|
Item 1.
|
Financial Statements.
|
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
|
|
For the three months ended
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
Revenues
|
|
$
|
26,273
|
|
|
$
|
9,472
|
|
Cost of sales
|
|
|
20,124
|
|
|
|
7,452
|
|
Gross profit
|
|
|
6,149
|
|
|
|
2,020
|
|
Selling, general and administrative expenses
|
|
|
5,166
|
|
|
|
1,454
|
|
Operating income
|
|
|
983
|
|
|
|
566
|
|
Interest expense, net
|
|
|
66
|
|
|
|
—
|
|
Income before provision for income taxes
|
|
|
917
|
|
|
|
566
|
|
Provision for income taxes
|
|
|
354
|
|
|
|
214
|
|
Net income
|
|
$
|
563
|
|
|
$
|
352
|
|
Net earnings per share – basic
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share – diluted
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
See Notes to Condensed Consolidated Financial
Statements
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS
|
|
|
|
|
|
|
September 30,
2017
(Unaudited)
|
|
June 30,
2017
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
414
|
|
|
$
|
727
|
|
Accounts receivable, net of allowance for doubtful accounts of
$159 and $150, respectively
|
|
|
10,844
|
|
|
|
13,638
|
|
Inventories, net
|
|
|
9,231
|
|
|
|
7,677
|
|
Vendor deposits
|
|
|
874
|
|
|
|
1,393
|
|
Other current assets
|
|
|
1,037
|
|
|
|
365
|
|
Total current assets
|
|
|
22,400
|
|
|
|
23,800
|
|
|
|
|
|
|
|
|
|
|
Equipment and improvements, net
|
|
|
1,180
|
|
|
|
1,272
|
|
Intangible assets, net
|
|
|
7,036
|
|
|
|
7,160
|
|
Goodwill
|
|
|
24,660
|
|
|
|
24,753
|
|
Other assets
|
|
|
319
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
55,595
|
|
|
$
|
57,135
|
|
See Notes to Condensed Consolidated Financial
Statements
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
September 30,
2017
(Unaudited)
|
|
June 30,
2017
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
10,249
|
|
|
$
|
12,317
|
|
Accrued employee expenses
|
|
|
1,452
|
|
|
|
1,546
|
|
Customer deposits
|
|
|
4,989
|
|
|
|
4,457
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
886
|
|
|
|
2,146
|
|
Current portion of long-term debt
|
|
|
714
|
|
|
|
714
|
|
Total current liabilities
|
|
|
18,290
|
|
|
|
21,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
|
4,161
|
|
|
|
3,731
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,451
|
|
|
|
24,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; authorized shares – 200,000; none issued
and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $.025 par value; 20,000,000 shares authorized and
10,499,481 shares issued, including shares held in treasury
|
|
|
262
|
|
|
|
262
|
|
Additional paid-in capital
|
|
|
27,375
|
|
|
|
27,018
|
|
Retained earnings
|
|
|
5,511
|
|
|
|
4,948
|
|
Treasury stock, 31,768 shares, at cost
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Total shareholders’ equity
|
|
|
33,144
|
|
|
|
32,224
|
|
Total liabilities and shareholders’ equity
|
|
$
|
55,595
|
|
|
$
|
57,135
|
|
See Notes to Condensed Consolidated Financial
Statements
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
|
|
For the three months ended
|
|
|
September 30,
2017
|
|
September 30,
2016
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
563
|
|
|
$
|
352
|
|
Adjustments to reconcile net income to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
219
|
|
|
|
13
|
|
Amortization of debt discount
|
|
|
5
|
|
|
|
—
|
|
Bad debt expense (recovery)
|
|
|
9
|
|
|
|
(15
|
)
|
Share-based compensation
|
|
|
357
|
|
|
|
—
|
|
Inventory reserve
|
|
|
56
|
|
|
|
2
|
|
(Benefit) provision for deferred income taxes
|
|
|
(163
|
)
|
|
|
9
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,785
|
|
|
|
(3,231
|
)
|
Inventories
|
|
|
(1,610
|
)
|
|
|
226
|
|
Vendor deposits
|
|
|
519
|
|
|
|
417
|
|
Other assets
|
|
|
(585
|
)
|
|
|
510
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(2,068
|
)
|
|
|
(325
|
)
|
Accrued employee expenses
|
|
|
(94
|
)
|
|
|
(411
|
)
|
Customer deposits
|
|
|
532
|
|
|
|
(32
|
)
|
Billings in excess of costs on uncompleted contracts
|
|
|
(1,260
|
)
|
|
|
—
|
|
Net cash used by operating activities
|
|
|
(735
|
)
|
|
|
(2,485
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(3
|
)
|
|
|
—
|
|
Net cash used by investing activities
|
|
|
(3
|
)
|
|
|
—
|
|
Net proceeds from borrowings on revolving line of credit
|
|
|
603
|
|
|
|
—
|
|
Debt repayments on term loan
|
|
|
(178
|
)
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
425
|
|
|
|
—
|
|
Net decrease in cash and cash equivalents
|
|
|
(313
|
)
|
|
|
(2,485
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
727
|
|
|
|
3,941
|
|
Cash and cash equivalents at end of period
|
|
$
|
414
|
|
|
$
|
1,456
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information (In
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
61
|
|
|
$
|
—
|
|
Cash paid during the period for income taxes
|
|
$
|
24
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note (1) - General:
The accompanying
unaudited condensed consolidated financial statements include the accounts of EnviroStar, Inc. and its subsidiaries (the “Company”).
