Item 1.
|
Financial Statements.
|
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
|
|
For the six months
ended
December 31,
|
|
|
For the three months ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
42,870
|
|
|
$
|
14,863
|
|
|
$
|
33,398
|
|
|
$
|
8,626
|
|
Cost of sales
|
|
|
33,782
|
|
|
|
11,537
|
|
|
|
26,330
|
|
|
|
6,735
|
|
Gross profit
|
|
|
9,088
|
|
|
|
3,326
|
|
|
|
7,068
|
|
|
|
1,891
|
|
Selling, general and administrative expenses
|
|
|
6,247
|
|
|
|
2,466
|
|
|
|
4,792
|
|
|
|
1,284
|
|
Operating income
|
|
|
2,841
|
|
|
|
860
|
|
|
|
2,276
|
|
|
|
607
|
|
Interest expense (income), net
|
|
|
50
|
|
|
|
(1
|
)
|
|
|
50
|
|
|
|
(1
|
)
|
Income before provision for income taxes
|
|
|
2,791
|
|
|
|
861
|
|
|
|
2,226
|
|
|
|
608
|
|
Provision for income taxes
|
|
|
1,111
|
|
|
|
325
|
|
|
|
897
|
|
|
|
229
|
|
Net income
|
|
$
|
1,680
|
|
|
$
|
536
|
|
|
$
|
1,329
|
|
|
$
|
379
|
|
Net earnings per share – basic and diluted
|
|
$
|
0.19
|
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic and diluted
common shares outstanding
|
|
|
8,538
|
|
|
|
7,034
|
|
|
|
10,043
|
|
|
|
7,034
|
|
See Notes to Condensed Consolidated Financial
Statements
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS
|
|
|
|
|
|
|
|
|
December 31,
2016
(Unaudited)
|
|
|
June 30,
2016
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,842
|
|
|
$
|
3,942
|
|
Accounts receivable, net of allowance for doubtful accounts of
$194 and $160, respectively
|
|
|
16,686
|
|
|
|
1,833
|
|
Inventories, net
|
|
|
5,830
|
|
|
|
2,627
|
|
Vendor deposits
|
|
|
1,214
|
|
|
|
803
|
|
Other current assets
|
|
|
1,641
|
|
|
|
673
|
|
Total current assets
|
|
|
28,213
|
|
|
|
9,878
|
|
|
|
|
|
|
|
|
|
|
Equipment and improvements, net
|
|
|
942
|
|
|
|
135
|
|
Intangible assets, net
|
|
|
6,412
|
|
|
|
27
|
|
Goodwill
|
|
|
22,069
|
|
|
|
—
|
|
Other assets
|
|
|
306
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
57,942
|
|
|
$
|
10,161
|
|
See Notes to Condensed Consolidated Financial
Statements
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
December 31,
2016
(Unaudited)
|
|
|
June 30,
2016
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
13,434
|
|
|
$
|
2,898
|
|
Accrued employee expenses
|
|
|
2,410
|
|
|
|
961
|
|
Customer deposits
|
|
|
3,533
|
|
|
|
1,213
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
5,778
|
|
|
|
—
|
|
Current portion of long-term debt
|
|
|
714
|
|
|
|
—
|
|
Total current liabilities
|
|
|
25,869
|
|
|
|
5,072
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
140
|
|
|
|
—
|
|
Long-term debt
|
|
|
4,104
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
30,113
|
|
|
|
5,072
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; authorized shares – 200,000; none issued
and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $.025 par value; 20,000,000 shares authorized at December
31, 2016 and 15,000,000 shares authorized at June 30, 2016; 10,815,575
shares issued at December 31, 2016 and 7,065,500 shares issued at June
30, 2016, including shares held in treasury
|
|
|
260
|
|
|
|
177
|
|
Additional paid-in capital
|
|
|
24,111
|
|
|
|
2,095
|
|
Retained earnings
|
|
|
3,462
|
|
|
|
2,821
|
|
Treasury stock, 31,768 shares, at cost
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Total shareholders’ equity
|
|
|
27,829
|
|
|
|
5,089
|
|
Total liabilities and shareholders’ equity
|
|
$
|
57,942
|
|
|
$
|
10,161
|
|
See Notes to Condensed Consolidated Financial
Statements
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
|
|
For the six months ended
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,680
|
|
|
$
|
536
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
158
|
|
|
|
33
|
|
Amortization of debt discount
|
|
|
3
|
|
|
|
—
|
|
(Recovery of) bad debt expense
|
|
|
(26
|
)
|
|
|
(2
|
)
|
Share-based compensation
|
|
|
46
|
|
|
|
—
|
|
Inventory reserve
|
|
|
35
|
|
|
|
8
|
|
Provision (benefit) for deferred income taxes
|
|
|
(38
|
)
|
|
|
17
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,230
|
)
|
|
|
691
|
|
Inventories
|
|
|
191
|
|
|
|
405
|
|
Vendor deposits
|
|
|
1,535
|
|
|
|
—
|
|
Other assets
|
|
|
(228
|
)
|
|
|
(825
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
3,198
|
|
|
|
(181
|
)
|
Accrued employee expenses
|
|
|
1,199
|
|
|
|
(286
|
)
|
Customer deposits
|
|
|
(1,927
|
)
|
|
|
1,699
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
1,890
|
|
|
|
—
|
|
Net cash provided by operating activities
|
|
|
1,486
|
|
|
|
2,095
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(7
|
)
|
|
|
(1
|
)
|
Cash paid for acquisition, net of cash acquired
|
|
|
(13,394
|
)
|
|
|
—
|
|
Net cash used by investing activities
|
|
|
(13,401
|
)
|
|
|
(1
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
—
|
|
|
|
(1,407
|
)
|
Proceeds from borrowings
|
|
|
12,583
|
|
|
|
—
|
|
Debt repayments
|
|
|
(7,702
|
)
|
|
|
—
|
|
Payment of debt issuance costs
|
|
|
(66
|
)
|
|
|
—
|
|
Proceeds from issuance of common shares with related
party
|
|
|
6,000
|
|
|
|
—
|
|
Net cash provided (used) by financing activities
|
|
|
10,815
|
|
|
|
(1,407
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,100
|
)
|
|
|
687
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,942
|
|
|
|
3,909
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,842
|
|
|
$
|
4,596
|
|
See Notes to Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
50
|
|
|
$
|
—
|
|
Cash paid during the period for income taxes
|
|
$
|
466
|
|
|
$
|
265
|
|
Supplemental disclosure of non-cash financing activities
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition.
