Item 1. Business.
General
The Company was
incorporated under the laws of the State of Delaware on June 13, 1963 under the name Metro-Tel Corp. and changed its name to DRYCLEAN
USA, Inc. on November 7, 1999. On December 1, 2009, the Company changed its name to EnviroStar, Inc.
The Company, through
its wholly-owned subsidiary, Steiner-Atlantic Corp. (“Steiner-Atlantic”), in the United States, the Caribbean and Latin
American:
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distributes commercial and industrial laundry and dry cleaning equipment and steam and hot water
boilers manufactured by others;
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supplies replacement parts and accessories, and provides maintenance services to its customers;
and
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designs and plans turn-key laundry, dry cleaning and boiler systems for its customers, which include
institutional, retail, industrial and commercial customers.
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In addition, the
Company, through DRYCLEAN USA License Corp., an indirect wholly-owned subsidiary of the Company, owns the worldwide rights to the
name DRYCLEAN USA® and licenses the right to use such name for a fee to retail dry cleaners in the United States, the Caribbean
and Latin America.
Prior to the quarter
ended June 30, 2016, the Company reported the results of its operations through two reportable segments - the Company’s commercial
and industrially laundry and dry cleaning equipment and boiler segment, which was comprised of the operations of Steiner-Atlantic,
and the Company’s license and franchise operations segment, which was comprised of the operations of DRYCLEAN USA License
Corp. As a result of the significantly reduced activities of DRYCLEAN USA License Corp., effective June 30, 2016, the license and
franchise operations segment ceased to be a separate reportable segment and, accordingly, the Company currently reports its results
of operations through a single reportable segment.
Available Information
The Company files
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, files or furnishes Current Reports on Form 8-K, files or furnishes
amendments to those reports, and files proxy and information statements with the SEC. These reports and statements may be read
and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports and statements, as well as beneficial
ownership reports filed by the Company’s officers, directors and beneficial owners of 10% or more of the Company’s
common stock, may also be accessed free of charge on the SEC’s website at
http://www.sec.gov
and, as soon as reasonably
practicable after such materials are filed with, or furnished to, the SEC, on the Company’s website at
http://www.envirostarinc.com
.
Products
The Company sells
a broad line of commercial and industrial laundry and dry cleaning equipment and steam and hot water boilers manufactured by others,
as well as related replacement parts and accessories, and provides maintenance services.
The commercial and
industrial laundry equipment distributed by the Company include washroom, finishing, material handling, and mechanical equipment
such as washers and dryers, tunnel systems and coin-operated machines, many of which are designed to reduce utility and water consumption.
Finishing equipment distributed by the Company includes sheet feeders, flatwork ironers, automatic sheet folders, and stackers.
Material handling equipment distributed by the Company includes conveyor and rail systems. Mechanical equipment distributed by
the Company includes boilers, hot water/steam systems and air compressors.
The dry cleaning
equipment distributed by the Company includes commercial dry cleaning machines, most of which, including the Company’s proprietary
Green Jet® dry-wetcleaning machine, are designed to be environmentally friendly as they do not use perchloroethylene (“Perc”)
in the dry cleaning process, thereby eliminating the health and environmental concerns that Perc poses to customers and their landlords.
This line of products also includes garment presses, finishing equipment, sorting and storage conveyors and accessories.
Boiler products
consist of high efficiency, low emission steam boilers, steam systems and hot water systems that are used in the laundry and dry
cleaning industry for temperature control, heating, pressing and de-wrinkling, and in the healthcare industry, food and beverage
industry, HVAC industry and in other industrial markets for sterilization, product sealing and other purposes.
The Company also
sells replacement parts and accessories for the products it
sells and provides maintenance services to its customers.
The Company seeks
to position and price the products that it sells to appeal to customers in each of the high-end, mid-range and value-priced markets,
as the products are generally offered in a wide range of price points to address the needs of a diverse customer base. Suggested
prices for most of the Company’s equipment range from approximately $5,000 to $1,000,000. The Company believes that the portfolio
of products that it sells affords the Company’s customers a “one-stop shop” for commercial and industrial laundry
and dry cleaning machines, boilers and accessories and that, as a result, the Company is better able to attract and support potential
customers who can choose from the Company’s broad product line. The products and parts sold by the Company and the maintenance
services provided by the Company accounted for approximately 99% of the Company’s revenues for the fiscal year ended June
30, 2016 (sometimes referred to herein as “fiscal 2016”) and approximately 98% of the Company’s revenues for
the fiscal year ended June 30, 2015 (sometimes referred to herein as “fiscal 2015”).
Buy-and-Build Growth Strategy
In
addition to organic growth, the Company’s current business strategy also includes the consideration and pursuit of acquisitions
and other strategic transactions that would complement the Company’s existing business or that might otherwise offer growth
opportunities for the Company. In connection therewith, the Company intends to seek to identify and acquire what the Company believes
are well-run businesses and help build them through certain initiatives, which may include investments in new locations, additional
product lines, expanded service capabilities and advanced technologies. There is no assurance that the Company’s buy-and-build
growth strategy will be successful.
