $7.2 million.

The following tables present our growth and maintenance capital expenditures (in thousands):

| Growth | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: |
| Cemetery development | $5,215 | $5,128 |
| Renovations at certain businesses(1) | 4,974 | 1,905 |
| Other | 447 | 110 |
| Total Growth | $10,636 | $7,143 |

(1) During the nine months ended September 30, 2023, we spent $0.8 million for renovations to two businesses that were affected by Hurricane Ian, which occurred during the third quarter of 2022 and $0.4 million for renovations to one business that was damaged by a fire, which occurred during the first quarter of 2023, all of which was reimbursed by our property insurance. During the nine months ended September 30, 2022, we spent $2.4 million for renovations to two businesses that were affected by Hurricane Ida, which occurred during the third quarter of 2021, all of which was reimbursed by our property insurance.

| Maintenance | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: |
| General equipment and furniture | $3,744 | $3,584 |
| Facility repairs and improvements | 3,131 | 1,380 |
| Vehicles | 1,770 | 568 |
| Paving roads and parking lots | 1,065 | 394 |
| Total Maintenance | $9,710 | $5,926 |

#### Financing Activities

Our financing activities resulted in a net cash outflow of $8.0 million for the nine months ended September 30, 2023 compared to a net cash outflow of $27.7 million for the nine months ended September 30, 2022, a decrease of $19.7 million.

During the nine months ended September 30, 2023, we had net payments on our Credit Facility, acquisition debt and finance leases of $3.9 million and we paid $5.0 million in dividends.

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During the nine months ended September 30, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $13.3 million, offset by $36.7 million for the purchase of treasury stock and $5.1 million in dividends.

#### Share Repurchase

Share repurchase activity is as follows (dollar value in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Number of Shares Repurchased | — | — | 695,496 | — |
| Average Price Paid Per Share | $— | $— | $49.22 | $— |
| Dollar Value of Shares Repurchased | $— | $— | $34,234 | $— |

Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury stock. At September 30, 2023, our share repurchase program had $48.9 million authorized for repurchases.

#### Cash Dividend

Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):

| 2023 | Per Share | Dollar Value |
| --- | ---: | ---: |
| March 1st | $0.1125 | $1,661 |
| June 1st | $0.1125 | $1,679 |
| September 1st | $0.1125 | $1,683 |
| **2022** | **Per Share** | **Dollar Value** |
| March 1st | $0.1125 | $1,725 |
| June 1st | $0.1125 | $1,730 |
| September 1st | $0.1125 | $1,653 |

#### Credit Facility, Lease Obligations and Acquisition Debt

The outstanding principal of our Credit Facility, lease obligations and acquisition debt at September 30, 2023 is as follows (in thousands):

|  | September 30, 2023 |
| --- | ---: |
| Credit Facility | $187,300 |
| Operating leases | 18,244 |
| Finance leases | 7,438 |
| Acquisition debt | 3,924 |
| Total | $216,906 |

### Credit Facility

At September 30, 2023, our senior secured revolving credit facility (the “Credit Facility”) was comprised of: (i) a $250.0 million revolving credit facility, including a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the aggregate in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 13, 2026.

Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (as defined in Note 12) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”).

The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations, continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, among others.

In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and the Subsidiary Guarantors to incur indebtedness, grant

\- 38 - liens, make investments, engage in mergers and acquisitions, pay dividends and make other restricted payments, and certain financial maintenance covenants. At September 30, 2023, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 6.00 to 1.00 and (B) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility as of September 30, 2023.

At September 30, 2023, we had outstanding borrowings under the Credit Facility of $187.3 million. We also had one letter of credit for $2.3 million under the Credit Facility, which was increased to $2.6 million on July 7, 2023. The letter of credit will expire on November 27, 2023 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2023, we had $60.1 million of availability under the Credit Facility.

