EVI EVI Industries Inc

Forward Looking Statements

Certain statements in this Quarterly Report on Form 10-Q are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, words such as “may,” “should,” “seek,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “strategy” and similar expressions are intended to identify forward looking statements. Forward looking statements may relate to, among other things, events, conditions and trends that may affect the future plans, operations, business, strategies, operating results, financial position and prospects 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 where the Company operates or where the Company’s customers and suppliers are located; industry conditions and trends; risks relating to the COVID-19 pandemic and the rapidly changing effects thereof and developments with respect thereto, including the impact of the COVID-19 pandemic on the Company and its business, liquidity and results, which in large part will depend on future developments and are highly uncertain and beyond the Company’s control, the length and severity of the COVID-19 pandemic and the pace of recovery following the COVID-19 pandemic, the success of actions taken or which may be taken by the Company in response to the COVID-19 pandemic, volatility in the economy, including in the credit markets, supply chain disruptions, reduced demand for products and services, business restrictions, worker absenteeism, quarantines and other health-related restrictions, governmental and agency orders, mandates and guidance in response to the COVID-19 pandemic, the impact of the COVID-19 pandemic on the Company’s suppliers and customers, the impact of the provisions of the CARES Act on the Company’s income taxes, the potential impairment of goodwill or other intangible assets, and uncertainties regarding the PPP Loans applied for by the Company’s subsidiaries, that the PPP Loans may not be accepted or otherwise received, in whole or in part, and that, if accepted and received, that forgiveness of the PPP Loans may not be obtained, in whole or in part; technology changes; competition, including the Company’s ability to compete effectively and the impact that competition may have on the Company and its results, including the prices which the Company may charge for its products and services and on the Company’s profit margins, and competition for qualified employees; the Company’s ability to implement its business and growth strategies and plans, including changes thereto; risks and uncertainties associated with the Company’s pursuit of acquisitions and other strategic opportunities, including, without limitation, that the Company may not be successful in identifying or consummating acquisitions or other strategic opportunities, integration risks, risks related to indebtedness incurred by the Company in connection with financing acquisitions, dilution experienced by the Company’s existing stockholders as a result of the issuance of shares of the Company’s common stock in connection with acquisitions, risks related to the business, operations and prospects of acquired businesses, risks that suppliers of the acquired business may not consent to the transaction or otherwise continue its relationship with the acquired business following the transaction and the impact that the loss of any such supplier may have on the results of the Company and the acquired business, and risks that the Company’s goals or expectations with respect to acquisitions and other strategic transactions may not be met; market share growth tactics and investments and expenses in pursuit of growth, including those incurred in connection with the Company’s “buy-and-build” growth strategy, or otherwise may not result in the benefits anticipated; risks relating to the impact of pricing concessions and other measures which the Company may take from time to time in connection with its expansion and pursuit of growth, including the impact they may have on gross margin and the Company’s other financial results; risks relating to the Company’s ability to enter into and compete effectively in new industries, as well as risks and trends related to those industries and the costs and timing of the Company’s efforts with respect thereto; risks relating to the Company’s relationships with its principal suppliers and customers, including the impact of the loss of any such relationship; risks that equipment sales may not result in the ancillary benefits anticipated, including that

they may not lead to increases in higher gross margin sale of parts, accessories, supplies, and technical services related to the equipment, and the risk that the benefit of lower gross margin equipment sales under longer-term contracts will not outweigh the possible short-term impact to gross margin; risks related to the Company’s indebtedness; the availability, terms and deployment of debt and equity capital if needed for expansion or otherwise; changes in, or the failure to comply with, government regulation, including environmental regulations; litigation risks, including the costs of defending litigation and the impact of any adverse ruling; 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; risks relating to the recognition of revenue, including the amount and timing of revenue expected to be recognized in future periods and that orders in the Company’s backlog may not be fulfilled as or when expected; risks related to the adoption of new accounting standards and the impact it may have on the Company’s financial statements and results; and other economic, competitive, governmental, technological and other risks and factors discussed in the Company’s filings with the SEC, including, without limitation, those described in the “Risk Factors” section of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. Many of these risks and factors are beyond the Company’s control. In addition, dividends are subject to declaration by the Company’s Board of Directors based on factors deemed relevant by it from time to time, may be restricted by the terms of the Company’s indebtedness, and may not be paid in the future, whether with the frequency or in the amounts previously paid or at all, including, without limitation, in light of the impact of the COVID-19 pandemic. Further, past performance and perceived trends may not be indicative of future results. The Company cautions that the foregoing factors are not exclusive. The reader should not place undue reliance on any forward looking statement, which speaks only as of the date made. The Company does not undertake to, and specifically disclaims any obligation to, update or supplement any forward looking statement, whether as a result of changes in circumstances, new information, subsequent events or otherwise, except as may be required by law.