All material intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation
S-X related to interim period financial statements. Accordingly, the accompanying unaudited condensed consolidated financial statements
do not include certain information and footnotes required by GAAP for complete financial statements. However, in management’s
opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal
recurring accruals and adjustments) which are necessary in order to state fairly the Company’s results of operations, financial
position and cash flows as of and for the periods presented. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year or any other future period. The unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and related notes, including the Summary
of Significant Accounting Policies, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2017. The June 30, 2017 balance sheet information contained herein was derived from the audited consolidated financial statements
as of that date included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
The preparation of the unaudited condensed
consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. The estimates and assumptions made may not prove to be correct,
and actual results could differ from the estimates.
The Company, through its wholly-owned subsidiaries,
distributes commercial and industrial laundry and dry cleaning equipment and steam and hot water boilers manufactured by others,
supplies related replacement parts and accessories, provides installation and maintenance services to its customers, and designs
and plans turn-key laundry, dry cleaning and boiler systems for its customers, which include institutional, retail, industrial
and commercial customers.
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 (“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. 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 of the assets of Martin-Ray Laundry Systems, Inc. (“MRLS”),
a Colorado-based distributor of commercial laundry equipment, for a purchase price consisting of $2.0 million in cash and 98,668
shares of the Company’s common stock. In connection with the acquisitions, the Company, indirectly through its wholly-owned
subsidiaries, also assumed certain of the liabilities of WSD and MRLS.
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. During the three months ended September 30, 2017 there was a decrease in goodwill of $93,000
which relates to a purchase price adjustment recorded in connection with the Martin – Ray acquisition.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
See also Note 9 – Subsequent Events
for information regarding the Company’s acquisition of substantially all of the assets of Tri-State Technical Services, Inc.
(“Tri-State”) on October 31, 2017 (the “Tri-State Acquisition”).
In addition, the Company, through an
indirect wholly-owned subsidiary, owns the worldwide rights to the name DRYCLEAN USA® and licenses the right to use such name
for a fee to retail dry cleaners in the United States, the Caribbean and Latin America.
Note (2) – Summary of Significant
Accounting Policies:
The Company’s significant accounting policies are described in Note 1 to the Company’s consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. During
the three months ended September 30, 2017, there were no significant changes in the Company’s significant accounting policies.
Note (3) - 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 cash dividends paid prior to forfeiture of the restricted stock, if any, irrespective of whether the awards ultimately
vest. Basic and diluted earnings per share for the three months ended September 30, 2017 and 2016 are computed as follows (in thousands
except per share data):
|
|
For the three months ended
September 30,
|
|
|
2017
(Unaudited)
|
|
2016
(Unaudited)
|
|
|
|
|
|
Net income
|
|
$
|
563
|
|
|
$
|
352
|
|
Less: distributed and undistributed
income allocated to non-vested
restricted common stock
|
|
|
44
|
|
|
|
—
|
|
Net income allocated to EnviroStar,
Inc. shareholders
|
|
$
|
519
|
|
|
$
|
352
|
|
Weighted average shares outstanding
used in basic earnings per share
|
|
|
10,468
|
|
|
|
7,034
|
|
|
|
|
|
|
|
|
|
|
Dilutive common share equivalents
|
|
|
381
|
|
|
|
—
|
|
Weighted average shares outstanding
used in dilutive earnings per share
|
|
|
10,849
|
|
|
|
7,034
|
|
Basic earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Diluted earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
For the three months ended September
30, 2017, 509,373 shares of restricted common stock were not included in the calculation of dilutive earnings per share because
their impact is anti-dilutive. There were no common share equivalents outstanding for the three months ended September 30, 2016.