The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Credit Facility interest expense | $1,971 | $4,508 | $4,132 | $12,987 |
| Credit Facility amortization of debt issuance costs | 109 | 138 | 293 | 414 |

Outstanding borrowings under our Credit Facility bear interest at a prime rate or the Bloomberg Short-Term Bank Yield Index (“BSBY”) rate, plus an applicable margin based on our leverage ratio. At September 30, 2023, the prime rate margin was equivalent to 2.375% and the BSBY rate margin was 3.375%. The weighted average interest rate on our Credit Facility was 4.3% and 9.0% for the three months ended September 30, 2022 and 2023, respectively and 3.1% and 8.5% for the nine months ended September 30, 2022 and 2023, respectively.

The interest payments on our remaining borrowings under the Credit Facility will be determined based on the average outstanding balance of our borrowings and the prevailing interest rate during that time.

### Lease Obligations

Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes, equipment and vehicles under finance leases with original terms ranging from three to forty years. At September 30, 2023, operating and finance lease obligations were $37.0 million, with $5.4 million payable within 12 months.

The components of lease cost are as follows (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Operating lease cost | $863 | $887 | $2,564 | $2,638 |
| Short-term lease cost | 82 | 75 | 260 | 261 |
| Variable lease cost | 37 | 69 | 60 | 183 |
| Finance lease cost: |  |  |  |  |
| Depreciation of leased assets | $111 | $190 | $328 | $407 |
| Interest on lease liabilities | 110 | 137 | 335 | 345 |
| Total finance lease cost | 221 | 327 | 663 | 752 |
| Total lease cost | $1,203 | $1,358 | $3,547 | $3,834 |

### Acquisition Debt

Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from nine to twenty years. At September 30, 2023, acquisition debt obligations were $5.4 million, with $0.8 million payable within 12 months.

The imputed interest expense related to our acquisition debt is as follows (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Acquisition debt imputed interest expense | $78 | $70 | $237 | $212 |

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### Senior Notes

At September 30, 2023, the principal amount of our 4.25% senior notes due in May 2029 (the “Senior Notes”) was $400.0 million. The Senior Notes were issued under an indenture, dated as of May 13, 2021 (the “Indenture”), among the Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally by each of the Subsidiary Guarantors. The Senior Notes mature on May 15, 2029, unless earlier redeemed or purchased and bear interest at 4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021.

The Indenture contains restrictive covenants limiting our ability and the ability of our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default.

The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 68 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes for both the three and nine months ended September 30, 2022 and 2023 was 4.42% and 4.30%, respectively.

At September 30, 2023, the fair value of the Senior Notes, which are Level 2 measurements, was $342.6 million.

The interest expense and amortization of debt discount and debt issuance costs related to our Senior Notes are as follows (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Senior Notes interest expense | $4,250 | $4,250 | $12,730 | $12,750 |
| Senior Notes amortization of debt discount | 125 | 129 | 368 | 384 |
| Senior Notes amortization of debt issuance costs | 35 | 37 | 104 | 110 |

At September 30, 2023, our future interest payments on our outstanding balance were $102.0 million, with $17.0 million payable within 12 months.

### FINANCIAL HIGHLIGHTS

Below are our financial highlights (in thousands except for volumes and averages):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $87,497 | $90,494 | $276,258 | $283,686 |
| Funeral contracts | 11,109 | 11,058 | 35,630 | 34,904 |
| Average revenue per funeral contract | $5,516 | $5,522 | $5,463 | $5,514 |
| Preneed interment rights (property) sold | 2,455 | 2,785 | 8,344 | 8,680 |
| Average price per preneed interment right sold | $4,569 | $5,134 | $4,449 | $4,990 |
| Gross profit | $25,598 | $27,412 | $87,788 | $89,669 |
| Net income | $5,860 | $4,645 | $33,161 | $21,775 |

Revenue for the three months ended September 30, 2023 increased $3.0 million compared to the three months ended September 30, 2022, as we experienced a 13.4% increase in the number of preneed interment rights (property) sold and a 12.4% increase in the average price per interment right sold, while the funeral contract volume and the average revenue per funeral contract remained flat.