Company Overview

EVI Industries, Inc., through its wholly-owned subsidiaries (collectively “EVI” or the “Company”), is a value-added distributor, and provides advisory and technical services. Through its vast sales organization, the Company provides its customers with planning, designing, and consulting services related to their commercial laundry operations. The Company sells and/or leases its customers commercial laundry equipment, specializing in washing, drying, finishing, material handling, water heating, power generation, and water reuse applications. In support of the suite of products it offers, the Company sells related parts and accessories. Additionally, through the Company’s robust network of commercial laundry technicians, the Company provides its customers with installation, maintenance, and repair services.

The Company’s customers include retail, commercial, industrial, institutional, and government customers. Product purchases made by customers range from parts and accessories, to single or multiple units of equipment, to large complex systems. The Company also provides its customers with the services described above.

The Company’s operating expenses consist of (a) selling, general and administrative expenses, primarily salaries, and commissions and marketing expenses that are variable and correlate to changes in sales, (b) expenses related to the operation of warehouse facilities, including facility rent, which is payable mostly under non-cancelable operating leases, and the Company’s fleet of installation and service vehicles, and (c) operating expenses at the parent company, including compensation expenses, fees for professional services, expenses associated with being a public company, including increased expenses attributable to the Company’s growth, and expenses in furtherance of the Company’s “buy-and-build” growth strategy.

Growth Strategy; Acquisition History

Prior to the completion of the Company’s first acquisition, the WSD Acquisition (as defined below), pursuant to its “buy-and-build” growth strategy, the Company’s operations consisted primarily of the business and operations of Steiner-Atlantic Corp. (“Steiner-Atlantic”), a wholly-owned subsidiary of the Company. Beginning in 2015, the Company implemented a “buy-and-build” growth strategy and has since acquired the following businesses under such growth strategy:

Acquisitions Completed During the Nine Months Ended March 31, 2020

See Note 3 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding these acquisitions.

Acquisitions Completed Prior to the Current Fiscal Year

Each acquisition described above was effected by the Company, indirectly through a separate wholly-owned subsidiary formed by the Company for the purpose of effecting the transaction and operating the related business following the acquisition, and included both cash consideration and stock consideration in the form of shares of the Company’s common stock. In connection with each asset acquisition, the Company, indirectly through its applicable wholly-owned subsidiary, also assumed certain of the liabilities of the acquired business. The financial position, including assets and liabilities, and results of operations of the acquired businesses following the respective closing dates are included in the Company’s consolidated financial statements.

The “build” component of the Company’s “buy-and-build” growth strategy involves implementing a growth culture at acquired businesses based on the exchange of ideas and business concepts among the management teams of the Company and the acquired businesses as well as through certain initiatives, which may include investments in additional sales and service personnel, new product lines, enhanced service operations and capabilities, new and improved facilities, and advanced technologies.

The Company pursues market share growth using a variety of strategies aimed at increasing the installed base of the wide range of commercial laundry equipment the Company represents. Certain market share growth tactics may, from time to time, result in lower gross margins. However, the Company believes that a greater installed base of equipment strengthens the Company’s existing customer relationships and increases the Company’s total number of customer relationships, consequently creating a larger and stronger customer base to which the Company may sell products and services. These may include certain higher margin products and services and any additional products and services which the Company may offer or sell from time to time as a result of any business acquisitions, the sale or lease of complementary products, and expansion of its service operations. From time to time, the Company also enters into longer-term contracts, including to fulfill large complex laundry projects for divisions of the federal government, where the nature of, and competition for, such contracts may result in a lower gross margin as compared to other equipment sales. Despite the potential for a lower gross margin from such longer-term contracts, the Company believes that the long-term benefit from the increase in its installed equipment will outweigh the possible short-term impact to gross margin.

