Item 1. Business.
General
The Company was
incorporated under the laws of the State of Delaware on June 13, 1963 under the name Metro-Tel Corp. and changed its name to DRYCLEAN
USA, Inc. on November 7, 1999. On December 1, 2009, the Company changed its name to EnviroStar, Inc.
The Company, through
its wholly-owned subsidiaries:
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distributes commercial, industrial and vended laundry and dry cleaning equipment and steam and
hot water boilers manufactured by others;
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supplies related replacement parts and accessories, and provides installation and
maintenance
services to its
customers; and
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designs and plans turn-key laundry, dry cleaning and boiler systems for its customers, which include
institutional, retail, industrial and commercial customers.
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These activities
are conducted in the United States, Canada, the Caribbean and Latin America. Historically, the Company’s operations related
to these activities consisted solely of the business and operations of Steiner-Atlantic Corp. (“Steiner-Atlantic”),
a wholly-owned subsidiary of the Company.
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,
a California-based distributor of commercial and industrial laundry equipment and related parts for new laundry facilities and
to the replacement laundry market. In addition, 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 the assets of Martin-Ray Laundry Systems, Inc., a Colorado-based distributor of commercial and industrial laundry equipment
and related parts for new laundry facilities and to the replacement laundry market. See “Buy and Build Growth Strategy”
below for additional information regarding these acquisitions.
In addition, the
Company, through DRYCLEAN USA License Corp., an indirect wholly-owned subsidiary of the Company, owns the worldwide rights to the
name DRYCLEAN USA® and licenses the right to use such name for a fee to retail dry cleaners in the United States, the Caribbean
and Latin America.
The Company reports
its results of operations through a single reportable segment, which includes the operations of Steiner-Atlantic as well as the
operations of Western State Design since the closing of the Western State Design Acquisition on October 10, 2016 and the operations
of Martin-Ray since the closing date of the Martin-Ray Acquisition on June 19, 2017.
Available Information
The Company files
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, files or furnishes Current Reports on Form 8-K, files or furnishes
amendments to those reports, and files proxy and information statements with the SEC. These reports and statements may be read
and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports and statements, as well as beneficial
ownership reports filed by the Company’s officers and directors and beneficial owners of 10% or more of the Company’s
common stock, may also be accessed free of charge on the SEC’s website at
http://www.sec.gov
and, as soon as reasonably
practicable after such materials are filed with, or furnished to, the SEC, on the Company’s website at
http://www.envirostarinc.com
.
Products
The Company sells
an extensive line of commercial and industrial laundry and dry cleaning equipment and steam and hot water boilers manufactured
by others, as well as related replacement parts and accessories, and provides installation and maintenance services.
The commercial and
industrial laundry equipment distributed by the Company includes washroom, finishing, material handling, and mechanical equipment
such as washers and dryers, tunnel systems and coin-operated machines, many of which are designed to reduce utility and water consumption.
Finishing equipment distributed by the Company includes sheet feeders, flatwork ironers, automatic sheet folders, and stackers.
Material handling equipment distributed by the Company includes
conveyor and rail systems. Mechanical equipment distributed by
the Company includes boilers, hot water/steam systems, water reuse systems and air compressors.
The dry cleaning
equipment distributed by the Company includes commercial dry cleaning machines, most of which are designed to be environmentally
friendly by not using perchloroethylene (“Perc”) in the dry cleaning process, and therefore eliminating the health
and environmental concerns that Perc poses. This line of products also includes garment presses, finishing equipment, sorting and
storage conveyors and accessories.
Boiler products
consist of high efficiency, low emission steam boilers, steam systems and hot water systems that are used in the laundry and dry
cleaning industry for temperature control, heating, pressing and de-wrinkling, and in the healthcare industry, food and beverage
industry, HVAC industry and in other industrial markets for sterilization, product sealing and other purposes.
The
Company also sells replacement parts and accessories for the products it sells and provides installation and maintenance
services to its customers.
The Company seeks
to position and price the products that it sells to appeal to customers in each of the high-end, mid-range and value-priced markets,
as the products are generally offered in a wide range of price points to address the needs of a diverse customer base. The Company
believes that the portfolio of products that it sells affords the Company’s customers a “one-stop shop” for commercial,
industrial and vended laundry and dry cleaning machines, boilers and accessories and that, as a result, the Company is able to
attract and support potential customers who can choose from the Company’s broad product line.
