UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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.
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).
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 ☐
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 Rule 12b-2 of the Exchange Act).
Yes ☐
No
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date: Common Stock, $.025 par value per share –
2
PART I—FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
| For the three months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating income | ||||||||
| Interest expense, net | ||||||||
| Income before income taxes | ||||||||
| Provision for income taxes | ||||||||
| Net income | $ | $ | ||||||
| Net earnings per share – basic | $ | $ | ||||||
| Net earnings per share – diluted | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
3
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except as otherwise noted)
| ASSETS | ||||||||
| September 30, 2023 (Unaudited) | June 30, 2023 | |||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Inventories, net | ||||||||
| Vendor deposits | ||||||||
| Contract assets | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Equipment and improvements, net | ||||||||
| Operating lease assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
4
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| September 30, 2023 (Unaudited) | June 30, 2023 | |||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued employee expenses | ||||||||
| Customer deposits | ||||||||
| Contract liabilities | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Deferred tax liabilities, net | ||||||||
| Long-term operating lease liabilities | ||||||||
| Long-term debt, net | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 11) | ||||||||
| Shareholders’ equity | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
5
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(In thousands, except share data) (Unaudited)
| Three months ended September 30, 2023 | ||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury Stock | Retained | |||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Cost | Earnings | Total | ||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Share repurchases | ( | ) | ( | ) | ||||||||||||||||||||||||
| Vesting of restricted shares | ( | ) | ||||||||||||||||||||||||||
| Issuances of shares in connection with acquisitions | ||||||||||||||||||||||||||||
| Stock compensation | — | — | ||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Three months ended September 30, 2022 | ||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury Stock | Retained | |||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Cost | Earnings | Total | ||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Stock compensation | — | — | ||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
6
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
| For the three months ended | ||||||||
| September 30, 2023 | September 30, 2022 | |||||||
| Operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Provision for bad debt expense | ||||||||
| Non-cash lease expense | ( | ) | ( | ) | ||||
| Stock compensation | ||||||||
| Inventory reserve | ( | ) | ||||||
| (Benefit) provision for deferred income taxes | ( | ) | ||||||
| Other | ( | ) | ||||||
| (Increase) decrease in operating assets: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Vendor deposits | ( | ) | ( | ) | ||||
| Contract assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued employee expenses | ||||||||
| Customer deposits | ( | ) | ||||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Net cash provided (used) by operating activities | ( | ) | ||||||
| Investing activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Cash paid for acquisitions, net of cash acquired | ( | ) | ( | ) | ||||
| Net cash used by investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Proceeds from long-term debt | ||||||||
| Debt repayments | ( | ) | ( | ) | ||||
| Repurchases of common stock in satisfaction of employee tax withholding obligations | ( | ) | ||||||
| Net cash (used) provided by financing activities | ( | ) | ||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
7
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
| For the three months ended | ||||||||
| September 30, 2023 | September 30, 2022 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash paid during the period for income taxes | $ | $ | ||||||
| Supplemental disclosures of non-cash financing activities: | ||||||||
| Issuances of common stock for acquisitions | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
8
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note (1) - General: The accompanying unaudited condensed consolidated financial statements include the accounts of EVI Industries, 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, shareholders’ equity 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 Company’s 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, 2023. The June 30, 2023 balance sheet information contained herein was derived from the Company’s 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, 2023.
The preparation of the Company’s 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, is a value-added distributor, and provides advisory and technical services. Through its sales organization, the Company provides its customers with planning, designing, and consulting services related to their commercial laundry operations. The Company sells and/or leases its customers commercial laundry equipment, specializing in washing, drying, finishing, material handling, water heating, power generation, and water reuse applications. In support of the suite of products it offers, the Company sells related parts and accessories. Additionally, through the Company’s network of commercial laundry technicians, the Company provides its customers with installation, maintenance, and repair services.
The Company’s customers include government, institutional, industrial, commercial and retail customers. Product purchases made by customers range from parts and accessories, to single or multiple units of equipment, to large complex systems. The Company also provides its customers with the services described above.
The Company’s growth strategy includes organic growth initiatives and business acquisitions pursuant to the Company’s “buy-and-build” growth strategy.
Note (2) – Summary of Significant Accounting Policies: There have been no material changes to the Company’s significant accounting policies from those described in Note 2 to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
9
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note (3) – Recently Issued Accounting Guidance: In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other specified instruments, entities are required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. The guidance was required to be applied using a cumulative-effect transition method. The Company adopted this ASU effective July 1, 2023, the first day of its fiscal year ending June 30, 2024. As a result, the consolidated financial statements for the quarter ended September 30, 2023 are presented under the new standard, while the comparative prior year period is not adjusted and continues to be reported in accordance with the historical accounting policy. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Trade receivables as of September 30, 2023 were $
The Company measures the allowance for credit losses on trade receivables on a collective (pool) basis when similar risk characteristics exist. Trade receivables are generally pooled based on the type of transaction generating the trade receivable. The Company establishes an estimate for the allowance for credit losses resulting from the failure of its clients to make required payments by applying an aging schedule to pools of assets. The Company generally monitors macroeconomic indicators to assess whether adjustments are necessary to reflect current conditions.