Finally, it is important to note that, as a value-added distributor and a provider of technical services in the commercial laundry industry, the Company partners with its customers to plan, design, install, and maintain their commercial laundry operations. The nature of the Company’s business not only requires a competent and well-trained sales organization to win customer orders, but also requires proper, timely, and cost-effective installation ranging from single units of equipment to complex multimillion dollar laundry systems. Such installations also require coordination and collaboration with the Company’s customers and any third-parties they may retain. Consequently, the recognition of revenue and profit, from time to time, may be impacted by delays in construction and/or the preparation of customer facilities for the installation of purchased commercial laundry equipment and systems. This may result in decreased revenue and profit in a current period but a source of future revenue and profit through the ultimate fulfillment of the orders.

Impact of COVID-19 on the Company’s Business

With the global outbreak of the novel coronavirus, COVID-19, and the declaration of a pandemic by the World Health Organization on March 11, 2020, the Company is keeping the safety of its associates, customers, and suppliers as a top priority while striving to continue to deliver quality products and exceptional service. The Company is monitoring developments and following appropriate recommendations from health and government authorities while proactively seeking to implement safe behaviors, minimize potential exposures, and facilitate safe and healthy environments in the Company’s facilities and at customer locations.

The COVID-19 pandemic has been, and continues to be, an unprecedented disruption in the economy and has negatively impacted, and is likely to continue to negatively impact, the Company’s business and results. Specifically, the COVID-19 pandemic and accompanying economic disruption have negatively impacted sales and sales contracts, with such decline beginning at the end of the quarter ended March 31, 2020. Accordingly, the Company experienced a decline in revenue for the quarter ended March 31, 2020 compared to the same period of the prior fiscal year. The Company expects this trend to continue in the near-term and possibly longer given that state of the pandemic and, among other matters related thereto, governmental actions, including, without limitation, business restrictions. In response to the negative sales trend, the Company has taken actions to reduce costs and spending across the organization, including changes to inventory stock levels, renegotiating credit terms with suppliers, and reducing hiring activities. The Company continues to actively monitor the COVID-19 pandemic and may take further actions, including those that may alter business operations, if required by federal, state or local authorities or otherwise determined to be advisable by management.

The Company is focused on ensuring ample liquidity to meet business needs as the impact of COVID-19 evolves. To that end, during April 2020, the Company borrowed approximately $9.0 million under its credit facility and certain subsidiaries of the Company applied for loans (the “PPP Loans”) under the Paycheck Protection Program established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the aggregate principal amount of approximately $7.3 million. The Company has not yet received any of the PPP Loans and is evaluating its potential acceptance of the PPP Loans, including in light of current guidance and the anticipation of future guidance with respect to PPP Loans. There can be no assurance that the Company will accept or otherwise receive the PPP Loans in whole or in part. See “Liquidity and Capital Resources” below for additional information regarding the Company’s credit facility and the PPP Loans.

As of the date of this Quarterly Report on Form 10-Q, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Factors arising from the COVID-19 pandemic that have impacted, or may negatively impact, the Company’s business and results, including sales and gross margin, in the future include, but are not limited to: limitations on the ability of suppliers to manufacture, or the Company’s ability to procure from manufacturers, the products the Company sells, or to meet delivery requirements and commitments; limitations on the ability of the Company’s employees to perform their work due to impacts caused by the pandemic or local, state, or federal orders that restrict the Company’s operations or the operations of its customers, or require that the employees be quarantined; limitations on the ability of carriers to deliver products to the Company’s facilities and customers; limitations on the ability of the Company’s customers to conduct their business, purchase products and services and pay for purchases on a timely basis or at all; and decreased demand for products and services.

The situation surrounding COVID-19 remains fluid. The Company is unable to determine or predict the nature, duration, or scope of the overall impact that the COVID-19 pandemic will have on the Company’s business, results of operations, liquidity, or financial condition, as such impact will depend on future developments, including the severity and duration of the pandemic and government and other actions taken in response thereto, all of which are highly uncertain. Further, even after the COVID-19 pandemic has subsides, the Company may continue to experience adverse impacts to its business as a result of, among other things, any economic impact that has occurred or may occur in the future.

See also Part II, Item 1A. - “Risk Factors” of this Quarterly Report on Form 10-Q for further discussion regarding risks related to the COVID-19 pandemic and its impact on, and risks and uncertainties the pandemic poses with respect to, the Company and its business, results, liquidity and financial condition.

Recent Accounting Pronouncements

Refer to Note 2 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently adopted significant accounting policies.

