S-1 1 d35159ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on January 8, 2021.

Registration No. 333-          

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

INTERIOR LOGIC GROUP HOLDINGS, LLC

to be converted as described herein to a corporation named

Interior Logic Group Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   1520   82-5478232
(State or other jurisdiction of
incorporation or organization
  (Primary Standard Industrial Classification Code Number)
 

(I.R.S. Employer

Identification Number)

10 Bunsen

Irvine, California 92618

(800) 959-8333

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Alan K. Davenport

Chief Executive Officer and Chairman

Interior Logic Group Holdings, LLC

10 Bunsen

Irvine, California 92618

(800) 959-8333

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to

Robin M. Feiner, Esq.
Holland & Knight LLP
31 W. 52nd St.
12th floor
New York, New York, 10019
(212) 513-3200
  Richard Strulson, Esq.
Executive Vice President, General Counsel
and Chief Compliance Officer
Interior Logic Group Holdings, LLC
10 Bunsen
Irvine, California 92618
(800) 959-8333
  Michael J. Zeidel, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
One Manhattan West
New York New York 10001
(212) 735-3000

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Proposed Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee

Common stock, $0.01 par value per share

  $100,000,000   $10,910

 

 

(1)   Estimated solely for purposes of determining the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Includes the aggregate offering price of shares of common stock that may be purchased by the underwriters pursuant to their option to purchase additional shares of common stock.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

 

Interior Logic Group Holdings, LLC, the registrant whose name appears on the cover of this Registration Statement, is a Delaware limited liability company. Prior to the effectiveness of this Registration Statement, Interior Logic Group Holdings, LLC will convert into a Delaware corporation and be renamed Interior Logic Group Holdings, Inc. (the “Corporate Conversion”). Shares of common stock of Interior Logic Group Holdings, Inc. are being offered by the prospectus. Except as otherwise disclosed in the prospectus, the consolidated financial statements and selected historical financial data and other financial information included in this Registration Statement are those of Interior Logic Group Holdings, LLC and its respective subsidiaries, as the case may be, and do not give effect to the Corporate Conversion.


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The information contained in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED JANUARY 8, 2021

 

Shares

 

LOGO

 

Interior Logic Group Holdings, Inc.

 

Common Stock

 

 

 

This is the initial public offering of our common stock. We are offering shares of our common stock.

 

No public market currently exists for our common stock. We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “ILG.”

 

We currently expect the initial public offering price to be between $             and $             per share.

 

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 23 of this prospectus.

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

 

(1)   See “Underwriting” for a complete description of the compensation payable to the underwriters.

 

The underwriters may also purchase up to an additional                shares of our common stock from us at the public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts will be $                , and the total proceeds, after underwriting discounts but before expenses, to us will be $                .

 

Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares to purchasers on or about                , 2021.

 

 

 

Citigroup    Goldman Sachs & Co. LLC    BofA Securities

 

Baird   Evercore ISI   Jefferies   RBC Capital Markets   Stephens Inc.   Truist Securities     UBS Investment Bank  


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You should rely only on the information contained in this prospectus and any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus and any related free writing prospectus. We and the underwriters take no responsibility for, and can provide no assurances as to the reliability of, any information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is only accurate as of the date of this prospectus, regardless of the time of delivery of this prospectus and any sale of shares of our common stock.

 

 

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     23  

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     56  

USE OF PROCEEDS

     58  

DIVIDEND POLICY

     59  

CAPITALIZATION

     60  

DILUTION

     62  

SELECTED HISTORICAL FINANCIAL DATA

     64  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     66  

OUR BUSINESS

     90  

MANAGEMENT

     109  

EXECUTIVE COMPENSATION

     117  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     132  

PRINCIPAL STOCKHOLDERS

     135  

DESCRIPTION OF CAPITAL STOCK

     137  

SHARES ELIGIBLE FOR FUTURE SALE

     142  

U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     144  

UNDERWRITING

     148  

LEGAL MATTERS

     155  

EXPERTS

     155  

WHERE YOU CAN FIND MORE INFORMATION

     155  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

 

Presentation of Market and Industry Data and Certain Definitions

 

We use market data and industry forecasts and projections throughout this prospectus, particularly in the sections entitled “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.” The industry and market data are based on the good faith estimates of our management, research studies and surveys, independent industry publications and other publicly available information. Industry publications and research studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. These data involve a number of assumptions and limitations, and investors are cautioned not to give undue weight to such estimates. Although we have not independently verified the accuracy or completeness of any third-party information, we believe that the information from these publications and studies included in this prospectus is generally reliable, and the conclusions contained in the third-party information are reasonable. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of

 

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factors, including those described in the section entitled “Risk Factors” and elsewhere in this prospectus. In particular, some of the market and industry estimates in this prospectus were prepared prior to the COVID-19 pandemic. These and other factors could cause results to differ materially from those expressed in the estimates made by independent parties and by us. We expect that the COVID-19 pandemic may continue to materially reduce the growth of various of the markets discussed in this prospectus, and we cannot predict the extent to which these estimates will be affected. These and other factors could cause results to differ materially from those expressed in, or implied by, the estimates made by independent parties and by us. Furthermore, we cannot assure you that a third party using different methods to assemble, analyze or compute industry and market data would obtain the same results. See “Information Regarding Forward-Looking Statements.”

 

In this prospectus, we present a variety of housing market indicators, including housing starts and home closings.

 

   

A housing start is counted at the point in time excavation begins for the footings or foundation of a home.

 

   

A home closing is counted when the new homeowner takes title to the home.

 

Housing starts are considered a leading indicator of the state of the housing market. Rankings of MSAs (as defined below) by 2019 single-family housing starts are based on estimated 2019 single-family housing starts per MSA published in Metrostudy’s September 2020 Builder Home Building Outlook.

 

References to a housing market mean a Metropolitan Statistical Area (“MSA”), which is an area that generally consists of at least one urbanized area of 50,000 or more inhabitants, plus adjacent territory that has a high degree of social and economic integration with the core area as measured by commuting ties. MSA boundaries are based on U.S. Census Bureau determinations as of March 2020. References to our “geographic markets” mean the MSAs we serve. References to our “turnkey” supply chain management and installation services mean the provision of both materials and workforce sold together.

 

References to the largest homebuilders are based on Builder Magazine’s 2020 Builder 100 list, which ranks U.S. homebuilders based on total number of home closings.

 

We calculate the size of the approximately $23 billion U.S. new home interior finish solutions industry by multiplying the average installed cost of flooring, cabinets and countertops in a new single-family home in 2019, which was approximately $25,500 according to the National Association of Homebuilders (the “NAHB”), by the number of 2019 single-family housing starts (approximately 887,700 based on U.S. Census Bureau data).

 

In this prospectus, we define a “direct” competitor as a company whose primary business is the provision of residential design services and the supply and installation of multiple categories of interior finishes.

 

In this prospectus, we refer to our “design studio solutions” and “builder direct solutions.” We define our design studio solutions as our full suite of design, supply chain management and installation services, including our dedicated builder-branded and shared ILG-branded design studios where we interface directly with homebuyers in the design process. We define our builder direct solutions as our supply chain management and installation services for homebuilders. Some of our customers start as builder direct customers and then convert to our design studio solutions.

 

Service Marks, Trademarks and Trade Names

 

This prospectus includes trademarks and service marks owned by us and our subsidiaries, as well as trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these

 

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trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

The Business Combination

 

On May 31, 2018, we consummated a business combination transaction (the “Business Combination”) where Interior Specialists, Inc. (“ISI”) acquired Interior Logic Group, Inc. (“ILG”) and combined under a new holding company, Interior Logic Group Holdings, LLC (“ILG Holdings”), pursuant to a Contribution Agreement (the “Contribution Agreement”) dated April 30, 2018, by and among Faraday Holdings, LLC (“Faraday”), Installation Services Holdings, LLC (“ISH”), ISI, Installation Services Holdings, Inc., (the parent company of ILG), and ILG Holdings.

 

We refer to the business of ISI prior to the Business Combination as “legacy ISI” and the business of ILG prior to the Business Combination as “legacy ILG.” Unless otherwise indicated, or the context otherwise requires, references to “we,” “us,” “our,” or the “Company” refer to (i) with respect to periods prior to the Business Combination, legacy ISI, (ii) with respect to periods beginning with the completion of the Business Combination and ending immediately before the completion of our Corporate Conversion (as defined below), Interior Logic Group Holdings, LLC and its subsidiaries, and (iii) with respect to periods beginning with the completion of our Corporate Conversion and thereafter, Interior Logic Group Holdings, Inc. and its consolidated subsidiaries. In accordance with Rule 3-05 of Regulation S-X, separate financial statements are not required for any of our acquisitions individually or in the aggregate.

 

Prior to the Business Combination, for the fiscal year ended December 31, 2017, legacy ILG had revenues of $566 million and nearly 1,600 employees, while legacy ISI had revenues of $852 million and nearly 2,600 employees. At the time of the Business Combination, legacy ILG was legacy ISI’s largest direct competitor.

 

Basis of Presentation

 

Our consolidated financial statements accompanying this prospectus have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Our consolidated financial statements are based on a fiscal year ending December 31.

 

Additional information regarding our financial performance and non-GAAP measures, including reconciliations of non-GAAP measures to their most directly comparable GAAP measure, is included in “Non- GAAP Financial Measures” and in “Summary Historical Financial Data.” In addition, such financial information should be read in conjunction with the disclosures set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

Non-GAAP Measures

 

In addition to the results reported in accordance with GAAP, we have provided information in this prospectus relating to Adjusted EBITDA and Adjusted EBITDA margin.

 

We define EBITDA as earnings before interest, income taxes, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA, adjusted for acquisition and integration costs, share-based compensation, management fees, pre-opening costs, refinancing costs and expenses associated with the submission of our prior draft registration statement to the SEC, which was discontinued. To calculate Adjusted EBITDA for the nine-month period ended September 30, 2020, we further adjusted EBITDA for direct COVID-19-related costs, which represent charges for severance costs, remote connectivity and health and safety modifications within our facilities, all of which are clearly and directly related to COVID-19 and are incremental and separable from

 

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normal operations. To calculate Adjusted EBITDA for 2018, we further adjusted EBITDA for an impairment charge resulting from our rebranding in connection with our Business Combination. Adjusted EBITDA measures performance by adjusting EBITDA for certain income or expense items that are not considered part of our core operations.

 

Adjusted EBITDA margin takes Adjusted EBITDA and divides it by revenues. We believe that the presentation of these measures provides useful information to investors regarding our results of operations because it assists both investors and us in analyzing and benchmarking the performance and value of our business. We also believe these measures are useful to investors and us as measures of comparative operating performance from period to period, as they measure our changes in pricing decisions, cost controls and other factors that impact operating performance, and they remove the effect of our capital structure (primarily interest expense), asset base (primarily depreciation and amortization), items outside our control (primarily income taxes) and the volatility related to the timing and extent of other activities, such as asset impairments, and non-core income and expenses, such as acquisition and integration expenses. Accordingly, we believe that these measures are useful for comparing general operating performance from period to period. In addition, we use various Adjusted EBITDA- based measures in determining certain of our incentive compensation programs. Other companies may define Adjusted EBITDA and Adjusted EBITDA margin differently and, as a result, our measures may not be directly comparable to measures of other companies. In addition, Adjusted EBITDA may be defined differently for purposes of covenants contained in our Revolving Credit Facility or any future indebtedness.

 

Although we use these measures to assess the performance of our business, the uses of the measures are limited because they do not include certain material expenses, such as interest and taxes, necessary to operate our business. Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, and not as substitutes for, net income (loss) in accordance with GAAP as a measure of performance. Our presentation of these measures should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items.

 

These measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Because of these limitations, these measures are not intended as alternatives to net income (loss) as indicators of our operating performance, as alternatives to any other measure of performance in conformity with GAAP or as alternatives to cash flow provided by operating activities as measures of liquidity. You should therefore not place undue reliance on these measures or ratios calculated using those measures.

 

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PROSPECTUS SUMMARY

 

This prospectus summary highlights certain information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision.

 

You should read the entire prospectus carefully, including the information under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, before investing. This prospectus includes forward-looking statements that involve risks and uncertainties. See “Information Regarding Forward-Looking Statements.”

 

Our Vision

 

Our vision is to utilize our value-added technology platform combined with our national footprint and customer relationships to revolutionize the way homebuyers purchase and design their homes. By seamlessly connecting key constituents in the housing lifecycle, including homebuilders, homebuyers, suppliers and subcontractors, we believe we can unlock significant market opportunities.

 

Our Company

 

We are the leading national provider of technology-enabled sales and marketing, design and installation solutions for homebuilders. Our robust technology platform delivers interior design visualization, interior option selection, supply chain management and data analytics solutions from initial homebuyer engagement through the construction and delivery of homes. We are also the leading national installer for select high-value and aesthetically important interior finishes, such as flooring, cabinets and countertops, to our homebuilder customers, as well as multi-family, commercial and repair & remodel customers. Our scalable technology solutions enhance the homebuying experience, streamline the homebuying process and meaningfully drive homebuyer satisfaction, while improving homebuilders’ profitability, construction quality and cycle times. We serve a broad range of national, regional and local homebuilders across the home price spectrum, from entry-level to move-up and luxury homes, including each of the 20 largest U.S. homebuilders. We have the leading position in the estimated $23 billion U.S. new home interior finish solutions industry, and our technology solutions significantly expand our addressable market to other economic transactions associated with the housing lifecycle, including new construction pre-sales marketing, monetization of valuable consumer data and providing access to homebuyers for future design and renovation needs, amongst others. We generated 2019 revenues, net loss and Adjusted EBITDA of $1,785.4 million, $(15.8) million and $123.2 million, respectively.1

 

We have built the most expansive national footprint in our highly fragmented industry, which uniquely positions us to serve our national, regional and local homebuilding customers consistently and effectively across markets. Furthermore, we collect, analyze and report valuable data on over 100,000 new homes annually, creating the largest repository of homebuyer design preference data in our industry. Our national network is comprised of 110 design studios, 109 warehousing and logistics centers and nine countertop fabrication facilities, from which we serve approximately 285 Metropolitan Statistical Areas (“MSAs”), including 46 of the top 50 U.S. homebuilding markets based on 2019 single-family housing starts. We are more than three times the size of our next largest direct competitor, based on number of locations. With an estimated market share today of only 6% based on 2019 single-family residential revenues, we believe we have significant runway for growth.

 

Our design studios serve to manage a key part of the homebuying process where homebuyers design, select and upgrade the interior finishes of their new home. We operate 64 builder-branded design studios on behalf of

 

1   For a definition of Adjusted EBITDA, as well a reconciliation to the most directly comparable GAAP measure, see “Non-GAAP Measures” and “—Summary Historical Financial Data.”

 

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20 homebuilders across the country, as well as 46 ILG-branded design studios that provide the same profesionally-managed design experience for multiple homebuilders in a single location.

 

The following map illustrates our expansive national footprint.

 

LOGO

 

We have an experienced team of approximately 4,200 employees, including approximately 300 design professionals and approximately 470 field managers, and utilize approximately 9,000 independent installation subcontractors. Additionally, our technology team includes approximately 140 software engineers, digital artists and technology specialists that facilitate the continual advancement of our industry-leading technology platform. In order to accelerate development of our technology solutions, we have added 40 new members to the technology team in 2020 alone and expect to continue to grow this group in 2021.

 

Our differentiated technology suite simplifies and enhances the home buying experience and has positioned us at the forefront of digitization in the homebuilding industry. Advancements in visualization technology and younger demographics reaching peak homebuying age have led to increasing demand for a more virtual homebuying and home design experience in recent years. Additionally, we believe the COVID-19 pandemic has been a catalyst for virtual engagement by homebuyers, resulting in a substantial increase in the use of our technology platform by our customers. We adapted our business model quickly to meet the increased demand for fully virtual offerings and we believe we will continue to benefit from our innovative business model. Many of our homebuilding customers are also reporting substantial increases in website traffic, virtual tours, and full virtual sales. Homebuyers are now spending, on average, four hours in our web-based design and option selection systems—a 24% increase in system usage in 2020 compared to 2019. Similarly, we have seen a notable increase in the percentage of our homebuyers who have completed their interior option selections via fully virtual appointments utilizing our technology platform in 2020 compared to 2019. Nearly 10% of all design sessions are now conducted virtually and the demand for online design appointments continues to increase. We believe we have the leading end-to-end technology platform that meets this demand and delivers a dynamic, digitally-enabled homebuying experience. Our engaging visualization technology allows homebuilders to offer photo-realistic virtual home tours as a marketing tool, eliminating the need to build costly model homes for every community, accelerating the pre-marketing window for each community and potentially shortening the overall sales cycle. Our cutting-edge option selection tools utilize visualization and real-time pricing technology to create a personalized, user-friendly design experience customized to the homebuyer’s community, floor plan and budget. Our streamlined integration with homebuilder back office systems creates valuable connectivity throughout the construction process, allowing us to improve construction quality, decrease cycle times and increase customer stickiness. In addition, our systems collect, analyze and report on vast quantities of valuable data, including homebuyer design preferences on over 100,000 new homes annually, which empowers

 

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homebuilders and suppliers with critical insight into evolving homebuyer preferences. Homebuilders use our proprietary analytics to tailor their product offerings and pricing by community to further drive incremental option sales and improve profitability. We have made significant technology investments to build our differentiated and scalable technology platform, which we believe will continue to further enhance our profitability and grow our revenue as we expand our footprint with existing and future customers and add new technology solutions.

 

We have grown considerably, more than doubling our business over the past three years, both organically and through acquisitions. Our organic growth has been driven by the addition of new design studios, new customer additions and increased penetration of existing customers, all of which is underpinned by our expanding technology offering. Technology-enabled solutions have further accelerated our organic growth, and adoption of these solutions by leading homebuilders has contributed to significant growth in our revenue generated by the top 10 U.S. homebuilders from 2015 to 2019. Our recent technology developments, including our photo-realistic visualization technology, have the potential to significantly accelerate the digitization of the homebuilding industry and drive further organic growth through increased adoption by new and existing homebuilders. In addition to our organic growth, we believe we are an acquirer of choice in our industry. We have completed over 18 acquisitions since 2013, which is more than any of our direct competitors, and we believe we have the opportunity to execute additional accretive acquisitions in our highly fragmented industry.

 

Historically, we have leveraged successful partnerships with homebuilders in specific markets to expand into additional geographies and product categories, which generally increases our profit margins by leveraging our infrastructure and personnel across a denser geographic footprint. We do not currently offer installation services for all three key product categories (i.e. flooring, cabinets and countertops) in all of our existing geographic markets. As such, we believe that expanding our service offering to capture incremental installation services offers significant growth opportunities. We also intend to drive margin expansion through purchasing efficiencies, economies of scale on both a local and national basis and the continued consolidation to a single integrated technology platform across our geographic markets.

 

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Our Value Proposition

 

The chart and graphic below summarize our value proposition and the technology-enabled solutions we deliver to the key constituents in the homebuilding value chain.

 

Constituent

  

ILG Value Proposition

   

Homebuilders  

  

•  Streamline marketing, sales generation, and design process

•  Improved homebuyer satisfaction levels

•  Maximize option profitability

•  Improve cycle times

•  Provide valuable data analytics and insights

   

Homebuyers  

  

•  Fully customize their home design and furnishings

•  Improve homebuyer satisfaction

•  Leverage fully remote visualization tools for options selection

•  Access to designers to facilitate decision making

   

Designers  

  

•  Collaborate on home design process

•  Ability to work with homebuyers in virtual setting

•  Real-time pricing capabilities

•  Data analytics inform design decisions

   

Suppliers  

  

•  Predictive analytics on homebuyer trends

•  Ability to showcase products in a physical or virtual design studio

•  Integrated systems facilitate efficiencies

•  Real-time pricing capabilities

   

Installers  

  

•  Provide consistent, predictable work

•  Increase productivity through technology

 

LOGO

 

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Our comprehensive suite of solutions provides meaningful value to each of the following constituencies:

 

Homebuilders

 

We have long-standing customer relationships with national, regional and local homebuilders as a result of our proven ability to drive increased homebuilder profitability through our technology solutions. We provide customized, value-added design studio solutions, critical insight into homebuyer demand trends and superior service, from pre-sale marketing to homebuyer option selection to supply chain management and installation. Homebuilders benefit from our valuable design expertise and installation capabilities, allowing them to focus on their core competencies in land procurement and development, home sales and construction management. Our visualization technology offers builders the ability to provide photo-realistic virtual tours of multiple floorplans to prospective homebuyers without needing to visit a physical model home. Our option selection technology, real-time pricing engine, and skilled design professionals enhance the homebuyer experience and drive homebuilder profitability by increasing sales of options and upgrades, while our turnkey supply chain management and installation services drive construction quality and process efficiencies. On average, buyers who use our online systems spend 25% more on interior options and upgrades compared to buyers that do not. We also offer supply chain management and installation services to homebuilders through our builder direct solutions, where our customers benefit from our extensive supplier relationships, service excellence and multi-product capabilities. Our streamlined integration with homebuilder back office systems helps our customers and our teams improve construction quality, decrease cycle times and increase customer stickiness. We complement our integration capabilities with extensive data analytics to offer insight into evolving design trends and homebuyer preferences and assist homebuilders in optimizing their option offerings and making home design and community investment decisions. Our ability to deliver fully-integrated services enhances our ability to retain customers over time.

 

We serve each of the top 20 U.S. homebuilders based on 2019 home closings. The top 20 U.S. homebuilders accounted for approximately 30% of total home closings in 2019, up from approximately 17% in 2000, according to Builder Magazine Online. We believe this increase in market share is due to the largest homebuilders benefiting from the financial and operational efficiencies associated with combining a national platform and local market concentration in the nation’s most attractive housing markets.

 

Approximately 80% of our 2019 revenues were derived from sales to the new single-family residential market. The following graphic illustrates the critical link we represent in the interior finish value chain for homebuilders.

 

LOGO

 

Homebuyers

 

Our direct and personal interactions with homebuyers enable us to meaningfully drive homebuyer satisfaction. Our design studio solutions streamline the often disjointed and overwhelming option selection

 

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process by creating a personalized and well-organized design experience. We offer tailored option selection tools, ranging from self-guided web portals for browsing interior finishes to one-on-one appointments with trained design professionals, which can take place in strategically laid out and conveniently-located showrooms or through virtual meetings. Homebuyers benefit from our design expertise and user-friendly visual selection tools that allow them to experience photo-realistic interior finish options and compare real-time pricing for options that are customized to their community and floor plan. Once option selections are made, our turnkey installation services facilitate timely and high-quality completion for the homebuyer.

 

Suppliers and Installers

 

We maintain strong relationships with our broad supplier base and we are the largest new single-family residential customer for many of our suppliers. Our supplier relationships typically are negotiated at the national level but coordinated at the regional level, driving both local efficiency and overall cost-effectiveness. We provided interior finishes for more than 100,000 new single-family homes in 2019, which is more than any U.S. homebuilder; the breadth of our direct homebuyer interactions enables us to provide suppliers with valuable insight into homebuyers’ evolving preferences. Suppliers value our ability to help them optimize product offerings to be leaders in the latest design trends. In addition, we believe independent installers are eager to work with us due to our extensive customer-base, consistent job volumes and rapid payments, which we believe is a competitive advantage in an increasingly competitive workforce market.

 

Multi-Family, Commercial and Repair & Remodel Customers

 

In addition to single-family homebuilders, we are a critical partner to a broad range of multi-family, commercial and repair & remodel customers, including new multi-family and light commercial contractors, multi-family owners and operators, senior living operators, home improvement retailers, single-family rental operators and single-family repair & remodel customers, where homeowners spend over $330 billion annually to repair and renovate their homes according to the Joint Center for Housing Studies of Harvard University. We provide turnkey supply chain management and installation services for these customers across a wide range of project types and job sizes. Whether we are managing the interior finish installation process for a large new multi-family apartment complex or providing replacement flooring on a tight timeline for single-family rental home turnover, we offer a streamlined process and high-quality end result from a trusted provider. In addition, we provide customized technology solutions such as online ordering options for property managers. We leverage our infrastructure to cost-effectively serve this customer base across multiple markets with strong service levels, efficiency and valuable local expertise.

 

Our Industry

 

The interior finish solutions industry is a large, growing and highly fragmented market in which we are the leading national provider. We primarily serve the new single-family residential market, while also serving the new multi-family residential, commercial, and repair & remodel markets. The average installed cost of flooring, cabinets and countertops in a new single-family home was approximately $25,500 in 2019, according to the NAHB. Assuming 2019 U.S. single-family housing starts of approximately 887,700 based on U.S. Census Bureau data, this implies a potential addressable market of approximately $23 billion, with future upside through the addition of adjacent product categories, increases in interior finish spend per home and incremental housing volumes. Additionally, our technology solutions significantly expand our addressable market to include other economic transactions associated with the housing lifecycle including new construction pre-sales marketing, monetization of valuable consumer data and the provision of access to homebuyers for future design and renovation needs, amongst others.

 

Purchasing and designing or renovating a home has historically been facilitated by model homes and physical design studios. While our services today are largely delivered through physical design studios, we are

 

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seeing an increased shift towards digitization and a more virtual and technology-oriented model, driven by evolving homebuyer preferences. We believe that the long-term shift to digital solutions is fundamentally changing our market, with more homebuyers and homeowners preferring to review options and make design selections online. Beyond the convenience that comes with making selections virtually, our options selection tools, powered by our visualization technology, provide a more visual and real-time experience, allowing homebuyers and homeowners to see digital renderings of their designs rather than relying on samples and swatches. The ongoing shift in preference towards digital solutions is especially true for younger homebuyers and homeowners. In a recent survey from the National Association of Realtors, approximately 30% of those in younger demographics stated that they would be comfortable buying a house completely virtually. These long-term shifts have accelerated in the current COVID-19 pandemic with social distancing guidelines. We expect that these trends will lead to significant interest from both homebuilders and homeowners to increasingly implement digital solutions in the process of purchasing and designing a new home.

 

New Single-Family Residential Market

 

The new single-family residential market, valued at approximately $306 billion as of September 2020, is the primary market in which we operate. According to the NAHB and the U.S. Census Bureau, since 2011, cumulative net U.S. household formations have exceeded total housing starts by greater than 1.5 million units, leading to a significant backlog of demand for new housing. We expect the continued growth in the overall population, the aging of approximately 70 million millennials into their prime household formation and homeownership years, and the long-term effects of the COVID-19 pandemic to provide support for continued growth in new single-family residential construction. In addition to the long-term effects of COVID-19 on the industry, the public homebuilders are currently experiencing a significant rebound in net new orders. We typically benefit from an increase in net new orders once those homes are completed, which have historically averaged approximately 6 months after an initial order, and therefore we believe the current trends will benefit us in 2021. Furthermore, public homebuilding companies have reported increasing backlog value throughout 2020, which further supports increased deliveries in 2021.

 

Single-family housing starts remain below their long-term historical average and, according to the NAHB, are projected to grow at a 3.9% compound annual growth rate (CAGR) from 2020 to 2022. In addition, our large homebuilder customers have been gaining market share due to a long-term shift in the way homeowners approach the home purchasing process.

 

 

LOGO

 

Source: U.S. Census Bureau Historical Data.

 

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LOGO

 

Source: U.S. Census Bureau Historical Data.

 

Repair & Remodel, Multi-Family and Commercial Markets

 

The residential repair & remodel market has been growing at a 4% CAGR since 2014. According to the Joint Center for Housing Studies of Harvard University, homeowner improvement and repair spend is expected to be approximately $338 billion in 2020. As new home construction has lagged historical build averages over the last decade, the average home age has steadily increased to over 40 years in the U.S. which we expect to result in an increase in repair and remodel spend over time. The market is also supported in the near term by a greater portion of the population staying at home due to the COVID-19 pandemic and spending incremental income on home repairs and renovations. Our core categories (flooring, cabinets and countertops) are typically high-priority items for homeowners to renovate due to their high visibility. We also expect continued growth in the multi-family repair & remodel market, driven primarily by the age of the housing base, with approximately 80% of the multi-family housing base built before 2000 as well as growth in demand for multi-family housing.

 

We provide supply chain management and installation services to the commercial and multi-family construction market, primarily focusing on apartment buildings, hotels, senior living facilities and light commercial contractors. According to the American Institute of Architects (AIA), non-residential construction spend is estimated to be approximately $400 billion in 2020 and the NAHB is expecting 393,000 multi-family housing starts in 2020.

