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; 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 relating to the COVID-19 pandemic
and the impact thereof on the Company and its business, financial condition,
liquidity and results and on the Company's suppliers and customers, including
risks related to potential audits of the loans received by the Company and
certain of its subsidiaries under the Payroll Protection Program notwithstanding
the previous forgiveness of the loans, and risks associated with vaccine
mandates, including the potential loss of employees, fines for noncompliance and
loss of, or future inability to secure, certain contracts, including with the
federal government; risks associated with international relations and
international hostilities, including actions of foreign governments 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, 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, 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 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,
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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, 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; 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; 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; and other economic,
competitive, governmental, technological and other risks and factors discussed
in the Company's filings with the SEC, including, without limitation, those
described in the "Risk Factors" section of the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2022. 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 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, 2022, the Company acquired Aldrich Clean-Tech
Equipment Corp. ("ACT"), a Massachusetts-based distributor of commercial,
industrial, and vended laundry products and provider of installation and
maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry, and K&B Laundry Service, LLC ("K&B"), a
North Carolina-based distributor of commercial, industrial, and vended laundry
products and provider of installation and maintenance services to the new and
replacement segments of the commercial, industrial and vended laundry industry.
The financial condition and results of operations of ACT and K&B subsequent to
the September 1, 2022 closing date of such acquisitions are included in the
Company's consolidated financial statements for the three and six months ended
December 31, 2022. In addition, as also described in Note 4 to the unaudited
condensed consolidated financial statements included in Item 1 of this Quarterly
Report on Form 10-Q, on November 1, 2022, the Company acquired Wholesale
Commercial Laundry Equipment Company SE, LLC, ("WCL"), an Alabama-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 financial condition and results
of operations of WCL subsequent to the November 1, 2022 closing date of such
acquisition is included in the Company's consolidated financial statements for
the three and six months ended December 31, 2022.
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.
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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 and
profit 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.
Impact of COVID-19 on the Company's Business
The COVID-19 pandemic negatively impacted the Company's business and results,
including sales and gross margin. Specifically, beginning at the end of the
quarter ended March 31, 2020, the COVID-19 pandemic and accompanying economic
disruption caused delays and declines in the placement of customer orders, the
completion of equipment and parts installations, and the fulfillment of parts
orders. Factors arising from the COVID-19 pandemic that impacted the Company's
business and results may also in the future have adverse impacts. These factors
include, but are not limited to: supply chain disruptions, which resulted in,
and may continue to result in, delays in delivering products or services to the
Company's customers as well as increases in product costs; labor shortages and
increases in the costs of labor; limitations on the ability of the Company's
employees to perform their work due to sickness or other impacts caused by the
pandemic or local, state, federal or foreign orders that may restrict the
Company's operations or the operations of its customers, or require that
employees be quarantined; limitations on the ability of carriers to deliver
products to the Company's facilities and customers; risks associated with
vaccine mandates, including the potential loss of employees, fines for
noncompliance and loss of, or future inability to secure, certain contracts,
including with the federal government; adverse impacts of the pandemic on
certain industries and customers of the Company which operate in those
industries, including the hospitality industry; and potential decreased demand
for products and services, including potential limitations on the ability of, or
adverse changes in the desire of, the Company's customers to conduct their
business, purchase products and services, and pay for purchases on a timely
basis or at all. Further, the Company may continue to experience adverse impacts
to its business as a result of, among other things, any adverse impact that has
occurred or may occur in the future in the economy or markets generally, and
changes in customer or supplier behavior.
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
Six and Three-Month Period Ended December 31, 2022 Compared to the Six and
Three-Month Period Ended December 31, 2021
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Revenues
Revenues for the six and three-month periods ended December 31, 2022 increased
$41.6 million, or 33%, and $21.9 million, or 36%, respectively, compared to the
same periods of the prior fiscal year. The increases in revenue are primarily
attributable to continued improved conditions in connection with the recovery
from the COVID-19 pandemic during the six and three-month periods ended December
31, 2022 and the completion during the six and three-month periods ended
December 31, 2022 of customers projects previously delayed by the pandemic.
Additionally, the increase in revenues was partially 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 cost increases, as well as the revenues generated by the
businesses acquired by the Company during fiscal 2022 (primarily Consolidated
Laundry Equipment, Inc. and Central Equipment Company, LLC, which were acquired
during February 2022) and the six months ended December 31, 2022, as described
under "Growth Strategy" above and 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.