|
|
$
|
16,053
|
|
|
$
|
—
|
|
Dividends payable.
|
|
$
|
1,039
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial
Statements
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
Note (1) - General:
The accompanying
unaudited condensed consolidated financial statements include the accounts of EnviroStar, Inc. and its subsidiaries (the “Company”).
All material intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation
S-X related to interim period financial statements. Accordingly, the accompanying unaudited condensed consolidated financial statements
do not include certain information and footnotes required by GAAP for complete financial statements. However, in management’s
opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal
recurring accruals and adjustments) which are necessary in order to state fairly the Company’s results of operations, financial
position and cash flows as of and for the periods presented. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year or any other future period. The unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and related notes, including the Summary
of Significant Accounting Policies, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2016. The June 30, 2016 balance sheet information contained herein was derived from the audited consolidated financial statements
as of that date included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016.
The preparation of the unaudited condensed
consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. The estimates and assumptions made may not prove to be correct,
and actual results could differ from the estimates.
Certain prior period amounts in the
accompanying unaudited condensed consolidated financial statements have been reclassified in order to be comparable to the current
period’s classifications. These reclassifications had no effect on previously reported net income.
The Company, through its wholly-owned
subsidiaries, distributes commercial and industrial laundry and dry cleaning equipment and steam and hot water boilers manufactured
by others, supplies replacement parts and accessories, provides maintenance services to its customers, and designs and plans turn-key
laundry, dry cleaning and boiler systems for its customers, which include institutional, retail, industrial and commercial customers.
On October 10, 2016 (the “Closing
Date”), the Company, through its wholly-owned subsidiary, Western State Design, Inc. (“Western State Design”),
completed the acquisition of substantially all the assets of Western State Design, LLC (“WSD”), a California-based
distributor of commercial and industrial laundry equipment and related parts for new laundry facilities and to the replacement
laundry market (the “Western State Design Acquisition”). As a result of the closing of the Western State Design Acquisition,
the financial condition, including assets and liabilities, and results of operations of the acquired business following the Closing
Date are included in the Company’s consolidated financial statements from the Closing Date. See Note 3 for additional information
regarding the Western State Design Acquisition.
In addition, the Company, through an
indirect wholly-owned subsidiary, 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.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
Note (2) – Summary of Significant Accounting Policies:
The Company’s significant accounting policies are described in Note 1 to the Company’s consolidated financial statements
included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016. During the six months ended
December 31, 2016 there were no significant changes in our significant accounting policies, unless otherwise described below.
Revenue Recognition:
Products
are generally shipped Free on Board (“FOB”) from the Company’s warehouses or drop shipped from the Company’s
vendor as FOB, at which time risk of loss and title passes to the purchaser. Revenue is recognized when there is persuasive evidence
that the arrangement, shipment or delivery has occurred, the price is fixed and determinable, and collectability is reasonably
assured. Installation revenues are recognized when the installation of the equipment has occurred.
There are also instances where the Company
enters into longer termed contracts where the price to the customer includes the sale of the equipment and the related installation.
The installation on these types of contracts is usually completed within six to twelve months. Revenues from these contracts are
recognized under the percentage-of-completion method of accounting, measured by the percentage of costs incurred to date against
the estimated total costs for each contract. This method is used because management considers the total cost to be the best available
measure of progress on the contracts. Due to the inherent uncertainties in estimating costs, it is possible that the estimates
used may change in the near term.
Contract costs include all direct material
and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tolls and insurance.
Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability
may result in revisions to costs and income, which would be recognized in the period during which the revisions are determined.
Costs and estimated earnings in excess of billings
are classified as other current assets. Billings in excess of costs on uncompleted contracts are classified as current liabilities.
Contract retentions billed are included in accounts receivable.
Revenues from part sales are recognized when
the part is shipped and service revenues are recognized when the service is completed.
Goodwill:
The Company evaluates goodwill
for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may
not be recoverable. The Company tests goodwill for impairment by first comparing the fair value of the reporting unit to its carrying
value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of
impairment loss. This step compares the current implied goodwill in the reporting unit to its carrying amount. If the carrying
amount of the goodwill exceeds the implied goodwill, an impairment is recorded for the excess. The Company performs it annual impairment
test on April 1.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
Note (3) – Acquisition
: The Western
State Design Acquisition was effected in accordance with the Asset Purchase Agreement between the parties dated September 7, 2016
(the “Asset Purchase Agreement”), pursuant to which the Company, indirectly through Western State Design, purchased
substantially all of the assets of WSD for a purchase price consisting of approximately $18.5 million in cash(the “Cash Consideration”)
and 2,044,990 shares of the Company’s common stock (the “Stock Consideration”). At the closing of the Western
State Design Acquisition, the Company paid the $18,500,000 of Cash Consideration, of which $2,800,000 was deposited in an escrow
account for no less than 18 months after the Closing Date (subject to extension in certain circumstances) and issued 1,656,486
shares of the Stock Consideration. The issuance of the remaining 388,504 shares of the Stock Consideration required stockholder
approval under the rules of the NYSE MKT, which was obtained at the Company’s Annual Meeting of Stockholders held on November
30, 2016. Such shares were issued during the third quarter ended March 31, 2017. Cash Consideration paid on the Closing Date was
financed through $12.5 million of borrowings under a Credit Facility (as defined below) entered into on October 7, 2016 (see Note
5) and $6.0 million of proceeds from the issuance of 1,290,323 shares of the Company’s common stock in connection with a
Private Placement Transaction (as defined below), which was completed on the Closing Date (see Note 7). Fees and expenses related
to the Western State Design Acquisition, consisting primarily of legal and other professional fees, totaled approximately $478,000
and are classified as selling, general and administrative expenses in the Company’s condensed consolidated statements of
operations for the three and six months ended December 31, 2016. Pursuant to the Asset Purchase Agreement, the Company indirectly,
through Western State Design, also assumed certain of the liabilities of WSD. The total purchase price for accounting purposes
was $34.6 million, which included cash acquired of $5.1 million.