On
September 7, 2016, the Company entered into an Asset Purchase Agreement with Western State Design, LLC, a California limited liability
company (“Western State Design”), and its members, Dennis Mack and Tom Marks (collectively, the “Selling Group”),
pursuant to which the Company, indirectly through a newly formed wholly owned subsidiary, has agreed to acquire substantially all
of the assets and assume certain liabilities of Western State Design (the “Western State Design Acquisition”). The
total consideration for the Western State Design Acquisition will be equal to $28,000,000, consisting of (i) cash consideration
of $18,000,000 (subject to certain net working capital and other adjustments) and (ii) 2,044,990 shares of the Company’s
common stock, which amount is equal to the quotient of $10,000,000 divided by the average closing price per share of the Company’s
common stock on the NYSE MKT for the 10 trading days immediately prior to the date of the Asset Purchase Agreement (the “Average
Common Stock Price”). Pursuant to the rules of NYSE MKT, the Company may not issue shares representing more than 19.9% of
the total number of shares of the Company’s common stock outstanding at the time of closing without stockholder approval.
Accordingly, at the closing of the Western State Design Acquisition, the Company will issue shares representing 19.9% of the total
number of outstanding shares of the Company’s common stock. The issuance of the balance of the shares issuable in connection
with the Western State Design Acquisition will require the approval of the Company’s stockholders. The Company has agreed
to seek stockholder approval of such issuance. If the Company does not obtain stockholder approval of the issuance or otherwise
issue the additional shares on or prior to the six-month anniversary after the date of the closing of the Western State Design
Acquisition, then the Company will be required to make a cash payment in an amount equal to the number of shares not issued multiplied
by the Average Common Stock Price.
In
connection with the financing of the Western State Design Acquisition, the Company entered into a Securities Purchase Agreement
with Symmetric Capital II LLC (“Symmetric Capital II”), a company controlled by Henry M. Nahmad, the Manager of Symmetric
Capital II and the Chairman, Chief Executive Officer, President and controlling stockholder of the Company. Pursuant to the Securities
Purchase Agreement, the Company agreed to issue and sell to Symmetric Capital II in a private placement transaction (the “Private
Placement”) an aggregate of 1,290,323 shares (the “Private Placement Shares”) of the Company’s common stock
for a total purchase price of approximately $6,000,000. The Company will use the proceeds from the Private Placement to fund a
portion of the cash consideration to be paid in
connection with the Western State Design Acquisition. Subject to certain closing
conditions, including a financing condition and the approval by the NYSE MKT of the listing of the Private Placement Shares, the
closing of the Private Placement is expected to occur immediately prior to the closing of the Western State Design Acquisition.
In
addition, the Company has obtained a debt financing commitment from Wells Fargo Bank, National Association (“Wells Fargo”),
for senior secured financing facilities in the maximum aggregate amount of up to $20,000,000, approximately $12,000,000 of which
the Company intends to use to finance the balance of the cash consideration to be paid in connection with the Western State Design
Acquisition not funded by the net proceeds of the Private Placement. The financing facilities are subject to the negotiation of
mutually acceptable definitive documentation, which will include customary representations and warranties, affirmative and negative
covenants, financial covenants, and events of default. Additionally, Wells Fargo’s obligation to provide the debt financing
is subject to a number of customary closing conditions, including consummation of the Western State Design Acquisition in accordance
with the terms of the Asset Purchase Agreement.
Closing of the Western
State Design Acquisition is subject to certain closing conditions, including, but not limited to, (i) the Company obtaining, on
terms and conditions acceptable to the Company, satisfactory debt and equity financing sufficient to fund the cash consideration;
(ii) the approval by the NYSE MKT of the listing of the shares to be issued at the closing of the Western State Design Acquisition;
(iii) the accuracy of the representations and warranties of the parties; and (iv) the parties’ performance and compliance
in all material respects with the agreements and covenants contained in the Asset Purchase Agreement. In addition, closing of the
Western State Design Acquisition is conditioned upon the members of the Selling Group entering into a Stockholders Agreement with
Symmetric Capital II and certain of its affiliates, including Mr. Nahmad, pursuant to which, among other things, the members of
the Selling Group will agree to vote all of the shares of the Company’s Common Stock owned by them at any time during the
term of the Stockholders Agreement as directed by the Manager of Symmetric Capital II and grant to the Manager of Symmetric Capital
II an irrevocable proxy and power of attorney in furtherance thereof. As previously described, Mr. Nahmad is the Manager of Symmetric
Capital II.
There is no assurance
that the Western State Design Acquisition will be completed on the contemplated terms, when anticipated, or at all.
Customers and Markets
The Company’s
customer base consists of approximately 1,600 customers in the United States, the Caribbean and Latin America. The Company’s
commercial and industrial laundry equipment and boilers are sold primarily to laundry plants, hotels, motels, cruise lines, hospitals,
hospital combines, nursing homes, government institutions, distributors and specialized users. Dry cleaning equipment is sold primarily
to independent and franchise dry cleaning stores, chains and higher-end hotels. Sales to one customer accounted for approximately
12% of the Company’s revenues for fiscal 2016.
