|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
General
The following discussion
should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto contained in Item 8
of this Report. See also “Forward Looking Statements” preceding Part I, Item 1 of this Report.
Overview
The Company, through its
wholly-owned subsidiaries, sells, leases and rents 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, government
and commercial customers. These activities are conducted in the United States, Canada, the Caribbean and Latin America. Historically,
the Company’s operations related to these activities consisted solely of the business and operations of Steiner-Atlantic
Corp., a wholly-owned subsidiary of the Company (“Steiner-Atlantic”). However, beginning in 2015, the Company implemented
a “buy-and-build” growth strategy and has acquired or, as indicated, entered into a definitive agreement to acquire,
the following businesses under such growth strategy.
On October 10, 2016, the
Company, through its wholly-owned subsidiary, Western State Design, Inc. (“Western State Design”), completed the acquisition
(the “Western State Design Acquisition”) of substantially all the assets of Western State Design, LLC (“WSD”),
a California-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance
services to the new and replacement segments of the commercial, industrial and vended laundry industry, for a purchase price consisting
of $18.5 million in cash and 2,044,990 shares of the Company’s common stock. The cash consideration was financed through
$12.5 million of borrowings under the credit facility entered into at the time (the “Credit Facility) and $6.0 million of
proceeds from the sale of 1,290,323 shares of the Company’s common stock to Symmetric Capital II LLC (“Symmetric Capital
II”) in a private placement transaction (the “Private Placement Transaction”). Henry M. Nahmad, the Company’s
Chairman, Chief Executive Officer, President and controlling stockholder, is the Manager of, and may be deemed to control, Symmetric
Capital II. Pursuant to the Asset Purchase Agreement, the Company, indirectly through Western State Design, also assumed certain
of the liabilities of WSD. The financial condition, including assets and liabilities, and results of operations of the acquired
business following the October 10, 2016 closing date are included in the Company’s consolidated financial statements as of,
and for the fiscal years ended, June 30, 2017 and June 30, 2018.
On June 19, 2017, the Company,
through its wholly-owned subsidiary, Martin-Ray Laundry Systems Inc. (“Martin-Ray”), completed the acquisition (the
“Martin-Ray Acquisition”) of substantially all of the assets of Martin-Ray Laundry Systems, Inc. (“MRLS”),
a Colorado-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance
services to the new and replacement segments of the commercial, industrial and vended laundry industry. The consideration for the
transaction consisted of $2.0 million in cash and 98,668 shares of the Company’s common stock. The Company funded the cash
consideration with cash on hand. Pursuant to the Asset Purchase Agreement, the Company, indirectly through Martin-Ray, also assumed
certain of the liabilities of MRLS. The financial condition, including assets and liabilities, and results of operations of the
acquired business following the June 19, 2017 closing date are included in the Company’s consolidated financial statements
as of, and for the fiscal years ended, June 30, 2017 and June 30, 2018.
On October 31, 2017, the
Company through its wholly-owned subsidiary, Tri-State Technical Services, Inc. (“Tri-State”), completed the acquisition
(the “Tri-State Acquisition”) of substantially all of the assets of Tri-State Technical Services, Inc. (“TSTS”),
a Georgia-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance
services to the new and replacement segments of the commercial, industrial and vended laundry industry. The consideration
paid
by the Company in connection with the acquisition consisted of $7.95 million in cash and 338,115 shares of the Company’s
common stock. The Company funded the cash consideration with borrowings under the Company’s Credit Facility, which was amended
at the time to, among other things, increase the borrowing limit. Pursuant to the Asset Purchase Agreement, the Company, indirectly
through Tri-State, also assumed certain of the liabilities of TSTS. The financial condition, including assets and liabilities,
and results of operations of the acquired business following the October 31, 2017 closing date are included in the Company’s
consolidated financial statements as of, and for the fiscal year ended, June 30, 2018.
In addition, on February
9, 2018, the Company, through its wholly-owned subsidiary, AAdvantage Laundry Systems, Inc. (“AAdvantage”), completed
the acquisition (the “AA Acquisition”) of substantially all of the assets of Zuf Acquisitions I LLC d/b/a AAdvantage
Laundry Systems (“Zuf”) for approximately $11.0 million and Sky-Rent LP (collectively with Zuf, “AA”) for
approximately $6.0 million. AAdvantage is based in Dallas and distributes commercial, industrial, and vended laundry products and
provides installation and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry
industry. The consideration paid by the Company in connection with the AA Acquisition consisted of approximately $8.1 million in
cash (subject to working capital and other preliminary adjustments) and 348,360 shares of the Company’s common stock. The
Company funded the cash consideration with borrowings under the Company’s Credit Facility, which was amended at the time
to, among other things, increase the borrowing limit. Pursuant to the Asset Purchase Agreement, the Company, indirectly through
AAdvantage, also assumed certain of the liabilities of AA. The financial condition, including assets and liabilities, and results
of operations of the acquired business following the February 9, 2018 closing date are included in the Company’s consolidated
financial statements as of, and for the fiscal year ended, June 30, 2018.
See Note 3 to the Consolidated
Financial Statements included in Item 8 of this Report for additional information about the Western State Design Acquisition, the
Martin-Ray Acquisition, the Tri-State Acquisition and the AA Acquisition.
On September 4, 2018, the
Company, through its wholly-owned subsidiary, Industrial Laundry Services, Inc. (“Industrial Laundry Services”), completed
the acquisition (the “ILS Acquisition”) of substantially all of the assets of Industrial Laundry Services LLC (“ILS”),
a Florida-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance
services to the new and replacement segments of the commercial, industrial and vended laundry industry. The consideration paid
by the Company in connection with the acquisition consisted of cash and stock and was immaterial to the Company on a consolidated
basis. Pursuant to the Asset Purchase Agreement, the Company, indirectly through Industrial Laundry Services, also assumed certain
of the liabilities of ILS.
On September 12, 2018,
the Company, through its wholly-owned subsidiary, Scott Equipment Inc. (“Scott Equipment”), completed the acquisition
(the “SEI Acquisition”) of substantially all of the assets Scott Equipment, Inc. (“SEI”), a Texas-based
distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance services to the
new and replacement segments of the commercial, industrial and vended laundry industry. The consideration paid by the Company in
connection with the SEI Acquisition consisted of $6.5 million in cash (subject to certain working capital and other adjustments)
and 209,678 shares of the Company’s common stock. The Company funded the cash consideration with borrowings under the Company’s
Credit Facility. Pursuant to the Asset Purchase Agreement, the Company, indirectly through Scott Equipment, also assumed certain
of the liabilities of SEI.
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 fiscal year ended June 30, 2018 (“fiscal 2018”) increased by 60% compared
to the fiscal year ended June 30, 2017 (“fiscal 2017”). Net income for fiscal 2018 increased by 25% from fiscal 2017.
The increases in revenues and net income during fiscal
2018 are primarily attributable to the consolidation in the Company’s results for fiscal 2018 of the results of operations
of Martin-Ray, which was acquired in June 2017, as well as the results of operations of Tri-State following the Tri-State Acquisition
in October 2017 and AAdvantage following the AA Acquisition in February 2018. The results of operations of these acquired businesses
were not included in the Company’s financial statements for fiscal 2017 other than approximately 10 days of results for Martin-Ray.
In addition, the Company’s fiscal 2018 results include a full year of results of Western State Design as opposed to approximately
nine months of Western State Design results during fiscal 2017
Consolidated Financial Condition
The Company’s total
assets increased from $57.1 million at June 30, 2017 to $95.5 million at June 30, 2018. The Company’s total liabilities increased
from $24.9 million at June 30, 2017 to $38.4 million at June 30, 2018. The increase in total assets and liabilities was primarily
attributable to the assets acquired and liabilities assumed by the Company in connection with the Tri-State Acquisition and the
AA Acquisition during fiscal 2018.
Liquidity and Capital
Resources
The Company had
cash and cash equivalents of approximately $1.3 million at June 30, 2018 compared to $727,000 at June 30, 2017. The increase in
cash was primarily due to earnings from operations, changes in operating accounts and proceeds from borrowings partially offset
by cash used to fund the cash consideration paid in connection with the Tri-State Acquisition and the AA Acquisition as well as
a $1.4 million dividend paid during January 2018. The following table summarizes the Company’s Consolidated Statements of
Cash Flows (in thousands):
|
|
Fiscal Years Ended June 30,
|
|
Net cash (used) provided by:
|
|
2018
|
|
|
2017
|
|
Operating activities
|
|
$
|
11,345
|
|
|
$
|
2,590
|
|
Investing activities
|
|
$
|
(14,181
|
)
|
|
$
|
(14,945
|
)
|
Financing activities
|
|
$
|
3,439
|
|
|
$
|
9,140
|
|
For fiscal 2018,
operating activities provided cash of approximately $11.3 million compared to approximately $2.6 million in fiscal 2017. This
$8.8 million increase in cash provided by operating activities was primarily attributable to changes in working capital and a
$799,000 increase in net income.
Investing activities
used cash of approximately $14.2 million during fiscal 2018 in connection with the funding of the cash consideration paid in connection
with the Tri-State Acquisition and the AA Acquisition and capital expenditures.
Financing activities provided
cash of approximately $3.4 million in fiscal 2018, which was primarily attributable to borrowings under the Credit Facility of
approximately $71.6 million. Borrowings under the Credit Facility of $7.9 million and $8.1 million were used to finance the cash
consideration for the Tri-State Acquisition and AA Acquisition, respectively. The balance of the Credit Facility borrowings were
used for general corporate purposes. These sources of cash were partially offset by $66.1 million of repayments of amounts borrowed
under the Revolving Line of Credit (as defined below) portion of the Credit Facility, $1.4 million related to the Company’s
payment of a cash dividend to its stockholders and $707,000 in share purchases to settle employee tax withholding liabilities
upon the vesting of restricted shares.