Note (4) - Debt:
Long-term debt
as of September 30, 2017 and June 30, 2017 are as follows (in thousands):
|
|
September 30,
2017
|
|
June 30,
2017
|
Term Loan
|
|
$
|
4,345
|
|
|
$
|
4,523
|
|
Revolving Line of Credit
|
|
|
603
|
|
|
|
—
|
|
Less: unamortized discount and deferred
financing costs
|
|
|
(73
|
)
|
|
|
(78
|
)
|
Total debt, net
|
|
|
4,875
|
|
|
|
4,445
|
|
Less: current maturities of long-term debt
|
|
|
(714
|
)
|
|
|
(714
|
)
|
Total long-term debt
|
|
$
|
4,161
|
|
|
$
|
3,731
|
|
In connection with the Western State Design
Acquisition, on October 7, 2016, the Company entered into a $20.0 million credit agreement (the “Credit Facility”),
consisting of a $15.0 million revolving line of credit, subject to adjustment as described below (the “Revolving Line of
Credit”), and a $5.0 million term loan (the “Term Loan”). The Company used a total of approximately $12.6 million
of borrowings under the Revolving Line of Credit and Term Loan to finance a portion of the cash consideration paid 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. At September 30, 2017, $0.6 million was outstanding under the Revolving Line of Credit and $4.3
million was outstanding under the Term Loan. The Credit Facility replaced the Company’s previous credit facility which allowed
for borrowings of up to $2.25 million. No amounts were outstanding under such prior credit facility at June 30, 2016 or at any
time during the period from July 1, 2016 through October 7, 2016, when it was replaced by the Credit Facility.
The Credit Facility has a term of five
years and matures on October 10, 2021. Interest on the outstanding principal amount of borrowings under the Credit Facility accrues
at an annual rate equal to the daily one-month LIBOR, plus (i) 2.25% in the case of borrowings under the Revolving Line of Credit
and (ii) 2.85% in the case of borrowings under the Term Loan. In addition to interest payments, the Company is required to make
monthly principal payments on borrowings outstanding under the Term Loan, with the balance due upon maturity. As of September 30,
2017, the required principal payments were $60,000 per month.
The obligations of the Company under
the Credit Facility are secured by substantially all of the assets of the Company and its subsidiaries. In addition, the Company’s
subsidiaries have jointly and severally guaranteed the performance of the Company’s payment and other obligations under the
Credit Facility. The Credit Facility also contains affirmative covenants which require the Company to meet certain financial criteria,
including a fixed charge coverage ratio, an asset coverage ratio, a senior leverage ratio and a total leverage ratio, as well as
other covenants which may restrict, among other things, the Company’s ability to pay dividends, complete merger, acquisition
or similar transactions, make certain capital expenditures, incur certain operating lease expenditures or repurchase shares of
its common stock. Additionally, the amount available to borrow under the Revolving Line of Credit is determined based on an asset-based
formula, which may restrict the amount available for borrowing under the Revolving Line of Credit to an amount less than $15.0
million. At September 30, 2017, the Company was in compliance with all Credit Facility covenants and $10.8 million was available
to borrow under the Revolving Line of Credit.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
See Note 9- Subsequent Events for information
regarding the amendment to the Credit Facility entered into on October 30, 2017 in connection with the Tri-State Acquisition, pursuant
to which the Company received an additional approximately $2.8 million of borrowings under the Term Loan and, in connection therewith,
the borrowing limit under the Credit Facility and the amount of required monthly principal payments were increased.
Note (5) - Income Taxes:
Income
tax expense varies from the federal corporate income tax rate of 34%, primarily due to state income taxes, net of federal income
tax effect, and permanent differences.
As of September 30, 2017 and June 30,
2017, the Company had net deferred tax assets of approximately $287,000 and $124,000, respectively, which are included in other
assets in the condensed consolidated balance sheets as of such dates. Consistent with the guidance of the Financial Accounting
Standards Board (the “FASB”) regarding accounting for income taxes, the Company regularly estimates its ability to
recover deferred tax assets and establishes a valuation allowance against deferred tax assets to reduce the balance to amounts
expected to be recoverable. This evaluation includes the consideration of several factors, including an estimate of the likelihood
of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred
tax liabilities, past and projected taxable income and available tax planning strategies. As of September 30, 2017 and June 30,
2017, management believed that it was more-likely-than not that the results of future operations will generate sufficient taxable
income to realize the net amount of the Company’s deferred tax assets over the periods during which temporary differences
reverse.
