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, is a value-added distributor, and provides advisory and technical services. Through the Company’s
vast sales organization, it provides its customers planning, designing, and consulting services related to their commercial laundry
operations. The Company sells and/or leases its customers commercial laundry equipment specializing in washing, drying, finishing,
material handling, water heating, power generation, and water reuse applications. In support of the suite of products it offers,
the Company sells related parts and accessories. Additionally, through the Company’s robust network of commercial laundry
technicians, the Company provides its customers installation, maintenance, and repair services.
The Company’s
customers include retail, commercial, industrial, institutional, and government customers. Purchases made by customers range from
parts and accessories, to single or multiple units of equipment, to large complex systems, as well as installation, maintenance
and repair services.
Prior to the completion
of the Company’s first acquisition pursuant to its “buy-and-build” growth strategy in October 2016, the Company’s
operations related to the activities described above consisted solely of the business and operations of Steiner-Atlantic Corp.
(“Steiner-Atlantic”), a wholly-owned subsidiary of the Company. Beginning in 2015, the Company implemented a “buy-and-build”
growth strategy which includes (i) the consideration and pursuit of acquisitions and other strategic transactions expected to complement
the Company’s existing business or that might otherwise offer growth opportunities for, or benefit, the Company and (ii)
the implementation of a growth culture at acquired businesses based on the exchange of ideas and business concepts among the management
teams of the Company and the acquired businesses as well as through certain additional initiatives, which may include investments
in new locations, additional product lines, expanded service capabilities and advanced technologies. See “Buy-and-Build Growth
Strategy” below and in Part I, Item 1 of this Report for additional information regarding the Company’s “buy-and-build”
growth strategy, including information regarding the acquisitions consummated by the Company since its implementation of the “buy-and-build”
growth strategy in 2015.
The Company reports
its results of operations through a single reportable segment.
Total revenues
for the fiscal year ended June 30, 2019 (“fiscal 2019”) increased by 52% compared to the fiscal year ended June 30,
2018 (“fiscal 2018”). Net income for fiscal 2019 decreased by 6% from fiscal 2018. The increase in revenues during
fiscal 2019 are primarily attributable to the revenues generated by the businesses acquired by the Company during fiscal 2019,
including primarily Scott Equipment, Inc. and PAC Industries, Inc, which were acquired during September 2018 and February 2019,
respectively, and the businesses acquired by the Company during fiscal 2018 whose results were consolidated in the Company’s
financial statements for all of fiscal 2019 as compared to just the period of fiscal 2018 from the respective closing date through
the end of fiscal 2018, including primarily Tri-State Technical Services, Inc., which was acquired in October 2017, and Zuf Acquisitions
I LLC (d/b/a AAdvantage Laundry Systems) and Sky-Rent LP, which were acquired in February 2018. The decrease in net income is
primarily attributable to an increase in operating expenses in connection with the Company’s growth and in interest expense,
due to an increase in outstanding debt, partially offset by the results of operations of the acquired businesses as well as a
decrease in the Company’s effective tax rate. See “Buy-and-Build Growth Strategy” below and in Part I, Item
1 of this Report for additional information regarding the acquisitions consummated by the Company since its implementation of
the “buy-and-build” growth strategy in 2015, including those consummated during fiscal 2018 and 2019.
The Company’s
operating expenses consist of (a) selling, general and administrative expenses, primarily salaries, and commissions and marketing
expenses that are variable and correlate to changes in sales, (b) expenses related to the operation of warehouse facilities, including
a fleet of installation and service vehicles, and facility rent, which are payable mostly under non-cancelable operating leases,
and (c) operating expenses at the parent company, including compensation expenses, fees for professional services, expenses associated
with being a public company, including increased expenses attributable to the Company’s growth, and expenses in furtherance
of the Company’s “buy-and-build” growth strategy.
Buy-and Build Growth
Strategy
Beginning in 2015, the
Company implemented a “buy-and-build” growth strategy and has since acquired 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 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.
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.
On October 31, 2017, the
Company through its wholly-owned subsidiary, Tri-State Technical Services, Inc. (“Tri-State”), completed the acquisition
(the “TRS Acquisition”) of substantially all of the assets of Tri-State Technical Services, Inc. (“TRS”),
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 at the time.
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 and 348,360 shares of
the Company’s common stock. The Company funded the cash consideration with borrowings under the Company’s credit facility
at the time.
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 of 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 and 209,678 shares of the Company’s common stock. The
Company funded the cash consideration with borrowings under the Company’s credit facility at the time.
On February 5, 2019, the
Company completed the acquisition (the “PAC Acquisition”) of PAC Industries Inc. (“PAC”), a Pennsylvania-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, pursuant to a merger whereby PAC merged
with and into PAC Industries Inc. (“PAC Industries”), a newly-formed wholly-owned subsidiary of the Company. The consideration
to paid by the Company in connection with the PAC Acquisition consisted of $6.4 million in cash (subject to certain working capital
and other adjustments) and 179,847 shares of the Company’s common stock. The Company funded the cash consideration with borrowings
under its current credit facility.
In addition to the SEI
Acquisition and the PAC Acquisition, during fiscal 2019, the Company completed the acquisition of four other companies: Industrial
Laundry Services, Inc. (“ILS”) on September 4, 2018; Washington Automated, Inc. (“WAI”) on November 6,
2018; Skyline Equipment, Inc. (“Skyline”) on November 14, 2018; and Worldwide Laundry, Inc. (“WWL”) on
November 16, 2018, each of which is a distributor of commercial, industrial, and vended laundry products and a provider of installation
and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry. The total
consideration for these four transactions consisted of $3.5 million in cash (subject to certain working capital and other adjustments),
net of $738,000 of cash acquired, and 141,000 shares of the Company’s common stock. The Company funded the cash consideration
for each acquisition with credit facility borrowings. The acquisitions of ILS, Skyline and WWL were structured as asset acquisitions.
The acquisition of WAI was effected by the merger of WAI with and into a newly-formed wholly-owned subsidiary of the Company. See
Note 3 to the Consolidated Financial Statements included in Item 8 of this Report for additional information about the acquisitions
completed during fiscal 2019.
Each transaction described
above was effected by the Company, indirectly through a separate wholly-owned subsidiary formed by the Company for the purpose
of effecting the transaction and operating the related business following the transaction. In connection with each asset acquisition,
the Company, indirectly through its applicable wholly-owned subsidiary, also assumed certain of the liabilities of the acquired
business. The financial position, including assets and liabilities, and results of operations of the acquired businesses following
the respective closing dates are included in the Company’s consolidated financial statements.
In addition, on August
1, 2019, the Company, through its wholly-owned subsidiary, Professional Laundry Systems, LLC (“Professional Laundry Systems”),
completed the acquisition of substantially all of the assets of Commercial Laundry Products, Inc., Professional Laundry Systems
of PA, Inc. and Professional Laundry Systems West, Inc. (collectively “PLS”), a New York-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 Professional Laundry Systems, also assumed certain of the liabilities of PLS. The financial position,
including assets and liabilities, and results of operations of PLS following the August 1, 2019 closing date will be consolidated
in the Company’s consolidated financial statements beginning with the quarter ending September 30, 2019.
Consolidated Financial Condition
The Company’s total
assets increased from $95.5 million at June 30, 2018 to $154.5 million at June 30, 2019. The increase in total assets was primarily
attributable to the assets acquired by the Company in connection with the SEI Acquisition, the PAC Acquisition and the four other
acquisitions completed during fiscal 2019 described above as well as increases in working capital, primarily accounts receivable
and inventory. The increase in accounts receivable was also due to the timing of collection of payments and increased amounts
that are owed related to progress billing on longer-term contracts. The increase in inventory was also due to (a) the timing of
the Company’s placement of equipment orders, (b) purchases by the Company due to the availability of products from certain
vendors at favorable prices during fiscal 2019, (c) inventory purchased to support the Company’s sales growth initiatives
in new distribution territories, and (d) inventory purchased in support of growth initiatives related to the establishment of
new manufacturer and supplier distribution relationships. Working capital was also impacted by a decrease in customer deposits
which was primarily attributable to the completion of certain large sales orders during fiscal 2019. The Company’s total
liabilities increased from $38.4 million at June 30, 2018 to $73.0 million at June 30, 2019. The increase in total liabilities
was primarily attributable to the liabilities assumed by the Company in connection with the SEI Acquisition, the PAC Acquisition
and the four other acquisitions completed during fiscal 2019 described above as well as funding the increases in working capital.
Liquidity and Capital
Resources
The Company had
cash and cash equivalents of approximately $5.0 million at June 30, 2019 compared to $1.3 million at June 30, 2018. The increase
in cash was primarily due to proceeds from borrowings and earnings from operations, partially offset by changes in operating assets
and liabilities, cash used to fund the cash consideration paid in connection with the SEI Acquisition, PAC Acquisition and the
four other acquisitions completed in fiscal 2019, and a $1.6 million dividend paid during January 2019.
The following table
summarizes the Company’s Consolidated Statements of Cash Flows (in thousands):
|
|
|
Fiscal Years Ended June 30,
|
|
|
Net cash (used) provided by:
|
|
2019
|
|
|
2018
|
|
|
Operating activities
|
|
$
|
(8,725
|
)
|
|
$
|
11,345
|
|
|
Investing activities
|
|
$
|
(15,521
|
)
|
|
$
|
(14,181
|
)
|
|
Financing activities
|
|
$
|
27,954
|
|
|
$
|
3,439
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2019,
operating activities used cash of approximately $8.7 million compared to approximately $11.3 million of cash provided by operating
activities in fiscal 2018. This $20.1 million increase in cash used by operating activities was primarily attributable to changes
in accounts receivable, inventory and customer deposits, as discussed above, partially offset by an increase in non-cash charges.
Investing activities
used cash of approximately $15.5 million during fiscal 2019 compared to approximately $14.2 million in fiscal 2018. This $1.3 million
increase is due primarily to capital expenditures in furtherance of certain growth initiatives, including an increase of $789,000
in capital expenditures during fiscal 2019 as compared to fiscal 2018 in connection with growth initiatives related to the equipment
used in laundry route and rental business in which certain of the Company’s subsidiaries are engaged.