The Western State Design Acquisition was treated
for accounting purposes as a purchase of WSD using the acquisition method of accounting in accordance with Accounting Standards
Codification (“ASC”) 805,
Business Combinations
. Under the acquisition method of accounting, the aggregate consideration
in the Western State Design Acquisition will be allocated to the acquired assets and assumed liabilities, in each case, based on
their respective fair values as of the Closing Date, with the excess of the consideration transferred over the fair value of the
net assets acquired being allocated to intangible assets and goodwill. The computation of purchase price consideration and the
preliminary allocation of consideration to the net assets acquired are presented in the following tables (in thousands):
Purchase price:
|
|
|
|
Cash Consideration, net of cash acquired
(a)
|
|
$
|
13,394
|
|
Stock Consideration
(b)
|
|
|
16,053
|
|
Total purchase price, net of cash acquired
|
|
$
|
29,447
|
|
|
|
|
|
|
(a)
Includes
$18.5 million paid at closing (inclusive of a preliminary working capital adjustment) and an estimated post-closing working capital
adjustment of $156,000 net of $5.1 million of cash acquired.
(b)
Calculated as 2,044,990
shares of common stock, multiplied by $7.85, the closing price of the Company’s common stock on the Closing Date.
Allocation of purchase price consideration (in thousands):
|
|
|
|
Accounts receivable
|
|
$
|
8,597
|
|
Inventory
|
|
|
3,429
|
|
Other assets
|
|
|
2,693
|
|
Property, plant and equipment
|
|
|
879
|
|
Intangible assets
|
|
|
6,464
|
|
Accounts payable and accrued expenses
|
|
|
(6,549
|
)
|
Customer deposits
|
|
|
(4,247
|
)
|
Billings in excess of costs on uncompleted contracts
|
|
|
(3,888
|
)
|
Total identifiable net assets
|
|
|
7,378
|
|
Goodwill
|
|
|
22,069
|
|
Total
|
|
$
|
29,447
|
|
|
|
|
|
|
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
The purchase price allocation reflects
preliminary fair value estimates based on preliminary work and analyses performed by management and is subject to change as additional
information to assist in determining the fair value of net assets acquired at the Closing Date is obtained during the one year
post-closing measurement period.
Intangible assets consist of $2.4
million allocated to the Western State Design trade name, $3.6 million allocated to customer-related intangible assets and
$0.4 million allocated to covenants not to compete. The Western State Design trade name is indefinite-lived and therefore not
subject to amortization. The Western State Design trade name will be evaluated for impairment annually or more
frequently when an event occurs or circumstances change that indicate it may be impaired, by comparing its fair value to its
carrying amount to determine if a write-down to fair value is required. Customer-related intangible assets and covenants not
compete will be amortized over 10 years and 5 years, respectively.
Goodwill is expected to be amortized and deductible for tax purposes
over 15 years. Goodwill is attributable primarily to the assembled workforce acquired, as well as benefits from the increased scale
of the Company as a result of the Western State Design Acquisition.
Supplemental Pro Forma Results of Operations
The following unaudited supplemental pro
forma information presents the results of operations of the Company, after giving effect to the Western State Design Acquisition,
as if the Company had completed the Western State Design Acquisition and related financing transactions on July 1, 2015, but using
the preliminary estimates of the fair values of the assets acquired and liabilities assumed as of the Closing Date. These unaudited
pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of
operations of the Company would have been if the Western State Design Acquisition had occurred on the date assumed, nor are they
indicative of future results of operations.
|
|
For the six months ended
December 31,
|
|
(in thousands)
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
Revenues
|
|
$
|
59,507
|
|
|
$
|
49,182
|
|
Net income
|
|
|
2,557
|
|
|
|
1,689
|
|
The unaudited supplemental pro forma net
income for the six months ended December 31, 2015 was adjusted to include $868,000 of transaction costs.
Note (4) - Earnings Per Share:
The Company computes earnings per share using the two-class method. The two-class method of computing earnings per share is an
earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends
declared (whether paid or unpaid) and participation rights in undistributed earnings. Shares of the Company’s non-vested
restricted stock are considered participating securities because these awards contain a non-forfeitable right to dividends paid
prior to forfeiture of the restricted stock, if any, irrespective of whether the awards ultimately vest. In November 2016, the
Company issued 414,762 of restricted stock under the EnviroStar, Inc. 2015 Equity Incentive Plan(See Note 8). Such shares constitute
a second class of stock for accounting purposes. Basic and diluted earnings per share for the six and three months ended December
31, 2016 and 2015 are computed as follows (in thousands except per share data):
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
|
|
For the six months ended
December 31,
|
|
|
For the three months ended
December 31,
|
|
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,680
|
|
|
$
|
536
|
|
|
$
|
1,329
|
|
|
$
|
379
|
|
Less: distributed and undistributed
income allocated to non-vested
restricted common stock
|
|
|
51
|
|
|
|
—
|
|
|
|
51
|
|
|
|
—
|
|
Net income allocated to EnviroStar,
Inc. shareholders
|
|
$
|
1,629
|
|
|
$
|
536
|
|
|
$
|
1,278
|
|
|
$
|
379
|
|
Weighted average shares outstanding
|
|
|
8,538
|
|
|
|
7,034
|
|
|
|
10,043
|
|
|
|
7,034
|
|
Basic and fully diluted earnings per
share
|
|
$
|
0.19
|
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
At December 31, 2016 and 2015, other
than the restricted common stock discussed above, there were no potentially dilutive securities outstanding.