 

Our Strengths

 

We benefit from the following key competitive strengths:

 

Clear Market Leader with an Unrivaled National Network

 

We are the leading national provider of technology-enabled sales and marketing, design and installation solutions for homebuilders. We have the leading market position in the approximately $23 billion U.S. new home interior finish solutions industry, and our scale and technology differentiation provide unique capabilities that attractively position us relative to our competitors.

 

Amidst an increasingly consolidated homebuilder landscape, our national footprint, leading technology platform and execution capabilities position us as a preferred partner to large national and regional homebuilders

 

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across the U.S. In addition, our national scale, combined with leading local market positions, drive strong supplier and local workforce relationships that allow us to capture meaningful supply chain efficiencies and deliver consistent, high-quality installation services. We believe independent contractors are eager to work with us due to our extensive customer-base, consistent job volumes and rapid payments, which we believe is a competitive advantage in an increasingly competitive workforce market.

 

Differentiated Technology-Enabled Solutions

 

We have made significant investments to build a robust technology platform that we believe differentiates our value proposition to homebuilders and enhances the user experience for homebuyers. Our end-to-end technology suite starts with pre-sales marketing solutions, offering photo-realistic virtual tours of floor plans to prospective homebuyers, eliminating the need for time-consuming in-person tours and potentially eliminating the need for costly model homes. Once a homebuyer has purchased a home, we offer online option selection tools that utilize visualization technology to allow homebuyers to conveniently browse thousands of customized product options in advance of design appointments—whether in-person or virtual—and create an online “wish list” for their new home with real-time pricing. Our design professionals have access to this key information and use it during design appointments to focus on a particular homebuyer’s preferences and tailor their sales approach to maximize upgrade sales. Our technology integrates with homebuilder back office systems to help improve construction quality, decrease cycle times and increase customer stickiness. The wealth of data captured by our technology also offers critical insight to homebuilders that influences their product offerings and community design and investment decisions. The over 100,000 homes we serve annually vastly outnumbers the number of homes built by even the largest national homebuilders, which enhances the value of the data we collect. We continue to invest in technological innovation to create new opportunities for expansion, from additional visualization applications, such as supplier product selections, to market and data analytics for homebuilders and product manufacturers. We believe that our investments in technology will significantly expand our addressable market as we seek to capture additional economic transactions in the housing lifecycle.

 

Superior Customer Value Proposition

 

Our comprehensive suite of sales, marketing, design and installation solutions delivers a superior value proposition to our customers. Our design solutions drive increased homebuilder sales and profitability, improved operating efficiency and an enhanced homebuyer experience. Our ability to increase efficiency and profitability for our homebuilder customers is critical to our value proposition. Our builder-branded design studios offer a dedicated solution for larger homebuilders, while our ILG-branded design studios provide the same professionally-managed design experience for multiple regional homebuilders in a single location. We have also proven the ability to serve our customers digitally, as we have seen a notable increase in the percentage of our customers that have completed fully virtual design selections in 2020 compared to 2019. Our expanding technological capabilities, particularly around visualization, are accelerating the digitization of the homebuilding industry and enhancing the homebuyer experience for homebuyers across the size and price spectrum. Interior option sales are an important driver of homebuilder profitability, and we focus on high-touch products, such as flooring, cabinets and countertops, that homebuyers view as critical to the design aesthetic and overall home satisfaction. Our commitment to providing excellent service and quality from the design appointment through installation enhances the overall homebuyer experience, further benefitting our homebuilder customers. As a result of our strong value proposition and proven track record, we have developed long-standing customer relationships, as demonstrated by our minimal customer turnover, and we frequently benefit from exclusivity across specified products and geographic markets. In addition, we utilize our strong supplier and independent contractor relationships to serve as a valued provider of supply chain management and installation services for homebuilders through our builder direct solutions, as well as for a diverse range of multi-family, commercial and repair & remodel customers.

 

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Robust Supply Chain Capabilities

 

We are the largest new single-family residential customer for many of our suppliers, which we believe allows us to achieve superior pricing, product selection and supply chain efficiencies relative to our competitors. We manage the complex process of matching product supply to homebuyer demand for our customers, leveraging our data-driven insights to guide simplified product offerings that focus on high-demand options. Similar to our homebuilder customers, we also provide value-added insights and data analytics to our suppliers that we believe we can monetize over time.

 

Successful Track Record of Identifying, Executing and Integrating Acquisitions

 

We operate in a highly fragmented industry, where we believe our resources, experience and access to capital position us to capitalize on the significant opportunity to execute accretive acquisitions and enhance our market position. We have completed approximately 18 acquisitions since 2013, which is more than any of our direct competitors. We have completed both tuck-in and transformative acquisitions, with an average purchase multiple below seven times adjusted annualized EBITDA. Our senior management team has significant experience executing a disciplined acquisition strategy and has institutionalized best practices for successful integration and synergy realization. As a result of our management tenure, history of successful acquisitions and local entrepreneurial cultures, we have extensive relationships in our industry and are an acquirer of choice among potential acquisition targets.

 

Strong Balance Sheet and Free Cash Flow Generation

 

On a pro forma basis to reflect the net proceeds from this initial public offering, we expect our net leverage will be approximately                  times 2019 Adjusted EBITDA.2 The capital requirements of our business are relatively low, as our primary investments are focused on technology innovation, design studios and countertop fabrication equipment. We are focused on managing our working capital as part of our efficient supply chain operations, as evidenced by our inventory turning more than 15 times per year and an overall cash conversion cycle of fewer than 30 days. We believe our relatively low leverage compared to public company peers, coupled with our strong free cash flow generation and prudent capital management, provides us significant advantages in today’s environment, including the flexibility to continue to grow organically and through acquisitions, as well as maximize our asset efficiency.

 

Proven Management Team and Entrepreneurial Culture

 

Our senior management team, led by CEO, Alan Davenport, and President and COO, Jason Peel, has been instrumental in developing our innovative business model. The deep industry knowledge and customer and supplier relationships of our management team are a competitive advantage in executing our strategy. Our key executives have an in-depth understanding of how to best serve our customers as a result of their extensive experience in the interior finish solutions industry as well as other areas of the homebuilding and building products supply chain. Our entrepreneurial culture and deeply experienced local and regional management teams drive service excellence and nimble decision-making, empowering local collaboration with customers, suppliers and installers. Our vision is not attainable without our employees, and our future success will in large part be determined by the talent, skills and culture of our workforce. We strive to foster a diverse and inclusive workforce and we recognize a responsibility to advance our human capital management strategies to attract, develop and safeguard the well-being of our talented and dedicated workforce, including our employees, partners and suppliers. The board is also engaged with management to create a corporate culture that embodies the attributes and behaviors necessary to advance our vision and execute on our strategies.

 

2   For a definition of Adjusted EBITDA and net leverage, as well a reconciliation to the most directly comparable GAAP measures, see “Non-GAAP Measures” and “—Summary Historical Financial Data.”

 

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Demonstrated and Growing Commitment to Environmental, Social and Governance Matters (ESG)

 

We continue to increase our focus on ESG initiatives to ensure that we as well as our services and solutions promote a commitment to these important areas. Regarding social initiatives, we are constantly focused on the health and safety of our employees in all aspects of the workplace. In response to the ongoing COVID-19 pandemic, we have provided many of our employees with the ability to work remotely, increased the cleaning and sanitizing of our offices and facilities and have implemented strict safety and health measures at remote worksites. We also seek to promote community involvement and diversity in our organization. We encourage our employees to give back to the community and foster social change by providing them with a paid day off to get involved in charitable and community activities. We have established a diversity committee chaired by our female CFO. We have implemented and are continuing to implement important corporate governance and risk management practices as well, including compensation programs with increased focus on performance-based equity compensation.

 

Our Growth Strategy

 

Our objective is to achieve profitable growth and increase stockholder value through the following key strategies:

 

Gain Market Share Through Unique Visualization Tools Addressing Changing Customer Preferences

 

We have a proven ability to expand our solutions with existing homebuilder customers over time, layering design studio and technology solutions on top of existing installation services to grow our wallet share and enhance our customer stickiness due to our technology integration with homebuilder back office systems. Technology is one of the hallmarks of our solutions-oriented business model, and we plan to continue to invest in further differentiating our offering. We believe the homebuilding industry is still in the early stages of leveraging technology and data analytics to more efficiently design, market, sell and deliver homes. We believe we are one of the industry leaders in this area and our scale positions us to continue to invest more than our competitors in technology and innovation, as evidenced by our technology spend of over $60 million over the past three years. We intend to continue to develop leading-edge technology tools that enrich the user experience, optimize sales and profitability, and enhance service levels and operational efficiency for our customers.

 

One of our key development priorities has been to expand our visualization features, which we have accelerated through our recent acquisition of Roomored, a leading visualization SaaS provider. The market continues to shift towards a more virtual homebuying experience as younger demographics begin to enter their prime homebuying years. For example, according to Apartment List, 80% of millennials state that buying a home is an important personal goal, and approximately 30% of the younger demographic population would be willing to buy a home fully online, according to a recent survey from the National Association of Realtors. These tailwinds emphasize the importance of rich, real-time visualization capabilities and digital marketing platforms in the current environment. Our superior virtual capabilities and design tools will continue to position us to take advantage of these trends, while also enabling us to gain additional data insights to understand changing homeowner preferences and provide feedback to our homebuilder, supplier and installer partners.

 

Execute on Our Technology Roadmap to Increase Revenue Streams Throughout the Entire Lifecycle of a Home

 

Our technology strategy is to expand our total addressable market to capture incremental economic transactions associated with the housing lifecycle. We believe that our access to over 100,000 homebuyers annually leaves us uniquely positioned to capitalize on this opportunity. Our technology roadmap is focused on continued enhancement of our design and selection capabilities, monetization of our significant repository of

 

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homebuyer data, and creating a digital marketplace to connect homebuyers, suppliers and installers for any future repair and remodel needs. In addition, we plan to capitalize on artificial intelligence-driven technology to show homeowners products and solutions of interest, to the benefit of both the homeowners, homebuilders and product partners.

 

Expand Our Extensive Relationships with Leading Homebuilders

 

We have a proven track record of growing our business with key customers, with our revenues from the top 10 U.S. homebuilders more than tripling from 2015 to 2019 through organic growth and acquisitions. Furthermore, from 2017 to 2019, we grew organic revenue from multiple key customers by more than 20%. Today we serve many of the leading national and regional homebuilders in the U.S. in multiple markets. We have an opportunity to substantially expand these relationships over time. In 2019, we served approximately 75,000 homes to our national accounts, which represent key scaled homebuilding customers that management has strategically aligned with across core markets. These customers delivered approximately 250,000 new homes in total, providing an opportunity to meaningfully increase penetration within our existing customers. We intend to continue to leverage our national footprint, technology platform and strong reputation for consistently superior execution to serve these customers in additional markets. Today, we operate 64 builder-branded design studios on behalf of 20 homebuilders across the country, as well as 46 ILG-branded design studios that provide the same professionally-managed design experience for multiple homebuilders in a single location. Our larger design customers collectively have operations in over 250 MSAs that we do not serve with our builder-branded model, providing significant runway for continued expansion, particularly in high growth attractive housing markets in the South and Southeast. Likewise, we provide builder direct solutions to national and regional homebuilders in multiple markets today, and we look to further penetrate these relationships in many more of the markets they serve. In addition, we have been successful in converting a number of builder direct customers to our design studio solutions, and in expanding the scope of our technology solutions to our design studio customers. Our investments in technology also significantly enhance our ability to serve new customers remotely outside of our design studio footprint. As an example, we recently executed a multi-year agreement with one of our national homebuilder customers to serve as their sole-source visualization provider for all interior finishes, regardless of whether we provide their installation services in a given market.

 

Expand Product Installation Capabilities Across Additional Markets

 

We perform supply chain management and installation services for flooring products across substantially all of our geographic markets. However, we offer cabinet and countertop installation services in only approximately 38% and 35% of these markets, respectively. We believe there is significant opportunity to grow our business in these and other products, through both expansion across geographic markets and increased penetration of the markets we currently serve. By expanding our supply chain management and installation services to additional products, we believe we can increase our potential revenues and profit per home and deepen our homebuilder relationships.

 

Drive Margin Enhancement Through Scale, Operational Initiatives and Technology Investments

 

We have demonstrated a proven ability to expand our margins over time and achieve industry-leading returns on invested capital. Our favorable margin profile is in part due to increasing our scale in specific markets, as we typically generate the highest margins in regions where we maintain leadership positions. Local economies of scale allow us to better leverage field managers, warehouses, and installation crews on a per home basis; as such, we expect to enhance our profitability as we achieve additional regional scale. We have also meaningfully expanded our margins through operational efficiencies and our investments in technology to improve our integration with homebuilder back office systems. Today, we believe we are optimized in the markets that collectively represent approximately 41% of our revenues for the nine months ended September 30, 2020. Our optimized markets demonstrate the aforementioned characteristics and generate margins in excess of our

 

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corporate average. Finally, the monetization of our technology initiatives, such as our visualization capabilities, are generating revenue at significantly higher margins, with technology-enabled revenue generating gross margins more than 800 bps higher than our builder direct revenue. We believe we can materially increase our overall margins in the long term through our technology initiatives.

 

Pursue Value-Enhancing Acquisitions in a Highly Fragmented Market

 

We estimate that approximately 80% of the interior finishes solutions industry remains highly fragmented. Our successful and disciplined acquisition strategy has provided us access to new technology, customers and markets, expanded our product capabilities, deepened our management team and enhanced our operational best practices. We will continue to focus on acquisitions that meet our criteria for growth, returns, technological advancement, market expansion, customer and product expansion and synergistic operations at attractive valuations. We believe our scale and access to capital relative to our competition, together with our senior management team’s strong relationships and reputation and vast and talented workforce, position us to take advantage of the many acquisition opportunities in our fragmented industry.

 

Pursue Growth Opportunities in Multi-Family, Commercial and Repair & Remodel End Markets

 

We employ our scale and supply chain management and installation expertise to serve a broad range of customers in multi-family, commercial and repair & remodel end-markets. These customers collectively represented approximately 20% of our 2019 revenues and provide another channel of growth outside of the new single-family residential market. We expect to continue to expand existing and develop new relationships where we can efficiently and effectively leverage our existing supply chain management and installation services to enhance our growth and profitability. Within these end markets, additional revenue opportunities include multi-family and light commercial contractors, multi-family owners and operators, senior living operators, single-family rental operators and home improvement retailers, where the largest companies have grown extensively through industry consolidation since the housing recession.

 

Our Sponsors

 

Founded in 1996, Littlejohn & Co., LLC (together with its affiliates, “Littlejohn”) is an investment firm headquartered in Greenwich, Connecticut. The firm’s current portfolio consists of 17 companies (excluding non-control investments) in a variety of industries, including multiple investments in the building products space. Littlejohn’s current and historical investments in the building products sector include Cook & Boardman and Contech. In addition, from 2011 to 2015, Littlejohn maintained an investment in Installed Building Products Inc. (NYSE: IBP), one of the nation’s largest insulation installers for the new single-family residential market and a diversified installer of complementary building products, which completed its initial public offering in 2014. Littlejohn invests primarily in North American headquartered businesses, many of which have global operations. Littlejohn will beneficially own approximately                % of our common stock immediately upon the consummation of this offering. See “Principal Stockholders” for additional information regarding beneficial ownership.

 

Founded in 1995, Platinum Equity is a global investment firm with approximately $23 billion of assets under management and a portfolio of approximately 40 operating companies that serve customers around the world. The firm’s portfolio companies generated more than $25 billion of revenue during the trailing twelve-month period ended June 30, 2020. Platinum Equity specializes in mergers, acquisitions and operations—a trademarked strategy it calls M&A&O®—acquiring and operating companies in a broad range of business markets, including manufacturing, distribution, transportation and logistics, equipment rental, metals services, packaging, media and entertainment, technology, telecommunications, healthcare and other industries. Platinum Equity’s current and historical investments in the building products and construction sector include PrimeSource,

 

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NILCO, United Site Services, Fabcon, CanWel Building Materials, and Yak Access. Over the past 25 years, Platinum Equity has completed more than 300 acquisitions. Certain affiliates of Platinum Equity, LLC (collectively, “Platinum” and, together with Littlejohn, the “Sponsors”) will beneficially own approximately    % of our common stock immediately upon the consummation of this offering. See “Principal Stockholders” for additional information regarding beneficial ownership.

 

Corporate Conversion

 

We currently operate as a Delaware limited liability company under the name Interior Logic Group Holdings, LLC. Faraday, which is owned by, among others, Littlejohn and members of legacy ISI management, owns 53% of our Class A Units, and ISH, which is owned by, among others, Platinum and members of legacy ILG management, owns 47% of our Class A Units. Certain employees of the Company hold options to purchase our Class B Units.

 

Prior to the effectiveness of the registration statement of which this prospectus is a part, Interior Logic Group Holdings, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Interior Logic Group Holdings, Inc. (the “Corporate Conversion”). As a result of the Corporate Conversion, the holders of Class A Units of Interior Logic Group Holdings, LLC and options to purchase Class B Units will become holders of shares of common stock of Interior Logic Group Holdings, Inc. and options to purchase shares of our common stock, respectively. The number of shares of our common stock and options to purchase shares of our common stock that holders of units and options to purchase units will be entitled to receive in the Corporate Conversion will be determined in accordance with the Plan of Conversion and our Second Amended and Restated Limited Liability Company Agreement, dated May 31, 2018 (the “LLC Agreement”). In connection with the Corporate Conversion, Faraday intends to undertake a series of restructuring actions such that each of Littlejohn and the other holders of the equity interests of Faraday will own our common stock or options to purchase shares of our common stock through a new holding company (“New Faraday”). Following the Faraday restructuring, Faraday will become a non-operating subsidiary of the Company.

 

The information in this prospectus is based on our estimate that, in the Corporate Conversion, shares of our common stock will be issued to holders of units and options to purchase shares of our common stock will be issued to holders of options to purchase units, in either case, based on an initial public offering price per share of common stock of $                , which is the midpoint of the price range set forth on the cover page of this prospectus. To the extent that the actual initial public offering price per share for this offering is greater or less than $                , the actual number of shares of common stock and options to be issued in connection with the Corporate Conversion will be adjusted accordingly. See “Description of Capital Stock” for additional information regarding our common stock following the Corporate Conversion.

 

In connection with the Corporate Conversion, Interior Logic Group Holdings, Inc. will continue to hold all property and assets of Interior Logic Group Holdings, LLC and will assume all of the debts and obligations of Interior Logic Group Holdings, LLC. Interior Logic Group Holdings, Inc. will be governed by a certificate of incorporation filed in the State of Delaware and bylaws, the material portions of which are described in “Description of Capital Stock.” On the effective date of the Corporate Conversion, the members of the board of managers of Interior Logic Group Holdings, LLC will become the members of the board of directors of Interior Logic Group Holdings, Inc., and the officers of Interior Logic Group Holdings, LLC will become the officers of Interior Logic Group Holdings, Inc.

 

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Our organizational and ownership structure, after giving effect to the Corporate Conversion and this offering, is presented below:

 

LOGO

 

The purpose of the Corporate Conversion is to reorganize our corporate structure so that the entity that is offering our common stock to the public in this offering is a corporation rather than a limited liability company and so that our existing investors will own our common stock rather than equity interests in a limited liability company. References in this prospectus to our capitalization and other matters pertaining to our equity prior to the Corporate Conversion relate to the capitalization, equity and limited liability company interests of Interior Logic Group Holdings, LLC, and after the Corporate Conversion, to the capitalization, equity and shares of Interior Logic Group Holdings, Inc.

 

Corporate Information

 

Our principal executive offices are located at 10 Bunsen, Irvine, California 92618. Our main telephone number is (800) 959-8333. Our corporate internet website address is www.interiorlogicgroup.com. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.

 

Risk Factors Summary

 

Investing in our common stock involves a high degree of risk, which are discussed more fully under “Risk Factors.” You should carefully consider all the information in this prospectus, including the risks described in

 

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“Risk Factors,” before making a decision to invest in our common stock. If any of these risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose part or all of your investment. Below is a summary of some of the principal risks we face:

 

   

the negative impacts of the COVID-19 pandemic on our business;

 

   

decreased new single-family residential construction activity;

 

   

downturns in the economy and credit markets;

 

   

decreased demand for interior option upgrades;

 

   

decline in the rate of growth in the housing market, in our geographic markets or of the homebuilding industry;

 

   

loss of, or decreased construction activity by, significant customers;

 

   

pricing pressures from customers;

 

   

changes in the cost of the products we install or in our product mix;

 

   

increased tariffs and other changes in foreign trade policy;

 

   

dependence on our senior management team and other key personnel;

 

   

inability to attract and retain qualified employees and the risks associated with our workforce supply and costs;

 

   

risks associated with completing the implementation of our enterprise resource planning (“ERP”) system and implementing other new initiatives for operating software;

 

   

dependence on the availability and skill of subcontractors and the risks associated with our use of subcontractors;

 

   

inability to execute our growth strategy;

 

   

competitive pressures in our industry;

 

   

risks associated with acquisitions, including our ability to realize anticipated synergies or the costs of integrating acquisitions;

 

   

inability to expand into new geographic markets;

 

   

product shortages, loss of key suppliers, failure to develop relationships with qualified suppliers, material disruptions in our supply or substantial changes to supply terms;

 

   

reliance on third-party license agreements;

 

   

the effect of seasonality of our business, severe weather conditions and climate change;

 

   

cybersecurity risks;

 

   

disruptions in our IT systems and software;

 

   

changes in, or failure to comply with, federal, state, local and other laws and regulations;

 

   

exposure to claims and legal proceedings;

 

   

our failure to adequately protect our intellectual property rights;

 

   

risks related to our indebtedness;

 

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our inability to maintain an effective system of internal controls and produce timely and accurate financial statements or comply with applicable regulations;

 

   

the obligations and increased costs associated with being a public company;

 

   

the significant ownership of our common stock by our Sponsors, whose interests may conflict with those of our stockholders; and

 

   

additional factors discussed under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.”

 

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The Offering

 

Common stock offered by us

            shares (or                shares if the underwriters exercise their option to purchase additional shares in full).

 

Common stock to be outstanding after this offering

            shares (or                shares if the underwriters exercise their option to purchase additional shares in full).

 

Option to purchase additional shares.

We have granted the underwriters a 30-day option to purchase up to                additional shares of our common stock.

 

Use of proceeds

We expect to receive net proceeds from this offering of approximately $                million, or approximately $                million if the underwriters exercise their option to purchase additional shares of our common stock in full, assuming an initial public offering price of $                per share, which is the midpoint of the price range set forth on the on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering (including any additional proceeds that we may receive if the underwriters exercise their option to purchase additional shares of our common stock) to repay indebtedness under our Term Loan Facility and the balance for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds we receive from this offering for acquisitions or other strategic investments, although we do not currently have any specific transactions at this time. See “Use of Proceeds.”

 

Dividend policy

We currently intend to retain any future earnings to finance the development and expansion of our business and, therefore, do not intend to pay dividends on our common stock after this offering and for the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including restrictions in our current and future debt instruments, our future earnings, capital requirements, financial condition, future prospects, and applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits. See “Dividend Policy.”

 

Proposed symbol

We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “ILG.”

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

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The number of shares of our common stock outstanding after this offering is based on                shares of our common stock outstanding as of                , 2020 and excludes:

 

   

            shares of our common stock issuable upon the exercise of outstanding options at a weighted-average exercise price of $                per share as of                 , 2020; and

 

   

shares of our common stock that will be reserved for issuance under the Interior Logic Group Holdings, Inc. 2021 Omnibus Incentive Plan (the “2021 Plan”).

 

Unless otherwise indicated, all information in this prospectus relating to the number of shares of our common stock indicated to be outstanding before or immediately after this offering, as applicable:

 

   

gives effect to the Corporate Conversion, the filing and effectiveness of our certificate of incorporation and the adoption of our bylaws, all of which will occur immediately prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

   

assumes no exercise by the underwriters of their option to purchase additional shares of our common stock.

 

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Summary Historical Financial Data

 

The summary consolidated statements of comprehensive income (loss) data for fiscal years 2019, 2018 and 2017 and the summary consolidated balance sheet data as of December 31, 2019 and December 31, 2018 have been derived from our consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of comprehensive income (loss) data for the nine months ended September 30, 2020 and September 30, 2019 and the summary consolidated balance sheet data as of September 30, 2020 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, our unaudited consolidated financial statements were prepared on the same basis as our audited consolidated financial statements and include all adjustments necessary for a fair presentation of the financial information set forth in those statements.

 

Our historical results are not necessarily indicative of future operating results and our results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year or any other period. You should read the following summary historical financial data in conjunction with our consolidated historical financial statements and the related notes thereto, and with the sections titled, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

(in thousands)   Nine Months Ended
September 30
    Year Ended December 31  
    2020     2019     2019     2018     2017  
    (Unaudited)                    

Statement of Comprehensive Income (Loss) Data:

         

Revenues

  $ 1,231,855     $ 1,314,021     $ 1,785,388     $ 1,405,325     $ 851,918  

Cost of revenues

    941,552       1,026,120       1,390,606       1,099,337       670,274  

Gross profit

    290,303       287,901       394,782       305,988       181,644  

Selling, general and administrative

    219,128       238,798       321,143       246,234       152,218  

Amortization of intangibles

    42,636       47,486       63,545       40,843       9,080  

Impairment of intangible assets and trade name(1)

    816       —         —         10,000       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    262,580       286,284       384,688       297,077       161,298  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    27,723       1,617       10,094       8,911       20,346  

Other expense:

         

Interest expense

    (18,712     (22,321     (29,088     (22,238     (10,458

(Loss) on extinguishment of debt

    —         —         —         (3,068     (552

Other income, net

    1,488       9       8       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    10,499       (20,695     (18,986     (16,395     9,336  

Income tax (expense) benefit

    (2,552     3,127       3,225       3,475       521  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 7,947     $ (17,568   $ (15,761   $ (12,920   $ 9,857  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized (loss) gain on derivative instruments

    (6,708     (108     431       —         (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ 1,239     $ (17,676   $ (15,330   $ (12,920   $ 9,852  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

         

Adjusted EBITDA(2)

  $ 101,974     $ 83,634     $ 123,230     $ 93,038     $ 45,147  

Adjusted EBITDA margin(2)

    8.3%       6.4%       6.9%       6.6%       5.3%  

 

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(in thousands)    As of
September 30
     As of December 31  
      2020      2019      2018      2017  
     (Unaudited)                       

Balance Sheet Data

           

Total current assets

   $ 349,366      $ 300,458      $ 286,197      $ 133,862  

Property, plant and equipment, net

     49,385        53,688        58,001        31,578  

Intangible assets, net

     263,592        300,744        354,388        56,437  

Goodwill

     266,847        253,977        249,849        72,273  

Total assets(3)

     999,997        986,442        956,642        299,030  

Total current liabilities

     225,634        201,857        195,117        111,112  

Long-term debt, net of current portion

     380,946        382,249        384,319        90,848  

Total liabilities(3)

     709,285        682,206        638,412        211,309  

Total members’ equity

   $ 290,712      $ 304,236      $ 318,230      $ 87,721  

 

(1)   Represents amounts for impairment of intangibles ($816 for September 30, 2020) and trade name ($10,000 for the year ended December 31, 2018).
(2)   Adjusted EBITDA measures performance by adjusting EBITDA for certain income or expense items that are not considered part of our core operations. Adjusted EBITDA margin takes Adjusted EBITDA and divides it by revenues. See “Non-GAAP Measures.”
(3)   On January 1, 2019, we adopted ASU 2016-02, Leases, and recognized total right of use assets of $68.5 million and total lease liabilities of $71.0 million related to our operating and finance leases.

 

The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated.