Management does not believe that accounting standards and updates which have been issued but are not yet effective will have a material impact on the Company’s consolidated financial statements upon adoption.
Note (4) – Acquisitions:
On September 1, 2023,
the Company completed the acquisition of ALVF, Inc. (dba ALCO Washer Center) (“ALCO”), a Pennsylvania based distributor of
commercial laundry products and a provider of related technical installation and maintenance services to the on-premise and vended laundry
segments of the commercial laundry industry. The consideration paid by the Company in connection with the acquisition consisted of $
10
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note (5) - 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 and restricted stock units are considered participating securities because they contain a non-forfeitable right to cash dividends
(in the case of restricted stock awards) or dividend equivalents (in the case of restricted stock units) paid prior to vesting or forfeiture,
if any, irrespective of whether the awards or units ultimately vest.
| For the three months ended September 30, | ||||||||
| 2023 (Unaudited) | 2022 (Unaudited) | |||||||
| Net income | $ | $ | ||||||
| Less: distributed and undistributed income allocated to unvested restricted common stock | ||||||||
| Net income allocated to EVI Industries, Inc. shareholders | $ | $ | ||||||
| Weighted average shares outstanding used in basic earnings per share | ||||||||
| Dilutive common share equivalents | ||||||||
| Weighted average shares outstanding used in diluted earnings per share | ||||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
At September 30, 2023 and 2022, other than
Note (6) – Debt: Long-term debt as of September 30, 2023 and June 30, 2023 are as follows (in thousands):
| September 30, 2023 | June 30, 2023 | |||||||
| Revolving credit facility | $ | $ | ||||||
| Less: unamortized discount and deferred financing costs | ( | ) | ( | ) | ||||
| Total long-term debt, net | $ | $ | ||||||
The Company is party, as borrower, to a syndicated
credit agreement (the “Credit Agreement”) which allows for borrowings in the maximum aggregate principal amount of up to $
11
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
The Credit Agreement contains certain covenants,
including financial covenants requiring the Company to comply with maximum leverage ratios and minimum interest coverage ratios. The
Credit Agreement also contains other provisions which may restrict the Company’s ability to, among other things, dispose of or
acquire assets or businesses, incur additional indebtedness, make certain investments and capital expenditures, pay dividends, repurchase
shares and enter into transactions with affiliates. At September 30, 2023, the Company was in compliance with its covenants under the
Credit Agreement and $
The carrying value of the Company’s long-term debt reported in the condensed consolidated balance sheets herein approximates its fair value since it bears interest at variable rates approximating market rates.
The obligations of the Company under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries, and are guaranteed, jointly and severally, by certain of the Company’s subsidiaries.
Note (7) - Leases:
Company as Lessee
As of September 30, 2023, the Company had 32 facilities,
consisting of warehouse facilities and administrative offices, financed under operating leases with
The following table provides details of the
Company’s future minimum lease payments under operating lease liabilities recorded on the Company’s condensed consolidated
balance sheet as of September 30, 2023.
| Fiscal years ending June 30, | Total
Operating Lease Obligations (in thousands) | |||
| 2024 (remainder of) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: amounts representing interest | ||||
| Present value of minimum lease payments | ||||
| Less: current portion | ||||
| Long-term portion | $ | |||
12
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
| Three months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating lease cost | ||||||||
| Operating lease cost (1) | $ | $ | ||||||
| Variable lease cost (2) | ||||||||
| Total lease cost | $ | $ | ||||||
| (1) |
| (2) |
The table below presents lease-related terms and discount rates as of September 30, 2023:
| September 30, 2023 | ||
| Weighted average remaining lease terms | ||
| Operating leases | ||
| Weighted average discount rate | ||
| Operating leases |
| Three months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | $ | $ | ||||||
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities: | $ | $ | ||||||
Company as Lessor
The Company derives a portion of its revenue from equipment leasing arrangements. Such arrangements provide for monthly payments covering the equipment provided, maintenance, and interest. These arrangements meet the criteria to be accounted for as sales type leases. Accordingly, revenue from the provision of the equipment is recognized upon delivery of the equipment and its acceptance by the customer. Upon the recognition of such revenue, an asset is established for the investment in sales type leases. Maintenance revenue and interest are recognized monthly over the lease term.
13
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
| Fiscal years ending June 30, | Total Minimum Lease Payments Receivable | Amortization of Unearned Income | Net Investment in Sales Type Leases | |||||||||
| 2024 (remainder of) | $ | $ | $ | |||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| Thereafter | ||||||||||||
| $ | * | |||||||||||
*
The total net investments in sales type leases, including
stated residual values, as of September 30, 2023 and June 30, 2023 was $
Note (8) - Income Taxes: Income taxes are recorded in the Company’s quarterly financial statements based on the Company’s estimated annual effective income tax rate, subject to adjustment for discrete events, should they occur.