Note (5) - Debt:
Long-term debt
as of December 31, 2016 and June 30, 2016 are as follows (in thousands):
|
|
December 31,
2016
|
|
|
June 30,
2016
|
|
Term Loan
|
|
$
|
4,881
|
|
|
$
|
—
|
|
Revolving Line of Credit
|
|
|
—
|
|
|
|
—
|
|
Less: unamortized discount and deferred
financing costs
|
|
|
(63
|
)
|
|
|
—
|
|
Total debt, net
|
|
|
4,818
|
|
|
|
—
|
|
Less: current maturities of long-term debt
|
|
|
(714
|
)
|
|
|
—
|
|
Total long-term debt
|
|
$
|
4,104
|
|
|
$
|
—
|
|
In connection with the Western State Design
Acquisition, on October 7, 2016, the Company entered into a $20.0 million credit agreement (the “Credit Facility”),
consisting of a $15.0 million revolving line of credit, subject to adjustment as described below (the “Revolving Line of
Credit”), and a $5.0 million term loan (the “Term Loan”). The Company used a total of approximately $12.6 million
of borrowings under the Revolving Line of Credit and Term Loan to finance a portion of the Cash Consideration paid on the Closing
Date for the Western State Design Acquisition, and to pay approximately $66,000 of fees, costs and expenses arising in connection
with entering into the Credit Facility. At December 31, 2016, no amounts were outstanding under the Revolving Line of Credit and
$4.9 million was outstanding under the Term Loan. The Credit Facility replaced the Company’s previous credit facility which
allowed for borrowings of up to $2.25 million. No amounts were outstanding under such prior credit facility at June 30, 2016 or
at any times during the period from July 1, 2016 through October 7, 2016, when it was replaced by the Credit Facility.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
The Credit Facility has a term of five
years and matures on October 10, 2021. Interest on the outstanding principal amount of borrowings under the Credit Facility accrue
at an annual rate equal to the daily one-month LIBOR, plus (i) 2.25% in the case of borrowings under the Revolving Line of Credit
and (ii) 2.85% in the case of borrowings under the Term Loan. In addition to interest payments, borrowings under the Term Loan
require monthly principal payments of approximately $60,000 over the five-year term, with the balance due upon maturity.
The obligations of the Company under
the Credit Facility are secured by substantially all of the assets of the Company and its subsidiaries. In addition, the Company’s
subsidiaries have jointly and severally guaranteed the performance of the Company’s payment and other obligations under the
Credit Facility. The Credit Facility also contains affirmative covenants which require the Company to meet certain financial criteria,
including a fixed charge coverage ratio, an asset coverage ratio, senior leverage ratio and a total leverage ratio, as well as
other covenants which may restrict, among other things, the Company’s ability to pay dividends, complete merger, acquisition
or similar transactions, make certain capital expenditures, incur certain operating lease expenditures or repurchase shares of
its common stock. Additionally, the amount available to borrow under the Revolving Line of Credit is determined based on an asset-based
formula, which may restrict the amount available for borrowing under the Revolving Line of Credit to an amount less than the $15.0
million facility amount. At December 31, 2016, the Company was in compliance with all Credit Facility covenants and $10.8 million
was available to borrow under the Revolving Line of Credit.
Note (6) - Income Taxes:
Income
tax expense varies from the federal corporate income tax rate of 34%, primarily due to state income taxes, net of federal income
tax effect, and permanent differences.
As of December 31, 2016 and June 30,
2016, the Company had deferred tax assets of approximately $299,000 and $121,000, respectively, which are included in Other Assets
in the Condensed Consolidated Balance Sheets as of such dates. Consistent with the guidance of the Financial Accounting Standards
Board (the “FASB”) regarding accounting for income taxes, the Company regularly estimates its ability to recover deferred
tax assets and establishes a valuation allowance against deferred tax assets to reduce the balance to amounts expected to be recoverable.
This evaluation includes the consideration of several factors, including an estimate of the likelihood of generating sufficient
taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past
and projected taxable income and available tax planning strategies. As of December 31, 2016 and June 30, 2016, management believed
that it was more-likely-than not that the results of future operations will generate sufficient taxable income to realize the net
amount of the Company’s deferred tax assets over the periods during which temporary differences reverse.
The Company follows Accounting Standards
Codification (“ASC”) Topic 740-10-25, “Accounting for Uncertainty in Income Taxes” (“ASC 740”).
ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. During the six months ended December 31, 2016, the Company’s
accounting for income taxes in accordance with this standard did not result in any adjustment to the Company’s provision
for income taxes.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
As of December 31, 2016, the Company
was subject to potential federal and state tax examinations for the tax years 2013 through 2016.