 

     Nine Months Ended
September 30
    Year Ended December 31  

(in thousands)

   2020      2019     2019     2018     2017  

Net income (loss)

   $ 7,947      $ (17,568   $ (15,761   $ (12,920   $ 9,857  

Interest expense

     18,712        22,321       29,088       22,238       10,458  

Income tax expense (benefit)

     2,552        (3,127     (3,225     (3,475     (521

Depreciation and amortization

     53,747        58,930       78,963       52,621       14,075  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     82,958        60,556       89,065       58,464       33,869  

Acquisition and integration costs(a)

     13,540        19,621       28,015       18,141       8,533  

Share-based compensation

     237        985       1,506       1,131       825  

Management fees(b)

     1,735        1,690       2,279       1,404       366  

Pre-opening costs(c)

     152        782       1,208       830       884  

Refinancing and related costs(d)

     —          —         —         3,068       670  

Direct COVID-19 related costs(e)

     2,259        —         —         —         —    

Intangible assets and trade name impairment(f)

     816        —         —         10,000       —    

Costs for an initial public filing(g)

     277        —         1,157       —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 101,974      $ 83,634     $ 123,230     $ 93,038     $ 45,147  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a)   Represents (i) expenses associated with severance, facility consolidations, centralization of functions and technology systems, and other integration activities following the acquisition of businesses, and (ii) transaction-related legal, banking, accounting and other professional fees incurred in connection with the acquisition and integration of businesses.
  (b)   Represents fees paid to the Sponsors for services provided pursuant to management agreements, which will be terminated in connection with this offering. See “Certain Relationships and Related Party Transactions.”

 

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  (c)   Represents non-capitalized expenses related to start-up costs of new facilities.
  (d)   Represents the loss on extinguishment of debt and fees for professional services, such as legal and banking, incurred in connection with the refinancing of debt.
  (e)   Represents charges for severance costs, remote connectivity and health and safety modifications within our facilities, all of which are clearly and directly related to COVID-19 and are incremental and separable from normal operations.
  (f)   Represents amounts for impairment of intangibles ($816 for September 30, 2020) and trade name ($10,000 for the year ended December 31, 2018).
  (g)   Represents costs incurred for legal, accounting and other professional fees associated with the submission of our prior confidential draft registration statement on Form S-1 (“DRS”) to the SEC that were written off in subsequent periods as a result of discontinuing work on the DRS.

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. In addition to the risks relating to the COVID-19 pandemic that are specifically described in these Risk Factors, the effects of the COVID-19 pandemic may also have the effect of significantly heightening many of the other risks associated with our business and an investment in our common stock, including the other risks described in this prospectus. There may be additional risks and uncertainties of which we are not currently aware or which we currently believe to be immaterial. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose part or all of your investment.

 

Risks Related to COVID-19 Pandemic

 

Our business, financial condition and results of operations have been, and are expected to continue to be, adversely affected by the current COVID-19 public health pandemic.

 

In December 2019, coronavirus was reported in China, and, in March 2020, the World Health Organization declared COVID-19 a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home for a period of time. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 50 million people have filed claims for unemployment, and financial markets have experienced extreme volatility. Any outbreaks of contagious diseases, public health epidemics or pandemics and other adverse public health developments could have a material adverse effect on our business, financial condition and results of operations. The COVID-19 pandemic, and the reactions of governmental and other authorities to contain, mitigate or combat the pandemic, which have severely restricted the level of economic activity around the world, have impacted, and are expected to continue to impact, our operations, and the nature, extent and duration of the impact of COVID-19 or any future disease or adverse health condition is highly uncertain and beyond our control. In response to the COVID-19 pandemic, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations. These restrictions have had negative impacts on our business, and may potentially continue to negatively impact our business operations in the future. While our operations have resumed in all of our markets as of the date of filing of this Registration Statement, future mandatory shutdowns, reductions in operations or other restrictions could have a material adverse effect on our business.

 

Although we have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations, including reducing our expenses, furloughing employees and expanding the use of our fully virtual design appointments in place of in-person design studios, these measures may not fully mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations. We have also experienced increased costs as a result of the COVID-19 pandemic, including severance costs and costs related to ensuring the safety of our workforce. We cannot predict the degree to, or the period over, which we will be affected by the COVID-19 pandemic and resulting governmental and other measures.

 

We expect that the economic effects of the COVID-19 pandemic will likely continue to adversely affect demand for our services and products as well as the length of the construction cycle and the timing of our revenue over the balance of fiscal 2020 and through the first half of 2021. Some of our customers have elected to delay remodeling activity due to the COVID-19 pandemic and the government has imposed certain restrictions in some geographic regions to contain the spread of the pandemic. We anticipate that homebuilders and our other

 

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customers may choose to continue to delay new construction or repair and remodeling activity, in response to the COVID-19 pandemic and the measures to contain its spread.

 

In addition, the construction industry in our sector has been experiencing labor and supply constraints as a result of the COVID-19 pandemic. We have and may continue in the future to experience disruptions or delays in our supply chain in connection with the pandemic in the future, which may result in the need to seek alternate suppliers. Alternate suppliers may be more expensive, may not be available or may encounter delays in shipments to us, which would affect our business, financial condition and results of operations. We cannot estimate the extent and duration of the disruption to our supply chain, or the significance of the related financial impact. Should any such disruption continue for an extended period of time, the impact could have a material adverse effect on our business, financial condition and results of operations.

 

In the long term, our liquidity will depend on many factors, including our results of operations, our future growth and the timing and extent of our expenditures, the expansion of our sales and marketing activities and the extent to which we make acquisitions. Changes in our operating plans, material changes in anticipated sales, increased expenses, acquisitions or other events may cause us to seek additional equity and/or debt financing in future periods. We cannot assure you that we will have access to capital to satisfy our needs under the impacts of the COVID-19 pandemic.

 

We expect that the COVID-19 pandemic will continue to adversely affect many aspects of our business, including, but not limited to, the following:

 

   

We experienced reductions in demand for our in-person design studio services during the initial peak of the COVID-19 pandemic. Although demand for our in-person design studio services has resumed at or above pre-COVID-19 levels, future mandatory shutdowns, or other government restrictions as a result of the spread of the virus could reduce demand for our in-person design studio services and many of our products, and could result in economic and financial issues experienced by our customers and suppliers.

 

   

Third parties, such as suppliers and other outside business partners, may experience significant disruptions in their ability to satisfy their obligations with respect to us or their customers, or they may be unable to do so altogether; for example, many of our suppliers have experienced significant extensions of backlog due to labor shortages.

 

   

The housing construction industry may continue to experience labor and material shortages and delays and this may continue to impact the length of the construction cycle and the timing of our revenue. Although we expect the long-term effects of the COVID-19 pandemic to provide support for continued growth in new single-family residential construction and homebuilders are currently experiencing a rebound in net new orders, we do not know if these positive trends will offset the negative effects of the pandemic on our business.

 

   

Measures that we have taken to address the COVID-19 pandemic, including, among other things, providing additional safety equipment, encouraging our employees who are able to work remotely to do so, enacting and enforcing employee physical distancing protocols in our design studios, and all of our facilities, and reducing the need for face-to-face interactions, are reducing the efficiency of our operations.

 

   

Additionally, we may be exposed to increased cybersecurity risks as a result of remote working requirements.

 

   

Illness, travel restrictions or other workforce disruptions could negatively affect our supply chain, our ability to timely and satisfactorily meet our customers’ demands or our other business processes. Even after the COVID-19 pandemic subsides, we could experience a longer-term impact on our operating expenses, including as a result of, among other things, the need for enhanced health and hygiene requirements in our facilities and in our corporate offices or the periodic revival of physical or social distancing or other measures in one or more regions, in attempts to counteract or prevent future outbreaks.

 

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We reduced the number of employees that we employ in order to reduce our operating expenses. We may experience difficulties associated with hiring additional employees or replacing employees. We have brought back all the employees that we furloughed but that might not be the case in the event of any future furloughs. Increased turnover rates of our employees could increase operating costs and create challenges for us in maintaining high levels of employee awareness of, and compliance with, our internal procedures and external regulatory compliance requirements, in addition to increasing our recruiting, training and supervisory costs.

 

   

In addition to existing travel restrictions implemented in response to the COVID-19 pandemic, states and other jurisdictions may continue to close borders, impose prolonged quarantines and further restrict travel and business activity, which could materially impair our ability to support our operations and customers, to source supplies through our supply chain and to identify, pursue and capture new business opportunities, and which could continue to restrict the ability of our employees to access their workplaces. We also face the possibility of increased overhead or other expenses resulting from compliance with any future government orders or other measures enacted in response to the COVID-19 pandemic.

 

Our management of the impact of COVID-19 has required, and will continue to require, significant investment of time by our management and employees as well as other resources. The focus on managing and mitigating the impacts of COVID-19 on our business will likely cause us to divert or delay the application of our resources toward new initiatives and growth opportunities, which may adversely impact our financial condition and results of operations in future periods.

 

The continuing impact of the COVID-19 pandemic on our business and operations depends on numerous factors beyond our control, including, among other things: (1) the duration of, and any revisions in, governmental quarantine, shelter-in-place or similar social distancing orders or guidelines; (2) the occurrence and magnitude of future outbreaks; (3) the availability of vaccines or other medical remedies and preventive measures; and (4) broader economic conditions, including unemployment levels and the reaction of consumers to potentially longer-term economic uncertainty, which may adversely impact our financial condition and results of operations in future periods.

 

Additionally, we continue to review available benefits under the federal and state relief and stimulus legislation and programs, including, among other things, those under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We anticipate benefiting from certain payroll-related items, net operating loss carryback provisions, increased depreciation provisions, and relaxed interest expense limitation provisions of the CARES Act, but we do not know whether we will be able to access additional benefits in a manner that is advantageous to us.

 

Risks Related to Our Business and Industry

 

Our business and the industry in which we operate are highly dependent on the level of new single-family residential construction activity, the U.S. and regional economies, credit markets and other important factors, all of which are beyond our control.

 

Our business is highly dependent on the level of new single-family residential construction activity, which is cyclical and sensitive to general and local economic conditions over which we have no control, including:

 

   

housing inventory and demand levels, including the number of new single-family residential housing starts, and average new home square footage and selling prices;

 

   

housing affordability;

 

   

rental housing demand, cost and occupancy rates;

 

   

short and long term effects of the COVID-19 pandemic;

 

   

availability and cost of land;

 

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availability and cost of workforce;

 

   

cost of raw materials;

 

   

availability and pricing of mortgage financing for homebuyers and commercial financing for residential and multi-family builders and subcontractors;

 

   

local zoning and permitting processes;

 

   

short- and long-term interest rates;

 

   

inflation;

 

   

employment levels and job and personal income growth;

 

   

foreclosure rates;

 

   

consumer confidence generally and the confidence of potential homebuyers in particular;

 

   

U.S. and global financial system and credit market stability;

 

   

private party and government mortgage loan programs and federal and state regulation, oversight and legal action regarding lending, appraisal, foreclosure and short sale practices;

 

   

federal and state personal income tax rates and provisions, including provisions for the deduction of mortgage loan interest payments, real estate taxes and other expenses;

 

   

national, regional and/or local economic conditions, including in the markets in which we operate and compete; and

 

   

natural disasters, pandemics, war, acts of terrorism and responses to these events.

 

Unfavorable changes in demographics, credit markets, political conditions, consumer confidence, household formation, housing affordability or housing inventory levels, or a weakening of the national economy or of any regional or local economy in which we operate, could adversely affect consumers’ spending on new single-family residential projects and, as a result, our business, financial condition, results of operations and prospects. Adverse changes in these conditions may affect our business generally or may be more prevalent or concentrated in particular markets in which we operate.

 

Decrease in demand for interior option upgrades could decrease our profit margins.

 

Our profitability is impacted by the mix of products for which we provide interior finish solutions. For example, in the new single-family residential market, sales of option upgrades are more profitable for us than sales of standard options, which are built into the base price of a home and vary based on the size of homes consumers are looking for. A shift in consumer preference towards smaller starter homes could lead to a decrease in demand for interior option upgrades. Although our overall product mix has shifted toward option upgrade sales through our design studios and virtual design appointments, there can be no assurance that this trend will continue. Unfavorable changes in demographics, credit markets, consumer confidence, health care costs, housing affordability, housing inventory levels, mortgage interest rates, a weakening of the national economy or of any regional or local economy in which we operate and other factors beyond our control could adversely affect consumer spending, resulting in decreased demand for interior option upgrades. Any shift to options that generate lower revenues and/or profit margins could adversely impact our business, financial condition, results of operations and cash flows.

 

The growth in the housing market may not continue at the same rate, and any decline in the growth rate in our geographic markets or of the homebuilding industry may materially and adversely affect our business, financial condition, results of operations and cash flows.

 

The U.S. Census Bureau reported approximately 887,700 total single-family housing starts in 2019. This is an increase from approximately 875,800 starts in 2018, but still below the historical average over the past 60

 

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years. There is significant uncertainty regarding the timing and extent of any further recovery in new home construction and resulting product demand levels, and any decline may materially adversely affect our business, financial condition, results of operations and cash flows. In particular, increases in mortgage interest rates and rising home prices, along with other economic factors, may slow the recovery of the home construction market or lead to a decline. In addition, concerns over the affordability of housing as a consequence of increasing mortgage interest rates and rising home prices may reduce the demand in the markets we serve.

 

In addition, some analysts project that the demand for residential construction may be negatively impacted by lower home ownership rates resulting from increases in the number of renting households. Further, even if homebuilding activity fully recovers, the impact of such recovery on our business may be dampened if, for example, the average selling price or average size of new single-family homes decreases, which could cause our homebuilder customers to decrease spending on our interior finish solutions. Other factors that might impact growth in the homebuilding industry include: uncertainty in domestic and international financial, credit and consumer lending markets amid slow growth or recessionary conditions in various regions around the world; levels of mortgage repayment; tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, more conservative appraisals, higher loan-to- value ratios and extensive buyer income and asset documentation requirements; federal and state personal income tax rates and recent changes to the deductibility of certain state and local taxes; Federal Reserve policy changes; and severe weather and adverse climate conditions. Given these factors, we can provide no assurance that present growth trends will continue, whether overall or in our markets, or whether the new single-family residential market will ever return to historical levels.

 

If there is limited or no economic growth or if there are declines in employment and consumer income and/ or continued tight mortgage lending standards and practices in the geographic areas in which we operate, or if interest rates for mortgage loans continue to rise, there would likely be a corresponding adverse effect on the new single-family residential market, which could adversely affect our business, financial condition, results of operations and prospects. Economic conditions could also have a negative effect on homebuyers’ ability or desire to spend on interior option upgrades, even if there is not an overall impact on housing market volumes. These factors could also have a disproportionate impact on homeowners who otherwise would consider relocating to a house with a higher average selling price. For example, improvements in the overall new single-family residential market would not have as positive an impact on our operations if accompanied by an increase in entry-level housing starts as a proportion of the overall market mix for new homes.

 

We also rely on repair & remodel activity. High unemployment levels, high mortgage delinquency and foreclosure rates, lower home prices, limited availability of mortgage and home improvement financing, higher mortgage rates and significantly lower housing turnover may restrict consumer spending, particularly on discretionary items such as home improvement projects, and affect consumer confidence levels leading to reduced spending in the repair & remodel market. In addition, as the residential rental market continues to grow and demand for rental properties increases, property owners may not need to engage in substantial levels of repair & remodel activity in order to secure tenants. Furthermore, with even a slight decline in the economy, nationally or in any of the markets in which we operate, consumer preferences and purchasing practices and the strategies of our customers may adjust in a manner that could result in changes to the nature and prices of products demanded by the end consumer and our customers, and could adversely affect our business, financial condition and results of operations.

 

Any loss or decrease in the construction activity of or purchases by any of our significant customers could affect our business, financial condition, results of operations and cash flows.

 

The top 10 U.S. homebuilders accounted for approximately 43.7% and 42.7% of our revenues for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively. We cannot guarantee that we will maintain or improve our relationships with these customers or that we will continue to provide

 

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services to these customers at historical levels. The revenues from these customers generally are correlated to the level of building activity in their respective markets. In the future, homebuilder customers may exit or decrease their building activity in one or more of our markets depending on market conditions in the homebuilding industry.

 

In addition, our homebuilder and other customers may: (i) purchase some of the products for which we currently provide supply chain management and installation services directly from manufacturers; (ii) elect to establish their own building products design, manufacturing, fabrication, distribution and/or installation facilities, or online and technology platforms in lieu of our design solutions; (iii) give advantages to design, manufacturing, fabrication, distribution and/or installation intermediaries in which they have an economic stake; or (iv) elect to utilize the technology platforms and/or services of our competitors. Continued consolidation among homebuilders could also result in a loss of some of our customers. The loss of, or a decrease in, the business of one or more of our significant customers, or deterioration in our relations with any of them, could significantly adversely affect our business, financial condition, results of operations and cash flows. There can also be no assurance that the continued impact of COVID-19 will not impact homebuilders’ financial health or result in changes from the past practice.

 

Furthermore, our customers are not required to purchase any minimum amount of product from us. Should our customers purchase the products for which we provide supply chain management and installation services in significantly lower quantities than they have in the past, or should the customers of any business that we acquire purchase products from us in significantly lower quantities than they had prior to our acquisition of such business, such decreased purchases could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Our customers may terminate their agreements with us.

 

Although we have agreements with our customers, there are not minimum commitments under all of these agreements, and such agreements are typically terminable by either party upon 30 to 90 days’ notice and may contain cross-default provisions. In addition, certain of our design studio services agreements obligate us to provide reasonable transition services to our homebuilder customers or their new service providers for a limited period of time following termination, and grant our homebuilder customers the ability to engage the services of or hire any or all of the design studio staff in place prior to termination.

 

We make investments to open and subsequently update and improve our design studios. However, the use of design studios in our business has been and may continue to be impacted by the COVID-19 pandemic. We experienced reductions in demand for our in-person design studio services during the initial peak of the COVID-19 pandemic. As a result of the ongoing COVID-19 pandemic and related quarantines, shelter-in-place orders, and similar restrictions, our customers have increasingly chosen to use our online and technology-based design and photo-realistic virtual tour platform. Also, demand for our in-person design studio services has resumed at or above pre-COVID-19 levels. Nevertheless, our customers may decide to use the technology of our competitors, or elect to establish their own building products design technologies, instead of visiting our physical design studios. While we have managed the increased volume of demand for our visual tour technology platform, there are no assurances that we will continue to do so. Disruptions, failures or other performance issues with our customer-facing technology systems, either due to the increased volume or other factors, could impair the benefits they provide, adversely impact our sales, and negatively affect our relationship with our customers. In addition, as more business activities have shifted online due to COVID-19 restrictions, and as many of our team members are working remotely, we face an increased risk due to the potential failure of internal or external information technology infrastructure as well as increased cybersecurity threats and attempts to breach our security networks.

 

As a result of the COVID-19 pandemic, we have experienced a customer terminating its design studio services agreement and choosing to establish its own design studio capabilities. If homebuilder customers

 

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terminate their design studio services agreements, depending on the terms of such agreements, we could experience a loss of our capital investment in the design studios operating under such agreement. The consequences of a termination of one or more design studio services agreements could impact our business, financial condition, results of operations, cash flows and prospects.

 

We are subject to significant pricing pressures from our customers.

 

Large homebuilders and other large customers historically have been able to exert significant pressure on their outside product and service providers to keep prices low in the highly fragmented building products supply and services industry. In addition, continued consolidation in the homebuilding industry and changes in customers’ purchasing policies and payment practices could result in even further pricing pressure. For example, there has been a trend of large publicly-traded homebuilders acquiring other large homebuilders, which increases their market share and buying power and, as a result, could adversely impact our margins. In addition, local providers may provide labor and materials services at extremely low prices. A decline in the prices of the products we source and the services we provide could adversely impact our results of operations. Alternatively, due to the rising market price environment, our suppliers may increase prices or reduce discounts on the products we source, and we may be unable to pass on any cost increase to our customers, thereby resulting in reduced margins and profits. Similarly, if our workforce costs increase, we may be unable to pass on any cost increase to our customers. Overall, these pricing pressures may adversely affect our financial condition, results of operations and cash flows.

 

Changes in the cost of products we install could decrease our profit margins.

 

The products that we install have been subject to price changes in the past, some of which have been significant. In particular, for certain products that require longer lead times, we may be subject to price increases between the time we place an order from our suppliers and the time we take delivery of the materials. We may not be able to pass any such price increases along to our customers. Accordingly, our operating results for individual quarterly periods can be adversely affected by a delay between when building product cost increases are implemented and when we are able to increase prices for our products and services. Further, our supplier purchase prices often depend on volume requirements. If we do not meet these volume requirements, our costs could increase and our margins may be adversely affected. While we have been able to achieve cost savings through volume purchasing and our relationships with suppliers, we may not be able to continue to receive advantageous pricing for the products that we install, which could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, some of our customers may work directly with suppliers to specify products for their projects. To the extent that our customers enter into agreements directly with suppliers, we may lose some of the benefits of our purchasing advantages, which could adversely impact our profit margins.

 

Tariffs and other changes in foreign trade policy could adversely affect our business and results of operations in the future.

 

Dynamic changes in legislation and government policy may have a material adverse effect on our business. The imposition of tariffs on certain materials has increased our product costs. The current U.S. administration has taken action with respect to certain trade policies, such as the imposition of tariffs on imported products and the withdrawal from or renegotiation of certain trade agreements, including the North American Free Trade Agreement. For example, the United States has increased tariffs on certain imports from China, as well as on steel and aluminum products imported from various countries. With an upcoming change of administration in January 2021, proposed legislation and regulatory changes could have a material impact on us including, but not limited to, modifications to international trade policy and increased regulation. Furthermore, existing tariffs imposed on goods imported from abroad that are used in our businesses may be extended or expanded.

 

We procure certain of the raw materials we use in the manufacturing of our products directly or indirectly from outside of the United States. The imposition of tariffs and other potential changes in U.S. trade policy could

 

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increase the cost or limit the availability of raw materials, which could hurt our competitive position and adversely impact our business, financial condition and results of operations.

 

These changes in trade policy and any recently enacted, proposed and future trade agreements or tariffs on imported products could negatively impact our business and results of operations if they seriously disrupt the movement of products through our supply chain or increase their cost. In addition, while we may be able to shift some of our sourcing options, executing such a shift would be time consuming and would be difficult or impracticable for many products and may result in an increase in our manufacturing costs. In the event that we are required to pay higher prices for the products that we install, we may not be able to pass on price increases to our customers in a timely manner or at all due to the competitive nature of our industry.

 

Our success depends on the continued services of our senior management team and other key personnel.

 

Our success depends to a significant degree upon the contributions of our senior management team and other key personnel, each of whom would be difficult to replace. To encourage the retention of our senior management team and key personnel, we have entered into various equity-based compensation agreements designed to encourage their retention. We do face the risk, however, that members of our senior management and other key personnel may not continue in their current positions, and the loss of their services could cause us to lose customers and reduce our sales and/or margins, negatively affect relationships with our customers or our suppliers, lead to employee morale problems and/or the loss of other key employees, or cause disruptions to our business. Also, we may be unable to find qualified individuals to replace members of our senior management team or other key personnel who leave our company on a timely basis or at all.

 

Our success depends on our ability to attract and retain qualified employees while controlling workforce costs.

 

Our success depends on our ability to attract, hire, train and retain qualified managerial, operational, sales, design and other personnel, while at the same time controlling our workforce costs. Further, in order to accelerate development of our technology solution, we have added and expect to continue to add, in the future, new members for our technology team. The labor market for the construction industry and the technology space is tight, resulting in significant competition for these types of employees and increased employee-related costs. Our ability to control workforce costs is subject to numerous external factors, including competitive wage rates and health and other insurance and benefit costs. A significant increase in competition, minimum wage or overtime rates in localities where we have employees could have a significant impact on our operating costs and may require that we take steps to mitigate such increases, all of which may cause us to incur additional costs, expend resources responding to such increases and lower our margins. We may be unsuccessful in attracting and retaining the personnel we require to conduct and expand our operations successfully. If we are unable to attract or retain qualified employees in the future, it could adversely impact our business, financial condition and results of operations.

 

We and our customers may be affected by shortages in workforce supply, increased workforce costs or workforce disruptions, which could affect our business, financial condition, results of operations and cash flows.

 

Our customers require a qualified labor force to build, repair and remodel homes and communities, and we require a qualified workforce to install our products in those homes and communities. Access to qualified workers and subcontractors by our customers and us may be affected by circumstances beyond their or our control, including:

 

   

work stoppages resulting from workforce disputes;

 

   

shortages of qualified trades people, such as carpenters, roofers, electricians and plumbers, especially in key markets;

 

   

changes in laws relating to union organizing activity;

 

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enforcement and/or audits of our implementation of current federal and state immigration laws and regulations by regulatory agencies, including the U.S. Immigration and Customs Enforcement, or ICE, and the Department of Labor;

 

   

changes in immigration laws and trends in workforce migration;

 

   

changes in state laws regulating the classification of “independent contractors”; and

 

   

increases in subcontractor and professional services costs.

 

Workforce shortages can be further exacerbated if demand for housing or repair and remodel activity increases. Any of these circumstances could give rise to delays in the start or completion of, or could increase the cost of, building, repairing and remodeling homes and communities. Such delays and cost increases would also have an effect on our ability to generate interior option sales from end customers and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We face risks in completing the implementation of our ERP system.

 

We are in the process of completing the implementation of a company-wide ERP system. Presently, more

than 50% of our revenues are processed through our ERP system. The implementation of this system is complex and time-consuming, and we have incurred and expect to incur additional expenses in connection with the implementation. Furthermore, the COVID-19 pandemic caused some delay in its implementation. Many companies have experienced delays and difficulties with the implementation of ERP systems that have had a negative effect on their business. Despite any delays we have experienced, our implementation of the ERP system has not to date had a material negative impact on our operations; nonetheless, we are still in the process of completing the implementation and successful implementation remains subject to significant risks.

 

If the ERP system rollout is not effectively implemented as planned, or the system does not operate as intended, the effectiveness of our internal controls over financial reporting could be adversely affected or our ability to assess those controls adequately could be delayed. If there are significant delays in documenting, reviewing and testing our internal controls over financial reporting, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our securities may decline.

 

If we are unable to successfully complete the implementation of the ERP system, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The implementation of new initiatives related to our operating software systems and related technology could disrupt our operations, and these initiatives might not provide the anticipated benefits or might fail.

 

We have made, and we plan to continue to make, significant investments in our visualization and option selection technology platform and enhancing our streamlined integration with homebuilders’ back office systems and ability to aggregate extensive data analytics to offer insights into evolving design trends and homeowner preferences. This includes the integration and expansion of technology obtained through acquisitions and the hiring of new members for our technology team. The cost and potential issues and interruptions associated with this technology development and integration, as well as those associated with managing third-party service providers, employing new cloud-based tools and services and aggregating large amounts of data, could disrupt or reduce the efficiency of our operations. In addition, our new and upgraded technology might cost more than anticipated or might not provide the anticipated benefits, or it might take longer than expected to realize the anticipated benefits or the initiatives might fail altogether. Furthermore, as more business activities have shifted online due to COVID-19 restrictions, we face an increased risk due to the potential failure or disruption of internal or external information technology infrastructure, as well as increased cybersecurity threats such as a breach to our company networks or systems. Because the success of our growth strategy depends in part on our IT infrastructure, issues that arise with ant related initiatives or our IT systems may adversely affect our business.

 

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Our business and results of operations are dependent on the availability and skill of subcontractors.

 

We primarily engage subcontractors to perform the installation of the products that we source for our customers. Accordingly, the timing and quality of our installations depends on the availability and skill of our subcontractors. Competition for skilled subcontractors can be significant in our markets. While we believe that our relationships with subcontractors are good, we generally do not have long-term contractual commitments with any subcontractors, and we can provide no assurance that skilled subcontractors will continue to be available at reasonable rates in our markets. The inability to contract with skilled subcontractors at reasonable rates on a timely basis could have a material adverse effect on our business, financial condition and results of operations.

 

Despite our quality control efforts, we may discover that our subcontractors have engaged in improper construction practices or have installed defective materials. The adverse costs of satisfying our warranty and other legal obligations in these instances may be significant and we may be unable to recover the costs of warranty-related repairs from subcontractors, suppliers and insurers, which could have a material impact on our business, financial condition and results of operations.

 

Our use of subcontractors for certain functions may expose us to additional risks.