Gross Profit
Gross profit for the six and three-month periods ended December 31, 2022
increased $14.9 million, or 43%, and $8.0 million, or 48%, respectively,
compared to the same periods of the prior fiscal year. The increases were
primarily the result of increased revenues and more favorable product and
customer mix. The increases were also attributable to the Company's efforts to
drive higher margin sales opportunities from promoting solution selling as a
value-added distributor. This resulted in an increase in gross margins from
27.7% for the six-month period ended December 31, 2021 to 29.7% for the
six-month period ended December 31, 2022 and from 27.7% for the three-month
period ended December 31, 2021 to 30.0% for the three-month period ended
December 31, 2022.
Selling, General and Administrative Expenses
Operating expenses increased by approximately $10.5 million, or 34%, and $5.3
million, or 34%, for the six and three-month periods ended December 31, 2022,
respectively, compared to the same periods of the prior fiscal year. These
increases are 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 six and three-month periods ended December 31,
2022, as described above, (c) increases in payroll and related fees, and (d)
increases in depreciation, amortization and stock compensation.
Interest Expense, Net
Interest expense for the six and three-month periods ended December 31, 2022 was
$1.0 million and $625,000, respectively, compared to $265,000 and $150,000 for
the six and three-month periods ended December 31, 2021, respectively. The
increases in interest expense were attributable primarily to increases in the
average outstanding debt balance and average effective interest rate incurred on
outstanding borrowings.
Income Taxes
The Company's effective tax rate was 27.8% and 26.3% for the six and three-month
periods ended December 31, 2022, respectively, compared to 24.5% and 35.7% for
the six and three-month periods ended December 31, 2021, respectively. For the
six-month period ended, the increases in the effective tax rate are attributable
to an increase in the net impact of permanent book-tax differences resulting
primarily from nondeductible compensation. For the three-month period ended, the
decrease in the effective tax rate is attributable to a decrease in the net
impact of the book-tax differences resulting primarily from the nondeductible
compensation.
Net Income
Net income for the six and three-months ended December 31, 2022 was $5.1 million
and $2.2 million, respectively, compared to net income of $2.5 million and
$528,000 for the six and three-month periods ended December 31, 2021,
respectively. The increases in net income were attributable primarily to the
increases in revenue and the resulting gross profit, partially offset by the
increases in selling, general and administrative expenses and interest expense,
all as described in further detail above.
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Consolidated Financial Condition
The Company's total assets increased from $230.8 million at June 30, 2022 to
$246.7 million at December 31, 2022. The increase in total assets was primarily
attributable to an increase in current assets, including inventory and contract
assets, as described below under "Liquidity and Capital Resources - Working
Capital." The Company's total liabilities increased from $113.1 million at June
30, 2022 to $122.0 million at December 31, 2022, which was primarily
attributable to an increase in customer deposits and long-term debt, partially
offset by a decrease in contract liabilities. The increase in long-term debt was
attributable to borrowings under the Company's credit facility in excess of
optional repayments.
Liquidity and Capital Resources
For the six-month period ended December 31, 2022, cash increased by
approximately $409,000 compared to a decrease of approximately $53,000 during
the six-month period ended December 31, 2021. 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 $30.8 million at June 30, 2022 to $45.6 million
at December 31, 2022, primarily reflecting increases in inventory and contract
assets, partially offset by decreases in accounts receivable and increases in
customer deposits. The increase in inventory was primarily due to warehousing of
inventory for fulfillment of contractual orders where either the customer is not
ready to receive delivery of the product or only partial orders have been
received from manufacturers as a result of continued supply chain constraints,
as well as increases in product costs. The increase in contract assets is due in
large part to the progress of certain large complex laundry projects for
divisions of the federal government. The decrease in accounts receivable is due
to increased collection efforts and timing of receipt of payments from
customers. The increase in customer deposits was due primarily to a greater
number of new jobs that had deposits received during the period than jobs that
were completed.
