UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020July 3, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ____________________to__________
Commission File No. file number: 001-39599
EMPOWER LTD.
HOLLEY INC.
(Exact name of registrant as specified in its charter)
Delaware | 87-1727560 | |
(State or other jurisdiction of | (I.R.S. Employer |
c/o MidOcean Partners245 Park Avenue, 38th FloorNew York, NY 10167
1801 Russellville Road, Bowling Green, KY 42101
(Address of Principal Executive Offices, including zip code)principal executive offices)
(212) 497-1400
(270) 782-2900
(Registrant’sRegistrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report) N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value Warrants to purchase common stock | HLLY HLLY WS | New York Stock Exchange | ||
New York Stock Exchange | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☐☒ No ☒☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2Rule12b-2 of the Exchange Act): .
Yes ☒☐ No ☐☒
AsThere were 118,026,472 shares of November 19, 2020, there were 25,000,000 Class A ordinaryCommon Stock, including 1,093,750 restricted earn-out shares, $0.0001 par value per share, and 7,187,500 Class B ordinary shares, $0.0001 par value per share, issued and outstanding.outstanding as of August 6, 2022.
EMPOWER LTD.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the Company’s business. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates,” “intends” or similar expressions. These forward-looking statements are subject to a number of risks and uncertainties and actual results could differ materially due to numerous factors, including but not limited to the Company’s ability to do any of the following:
• | anticipate and manage through disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain company products in distribution channels; |
• | access, collect and use personal data about consumers; |
• | execute its business strategy, including monetization of services provided and expansions in and into existing and new lines of business; |
• | anticipate the impact of the coronavirus disease 2019 (“COVID-19”) pandemic and its effect on business and financial conditions; |
• | manage risks associated with operational changes in response to the COVID-19 pandemic; |
• | recognize the anticipated benefits of and successfully deploy the proceeds from the Business Combination (as defined herein), which may be affected by, among other things, competition, the ability to integrate the combined businesses and the ability of the combined business to grow and manage growth profitably; |
• | anticipate the uncertainties inherent in the development of new business lines and business strategies; |
• | retain and hire necessary employees; |
• | increase brand awareness; |
• | attract, train and retain effective officers, key employees or directors; |
• | upgrade and maintain information technology systems; |
• | respond to cyber-attacks, security breaches, or computer viruses; |
• | comply with privacy and data protection laws, and respond to privacy or data breaches, or the loss of data. |
• | acquire and protect intellectual property; |
• | meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness; |
• | effectively respond to general economic and business conditions (including the impacts of the Russian invasion of Ukraine and its regional and global ramifications); |
• | maintain proper and effective internal controls; |
• | maintain the listing on, or the delisting of the Company’s securities from, the NYSE or an inability to have our securities listed on another national securities exchange; |
• | obtain additional capital, including use of the debt market; |
• | enhance future operating and financial results; |
• | anticipate rapid technological changes; |
• | comply with laws and regulations applicable to its business and industry, including laws and regulations related to environmental health and safety; |
• | stay abreast of modified or new laws and regulations; |
• | anticipate the impact of, and response to, new accounting standards; |
• | respond to fluctuations in foreign currency exchange rates and political unrest and regulatory changes in international markets from various events; |
• | anticipate the rise in interest rates which would increase the cost of capital, as well as responding to inflationary pressures; |
• | anticipate the significance and timing of contractual obligations; |
• | maintain key strategic relationships with partners and resellers; |
• | respond to uncertainties associated with product and service development and market acceptance; |
• | manage to finance operations on an economically viable basis; |
• | anticipate the impact of new U.S. federal income tax law, including the impact on deferred tax assets; |
• | respond to litigation, investigations, complaints, product liability claims and/or adverse publicity; |
• | anticipate the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"); |
• | anticipate the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, and demographic trends; and |
• | other risks and factors, listed under the caption “Risk Factors” included in our Annual Report on 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022, and in any subsequent filings with the SEC. |
Forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and our management’s expectations, forecasts and assumptions, and involve a number of judgements, risks and uncertainties, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as my be required under applicable securities laws.
PART I – FINANCIAL INFORMATION
HOLLEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
As of | ||||||||
July 3, 2022 | December 31, 2021 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 30,555 | $ | 36,325 | ||||
Accounts receivable, less allowance for credit losses of $1,269 and $1,387, respectively | 58,222 | 51,390 | ||||||
Inventory | 214,867 | 185,040 | ||||||
Prepaids and other current assets | 16,881 | 18,962 | ||||||
Total current assets | 320,525 | 291,717 | ||||||
Property, plant, and equipment, net | 56,009 | 51,495 | ||||||
Goodwill | 417,339 | 411,383 | ||||||
Other intangibles assets, net | 434,120 | 438,461 | ||||||
Right-of-use assets | 32,762 | 0 | ||||||
Total assets | $ | 1,260,755 | $ | 1,193,056 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Accounts payable | $ | 39,648 | $ | 45,708 | ||||
Accrued interest | 3,843 | 3,359 | ||||||
Accrued liabilities | 41,051 | 34,853 | ||||||
Current portion of long-term debt | 6,300 | 7,875 | ||||||
Total current liabilities | 90,842 | 91,795 | ||||||
Long-term debt, net of current portion | 636,756 | 637,673 | ||||||
Warrant liability | 40,352 | 61,293 | ||||||
Earn-out liability | 10,054 | 26,596 | ||||||
Deferred taxes | 68,955 | 70,045 | ||||||
Other noncurrent liabilities | 29,429 | 1,167 | ||||||
Total liabilities | 876,388 | 888,569 | ||||||
Commitments and contingencies (Refer to Note 16 - Commitments and Contingencies) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding as of July 3, 2022 and December 31, 2021 | 0 | 0 | ||||||
Common stock, $0.0001 par value, 550,000,000 shares authorized, 116,932,722 and 115,805,639 shares issued and outstanding as of July 3, 2022 and December 31, 2021, respectively | 12 | 12 | ||||||
Additional paid-in capital | 351,422 | 329,705 | ||||||
Accumulated other comprehensive gain (loss) | 486 | (256 | ) | |||||
Retained earnings (accumulated deficit) | 32,447 | (24,974 | ) | |||||
Total stockholders' equity | 384,367 | 304,487 | ||||||
Total liabilities and stockholders' equity | $ | 1,260,755 | $ | 1,193,056 |
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2020
(Unaudited)
ASSETS | | |||
Deferred offering costs | $ | 165,893 | ||
TOTAL ASSETS | $ | 165,893 | ||
LIABILITIES AND SHAREHOLDER’S EQUITY | | |||
Current liabilities | | |||
Promissory note – related party | $ | 145,893 | ||
Total Current Liabilities | 145,893 | |||
Commitments | | |||
Shareholder’s Equity | | |||
Preferred shares, $0.0001 par value; 5,000,000 shares authorized; none issued and outstanding | — | |||
Class A ordinary shares, $0.0001 par value; 500,000,000 shares authorized; none issued and outstanding | — | |||
Class B ordinary shares, $0.0001 par value; 50,000,000 shares authorized; 7,187,500 shares issued and outstanding (1) | 719 | |||
Additional paid-in capital | 24,281 | |||
Accumulated deficit | (5,000 | ) | ||
Total Shareholder’s Equity | 20,000 | |||
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY | $ | 165,893 |
The accompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.
CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 19, 2020 (INCEPTION) THROUGH SEPTEMBER 30, 2020
(Unaudited)
Formation costs | $ | 5,000 | ||
Net Loss | $ | (5,000 | ) | |
Weighted average shares outstanding, basic and diluted (1) | 6,250,000 | |||
Basic and diluted net loss per ordinary share | $ | (0.00 | ) |
HOLLEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Net sales | $ | 179,420 | $ | 193,041 | $ | 379,475 | $ | 353,373 | ||||||||
Cost of goods sold | 104,132 | 111,841 | 221,466 | 206,494 | ||||||||||||
Gross profit | 75,288 | 81,200 | 158,009 | 146,879 | ||||||||||||
Selling, general, and administrative | 36,269 | 26,190 | 70,611 | 50,202 | ||||||||||||
Research and development costs | 8,196 | 7,065 | 16,357 | 13,034 | ||||||||||||
Amortization of intangible assets | 3,662 | 3,502 | 7,323 | 6,838 | ||||||||||||
Acquisition and restructuring costs | 1,691 | 2,676 | 1,981 | 21,509 | ||||||||||||
Related party acquisition and management fee costs | 0 | 1,658 | 0 | 2,539 | ||||||||||||
Other operating expense (income) | 325 | 47 | 547 | (86 | ) | |||||||||||
Total operating expense | 50,143 | 41,138 | 96,819 | 94,036 | ||||||||||||
Operating income | 25,145 | 40,062 | 61,190 | 52,843 | ||||||||||||
Change in fair value of warrant liability | (23,168 | ) | 0 | (20,941 | ) | 0 | ||||||||||
Change in fair value of earn-out liability | (4,234 | ) | 0 | (1,853 | ) | 0 | ||||||||||
Interest expense | 8,961 | 11,174 | 16,352 | 21,245 | ||||||||||||
Total non-operating (income) expense | (18,441 | ) | 11,174 | (6,442 | ) | 21,245 | ||||||||||
Income before income taxes | 43,586 | 28,888 | 67,632 | 31,598 | ||||||||||||
Income tax expense | 3,023 | 5,790 | 10,211 | 10,556 | ||||||||||||
Net income | $ | 40,563 | $ | 23,098 | $ | 57,421 | $ | 21,042 | ||||||||
Comprehensive income: | ||||||||||||||||
Foreign currency translation adjustment | 501 | 35 | 742 | 19 | ||||||||||||
Total comprehensive income | $ | 41,064 | $ | 23,133 | $ | 58,163 | $ | 21,061 | ||||||||
Common Share Data: | ||||||||||||||||
Weighted average common shares outstanding - basic | 116,931,623 | 67,673,884 | 116,398,177 | 67,673,884 | ||||||||||||
Weighted average common shares outstanding - diluted | 117,114,553 | 67,673,884 | 117,343,975 | 67,673,884 | ||||||||||||
Basic net income per share | $ | 0.35 | $ | 0.34 | $ | 0.49 | $ | 0.31 | ||||||||
Diluted net income per share | $ | 0.35 | $ | 0.34 | $ | 0.31 | $ | 0.31 |
The accompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.