Sales, Marketing and Customer Support
The laundry and
dry cleaning equipment products and boilers marketed by the Company are sold to its customers in the United States, the Caribbean
and Latin America, as well as customers of its DRYCLEAN USA® licensing subsidiary. The Company employs sales persons to market
its proprietary and distributed products in
the United States, the Caribbean and Latin America. A substantial portion of
sales orders for equipment and replacement parts and accessories are obtained by telephone, e-mail and fax inquiries originated
by the customer or by the Company, and significant repeat sales are derived from existing customers. The Company supports product
sales through its website and by advertising in trade publications, participating in trade shows and engaging in regional promotions
and sales incentive programs.
The Company seeks
to establish customer satisfaction by offering:
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maintenance of a comprehensive replacement parts and accessories inventory, often with same day
or overnight availability;
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design and layout services;
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a toll-free support line and technical website to resolve customer service problems; and
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service and on-site training performed by factory trained technicians.
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The Company trains
its employees to provide service and customer support. The Company uses in-person classroom training, instructional videos and
vendor sponsored seminars to educate employees about product information. In addition, the Company’s technical staff has
prepared training manuals, written in English and Spanish, relating to specific training procedures. The Company’s technical
personnel are retrained as the Company believes to be necessary as new technology is developed.
Foreign Sales
For fiscal 2016 and
fiscal 2015, export revenues, principally to the Caribbean and Latin America, totaled approximately $4.6 million and $8.5 million,
respectively, substantially all of which related to commercial and industrial laundry and dry cleaning equipment and boilers.
All of the Company’s
export sales require the customer to make payment in United States dollars. Foreign sales may be affected by the strength of the
United States dollar relative to the currencies of the countries in which the Company’s customers are located, as well as
the strength of the economies of the countries in which the Company’s customers are located.
Sources of Supply
The Company purchases
laundry, dry cleaning machines, boilers and other products from a number of manufacturers and suppliers. Three of these manufacturers
accounted for approximately 34%, 24% and 10%, respectively, of the Company’s purchases for fiscal 2016, and two manufacturers
each accounted for approximately 27% of the Company’s purchases for fiscal 2015. The major manufacturers of the products
sold by the Company are Pellerin Milnor Corporation, Chicago Dryer Company, Alliance Laundry Systems, LLC, Cleaver Brooks Inc.,
E-Tech Inc., Fulton Thermal Corp., and Unipress Corporation. While the Company has contracts with only a few of the manufacturers
and suppliers of the products which the Company sells, the Company has established long-standing relationships with most of its
manufacturers and suppliers. The Company has not historically experienced difficulty in purchasing products it distributes and
believes that it has good working relationships with its manufacturers and suppliers. The Company further believes that such relationships
provide the Company with certain competitive advantages, including exclusivity for certain products in certain areas and, in certain
cases, favorable prices and terms. However, there is no assurance that the Company will maintain its relationships with any of
its suppliers, and the loss of certain of these relationships, including the loss of a relationship with one of the Company’s
principal suppliers, could adversely affect the Company’s business and results.
Due to special options
and features on most of the larger and more expensive equipment ordered by customers, in most instances, the Company purchases
the equipment sold by it after its receipt of orders from its customers. However, the Company also maintains an inventory of more
standardized and smaller-sized equipment that often requires more rapid delivery to meet customer needs.
Competition
The commercial and
industrial laundry, dry cleaning equipment and boiler distribution business is highly competitive and fragmented, with over 100
full-line or partial-line equipment distributors in the United States. The Company’s management believes that no one distributor
has a major share of the
market; substantially all distributors are independently owned; and, with the exception of several regional
distributors, distributors operate primarily in local markets. In Florida, the Company’s principal domestic market, the Company’s
primary competition is from a number of full-line distributors and several manufacturers, which sell direct to the customer. In
the export market, the Company competes with distributors and manufacturers as well. Competition is based primarily on price, product
quality, and delivery and support services provided to the customer. In all geographic areas, the Company seeks to compete by offering
an extensive product selection, value-added services, such as product inspection and quality assurance, a toll-free customer support
line and technical website, reliability, warehouse location, price, competitive special features and, with respect to certain products,
exclusivity from the manufacturer.
The Company also
faces competition from several franchisors and turn-key suppliers of dry cleaning stores, primarily on the basis of trademark recognition
and reputation, in connection with its licensing operations and its activities related to the design and planning of turn-key dry
cleaning establishments for its customers.
Research and Development
The Company’s
research and development efforts and expenses are generally immaterial as most of the Company’s products are distributed
for manufacturers that perform their own research and development.
Patents and Trademarks
The Company is the
owner of United States service mark registrations for the names EnviroStar®, Aero-Tech®, and Green Jet®, which are
used in connection with its laundry and dry cleaning equipment, and for the name DRYCLEAN USA®, which is licensed by it to
retail dry cleaning establishments. The Company intends to use and protect these or related service marks, as necessary.