 

We primarily rely on subcontractors to perform installation services. We structure our relationships with subcontractors in a manner that we believe results in an independent contractor relationship, not an employee relationship. An independent contractor is generally distinguished from an employee by, among other things, his or her degree of autonomy and independence in providing services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control by the hiring entity is generally indicative of an employment relationship. However, laws regarding independent contractor status vary from state to state and are subject to change and interpretation based on court decisions and regulation. For example, the California Supreme Court recently adopted a new standard for determining in certain circumstances whether a company “employs” individuals for purposes of the California Wage Orders in its decision in the Dynamex Operations West, Inc. v. Superior Court case. The Dynamex decision, codified in AB 5, generally alters the analysis of whether an individual, who is classified by a hiring entity as an independent contractor in California, has been properly classified as an independent contractor by requiring satisfaction of a three-part test. Adverse determinations regarding the independent contractor status of any of our subcontractors could entitle such individuals to, among other things, the reimbursement of certain expenses and to the benefit of wage-and-hour laws, and could result in us being liable for employment and withholding tax and benefits for such individuals. Any such adverse determination could result in a material reduction of the number of subcontractors we can use for our business or significantly increase our costs to serve our customers, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, we cannot assure you that there will not be further changes in laws relating to characterization and treatment of independent contractors.

 

The subcontractors we rely on to perform our installation services are also subject to a significant and evolving number of local, state and federal laws and regulations, including laws involving matters that are not within our control. If these subcontractors fail to comply with applicable laws, or if they take other improper actions, we may suffer reputational damage and may be exposed to liability.

 

We may be unable to effectively execute our growth strategy, which could have an adverse effect on our business, results of operations and prospects.

 

Some of the challenges we may encounter in executing our growth strategy include:

 

   

existing and new customers may not adopt our interior finish solutions at the rate or levels that we expect, or at all;

 

   

we may be unable to develop new customer relationships and expand our existing customer relationships;

 

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we may not be able to develop new technologies to keep pace with our customers’ demand or as quickly as our competitors;

 

   

we may face increased competition from new or existing competitors as we move into new geographies and end markets or as competitors enter our existing geographic markets;

 

   

we may not be successful in identifying and expanding into providing interior finish solution services for new product categories;

 

   

we may be unable to successfully integrate new technology or businesses, or realize expected synergies from acquisitions;

 

   

we may not be able to expand in the multi-family, commercial or repair & remodel end-markets, or such expansion may require more resources than we expect;

 

   

we may have difficulties in consistently and effectively implementing our growth initiatives across our geographically dispersed network of design studios, operating centers, warehousing and logistics centers, and sales offices;

 

   

we may be unable to effectively manage the costs of growth;

 

   

growth could put additional strains on our management, capital resources, IT systems and customer service; and

 

   

there may be insufficient qualified employees and subcontractors to accommodate our growth.

 

If we fail to overcome the risks associated with the effective execution of our growth strategy, our financial position, results of operations and prospects could be adversely affected.

 

We face competition from a variety of competitors and increased competitive pressure may adversely affect our business, financial condition, results of operations and cash flows.

 

Our industry is highly fragmented and competitive. We face significant competition from other national, regional and local companies that (i) provide design studio solutions (both in-person and virtually) and supply chain management and installation services, (ii) provide repair and remodel services, or (iii) sell and install building products directly to and for consumers. We expect to face increased competition from current and future companies in the property technology industry as the demand for virtual and digital technology grows. In addition, homebuilders may perform interior design services or develop new technologies in-house. Any of these competitors may:

 

   

foresee the course of market developments more accurately than we do;

 

   

offer products, design studio solutions, or supply chain management and installation services that are deemed superior to ours;

 

   

produce or supply products or provide services similar to our offerings at a lower cost or within a better time frame;

 

   

develop stronger relationships with homebuilders, property managers, contractors, or product suppliers;

 

   

adapt more quickly to new technologies, new techniques or evolving consumer preferences, or develop new technologies or techniques;

 

   

operate in markets to which we seek to expand or have preexisting customer relationships that we do not have; or

 

   

have access to financing on more favorable terms than we can obtain in the market.

 

As a result, we may not be able to compete successfully with our competitors. If we are unable to compete effectively, our business, financial condition, results of operations and cash flows may be adversely affected.

 

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Acquisitions involve a number of risks which could have an adverse effect on our business, financial condition, results of operations and cash flow.

 

Acquisitions have contributed to our growth, and as part of our growth strategy, we intend to continue to pursue acquisitions. At any given time, we may be evaluating or in discussions with one or more acquisition candidates. However, we may not be able to identify suitable acquisition candidates and may face increased competition for acquisition candidates that meet our criteria. In addition, acquired businesses may not perform in accordance with expectations, and our business judgments concerning the value, strengths and weaknesses of acquired businesses may not prove to be correct. We may also be unable to achieve expected improvements or anticipated cost savings in businesses that we acquire.

 

Acquisitions involve a number of other special risks, including:

 

   

the possibility that we may not be able to manage acquired businesses or control integration costs and other costs relating to acquisitions;

 

   

potential adverse short-term effects on operating results from increased costs or otherwise;

 

   

diversion of management’s attention;

 

   

failure to retain existing key personnel of the acquired business and recruit qualified new employees at the acquired business locations;

 

   

failure to successfully implement infrastructure, logistics and systems integration;

 

   

potential impairment of goodwill;

 

   

risks associated with the culture and/or internal controls of acquired businesses;

 

   

disruption of our relationships with, or losses of, key customers or suppliers;

 

   

exposure to legal claims for activities of the acquired business prior to acquisition and inability to realize on any indemnification claims; and

 

   

our inability to obtain financing necessary to complete acquisitions on attractive terms or at all.

 

Our failure to integrate any acquired businesses effectively or to manage other consequences of our acquisitions, including as a result of the foregoing factors, could prevent us from implementing our growth strategy, remaining competitive and, ultimately, could adversely affect our business, financial condition, results of operations and cash flows.

 

Future acquisitions may result in the incurrence of debt and contingent liabilities, legal liabilities, goodwill impairments, increased interest and/or amortization expense and significant integration costs. In particular, we may be subject to claims or liabilities arising from the ownership or operation of acquired businesses for the periods prior to our acquisition of them, including tax liabilities, product liabilities, asbestos liabilities, environmental liabilities, pension liabilities, liabilities for employment and immigration practices and other liabilities and claims not covered by insurance. These claims or liabilities could be significant, and our ability to seek indemnification from the former owners of our acquired businesses for these claims or liabilities may be limited by various factors, including the specific time, monetary or other limitations contained in the respective acquisition agreements and the financial ability of the former owners to satisfy our indemnification claims. In addition, insurance companies may be unwilling to cover claims that have arisen from acquired businesses or locations, or claims may exceed the coverage limits that our acquired businesses had in effect prior to the date of acquisition.

 

In addition, we may require additional debt or equity financing for future acquisitions, and such financing may not be available on favorable terms, if at all. If we finance acquisitions by issuing our equity securities or securities convertible into our equity securities, the ownership of our existing stockholders would be diluted, which, in turn, could adversely affect the market price of our common stock. We could also finance an acquisition with debt, resulting in higher leverage and interest costs relating to an acquisition.

 

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Possible future acquisitions or dispositions may also trigger a review by the U.S. Department of Justice, the U.S. Federal Trade Commission, and/or the state attorneys general under their respective regulatory authority, focusing on the effects on competition, including the size or structure of the relevant markets and the pro- competitive benefits of the transaction. Any delay, prohibition or modification required by regulatory authorities could adversely affect the terms of a proposed acquisition or could require us to modify or abandon an otherwise attractive acquisition opportunity.

 

We intend to expand into new geographic markets, and our expansion may be costly and unsuccessful.

 

Our growth depends, in part, on our ability to expand into new geographic markets. Our expansion into new geographic markets will require us to make incremental expenditures for the workforce and facilities. In addition, we may face challenges operating in new business environments with which we are unfamiliar, including facing difficulties securing adequate workers, subcontractors and managing our new operations, expanding our sales channels and sourcing capabilities and stemming from our exposure to new legal and regulatory environments. Expansion into new geographic markets may also expose us to direct competition with companies with whom we have limited or no past experience as competitors. If we fail to manage the risks inherent in our geographic expansion, we could incur substantial capital and operating costs without any related increase in revenues, which would harm our results of operations. Further, even if our geographic expansion is successful in generating additional revenues, failure to effectively manage our growth in a cost-effective manner could result in declines in customer satisfaction, increased costs or disruptions of our operations.

 

Increases in the construction of modular and manufactured homes could adversely affect our business, financial condition, results of operations and cash flows.

 

If concerns over the affordability of housing increase due to rising mortgage interest rates or home prices, homebuyers may choose to purchase modular or manufactured homes, which are built, in whole or in part, in offsite factories. To the extent these types of homes become more popular among homebuyers, it may reduce the construction activity of our homebuilder customers. In addition, an increase in the construction of homes at offsite locations would reduce our opportunity to perform on-site installation services for such homes, which could have an adverse effect on our business, financial condition, results of operations and cash flows.

 

Product shortages, the loss of key suppliers or failure to develop relationships with qualified suppliers or substantial changes to supply terms could affect our business, financial condition, results of operations and cash flows.

 

We primarily rely on third-party suppliers for the products for which we provide interior finish solutions, and as such, our business depends on our ability to obtain adequate product supply from manufacturers and other suppliers. Our two largest suppliers collectively accounted for approximately 39% and 37% of our product purchases for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively. We typically do not enter into long-term agreements with our suppliers, as the products that we offer are generally available from various sources and in sufficient quantities. However, suppliers have been subject to increased consolidation and, during construction downturns, some of our suppliers experienced bankruptcy. The loss of, or a substantial decrease in the availability of, products from our suppliers, or the loss of key supplier arrangements, could adversely impact our business, financial condition, results of operations and cash flows. In prior downturns in the housing industry, building products manufacturers have reduced capacity by closing plants and production lines within plants. Even if such capacity reductions are not permanent, there may be a delay in manufacturers’ ability to increase capacity in times of rising demand. If the demand for products from manufacturers and other suppliers exceeds the available supply, we may be unable to source additional products in sufficient quantity or quality in a timely manner and the prices for the products that we install could rise. These developments could affect our ability to take advantage of market opportunities and limit our growth prospects.

 

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Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice. Many of our suppliers also offer us favorable purchasing terms based on our large scale and the volume of our purchases. If market conditions change, suppliers may stop offering us favorable terms. Failure by our suppliers to continue to supply us with products on favorable terms, commercially reasonable terms, or at all, could put pressure on our operating margins or have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our business also depends on our ability to identify and develop relationships with qualified suppliers in order to provide our services with high-quality products in a timely manner. Disruptions at distribution centers, shipping ports, transportation carriers or elsewhere along our supply chain due to labor disputes, work stoppages, natural disasters or otherwise may affect our ability to deliver products to our customers on a timely basis, which may in turn adversely affect our relationships and reputation with customers and our results of operations.

 

A material disruption at one of our suppliers’ facilities or loss of a supplier relationship could prevent us from meeting customer demand, reduce our sales, increase our costs and negatively affect our overall results of operations.

 

Any of the following events could cease or limit the operations of our suppliers unexpectedly: fires, floods, earthquakes, hurricanes, on-site or off-site environmental incidents or other catastrophes; utility and transportation infrastructure disruptions; labor difficulties; other operational problems; pandemics; or war, acts of terrorism or other unexpected events. Any downtime or facility damage at our suppliers could prevent us from meeting customer demand for our products or require us to make more expensive purchases from a competing supplier. If our suppliers were to incur significant downtime, our ability to satisfy customer requirements could be impaired, resulting in customers seeking products and services from other sources, as well as decreased customer satisfaction and lower revenues. In addition, a loss of a supplier relationship could harm our operations. Because we purchase from a limited number of suppliers, the effects of any particular shutdown or facility damage or loss of a supplier relationship could be significant to our operating margins and our overall operations. In addition, our suppliers’ inability to produce or procure the necessary raw materials to supply finished goods to us may adversely impact our business, financial condition, results of operations and cash flows.

 

We rely on third-party license agreements. Any changes to these agreements could adversely affect our business.

 

We rely on third-party license agreements for certain trademarks and technologies we employ in our business, including software that we utilize in connection with our design and installation services that could be difficult to replace. There is a risk that third parties may modify or terminate such licenses, which may harm our operating results. Certain of the software we use is not licensed to us on an exclusive basis or is used jointly with our customers. Accordingly, if our licenses are terminated, or if our commercial relationships with the licensors and/or our customers become adverse, such software may be used by our customers or competitors to compete against us, which may, in turn, have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, while these license agreements generally provide that the licensors will indemnify us, subject to certain limitations, for certain infringement liabilities, our ability to seek indemnification from the respective licensors is limited by various factors, including the financial condition of the licensor as well as by the terms and limits of such indemnities or obligations. As a result, there can be no assurance that we could receive any indemnification from licensors, and any related infringement liabilities, costs or penalties could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our industry is both seasonal and cyclical and may be affected by severe weather conditions and a changing climate.

 

Our industry is both seasonal and cyclical. Seasonal changes and other weather-related conditions can adversely affect our businesses and operations through a decline in the demand for our services. Our products are

 

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installed near the end of the construction process and therefore typically lag housing starts by several months. Housing starts have historically been highest in the second and third quarters due to weather as well as seasonal selling peaks in most areas of the country. Accordingly, our sales are generally highest in the third and fourth quarters. We expect this seasonal pattern to continue, but it may be affected by volatility in the weather as well as in the new construction industry, including the impacts from the COVID-19 pandemic and changing climate conditions in the geographic markets we serve, and we can make no assurance as to the degree to which these historical patterns will continue, if at all.

 

Construction-based businesses are also generally cyclical. Our financial performance will be impacted by economic changes nationally and locally in the geographic markets we serve and is subject to cyclical market pressures. Our operations are subject to fluctuations arising from changes in supply and demand, national and international economic conditions, workforce costs, competition, government regulation, trade policies, and other factors that affect the construction industry such as demographic trends, interest rates, housing starts, average home selling prices, interior options and upgrades, commercial construction activity, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors and homeowners.

 

Although our interior finish solutions relate primarily to the interior of buildings, severe weather and natural disasters can cause delays or halts and increased costs in the construction process. Severe weather is often unpredictable, which contributes to earnings volatility and makes forecasting our results of operation more difficult. Severe weather and volatility in seasonality, which is projected to be exacerbated by climate change, may have an adverse impact on our business, financial position, results of operations and cash flows, and our results of operations in any given period may not be necessarily representative of other periods. We may also expand into geographic markets that are disproportionately impacted by severe weather and adverse climate effects.

 

Our systems and IT infrastructure may be subject to security breaches and other cybersecurity incidents.

 

We rely heavily on our systems and IT infrastructure to interact with our customers and suppliers, including our design platform. The use of our systems and IT infrastructure involve the transmission and/or storage of valuable data, including in certain instances, customers’ confidential business information. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers, as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information. We may face attempts by experienced hackers, cybercriminals or others with unauthorized access to our systems to misappropriate our proprietary information and technology, interrupt our business, and/or gain unauthorized access to confidential information. The reliability and security of our IT infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs, is critical to our business. Furthermore, our technology is integrated with homebuilder back office systems to help improve construction quality, decrease cycle times and increase customer stickiness. To the extent that any security disruptions or breaches result in a loss or damage to our data, it could cause harm to our reputation and cause customers to fear that their systems may be compromised. This could lead to some existing customers discontinuing doing, and prospective customers choosing not to do, business with us. We may also be subject to state or federal enforcement actions, which could result in fines, penalties and/or other liabilities and which may cause us to incur legal fees and costs, and/or additional costs associated with responding to the cyberattack. Increased regulation regarding cybersecurity may increase our costs of compliance, including fines and penalties, as well as costs of cybersecurity audits. Any of these actions could materially adversely impact our business, financial condition, results of operations and cash flows.

 

To date, to our knowledge we have not experienced a material breach that affected our IT systems. As cyberattacks become more sophisticated generally, we expect to incur significant costs to strengthen our systems to protect against outside intrusions and/or maintain insurance coverage related to the threat of such attacks. While we have invested in industry appropriate protections and monitoring practices of our data and IT to reduce these risks and continue to monitor our systems on an ongoing basis for any current or potential threats, there can be no assurance that our efforts will prevent breakdowns or breaches of our or our third-party providers’ databases or systems that could adversely affect our business.

 

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There is also a risk that our software or IT systems could be subject to a virus or other malware or a cyberattack or other security breach. The measures that we implement to reduce and mitigate this risk may not be effective. If such an event occurred, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Any major disruption or failure of our information technology systems or our website, or our failure to implement technology effectively, could adversely affect our business and operations.

 

We rely on various information technology systems, owned by us and third parties, to manage our operations, maintain books and records, record transactions, provide information to management and prepare our financial statements. We own our core ERP system, which is a tier 1 ERP system from a global vendor, and we are in the process of completing our ERP implementation and the associated core technology tools across our company. Presently, more than 50% of our revenues are processed through our ERP system. When we complete the deployment in 2021, approximately 85% of our revenues will be transacted through this system. We also own our retail flooring specialty software systems that support the remaining 15% of our revenues.

 

Our human capital management system is a cloud-based SAAS offering by a nationally recognized vendor and our payroll and related tax filings are outsourced to an experienced nationally recognized vendor. To support our installation and field management processes, we utilize various proprietary and third-party software solutions with direct interfaces into our core ERP platform. Our web-based marketing and pre-sales systems have been developed in-house and are built on our proprietary technology. Our design studio solutions encompass our proprietary visualization platform and proprietary design software that is used to configure, price and quote at the end of the design process. Our interior option selection systems which are used during at-home or in-studio design sessions leverage both in-house and third-party technology. Our ERP system and all of our design systems, including any third-party components, are hosted on major cloud-computing platforms such as AWS and Azure. For our third-party technology, including software that we utilize in connection with our design and installation services, we rely on third-party license agreements with the software owners.

 

In addition, we have made a significant investment in our website which we believe is critical for lead generation and is the primary forum through which we interact with end consumers. As more business activities have shifted online, in part due to COVID-19 restrictions, a failure of internal or external information technology infrastructure or a cybersecurity attack could have a more significant impact on our business operations than in the past. A failure of our information technology systems or our website to operate as expected could disrupt our business and adversely affect our financial condition and results of operations. These systems and our website are vulnerable to damage from hardware failure; fire; power loss; Internet; data network and telecommunications failure; loss or corruption of data and impacts of terrorism; natural disasters or other disasters. We may not have sufficient redundant operations to cover a loss or failure in a timely manner. In addition, the operation of these systems and our website is dependent upon third party technologies, systems and services, and support by third party vendors, and we cannot be sure that these third party systems, services and support will continue to be available to us without interruption, particularly in light of the disruptions stemming from the COVID-19 pandemic. Any damage to our information technology systems or website could cause interruptions to our operations that materially adversely affect our ability to meet customers’ requirements, resulting in an adverse impact to our business, financial condition and results of operations. Periodically, these systems and our website need to be expanded, updated or upgraded as our business needs change. We may not be able to successfully implement changes in our information technology systems and to our website without experiencing difficulties, which could require significant financial and human resources.

 

Our fabrication operations involve significant risks.

 

A portion of our business involves the fabrication of certain products that we install, including countertops. We currently operate nine countertop fabrication facilities. These fabrication activities require significant resources to maintain. For instance, we must continuously review and improve our fabrication processes in order

 

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to maintain satisfactory yields and product performance, try to lower our costs and otherwise remain competitive. As we fabricate new and more complex products, the risk of encountering delays, difficulties or higher costs increases. In addition, the start-up costs associated with implementing new fabrication technologies, methods and processes, including the purchase of new equipment and any resulting delays and inefficiencies, could negatively impact our results of operations.

 

Additionally, we could experience a prolonged disruption, material malfunction, interruption or other loss of operations at our fabrication facilities, or we may need to add capacity to satisfy any increased demand for our products. Under these circumstances, we may be forced to rely on third parties for our fabrication needs, which could increase our costs, decrease our gross margin, decrease our control over fabrication processes, limit our ability to satisfy customer requirements and demand and delay new product development until we could secure a relationship with a third-party manufacturer, which we may not be able to do in a timely manner, on acceptable terms or at all. If any of these risks occur, our operations, performance and customer relationships could be severely harmed.

 

We also may need to expand our existing fabrication facilities or establish new facilities in the future. Any need to expand or replace our existing facilities would be expensive and time-consuming. Further, we may not be able to replace or increase our fabrication capacity at all. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

 

We operate our design studios and other facilities under leases with typical durations of three to five years. We may be unable to renew leases at the end of their terms or to terminate a lease if a homebuilder customer terminates a design studio services agreement.

 

Most of our design studios and other facilities are located in leased premises with typical lease durations of three to five years. At the end of the lease term and any renewal period, we may be unable to renew the lease without substantial additional cost, if at all. If we are unable to renew our design studio or other leases, we may be required to close or relocate such design studio or facility, which could subject us to construction, relocation and other costs, disruption of our operations and other risks, which in turn could have a material adverse effect on our business and results of operations.

 

Additionally, our leases are terminable only in certain circumstances. As a result of the COVID-19 pandemic, we have experienced a customer terminating its design studio services agreement and choosing to establish its own design studio capabilities. Although demand for our in-person design studio services has resumed at or above pre-COVID-19 levels, future mandatory shutdowns, or other government restrictions as a result of the spread of the virus could reduce demand for our in-person design studio services. We also may experience a reduction in demand from customers for our physical design studios in the future in order to transition to use of our technology-based design platforms or our competitors. If additional homebuilder customers terminate design studio services agreements, and we are unable to terminate a lease and/or be reimbursed for termination-related costs, we will be subject to costs associated with a vacant lease, which could have a material adverse effect on our business and results of operations.

 

The estimates and forecasts of market opportunity and market growth included in this prospectus may prove to be inaccurate, and we cannot assure you our business will grow at similar rates, or at all.

 

The interior finish solutions industry is a large, growing and highly fragmented market. We estimate the market to be approximately $23 billion in size, based on the average installed cost of flooring, cabinets and countertops in a new single-family home. However, estimates and forecasts of market size and opportunity and of market growth are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this prospectus of the size of the markets that we may be able to address and the growth in these markets are subject to many assumptions and may prove to be inaccurate. In addition, we expect that the COVID-19 pandemic may materially affect the growth of various of the markets

 

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discussed in this prospectus, and we cannot predict the extent to which those estimates will be affected. Further, we may not be able to address fully the markets that we believe we can address, and we cannot be sure that these markets will grow at historical rates or the rates we expect for the future. We believe that the long-term shift to digital solutions is fundamentally changing our market, with more homebuyers and homeowners preferring to review options and make design selections online. We may not be able to address this shift with a shift in our products and services as swiftly as the market’s demand. Even if we are able to address the markets that we believe represent our market opportunity and even if these markets experience the growth we expect, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the estimates and forecasts of market size and opportunity and of market growth included in this prospectus may not be indicative of our future growth.

 

Risks Related to Legal and Regulatory Matters

 

Changes in employment laws or failure to properly verify the employment eligibility of our employees may adversely affect our business.

 

Various federal and state labor laws govern the relationship with our employees and impact operating costs.

 

These laws include:

 

   

employee classification as exempt or non-exempt for overtime and other purposes;

 

   

minimum wage requirements;

 

   

unemployment tax rates;

 

   

workers’ compensation rates;

 

   

immigration status;

 

   

mandatory health benefits;

 

   

paid leaves of absence, including paid sick leave;

 

   

tax reporting; and

 

   

other wage and benefit requirements.

 

Significant additional government-imposed increases in the preceding areas could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, various states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and, from time to time, the U.S. Congress, Department of Homeland Security and the Executive Branch of the U.S. government consider and implement changes to federal immigration laws, regulations or enforcement programs. These changes may increase our compliance and oversight obligations, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we take steps to verify the employment eligibility status of all our employees, some of our employees may, without our knowledge, be unauthorized workers, and we cannot guarantee that we will properly identify all applicants who are ineligible for employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties and adverse publicity that negatively impacts our brand and may make it more difficult to hire and retain qualified employees. Termination of a significant number of employees who were unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration laws. These factors could have a material adverse effect on our business, financial condition and results of operations.

 

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Furthermore, we are subject to regulations of U.S. Immigration and Customs Enforcement, or ICE, and Department of Labor, and we are audited from time to time by these parties for compliance with work authentication requirements. While we believe we are in compliance with applicable laws and regulations, if we are found not to be in compliance as a result of any audits, we may be subject to fines or other remedial actions, which could be material.

 

We are exposed to warranty, casualty, construction defect, contract, tort and other claims, and legal proceedings related to our business, the services we provide, and services provided for us by third parties.

 

In the ordinary course of business, we are subject to various claims and litigation. Any such claims, whether with or without merit, could be time consuming and expensive to defend and could divert management’s attention and resources. We may not always be able to successfully defend or be excused from the lawsuits related to these claims and could be subject to substantial losses.

 

Our customers may be subject to construction defect and warranty claims in the ordinary course of their business. Our contractual arrangements with these customers may include our agreement to defend and indemnify them against various liabilities. These claims, often asserted several years after completion of construction, can result in complex lawsuits or claims against our customers and many of their subcontractors, including us, and may require us to incur defense and indemnity costs even when our services or installed products are not the principal basis for the claims. In addition, we are exposed to potential claims arising from the conduct of our employees and subcontractors. In the process of negotiating contracts with our customers and our subcontractors, we may be unable to secure favorable indemnity, limitation of liability and/or insurance provisions.

 

We rely on manufacturers and other suppliers, including overseas suppliers, to provide us with the products for which we provide interior finish solutions. As we do not have direct control over the quality of the products manufactured or supplied by such third-party suppliers, we are exposed to risks relating to the quality of those products. It is possible that products from a manufacturer or supplier could be sold to our customers and later be alleged to have quality problems or to have caused personal injury, subjecting us to potential claims from customers or third parties. We have in the past been, and may in the future be, subject to such claims.

 

Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts, there can be no assurance that we will be able to obtain and maintain insurance on acceptable terms, including premiums and deductibles, or that such insurance will provide adequate protection against potential liabilities. Construction defect, product liability and other claims and legal proceedings can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our company. In addition, we are involved on an ongoing basis in other types of legal proceedings. We cannot assure you that any current or future claims will not adversely affect our financial condition, results of operations or cash flows.

 

We may fail to adequately protect our intellectual property rights or may be accused of infringing the intellectual property rights of third parties.

 

We rely on trademark and service mark protection in the conduct of our business. We also rely on trade secret and copyright protection for certain of our IT systems and software, as well as contractual obligations with many customers, service providers and other business partners. These protections may not adequately safeguard our intellectual property and we may incur significant costs to defend our intellectual property rights, which may harm our operating results. There is a risk that third parties, including our current competitors, will infringe on our intellectual property rights, in which case we may have to defend these rights. There is also a risk that third parties will claim that our products and services infringe their intellectual property rights or that we are overusing or misusing licenses. These third parties may assert infringement claims against us, our customers, our employees or businesses we have acquired. Despite carrying insurance coverage to manage risk exposure for certain claims, the outcome of litigation or other legal proceedings intrinsically uncertain. These claims, if resolved in a manner adverse to us, could result in significant liabilities and could restrict or prohibit our ability to use the technology on which we rely, which could have a material

 

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adverse effect on our business, financial condition, results of operations and cash flows. Even if these claims are resolved in our favor, such claims result in significant expenses and could distract our management until resolved.

 

As we continue to expand our technology solutions, acquire companies and grow our team and business, we may be increasingly subject to claims and lawsuits, including intellectual property infringement claims, and threats to our intellectual property rights. We rely on a combination of laws and contractual restrictions on access to and use of confidential information and our proprietary technology with employees, contractors, business partners and other third parties to establish and protect our and their various intellectual property rights. No guarantees can be given that these efforts will result in adequate protections. Despite these measures, challenges to our intellectual property rights could still arise, third parties could copy or otherwise obtain and use our intellectual property without authorization, and/or laws regarding the enforceability of existing intellectual property rights could change or be applied in an adverse manner. In addition, to the extent that our employees, contractors, business partners or other third parties with which we do business use intellectual property owned by others in their work for us, we may be subject to third party infringement, breach of contract or misappropriation allegations given our relationships, with claims that could be expensive and timing-consuming to defend against, and with uncertain outcomes.

 

The occurrence of any of these events could impede our expansion and place limitations on our ability to operate our business, as well as impede our ability to effectively compete, any of which could adversely affect our business, financial condition and results of operations.