HOLLEY INC.
CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’SSTOCKHOLDERS' EQUITY
FOR THE PERIOD FROM AUGUST 19, 2020 (INCEPTION) THROUGH SEPTEMBER 30, 2020(in thousands, except share data)
(Unaudited)(unaudited)
Class B Ordinary Shares | Additional Paid-in | Accumulated | Total Shareholder’s | |||||||||||||||||
�� | Shares | Amount | Capital | Deficit | Equity | |||||||||||||||
Balance – August 19, 2020 (inception) | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Issuance of Class B ordinary shares to Sponsor (1) | 7,187,500 | 719 | 24,281 | — | 25,000 | |||||||||||||||
Net loss | — | — | — | (5,000 | ) | (5,000 | ) | |||||||||||||
Balance – September 30, 2020 | 7,187,500 | $ | 719 | $ | 24,281 | $ | (5,000 | ) | $ | 20,000 |
Common Stock | ||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Gain (Loss) | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||||||
Balance at December 31, 2020 | 100 | $ | — | $ | 238,890 | $ | (674 | ) | $ | 2,165 | $ | 240,381 | ||||||||||||
Retroactive application of recapitalization | 67,673,784 | 7 | (7 | ) | — | — | — | |||||||||||||||||
Adjusted balance at December 31, 2020 | 67,673,884 | 7 | 238,883 | (674 | ) | 2,165 | 240,381 | |||||||||||||||||
Net loss | — | 0 | 0 | 0 | (2,056 | ) | (2,056 | ) | ||||||||||||||||
Equity compensation | — | 0 | 131 | 0 | 0 | 131 | ||||||||||||||||||
Foreign currency translation | — | 0 | 0 | (16 | ) | 0 | (16 | ) | ||||||||||||||||
Balance at March 28, 2021 | 67,673,884 | 7 | 239,014 | (690 | ) | 109 | 238,440 | |||||||||||||||||
Net income | — | 0 | 0 | 0 | 23,098 | 23,098 | ||||||||||||||||||
Equity compensation | — | 0 | 131 | 0 | 0 | 131 | ||||||||||||||||||
Foreign currency translation | — | 0 | 0 | 35 | 0 | 35 | ||||||||||||||||||
Balance at June 27, 2021 | 67,673,884 | $ | 7 | $ | 239,145 | $ | (655 | ) | $ | 23,207 | $ | 261,704 | ||||||||||||
Balance at December 31, 2021 | 115,805,639 | $ | 12 | $ | 329,705 | $ | (256 | ) | $ | (24,974 | ) | $ | 304,487 | |||||||||||
Net income | — | 0 | 0 | 0 | 16,858 | 16,858 | ||||||||||||||||||
Equity compensation | — | 0 | 3,162 | 0 | 0 | 3,162 | ||||||||||||||||||
Foreign currency translation | — | 0 | 0 | 241 | 0 | 241 | ||||||||||||||||||
Issuance of earn-out shares | 1,093,750 | 0 | 14,689 | 0 | 0 | 14,689 | ||||||||||||||||||
Balance at April 3, 2022 | 116,899,389 | 12 | 347,556 | (15 | ) | (8,116 | ) | 339,437 | ||||||||||||||||
Net income | — | 0 | 0 | 0 | 40,563 | 40,563 | ||||||||||||||||||
Equity compensation | — | 0 | 3,483 | 0 | 0 | 3,483 | ||||||||||||||||||
Warrants exercised | 33,333 | 0 | 383 | 0 | 0 | 383 | ||||||||||||||||||
Foreign currency translation | — | 0 | 0 | 501 | 0 | 501 | ||||||||||||||||||
Balance at July 3, 2022 | 116,932,722 | $ | 12 | $ | 351,422 | $ | 486 | $ | 32,447 | $ | 384,367 |
The accompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.
HOLLEY INC.
CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 19, 2020 (INCEPTION) THROUGH SEPTEMBER 30, 2020(in thousands)
(Unaudited)(unaudited)
Cash Flows from Operating Activities: | ||||
Net loss | $ | (5,000 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Payment of formation costs through issuance of Class B ordinary shares | 5,000 | |||
Net cash used in operating activities | — | |||
Cash Flows from Financing Activities: | ||||
Proceeds from promissory note - related party | 145,893 | |||
Payment of offering costs | (145,893 | ) | ||
Net cash provided by financing activities | — | |||
Net Change in Cash | — | |||
Cash – Beginning | — | |||
Cash – Ending | $ | — | ||
Non-cash investing and financing activities: | ||||
Deferred offering costs paid by Sponsor in exchange for the issuance of Class B ordinary shares | $ | 20,000 |
For the twenty-six weeks ended | ||||||||
July 3, 2022 | June 27, 2021 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 57,421 | $ | 21,042 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Depreciation | 4,663 | 4,453 | ||||||
Amortization of intangible assets | 7,323 | 6,838 | ||||||
Amortization of deferred loan costs | 846 | 1,955 | ||||||
Amortization of right of use assets | 2,753 | 0 | ||||||
Gain on termination of leases | (279 | ) | 0 | |||||
Decrease in warrant liability | (20,941 | ) | 0 | |||||
Decrease in earn-out liability | (1,853 | ) | 0 | |||||
Increase in acquisition contingent consideration payable | 0 | 17,173 | ||||||
Equity compensation | 6,645 | 262 | ||||||
Change in deferred taxes | (1,090 | ) | 1,188 | |||||
Loss (gain) on disposal of property, plant and equipment | 336 | (282 | ) | |||||
Provision for inventory reserves | 2,787 | 3,173 | ||||||
Provision for credit losses | 145 | 410 | ||||||
Change in operating assets and liabilities: | - | |||||||
Accounts receivable | (6,343 | ) | (12,457 | ) | ||||
Inventories | (29,483 | ) | (708 | ) | ||||
Prepaids and other current assets | 3,838 | (2,295 | ) | |||||
Accounts payable | (5,778 | ) | 6,038 | |||||
Accrued interest | 484 | (901 | ) | |||||
Accrued and other liabilities | (643 | ) | 508 | |||||
Net cash provided by operating activities | 20,831 | 46,397 | ||||||
INVESTING ACTIVITIES | ||||||||
Capital expenditures | (9,609 | ) | (7,141 | ) | ||||
Proceeds from the disposal of fixed assets | 244 | 285 | ||||||
Cash paid for acquisitions, net | (14,077 | ) | (54,011 | ) | ||||
Net cash used in investing activities | (23,442 | ) | (60,867 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net change under revolving credit agreement | (25,000 | ) | 0 | |||||
Proceeds from long-term debt | 27,000 | 0 | ||||||
Principal payments on long-term debt | (5,099 | ) | (1,539 | ) | ||||
Proceeds from issuance of common stock in connection with the exercise of warrants | 383 | 0 | ||||||
Net cash used in financing activities | (2,716 | ) | (1,539 | ) | ||||
Effect of foreign currency rate fluctuations on cash | (443 | ) | 0 | |||||
Net change in cash and cash equivalents | (5,770 | ) | (16,009 | ) | ||||
Cash and cash equivalents: | ||||||||
Beginning of period | 36,325 | 71,674 | ||||||
End of period | $ | 30,555 | $ | 55,665 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Earn-out shares issued to Empower Sponsor Holdings LLC | $ | 14,689 | $ | 0 | ||||
Cash paid for interest | $ | 16,005 | $ | 20,191 | ||||
Cash paid for income taxes | $ | 4,276 | $ | 7,182 |
The accompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.
SEPTEMBER 30, 2020(Unaudited)
1. | Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies |
Holley Inc., a Delaware corporation headquartered in Bowling Green, Kentucky (the “Company” or “Holley”), conducts operations through its wholly-owned subsidiaries. These operating subsidiaries are comprised of Holley Performance Products Inc. (“Holley Performance”), Hot Rod Brands, Inc. (“Hot Rod Brands”), Simpson Safety Solutions, Inc., B&M Racing and Performance Products, Inc., and Speedshop.com, Inc. Investment funds managed by Sentinel Capital Partners hold a controlling interest in Holley.
NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Empower Ltd. (the “Company”) is a blank check company incorporated as a Cayman Islands exempted company on August 19, 2020. The Company was formed for On July 16, 2021, (the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (“Business Combination”).
The Company is not limited to a particular industry or geographic region for purposes of completing a Business Combination. The Company is an early stage“Closing” and emerging growth company and, as such date, the Company is subject to all of the risks associated with early stage and emerging growth companies.
As of September 30, 2020, the Company had not commenced any operations. All activity for the period from August 19, 2020 (inception) through September 30, 2020 relates to the Company’s formation and the initial public offering (“Initial Public Offering”“Closing Date”), which is described below. The Company will not generate any operating revenues until after the completion of a Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income from the proceeds derived from the Initial Public Offering.
The registration statement for the Company’s Initial Public Offering became effective on October 6, 2020. On October 9, 2020, the Company consummated the Initial Public Offeringbusiness combination (the “Business Combination”) pursuant to that certain Agreement and Plan of 25,000,000 units (the “Units”Merger dated March 11, 2021 (the “Merger Agreement”), by and with respectamong Empower Ltd., (“Empower”), Empower Merger Sub I Inc. (“Merger Sub I”), Empower Merger Sub II LLC (“Merger Sub II”), and Holley Intermediate Holdings, Inc. (“Holley Intermediate”). On the Closing Date, Empower changed its name to the Class A ordinary shares included in the Units sold, the “Public Shares”), at $10.00 per Unit, generating gross proceeds of $250,000,000 which is described inHolley Inc. See Note 3.
Simultaneously with the closing of the Initial Public Offering, the Company consummated the sale of 4,666,667 warrants (the “Private Placement Warrants”) at a price of $1.50 per Private Placement Warrant in a private placement to Empower Sponsor Holdings LLC (the “Sponsor”), generating gross proceeds of $7,000,000, which is described in Note 4.
Transaction costs amounted to $14,215,163, consisting of $5,000,000 of underwriting fees, $8,750,000 of deferred underwriting fees and $465,163 of other offering costs. In addition, at October 9, 2020, cash of $1,122,742 was held outside of the Trust Account (as defined below) and is available for the payment of offering expenses and for working capital purposes.