Buy-and-Build Growth Strategy
The
Company intends to grow using a “buy-and-build” strategy. The “buy” component of the strategy includes
the consideration and pursuit of acquisitions and other strategic transactions that would complement the Company’s existing
business or that might otherwise offer growth opportunities for, or benefit, the Company. The Company is disciplined and conservative
in its consideration of acquisitions and generally seeks to identify opportunities that fit certain financial and strategic criteria.
The “build” component of the strategy involves implementing a growth culture at acquired businesses based on the exchange
of ideas and business concepts among the management teams of the Company and the acquired businesses as well as through certain
additional initiatives, which may include investments in new locations, additional product lines, expanded service capabilities
and advanced technologies. The Company generally seeks to structure acquisitions to include both cash and stock consideration.
The Company believes the issuance of stock consideration aligns the interests of the sellers of the acquired businesses, who the
Company seeks to maintain to continue to operate the acquired businesses, with those of our other stockholders. The sellers as
well as other key individuals at the acquired businesses may also be provided with the opportunity to own shares of the Company’s
common stock through equity-based plans of the Company.
As
previously described, on October 10, 2016, the Company completed the Western State Design Acquisition pursuant to which the Company,
through its wholly-owned subsidiary, Western State Design, purchased substantially all the assets of Western State Design, LLC
(“WSD”), a California-based distributor of commercial and industrial laundry equipment and related parts for new laundry
facilities and to the replacement laundry market, 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, which included $2.8 million which was placed in escrow for no less
than 18 months after the closing date (subject to extension in certain circumstances), 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. Henry M. Nahmad,
the Company’s Chairman, Chief Executive Officer, President and controlling stockholder, is the Manager of, and may be deemed
to control, Symmetric Capital II. Pursuant to the Asset Purchase Agreement, the Company, indirectly through Western State Design,
also assumed certain of the liabilities of WSD.
In
addition, on June 19, 2017, the Company completed the Martin-Ray Acquisition pursuant to which the Company, through its wholly-owned
subsidiary, Martin-Ray, purchased substantially all of the assets and assumed certain of the liabilities of Martin-Ray Laundry
Systems, Inc. (“MRLS”), a Colorado-based distributor of commercial laundry equipment. The consideration for the transaction
consisted of $2.0 million in cash, $400,000 of which was placed in escrow for no less than 18 months after the closing
date (subject
to extension in certain circumstances), and 98,668 shares of the Company’s common stock. The Company funded the cash consideration
with cash on hand.
On September 8, 2017, the
Company and a newly formed wholly owned subsidiary of the Company entered into an Asset Purchase Agreement pursuant to which the
Company would acquire substantially all of the assets and assume certain of the liabilities of Tri-State Technical Services, Inc.
(“Tri-State”), a Georgia-based 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 consideration to be paid by the Company in connection with the acquisition consists of $8.25 million in cash (subject to certain
working capital and other adjustments), of which $2.1 million will be deposited in an escrow account for no less than 24 months
after the closing date (subject to extension in certain circumstances), and 338,115 shares of the Company’s common stock.
The Company intends to fund the cash consideration with cash on hand and borrowings under the Company’s existing credit facility.
Consummation of the transaction is subject to certain closing conditions. There is no assurance that the transaction will be consummated
on the contemplated terms, when anticipated, or at all.
Customers and Markets
The
Company’s customer base consists of approximately 9,100 customers in the United States, Canada, the Caribbean and Latin
America. The Company’s commercial and industrial laundry equipment and boilers are sold primarily to laundry plants,
hotels, motels, cruise lines, hospitals, hospital combines, nursing homes, government institutions, distributors, coin
laundries and specialized users. Dry cleaning equipment is sold primarily to dry cleaning stores, chains and higher-end
hotels.
Sales, Marketing and Customer Support
The Company employs
sales personnel to market its products in the United States, Canada, the Caribbean and Latin America. The Company has exclusive
and nonexclusive distribution rights to market the products it sells. Sales orders for equipment and replacement parts and accessories
are generally obtained by telephone, e-mail and fax inquiries originated by the customer or by the Company, from existing customer
relationships and from newly formed customer relationships. The Company supports product sales through its websites and by advertising
in trade publications, participating in trade shows and engaging in regional promotions and sales incentive programs.