As of September 30, 2023 and June 30, 2023,
the Company had net deferred tax liabilities of approximately $
The Company follows 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. The Company’s accounting for income taxes in accordance with this standard did not result in a material adjustment to the Company’s provision for income taxes during the three months ended September 30, 2023 or 2022.
On August 16, 2022, the Inflation Reduction
Act of 2022 (the “IR Act”) was signed into federal law. The IR Act includes the largest-ever U.S. investment committed to
combat climate change, allocating $
As of September 30, 2023, the Company was subject to potential federal and state tax examinations for the tax years including and subsequent to 2019.
14
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note (9) – Equity Plans and Dividends:
Equity Incentive Plan
In November 2015, the Company’s stockholders
approved the Company’s 2015 Equity Incentive Plan (the “Plan”). During December 2020, the Company’s stockholders
approved an amendment to the Plan to increase the number of shares of the Company’s common stock authorized for issuance pursuant
to awards granted under the Plan to
During the three months ended September 30,
2023, there were no restricted stock awards or restricted stock units granted under the Plan. During the three months ended September
30, 2022, restricted stock awards of a total of
For the three months ended September 30, 2023
and 2022, non-cash share-based compensation expense awards granted under the Plan totaled $
As of September 30, 2023, the Company had $
| Restricted Stock Awards | Restricted Stock Units | |||||||||||||||
| Shares | Weighted- Average Grant Date Fair Value | Shares | Weighted- Average Grant Date Fair Value | |||||||||||||
| Non-vested awards or units outstanding at June 30, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | ( | ) | ||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Non-vested awards or units outstanding at September 30, 2023 | $ | $ | ||||||||||||||
Employee Stock Purchase Plan
During 2017, the Company’s stockholders
approved the Company’s 2017 Employee Stock Purchase Plan (the “ESPP”). Subject to the terms and conditions thereof,
the ESPP allows eligible employees the opportunity to purchase shares of the Company’s common stock at a
15
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Dividends
The declaration and payment of cash dividends with respect to the Company’s common stock is determined by the Company’s Board of Directors based on the Company’s financial condition and results, including, but not limited to, cash flow generated by operations and profitability, prospects and liquidity needs and other factors deemed relevant by the Company’s Board of Directors.
The Company has not historically paid regular dividends on its common stock. However, the Company has from time to time paid special cash dividends on its common stock. The Company did not pay any dividends on its common stock during the three months ended September 30, 2023 or 2022.
On October 4, 2023, the Company’s Board
of Directors declared a special cash dividend on the Company’s common stock of $
The payment of dividends, if any, in the future will be in the discretion of the Company’s Board of Directors, as described above. The payment of dividends may also be subject to restrictions contained in the Company’s debt instruments. As described elsewhere in this Report, including under “Liquidity and Capital Resources” in Item 2 of this Report, the Company’s Credit Agreement contains certain covenants which may, among other things, restrict the Company’s ability to pay dividends, and any future facilities may contain similar or more stringent requirements.
Note (10) – Transactions with Related Parties: Certain of the Company’s subsidiaries lease warehouse and office space from one or more of the principals or former principals of those subsidiaries. These leases include the following:
On October 10, 2016, the Company’s wholly-owned
subsidiary, Western State Design, entered into a lease agreement pursuant to which it leases
On October 31, 2017, the Company’s wholly-owned
subsidiary, Tri-State Technical Services, entered into lease agreements pursuant to which it leases a total of
16
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
On November 1, 2018, the Company’s wholly-owned
subsidiary, AAdvantage Laundry Systems, entered into a lease agreement pursuant to which it leases warehouse and office space from an
affiliate of Mike Zuffinetti, former Chief Executive Officer of AAdvantage. Monthly base rental payments under this lease were $
On November 3, 2020, the Company’s wholly-owned
subsidiary, Yankee Equipment Systems, entered into a lease agreement pursuant to which it leases a total of
Note (11) – Commitments and Contingencies: In the ordinary course of business, certain of the Company’s contracts require the Company to provide performance and payment bonds related to projects in process. These bonds are intended to provide a guarantee to the customer that the Company will perform under the terms of the contract and that the Company will pay subcontractors and vendors. If the Company fails to perform under the contract or pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company is required to reimburse the surety for expenses or outlays it incurs. No such performance or payment bonds were outstanding at September 30, 2023 or June 30, 2023.
The Company may from time to time become subject to litigation and other legal proceedings. Litigation and other legal proceedings may require the Company to incur significant expenses, including those relating to legal and other professional fees, as well as damages or other payments. Litigation and other legal proceedings are inherently uncertain, and adverse outcomes in litigation or other legal proceedings could adversely affect the Company’s financial condition, cash flows, and operating results.
