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 Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

OR

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________to__________

 

Commission file number: 001-39599

 

HOLLEY INC.

(Exact name of registrant as specified in its charter)

 

Delaware

87-1727560

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

1801 Russellville Road, Bowling Green, KY 42101

(Address of principal executive offices)

 

(270) 782-2900

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report) N/A

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

symbol(s)

 

Name of each exchange

on which registered

Common Stock, par value $0.0001

Warrants to purchase common stock

 

HLLY

HLLY WS

 

New York Stock Exchange

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

☐

 

Accelerated filer

 

☒

       

Non-accelerated filer

 ☐ 

Smaller reporting company

 

☐

       
    

Emerging growth company

 

☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒

 

There were 119,311,341 shares of Common Stock, including 1,093,750 restricted earn-out shares, par value $0.0001 per share, issued and outstanding as of May 1, 2024.

 

 
Table of Contents
 

 

 
 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by the Securities Act and Exchange Act, as well as protections afforded by other federal securities laws. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the Company’s business. Forward-looking statements may be accompanied by words such as “believe,” “estimate,” “expect,” “project,” “forecast,” “may,” “will,” “should,” “seek,” “plan,” “scheduled,” “anticipate,” “intend” or similar expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control. Therefore, you should not place undue reliance on such statements. Actual results could differ materially due to numerous factors, including but not limited to the Company’s ability to do any of the following:

 

 

•

execute its business strategy, including monetization of services provided and expansions in and into existing and new lines of business;

 

 

•

anticipate and manage through disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain company products in distribution channels;

 

 

•

anticipate and manage through supply shortages of key component parts used in our products and the need to shift the mix of products offered in response thereto;

 

 

•

respond to the impact of geopolitical events, including military conflicts (including the conflict in Ukraine, the conflict in the Middle East, the possible expansion of such conflicts and potential geopolitical consequences), the interruption from catastrophic events and problems such as terrorism, and public health crises;

 

 

•

maintain key strategic relationships with partners and resellers;

 

 

•

anticipate and manage through the impact of elevated interest rate levels, which cause the cost of capital to increase, as well as respond to inflationary pressures;

 

 

•

enhance future operating and financial results, whether through anticipated organic or external growth initiatives or through the implementation of cost savings initiatives;

 

 

•

respond to uncertainties associated with product and service development and market acceptance;

 

 

•

anticipate and manage through increased constraints in consumer demand and/or shifts in the mix of products sold;

 

 

•

attract and retain qualified employees and key personnel;

 

 

•

protect and enhance the Company’s corporate reputation and brand awareness;

 

 

•

recognition of goodwill and other intangible asset impairment charges;

 

 

•

effectively respond to general economic and business conditions;

 

 

•

acquire and protect intellectual property;

 

 

•

collect, store, process and use personal and payment information and other consumer data;

 

 

•

comply with privacy and data protection laws and other legal obligations related to privacy, information security, and data protection;

 

 

•

manage the impact of any security breaches, cyber-attacks, or other cybersecurity threats or incidents, or the failure of any key information technology systems;

 

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•

meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness;

 

 

•

obtain additional capital, including through the sale of equity or debt securities;

 

 

•

manage to finance operations on an economically viable basis;

 

 

•

maintain Holley’s New York Stock Exchange (“NYSE”) listing of its common stock (“Common Stock”) and warrants to purchase Common Stock ("Warrants");

 

 

•

comply with existing and/or future laws and regulations applicable to our business, including laws and regulations related to environmental health and safety and the recently issued required climate-related disclosures;

 

 

•

respond to litigation, complaints, product liability claims and/or adverse publicity;

 

 

•

anticipate the significance and timing of contractual obligations;

 

 

•

anticipate the impact of, and response to, new accounting standards;

 

 

•

maintain proper and effective internal controls;

 

 

•

respond to the impact of changes in U.S. tax laws and regulations, including the impact on deferred tax assets;

 

 

•

anticipate the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”);

 

 

•

anticipate the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, and demographic trends; and

 

 

•

respond to other risks and factors, listed under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the U.S. Securities and Exchange Commission (the "SEC") on March 14, 2024, and/or as disclosed in any subsequent filings with the SEC.

 

Forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and our management’s expectations, forecasts and assumptions, and involve a number of judgements, risks and uncertainties, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HOLLEY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

  

As of

 
  

March 31, 2024

  

December 31, 2023

 

ASSETS

        

Cash and cash equivalents

 $41,127  $41,081 

Accounts receivable, less allowance for credit losses of $1,368 and $1,577 respectively

  48,721   48,360 

Inventory

  184,016   192,260 

Prepaids and other current assets

  15,944   15,665 

Total current assets

  289,808   297,366 

Property, plant, and equipment, net

  46,376   47,206 

Goodwill

  419,056   419,056 

Other intangibles assets, net

  406,896   410,465 

Right-of-use assets

  28,481   29,250 

Other noncurrent assets

  1,117   — 

Total assets

 $1,191,734  $1,203,343 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Accounts payable

 $50,258  $43,692 

Accrued interest

  442   455 

Accrued liabilities

  43,580   42,129 

Current portion of long-term debt

  7,444   7,461 

Total current liabilities

  101,724   93,737 

Long-term debt, net of current portion

  560,112   576,710 

Warrant liability

  5,256   8,383 

Earn-out liability

  2,830   3,479 

Deferred taxes

  51,631   53,542 

Other noncurrent liabilities

  25,266   26,341 

Total liabilities

  746,819   762,192 

Commitments and contingencies (Refer to Note 15 - Commitments and Contingencies)

          

Stockholders' equity:

        

Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding on March 31, 2024 and December 31, 2023

  —   — 

Common stock, $0.0001 par value, 550,000,000 shares authorized, 118,311,341 and 117,707,280 shares issued and outstanding on March 31, 2024 and December 31, 2023, respectively

  12   12 

Additional paid-in capital

  374,089   373,869 

Accumulated other comprehensive loss

  (896)  (710)

Retained earnings

  71,710   67,980 

Total stockholders' equity

  444,915   441,151 

Total liabilities and stockholders' equity

 $1,191,734  $1,203,343 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

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HOLLEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

   

For the thirteen weeks ended

  
   

March 31, 2024

    

April 2, 2023

  