Gross profit for the three months ended September 30, 2023 increased $1.8 million compared to the three months ended September 30, 2022, primarily due to the increase in revenue from our cemetery segment, as well as improved cost management within our funeral segment.

Net income for the three months ended September 30, 2023 decreased $1.2 million compared to the three months ended September 30, 2022, primarily due to a $2.6 million increase in interest expense and a $0.9 million increase in general and administrative expenses, offset by the $1.8 million increase in gross profit.

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Revenue for the nine months ended September 30, 2023 increased $7.4 million compared to the nine months ended September 30, 2022, as we experienced a 12.2% increase in the average price per preneed interment right sold, a 4.0% increase in the number of preneed interment rights (property) sold and a 0.9% increase in the average revenue per funeral contract, offset by a 2.0% decrease in the funeral contract volume. The funeral contract volume decrease is primarily a result of the lower impact of COVID-19 related deaths in the first quarter of 2023 as compared to the same period in 2022.

Gross profit for the nine months ended September 30, 2023 increased $1.9 million compared to the nine months ended September 30, 2022, due to the increase in revenue from our cemetery segment, offset by increases in operating expenses in both our funeral home and cemetery segments.

Net income for the nine months ended September 30, 2023 decreased $11.4 million compared to the nine months ended September 30, 2022, primarily due to a $9.0 million increase in interest expense and a $3.7 million impact from divestitures, disposals and insurance reimbursements.

Further discussion of revenue and the components of gross profit for our Funeral Home and Cemetery segments is presented under “– Results of Operations.”

Further discussion of general, administrative and other expenses, interest expense, income taxes and other components of income and expenses are presented under “– Other Financial Statement Items.”

### REPORTING AND NON-GAAP FINANCIAL MEASURES

We also present our financial performance in our “Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended September 30, 2023 issued on November 8, 2023, and discussed in the corresponding earnings conference call. The Trend Report is used as a supplemental financial statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.

Below is a reconciliation of gross profit (a GAAP financial measure) to operating profit (a non-GAAP financial measure) (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | $25,598 | $27,412 | $87,788 | $89,669 |
| Cemetery property amortization | 1,278 | 1,318 | 4,314 | 4,411 |
| Field depreciation expense | 3,281 | 3,634 | 9,831 | 10,546 |
| Regional and unallocated funeral and cemetery costs | 5,096 | 3,771 | 17,409 | 13,339 |
| Operating profit(1) | $35,253 | $36,135 | $119,342 | $117,965 |

(1) Operating profit is defined as gross profit plus cemetery property amortization, field depreciation expense and regional and unallocated funeral and cemetery costs.

Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of operating profit (a non-financial GAAP measure) by segment (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Funeral Home | $24,173 | $23,962 | $82,060 | $76,875 |
| Cemetery | 11,080 | 12,173 | 37,282 | 41,090 |
| Operating profit | $35,253 | $36,135 | $119,342 | $117,965 |
| Operating profit margin(1) | 40.3% | 39.9% | 43.2% | 41.6% |

(1) Operating profit margin is defined as operating profit as a percentage of revenue.

Further discussion of operating profit for our Funeral Home and Cemetery segments is presented under “– Results of Operations.”

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### RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three and nine months ended September 30, 2023 and 2022.

The term “operating” in the Funeral Home and Cemetery segments refers to all funeral homes and cemeteries that we owned and operated in the current reporting period, excluding certain funeral home and cemetery businesses that we have divested in such period.

The term “divested” when discussed in the Funeral Home segment, refers to two funeral home we sold in the nine months ended September 30, 2023 and two funeral homes we sold in the nine months ended September 30, 2022. The term “divested” when discussed in the Cemetery segment, refers to two cemeteries we sold during the nine months ended September 30, 2023.

The term “ancillary” in the Funeral Home segment represents our flower shop, monument company, pet cremation business and online cremation businesses.