17
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note (12) – Goodwill:
| Balance at June 30, 2023 | $ | |||
| Goodwill from acquisitions (1) | ||||
| Working capital adjustments (2) | ( | ) | ||
| Balance at September 30, 2023 | $ |
(1)
(2)
18
| Item 2. | Management’s Discussion and Analysis of Financial Conditions and Results of Operations. |
Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-Q are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, words such as “may,” “should,” “could,” “seek,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “strategy” and similar expressions are intended to identify forward looking statements. Forward looking statements may relate to, among other things, events, conditions and trends that may affect the future plans, operations, business, strategies, operating results, financial position and prospects 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, including the potential of a recession; industry conditions and trends; credit market volatility; risks related to supply chain delays and disruptions and their impact on the Company’s business and results, including the Company’s ability to deliver products and services to its customers on a timely basis; risks relating to inflation, including the current inflationary trend, and the impact of inflation on the Company’s costs and its ability to increase the price of its products and services to offset such costs, and on the market for the Company’s products and services; risks related to labor shortages and increases in the costs of labor, and the impact thereof on the Company, including its ability to deliver products, provide services or otherwise meet customers’ expectations; risks related to interest rate increases, including the impact thereof on the cost of the Company’s indebtedness and the Company’s ability to raise capital if deemed necessary or advisable; risks associated with international relations and international hostilities, and the impact thereof on economic conditions, including supply chain constraints and inflationary trends; the Company’s ability to implement its business and growth strategies and plans, including changes thereto; risks and uncertainties associated with the Company’s ”buy-and-build” growth strategy, including, without limitation, that the Company may not be successful in identifying or consummating acquisitions or other strategic transactions, integration risks, risks related to indebtedness incurred by the Company in connection with the financing of acquisitions and other strategic transactions, 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 or other strategic transactions (or for other purposes), risks related to the business, operations and prospects of acquired businesses, risks that suppliers of the acquired business may not consent to the transaction or otherwise continue its relationship with the acquired business following the transaction and the impact that the loss of any such supplier may have on the results of the Company and the acquired business, risks that the Company’s goals or expectations with respect to acquisitions and other strategic transactions may not be met, and risks related to the accounting for acquisitions; risks relating to the impact of pricing concessions and other measures which the Company may take from time to time in connection with its expansion efforts and pursuit of market share growth, including that they may not be successful and may adversely impact the Company’s gross margin and other financial results; technology changes; competition, including the Company’s ability to compete effectively and the impact that competition may have on the Company and its results, including the prices which the Company may charge for its products and services and on the Company’s profit margins, and competition for qualified employees; to the extent applicable, risks relating to the Company’s ability to enter into and compete effectively in new industries, as well as risks and trends related to those industries; risks relating to the Company’s relationships with its principal suppliers and customers, including the impact of the loss of any such relationship; risks that equipment sales may not result in the ancillary benefits anticipated, including that they may not lead to increases in customers (or a stronger relationship with customers) or higher gross margin sales of parts, accessories, supplies, and technical services related to the equipment, and the risk that the benefit of lower gross margin equipment sales under longer-term contracts will not outweigh the possible short-term impact to gross margin; the risk that the Company’s service operations may not expand to the extent anticipated,
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or at all; risks related to the Company’s indebtedness; the availability, terms and deployment of debt and equity capital if needed for expansion or otherwise; changes in, or the failure to comply with, government regulation, including environmental regulations; litigation risks, including the costs of defending litigation and the impact of any adverse ruling; 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; risks relating to the recognition of revenue, including the amount and timing thereof (including potential delays resulting from, among other circumstances, delays in installation (including due to delays in construction or the preparation of the customer’s facilities) or in receiving required supplies) and that orders in the Company’s backlog may not be fulfilled as or when expected; risks related to the adoption of new accounting standards and the impact it may have on the Company’s financial statements and results; risks that the Company’s decentralized operating model, and that product, end-user and geographic diversity, may not result in the benefits anticipated and may change over time; risks related to organic growth initiatives and market share and other growth strategies, including that they may not result in the benefits anticipated; risks that investments, initiatives and expenses, including, without limitation, investments in acquired businesses and modernization initiatives, expenses associated with the Company’s implementation of its enterprise resource planning system, and other investments, initiatives and expenses, may not result in the benefits anticipated; risks related to the soundness of financial institutions and the Company’s exposure with respect to its cash balances in depositary accounts in excess of the $250,000 in maximum Federal Deposit Insurance Corporation (“FDIC“) insurance coverage; dividends may not be paid in the future; risks related to the material weakness in the Company’s internal control over financial reporting, the Company’s ability to remediate such weakness in the anticipated timeframe, and the costs incurred in connection therewith; 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, in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. Many of these risks and factors are beyond the Company’s control. Further, past performance and perceived trends may not be indicative of future results. The Company cautions that the foregoing factors are not exclusive. The reader should not place undue reliance on any forward-looking statement, which speaks only as of the date made. The Company does not undertake to, and specifically disclaims any obligation to, update, revise or supplement any forward-looking statement, whether as a result of changes in circumstances, new information, subsequent events or otherwise, except as may be required by law.
Company Overview
EVI Industries, Inc., through its wholly-owned subsidiaries (collectively, the “Company”), is a value-added distributor, and provides advisory and technical services. Through its vast sales organization, the Company provides its customers with planning, designing, and consulting services related to their commercial laundry operations. The Company sells and/or leases its customers commercial laundry equipment, specializing in washing, drying, finishing, material handling, water heating, power generation, and water reuse applications. In support of the suite of products it offers, the Company sells related parts and accessories. Additionally, through the Company’s robust network of commercial laundry technicians, the Company provides its customers with installation, maintenance, and repair services.