Net sales

   $ 158,636     $ 172,205  

Cost of goods sold

     106,577       104,492  

Gross profit

     52,059       67,713  

Selling, general, and administrative

     32,996       30,017  

Research and development costs

     4,812       6,653  

Amortization of intangible assets

     3,436       3,679  

Restructuring costs

     615       1,339  

Other operating expense (income)

     (8 )     51  

Total operating expense

     41,851       41,739  

Operating income

     10,208       25,974  

Change in fair value of warrant liability

     (3,127 )     1,435  

Change in fair value of earn-out liability

     (649 )     428  

Loss on early extinguishment of debt

     141       —  

Interest expense, net

     11,004       18,298  

Total non-operating expense

     7,369       20,161  

Income before income taxes

     2,839       5,813  

Income tax expense (benefit)

     (891 )     1,566  

Net income

   $ 3,730     $ 4,247  

Comprehensive income:

                

Foreign currency translation adjustment

     (186 )     (199 )

Total comprehensive income

   $ 3,544     $ 4,048  

Common Share Data:

                

Weighted average common shares outstanding - basic

     117,871,829       117,153,525  

Weighted average common shares outstanding - diluted

     119,505,330       117,244,762  

Basic net income per share

   $ 0.03     $ 0.04  

Diluted net income per share

   $ 0.03     $ 0.04  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

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HOLLEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share data)

(unaudited)

 

   

Common Stock

            

Accumulated

                
                   

Additional

    

Other

                
                   

Paid-In

    

Comprehensive

    

Retained

          
   

Shares

    

Amount

    

Capital

    

Loss

    

Earnings

    

Total

  

Balance at December 31, 2022

     117,147,997     $ 12     $ 368,122     $ (944 )   $ 48,800     $ 415,990  

Net income

     —       —       —       —       4,247       4,247  

Equity compensation

     —       —       394       —       —       394  

Foreign currency translation

     —       —       —       (199 )     —       (199 )

Tax withholding related to vesting of restricted stock units

     —       —       (34 )     —       —       (34 )

Issuance of shares for restricted stock units

     24,219       —       —       —       —       —  

Balance at April 2, 2023

     117,172,216     $ 12     $ 368,482     $ (1,143 )   $ 53,047     $ 420,398  
                                                 

Balance at December 31, 2023

     117,707,280     $ 12     $ 373,869     $ (710 )   $ 67,980     $ 441,151  

Net income

     —       —       —       —       3,730       3,730  

Equity compensation

     —       —       1,141       —       —       1,141  

Foreign currency translation

     —       —       —       (186 )     —       (186 )

Tax withholding related to vesting of restricted stock units

     —       —       (921 )     —       —       (921 )

Issuance of shares for restricted stock units

     604,061       —       —       —       —       —  

Balance at March 31, 2024

     118,311,341     $ 12     $ 374,089     $ (896 )   $ 71,710     $ 444,915  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

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HOLLEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

   

For the thirteen weeks ended

  
   

March 31, 2024

    

April 2, 2023

  

OPERATING ACTIVITIES:

                

Net income

   $ 3,730     $ 4,247  

Adjustments to reconcile net income to net cash from operating activities:

                

Depreciation

     2,464       2,485  

Amortization of intangible assets

     3,436       3,679  

Amortization of deferred loan costs

     436       445  

Amortization of right of use assets

     1,421       1,371  

Fair value adjustments to warrant liability

     (3,127 )     1,435  

Fair value adjustments to earn-out liability

     (649 )     428  

Fair value adjustments to interest rate collar

     (2,281 )     3,020  

Equity compensation

     1,141       394  

Change in deferred taxes

     (1,911 )     (2,302 )

Loss on early extinguishment of long-term debt

     141       -  

Gain on disposal of property, plant and equipment

     (514 )     (252 )

Provision for inventory reserves

     10,338       2,735  

Provision for credit losses

     76       436  

Change in operating assets and liabilities:

                

Accounts receivable

     (467 )     (9,623 )

Inventories

     (2,257 )     1,899  

Prepaids and other current assets

     (302 )     146  

Accounts payable

     6,599       (7,611 )

Accrued interest

     (13 )     (86 )

Accrued and other liabilities

     582       793  

Net cash provided by operating activities

     18,843       3,639  

INVESTING ACTIVITIES:

                

Capital expenditures

     (1,265 )     (1,001 )

Proceeds from the disposal of fixed assets

     174       318  

Net cash used in investing activities

     (1,091 )     (683 )

FINANCING ACTIVITIES:

                

Principal payments on long-term debt

     (16,748 )     (7,284 )

Deferred financing fees

     —       (1,117 )

Payments from stock-based award activities

     (921 )     (34 )

Net cash used in financing activities

     (17,669 )     (8,435 )

Effect of foreign currency rate fluctuations on cash

     (37 )     145  

Net change in cash and cash equivalents

     46       (5,334 )

Cash and cash equivalents:

                

Beginning of period

     41,081       26,150  

End of period

   $ 41,127     $ 20,816  

Supplemental disclosures of cash flow information:

                

Cash paid for interest

   $ 13,307     $ 14,919  

Cash paid for income taxes

     —       2,500  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)

 

 

1.

DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Holley Inc., a Delaware corporation headquartered in Bowling Green, Kentucky, conducts operations through its wholly owned subsidiaries. These operating subsidiaries are comprised of Holley Performance Products Inc., Hot Rod Brands, Inc., Simpson Safety Solutions, Inc., B&M Racing and Performance Products, Inc., and Speedshop.com, Inc. When used in these notes, the terms the “Company” or “Holley” mean Holley, Inc. and all entities included in its consolidated financial statements.

 

The Company designs, manufactures and distributes high-performance automotive products to car and truck enthusiasts primarily in the United States, Canada and Europe. The Company is a leading manufacturer of a diversified line of performance automotive products, including carburetors, fuel pumps, fuel injection systems, nitrous oxide injection systems, superchargers, exhaust headers, mufflers, distributors, ignition components, engine tuners and automotive performance plumbing products. The Company is also a leading manufacturer of exhaust products as well as shifters, converters, transmission kits, transmissions, tuners and automotive software. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance through increased horsepower, torque and drivability. The Company has locations in the United States, Canada, Italy and China.

 

Emerging Growth Company Status

 

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company is an emerging growth company, and, as such, has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.