Following the closing of the Initial Public Offering on October 9, 2020, an amount of $250,000,000 ($10.00 per Unit) from the net proceeds of the sale of the Units in the Initial Public Offering and the sale of the Private Placement Warrants was placed in a trust account (the “Trust Account”) and invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), with a maturity of 185 days or less, or in any open-ended investment company that holds itself out as a money market fund meeting certain conditions of Rule 2a-7 of the Investment Company Act, as determined by the Company, until the earlier of: (i) the completion of a 2, “Business Combination and (ii) the distribution of the funds in the Trust Account to the Company’s shareholders, as described below.Acquisitions,” for more information.
The Company’s management has broad discretion with respectHolley Intermediate, the predecessor to Holley, was incorporated on October 25, 2018 to effect the specific applicationmerger of the net proceeds of the Initial Public OfferingDriven Performance Brands, Inc. (“Driven”) and the salepurchase of the Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward completing a Business Combination.High Performance Industries, Inc. (“HPI”). The Company must complete its initial Business Combination with one or more target businesses that together have a fair market value equaldesigns, manufactures and distributes performance automotive products to at least 80% of the net assets held in the Trust Account (excluding any deferred underwriting commissions held in the Trust Account) at the time of the agreement to enter into a Business Combination. The Company will only complete a Business Combination if the post-Business Combination company owns or acquires 50% or more of the issued and outstanding voting securities of the target or otherwise acquires a controlling interest in the target business sufficient for it not to be required to register as an investment company under the Investment Company Act. There is no assurance that the Company will be able to successfully effect a Business Combination.
The Company will provide its shareholders with the opportunity to redeem all or a portion of their Public Shares upon the completion of a Business Combination either (i) in connection with a shareholder meeting called to approve the Business Combination or (ii) by means of a tender offer. The decision as to whether the Company will seek shareholder approval of a Business Combination or conduct a tender offer will be made by the Company. The shareholders will be entitled to redeem their shares for a pro rata portion of the amount held in the Trust Account (initially $10.00 per share), calculated as of two business days prior to the completion of a Business Combination, including any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company to pay its tax obligations. There will be no redemption rights upon the completion of a Business Combination with respect to the Company’s warrants.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
If the Company seeks shareholder approval in connection with a Business Combination, it receives an ordinary resolution under Cayman Islands law approving a Business Combination, which requires the affirmative vote of a majority of the shareholders who vote at a general meeting of the Company. If a shareholder vote is not required under applicable law or stock exchange listing requirements and the Company does not decide to hold a shareholder vote for business or other reasons, the Company will, pursuant to its Amended and Restated Memorandum and Articles of Association, conduct the redemptions pursuant to the tender offer rules of the Securities and Exchange Commission (“SEC”), and file tender offer documents containing substantially the same information as would be included in a proxy statement with the SEC prior to completing a Business Combination. If the Company seeks shareholder approval in connection with a Business Combination, the Sponsor has agreed to vote its Founder Shares (as defined in Note 5) and any Public Shares purchased in or after the Initial Public Offering in favor of approving a Business Combination and to waive its redemption rights with respect to any such shares in connection with a shareholder vote to approve a Business Combination. However, in no event will the Company redeem its Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001. Additionally, each public shareholder may elect to redeem its Public Shares, without voting, and if they do vote, irrespective of whether they vote for or against a proposed Business Combination.
Notwithstanding the foregoing, if the Company seeks shareholder approval of a Business Combination and it does not conduct redemptions pursuant to the tender offer rules, the Company’s Amended and Restated Memorandum and Articles of Association provides that a public shareholder, together with any affiliate of such shareholder or any other person with whom such shareholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from redeeming its shares with respect to more than an aggregate of 15% of the Public Shares without the Company’s prior written consent.
The Sponsor has agreed (a) to waive its redemption rights with respect to any Founder Shares and Public Shares held by it in connection with the completion of a Business Combination and (b) not to propose an amendment to the Amended and Restated Memorandum and Articles of Association (i) to modify the substance or timing of the Company’s obligation to redeem 100% of the Public Shares if the Company does not complete a Business Combination within the Combination Period (as defined below) or (ii) with respect to any other provision relating to shareholders’ rights or pre-initial business combination activity, unless the Company provides the public shareholders with the opportunity to redeem their Public Shares in conjunction with any such amendment and (iii) to waive its rights to liquidating distributions from the Trust Account with respect to the Founder Shares if the Company fails to complete a Business Combination.
The Company will have until October 9, 2022 (the “Combination Period”) to complete a Business Combination. If the Company is unable to complete a Business Combination within the Combination Period, the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but no more than 10 business days thereafter, redeem 100% of the outstanding Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned (less up to $100,000 of interest to pay dissolution expenses and net of taxes payable), divided by the number of then outstanding Public Shares, which redemption will completely extinguish public shareholders’ rights as shareholders (including the right to receive further liquidation distributions, if any), and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining shareholders and the Company’s board of directors, dissolve and liquidate, subject in each case to its obligations under Cayman Islands law to provide for claims of creditors and the requirements of other applicable law.
The Sponsor has agreed to waive its liquidation rights with respect to the Founder Shares if the Company fails to complete a Business Combination within the Combination Period. However, if the Sponsor acquires Public Shares in or after the Initial Public Offering, such Public Shares will be entitled to liquidating distributions from the Trust Account if the Company fails to complete a Business Combination within the Combination Period. The underwriters have agreed to waive their rights to their deferred underwriting commission (see Note 6) held in the Trust Account in the event the Company does not complete a Business Combination within the Combination Period and, in such event, such amounts will be included with the funds held in the Trust Account that will be available to fund the redemption of the Public Shares. In the event of such distribution, it is possible that the per share value of the assets remaining available for distribution will be less than the Initial Public Offering price per Unit ($10.00).
The Sponsor has agreed that it will be liable to the Company, if and to the extent any claims by a third party for services rendered or products sold to the Company, or by a prospective target business with which the Company has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account to below (1) $10.00 per Public Share or (2) such lesser amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account due to reductions in the value of trust assets, in each case net of the amount of interest which may be withdrawn to pay taxes. This liability will not apply with respect to any claims by a third party who executed a waiver of any and all rights to seek access to the Trust Account nor will it apply to any claims under the Company’s indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Moreover, in the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the extent of any liability for such third-party claims. The Company will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers (other than the Company’s independent auditors), prospective target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally acceptedcustomers primarily in the United States, of America (“GAAP”) for interim financial informationCanada and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary forEurope. The Company is a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consistingleading manufacturer of a normal recurring nature, which are necessary fordiversified line of performance automotive products, including carburetors, fuel pumps, fuel injection systems, nitrous oxide injection systems, superchargers, exhaust headers, mufflers, distributors, ignition components, engine tuners and automotive performance plumbing products. The Company is also a fair presentationleading manufacturer of the financial position, operating results and cash flows for the periods presented.
The accompanying unaudited condensed financial statements should be read in conjunction with the Company’s prospectus for its Initial Public Offering as filed with the SEC on October 7, 2020,exhaust products as well as theshifters, converters, transmission kits, transmissions, tuners and automotive software. The Company’s Current Reports on Form 8-K, as filed with the SEC on October 13, 2020products are designed to enhance street, off-road, recreational and October 16, 2020.competitive vehicle performance through increased horsepower, torque and drivability. The interim results for the period from August 19, 2020 (inception) through September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future periods.Company has locations in North America, Canada, Italy and China.
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”102(b)(1), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparisonand, as such, has elected to take advantage of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted outbenefits of using the extended transition period difficultfor new or impossible becauserevised financial accounting standards.
Risks and Uncertainties
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has experienced disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. The full extent of the potential differences in accounting standards used.impact of the COVID-19 pandemic on the Company's business and operational and financial performance and condition is currently uncertain and will depend on many factors outside the Company's control, including but not limited to the timing, extent, duration and effects of the virus and any of its mutations, the utilization and effectiveness of treatments and vaccines, the imposition of effective public safety and other protective measures, the further impact of COVID-19 on the global economy and demand for the Company's products and services. Should the ongoing COVID-19 pandemic, including any variants of COVID-19,not improve or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, financial condition and prospects may be adversely affected.