Results of Operations

Nine and Three-Month Periods Ended March 31, 2020 Compared to the Nine and Three-Month Periods Ended March 31, 2019

Revenues

Revenues for the nine and three-month periods ended March 31, 2020 increased $17.9 million, or 11%, and decreased $249,000, or less than 1%, respectively, compared to the same periods of the prior fiscal year. The increase in revenue for the nine-month period was due to the results of operations of acquired businesses whose results for all or part of the nine months ended March 31, 2019 were not included in the Company’s consolidated financial statements for such periods, including Scott Equipment, Washington Automated, and PAC Industries, and the success of certain sales tactics executed by the Company to increase market share. Revenue for the three-month period was flat due primarily to the adverse impact of COVID-19 on revenues beginning at the end of the three-month period, including due to the delay in completion of a number of open sales contracts as a result of shelter-in-place orders and other restrictions, and a decrease in revenues from longer-term contracts due to delays in construction and installation as discussed above, partially offset by the results of operations of acquired businesses.

Gross Profit

Gross profit for the nine and three-month periods ended March 31, 2020 increased $4.9 million, or 13%, and $407,000, or 3%, respectively, compared to the same periods of the prior fiscal year, primarily as a result of increased revenues for the nine-month period and increased gross margin during the three-month period. Gross margins increased from 22.5% to 23.0% and from 22.6% to 23.4% for the nine and three-month periods ended March 31, 2020, respectively, each compared to the same period of the prior fiscal year. The increases were primarily attributed to product and customer mix.

Further, as described above, from time to time the Company enters into longer-term contracts, including to fulfill large complex laundry projects for divisions of the federal government. These contracts generally have a lower gross margin compared to other equipment sales and, as a result, adversely impact the Company’s gross margin for periods in which a significant number of these contracts are entered into. However, the Company believes that these contracts will result in higher margin opportunities over the long-term. During the nine and three month periods ended March 31, 2020 and March 31, 2019, the Company entered into a number of longer-term federal government contracts, which adversely impacted the Company’s gross margin for each such period. In the absence of such longer-term federal government contracts, gross margins for the nine and three-month periods ended March 31, 2020 as compared to the same periods of the prior fiscal year decreased 1.5% to 23.9% and 1.3% to 23.7%, respectively.

Selling, General and Administrative Expenses

Operating expenses increased $7.1 million, or 22%, and $1.2 million, or 9%, for the nine and three-month periods ended March 31, 2020, compared to the same periods of the prior fiscal year. The increase in operating expenses resulted from the Company’s continued execution of its “buy-and-build” growth strategy and other expenses in connection with the Company’s growth and growth initiatives.

The increase in operating expenses is primarily attributable to (a) additional post-acquisition operating expenses associated with acquired businesses not reflected in operating expenses for the prior fiscal year period, (b) additional operating expenses at the acquired businesses in pursuit of future growth and in support of the Company’s growing operations, (c) increases in operating expenses at the parent company level in connection with the Company’s growth, including greater accounting fees and expenses, legal fees, and insurance costs, (d) the addition of sales, service, and operations support professionals and related costs, as total personnel at March 31, 2020 increased by 11% compared to total personnel at March 31, 2019, with 80% of such increase attributable to sales and service related personnel, (e) increased investments in sales, service, and operations related technologies in support of the Company’s “buy-and-build” growth strategy, and (f) an increase in non-cash amortization expense related to the intangible assets the Company acquired in connection with its acquisitions, an increase in depreciation expense and an increase in non-cash share-based compensation.

As a result of the foregoing, operating expenses as a percentage of revenues for the nine and three-month periods ended March 31, 2020 were 21.7% and 22.8%, respectively, compared to 19.7% and 20.8% for the nine and three-month periods ended March 31, 2019, respectively.

Interest Expense

Net interest expense for the nine and three-month periods ended March 31, 2020 were $1.2 million and $343,000, respectively, compared to $942,000 and $403,000, respectively, for the same periods of the prior fiscal year. The increase in net interest expense for the nine-month period is primarily due an increase in average outstanding borrowings, partially offset by a decrease in the average effective interest rate. The decrease in net interest expense for the three-month period is primarily due to a decrease in average outstanding borrowings and a decrease in the average effective interest rate.