 

Risks and Uncertainties

 

The Company's business and results of operations, financial condition, and liquidity are impacted by broad economic conditions, as well as by geopolitical events, including the conflict in Ukraine, the conflict in the Middle East, and the possible expansion of such conflicts and potential geopolitical consequences. The Company's business is impacted by various economic factors that affect both consumers and the automotive aftermarket industry, including by not limited to inflation, fuel costs, wage rates, supply chain disruptions, hiring, and other economic conditions. In response to inflationary impacts and supply chain disruptions, the Company has attempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and increased attention to maintaining appropriate inventory levels in the distribution channel. The Company's profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales to lower-margin products, and demands on our performance that increase our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate the impact on its supply chain, operations and costs is not successful, the Company’s business, results of operations and financial condition may be adversely affected.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or “GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended  December 31, 2023, as filed with the SEC on March 14, 2024, in the Company’s annual report on Form 10-K. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.

 

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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The Company operates on a fiscal year that ends on  December 31. The three-month periods ended March 31, 2024 and April 2, 2023 each included 13 weeks.

 

Principles of Consolidation

 

These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

 

Recent Accounting Pronouncements

 

Accounting Standards Not Yet Adopted

 

In  October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to SEC's Disclosure Update and Simplification Initiative. This ASU amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification. The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company will monitor the removal of various requirements from the current regulations in order to determine when to adopt the related amendments, but it does not anticipate that the adoption of the new guidance will have a material impact on the Company’s consolidated financial statements and related disclosures. The Company will continue to evaluate the impact of this guidance on its consolidated financial statements.

 

In  November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The standard requires interim and annual disclosure of significant segment expenses that are regularly provided to the chief operating decision-maker ("CODM") and included within the reported measure of a segment’s profit or loss, requires interim disclosures about a reportable segment’s profit or loss and assets that are currently required annually, requires disclosure of the position and title of the CODM, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, and contains other disclosure requirements. This ASU is effective for fiscal years beginning after  December 15, 2023 and interim periods within fiscal years beginning after  December 15, 2024, with early adoption permitted. The Company is currently evaluating the effect of this new guidance on its consolidated financial statements and related disclosures.

 

In  December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires additional disclosures of various income tax components that affect the rate reconciliation based on the applicable taxing jurisdictions, as well as the qualitative and quantitative aspects of those components. The standard also requires information pertaining to taxes paid to be disaggregated for federal, state and foreign taxes, and contains other disclosure requirements. This ASU is effective for fiscal years beginning after  December 15, 2024 and interim periods within fiscal years beginning after  December 15, 2025, with early adoption permitted. The Company is currently evaluating the effect of this new guidance on its consolidated financial statements and related disclosures.

 

 

 

2.

INVENTORY

 

Inventories of the Company consisted of the following:

 

  

As of

 
  

March 31, 2024

  

December 31, 2023

 

Raw materials

 $57,416  $63,552 

Work-in-process

  6,145   22,619 

Finished goods

  120,455   106,089 
  $184,016  $192,260 

 

During the 13-week period ended March 31, 2024, the Company recognized inventory charges of $9,713, primarily due to product rationalization initiatives aimed at eliminating unprofitable or slow-moving stock keeping units.

 

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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

3.

PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment of the Company consisted of the following:

 

  

As of

 
  

March 31, 2024

  

December 31, 2023

 

Land

 $3,326  $3,326 

Buildings and improvements

  11,576   11,404 

Machinery and equipment

  73,774   73,332 

Construction in process

  6,790   6,224 

Total property, plant and equipment

  95,466   94,286 

Less: accumulated depreciation

  49,090   47,080 

Property, plant and equipment, net

 $46,376  $47,206 

 

The Company’s long-lived assets by geographic locations are as follows:

 

  

As of

 
  

March 31, 2024

  

December 31, 2023

 

United States

 $43,861  $44,931 

International

  2,515   2,275 

Total property, plant and equipment, net

 $46,376  $47,206 

 
 

4.

GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company's business combinations. There were no changes to goodwill during the 13-week period ended March 31, 2024.

 

No goodwill impairment charges were incurred during the 13-week period ended March 31, 2024 and April 2, 2023. Potential changes in the Company's costs and operating structure, the implementation of synergies, and overall performance in the automotive aftermarket industry, could negatively impact near-term cash-flow projections and could trigger a potential impairment of the Company's goodwill and / or indefinite-lived intangible assets. In addition, failure to execute the Company's strategic plans as well as increases in weighted average costs of capital could negatively impact the fair value of the reporting unit and increase the risk of future impairment charges. 

 

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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

Intangible assets consisted of the following:

 

  

March 31, 2024

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Value

 

Finite-lived intangible assets:

            

Customer relationships

 $269,950  $(58,620) $211,330 

Tradenames

  13,775   (5,750)  8,025 

Technology

  26,676   (14,167)  12,509 

Total finite-lived intangible assets

 $310,401  $(78,537) $231,864 
             

Indefinite-lived intangible assets:

            

Tradenames

 $175,032   —  $175,032 

 

  

December 31, 2023

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Value

 

Finite-lived intangible assets:

            

Customer relationships

 $269,950  $(55,732) $214,218 

Tradenames

  13,775   (5,569)  8,206 

Technology

  26,676   (13,800)  12,876 

Total finite-lived intangible assets

 $310,401  $(75,101) $235,300 
             

Indefinite-lived intangible assets:

            

Tradenames

 $175,165   —  $175,165 

 

The following outlines the estimated future amortization expense related to intangible assets held as of March 31, 2024:

 

2024 (excluding the thirteen weeks ended March 31, 2024)

 $10,307 

2025

  13,713 

2026

  13,608 

2027

  13,602 

2028

  13,602 

Thereafter

  167,032 

Total

 $231,864 

  
 

5.

ACCRUED LIABILITIES

 

Accrued liabilities of the Company consisted of the following:

 

  

As of

 
  

March 31, 2024

  

December 31, 2023

 

Accrued freight

 $6,010  $5,654 

Accrued employee compensation and benefits

  10,141   11,696 

Accrued returns and allowances

  12,072   11,267 

Accrued taxes

  1,581   1,475 

Current portion of operating lease liabilities

  4,476   4,948 

Accrued other

  9,300   7,089 

Total accrued liabilities

 $43,580  $42,129 

  

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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
  
 

6.