The Company follows Accounting Standards
Codification (“ASC”) Topic 740-10-25, “Accounting for Uncertainty in Income Taxes” (“ASC 740”).
ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. During the three months ended September 30, 2017 and 2016, the Company’s
accounting for income taxes in accordance with this standard did not result in any adjustment to the Company’s provision
for income taxes.
As of September 30, 2017, the Company
was subject to potential federal and state tax examinations for the tax years 2014 through 2017.
Note (6) – Equity Incentive
Plan:
In November 2015, the Company’s stockholders approved the EnviroStar, Inc. 2015 Equity Incentive Plan (the “Plan”).
The Plan authorizes the issuance of up to 1,500,000 shares of the Company’s common stock pursuant to awards granted under
the Plan. The fair value of awards granted under the Plan is expensed on straight-line basis over the vesting period of the awards.
Share-based compensation expense is included in selling, general and administrative expenses in the Company’s condensed consolidated
statements of operations. During the three months ended September 30, 2017 and 2016, no shares were issued under the Plan. As of
September 30, 2017, the Company had $14.3 million of total unrecognized compensation expense, all of which related to awards of
restricted stock granted under the Plan during the fiscal year ended June 30, 2017.
Note (7) – Transactions with
Related Parties:
The Company’s wholly-owned subsidiary, Steiner-Atlantic, leases 27,000 square feet of warehouse and
office space from an affiliate of Michael S. Steiner, a director and Executive Vice President and Chief Operating Officer of the
Company, pursuant to a lease agreement dated November 1, 2014, as amended. Under the lease, monthly base rental payments were $10,275
during the first year of the lease, $10,580 during the second year of the lease, and $10,900 during the third year of the lease.
In addition to base rent, Steiner-Atlantic is responsible under the lease for costs related to real estate taxes, utilities, maintenance,
repairs and insurance. Payments under this lease totaled approximately $33,000 during each of the three months ended September
30, 2017 and 2016. The lease had an initial term of three years. Effective November 1, 2017, the term of the lease was extended
to, including renewals at the option of the Company, run through June 30, 2018.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The Company’s wholly-owned subsidiary,
Western State Design, leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a director and
Executive Vice President of the Company, and Tom Marks, an Executive Vice President of the Company, pursuant to a lease agreement
dated October 10, 2016. Under the lease, monthly base rental payments are $12,000 during the initial term of the lease. In addition
to base rent, Western State Design is responsible under the lease for costs related to real estate taxes, utilities, maintenance,
repairs and insurance. The lease has an initial term of five years and provides for two successive three-year renewal terms at
the option of Western State Design. Payments under this lease totaled approximately $36,000 during the three months ended September
30, 2017.
One June 19, 2017, the Company’s wholly-owned
subsidiary, Martin-Ray, entered into a lease agreement, pursuant to which it leases 10,000 square feet of warehouse and office
space from an affiliate of Jim Hohnstein, President of Martin-Ray, and Bill Mann, a Vice President of Martin-Ray. Under the lease,
monthly base rental payments are $6,000 during the initial term of the lease. In addition to base rent, Martin-Ray is responsible
under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial
term of three years and provides for two successive three-year renewal terms at the option of Martin-Ray. Payments under this lease
totaled approximately $18,000 during the three months ended September 30, 2017.
Note (8) – Recently Issued Accounting
Guidance
: In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts
with Customers (“ASC 606”). The standard outlines a single comprehensive model for entities to use in accounting for
revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services.” ASC 606 is effective for the Company beginning on July 1, 2018. The Company is evaluating the
impact that adopting this standard may have on its consolidated financial statements.
In July 2015, the FASB issued ASU No.