Income Taxes

The Company’s effective tax rates were 32.9% and 250.0% for the nine and three-month periods ended March 31, 2020, respectively, compared to 31.7% and 33.8% for the same periods of the prior fiscal year, respectively. The increase in the effective tax rate for the nine and three-month periods ended March 31, 2020 is attributable to an increase in the net impact of permanent book-tax differences resulting primarily from nondeductible compensation, partially offset by lower effective state tax rates from increased apportionment to states with lower tax rates.

Net Income (Loss)

Net income (loss) for the nine and three months ended March 31, 2020 was $831,000 and $(12,000), respectively, compared to net income of $2.5 million and $466,000 for the same periods of the prior fiscal year, respectively. As described above, the increases in revenue and gross profit for the nine-month period were offset by operating expense increases, including increases in (a) operating expenses related to acquired businesses, (b) operating expenses in support of the Company’s buy-and-build efforts and initiatives, and (c) the increase in non-cash charges related to the amortization of intangible assets, depreciation expense and share-based compensation. The impact of the COVID-19 pandemic also contributed to the decrease in net income, particularly with respect to the three-month period ended March 31, 2020.

Consolidated Financial Condition

The Company’s total assets increased from $154.5 million at June 30, 2019 to $158.4 million at March 31, 2020. The increase in total assets was primarily attributable to the adoption of the new lease accounting standard effective July 1, 2019, resulting in the establishment of an operating lease asset, and the assets the Company acquired in connection with the acquisitions consummated by the Company during the nine months ended March 31, 2020, partially offset by a decrease in accounts receivable and contract assets. The Company’s total liabilities decreased from $73.0 million at June 30, 2019 to $71.0 million at March 31, 2020, which was primarily attributable to a decrease in long-term debt offset by the adoption of the new lease accounting standard effective July 1, 2019, resulting in the establishment of an operating lease liability, and an increase in customer deposits.

Liquidity and Capital Resources

For the nine-month period ended March 31, 2020, cash decreased by approximately $1.1 million compared to an increase of approximately $5.4 million during the nine-month period ended March 31, 2019.

Working Capital

Working capital decreased from $37.2 million at June 30, 2019 to $26.9 million at March 31, 2020, primarily reflecting lower levels of accounts receivable and contract assets, an increase in customer deposits and the utilization of cash on hand to pay off long-term debt as well as the adoption of the new lease accounting standard effective July 1, 2019, resulting in the establishment of a current operating lease liability, partially offset by lower levels of accrued employee expenses. The decrease in accounts receivable and increase in customer deposits was primarily attributable to the timing of collection of payments and more stringent standards regarding the extension of credit on new sales amid the COVID-19 pandemic. The decrease in contract assets is due to decreased amounts that were owed related to progress billing on longer-term contracts.

The individual items contributing to cash flow changes for the periods presented are detailed in the unaudited condensed consolidated statements of cash flows included in Item 1 of this Quarterly Report on Form 10-Q.

Operating Activities

For the nine months ended March 31, 2020, operating activities provided cash of $14.3 million compared to cash used by operating activities of $9.6 million during the nine months ended March 31, 2019. This $23.9 million increase in cash provided by operating activities was primarily attributable to changes in working capital, including a decrease in accounts receivable, inventory and contract assets and an increase in customer deposits, partially offset by a decrease in accounts payable and accrued expenses.

Investing Activities

Net cash used in investing activities decreased $10.2 million to $4.1 million during the nine months ended March 31, 2020 compared to $14.3 million during the nine months ended March 31, 2019. This $10.2 million decrease was primarily attributable to a decrease in cash used for acquisitions, partially offset by an increase in cash used for capital expenditures. The increase in capital expenditures is due in part to expenses in furtherance of certain growth initiatives, including primarily expenditures related to the laundry route and rental business in which certain of the Company’s subsidiaries are engaged.

Financing Activities

For the nine months ended March 31, 2020, financing activities used cash of $11.3 million compared to cash provided by financing activities of $29.3 million during the nine months ended March 31, 2019. This $40.6 million increase in cash used by financing activities was primarily attributable to the cash provided by operating activities during the nine months ended March 31, 2020 which were used to make debt repayments in excess of proceeds from borrowings compared to proceeds from borrowings in excess of debt repayments during the nine months ended March 31, 2019. Borrowings during the nine months ended March 31, 2019 were used primarily to fund the changes in working capital during such period and the cash consideration paid in connection with the acquisitions consummated by the Company during such period.