Basis of Presentation The The Company Principles of Consolidation These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Summary of Significant Accounting Policies The following are updates to the significant accounting policies described in our audited consolidated financial statements as of and for the year ended December 31, 2021. Leases Operating lease right of use (ROU) assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company's leases may include options to extend or terminate the lease. These options to extend are included in the lease term when it is reasonably certain that the Company will exercise that option. Some leases have variable payments, however, because they are not based on an Warrants The Company accounts for If a warrant does not meet the conditions for Recent Accounting Usepreparationaccompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or “GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in conformityaccordance with U.S. GAAP requires managementhave been condensed or omitted pursuant to make estimatessuch rules and assumptions that affectregulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of theCompany's audited consolidated financial statements and notes thereto for the reported amountsyear ended December 31, 2021, as filed with the SEC on March 15, 2022 in the Company’s annual report on Form 10-K. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of revenuesa normal and expenses duringrecurring nature, that are necessary for a fair presentation of financial results for the reporting period.Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimateinterim periods presented. Operating results for any quarter are not necessarily indicative of the effect of a condition, situation or set of circumstances that existed atresults for the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.Cash and Cash Equivalentsfull fiscal year.considers all short-term investments withoperates on a calendar year that ends on December 31, 2022 and 2021. The three and six month periods ended July 3, 2022 and June 27, 2021 each included 13 weeks and 26 weeks, respectively.original maturityindex or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Since the Company's leases generally do not provide an implicit rate, the Company applies a portfolio approach using an estimated incremental borrowing rate based on the lease term and other information available at the commencement date in determining the present value of threelease payments. The rate applied is based on the currency of the lease. Leases having a lease term of twelve months or less when purchased to be cash equivalents. The Company did are not have any cash equivalents as of September 30, 2020.Deferred Offering CostsOffering costs consist of legal, accounting and other costs incurred through recorded on the balance sheet date that are directlyand the related tolease expense is recognized on a straight-line basis over the Initial Public Offering. Offering costs amounting to $14,215,163 were charged to shareholders’ equity upon the completionterm of the Initial Public Offering.lease. In addition, the Company has applied the practical expedient to account for the lease and non-lease components as a single lease component for all of the Company's leases. See Note 14,"Lease Commitments," for further details.EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)Income Taxesincome taxeswarrants to purchase its common stock as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 740, “Income Taxes” (“ASC 740”). ASC 740815, including whether the warrants are indexed to the Company’s own shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the recognitionuse of deferred tax assetsprofessional judgment, is conducted at the time of warrant issuance and liabilitiesas of each subsequent quarterly period end date while the warrants are outstanding.both the expected impact of differences between the financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires a valuation allowance to be established whenequity classification, it is more likely than not that all or a portion of deferred tax assets will not be realized.ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of September 30, 2020. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.The Company is considered an exempted Cayman Islands Company and is presently not subject to income taxes or income tax filing requirementscarried in the Cayman Islands or the United States. As such, the Company’s tax provision was zero for the period presented.Net Loss per Ordinary ShareNet loss per ordinary share is computed by dividing net loss by the weighted average number of ordinary shares outstanding during the period, excluding ordinary shares subject to forfeiture. Weighted average shares were reduced for the effect of an aggregate of 937,500 ordinary shares, that were subject to forfeiture if the over-allotment option was not exercised by the underwriter (see Note 5). At September 30, 2020, the Company did not have any dilutive securities and other contracts that could, potentially, be exercised or converted into ordinary shares and then shareconsolidated balance sheet as a warrant liability measured at fair value, with subsequent changes in the earnings of the Company. As a result, diluted loss per common share is the same as basic loss per share for the period presented.Concentration of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist of a cash account in a financial institution which, at times may exceed the Federal Depository Insurance Coverage of $250,000. The Company has not experienced losses on this account and management believes the Company is not exposed to significant risks on such account.Fair Value of Financial InstrumentsThe fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts representedwarrant recorded in the accompanying condensedconsolidated statements of comprehensive income as a non-operating expense. If a warrant meets both conditions for equity classification, the warrant is initially recorded in additional paid-in capital on the consolidated balance sheet, primarily due to their short-term nature.and the amount initially recorded is not subsequently re-measured at fair value. See Note 7,"Common Stock Warrants," and Note 8,"Fair Value Measurements," for further details.Standards
Management does Accounting Standards Recently Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) which requires lessees to recognize right-of-use assets, representing their right to use the underlying asset for the lease term, and lease liabilities on the balance sheet for all leases with terms greater than 12 months. The Company adopted the provisions of this guidance effective January 1, 2022, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2022 and prior periods were not believe restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected the package of practical expedients and implemented internal controls and executed changes to business processes to enable the preparation of financial information upon adoption. The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company's consolidated balance sheet related to operating leases. In addition, the adoption of the standard did not have a material impact on the Company's results of operations or cash flows. See Note 14,"Lease Commitments," for further details.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirements Benefits – Defined Benefit Plans – General (Subtopic 715-20). The ASU will update disclosure requirements for employers that any recentlysponsor defined benefit pension or other post retirement plans. The Company adopted ASU 2019-12 on a retrospective basis as of January 1, 2022. Adoption did not result in a significant change to the Company's consolidated financial statement disclosures.
In December 2019, the FASB issued but not yet effective,ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) which is intended to simplify various aspects related to accounting standards, if currentlyfor income taxes. The ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted wouldASU 2019-12 on a prospective basis as of January 1, 2022. Adoption of the ASU did not have a material effect on the accompanying condensedCompany's consolidated financial statements.
RisksIn August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and UncertaintiesContracts in an Entity’s Own Equity (Subtopic 470-20). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. The new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The Company adopted ASU 2020-06 on January 1, 2022. Adoption of the ASU did not impact the Company's consolidated financial statements.
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to apply the definition of a performance obligation under ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current U.S. GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No.2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. Adoption of the provisions of ASU 2021-08 are effective for the Company's fiscal year beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In March 2020, the World Health Organization declaredFASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Adoption of the outbreakprovisions of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United StatesASU 2020-04 are optional and the World. are effective from March 12, 2020 through December 31, 2022. As of July 3, 2022, the date the financial statements were issued, there was considerable uncertainty around the expected duration of this pandemic.Company did not adopt any expedients or exceptions under ASU 2020-04. The Company has concluded that whilewill continue to evaluate the impact of ASU 2020-04 and whether it is reasonably possible that COVID-19 could have a negative effect on identifying a target company for a Business Combination,will apply the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.optional expedients and exceptions.
2. | BUSINESS COMBINATION AND ACQUISITIONS |
BUSINESS COMBINATION
NOTE 3. INITIAL PUBLIC OFFERINGOn July 16, 2021, Holley consummated the Business Combination pursuant to the terms of the Merger Agreement, whereby (i) Merger Sub I, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Holley Intermediate surviving such merger as a wholly owned subsidiary of Holley (“Merger I”) and (ii) Merger Sub II, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Merger Sub II surviving such merger as a wholly owned subsidiary of Holley (“Merger II”).
Pursuant to the Initial Public Offering,Merger Agreement, at the Closing, all outstanding shares of Holley Intermediate common stock as of immediately prior to the effective time of Merger I were cancelled and Holley Parent Holdings, LLC, the sole stockholder of Holley Intermediate (the “Holley Stockholder” or “Parent”), received $264,718 in cash and 67,673,884 shares of common stock (at a deemed value of $10.00 per share). The Company’s common stock is listed on the New York Stock Exchange (the "NYSE") under the symbol “HLLY.”
In connection with the Business Combination, a number of subscribers purchased from the Company sold 25,000,000 Units, atan aggregate of 24,000,000 shares of common stock (the “PIPE”), for a purchase price of $10.00 per Unit. Each Unit consistsshare, or $240,000 in the aggregate. Per the Merger Agreement, $100,000 of one Class A ordinary share and one-third of one redeemable warrant (“Public Warrant”). Each whole Public Warrant entitles the holderPIPE proceeds were used to purchase one Class A ordinary share at an exercise price of $11.50 per share, subject to adjustment (see Note 7).
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)partially pay off Holley’s debt.
NOTE 4. PRIVATE PLACEMENT
Simultaneously withPursuant to the closingAmended and Restated Forward Purchase Agreement (“A&R FPA”), at the Closing, 5,000,000 shares of the Initial Public Offering, the Sponsor purchased an aggregate of 4,666,667 Private Placement Warrants at a price of $1.50 per Private Placement Warrant,Company’s common stock and 1,666,667 warrants were issued to certain investors for an aggregate purchase price of $7,000,000.$50,000. Pursuant to the A&R FPA, each warrant entitles the holder to purchase one share of the Company’s common stock at a price of $11.50 per share (the ”Public Warrants”), subject to certain conditions.
The Company also assumed 8,333,310 Public Warrants and 4,666,667 private placement warrants (the “Private Warrants”, and together with the Public Warrants, the “Warrants”) upon the Business Combination, all of which were issued in connection with Empower’s initial public offering. Each Private Placement Warrant is exercisable for represents the right to purchase one Class A ordinary share of the Company’s common stock at a price of $11.50 per share, subject to adjustment (see Note 7)certain conditions. The Warrants became exercisable on October 9, 2021 (the one-year anniversary of Empower’s initial public offering) and expire on July 16, 2026 (five years after the Closing Date). The proceeds fromPublic Warrants are listed on the sale ofNYSE under the Private Placement Warrants were added to the net proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the proceeds from the sale of the Private Placement Warrants held in the Trust Account will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law) and the Private Placement Warrants will expire worthless.symbol “HLLY WS.”
NOTE 5. RELATED PARTY TRANSACTIONSAdditionally, Empower Sponsor Holdings LLC (the "Sponsor") received 2,187,500 shares of the Company’s common stock, which vest in two equal tranches upon achieving certain market share price milestones as outlined in the Merger Agreement during the earn-out period (“the “Earn-Out Shares”). The first tranche of Earn-Out Shares vested during the first quarter of 2022. Upon vesting, the first tranche of the Earn-Out Shares, or 1,093,750 shares, were issued and a liability of $14,689, representing the fair value of the shares on the date of vesting, was reclassified from liabilities to equity. The remaining tranche of Earn-Out Shares will be forfeited if the applicable conditions are not satisfied before July 16, 2028 (seven years after the Closing Date). The remaining Earn-Out Shares are classified as a liability on the condensed consolidated balance sheet and are remeasured at fair value with changes in the post-Business Combination fair value recognized in the Company’s condensed consolidated statement of comprehensive income as non-operating expense.
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. This determination was primarily based on current shareholders of Holley having a relative majority of the voting power of the Company, the operations of Holley prior to the acquisition comprising the only ongoing operations of the Company, and senior management of Holley comprising the majority of the senior management of the Company. Under this method of accounting, Empower was treated as the acquired company for financial reporting. Accordingly, the Business Combination was accounted for as the equivalent of Holley issuing stock for the net assets of Empower, accompanied by a recapitalization. The net assets of Empower are stated at historical cost, with no goodwill or other intangible assets recorded. Reported amounts from operations included herein prior to the Business Combination are those of Holley Intermediate. The shares and corresponding capital amounts and earnings per share, prior to the Business Combination, have been retroactively restated based on shares received by the Holley Stockholder.
Founder SharesACQUISITIONS
During the 26-weeks ended July 3, 2022, the Company has completed three acquisitions, and during the year ended December 31, 2021, the Company completed eight acquisitions. These acquisitions are expected to enhance the Company's portfolio of products and services in the automotive aftermarket and automotive safety solutions market.
The Company accounts for acquisitions using the acquisition method, and accordingly, the purchase price has been allocated based upon the fair value of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the Company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected. Goodwill generated by the acquisitions is primarily attributable to the strong market position of the entities acquired.
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions were for 100 percent of the acquired business and are reported in the Consolidated Statements of Cash Flows, net of acquired cash and cash equivalents. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in acquisition and restructuring costs. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
During the twenty-six weeks ended July 3, 2022, the Company acquired substantially all the assets of John's Ind., Inc. ("John's"), Southern Kentucky Classics ("SKC"), and Vesta Motorsports USA, Inc., doing business as RaceQuip ("RaceQuip"). These acquisitions were immaterial business combinations. Cash paid for the three acquisitions, net of cash acquired, was $13,778, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and nonamortizable intangibles and goodwill totaling $9,059. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. The final allocation of the purchase price to specific assets acquired and liabilities assumed may change in future periods as the fair value estimates of inventory and intangibles are completed.