Cemetery property amortization, field depreciation expense and regional and unallocated funeral and cemetery costs, are not included in operating profit, a non-GAAP financial measure. Adding back these items will result in gross profit, a GAAP financial measure.

### Funeral Home Segment

The following table sets forth certain information regarding our revenue and operating profit for our funeral home operations (in thousands):

| Revenue: | Three months ended September 30, 2022 | 2023 |
| --- | ---: | ---: |
| Operating | $58,919 | $59,397 |
| Divested | 335 | 18 |
| Ancillary | 1,049 | 1,156 |
| Other | 2,477 | 2,055 |
| Total | $62,780 | $62,626 |
| Operating profit: |  |  |
| Operating | $21,707 | $22,025 |
| Divested | 59 | 11 |
| Ancillary | 188 | 147 |
| Other | 2,219 | 1,779 |
| Total | $24,173 | $23,962 |
| The following operating measures reflect the significant metrics over this comparative period: |  |  |
| Contract volume | 11,039 | 11,055 |
| Average revenue per contract, excluding preneed funeral trust earnings | $5,338 | $5,373 |
| Average revenue per contract, including preneed funeral trust earnings | $5,517 | $5,522 |
| Cremation rate | 58.3% | 59.5% |

Funeral home operating revenue increased $0.5 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in operating revenue is primarily driven by our newly acquired funeral home businesses, which were not present in the comparative quarter of 2022, as the funeral contract volume and the average revenue per contract excluding preneed interest remained flat.

Funeral home operating profit for the three months ended September 30, 2023 increased $0.3 million when compared to the same period in 2022. The comparable operating profit margin increased 30 basis points to 37.1%. The increase in operating profit is primarily due to the increase in operating revenue, as well as improved cost management across our businesses. Operating expenses as a percentage of revenue remained flat for the comparable period.

Ancillary revenue, which represents revenue from our flower shop, monument company, pet cremation business and online cremation businesses, increased $0.1 million, while ancillary operating profit remained flat for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

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Other revenue and other operating profit, which consists of preneed funeral insurance commissions and preneed funeral trust and insurance, both decreased $0.4 million, for the three months ended September 30, 2023, compared to the same period in 2022. The decreases are primarily due to a decline in realized earnings on preneed funeral trust and insurance contracts that matured to atneed during the period.

The following table sets forth certain information regarding our revenue and operating profit for our funeral home operations (in thousands):

| Revenue: | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: |
| Operating | $187,433 | $186,779 |
| Divested | 1,287 | 217 |
| Ancillary | 3,099 | 3,445 |
| Other | 7,254 | 6,775 |
| Total | $199,073 | $197,216 |
| Operating profit: |  |  |
| Operating | $75,078 | $70,578 |
| Divested | 22 | (20) |
| Ancillary | 560 | 366 |
| Other | 6,400 | 5,951 |
| Total | $82,060 | $76,875 |
| The following operating measures reflect the significant metrics over this comparative period: |  |  |
| Contract volume | 35,373 | 34,852 |
| Average revenue per contract, excluding preneed funeral trust earnings | $5,299 | $5,359 |
| Average revenue per contract, including preneed funeral trust earnings | $5,464 | $5,516 |
| Cremation rate | 57.6% | 59.0% |

Funeral home operating revenue decreased $0.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in operating revenue is primarily driven by a 1.5% decrease in contract volume, which was not fully offset by a 1.1% increase in the average revenue per contract excluding preneed interest. The contract volume decrease is primarily a result of the significant decline in COVID-19 related deaths in the first quarter of 2023 as compared to the same period in 2022, as these deaths now have a minimal impact on the overall death rate. The increase in average revenue per contract is primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.

Funeral home operating profit for the nine months ended September 30, 2023 decreased $4.5 million when compared to the same period in 2022, primarily due to an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 230 basis points to 37.8%. Operating expenses as a percentage of revenue increased 2.3%, with the largest increases in salary and benefits expenses of 1.3%, general and administrative expenses of 0.4%, other funeral costs of 0.3%, and facilities and grounds expenses of 0.2%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities and funeral supplies.