Financing activities provided
cash of approximately $28.0 million in fiscal 2019 compared to approximately $3.4 million in fiscal 2018. The cash provided by
financing activities during fiscal 2019 related to total borrowings under the Company’s 2018 Credit Agreement (as defined
below) and its prior credit facility of approximately $113.0 million. Borrowings totaling $12.5 million were used to finance the
cash consideration for the SEI Acquisition, PAC Acquisition, and the four other acquisitions completed in fiscal 2019. The balance
of the Credit Facility borrowings were used to fund operating activities and other activities in support of the Company’s
buy-and-build growth strategy. The cash provided by financing activities during fiscal 2019 was partially offset by the repayment
of approximately $82.4 million of borrowings, the $1.6 million cash dividend paid by the Company to its stockholders during January
2019, and $728,000 in share repurchases to settle employee tax withholding liabilities upon the vesting of restricted shares as
described below.
On November 2, 2018, the
Company entered into a syndicated credit agreement (the “2018 Credit Agreement”) for a five-year revolving credit facility
in the maximum aggregate principal amount of up to $100 million, with an accordion feature to increase the revolving credit facility
by up to $40 million for a total of $140 million. A portion of the revolving credit facility is available for swingline loans of
up to a sublimit of $5 million and for the issuance of standby letters of credit of up to a sublimit of $10 million.
Borrowings (other than
swingline loans) under the 2018 Credit Agreement bear interest at a rate, at the Company’s election at the time of borrowing,
equal to (a) LIBOR plus a margin that ranges from 1.25% to 1.75% depending on the Company’s consolidated leverage ratio,
which is a ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) (the “Consolidated Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis
points, and (iii) the one month LIBOR rate plus 100 basis points (such highest rate, the “Base Rate”), plus a margin
that ranges from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. Swingline loans bear interest calculated at the Base
Rate plus a margin that ranges from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. The 2018 Credit Agreement has
a term of five years and matures on November 2, 2023.
The 2018 Credit Agreement
contains certain covenants, including financial covenants requiring the Company to comply with maximum leverage ratios and minimum
interest coverage ratios. The 2018 Credit Agreement also contains other provisions which may restrict the Company’s ability
to, among other things, dispose of or acquire assets or businesses, incur additional indebtedness, make certain investments and
capital expenditures, pay dividends, repurchase shares and enter into transactions with affiliates. At June 30, 2019, the Company
was in compliance with its covenants under the 2018 Credit Agreement and $6.9 million was available to borrow under the revolving
credit facility.
The obligations of the
Company under the 2018 Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries,
and are guaranteed, jointly and severally, by certain of the Company’s subsidiaries.
In connection with its entry into the 2018 Credit
Agreement on November 2, 2018, the Company repaid all outstanding amounts under, and terminated, its prior credit facility initially
entered into in October 2016.
The Company believes that
its existing cash and cash equivalents, anticipated cash from operations and funds available under the Company’s 2018 Credit
Agreement 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 in place
an equity incentive plan, the EVI Industries, Inc. 2015 Equity Incentive Plan (the “Plan”), pursuant to which restricted
stock and other equity-based awards and cash awards may be granted to participants in the Plan. Upon request by a holder of restricted
stock granted under the Plan, the Company may issue shares upon vesting net of the statutory withholding requirements that the
Company pays on behalf of its employees. For financial statement purposes, the shares withheld are treated as being repurchased
by the Company and reduce additional paid-in capital within shareholders’ equity and are reflected as repurchases in the
Company’s condensed consolidated statements of cash flows and shareholders’ equity as they reduce the number of shares
that would have been issued upon vesting. During the fiscal 2019 and fiscal 2018, there were approximately $728,000 and $707,000,
respectively, of share repurchases related to shares withheld upon the vesting of previously granted restricted stock awards.
Off-Balance Sheet Financing
As of June 30, 2019,
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
2019 increased by approximately $78.3 million (52%) from fiscal 2018. The increase in revenues was primarily due to the results
post acquisition of Scott Equipment, which was acquired on September 12, 2018, and PAC Industries, which was acquired on February
5, 2019, as well as the four other acquisitions completed in fiscal 2019 as described above. In addition, the Company’s revenues
for fiscal 2019 include a full year of revenues of Tri-State and AAdvantage, which were acquired on October 31, 2017 and February
9, 2018, respectively, as compared to approximately eight months and four months of results of Tri-State and AAdvantage, respectively,
for fiscal 2018.
From time to time
the Company enters into longer-term contracts to fulfill large complex laundry projects for divisions of the federal government
where the nature of, and competition for, such contracts may result in a lower gross margin as compared to other equipment sales.
During fiscal 2019, the Company experienced an increase in such lower-margin equipment sales. The Company believes that the increase
in equipment sales provides a strong foundation for the Company to further strengthen its customer relationships, including that
they may in the future result in higher gross margin opportunities from the sale of parts, accessories, supplies, and technical
services related to the equipment. Despite the lower gross margin from such longer-term contracts, the Company believes that the
long-term benefit from the increase in its installed equipment base will outweigh the possible short-term impact to gross margin.
Operating Expenses
|
|
|
Fiscal Year Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
As a percentage of revenues:
|
|
|
|
|
|
|
|
Cost of sales, net
|
|
|
76.9
|
%
|
|
|
75.7
|
%
|
|
As a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
20.0
|
%
|
|
|
19.7
|
%
|
Cost of sales, expressed
as a percentage of revenues, increased to 76.9% in fiscal 2019 from 75.7% in fiscal 2018, representing gross margins of 23.1% in
fiscal 2019 and 24.3% in fiscal 2018. As described above, from time to time the Company enters into longer-term contracts to fulfill
large complex laundry projects for divisions of the federal government. These contracts generally have a lower gross margin compared
to other equipment sales, however the Company believes that these contracts will result in higher margin opportunities in the long-term.
The increase in cost of sales, expressed as a percentage of revenues, was primarily due to the Company’s increased engagement
in longer-term federal government contracts during fiscal 2019 as compared to fiscal 2018. In the absence of such longer-term federal
government contracts, cost of sales, expressed as a percentage of revenues, for fiscal 2019 as compared to fiscal 2018 increased
1.1% to 74.8% in fiscal 2019 from 73.7% in fiscal 2018, representing gross margins of 25.2% in fiscal 2019 and 26.3% in fiscal
2018, attributable primarily to changes in product mix.
Selling, general
and administrative expenses increased by approximately $16.1 million (55%) in fiscal 2019 compared to fiscal 2018. As a percentage
of revenues, selling, general and administrative expenses increased to 20.0% in fiscal 2019 from 19.7% in fiscal 2018. The increase
in operating expenses is primarily attributable to (a) additional operating expenses associated with acquired businesses not reflected
in prior fiscal year operating expenses, (b) additional operating expenses at the acquired businesses in pursuit of future growth
and in support of the Company’s growing operations, (c) increases in operating expenses in connection with the Company’s
growth, including greater accounting fees, legal fees, and insurance costs, (d) the addition of sales, service, and operations
support professionals and related costs, as total personnel at June 30, 2019 increased by 71% compared to total personnel at June
30, 2018, with 76% of such increase attributable to sales and service related personnel, (e) increased investments in sales, service,
and operations related technologies in support of the Company’s “buy-and-build growth” strategy, and (f) an
increase in non-cash amortization expense related to the intangible assets the Company acquired in connection with its acquisitions
and an increase in non-cash share-based compensation.
Interest expense,
net was approximately $1.4 million in fiscal 2019 compared to approximately $552,000 of interest expense, net in fiscal 2018,
and represents interest on borrowings. The increase was primarily attributable to an increase in outstanding debt, partially offset
by a decrease in interest rates under the 2018 Credit Agreement as compared to the Company’s prior credit facility.
The Company’s
effective income tax rate was 33.4% for fiscal 2019 compared to 37.9% in fiscal 2018. The decrease in the effective income tax
rate in fiscal 2019 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.”
Inflation
Inflation did not
have a significant effect on the Company’s operations during either of fiscal 2019 or 2018.
Transactions with Related Parties
Certain of the Company’s
subsidiaries lease warehouse and office space from one or more of the principals of the Company or its subsidiaries. These leases
include the following:
The Company’s
wholly-owned subsidiary, Steiner-Atlantic, leases 28,000 square feet of warehouse and office space from an affiliate of Michael
S. Steiner, a director and Executive Vice President and Secretary of the Company, pursuant to a lease agreement dated November
1, 2014, as amended. The lease term was extended during December 2018 to run through December 31, 2019. 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 $146,000 and $137,000
during fiscal 2019 and 2018, 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, Corporate
Strategy of the Company, and Tom Marks, Executive Vice President, Business Development of the Company. Monthly base rental payments
are $12,000 during the initial term of the lease. In addition to base rent, Western State Design is responsible under the lease
for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial term of five years
and provides for two successive three-year renewal terms at the option of the Company. Payments under this lease totaled approximately
$144,000 during each of fiscal 2019 and 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 $252,000
during the fiscal 2019 and $168,000 during the period from October 31, 2017 through 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 are $3,950 during the initial term of the lease. In addition to base rent, AAdvantage is responsible under
the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial term
of five years and provides for two successive three-year renewal terms at the option of the Company. During February 2018, AAdvantage
entered into a month-to-month lease agreement with an affiliate of Mike Zuffinetti for a total of 17,000 square feet of warehouse
and office space. Monthly base rental payments under this lease were $13,500. This month-to-month lease was terminated on October
31, 2018. In addition, on November 1, 2018, AAdvantage entered into a lease agreement pursuant to which it leases warehouse and
office space from an affiliate of Mike Zuffinetti. Monthly base rental payments were initially $26,000. Pursuant to the lease agreement,
on January 1, 2019, the lease expanded to cover additional warehouse space and, in connection therewith, monthly base rental payments
increased to $36,000. In addition to base rent, AAdvantage is responsible under the lease for costs related to real estate taxes,
utilities, maintenance, repairs and insurance. The lease has an initial term of five years and provides for two successive three-year
renewal terms at the option of the Company. Payments under the leases described in this paragraph totaled approximately $369,000
during fiscal 2019. Payments under the leases from February 9, 2018 through June 30, 2018 were approximately $87,000.