Compliance with Environmental and Other Government Laws
and Regulations
Over the past several
decades, federal, state and local governments in the United States and various other countries have enacted environmental protection
laws in response to public concerns about the environment, including with respect to Perc, the primary cleaning agent historically
used in the commercial and industrial dry cleaning process. A number of industries, including the commercial and industrial dry
cleaning and laundry equipment industries, are subject to these evolving laws and implementing regulations. As a supplier to the
industry, the Company serves customers who are primarily responsible for compliance with environmental regulations. Among the United
States federal laws that the Company believes are applicable to the industry are the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (“CERCLA”), which provides for the investigation and remediation of hazardous waste sites;
the Resource Conservation and Recovery Act of 1976, as amended (“RCRA”), which regulates the generation and transportation
of hazardous waste as well as its treatment, storage and disposal; and the Occupational Safety and Health Administration Act (“OSHA”),
which regulates exposure to toxic substances and other health and safety hazards in the workplace. Most states and a number of
localities have laws that regulate the environment, which are at least as stringent as the federal laws. In Florida, for example,
in which a significant amount of the Company’s dry cleaning and laundry equipment sales are made, environmental matters are
regulated by the Florida Department of Environmental Protection, which generally follows the United States government’s Environmental
Protection Agency’s (“EPA”) policy with respect to the implementation of CERCLA and RCRA, and closely adheres
to OSHA’s standards.
The Company does
not believe that compliance with federal, state and local environmental and other laws and regulations which have been adopted
have had, or will have, a material effect on its capital expenditures, earnings or competitive position.
Employees
As of September
16, 2016, the Company had 31 employees, including 30 full-time employees. None of the Company’s employees are subject to
a collective bargaining agreement. The Company believes that its relations with its employees are satisfactory.
Item 1A. Risk Factors.
The Company’s business
is subject to various risks and uncertainties, including those described below, which could adversely affect the Company’s
business, financial condition, results of operations and cash flows, and the trading price of the Company’s common stock.
The risks described below are not the only risks faced by the Company. Additional risks not presently known to the Company or other
factors that the Company does not presently perceive to present significant risks to the Company at this time may also impair the
Company’s business, financial condition, results of operations or cash flows, or the trading price of the Company’s
common stock.
Acquisitions could result in operating difficulties,
dilution, and other consequences that may adversely impact the Company’s business and results of operations.
Acquisitions are an important
element of the Company’s growth strategy and are expected to be material to the Company’s financial condition and results
of operations. The Company expects to evaluate and enter into discussions regarding acquisitions and other potential strategic
transactions. However, the Company may not be successful in consummating acquisitions or other strategic transactions as expected,
including in the time frame anticipated, or at all. Expenses related to the Company’s pursuit of acquisitions and other strategic
transactions may be significant and will be incurred by the Company regardless of whether the underlying acquisition or other strategic
transaction is ultimately consummated.
Acquisitions and the Company’s
efforts with respect thereto, including efforts with respect to the integration of acquired businesses, may use significant resources,
result in disruptions to the Company’s business operations, result in distractions of management and not proceed as planned,
and they could expose the Company to unforeseen liabilities. These involve a number of special problems and risks, including, but
not limited to:
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difficulty integrating acquired technologies, products, services, operations, customers and personnel;
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diversion of management’s attention;
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strain on managerial and operational resources as management tries to oversee larger operations;
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difficulty implementing and maintaining effective internal control over financial reporting at
the acquired businesses; and
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exposure to unforeseen liabilities of the acquired businesses.
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As a result of these or
other problems and risks, businesses the Company may acquire may not produce the revenues, earnings, cash flows or business synergies
anticipated, and the acquired businesses may not perform as expected. As a result, the Company may incur higher costs and realize
lower revenues and earnings than anticipated. The Company may not be able to successfully address these problems, integrate any
acquired businesses or generate sufficient revenue to offset the associated costs or other negative effects on its business.
In addition, acquisitions
could also result in dilutive issuances of the Company’s equity securities, the incurrence of debt, contingent liabilities,
or amortization expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which
could harm the Company’s financial condition or results.
Further, businesses that
grow rapidly often have difficulty managing their growth. If the Company is successful in growing through acquisitions, such
growth may place significant demands on management, as well as on the Company’s accounting, financial, information and other
systems and on the Company’s business. Management may not be able to manage the Company’s growth effectively
or successfully, and the Company’s financial, accounting, information and other systems may not be able to successfully accommodate
the Company’s growth.
The proposed acquisition of Western State
Design may not be completed on a timely basis, on anticipated terms, or at all, and there are uncertainties and risks relating
to the transaction.