The Company seeks
to establish customer satisfaction by offering:
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an experienced sales and service organization;
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a comprehensive product offering;
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maintenance of comprehensive and well-stocked inventories of replacement parts and
accessories,
often with same
day or overnight availability;
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design and layout services;
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a toll-free support line and technical websites to resolve customer service problems;
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installation and maintenance services; and
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service on-site training performed by factory trained technicians.
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The Company trains
its employees to provide service and customer support. The Company uses in-person classroom training, instructional videos and
vendor sponsored seminars to educate employees about product information. In addition, the Company’s technical staff has
prepared training manuals, written in English and Spanish, relating to specific training procedures. The Company’s technical
personnel are retrained as the Company believes to be necessary, including in connection with the development of new technology.
Foreign Sales
For the fiscal year
ended June 30, 2017 (“fiscal 2017”) and the fiscal year ended June 30, 2016 (“fiscal 2016”), revenues
related to foreign sales totaled approximately $5.8 million and $4.6 million, respectively, substantially all of which related
to the sale of commercial and industrial laundry and dry cleaning equipment and boilers to customers in Canada, the Caribbean
and Latin America.
All of the Company’s
foreign sales require the customer to make payment in United States dollars. Foreign sales may be affected by the strength of the
United States dollar relative to the currencies of the countries in which the Company’s customers are located, as well as
the strength of the economies of the countries in which the Company’s customers are located.
Sources of Supply
The Company purchases
commercial and industrial laundry products, dry cleaning machines, boilers and other products from a number of manufacturers and
suppliers. Purchases from four manufacturers accounted for approximately 59% of the Company’s purchases for fiscal 2017,
while purchases from three manufacturers accounted for approximately 68% of the Company’s purchases for fiscal 2016. The
major manufacturers of the products sold by the Company are Pellerin Milnor Corporation, Chicago Dryer Company, Dexter Laundry,
Inc., Alliance Laundry Systems, LLC, Cleaver Brooks Inc., E-Tech Inc., Fulton Thermal Corp., and Unipress Corporation. The Company
has contracts with several of the manufacturers and suppliers of the products which the Company sells and has established, long-standing
relationships with most of its manufacturers and suppliers. The Company has not historically experienced difficulty in purchasing
products it distributes and believes that it has good working relationships with its manufacturers and suppliers. The Company
further believes that such relationships provide the Company with certain competitive advantages, including exclusivity for certain
products in certain areas and, in certain cases, favorable prices and terms. However, there is no assurance that the Company will
maintain its relationships with any of its suppliers, and the loss of certain of these relationships, including the loss of a
relationship with one of the Company’s principal suppliers, could adversely affect the Company’s business and results.
Due to special options
and features on most of the larger and more expensive equipment ordered by customers, in most instances, the Company purchases
the equipment sold by it after its receipt of orders from its customers. However, the Company also maintains an inventory of more
standardized and smaller-sized equipment that often requires more rapid delivery to meet customer needs.
Competition
The commercial and
industrial laundry, dry cleaning equipment and boiler distribution business is highly competitive and fragmented, with over 100
full-line or partial-line equipment distributors in the United States. The Company’s management believes that no one distributor
has a major share of the market; substantially all distributors are independently owned; and, with the exception of several regional
distributors, distributors operate primarily in local markets. In the United States market, the Company’s primary competition
is from a number of full-line distributors and several manufacturers, which sell direct to the customer. In foreign markets, the
Company also competes with several distributors and manufacturers. Competition is based primarily on price, product quality, and
delivery and support services provided to the customer. In all geographic areas, the Company seeks to compete by offering an extensive
product selection, value-added services, such as product inspection and quality assurance, a toll-free customer support line and
technical websites, reliability, warehouse location, price, competitive special features and, with respect to certain products,
exclusivity from the manufacturer.
Research and Development
The Company’s
research and development efforts and expenses are generally immaterial as most of the Company’s products are distributed
for manufacturers that perform their own research and development.