In connection with the
Western State Design Acquisition, on October 7, 2016, the Company entered into a $20.0 million 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, including approximately $88,000 of fees, costs and expenses arising in connection
with entering into the Credit Facility, to finance a portion of the cash consideration paid in connection with the Western State
Design Acquisition.
In connection with the
Tri-State Acquisition, the Company’s Credit Facility was amended on October 30, 2017. Pursuant to the amendment, the Company
received an additional approximately $2.8 million of borrowings under the Term Loan and, in connection therewith, the maximum borrowing
limit of the Credit Facility was increased from $20.0 million to approximately $22.2 million and the minimum required monthly payments
under the Term Loan (as described below) were increased from $60,000 to $100,000. The Company used a total of approximately $7.9
million of borrowings under the Revolving Line of Credit and Term Loan to fund the cash consideration paid in connection with the
Tri-State Acquisition.
In connection with the
AA Acquisition, the Company’s Credit Facility was further amended on February 8, 2018. Pursuant to the amendment, the Company
received an additional approximately $5.0 million of borrowings under the Revolving Line of Credit and, in connection therewith,
the maximum borrowing limit of the Revolving Line of Credit was increased from $15.0 million to approximately $20.0 million. Pursuant
to the terms of the Credit Facility, however, the amount of permitted borrowings under the Revolving Line of Credit is also subject
to a cap determined using an asset-based formula, which may limit the amount available for borrowing. The Company used a total
of approximately $8.1 million of borrowings under the Revolving Line of Credit to fund the cash consideration paid in connection
with the AA Acquisition.
At June 30, 2018, $3.7
million was outstanding under the Revolving Line of Credit and $6.4 million was outstanding under the Term Loan. At June 30, 2017,
no amounts were outstanding under the Revolving Line of Credit and $4.5 million was outstanding under the Term Loan.
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 accrues 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. As of June 30, 2018, the effective rates for the
Revolving Line and Term Loan were 4.34% and 4.94%, respectively. In addition to interest payments, the Company is required to
make monthly principal payments on borrowings outstanding under the Term Loan, with the balance due upon maturity. As of June
30, 2018, the required principal payments were $100,000 per month.
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, a 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. At June 30, 2018, the Company was in compliance with all Credit Facility covenants and
$12.2 million was available to borrow under the Revolving Line of Credit.
The Company believes that
its existing cash and cash equivalents, anticipated cash from operations and funds available under the Company’s Credit
Facility or which the Company anticipates may be available for borrowing under future credit facilities 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. The Company has received a commitment letter for a new credit facility in excess of its current Credit Facility. If
the Company receives such financing, it is expected that the Company will pay-off its current Credit Facility in full. The financing
contemplated by the commitment letter is subject to certain conditions, including the execution of definitive credit instruments,
and there is no assurance that such conditions will be satisfied or that the Company will otherwise receive such financing or
any other financing which the Company may seek to obtain in the future on acceptable terms or at all.
Off-Balance Sheet Financing
As of June 30, 2018,
the Company had no off-balance sheet financing arrangements within the meaning of Item 303(a)(4) of Regulation S-K.
Results of Operations
Revenues
Revenues for fiscal
2018 increased by approximately $56.0 million (60%) from fiscal 2017. The increase in revenues was primarily due to the results
of Martin-Ray, which was acquired on June 19, 2017, Tri-State, which was acquired on October 31, 2017, and AAdvantage, which was
acquired on February 9, 2018. In addition, our revenues for fiscal 2018 include a full year of revenues of Western State Design,
which was acquired on October 10, 2016, as compared to approximately nine months of results of Western State Design for fiscal
2017.
Operating Expenses
|
|
Fiscal Year Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
As a percentage of revenues:
|
|
|
|
|
|
|
Cost of sales, net
|
|
|
75.7%
|
|
|
|
78.4%
|
|
As a percentage of revenues:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
19.7%
|
|
|
|
15.9%
|
|
Cost of sales, expressed
as a percentage of revenues, decreased to 75.7% in fiscal 2018 from 78.4% in fiscal 2017, primarily due to changes in product mix.
Selling, general
and administrative expenses increased by approximately $14.6 million (97%) in fiscal 2018 compared to fiscal 2017. As a percentage
of revenues, selling, general and administrative expenses increased to 19.7% in fiscal 2018 from 15.9% in fiscal 2017. These increases
are primarily due to the consolidation of selling, general and administrative expenses of Western State Design, Martin-Ray, Tri-State
and AAdvantage, in each case, following the respective closing dates of the acquisitions of such businesses, an increase in amortization
expense related to intangible assets, and an increase in non-cash share-based compensation. Additionally, the Company’s
rapid growth and the increase in the Company’s market capitalization resulted in new and increased expenses at the parent-company
level. More specifically, the Company incurred an increase in accounting fees as a result of the processes undertaken in connection
with the requirement that management’s report on the Company’s internal control over financial reporting be subject
to auditor attestation beginning with this Form 10-K, an increase in insurance costs, and an increase in personnel and related
compensation expenses. These costs and expenses are in support of the Company’s long-term buy and build growth strategy.
Interest expense,
net was approximately $552,000 in fiscal 2018 compared to approximately $160,000 of interest expense, net in fiscal 2017, and
represents interest on borrowings under the Credit Facility. The increase was primarily attributed to an increase in outstanding
debt and corresponding interest rates.
The Company’s
effective income tax rate was 37.9% for fiscal 2018 compared to 38.9% in fiscal 2017. The decrease in the effective income tax
rate in fiscal 2018 reflects lower taxes as a result of the
enactment in December 2017 of the Tax Act, as defined and described
in further detail below under “Critical Accounting Policies – Income Taxes,” partially offset by permanent book-tax
differences resulting from nondeductible compensation.
Inflation
Inflation did not
have a significant effect on the Company’s operations during either of fiscal 2018 or 2017.
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, as amended. The term of the lease runs through December 31, 2018. 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 $137,000 and $139,000 during fiscal
2018 and 2017, respectively.
On October 10, 2016,
the Company’s wholly-owned subsidiary, 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 of
the Company, and Tom Marks, an Executive Vice President 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 $144,000 and $88,000 during
fiscal 2018 and 2017, respectively.
On June 19, 2017,
the Company’s wholly-owned subsidiary, Martin-Ray, entered into a lease agreement pursuant to which it leases 10,000 square
feet of warehouse and office space from an affiliate of Jim Hohnstein, President of Martin-Ray. Monthly base rental payments are
$6,500 during the initial term of the lease. In addition to base rent, Martin-Ray is responsible under the lease for costs related
to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial term of three years and provides
for two successive three-year renewal terms at the option of the Company. Payments under this lease totaled approximately $78,000
during fiscal 2018.
On October 31, 2017,
the Company’s wholly-owned subsidiary, 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 $168,000
during fiscal 2018.
On February 9, 2018,
the Company’s wholly-owned subsidiary, 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. In addition, 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 are $13,500. Payments under these leases totaled approximately $87,000 during
fiscal 2018.
On October 10, 2016, the
Company sold 1,290,323 shares of its common stock to Symmetric Capital II LLC for a total purchase price of $6.0 million, which
the Company used to fund a portion of the cash consideration paid in connection with 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.
Critical Accounting Policies
Use of Estimates
In
connection with the preparation of its financial statements in accordance with generally accepted accounting principles in the
United States (“GAAP”), 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 are set forth below. The critical accounting policies discussed below are not intended to be a comprehensive
list of all of the Company’s accounting policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP, with no need for management’s judgment in their application. There are also areas in which
management’s judgment in selecting any available alternative would not produce a materially different result.
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 for revenue from these contracts because
management considers the total cost to be the best available measure of progress on such 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 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. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative
assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying
value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to
its fair 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 performed
its annual impairment test on April 1 and determined there was no impairment.
Customer Relationships,
Tradenames and Other Intangible Assets
Customer relationships,
tradenames, and other intangible assets are stated at cost less accumulated amortization. These assets are amortized on a straight-line
basis over the estimated future periods to be benefited (5-10 years). The Company reviews the recoverability of intangible assets
that are amortized based primarily upon an analysis of undiscounted cash flows from the intangible assets. In the event the expected
future net cash flows become less than the carrying amount of the assets, an impairment loss would be recorded in the period the
determination is made based on the fair value of the related assets.
Income Taxes
The Company follows
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, “Income
Taxes” (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are
recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. If it is determined that it is more likely than not that some portion of a deferred tax asset
will not be realized, a valuation allowance is recognized.
Significant judgment
is required in developing the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation
allowances that might be required against the deferred tax assets. Management evaluates the Company’s ability to realize
its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is more likely than not
that the asset will not be realized.
The Company follows
ASC Topic 740-10-25, “Accounting for Uncertainty in Income Taxes,” which contains a two-step approach to recognizing
and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight
of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more
than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its
tax positions and tax benefits, which may require periodic adjustments and which may not accurately reflect actual outcomes. At
June 30, 2018 and 2017, the Company does not believe that there are any unrecognized tax benefits related to tax positions taken
on its income tax returns. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits,
if and when required, as part of interest expense and general and administrative expense, respectively, in the Company’s
consolidated statements of operations. The Company is subject to examination by U.S. federal and state authorities for the tax
years including and subsequent to 2014.
On December 22,
2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the
“Tax Act”). The Tax Act represents significant U.S. federal tax reform legislation that includes a permanent reduction
to the U.S. federal corporate income tax rate. The changes included in the Tax Act are broad and complex. The impact of the Tax
Act on the Company’s financial statements as of and for the fiscal year ended June 30, 2018 is considered provisional until
the necessary information is available and the Company can complete its assessment and calculations. The final impact of the Tax
Act may differ from the impact based on the Company’s current estimates, possibly materially, due to, among other things,
changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes
in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to the
Company’s estimates. The SEC has issued rules that would allow for a measurement period of up to one year after the enactment
date of the Tax Act to finalize the recording of the related tax impacts. See Note 12 to the Consolidated Financial Statements
included in Item 8 of this Report for additional information regarding income taxes.