As previously described,
on September 7, 2016, the Company entered into an Asset Purchase Agreement with Western State Design and its members, pursuant
to which the Company, indirectly through a newly formed wholly owned subsidiary, has agreed to acquire substantially all of the
assets and assume certain liabilities of Western State Design. The total consideration for the Western State Design Acquisition
will be equal to $28,000,000, consisting of (i) cash consideration of $18,000,000 (subject to certain net working capital and other
adjustments) and (ii) 2,044,990 shares of the Company’s common stock. In addition, in connection with the financing of the
Western State Design Acquisition, the Company entered into a Securities Purchase Agreement with Symmetric Capital II, a company
controlled by Henry M. Nahmad, the Manager of Symmetric Capital II and the Chairman, Chief Executive Officer, President and controlling
stockholder of the Company. Pursuant to the Securities Purchase Agreement, the Company agreed to issue and sell to Symmetric Capital
II in a Private Placement an aggregate of 1,290,323 shares of the Company’s Common Stock for a total purchase price of approximately
$6,000,000. Subject to certain closing conditions, including a financing condition and the approval by the NYSE MKT of the listing
of the Private Placement Shares, the closing of the Private Placement is expected to occur immediately prior to the closing of
the Western State Design Acquisition. Accordingly, the Company expects to issue a total of 3,335,313 shares of its common stock
in connection with the Western State Design Acquisition and the Private Placement. Based on the number of shares of the Company’s
common stock currently outstanding, the issuance of shares in connection with the Western State Design Acquisition and the Private
Placement would result in an approximately 47% increase in the total number of shares of the Company’s common stock immediately
and therefore would result in substantial dilution to the Company’s stockholders. Further, closing of the Western State Design
Acquisition is conditioned upon the members of the Selling Group entering into a Stockholders Agreement with Symmetric Capital
II and certain of its affiliates, including Mr. Nahmad, pursuant to which, among other things, the members of the Selling Group
will agree to vote all of the shares of the Company’s Common Stock owned by them at any time during the term of the Stockholders
Agreement as directed by Mr. Nahmad, as the Manager of Symmetric Capital II, and grant to Mr. Nahmad, as the Manager of Symmetric
Capital II, an irrevocable proxy and power of attorney in furtherance thereof. Accordingly, Mr. Nahmad, who currently has voting
power over approximately 50.3% of the outstanding shares of the Company’s Common Stock, will, as the Manager of Symmetric
Capital II, have voting power over all of the shares of the Company’s Common Stock issued in connection with the Western
State Design Acquisition and the Private Placement, and the transactions will therefore increase Mr. Nahmad’s voting power
with respect to the Company. See the risk factor captioned “Henry M. Nahmad may be deemed to control the Company” below
for risks related to Mr. Nahmad’s control position with respect to the Company.
Closing of the Western
State Design Acquisition is also subject to certain other closing conditions, including, but not limited to, (i) the Company obtaining,
on terms and conditions acceptable to the Company, satisfactory debt and equity financing sufficient to fund the cash consideration;
(ii) the approval by the NYSE MKT of the listing of the shares to be issued at the closing of the Western State Design Acquisition;
(iii) the accuracy of the representations and warranties of the parties; and (iv) the parties’ performance and compliance
in all material respects with the agreements and covenants contained in the Asset Purchase Agreement. There is no assurance that
the Western State Design Acquisition will be completed on the contemplated terms, when anticipated, or at all, or that, if completed,
the Western State Design Acquisition will have a positive impact on the Company or its business, operating results or financial
condition.
Further, as previously
described, the Company has obtained a debt financing commitment from Wells Fargo for senior secured financing facilities in the
maximum aggregate amount of up to $20,000,000, approximately $12,000,000 of which the Company intends to use to finance the balance
of the cash consideration to be paid in connection with the Western State Design Acquisition not funded by
the net proceeds of
the Private Placement. See the risk factor captioned “The Company’s indebtedness may impact its financial condition
and results of operations, and the terms of the Company’s indebtedness may limit its activities” below for risks related
to the Company’s indebtedness.
If the Company fails to collect its accounts
receivable or is required to increase its allowance for doubtful accounts, its operating results could be materially adversely
affected
.
The Company maintains an
allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. As
of June 30, 2016, the Company’s accounts receivable were approximately $2.0 million, and its allowance for doubtful accounts
was approximately $160,000. Accounts and trade notes receivable due from two customers accounted for 33% of the Company’s
accounts and trade notes receivable at June 30, 2016. There is no assurance that the Company will collect its outstanding accounts
receivable or that its allowance for doubtful accounts will be adequate. The failure to collect outstanding receivables could have
a material adverse effect on the Company’s business, prospects, operating results or financial condition. Further, if the
Company is required to make additional allowances, including, without limitation, in the event the financial condition of the Company’s
customers was to deteriorate and, for that reason or based on other factors, their ability to make required payments was impaired,
then the Company’s operating results for the period in which the determination or allowance is or was made would be adversely
affected.
The Company’s indebtedness may impact
its financial condition and results of operations, and the terms of the Company’s indebtedness may limit its activities.
The Company’s level
of indebtedness may have several important effects on the Company’s operations, including, without limitation, that the Company
may be required to use a portion of its cash flow for the payment of principal and interest due on outstanding indebtedness, that
outstanding indebtedness and the Company’s leverage position will increase the impact on the Company of negative changes
in general economic and industry conditions, as well as competitive pressures, and that the Company’s ability to obtain additional
financing for acquisitions, working capital or other corporate purposes may be impacted.
The Company has a revolving
line of credit facility pursuant to which the Company may borrow up to $2,250,000. Borrowings under the credit facility bear interest
at 2.50% per annum above the Adjusted LIBOR Market Index Rate. Accordingly, if interest rates increase, then the amount of the
interest payments on any outstanding indebtedness under the credit facility or any other floating rate debt the Company may incur
in the future will also increase. The Company’s obligations under the credit facility are guaranteed by the Company’s
subsidiaries and collateralized by substantially all of the assets of the Company and its subsidiaries. The loan agreement pursuant
to which the revolving line of credit has been made available to the Company requires maintenance of certain fixed charge coverage
and leverage ratios and contains other restrictive covenants, including limitations on the extent to which the Company and its
subsidiaries could incur additional indebtedness, pay dividends, guarantee indebtedness of others, grant liens, sell assets and
make investments. The credit facility will expire on, and the maturity date for borrowings under the credit facility is, November
1, 2016. While the Company anticipates that it will seek to extend the credit facility, the Company may not be successful in doing
so or entering into an additional or replacement facility, in each case, on acceptable terms, or at all. No amounts were outstanding
under the credit facility at June 30, 2016.