Note (7) – Shareholders’ Equity
:
In connection with the Western State Design Acquisition (see Note 3), the Company issued 2,044,990 shares of its common stock to
WSD as Stock Consideration, of which 1,656,486 shares were issued upon closing and 388,504 shares were issued during the quarter
ending March 31, 2017. Additionally, on October 10, 2016, the Company completed the issuance and sale of 1,290,323 shares of its
common stock to Symmetric Capital II LLC for a total purchase price of $6.0 million (the “Private Placement Transaction”)
pursuant to a Securities Purchase Agreement, dated September 7, 2016, between the Company and Symmetric Capital II LLC. The Company
used the $6.0 million of proceeds received from the Private Placement Transaction to fund a portion of the Cash Consideration for
the Western State Design Acquisition. Henry M. Nahmad, the Company’s Chairman, Chief Executive Officer and President, is
the Manager of Symmetric Capital II LLC and has voting power over the shares of the Company’s common stock held by Symmetric
Capital II LLC.
On November 30, 2016, the Company’s Board
of Directors declared a $.10 per share cash dividend (an aggregate of $1.0 million), which was paid on January 6, 2017 to stockholders
of record at the close of business on December 21, 2016. This amount is included in Accounts Payable and Accrued Expenses in the
Condensed Consolidated Balance Sheet as of December 31, 2016.
On November 13, 2015, the Company’s Board
of Directors declared a $.20 per share cash dividend (an aggregate of $1.4 million), which was paid on December 18, 2015 to stockholders
of record at the close of business on December 4, 2015.
Note (8) – Equity Incentive
Plan:
In November 2015, the Company’s stockholders approved the EnviroStar, Inc. 2015 Equity Incentive Plan (the “Plan”).
The Plan authorizes the issuance of up to 1,500,000 shares of the Company’s common stock pursuant to awards granted under
the Plan. The fair value of awards granted under the Plan are expensed on straight-line basis over the vesting period of the awards.
Share-based compensation expense is included in selling, general and administrative expenses in the Company’s consolidated
statements of operations. During the three months ended December 31, 2016, the Company granted 414,762 shares of restricted stock,
a portion of which is scheduled to vest ratably over four years and the reminder of which is scheduled to vest in 24 years. The
grant date fair value of such restricted stock was $5.9 million. The fair value of the restricted stock was determined using the
closing price of the Company’s common stock on the date of grant. Prior to this grant, the Company had not granted any awards
under the Plan.
Note (9) – Transactions with Related
Parties:
The Company’s wholly-owned subsidiary, Steiner-Atlantic Corp. (“Steiner-Atlantic”), leases 27,000
square feet of warehouse and office space from an affiliate of Michael S. Steiner, a director and Executive Vice President and
Chief Operating Officer of the Company, pursuant to a lease agreement dated November 1, 2014. Under the lease, which has a term
of three years, monthly base rental payments were $10,275 during the first year of the lease and $10,580 during the second year
of the lease, and are $10,900 during the third year of the lease. In addition to base rent, Steiner-Atlantic is responsible under
the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Payments under this lease totaled
approximately $68,000 and $66,600 in the first six months of fiscal 2017 and 2016, respectively.
The Company’s wholly-owned subsidiary,
Western State Design, leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a director and
executive officer of the Company, and Tom Marks, an executive officer of the Company, pursuant to a lease agreement dated October
10, 2016. Under the lease, monthly base rental payments are $12,000 during the initial term of the lease. In addition to base rent,
Western State Design is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and
insurance. The lease has an initial term of five years and provides for two successive three-year renewal terms at the option of
Western State Design. Payments under this lease totaled approximately $32,500 in the period from October 10, 2016 through December
31, 2016.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
At December 31, 2016, the Company was owed
$520,000 from an entity that is controlled by Dennis Mack and Tom Marks. These amounts related to payments that were made by the
Company on behalf of this entity in connection with the Western State Design Acquisition. In January 2017, $450,000 of the amount
of above was repaid to the Company.
See also Note 7 for a description of the Private
Placement Transaction between the Company and an affiliate of Henry M. Nahmad, the Company’s Chairman, Chief Executive Officer
and President, which was completed on October 10, 2016.
Note (10) – Recently Issued Accounting
Guidance
: In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts
with Customers (“ASU No. 2014-09”). The standard outlines a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services.” ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017.
Early application is permitted only for annual reporting periods beginning after December 31, 2016. The Company is evaluating the
impact, if any, that adopting this standard may have on its consolidated financial statements.
In December 2015, the FASB issued ASU No. 2015-17,
“Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU No. 2015-17”). The
amendments in ASU No. 2015-17 eliminate the current requirement for organizations to separate deferred tax assets and liabilities
into current and noncurrent amounts in a classified balance sheet. Instead, organizations will be required to classify all deferred
tax assets and liabilities as noncurrent. The standard is effective for annual reporting periods beginning after December
15, 2016. The amendments may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods
presented. The Company is evaluating the impact, if any, that adopting this standard may have on its consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842)” (“ASU No. 2016-02”) which is designed to increase transparency and comparability by
recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The new standard will require an entity to recognize the following for all leases (with the exception of short-term leases) at
the commencement date (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease term. ASU No. 2016-02 is effective for fiscal years beginning after December
15, 2018, with early adoption permitted. The Company is evaluating the impact, if any, that adopting this standard may have on
its consolidated financial statements.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Unaudited)
In March 2016, the FASB issued ASU No. 2016-09,
“Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU
No. 2016-09”), which requires that all income tax effects of awards be recognized in the statement of operations when the
awards vest or settle. The standard also requires presentation of excess tax benefits as an operating activity on the statement
of cash flows rather than as a financing activity. The standard increases the amount companies can withhold to cover income taxes
on awards without triggering liability classification for shares used to satisfy statutory income tax withholding obligations and
requires application of a modified retrospective transition method. ASU No. 2016-09 is effective for interim and annual periods
beginning after December 15, 2016. Early adoption is permitted if all provisions are adopted in the same period. The Company is
evaluating the impact, if any, that adopting this standard may have on its consolidated financial statements.
Management believes the impact of other issued
accounting standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows upon adoption.