Recently Issued Accounting Guidance
See Note 2 to the Consolidated
Financial Statements included in Item 8 of this Report for a description of
Recently Issued Accounting Guidance
.
Item 8. Financial Statements and Supplementary Data.
EnviroStar,
Inc. and Subsidiaries
Index
to Consolidated Financial Statements
|
Page
|
Reports of Independent Registered Public Accounting Firms
|
28
|
Consolidated Balance Sheets at June 30, 2018 and 2017
|
30
|
Consolidated Statements of Operations for the years ended June 30, 2018 and 2017
|
32
|
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2018 and 2017
|
33
|
Consolidated Statements of Cash Flows for the years ended June 30, 2018 and 2017
|
34
|
Notes to Consolidated Financial Statements
|
35
|
Report of Independent
Registered Public Accounting Firm
Shareholders and Board
of Directors
EnviroStar, Inc.
Miami, Florida
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheet of EnviroStar, Inc. (the “Company”) and subsidiaries as of
June 30, 2018, the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended
June 30, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
and subsidiaries at June 30, 2018, and the results of their operations and their cash flows for the year ended June 30, 2018
,
in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of June 30, 2018, based on criteria established in
Internal Control – Integrated
Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) and our report dated September 13, 2018 expressed an unqualified opinion thereon.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit
in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We
believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s
auditor since 2018.
Miami, Florida
September 13, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders of
EnviroStar, Inc.:
We have audited the accompanying consolidated balance sheet of EnviroStar,
Inc. and Subsidiaries (the “Company") as of June 30, 2017, and the related consolidated statements of operations, shareholders’
equity, and cash flows for the year then ended. The financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial position of EnviroStar, Inc. and Subsidiaries as of
June 30, 2017 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ EisnerAmper LLP
EISNERAMPER LLP
Fort Lauderdale, Florida
September 28, 2017
EnviroStar, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per
share data)
ASSETS
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,330
|
|
|
$
|
727
|
|
Accounts receivable, net of allowance for doubtful accounts of $233 and $150, respectively
|
|
|
16,026
|
|
|
|
13,638
|
|
Inventories, net
|
|
|
15,350
|
|
|
|
7,677
|
|
Vendor deposits
|
|
|
606
|
|
|
|
1,393
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
1,012
|
|
|
|
86
|
|
Other current assets
|
|
|
2,050
|
|
|
|
279
|
|
Total current assets
|
|
|
36,374
|
|
|
|
23,800
|
|
|
|
|
|
|
|
|
|
|
Equipment and improvements, net
|
|
|
2,983
|
|
|
|
1,272
|
|
Intangible assets, net
|
|
|
15,775
|
|
|
|
7,160
|
|
Goodwill
|
|
|
37,061
|
|
|
|
24,753
|
|
Other assets
|
|
|
3,281
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
95,474
|
|
|
$
|
57,135
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements
EnviroStar, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per
share data)
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
11,742
|
|
|
$
|
12,317
|
|
Accrued employee expenses
|
|
|
4,248
|
|
|
|
1,546
|
|
Customer deposits
|
|
|
11,624
|
|
|
|
4,457
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
259
|
|
|
|
2,146
|
|
Current portion of long-term debt
|
|
|
1,195
|
|
|
|
714
|
|
Total current liabilities
|
|
|
29,068
|
|
|
|
21,180
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
558
|
|
|
|
—
|
|
Long-term debt, net
|
|
|
8,817
|
|
|
|
3,731
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
38,443
|
|
|
|
24,911
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; authorized shares – 200,000; none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $.025 par value; authorized shares – 20,000,000; 11,239,656 shares issued at June 30, 2018 and 10,499,481 shares issued at June 30, 2017, including shares held in treasury
|
|
|
281
|
|
|
|
262
|
|
Additional paid-in capital
|
|
|
49,950
|
|
|
|
27,018
|
|
Retained earnings
|
|
|
7,511
|
|
|
|
4,948
|
|
Treasury stock, 52,686 shares, at cost, at June 30, 2018 and 31,768 shares, at cost, at June 30, 2017
|
|
|
(711
|
)
|
|
|
(4
|
)
|
Total shareholders’ equity
|
|
|
57,031
|
|
|
|
32,224
|
|
Total liabilities and shareholders’ equity
|
|
$
|
95,474
|
|
|
$
|
57,135
|
|
The accompanying notes are an integral part
of these consolidated financial statements
EnviroStar, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
|
|
For the year
ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
150,007
|
|
|
$
|
93,978
|
|
Cost of sales
|
|
|
113,501
|
|
|
|
73,639
|
|
Gross profit
|
|
|
36,506
|
|
|
|
20,339
|
|
Selling, general and administrative expenses
|
|
|
29,572
|
|
|
|
14,989
|
|
Operating income
|
|
|
6,934
|
|
|
|
5,350
|
|
Interest expense, net
|
|
|
552
|
|
|
|
160
|
|
Income before provision for income taxes
|
|
|
6,382
|
|
|
|
5,190
|
|
Provision for income taxes
|
|
|
2,416
|
|
|
|
2,023
|
|
Net income
|
|
$
|
3,966
|
|
|
$
|
3,167
|
|
Net earnings per share – basic
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share – diluted
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
EnviroStar, Inc. and Subsidiaries
Consolidated Statements of Shareholders’
Equity
(In thousands, except share data)
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury Stock
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Cost
|
|
|
Earnings
|
|
|
Total
|
|
Balance at June 30, 2016
|
|
|
7,065,500
|
|
|
$
|
177
|
|
|
$
|
2,095
|
|
|
|
31,768
|
|
|
$
|
(4
|
)
|
|
$
|
2,821
|
|
|
$
|
5,089
|
|
Dividends paid ($.10 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,040
|
)
|
|
|
(1,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in connection with Western State Design Acquisition
|
|
|
2,044,990
|
|
|
|
51
|
|
|
|
16,002
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to Symmetric Capital II
|
|
|
1,290,323
|
|
|
|
32
|
|
|
|
5,968
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in connection with Martin-Ray Acquisition
|
|
|
98,668
|
|
|
|
2
|
|
|
|
2,532
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
421
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,167
|
|
|
|
3,167
|
|
Balance at June 30, 2017
|
|
|
10,499,481
|
|
|
|
262
|
|
|
|
27,018
|
|
|
|
31,768
|
|
|
|
(4
|
)
|
|
|
4,948
|
|
|
|
32,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid ($.12 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,403
|
)
|
|
|
(1,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,918
|
|
|
|
(707
|
)
|
|
|
—
|
|
|
|
(707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares
|
|
|
53,700
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in connection with Tri-State Acquisition
|
|
|
338,115
|
|
|
|
8
|
|
|
|
9,019
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in connection with AA Acquisition
|
|
|
348,360
|
|
|
|
9
|
|
|
|
12,340
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,575
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,966
|
|
|
|
3,966
|
|
Balance at June 30, 2018
|
|
|
11,239,656
|
|
|
$
|
281
|
|
|
$
|
49,950
|
|
|
|
52,686
|
|
|
$
|
(711
|
)
|
|
$
|
7,511
|
|
|
$
|
57,031
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
EnviroStar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Years ended June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,966
|
|
|
$
|
3,167
|
|
Adjustments to reconcile net income to net cash and cash equivalents
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,579
|
|
|
|
576
|
|
Amortization of debt discount
|
|
|
18
|
|
|
|
10
|
|
Bad debt expense
|
|
|
105
|
|
|
|
61
|
|
Share-based compensation
|
|
|
1,575
|
|
|
|
421
|
|
Inventory reserve
|
|
|
77
|
|
|
|
52
|
|
Provision (benefit) for deferred income taxes
|
|
|
681
|
|
|
|
(3
|
)
|
Gain on sale of assets
|
|
|
—
|
|
|
|
15
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,773
|
|
|
|
(2,390
|
)
|
Inventories
|
|
|
(1,884
|
)
|
|
|
(838
|
)
|
Vendor deposits
|
|
|
826
|
|
|
|
1,356
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
(926
|
)
|
|
|
(86
|
)
|
Other assets
|
|
|
(533
|
)
|
|
|
1,055
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(4,320
|
)
|
|
|
2,040
|
|
Accrued employee expenses
|
|
|
2,702
|
|
|
|
335
|
|
Customer deposits
|
|
|
5,593
|
|
|
|
(1,439
|
)
|
Billings in excess of costs on uncompleted contracts
|
|
|
(1,887
|
)
|
|
|
(1,742
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
11,345
|
|
|
|
2,590
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(829
|
)
|
|
|
(237
|
)
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(13,352
|
)
|
|
|
(14,708
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14,181
|
)
|
|
|
(14,945
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(1,403
|
)
|
|
|
(1,040
|
)
|
Proceeds from borrowings
|
|
|
71,628
|
|
|
|
25,934
|
|
Debt repayments
|
|
|
(66,079
|
)
|
|
|
(21,666
|
)
|
Payment of debt issuance costs
|
|
|
—
|
|
|
|
(88
|
)
|
Proceeds from issuance of common shares to related party
|
|
|
—
|
|
|
|
6,000
|
|
Purchase of shares
|
|
|
(707
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,439
|
|
|
|
9,140
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
603
|
|
|
|
(3,215
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
727
|
|
|
|
3,942
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
1,330
|
|
|
$
|
727
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
499
|
|
|
$
|
152
|
|
Cash paid for income taxes
|
|
$
|
1,223
|
|
|
$
|
1,843
|
|
Supplemental disclosure of non-cash financing activities
|
|
|
|
|
|
|
|
|
Common stock issued for acquisitions
|
|
$
|
21,376
|
|
|
$
|
18,587
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. General
Nature of Business
|
EnviroStar, Inc., indirectly through its subsidiaries (EnviroStar, Inc. and its subsidiaries, collectively, the “Company”), distributes commercial and industrial laundry and dry cleaning equipment and steam and hot water boilers manufactured by others, supplies related replacement parts and accessories, provides installation and maintenance services to its customers and designs turn-key laundry, dry cleaning and boiler systems for its customers, which include institutional, retail, industrial, government and commercial customers. The Company reports its results of operations through a single operating and reportable segment.