Patents and Trademarks
The Company is the
owner of United States service mark registrations for the names EnviroStar® and for the name DRYCLEAN USA®, which is licensed
by it to retail dry cleaning establishments. The Company intends to use and protect these or related service marks and tradenames,
as necessary.
Compliance with Environmental and Other Government Laws
and Regulations
Over the past several
decades, federal, state and local governments in the United States and various other countries have enacted environmental protection
laws in response to public concerns about the environment, including with respect to Perc, the primary cleaning agent historically
used in the commercial and industrial dry cleaning process. A number of industries, including the commercial and industrial dry
cleaning and laundry equipment industries, are subject to these evolving laws and implementing regulations. As a supplier to the
industry, the Company serves customers who are primarily responsible for compliance with environmental regulations. Among the United
States federal laws that the Company believes are applicable to the industry are the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (“CERCLA”), which provides for the investigation and remediation of hazardous waste sites;
the Resource Conservation and Recovery Act of 1976, as amended (“RCRA”), which regulates the generation and transportation
of hazardous waste as well as its treatment, storage and disposal; and the Occupational Safety and Health Administration Act (“OSHA”),
which regulates exposure to toxic substances and other health and safety hazards in the workplace. Most states and a number of
local jurisdictions have laws that regulate the environment, which are at least as stringent as the federal laws.
The Company does
not believe that compliance with federal, state and local environmental and other laws and regulations which have been adopted
have had, or will have, a material effect on its capital expenditures, earnings or competitive position.
Employees
As of September
1, 2017, the Company had 138 employees. None of the Company’s employees are subject to a collective bargaining agreement.
The Company believes that its relations with its employees are satisfactory.
Item 1A. Risk Factors.
The Company is subject
to various risks and uncertainties, including those described below, which could adversely affect the Company’s business,
financial condition, results of operations and cash flows, and the value of the Company’s common stock. The risks described
below are not the only risks faced by the Company. Additional risks not presently known to the Company or other factors that the
Company does not presently perceive to present significant risks to the Company at this time may also impair the Company’s
business, financial condition, results of operations or cash flows, or the value of the Company’s common stock.
Acquisitions could result in operating difficulties,
dilution, and other consequences that may adversely impact the Company’s business and results of operations.
Acquisitions are an important
element of the Company’s growth strategy and are material to the Company’s financial condition and results
of operations. Acquisitions and the Company’s efforts with respect thereto involve a number of risks, including, but not
limited to:
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the ability to identify and consummate transactions with acquisition candidates;
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the successful operation and / or integration of acquired companies;
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diversion of management’s attention from other business functions and operations;
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strain on managerial and operational resources as management tries to oversee larger operations;
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difficulty implementing and maintaining effective internal control over financial reporting at
the acquired businesses;
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possible loss of key employees and/or customer relationships of the acquired business; and
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exposure to unforeseen liabilities of the acquired businesses.
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As a result of these or
other problems and risks, businesses the Company may acquire may not produce the revenues, earnings, cash flows or business synergies
anticipated, and the acquired businesses may not perform as expected. As a result, the Company may incur higher costs and realize
lower revenues and earnings than anticipated. The Company may not be able to successfully address these problems, integrate any
acquired businesses or generate sufficient revenue to offset the associated costs or other negative effects on its business.
In addition, acquisitions
have in the past resulted in, and are expected in the future to result in, dilutive issuances of the Company’s equity securities
and the incurrence of debt. See “The Company’s indebtedness may impact its financial condition and results of operations,
and the terms of the Company’s indebtedness may place restrictions on the Company” below. Acquisitions may also result
in contingent liabilities, or amortization expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring
charges, any of which could harm the Company’s financial condition or results.
The Company’s revenues
increased by approximately 161% in fiscal 2017 compared to fiscal 2016, primarily due to the Western State Design Acquisition in
October 2016. Businesses that grow rapidly often have difficulty managing their growth. Such growth may place significant
demands on management, as well as on the Company’s accounting, financial, information and other systems and on the Company’s
business. Management may not be able to manage the Company’s growth effectively or successfully, and the Company’s
financial, accounting, information and other systems may not be able to successfully accommodate the Company’s growth.