Cash Flows
The following table summarizes the Company's cash flow activity for the six
months ended December 31, 2022 and 2021 (in thousands):
Six Months Ended
December 31,
2022 2021
Net cash provided (used) by:
Operating activities $ (4,872 ) $ (997 )
Investing activities $ (3,712 ) $ (1,973 )
Financing activities $ 8,993 $ 2,917The 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 six months ended December 31, 2022, operating activities used cash of
$4.9 million compared to $1.0 million of cash used by operating activities
during the six months ended December 31, 2021. This $3.9 million increase in
cash used by operating activities was primarily attributable to changes in
working capital offset by an increase in net income. The changes in working
capital include increases in cash used from operating activities from changes in
operating assets such as inventories and contract assets, and from changes in
operating liabilities such as accounts payable and accrued expenses and customer
deposits, partially offset by decreases to the cash used by operating activities
from changes in operating assets such as accounts receivable and from changes in
operating liabilities such as contract liabilities and accrued employee
expenses.
Investing Activities
Net cash used in investing activities increased $1.7 million to $3.7 million
during the six months ended December 31, 2022 compared to $2.0 million during
the six months ended December 31, 2021. This $1.7 million increase was
attributable primarily to an increase in cash used in connection with
acquisitions, partially offset by a decrease in capital expenditures.
Financing Activities
For the six months ended December 31, 2022, financing activities provided cash
of $9.0 million compared to $2.9 million of cash provided by financing
activities during the six months ended December 31, 2021. The $6.1 million
increase in cash provided by financing activities was attributable to proceeds
from borrowings during the six months ended December 31, 2022 in excess of
optional debt payments to fund changes in working capital and acquisitions.
Revolving Credit Agreement
On November 2, 2018, the Company entered into a syndicated credit agreement (the
"Credit Agreement") for a five-year revolving credit facility in the maximum
aggregate principal amount of up to $100 million, with an accordion feature to
increase the revolving credit facility by up to $40 million for a total of $140
million. A portion of the revolving credit facility is available for swingline
loans of up to a sublimit of $5 million and for the issuance of standby letters
of credit of up to a sublimit of $10 million.
Prior to the amendment described below, borrowings (other than swingline loans)
under the Credit Agreement accrued interest at a rate, at the Company's election
at the time of borrowing, equal to (a) LIBOR plus a margin that ranged from
1.25% to 1.75% depending on the Company's consolidated leverage ratio, which is
a ratio of consolidated funded indebtedness to consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA) (the "Consolidated
Leverage Ratio") or (b) the highest of (i) prime, (ii) the federal funds rate
plus 50 basis points, and (iii) the one month LIBOR rate plus 100 basis points,
plus a margin that ranged from 0.25% to 0.75% depending on the Consolidated
Leverage Ratio. Swingline loans accrued interest calculated at the base rate
determined in accordance with clause (b) of the preceding sentence plus a margin
that ranged from 0.25% to 0.75% depending on the Consolidated Leverage Ratio.
The Credit Agreement had an initial term of five years with a scheduled maturity
date of November 2, 2023.
On May 6, 2022, the Company entered into an amendment to the Credit Agreement.
The amendment amended the Credit Agreement to, among other things, extend the
maturity date from November 2, 2023 to May 6, 2027 and, in connection with the
phasing out of LIBOR, replace LIBOR with the Bloomberg Short-Term Bank Yield
Index rate (the "BSBY rate"). As a result, 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 BSBY rate plus a margin that
ranges between 1.25% and 1.75% depending on the Company's 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.
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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 December 31, 2022, the Company was in
compliance with its covenants under the Credit Agreement and $38.8 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.
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.
Off-Balance Sheet Financing
The Company had no off-balance sheet financing arrangements within the meaning
of Item 303(a)(4) of Regulation S-K at December 31, 2022.
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:
During October 2016, the Company's wholly-owned subsidiary, Western State
Design, Inc. ("Western State Design"), entered into a lease agreement pursuant
to which it leases 17,600 square feet of warehouse and office space from an
affiliate of Dennis Mack, a director and Executive Vice President, Corporate
Strategy of the Company, and Tom Marks, Executive Vice President, Business
Development 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, which commenced in October
2021. 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 $114,000 and $93,000 during the six
months ended December 31, 2022 and 2021, respectively, and $57,000 during each
of the three months ended December 31, 2022 and 2021.
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During October 2017, the Company's wholly-owned subsidiary, Tri-State Technical
Services, LLC ("Tri-State"), entered into lease agreements pursuant to which it
leases a total of 81,000 square feet of warehouse and office space from an
affiliate of Matt Stephenson, President of Tri-State. Each 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 totaled $21,000 during
the initial terms of the leases. The Company exercised its option to renew the
leases for the first three-year renewal term, which commenced in October 2022.