Revolving Credit Agreement

On November 2, 2018, the Company entered into a syndicated credit agreement (the “2018 Credit Agreement”) for a revolving credit facility with a five-year term and a maximum aggregate principal amount of up to $100 million, with an accordion feature to increase the revolving credit facility by up to $40 million for a total of $140 million. The Company uses borrowings under the revolving credit facility to fund in part its working capital needs, acquisitions, dividends (if and to the extent declared by the Company’s Board of Directors), capital expenditures, amounts paid to satisfy tax withholding obligations upon the vesting of certain restricted stock awards, issuances of letters of credit, and for other general corporate purposes. The obligations of the Company under the 2018 Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries, and are guaranteed, jointly and severally, by certain of the Company’s subsidiaries. The 2018 Credit Agreement replaced the Company’s previous credit facility, which was repaid in full with borrowings of $20.8 million under the 2018 Credit Agreement.

Borrowings (other than swingline loans) under the 2018 Credit Agreement bear interest at a rate, at the Company’s election at the time of borrowing, equal to (a) LIBOR plus a margin that ranges from 1.25% to 1.75% depending on the Company’s consolidated leverage ratio, which is a ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Consolidated Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the one month LIBOR rate plus 100 basis points (such highest rate, the “Base Rate”), plus a margin that ranges from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. Swingline loans bear interest calculated at the Base Rate plus a margin that ranges from 0.25% to 0.75% depending on the Consolidated Leverage Ratio.

The 2018 Credit Agreement contains certain covenants, including financial covenants requiring the Company to comply with maximum leverage ratios and minimum interest coverage ratios. The 2018 Credit Agreement also contains other provisions which may restrict the Company’s ability to, among other things, dispose of or acquire assets or businesses, incur additional indebtedness, make certain investments and capital expenditures, pay dividends, repurchase shares and enter into transactions with affiliates. The Company believes that it is in compliance with its covenants under the 2018 Credit Agreement and $10.0 million was available to borrow under the revolving credit facility at March 31, 2020.

The Company is focused on ensuring ample liquidity to meet business needs as the impact of COVID-19 evolves. To that end, on April 1, 2020, the Company borrowed approximately $9.0 million under the Company’s existing 2018 Credit Agreement. In addition, on April 15, 2020, certain subsidiaries of the Company applied for loans totaling approximately $7.3 million in principal amount (the “PPP Loans”) from Fifth Third Bank, N.A., under the Paycheck Protection Program (“PPP”) which was established under the CARES Act. The Company has not yet received any of the PPP Loans and is evaluating its potential acceptance of the PPP Loans, including in light of current guidance and the anticipation of future guidance with respect to PPP Loans. There can be no assurance that the Company will accept or otherwise receive the PPP Loans in whole or in part.

Loans under the PPP have a term of two years and provide for an interest rate of 1.00%, which is deferred for the first six months of the term of the loan, and can be prepaid in whole or in part at any time without penalty. Pursuant to the terms of the CARES Act, the proceeds of loans made under the PPP may be used for payroll costs, rent or utility costs, and each borrower can apply for and be granted forgiveness for all or a portion of the loan. Any such forgiveness is not assured and will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act, as described above, during the 8-week period after loan origination and the maintenance or achievement of certain employee levels, as well as approval by the lender and the U.S. Small Business Administration, which is administering the PPP under the CARES Act. The Company believes that its existing cash and cash equivalents, anticipated cash from operations and funds available under the 2018 Credit Agreement will be sufficient to fund its operations and anticipated capital expenditures for at least the next twelve months. While market conditions are not currently favorable in light of the current economic environment and the Company has no plans to do so, the Company may in the future 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 pursued or consummated by the Company as part of its “buy-and-build” growth strategy. As described above, certain subsidiaries of the Company have applied for approximately $7.3 million of PPP Loans, although there is no assurance that any or all of such funds will be accepted or otherwise received.

As previously described, the Company has in place an equity incentive plan, the EVI Industries, Inc. 2015 Equity Incentive Plan (the “Plan”), pursuant to which restricted stock and other equity-based awards and cash awards may be granted to participants in the Plan. Upon request by a holder of restricted stock granted under the Plan, the Company may issue shares upon vesting net of the statutory withholding requirements that the Company pays on behalf of its employees. For financial statement purposes, the shares withheld are treated as being repurchased by the Company and reduce additional paid-in capital within shareholders’ equity and are reflected as repurchases in the Company’s condensed consolidated statements of cash flows and shareholders’ equity as they reduce the number of shares that would have been issued upon vesting. During the nine months ended March 31, 2020 and 2019, share repurchases related to shares withheld upon the vesting of previously granted restricted stock awards were approximately $425,000 and $359,000, respectively.