Item 2.
|
Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
|
Overview
The Company, through its
wholly-owned subsidiaries, distributes commercial and industrial laundry and dry cleaning equipment and steam and hot water
boilers, supplies replacement parts and accessories, provides maintenance and installation services, and designs and plans turn-key laundry, dry cleaning and boiler systems for its customers, which include
institutional, retail, industrial and commercial customers.
On October 10, 2016 (the “Closing Date”),
the Company, through its wholly-owned subsidiary Western State Design, Inc. (“Western State Design”), completed the
acquisition of substantially all the assets of Western State Design, LLC (“WSD”), a California-based distributor of
commercial and industrial laundry equipment and related parts for new laundry facilities and to the replacement laundry market
(the “Western State Design Acquisition”) for a purchase price consisting of approximately $18.5 million in cash (the
“Cash Consideration”) and 2,044,990 shares of the Company’s common stock (the “Stock Consideration”).
At the closing of the Western State Design Acquisition, the Company paid the $18,500,000 of Cash Consideration, of which $2,800,000
was deposited in an escrow account for no less than 18 months after the Closing Date (subject to extension in certain circumstances)
and issued 1,656,486 shares of the Stock Consideration. The issuance of the remaining 388,504 shares of the Stock Consideration
required stockholder approval under the rules of the NYSE MKT, which was obtained at the Company’s Annual Meeting of Stockholders
held on November 30, 2016. Such shares were issued during the quarter ending March 31, 2017. The Cash Consideration was financed
through $12.5 million of borrowings under a new Credit Facility (as defined below) and $6.0 million of proceeds from the sale of
shares of the Company’s common stock in a Private Placement Transaction (as defined below). As a result of the closing of
the Western State Design Acquisition, the financial condition, including assets and liabilities, and results of operations of the
acquired business following the Closing Date are included in the Company’s consolidated financial statements as of, and for
three and six months ended, December 31, 2016. See Note 3 to the Condensed Consolidated Financial Statements included in Item 1
of this Report for additional information about the Western State Design Acquisition.
In addition, the Company, through an indirect
wholly-owned subsidiary, 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.
Total revenues for the six-month period ended
December 31, 2016 increased by 188% compared to the six-month period ended December 31, 2015. Revenues for the second quarter of
fiscal 2017 increased by 287% compared to the same period of fiscal 2016. Net income for the six and three month periods ended
December 31, 2016 increased by 213% and 251%, respectively, from the same periods of fiscal 2016. The increases in revenues and
net income for the three and six-months ended December 31, 2016 are primarily attributable to the results of operations of Western
State Design following the Western State Design Acquisition, partially offset by $478,000 of costs and interest associated with
the transaction.
Consolidated Financial Condition
The Company’s total assets increased
from $10.2 million at June 30, 2016 to $57.9 million at December 31, 2016. The Company’s total liabilities increased from
$5.1 million at June 30, 2016 to $30.1 million at December 31, 2016. The increase in total assets and liabilities was primarily
attributable to the assets acquired and liabilities assumed by the Company in connection with the Western State Design Acquisition.
Liquidity and Capital Resources
For the six-month period ended December 31,
2016, cash decreased by approximately $1.1 million compared to an increase of approximately $687,000 during the same period of
fiscal 2016. The following summarizes the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):
|
|
Six Months Ended
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Net cash provided (used) by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,486
|
|
|
$
|
2,095
|
|
Investing activities
|
|
$
|
(13,401
|
)
|
|
$
|
(1
|
)
|
Financing activities
|
|
$
|
10,815
|
|
|
$
|
(1,407
|
)
|
For the six-months ended December 31,
2016, operating activities provided cash of approximately $1.5 million compared to approximately $2.1 million during the same period
of fiscal 2016. This $0.6 million decrease in cash provided by operating activities was attributable to uses of cash to fund changes
in working capital, partially offset by an approximately $1.1 million increase in earnings during the six months ended December
31, 2016 compared to the prior year period. Uses of cash to fund changes in working capital were driven primarily by a $6.2 million
increase in accounts receivable due to December 2016 shipments for which payments were not yet due at December 31, 2016, partially
offset by a $4.4 million increase in accounts payable and accrued expenses.
Investing activities used cash of approximately
$13.4 million during the six-month period ended December 31, 2016 in connection with the funding of the Cash Consideration for
the Western State Design Acquisition.
Financing activities provided cash of
approximately $10.8 million in the six-months ended December 31, 2016, which was primarily attributable to borrowings under the
Credit Facility of approximately $12.6 million and $6.0 million of proceeds from the issuance and sale of 1,290,323 shares of the
Company’s common stock in a private placement transaction (the “Private Placement Transaction”), which in each
case was used to finance the Cash Consideration for the Western State Design Acquisition. These sources of cash were partially
offset by $7.7 million of Revolving Line of Credit (as defined below) repayments and the payment of approximately $66,000 in financing
fees in connection with the Credit Facility. Financing activities used cash of approximately $1.4 million in the six-month period
ended December 31, 2015 related to the Company’s payment of a cash dividend to its stockholders.
In connection with the Western State Design
Acquisition, on October 7, 2016, the Company entered into a $20.0 million credit agreement (the “Credit Facility”),
consisting of a $15.0 million revolving line of credit, subject to adjustment as described below (the “Revolving Line of
Credit”), and a $5.0 million term loan (the “Term Loan”). The Company used a total of approximately $12.6 million
of borrowings under the Revolving Line of Credit and Term Loan to finance a portion of the Cash Consideration paid on the Closing
Date for the Western State Design Acquisition, and to pay approximately $66,000 of fees, costs and expenses arising in connection
with entering into the Credit Facility. At December 31, 2016, no amounts were outstanding under the Revolving Line of Credit and
$4.9 million was outstanding under the Term Loan. The Credit Facility replaced the Company’s previous credit facility, which
allowed for borrowings of up to $2.25 million. No amounts were outstanding under such prior credit facility at June 30, 2016 or
at any time during the period from July 1, 2016 through October 7, 2016, when the Credit Facility replaced it.