The Company’s customers include government, institutional, industrial, commercial and retail customers. Product purchases made by customers range from parts and accessories, to single or multiple units of equipment, to large complex systems. The Company also provides its customers with the services described above.
The Company’s operating expenses consist primarily of (a) selling, general and administrative expenses, which are comprised primarily of salaries, and commissions and marketing expenses that are variable and correlate to changes in sales, (b) expenses related to the operation of warehouse facilities, including a fleet of installation and service vehicles, and facility rent, which are payable mostly under non-cancelable operating leases, and (c) operating expenses at the parent company, including compensation expenses, fees for professional services, other expenses associated with being a public company, and expenses in furtherance of the Company’s “buy-and-build” growth strategy.
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Growth Strategy
During 2015, the Company implemented a “buy-and-build” growth strategy. The “buy” component of the strategy includes the consideration and pursuit of acquisitions and other strategic transactions which management believes would complement the Company’s existing business or otherwise offer growth opportunities for, or benefit, the Company. The Company generally seeks to structure acquisitions to include both cash and stock consideration. Acquisitions are effected through a wholly-owned subsidiary which acquires the business or assets of the acquired company, whether by an asset purchase or merger, and operates the acquired business following the transaction. In connection with each transaction, the Company, indirectly through its applicable wholly-owned subsidiary, also assumes certain of the liabilities of the acquired business. The financial position, including assets and liabilities, and results of operations of the acquired businesses following the respective closing dates of the acquisitions are included in the Company’s consolidated financial statements. As described in greater detail in Note 4 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, on September 1, 2023, the Company acquired ALVF, Inc. (dba ALCO Washer Center) (“ALCO”), a Pennsylvania based distributor of commercial laundry products and a provider of related technical installation and maintenance services to the on-premise and vended laundry segments of the commercial laundry industry, for consideration consisting of $987,000 in cash and 8,621 shares of the Company’s common stock. The financial position, including assets and liabilities, of ALCO is included in the Company’s consolidated balance sheet as of September 30, 2023 and the results of operations of ALCO since the September 1, 2023 closing date are included in the Company’s consolidated financial statements for the quarter ended September 30, 2023.
The “build” component of the Company’s “buy-and-build” growth strategy involves implementing a growth culture at acquired businesses based on the exchange of ideas and business concepts among the management teams of the Company and the acquired businesses as well as through certain initiatives, which may include investments in additional sales and service personnel, new product lines, enhanced service operations and capabilities, new and improved facilities, and advanced technologies.
The Company pursues market share growth using a variety of strategies aimed at increasing the installed base of the wide range of commercial laundry equipment the Company represents. Certain market share growth tactics may, from time to time, result in lower gross margins. However, the Company believes that a greater installed base of equipment strengthens the Company’s existing customer relationships and may lead to increases in the total number of customers, consequently creating a larger and stronger customer base to which the Company may sell products and services. These may include the sale or provision of certain higher margin products and services and any additional products and services which the Company may offer or sell from time to time as a result of any business acquisitions, the sale or lease of complementary products, and expansion of its service operations. From time to time, the Company also enters into longer-term contracts, including to fulfill large complex laundry projects for divisions of the federal government, where the nature of, and competition for, such contracts may result in a lower gross margin as compared to other equipment sales. Despite the potential for a lower gross margin from such longer-term contracts, the Company believes that the long-term benefit from the increase in its installed equipment will outweigh the possible short-term impact to gross margin.
Further, as a value-added distributor and a provider of technical services in the commercial laundry industry, the Company partners with its customers to plan, design, install, and maintain their commercial laundry operations. The nature of the Company’s business not only requires an experienced and well-trained sales organization to procure customer orders, but also requires proper, timely, and cost-effective installation ranging from single units of equipment to complex multimillion dollar laundry systems. Such installations also require coordination and collaboration with the Company’s customers and any third parties they may retain. Consequently, the recognition of revenue may from time to time be impacted by delays in construction and/or the preparation of customer facilities for the installation of purchased commercial laundry equipment and systems. This may result in decreased revenue and profit in a current period but a source of future revenue and profit through the ultimate fulfillment of the orders.
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Recent Accounting Pronouncements
Refer to Note 3 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a description of Recently Issued Accounting Guidance.
Results of Operations
Three-Month Period Ended September 30, 2023 Compared to the Three-Month Period Ended September 30, 2022
Revenues
Revenues for the three-month period ended September 30, 2023 increased $4.6 million, or 6%, compared to the same period of the prior fiscal year. The increase in revenue is primarily attributable to price increases established throughout the Company’s product lines and service offerings aimed at maintaining or increasing margins to cover incremental product and operating costs, as well as the revenues generated by the businesses acquired by the Company during fiscal 2023 and the three-month period ended September 30, 2023.