The Company also expects
to seek debt financing in connection with its pursuit of acquisitions as part of its buy-and-build growth strategy. As previously
described, in connection with the financing of the Western State Design Acquisition, the Company has obtained a debt financing
commitment from Wells Fargo for senior secured financing facilities in the maximum aggregate amount of up to $20,000,000. In addition,
the Company may seek to incur additional debt financing as determined to be appropriate by management. In connection therewith,
the Company may seek to increase its current credit facility and/or enter into new credit facilities or other financing arrangements
with lenders. However, the Company may not be able to increase its credit facility or otherwise incur additional debt on acceptable
terms, or at all,
including in the event additional funds are necessary to consummate an acquisition or support the Company’s
business operations.
The products the Company sells could fail
to perform according to specification or prove to be unreliable, which could damage the Company’s customer relationships
and industry reputation and result in lawsuits and loss of sales.
The Company’s customers
require demanding specifications for product performance and reliability. Product defects or other failures to perform to specifications
or as expected could result in higher service costs and may damage the Company’s customer relationships and industry reputation
and/or otherwise negatively impact the Company’s sales and business. Further, the Company may be subject to lawsuits if any
of the products it distributes fails to operate properly or causes property or other physical damage.
The Company’s business and results
may be adversely affected if the Company does not maintain its relationships with its significant suppliers or customers.
The Company purchases the
products it distributes from a number of manufacturers and suppliers. Three of these manufacturers accounted for a total of approximately
68% of the Company’s product purchases for fiscal 2016, and two manufacturers accounted for a total of approximately 54%
of the Company’s product purchases for fiscal 2015. While the Company has not historically experienced difficulty in purchasing
products it distributes, and believes it has good working relationships with the manufacturers or suppliers from which the Company
purchases its products, if such relationships deteriorate or the Company is unable to maintain such relationships, including with
any of the three manufacturers referred to above, the Company’s business and results could be materially and adversely impacted.
Further, while the Company has contracts with two of the three significant manufacturers referred to above, it does not have a
contract with the third significant manufacturer or with several of the other manufacturers and suppliers of the products it distributes,
and in such cases, the Company has no contractual basis for maintaining its relationships with the manufacturers and suppliers.
Further, third parties may not comply with the terms of any agreements to which the Company is a party or may choose to terminate
such agreements, allow such agreements to expire or seek to revise the agreements on terms which are less favorable to the Company
than the prevailing terms, any of which could materially and adversely impact the Company’s business and results.
In addition, while the
Company sells its products to various users, including independent and franchise dry cleaning stores and chains, laundry plants,
hotels, motels, cruise lines, hospitals, nursing homes, government institutions, coin laundry stores and distributors, sales to
one customer accounted for approximately 12% of the Company’s revenues for fiscal 2016. The Company’s operating results
and financial condition could be materially adversely impacted if the Company loses such significant customer, fails to meet its
customers’ expectations or otherwise realizes a decrease in its sales.
The Company faces substantial competition.
The commercial and
industrial laundry, dry cleaning equipment and boiler distribution business is highly competitive and fragmented, with over 100
full-line or partial-line equipment distributors in the United States. The Company’s management believes that no one distributor
has a major share of the market; substantially all distributors are independently owned; and, with the exception of several regional
distributors, distributors operate primarily in local markets. In Florida, the Company’s principal domestic market, the Company’s
primary competition is from a number of full line distributors and several manufacturers, which sell direct to the customer. In
the export market, the Company competes with distributors and manufacturers. The Company also faces competition from several franchisors
and turn-key suppliers of dry cleaning stores, primarily on the basis of trademark recognition and reputation, in connection with
its licensing operations and its activities related to the design and planning of turn-key dry cleaning establishments for its
customers. Certain of the Company’s competitors have greater
financial and other resources than the Company. In addition,
some of the Company’s competitors may have less indebtedness than the Company, and therefore more of their cash may be potentially
available for business purposes other than debt service. The Company’s results and financial condition would be materially
and adversely impacted if the Company is unable to compete effectively. Further, the Company may not be able to operate profitably
if the competitive environment changes.
Inability to protect the Company’s
service marks and other proprietary rights could adversely impact the Company’s competitive position.
The Company is the owner
of United States service mark registrations for the names EnviroStar®, Aero-Tech®, and Green Jet®, which are used in
connection with the Company’s laundry and dry cleaning equipment, and for the name DRYCLEAN USA®, which is licensed by
the Company to retail dry cleaning establishments. While the Company intends to and has taken steps to protect its service marks
and other proprietary rights, the Company may not be successful in doing so and third parties may infringe or misappropriate the
Company’s intellectual property and proprietary rights. Any infringement or misappropriation of the Company’s intellectual
property and proprietary rights could damage their value and could have a material adverse effect on the Company’s business,
results and financial condition. Further, the Company may have to engage in litigation to protect the rights to its intellectual
property and proprietary rights, which could result in significant litigation expenses and require a significant amount of management's
time.