|
Historically, the Company’s
operations related to these activities consisted solely of the business and operations of Steiner-Atlantic Corp. (“Steiner-Atlantic”),
a wholly-owned subsidiary of the Company. However, beginning in 2015, the Company implemented a “buy-and-build” growth
strategy and has acquired or, as indicated, entered into a definitive agreement to acquire, the following businesses under such
growth strategy. On October 10, 2016, the Company, through its wholly-owned subsidiary, Western State Design, Inc. (“Western
State Design”), completed the acquisition (the “Western State Design Acquisition”) of substantially all the
assets of Western State Design, LLC (“WSD”), a California-based distributor of commercial, industrial, and vended
laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry, for a purchase price consisting of $18.5 million in cash and 2,044,990 shares of the Company’s
common stock. The assets and liabilities and results of operations of Western State Design following the October 10, 2016 closing
date are included in the Company’s consolidated financial statements as of, and for the fiscal years ended, June 30, 2017
and June 30, 2018. On June 19, 2017, the Company, through its wholly owned subsidiary, Martin-Ray Laundry Systems Inc. (“Martin-Ray”),
completed the acquisition (the “Martin-Ray Acquisition”) of substantially all of the assets of Martin-Ray Laundry
Systems, Inc. (“MRLS”), a Colorado-based distributor of commercial, industrial, and vended laundry products and provider
of installation and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry
industry for a purchase price consisting of $2.0 million in cash and 98,668 shares of the Company’s common stock. The assets
and liabilities and results of operations of Martin-Ray following the June 19, 2017 closing date are included in the Company’s
consolidated financial statements as of, and for the fiscal years ended, June 30, 2017 and June 30, 2018. On October 31, 2017,
the Company, through its wholly-owned subsidiary, Tri-State Technical Services, Inc. (“Tri-State”), completed the
acquisition (the “Tri-State Acquisition”) of substantially all of the assets of Tri-State Technical Services, Inc.
(“TSTS”), a Georgia-based distributor of commercial, industrial, and vended laundry products and provider of installation
and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry for a purchase
price consisting of $7.95 million in cash and 338,115 shares of the Company’s common stock. The assets and liabilities and
results of operations of Tri-State following the October 31, 2017 closing date are included in the Company’s consolidated
financial statements as of, and for the fiscal year ended, June 30, 2018. On February 9, 2018, the Company, through its wholly-owned
subsidiary, AAdvantage Laundry Systems, Inc. (“AAdvantage”), completed the acquisition (the “AA Acquisition”)
of substantially all of the assets of Zuf Acquisitions I LLC d/b/a/ AAdvantage Laundry Systems (“Zuf”) and Sky-Rent
LP (collectively with Zuf “AA”). AAdvantage is a based in Dallas and distributes commercial, industrial, and vended
laundry products and provides installation and maintenance services to the new and replacement segments of the commercial, industrial
and vended laundry industry. The total purchase price for the acquired business was $8.1 million in cash and 348,360 shares of
the Company’s common stock. The assets and liabilities and results of operations of AAdvantage following the February 9,
2018 closing date are included in the Company’s consolidated financial statements as of, and for the fiscal year ended,
June 30, 2018. See Note 3 for additional information regarding the Western State Design Acquisition, the Martin-Ray Acquisition,
the Tri-State Acquisition and the AA Acquisition.
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
See also Note 20 for information regarding
the acquisition of substantially all of the assets of Industrial Laundry Services, Inc. (“Industrial Laundry Services”),
a Florida-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance
services to the new and replacement segments of the commercial, industrial and vended laundry industry, which was completed during
September 2018.
In September 2018, the Company also
completed the acquisition of substantially all of the assets and assumed certain of the liabilities of Scott Equipment, Inc. (“Scott
Equipment”), a Texas-based distributor of commercial, industrial, and vended laundry products and provider of installation
and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry. The total
purchase price for the acquired business was $6.5 million in cash (subject to certain working capital and other adjustments) and
209,678 shares of the Company’s common stock.
In connection with each acquisition,
the Company, indirectly through its wholly-owned subsidiary, also assumed certain of the liabilities related to the acquired business.
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. The operations of this subsidiary are not significant to the
consolidated Company.
2. Summary
of Significant Accounting Policies
Principles of Consolidation
|
The accompanying consolidated financial statements include the accounts of EnviroStar, Inc. and its subsidiaries, all of which are wholly-owned. Intercompany transactions and balances have been eliminated in consolidation.
|
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
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 for revenue from these contracts because
management considers the total cost to be the best available measure of progress on such 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 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 in other current assets. Billings in excess of costs on uncompleted contracts are
classified as current liabilities. Contract retentions billed are included in accounts receivable.
Costs, estimated earnings and billings
on percentage of completion contracts as of June 30, 2018 and 2017 consisted of the following (in thousands):
June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
5,286
|
|
|
$
|
20,088
|
|
Estimated earnings
|
|
|
1,072
|
|
|
|
6,031
|
|
Less: billings to date
|
|
|
(5,605
|
)
|
|
|
(28,179
|
)
|
Ending balance
|
|
$
|
753
|
|
|
$
|
(2,060
|
)
|
These amounts are included in
the Company’s consolidated balance sheets under the following captions (in thousands):
June 30,
|
|
2018
|
|
|
2017
|
|
Costs and estimated earnings in excess of billings (Other current assets)
|
|
$
|
1,012
|
|
|
$
|
86
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
(259
|
)
|
|
|
(2,146
|
)
|
Ending balance
|
|
$
|
753
|
|
|
$
|
(2,060
|
)
|
Revenues from part sales are
recognized when the part is shipped and service revenues are recognized when the service is completed.
Goodwill
|
Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of net assets acquired in a business combination. 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. Goodwill is tested for impairment at the reporting unit level by first performing a
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
qualitative assessment to determine
whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the
reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair 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 performed its annual impairment
test on April 1, 2018 and determined there was no impairment.
Accounts Receivable
|
Accounts receivable are customer obligations due
under what management believes to be customary trade terms. The Company sells its products primarily to laundry
plants, hotels, motels, cruise lines, hospitals, nursing homes, government institutions, vended laundry stores and
distributors and dry cleaning stores and chains. Such receiveables may include retainage provisions, under which a portion of
the contract amount (generally, from 5% to 20% of billings) can be withheld from the Company until the work has been
completed and accepted by the customer. The Company performs continuing credit evaluations of its customers’ financial
condition and depending on the terms of credit, the amount of the credit granted and management’s history with a
customer, the Company may require the customer to grant a security interest in the purchased equipment as collateral for the
receivable. Management reviews accounts receivable on a regular basis to determine if any amounts will potentially
be uncollectible. The Company includes any balances that are determined to be uncollectible in its overall
allowance for doubtful accounts. If customary attempts to collect a receivable are not successful, the receivable
is then written off. The Company’s allowance for doubtful accounts was $233,000 at June 30, 2018 and
$150,000 at June 30, 2017. Actual write-offs might vary from the recorded allowance.
|
Cash and Cash Equivalents
|
The Company considers all short term, high liquid investments that are readily convertible to cash with an original maturity of three months or less to be cash equivalents.
|
Inventories
|
Inventories consist principally of equipment inventories and spare part inventories. Equipment inventories are valued at the lower of cost, determined on the specific identification method, or market. Spare part inventories are valued at the lower of average cost or net realizable value.
|
Equipment, Improvements and Depreciation
|
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on straight-line methods over useful lives of five to seven years for furniture and equipment and the shorter of ten years or remaining lease term (including renewal periods that are deemed reasonably assured) for leasehold improvements. Repairs and maintenance costs are expensed as incurred.
|
Customer-Related Intangibles, Tradenames and Other Intangible Assets
|
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other” (“ASC 350”), which requires that finite-lived intangibles be amortized over their estimated useful life while indefinite-lived intangibles and goodwill not be amortized. Customer-related intangibles, non-compete, and other finite-lived intangible assets are stated at cost less accumulated amortization, and are amortized on a straight-line basis over the estimated future periods to be benefited (5-10 years). The Company also evaluates indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company performed its annual impairment test on April 1, 2018 and determined there was no impairment.