Ancillary revenue, which represents revenue from our flower shop, monument company, pet cremation business and online cremation businesses, increased $0.3 million, while ancillary operating profit decreased $0.2 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in revenue is primarily due to our Bakersfield, CA business acquired during the first quarter of 2023, as it was not present in the comparative period of 2022. Similarly, the decrease in operating profit is primarily due to this same business, as its operating profit margins were lower compared to our other ancillary businesses, particularly with regard to higher salaries and benefits expenses.

Other revenue, which consists of preneed funeral insurance commissions and preneed funeral trust decreased $0.5 million and other operating profit decreased $0.4 million, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The decreases are primarily due to a decline in realized earnings on preneed funeral trust and insurance contracts that matured to atneed during the period.

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### Cemetery Segment

The following table sets forth certain information regarding our revenue and operating profit for our cemetery operations (in thousands):

| Revenue: | Three months ended September 30, 2022 | 2023 |
| --- | ---: | ---: |
| Operating | $21,285 | $24,577 |
| Divested | 60 | 3 |
| Other | 3,372 | 3,288 |
| Total | $24,717 | $27,868 |
| Operating profit (loss): |  |  |
| Operating | $7,869 | $9,005 |
| Divested | (21) | 2 |
| Other | 3,232 | 3,166 |
| Total | $11,080 | $12,173 |
| The following operating measures reflect the significant metrics over this comparative period: |  |  |
| Preneed revenue as a percentage of operating revenue | 61.0% | 62.0% |
| Preneed revenue (in thousands) | $12,905 | $15,166 |
| Atneed revenue (in thousands) | $8,380 | $9,411 |
| Number of preneed interment rights sold | 2,444 | 2,785 |
| Average price per interment right sold | $4,585 | $5,134 |

Cemetery operating revenue increased $3.3 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, as we experienced a 12.0% increase in the average price per preneed interment right sold, and a 14.0% increase in preneed interment rights sold. Cemetery atneed revenue, which represents 38.0% of our total operating revenue, increased $1.0 million for the three months ended September 30, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services from our newly acquired cemetery businesses, not present in the comparative quarter of 2022.

Cemetery operating profit increased $1.1 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The comparable operating profit margin decreased 40 basis points to 36.6%. The increase in operating profit is primarily due to the increase in operating revenue, as well as improved cost management across our businesses. Operating expenses as a percentage of revenue remained flat for the comparable period.

Other revenue and other operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, both decreased $0.1 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The decreases are primarily due to realized capital gains in the current year compared to the prior year in our merchandise and service fund.

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The following table sets forth certain information regarding our revenue and operating profit for our cemetery operations (in thousands):

| Revenue: | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: |
| Operating | $66,864 | $75,324 |
| Divested | 190 | 45 |
| Other | 10,131 | 11,101 |
| Total | $77,185 | $86,470 |
| Operating profit (loss): |  |  |
| Operating | $27,600 | $30,338 |
| Divested | (35) | 12 |
| Other | 9,717 | 10,740 |
| Total | $37,282 | $41,090 |
| The following operating measures reflect the significant metrics over this comparative period: |  |  |
| Preneed revenue as a percentage of operating revenue | 62.0% | 62.0% |
| Preneed revenue (in thousands) | $41,461 | $46,999 |
| Atneed revenue (in thousands) | $25,403 | $28,325 |
| Number of preneed interment rights sold | 8,315 | 8,675 |
| Average price per interment right sold | $4,461 | $4,992 |

Cemetery operating revenue increased $8.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, as we experienced an 11.9% increase in the average price per preneed interment right sold, as well as a 4.3% increase in the number of preneed interment rights sold. Cemetery atneed revenue, which represents 38.0% of our total operating revenue, increased $2.9 million for the nine months ended September 30, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services from our newly acquired cemetery businesses, which were not present in the comparative period of 2022.