 

Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant penalties, operational delays and adverse publicity.

 

The fabrication and installation of building products may pose certain health and safety risks to our employees and subcontractors. For example, our countertop fabrication facilities are subject to regulations concerning air quality, including maximum permissible quantities of silica dust. Our operations are subject to regulation under the U.S. Occupational Safety and Health Act (“OSHA”) and equivalent state laws. Changes to OSHA requirements, or stricter interpretation or enforcement of existing laws or regulations, could result in increased costs. If we fail to comply with applicable OSHA regulations, even if no work-related serious injury or death occurs, we may be subject to civil or criminal enforcement and be required to pay substantial penalties, incur significant capital expenditures, or suspend or limit operations. Any accidents, citations, violations, injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and adversely affect our business. We have not in the past been subject to material fines or penalties, although we cannot assure that we will not be in the future. See also “Our Business—Regulatory Matters.”

 

Federal, state, local and other laws and regulations could impose substantial costs, liabilities and/or restrictions on our operations that would adversely affect our financial condition, results of operations and cash flows.

 

Our industry is subject to various federal, state and local statutes, ordinances, rules and regulations concerning zoning, building design and safety, construction, contractors’ licensing, energy conservation and similar matters. Difficulties or failures in obtaining required permits, licenses or other regulatory approvals could delay or prevent our interior product installation activity in a particular locale, and the suspension of, or inability to renew, a license or permit could interrupt previously contracted installation services. Regulatory restrictions and industry standards may require us to alter our supply chain management and installation processes, which could increase our operating expenses and negatively affect the level of construction activity of our customers, any of which could negatively affect our business, financial condition and results of operations.

 

We are also subject to employment regulations promulgated by the U.S. Equal Employment Opportunity Commission. More burdensome regulatory requirements in this or other areas, including workers’ compensation, may increase our expenses and adversely affect our business, financial condition, results of operations and cash flows. Moreover, failure to comply with the regulatory requirements applicable to our business could expose us to substantial fines and penalties that could adversely affect our business and reputation.

 

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We are also subject to various federal, state and local environmental laws, ordinances, rules and regulations including those promulgated by the United States Environmental Protection Agency and analogous state agencies. As current and former owners, lessees and operators of real property, we can be held liable for the investigation or remediation of contamination at or from such properties, in some circumstances irrespective of whether we knew of or caused such contamination. No assurance can be provided that investigation and remediation will not be required in the future as a result of spills or releases of petroleum products or hazardous substances, the discovery of currently unknown environmental conditions, more stringent standards regarding existing contamination, or changes in legislation, laws, ordinances, rules or regulations or their interpretation or enforcement. More burdensome environmental regulatory requirements may increase our costs and adversely affect our financial condition, results of operations and cash flows. See also “Our Business—Regulatory Matters.”

 

Changes in legislation and government policy may have a material adverse effect on our business, financial condition and results of operations.

 

Our markets are affected by legislative and regulatory policies that promote or do not promote home ownership, such as U.S. tax rules allowing for deductions of mortgage interest or interest on home equity loans. For example, the Tax Cuts and Jobs Act, which was enacted into law on December 22, 2017 (the “Tax Act”), imposes limitations on the deductibility of interest on mortgages qualifying of the home mortgage interest deduction. The Tax Act provides that taxpayers may only deduct interest on $750,000 of qualified residence loans, including home equity loans that are used to substantially improve the taxpayer’s home that secures the loan, a reduction from the prior limit of $1.0 million. As many consumers finance renovation projects that use our products with home equity loans, limitations on the deductibility of interest on those loans could reduce demand for our products. In addition, recent U.S. federal and state legislative and regulatory policies enacted in response to the COVID-19 pandemic provide various measures of relief for homeowners, primarily in the form of mortgage payment forbearance for homeowners with federally-backed mortgages and temporary moratoria on foreclosures and evictions. It remains uncertain whether or to what extent such relief measures could protect homeowners and what impact they will have on the U.S. real estate market and the U.S. and global economies generally, and our business, financial condition and results of operations may be materially and adversely affected as a result. Future changes to laws or policies relating to these or similar matters could reduce demand for our products and have a material adverse effect on our business, financial condition and results of operations.

 

Changes in international trade policy, increased regulation and any trade agreements or tariffs on imported products could negatively impact our business and results of operations if they seriously disrupt the movement of products through our supply chain or increase their cost. With the upcoming change in administration in January 2021, we are currently unable to predict whether any meaningful changes to existing legislative and regulatory environments relevant to our business will materialize, or if any such changes would favorably or unfavorably impact our business. To the extent that such changes have a negative impact on us or the industries we serve, these changes may materially and adversely impact our business, financial condition, result of operations and cash flows. We are also impacted by changes in local laws and policies in markets in which we operate, which could subject us to rules and regulations that are not uniform across our footprint.

 

We may be limited in our ability to use our net operating loss carryforwards, which could adversely affect our profitability.

 

We have state net operating loss carryforwards due to prior period losses, which could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), our ability to utilize net operating loss (“NOL”) carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws in the United States. It is possible that any future ownership changes or issuances of our capital stock, could have a material effect on the use of our NOL carryforwards or other tax attributes, which could adversely affect our future profitability.

 

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Contracting on government programs is subject to significant regulation, and any non-compliance could subject us to fines and penalties.

 

We are party to several contracts with federal, state and local governments and are subject to risks associated with this contracting, including substantial civil and criminal fines and penalties. These fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting standards, not complying with workforce obligations, receiving or paying kickbacks or filing false claims. We expect to be subjected to audits and investigations by federal, state and local governmental agencies and authorities. The failure to comply with the terms of our government contracts could harm our business reputation. It could also result in our progress payments being withheld or our suspension or debarment from future government contracts, which could have a material adverse effect on our results of operations.

 

Union organizing activity and work stoppages could delay or reduce demand for or availability of products that we install and negatively affect our results of operations.

 

None of our employees are currently covered by collective bargaining or other similar labor agreements. However, if our employees were to unionize, including as a result of any future legislation that makes it easier for employees to unionize, our business could be negatively affected.

 

In general, our customers do not have employees that are covered by collective bargaining or similar labor agreements. However, our customers conduct virtually all construction work through unaffiliated third-party subcontractors that in some instances have unionized employees. Any inability by our customers to negotiate collective bargaining arrangements could cause strikes or other work stoppages, and new contracts could result in increased operating costs. If any such strikes or other work stoppages occur, or if employees or other subcontractors become represented by a union, our customers could experience a disruption in their operations and higher labor costs, which could have an adverse effect on our results of operations.

 

In addition, certain of our suppliers have unionized employees, and certain of our products are transported by unionized truckers. Strikes, work stoppages or other labor disputes of our suppliers’ work forces or truckers could result in slowdowns or closures of facilities where the products for which we provide supply chain management and installation services are manufactured or could affect the ability of our suppliers to deliver such products to us. Any interruption in the production or delivery of these products could delay or reduce availability of these products and increase our costs or cause us to fail to meet a customer’s construction schedule.

 

Political and economic uncertainty and unrest in foreign countries where some of our direct and indirect suppliers are located could adversely affect our results of operations.

 

Our products and building materials are sourced directly and indirectly from a wide variety of suppliers, including certain overseas providers. Such products or materials may be imported because they are not available for domestic purchase in the United States, because of significantly reduced cost or because there is a shortfall of inventory available locally. Despite our efforts to ensure the merchantability of these products, such products may not adhere to U.S. standards or laws. We are subject to risks and uncertainties associated with changing economic and political conditions in the foreign countries from which we source, or in the future may source, any of our products, such as:

 

   

increased import duties, tariffs, trade restrictions, and quotas;

 

   

work stoppages;

 

   

economic uncertainties (including inflation);

 

   

adverse foreign government regulations, government control, or sudden changes in laws and regulations;

 

   

wars, fears of war, and terrorist attacks;

 

   

pandemics and other global crises, including, without limitation, the COVID-19 pandemic; and

 

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political unrest.

 

In addition, pricing of these products and materials may be impacted by changes to the relative value of the U.S. dollar over the applicable foreign currency in the long-term, which could negatively impact our margins. Importation of such products or materials could subject us to greater risk, including currency risk, and lawsuits by customers or governmental entities.

 

We cannot predict if, when, or the extent to which the countries in which we source our products and building materials will experience any of the above events. Any event causing a disruption, delay or cessation of imports from foreign locations would likely increase the cost or reduce the supply of products available to us, and cause us to seek alternative sources for our products, which may only be available on less advantageous terms, and would adversely affect our results of operations.

 

Risks Related to Our Indebtedness

 

Restrictions in our existing credit arrangements, or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, results of operations, our ability to make distributions to stockholders and the value of our common stock.

 

Our Revolving Credit Facility and Term Loan Facility (each as defined herein), or any future credit facility or other indebtedness we enter into, may limit our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

make distributions or dividends on or redeem or repurchase shares of common stock;

 

   

make certain investments and acquisitions;

 

   

incur certain liens or permit them to exist;

 

   

enter into certain types of transactions with affiliates;

 

   

guarantee leases;

 

   

acquire, merge or consolidate with another company; and

 

   

transfer, sell or otherwise dispose of all or substantially all of our assets.

 

Our Revolving Credit Facility contains, and any future credit facility or other debt instruments we may enter into will also likely contain, covenants requiring us to maintain certain financial ratios and meet certain tests, such as a fixed charge coverage ratio, under certain circumstances. Our ability to comply with those financial ratios and tests can be affected by events beyond our control, and we may not be able to comply with those ratios and tests when required to do so under the applicable debt instruments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

The provisions of our Revolving Credit Facility, Term Loan Facility or other debt instruments may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our Revolving Credit Facility, Term Loan Facility, any future credit facility or other debt instruments could result in a default or an event of default that could enable our lenders or other debt holders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our stockholders could experience a partial or total loss of their investment.

 

We have, and may in the future incur, substantial indebtedness and could be subject to risks associated with incurring such indebtedness, which may adversely affect our business.

 

As of September 30, 2020, our total debt outstanding was approximately $383.5 million (net of original issue discount of $1.3 million and debt issuance costs of $7.6 million). Following this offering, we will have, and

 

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may in the future incur, substantial indebtedness and could be subject to risks associated with incurring such indebtedness, including:

 

   

we could be required to dedicate a substantial portion of our cash flow from operations to making interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

   

it may be more difficult and expensive to obtain additional funds through financings, if such funds are available at all;

 

   

we could be more vulnerable to economic downturns and fluctuations in interest rates, less able to withstand competitive pressures and less flexible in reacting to changes in our industry and general economic conditions;

 

   

we could be prevented from capitalizing on business opportunities;

 

   

if we default under any of our existing indebtedness or if our creditors demand payment of a portion or all of our indebtedness, we may not have sufficient funds to make such payments; and

 

   

we could be placed at a competitive disadvantage to less leveraged competitors.

 

We and our subsidiaries may incur substantial additional indebtedness in the future, subject to the terms and restrictions contained in the agreements governing our indebtedness. If we or our subsidiaries incur additional indebtedness, the related risks that we and they now face could intensify.

 

Our ability to make scheduled payments on our existing indebtedness as well as any future indebtedness that we may incur and to fund planned capital expenditures and other liquidity needs will depend on our ability to generate cash from operations or asset sales as well as our ability to refinance our indebtedness on favorable terms, all of which are subject to economic, financial, competitive and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. We cannot assure you that our businesses will generate sufficient cash flow from operations or that future borrowings will be available to us through capital markets financings or under our credit facilities or otherwise in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We cannot assure you that we will be able to refinance any of the indebtedness that we will incur on commercially reasonable terms, or at all. In addition, we may incur additional indebtedness in order to finance our operations or to repay our indebtedness. If we are not able to repay or refinance our debt as it becomes due, the lenders who hold our debt could accelerate amounts due which could potentially trigger a default or acceleration of the maturity of our other debt. Further, if we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional debt or equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms, or at all, or on terms that would be advantageous to our stockholders or on terms that would not require us to breach the terms and conditions of our existing or future financing arrangements.

 

Interest expense on debt we will incur may limit our cash available to fund our growth strategies.

 

Our current financing arrangements have, and any additional debt we subsequently incur may have, a variable rate of interest. Higher interest rates could increase debt service requirements on our current variable rate indebtedness and on any debt we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay debt during periods of rising interest rates, we could be required to refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times which may not permit realization of the maximum return on such assets and could result in a loss. The occurrence of either or both of such events could materially and adversely affect our cash flows and results of operations.

 

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The interest rates under our Revolving Credit Facility and Term Loan Facility are calculated using LIBOR. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, the administrative agents under our Revolving Credit Facility and Term Loan Facility may replace LIBOR with one or more Secured Overnight Financing Rate (SOFR) values or another alternate benchmark rate, giving due consideration to any evolving or then-existing convention for similar U.S. dollar denominated syndicated credit facilities for such alternative benchmarks. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. Dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by treasury securities. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere. However, if LIBOR ceases to exist after 2021, the interest rates under the alternative rate could be higher than LIBOR. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.

 

Our Term Loan Facility bears interest at a variable rate, however interest rate hedges in place mitigate the risk of interest rate fluctuations associated with a portion of the outstanding debt balance. For some instruments, the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition. If a contract is not transitioned to an alternative reference rate and LIBOR is discontinued, the impact on our contracts is likely to vary by contract. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected. While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.

 

We may require additional capital in the future and may not be able to secure adequate funds on terms acceptable to us.

 

The expansion and development of our businesses may require significant capital, which we may be unable to obtain, to fund our capital expenditures, operating expenses, working capital needs, and potential strategic acquisitions. In accordance with our growth strategy, we may opportunistically raise additional equity or debt capital to help fund the growth of our businesses, subject to market and other conditions, but such capital may not be available to us on a timely basis, or at all, to meet our cash requirements. Further, our capital requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities.

 

To a large extent, our cash flow generation ability is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our businesses will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before its maturity or obtain additional equity or debt financing. We cannot assure you that we will be able to do so on favorable terms, if at all. Any inability to generate sufficient cash flow, refinance our debt or incur additional debt on favorable terms could adversely affect our financial condition and could cause us to be unable to service our debt and may delay or prevent the expansion of our businesses.

 

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Risks Related to Our Company’s Organization and Structure

 

We are a holding company and conduct all of our operations through our subsidiaries.

 

We are a holding company and all of our operating assets are held by certain of our direct and indirect subsidiaries. We derive all of our operating income from our operating subsidiaries. We and our other holding company subsidiaries rely on the earnings and cash flows of our subsidiaries, which are paid to us by our operating subsidiaries in the form of dividends and other payments or distributions, to meet our debt service and other obligations. The ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends and other distributions to us), the terms of existing and future indebtedness, including the Term Loan Facility and the Revolving Credit Facility, and other agreements of our subsidiaries and the covenants of any future outstanding indebtedness that our subsidiaries incur.

 

Provisions of our charter documents and Delaware law could delay, discourage or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for our stockholders to change our management.

 

Our certificate of incorporation and bylaws that will be in effect immediately prior to the effectiveness of this registration statement may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares of our common stock. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions may include the following:

 

   

a classified board of directors with three-year staggered terms;

 

   

no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

   

the exclusive right of our board of directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of the holders of our stock or a hostile acquirer;

 

   

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

   

a requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, our Chief Executive Officer or upon a resolution approved by a majority of the total number of directors that we would have if there were no vacancies, and not by our stockholders;

 

   

advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us; and

 

   

super-majority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation.

 

In addition, we will be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”), which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with a stockholder owning 15% or more of such corporation’s outstanding voting stock for a period

 

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of three years following the date on which such stockholder became an “interested” stockholder. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Any delay or prevention of a change of control transaction or changes in our board of directors and management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares of our common stock. See “Description of Capital Stock—Anti-Takeover Effects of Provisions of our Charter, our Bylaws and Delaware Law.”

 

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for a wide range of disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

 

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (iii) any action asserting a claim arising pursuant to any provision of the DGCL or of our certificate of incorporation or our bylaws; (iv) any action or proceeding to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws (including any right, obligation or remedy under our certificate of incorporation or our bylaws); (v) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal-affairs doctrine; or (vi) any action or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware.

 

This provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction.

 

The exclusive-forum provisions also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Section 22 of the Securities Act created concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce this exclusive forum provision, and the enforceability of similar choice of forum provisions in other companies’ charter documents have been challenged in legal proceedings. While the Delaware courts have determined that such exclusive forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provision, and there can be no assurance that such provision will be enforced by a court in those other jurisdictions. Any person or entity purchasing or otherwise acquiring any interest in our securities shall be deemed to have notice of and consented to this provision; however, we note that investors cannot waive our compliance with the federal securities laws and the rules and regulations thereunder.

 

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees, which may discourage lawsuits against us and our directors, officers and employees.

 

Risks Related to this Offering, Being a Public Company and our Common Stock

 

Before this offering, there has been no public market for our common stock, and an active trading market for our common stock may not develop or be sustained, which could impede your ability to sell shares and depress the market price of your shares.

 

Prior to this offering, there has been no public market for our common stock. An active trading market for our common stock may not develop upon completion of this offering or, if it does develop, it may not be

 

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sustained. Furthermore, we cannot be certain that we will continue to satisfy the continued listing standards of Nasdaq.

 

Accordingly, no assurance can be given as to the following:

 

   

the likelihood that an active trading market for our common stock will develop or be sustained;

 

   

the liquidity of any such market;

 

   

the ability of our stockholders to sell their shares of our common stock; or

 

   

the price that our stockholders may obtain for their common stock.

 

If an active trading market does not develop or is not maintained, you may have difficulty selling any shares of our common stock that you purchase, and the value of such shares might be materially impaired. Even if an active trading market develops for our common stock, the market price may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock. The initial public offering price of our common stock will be determined by negotiations between us and representatives of the underwriters and may not reflect the prevailing price in the open market. See “Underwriting” for a discussion of the factors considered in determining the initial public offering price.

 

The market price of our common stock may fluctuate substantially, and your investment may decline in value.

 

The initial public offering price for our common stock will be determined through negotiations among the underwriters and us, and may vary from the market price of our common stock following this offering. If you purchase shares of common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. The market price of our common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our control, including:

 

   

the impacts of the COVID-19 pandemic on us and the national and global economies;

 

   

market conditions affecting the new single-family residential, building products, repair & remodel and related industries;

 

   

quarterly variations in our results of operations;

 

   

changes in market valuations of similar companies;

 

   

passage of legislation or changes in regulations, including tax and international trade policies;

 

   

the announcement of acquisitions by us or our competitors;

 

   

changes in general economic and political conditions;

 

   

volatility in the financial markets;

 

   

results of our operations and the operations of other companies in the homebuilding, building products and related industries;

 

   

changes in interest rates;

 

   

threatened or actual litigation and government investigations;

 

   

adverse market reaction to our level of indebtedness;

 

   

the addition or departure of key personnel;

 

   

actions taken by our stockholders, including the sale or disposition of their shares of our common stock;

 

   

speculation in the press or investment community;

 

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negative publicity regarding us specifically or our business generally;

 

   

differences between our actual financial and operating results and those expected by investors and analysts, and changes in analysts’ recommendations or projections;

 

   

passage of legislation or other regulatory developments that adversely affect us or the building products supply and services industry; and

 

   

natural disasters, pandemics, war, acts of terrorism and responses to these events.

 

These and other factors may lower the market price of our common stock, regardless of our actual operating performance. As a result, our common stock may trade at prices significantly below the public offering price.

 

Furthermore, in recent years, the stock market has experienced significant price and volume fluctuations.

 

This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our and related industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce the price of our common stock and materially affect the value of your investment.

 

The obligations associated with being a public company will require significant resources and management attention.

 

As a public company, we will face increased legal, accounting, administrative and other costs and expenses that we have not incurred as a private company. We expect to incur substantial incremental costs related to operating as a public company. After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which requires that we file annual, quarterly and current reports with respect to our business and financial condition, and proxy and other information statements. In addition, we will be subject to the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Public Company Accounting Oversight Board and    , each of which imposes additional reporting and other obligations on public companies. As a public company, we will be required to:

 

   

prepare and distribute periodic reports, proxy statements and other stockholder communications in compliance with the federal securities laws and Nasdaq rules;

 

   

expand the roles and duties of our board of directors and committees thereof;

 

   

meet independence and qualification requirements for our board of directors and committees thereof;

 

   

maintain an internal audit function;

 

   

institute more comprehensive financial reporting and disclosure compliance functions;

 

   

involve and retain to a greater degree outside counsel and accountants in the activities listed above;

 

   

enhance our investor relations function;

 

   

establish new internal policies, including those relating to trading in our securities and disclosure controls and procedures;

 

   

retain additional personnel;

 

   

comply with Nasdaq listing standards; and

 

   

comply with the Sarbanes-Oxley Act.

 

We expect these rules and regulations and changes in laws, regulations and standards relating to corporate governance and public disclosure to increase legal and financial compliance costs and make some activities more

 

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time consuming and costly. Compliance with existing and evolving regulatory requirements will result in increased administrative expenses and may result in a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

These increased costs will require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives. We also expect that it will be expensive to maintain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and civil litigation.

 

We will have broad discretion in the use of the net proceeds of this offering and may not use them effectively.

 

Our management will have broad discretion in the application of the net proceeds received by us from this offering. We may use the proceeds for any of the purposes described in “Use of Proceeds” or other purposes as determined from time to time by our management. You will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could adversely affect our ability to operate and grow our business.

 

If we are unable to implement and maintain effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, which could adversely affect the market price of our common stock.

 

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act (“Section 404”), and are therefore not required to make an assessment of the effectiveness of our internal controls over financial reporting for that purpose. However, as a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, we will be required to furnish a report by management on the effectiveness of our internal controls over financial reporting pursuant to Section 404, at the time of our second annual report on Form 10-K, which will be for our fiscal year ending December 31, 2021. We are in the process of designing, implementing and testing the internal controls over financial reporting required to comply with this obligation, which process is time consuming, costly and complex.

 

If (i) we are unable to design, implement and test our internal controls over financial reporting; (ii) we identify material weaknesses in our internal controls over financial reporting; (iii) we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal controls over financial reporting are effective; or (iv) our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected; and we could become subject to investigations by the SEC, Nasdaq or other regulatory authorities, which could require additional financial and management resources.

 

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

The market price of our common stock could decline significantly as a result of sales of a large number of shares of our common stock in the market after this offering. These sales, or the perception that these sales might

 

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occur, could depress the market price of our common stock or make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

Upon the completion of this offering, we will have                shares of common stock outstanding (or                shares if the underwriters exercise their option to purchase additional shares in full). The shares of common stock offered in this offering will be freely tradable, except for any shares of common stock that may be held or acquired by our directors, executive officers and other affiliates, the sale of which will be restricted under the Securities Act. In addition, upon completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register a total of                shares of our common stock that may be issued under our equity incentive plans. Shares registered under such registration statements will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations.

 

Moreover, pursuant to the Stockholders Agreement (as defined below) to be entered into among us, Littlejohn and Platinum, for so long as Littlejohn or Platinum continues to hold at least 20% of the outstanding shares of our common stock, it will have the right to require us to register the shares it holds in our company under the Securities Act. See “Certain Relationships and Related Party Transactions—Stockholders Agreement—Registration Rights.” If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

 

In connection with this offering, we, our directors and executive officers and holders of substantially all of our outstanding common stock have each agreed to certain lock-up restrictions. We and they will not, subject to certain exceptions, during the period ending 180 days after the date of the final prospectus for this offering, directly or indirectly, offer, sell, hypothecate, pledge, contract or agree to sell (including any short sale), grant any option to purchase or otherwise dispose of or agree to dispose of, enter into any hedging transaction relating to, or file (or participate in the filing of) a registration statement with the SEC in respect of, any shares of our common stock or any other securities that are substantially similar to the common stock, or publicly announce an intention to effect any transaction specified above. The representatives of the underwriters may, in their sole discretion, release all or any portion of the shares of our common stock from the restrictions in any of the lock-up agreements described above. See “Underwriting.”

 

We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments.

 

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition or under a compensation or incentive plan), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock and could impair our ability to raise capital through future sales of our securities.

 

Littlejohn and Platinum will continue to have significant ownership of our common stock and may have interests that conflict with those of our other stockholders.

 

Upon the completion of this offering, Littlejohn and Platinum will beneficially own approximately                % and        % of our common stock, respectively, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock. So long as Littlejohn and Platinum continue to hold, directly or indirectly, shares of common stock representing a significant percentage of the voting power of our common stock, they will be able to exercise control over all matters requiring stockholder

 

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approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions, and will have significant control over our management and policies. This concentration of voting power may have the effect of delaying or preventing a change in control of us or discouraging others from making tender offers for our shares of common stock, which could prevent stockholders from receiving a premium for their shares of common stock. Certain corporate actions may be taken even if other stockholders oppose them. The interests of Littlejohn and Platinum may not always coincide with the interests of other stockholders, and Littlejohn and Platinum may act in a manner that advances their best interests and not necessarily those of our other stockholders. In addition, under our certificate of incorporation, Littlejohn and Platinum are permitted to pursue corporate opportunities for themselves, rather than for us. Littlejohn and Platinum have in the past, and may in the future, invest in and be affiliated with other companies in our and related industries. See “Description of Capital Stock—Corporate Opportunity.”

 

We may issue preferred securities, the terms of which could adversely affect the voting power or value of our common stock.

 

Our certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred securities having such designations, preferences, limitations, and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred securities could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred securities the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred securities could affect the residual value of the common stock.

 

Purchasing shares of our common stock in this offering will result in an immediate and substantial dilution of your investment.

 

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, investors purchasing shares of our common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $         per share (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock), based on an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus. See “Dilution.”

 

Furthermore, if we raise additional capital or acquire new businesses by issuing new convertible or equity securities, your interest will be further diluted. This may result in the loss of all or a portion of your investment in our common stock. In addition, newer securities may have rights, preferences or privileges senior to those of securities held by investors in our common stock.

 

We do not expect to pay any dividends in the foreseeable future.

 

We currently intend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do not intend to pay dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, the limits imposed by the terms of our Revolving Credit Facility and Term Loan Facility, or any then-existing debt instruments, and such other factors as our board of directors deems relevant. Accordingly, investors in our common stock may need to sell their shares to realize a return on their investment in our common stock, and investors may not be able to sell their shares at or above the prices paid for them.

 

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If securities analysts do not publish favorable reports about us or if we, or our industry, are the subject of unfavorable commentary, the price of our common stock could decline.

 

The trading price and volume for our common stock will depend in part on the research and reports about us that are published by analysts in the financial industry. Analysts could issue negative commentary about us or our industry, or they could downgrade our common stock. We may also not receive sufficient research coverage or visibility in the market. Any of these factors could result in the decline of the trading price of our common stock, causing investors in our common stock to lose all or a portion of their investment.

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements within the meaning of U.S. federal securities laws, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believe,” “estimate,” “project,” “aim,” “anticipate,” “expect,” “seek,” “predict,” “contemplate,” “continue,” “possible,” “intend,” “may,” “plan,” “objective,” “ongoing,” “potential,” “forecast,” “future,” “might,” “will,” “could,” “would” or “should” or, in each case, their negative, or other variations or comparable terminology. In particular, statements regarding the potential impact of the COVID-19 pandemic, statements about the markets in which we operate, including growth of our various markets, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” are forward-looking statements.