Further, the Company may
not be successful in consummating acquisitions or other strategic transactions, including the proposed acquisition of Tri-State,
as expected, whether on the contemplated terms, in the time frame anticipated, or at all. Expenses related to the Company’s
pursuit of acquisitions and other strategic transactions may be significant and will be incurred by the Company regardless of whether
the underlying acquisition or other strategic transaction is ultimately consummated.
If the Company fails to collect its accounts
receivable or is required to increase its allowance for doubtful accounts, its operating results could be materially adversely
affected
.
The Company
maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments. As of June 30, 2017, the Company’s accounts receivable were approximately $13.6 million, and its
allowance for doubtful accounts was approximately $150,000. Accounts receivable due from a federal government agency
accounted for approximately 28.8% of the Company’s accounts receivable at June 30, 2017. There is no assurance that the
Company will collect its outstanding accounts receivable or that its allowance for doubtful accounts will be adequate. The
failure to collect outstanding receivables could have a material adverse effect on the Company’s business, prospects,
operating results or financial condition. Further, if the Company is required to make additional allowances, including,
without limitation, in the event the financial condition of the Company’s customers was to deteriorate and, for that
reason or based on other factors, their ability to make required payments was impaired, then the Company’s operating
results for the period in which the determination or allowance is or was made would be adversely affected.
The Company’s indebtedness may impact
its financial condition and results of operations, and the terms of the Company’s indebtedness may place restrictions on
the Company.
The Company’s level
of indebtedness may have several important effects on the Company’s operations, including, without limitation, that the Company
may be required to use a portion of its cash flow for the payment of principal and interest due on outstanding indebtedness, that
outstanding indebtedness and the Company’s leverage position will increase the impact on the Company of negative changes
in general economic and industry conditions, as well as competitive pressures, and that the Company’s ability to obtain additional
financing for acquisitions, working capital or other corporate purposes may be impacted.
The Company has a $20.0
million credit facility (the “Credit Facility”), consisting of a $15.0 million revolving line of credit, subject to
certain adjustments, and a $5.0 million term loan. At June 30, 2017, no amounts were outstanding under the revolving line of credit
and approximately $4.5 million was outstanding under the term loan. The Credit Facility contains affirmative covenants which require
the Company to meet certain financial criteria, including a fixed charge coverage ratio, an asset coverage ratio, a senior leverage
ratio and a total leverage ratio, as well as other covenants which may restrict, among other things, the Company’s ability
to pay dividends, complete merger, acquisition or similar transactions, make certain capital expenditures, incur certain operating
lease expenditures or repurchase shares of its common stock. See Note 12 to the Consolidated Financial Statements included in this
Report for additional information regarding the Credit Facility.
The Company may incur
additional debt financing as determined to be appropriate by management, including in connection with the financing of acquisitions,
which would increase the Company’s vulnerability to the risk factors described above related to its level of indebtedness
and may place restrictions on the Company similar or in addition to those contained in the current Credit Facility. In addition,
the Company may not be able to obtain additional debt financing on acceptable terms, or at all, including in the event additional
funds are necessary to consummate an acquisition or support the Company’s business operations.
The products the Company sells could fail
to perform according to specifications or prove to be unreliable, which could damage the Company’s customer relationships
and industry reputation and result in lawsuits and loss of sales.
The Company’s customers
require demanding specifications for product performance and reliability. Product defects or other failures to perform to specifications
or as expected could result in higher service costs and may damage the Company’s customer relationships and industry reputation
and/or otherwise negatively impact the Company’s sales and business. Further, the Company may be
subject to lawsuits if any
of the products it distributes fails to operate properly or causes property or other physical damage.
The Company’s business and results
may be adversely affected if the Company does not maintain its relationships with its significant suppliers or customers.
The Company purchases the
products it distributes from a number of manufacturers and suppliers. Purchases from four of these manufacturers accounted for
a total of approximately 59% of the Company’s product purchases for fiscal 2017, and purchases from three manufacturers accounted
for a total of approximately 68% of the Company’s product purchases for fiscal 2016. While the Company has not historically
experienced difficulty in purchasing products it distributes, and believes it has good working relationships with the manufacturers
or suppliers from which the Company purchases its products, if such relationships deteriorate or the Company is unable to maintain
such relationships, including with any of its principal manufacturers, the Company’s business and results could be materially
and adversely impacted. Further, other than contracts with six manufacturers, including four of the Company’s principal manufacturers,
the Company has no contractual basis for maintaining its relationships with its manufacturers and suppliers. In addition, third
parties may not comply with the terms of any agreements to which the Company is a party or may choose to terminate such agreements,
allow such agreements to expire or seek to revise the agreements on terms which are less favorable to the Company than the prevailing
terms, any of which could materially and adversely impact the Company’s business and results.