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Asset Impairments
|
ASC Topic 360, “Property, Plant, and Equipment” (“ASC 360”) and ASC 350 require the Company to periodically review the carrying amounts of its long-lived assets, including property, plant and equipment and finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of their carrying amount or fair value less estimated costs to sell. The Company has concluded that there was no impairment of long-lived assets in fiscal 2018 or fiscal 2017.
|
Estimates
|
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates on an ongoing basis. Estimates which may be particularly significant to the Company’s consolidated financial statements include those relating to the determination of impairment of assets (including goodwill and intangible assets), the useful life of property and equipment, net realizable value of inventory, the residual value of leased equipment, the recoverability of deferred income tax assets, allowances for doubtful accounts, intangible assets, estimates of contract percentage of completion, the carrying value of inventories and long-lived assets, the timing of revenue recognition, and sales returns and allowances. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the recognition of revenues and expenses and the carrying value of assets and liabilities that are not readily apparent from other sources. Assumptions and estimates may, however, prove to have been incorrect, and actual results may differ from these estimates.
|
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 common stock subject to unvested
restricted stock awards 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. During the fiscal
year ended June 30, 2018 (“fiscal 2018”) and the fiscal year ended June 30, 2017 (“fiscal 2017”), the
Company issued awards of 66,226 and 890,576 shares of restricted stock, respectively, under the EnviroStar, Inc. 2015 Equity Incentive
Plan (see Note 19). Such shares are deemed to constitute a second class of stock for accounting purposes. Basic and diluted earnings
per share for fiscal 2018 and fiscal 2017 are computed as follows (in thousands except per share data):
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
For the years ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,966
|
|
|
$
|
3,167
|
|
Less: distributed and undistributed income allocated
to non-vested restricted common stock
|
|
|
295
|
|
|
|
248
|
|
Net income allocated to EnviroStar, Inc. shareholders
|
|
$
|
3,671
|
|
|
$
|
2,919
|
|
Weighted average shares outstanding used in basic
earnings per share
|
|
|
10,840
|
|
|
|
9,449
|
|
|
|
|
|
|
|
|
|
|
Dilutive common share equivalents
|
|
|
437
|
|
|
|
88
|
|
Weighted average shares outstanding used in dilutive
earnings per share
|
|
|
11,277
|
|
|
|
9,537
|
|
Basic earnings per share
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
Diluted earnings per share
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
At June 30, 2018, other than 437,000
unvested shares subject to restricted stock awards, there were no potentially dilutive securities outstanding. The remaining 466,148
shares of restricted common stock were not included in the calculation of diluted earnings per share because their impact was
anti-dilutive. At June 30, 2017, other than 88,000 shares subject to restricted stock awards, there were no potentially dilutive
securities outstanding. The remaining 802,576 shares of restricted common stock were not included in the calculation of diluted
earnings per share because their impact was anti-dilutive.
Supplier Concentration
|
The Company purchases laundry, dry cleaning equipment, boilers and other products from a number of manufacturers and suppliers. Purchases from four of these manufacturers accounted for a total of approximately 76% of the Company’s purchases for fiscal 2018 and approximately 59% of the Company’s purchases for fiscal 2017.
|
Advertising Costs
|
The Company expenses the cost of advertising as of the first date an advertisement is run. The Company incurred approximately $164,000 and $60,000 of advertising costs for fiscal 2018 and 2017, respectively, which are included in selling, general and administrative expenses in the consolidation statements of operations.
|
Shipping and Handling
|
Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through cost of sales as inventories are sold. Shipping and handling costs associated with the delivery of products is included in selling, general and administrative expenses.
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fair Value of Certain Current Assets and Current Liabilities
|
Fair value is the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants at the measurement date. The inputs used to measure
fair value are prioritized based on a three-level hierarchy. The three levels of inputs used to measure fair value are as follows:
|
|
·
|
Level 1 - Quoted prices in active markets for identical assets and liabilities.
|
|
·
|
Level 2 - Observable inputs other than quoted prices included in Level 1. This includes dealer
and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are
observable or can be corroborated by observable market data.
|
|
·
|
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities. This includes discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.
|
The Company has no assets or liabilities that
are adjusted to fair value on a recurring basis. The Company did not have any assets or liabilities measured at fair value on
a nonrecurring basis, except for certain assests acquired and liabilities assumed in a business combination (as described in Note
3), during fiscal 2018 or 2017.
The Company’s cash and cash equivalents,
accounts receivable and accounts payable, are reflected in the accompanying consolidated financial statements at cost, which approximated
estimated fair value, using Level 1 inputs, as they are maintained with various high-quality financial institutions and have original
maturities of three months or less. The fair value of the Company’s indebtedness was estimated using Level 2 inputs based
on quoted prices for those or similar debt instruments using applicable interest rates as of June 30, 2018 and approximate the
carrying value of such debt because it accrues interest at variable rates that are repriced frequently.
Customer Deposits
|
Customer deposits represent advances paid by customers when placing orders for equipment with the Company.
|
Net Investment in Sales Type Leases
|
The Company derives a portion of its revenue from leasing arrangements. Such arrangements provide for monthly payments covering the equipment sales, maintenance, and interest. These arrangements meet the criteria to be accounted for as sales type leases. Accordingly, the equipment sale is recognized upon delivery of the system and acceptance by the customer. Upon the recognition of revenue, an asset is established for the investment in sales type leases. Maintenance revenue and interest are recognized monthly over the lease term.
|
Income Taxes
|
The Company
follows ASC Topic 740, “Income Taxes” (“ASC 740”). Under the asset and liability method of ASC 740, deferred
tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. If it is determined that it is more likely than not that some portion
of a deferred tax asset will not be realized, a valuation allowance is recognized.
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Significant judgment
is required in developing the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation
allowances that might be required against the deferred tax assets. Management evaluates the Company’s ability to realize
its deferred tax assets on a quarterly basis and adjusts the valuation allowance when it believes that it is more likely than not
that the asset will not be realized. There were no valuation allowance adjustments during fiscal 2018 or fiscal 2017.
The Company follows ASC Topic 740-10-25
“Accounting for Uncertainty in Income Taxes,” which contains a two-step approach to recognizing and measuring uncertain
tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely
of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions
and tax benefits, which may require periodic adjustments and which may not accurately reflect actual outcomes. The Company does
not believe that there are any unrecognized tax benefits related to tax positions taken on its income tax returns. The Company’s
policy is to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of interest expense
and general and administrative expense, respectively, in the consolidated statements of operations.
On December 22, 2017, the U.S. government enacted comprehensive
tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act represents significant
U.S. federal tax reform legislation that includes a permanent reduction to the U.S. federal corporate income tax rate. The changes
included in the Tax Act are broad and complex. The impact of the Tax Act on the Company’s financial statements as of and
for the fiscal year ended June 30, 2018 is considered provisional until the necessary information is available and the Company
can complete its assessment and calculations. The final impact of the Tax Act may differ from the impact based on the Company’s
current estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative
action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related
interpretations in response to the Tax Act, or any updates or changes to the Company’s estimates. The SEC has issued rules
that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of
the related tax impacts.
Recently Issued Accounting Guidance
|
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606), as subsequently amended
(“ASU 2014-09”). The standard outlines a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and will supersede 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.” This standard is effective for the Company beginning with its financial statements for the
fiscal year ending June 30, 2019, including interim periods therein. The Company will adopt ASU 2014-09 using the modified retrospective
approach. The adoption of this standard will not have a material impact on the amount and timing of our revenue recognition.
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In July 2015, the FASB issued ASU No.
2015-11, “Simplifying the Measurement of Inventory (Topic 330)” ("ASU 2015-11"). ASU 2015-11 requires that
inventory within the scope of its guidance be measured at the lower of cost and net realizable value instead of at the lower of
cost or market (with market being defined as replacement cost and having a ceiling of net realizable value and a floor of net realizable
value less a normal profit margin). For a public entity, the amendments in ASU 2015-11 became effective, in a prospective manner,
for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company
adopted this standard effective July 1, 2017. The adoption of this standard did not have a material impact on the Company’s
consolidated financial statements.
In February 2016, the FASB issued ASU
No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which is designed to increase transparency and comparability
by requiring the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of certain additional
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 2016-02 is effective for fiscal
years beginning after December 15, 2018 (the fiscal year ending June 30, 2020 for the Company), with early adoption permitted.
The Company is evaluating the impact, if any, that adopting this standard may have on its consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
(“ASU 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 the 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 2016-09 became effective for annual reporting
periods beginning after December 15, 2016 (and interim periods therein). The Company adopted this standard effective July 1, 2017.
The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU
No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which
is designed to simplify the subsequent measurement of goodwill. The new guidance will eliminate the second step from the goodwill
impairment test required in computing the implied fair value of goodwill. Instead, under the amendment, an entity will be required
to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount
and, if applicable, the entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the charge recognized should not exceed the total amount of goodwill allocated to that reporting
unit. If applicable, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the
reporting unit when performing the goodwill impairment test. The amendments in this guidance are effective for public business
entities for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 (the fiscal
year ending June 30, 2021 for the Company), with early adoption permitted. The Company is currently evaluating the impact, if any,
that adopting this guidance may have on its consolidated financial statements.
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Management does not believe the impact
of other issued accounting standards and updates, which are not yet effective, will have a material impact on the Company’s
consolidated financial position, results of operations or cash flows upon adoption.
Reclassifications
|
Certain prior year amounts in the
consolidated financial statements have been reclassified to conform to the current year’s presentation.
|
3. Acquisitions
|
Western State Design Acquisition
|
As previously described, on October
10, 2016, the Company completed the Western State Design Acquisition pursuant to which the Company, through its wholly-owned subsidiary,
Western State Design, purchased substantially all the assets of WSD, a California-based distributor of commercial, industrial,
and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry, for a purchase price consisting of $18.5 million in cash and 2,044,990 shares of the Company’s
common stock. The cash consideration was financed through $12.5 million of borrowings under the Credit Facility entered into at
the time (as described in Note 13) and $6.0 million of proceeds from the sale of 1,290,323 shares of the Company’s common
stock to Symmetric Capital II LLC (“Symmetric Capital II”) in a private placement transaction. Henry M. Nahmad, the
Company’s Chairman, Chief Executive Officer, President and controlling stockholder, is the Manager of, and may be deemed
to control, Symmetric Capital II. Pursuant to the Asset Purchase Agreement, the Company, indirectly through Western State Design,
also assumed certain of the liabilities of WSD.
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 consolidated statement of operations for the fiscal year
ended June 30, 2017. The total purchase price 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 ASC 805,
Business Combinations
. Under the acquisition method of accounting, the aggregate consideration, or “purchase price
consideration,” in the Western State Design Acquisition was 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 the purchase price
consideration and the allocation thereof to the net assets acquired are presented in the following tables (in thousands):
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Purchase price consideration:
|
|
|
|
Cash consideration, net of cash acquired
(a)
|
|
$
|
13,394
|
|
Stock consideration
(b)
|
|
|
16,053
|
|
Total purchase price consideration, net of cash acquired
|
|
$
|
29,447
|
|
|
|
|
|
|
(a) Includes
$18.5 million, 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.
|
|
|
|
|
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Allocation of purchase price consideration:
|
|
|
|
Accounts receivable
|
|
$
|
8,597
|
|
Inventory
|
|
|
3,429
|
|
Other assets
|
|
|
2,623
|
|
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
|
|
|
7,308
|
|
Goodwill
|
|
|
22,139
|
|
Total
|
|
$
|
29,447
|
|
|
|
|
|
|
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. Customer-related intangible assets and covenants not to 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.