 

These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth strategies, the industry in which we operate and potential acquisitions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this prospectus.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the stability of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause our results to vary from expectations include, but are not limited to:

 

   

the negative impacts of the COVID-19 pandemic on our business;

 

   

decreased new single-family residential construction activity;

 

   

downturns in the economy and credit markets;

 

   

decreased demand for interior option upgrades;

 

   

decline in the rate of growth in the housing market, in our geographic markets or of the homebuilding industry;

 

   

loss of, or decreased construction activity by, significant customers;

 

   

pricing pressures from customers;

 

   

changes in the cost of the products we install or in our product mix;

 

   

increased tariffs and other changes in foreign trade policy;

 

   

dependence on our senior management team and other key personnel;

 

   

inability to attract and retain qualified employees and the risks associated with our workforce supply and costs;

 

   

risks associated with completing the implementation of our ERP system and implementing other new initiatives for operating software;

 

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dependence on the availability and skill of subcontractors and the risks associated with our use of subcontractors;

 

   

inability to execute our growth strategy;

 

   

competitive pressures in our industry;

 

   

risks associated with acquisitions, including our ability to realize anticipated synergies or the costs of integrating acquisitions;

 

   

inability to expand into new geographic markets;

 

   

product shortages, loss of key suppliers, failure to develop relationships with qualified suppliers, material disruptions in our supply or substantial changes to supply terms;

 

   

reliance on third-party license agreements;

 

   

the effect of seasonality of our business, severe weather conditions and climate change;

 

   

cybersecurity risks;

 

   

disruptions in our IT systems and software;

 

   

changes in, or failure to comply with, federal, state, local and other laws and regulations;

 

   

exposure to claims and legal proceedings;

 

   

our failure to adequately protect our intellectual property rights;

 

   

risks related to our indebtedness;

 

   

our inability to maintain an effective system of internal controls and produce timely and accurate financial statements or comply with applicable regulations;

 

   

the obligations and increased costs associated with being a public company;

 

   

the significant ownership of our common stock by our Sponsors, whose interests may conflict with those of our stockholders; and

 

   

additional factors discussed under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.”

 

Other sections of this prospectus include additional factors that could adversely impact our business and financial performance. In light of these risks, uncertainties and assumptions, the forward-looking events described in this prospectus may not occur. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time, and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

 

Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this prospectus might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, but not limited to, the factors mentioned above. Because of these uncertainties, you should not place undue reliance on these forward-looking statements when making an investment decision.

 

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USE OF PROCEEDS

 

We expect to receive net proceeds from this offering of approximately $                million, or approximately $                million if the underwriters exercise their option to purchase additional shares in full (assuming an initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering (including any additional proceeds that we may receive if the underwriters exercise their option to purchase additional shares of our common stock) to repay indebtedness outstanding under our Term Loan Facility, and the balance for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds we receive from this offering for acquisitions or other strategic investments, although we do not currently have any specific transactions at this time. However, we will have broad discretion over use of the net proceeds from this offering.

 

We entered into the Term Loan Facility in May 2018 in connection with the Business Combination and used the proceeds thereof to refinance the indebtedness of legacy ISI and legacy ILG and to pay related fees and expenses. As of September 30, 2020, we had an outstanding borrowing of $392 million under the Term Loan Facility. The Term Loan Facility matures in May 2025. Borrowings under the Term Loan Facility bear interest, at our option, at either (i) the base rate plus 3.00% per annum or (ii) LIBOR plus 4.00% per annum.

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds received by us from this offering by approximately $                million, assuming the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We may also increase or decrease the number of shares we are offering. Each increase (decrease) of one million shares in the number of shares of our common stock offered by us would increase (decrease) the net proceeds received by us from this offering by approximately $                million, assuming an initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The information discussed above is illustrative only and subject to the actual public offering price and the actual number of shares sold in this offering.

 

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DIVIDEND POLICY

 

We currently do not anticipate paying dividends after this offering for the foreseeable future. Instead, we anticipate that our earnings will be used to provide working capital to support our operations and to finance the growth and development of our business. Any future determination relating to dividends will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, contractual restrictions, legal requirements and other factors as our board of directors may deem relevant. The ability of our board of directors to declare any dividends will be subject to certain limits imposed by the terms of our Revolving Credit Facility, Term Loan Facility and any then-existing debt instruments.

 

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CAPITALIZATION

 

The following table describes our cash, cash equivalents and capitalization as of September 30, 2020:

 

   

on an actual basis; and

 

   

on a pro forma basis to give effect to:

 

   

the payment of a special cash distribution of $31.8 million and $28.2 million to our membership equityholders, Faraday and ISH, respectively, or $60 million in the aggregate, in December 2020;

   

the Corporate Conversion;

 

   

the issuance and sale of                shares of our common stock in this offering at an assumed initial public offering price of $                per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us; and

 

   

application of the net proceeds from this offering as described under “Use of Proceeds.”

 

You should read this table in conjunction with the sections entitled “Use of Proceeds,” “Summary Historical Financial Data,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The table below does not give effect to any exercise by the underwriters of their option to purchase additional shares of our common stock.

 

     As of September 30, 2020  
     Actual     Pro Forma  
     (Unaudited)  

Cash and cash equivalents

   $ 82,349   $              
  

 

 

   

 

 

 

Debt:

    

Revolving Credit Facility(1)

   $ —       $    

Term Loan Facility

     383,040 (2)   

Other Long-term Debt

     434    
  

 

 

   

 

 

 

Total debt

     383,474    
  

 

 

   

 

 

 

Equity:

    

Preferred stock, $0.01 par value: no shares authorized, issued and outstanding, actual;         shares authorized, no shares issued and outstanding, pro forma

     —      

Common stock, $0.01 par value: no shares authorized, issued and outstanding, actual;         shares authorized,         shares issued and outstanding, pro forma

     —      

Additional paid-in capital

     314,994    

Accumulated deficit

     (18,005  

Accumulated other comprehensive loss

     (6,277  
  

 

 

   

 

 

 

Total equity

     290,712    
  

 

 

   

 

 

 

Total capitalization

   $       $    
  

 

 

   

 

 

 

 

(1)   Provides for aggregate borrowings of up to $100 million.
(2)   Net of original issue discount of $1.3 million and debt issuance cost of $7.6 million. Includes the current portion of the Term Loan Facility.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $                per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the pro forma amounts of each of cash, total equity and total capitalization by $                million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

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A one million share increase (decrease) in the number of shares of common stock sold by us in this offering would increase (decrease) the pro forma amounts of each of cash, total equity and total capitalization by approximately $                million, assuming an initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and estimated offering expenses.

 

The pro forma amounts discussed above are illustrative only and subject to the actual public offering price and the actual number of shares sold in this offering.

 

See “Prospectus Summary—The Offering” for a description of those shares that are or are not reflected as outstanding shares in the table above.

 

The pro forma amounts discussed above are illustrative only and subject to the actual public offering price and the actual number of shares sold in this offering.

 

See “Prospectus Summary—The Offering” for a description of those shares that are or are not reflected as outstanding shares in the table above.

 

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DILUTION

 

Our pro forma net tangible book value as of September 30, 2020 was approximately $                million, or approximately $                per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding, prior to the sale by us of shares of common stock in this offering. Pro forma net tangible book value as of September 30, 2020 gives pro forma effect to the Corporate Conversion and the payment of a special cash distribution of $31.8 million and $28.2 million to our membership equityholders, Faraday and ISH, respectively, or $60 million in the aggregate, in December 2020.

 

After giving effect to the (i) sale by us of                shares of common stock in this offering, based upon the assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering and (ii) application of the net proceeds from this offering as described under “Use of Proceeds,” our pro forma as adjusted net tangible book value as of September 30, 2020 would have been approximately $                million, or $                per share (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock). This represents an immediate increase in pro forma net tangible book value of $                per share to existing stockholders and immediate dilution of $                per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price.

 

The following table illustrates this per share dilution.

 

Assumed initial public offering price

      $            

Pro forma net tangible book value per share as of September 30, 2020

   $               

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma as adjusted net tangible book value per share as of September 30, 2020

     
     

 

 

 

Dilution per share to new investors

      $    
     

 

 

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $                 per share would increase or decrease our pro forma as adjusted net tangible book value by approximately $                per share and increase or decrease dilution per share to new investors purchasing shares of common stock in this offering by $                , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

The following table sets forth, as of September 30, 2020, on a pro forma as adjusted basis as described above, the number of shares of our common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of our common stock in this offering. The table is based upon the assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering:

 

     Common Stock
Purchased
    Total Consideration
(in thousands)
 
     Number      Percent     Amount      Percent     Average
Price Per
Share
 

Existing stockholders

            

New investors

                            $                         $            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $          100   $    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $                per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors in this offering by $                million and would increase (decrease) the average price per share paid by new investors by $                , assuming the number of shares of common stock offered, as set forth on the cover page of this prospectus, remains the same and without deducting the estimated underwriting discounts and commissions and offering expenses payable by us in connection with this offering.

 

If the underwriters exercise in full their option to purchase additional shares of our common stock in the offering, the following will occur (in each case assuming an initial public offering price of $                per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus):

 

   

the number of shares of our common stock held by new investors will increase to                , or                % of the total number of shares of our common stock outstanding after this offering; and

 

   

the pro forma as adjusted net tangible book value would be $                per share and the dilution to new investors in this offering would be $                per share.

 

As of September 30, 2020, after giving effect to the Corporate Conversion and the payment of a special cash distribution of $31.8 million and $28.2 million to our membership equityholders, Faraday and ISH, respectively, or $60 million in the aggregate, in December 2020,                 shares of our common stock would be issuable upon the exercise of outstanding options at a weighted-average exercise price of $                per share. In addition,                shares of our common stock will be reserved for future issuance under our 2021 Plan, which will be effective upon the completion of this offering. To the extent these options are exercised or these shares are issued, there will be further dilution to new investors. See “Executive Compensation—Equity Compensation Plans.”

 

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders. See “Risk Factors—Risks Related to this Offering, Being a Public Company and our Common Stock—Purchasing shares of our common stock in this offering will result in an immediate and substantial dilution of your investment.”

 

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SELECTED HISTORICAL FINANCIAL DATA

 

The selected consolidated statements of comprehensive income (loss) data for fiscal years 2019, 2018 and 2017 and the selected consolidated balance sheet data as of December 31, 2019 and December 31, 2018 have been derived from our consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of comprehensive income (loss) data for fiscal years 2016 and 2015 and the selected consolidated balance sheet as of December 31, 2017, December 31, 2016 and December 31, 2015 have been derived from our consolidated financial statements not included in this prospectus. The selected consolidated statements of comprehensive income (loss) data for the nine months ended September 30, 2020 and September 30, 2019 and the selected consolidated balance sheet data as of September 30, 2020 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, our unaudited consolidated financial statements were prepared on the same basis as our audited consolidated financial statements and include all adjustments necessary for a fair presentation of the financial information set forth in those statements.

 

Our historical results are not necessarily indicative of future operating results and our results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year or any other period. You should read the following selected historical financial data in conjunction with our consolidated historical financial statements and the related notes thereto, and with the sections titled, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

     Nine Months Ended
September 30
    Year Ended December 31  

(in thousands, except share
and per share data)

   2020     2019     2019     2018     2017     2016     2015  
     (Unaudited)                                

Statements of Comprehensive Income (Loss) Data:

              

Revenues

   $ 1,231,855     $ 1,314,021   $ 1,785,388     $ 1,405,325     $ 851,918     $ 702,146     $ 390,962  

Cost of revenues

     941,552       1,026,120       1,390,606       1,099,337       670,274       538,164       302,972  

Gross profit

     290,303       287,901       394,782       305,988       181,644       163,982       87,990  

Selling, general and administrative(1)

     219,128       238,798       321,143       246,234       152,218       144,016       79,390  

Amortization of intangibles

     42,636       47,486       63,545       40,843       9,080       10,286       9,267  

Impairment of intangible assets and tradename(2)

     816       —         —         10,000       —         —         —    

Total operating expenses

     262,580       286,284       384,688       297,077       161,298       154,302       88,657  

Income (loss) from operations

     27,723       1,617       10,094       8,911       20,346       9,680       (667

Other expense:

              

Interest expense

     (18,712     (22,321     (29,088     (22,238     (10,458     (11,033     (7,288

(Loss) on extinguishment of debt

     —         —         —         (3,068     (552     —         —    

Other income, net

     1,488       9       8       —         —         —         —    

Income (loss) before income taxes

     10,499       (20,695     (18,986     (16,395     9,336       (1,353     (7,955

Income tax benefit (expense)

     (2,552     3,127       3,225       3,475       521       1,003       1,526  

Net income (loss)

   $ 7,947     $ (17,568   $ (15,761   $ (12,920   $ 9,857     $ (350   $ (6,429

Net unrealized (loss) gain on derivative instrument

     (6,708     (108     431       —         (5     —         —    

Comprehensive (loss) income

   $ 1,239     $ (17,676   $ (15,330   $ (12,920   $ 9,852     $ (350   $ (6,429

Net income (loss) per share (basic and diluted)

   $ 7.95     $ (17.57   $ (15.76   $ (16.01   $ 18.60     $ (0.66   $ (12.13

Weighted average number of shares outstanding (basic and diluted)

     1,000,000       1,000,000       1,000,000       806,849       530,000       530,000       530,000  

 

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     As of
September 30
     As of December 31  

(in thousands)

   2020      2019      2018      2017      2016      2015  
     (Unaudited)                                     

Balance Sheet Data:

                 

Total current assets

   $ 349,366      $ 300,458      $ 286,197      $ 133,862      $ 132,939      $ 79,704  

Property, plant and equipment, net

     49,385        53,688        58,001        31,578        24,838        8,481  

Intangible assets, net

     263,592        300,744        354,388        56,437        63,440        70,025  

Goodwill

     266,847        253,977        249,849        72,273        69,778        68,145  

Total assets(3)

     999,997        986,442        956,642        299,030        299,720        228,487  

Total current liabilities

     225,634        201,857        195,117        111,112        117,376        67,211  

Long-term debt, net of current portion

     380,946        382,249        384,319        90,848        88,479        86,938  

Total liabilities(3)

     709,285        682,206        638,412        211,309        222,419        167,353  

Total stockholders’ equity

   $ 290,712      $ 304,236      $ 318,230      $ 87,721      $ 77,301      $ 61,134  

 

(1)   Selling, general and administrative also includes depreciation and amortization, acquisition-related expenses, integration expenses, and management fees and expenses.
(2)   Represents amounts for impairment of intangibles ($816 for September 30, 2020) and trade name ($10,000 for the year ended December 31, 2018).
(3)   On January 1, 2019, we adopted ASU 2016-02, Leases, and recognized total right of use assets of $68.5 million and total lease liabilities of $71.0 million related to our operating and finance leases.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following in conjunction with the sections of this prospectus captioned “Risk Factors,” “Information Regarding Forward-Looking Statements,” “Selected Historical Financial Data” and “Our Business” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section captioned “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We are the leading national provider of technology-enabled sales and marketing, design and installation solutions for homebuilders. Our robust technology platform delivers interior design visualization, interior option selection, supply chain management and data analytics solutions from initial homebuyer engagement through the construction and delivery of homes. We are also the leading national installer for select high-value and aesthetically important interior finishes, such as flooring, cabinets and countertops, to our homebuilder customers, as well as multi-family, commercial and repair & remodel customers. Our scalable technology solutions enhance the homebuying experience, streamline the homebuying process and have the ability to meaningfully drive homebuyer satisfaction, while improving homebuilders’ profitability, construction quality and cycle times. We serve national, regional and local homebuilders across the home price spectrum, from entry-level to move-up and luxury homes, including each of the 20 largest U.S. homebuilders. We have the leading position in the estimated $23 billion U.S. new home interior finish solutions industry. We generated 2019 revenues, net loss and Adjusted EBITDA of $1,785.4 million, $(15.8) million and $123.2 million, respectively.

 

Our design studio solutions include a full suite of design, supply chain management and installation services. We operate dedicated builder-branded and shared ILG-branded design studios, interfacing directly with homebuyers in the design process. Our builder direct solutions include supply chain management and installation services for homebuilders. For our multi-family, commercial and repair & remodel customers, we provide supply chain management and installation services for new multi-family and light commercial contractors, multi-family owners and operators, senior living operators, single-family rental operators and single-family repair and remodel customers, and home improvement retailers. The Company’s operating segments are aggregated into a single reportable segment based on the uniformity of our products and services and the similar operating and economic characteristics of our business.

 

Key Factors Affecting our Operating Results

 

New single-family residential construction activity

 

Approximately 82.2% and 79.5% of our revenues for the nine months ended September 30, 2020 and September 30, 2019, respectively, were derived from sales to the new single-family residential market. Accordingly, our business is driven primarily by the new single-family residential market, which is in turn dependent upon a number of factors, including demographic trends, new home average selling prices, mortgage interest rates, consumer confidence, employment rates, foreclosure rates, age of existing housing stocks, availability of rental housing, the availability of skilled construction labor, and the health of the economy and mortgage markets. Housing starts remain below their long-term historical average and, according to the NAHB, are projected to grow at a 3.9% CAGR from 2020 to 2022. According to the NAHB and the U.S. Census Bureau, since 2011, cumulative net U.S. household formations have exceeded total housing starts by greater than 1.5 million units, leading to a significant backlog of demand for new housing.

 

We expect the continued growth in the overall population, the aging of approximately 70 million millennials into their prime household formation and homeownership years, and the long-term effects of the COVID-19

 

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pandemic to provide support for continued growth in new single-family residential construction. As millennials continue to form households in greater numbers, their home ownership rate is expected to become more aligned with the levels of other home-owning generations. Accordingly, we believe there remains significant potential for growth in this market, which we believe will favorably impact our market opportunity and results of operations.

 

Multi-family, commercial and repair & remodel activity

 

The multi-family new construction market has experienced strong growth since the 2007-2009 recession. According to the NAHB, multi-family housing starts are expected to be approximately 393,000 in 2020, and the outlook for multi-family construction suggests sustained new build activity in line with historical levels, supported by stable underlying industry and demographic trends.

 

We also serve the commercial construction market, primarily focusing on hotels, senior living facilities and light commercial contractors. According to the AIA, non-residential construction spend is estimated to be approximately $400 billion in 2020.

 

The residential repair & remodel market has been growing at a 4% CAGR since 2014. According to the Joint Center for Housing Studies of Harvard University, homeowner improvement and repair spend is expected to be approximately $338 billion in 2020. As new home construction has lagged historical build averages over the last decade, the average home age has steadily increased to over 40 years in the U.S. We believe that the disconnect between the age of existing housing inventory and the tastes of the most active homebuying generation, the millennial generation, will continue to drive repair & remodel demand. The market is also supported in the near term by a greater portion of the population staying at home due to the COVID-19 pandemic and spending incremental income on home repairs and renovations. Our core categories (flooring, cabinets and countertops) are typically high-priority items for homeowners to renovate due to their high visibility.

 

We also expect continued growth in the multi-family repair & remodel market, driven primarily by the age of the housing base, with approximately 80% of the multi-family housing base built before 2000 as well as growth in demand for multi-family housing. In the multi-family repair & remodel market, we expect to benefit from the increasing stream of repair & remodel work that will be required as a result of the aging of the multi-family housing base. In addition, we serve the single-family rental repair & remodel market, and believe we will benefit from the recent and continuing consolidation among single-family rental operators due to our national scale.

 

Long-term trends and expectations in the homebuilding industry

 

Over the past ten years, the homebuilding industry has undergone significant consolidation, and the larger homebuilders have increased their market share. We are aligned with this trend, as we service each of the U.S. top 20 homebuilders. We expect this consolidation trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. We expect that this continued consolidation may result in competitive pressures related to servicing large homebuilders with certain profitability expectations. Our focus is on expanding relationships and market share with large national and regional homebuilders.

 

Overall economic conditions in the markets where we operate

 

Economic changes, both nationally and locally in the markets we serve, impact our financial performance. Unfavorable changes in demographics, credit markets, consumer confidence, health care costs, housing affordability, housing inventory levels, mortgage interest rates, a weakening of the national economy or of any regional or local economy in which we operate and other factors beyond our control could adversely affect consumer spending, result in decreased demand for homes and/or interior options and upgrades, which could adversely affect our business. We believe continued employment growth, prospective homebuyers’ access to

 

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financing and strong consumer confidence will be necessary to increase household formation rates and spending on interior options. We believe improved household formation rates in turn will increase demand for housing and stimulate residential new construction, repair & remodel activity and sales of interior options. In addition, we believe we will continue to see increased repair and remodel activity and demand for interior options in 2021 as a result of consumers spending more time at home during the ongoing COVID-19 pandemic. See also “COVID-19 Impacts” below in this management’s discussion and analysis of financial condition and results of operations (“MD&A”).

 

Product and service mix

 

Our performance is impacted by the type and quantity of interior options and upgrades that homebuyers select, as well as the type of service and products, such as flooring, countertops or cabinets, we provide to the homebuilder. Economic conditions and consumer preferences may impact homebuyer spending on interior options and, in turn, our margins. In addition, shifts in our service mix between design studio solutions and supply chain management and installation services can impact performance, as our design studio solutions typically generate higher margins.

 

Materials costs

 

We purchase a majority of the materials that we install, including flooring, cabinets, countertops and sundries, from manufacturers and distributors. We purchase the majority of our material on a project-specific basis, and therefore, our inventory on hand is a metric that we use to manage working capital. For the nine months ended September 30, 2020 and the year ended December 31, 2019, our inventory on hand was 24.3 days and 23.2 days, respectively. We are the largest new single-family residential customer for many of our suppliers, which we believe allows us to achieve favorable pricing, product selection and supply chain efficiency relative to our competitors. As a result of our national scale and long-standing supplier relationships, we believe we will continue to have access to an adequate supply of these materials at favorable prices to keep up with the growing demand for our services as the housing market recovers. Prices for our products have generally been subject to cyclical market fluctuations and track the health of the U.S. new single-family residential market. In addition, the imposition of tariffs on certain materials in 2018 has increased our product costs. In the event that we are required to pay higher prices for the products that we install, due to the competitive nature of our industry, we may have limited, if any, ability to pass on price increases in a timely manner or at all. In the past, we have generally been able to buy favorably compared to our competitors, source alternative products or pass on price increases to our customers over time. Our supply agreements generally have not contained restrictions on our ability to pass on price increases, but future supply agreements may contain such restrictions.

 

Workforce costs

 

Our business is workforce intensive. With respect to the installation workforce, we primarily contract with independent subcontractors to perform the installation of products that we offer to our customers. Accordingly, the timing and quality of our installations depends on the availability and skill of independent subcontractors. Depending on market conditions, we may find it necessary to augment our workforce with additional independent subcontractors to ensure we can meet customer demand. Tight workforce markets for independent subcontractors have increased, and may continue to increase, our workforce costs related to independent subcontractors and make it more difficult for us to contract with independent subcontractors who can perform on time and in a high-quality manner. In a few of our markets, we utilize our employees rather than independent subcontractors to perform installation services. Our ability to adequately recruit and retain employees across our entire business is subject to market pressures. Accordingly, we offer a comprehensive benefits package to our employees, which many of our local competitors are not able to provide and which will increase our costs as we hire additional personnel. As a result, our costs will increase if our workforce grows.

 

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Operating costs

 

Our costs incurred for operational support, sales, design, general management and administrative functions represent a significant component of our operating results. As we continue to grow organically and through acquisitions, we expect our operating and administrative costs will increase on an absolute basis but decrease as a percentage of total revenues. Integrating acquisitions and continuing to implement scalable technology and process improvements will be integral to increasing efficiency and gaining economies of scale. In addition, we expect to incur incremental annual costs related to operating as a public company. We also expect to continue to incur incremental costs, at least in the short-term, relating to COVID-19, which is discussed more below.

 

Acquisition and integration costs

 

In addition to our organic growth, we have grown, and expect to continue to grow, our business through acquisitions in an effort to better service our existing customers and to attract new customers. These acquisitions have allowed us to increase our density and leadership positions in existing local markets, enter into attractive new geographic markets and expand our portfolio of services. In accordance with GAAP, the results of the acquisitions we have completed are reflected in our financial statements from the date of acquisition forward and will therefore affect the comparability of our results of operations on a year-over-year basis.

 

We incur transaction costs in connection with identifying and completing acquisitions and ongoing integration costs as we integrate acquired companies and seek to achieve synergies. We may also incur impairment charges and record impairment of goodwill or intangible assets in connection with our acquisitions. We have completed over 18 acquisitions since 2013. Our more recent acquisitions are described below in this MD&A.

 

Seasonality and Cyclicality

 

Our business is both seasonal and cyclical. Our products are installed near the end of the construction process and therefore typically lag housing starts by several months. Housing starts have historically been highest in the second and third quarters due to weather as well as seasonal selling peaks in most areas of the country. Accordingly, our sales are generally highest in the third and fourth quarters. We expect this seasonal pattern to continue, but it may be affected by volatility and changes in the weather and climate, as well as in the new construction industry, including the impacts from the COVID-19 pandemic, and we can make no assurance as to the degree to which our historical seasonal patterns will continue, if at all.

 

Construction-based businesses are also generally cyclical. Our financial performance will be impacted by economic changes nationally and locally in the geographic markets we serve and is subject to cyclical market pressures. Our operations are subject to fluctuations arising from changes in supply and demand, national and international economic conditions, workforce costs, competition, government regulation, trade policies, and other factors that affect the construction industry, such as demographic trends, interest rates, housing starts, average home selling prices, interior options and upgrades, commercial construction activity, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors and homeowners.

 

COVID-19 Impacts

 

In the second and third quarter of 2020, the U.S. economy was negatively impacted and unemployment rose significantly as a result of state and municipal government efforts to contain the spread and human toll of the COVID-19 pandemic. While the economy is still recovering from these containment measures, the homebuilding and construction industries were primarily impacted from mid-March 2020 through April 2020. Despite this shorter-than-expected stalling of activity, our customers’ new single-family residential sales during March through May 2020 slowed. By the end of April, most states and municipalities across the country deemed housing and construction as essential services. Beginning late in the second quarter, the market for new single-

 

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family homes began to steadily strengthen in many areas of the country, likely as a result of low interest rates and short supply, together with what appeared to be an increasing desire by many people to move out of crowded urban areas into new homes in the suburbs and even rural areas. The strength in the residential construction market may also be partially attributable to built-up demand from the earlier part of the second quarter when more restrictive stay at home orders were in place in many markets and when public concern over COVID-19 was at a peak.

 

The housing construction industry has experienced unique labor and material constraints due to COVID-19. We have seen material delays in our suppliers’ ability to produce and deliver a wide variety of construction-related raw materials and goods, from concrete to appliances. In addition, the construction labor associated with the front-end services struggled in the second and third quarter of 2020 to source crews and maintain schedules in light of COVID furloughs and layoffs, coupled with surprisingly strong housing demand. Because our services are provided later in the construction cycle, front-end trade delays have resulted in schedule date pushbacks for the provision of our services, which have extended the construction cycle time and adversely impacted our results for the three months ended September 30, 2020. Before the onset of COVID-19, we typically completed our services and recognized revenue within a range of 4 to 6 months following the date when our customers sell a home to a homebuyer. During the three months ended September 30, 2020, we saw this cycle time extend as much as 30 days. We expect similar extensions of the cycle time for the remainder of 2020 and believe it may continue through the first half of 2021. In addition, we saw a divergence between housing starts and housing completions during the third quarter of 2020. This divergence indicates a growing builder backlog. This growing backlog has put additional strains on a housing market recovering from construction pauses, construction furloughs and layoffs and supply chain delays across our major suppliers. Moreover, our multi-family repair and remodel business was adversely affected because COVID limited our access to senior living facilities and owner-occupied homes for repairs and remodeling. Our senior living facilities business continues to be significantly impacted by COVID-19, as many of these facilities have restrictions from the facilities or governmental authorities that hinder our repair and remodel activities.

 

Since the onset of the COVID-19 pandemic, we have been focused on protecting our employees’ health and safety, meeting our customers’ needs as they navigate an uncertain financial and operating environment, working closely with our suppliers to protect our ongoing business operations and rapidly adjusting our short-, medium- and long-term operational plans to proactively and effectively respond to the current and potential future public health crises. We have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, financial condition and results of operations, including reducing expenses through cash conservation activities, such as a 60-day furlough of 8% of our workforce, temporary suspension of our 401k plan employer match, temporary wage reductions for executives, reduction of approximately 10% of our workforce as volume slowed down, and elimination of non-essential travel, and expanding the use of our technology-enabled design services in place of in-person design studio services. We expect that these measures may not fully mitigate the impact of the COVID-19 pandemic.

 

We cannot predict the degree to, or the period over, which we will be affected by the pandemic and resulting governmental and other measures. We expect that the economic effects of the COVID-19 pandemic will likely continue to adversely affect construction cycle times over the balance of fiscal 2020 and through the first half of fiscal 2021. While the COVID-19 pandemic continues to present concerns for our business and operations, our employees and their families, our customers and our suppliers, we believe that we have adapted well to the wide-ranging changes that the U.S. economy is currently undergoing, and we remain confident that we will continue to maintain business continuity, provide our services safely and in compliance with applicable laws and governmental orders and mandates, maintain our flexible supply chains and be in a position to maintain financial flexibility even in the event of a potentially extended economic downturn. We believe that we are in a strong market position to capitalize on increased housing demand and housing starts and the industry’s drive to work out the material and supply chain delays impacting build cycle that have resulted from COVID-19. The global impact of the COVID-19 pandemic continues to evolve, and we will continue to monitor the situation closely. As the COVID-19 pandemic continues, it may also have the effect of heightening many of the risks described in

 

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“Risk Factors” in this prospectus. See “Risk Factors” for a further discussion of the adverse impacts of the COVID-19 pandemic on our business.