Base rent for the first renewal term is $22,000 per month. 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 $132,000 and $126,000 during the six months ended
December 31, 2022 and 2021, respectively, and $66,000 and $63,000 during the
three months ended December 31, 2022 and 2021, respectively.
During February 2018, the Company's wholly-owned subsidiary, AAdvantage Laundry
Systems, LLC ("AAdvantage"), entered into a lease agreement pursuant to which it
leased a total of 5,000 square feet of warehouse and office space from an
affiliate of Mike Zuffinetti, former Chief Executive Officer of AAdvantage.
Monthly base rental payments under this lease were $4,000. This lease had a term
of five years and expired during February 2023. In addition, during November
2018, AAdvantage entered into an additional lease agreement pursuant to which it
leases warehouse and office space from an affiliate of Mike Zuffinetti. 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 each of these leases for costs related to real estate taxes,
utilities, maintenance, repairs and insurance. Each lease has an initial term of
five years and provides for two successive three-year renewal terms at the
option of the Company. Payments under the leases described in this paragraph
totaled approximately $240,000 during each of the six months ended December 31,
2022 and 2021 and $120,000 during each of the three months ended December 31,
2022 and 2021.
During September 2018, the Company's wholly-owned subsidiary, Scott Equipment,
LLC ("Scott Equipment"), entered into lease agreements pursuant to which it
leases a total of 18,000 square feet of warehouse and office space from an
affiliate of Scott Martin, former President of Scott Equipment. Monthly base
rental payments total $11,000 during the initial terms of the leases. In
addition to base rent, Scott Equipment is responsible under the leases for costs
related to real estate taxes, utilities, maintenance, repairs and insurance.
Each lease has an initial term of five years and provides for two successive
three-year renewal terms at the option of the Company. Payments under these
leases totaled approximately $69,000 during each of the six months ended
December 31, 2022 and 2021 and $35,000 during each of the three months ended
December 31, 2022 and 2021.
During February 2019, the Company's wholly-owned subsidiary, PAC Industries, LLC
("PAC Industries"), entered into two lease agreements pursuant to which it
leases a total of 29,500 square feet of warehouse and office space from an
affiliate of Frank Costabile, former President of PAC Industries, and Rocco
Costabile, former Director of Finance of PAC Industries. Monthly base rental
payments total $15,000 during the initial terms of the leases. In addition to
base rent, PAC Industries is responsible under the leases for costs related to
real estate taxes, utilities, maintenance, repairs and insurance. Each lease has
an initial term of four years and provides for two successive three-year renewal
terms at the option of the Company. Payments under these leases totaled
approximately $91,000 during each of the six months ended December 31, 2022 and
2021 and $46,000 during each of the three months ended December 31, 2022 and
2021.
During November 2020, the Company's wholly-owned subsidiary, Yankee Equipment
Systems, LLC ("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 are $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 has an initial term of three years
and provides for three successive three-year renewal terms at the option of the
Company. Payments under this lease totaled approximately $70,000 during each of
the six months ended December 31, 2022 and 2021 and $35,000 during each of the
three months ended December 31, 2022 and 2021.
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During February 2022, the Company's wholly-owned subsidiary, Consolidated
Laundry Equipment, LLC ("Consolidated Laundry Equipment"), entered into two
lease agreements pursuant to which it leases a total of 20,300 square feet of
warehouse and office space from an affiliate of William Kincaid, President of
Consolidated Laundry Equipment. Monthly base rental payments total $20,000
during the initial terms of the leases. In addition to base rent, Consolidated
Laundry Equipment is responsible under the leases for costs related to real
estate taxes, utilities, maintenance, repairs and insurance. Each lease has an
initial term of three years and provides for three successive three-year renewal
terms at the option of the Company. Payments under these leases totaled
approximately $120,000 and $60,000 during the six and three months ended
December 31, 2022, respectively.
Critical Accounting Policies
In connection with the preparation of its financial statements, the Company
makes estimates and assumptions, including those that affect the reported
amounts of assets and liabilities, contingent assets and liabilities, and
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, 2022.
Recently Issued Accounting Guidance
See 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.
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