DEBT

 

Debt of the Company consisted of the following:

 

  

As of

 
  

March 31, 2024

  

December 31, 2023

 

First lien term loan due November 17, 2028

 $575,862  $592,505 

Revolver

  —   — 

Other

  1,312   1,974 

Less unamortized debt issuance costs

  (9,618)  (10,308)
   567,556   584,171 

Less current portion of long-term debt

  (7,444)  (7,461)
  $560,112  $576,710 

 

On November 18, 2021, the Company entered into a credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consisted of a seven-year $600,000 first lien term loan, a five-year $125,000 revolving credit facility, and a $100,000 delayed draw term loan. The proceeds of delayed draw loans made after closing were available to the Company to finance acquisitions. Upon the expiration of the delayed draw term loan in May 2022, the Company had drawn $57,000, which is included in the amount outstanding under the first lien term loan due November 17, 2028. Proceeds from the credit facility were used to repay in full the Company’s obligations under its previously existing first lien and second lien notes and to pay $13,413 in deferred financing fees related to the refinancing.

 

The revolving credit facility includes a letter of credit facility in the amount of $10,000, pursuant to which letters of credit may be issued as long as revolving loans may be advanced and subject to availability under the revolving credit facility. The Company had $1,728 in outstanding letters of credit on March 31, 2024.

 

The first lien term loan is to be repaid in quarterly payments of $1,643 through September 30, 2028 with the balance due upon maturity on November 17, 2028. The Company is required to make annual payments on the term loan in an amount equal to 50% of annual excess cash flow greater than $5,000, as defined in the Credit Agreement. This percentage requirement may decrease or be eliminated if certain leverage ratios are achieved. Based on the Company's results for 2023, no excess cash flow payment was required in 2024. Any such payments offset future mandatory quarterly payments. The Credit Agreement permits voluntary prepayments at any time, in whole or in part. The Company repurchased $15,000 outstanding principal on its first lien term loan at a discount to par during the 13-week period ended March 31, 2024.

 

As of March 31, 2024, amounts outstanding under the credit facility accrue interest at a rate equal to either the Secured Overnight Financing Rate ("SOFR") or base rate, at the Company's election, plus a specified margin. In the case of revolving credit loans and letter of credit fees, the specified margin is based on the Company's Total Leverage Ratio, as defined in the Credit Agreement. Commitment fees payable under the revolving credit facility are based on the Company's Total Leverage Ratio. On March 31, 2024, the weighted average interest rate on the Company's borrowings under the credit facility was 9.2%.

 

The Company has entered into an interest rate collar in the notional amount of $500,000 to hedge the Company's exposure to fluctuations in interest rates on its variable-rate debt. Refer to Note 8, "Derivative Instruments," for additional information. 

 

Obligations under the Credit Agreement are secured by substantially all of the Company’s assets, including a secured interest in the Company's headquarter, with a carrying value of $5,947. The Credit Agreement includes representations and warranties and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales.

 

13
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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

In February 2023, the Company entered into an amendment to the Credit Agreement which, among other things, increases the Total Leverage Ratio applicable under the Credit Agreement as of the quarter ending April 2, 2023 to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter through the fiscal quarter ending March 31, 2024 (the “Covenant Relief Period”). As of March 31, 2024, the required Total Leverage Ratio was5.75:1.00.As an ongoing condition to the Covenant Relief Period, the Company also agreed to (i) a minimum liquidity test, (ii) an interest coverage test, (iii) an anti-cash hoarding test at any time revolving loans are outstanding, and (iv) additional reporting obligations. Under the amended Credit Agreement, the revolving credit facility contains a minimum liquidity financial covenant of $45,000, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. In April 2023, the Company entered into a second amendment to the Credit Agreement in which the interest rate on any outstanding borrowings under the Credit Agreement was changed from LIBOR to SOFR. In May 2023, the Company entered into a third amendment to the Credit Agreement in which certain defined terms were clarified. The Company incurred $1,427 of deferred financing fees related to these amendments. On March 31, 2024, the Company was in compliance with all financial covenants. 

 

Some of the lenders that are parties to the Credit Agreement, and their respective affiliates, have various relationships with the Company in the ordinary course of business involving the provision of financial services, including cash management, commercial banking, investment banking or other services.

 

Future maturities of long-term debt and amortization of debt issuance costs as of March 31, 2024 are as follows:

 

  

Debt

  

Debt Issuance Costs

 

2024 (excluding the thirteen weeks ended March 31, 2024)

 $5,582  $1,307 

2025

  7,230   1,876 

2026

  6,571   2,034 

2027

  6,572   2,209 

2028

  551,219   2,192 
  $577,174  $9,618 

 
 

7.

COMMON STOCK WARRANTS AND EARN-OUT LIABILITY

 

The Company consummated a business combination (the “Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021 (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc., Empower Merger Sub II LLC, and Holley Intermediate Holdings, Inc. (“Holley Intermediate”) on July 16, 2021, (the “Closing” and such date, the “Closing Date”). Upon the Closing, there were 14,666,644 Warrants, consisting of 9,999,977 public warrants ("Public Warrants") and 4,666,667 private warrants ("Private Warrants" and together with the Public Warrants, the “Warrants”), outstanding to purchase shares of Common Stock that were issued by Empower prior to the Business Combination. Each Warrant entitles the registered holder to purchase one share of Common Stock at a price of $11.50 per share, subject to adjustments, provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. The Warrants may be exercised only for a whole number of shares of Common Stock. The Warrants expire on July 16, 2026, the date that is five years after the Closing Date, or earlier upon redemption or liquidation. Additionally, the Private Warrants will be non-redeemable and are exercisable on a cashless basis so long as they are held by Empower Sponsor Holdings, LLC (the "Sponsor") or any of its permitted transferees. If the Private Warrants are held by someone other than the Sponsor or its permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

  

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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The Company may redeem the Public Warrants at a price of $0.01 per warrant upon 30 days' notice if the closing price of Common Stock equals or exceeds $18.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given, provided there is an effective registration statement and current prospectus in effect with respect to the ordinary shares underlying such Warrants throughout the 30-day redemption period. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the Warrants, the Warrant holder is entitled to exercise his, her or its Warrant prior to the scheduled redemption date. Any such exercise requires the Warrant holder to pay the exercise price for each Warrant being exercised. Further, the Company may redeem the Public Warrants at a price of $0.10 per warrant upon 30 days' notice if the closing price of Common Stock equals or exceeds $10.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given. Beginning on the date the notice of redemption is given until the Warrants are redeemed or exercised, holders may elect to exercise their Warrants on a cashless basis and receive that number of shares of Common Stock as determined by reference to a table in the warrant agreement.