 

2018 Business Combination

 

On May 31, 2018, we consummated the Business Combination, where legacy ISI acquired legacy ILG and combined under a new holding company, ILG Holdings. Prior to the Business Combination, for the fiscal year ended December 31, 2017, legacy ILG had revenues of $566 million and nearly 1,600 employees, while legacy ISI had revenues of $852 million and nearly 2,600 employees. At the time of the Business Combination, legacy ILG was legacy ISI’s largest direct competitor. The Business Combination increased our scale, geographic diversification, and product offerings. See “The Business Combination” for additional information.

 

2020 Acquisition of Roomored

 

On July 23, 2020 we acquired the remaining outstanding equity interests of Roomored, Inc., a company that provides online visualization technology focused on increasing buyer engagement in the new home sale and design process for a total of $16.5 million. We expect the technology to enhance our homebuilder customers’ marketing and sales, particularly during the COVID-19 pandemic and beyond, by providing homebuilders alternative tools to serve their clients, in addition to model homes and design studios. The technology allows homebuilders to offer photo-realistic virtual home tours as a marketing tool, accelerating the pre-marketing window for each community, eliminating the need for time-consuming in-person tours, and potentially eliminating the need to build costly model homes for every community and shortening the overall sales cycle. We also expect the technology to enhance the experience of the homebuyer. Our option selection tools utilize visualization and real-time pricing technology to create a personalized, user-friendly design experience customized to the homebuyer’s community, floor plan and budget and allows the homebuyer to conveniently browse thousands of customized product options in advance of design appointments – whether in-person or virtual. Roomored’s visualization capabilities enhance the visual solutions we were already providing to our homebuilder customers.

 

Other 2019 and 2018 Acquisitions

 

Closs Enterprises, Inc.

 

On August 1, 2019, we acquired substantially all of the assets of Closs Enterprises, Inc. dba Flooring Systems (“Flooring Systems”), a full service commercial and residential installation services, design services and design center business for interior finishes, for $3.3 million. With this acquisition, we expanded our presence in the Texas market.

 

Mike’s Flooring Companies, Inc.

 

On September 1, 2019, we acquired substantially all of the assets of Mike’s Flooring Companies, Inc., Mike’s Carpets of Virginia, Inc., Mike’s Carpets of Florida, LLC and Potomac Flooring Covering, Inc. (collectively, “Mike’s Flooring”), a full service commercial and multi-family flooring installation sales and services business for carpet, tile and vinyl flooring, hardwood flooring, flooring and floor covering, for $9.0 million. As a result of this acquisition, we expanded our presence in Virginia, Florida, North Carolina, New Jersey, Rhode Island and Georgia.

 

Chris & Dick’s

 

On May 1, 2018, we acquired substantially all of the assets of Chris & Dick’s Cabinets and Countertops LLC, a leading provider of cabinet and countertop installation services in the Salt Lake City market, for $16.0 million. With this acquisition, we expanded our presence in Utah and our cabinet and countertop capabilities.

 

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Sterling Manufacturing

 

On July 1, 2018, we acquired substantially all of the assets of Sterling Purchasing Corp., a fabricator of solid surface countertops and installer of countertops and cabinets in Florida, for $14.1 million. This acquisition expanded our countertop business and our presence in southwest Florida.

 

Coleman Flooring

 

On November 1, 2018, we acquired substantially all of the assets of Coleman Floor, LLC, a design center services and flooring installation business serving the Mid-Atlantic and the Carolinas, for $7.8 million. We increased our local density within the Carolinas and Mid-Atlantic markets as a result of this acquisition.

 

Key Components of Results of Operations

 

Revenues

 

Revenues are derived from the provision of design studio solutions to homebuilders, supply chain management and the installation of interior products.

 

Cost of revenues

 

Cost of revenues primarily includes direct costs of materials, subcontractors, internal labor and related fringe benefits, overhead and depreciation related to our fabrication facilities and certain direct costs related to our supply chain management services.

 

Selling, general and administrative expenses (SG&A)

 

SG&A includes wages and benefits for operational support, general management and administrative personnel, facility costs, non-cash stock compensation costs, general liability insurance costs, and other overhead costs such as sales and marketing, information technology, legal, accounting and other corporate functions. SG&A also includes costs incurred for acquiring and integrating businesses as part of our growth strategy as well as, in 2020, costs related to COVID-19 safety measures and the Corporate Conversion.

 

Amortization of intangibles

 

Amortization expense represents the decline in value over time of definite-lived intangible assets such as trade names, customer relationships and non-competition agreements obtained as a result of past acquisitions.

 

Impairment of Intangible Assets or Trade Name

 

Impairment of intangible assets or trade name represents the write-off of certain intangible assets such as customer lists and an indefinite-lived trade name intangible asset that no longer provides ongoing value.

 

Interest expense

 

Interest expense primarily represents interest on our revolving credit facilities and term loans outstanding from time to time, as well as the amortization of debt issuance costs.

 

Loss on extinguishment of debt

 

Loss on extinguishment of debt represents the unamortized debt discount and deferred financing fees that are written off in connection with the Business Combination in 2018 and refinancing of our debt in 2017.

 

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Income taxes

 

Income taxes are recorded using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.

 

Results of Operations

 

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

 

The following table sets forth our operating results in dollars and as a percentage of revenues for the periods indicated.

 

(Dollars in thousands)

   Nine Months Ended
September 30,
    $  Variance
Increase

(Decrease)
    %  Variance
Increase

(Decrease)
 
   2020     2019  
     (Unaudited)              

Revenue

   $ 1,231,855     $ 1,314,021     $ (82,166     (6.3 )% 

Cost of revenues

     941,552       1,026,120       (84,568     (8.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 
     290,303       287,901       2,402       0.8

Selling, general and administrative expenses

     219,128       238,798       (19,670     (8.2 )% 

Amortization of intangibles

     42,636       47,486       (4,850     (10.2 )% 

Intangible asset impairment

     816       —         816       N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     27,723       1,617       26,106       N/M  

Interest expense, net

     (18,712     (22,321     3,609       (16.2 )% 

Other income, net

     1,488       9       1,479       N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     10,499       (20,695     31,194       150.8

Income tax (expense) benefit

     (2,552     3,127       (5,679     N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 7,947     $ (17,568   $ 25,515       145.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized (loss) gain on derivative instruments

     (6,708     (108     (6,600     N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ 1,239     $ (17,676   $ 18,915       107
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   “N/M” indicates that variance as a percentage is not meaningful.

 

Revenues

 

Revenues are highly dependent upon (i) the overall housing market, specifically new single-family residential home construction, (ii) the level of tenant turn-over and occupancy rates at multi-family apartments, and (iii) general economic conditions that support commercial multi-family construction activity levels.

 

Revenues for the nine months ended September 30, 2020 were $1.2 billion, a decrease of $82.2 million or 6.3%, compared to $1.3 billion for the nine months ended September 30, 2019, predominantly due to the impact of COVID-19, which slowed down our customers’ new single-family residential sales during March through May 2020, limited our access to senior living facilities and owner-occupied homes for repair and remodel, and limited tenant turn-over and occupancy rates at multi-family apartments. This decrease was partially offset by an increase in revenue from our 2019 acquisitions. In addition to the slowdown of single family residential sales, we experienced an extension of the construction cycle time where COVID-19 had an impact to the labor and materials supply chain for other installations in the home, such as foundation, framing and appliances. Before the

 

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onset of COVID-19, we typically completed our services and recognized revenue 4 to 6 months following the date when our customers sell a home to a homebuyer. During the three months ended September 30, 2020, we saw this cycle time extend as much as 30 days.

 

Cost of Revenues

 

Cost of revenues for the nine months ended September 30, 2020 were $941.6 million, a decrease of $84.5 million or 8.2%, compared to $1,026.1 million for the nine months ended September 30, 2019. As a percentage of revenues for the nine months ended September 30, 2020 and September 30, 2019, cost of revenues were 76.4% and 78.1%, respectively. The decrease of 1.7% over the same period of the prior year was driven by supply chain cost reductions and improvements in customer and product mix, largely related to a growing portion of technology-enabled revenue.

 

Gross profit

 

Gross profit for the nine months ended September 30, 2020 was $290.3 million, an increase of $2.4 million or 0.8%, compared to $287.9 million of gross profit for the nine months ended September 30, 2019. As a percentage of revenues for the nine months ended September 30, 2020 and September 30, 2019, gross profit was 23.6% and 21.9%, respectively, representing an increase of 1.7%, driven by improved operating performance, supply chain cost reductions and improved product upgrade mix.

 

Selling, General and Administrative Expenses

 

SG&A expenses for the nine months ended September 30, 2020 were $219.1 million, a decrease of $19.7 million or 8.2%, compared to $238.8 million for the nine months ended September 30, 2019, predominately due to cost reductions in response to the uncertainty of the impact of the COVID-19 pandemic on our results of operations. We also saw lower acquisition and integration costs as the integration of the Business Combination was substantially completed in 2019, partially offset by the impacts of our acquisitions of Flooring Systems and Mike’s Flooring and the continuing implementation of our ERP platform. As a percentage of revenues for the nine months ended September 30, 2020 and September 30, 2019, SG&A expenses were 17.8% and 18.2%, respectively, primarily due to the factors discussed above.

 

Amortization of Intangibles

 

Amortization of intangibles for the nine months ended September 30, 2020 was $42.6 million, a decrease of $4.9 million compared to $47.5 million for the nine months ended September 30, 2019. The decrease was attributed to a lower amortizable base of our customer relationships due to our amortization methodology. We recognize amortization expense on our customer relationships on an accelerated basis, which is reflective of the period over which the economic benefit is expected to be attained. In addition, the decrease was attributed to a lower amortizable base of our trademarks as certain of them became fully amortized.

 

Impairment of Intangible Assets

 

For the nine months ended September 30, 2020, we wrote-off $0.8 million of intangible assets associated with a prior investment in a visualization platform as our strategy changed with the acquisition of Roomored, Inc. and customer relationships related to the acquisition of a small countertop company in 2018.

 

Interest Expense

 

Interest expense for the nine months ended September 30, 2020 was $18.7 million, a decrease of $3.6 million compared to $22.3 million for the nine months ended September 30, 2019. The decrease was primarily driven by reduced interest rates associated with the Term Loan Facility resulting from the reduction in LIBOR during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

 

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Income Taxes

 

Income tax expense for the nine months ended September 30, 2020 was $2.6 million, an increase of $5.7 million compared to the $3.1 million tax benefit for the nine months ended September 30, 2019. This increase was primarily driven by an increase in net income.

 

Net Unrealized Loss on Derivative Instrument

 

Effective January 2020 and expiring in December 2022, we entered into an interest rate swap agreement with respect to the Term Loan Facility to manage our exposure to interest rate changes. Since the interest rate swap qualifies for hedge accounting, changes in fair value are recorded in comprehensive income in the consolidated statement of comprehensive loss. The decrease in interest rates starting in March 2020 as a result of COVID-19 resulted in an unrealized loss on the interest rate swap of $6.7 million for the nine months ended September 30, 2020.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

The following table sets forth our consolidated operating results for the periods indicated:

 

     Years Ended
December 31,
    $ Variance
Increase

(Decrease)
    %  Variance
Increase

(Decrease)
 

(Dollars in thousands)

   2019     2018  

Revenue

   $ 1,785,388     $ 1,405,325     $ 380,063       27.0

Cost of revenues

     1,390,606       1,099,337       291,269       26.5
  

 

 

   

 

 

   

 

 

   

 

 

 
     394,782       305,988       88,794       29.0

Selling, general and administrative expenses

     321,143       246,234       74,909       30.4

Amortization of intangibles

     63,545       40,843       22,702       55.6

Trade name impairment

     —         10,000       (10,000     N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     10,094       8,911       1,183       13.3

Interest expense, net

     (29,088     (22,238     (6,850     30.8

Loss on extinguishment of debt

     —         (3,068     3,068       N/M  

Other income

     8       —         8       N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (18,986     (16,395     (2,591     15.8

Income tax benefit

     3,225       3,475       (250     (7.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (15,761   $ (12,920   $ (2,841     22.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   “N/M” indicates that variance as a percentage is not meaningful.

 

The increases in our revenues, cost of revenues, gross profit, SG&A and amortization of intangibles for the year ended December 31, 2019 compared to the year ended December 31, 2018, as described below, were predominantly related to the Business Combination completed in 2018, as the revenues, gross profit, SG&A and amortization of intangibles for the year ended December 31, 2018 only included the period June 1, 2018 through December 31, 2018 for legacy ILG. To a lesser extent, these increases were also related to our 2018 acquisitions that have a full year of operations reflected in the revenues, cost of revenues, gross profit, SG&A and amortization of intangibles for the year ended December 31, 2019, and our 2019 acquisitions that have less than a full year of operations reflected in the revenues, cost of revenues, gross profit, SG&A and amortization of intangibles for the year ended December 31, 2019. As a result, a comparison of the results of operations for the year ended December 31, 2019 with the year ended December 31, 2018 may not be meaningful.

 

Revenues

 

Revenues for the year ended December 31, 2019 were $1.8 billion, an increase of $380.1 million or 27.0%, compared to $1.4 billion for the year ended December 31, 2018.

 

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Cost of Revenues

 

Cost of revenues for the year ended December 31, 2019 was $1.4 billion, an increase of $291.3 million or 26.5%, compared to $1.1 billion for the year ended December 31, 2018. As a percentage of revenues for the year ended December 31, 2019 and December 31, 2018, cost of revenues was comparable at 77.9% and 78.2%, respectively.

 

Gross Profit

 

Gross profit for the year ended December 31, 2019 was $394.8 million, an increase of $88.8 million or 29.0%, compared to $306.0 million of gross profit for year ended December 31, 2018. As a percentage of revenues for the year ended December 31, 2019 and December 31, 2018, gross profit was relatively consistent at 22.1% and 21.8%, respectively.

 

Selling, General and Administrative Expenses

 

SG&A expenses for the year ended December 31, 2019 were $321.1 million, an increase of $74.9 million or 30.4%, compared to $246.2 million for the year ended December 31, 2018. As a percentage of revenues for the year ended December 31, 2019 and December 31, 2018, SG&A expenses were 18.0% and 17.5%, respectively, and the increase was primarily driven by integration costs.

 

Amortization of Intangibles

 

Amortization of intangibles for the year ended December 31, 2019 was $63.5 million, an increase of $22.7 million compared to $40.8 million for the year ended December 31, 2018 primarily driven by a full year of amortization expense on the intangible assets from the Business Combination. In addition, the impact of the change from an indefinite lived trade name to a definite lived tradename resulted in $9.4 million of incremental amortization during the year ended December 31, 2019.

 

Trade Name Impairment

 

As a result of our decision to rebrand under the ILG name, we abandoned certain of our indefinite lived trade names. Accordingly, we recorded an impairment charge of $10.0 million during the year ended December 31, 2018.

 

Interest Expense

 

Interest expense for the year ended December 31, 2019 was $29.1 million, an increase of $6.8 million compared to $22.2 million for the year ended December 31, 2018. The increase was primarily driven by interest associated with the Term Loan Facility (as defined below).

 

Loss on Extinguishment of Debt

 

In connection with the Business Combination, our Prior Term Loan Facility (as defined below) was paid in full. We recognized a loss of $3.1 million on the extinguishment of debt in 2018 related to a prepayment penalty and write-off of unamortized debt issuance costs.

 

Income Taxes

 

Given our full year net losses during 2019 and 2018, we recorded an income tax benefit during the years ended December 31, 2019 and 2018. At December 31, 2019, we had no federal net operating loss carryforwards and state NOL carryforwards of approximately $33.8 million. At December 31, 2018, we had federal NOL carryforwards of approximately $12.3 million and state NOL carryforwards of approximately $10.1 million. The state NOL carryforwards begin expiring in 2030, unless previously utilized.

 

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Year Ended December 31, 2018 Compared with Year Ended December 31, 2017

 

The following table sets forth our consolidated operating results for the periods indicated:

 

     Years Ended
December 31,
    $  Variance
Increase

(Decrease)
    %  Variance
Increase

(Decrease)
 

(Dollars in thousands)

   2018     2017  

Revenue

   $ 1,405,325     $ 851,918     $ 553,407       65.0

Cost of revenues

     1,099,337       670,274       429,063       64.0
  

 

 

   

 

 

   

 

 

   

 

 

 
     305,988       181,644       124,344       68.5

Selling, general and administrative expenses

     246,234       152,218       94,016       61.8

Amortization of intangibles

     40,843       9,080       31,763       N/M  

Trade name impairment

     10,000       —         10,000       N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     8,911       20,346       (11,435     (56.2 )% 

Interest expense, net

     (22,238     (10,458     (11,780     112.6

Loss on extinguishment of debt

     (3,068     (552     (2,516     N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (16,395     9,336       (25,731     N/M  

Income tax benefit

     3,475       521       2,954       N/M  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (12,920   $ 9,857     $ (22,777     N/M  

 

(1)   “N/M” indicates that variance as a percentage is not meaningful.

 

The increases in our revenues, cost of revenues, gross profit, SG&A and amortization of intangibles for the year ended December 31, 2018 compared to the year ended December 31, 2017, as described below, were predominantly related to the Business Combination completed in 2018 and our 2018 acquisitions. As a result, a comparison of the results of operations for the year ended December 31, 2018 with the year ended December 31, 2017 may not be meaningful.

 

Revenues

 

Revenues for the year ended December 31, 2018 were $1.4 billion, an increase of $553.4 million or 65.0%, compared to $851.9 million for the year ended December 31, 2017. In addition to the factors described above, the increase in revenues was also due to ongoing improvement in the housing market, increased market share and geographical product expansion.

 

Cost of Revenues

 

Cost of revenues for the year ended December 31, 2018 was $1.1 billion, an increase of $429.1 million or 64.0%, compared to $670.3 million for the year ended December 31, 2017. As a percentage of revenues for the year ended December 31, 2018 and December 31, 2017, cost of revenues was 78.2% and 78.7%, respectively.

 

Gross profit

 

Gross profit for the year ended December 31, 2018 was $306.0 million, an increase of $124.4 million or 68.5%, compared to $181.6 million of gross profit for year ended December 31, 2017. As a percentage of revenues for the year ended December 31, 2018 and December 31, 2017, gross profit was 21.8% and 21.3%, respectively.

 

Selling, General and Administrative Expenses

 

SG&A expenses for the year ended December 31, 2018 were $246.2 million, an increase of $94.0 million or 61.8%, compared to $152.2 million for the year ended December 31, 2017. As a percentage of revenues for the year ended December 31, 2018 and December 31, 2017, SG&A expenses were 17.5% and 17.9%, respectively.

 

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Amortization of Intangibles

 

Amortization of intangibles for the year ended December 31, 2018 was $40.8 million, an increase of $31.7 million, compared to $9.1 million for the year ended December 31, 2017. The impact of the change from an indefinite lived trade name to a definite lived trade name resulted in $5.5 million of incremental amortization of intangibles during the year ended December 31, 2018.

 

Trade Name Impairment

 

As a result of our decision to rebrand our company under the ILG name following the Business Combination, we abandoned certain of our indefinite lived trade names. Accordingly, we recorded an impairment charge of $10.0 million during the year ended December 31, 2018.

 

Interest Expense

 

Interest expense for the year ended December 31, 2018 was $22.2 million, an increase of $11.7 million compared to $10.5 million for the year ended December 31, 2017. The increase was primarily driven by increased borrowings used to finance the Business Combination and our 2018 acquisitions, as well as interest associated with the Term Loan Facility.

 

Loss on Extinguishment of Debt

 

In connection with the Business Combination, our Prior Term Loan Facility was paid in full. We recognized a loss of $3.1 million on the extinguishment of debt in 2018 related to a prepayment penalty and write-off of unamortized debt issuance costs.

 

Income Taxes

 

We recorded an income tax benefit during the year ended December 31, 2017. At December 31, 2017, we had state NOL carryforwards of approximately $3.5 million. The state NOL carryforwards begin expiring in 2030, unless previously utilized.

 

Liquidity and Capital Resources

 

Our primary capital requirements are to fund working capital needs, operating expenses, capital expenditures, required interest payments and selective strategic acquisitions. Cash and cash equivalents totaled $82.3 million at September 30, 2020, compared to $5.7 million at December 31, 2019. Accounts receivable and inventory represented 57% of our current assets at September 30, 2020 compared to 74% at December 31, 2019, and accordingly, management of working capital is important to our business. Our working capital (which is current assets minus current liabilities) totaled $123.7 million at September 30, 2020, compared to $98.6 million at December 31, 2019. In December 2020, we paid a special cash distribution of $31.8 million and $28.2 million to our membership equityholders, Faraday and ISH, respectively, or $60 million in the aggregate. In the past, from time to time, we have utilized our borrowing availability under our credit facilities to cover short-term working capital needs. We have, and, after this offering will continue to have, significant debt and debt service requirements.

 

Our primary sources of liquidity are cash flows generated from our operations and borrowings under the Term Loan Facility and Revolving Credit Facility (as defined below). Construction-related services continues to be identified as essential services by most local or state government authorities, in response to the COVID-19 pandemic, and we continue to perform services for our customers in all of our markets. At this time, we expect that these sources will fund our ongoing cash requirements for operating activities and acquisitions of businesses over the next 12 months of operations after consideration of our debt service requirements and other cash requirements. In the longer term, our liquidity will depend on many factors, including our results of operations,

 

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our future growth, the timing and extent of our expenditures to develop new products and improve our service capabilities, the expansion of our sales and marketing activities and the extent to which we make acquisitions. Changes in our operating plans, material changes in anticipated sales, increased expenses, acquisitions or other events may cause us to seek additional equity and/or debt financing in future periods.

 

The table below summarizes our cash flows for the periods indicated.

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
2019
    Year Ended
December 31,
2018
    Year Ended
December 31,
2017
 

(in thousands)

   2020     2019  
      (Unaudited)                    

Net cash provided by operating activities

   $ 116,764     $ 30,189     $ 44,639     $ 3,705     $ 51,553  

Net cash used in investing activities

     (21,847     (21,303   $ (23,926   $ (34,596   $ (17,526

Net cash (used in) provided by financing activities

     (18,310     (10,569   $ (21,836   $ 37,756     $ (36,179

Net increase (decrease) in cash

     76,607       (1,683   $ (1,123   $ 6,865     $ (2,152

 

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities for the nine months ended September 30, 2020 was $116.8 million compared to $30.2 million for the nine months ended September 30, 2019. The increase in net cash provided by operating activities of $86.6 million was primarily due to higher income from operations as a result of improved operating performance, cost reductions and cash conservation activities put in place in response to COVID-19, as well as improved working capital management.

 

Net Cash Used in Investing Activities

 

During the nine months ended September 30, 2020 and 2019, net cash used in investing activities was primarily related to acquisitions, as well as funding property and equipment purchases primarily comprised of leasehold improvements on design studio build-outs, machinery and equipment for our fabrication facilities and field management vehicles. However, due to COVID-19, we have limited capital expenditures except if related to safety projects or if critical to ongoing operations.

 

Net Cash Used in Financing Activities

 

Net cash used in financing activities during the nine months ended September 30, 2020 primarily included $15.0 million of distributions made to membership equityholders that were declared, approved and paid in January 2020 and $3.0 million of repayments of principal on the Term Loan Facility. Net cash used in financing activities during the nine months ended September 30, 2019 primarily included $7.3 million of net repayments on the Revolving Credit Facility and $3.0 million of repayments of principal on the Term Loan Facility.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities for the year ended December 31, 2019 was $44.6 million compared to $3.7 million of net cash provided by operating activities for the year ended December 31, 2018. The increase in net cash provided by operating activities of $40.9 million was primarily due to changes in working capital and operational growth.

 

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Net Cash Used in Investing Activities

 

Net cash used in investing activities for the year ended December 31, 2019 was $23.9 million compared to $34.6 million in the prior year. The decrease in investing activities was primarily driven by two smaller acquisitions in 2019 compared to three acquisitions in 2018 and lower capitalized software and leasehold improvements on design studios partially offset by increased purchases of machinery for our fabrication facilities and computer hardware in conjunction with the integration of the Business Combination.

 

Net Cash (Used in) Provided by Financing Activities

 

Net cash used in financing activities during the year ended December 31, 2019 included $4.2 million of payments on the Term Loan Facility and $17.6 million of net repayments on the Revolving Credit Facility as we generated cash from strong working capital management compared to net cash provided during the year ended December 31, 2018. Net cash of $37.7 million provided during the year ended December 31, 2018 was primarily driven by financing activities related to the Business Combination as we entered into a new Term Loan Facility and new Revolving Credit Facility, described below, while extinguishing the Prior Revolving Credit Facility (as defined below) and Prior Term Loan Facility.

 

Year Ended December 31, 2018 Compared with Year Ended December 31, 2017

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities for the year ended December 31, 2018 was $3.7 million compared to $51.6 million of net cash provided by operating activities for the year ended December 31, 2017. The decrease in net cash provided by operating activities of $47.9 million was primarily due to a net loss in 2018, which was driven by acquisition and integration costs related to the Business Combination and increased interest expense related to the increase in long-term debt. In addition, as a result of the Business Combination and continued integration activities, during the year ended December 31, 2018, accounts receivable, inventory, prepaid expense and other assets increased compared to December 31, 2017.

 

Net Cash Used in Investing Activities

 

During the year ended December 31, 2018, net cash used in investing activities was primarily related to our acquisitions in 2018 and to fund property and equipment purchases primarily comprised of leasehold improvements on design studio build-outs and capitalized software. During the year ended December 31, 2017, net cash used in investing activities was primarily related to property and equipment purchases primarily comprised of leasehold improvements on design studio build-outs and to a lesser extent an asset acquisition we completed in September 2017.

 

Net Cash Provided by (Used in) Financing Activities

 

Net cash provided by financing activities during the year ended December 31, 2018 was related to the Business Combination and included $60.7 million of net proceeds provided by the Term Loan Facility, net of the repayments of our Prior Term Loan. The net cash provided by financing activities was partially offset primarily by payments of debt issuance costs of $12.5 million, net repayments on our Prior Revolving Credit Facility and the Revolving Credit Facility of $5.8 million, and the payment of a prepayment penalty related to our previous term loan of $0.9 million. For the year ended December 31, 2017, net cash used in financing activities was primarily related to net borrowings on our Prior Revolving Credit Facility and payments on our Prior Term Loan Facility.

 

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Indebtedness

 

Existing Indebtedness

 

The table below sets forth the carrying amounts of long-term debt as of September 30, 2020 (in thousands, unaudited):

 

Term Loan Facility

   $ 392,000  

Unamortized original issue discount

     (1,333

Unamortized debt issuance costs

     (7,627

Other long-term debt

     434  
  

 

 

 

Long-term debt

   $ 383,474  

Less: current maturities of long-term debt

     (2,528
  

 

 

 

Long-term debt, net of current portion

   $ 380,946  
  

 

 

 

 

The table below sets forth the carrying amounts of long-term debt as of December 31, 2019 (in thousands):

 

Term Loan Facility

   $ 395,000  

Unamortized original issue discount

     (1,547

Unamortized deferred financing fees

     (8,849

Other long-term debt

     78  
  

 

 

 

Long-term debt

   $ 384,682  

Less: current maturities of long-term debt

     (2,433
  

 

 

 

Long-term debt, net of current portion

   $ 382,249  
  

 

 

 

 

In connection with the Business Combination, we undertook a series of transactions to refinance our indebtedness. The following summarizes our prior and existing indebtedness.