On September 12, 2018,
the Company’s wholly-owned subsidiary, Scott Equipment, entered into lease agreements pursuant to which it leases a total
of 18,000 square feet of warehouse and office space from an affiliate of Scott Martin, President of Scott Equipment. Monthly base
rental payments total $11,000 during the initial terms of the leases. In addition to base rent, Scott Equipment is responsible
under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial
term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under these
leases totaled approximately $114,000 during fiscal 2019.
On February 5, 2019,
the Company’s wholly-owned subsidiary, PAC Industries, entered into two lease agreements pursuant to which it leases a total
of 29,500 square feet of warehouse and office space from an affiliate of Frank Costabile, President of PAC Industries, and Rocco
Costabile, Director of Finance of PAC Industries. Monthly base rental payments total $14,600 during the initial terms of the leases.
In addition to base rent, PAC Industries is responsible under the leases for costs related to real estate taxes, utilities, maintenance,
repairs and insurance. Each lease has an initial term of four years and provides for two successive three-year renewal terms at
the option of the Company. Payments under these leases totaled approximately $73,000 during fiscal 2019.
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
Performance Obligations
Revenue primarily
consists of revenues from the sale or leasing of commercial and industrial laundry and dry cleaning equipment and steam and hot
water boilers manufactured by others; the sale of related replacement parts and accessories; and the provision of installation
and maintenance services. The Company generates revenue primarily from the sale of equipment and parts to customers. Therefore,
the majority of the Company’s contracts are short-term in nature and have a single performance obligation (to deliver products),
and the Company’s performance obligation is satisfied when control of the product is transferred to the customer. Other
contracts contain a combination of equipment sales and services expected to be performed in the near-term, which services are
distinct and accounted for as separate performance obligations. Revenue is recognized on these contracts when control transfers
to the Company’s customers via shipment of products or provision of services and the Company has the right to receive consideration
for these products and services. Additionally, from time to time, the Company enters into longer-termed contracts which provide
for the sale of the equipment by the Company and the provision by the Company of related installation and construction services.
The installation on these types of contracts is usually completed within six to twelve months. From time to time, the Company
also enters into maintenance and service contracts. These longer-term contracts, maintenance and service contracts have a single
performance obligation where revenue is recognized over time using the cost-to-cost measure of progress, which best depicts the
continuous transfer of control of goods or services to the customer.
The Company measures
revenue, including shipping and handling fees charged to customers, as the amount of consideration it expects to be entitled to
receive in exchange for its goods or services, net of any taxes collected from customers and subsequently remitted to governmental
authorities. Costs associated with shipping and handling activities performed after the customer obtains control are accounted
for as fulfillment costs.
Revenue from products
transferred to customers at a point in time is recognized when obligations under the terms of the contract with the Company’s
customer are satisfied, which generally occurs with the transfer of control upon shipment.
Revenues that are
recognized over time include (i) longer-termed contracts that include equipment purchase with installation and construction services,
(ii) maintenance contracts, and (iii) service contracts.
Contract Assets and Liabilities
Contract assets
and liabilities are presented in the Company’s condensed consolidated balance sheets. Contract assets consist of unbilled
amounts resulting from sales under longer-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue
recognized exceeds the amount billed to the customer. The Company typically receives progress payments on sales under longer-term
contracts as work progresses, although for some contracts, the Company may be entitled to receive an advance payment. Contract
assets also include retainage. Retainage represents a portion of the contract amount that has been billed, but for which the contract
allows the customer to retain a portion of the billed amount (generally, from 5% to 20% of contract billings) until final contract
settlement. Retainage amounts are generally classified as current assets within the Company’s consolidated balance sheets.
Retainage that has been billed, but is not due until completion of performance and acceptance by customers, is generally expected
to be collected within one year. Contract liabilities consist of advanced payments, billings in excess of costs incurred and deferred
revenue.
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, except for tradenames,
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.
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. Pursuant to Staff Accounting Bulletin (“SAB”) No. 118 (“SAB 118”),
the Company’s measurement period for implementing the accounting changes required by the Tax Act closed on December 22,
2018. The Company completed the accounting for the effects of the Tax Act in the second quarter of fiscal 2019. 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.
EVI
Industries, Inc. and Subsidiaries
Index
to Consolidated Financial Statements
|
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
31
|
|
Consolidated Balance Sheets at June 30, 2019 and 2018
|
32
|
|
Consolidated Statements of Operations for the years ended June 30, 2019 and 2018
|
34
|
|
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2019 and 2018
|
35
|
|
Consolidated Statements of Cash Flows for the years ended June 30, 2019 and 2018
|
36
|
|
Notes to Consolidated Financial Statements
|
37
|
Report of Independent
Registered Public Accounting Firm
Shareholders and Board
of Directors
EVI Industries, Inc.
Miami, Florida
Opinion on the
Consolidated Financial Statements
We have audited the
accompanying consolidated balance sheets of EVI Industries, Inc., formerly EnviroStar, Inc. (the “Company”) as of
June 30, 2019 and 2018, the related consolidated statements of operations, shareholders’ equity, and cash flows for each
of the two years in the period ended June 30, 2019, 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
at June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended
June 30, 2019, 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, 2019, 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, 2019 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 audits. 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 audits
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 audits 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 audits 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 audits provide a reasonable basis for our opinions.
/s/ BDO USA, LLP
We have served as the Company's auditor
since 2018.
Miami, Florida
September 13, 2019
EVI Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per
share data)
|
ASSETS
|
|
|
|
|
|
|
|
June 30,
2019
|
|
June
30,
2018
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,038
|
|
|
$
|
1,330
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $323 and $233, respectively
|
|
|
30,557
|
|
|
|
16,026
|
|
|
Inventories, net
|
|
|
26,445
|
|
|
|
15,350
|
|
|
Vendor deposits
|
|
|
403
|
|
|
|
606
|
|
|
Contract assets
|
|
|
2,487
|
|
|
|
1,012
|
|
|
Other current assets
|
|
|
2,938
|
|
|
|
2,050
|
|
|
Total current assets
|
|
|
67,868
|
|
|
|
36,374
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and improvements, net
|
|
|
5,865
|
|
|
|
2,983
|
|
|
Intangible assets, net
|
|
|
22,351
|
|
|
|
15,775
|
|
|
Goodwill
|
|
|
54,501
|
|
|
|
37,061
|
|
|
Other assets
|
|
|
3,900
|
|
|
|
3,281
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
154,485
|
|
|
$
|
95,474
|
|
The accompanying notes are an integral part
of these consolidated financial statements
EVI Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per
share data)
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
June 30,
2019
|
|
June 30,
2018
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
17,508
|
|
|
$
|
11,742
|
|
|
Accrued employee expenses
|
|
|
5,187
|
|
|
|
4,248
|
|
|
Customer deposits
|
|
|
7,163
|
|
|
|
11,624
|
|
|
Contract liabilities
|
|
|
854
|
|
|
|
259
|
|
|
Current portion of long-term debt
|
|
|
—
|
|
|
|
1,195
|
|
|
Total current liabilities
|
|
|
30,712
|
|
|
|
29,068
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
1,708
|
|
|
|
558
|
|
|
Long-term debt, net
|
|
|
40,563
|
|
|
|
8,817
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
72,983
|
|
|
|
38,443
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock related to acquiree’s Employee Stock Ownership Plan (“ESOP”)
|
|
|
4,240
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
11,825,615 shares issued at June 30, 2019 and 11,239,656 shares
issued at June 30, 2018, including shares held in treasury
|
|
|
296
|
|
|
|
281
|
|
|
Additional paid-in capital
|
|
|
73,010
|
|
|
|
49,950
|
|
|
Retained earnings
|
|
|
9,635
|
|
|
|
7,511
|
|
Treasury stock, 72,934 shares, at cost, at June 30, 2019 and 52,686
shares, at cost, at June 30, 2018
|
|
|
(1,439
|
)
|
|
|
(711
|
)
|
|
Common stock related to acquiree’s ESOP
|
|
|
(4,240
|
)
|
|
|
—
|
|
|
Total shareholders’ equity
|
|
|
77,262
|
|
|
|
57,031
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
154,485
|
|
|
$
|
95,474
|
|
The accompanying notes are an integral part
of these consolidated financial statements
EVI Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
|
|
|
For the year
ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
Revenues
|
|
$
|
228,318
|
|
|
$
|
150,007
|
|
|
Cost of sales
|
|
|
175,620
|
|
|
|
113,501
|
|
|
Gross profit
|
|
|
52,698
|
|
|
|
36,506
|
|
|
Selling, general and administrative expenses
|
|
|
45,693
|
|
|
|
29,572
|
|
|
Operating income
|
|
|
7,005
|
|
|
|
6,934
|
|
|
Interest expense, net
|
|
|
1,389
|
|
|
|
552
|
|
|
Income before provision for income taxes
|
|
|
5,616
|
|
|
|
6,382
|
|
|
Provision for income taxes
|
|
|
1,873
|
|
|
|
2,416
|
|
Net income
|
|
$
|
3,743
|
|
|
$
|
3,966
|
|
Net earnings per share – basic
|
|
$
|
0.30
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share – diluted
|
|
$
|
0.29
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
EVI Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’
Equity
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Related to
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Treasury Stock
|
|
Retained
|
|
Acquiree’s
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
Cost
|
|
Earnings
|
|
ESOP
|
|
Total
|
|
Balance at June 30, 2017
|
|
|
10,499,481
|
|
|
$
|
262
|
|
|
$
|
27,018
|
|
|
|
31,768
|
|
|
$
|
(4
|
)
|
|
$
|
4,948
|
|
|
$
|
—
|
|
|
$
|
32,224
|
|
|
Dividends paid ($.12 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,403
|
)
|
|
|
—
|
|
|
|
(1,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share repurchases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,918