Gross Profit
Gross profit for the three-month period ended September 30, 2023 increased $1.2 million, or 5%, compared to the same period of the prior fiscal year. The increase was primarily the result of the increased revenues described above. Gross margins slightly decreased from 29.4% for the three-month period ended September 30, 2022 to 29.2% for the three-month period ended September 30, 2023.
Selling, General and Administrative Expenses
Operating expenses increased $3.0 million, or 15%, for the three-month period ended September 30, 2023 compared to the same period of the prior fiscal year. The increase is primarily attributable to (a) operating expenses of acquired businesses, including additional operating expenses at the acquired businesses in pursuit of future growth and in connection with the Company’s optimization initiatives, (b) increases in selling costs, including commissions, from increases in revenues during the period, and (c) increases in salary, rent, technology costs, depreciation, and stock compensation, including an increase of $1.2 million in stock compensation expense from the acceleration of the vesting of certain restricted stock awards and restricted stock units in accordance with their terms during the three-month period ended September 30, 2023.
Interest Expense, Net
Interest expense for the three-month period ended September 30, 2023 was $770,000 compared to $377,000 for the same period of the prior fiscal year. The increase in interest expense was attributable primarily to the increase in the average effective interest rate incurred on outstanding borrowings.
Income Taxes
The Company’s effective tax rate was 30.6% for the three-month period ended September 30, 2023 compared to 28.9% for the same period of the prior fiscal year. The increase in the effective tax rate is attributable to an increase in the net impact of permanent book-tax differences resulting primarily from nondeductible compensation.
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Net Income
Net income for the three months ended September 30, 2023 was $1.3 million compared to net income of $2.8 million for the same period of the prior fiscal year. The decrease in net income was attributable primarily to the increase in operating expenses, partially offset by an increase in gross profit, all as described in further detail above.
Consolidated Financial Condition
The Company’s total assets decreased from $253.8 million at June 30, 2023 to $249.5 million at September 30, 2023. The decrease in total assets was primarily attributable to a decrease in current assets, including inventory and cash as described under “Liquidity and Capital Resources - Working Capital” below. The Company’s total liabilities decreased from $122.9 million at June 30, 2023 to $115.5 million at September 30, 2023, which was primarily attributable to a decrease in accounts payable.
Liquidity and Capital Resources
For the three-month period ended September 30, 2023, cash decreased by approximately $1.7 million compared to a decrease of approximately $200,000 during the three-month period ended September 30, 2022. The Company’s primary sources of cash are sales and borrowings under its credit facility. The Company’s primary uses of cash are purchases of the products sold by the Company, employee related costs, and the cash consideration paid in connection with business acquisitions.
Working Capital
Working capital increased from $49.1 million at June 30, 2023 to $51.2 million at September 30, 2023, primarily reflecting decreases in accounts payable and accrued expenses, partially offset by decreases in cash, accounts receivable, and inventories.
Cash Flows
The following table summarizes the Company’s cash flow activity for the three months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash provided (used) by: | ||||||||
| Operating activities | $ | 1,540 | $ | (6,205 | ) | |||
| Investing activities | $ | (1,958 | ) | $ | (1,995 | ) | ||
| Financing activities | $ | (1,314 | ) | $ | 8,000 | |||
The individual items contributing to cash flow changes for the periods presented are detailed in the unaudited condensed consolidated statements of cash flows included in Item 1 of this Quarterly Report on Form 10-Q.
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Operating Activities
For the three months ended September 30, 2023, operating activities provided cash of $1.5 million compared to $6.2 million of cash used by operating activities during the three months ended September 30, 2022. This $7.7 million increase in cash provided by operating activities was primarily attributable to changes in working capital partially offset by a decrease in net income. The changes in working capital include increases in cash provided by operating activities from changes in operating assets such as accounts receivable, inventories, contract assets, and customer deposits, partially offset by increases to the cash used by operating activities from changes in accounts payable.
Investing Activities
For both the three months ended September 30, 2023 and 2022, investing activities used cash of $2.0 million. Cash paid for acquisitions decreased by $200,000 and capital expenditures increased by $200,000, in each case, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Financing Activities
For the three months ended September 30, 2023, financing activities used cash of $1.3 million compared to $8.0 million of cash provided by financing activities during the three months ended September 30, 2022. This $9.3 million increase in cash used by financing activities was primarily attributable to less net borrowings required to support working capital changes.
Revolving Credit Agreement
The Company is party, as borrower, to a syndicated credit agreement (the “Credit Agreement”) which allows for borrowings in the maximum aggregate principal amount of up to $100 million, with an accordion feature to increase the revolving credit facility by up to $40 million for a total of $140 million. A portion of the revolving credit facility is available for swingline loans of up to a sublimit of $5 million and for the issuance of standby letters of credit of up to a sublimit of $10 million. Borrowings (other than swingline loans) under the Credit Agreement bear interest, at a rate, at the Company’s election at the time of borrowing, equal to (a) the Bloomberg Short-Term Bank Yield Index rate (the “BSBY rate”) plus a margin that ranges between 1.25% and 1.75% depending on the Company’s consolidated leverage ratio, which is a ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Consolidated Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the BSBY rate plus 100 basis points (such highest rate, the “Base Rate”), plus a margin that ranges between 0.25% and 0.75% depending on the Consolidated Leverage Ratio. Swingline loans generally bear interest at the Base Rate plus a margin that ranges between 0.25% and 0.75% depending on the Consolidated Leverage Ratio. The maturity date of the Credit Agreement is May 6, 2027.