In addition, while
the Company sells its products to various users, including independent and franchise dry cleaning stores and chains, laundry
plants, hotels, motels, cruise lines, hospitals, nursing homes, government institutions, coin laundry stores and
distributors. Sales to a federal government agency accounted for approximately 22% of the Company’s revenues for
fiscal 2017; however, no single contract for a federal government facility accounted for more than 10% of the Company’s
revenues for fiscal 2017. The Company’s operating results and financial condition could be materially adversely
impacted if the Company loses a significant customer, fails to meet its customers’ expectations or otherwise realizes a
decrease in its sales.
The Company faces substantial competition.
The
commercial and industrial laundry, dry cleaning equipment and boiler distribution business is highly competitive and
fragmented, with over 100 full-line or partial-line equipment distributors in the United States. The Company’s
management believes that no single competitor of the Company has a major share of the market; substantially all distributors
are independently owned; and, with the exception of several regional distributors, distributors operate primarily in local
markets. In the United States, the Company’s primary competition is from a number of full line distributors and several
manufacturers, which sell direct to the customer. In foreign markets, the Company also competes with distributors and
manufacturers. Certain of the Company’s competitors may have greater financial and other resources than the Company. In
addition, some of the Company’s competitors may have less indebtedness than the Company, and therefore more of their
cash may be potentially available for business purposes other than debt service. The Company’s results and financial
condition would be materially and adversely impacted if the Company is unable to compete effectively. Further, the Company
may not be able to operate profitably if the competitive environment changes.
Inability to protect the Company’s
service marks and other proprietary rights could adversely impact the Company’s competitive position.
The Company is the owner
of United States service mark registrations for the names EnviroStar® and for the name DRYCLEAN USA®, which is licensed
by the Company to retail dry cleaning establishments. While the Company intends to and has taken steps to protect its service marks
and other proprietary rights, the Company may not be successful in doing so and third parties may infringe or
misappropriate the Company’s
intellectual property and proprietary rights. Any infringement or misappropriation of the Company’s
intellectual property and proprietary rights could damage their value and could have a material adverse effect on the
Company’s business, results and financial condition. Further, the Company may have to engage in litigation to protect
the rights to its intellectual property and proprietary rights, which could result in significant litigation expenses and
require a significant amount of management's time.
Damages to or disruptions at the Company’s
facilities could adversely impact the Company’s business, operating results and financial condition.
Although the Company has
certain limited protection afforded by insurance, the Company’s business, earnings and financial condition could be materially
adversely affected if it suffers damages to, or disruptions at, its facilities. The Company’s executive offices and one
of its distribution centers for the products it distributes are housed in two leased adjacent facilities totaling approximately
38,000 square feet in Miami, Florida, which is an area subject to hurricane casualty and flood risk. Additionally, the distribution
centers for Western State Design are located in California, which is an area subject to earthquake casualty risk.
The Company faces risks associated with
environmental and other regulation.
The Company’s business
and operations are subject to federal, state, local and foreign environmental and other laws and regulations, including environmental
laws governing the discharge of pollutants, the handling, generation, storage and disposal of hazardous materials, substances,
and wastes and the cleanup of contaminated sites. The Company may not remain in compliance with all applicable laws and regulations
and could be required to incur significant costs as a result of violations of, liabilities under, or efforts to comply with, applicable
laws and regulations. In addition, violations may have other adverse implications for the Company, including negative public relations
and potential litigation. Further, the Company may incur significant compliance costs in the event of changes to the laws and regulations
applicable to the Company.
The Company faces risks related to its foreign
operations
.