 

During any period when the Company has failed to maintain an effective registration statement, warrant holders may exercise Warrants on a cashless basis in accordance with Section 3(a)(9) of the Securities Act or another exemption, and the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue-sky laws to the extent an exemption is not available.

 

The Company’s Warrants are accounted for as a liability in accordance with ASC 815-40 and are presented as a warrant liability on the balance sheet. The warrant liability was measured at fair value at inception and on a recurring basis, with changes in fair value recognized as non-operating expense. As of March 31, 2024 and  December 31, 2023, a warrant liability with a fair value of $5,256 and $8,383, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. A decrease of $3,127 and an increase of $1,435 in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 13-week periods ended March 31, 2024 and April 2, 2023, respectively. 

 

Additionally, the Sponsor received 2,187,500 shares of Common Stock upon the Closing, which vest in two equal tranches upon achievement of certain market share price milestones during the earn-out period, as outlined in the Merger Agreement (the “Earn-Out Shares”). The first tranche of Earn-Out Shares vested during the first quarter of 2022. Upon vesting, the first tranche of 1,093,750 Earn-Out Shares were issued and a liability of $14,689, representing the fair value of the shares on the date of vesting, was reclassified from liabilities to equity. The remaining tranche of Earn-Out Shares will be forfeited if the applicable conditions are not satisfied before July 16, 2028 (seven years after the Closing Date). The unvested Earn-Out Shares are presented as an earn-out liability on the balance sheet and are remeasured at fair value with changes in fair value recognized as non-operating expense. As of March 31, 2024 and  December 31, 2023, an earn-out liability with a fair value of $2,830 and $3,479, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. A decrease of $649 and an increase of $428 in the fair value of the earn-out liability was reflected as change in fair value of earn-out liability in the condensed consolidated statements of comprehensive income for the 13-week periods ended March 31, 2024 and April 2, 2023, respectively. 

 

 

8.

DERIVATIVE INSTRUMENTS

 

The Company from time to time enters into derivative financial instruments, such as interest rate collar agreements (each, a “Collar”), to manage its exposure to fluctuations in interest rates on the Company’s variable rate debt. On January 4, 2023, the Company entered into a Collar with Wells Fargo Bank, N.A. ("Wells Fargo") with a notional amount of $500,000 that expires on February 18, 2026. The Collar has a floor of 2.811% and a cap of 5% (based on three-month SOFR). The structure of this Collar is such that the Company receives an incremental amount if the Collar index exceeds the cap rate. Conversely, the Company pays an incremental amount to Wells Fargo if the Collar index falls below the floor rate. No payments are required if the Collar index falls between the cap and floor rates. 

 

As of March 31, 2024, the Company recognized a derivative asset of $1,117 for the Collar in other noncurrent assets on the condensed consolidated balance sheet. The Company recorded a net change in the fair value of the Collar as a decrease to interest expense of $2,281 and as an increase to interest expense of $3,020, for the 13-week periods ended March 31, 2024 and April 2, 2023, respectively. Cash receipts for the Collar totaled $469 for the 13-week period ended March 31, 2024.

 

The fair value of the Collar is determined using observable market-based inputs and the impact of credit risk on the derivative’s fair value (the creditworthiness of the Company’s counterparty for assets and the creditworthiness of the Company for liabilities) (a Level 2 measurement, as described in Note 9, "Fair Value Measurements").

 

15
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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

9.

FAIR VALUE MEASUREMENTS

 

The Company’s financial liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows:

 

  

Fair Value Measured on March 31, 2024

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 

Assets:

                

Interest rate collar

 $—  $1,117  $—  $1,117 
                 

Liabilities:

                

Warrant liability (Public)

 $3,488  $—  $—  $3,488 

Warrant liability (Private)

  —   —   1,768   1,768 

Earn-out liability

  —   —   2,830   2,830 

Total fair value liabilities

 $3,488  $—  $4,598  $8,086 

 

  

Fair Value Measured on December 31, 2023

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 

Liabilities:

                

Warrant liability (Public)

 $5,480  $—  $—  $5,480 

Warrant liability (Private)

  —   —   2,903   2,903 

Earn-out liability

  —   —   3,479   3,479 

Interest rate collar liability

  —   1,164   —   1,164 

Total fair value liabilities

 $5,480  $1,164  $6,382  $13,026 

 

As of March 31, 2024, the Company's derivative liabilities for its Private and Public Warrants, earn-out liability, and derivative asset for its Collar are measured at fair value on a recurring basis (see Note 7, “Common Stock Warrants and Earn-Out Liability,” and Note 8, "Derivative Instruments," for more details). The fair values of the Private Warrants and earn-out liability are determined based on significant inputs not observable in the market (Level 3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its Private Warrants and earn-out liability. The fair value of the Collar, which is included in other noncurrent assets on the condensed consolidated balance sheet, is determined based on models that reflect the contractual terms of the derivative, yield curves, and the credit quality of the counterparties. Inputs are generally observable and do not contain a high level of subjectivity (Level 2). The fair value of the Public Warrants is determined using publicly traded prices (Level 1). Changes in the fair value of the derivative liabilities related to Warrants and the earn-out liability are recognized as non-operating expense in the condensed consolidated statements of comprehensive income. Changes in the fair value of the Collar is recognized as an adjustment to interest expense in the condensed consolidated statements of comprehensive income. Changes in the fair value of the derivative liabilities related to Warrants and the earn-out liability and changes in the fair value of the Collar are recognized in net cash provided by operating activities on the condensed consolidated statements of cash flows.