 

Revolving Credit Facility

 

Effective May 31, 2018, ILG Holdings IV, LLC and certain of its subsidiaries, as borrowers, along with ILG Holdings III, LLC and certain of its subsidiaries, as guarantors, entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) with Bank of America, as administrative agent and collateral agent, and the other lenders party thereto (the “Revolving Credit Facility”) providing for aggregate borrowings of up to $100 million. As of September 30, 2020 and December 31, 2019, we did not have any borrowings under our Revolving Credit Facility, with $96.8 million available under the Revolving Credit Facility. The Revolving Credit Facility provides a sublimit of up to $30.0 million in letters of credit. As of September 30, 2020 and December 31, 2019, we had $3.2 million of letters of credit issued under the Revolving Credit Facility. Our Revolving Credit Facility matures in May 2023.

 

Availability under our Revolving Credit Facility is limited to the lesser of $100 million and a borrowing base determined by reference to, among other things, the value of our eligible receivables, inventory and cash, reduced by certain reserve amounts. Availability under our Revolving Credit Facility is further limited by the amount of outstanding borrowings and letters of credit.

 

The obligations of borrowers and guarantors under the Revolving Credit Facility are guaranteed by us and our subsidiaries and secured on (i) a first-priority basis by liens on, among other things, cash, accounts receivable, inventory and other related assets, in each case except to the extent such items constitute identifiable proceeds of the Term Loan Facility Priority Collateral (the “Revolving Credit Facility Priority Collateral”) and (ii) a second-priority basis by liens on all our assets other than the Revolving Credit Facility Priority Collateral (the “Term Loan Facility Priority Collateral”). All guarantees by us and our subsidiaries are joint and several and fully unconditional.

 

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The interest rate under our Revolving Credit Facility is, at our option, based on either (i) the base rate plus an applicable margin ranging between 0.50% and 1.00% per annum based on average usage of the Revolving Credit Facility or (ii) LIBOR plus an applicable margin ranging between 1.50% and 2.00% per annum based on average usage of the Revolving Credit Facility. If LIBOR ceases to exist, the administrative agent may replace LIBOR with an alternate benchmark rate, giving due consideration to any evolving or then-existing convention for similar U.S. dollar denominated syndicated credit facilities for such alternative benchmarks. In addition, we are required to pay an unused commitment fee ranging from 0.250% to 0.375% per annum of the average unused portion of the lending commitments.

 

The Revolving Credit Facility contains covenants that restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens or contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve; engage in businesses that are not reasonably related to our current business activities; make loans, advances, or guarantees; pay dividends or make other distributions; engage in transactions with affiliates; and make certain investments. The Revolving Credit Facility also requires that we maintain a fixed-charge coverage ratio of not less than 1.0 to 1.0 to be tested if and when excess availability, as defined under the Revolving Credit Agreement, falls below 10% of the facility’s maximum availability, or $8.0 million.

 

Events of default under the Revolving Credit Facility include, but are not limited to, payment defaults, covenant defaults, breaches of representations and warranties, cross-defaults to certain indebtedness, certain events of bankruptcy and insolvency, defaults under any security documents and a change of control. As of September 30, 2020 and December 31, 2019, we were in compliance with all covenants and no “event of default” (as such term is defined in the Revolving Credit Agreement) had occurred.

 

Term Loan Facility

 

Effective May 31, 2018, ILG Holdings IV, LLC and certain of its subsidiaries, as borrowers, along with ILG Holdings III, LLC and certain of its subsidiaries, as guarantors, entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with Bank of America, as administrative agent and collateral agent, and the lenders party thereto (the “Term Loan Facility”). The Term Loan Facility provides for (i) initial term loan commitments of $400.0 million and (ii) the right to request up to two incremental term loan facilities in an aggregate amount not to exceed the greater of $130.0 million and 100% of consolidated trailing twelve months EBITDA. As of September 30, 2020 and December 31, 2019, borrowings under our Term Loan Facility totaled $392 million and $395 million, respectively, and accrued interest at a rate of 4.2% and 6.3%, respectively. The Term Loan Facility matures in May 2025.

 

Borrowings under the Term Loan Facility bear interest, at our option, at either (i) the base rate plus 3.00% per annum or (ii) LIBOR plus 4.00% per annum. If LIBOR ceases to exist, the administrative agent may replace LIBOR with an alternate benchmark rate, giving due consideration to any evolving or then-existing convention for similar U.S. dollar denominated syndicated credit facilities for such alternative benchmarks.

 

The obligations under the Term Loan Facility are guaranteed by us and our subsidiaries and secured on a (i) first-priority basis by liens on the Term Loan Facility Priority Collateral and (ii) second-priority basis by liens on the Revolving Credit Facility Priority Collateral. All guarantees by us are joint and several and fully unconditional.

 

The Term Loan Facility contains covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve; engage in businesses that are not reasonably related to our existing business activities; make loans, advances, or guarantees; pay dividends or make other distributions; engage in transactions with affiliates and make capital expenditures and other investments. The Term Loan Facility does not contain any maintenance covenants.

 

Events of default under the Term Loan Facility include, but are not limited to, payment defaults, covenant defaults, breaches of representations and warranties, cross-defaults to certain indebtedness, certain events of

 

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bankruptcy and insolvency, defaults under security documents and a change of control. As of September 30, 2020 and December 31, 2019, we were in compliance with all covenants and no “event of default” (as such term is defined in the Term Loan Credit Agreement) had occurred.

 

Prior Indebtedness

 

Prior Revolving Credit Facility

 

Prior to the Business Combination, we were party to a revolving credit facility with an asset-based lender (the “Prior Revolving Credit Facility”). Maximum availability under the Prior Revolving Credit Facility was $65.0 million. Obligations under the Prior Revolving Credit Facility were guaranteed by us and our subsidiaries and secured on a first-lien priority basis by, among other things, cash, accounts receivable, inventory and other related assets, in each case except to the extent such items constituted identifiable proceeds of collateral securing our Prior Term Loan Facility (the “Prior Revolving Credit Facility Priority Collateral”) and on a second-priority basis by liens on all of our assets other than the Prior Revolving Credit Facility Priority Collateral (the “Prior Term Loan Facility Priority Collateral”). Interest under the Prior Revolving Credit Facility was based on the three-month LIBOR plus a spread over such rate that ranged from 2.50% to 3.00%, based on excess availability. The Prior Revolving Credit Facility was repaid in full on May 31, 2018 with proceeds of the Term Loan Facility.

 

Prior Term Loan Facility

 

Prior to the Business Combination, we were party to a term loan facility with an asset-based lender (the “Prior Term Loan Facility”), which provided for $94.0 million in principal amount of borrowings, a portion of which was drawn in October 2017 to repay the Sponsor Credit Agreement (as defined below). Obligations under the Prior Term Loan Facility were guaranteed by us and our subsidiaries and secured on a first-priority basis by the Prior Term Loan Facility Priority Collateral and on a second-priority basis by the Prior Revolving Credit Facility Priority Collateral. Borrowings under the Prior Term Loan Facility bore interest at LIBOR (not to fall below 1.00%) plus a margin of 6.00%. The Prior Term Loan Facility was repaid in full on May 31, 2018 with the proceeds of the Term Loan Facility.

 

Sponsor Credit Agreement

 

In August 2014, certain affiliates of Littlejohn & Co., LLC executed an assignment agreement with each of the lenders under our then-existing credit facility (the “Sponsor Credit Agreement”) pursuant to which Littlejohn acquired the prior lenders’ loan interests and assumed the lenders’ rights and obligations under the Sponsor Credit Agreement. The Sponsor Credit Agreement balance of $21.4 million, including accrued interest, was repaid in full on October 16, 2017 with funds from the Prior Term Loan Facility.

 

Letters of Credit and Performance Bonds

 

As of September 30, 2020, we had $3.2 million outstanding letters of credit issued under our Revolving Credit Facility primarily to secure performance bonds in place under certain customer contracts and to secure our performance under a prior workers’ compensation program which was a high deductible program and had three outstanding claims. We occasionally use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods. As of September 30, 2020, we had performance bonds outstanding totaling $20 million. Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed.

 

Contractual Obligations

 

In the table below, we set forth our enforceable and legally binding obligations as of December 31, 2019. Some of the amounts included in the table are based on management’s estimates and assumptions about these

 

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obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. The figures in the table below do not reflect the anticipated proceeds of this offering and the application thereof.

 

     Payments due by period  
     Total      Less
than
1 year
     1-3
years
     3-5
years
     More
than 5
years
 

Long-term debt obligations(1)

   $ 395,000      $ 4,000      $ 8,000      $ 8,000      $ 375,000  

Finance lease obligations(2)

   $ 883      $ 283        405      $ 174      $ 21  

Operating lease obligations(3)

   $ 71,728      $ 21,634      $ 34,127      $ 13,887      $ 2,080  

 

(1)   Amounts represent contractual amounts due under our Term Loan Facility, which matures in May 2025.
(2)   We maintain certain production vehicles under a finance lease structure. The leases expire on various dates. Finance lease obligations include estimated interest expense payments. In determining expected interest expense payments, we utilize the rates embedded in the lease documentation.
(3)   We lease certain locations and equipment under operating lease agreements, including, but not limited to, corporate offices, design studios, fabrication facilities, warehousing and logistics centers and various office and operating equipment. In some instances, these lease agreements exist with related parties. For additional information, see Note 10, Related Party Transactions, to our audited consolidated financial statements included in this prospectus.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2020 and December 31, 2019, other than letters of credit issued under our Revolving Credit Facility and performance bonds, we had no other material off-balance sheet arrangements with unconsolidated entities. Effective January 1, 2019, we adopted ASU No. 2016-02, Leases (“ASC 842”) and our operating leases are no longer considered off-balance sheet arrangements. The FASB issued this Accounting Standards Update (“ASU”) to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases and finance leases and disclosing key information about leasing arrangements.

 

Our discussion and analysis of our results of operations and our liquidity and capital resources is based on our consolidated financial statements included in this prospectus, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities and our reported amounts of revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accounts receivable and the allowance for doubtful accounts, the valuation of intangible assets, goodwill, long-lived assets and income taxes. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates.

 

Critical Accounting Policies

 

We believe that the following critical accounting policies and estimates involve a higher degree of judgment or complexity than others used in the preparation of our consolidated financial statements.

 

Revenue and Cost Recognition

 

Prior to the adoption of ASC 606 on January 1, 2018, revenues from the sale and installation of products were recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists;

 

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(ii) delivery has occurred or services have been rendered; (iii) the price is fixed or determinable; and (iv) the ability to collect is reasonably assured. Revenues from fixed-price installation contracts are recognized on the units-of-delivery method. Under the units-of-delivery method, substantive contract milestones are identified and revenues are recognized when the milestone deliverables have been installed according to specifications or accepted by the customer.

 

Contract costs include all direct material and workforce costs and are recognized as cost of revenues when installation is complete. Vendor rebates on material purchases are recognized as a reduction in contract costs when earned based on the terms of the rebate agreement. Contract costs incurred prior to completing installation are recorded as work-in-progress inventories. Indirect contract costs are insignificant to contract costs and are expensed as incurred. General and administrative costs are expensed as incurred.

 

On January 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, using the modified retrospective transition method applied to those contracts that were not completed as of January 1, 2018. We have determined that control for our design and installation services passes over time for the installed products, and revenue is recognized to the extent costs have been incurred until installation is complete and represents the estimated consideration we expect to receive for the exchange of the performance obligation.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are carried at the original invoice amount less payments applied, and an estimate is made for doubtful receivables based on a review of all amounts outstanding. Receivables are considered past due if any portion of the receivable is outstanding for more than thirty days. No interest on past-due amounts is charged. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history as well as current economic conditions that we expect will impact the level of credit losses over the life of our receivables. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

 

Leases

 

On January 1, 2019, we adopted ASC 842, “Leases” which, among other changes, requires us to record liabilities classified as operating leases on our Condensed Consolidated Balance Sheets along with a corresponding right-of-use asset. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. See Note 8, “Operating and Finance Leases,” to our audited consolidated financial statements included in this prospectus for additional information.

 

As a result of the adoption of the new accounting standard, we elected transition-related practical expedients as accounting policies which allowed us to not reassess, as of the adoption date, (1) whether any expired or existing contracts are or contain leases, (2) the classification of any expired or existing leases, and (3) if previously capitalized initial direct costs qualify for capitalization under ASC 842. We elected the practical expedient option to not separate lease and non-lease components for all of our leases, and also elected the short-term lease recognition exemption that keeps leases with an initial term of 12 months or less excluded from the balance sheet.

 

Impairment of Goodwill

 

Goodwill results from business combinations and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. The allocation of purchase price for acquisitions requires the use of accounting estimates and judgments to allocate the purchase price to the tangible assets and liabilities and identifiable intangible assets based on their respective fair values. Goodwill is deemed to have an indefinite life and, therefore, is not amortized.

 

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Annually, in the fourth quarter of each year, or if conditions indicate an earlier review is necessary, we assess qualitative factors to determine if it is more likely than not the fair value of a reporting unit is less than its carrying amount and if it is necessary to perform the quantitative two-step goodwill impairment test. If we perform the quantitative test, we compare the carrying value of the reporting unit to the reporting unit’s fair value to identify potential impairment. The estimate of the reporting unit’s fair value is determined by using a market approach using current industry information classified as unobservable inputs (Level 3 inputs). In determining the estimated future cash flow, we consider and apply certain estimates and judgments, including the current and projected future levels of income based on management’s plans, business trends, prospects, and market and economic conditions and market-participant considerations. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to measure goodwill impairment.

 

Intangible Assets

 

Intangible assets include our trade names, customer relationships, developed technology and noncompete agreements. Amortization of intangible assets with definite lives is recognized on a straight-line basis over the respective lives of the asset or on an accelerated basis that reflects the economic benefit when there is a pattern of declining cash flows that is reliably determinable (generally one to nineteen years). We assess the definite lived intangibles for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. An intangible impairment is recorded when the undiscounted cash flows generated from the definite lived intangible asset are less than the asset’s carrying value. The impairment loss is the difference between the discounted cash flows generated from the asset, which approximates fair value and the asset’s carrying amount.

 

Impairment of Long-lived Assets

 

We review our depreciating long-lived assets when there is evidence that events or changes in circumstances indicate that their carrying values may not be recoverable. An impairment loss may be required to be recognized when the undiscounted cash flows expected to be generated by a long-lived asset (or group of such assets) are less than its carrying value. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations.

 

Income Taxes

 

We account for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that exist between the tax basis and financial reporting basis of our assets and liabilities.

 

Valuation allowances are established against deferred tax assets when it is more likely than not that the realization of those deferred tax assets will not occur. In evaluating our ability to recover deferred tax assets within the jurisdiction from which they arise, both positive and negative evidence is considered as well as sources of taxable income, including income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projected taxable income from future operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporates assumptions, including the amount of future federal and state pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

 

Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change.

 

A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation based on its

 

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technical merits. We recognize tax liabilities for uncertain tax positions and adjusts these liabilities when our judgments change as a result of the evaluation of any new information.

 

Our income tax expense, deferred tax assets and liabilities and allowances for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in the United States which includes numerous state and local jurisdictions. Significant judgments and estimates are required in determining income tax expense.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which was further modified in ASU 2018—10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842) Targeted Improvements to clarify implementation guidance. The guidance requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. The new standard was effective for us for fiscal years beginning January 1, 2019. We adopted Topic 842 using a modified retrospective approach by recognizing a cumulative-effect adjustment to retained earnings. As of the effective date, January 1, 2019, we recognized total ROU assets of $68.2 million and $0.3 million related to operating and finance leases respectively. We also recognized total lease liabilities of $70.7 million and $0.3 million related to operating and finance leases respectively. The adoption of this standard did not have a material impact on our consolidated statements of comprehensive loss and consolidated statements of cash flows. As of September 30, 2020, future minimum lease payments under operating and finance leases were approximately $63.7 million and $1.1 million, respectively.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which amends the accounting for credit losses on available-for-sale securities and purchased financial assets with credit deterioration. In addition, these amendments require the measurement of all expected credit losses for financial assets, including trade accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable and supportable facts. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods therein. We adopted the new credit loss standard effective January 1, 2020 and the impact of the adoption was not material to our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the process used to test for goodwill. Under the new standard, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit, therefore eliminating Step 2 of the goodwill impairment test. The ASU is effective for annual impairment tests for periods beginning after December 15, 2019. We adopted the new standard effective January 1, 2020 and the impact of the adoption was not material to our consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements. This ASU is effective fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted this new standard effective January 1, 2020 and the impact of the adoption was not material to our consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The new standard removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We adopted the standard on January 1, 2019, and the adoption of the standard did not have a material impact on our consolidated financial statements.

 

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In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. For public entities, the updated standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The standard can be adopted either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. We elected to early adopt this ASU using the prospective method as of December 31, 2018 and, as such, have capitalized certain implementation costs associated with service contracts in a cloud computing arrangement. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

Recently Issued But Not Yet Adopted Accounting Pronouncements

 

In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The new guidance clarifies the interactions between accounting standards that apply to equity investments without readily determinable fair values. Specifically, it addresses the accounting for the transition into and out of the equity method. This standard is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We do not believe the adoption of this ASU will have a material impact on our consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is effective for all entities as of March 12, 2020, and will apply through December 31, 2022. We are currently evaluating the impact this adoption will have on our consolidated financial statements.

 

There have been no other new accounting pronouncements issued but not yet adopted that are expected to materially affect our consolidated financial condition or results of operations.

 

Inflation

 

Our revenues are dependent to a significant extent upon the level of U.S. new single-family residential spending, which is affected by factors such as interest rates, inflation, consumer confidence and unemployment. We do not believe that inflation has had a material impact on our business, financial condition or results of operations during the past three fiscal years.

 

Quantitative and Qualitative Disclosure on Market Risks

 

We are exposed to market risks related to fluctuations in interest rates on borrowings under our Revolving Credit Facility and our Term Loan Facility, which bear interest at variable rates. As of September 30, 2020 and December 31, 2019, we had no borrowings under our Revolving Credit Facility, $3.2 million in letters of credits issued under the Revolving Credit Facility and $392 million and $395 million, respectively, outstanding under our Term Loan Facility. Based on the amounts outstanding under our Term Loan Facility as of September 30, 2020 and December 31, 2019, a hypothetical change in the respective blended interest rates applicable to these borrowings of 1.0% would result in a change in annual interest expense of $3.0 million and $4.0 million, respectively.

 

For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. As disclosed above, effective January 2020 and expiring in December 2022, we entered into an interest rate swap agreement with respect to our

 

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Term Loan Facility to manage our exposure to interest rate changes. The interest rates under our Revolving Credit Facility and Term Loan Facility are calculated using LIBOR. It is not possible to predict the effect of possible changes or other reforms to LIBOR or the establishment of alternative reference rates in the United Kingdom, the U.S. or elsewhere. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected. See “Risk Factors—Risks Related to Our Indebtedness—Restrictions in our existing credit arrangements, or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, results of operations, our ability to make distributions to stockholders and the value of our common stock.”

 

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OUR BUSINESS

 

Our Vision

 

Our vision is to utilize our value-added technology platform combined with our national footprint and customer relationships to revolutionize the way homebuyers purchase and design their homes. By seamlessly connecting key constituents in the housing lifecycle, including homebuilders, homebuyers, suppliers and subcontractors, we believe we can unlock significant market opportunities.

 

Our Company

 

We are the leading national provider of technology-enabled sales and marketing, design and installation solutions for homebuilders. Our robust technology platform delivers interior design visualization, interior option selection, supply chain management and data analytics solutions from initial homebuyer engagement through the construction and delivery of homes. We are also the leading national installer for select high-value and aesthetically important interior finishes, such as flooring, cabinets and countertops, to our homebuilder customers, as well as multi-family, commercial and repair & remodel customers. Our scalable technology solutions enhance the homebuying experience, streamline the homebuying process and meaningfully drive homebuyer satisfaction, while improving homebuilders’ profitability, construction quality and cycle times. We serve a broad range of national, regional and local homebuilders across the home price spectrum, from entry-level to move-up and luxury homes, including each of the 20 largest U.S. homebuilders. We have the leading position in the estimated $23 billion U.S. new home interior finish solutions industry, and our technology solutions significantly expand our addressable market to other economic transactions associated with the housing lifecycle, including new construction pre-sales marketing, monetization of valuable consumer data and providing access to homebuyers for future design and renovation needs, amongst others. We generated 2019 revenues, net loss and Adjusted EBITDA of $1,785.4 million, $(15.8) million and $123.2 million, respectively.3

 

We have built the most expansive national footprint in our highly fragmented industry, which uniquely positions us to serve our national, regional and local homebuilding customers consistently and effectively across markets. Furthermore, we collect, analyze and report valuable data on over 100,000 new homes annually, creating the largest repository of homebuyer design preference data in our industry. Our national network is comprised of 110 design studios, 109 warehousing and logistics centers and nine countertop fabrication facilities, from which we serve approximately 285 Metropolitan Statistical Areas (“MSAs”), including 46 of the top 50 U.S. homebuilding markets based on 2019 single-family housing starts. We are more than three times the size of our next largest direct competitor, based on number of locations. With an estimated market share today of only 6% based on 2019 single-family residential revenues, we believe we have significant runway for growth.

 

Our design studios serve to manage a key part of the homebuying process where homebuyers design, select and upgrade the interior finishes of their new home. We operate 64 builder-branded design studios on behalf of 20 homebuilders across the country, as well as 46 ILG-branded design studios that provide the same professionally-managed design experience for multiple homebuilders in a single location.

 

3   For a definition of Adjusted EBITDA, as well a reconciliation to the most directly comparable GAAP measure, see “Non-GAAP Measures” and “—Summary Historical Financial Data.”

 

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The following map illustrates our expansive national footprint.

 

LOGO

 

We have an experienced team of approximately 4,200 employees, including approximately 300 design professionals and approximately 470 field managers, and utilize approximately 9,000 independent installation subcontractors. Additionally, our technology team includes approximately 140 software engineers, digital artists and technology specialists that facilitate the continual advancement of our industry-leading technology platform. In order to accelerate development of our technology solutions, we have added 40 new members to the technology team in 2020 alone and expect to continue to grow this group in 2021.

 

Our differentiated technology suite simplifies and enhances the home buying experience and has positioned us at the forefront of digitization in the homebuilding industry. Advancements in visualization technology and younger demographics reaching peak homebuying age have led to increasing demand for a more virtual homebuying and home design experience in recent years. Additionally, we believe the COVID-19 pandemic has been a catalyst for virtual engagement by homebuyers, resulting in a substantial increase in the use of our technology platform by our customers. We adapted our business model quickly to meet the increased demand for fully virtual offerings and we believe we will continue to benefit from our innovative business model. Many of our homebuilding customers are also reporting substantial increases in website traffic, virtual tours, and full virtual sales. Homebuyers are now spending, on average, four hours in our web-based design and option selection systems—a 24% increase in system usage in 2020 compared to 2019. Similarly, we have seen a notable increase in the percentage of our homebuyers who have completed their interior option selections via fully virtual appointments utilizing our technology platform in 2020 compared to 2019. Nearly 10% of all design sessions are now conducted virtually and the demand for online design appointments continues to increase. We believe we have the leading end-to-end technology platform that meets this demand and delivers a dynamic, digitally-enabled homebuying experience. Our engaging visualization technology allows homebuilders to offer photo-realistic virtual home tours as a marketing tool, eliminating the need to build costly model homes for every community, accelerating the pre-marketing window for each community and potentially shortening the overall sales cycle. Our cutting-edge option selection tools utilize visualization and real-time pricing technology to create a personalized, user-friendly design experience customized to the homebuyer’s community, floor plan and budget. Our streamlined integration with homebuilder back office systems creates valuable connectivity throughout the construction process, allowing us to improve construction quality, decrease cycle times and increase customer stickiness. In addition, our systems collect, analyze and report on vast quantities of valuable data, including homebuyer design preferences on over 100,000 new homes annually, which empowers homebuilders and suppliers with critical insight into evolving homebuyer preferences. Homebuilders use our proprietary analytics to tailor their product offerings and pricing by community to further drive incremental option sales and improve profitability. We have made significant technology investments to build our differentiated and scalable technology platform, which we believe will continue to further enhance our

 

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profitability and grow our revenue as we expand our footprint with existing and future customers and add new technology solutions.

 

We have grown considerably, more than doubling our business over the past three years, both organically and through acquisitions. Our organic growth has been driven by the addition of new design studios, new customer additions and increased penetration of existing customers, all of which is underpinned by our expanding technology offering. Technology-enabled solutions have further accelerated our organic growth, and adoption of these solutions by leading homebuilders has contributed to significant growth in our revenue generated by the top 10 U.S. homebuilders from 2015 to 2019. Our recent technology developments, including our photo-realistic visualization technology, have the potential to significantly accelerate the digitization of the homebuilding industry and drive further organic growth through increased adoption by new and existing homebuilders. In addition to our organic growth, we believe we are an acquirer of choice in our industry. We have completed over 18 acquisitions since 2013, which is more than any of our direct competitors, and we believe we have the opportunity to execute additional accretive acquisitions in our highly fragmented industry.

 

Historically, we have leveraged successful partnerships with homebuilders in specific markets to expand into additional geographies and product categories, which generally increases our profit margins by leveraging our infrastructure and personnel across a denser geographic footprint. We do not currently offer installation services for all three key product categories (i.e. flooring, cabinets and countertops) in all of our existing geographic markets. As such, we believe that expanding our service offering to capture incremental installation services offers significant growth opportunities. We also intend to drive margin expansion through purchasing efficiencies, economies of scale on both a local and national basis and the continued consolidation to a single integrated technology platform across our geographic markets.

 

Our Value Proposition

 

The chart and graphic below summarize our value proposition and the technology-enabled solutions we

deliver to the key constituents in the homebuilding value chain.

 

Constituent

  

ILG Value Proposition

   

Homebuilders  

  

•  Streamline marketing, sales generation, and design process

•  Improved homebuyer satisfaction levels

•  Maximize option profitability

•  Improve cycle times

•  Provide valuable data analytics and insights

   

Homebuyers  

  

•  Fully customize their home design and furnishings

•  Improve homebuyer satisfaction

•  Leverage fully remote visualization tools for options selection

•  Access to designers to facilitate decision making

   

Designers  

  

•  Collaborate on home design process

•  Ability to work with homebuyers in virtual setting

•  Real-time pricing capabilities

•  Data analytics inform design decisions

   

Suppliers  

  

•  Predictive analytics on homebuyer trends

•  Ability to showcase products in a physical or virtual design studio

•  Integrated systems facilitate efficiencies

•  Real-time pricing capabilities

   

Installers  

  

•  Provide consistent, predictable work

•  Increase productivity through technology

 

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LOGO

 

Our comprehensive suite of solutions provides meaningful value to each of the following constituencies:

 

Homebuilders

 

We have long-standing customer relationships with national, regional and local homebuilders as a result of our proven ability to drive increased homebuilder profitability through our technology solutions. We provide customized, value-added design studio solutions, critical insight into homebuyer demand trends and superior service, from pre-sale marketing to homebuyer option selection to supply chain management and installation. Homebuilders benefit from our valuable design expertise and installation capabilities, allowing them to focus on their core competencies in land procurement and development, home sales and construction management. Our visualization technology offers builders the ability to provide photo-realistic virtual tours of multiple floorplans to prospective homebuyers without needing to visit a physical model home. Our option selection technology, real-time pricing engine, and skilled design professionals enhance the homebuyer experience and drive homebuilder profitability by increasing sales of options and upgrades, while our turnkey supply chain management and installation services drive construction quality and process efficiencies. On average, buyers who use our online systems spend 25% more on interior options and upgrades compared to buyers that do not. We also offer supply chain management and installation services to homebuilders through our builder direct solutions, where our customers benefit from our extensive supplier relationships, service excellence and multi-product capabilities. Our streamlined integration with homebuilder back office systems helps our customers and our teams improve construction quality, decrease cycle times and increase customer stickiness We complement our integration capabilities with extensive data analytics to offer insight into evolving design trends and homebuyer preferences and assist homebuilders in optimizing their option offerings and making home design and community investment decisions. Our ability to deliver fully-integrated services enhances our ability to retain customers over time.

 

We serve each of the top 20 U.S. homebuilders based on 2019 home closings. The top 20 U.S. homebuilders accounted for approximately 30% of total home closings in 2019, up from approximately 17% in 2000, according to Builder Magazine Online. We believe this increase in market share is due to the largest homebuilders benefiting from the financial and operational efficiencies associated with combining a national platform and local market concentration in the