Cemetery operating profit increased $2.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in operating profit is primarily due to the increase in operating revenue, offset by an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 100 basis point to 40.3%. Operating expenses as a percent of operating revenue increased 1.0% primarily due to an increase in salary and benefits expenses.

Other revenue and other operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, both increased $1.0 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increases are primarily due to an increase in income in our perpetual care trust fund and an increase in finance charges on preneed sales.

*Cemetery property amortization.* Cemetery property amortization totaled $1.3 million for both the three months ended September 30, 2023 and 2022. Cemetery property amortization totaled $4.4 million for the nine months ended September 30, 2023, an increase of $0.1 million, compared to the same period in 2022, primarily due to the increase in property sold across our cemetery portfolio.

*Field depreciation.* Depreciation expense for our field businesses totaled $3.6 million and $10.5 million for the three and nine months ended September 30, 2023, respectively, an increase of $0.4 million and $0.7 million, respectively, compared to the same period in 2022, primarily due to the business acquisitions made in the latter half of 2022 and the first quarter of 2023.

*Regional and unallocated funeral and cemetery costs.* Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled $3.8 million for the three months ended September 30, 2023, a decrease of $1.3 million compared to the same period in 2022, primarily due to the following: (1) a $1.0 million decrease in cash incentives and equity compensation; (2) a $0.2 million decrease in incentive award trips and annual managing partner meetings and (3) a $0.1 million decrease in other expenses.

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Regional and unallocated funeral and cemetery costs totaled $13.3 million for the nine months ended September 30, 2023, a decrease of $4.1 million compared to the same period in 2022, primarily due to the following: (1) a $2.2 million decrease in cash incentives and equity compensation; (2) a $1.2 million decrease in incentive award trips and annual managing partner meetings; (3) $0.4 million decrease in travel expense and (3) a $0.3 million decrease in other expenses.

### Other Financial Statement Items

*General, administrative and other.* General, administrative and other expenses, which includes salaries and benefits, cash and equity incentive compensation for the Houston support office totaled $11.3 million for the three months ended September 30, 2023, an increase of $0.9 million compared to the same period in 2022, which is primarily due to a $0.9 million increase in consulting fees related to our review of strategic alternatives.

General, administrative and other expenses totaled $31.7 million for the nine months ended September 30, 2023, an increase of $3.6 million compared to the same period in 2022, primarily due to the following: (1) a $3.1 million increase in salary and benefits expense and cash and equity incentive compensation, as a result of changes to our senior leadership team, including current year executive promotions and (2) a $1.0 million increase in consulting fees related to our review of strategic alternatives, offset by (3) a $0.5 million decrease in other expenses, including lower online marketing costs and travel costs.

*Net (gain) loss on divestitures, disposals and impairments charges.* The components of *Net (gain) loss on divestitures, disposals and impairment charges* are as follows (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Impairment of goodwill, intangibles and PPE | $— | $211 | $— | $454 |
| Net (gain) loss on divestitures | — | 24 | (575) | 106 |
| Net (gain) loss on disposals of fixed assets | (7) | 188 | 142 | 369 |
| Total | $(7) | $423 | $(433) | $929 |

During the nine months ended September 30, 2023, we sold two funeral homes and two cemeteries for a loss of $0.1 million. We also recognized an impairment of $0.2 million as a result of our 2023 qualitative assessment of tradenames and an impairment of $0.2 million related to property, plant and equipment for assets held for sale.

During the nine months ended September 30, 2022, we sold real property and two funeral homes for a net gain of $0.7 million, of which $0.1 million was recorded in *Other, net* related to the sale of assets not used in operating activities.