The Credit Agreement contains certain covenants, including financial covenants requiring the Company to comply with maximum leverage ratios and minimum interest coverage ratios. The Credit Agreement also contains other provisions which may restrict the Company’s ability to, among other things, dispose of or acquire assets or businesses, incur additional indebtedness, make certain investments and capital expenditures, pay dividends, repurchase shares and enter into transactions with affiliates. At September 30, 2023, the Company was in compliance with its covenants under the Credit Agreement and $55.1 million was available to borrow under the revolving credit facility.
The obligations of the Company under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries, and are guaranteed, jointly and severally, by certain of the Company’s subsidiaries.
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The Company believes that its existing cash, anticipated cash from operations and funds available under the Company’s Credit Agreement will be sufficient to fund its operations and anticipated capital expenditures for at least the next twelve months and thereafter. 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 pursued by the Company as part of its “buy-and-build” growth strategy.
Inflation
Inflation did not have a significant effect on the Company’s results during any of the reported periods. However, the Company faces risks relating to inflation, including the current inflationary trend, which may have an adverse impact on the market for the Company’s products and services, including that there is no assurance that the Company will be able to effectively increase the price of its products and services to offset increased costs.
Transactions with Related Parties
Certain of the Company’s subsidiaries lease warehouse and office space from one or more of the principals or former principals of those subsidiaries. These leases include the following:
On October 10, 2016, the Company’s wholly-owned subsidiary, Western State Design, entered into a lease agreement pursuant to which it leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a director and Executive Vice President, Corporate Strategy of the Company, and Tom Marks, Executive Vice President, Business Development and President of the West Region of the Company. The lease had an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Monthly base rental payments were $12,000 during the initial term of the lease. The Company exercised its option to renew the lease for the first three-year renewal term. Base rent for the first renewal term is $19,000 per month. 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. Payments under this lease totaled approximately $57,000 during each of the three months ended September 30, 2023 and 2022.
On October 31, 2017, the Company’s wholly-owned subsidiary, Tri-State Technical Services, entered into lease agreements pursuant to which it leases a total of 81,000 square feet of warehouse and office space from an affiliate of Matt Stephenson, President of Tri-State. Monthly base rental payments total $21,000 during the initial terms of the leases. Each lease had an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. The Company exercised its option to renew the leases for the first three-year renewal term. Base rent for the first renewal term is $25,000. In addition to such leases, since May 1, 2023, Tri-State Technical Services has also leased an additional 50,000 square feet of space from Mr. Stephenson. Monthly base rental payments for the additional space total $15,000. The term of this lease will expire upon the expiration of the other leases with Mr. Stephenson described above. In addition to base rent, Tri-State is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Payments under these leases totaled approximately $119,000 and $63,000 during the three months ended September 30, 2023 and 2022, respectively.
On November 1, 2018, the Company’s wholly-owned subsidiary, AAdvantage Laundry Systems, entered into a lease agreement pursuant to which it leases warehouse and office space from an affiliate of Mike Zuffinetti, former Chief Executive Officer of AAdvantage. Monthly base rental payments under this lease were $26,000 initially. Pursuant to the lease agreement, on January 1, 2019, the lease expanded to cover additional warehouse space and, in connection therewith, monthly base rental payments under this lease increased to $36,000. In addition to base rent, AAdvantage is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease had an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. The Company expects to exercise its option to renew this lease for the first three-year renewal term and is in the process of finalizing the terms. Payments under the lease totaled approximately $108,000 during each of the three months ended September 30, 2023 and 2022.
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On November 3, 2020, the Company’s wholly-owned subsidiary, Yankee Equipment Systems, entered into a lease agreement pursuant to which it leases a total of 12,500 square feet of warehouse and office space from an affiliate of Peter Limoncelli, President of Yankee Equipment Systems. Monthly base rental payments were $11,000 during the initial term of the lease. In addition to base rent, Yankee Equipment Systems is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease had an initial term of three years and provides for three successive three-year renewal terms at the option of the Company. The Company has exercised its option to renew this lease for the first three-year renewal term. Base rent for the first year of the renewal term is $12,500 per month. Payments under this lease totaled approximately $38,000 and $36,000 during the three months ended September 30, 2023 and 2022, respectively.