 

The fair value of Private Warrants was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:

 

  

March 31, 2024

  

December 31, 2023

 

Valuation date price

 $4.46  $4.87 

Strike price

 $11.50  $11.50 

Remaining life (in years)

  2.29   2.54 

Expected dividend

 $—  $— 

Risk-free interest rate

  4.42%  4.01%

Price threshold

 $18.00  $18.00 

 

16
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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The fair value of the earn-out liability was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:

 

  

March 31, 2024

  

December 31, 2023

 

Valuation date price

 $4.46  $4.87 

Expected term (in years)

  4.29   4.54 

Expected volatility

  65.22%  67.20%

Risk-free interest rate

  4.17%  3.79%

Price hurdle

 $15.00  $15.00 

   

As of March 31, 2024 and  December 31, 2023, the Company has accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.

 

The reconciliation of changes in Level 3 liabilities during the 13-week periods ended March 31, 2024 and April 2, 2023 is as follows:

 

  

Private Warrants

  

Earn-Out Liability

  

Total

 

Balance at December 31, 2022

 $1,581  $1,176  $2,757 

Losses included in earnings

  518   428   946 

Balance at April 2, 2023

 $2,099  $1,604  $3,703 
             

Balance at December 31, 2023

 $2,903  $3,479  $6,382 

Gains included in earnings

  (1,135)  (649)  (1,784)

Balance at March 31, 2024

 $1,768  $2,830  $4,598 

 
 

10.

REVENUE

 

The principal activity from which the Company generates its revenue is the manufacturing and distribution of after-market automotive parts for its customers, comprised of resellers and end users. The Company recognizes revenue at a point in time, rather than over time, as the performance obligation is satisfied when customer obtains control of the product upon title transfer and not as the product is manufactured or developed. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e., estimated rebates, co-op advertising, etc.).

 

The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.

 

The Company allows customers to return products when certain Company-established criteria are met. These sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. Returned products, which are recorded as inventories, are valued at the lower of cost or net realizable value. The physical condition and marketability of the returned products are the major factors considered in estimating realizable value. The Company also estimates expected sales returns and records the necessary adjustment as a charge against gross sales.

 

17
Table of Contents
HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 365 days. The Company elected the practical expedient to disregard the possible existence of a significant financing component related to payment on contracts, as the Company expects that customers will pay for the products within one year. The Company has evaluated the terms of our arrangements and determined that they do not contain significant financing components. Additionally, as all contracts with customers have an expected duration of one year or less, the Company has elected the practical expedient to exclude disclosure of information regarding the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. The Company provides limited warranties on most of its products against certain manufacturing and other defects. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 15, “Commitments and Contingencies” for more information.

 

The following table summarizes total revenue by product category.

 

  

For the thirteen weeks ended

 
  

March 31, 2024

  

April 2, 2023

 

Electronic systems

 $63,880  $68,751 

Mechanical systems

  38,395   43,318 

Exhaust

  13,990   15,829 

Accessories

  23,384   27,465 

Safety

  18,987   16,842 

Net sales

 $158,636  $172,205 

 

The following table summarizes total revenue based on geographic location from which the product is shipped:

 

  

For the thirteen weeks ended

 
  

March 31, 2024

  

April 2, 2023

 

United States

 $153,325  $166,418 

Italy

  5,311   5,787 

Net sales

 $158,636  $172,205 

 
 

11.

INCOME TAXES

 

The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.

 

  

For the thirteen weeks ended

 
  

March 31, 2024

  

April 2, 2023

 

Income tax expense (benefit)

 $(891) $1,566 

Effective tax rate

  (31.4)%  26.9%

 

For the 13-week period ended March 31, 2024, the Company's effective tax rate of -31.4% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the warrant and earn-out liabilities recognized during the period, federal research and development tax credits, and the impact of foreign taxes in higher tax rate jurisdictions. In addition, the Company incurred expenses related to product rationalization that were determined to be significant and infrequent in nature; therefore, the full tax benefit of these expenses were recorded during the quarter as a discrete adjustment. For the 13-week period ended April 2, 2023, the Company’s effective tax rate of 26.9% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in the fair value of the warrant and earn-out liabilities recognized during the period. 

 

18
Table of Contents
HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
   
 

12.

EARNINGS PER SHARE

 

The following table sets forth the calculation of basic and diluted earnings per share:

 

  

For the thirteen weeks ended

 
  

March 31, 2024

  

April 2, 2023

 

Numerator:

        

Net income

 $3,730  $4,247 

Denominator:

        

Weighted average common shares outstanding - basic

  117,871,829   117,153,525 

Dilutive effect of potential common shares from RSUs

  1,429,198   91,237 

Dilutive effect of potential common shares from PSUs

  204,303   — 

Weighted average common shares outstanding - diluted

  119,505,330   117,244,762 

Earnings per share:

        

Basic

 $0.03  $0.04 

Diluted

 $0.03  $0.04 

 

The following outstanding shares of Common Stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Warrants to purchase shares of Common Stock having an exercise price greater than the average share market price are excluded from the calculation of diluted earnings per share. 

 

  

For the thirteen weeks ended

 
  

March 31, 2024

  

April 2, 2023

 

Anti-dilutive shares excluded from calculation of diluted EPS:

        

Warrants

  14,633,311   14,633,311 

Stock options

  701,849   1,117,102 

Restricted stock units

  61,470   429,948 

Performance stock units

  797,879   949,412 

Unvested Earn-Out Shares

  1,093,750   1,093,750 

Total anti-dilutive shares

  17,288,259   18,223,523 

  
 

13.

EQUITY-BASED COMPENSATION PLANS

 

In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), under which awards, including stock options, restricted stock units ("RSUs") and performance stock units ("PSUs") may be granted to employees and non-employee directors. The 2021 Plan authorized 8,850,000 shares of Common Stock to be available for award grants. As of March 31, 2024, 4,754,499 shares of Common Stock remained available for future issuance under the 2021 Plan. On June 6, 2023, the Company granted 1,000,000 RSUs and 1,520,000 PSUs to its new President and Chief Executive Officer. These awards were granted outside of the 2021 Plan as employment inducement awards and did not require shareholder approval under the rules of the NYSE or otherwise. 

 

Equity-based compensation expense included the following components:

 

  

For the thirteen weeks ended

 
  

March 31, 2024

  

April 2, 2023

 

Restricted stock units

 $774  $648 

Performance stock units

  390   52 

Stock options

  (23)  (306)

 

All equity-based compensation expenses are recorded in selling, general and administrative costs in the condensed consolidated statements of comprehensive income.