|
|
|
|
(707
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares
|
|
|
53,700
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in connection with acquisitions
|
|
|
686,475
|
|
|
|
17
|
|
|
|
21,359
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,575
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,966
|
|
|
|
—
|
|
|
|
3,966
|
|
|
Balance at June 30, 2018
|
|
|
11,239,656
|
|
|
|
281
|
|
|
|
49,950
|
|
|
|
52,686
|
|
|
|
(711
|
)
|
|
|
7,511
|
|
|
|
—
|
|
|
|
57,031
|
|
|
Dividends paid ($.13 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,619
|
)
|
|
|
—
|
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share repurchases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,248
|
|
|
|
(728
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares
|
|
|
54,093
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of shares under employee stock purchase
plan
|
|
|
1,341
|
|
|
|
—
|
|
|
|
45
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in connection with acquisitions
|
|
|
530,525
|
|
|
|
13
|
|
|
|
21,277
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,240
|
)
|
|
|
17,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,740
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,743
|
|
|
|
—
|
|
|
|
3,743
|
|
|
Balance at June 30, 2019
|
|
|
11,825,615
|
|
|
$
|
296
|
|
|
$
|
73,010
|
|
|
|
72,934
|
|
|
$
|
(1,439
|
)
|
|
$
|
9,635
|
|
|
$
|
(4,240
|
)
|
|
$
|
77,262
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
EVI Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
|
Years ended June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,743
|
|
|
$
|
3,966
|
|
|
Adjustments to reconcile net income to net cash and cash equivalents (used) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,743
|
|
|
|
1,579
|
|
|
Amortization of debt discount
|
|
|
95
|
|
|
|
18
|
|
|
Provision for bad debt expense
|
|
|
283
|
|
|
|
105
|
|
|
Share-based compensation
|
|
|
1,740
|
|
|
|
1,575
|
|
|
Inventory reserve
|
|
|
86
|
|
|
|
77
|
|
|
Provision for deferred income taxes
|
|
|
861
|
|
|
|
682
|
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,934
|
)
|
|
|
3,773
|
|
|
Inventories
|
|
|
(4,335
|
)
|
|
|
(1,884
|
)
|
|
Vendor deposits
|
|
|
203
|
|
|
|
826
|
|
|
Contract assets
|
|
|
(1,475
|
)
|
|
|
(926
|
)
|
|
Other assets
|
|
|
(988
|
)
|
|
|
(533
|
)
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
2,381
|
|
|
|
(4,321
|
)
|
|
Accrued employee expenses
|
|
|
241
|
|
|
|
2,702
|
|
|
Customer deposits
|
|
|
(5,964
|
)
|
|
|
5,593
|
|
|
Contract liabilities
|
|
|
595
|
|
|
|
(1,887
|
)
|
Net cash (used) provided by operating activities
|
|
|
(8,725
|
)
|
|
|
11,345
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,979
|
)
|
|
|
(829
|
)
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(12,542
|
)
|
|
|
(13,352
|
)
|
Net cash used by investing activities
|
|
|
(15,521
|
)
|
|
|
(14,181
|
)
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(1,619
|
)
|
|
|
(1,403
|
)
|
|
Proceeds from borrowings
|
|
|
112,963
|
|
|
|
71,628
|
|
|
Debt repayments
|
|
|
(82,435
|
)
|
|
|
(66,079
|
)
|
|
Payment of debt issuance costs
|
|
|
(272
|
)
|
|
|
—
|
|
|
Repurchases of common stock in satisfaction of employee tax withholding obligations
|
|
|
(728
|
)
|
|
|
(707
|
)
|
|
Issuances of common stock under employee
stock purchase plan
|
|
|
45
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
27,954
|
|
|
|
3,439
|
|
|
Net increase in cash and cash equivalents
|
|
|
3,708
|
|
|
|
603
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
1,330
|
|
|
|
727
|
|
Cash and cash equivalents at end of year
|
|
$
|
5,038
|
|
|
$
|
1,330
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,231
|
|
|
$
|
499
|
|
|
Cash paid for income taxes
|
|
$
|
1,737
|
|
|
$
|
1,223
|
|
|
Supplemental disclosure of non-cash financing activities
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisitions
|
|
$
|
21,290
|
|
|
$
|
21,376
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. General
|
Nature of Business
|
EVI Industries,
Inc., formerly EnviroStar, Inc., indirectly through its subsidiaries (EVI Industries, Inc. and its subsidiaries, collectively,
the “Company”), is a value-added distributor, and provides advisory and technical services. Through the Company’s
vast sales organization, it provides its customers planning, designing, and consulting services related to their commercial laundry
operations. The Company sells and/or leases its customers commercial laundry equipment specializing in washing, drying, finishing,
material handling, water heating, power generation, and water reuse applications. In support of the suite of products it offers,
the Company sells related parts and accessories. Additionally, through the Company’s robust network of commercial laundry
technicians, the Company provides its customers installation, maintenance, and repair services.
|
The
Company’s customers include retail, commercial, industrial, institutional, and government customers. Purchases made by
customers range from parts and accessories, to single or multiple units of equipment, to large complex systems, as well as
installation, maintenance and repair services.
The Company reports its results of operations through a single operating and reportable segment.
Prior to the completion of the Company’s first acquisition, the WSD Acquisition (as defined below), pursuant to its “buy-and-build” growth strategy, the Company’s operations related to the activities described above consisted solely of the business and operations of Steiner-Atlantic Corp. (“Steiner-Atlantic”), a wholly-owned subsidiary of the Company. Beginning in 2015, the Company implemented a “buy-and-build” growth strategy and has since acquired the following businesses under such growth strategy:
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 are included in the Company’s consolidated financial statements as of, and for the fiscal years ended, June 30, 2018 and June 30, 2019. 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 are included in the Company’s consolidated financial statements as of, and for the fiscal years ended, June 30, 2018 and June 30, 2019. On October 31, 2017, the Company, through its wholly-owned subsidiary, Tri-State Technical Services, Inc. (“Tri-State”), completed the acquisition (the “TRS Acquisition”) of substantially all of the assets of Tri-State Technical Services, Inc. (“TRS”), a Georgia-based distributor of commercial, industrial, and vended laundry products and provider
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 years ended, June 30, 2019 and 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 businesses 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 years
ended, June 30, 2019 and June 30, 2018. 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 of 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 financial condition, including assets and liabilities, and results of
operations of the acquired business following the September 12, 2018 closing date are included in the Company’s
consolidated financial statements as of, and for the fiscal year ended, June 30, 2019. On February 5, 2019, the Company
completed the acquisition (the “PAC Acquisition”) of PAC Industries Inc. (“PAC”), a
Pennsylvania-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, pursuant
to a merger whereby PAC merged with and into PAC Industries Inc. (“PAC Industries”), a newly-formed wholly-owned
subsidiary of the Company. The consideration paid by the Company in connection with the PAC Acquisition consisted of $6.4
million in cash (subject to certain working capital and other adjustments) and 179,847 shares of the Company’s common
stock. The financial condition, including assets and liabilities, and results of operations of the acquired business
following the February 5, 2019 closing date are included in the Company’s consolidated financial statements as of, and
for the fiscal year ended, June 30, 2019. In addition to the SEI Acquisition and the PAC Acquisition, during the fiscal year
ended June 30, 2019, the Company completed the acquisition of four other companies: Industrial Laundry Services, Inc.,
substantially all of the assets of which were acquired on September 4, 2018; Washington Automated, Inc., which merged with
and into a newly-formed wholly-owned subsidiary of the Company on November 6, 2018; Skyline Equipment, Inc., substantially
all of the assets of which were acquired on November 14, 2018; and Worldwide Laundry, Inc., substantially all of the assets
of which were acquired on November 16, 2018), each of which is a distributor of commercial, industrial, and vended laundry
products and a provider of installation and maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry. The total consideration for these four transactions consisted of $3.5 million in cash
(subject to certain working capital and other adjustments), net of $738,000 of cash acquired, and 141,000 shares of the
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Company’s common stock. The financial condition, including assets and liabilities, and results of operations of the acquired businesses following the respective closing dates are included in the Company’s consolidated financial statements as of, and for the fiscal year ended, June 30, 2019. In connection with each acquisition, the Company, indirectly through its wholly-owned subsidiary, also assumed certain of the liabilities related to the acquired business.
See Note 3 for additional information regarding the TRS Acquisition, the AA Acquisition, the SEI Acquisition, the PAC Acquisition and the four other acquisitions completed during the fiscal year ended June 30, 2019.
See also Note 20 for information
regarding the acquisition of substantially all of the assets of Commercial Laundry Products, Inc., Professional Laundry Systems
of PA, Inc. and Professional Laundry Systems West, Inc., which was completed during August 2019.
2. Summary of Significant Accounting Policies
|
Principles of Consolidation
|
The accompanying consolidated financial statements include the accounts of EVI Industries, Inc. and its subsidiaries, all of which are wholly-owned. Intercompany transactions and balances have been eliminated in consolidation.
|
|
Revenue Recognition
|
Adoption of New Revenue
Standard
|
In May 2014, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from
Contracts with Customers (Topic 606)” (“Topic 606”). Topic 606 supersedes the revenue requirements in ASU Topic
605, “Revenue Recognition” ("Topic 605"), and requires the recognition of revenues when promised goods or
services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods
or services. To recognize revenue, the Company does the following:
|
|
·
|
identify the contract(s) with a customer;
|
|
|
·
|
identify the performance obligations in the contract;
|
|
|
·
|
determine the transaction price;
|
|
|
·
|
allocate the transaction price to the performance obligations in the contract; and
|
|
|
·
|
recognize revenue when, or as, the entity satisfies a performance obligation.
|
The new standard also includes Subtopic
340-40, “Other Assets and Deferred Costs - Contracts with Customers” (“Subtopic 340-40”), which sets forth
requirements relating to the deferral of incremental costs of obtaining a contract with a customer, including the period of amortization
of such costs. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenues and cash
flows arising from contracts with customers. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as the "New
Revenue Standard."