The Credit Facility has a term of five
years and matures on October 10, 2021. Interest on the outstanding principal amount of borrowings under the Credit Facility accrue
at an annual rate equal to the daily one-month LIBOR, plus (i) 2.25% in the case of borrowings under the Revolving Line of Credit
and (ii) 2.85% in the case of borrowings under the Term Loan. In addition to interest payments, borrowings under the Term Loan
require monthly principal payments of approximately $59,500 over the five-year term, with the balance due upon maturity.
The obligations of the Company under the Credit
Facility are secured by substantially all of the assets of the Company and its subsidiaries. In addition, the Company’s
subsidiaries have jointly and severally guaranteed the performance of the Company’s payment and other obligations under
the Credit Facility. The Credit Facility also contains affirmative covenants which require the Company to meet certain financial
criteria, including a fixed charge coverage ratio, an asset coverage ratio, senior leverage ratio and a total leverage ratio,
as well as other covenants which may restrict, among other things, the Company’s ability to pay dividends, complete merger,
acquisition or similar transactions, make certain capital expenditures, incur certain operating lease expenditures or repurchase
shares of its common stock. Additionally, the amount available to borrow under the Revolving Line of Credit is determined based
on an asset-based formula, which may restrict the amount available for borrowing under the Revolving Line of Credit to an amount
less than the $15.0 million facility amount. At December 31, 2016, the Company was in compliance with all Credit Facility covenants
and $10.8 million was available to borrow under the Revolving Line of Credit.
The Company believes that its existing
cash and cash equivalents, net cash from operations and funds available under the Company’s Credit Facility will be sufficient
to fund its operations and anticipated capital expenditures for at least the next twelve months. The Company may also seek to raise
funds through the issuance of equity and/or debt securities or the incurrence of additional secured or unsecured indebtedness,
including in connection with acquisitions or other transactions consummated by the Company as part of its buy-and-build growth
strategy.
Off-Balance Sheet Financing
The Company had no off-balance sheet financing arrangements
within the meaning of Item 303(a)(4) of Regulation S-K at December 31, 2016.
Results of Operations
Revenues
Revenues for the six and three month
periods ended December 31, 2016 increased by approximately $28.0 million (188%) and $24.8 million (287%), respectively, from the
same periods of fiscal 2016, primarily as a result of the Western State Design Acquisition on October 10, 2016.
Operating Expenses
|
|
Six months ended
|
|
Three months ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
As a percentage of revenues:
|
|
|
|
|
|
|
Cost of sales
|
|
|
78.8%
|
|
|
|
77.6%
|
|
|
|
78.8%
|
|
|
|
78.1%
|
|
As a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
14.6%
|
|
|
|
16.6%
|
|
|
|
14.3%
|
|
|
|
14.9%
|
|
Cost of sales, expressed as a percentage
of revenues, increased to 78.8% for both the six and three-month periods ended December 31, 2016 from 77.6% and 78.1% for the six
and three-month periods ended December 31, 2015, respectively. Cost of sales, expressed as a percentage of revenues, for both periods
of fiscal 2017 compared to the same periods of fiscal 2016 was affected by product mix.
Selling, general and administrative
expenses increased by approximately $3.8 million (153%) and $3.5 million (273%) for the six and three-month periods ended December
31, 2016, respectively, from the same periods of fiscal 2016, primarily as a result of selling, general and administrative expenses
from the consolidation of Western State Design following the Western State Design Acquisition and $478,000 of transaction costs.
As a percentage of revenues, selling, general and administrative expenses were 14.6% and 16.6% for the six-month periods ended
December 31, 2016 and 2015, respectively, and 14.3% and 14.9% for the three-months ended December 31, 2016 and 2015, respectively.
The decreases resulted primarily from the consolidation of Western State Design revenues following the Western State Design Acquisition.
Interest expense, net was approximately
$50,000 for the six and three-months ended December 31, 2016 and represents interest on borrowings under the Credit Facility in
fiscal 2017 in connection with the financing of the Western State Design Acquisition.
The Company’s effective tax rate
was 39.8% and 40.3% for the six and three-months ended December 31, 2016, respectively, compared to 37.7% for both the six and
three-month periods ended December 31, 2015. The increase in the effective tax rate in both the six and three-months periods of
fiscal 2017 reflect higher state taxes in additional operating jurisdictions following the Western State Design Acquisition.
Inflation
Inflation did not have a significant effect on the Company’s
operations during any of the reported periods.
Transactions with Related Parties
The Company’s wholly owned
subsidiary, Steiner-Atlantic, leases 27,000 square feet of warehouse and office space from an affiliate of Michael S.
Steiner, a director and Executive Vice President and Chief Operating Officer of the Company, pursuant to a lease agreement
dated November 1, 2014. Under the lease, which has a term of three years, monthly base rental payments were $10,275 during
the first year of the lease and $10,580 during the second year of the lease, and are $10,900 during the third year of the
lease. In addition to base rent, Steiner-Atlantic is responsible under the lease for costs related to real estate taxes,
utilities, maintenance, repairs and insurance. Payments under this lease totaled approximately $68,000 and $66,600 in the
first six months of fiscal 2017 and 2016, respectively.
The Company’s wholly owned
subsidiary, Western State Design, leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a
director and executive officer of the Company, and Tom Marks, an executive officer of the Company, pursuant to a lease
agreement dated October 10, 2016. Under the lease, monthly base rental payments are $12,000 during the initial term of the
lease. In addition to base rent, Western State Design is responsible under the lease for costs related to real estate taxes,
utilities, maintenance, repairs and insurance. The lease has an initial term of five years and provides for two successive
three-year renewal terms at the option of Western State Design. Payments under this lease totaled approximately $32,500 in
the period from October 10, 2016 through December 31, 2016.