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
2022 | ||||
Accounts receivable | $ | 959 | ||
Inventory | 3,481 | |||
Property, plant and equipment | 275 | |||
Other assets | 1,132 | |||
Tradenames | 1,689 | |||
Customer relationships | 1,512 | |||
Goodwill | 5,858 | |||
Accounts payable | (25 | ) | ||
Accrued liabilities | (1,103 | ) | ||
$ | 13,778 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
In 2021, the Company acquired substantially all the assets of Finspeed, LLC ("Finspeed"), Classic Instruments LLC, ADS Precision Machining, Inc., doing business as Arizona Desert Shocks, Rocket Performance Machine, Inc., doing business as Rocket Racing Wheels, and Speartech Fuel Injections Systems, Inc. These five acquisitions were individually immaterial business combinations that are material in the aggregate. Cash paid for the five immaterial acquisitions, net of cash acquired, was $19,685, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and nonamortizable intangibles and goodwill totaling $13,023. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. The final allocation of the purchase price to specific assets acquired and liabilities assumed may change in future periods as the fair value estimates of inventory and intangibles are completed. However, for Finspeed, the measurement period has ended August 21, 2020,and the Sponsor paid $25,000final fair value estimates of acquired assets and liabilities is reflected below.
The allocation of the purchase price to cover certain offeringthe assets acquired and formation costsliabilities assumed was based on estimates of the fair value of the net assets as follows:
2021 | Measurement | 2021 | ||||||||||
Cash | $ | 122 | $ | 122 | ||||||||
Accounts receivable | 618 | 618 | ||||||||||
Inventory | 3,975 | 3,975 | ||||||||||
Property, plant and equipment | 2,274 | 2,274 | ||||||||||
Other assets | 23 | 23 | ||||||||||
Tradenames | 2,608 | 2,608 | ||||||||||
Customer relationships | 2,450 | 2,450 | ||||||||||
Goodwill | 8,087 | (122 | ) | 7,965 | ||||||||
Accounts payable | (343 | ) | (343 | ) | ||||||||
Accrued liabilities | (129 | ) | 122 | (7 | ) | |||||||
$ | 19,685 | $ | — | $ | 19,685 |
The fair value of the acquired customer relationship intangible assets were estimated using the excess earnings approach. The customer relationship intangible assets are being amortized based on the attrition rate of customers which have an estimated weighted average life of 18 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The remaining three acquisitions completed during 2021 are described below.
Baer, Inc.
On December 23, 2021, the Company acquired substantially all the assets and liabilities of Baer, Inc., doing business as Baer Brakes. Consideration for the assets acquired was cash payments of $22,170. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill totaling $18,989. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded with borrowings from the Company's credit facility and cash on hand. The determination of the final purchase price allocation to specific assets acquired and liabilities assumed may change in future periods as the fair value estimates of inventory and intangibles are completed.
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
December 23, 2021 (as initially reported) | Measurement Period Adjustments | December 23, 2021 (as adjusted) | ||||||||||
Accounts receivable | $ | 627 | $ | 627 | ||||||||
Inventory | 1,813 | 1,813 | ||||||||||
Property, plant and equipment | 695 | 695 | ||||||||||
Other assets | 76 | 76 | ||||||||||
Tradenames | 4,630 | 4,630 | ||||||||||
Customer relationships | 6,075 | 6,075 | ||||||||||
Goodwill | 8,363 | (79 | ) | 8,284 | ||||||||
Accounts payable | (81 | ) | 79 | (2 | ) | |||||||
Accrued liabilities | (28 | ) | (28 | ) | ||||||||
$ | 22,170 | $ | — | $ | 22,170 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $800.
Brothers Mail Order Industries, Inc.
On December 16, 2021, the Company acquired substantially all the assets and liabilities of Brothers Mail Order Industries, Inc., doing business as Brothers Trucks. Consideration for the assets acquired was cash payments of $26,135. The acquisition resulted in non-amortizable intangibles and goodwill totaling $24,835. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded with borrowings from the Company's credit facility and cash on hand. The determination of the final purchase price allocation to specific assets acquired and liabilities assumed may change in future periods as the fair value estimates of inventory and intangibles are completed.
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
December 16, 2021 (as initially reported) | Measurement Period Adjustments | December 16, 2021 (as adjusted) | ||||||||||
Accounts receivable | $ | 22 | $ | 22 | ||||||||
Inventory | 1,682 | 1,682 | ||||||||||
Property, plant and equipment | 20 | 20 | ||||||||||
Other assets | 13 | 13 | ||||||||||
Tradenames | 4,975 | 4,975 | ||||||||||
Goodwill | 19,561 | 299 | 19,860 | |||||||||
Accounts payable | (34 | ) | (34 | ) | ||||||||
Accrued liabilities | (403 | ) | (403 | ) | ||||||||
$ | 25,836 | $ | 299 | $ | 26,135 |
The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $22.
Advance Engine Management Inc.
On April 14, 2021, the Company acquired substantially all the assets and liabilities of Advance Engine Management Inc. doing business as AEM Performance Electronics. Consideration for the assets acquired was cash payments of $51,243. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $44,486. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded from cash on hand.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
April 14, 2021 | Measurement | April 14, 2021 | ||||||||||
Accounts receivable | $ | 3,454 | $ | (61 | ) | $ | 3,393 | |||||
Inventory | 3,892 | — | 3,892 | |||||||||
Property, plant and equipment | 1,342 | — | 1,342 | |||||||||
Other assets | 493 | (91 | ) | 402 | ||||||||
Tradenames | 10,760 | — | 10,760 | |||||||||
Customer relationships | 14,640 | — | 14,640 | |||||||||
Patents | 1,970 | — | 1,970 | |||||||||
Technology intangibles | 110 | — | 110 | |||||||||
Goodwill | 17,426 | (420 | ) | 17,006 | ||||||||
Accounts payable | (2,032 | ) | 110 | (1,922 | ) | |||||||
Accrued liabilities | (489 | ) | 139 | (350 | ) | |||||||
$ | 51,566 | $ | (323 | ) | $ | 51,243 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames and patents intangible assets were estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life. The patents are being amortized over 13 years based on the weighted average remaining life of the patent portfolio.
The contractual value of the accounts receivable acquired was $3,454.
3. | INVENTORY |
Inventories of the Company consisted of the following:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
Raw materials | $ | 61,146 | $ | 54,818 | ||||
Work-in-process | 26,334 | 21,728 | ||||||
Finished goods | 127,387 | 108,494 | ||||||
$ | 214,867 | $ | 185,040 |
4. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment of the Company consisted of the following:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
Land | $ | 3,426 | $ | 1,330 | ||||
Buildings and improvements | 10,935 | 10,623 | ||||||
Machinery and equipment | 63,367 | 56,824 | ||||||
Construction in process | 12,076 | 12,859 | ||||||
Total property, plant and equipment | 89,804 | 81,636 | ||||||
Less: accumulated depreciation | 33,795 | 30,141 | ||||||
Property, plant and equipment, net | $ | 56,009 | $ | 51,495 |
The Company’s long-lived assets by geographic locations are as follows:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
United States | $ | 54,260 | $ | 49,547 | ||||
International | 1,749 | 1,948 | ||||||
Total property, plant and equipment, net | $ | 56,009 | $ | 51,495 |
5. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following presents changes to goodwill for 7,187,500 sharesthe period indicated:
For the twenty-six weeks ended July 3, 2022 | ||||
Balance at December 31, 2021 | $ | 411,383 | ||
John's acquisition | 240 | |||
SKC acquisition | 1,270 | |||
RaceQuip acquisition | 4,348 | |||
Measurement period adjustments* | 98 | |||
Balance at July 3, 2022 | $ | 417,339 |
* See Note 2, "Business Combination and Acquisitions - Acquisitions," for further details."
Goodwill represents the premium paid over the fair value of Class B ordinary sharesthe net tangible and identifiable intangible assets acquired in the Company's business combinations. The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes available, not to exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Intangible assets consisted of the following:
July 3, 2022 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 269,950 | $ | (38,401 | ) | $ | 231,549 | |||||
Tradenames | 13,775 | (4,481 | ) | 9,294 | ||||||||
Technology | 26,676 | (10,302 | ) | 16,374 | ||||||||
Total finite-lived intangible assets | $ | 310,401 | $ | (53,184 | ) | $ | 257,217 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 176,903 | — | $ | 176,903 |
December 31, 2021 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 268,438 | $ | (32,662 | ) | $ | 235,776 | |||||
Tradenames | 13,775 | (4,119 | ) | 9,656 | ||||||||
Technology | 26,675 | (9,080 | ) | 17,595 | ||||||||
Total finite-lived intangible assets | $ | 308,888 | $ | (45,861 | ) | $ | 263,027 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 175,434 | — | $ | 175,434 |
The following outlines the estimated future amortization expense related to intangible assets held as of July 3, 2022:
2022 (excluding the twenty-six weeks ended July 3, 2022) | $ | 7,372 | ||
2023 | 14,582 | |||
2024 | 13,769 | |||
2025 | 13,739 | |||
2026 | 13,633 | |||
Thereafter | 194,122 | |||
Total | $ | 257,217 |
6. | DEBT |
Debt of the Company consisted of the following:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
First lien term loan due November 17, 2028 | $ | 652,350 | $ | 630,000 | ||||
Revolver | 0 | 25,000 | ||||||
Other | 3,124 | 3,812 | ||||||
Less unamortized debt issuance costs | (12,418 | ) | (13,264 | ) | ||||
643,056 | 645,548 | |||||||
Less current portion of long-term debt | (6,300 | ) | (7,875 | ) | ||||
$ | 636,756 | $ | 637,673 |
On November 18, 2021, the Company entered into a new credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the “Founder Shares”"Credit Agreement"). The Founder Shares include an aggregatefinancing consisted of up to 937,500 shares subject to forfeiture by the Sponsora seven-year $600,000first lien term loan, a five-year $125,000 revolving credit facility, and a $100,000 delayed draw term loan.