The Company adopted the New Revenue Standard on July 1, 2018 using the modified retrospective approach. The
New Revenue Standard did not have an impact on the amount and timing of the Company’s revenue recognition through July 1,
2018. Results for reporting periods beginning on and after July 1, 2018 are presented under the New Revenue Standard, while prior
period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Revenue Recognition
Performance
Obligations
Revenue primarily
consists of revenues from the sale or leasing of commercial and industrial laundry and dry cleaning equipment and steam and hot
water boilers manufactured by others; the sale of related replacement parts and accessories; and the provision of installation
and maintenance services. The Company generates revenue primarily from the sale of equipment and parts to customers. Therefore,
the majority of the Company’s contracts are short-term in nature and have a single performance obligation (to deliver products),
and the Company’s performance obligation is satisfied when control of the product is transferred to the customer. Other
contracts contain a combination of equipment sales and services expected to be performed in the near-term, which services are
distinct and accounted for as separate performance obligations. Revenue is recognized on these contracts when control transfers
to the Company’s customers via shipment of products or provision of services and the Company has the right to receive consideration
for these products and services. Additionally, from time to time, the Company enters into longer-termed contracts which provide
for the sale of the equipment by the Company and the provision by the Company of related installation and construction services.
The installation on these types of contracts is usually completed within six to twelve months. From time to time, the Company
also enters into maintenance contracts and ad hoc maintenance and installation service contracts. These longer-term contracts,
and maintenance and service contracts have a single performance obligation where revenue is recognized over time using the cost-to-cost
measure of progress, which best depicts the continuous transfer of control of goods or services to the customer.
The Company measures revenue, including
shipping and handling fees charged to customers, as the amount of consideration it expects to be entitled to receive in exchange
for its goods or services, net of any taxes collected from customers and subsequently remitted to governmental authorities. Costs
associated with shipping and handling activities performed after the customer obtains control are accounted for as fulfillment
costs and are not promised services that have to be further evaluated under Topic 606.
Revenue
from products transferred to customers at a point in time include commercial and vended laundry parts and equipment sales and
accounted for approximately 83% of the Company’s revenue for the fiscal year ended June 30, 2019. Revenue from products
transferred to customers at a point in time is recognized when obligations under the terms of the contract with the Company’s
customer are satisfied, which generally occurs with the transfer of control upon shipment.
Revenues that
are recognized over time include (i) longer-termed contracts that include equipment purchase with installation and construction
services, (ii) maintenance contracts, and (iii) service contracts. Revenue from products and services that are recognized over
time accounted for approximately 17% of the Company’s revenue for both the fiscal year ended June 30, 2019.
Contract Assets and Liabilities
Contract
assets and liabilities are presented in the Company’s consolidated balance sheets. Contract assets consist of unbilled
amounts resulting from sales under longer-term contracts when the cost-to-cost method of revenue recognition is utilized and
revenue recognized exceeds the amount billed to the customer. The Company
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
typically receives progress payments on sales under
longer-term contracts as work progresses, although for certain contracts, the Company may be entitled to receive an advance
payment. Contract assets also include retainage. Retainage represents a portion of the contract amount that has been billed,
but for which the contract allows the customer to retain a portion of the billed amount (generally, from 5% to 20% of
contract billings) until final contract settlement. Retainage amounts are generally classified as current assets within the
Company’s consolidated balance sheets. Retainage that has been billed, but is not due until completion of performance
and acceptance by customers, is generally expected to be collected within one year. Contract liabilities consist of advanced
payments, billings in excess of costs incurred and deferred revenue.
Costs, estimated earnings
and billings on longer-term contracts when the cost-to-cost method of revenue recognition is utilized as of June 30, 2019 and 2018
consisted of the following (in thousands):
|
June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
19,285
|
|
|
$
|
5,286
|
|
|
Estimated earnings
|
|
|
1,224
|
|
|
|
1,072
|
|
|
Less: revenues recognized to date
|
|
|
(19,673
|
)
|
|
|
(5,605
|
)
|
|
Retainage
|
|
|
797
|
|
|
|
—
|
|
|
Ending balance
|
|
$
|
1,633
|
|
|
$
|
753
|
|
These amounts are included in the
Company’s consolidated balance sheets under the following captions (in thousands):
|
June 30,
|
|
2019
|
|
2018
|
|
Contract assets
|
|
$
|
2,487
|
|
|
$
|
1,012
|
|
|
Contract liabilities
|
|
|
(854
|
)
|
|
|
(259
|
)
|
|
Ending balance
|
|
$
|
1,633
|
|
|
$
|
753
|
|
|
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 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, 2019 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 facilities and distributors and dry cleaning stores and chains. 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 whether it is
probable that any amounts are impaired. The Company includes any balances that are deemed probable to be impaired in its overall
allowance for doubtful accounts. The provision for doubtful accounts is recorded in selling, general and administrative expenses
in the consolidated statements of operations. If customary attempts to collect a receivable are not successful, the receivable
is then written off against the allowance for doubtful accounts. The Company’s allowance for doubtful accounts was $323,000
at June 30, 2019 and $233,000 at June 30, 2018. Actual write-offs may vary from the recorded allowance.
|
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
Cash and Cash Equivalents
|
The Company considers all short term, highly liquid investments that are readily convertible to cash with an original maturity of three months or less when purchased to be cash equivalents. The Company has not experienced any losses in such accounts and believes it is not exposed to significant
credit risk due to the financial position of the depository institutions in which those deposits are held.
|
|
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 net realizable value. Spare part inventories are valued at the lower of average cost or
net realizable value. Lower of cost or net realizable value adjustments are recorded in cost of goods sold in the
consolidated statement of operations.
|
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 the remaining lease term (including renewal periods that are deemed reasonably assured) for leasehold improvements.
Depreciation and amortization of property and equipment is included in selling, general and administrative expenses in the consolidated
statements of operations. Repairs and maintenance costs are expensed as incurred.
|
Customer-Related Intangibles,
Tradenames and
Other Intangible
Assets
|
Finite-lived intangibles are amortized over their estimated useful life while indefinite-lived intangibles
and goodwill are not 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). Amortization of finite-lived intangibles is included in selling, general and administrative expenses in the consolidated
statements of operations. 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, 2019 and determined there was no impairment.
|
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
Asset Impairments
|
The Company periodically reviews 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 the fiscal year ended June 30, 2019 (sometimes
hereinafter referred to as “fiscal 2019”) or the fiscal year ended June 30, 2018 (sometimes hereinafter referred to
as “fiscal 2018”).
|
|
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 to complete on contracts where revenue is recognized over time, 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 fiscal 2019
and fiscal 2018, the Company issued awards of 34,345 and 66,226 shares of restricted stock, respectively, under the EVI Industries,
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 2019 and fiscal 2018 are computed as follows (in thousands, except per share data):
|
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
|
For the years ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,743
|
|
|
$
|
3,966
|
|
Less: distributed and
undistributed income
allocated to non-vested
restricted common stock
|
|
|
260
|
|
|
|
295
|
|
Net income allocated to EVI
Industries, Inc.
shareholders
|
|
$
|
3,483
|
|
|
$
|
3,671
|
|
Weighted average shares
outstanding used in basic
earnings per share
|
|
|
11,533
|
|
|
|
10,840
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common share
equivalents
|
|
|
489
|
|
|
|
437
|
|
Weighted average shares
outstanding used in
dilutive earnings per share
|
|
|
12,022
|
|
|
|
11,277
|
|
|
Basic earnings per share
|
|
$
|
0.30
|
|
|
$
|
0.34
|
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.33
|
|
At June 30, 2019, other than 813,610 unvested shares subject to
restricted stock awards, there were no potentially dilutive securities outstanding. The remaining 69,744 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, 2018,
other than 437,000 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.
|
Supplier Concentration
|
The Company purchases laundry, dry cleaning equipment, boilers and other products from a number of manufacturers and suppliers. Purchases from three of these manufacturers accounted for a total of approximately 62% of the Company’s purchases for fiscal 2019 and purchases from four manufacturers accounted for approximately 76% of the Company’s purchases for fiscal 2018.
|
|
Advertising Costs
|
The Company expenses the cost of advertising as of the first date an advertisement is run. The Company incurred approximately $355,000 and $164,000 of advertising costs for fiscal 2019 and 2018, respectively, which are included in selling, general and administrative expenses in the consolidated 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
EVI Industries, 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 during fiscal 2019 or 2018, except for certain assets acquired and liabilities assumed in a business combination
(as described in Note 3).
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, 2019 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 recognizes
income taxes using the asset and liability method. Under the asset and liability method, 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.
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
EVI Industries, 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 2019 or fiscal 2018.
The Company accounts for uncertainty
in income taxes using 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
as of June 30, 2019 or 2018 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. Pursuant to Staff Accounting Bulletin (“SAB”)
No. 118 (“SAB 118”), the Company’s measurement period for implementing the accounting changes required by the
Tax Act closed on December 22, 2018. The Company completed the accounting for the effects of the Tax Act in the second quarter
of fiscal 2019, which did not result in any changes to previously reported amounts, and there were no adjustments to the preliminary
amounts previously recognized.
|
Recently Issued
Accounting Guidance
|
In February 2016, the FASB issued
ASU No. 2016-02, “Leases (Topic 842)” (“Topic 842”), 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 (ROU) 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. Topic 842 is effective
for fiscal years beginning after December 15, 2018 (i.e., the fiscal year ending June 30, 2020 for the Company). In July 2018,
updated guidance was issued which provides an additional transition method of adoption that allows entities to initially apply
the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in
the period of adoption. The Company adopted Topic 842 utilizing this modified retrospective adoption method with an effective
date of July 1, 2019. Consequently, the accompanying financial statements and footnotes have not been updated to comply with Topic
842.
|
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company has completed scoping reviews
to identify a complete population of leases, and determined its population of leases is comprised largely of real estate leases.
While the Company continues to assess all of the effects of adopting Topic 842, the Company currently believes the most significant
effects will relate to the recognition of new ROU assets and lease liabilities on the consolidated balance sheet for its real estate
operating leases. The Company does not expect that the adoption of Topic 842 will have a significant impact on the Company’s
consolidated statements of operations or cash flows.
Topic 842 provides a number of optional practical
expedients and policy elections in transition. The Company expects to elect the ‘package of practical expedients’,
which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification
and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land
easements.