2015-11
,
“Simplifying the Measurement of Inventory (Topic 330)” ("ASU 2015-11"). ASU 2015-11 requires
that inventory within the scope of its guidance be measured at the lower of cost and net realizable value instead of the lower
of cost or market (with market being defined as replacement cost and having a ceiling of net realizable value and a floor of net
realizable value less a normal profit margin). Inventory measured using last-in, first-out (LIFO) will not be impacted by the new
guidance. For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods
beginning after December 15, 2016, including interim periods within that reporting period (the first quarter of fiscal year 2018
for the Company). The Company adopted this standard effective July 1, 2017. The adoption of this standard did not
have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842)” (“ASU No. 2016-02”), which is designed to increase transparency and comparability
by requiring the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about
leasing arrangements. The new standard will require an entity to recognize the following for all leases (with the exception of
short-term leases) at the commencement date (i) a lease liability, which is a lessee’s obligation to make lease payments
arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s
right to use, or control the use of, a specified asset for the lease term. ASU No. 2016-02 is effective for fiscal years beginning
after December 15, 2018 (the fiscal year ending June 30, 2020 for the Company), with early adoption permitted. The Company is
evaluating the impact, if any, that adopting this standard may have on its consolidated financial statements.
Index
EnviroStar, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
In March 2016, the FASB issued ASU No.
2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
(“ASU No. 2016-09”), which requires that all income tax effects of awards be recognized in the statement of operations
when the awards vest or settle. The standard also requires the presentation of excess tax benefits as an operating activity on
the statement of cash flows rather than as a financing activity. The standard increases the amount companies can withhold to cover
income taxes on awards without triggering liability classification for shares used to satisfy statutory income tax withholding
obligations and requires application of a modified retrospective transition method. ASU No. 2016-09 is effective for annual reporting
periods beginning after December 15, 2016 (and interim periods therein). The Company adopted this standard effective July 1, 2017.
The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU
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 eliminated the second step from the goodwill impairment
test which was 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.
An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value, however, the loss 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
measuring the goodwill impairment loss. 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 of
this guidance may have on its consolidated financial statements.
Management believes the impact of other issued
accounting standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows upon adoption.
Note (9) – Subsequent Events
:
On October 31, 2017, the Company, through its wholly-owned subsidiary, Tri-State Technical Services, Inc. (“TSTS”),
completed the acquisition of substantially all of the assets of Tri-State, 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 $8.25
million in cash (subject to certain working capital and other adjustments), of which $2.1 million was 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 funded the cash amount through borrowings under its Credit Facility. In connection with the acquisition,
the Company assumed certain of the liabilities of Tri-State.
On October 30, 2017, the Company’s Credit
Facility (described in Note 4 – Debt) was amended, pursuant to the amendment, the Company received an additional approximately
$2.8 million of borrowings under the Term Loan and, in connection therewith, the maximum borrowing limit of the Credit Facility
was increased from $20.0 million to approximately $22.2 million and the minimum required monthly payments were increased from $60,000
to $100,000. In addition, TSTS was added as a co-guarantor under the Credit Facility.
|
Item 2.
|
Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
|
Forward Looking Statements
Certain statements in this Report are “forward
looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report,
words such as “may,” “should,” “seek,” “believe,” “expect,” “anticipate,”
“estimate,” “project,” “intend,” “strategy” and similar expressions are intended
to identify forward looking statements regarding events, conditions and financial trends that may affect the future plans, operations,
business, strategies, operating results and financial position of the Company. Forward looking statements are subject to a number
of known and unknown risks and uncertainties that may cause actual results, trends, performance or achievements of the Company,
or industry trends and results, to differ materially from the future results, trends, performance or achievements expressed or
implied by such forward looking statements. These risks and uncertainties include, among others, those associated with: general
economic and business conditions in the United States and other countries where the Company operates or where the Company’s
customers and suppliers are located; industry conditions and trends; technology changes; competition, including the Company’s
ability to compete effectively and the impact that competition may have on prices which the Company may charge for its products
and services and on the Company’s profit margins; the availability and cost of inventory purchased by the Company; the relative
value of the United States dollar to currencies in the countries in which the Company’s customers, suppliers and competitors
are located; changes in, or the failure to comply with, government regulation, including environmental regulations; the Company’s
ability to implement its business and growth strategies and plans, including changes thereto; the availability, terms and deployment
of debt and equity capital if needed for expansion or otherwise; risks relating to the Company’s relationships with its principal
suppliers and customers, including the impact of the loss of any such relationship; risks relating to the timing of shipments of
customers’ orders and the Company’s recognition of revenue relating thereto; risks and uncertainties associated with
the Company’s pursuit of acquisitions and other strategic opportunities, including, without limitation, that the Company
may not be successful in identifying or consummating acquisitions or other strategic opportunities, integration risks, risks related
to indebtedness incurred by the Company in connection with financing acquisitions, dilution experienced by the Company’s
existing stockholders as a result of the issuance of shares of the Company’s common stock in connection with acquisitions
and risks that the Company’s goals or expectations with respect to acquisitions and other strategic transactions may not
be met ; and other economic, competitive, governmental, technological and other risks and factors discussed in the Company’s
filings with the Securities and Exchange Commission (the “SEC”), including, without limitation, those described in
the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Many of these risks and factors are beyond the Company’s control. In addition, past performance and perceived trends may
not be indicative of future results. The Company cautions that the foregoing factors are not exclusive. The Company expressly
disclaims any obligation to update or revise any forward looking statements, whether as a result of new information, future events
or otherwise, except as required by law.