Damages to or disruptions at the Company’s
facilities could adversely impact the Company’s business, operating results and financial condition
.
The Company’s executive
offices and the main distribution center for the products it distributes are housed in two leased adjacent facilities totaling
approximately 38,000 square feet in Miami, Florida, which is an area subject to hurricane casualty and flood risk. Although the
Company has certain limited protection afforded by insurance, the Company’s business, earnings and financial condition could
be materially adversely affected in the event of a major windstorm or flooding.
The Company faces risks associated with
environmental and other regulation.
The Company’s business
and operations are subject to federal, state, local and foreign environmental and other laws and regulations, including environmental
laws governing the discharge of pollutants, the handling, generation, storage and disposal of hazardous materials, substances,
and wastes and the cleanup of contaminated sites. The Company may not remain in compliance with all applicable laws and regulations
and could be required to incur significant costs as a result of violations of, liabilities under, or efforts to comply with, applicable
laws and regulations. In addition, violations may have other adverse implications for the Company, including negative public relations
and potential litigation. Further, the Company may incur significant compliance costs in the event of changes to the laws and regulations
applicable to the Company.
The Company faces risks related to its foreign
operations
.
For the fiscal year ended
June 30, 2016, export revenues totaled approximately $4.6 million, which represented approximately 12.9% of the Company’s
total revenues for such fiscal year. These export revenues related principally to the Company’s sales of commercial and industrial
laundry and dry cleaning equipment and boilers activities to the Caribbean and Latin America. All of the Company’s export
sales require the customer to make payment in United States dollars. Foreign sales may be affected by the strength of the United
States dollar relative to the currencies of the countries in which customers and competitors are located, as well as the strength
of the economies of the countries in which the Company’s customers are located.
Further, conducting an
international business inherently involves a number of difficulties, risks and uncertainties, such as:
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export and trade restrictions,
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inconsistent and changing regulatory requirements,
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tariffs and other trade barriers,
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problems in collecting accounts receivable,
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local economic downturns, and
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potentially adverse tax consequences.
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Any of the above factors
may materially and adversely affect the Company’s business, prospects, operating results or financial condition.
Henry M. Nahmad may be deemed to control
the Company
.
Henry M. Nahmad, the Company’s
Chairman, Chief Executive Officer and President, is the Manager and President of Symmetric Capital LLC (“Symmetric”)
and may be deemed to control Symmetric. Symmetric owns 2,838,194 shares of the Company’s common stock, which represents approximately
40.4% of the total number of issued and outstanding shares of the Company’s common stock. In addition, Symmetric and Mr.
Nahmad are parties to a Stockholders Agreement with Michael S. Steiner, the Company’s Chief Operating Officer and Executive
Vice President, and Robert M. Steiner, Mr. Michael Steiner’s brother. Pursuant to such Stockholders Agreement, each of Mr.
Michael Steiner and Mr. Robert Steiner (who as of the date of filing of this Report hold 600,100 shares of the Company’s
common stock and 100,000 shares of the Company’s common stock, respectively) agreed to vote all shares of the Company’s
common stock owned by them at any time during the term of the Stockholders Agreement as directed by Mr. Nahmad, as the Manager
of Symmetric, and have granted to Mr. Nahmad, as the Manager of Symmetric, an irrevocable proxy and power of attorney in furtherance
thereof. The Stockholders Agreement also contains, among other things, (i) a right of first refusal held by Symmetric with respect
to proposed sales of shares of the Company’s common stock by Mr. Michael Steiner or Mr. Robert Steiner and (ii) a special
call right which, in the event of Mr. Michael Steiner’s death or Disability (as defined in the Stockholders Agreement) during
the term of the Stockholders Agreements, would entitle Symmetric (or its assignee) to purchase all of the shares of the Company’s
common stock held by Mr. Michael Steiner and Mr. Robert Steiner at the then-prevailing fair market value. The Stockholders Agreement
will expire in March 2020, unless earlier terminated at Symmetric’s election or under certain other limited circumstances.
Including the shares of
the Company’s common stock owned by Symmetric and the shares of the Company’s common stock over which Mr. Nahmad, as
the Manager of Symmetric, may be deemed to have voting power as a result of the Stockholders Agreement described above, Mr. Nahmad,
as the Manager of Symmetric, may be deemed to have voting power over a total of approximately 50.3% of the issued and outstanding
shares of the Company’s common stock. Under the Company’s Bylaws, except with respect to the election of directors
(which requires a plurality vote), with respect to any matter put to a vote of the Company’s stockholders, the affirmative
vote of a majority of the shares of the Company’s common stock represented at a meeting, in person or by proxy, and entitled
to vote on the matter is required to approve the matter, unless a greater percentage is required by applicable law. Consequently,
Mr. Nahmad, as the Manager of Symmetric, without the consent of any other stockholders of the Company, can approve actions that
require stockholder approval and elect directors acceptable to him. Mr. Nahmad’s interests may conflict with the interests
of the Company’s other stockholders.