Topic 842
also provides practical expedients for an entity’s ongoing accounting. The Company expects to elect the short-term lease
recognition exemption for all leases that qualify (i.e., leases of 12 months or less). This means, for those leases that qualify,
the Company, if it elects such exemptions, will not recognize ROU assets or lease liabilities, including ROU assets or lease liabilities
for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient
to not separate lease and non-lease components for all of the Company’s leases.
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.
In August 2018, the FASB issued ASU 2018-15,
“Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), to reduce diversity in
practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. ASU 2018-15 aligns
the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with
the requirements for internal-use software. Accounting for the service element of the cloud computing arrangement is not affected
by the new guidance. Under ASU 2018-15, amortization expense and payments for, and asset balances related to, such capitalized
implementation costs are to be presented within the same line items of the entity’s balance sheets and statements of operations
and cash flows, as the related balances and service fee activity would be presented. ASU 2018-15 is effective for fiscal years,
and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company
is currently evaluating the potential effect of the adoption of ASU 2018-15 on its consolidated financial statements.
Table of Contents
EVI Industries, 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.
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
3. Acquisitions
|
TRS Acquisition
|
On October 31, 2017, the Company, indirectly
through Tri-State, the Company’s wholly-owned subsidiary, completed the TRS Acquisition pursuant to which it purchased substantially
all of the assets of TRS for a purchase price consisting of approximately $7,952,000 in cash and 338,115 shares of the Company’s
common stock. The Company used borrowings under its credit facility at the time to fund the cash consideration. Fees and expenses
related to the TRS 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 TRS. The
total purchase price was $17.3 million, which included cash acquired of $1.8 million.
The TRS Acquisition was
treated for accounting purposes as a purchase of TRS using the acquisition method of accounting. Under the acquisition method
of accounting, the aggregate consideration in the TRS 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 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
|
|
|
Equipment and improvements
|
|
|
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
|
|
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 is 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
EVI Industries, 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 TRS 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 and 348,360 shares of the Company’s
common stock. and the Company used borrowings under its credit facility at the time 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. Under the acquisition method
of accounting, the aggregate consideration in the AA 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 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
|
|
|
Equipment and improvements
|
|
|
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
|
|
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 is 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
EVI Industries, 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 AA Acquisition.
SEI Acquisition
On September
12, 2018, the Company completed the acquisition (the “SEI Acquisition”) of 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. In the SEI Acquisition,
the Company, indirectly through its newly-formed wholly-owned subsidiary, Scott Equipment Inc. (“Scott Equipment”),
purchased substantially all of the assets of SEI for a purchase price consisting of approximately $6,500,000 in cash and 209,678
shares of the Company’s common stock. The Company funded the cash consideration with borrowings under its credit facility
at the time. Fees and expenses related to the SEI Acquisition, consisting primarily of legal and other professional fees, totaled
approximately $65,000 and are classified as selling, general and administrative expenses in the Company’s consolidated statement
of operations for the fiscal year ended June 30, 2019. The Company, indirectly through Scott Equipment, also assumed certain of
the liabilities of SEI. The total purchase price for accounting purposes was $15.9 million, which included cash acquired of $2.8
million.
The SEI Acquisition
was treated for accounting purposes as a purchase of SEI using the acquisition method of accounting. Under the acquisition method
of accounting, the aggregate consideration in the SEI 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 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)
|
|
$
|
3,709
|
|
|
Stock consideration(b)
|
|
|
9,436
|
|
|
Total purchase price consideration, net of cash acquired
|
|
$
|
13,145
|
|
|
|
|
|
|
|
(a)Includes $6,500,000 paid net of
$2.8 million of cash acquired.
(b)Calculated as 209,678 shares of
the Company’s common stock, multiplied by $45.00, the closing price of the Company’s common stock on the closing date.
|
Allocation of purchase price consideration:
|
|
|
|
Accounts receivable
|
|
$
|
2,658
|
|
|
Inventory
|
|
|
1,595
|
|
|
Other assets
|
|
|
156
|
|
|
Equipment and improvements
|
|
|
424
|
|
|
Intangible assets
|
|
|
3,100
|
|
|
Accounts payable and accrued expenses
|
|
|
(740
|
)
|
|
Customer deposits
|
|
|
(398
|
)
|
|
Total identifiable net assets
|
|
|
6,795
|
|
|
Goodwill
|
|
|
6,350
|
|
|
Total
|
|
$
|
13,145
|
|
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company is continuing its valuation
of the net assets acquired, which is 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 also still assessing
certain working capital items.
Intangible assets consist of $1.3 million
allocated to the Scott Equipment trade name and $1.8 million allocated to customer-related intangible assets. The Scott Equipment
trade name is indefinite-lived and therefore not subject to amortization. The Scott Equipment trade name is 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 SEI Acquisition.
PAC Acquisition
On February 5,
2019, the Company completed the acquisition (the “PAC Acquisition”) of PAC Industries Inc. (“PAC”), a
Pennsylvania-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, pursuant to a merger whereby
PAC merged with and into PAC Industries Inc., a newly-formed wholly-owned subsidiary of the Company (“PAC Industries”).
The purchase price in the PAC Acquisition consisted of approximately $6,400,000 in cash and 179,847 shares of the Company’s
common stock. The Company funded the cash consideration with borrowings under its current credit facility. Fees and expenses related
to the PAC Acquisition, consisting primarily of legal and other professional fees, totaled approximately $182,000 and are classified
as selling, general and administrative expenses in the Company’s consolidated statement of operations for the fiscal year
ended June 30, 2019. The total purchase price for accounting purposes was $13.1 million, which included cash acquired of $1.1
million.
The PAC Acquisition
was treated for accounting purposes as a purchase of PAC using the acquisition method of accounting. Under the acquisition method
of accounting, the aggregate consideration in the PAC Acquisition was allocated to the assets and liabilities of PAC, 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):
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
Purchase price consideration:
|
|
|
|
Cash consideration, net of cash acquired(a)
|
|
$
|
5,312
|
|
|
Stock consideration(b)
|
|
|
6,653
|
|
|
Total purchase price consideration, net of cash acquired
|
|
$
|
11,965
|
|
|
|
|
|
|
|
(a)Includes $6,400,000 paid net of
$1.1 million of cash acquired.
(b)Calculated as 179,847 shares of
the Company’s common stock, multiplied by $36.99, the closing price of the Company’s common stock on the closing date.
|
Allocation of purchase price consideration:
|
|
|
|
Accounts receivable
|
|
$
|
2,231
|
|
|
Inventory
|
|
|
2,136
|
|
|
Other assets
|
|
|
158
|
|
|
Equipment and improvements
|
|
|
357
|
|
|
Intangible assets
|
|
|
3,000
|
|
|
Accounts payable and accrued expenses
|
|
|
(1,912
|
)
|
|
Customer deposits
|
|
|
(465
|
)
|
|
Assumption of debt
|
|
|
(200
|
)
|
|
Total identifiable net assets
|
|
|
5,305
|
|
|
Goodwill
|
|
|
6,660
|
|
|
Total
|
|
$
|
11,965
|
|
|
|
|
|
|
|
The Company is continuing its valuation
of the net assets acquired, which is subject to adjustment in accordance with the merger 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 also still assessing certain working
capital items.
Intangible assets consist of $1.1 million
allocated to the PAC Industries trade name and $1.9 million allocated to customer-related intangible assets. The PAC Industries
trade name is indefinite-lived and therefore not subject to amortization. The PAC Industries trade name is 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 of PAC, as well as benefits
from the increased scale of the Company as a result of the PAC Acquisition.
In connection with the PAC Acquisition,
the Company transferred 114,634 shares to PAC’s ESOP. These shares were not permitted to be traded during the six-month period
commencing on the closing date. Further, if a distribution event occurred during such six-month period, then each participant would
have had the option to require the Company to purchase such participant’s shares at fair market value. Due to the Company’s
obligation under this put option, which was in effect at June 30, 2019 but has subsequently expired, the distributed shares subject
to the put option and the shares held by the ESOP are classified as temporary equity in the mezzanine section of the consolidated
balance sheet as of June 30, 2019. There were no distribution events during the six-month restriction period.
Other Acquisitions
As previously described, in addition
to the SEI Acquisition and the PAC Acquisition, during the fiscal ended June 30, 2019, the Company completed the acquisition of
four other companies (Industrial Laundry Services, Inc. on September 4, 2018, Washington Automated, Inc. on November 6, 2018, Skyline
Equipment, Inc. on November 14, 2018 and Worldwide Laundry, Inc. on November 16, 2018). The total consideration
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
for these four
transactions consisted of $3.5 million in cash, net of $738,000 of cash acquired, and 141,000 shares of the Company’s common
stock. The Company funded the cash consideration for each acquisition with credit facility borrowings. Each acquisition was treated
for accounting purposes as a purchase of the acquired business 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 preliminarily
allocated a total of $4.5 million to goodwill, $1.3 million to customer-related intangibles, and $690,000 to the respective trade
names. The purchase price allocations are considered preliminary, as the Company is still assessing certain working capital and
valuation-related items.
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 TRS Acquisition, AA Acquisition,
SEI Acquisition, PAC Acquisition and the four other acquisitions completed during fiscal 2019 as described above, as if the Company
had completed each such transaction and all related financing transactions on July 1, 2017, 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)
|
|
2019
(Unaudited)
|
|
2018
(Unaudited)
|
|
Revenues
|
|
$
|
252,182
|
|
|
$
|
240,711
|
|
|
Net income
|
|
|
4,472
|
|
|
|
7,046
|
|
The Company’s consolidated results of
operations for fiscal 2019 include total revenue of approximately $98.8 million and total net income of approximately $2.9 million
attributable to businesses acquired during fiscal 2019 or 2018, based on the consolidated effective tax rate. These results of
acquired businesses do not include the effects of acquisition costs or interest expense associated with consideration paid for
the related acquisitions.