On October 10, 2016, the Company completed
a Private Placement Transaction pursuant to which the Company issued and sold 1,290,323 shares of its common stock to Symmetric
Capital II LLC for a total purchase price of $6,000,000. As previously described, the Company used the $6,000,000 of proceeds received
by it in connection with the Private Placement Transaction to fund a portion of the Cash Consideration for the Western State Design
Acquisition. Henry M. Nahmad, the Company’s Chairman, Chief Executive Officer and President, is the Manager of Symmetric
Capital II LLC and has voting control over the shares of the Company’s common stock held by Symmetric Capital II LLC.
At December 31, 2016, the Company was owed
$520,000 from an entity that is controlled by Dennis Mack and Tom Marks. These amounts related to payments that were made by the
Company on behalf of this entity in connection with the Western State Design Acquisition. In January 2017, $450,000 of the amount
of above was repaid to the Company.
Critical Accounting Policies
In connection with the preparation of its financial
statements, the Company makes estimates and assumptions, including those that affect the reported amounts of assets and liabilities,
contingent assets and liabilities, and the reported amounts of revenues and expenses during the reported periods. Estimates and
assumptions made may not prove to be correct, and actual results may differ from the estimates. The accounting policies that the
Company has identified as critical to its business operations and to an understanding of the Company’s financial statements
remain unchanged from those described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations
section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016, except for the following:
Revenue Recognition
Products are generally shipped Free on Board
(“FOB”) from the Company’s warehouses or drop shipped from the Company’s vendor as FOB, at which time risk
of loss and title passes to the purchaser. Revenue is recognized when there is persuasive evidence that the arrangement, shipment
or delivery has occurred, the price is fixed and determinable, and collectability is reasonably assured. Installation revenues
are recognized when the installation of the equipment has occurred.
There are also instances where the Company
enters into a contract with a customer where the price to the customer includes the sale of the equipment and the related installation.
The installation on these types of contracts is usually completed within six to twelve months. Revenues from these contracts are
recognized under the percentage-of-completion method, measured by the percentage of costs incurred to date against the estimated
total costs for each contract. This method is used because management considers the total cost to be the best available measure
of progress on the contracts. Due to the inherent uncertainties in estimating costs, it is possible that the estimates used may
change in the near term.
Contract costs include all direct material
and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tolls and insurance.
Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability
may result in revisions to costs and income which would be recognized in the period during which the revisions are determined.
Costs and estimated earnings in excess of billings
are classified as other current assets. Billings in excess of costs on uncompleted contracts are classified as current liabilities.
Contract retentions billed are included in accounts receivable.
Revenues from part sales are recognized when
the part is shipped and service revenues are recognized when the service is completed.
Goodwill
The Company evaluates goodwill for impairment
annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable.
The Company tests goodwill for impairment by first comparing the fair value of the reporting unit to its carrying value. If the
fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss.
This step compares the current implied goodwill in the reporting unit to its carrying amount. If the carrying amount of the goodwill
exceeds the implied goodwill, an impairment is recorded for the excess. The Company performs it annual impairment test on April
1.
Recently Issued Accounting Guidance
See Note 10 to the Condensed Consolidated Financial
Statements included in Item 1 of this Report for a description of
Recently Issued Accounting Guidance
.
Forward Looking Statements
Certain statements in this Report are “forward
looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report,
words such as “may,” “should,” “seek,” “believe,” “expect,” “anticipate,”
“estimate,” “project,” “intend,” “strategy” and similar expressions are intended
to identify forward looking statements regarding events, conditions and financial trends that may affect the future plans, operations,
business strategies, operating results and financial position of the Company. Forward looking statements are subject to a number
of known and unknown risks and uncertainties that may cause actual results, trends, performance or achievements of the Company,
or industry trends and results, to differ materially from the future results, trends, performance or achievements expressed or
implied by such forward looking statements. These risks and uncertainties include, among others, those associated with: general
economic and business conditions in the United States and other countries in which the Company’s customers and suppliers
are located; industry conditions and trends; technology changes; competition and other factors which may affect prices which the
Company may charge for its products and its profit margins; the availability and cost of inventory purchased by the Company; the
relative value of the United States dollar to currencies in the countries in which the Company’s customers, suppliers and
competitors are located; changes in, or the failure to comply with, government regulation, including environmental regulations;
the Company’s ability to implement changes in its business strategies and development plans; the availability, terms and
deployment of debt and equity capital if needed for expansion or otherwise; risks relating to the timing of shipments of customers’
orders and the Company’s recognition of revenue relating thereto; risks and uncertainties associated with the Company’s
buy-and-build growth strategy, including that the Company may not be successful in identifying or consummating acquisitions or
other strategic opportunities, that the potential benefits of acquisitions (including the recent acquisition of WSD) may not be
realized to the extent anticipated or at all, integration risks, risks related to indebtedness incurred in connection acquisitions
(including the indebtedness incurred in connection with the recent acquisition of WSD), dilution experienced by the Company’s
stockholders as a result of shares issued by the Company in connection with acquisitions and the financing of acquisitions (including
the recent acquisition of WSD), and risks related to the business, operations and prospects of acquired companies (including WSD);
the impact of accounting standards and updates on the Company’s financial position, results of operations and cash flows;
and other economic, competitive, governmental, technological and other risks and factors discussed in the Company’s filings
with the Securities and Exchange Commission (the “SEC”), including, without limitation, those disclosed in the “Risk
Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016. Many of these
risks and factors are beyond the Company’s control. In addition, past performance and perceived trends may not be indicative
of future results. The Company cautions that the foregoing factors are not exclusive. The Company expressly disclaims any obligation
to update or revise any forward looking statements, whether as a result of new information, future
events
or otherwise, except as required by law.