Martin-Ray Acquisition
On June 19, 2017, the Company
completed the Martin-Ray Acquisition pursuant to which the Company, through its wholly owned subsidiary, Martin-Ray, purchased
substantially all of the assets and assumed certain of the liabilities of MRLS, a Colorado-based distributor of commercial, industrial,
and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry. The consideration for the transaction consisted of $2.0 million in cash and 98,668 shares
of the Company’s common stock. The Company funded the cash consideration with cash on hand. The Martin-Ray Acquisition was
treated for accounting purposes as a purchase of MRLS using the acquisition method of accounting in accordance with ASC 805,
Business
Combinations
, pursuant to which the consideration paid by the Company was 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 Company allocated $2.6 million
to goodwill, $0.6 million to customer-related intangibles, $0.3 million to the Martin-Ray trade name and $0.1 million to a covenant
not to compete.
The goodwill is expected to be
amortized and deductible for tax purposes over 15 years.
Tri-State Acquisition
On October 31, 2017, the Company,
indirectly through Tri-State, the Company’s wholly-owned subsidiary, completed the Tri-State Acquisition pursuant to which
it purchased substantially all of the assets of TSTS for a purchase price consisting of
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
approximately $7,952,000 in cash and 338,115
shares of the Company’s common stock. The Company used borrowings under its Credit Facility, which was amended in connection
with the acquisition to, among other things, increase the borrowing limit (as described in Note 13), to fund the cash consideration.
Fees and expenses related to the Tri-State Acquisition, consisting primarily of legal and other professional fees, totaled approximately
$137,000 and are classified as selling, general and administrative expenses in the Company’s consolidated statement of operations
for the fiscal year ended June 30, 2018. The Company, indirectly through Tri-State, also assumed certain of the liabilities of
TSTS. The total purchase price was $17.3 million, which included cash acquired of $1.8 million.
The Tri-State Acquisition was
treated for accounting purposes as a purchase of TSTS using the acquisition method of accounting in accordance with ASC 805,
Business
Combinations
. Under the acquisition method of accounting, the aggregate consideration in the Tri-State Acquisition is 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 the purchase price consideration and the preliminary allocation of the consideration to the net
assets acquired are presented in the following tables (in thousands):
Purchase price consideration:
|
|
|
|
Cash consideration, net of cash acquired
(a)
|
|
$
|
6,474
|
|
Stock consideration
(b)
|
|
|
9,027
|
|
Total purchase price consideration, net of cash acquired
|
|
$
|
15,501
|
|
|
|
|
|
|
(a) Includes $8,250,000 paid net of $1.8
million of cash acquired.
(b) Calculated as 338,115 shares of
the Company’s common stock, multiplied by $26.70, the closing price of the Company’s common stock on the closing date.
|
|
|
|
|
|
Allocation of purchase price consideration:
|
|
|
|
Accounts receivable
|
|
$
|
3,416
|
|
Inventory
|
|
|
3,050
|
|
Other assets
|
|
|
1,565
|
|
Property, plant and equipment
|
|
|
805
|
|
Intangible assets
|
|
|
5,200
|
|
Accounts payable and accrued expenses
|
|
|
(2,220
|
)
|
Customer deposits
|
|
|
(1,289
|
)
|
Total identifiable net assets
|
|
|
10,527
|
|
Goodwill
|
|
|
4,974
|
|
Total
|
|
$
|
15,501
|
|
|
|
|
|
|
The Company is continuing its
valuation of the intangible assets acquired, which are subject to adjustment in accordance with the Asset Purchase Agreement.
Accordingly, the purchase price allocation set forth above 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 the net assets acquired at the closing date is obtained during the post-closing measurement period of up to one year. The Company
is still assessing certain working capital items.
Intangible assets consist of
$1.5 million allocated to the Tri-State trade name and $3.7 million allocated to customer-related intangible assets. The Tri-State
trade name is indefinite-lived and therefore not subject to amortization. The Tri-State trade name will be evaluated for impairment
annually or more frequently if 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 will be
amortized over 10 years.
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 Tri-State Acquisition.
AA Acquisition
On February 9, 2018, the Company,
indirectly through AAdvantage, the Company’s wholly-owned subsidiary, completed the AA Acquisition pursuant to which it purchased
substantially all of the assets of AA for a total purchase price consisting of approximately $8.1 million in cash (subject to working
capital and other preliminary adjustments) and 348,360 shares of the Company’s common stock. As described in Note 13, the
Company entered into an amendment to its Credit Facility in connection with the AA Acquisition and used borrowings under the Credit
Facility to fund the cash consideration. Fees and expenses related to the AA Acquisition, consisting primarily of legal and other
professional fees, totaled approximately $160,000 and are classified as selling, general and administrative expenses in the Company’s
consolidated statement of operations for the fiscal year ended June 30, 2018. The Company, indirectly through AAdvantage, also
assumed certain of the liabilities of AA. The total purchase price was $20.4 million, which included cash
acquired of $0.9 million.
The AA Acquisition was treated
for accounting purposes as a purchase of AA using the acquisition method of accounting in accordance with ASC 805,
Business
Combinations
. Under the acquisition method of accounting, the aggregate consideration in the AA Acquisition is 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 the purchase price consideration and the preliminary allocation of the consideration to the net assets
acquired are presented in the following tables (in thousands):
Purchase price consideration:
|
|
|
|
Cash consideration, net of cash acquired
(a)
|
|
$
|
7,175
|
|
Stock consideration
(b)
|
|
|
12,349
|
|
Total purchase price consideration, net of cash acquired
|
|
$
|
19,524
|
|
|
|
|
|
|
(a) Includes $8,119,000 paid at
closing (inclusive of a preliminary working capital adjustment) net of $0.9 million of cash acquired.
(b) Calculated as 348,360 shares of
the Company’s common stock, multiplied by $35.45, the closing price of the Company’s common stock on the closing date.
|
|
|
|
|
|
Allocation of purchase price consideration:
|
|
|
|
Accounts receivable
|
|
$
|
2,850
|
|
Inventory
|
|
|
2,816
|
|
Other assets
|
|
|
2,966
|
|
Property, plant and equipment
|
|
|
771
|
|
Intangible assets
|
|
|
4,300
|
|
Accounts payable and accrued expenses
|
|
|
(1,228
|
)
|
Customer deposits
|
|
|
(285
|
)
|
Total identifiable net assets
|
|
|
12,190
|
|
Goodwill
|
|
|
7,334
|
|
Total
|
|
$
|
19,524
|
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company is continuing its
valuation of the intangible assets acquired, as well as the final working capital amount, which are subject to adjustment in accordance
with the Asset Purchase Agreement. Accordingly, the purchase price allocation set forth above 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 the net assets acquired at the closing date is obtained during the post-closing measurement period
of up to one year. The Company is still assessing certain working capital items.
Intangible assets consist of
$1.8 million allocated to the AA trade name and $2.5 million allocated to customer-related intangible assets. The AA trade name
is indefinite-lived and therefore not subject to amortization. The AA trade name will be evaluated for impairment annually or more
frequently if 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 will be amortized over 10 years.
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 AA 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,
Martin-Ray Acquisition, Tri-State Acquisition and AA Acquisition, as if the Company had completed the Western State Design Acquisition
and related financing transactions, Martin-Ray Acquisition, Tri-State Acquisition and related financing transactions and AA Acquisition
and related financing transactions on July 1, 2016, using the estimated fair values of the assets acquired and liabilities assumed.
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 acquisitions and related financing transactions had occurred
on the date assumed, nor are they indicative of future results of operations.
|
|
For the year ended
June 30,
|
|
(in thousands)
|
|
2018
(Unaudited)
|
|
|
2017
(Unaudited)
|
|
Revenues
|
|
$
|
176,643
|
|
|
$
|
165,471
|
|
Net income
|
|
|
5,770
|
|
|
|
6,504
|
|
For the fiscal year ended June 30, 2018, acquisition-related
results included in the Company’s consolidated results of operations included revenue of approximately $26.3 million and
net income of approximately $0.8 million, based on the consolidated effective tax rate. These acquisition-related results do not
include the effects of acquisition costs or interest expense associated with consideration paid for the related acquisitions.
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
|
|
4. Accounts Receivable
|
Accounts receivable as of June
30, 2018 and 2017 consisted of the following (in thousands):
|
June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accounts receivable- trade
|
|
$
|
14,761
|
|
|
$
|
5,889
|
|
Contract receivables
|
|
|
770
|
|
|
|
5,592
|
|
Retention receivables
|
|
|
728
|
|
|
|
2,307
|
|
|
|
|
16,259
|
|
|
|
13,788
|
|
Allowance for doubtful accounts
|
|
|
(233
|
)
|
|
|
(150
|
)
|
|
|
$
|
16,026
|
|
|
$
|
13,638
|
|
5. Inventories
|
Inventories as of June 30, 2018 and 2017 were comprised of (in thousands):
|
June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Equipment and parts
|
|
$
|
15,603
|
|
|
$
|
7,961
|
|
Reserve
|
|
|
(253
|
)
|
|
|
(284
|
)
|
|
|
$
|
15,350
|
|
|
$
|
7,677
|
|
|
|
|
|
|
|
|
|
|
The Company established reserves of
approximately $253,000 and $284,000 as of June 30, 2018 and 2017, respectively, against slow moving inventory.