Overview
The Company, through its wholly-owned
subsidiaries, distributes commercial and industrial laundry and dry cleaning equipment and steam and hot water boilers,
supplies related replacement parts and accessories, provides maintenance and installation services, and designs and plans
turn-key laundry, dry cleaning and boiler systems for its customers, which include commercial, industrial, institutional,
government and retail customers. These activities are conducted in the United States, Canada,
the Caribbean and Latin America.
Historically, the
Company’s operations related to these activities consisted solely of the business and operations of Steiner-Atlantic
Corp. (“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 (“WSD”), a California-based distributor of commercial, industrial and vended laundry equipment and related
parts for new laundry facilities and to the replacement laundry market and a provider of installation and maintenance
services, for a purchase price consisting of $18.5 million in cash and 2,044,990 shares of the Company’s common stock.
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 of
the assets of Martin-Ray Laundry Systems, Inc. (“MRLS”), a Colorado-based distributor of commercial, industrial
and vended laundry equipment and related parts for new laundry facilities and to the replacement laundry market and a
provider of installation and maintenance services, for a purchase price consisting of $2.0 million in cash and 98,668 shares of the
Company’s common stock. In connection with the acquisitions, the Company, indirectly through its wholly-owned
subsidiaries, also assumed certain of the liabilities of WSD and MRLS.
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.
On October 31, 2017, the Company, through its
wholly-owned subsidiary, Tri-State Technical Services, Inc. (“TSTS”), completed its acquisition of substantially all
of the assets of Tri-State, 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 $8.25 million in cash (subject to certain working capital and
other adjustments), of which $2.1 million was 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 funded the
cash consideration through borrowings under its amended Credit Facility. In connection with the acquisition, the Company, indirectly
through TSTS, assumed certain of the liabilities of Tri-State.
In addition, the Company, through an indirect
wholly-owned subsidiary, owns the worldwide rights to the name DRYCLEAN USA® and licenses the right to use such name for a
fee to retail dry cleaners in the United States, the Caribbean and Latin America.
It is important to note that the
timing of revenue recognition related to the sale and installation of commercial, industrial, and vended laundry products is
occasionally impacted by delays related to installation schedules.
Total revenues for the quarter ended
September 30, 2017 increased by 177% compared to the quarter ended September 30, 2016. Net income for the quarter ended
September 30, 2017 increased by 60% from the quarter ended September 30, 2016. The increases in revenues and net income
during the quarter ended September 30, 2017 as compared to the quarter ended September 30, 2016 are primarily attributable to
the results of operations of Western State Design and Martin-Ray, which were acquired during October 2016 and June 2017,
respectively, and are included in the Company’s results for the quarter ended September 30, 2017. These increases in
revenues were offset by decreases in revenues due to the effects of Hurricane Irma in Florida and the Caribbean, which caused
delays in the placement of orders, the delivery and shipment of laundry products, and the completion of installation services.
Consolidated Financial Condition
The Company’s total assets decreased
from $57.1 million at June 30, 2017 to $55.6 million at September 30, 2017. The decrease in total assets was primarily attributable
to a decrease in accounts receivable as a result of the collection of payments, partially offset by an increase in inventory due
to increased purchasing. The Company’s total liabilities decreased from $24.9 million at June 30, 2017 to $22.5 million at
September 30, 2017. The decrease in total liabilities was primarily attributable to the timing of payments to vendors related to
accounts payable and accrued expenses and the changes in when payments are received related to billings in excess of costs on uncompleted
contracts.