For fiscal 2017, the Company’s
revenues from foreign operations totaled approximately $5.8 million, which represented approximately 6% of the Company’s
total revenues for such fiscal year. For fiscal 2016, the Company’s revenues from foreign operations totaled approximately
$4.6 million, which represented approximately 13% of the Company’s total revenues for such fiscal year. Revenues from foreign
operations related principally to the Company’s sales of commercial and industrial laundry and dry cleaning equipment and
boilers to Canada, the Caribbean and Latin America. All of the Company’s foreign sales require the customer to make payment
in United States dollars. Foreign sales may be affected by the strength of the United States dollar relative to the currencies
of the countries in which customers and competitors are located, as well as the strength of the economies of the countries in
which the Company’s customers are located.
Further, conducting an
international business inherently involves a number of difficulties, risks and uncertainties, such as:
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export and trade restrictions,
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inconsistent and changing regulatory requirements,
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tariffs and other trade barriers,
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problems in collecting accounts receivable,
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local economic downturns, and
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potentially adverse tax consequences.
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Any of the above factors
may materially and adversely affect the Company’s business, prospects, operating results or financial condition.
Henry M. Nahmad may be deemed to control
the Company
.
Henry M. Nahmad, the Company’s
Chairman, Chief Executive Officer and President, may be deemed to control the Company as a result of his voting power over shares
representing approximately 67.6% of the issued and outstanding shares of the Company’s common stock. The shares over which
Mr. Nahmad has voting power include shares subject to restricted stock awards granted to Mr. Nahmad, shares held by Symmetric
Capital LLC (“Symmetric Capital”) and Symmetric Capital II, each of which may be deemed to be controlled by Mr. Nahmad
as a result of his serving as Manager of such entity, and shares which Symmetric Capital has the right to vote pursuant to Stockholders
Agreements entered into with Michael S. Steiner, a director and Executive Vice President and Chief Operating Officer of the Company,
and his brother, Robert M. Steiner, and with WSD, Dennis Mack, a director and Executive Vice President of the Company, and Tom
Marks, an Executive Vice President of the Company. Copies of such Stockholder Agreements are filed as exhibits to this Report.
Under the Company’s Bylaws, the election of directors requires a plurality vote and all other matters put to a vote of the
Company’s stockholders require the affirmative vote of a majority of the shares of the Company’s common stock represented
at a meeting, in person or by proxy, and entitled to vote on the matter unless a greater percentage is required by applicable
law. Consequently, other than in very limited circumstances where a greater vote is required by applicable law, Mr. Nahmad, as
the Manager of Symmetric, without the consent or vote of any other stockholders of the Company, has the voting power to approve
actions that require stockholder approval and elect directors acceptable to him. Mr. Nahmad’s interests may conflict with
the interests of the Company’s other stockholders. In addition, Mr. Nahmad’ control could have the effect of delaying
or preventing a change in control or changes in management, deprive the Company’s other stockholders of an opportunity to
receive a premium for their shares in connection with any sale of the Company, or otherwise adversely impact the market price
of the Company’s common stock.
Further, as a result of
Mr. Nahmad’s controlling voting position with respect to the Company’s common stock, the Company is a “controlled
company” within the meaning of the listing standards of the NYSE American, on which the Company’s common stock is listed.
As a “controlled company,” the Company is not required to comply with certain corporate governance requirements set
forth in the listing standards of the NYSE American, including:
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the requirement that a majority of the Company’s Board of Directors consists of independent
directors;
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the requirement that nominating and corporate governance matters be decided solely by a nominating/corporate
governance committee consisting of independent directors; and
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the requirement that executive compensation matters be decided by a compensation committee consisting
of independent directors.
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While executive compensation
matters are determined by the Company’s independent directors and the Company’s Board of Directors is currently comprised
of a majority of independent directors, the Company does not have a standing nominating/corporate governance committee and the
Company has in the past from time to time, including for portions of fiscal 2017 and 2016, maintained a Board of Directors not
comprised of a majority of independent directors. In addition, in the discretion of the Company’s Board of Directors, the
Company may choose to utilize or continue to utilize any or all of the exceptions in the future. As a result, the Company’s
stockholders may not have the same protections as a stockholder of other publicly-traded companies and the market price of the
Company’s common stock may be adversely affected.
The concentration of ownership
with respect to the Company’s common stock also results in there being a limited trading volume, which may make it more difficult
for stockholders to sell their shares and increase the price volatility of the Company’s common stock.
As a “smaller reporting company,”
the Company may avail itself of reduced disclosure requirements, which may make the Company’s common stock less attractive
to investors.