See also the risk factor
captioned “The proposed acquisition of Western State Design may not be completed on a timely basis, on anticipated terms,
or at all, and there are uncertainties and risks relating
to the transaction” above for information regarding the increased
voting power that Mr. Nahmad is expected have with respect to the Company if the Western State Design Acquisition and Private Placement
are consummated.
The Company’s success depends on key
personnel, the loss of whom could harm the Company’s business, operating results and financial condition
.
The Company’s business
is dependent on the active participation of its executive officers, including, without limitation Henry M. Nahmad and Michael S.
Steiner. The loss of the services of any of these individuals could adversely affect the Company business and future prospects.
In addition, the Company’s success is dependent on its ability to retain and attract additional qualified management and
other personnel. Competition for such talent is intense, and the Company may not be successful in attracting and retaining such
personnel.
The Company’s common stock has a limited
trading volume, and the market price of the Company’s common stock may be volatile
.
The Company’s common
stock is listed and traded on the NYSE MKT. Because, as described above, Symmetric owns approximately
40.4% of the issued
and outstanding shares of the Company’s common stock and has a right of first refusal over an additional approximately 9.9%
of the issued and outstanding shares of the Company’s common stock, the Company has a limited non-affiliate market capitalization.
As a result, the Company’s common stock has a limited trading volume, which may make it more difficult for stockholders to
sell their shares, and which may make the trading price of the Company’s common stock subject to price volatility.
The issuance of preferred stock and common
stock, and the Company’s Board of Directors authority to approve issuances of preferred stock and common stock, could adversely
affect the Company’s stockholders and have an anti-takeover effect
.
The Company’s Board
of Directors is authorized under the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”),
to approve the issuance by the Company of up to 200,000 shares of preferred stock, and to designate the relative rights, preferences
and limitations of any preferred stock so issued, in each case, without any further action on the part of the Company’s stockholders.
Currently, no shares of preferred stock are outstanding. In the event that the Company issues preferred stock in the future that
has preference over the Company’s common stock with respect to payment of dividends or upon liquidation, dissolution or winding
up of the Company, the rights of holders of shares of the Company’s common stock may be adversely affected. In addition,
the Company is authorized under its Certificate of Incorporation to issue 15,000,000 shares of common stock, and currently has
7,033,732 shares outstanding. Subject to applicable law and the rules and regulations of the NYSE MKT, the Company’s Board
of Directors (or a committee thereof, in the case of shares issued under the Company’s 2015 Equity Incentive Plan (the “Plan”))
has the power to approve the issuance of any authorized but unissued shares of the Company’s common stock, and any such issuances,
including, without limitation, those under the Plan or pursuant to any acquisitions consummated by the Company or in connection
with the financing thereof, would result in dilution to the Company’s stockholders. As previously described, the Company
expects to issue a total of 3,335,313 shares of its Common Stock in connection with the Western State Design Acquisition and the
Private Placement. Based on the number of shares of the Company’s common stock currently outstanding, the issuance of shares
in connection with the Western State Design Acquisition and the Private Placement would result in an approximately 47% increase
in the total number of shares of the Company’s common stock immediately and therefore would result in substantial dilution
to the Company’s stockholders.
The above-described provisions
of the Company’s Certificate of Incorporation, as well as Mr. Nahmad’s control position with respect to the Company,
could also delay, defer or prevent a change of
control of the Company or its management, and could limit the price that investors
are willing to pay in the future for shares of the Company’s common stock.
Litigation and legal proceedings and the
impact of any finding of liability or damages could adversely impact the Company and its financial condition and operating results.
The Company may from time
to time become subject to litigation and other legal proceedings relating to its business and operations. Litigation and other
legal proceedings may require the Company to incur significant expenses, including those relating to legal and other professional
fees. In addition, litigation and other legal proceedings are inherently uncertain, and adverse outcomes in litigation or other
legal proceedings could adversely affect the Company’s financial condition, cash flows, and operating results.
There are inherent uncertainties involved
in estimates, judgments and assumptions used in the preparation of financial statements in accordance with GAAP. Any changes in
estimates, judgments and assumptions used could have a material adverse effect on the Company’s business, financial position
and operating results.
The consolidated financial
statements included in the periodic reports the Company files with the Securities and Exchange Commission, including those included
as part of this Report, are prepared in accordance with accounting principles generally accepted in the United States of America,
or GAAP. The preparation of financial statements in accordance with GAAP involves making estimates, judgments and assumptions that
affect reported amounts of assets (including goodwill and other intangible assets), liabilities and related reserves, revenues,
expenses and income. This includes estimates, judgments and assumptions for assessing the recoverability of intangible assets pursuant
to applicable accounting guidance. If any estimates, judgments or assumptions change in the future, the Company may be required
to record additional expenses or impairment charges, which would be recorded as a charge against earnings, and any such changes
could result in corresponding changes to the amounts of assets (including goodwill and other intangible assets), liabilities, revenues,
expenses and income, any of which could have a material adverse effect on the Company’s financial position and operating
results.