 

19
Table of Contents
HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

Restricted Stock Awards

 

RSUs and PSUs are collectively referred to as "Restricted Stock Awards". The Compensation Committee has awarded RSUs to select employees and non-employee directors and has awarded PSUs to select employees. The RSUs vest ratably over one to four years of continued employment. The grant date fair value of a time-based award or a performance-based award without a market condition is equal to the market price of Common Stock on the grant date and is recognized over the requisite service period. The grant date fair value of a performance-based award with a market condition is determined using a Monte Carlo simulation and is recognized over the requisite service period. On  March 31, 2024, there was $8,977 of unrecognized compensation cost related to unvested Restricted Stock Awards that is expected to be recognized over a remaining weighted average period of 2.4 years.

 

The weighted-average grant-date fair value of Restricted Stock Awards granted during the 13-week periods ended March 31, 2024 and April 2, 2023, was $4.25 and $2.11, respectively. The fair value of Restricted Stock Awards vested and converted to shares of Common Stock during the 13-week periods ended March 31, 2024 and April 2, 2023, was $3,364 and $146, respectively.

 

The following table summarizes Restricted Stock Award for the 13-week period ended March 31, 2024:

 

  

Unvested Restricted Stock Awards

 
      

Weighted Average

 
  

Number of RSAs

  

Grant Date Fair Value

 

Balance on December 31, 2023

  4,904,801  $2.86 

Granted

  803,080   4.25 

Vested

  (819,876)  2.61 

Forfeited

  (478,261)  3.13 

Balance on March 31, 2024

  4,409,744  $3.13 

 

Performance-based Restricted Stock Units

 

The PSUs granted under the 2021 Plan represent shares of Common Stock that are potentially issuable in the future based on a combination of performance and service requirements. On March 4, 2024, the Company granted 340,895 PSUs under the 2021 Plan to key employees with a grant date fair value of $4.22 and on March 18, 2024, the Company granted an additional 26,020 PSUs with a grant data fair value of $4.25. The PSUs granted to employees were based on salary and include annual net sales and adjusted EBITDA growth targets with threshold and stretch goals. The awards vest ratably over three years, subject to the employee’s continuous employment through the vesting date and the level of performance achieved. The number of PSUs granted reflects the target number able to be earned under a given award. Non-vested PSU compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change. The fair value of a PSU at the grant date is equal to the market price of Common Stock on the grant date. The cost estimates for PSU grants represent initial target awards until the Company can reasonably forecast the financial performance of each PSU award grant. The actual number of shares of Common Stock to be issued at the end of each performance period will range from 0% to 150% of the initial target awards.

 

Stock Options

 

Stock option grants have an exercise price at least equal to the market value of the underlying Common Stock on the date of grant, have ten-year terms, and vest ratably over three years of continued employment. In general, vested options expire if not exercised within 90 days of termination of service. Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period. As of March 31, 2024, there was $364 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a remaining weighted-average period of 0.8 years.

 

20
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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The following table summarizes stock option activity for the 13-week period ended March 31, 2024:

 

          

Weighted Average

 
      

Weighted

  

Remaining

 
  

Number of

  

Average

  

Contractual

 
  

Stock Options

  

Exercise Price

  

Term (years)

 

Options outstanding on December 31, 2023

  886,046  $10.97     

Forfeited

  (134,066)  11.03     

Expired

  (50,131)  10.76     

Options outstanding on March 31, 2024

  701,849  $10.98   4.95 

Options exercisable on March 31, 2024

  535,805  $11.00   4.12 

 
 

14.

LEASE COMMITMENTS

 

The Company leases retail stores, manufacturing, distribution, engineering, and research and development facilities, office space, equipment, and automobiles under operating lease agreements. Leases have remaining lease terms of one to 11 years, inclusive of renewal options that the Company is reasonably certain to exercise.

 

The following table summarizes operating lease assets and obligations, and provides information associated with the measurement of operating lease obligations.

 

  

As of

 
  

March 31, 2024

  

December 31, 2023

 

Assets:

        

Operating right of use assets

 $28,481  $29,250 

Liabilities:

        

Current operating lease liabilities - Accrued liabilities

 $4,476  $4,948 

Long-term operating lease liabilities

  25,266   25,177 

Total lease liabilities

 $29,742  $30,125 

Lease term and discount rate

        

Weighted average remaining lease term (in years)

  7.2   7.2 

Weighted average discount rate

  6.35%  6.21%

 

The following summarizes the components of operating lease expense and provides supplemental cash flow information for operating leases:

 

  

For the thirteen weeks ended

 
  

March 31, 2024

  

April 2, 2023

 

Components of lease expense:

        

Operating lease expense

 $2,145  $1,586 

Short-term lease expense

  428   512 

Variable lease expense

  80   152 

Total lease expense

 $2,653  $2,250 

Supplemental cash flow information related to leases:

        

Cash paid for amounts included in measurement of operating lease liabilities

 $1,849  $1,751 

Right-of-use assets obtained in exchange for new operating lease liabilities

  2,014   — 

Decapitalization of right-of-use assets upon lease termination or modification

  1,360   — 

 

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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The following table summarizes the maturities of the Company's operating lease liabilities as of March 31, 2024:

 

2024 (excluding the thirteen weeks ended March 31, 2024)

 $4,857 

2025

  5,289 

2026

  4,814 

2027

  4,807 

2028

  4,568 

Thereafter

  12,896 

Total lease payments

  37,231 

Less imputed interest

  (7,489)

Present value of lease liabilities

 $29,742 

 
 

15.

COMMITMENTS AND CONTINGENCIES

 

Litigation 

 

The Company is a party to various lawsuits and claims in the normal course of business, as well as the putative securities class action described below. While the lawsuits and claims against the Company cannot be predicted with certainty, management believes that the ultimate resolution of such matters will not have a material effect on the consolidated financial position or liquidity of the Company; however, in light of the inherent uncertainties involved in such lawsuits and claims, some of which  may be beyond the Company’s control, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period. The Company has established loss provision for matters in which losses are probable and can be reasonably estimated. Although management will continue to reassess the estimated liability based on future developments, an objective assessment of such claims may not always be predictive of the outcome and actual results may vary from current estimates.