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
4. Accounts Receivable
|
Accounts receivable as of June
30, 2019 and 2018 consisted of the following (in thousands):
|
|
June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Accounts receivable - trade
|
|
$
|
26,158
|
|
|
$
|
14,761
|
|
|
Contract receivables
|
|
|
4,722
|
|
|
|
770
|
|
|
Retention receivables
|
|
|
—
|
|
|
|
728
|
|
|
|
|
|
30,880
|
|
|
|
16,259
|
|
|
Allowance for doubtful accounts
|
|
|
(323
|
)
|
|
|
(233
|
)
|
|
|
|
$
|
30,557
|
|
|
$
|
16,026
|
|
|
5. Inventories
|
Inventories as of June 30, 2019 and 2018 were comprised of (in thousands):
|
|
June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Equipment and parts
|
|
$
|
26,735
|
|
|
$
|
15,603
|
|
|
Reserve
|
|
|
(290
|
)
|
|
|
(253
|
)
|
|
|
|
$
|
26,445
|
|
|
$
|
15,350
|
|
The Company established reserves of
approximately $290,000 and $253,000 as of June 30, 2019 and 2018, 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, 2019 and 2018 were comprised of (in thousands):
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Other receivables
|
|
$
|
856
|
|
|
$
|
480
|
|
|
Prepaid insurance
|
|
|
251
|
|
|
|
295
|
|
|
Other current assets
|
|
|
1,831
|
|
|
|
1,275
|
|
|
|
|
$
|
2,938
|
|
|
$
|
2,050
|
|
8. Net Investment in
Sales Type Leases
|
The future minimum lease payments receivable
for sales type leases are as follows (in thousands):
|
|
Fiscal years ending June 30,
|
|
Total Minimum
Lease Payments
to be Received
|
|
Amortization of
Unearned
Income
|
|
Net Investment in
Sales Type
Leases
|
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
1,383
|
|
|
$
|
765
|
|
|
$
|
618
|
|
|
2021
|
|
|
889
|
|
|
|
530
|
|
|
|
359
|
|
|
2022
|
|
|
600
|
|
|
|
320
|
|
|
|
280
|
|
|
2023
|
|
|
354
|
|
|
|
163
|
|
|
|
191
|
|
|
2024
|
|
|
140
|
|
|
|
57
|
|
|
|
83
|
|
|
Thereafter
|
|
|
94
|
|
|
|
51
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,574
|
*
|
*
Excludes residual values of $1.4 million
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The total net investments in sales
type leases, including stated residual values, as of June 30, 2019 and 2018 was $3.0 million and $2.8 million, respectively. The
current portion of $0.5 million and $0.4 million is included in Other Current Assets in the consolidated balance sheets as of
June 30, 2019 and 2018, respectively, and the long term portion of $2.5 million and $2.4 million is included in Other Assets in
the consolidated balance sheets as of June 30, 2019 and 2018, respectively.
|
9. Equipment and
Improvements
|
Major classes of equipment and improvements as of June 30, 2019 and 2018 consisted of the following (in thousands):
|
|
June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
3,365
|
|
|
$
|
2,019
|
|
|
Leasehold improvements
|
|
|
1,567
|
|
|
|
674
|
|
|
Vehicles
|
|
|
3,902
|
|
|
|
1,989
|
|
|
|
|
|
8,834
|
|
|
|
4,682
|
|
|
Accumulated depreciation and amortization
|
|
|
(2,969
|
)
|
|
|
(1,699
|
)
|
|
|
|
$
|
5,865
|
|
|
$
|
2,983
|
|
Depreciation
and amortization of equipment and improvements amounted to approximately $1.2 million in fiscal 2019 and $721,000 in fiscal 2018.
|
10. Goodwill and Intangible Assets
|
The changes in the carrying amount of goodwill
are as follows (in thousands):
|
|
Balance at June 30, 2017
|
|
$
|
24,753
|
|
|
Goodwill from TRS Acquisition
|
|
|
4,974
|
|
|
Goodwill from AA Acquisition
|
|
|
7,334
|
|
|
Balance at June 30, 2018
|
|
|
37,061
|
|
|
Goodwill from SEI Acquisition
|
|
|
6,350
|
|
|
Goodwill from PAC Acquisition
|
|
|
6,660
|
|
|
Goodwill from other acquisitions (as described in Note 3)
|
|
|
4,430
|
|
|
Balance at June 30, 2019
|
|
$
|
54,501
|
|
Customer-related
intangibles, tradenames and other intangible assets as of June 30, 2019 and 2018 consisted of the following (dollars in thousands):
|
June 30,
|
|
Estimated
Useful Lives
(in years)
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Customer-related intangibles
|
|
|
8-10
|
|
|
$
|
15,340
|
|
|
$
|
10,380
|
|
|
Tradenames
|
|
|
Indefinite
|
|
|
|
9,145
|
|
|
|
6,055
|
|
|
Covenants not to compete
|
|
|
5
|
|
|
|
566
|
|
|
|
566
|
|
|
License agreements
|
|
|
10
|
|
|
|
529
|
|
|
|
529
|
|
|
Trademarks and patents
|
|
|
10-15
|
|
|
|
176
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
25,756
|
|
|
|
17,706
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
(3,405
|
)
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
$
|
22,351
|
|
|
$
|
15,775
|
|
Amortization
expense was approximately $1.5 million in fiscal 2019 and $858,000 in fiscal 2018. Weighted average remaining estimated useful
lives for customer-related intangibles, covenants not to compete, license agreements, and trademarks and patents were 8.4 years,
2.4 years, 0 years and 1.0 years, respectively.
Based on
the carrying amount of intangible assets as of June 30, 2019, 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, 2024 and thereafter is as
follows (in thousands):
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
Fiscal years ending June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
1,665
|
|
|
2021
|
|
|
1,659
|
|
|
2022
|
|
|
1,593
|
|
|
2023
|
|
|
1,550
|
|
|
2024
|
|
|
1,550
|
|
|
Thereafter
|
|
|
5,189
|
|
|
Total
|
|
$
|
13,206
|
|
|
11. Accounts Payable and Accrued Expenses
|
Accounts payable and accrued
expenses as of June 30, 2019 and 2018 were comprised of (in thousands):
|
|
June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,305
|
|
|
$
|
7,691
|
|
|
Accrued expenses
|
|
|
5,065
|
|
|
|
3,371
|
|
|
Sales tax accruals
|
|
|
1,138
|
|
|
|
680
|
|
|
|
|
$
|
17,508
|
|
|
$
|
11,742
|
|
|
12. Income Taxes
|
The following are the components of income taxes (in thousands):
|
|
Fiscal years ended June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
673
|
|
|
$
|
1,192
|
|
|
State
|
|
|
339
|
|
|
|
542
|
|
|
|
|
|
1,012
|
|
|
|
1,734
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
663
|
|
|
|
562
|
|
|
State
|
|
|
198
|
|
|
|
120
|
|
|
|
|
|
861
|
|
|
|
682
|
|
|
|
|
$
|
1,873
|
|
|
$
|
2,416
|
|
The reconciliation
of income tax expense computed at the federal statutory tax rate of 21% and 28% for the fiscal years ended June 30, 2019 and 2018,
respectively, to the provision for income taxes is as follows (in thousands):
|
Fiscal years ended June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Tax at the statutory rate
|
|
$
|
1,180
|
|
|
$
|
1,788
|
|
State income taxes,
net of federal benefit
|
|
|
323
|
|
|
|
319
|
|
|
Other
|
|
|
370
|
|
|
|
309
|
|
|
|
|
$
|
1,873
|
|
|
$
|
2,416
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
33.4
|
%
|
|
|
37.9
|
%
|
Deferred
income taxes reflect the net tax effect of temporary differences between the basis of assets and liabilities for financial reporting
purposes and the basis used for income tax purposes. Significant components of the Company’s current and noncurrent
deferred tax assets and liabilities as of June 30, 2019 and 2018 were as follows (in thousands):
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
Fiscal years ended June 30,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
116
|
|
|
$
|
66
|
|
|
Inventory capitalization
|
|
|
471
|
|
|
|
303
|
|
|
Stock compensation
|
|
|
499
|
|
|
|
277
|
|
|
Other
|
|
|
46
|
|
|
|
74
|
|
|
|
|
|
1,132
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(1,375
|
)
|
|
|
(664
|
)
|
|
Depreciation
|
|
|
(1,217
|
)
|
|
|
(614
|
)
|
|
Intangible assets
|
|
|
(248
|
)
|
|
|
—
|
|
|
|
|
|
(2,840
|
)
|
|
|
(1,278
|
)
|
|
Net deferred income tax (liabilities) assets
|
|
$
|
(1,708
|
)
|
|
$
|
(558
|
)
|
As of June 30,
2019, 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. Pursuant to SAB 118, the
Company’s measurement period for implementing the accounting changes required by the Tax Act closed on December 22, 2018.
The Company completed the accounting under ASC 740 in the second quarter of fiscal 2019, and there were no adjustments to the preliminary amounts previously recognized.
|
13. Debt
|
The Company’s
long-term debt as of June 30, 2019 and 2018 was as follows (in thousands):
|
|
|
|
June 30,
2019
|
|
June 30,
2018
|
|
Term Loan
|
|
$
|
—
|
|
|
$
|
6,375
|
|
|
Revolving Line of Credit
|
|
|
40,800
|
|
|
|
3,697
|
|
|
Less: unamortized discount and deferred financing costs
|
|
|
(237
|
)
|
|
|
(60
|
)
|
|
Total debt, net
|
|
|
40,563
|
|
|
|
10,012
|
|
|
Less: current maturities of long-term debt
|
|
|
—
|
|
|
|
(1,195
|
)
|
|
Total long-term debt
|
|
$
|
40,563
|
|
|
$
|
8,817
|
|
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On November 2, 2018, the Company entered into
a syndicated credit agreement (the “2018 Credit Agreement”) for a five-year revolving credit facility in the maximum
aggregate principal amount of up to $100 million, with an accordion feature to increase the revolving credit facility by up to
$40 million for a total of $140 million. A portion of the revolving credit facility is available for swingline loans of up to a
sublimit of $5 million and for the issuance of standby letters of credit of up to a sublimit of $10 million.