Liquidity and Capital Resources
For the three-month period ended September
30, 2017, cash decreased by approximately $0.3 million compared to a decrease of approximately $2.5 million during the three-month
period ended September 30, 2016. The following summarizes the Company’s Condensed Consolidated Statements of Cash Flows (in
thousands):
|
|
Three Months Ended
September 30,
|
|
|
2017
|
|
2016
|
Net cash provided (used) by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(735
|
)
|
|
$
|
(2,485
|
)
|
Investing activities
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
Financing activities
|
|
$
|
425
|
|
|
$
|
—
|
|
For the three-months ended September
30, 2017, operating activities used cash of approximately $0.7 million compared to approximately $2.5 million of cash used during
the same period of 2016. This $1.7 million decrease in cash used by operating activities was attributable to increases in working
capital, and an approximately $0.2 million increase in earnings during the three months ended September 30, 2017 compared to the
prior year period. The increase in working capital was driven primarily by a $6.0 million decrease in accounts receivable due to
collection activity during the period, partially offset by a $1.7 million decrease in accounts payable and accrued expenses.
Financing activities provided cash of
approximately $0.4 million in the three-months ended September 30, 2017, which was primarily attributable to net borrowings under
the Revolving Line of Credit of approximately $0.6 million, which were used for general corporate purposes, partially offset by
$0.2 million of repayments of borrowing under the Term Loan (as defined below).
In connection with the Western State
Design Acquisition, on October 7, 2016, the Company entered into a $20.0 million credit agreement (the “Credit Facility”),
consisting of a $15.0 million revolving line of credit, subject to adjustment as described below (the “Revolving Line of
Credit”), and a $5.0 million term loan (the “Term Loan”). The Company used a total of approximately $12.6 million
of borrowings under the Revolving Line of Credit and Term Loan to finance a portion of the Cash Consideration paid 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. The Credit Facility has a term of five years and matures on October 10, 2021. Interest on the
outstanding principal amount of borrowings under the Credit Facility accrues at an annual rate equal to the daily one-month LIBOR,
plus (i) 2.25% in the case of borrowings under the Revolving Line of Credit and (ii) 2.85% in the case of borrowings under the
Term Loan. In addition to interest payments, the Company is required under the Term Loan to make monthly principal payments, with
the balance due upon maturity. At September 30, 2017, $0.6 million was outstanding under the Revolving Line of Credit and $4.3
million was outstanding under the Term Loan. In connection with the Company’s acquisition of Tri-State, the Credit Facility
was amended during October 2017. Pursuant to the amendment, the Company received an additional $2.8 million of borrowings under
the Term Loan and, in connection therewith, the maximum borrowings under the Credit Facility were increased from $20.0 million
to approximately $22.2 million and the minimum required monthly principal payments under the Term Loan were increased from $60,000
to $100,000. The Company used approximately $8.0 million of borrowings under the Credit Facility to fund the cash consideration
paid in connection with the acquisition of Tri-State.
The obligations of the Company under the Credit
Facility are secured by substantially all of the assets of the Company and its subsidiaries. In addition, the Company’s subsidiaries
have jointly and severally guaranteed the performance of the Company’s payment and other obligations under the Credit Facility.
The Credit Facility also contains affirmative covenants which require the Company to meet certain financial criteria, including
a fixed charge coverage ratio, an asset coverage ratio a senior leverage ratio and a total leverage ratio, as well as other covenants
which may restrict, among other things, the Company’s ability to pay dividends, complete merger, acquisition or similar transactions,
make certain capital expenditures, incur certain operating lease expenditures or repurchase shares of its common stock. Additionally,
the amount available to borrow under the Revolving Line of Credit is determined based on an asset-based formula, which may restrict
the amount available for borrowing under the Revolving Line of Credit to an amount less than $15.0 million. At September 30, 2017,
the Company was in compliance with all Credit Facility covenants and $10.8 million was available to borrow under the Revolving
Line of Credit.
The Company believes that its existing
cash and cash equivalents, net cash from operations and funds available under the Company’s Credit Facility will be sufficient
to fund its operations and anticipated capital expenditures for at least the next twelve months. The Company may also seek to raise
funds through the issuance of equity and/or debt securities or the incurrence of additional secured or unsecured indebtedness,
including in connection with acquisitions or other transactions consummated by the Company as part of its buy-and-build growth
strategy.
Off-Balance Sheet Financing
The Company had no off-balance sheet financing arrangements
within the meaning of Item 303(a)(4) of Regulation S-K at September 30, 2017.
Results of Operations
Revenues for the
three-month period ended September 30, 2017 increased by approximately $16.8 million (177%) compared to the three-month
period ended September 30, 2016, primarily due to the results of Western State Design and Martin-Ray. These increases in
revenues were offset by decreases in revenues due to the effects of Hurrican Irma in Florida and the Caribbean, which caused
delays in the placement of orders, the delivery and shipment of laundry products, and the completion of installation services.