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 March 31, 2020.

Inflation

Inflation did not have a significant effect on the Company’s results during any of the reported periods.

Transactions with Related Parties

Certain of the Company’s subsidiaries lease warehouse and office space from one or more of the principals of those subsidiaries. These leases include the following:

The Company’s wholly-owned subsidiary, Steiner-Atlantic, leases 28,000 square feet of warehouse and office space from an affiliate of Michael S. Steiner, President of Steiner-Atlantic and a former director and officer of the Company, pursuant to a lease agreement dated November 1, 2014, as amended. The lease term was extended during January 2020 to run through October 31, 2020. Monthly base rental payments under the lease are $12,000. 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 $111,000 and $108,000 during the nine months ended March 31, 2020 and 2019, respectively.

On October 10, 2016, the Company’s wholly-owned subsidiary, Western State Design, Inc. (“Western State Design”), entered into a lease agreement pursuant to which it leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a director and Executive Vice President, Corporate Strategy of the Company, and Tom Marks, Executive Vice President, Business Development of the Company. 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 the Company. Payments under this lease totaled approximately $108,000 during each of the nine months ended March 31, 2020 and 2019.

On October 31, 2017, the Company’s wholly-owned subsidiary, Tri-State Technical Services, Inc. (“Tri-State”), entered into lease agreements pursuant to which it leases a total of 81,000 square feet of warehouse and office space from an affiliate of Matt Stephenson, President of Tri-State. Monthly base rental payments total $21,000 during the initial terms of the leases. In addition to base rent, Tri-State is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $189,000 during each of the nine months ended March 31, 2020 and 2019.

On February 9, 2018, the Company’s wholly-owned subsidiary, AAdvantage Laundry Systems, Inc. (“AAdvantage”), entered into a lease agreement pursuant to which it leases a total of 5,000 square feet of warehouse and office space from an affiliate of Mike Zuffinetti, Chief Executive Officer of AAdvantage. Monthly base rental payments are $3,950 during the initial term of the lease. In addition to base rent, AAdvantage 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 the Company. During February 2018, AAdvantage entered into a month-to-month lease agreement with an affiliate of Mike Zuffinetti for a total of 17,000 square feet of warehouse and office space. Monthly base rental payments under this lease were $13,500. This month-to-month lease was terminated on October 31, 2018. In addition, on November 1, 2018, AAdvantage entered into a lease agreement pursuant to which it leases warehouse and office space from an affiliate of Mike Zuffinetti. Monthly base rental payments were $26,000 initially. Pursuant to the lease agreement, on January 1, 2019, the lease expanded to cover additional warehouse space and, in connection therewith, monthly base rental payments increased to $36,000. In addition to base rent, AAdvantage 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 the Company. Payments under the leases described in this paragraph totaled approximately $360,000 and $220,000 during the nine months ended March 31, 2020 and 2019, respectively.

On September 12, 2018, the Company’s wholly-owned subsidiary, Scott Equipment, entered into lease agreements pursuant to which it leases a total of 18,000 square feet of warehouse and office space from an affiliate of Scott Martin, President of Scott Equipment. Monthly base rental payments total $11,000 during the initial terms of the leases. In addition to base rent, Scott Equipment is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $103,000 and $77,000 during the nine months ended March 31, 2020 and 2019, respectively.

On February 5, 2019, the Company’s wholly-owned subsidiary, PAC Industries, entered into two lease agreements pursuant to which it leases a total of 29,500 square feet of warehouse and office space from an affiliate of Frank Costabile, President of PAC Industries, and Rocco Costabile, Director of Finance of PAC Industries. Monthly base rental payments total $14,600 during the initial terms of the leases. In addition to base rent, PAC Industries is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of four years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $132,000 and $29,000 during the nine months ended March 31, 2020 and 2019, respectively.

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 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, 2019, except with respect to the adoption of the new lease accounting standard as described in Note 2 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Recently Issued Accounting Guidance

See Note 10 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a description of Recently Issued Accounting Guidance.