The proceeds of any delayed draw loans made after closing were available to the extent thatCompany to finance acquisitions. As of July 3, 2022, the underwriters’ over-allotment is not exercisedCompany had drawn $57,000 under the delayed draw term loan. Availability under the delayed draw term loan expired in full or in part, so that the number of Founder Shares will collectively represent 20% of the Company’s issued and outstanding shares upon the completion of the Initial Public Offering.May 2022.
The Sponsor has agreed,revolving credit facility includes a letter of credit facility in the amount of $10,000, pursuant to which letters of credit may be issued as long as revolving loans may be advanced and subject to limited exceptions, notavailability under the revolving credit facility. The Company had $1,236 in outstanding letters of credit at July 3, 2022.
Proceeds from the new credit facility were used to transfer, assign or sell anyrepay in full the Company’s obligations under its existing first lien and second lien notes and to pay $13,413 in original issue discount and issuance costs related to the refinancing.
The first lien term loan is to be repaid in quarterly payments of its Founder Shares until$1,575through September 30, 2028 with the earlier to occur of: (A) onebalance due upon maturity on November 17, 2028. Beginning with the fiscal year after the completion of a Business Combination; and (B) subsequent to a Business Combination, (x) if the closing price of the Class A ordinary shares equals or exceeds $12.00 per share (as adjusted for share sub-divisions, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after a Business Combination, or (y) the dateending on which December 31, 2022, the Company completesis required to make a liquidation, merger, share exchangepayment based on its available free cash flow (as defined in the Credit Agreement). Any such payments offset future mandatory quarterly payments.
Amounts outstanding under the new credit facility will accrue interest at a rate equal to either the London Interbank Offering Rate ("LIBOR") or other similar transaction that resultsbase rate, at the Company's election, plus a specified margin. In the case of revolving credit loans and letter of credit fees, the specified margin is based on the Company's Total Leverage Ratio, as defined in the Credit Agreement. Commitment fees payable under the revolving credit facility are based on the Company's Total Leverage Ratio. At July 3, 2022, the weighted average interest rate on the Company's borrowings under the credit facility was 5.2%.
Obligations under the Credit Agreement are secured by substantially all of the Company’s shareholders havingassets. The Credit Agreement includes representations and warranties and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales. The Credit Agreement also requires that Holley maintain on the rightlast day of each quarter, a Total Leverage Ratio not to exchangeexceed a maximum amount. At July 3, 2022, the Company was in compliance with all financial covenants.
Some of the lenders that are parties to the Credit Agreement, and their Class Arespective affiliates, have various relationships with the Company in the ordinary shares forcourse of business involving the provision of financial services, including cash securitiesmanagement, commercial banking, investment banking or other property.services.
Promissory Note — Related PartyFuture maturities of long-term debt and amortization of debt issuance costs as of July 3, 2022 are as follows:
2022 (excluding the twenty-six weeks ended July 3, 2022) | $ | 3,563 | $ | 867 | ||||
2023 | 7,132 | 1,782 | ||||||
2024 | 7,140 | 1,690 | ||||||
2025 | 7,335 | 1,909 | ||||||
2026 | 6,300 | 1,980 | ||||||
Thereafter | 624,004 | 4,190 | ||||||
$ | 655,474 | $ | 12,418 |
On August 21, 2020,
7. | COMMON STOCK WARRANTS |
Upon the CompanyClosing, there were 14,666,644 Warrants, consisting of 9,999,977 Public Warrants and 4,666,667 Private Warrants, outstanding to purchase shares of the Company's common stock that were issued an unsecured promissory noteby Empower prior to the Sponsor (the “Promissory Note”), pursuantBusiness Combination. Each warrant entitles the registered holder to which the Company may borrow up to an aggregate principal amount of $300,000. The Promissory Note is non-interest bearing and payable on the earlier of (i) December 31, 2020 or (i) the consummationpurchase one share of the Initial Public Offering. As of September 30, 2020, there was $145,893 outstanding under the Promissory Note. The outstanding balance under the Note of $150,295 was repaid at the closing of the Initial Public Offering on October 9, 2020.
Related Party Loans
In order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor or certain of the Company’s directors and officers may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $2,000,000 of such Working Capital Loans may be convertible into warrants of the post-Business Combination entityCompany's common stock at a price of $1.50$11.50 per warrant. The warrants would be identicalshare, subject to the Private Placement Warrants.
NOTE 6. COMMITMENTS
Registration and Shareholders Rights
Pursuant to a registration and shareholder rights agreement entered intoadjustments, commencing on October 9, 2020, 2021 (the holdersone-year anniversary of the Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of the Working Capital Loans (and any Class A ordinary shares issuable upon the exercise of the Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans and upon conversion of the Founder Shares) will be entitled to registration rights. The holders of these securities are entitled to make up to three demands, excluding short form demands,Empower’s initial public offering), provided that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to completion of a Business Combination. However, the registration and shareholder rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to becomehas an effective until termination of the applicable lockup period. The registration and shareholders rights agreement does not contain liquidating damages or other cash settlement provisions resulting from delays in registering the Company’s securities. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
Pursuant to the forward purchase agreement, the Company agreed that it will use its commercially reasonable efforts to (i) within 30 days after the closing of the a Business Combination, file a registration statement with the SEC for a secondary offering of (A) the forward purchase investors’ forward purchase shares, (B) the Class A ordinary shares issuable upon exercise of the forward purchase investors’ forward purchase warrants and (C) any other Class A ordinary shares acquired by the forward purchase investors, including any acquisitions after the Company completes a Business Combination, (ii) cause such registration statement to be declared effective promptly thereafter, but in no event later than 90 days after the closing of a Business Combination and (iii) maintain the effectiveness of such registration statement and to ensure the registration statement does not contain a material omission or misstatement, including by way of amendment or other update, as required, until the earlier of (A) the date on which a forward purchase investor ceases to hold the securities covered thereby and (B) the date all of the securities covered thereby can be sold publicly without restriction or limitation under Rule 144 under the Securities Act, and without the requirement to be in compliance with Rule 144(c)(1) under the Securities Act, subject to certain conditions and limitations set forth in the forward purchase agreement. The Company will bear the cost of registering these securities.
Underwriting Agreement
The Company granted the underwriters a 45-day option to purchase up to 3,750,000 additional Units to cover over-allotments at the Initial Public Offering price, less the underwriting discounts and commissions.
The underwriters are entitled to a deferred fee of $0.35 per Unit, or $8,750,000 in the aggregate (or $10,062,500 if the underwriters’ over-allotment is exercised in full). The deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes a Business Combination, subject to the terms of the underwriting agreement.
Forward Purchase Agreement
The Company entered into a forward purchase agreement to which Empower Funding LLC (“Empower Funding”), a newly formed Delaware limited liability company which has received commitments from one or more funds affiliated with MidOcean Partners (“MidOcean”), and is an affiliate of the Sponsor, will purchase an aggregate of up to 5,000,000 forward purchase units, consisting of one Class A ordinary share and one-third of one warrant to purchase one Class A ordinary share for $10.00 per unit, or up to $50,000,000 in the aggregate, in a private placement to close substantially concurrently with the closing of a Business Combination, subject to approval at such time by the MidOcean investment committee. The allocation of the forward purchase securities among the ultimate MidOcean funds that will be funding the forward purchase will be determined by MidOcean, in its sole discretion, at the time of a Business Combination. If the sale of the forward purchase units fails to close, for any reason, the Company may lack sufficient funds to consummate a Business Combination. The forward purchase shares and forward purchase warrants will be identical to the Class A ordinary shares included in the units sold in the Initial Public Offering, except that they will be subject to certain registration rights.
NOTE 7. SHAREHOLDER’S EQUITY
Preference Shares — The Company is authorized to issue 5,000,000 preference shares with a par value of $0.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At September 30, 2020, there were no preference shares issued or outstanding.
Class A Ordinary Shares — The Company is authorized to issue 500,000,000 Class A ordinary shares, with a par value of $0.0001 per share. Holders of Class A ordinary shares are entitled to one vote for each share. At September 30, 2020, there were no Class A ordinary shares issued or outstanding.
Class B Ordinary Shares — The Company is authorized to issue 50,000,000 Class B ordinary shares, with a par value of $0.0001 per share. Holders of the Class B ordinary shares are entitled to one vote for each share. At September 30, 2020, there were 7,187,500 Class B ordinary shares issued and outstanding, of which an aggregate of up to 937,500 shares are subject to forfeiture to the extent that the underwriters’ over-allotment option is not exercised in full or in part so that the number of Founder Shares will equal 20% of the Company’s issued and outstanding ordinary shares after the Initial Public Offering.
Holders of Class A ordinary shares and holders of Class B ordinary shares will vote together as a single class on all other matters submitted to a vote of the Company’s shareholders except as otherwise required by law.
The Class B ordinary shares will automatically convert into Class A ordinary shares at the time of a Business Combination or earlier at the option of the holders thereof at a ratio such that the number of Class A ordinary shares issuable upon conversion of all Founder Shares will equal, in the aggregate, on an as-converted basis, 20% of the sum of (i) the total number of ordinary shares issued and outstanding upon completion of Initial Public Offering, plus (ii) the total number of Class A ordinary shares issued or deemed issued or issuable upon conversion or exercise of any equity-linked securities or rights issued or deemed issued, by the Company in connection with or in relation to the consummation of a Business Combination, excluding any forward purchase securities and Class A ordinary shares or equity-linked securities exercisable for or convertible into Class A ordinary shares issued, deemed issued, or to be issued, to any seller in the Business Combination and any Private Placement Warrants issued to the Sponsor, its affiliates or any member of the Company’s management team upon conversion of Working Capital Loans. In no event will the Class B ordinary shares convert into Class A ordinary shares at a rate of less than one-to-one.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
Warrants — Public Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination and (b) one year from the closing of the Initial Public Offering. The Public Warrants will expire five years from the completion of a Business Combination or earlier upon redemption or liquidation.
The Company will not be obligated to deliver any Class A ordinary shares pursuant to the exercise of a Public Warrant and will have no obligation to settle such Public Warrant exercise unless a registration statement under the Securities Act covering the issuanceshares of the Class A ordinary sharescommon stock issuable upon exercise of the warrants is then effective and a current prospectus relating theretoto them is available subject to the Company satisfying its obligations with respect to registration,and such shares are registered, qualified or a valid exemptionexempt from registration is available. No warrant will be exercisable for cash or on a cashless basis, and the Company will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of residence of the exercising holder, or an exemptionholder. The Warrants may be exercised only for a whole number of shares of the Company’s common stock. The Warrants expire on July 16, 2026, the date that is available.