6. Vendor Deposits
|
Vendor deposits represent advances
made to the Company’s vendors for specialized inventory on order.
|
7. Other Current
Assets
|
Other current assets as of June 30, 2018 and 2017 were comprised of (in thousands):
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Other receivables
|
|
$
|
480
|
|
|
$
|
—
|
|
Prepaid insurance
|
|
|
295
|
|
|
|
179
|
|
Other current assets
|
|
|
1,275
|
|
|
|
100
|
|
|
|
$
|
2,050
|
|
|
$
|
279
|
|
8. Net Investment in Sales Type Leases
|
The future minimum lease payments receivable
for sales type leases are as follows (in thousands):
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal years ending June 30,
|
|
Total Minimum
Lease Payments
to be Received
|
|
|
Amortization of
Unearned
Income
|
|
|
Net Investment in
Sales Type
Leases
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
1,364
|
|
|
$
|
859
|
|
|
$
|
505
|
|
2020
|
|
|
968
|
|
|
|
621
|
|
|
|
347
|
|
2021
|
|
|
683
|
|
|
|
391
|
|
|
|
292
|
|
2022
|
|
|
361
|
|
|
|
180
|
|
|
|
181
|
|
2023
|
|
|
88
|
|
|
|
36
|
|
|
|
52
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,377
|
*
|
*
Excludes residual values of $1.4 million
The
total net investment in sales type leases, including stated residual values, as of June 30, 2018 is $2.8 million. There were no
investment in sales type leases as of June 30, 2017. The current portion of $0.4 million is included in Other Current Assets and
the long term portion of $2.4 million is included in Other Assets.
9. Equipment and
Improvements
|
Major classes of equipment and improvements as of June 30, 2018 and 2017 consisted of the following (in thousands):
|
June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
2,019
|
|
|
$
|
686
|
|
Leasehold improvements
|
|
|
674
|
|
|
|
660
|
|
Vehicles
|
|
|
1,989
|
|
|
|
904
|
|
|
|
|
4,682
|
|
|
|
2,250
|
|
Accumulated depreciation and amortization
|
|
|
(1,699
|
)
|
|
|
(978
|
)
|
|
|
$
|
2,983
|
|
|
$
|
1,272
|
|
Depreciation and amortization
of equipment and improvements amounted to approximately $721,000 in fiscal 2018 and $231,000 in fiscal 2017.
10. Goodwill and Intangible Assets
|
The changes in the carrying
amount of goodwill are as follows (in thousands):
|
Balance at June 30, 2016
|
|
$
|
—
|
|
Goodwill from Western State Design Acquisition
|
|
|
22,139
|
|
Goodwill from Martin-Ray Acquisition
|
|
|
2,614
|
|
Balance at June 30, 2017
|
|
|
24,753
|
|
Goodwill from Tri-State Acquisition
|
|
|
4,974
|
|
Goodwill from AA Acquisition
|
|
|
7,334
|
|
Balance at June 30, 2018
|
|
$
|
37,061
|
|
Customer-related intangibles, tradenames and other intangible assets as of June 30, 2018 and 2017 consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Estimated
Useful Lives
(in years)
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related intangibles
|
|
|
10
|
|
|
$
|
10,380
|
|
|
$
|
4,180
|
|
Tradenames
|
|
|
Indefinite
|
|
|
|
6,055
|
|
|
|
2,755
|
|
Covenants not to compete
|
|
|
5
|
|
|
|
566
|
|
|
|
543
|
|
License agreements
|
|
|
10
|
|
|
|
529
|
|
|
|
529
|
|
Trademarks and patents
|
|
|
10-15
|
|
|
|
176
|
|
|
|
226
|
|
|
|
|
|
|
|
|
17,706
|
|
|
|
8,233
|
|
Accumulated amortization
|
|
|
|
|
|
|
(1,931
|
)
|
|
|
(1,073
|
)
|
|
|
|
|
|
|
$
|
15,775
|
|
|
$
|
7,160
|
|
Amortization expense was approximately
$858,000 in fiscal 2018 and $345,000 in fiscal 2017.
Based on the carrying amount of
intangible assets as of June 30, 2018, and assuming no future impairment of the underlying assets, the estimated future amortization
at the end of each fiscal year in the five-year period ending June 30, 2023 and thereafter is as follows (in thousands):
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal years ending June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
1,153
|
|
2020
|
|
|
1,153
|
|
2021
|
|
|
1,147
|
|
2022
|
|
|
1,081
|
|
2023
|
|
|
1,038
|
|
Thereafter
|
|
|
4,148
|
|
Total
|
|
$
|
9,720
|
|
11. Accounts Payable and Accrued Expenses
|
Accounts payable and accrued
expenses as of June 30, 2018 and 2017 were comprised of (in thousands):
|
June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,691
|
|
|
$
|
7,715
|
|
Accrued expenses
|
|
|
3,371
|
|
|
|
4,338
|
|
Sales tax accruals
|
|
|
680
|
|
|
|
264
|
|
|
|
$
|
11,742
|
|
|
$
|
12,317
|
|
12. Income Taxes
|
The following are the components of income taxes (in thousands):
|
Fiscal years ended June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,192
|
|
|
$
|
1,712
|
|
State
|
|
|
542
|
|
|
|
314
|
|
|
|
|
1,734
|
|
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
562
|
|
|
|
(2
|
)
|
State
|
|
|
120
|
|
|
|
(1
|
)
|
|
|
|
682
|
|
|
|
(3
|
)
|
|
|
$
|
2,416
|
|
|
$
|
2,023
|
|
The reconciliation of income tax expense computed at the federal statutory tax rate of 28% and 34% for the fiscal years ended June 30, 2018 and 2017, respectively, to the provision for income taxes is as follows (in thousands):
Fiscal years ended June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Tax at the statutory rate
|
|
$
|
1,788
|
|
|
$
|
1,765
|
|
State income taxes,
net of federal benefit
|
|
|
319
|
|
|
|
196
|
|
Other
|
|
|
309
|
|
|
|
62
|
|
|
|
$
|
2,416
|
|
|
$
|
2,023
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
37.9%
|
|
|
|
38.9%
|
|
Deferred income taxes reflect the net tax effect of temporary differences between the bases of assets and liabilities for financial reporting purposes and the bases used for income tax purposes. Significant components of the Company’s current and noncurrent deferred tax assets and liabilities as of June 30, 2018 and 2017 were as follows (in thousands):
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal years ended June 30,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
66
|
|
|
$
|
39
|
|
Inventory capitalization
|
|
|
303
|
|
|
|
94
|
|
Stock compensation
|
|
|
277
|
|
|
|
159
|
|
Other
|
|
|
74
|
|
|
|
86
|
|
|
|
|
720
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill Amortization
|
|
|
(664
|
)
|
|
|
(101
|
)
|
Depreciation
|
|
|
(614
|
)
|
|
|
(153
|
)
|
|
|
|
(1,278
|
)
|
|
|
(254
|
)
|
Net deferred income tax (liabilities) assets
|
|
$
|
(558
|
)
|
|
$
|
124
|
|
As of June 30, 2017, the net deferred
income tax assets are included in Other Assets.
As of June 30, 2018, the Company was
subject to potential federal and state tax examinations for the tax years including and subsequent to 2014.
As previously discussed, on December
22, 2017, the U.S. government enacted the Tax Act. The Tax Act represents significant U.S. federal tax reform legislation that
includes a permanent reduction to the U.S. federal corporate income tax rate. The changes included in the Tax Act are broad and
complex. The impact of the Tax Act on the Company’s financial statements as of and for the fiscal year ended June 30, 2018
is considered provisional until the necessary information is available and the Company can complete its assessment and calculations.
The impact of the Tax Act on the Company’s financial statements as of and for the year ended June 30, 2018 is considered
provisional until the necessary information is available and the Company can complete its assessment and calculations. The final
impact of the Tax Act may differ from the impact based on the Company’s current estimates, possibly materially, due to, among
other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the
Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates
or changes to the Company’s estimates. The SEC has issued rules that would allow for a measurement period of up to one year
after the enactment date of the Tax Act to finalize the recording of the related tax impacts.
13. Debt
|
The Company’s
long-term debt as of June 30, 2018 and 2017 was as follows (in thousands):
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Term Loan
|
|
$
|
6,375
|
|
|
$
|
4,523
|
|
Revolving Line of Credit
|
|
|
3,697
|
|
|
|
—
|
|
Less: unamortized discount and deferred financing costs
|
|
|
(60
|
)
|
|
|
(78
|
)
|
Total debt, net
|
|
|
10,012
|
|
|
|
4,445
|
|
Less: current maturities of long-term debt
|
|
|
(1,195
|
)
|
|
|
(714
|
)
|
Total long-term debt
|
|
$
|
8,817
|
|
|
$
|
3,731
|
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 fund a portion of the cash consideration paid in connection with
the Western State Design Acquisition, and to pay approximately $88,000 of fees, costs and expenses arising in connection with entering
into the Credit Facility.
In connection with the Tri-State Acquisition,
the Company’s Credit Facility was amended on October 30, 2017. Pursuant to the amendment, the Company received an additional
approximately $2.8 million of borrowings under the Term Loan and, in connection therewith, the maximum borrowing limit of the Credit
Facility was increased from $20.0 million to approximately $22.2 million and the minimum required monthly payments under the Term
Loan (as described below) were increased from $60,000 to $100,000. The Company used a total of approximately $7.9 million of borrowings
under the Revolving Line of Credit and Term Loan to fund the cash consideration paid in connection with the Tri-State Acquisition.
In connection with the AA Acquisition,
the Company’s Credit Facility was further amended on February 8, 2018. Pursuant to the amendment, the Company received an
additional approximately $5.0 million of borrowings under the Revolving Line of Credit and, in connection therewith, the maximum
borrowing limit of the Revolving Line of Credit was increased from $15.0 million to approximately $20.0 million. Pursuant to the
terms of the Credit Facility, however, the amount of permitted borrowings under the Revolving Line of Credit is also subject to
a cap determined using an asset-based formula, which may limit the amount available for borrowing. The Company used a total of
approximately $8.1 million of borrowings under the Revolving Line of Credit to fund the cash consideration paid in connection with
the AA Acquisition.