*Interest expense*. Interest expense related to its respective debt arrangement is as follows (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Senior Notes | $4,410 | $4,416 | $13,203 | $13,244 |
| Credit Facility | 2,081 | 4,647 | 4,425 | 13,402 |
| Finance leases | 110 | 137 | 335 | 345 |
| Acquisition debt | 78 | 70 | 237 | 212 |
| Other | (1) | 8 | 8 | 10 |
| Total | $6,678 | $9,278 | $18,208 | $27,213 |

*Net gain on property damage, net of insurance claims.* The components of *Net gain on property damage, net of insurance claims* are as follows (in thousands):

|  | Three months ended September 30, 2022 | 2023 | Nine months ended September 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| (Gain) on property damaged by Hurricane Ida | $— | $— | $(3,275) | $(28) |
| (Gain) on property damaged by Hurricane Ian | — | (379) | — | (379) |
| Loss on property damaged by a fire in Q1 2023 | — | — | — | 64 |
| Total | $— | $(379) | $(3,275) | $(343) |

*Other, net.* During the nine months ended September 30, 2023, we recorded a $0.6 million gain on the sale of other real property not used in business operations. We did not record any gain or loss activity during the three months ended September 30, 2023.

*Income taxes.* Income tax expense totaled $2.1 million for the three months ended September 30, 2023, a decrease of $0.6 million compared to the same period in 2022, primarily due to lower pre-tax income in the current period. Our operating tax rate before discrete items was 30.4% and 30.6% for the three months ended September 30, 2023 and 2022, respectively.

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Income tax expense totaled $9.0 million for the nine months ended September 30, 2023, a decrease of $3.0 million compared to the same period in 2022, primarily due to lower pre-tax income in the current period. Our operating tax rate before discrete items was 28.9% and 27.8% for nine months ended September 30, 2023 and 2022, respectively.

### OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Understanding our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies is integral to understanding our Consolidated Financial Statements. Our critical accounting policies are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data” in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2022.

We have identified Business Combinations and Goodwill as those accounting policies that require significant judgments, assumptions and estimates and that have a significant impact on our financial condition and results of operations. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from period to period. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.

### SEASONALITY

Our business can be affected by seasonal fluctuations in the death rate, with number of deaths generally higher during the winter months due to the higher incidences of death from influenza and pneumonia as compared to other periods of the year. Seasonal fluctuations in the death rate may be further affected by epidemics and pandemics, like COVID-19, including any new or emerging public health threats. These unexpected fluctuations may not only increase death rates during the affected period, but also may subsequently decrease death rates following the affected period as a result of an acceleration of death rates. As a result, we are unable to predict or forecast the duration or variation of the current death rate with any certainty.

## Market risk

As filed, 4,630 characters.

In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks other than those related to the impact of health and safety concerns from epidemics and pandemics and inflation, which are described in more detail in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following quantitative and qualitative information is provided about financial instruments to which we are a party at September 30, 2023 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.

Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.

The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”

In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments at September 30, 2023 are presented in Part 1, Item 1, Financial Statements, Note 8 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.25% change in the value of the fixed income securities.

We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. At September 30, 2023, we had outstanding borrowings under the Credit Facility of

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$187.3 million. Any further borrowings or voluntary prepayments against the Credit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under the Credit Facility at either prime rate or the BSBY rate plus a margin. At September 30, 2023, the prime rate margin was equivalent to 2.375% and the BSBY rate margin was 3.375%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of $1.9 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.

Our Senior Notes bear interest at the fixed annual rate of 4.25%. We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. At September 30, 2023, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $395.7 million and the fair value of the Senior Notes was $342.6 million based on the last traded or broker quoted price, reported by the Financial Industry Regulatory Authority, Inc. Increases in market interest rates may cause the value of the Senior Notes to decrease, but such changes will not affect our interest costs.

The remainder of our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease, but such changes will not affect our interest costs.

## Controls and procedures

As filed, 1,747 characters.

### Management’s Evaluation of Disclosure Controls and Procedures

Our management, including our principal executive and principal financial officers, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures are effective at September 30, 2023 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with US GAAP.

### Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting (defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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## Risk factors

As filed, 8,090 characters.