Borrowings (other than swingline loans) under
the 2018 Credit Agreement bear interest at a rate, at the Company’s election at the time of borrowing, equal to (a) LIBOR
plus a margin that ranges from 1.25% to 1.75% depending on the Company’s consolidated leverage ratio, which is a ratio of
consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Consolidated
Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the one month
LIBOR rate plus 100 basis points (such highest rate, the “Base Rate”), plus a margin that ranges from 0.25% to 0.75%
depending on the Consolidated Leverage Ratio. Swingline loans bear interest calculated at the Base Rate plus a margin that ranges
from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. The 2018 Credit Agreement has a term of five years and matures
on November 2, 2023.
The 2018 Credit Agreement contains certain
covenants, including financial covenants requiring the Company to comply with maximum leverage ratios and minimum interest coverage
ratios. The 2018 Credit Agreement also contains other provisions which may restrict the Company’s ability to, among other
things, dispose of or acquire assets or businesses, incur additional indebtedness, make certain investments and capital expenditures,
pay dividends, repurchase shares and enter into transactions with affiliates. At June 30, 2019, the Company was in compliance with
its covenants under the 2018 Credit Agreement and $6.9 million was available to borrow under the revolving credit facility.
The obligations of the Company under the 2018
Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries, and are guaranteed,
jointly and severally, by certain of the Company’s subsidiaries.
In connection with the Western State Design
Acquisition, on October 7, 2016, the Company entered into a $20.0 million credit agreement (the “Prior 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 TRS Acquisition, the
Company’s Prior 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 Prior
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 TRS Acquisition.
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In connection with the AA Acquisition, the
Company’s Prior 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 Prior 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. In connection with its entry into the
2018 Credit Agreement on November 2, 2018, the Company repaid all
outstanding amounts under, and terminated, the Prior Credit Facility.
|
14. Related Party Transactions
|
Certain of the Company’s subsidiaries
lease warehouse and office space from one or more of the principals of the Company or its subsidiaries. These leases include the
following:
|
The Company’s wholly-owned subsidiary,
Steiner-Atlantic, leases 28,000 square feet of warehouse and office space from an affiliate of Michael S. Steiner, a director and
Executive Vice President and Secretary of the Company, pursuant to a lease agreement dated November 1, 2014, as amended. The lease
term was extended during December 2018 to run through December 31, 2019. 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 $146,000 and $137,000 during the fiscal years ended June
30, 2019 and 2018, respectively.
On October 10, 2016, the Company’s
wholly-owned subsidiary, Western State Design, Inc. (“Western State Design”), entered into a lease agreement pursuant
to which it leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a director and Executive
Vice President, Corporate Strategy of the Company, and Tom Marks, Executive Vice President, Business Development of the Company.
Monthly base rental payments are $12,000 during the initial term of the lease. In addition to base rent, Western State Design is
responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has
an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under
this lease totaled approximately $144,000 during each of the fiscal years ended June 30, 2019 and 2018.
On October
31, 2017, the Company’s wholly-owned subsidiary, Tri-State Technical Services, Inc. (“Tri-State”), entered into
lease agreements pursuant to which it leases a total of 81,000 square feet of warehouse and office space from an affiliate of
Matt Stephenson, President of Tri-State. Monthly base rental payments total $21,000 during the initial terms of the leases. In
addition to base rent, Tri-State is responsible under the leases for costs related to real estate taxes, utilities, maintenance,
repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at
the option of the Company. Payments under these leases totaled approximately $252,000 during the fiscal year ended June 30, 2019
and $168,000 during the period from October 31, 2017 through June 30, 2018.
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On February
9, 2018, the Company’s wholly-owned subsidiary, AAdvantage Laundry Systems, Inc. (“AAdvantage”), entered into
a lease agreement pursuant to which it leases a total of 5,000 square feet of warehouse and office space from an affiliate of
Mike Zuffinetti, Chief Executive Officer of AAdvantage. Monthly base rental payments are $3,950 during the initial term of the
lease. In addition to base rent, AAdvantage is responsible under the lease for costs related to real estate taxes, utilities,
maintenance, repairs and insurance. The lease has an initial term of five years and provides for two successive three-year renewal
terms at the option of the Company. During February 2018, AAdvantage entered into a month-to-month lease agreement with an affiliate
of Mike Zuffinetti for a total of 17,000 square feet of warehouse and office space. Monthly base rental payments under this lease
were $13,500. This month-to-month lease was terminated on October 31, 2018. In addition, on November 1, 2018, AAdvantage entered
into a lease agreement pursuant to which it leases warehouse and office space from an affiliate of Mike Zuffinetti. Monthly base
rental payments were initially $26,000. Pursuant to the lease agreement, on January 1, 2019, the lease expanded to cover additional
warehouse space and, in connection therewith, monthly base rental payments increased to $36,000. In addition to base rent, AAdvantage
is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease
has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments
under the leases described in this paragraph totaled approximately $369,000 during the fiscal year ended June 30, 2019. Payments
under the leases from February 9, 2018 through June 30, 2018 were approximately $87,000.
On September
12, 2018, the Company’s wholly-owned subsidiary, Scott Equipment, entered into lease agreements pursuant to which it leases
a total of 18,000 square feet of warehouse and office space from an affiliate of Scott Martin, President of Scott Equipment. Monthly
base rental payments total $11,000 during the initial terms of the leases. In addition to base rent, Scott Equipment is responsible
under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial
term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under these
leases totaled approximately $114,000 during the fiscal year ended June 30, 2019.
On February 5, 2019, the Company’s wholly-owned
subsidiary, PAC Industries, entered into two lease agreements pursuant to which it leases a total of 29,500 square feet of warehouse
and office space from an affiliate of Frank Costabile, President of PAC Industries, and Rocco Costabile, Director of Finance of
PAC Industries. Monthly base rental payments total $14,600 during the initial terms of the leases. In addition to base rent, PAC
Industries is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance.
Each lease has an initial term of four years and provides for two successive three-year renewal terms at the option of the Company.
Payments under these leases totaled approximately $73,000 during the
fiscal year ended June 30, 2019.
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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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, 2019, 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 9% and 8% of the Company’s revenues for fiscal 2019 and 2018, respectively. Additionally, no single contract for a federal government facility or other contract accounted for more than 10% of the Company’s revenues for fiscal 2019 or 2018. As of June 30, 2019, the largest account receivable from a single third party entity relating to a single project was $4.0 million. There were no other accounts receivable due from any individual entity which accounted for greater than 10% of the Company’s accounts receivable at June 30, 2019.
|
|
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,
|
|
|
|
|
|
|
|
2020
|
|
$
|
1,922
|
|
|
2021
|
|
|
1,554
|
|
|
2022
|
|
|
1,332
|
|
|
2023
|
|
|
1,031
|
|
|
2024
|
|
|
179
|
|
|
Total
|
|
$
|
6,018
|
|
Rent expense, including those with related parties, under these leases totaled approximately $1.5 million and $704,000 for fiscal 2019 and 2018, 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 is required to reimburse the surety for any such expenses or outlays it incurs. As of June 30, 2019 and June 30, 2018, outstanding performance and payment bonds totaled $8.0 million and $8.3 million, respectively. As of June 30, 2019, there were no estimated costs to complete on projects secured by these bonds. As of June 30, 2018, estimated costs to complete projects secured by these bonds totaled $4.4 million.
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
EVI Industries, 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 $453,000 and $228,000 to the plans during fiscal 2019 and fiscal 2018, respectively. The plans are qualified
under Section 401(k) of the Internal Revenue Code.
|
|
18. Shareholders’
Equity
|
On December 11, 2018, the Company’s
Board of Directors declared a $.13 per share cash dividend on the Company’s common stock (an aggregate of approximately
$1.6 million), which was paid on January 8, 2019 to stockholders of record at the close of business on December 26, 2018.
|
On December 12, 2017, the Company’s Board
of Directors declared a $.12 per share cash dividend on the Company’s common stock (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.
|
19. Equity Plan
|
In November 2015, the Company’s
stockholders approved the Company’s 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 a straight-line basis over the vesting period of the awards. Share-based compensation expense,
which totaled $1.7 million and $1.6 million in fiscal 2019 and 2018, respectively, is included in selling, general and administrative
expenses in the Company’s consolidated statements of operations. During fiscal 2019, the Company granted a total of 34,345
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 5 to 31 years. The total grant date fair value of such restricted stock was $1.2 million. 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. 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 2019, 54,093 shares of restricted stock vested and 20,248 shares of common stock with
an aggregate fair market value of $728,000 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection
with the vesting of such restricted stock. 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. As of June 30, 2019, the Company had $15.1 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 17.3 years after the respective dates of grant.
|
The following is a summary of non-vested
restricted stock activity as of, and for the fiscal year ended, June 30, 2019:
Table of Contents
EVI Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
|
Restricted Stock Awards
|
|
Restricted Stock Units
|
|
|
|
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Non-vested restricted stock outstanding at June 30, 2018
|
|
|
903,102
|
|
|
$
|
18.41
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
6,845
|
|
|
|
36.53
|
|
|
|
27,500
|
|
|
|
36.24
|
|
|
Vested
|
|
|
(54,093
|
)
|
|
|
17.43
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-vested restricted stock outstanding at June 30, 2019
|
|
|
855,854
|
|
|
$
|
18.62
|
|
|
|
27,500
|
|
|
$
|
36.24
|
|
Employee Stock Purchase Plan
The Company’s employee stock purchase plan commenced on July 1, 2018 and provides for consecutive six-month offering periods. During fiscal 2019, 1,341 shares of common stock were issued under the Company’s employee stock purchase plan for which the Company received net proceeds of $45,000. There were no shares issued under the Company’s employee stock purchase plan during fiscal 2018.
|
20. Subsequent Events
|
On August 1, 2019, the Company, through its
wholly-owned subsidiary, Professional Laundry Systems, LLC (“Professional Laundry Systems”), completed the acquisition
of substantially all of the assets of Commercial Laundry Products, Inc., Professional Laundry Systems of PA, Inc., and Professional
Laundry Systems West, Inc. (collectively “PLS”), a New York-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
Professional Laundry Systems, also assumed certain of the liabilities of PLS. The financial position, including assets and liabilities,
and results of operations of PLS following the August 1, 2019 closing date will be consolidated in the Company’s consolidated
financial statements beginning with the quarter ending September 30, 2019.
|