The Company has agreed that as soon as practicable, but in no event later than 20 business days,five years after the closing of a Business Combination, it will use its commercially reasonable efforts to file with the SEC a registration statement, under the Securities Act, of the Class A ordinary shares issuableClosing date, or earlier upon exercise of the warrants, and the Company will use its commercially reasonable efforts to cause the same to become effective within 60 business days after the closing of a Business Combination, and to maintain the effectiveness of such registration statement and a current prospectus relating to those Class A ordinary shares until the warrants expireredemption or are redeemed, as specified in the warrant agreement; provided that if our Class A ordinary shares are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to file or maintain in effect a registration statement, but the Company will use its commercially reasonably efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available. If a registration statement covering the Class A ordinary shares issuable upon exercise of the warrants is not effective by the 60th day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company has failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption, but the Company will use its commercially reasonably efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
Redemption of Warrants When the Price per Class A Ordinary Share Equals or Exceeds $18.00 — Once the warrants become exercisable, the Company may redeem the outstanding Public Warrants:
If and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if the Company are unable to register or qualify the underlying securities for sale under all applicable state securities laws.
Redemption of Warrants When the Price per Class A Ordinary Share Equals or Exceeds $10.00 — Once the warrants become exercisable, the Company may redeem the outstanding warrants:
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
The exercise price and number of ordinary shares issuable upon exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. However, except as described below, the Public Warrants will not be adjusted for issuances of ordinary shares at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the Public Warrants. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of Public Warrants will not receive any of such funds with respect to their Public Warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with respect to such Public Warrants. Accordingly, the Public Warrants may expire worthless.
In addition, if (x) the Company issues additional Class A ordinary shares or equity-linked securities for capital raising purposes in connection with the closing of a Business Combination at an issue price or effective issue price of less than $9.20 per Class A ordinary share (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of a Business Combination on the date of the consummation of a Business Combination (net of redemptions), and (z) the volume weighted average trading price of its Class A ordinary shares during the 20 trading day period starting on the trading day prior to the day on which the Company consummates its Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the higher of the Market Value and the Newly Issued Price, the $18.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market Value and the Newly Issued Price, and the $10.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to the higher of the Market Value and the Newly Issued Price.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants and the Class A ordinary shares issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions.liquidation. Additionally, the Private Placement Warrants will be non-redeemable and are exercisable on a cashless basis and be non-redeemable, except as described above, so long as they are held by the initial purchasersSponsor or theirany of its permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasersSponsor or theirits permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
NOTE 8. SUBSEQUENT EVENTSThe Company may redeem the Public Warrants at a price of $0.01 per warrant upon 30 days' notice if the closing price of the Company’s common stock equals or exceeds $18.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given, provided there is an effective registration statement and current prospectus in effect with respect to the ordinary shares underlying such Warrants throughout the 30-day redemption period. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the Warrants, the Warrant holder is entitled to exercise his, her or its Warrant prior to the scheduled redemption date. Any such exercise requires the Warrant holder to pay the exercise price for each Warrant being exercised.
Further, the Company may redeem the Public Warrants at a price of $0.10 per warrant upon 30 days' notice if the closing price of the Company’s common stock equals or exceeds $10.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given. Beginning on the date the notice of redemption is given until the Warrants are redeemed or exercised, holders may elect to exercise their Warrants on a cashless basis and receive that number of shares of the Company’s common stock as determined by reference to a table in the warrant agreement.
During any period when the Company has failed to maintain an effective registration statement, warrant holders may exercise warrants on a cashless basis in accordance with Section 3(a)(9) of the Securities Act or another exemption, but the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
In April 2022, the Company issued 33,333 shares of common stock in connection with the exercise of Public Warrants assumed in the Business Combination.
The Company’s Warrants are accounted for as a liability in accordance with ASC 815-40 and are presented as a warrant liability on the balance sheet. The warrant liability was measured at fair value at inception and on a recurring basis, with changes in fair value recognized as non-operating expense. As of July 3, 2022, a warrant liability with a fair value of $40,352 was reflected as a long-term liability in the condensed consolidated balance sheet, and a $23,168 and $20,941 decrease in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 13-week and 26-week periods ended July 3, 2022, respectively.
8. | FAIR VALUE MEASUREMENTS |
The Company’s financial liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows:
Fair Value Measured as of July 3, 2022 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities included in: | ||||||||||||||||
Warrant liability (Public) | $ | 26,212 | $ | — | $ | — | $ | 26,212 | ||||||||
Warrant liability (Private) | — | — | 14,140 | 14,140 | ||||||||||||
Earn-out liability | — | — | 10,054 | 10,054 | ||||||||||||
Total fair value | $ | 26,212 | $ | — | $ | 24,194 | $ | 50,406 |
Fair Value Measured as of December 31, 2021 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities included in: | ||||||||||||||||
Warrant liability (Public) | $ | 39,500 | $ | — | $ | — | $ | 39,500 | ||||||||
Warrant liability (Private) | — | — | 21,793 | 21,793 | ||||||||||||
Earn-out liability | — | — | 26,596 | 26,596 | ||||||||||||
Total fair value | $ | 39,500 | $ | — | $ | 48,389 | $ | 87,889 |
As of July 3, 2022, the Company's derivative liabilities for its private and public warrants and the earn-out liability (see Note 2, “Business Combination and Acquisitions,” for more details) are measured at fair value on a recurring basis. The fair value for the private warrants and earn-out liability are determined based on significant inputs not observable in the market (Level 3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its private warrants and earn-out liability. The fair value of the public warrants is determined using publicly traded prices (Level 1). Changes in the fair value of the derivative liabilities related to warrants and the earn-out liability are recognized as non-operating expense in the condensed consolidated statements of comprehensive income.
The fair value of private warrants was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
Valuation date price | $ | 10.98 | $ | 12.99 | ||||
Strike price | $ | 11.50 | $ | 11.50 | ||||
Remaining life (in years) | 4.04 | 4.54 | ||||||
Expected dividend | $ | — | $ | — | ||||
Risk-free interest rate | 2.83 | % | 1.19 | % | ||||
Price threshold | $ | 18.00 | $ | 18.00 |
The fair value of the earn-out liability was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
Valuation date price | $ | 10.98 | $ | 12.99 | ||||
Expected term (in years) | 6.04 | 6.54 | ||||||
Expected volatility | 39.78 | % | 40.59 | % | ||||
Risk-free interest rate | 2.86 | % | 1.40 | % | ||||
Price hurdle 1 | not applicable | $ | 13.00 | |||||
Price hurdle 2 | $ | 15.00 | $ | 15.00 |
As of July 3, 2022 and December 31, 2021, the Company has accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.
The reconciliation of changes in Level 3 during the 26-week period ended July 3, 2022 is as follows:
For the twenty-six weeks ended July 3, 2022 | ||||||||||||
Private Warrants | Earn-Out Liability | Total | ||||||||||
Balance at December 31, 2021 | $ | 21,793 | $ | 26,596 | $ | 48,389 | ||||||
Liabilities reclassed to equity | 0 | (14,689 | ) | (14,689 | ) | |||||||
Losses included in earnings | (7,653 | ) | (1,853 | ) | (9,506 | ) | ||||||
Balance at July 3, 2022 | $ | 14,140 | $ | 10,054 | $ | 24,194 |
9. | REVENUE |
The principal activity from which the Company generates its revenue is the manufacturing and distribution of after-market automotive parts for its customers, comprised of resellers and end users. The Company recognizes revenue at a point in time, rather than over time, as the performance obligation is satisfied when customer obtains control of the product upon title transfer and not as the product is manufactured or developed. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e., estimated rebates, co-op advertising, etc.).
The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.
The Company allows customers to return products when certain Company-established criteria are met. These sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. Returned products, which are recorded as inventories, are valued at the lower of cost or net realizable value. The physical condition and marketability of the returned products are the major factors considered in estimating realizable value. The Company also estimates expected sales returns and records the necessary adjustment as a charge against gross sales.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 365 days. The Company elected the practical expedient to disregard the possible existence of a significant financing component related to payment on contracts, as the Company expects that customers will pay for the products within one year. The Company has evaluated subsequent eventsthe terms of our arrangements and transactionsdetermined that occurred afterthey do not contain significant financing components. Additionally, as all contracts with customers have an expected duration of one year or less, the balance sheet date upCompany has elected the practical expedient to exclude disclosure of information regarding the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. The Company provides limited warranties on most of its products against certain manufacturing and other defects. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 16 for more information.
The following table summarizes total revenue by product category. The Company's product category definitions have been revised by management in 2022. The prior-year period has been revised to conform with the current presentation. There is no change to total sales.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Electronic systems | $ | 71,060 | $ | 87,195 | $ | 157,206 | $ | 157,934 | ||||||||
Mechanical systems | 44,206 | 42,042 | 90,048 | 78,131 | ||||||||||||
Exhaust | 18,037 | 23,042 | 37,369 | 43,342 | ||||||||||||
Accessories | 28,353 | 22,508 | 57,099 | 39,941 | ||||||||||||
Safety | 17,764 | 18,254 | 37,753 | 34,025 | ||||||||||||
Total sales | $ | 179,420 | $ | 193,041 | $ | 379,475 | $ | 353,373 |
The following table summarizes total revenue based on geographic location from which the product is shipped:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
United States | $ | 173,514 | $ | 187,993 | $ | 369,573 | $ | 345,570 | ||||||||
Italy | 5,906 | 5,048 | 9,902 | 7,803 | ||||||||||||
Total sales | $ | 179,420 | $ | 193,041 | $ | 379,475 | $ | 353,373 |
10. | INCOME TAXES |
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Income tax expense | $ | 3,023 | $ | 5,790 | $ | 10,211 | $ | 10,556 | ||||||||
Effective tax rates | 6.9 | % | 20.0 | % | 15.1 | % | 33.4 | % |
For the 13-week period ended July 3, 2022, the Company's effective tax rate of 6.9% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the Private Warrants and the earn-out liability recognized during the period. For the 13-week period ended June 27, 2021, the Company’s effective tax rate was 20.0%.