At June 30, 2018, $3.7 million was
outstanding under the Revolving Line of Credit and $6.4 million was outstanding under the Term Loan. At June 30, 2017, no amounts
were outstanding under the Revolving Line of Credit and $4.5 million was outstanding under the Term Loan.
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 accrues
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. As of June 30, 2018 and 2017, the effective rates for the Revolving
Line were 4.34% and 3.47%, respectively. As of June 30, 2018 and 2017, the effective rates for the Term Loan were 4.94% and 4.07%,
respectively. In addition to interest payments, borrowings under the Term Loan require principal payments of approximately $1,195,000
in each year between fiscal 2018 and fiscal 2021, with the balance of approximately $2.4 million due upon maturity in fiscal 2022.
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, a 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. At June
30, 2018, the Company was in compliance with all Credit Facility covenants and $12.2 million was available to borrow under the
Revolving Line of Credit.
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. Related Party Transactions
|
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, as amended. The lease term runs through December 31, 2018. 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 $137,000 and $139,000 during the fiscal year ended June
30, 2018 and 2017, respectively.
|
On October 10, 2016, the Company’s
wholly-owned subsidiary, 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 of the Company, and Tom Marks,
an Executive Vice President 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 $144,000 and $88,000 during the fiscal year ended June
30, 2018 and 2017, respectively.
On June 19, 2017, the Company’s wholly-owned subsidiary, Martin-Ray, entered into a lease agreement
pursuant to which it leases 10,000 square feet of warehouse and office space from an affiliate of Jim Hohnstein, President of Martin-Ray.
Monthly base rental payments are $6,500 during the initial term of the lease. In addition to base rent, Martin-Ray is responsible
under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial
term of three years and provides for two successive three-year renewal terms at the option of the Company. Payments under this
lease totaled approximately $78,000 during the fiscal year ended June 30, 2018.
On October 31, 2017, the Company’s
wholly-owned subsidiary, 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 $168,000
during the fiscal year ended June 30, 2018.
On February 9, 2018, the Company’s
wholly-owned subsidiary, 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
total $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. In addition, AAdvantage entered into a month-to-month
lease agreement with an affiliate of Mike Zuffinetti. The lease is for a total of 17,000 square feet of warehouse and office space.
Monthly base rental payments under this lease are $13,500. Payments under these leases totaled approximately $87,000 during the
fiscal year ended June 30, 2018.
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
See also Note 18 for a description
of the Private Placement Transaction between the Company and Symmetric Capital II, an affiliate of Henry M. Nahmad, the Company’s
Chairman, Chief Executive Officer and President, which was completed on October 10, 2016.
15. Concentrations of Credit Risk
|
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts and trade receivables. The Company maintains its cash and cash equivalents at large financial institutions. At June 30, 2018, bank deposits exceeded Federal Deposit Insurance Corporation insured limits. Concentrations of credit risk with respect to trade receivables are limited due to a large customer base. Also, based on the Company’s credit evaluation, trade receivables are often collateralized by the equipment sold. Sales to a federal government agency accounted for approximately 8% and 22% of the Company’s revenues for fiscal 2018 and 2017, respectively. Additionally, no single contract for a federal government facility accounted for more than 10% of the Company’s revenues for fiscal 2018 or 2017. There were no accounts receivable due from any individual entity which accounted for greater than 10% of the Company’s accounts receivable at June 30, 2018.
|
16. Commitments and Contingencies
|
In addition to the leased warehouse and office space described in Note 14 above, the Company leases additional warehouse facilities from unrelated third parties under operating leases.
|
Minimum future rental commitments for all of the Company’s
real property leases, including those with related parties, approximate the following (in thousands):
Fiscal years ending June 30,
|
|
|
|
|
|
|
|
2019
|
|
$
|
759
|
|
2020
|
|
|
682
|
|
2021
|
|
|
471
|
|
2022
|
|
|
348
|
|
2023
|
|
|
112
|
|
Total
|
|
$
|
2,372
|
|
Rent expense, including those with
related parties, under these leases totaled approximately $704,000 and $381,000 for fiscal 2018 and 2017, respectively.
The Company, through its manufacturers,
provides parts warranties for products sold. These warranties are mainly the responsibility of the manufacturer. As such, warranty-related
expenses are generally insignificant to the Company’s consolidated financial statements.
Further, in the ordinary course of
business, certain of the Company’s contracts require the Company to provide performance and payment bonds related to projects
in process. These bonds are intended to provide a guarantee to the customer that the Company will perform under the terms of the
contract and that the Company will pay subcontractors and vendors. If the Company fails to perform under the contract or pay subcontractors
and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse
the surety for expenses or outlays it incurs. As of June 30, 2018 and June 30, 2017, outstanding performance and payment bonds
totaled $8.3 million and $9.7 million, respectively, and estimated costs to complete projects secured by these bonds totaled $4.4
million and $7.1 million, respectively.
The Company may from time to time become subject to litigation and other legal proceedings. Litigation and
other legal proceedings may require the Company to incur significant expenses, including those relating to legal and other professional
fees. In addition, litigation and other legal proceedings are inherently uncertain, and adverse outcomes in litigation or other
legal proceedings could adversely affect the Company’s financial condition, cash flows, and operating results.
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
17. Retirement Plan
|
The Company has participatory
deferred compensation plans under which it matches half of employee contributions up to 6% of an eligible employee’s yearly
compensation on a discretionary basis. Employees are eligible to participate in the plans after one year of service. The Company
contributed approximately $228,000 and $58,000 to the plans during fiscal 2018 and fiscal 2017, respectively. The plans are qualified
under Section 401(k) of the Internal Revenue Code.
|
18. Shareholders’
Equity
|
On October 10, 2016, the Company completed
a Private Placement Transaction pursuant to which it issued and sold 1,290,323 shares of its common stock to Symmetric Capital
II for a total purchase price of $6.0 million. 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 and has voting power over the shares of
the Company’s common stock held by Symmetric Capital II as well as the shares issued to WSD in connection with the Western
State Design Acquisition as a result of the Stockholders Agreement entered into at that time.
|
On December 12, 2017, the Company’s
Board of Directors declared a $.12 per share cash dividend (an aggregate of approximately $1.4 million), which was paid on January
9, 2018 to stockholders of record at the close of business on December 26, 2017.
On November 30, 2016, the Company’s
Board of Directors declared a $.10 per share cash dividend (an aggregate of approximately $1.0 million), which was paid on January
6, 2017 to stockholders of record at the close of business on December 21, 2016.
19. Equity 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 is expensed on straight-line basis over the vesting period of the awards. Share-based compensation
expense, which totaled $1,575,000 and $421,000 in fiscal 2018 and 2017, respectively, is included in selling, general and
administrative expenses in the Company’s consolidated statements of operations. During fiscal 2018, the
Company granted a total of 66,226 shares of restricted stock, a portion of which is scheduled to vest ratably over four years
and the remainder of which is scheduled to vest in 10 to 29 years. The total grant date fair value of such restricted stock
was $2.5 million. During fiscal 2017, the Company granted a total of 890,576 shares of restricted stock, a portion
of which is scheduled to vest ratably over four years and the remainder of which is scheduled to vest in 10 to 24 years. The
total grant date fair value of such restricted stock was $15.1 million. In each case, the fair value of the
restricted stock was determined using the closing price of the Company’s common stock on the applicable grant
date. During fiscal 2018, 53,700 shares of restricted stock vested and 20,918 shares of Common stock with an
aggregate fair market value of $707,000 were withheld as payment in lieu of cash to satisfy tax withholding obligations in
connection with the vesting of such restricted stock. No restricted stock awards vested during fiscal
2017. As of June 30, 2018, the Company had $15.6 million of total unrecognized compensation expense, net of
estimated forfeitures, related to non-vested restricted stock, which is recognized over the weighted-average period of 17.6
years after the respective dates of grant.
|
The following is a summary of non-vested restricted stock activity as of and for the year ended June 30, 2018:
|
|
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Non-vested restricted stock outstanding at June 30, 2017
|
|
|
890,576
|
|
|
$
|
16.94
|
|
Granted
|
|
|
66,226
|
|
|
|
37.24
|
|
Vested
|
|
|
53,700
|
|
|
|
17.32
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested restricted stock outstanding at June 30, 2018
|
|
|
903,102
|
|
|
$
|
18.41
|
|
Table of Contents
EnviroStar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
20. Subsequent Events
|
On September 4, 2018, the Company,
through its wholly-owned subsidiary, Industrial Laundry Services, Inc. (“Industrial Laundry Services”), completed
the acquisition (the “ILS Acquisition”) of substantially all of the assets of Industrial Laundry Services LLC (“ILS”),
a Florida-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance
services to the new and replacement segments of the commercial, industrial and vended laundry industry. The consideration paid
by the Company in connection with the acquisition consisted of cash and stock and was immaterial to the Company on a consolidated
basis. Pursuant to the Asset Purchase Agreement, the Company, indirectly through Industrial Laundry Services, also assumed certain
of the liabilities of ILS.
|
On September 12, 2018, the Company, through its wholly-owned
subsidiary, Scott Equipment Inc. (“Scott Equipment”), completed the acquisition (the “SEI Acquisition”)
of substantially all of the assets Scott Equipment, Inc. (“SEI”), a Texas-based distributor of commercial, industrial,
and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry. The consideration paid by the Company in connection with the SEI Acquisition consisted
of $6.5 million in cash (subject to certain working capital and other adjustments) and 209,678 shares of the Company’s common
stock. The Company funded the cash consideration with borrowings under the Company’s Credit Facility. Pursuant to the Asset
Purchase Agreement, the Company, indirectly through Scott Equipment, also assumed certain of the liabilities of SEI.