Operating Expenses
|
|
Three months ended
|
|
|
September 30
|
|
|
2017
|
|
2016
|
As a percentage of revenues:
|
|
|
|
|
Cost of sales
|
|
|
77
|
%
|
|
|
79
|
%
|
As a percentage of revenues:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
20
|
%
|
|
|
15
|
%
|
Cost of sales, expressed as a percentage
of revenues, was 77% for the three-month period ended September 30, 2017, as compared to 79% for the three month-period ended September
30, 2016. The decrease in cost of sales, expressed as a percentage of revenues, was primarily due to changes in product mix.
Selling, general and administrative
expenses increased by approximately $3.7 million (255%) for the three- month period ended September 30, 2017, from the same period
of 2016, primarily as a result of the consolidation of the selling, general and administrative expenses of Western State Design
and Martin-Ray following their acquisitions and $357,000 of share-based compensation costs related to the restricted stock awards
granted subsequent to September 30, 2016. As a percentage of revenues, selling, general and administrative expenses were 20% for
the three-month period ended September 30, 2017 and 15% for the three- month period ended September 30, 2016. The increase resulted
primarily from the consolidation of Western State Design and Martin-Ray following their acquisitions.
Interest expense, net was approximately
$66,000 for the three months ended September 30, 2017, and represents interest on borrowings under the Credit Facility.
The Company’s effective tax rate
was 39% for the three-months ended September 30, 2017, compared to 38% for the three- months ended September 30, 2016. The increase
in the effective tax rate is the result of higher state taxes in additional operating jurisdictions following the Western State
Design and Martin-Ray acquisitions.
Inflation
Inflation did not have a significant effect on the Company’s
operations during any of the reported periods.
Transactions with Related Parties
The Company’s wholly-owned subsidiary,
Steiner-Atlantic leases 27,000 square feet of warehouse and office space from an affiliate of Michael S. Steiner, a director and
Executive Vice President and Chief Operating Officer of the Company, pursuant to a lease agreement dated November 1, 2014, as amended.
Under the lease, monthly base rental payments were $10,275 during the first year of the lease, $10,580 during the second year of
the lease, and $10,900 during the third year of the lease. In addition to base rent, Steiner-Atlantic is responsible under the
lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Payments under this lease totaled
approximately $33,000 during each of the three months ended September 30, 2017 and 2016. The lease had an initial term of three
years. Effective November 1, 2017, the term of the lease was extended to, including renewals at the option of the Company, run
through June 30, 2018.
The Company’s wholly-owned subsidiary,
Western State Design, leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a director and
Executive Vice President of the Company, and Tom Marks, an Executive Vice President of the Company, pursuant to a lease agreement
dated October 10, 2016. Under the lease, monthly base rental payments are $12,000 during the initial term of the lease. In addition
to base rent, Western State Design is responsible under the lease for costs related to real estate taxes, utilities, maintenance,
repairs and insurance. The lease has an initial term of five years and provides for two successive three-year renewal terms at
the option of Western State Design. Payments under this lease totaled approximately $36,000 during the three months ended September
30, 2017.
One June 19, 2017, the Company’s wholly-owned
subsidiary, Martin-Ray, entered into a lease agreement, pursuant to which it leases 10,000 square feet of warehouse and office
space from an affiliate of Jim Hohnstein, President of Martin-Ray, and Bill Mann, a Vice President of Martin-Ray. Under the lease,
monthly base rental payments are $6,000 during the initial term of the lease. In addition to base rent, Martin-Ray is responsible
under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial
term of three years and provides for two successive three-year renewal terms at the option of Martin-Ray. Payments under this lease
totaled approximately $18,000 during the three months ended September 30, 2017.
Critical Accounting Policies
In connection with the preparation of its financial
statements, the Company makes estimates and assumptions, including those that affect the reported amounts of assets and liabilities,
contingent assets and liabilities, and the reported amounts of revenues and expenses during the reported periods. Estimates and
assumptions made may not prove to be correct, and actual results may differ from the estimates. The accounting policies that the
Company has identified as critical to its business operations and to an understanding of the Company’s financial statements
remain unchanged from those described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations
section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Recently Issued Accounting Guidance
See Note 8 to the Condensed Consolidated Financial
Statements included in Item 1 of this Report for a description of
Recently Issued Accounting Guidance
.