Because the market value
of the Company’s common stock as of the end of its most recently completed second fiscal quarter was less than $75 million,
the Company is a “smaller reporting company” under applicable SEC rules and regulations. As a “smaller reporting
company,” the Company has relied on exemptions from certain disclosure requirements that are applicable to other public companies.
The Company may continue to rely on such exemptions for so long as the Company remains a “smaller reporting company.”
These exemptions include reduced financial disclosure, reduced disclosure obligations regarding executive compensation, and not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The Company’s
reliance on these exemptions may result in the public finding the Company’s common stock to be less attractive and adversely
impact the market price of the Company’s common stock or the trading market thereof.
The Company’s success depends on key
personnel, the loss of whom could harm the Company’s business, operating results and financial condition
.
The Company’s business
is dependent on the active participation of its executive officers, including Henry M. Nahmad, Michael S. Steiner, Dennis Mack
and Tom Marks. The loss of the services of any of these individuals could adversely affect the Company’s business and prospects.
In addition, the Company’s success is dependent on its ability to retain and attract additional qualified management and
other personnel. Competition for such talent is intense, and the Company may not be successful in attracting and retaining such
personnel.
The issuance of preferred stock and common
stock, and the Company’s Board of Directors authority to approve issuances of preferred stock and common stock, could adversely
affect the Company’s stockholders and have an anti-takeover effect
.
The Company’s Board
of Directors is authorized under the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”),
to approve the issuance by the Company of up to 200,000 shares of preferred stock, and to designate the relative rights, preferences
and limitations of any preferred stock so issued, in each case, without any further action on the part of the Company’s stockholders.
Currently, no shares of preferred stock are outstanding. In the event that the Company issues preferred stock in the future that
has preference over the Company’s common stock with respect to payment of dividends or upon liquidation, dissolution or winding
up of the Company, the rights of holders of shares of the Company’s common stock may be adversely affected. In addition,
the Company is authorized under its Certificate of Incorporation to issue up to 20,000,000 shares of common stock. There are currently
approximately 10.5 million shares of common stock outstanding. Subject to applicable law and the rules and regulations of the NYSE
American, the Company’s Board of Directors (or a committee thereof, in the case of shares issued under the Company’s
2015 Equity Incentive Plan (the “Plan”)) has the power to approve the issuance of any authorized but unissued shares
of the Company’s common stock, and any such issuances, including, without limitation, those under the Plan or pursuant to
any acquisitions consummated by the Company or in connection with the financing thereof, would result in dilution to the Company’s
stockholders. These provisions of the Certificate of Incorporation could also delay, defer or prevent a change of control of the
Company or its management, and could limit the price that investors are willing to pay in the future for shares of the Company’s
common stock.
Litigation and legal proceedings and the
impact of any finding of liability or damages could adversely impact the Company and its financial condition and operating results.
The Company may from time
to time become subject to litigation and other legal proceedings. Litigation and other legal proceedings may require the Company
to incur significant expenses, including those relating to legal and other professional fees. In addition, litigation and other
legal proceedings are
inherently uncertain, and adverse outcomes in litigation or other legal proceedings could adversely affect
the Company’s financial condition, cash flows, and operating results.
There are inherent uncertainties involved
in estimates, judgments and assumptions used in the preparation of financial statements in accordance with GAAP. Any changes in
estimates, judgments and assumptions used could have a material adverse effect on the Company’s business, financial condition
and operating results.
The consolidated financial
statements included in the periodic reports the Company files with the SEC, including those included as part of this Report, are
prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation
of financial statements in accordance with GAAP involves making estimates, judgments and assumptions that affect reported amounts
of assets (including goodwill and other intangible assets), liabilities and related reserves, revenues, expenses and income. This
includes estimates, judgments and assumptions for assessing the recoverability of intangible assets pursuant to applicable accounting
guidance. If any estimates, judgments or assumptions change in the future, the Company may be required to record additional expenses
or impairment charges, which would be recorded as a charge against earnings, and any such changes could result in corresponding
changes to the amounts of assets (including goodwill and other intangible assets), liabilities, revenues, expenses and income,
any of which could have a material adverse effect on the Company’s financial condition and operating results.