 

A putative securities class action was filed on  November 6, 2023, against the Company, Tom Tomlinson (the Company’s former Director, President, and Chief Executive Officer), and Dominic Bardos (the Company’s former Chief Financial Officer) in the United States District Court for the Western District of Kentucky (the “Complaint”) and is captioned City of Fort Lauderdale General Employees’ Retirement System v. Holley, Inc., f/k/a Empower LTD., Tom Tomlinson, and Dominic Bardos, Civil Action No. 1:23-cv-148-S.

 

On  February 26, 2024, the court appointed City of Fort Lauderdale General Employees’ Retirement System to serve as lead plaintiff to prosecute claims on behalf of a proposed class of stockholders who purchased or otherwise acquired Holley securities between  July 21, 2021 and  February 6, 2023. On April 26, 2024, lead plaintiff filed an amended complaint, adding Vinod Nimmagadda (the Company’s Executive Vice President of Corporate Development and New Ventures) as a defendant. Lead plaintiff alleges that statements made regarding the Company’s business, operations, and prospects violated Sections 10(b), Section 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 and seeks class certification, damages, interest, attorneys’ fees, and other relief. The Company’s response to the amended complaint is due by June 28, 2024.

 

Due to the early stage of this proceeding, we cannot reasonably estimate the potential range of loss, if any. The Company disputes the allegations and intends to vigorously defend against them.

 

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HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

Product Warranties

 

The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. The accrued product warranty costs are based primarily on historical experience of actual warranty claims and are recorded at the time of the sale.

 

The following table provides the changes in the Company's accrual for product warranties, which is classified as a component of accrued liabilities in the condensed consolidated balance sheets.

 

  

For the thirteen weeks ended

 
  

March 31, 2024

  

April 2, 2023

 

Beginning balance

 $3,325  $3,584 

Accrued for current year warranty claims

  3,343   2,954 

Settlement of warranty claims

  (1,897)  (3,357)

Ending balance

 $4,771  $3,181 

 

Employee Savings Plans 

 

The Company has a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code that covers United States-based employees.United States-based eligible employees may contribute up to the current statutory limits under the Internal Revenue Service regulations. Holley matches employee contributions to the 401(k) Plan up to 3.5% each pay period, and an additional discretionary match of up to 1.5% is made based on company performance targets. The Company also has defined-contribution saving plan for Canada-based employees. Canada-based eligible employees may contribute up to the current statutory limits for a Registered Retirement Savings Plan. Holley matches employee contributions to the Group Savings Plan up to 3.0% each pay period, and an additional discretionary match of up to 1.5% is made based on company performance targets.  

 

During the 13-week periods ended March 31, 2024 and April 2, 2023, the Company made matching contributions under the savings plans totaling $616 and $575, respectively.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Unless the context requires otherwise, references to “Holley,” “we,” “us,” “our” and “the Company” in this section are to the business and operations of Holley Inc. and its subsidiaries unless the context otherwise indicates. The following discussion and analysis should be read in conjunction with Holley’s condensed consolidated financial statements and related notes thereto included in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause Holley’s actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed herein and under the caption, “Cautionary Note Regarding Forward-Looking Statements.”

 

Overview

 

We are a leading designer, marketer, and manufacturer of high performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the United States, Canada, Europe and China. We design, market, manufacture and distribute a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. Our products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety. 

 

Innovation is at the core of our business and growth strategy. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.

 

In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer scale and connection, (iv) expand share in current product categories and (v) realize value-enhancing revenue and cost synergies. While we believe our business is positioned for continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that would complement our current business and expand our addressable target market.

 

Factors Affecting our Performance

 

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed above, under the caption, "Cautionary Note Regarding Forward-Looking Statements," in this Quarterly Report on Form 10-Q, under the caption, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 14, 2024, and in our subsequent filings with the SEC.

 

Business Environment

 

Our business and results of operations, financial condition, and liquidity are impacted by broad economic conditions, as well as by geopolitical events, including the conflict in Ukraine, the conflict in the Middle East, and the possible expansion of such conflicts and potential geopolitical consequences. Our business is impacted by various economic factors that affect both consumers and the automotive industry, including by not limited to inflation, fuel costs, wage rates, supply chain disruptions, hiring, and other economic conditions. In response to inflationary impacts and supply chain disruptions, we have attempted to minimize potential adverse impacts on our business with cost savings initiatives, price increases to customers, and increased attention to maintaining appropriate inventory levels in the distribution channel. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales to lower-margin products, and demands on our performance that increase our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if our attempt to mitigate the impact on our supply chain, operations and costs is not successful, our business, results of operations and financial condition may be adversely affected.

 

Key Components of Results of Operations

 

Net Sales

 

The principal activity from which we generate sales is the designing, marketing, manufacturing and distribution of performance after-market automotive parts for our end consumers. Sales are displayed net of rebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized.

 

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Cost of Goods Sold

 

Cost of goods sold consists primarily of the cost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.

 

Selling, General, and Administrative

 

Selling, general, and administrative costs consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, outgoing shipping costs, pre-production and start-up costs are also included within selling, general, and administrative. 

 

Restructuring Costs

 

Restructuring costs include charges attributable to operational restructuring and integration activities, including professional and consulting services; termination related benefits; facilities relocation; and executive transition costs. 

 

Interest Expense

 

Interest expense consists of interest due on the indebtedness under our credit facilities. Interest is based on SOFR or the base rate, at the Company's election, plus the applicable margin rate. As of March 31, 2024, $575.9 million was outstanding under our Credit Agreement.

 

 

Results of Operations

 

13-Week Period Ended March 31, 2024 Compared With 13-Week Period Ended April 2, 2023

 

The table below presents Holley’s results of operations for the 13-week periods ended March 31, 2024 and April 2, 2023 (dollars in thousands):

 

   

For the thirteen weeks ended

  
   

March 31, 2024

    

April 2, 2023

    

Change ($)

    

Change (%)

  

Net sales

   $ 158,636     $ 172,205     $ (13,569 )     (7.9 )%

Cost of goods sold

     106,577       104,492       2,085       2.0 %

Gross profit

     52,059       67,713       (15,654 )     (23.1 )%

Selling, general, and administrative

     32,996       30,017       2,979       9.9 %

Research and development costs

     4,812       6,653       (1,841 )     (27.7 )%

Amortization of intangible assets

     3,436       3,679       (243 )     (6.6 )%

Restructuring costs

     615       1,339       (724 )     (54.1 )%

Other operating expense

     (8 )     51       (59 )