Critical Accounting Estimates
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 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, 2023.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company’s indebtedness subjects the Company to interest rate risk. Interest rates are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The nature and timing of any changes in such policies or general economic conditions and the effect they may have on the Company are unpredictable. The Company’s indebtedness may also have other important impacts on the Company, including that the Company will be required to utilize cash flow to service the debt, indebtedness may make the Company more vulnerable to economic downturns, and the Company’s indebtedness subjects the Company to covenants and may place restrictions on its operations and activities, including its ability to pay dividends and take certain other actions. As described above, interest on borrowings under the Company’s Credit Agreement accrue at a rate, at the Company’s election at the time of borrowing, equal to (a) the BSBY rate plus a margin that ranges from 1.25% to 1.75% depending on the Company’s consolidated leverage ratio, which is a ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Consolidated Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the BSBY rate plus 100 basis points, plus a margin that ranges from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. As of September 30, 2023, the Company had approximately $34.0 million of outstanding borrowings under the Credit Agreement with a weighted average interest rate of 6.19%. Based on the amount outstanding at September 30, 2023, a hypothetical 1% increase in daily interest rates would increase the Company’s annual interest expense by approximately $340,000.
All of the Company’s export sales require the customer to make payment in United States dollars. Accordingly, foreign sales may be affected by the strength of the United States dollar relative to the currencies of the countries in which the Company’s customers are located, as well as the strength of the economies of the countries in which the Company’s customers are located. The Company has, at times in the past, paid certain suppliers in Euros. The Company had no foreign exchange contracts outstanding at September 30, 2023 or June 30, 2023.
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The Company’s cash is maintained in bank accounts which bear interest at prevailing interest rates. While depositary accounts are covered by FDIC insurance and the Company does not currently believe that it is exposed to significant credit risk due to the financial position of the banks in which the Company’s cash is held, there recently have been adverse events related to the soundness of financial institutions, including a number of smaller bank failures, and the Company has exposure to the extent its cash balances exceed the current $250,000 in maximum FDIC coverage.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to ensure that information required to be disclosed in reports filed or submitted by the Company under, is recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2023 because of the material weakness in the Company’s internal control over financial reporting identified as of June 30, 2023 related to the review and approval of manual journal entries made to the general ledger at certain of the Company’s subsidiaries (as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023) which had not been remediated as of September 30, 2023.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Notwithstanding the material weakness in the Company’s internal control over financial reporting, the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. In addition, the material weakness did not result in any identified misstatements to the audited financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 or the financial statements for any previously reported period.
As described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023, management has implemented and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated. These remediation actions are ongoing and include or are expected to include modifying the journal entry process and system role configuration to establish a formal hierarchy of review of journal entries in order to enforce proper segregation of duties. The Company may also take additional measures to remediate the underlying control deficiencies identified above or modify the remediation plans described above. Although management believes that these actions will remediate the material weakness, the weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
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The Company’s management, including the Company’s principal executive officer and principal financial officer, does not expect that the Company’s disclosure controls and procedures and internal control over financial reporting will prevent all errors and improper conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports or that the objectives of the control system will otherwise be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of improper conduct, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by the collusion of two or more people. Further, the design of any control system is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any such design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2023, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting other than, as described above, the identification of the material weakness in the Company’s internal control over financial reporting and the related remediation efforts.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in, or subject to, legal and regulatory claims, proceedings, demands or actions arising in the ordinary course of business. There have been no material changes with respect to such matters from the disclosure included in the “Legal Proceedings” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Item 1A. Risk Factors
There have been no material changes in the risk factors that the Company faces from those disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company does not have in place any formal share repurchase plans or programs. Upon request by a recipient of awards granted under the Company’s equity incentive plan, the Company may issue shares upon the vesting of restricted stock awards or restricted stock units or the grant of stock awards net of the statutory tax withholding requirements that the Company pays on behalf of its employees. For financial statement purposes, the shares withheld are treated as being repurchased by the Company and are reflected as repurchases in the Company’s condensed consolidated statements of cash flows and shareholders’ equity as they reduce the number of shares that would have been issued. The following table provides information concerning shares of the Company’s common stock treated as repurchased during the quarter ended September 30, 2023 in connection with the issuance of shares upon the vesting of restricted stock awards or restricted stock units net of statutory tax withholding requirements:
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| Period | Total Number of Shares Purchased | Average Price Per Share | Total Number of Shares Purchased as a Part of Publicly Announced Programs | Maximum Number of Shares That May Yet Be Purchased Under the Program | ||||||||||||
| July 1 – July 31, 2023 | — | $ | — | — | — | |||||||||||
| August 1 – August 31, 2023 | — | — | — | — | ||||||||||||
| September 1 – September 30, 2023 | 12,825 | 24.44 | — | — | ||||||||||||
| Total | 12,825 | $ | 24.44 | — | — | |||||||||||
During the quarter ended September 30, 2023, the Company did not repurchase any shares other than shares treated as repurchased upon the vesting of restricted stock awards or restricted stock units net of statutory tax withholding requirements as described and set forth above.
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| Item 6. | Exhibits. |
| Exhibit | ||
| Number | Description | |
| *31.01 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| *31.02 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| +32.01 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| +32.02 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
* Filed with this Quarterly Report on Form 10-Q.
+ Furnished with this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November 9, 2023 | EVI Industries, Inc. | |
| By: | /s/ Robert H. Lazar | |
| Robert H. Lazar | ||
| Chief Financial Officer |
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