#### Risk Factor Update

The risk factors below should be carefully read in conjunction with the risk factors set out in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2022, and our Quarterly Report on Form 10-Q for the quarter ending March 31, 2023 and June 30, 2023, respectively, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

### RISKS RELATED TO OUR BUSINESS

### Risks Related to Review of Strategic Alternatives Process and a Potential Strategic Transaction

**We are reviewing strategic alternatives and there can be no assurance that we will be successful in identifying or completing any strategic transaction, that any such strategic transaction will result in additional value for our stockholders or that the process will not have an adverse impact on our business.**

On June 29, 2023, we announced our Board had initiated a process to explore potential strategic alternatives, possibly including, but not limited to, a sale, merger or other potential strategic or financial transaction, aimed at increasing stockholder value. There can be no assurance that the review of strategic alternatives will result in the identification or consummation of any transaction. Our Board may also determine that our most effective strategy is to continue to execute on our current strategy.

The process of reviewing strategic alternatives may be costly, time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We have incurred, and may in the future incur, significant costs associated with identifying, evaluating and negotiating potential strategic alternatives, such as legal, financial advisor and accounting fees and expenses and other related charges. We may also incur additional unanticipated expenses in connection with this process. A considerable portion of these costs will be incurred regardless of whether any such course of action is implemented or transaction is completed, decreasing cash available for use in our business.

There can be no assurance that any potential transaction, or series of transactions, or other strategic alternative, if consummated, will provide greater value to our stockholders than that reflected in the current price of our common stock. Until the review process is concluded, perceived uncertainties related to our future may impact our business performance and volatility in the market price of our common stock and may make it more difficult for us to attract and retain qualified personnel and key employees. Our Board has not set a timetable for the conclusion of this review, nor has it made any definitive decisions related to taking any further actions or potential strategic options at this time or at all.

**Even if we are successful in completing a strategic alternative, we may be exposed to other operational and financial risks.**

Although there can be no assurance that a strategic alternative will result from the process we have undertaken to explore potential strategic alternatives, the negotiation and consummation of any such transaction, if completed, will require significant time on the part of our management, which could result in disruption to our business.

The negotiation and consummation of any such transaction may also require more time or greater cash resources than we anticipate and expose us to other operational and financial risks, including, but not limited to:

- increased near-term and long-term expenditures;

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- exposure to unknown liabilities;
- higher than expected acquisition or integration costs;
- incurrence of substantial debt or dilutive issuances of equity securities to fund future operations;
- write-downs of assets or goodwill or incurrence of non-recurring, impairment or other charges;
- increased amortization expenses;
- difficulty and cost in combining the operations and personnel of any acquiring or acquired business with our operations and personnel;
- impairment of relationships with key suppliers or customers of any acquired business due to changes in management and ownership;
- inability to retain key employees of our Company or any acquired or merged business; and
- possibility of future litigation.

Any of the foregoing risks could have a material adverse effect on our business, financial condition and prospects.

### GENERAL RISKS

### Economic Conditions and Natural Disasters

**Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults, or non-performance by financial institutions, could adversely affect our business, financial condition, or results of operations.**

We currently maintain cash balances in accounts at U.S. financial institutions that we believe are high quality. These accounts, held by us and our affiliated companies, are in non-interest-bearing and interest-bearing operating accounts and may, from time to time, exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If such banking institutions were to fail, we could lose all or a portion of those amounts held in excess of such insurance limitations. In addition, actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, our third-party vendors and counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems, which could adversely affect our business, financial condition, results of operations and liquidity.

Although we assess our banking relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our respective current and projected future business operations could be significantly impaired by factors that affect us, the financial institutions with which we have arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions or financial services industry companies with which we, have financial or business relationships, but could also include factors involving financial markets or the financial services industry generally.

In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire future financing or access to capital on acceptable terms or at all. As availability under our Credit Facility and/or the ability to access capital has historically been, and is expected to continue to be, one of our primary sources of liquidity, any adverse impacts on our ability to access such credit and liquidity sources as a result of adverse developments affecting the financial services industry could adversely affect our business, financial condition, results of operations.

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Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001016281-23-000132. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.