For the 26-week period ended July 3, 2022, the Company's effective tax rate of 15.1% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the Private Warrants and the earn-out liability recognized during the period. For the 26-week period ended June 27, 2021, the Company’s effective tax rate of 33.4% differed from the 21% federal statutory rate primarily due a permanent difference resulting from the change in fair value of an earn-out liability related to the 2020 acquisition of Simpson Performance Products ("Simpson") recognized during the period.
11. | EARNINGS PER SHARE |
The following table sets forth the calculation of basic and diluted earnings per share:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Numerator: | ||||||||||||||||
Net income - basic | $ | 40,563 | $ | 23,098 | $ | 57,421 | $ | 21,042 | ||||||||
Less: fair value adjustment for warrants | 0 | 0 | (20,941 | ) | 0 | |||||||||||
Net income - diluted | $ | 40,563 | $ | 23,098 | $ | 36,480 | $ | 21,042 | ||||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding - basic | 116,931,623 | 67,673,884 | 116,398,177 | 67,673,884 | ||||||||||||
Dilutive effect of potential common shares from RSUs | 182,930 | 0 | 177,642 | 0 | ||||||||||||
Dilutive effect of potential common shares from warrants | 0 | 0 | 768,156 | 0 | ||||||||||||
Weighted average common shares outstanding - diluted | 117,114,553 | 67,673,884 | 117,343,975 | 67,673,884 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.35 | $ | 0.34 | $ | 0.49 | $ | 0.31 | ||||||||
Diluted | $ | 0.35 | $ | 0.34 | $ | 0.31 | $ | 0.31 |
The following outstanding shares of common stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Warrants to purchase shares of common stock having an exercise price greater than the average share market price for the thirteen weeks ended July 3, 2022 are excluded from the calculation of diluted earnings per share.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Anti-dilutive shares excluded from calculation of diluted EPS: | ||||||||||||||||
Warrants | 14,633,311 | 0 | 0 | 0 | ||||||||||||
Stock options | 1,960,708 | 0 | 1,960,708 | 0 | ||||||||||||
Restricted stock units | 220,051 | 0 | 220,051 | 0 | ||||||||||||
Earn-out shares | 1,093,750 | 0 | 1,093,750 | 0 | ||||||||||||
Total anti-dilutive shares | 17,907,820 | 0 | 3,274,509 | 0 |
12. | BENEFIT PLANS |
The Company has a defined benefit pension plan (the “Plan”) for its employees. On January 28, 2022, the Company approved the termination of the Plan, effective March 31, 2022. Distribution of the Plan's assets, pursuant to the termination, will not be made until the Plan termination satisfies all regulatory requirements, which is expected to be completed by the fourth quarter of 2022. Plan participants will receive their full accrued benefits from the Plan's assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. The resulting settlement effect of the Plan termination will be determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at the date of distribution. The Company estimates that the settlement charge will be in the range of $400 - $550.
The following summarizes the components of net periodic benefit cost for the Plan:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Components of expense: | ||||||||||||||||
Service cost | $ | 27 | $ | 36 | $ | 54 | $ | 36 | ||||||||
Interest cost | 32 | 38 | 64 | 38 | ||||||||||||
Expected return on plan assets | (52 | ) | (61 | ) | (104 | ) | (61 | ) | ||||||||
Amortization of net loss | 0 | 5 | 0 | 5 | ||||||||||||
Net periodic benefit cost | $ | 7 | $ | 18 | $ | 14 | $ | 18 |
The Company made matching contributions totaling $1,156 and $526 to our 401(k) plan during the 13-week periods ended July 3, 2022 and June 27, 2021, respectively. The Company made matching contributions totaling $1,844 and $1,000 to our 401(k) plan during the 26-week periods ended July 3, 2022 and June 27, 2021, respectively.
The Company made 0 contributions and contributions of $98 to the Plan during the 13-week periods ended July 3, 2022 and June 27, 2021, respectively. The Company made contributions of $150 and $117 to the Plan during the 26-week periods ended July 3, 2022 and June 27, 2021, respectively.
13. | EQUITY-BASED COMPENSATION PLANS |
In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), which provides for the grant of restricted stock awards, incentive and nonqualified stock options, and other share based awards to employees, directors and non-employees. The 2021 Plan authorized 8,850,000 shares of the Company’s common stock to be available for award grants. As of July 3, 2022, 5,951,568 shares of common stock remained available for future issuance under the 2021 Plan.
Equity-based compensation expense included the following components:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Stock options | $ | 652 | $ | 0 | $ | 1,205 | $ | 0 | ||||||||
Restricted stock units | 1,350 | 0 | 2,533 | 0 | ||||||||||||
Profit interest units | 1,481 | 131 | 2,907 | 262 |
All equity-based compensation expense is recorded in selling, general and administrative costs in the condensed consolidated statements of comprehensive income.
Stock Options
Stock option grants have an exercise price at least equal to the market value of the underlying common stock on the date of grant, have ten-year terms, and vest ratably over three years of continued employment. In general, vested options expire if not exercised at termination of service. On February 15, 2022 and May 6, 2022, the Company granted 548,001 and 44,055 options to purchase shares of the Company’s common stock to key employees, respectively. These stock options had weighted-average grant date fair values of $4.68 per share and $4.32per share, respectively, which values were estimated as of their respective grant dates using a Black-Scholes option pricing model with the following assumptions:
Granted Feb. 15, 2022 | Granted May 6, 2022 | |||||||
Weighted-average expected term | 6.0 | 6.0 | ||||||
Expected volatility | 36.0 | % | 40.0 | % | ||||
Expected dividend | $ | 0 | $ | 0 | ||||
Risk-free interest rate | 1.98 | % | 3.06 | % |
The expected term has been estimated using a simplified method, which calculates the expected term as the mid-point between the vesting date and the contractual life of the awards since the Company does not have an extended history of actual exercises. The expected dividend yield is assumed to be zero since the Company has never paid dividends and does not have current plans to pay any dividends. The risk-free interest rate is based on yields of U.S. Treasury securities with maturities similar to the expected term of the options. Expected volatility is based on an evenly weighted blend of implied volatility and historical volatility of publicly-traded peer companies since the Company has limited historical volatility.
Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period. As of July 3, 2022, there was $5,986 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a remaining weighted-average period of 2.3 years.
Restricted Stock Units
Restricted stock units (“RSUs”) vest ratably over one to three years of continued employment. The fair value of a RSU at the grant date is equal to the market price of the Company’s common stock on the grant date. On February 15, 2022 and May 6, 2022, the Company granted 228,180 and 16,767 RSUs, respectively to key employees with grant date fair values of $12.29 per unit and $9.95 per unit, respectively. Additionally, on May 11, 2022, 55,920 RSUs were granted to members of Holley's Board of Directors with a grant date fair value of $8.53 per unit. Compensation expense for RSUs is recorded based on amortization of the grant date fair market value over the period the restrictions lapse. As of July 3, 2022, there was $7,630 of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a remaining weighted average period of 2.2 years.
Profit Interest Units
The Holley Stockholder has authorized an incentive pool of 41.4 million units of Parent, which are designated as PIUs, that its management has the right to grant to certain employees of the Company. As of July 3, 2022, no units are available for grant. The PIU's are a special type of limited liability company equity unit that allows the recipient to potentially participate in a future increase in the value of the Company. PIUs are issued for no consideration and generally provide for vesting over the requisite service period, subject to the recipient remaining an employee of the Company through each vesting date.
As of July 3, 2022, there was $6,578 of unrecognized compensation cost related to unvested time-based PIUs that is expected to be recognized over a remaining weighted-average period of 1.2 years.
14. | LEASE COMMITMENTS |
On January 1, 2022, the Company adopted ASC 842 using the modified retrospective optional transition method provided by ASU 2018-11. The effect of applying this guidance resulted in an increase in noncurrent assets for right-of-use assets of $33.9 million and an increase in liabilities for associated lease obligations of $34.6 million, most of which were classified as noncurrent. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings.
Under the transition option elected by the Company, ASC 842 is applied only to the most current period and reporting for comparative periods presented in the financial statements were issued. Other than as describedcontinues to be in these condensed financial statements,accordance with Topic 840, including disclosures. Upon adoption, the Company did not identify any additional subsequent eventselected the following practical expedients related to ASC 842:
• | not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases; |
• | to account for the lease and non-lease components as a single lease component for all of the Company's leases; and |
• | to apply accounting similar to Topic 840 to leases that meet the definition of short-term leases. |
The Company leases retail stores, manufacturing, distribution, engineering, and research and development facilities, office space, equipment, and automobiles under operating lease agreements. Leases have remaining lease terms of one to 14 years, inclusive of renewal options that wouldthe Company is reasonably certain to exercise.
The following table summarizes operating lease assets and obligations:
July 3, 2022 | ||||
Assets: | ||||
Operating right of use assets | $ | 32,762 | ||
Liabilities: | ||||
Current operating lease liabilities | $ | 5,006 | ||
Long-term lease liabilities | 28,225 | |||
Total lease liabilities | $ | 33,231 |
The following summarizes the components of operating lease expense and provides supplemental cash flow information for operating leases:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||
July 3, 2022 | July 3, 2022 | |||||||
Components of lease expense: | ||||||||
Operating lease expense | $ | 1,482 | $ | 3,901 | ||||
Short-term lease expense | 642 | 1,250 | ||||||
Variable lease expense | 327 | 414 | ||||||
Total lease expense | $ | 2,451 | $ | 5,565 | ||||
Supplemental cash flow information related to leases: | ||||||||
Cash paid for amounts included in measurement of operating lease liabilities | $ | 1,821 | $ | 3,581 | ||||
Right of use assets obtained in exchange for new operating lease liabilities | 13,491 | 13,769 | ||||||
Decapitalization of right-of-use assets upon lease termination and/or modification | 12,178 | 12,178 |
Information associated with the measurement of operating lease obligations as of July 3, 2022 is as follows:
Weighted average remaining lease term (in years) | 8.0 | |||
Weighted average discount rate | 5.67 | % |
The following table summarizes the maturities of the Company's operating lease liabilities as of July 3, 2022:
2022 (excluding the twenty-six weeks ended July 3, 2022) | $ | 3,718 | ||
2023 | 6,830 | |||
2024 | 5,583 | |||
2025 | 3,867 | |||
2026 | 3,660 | |||
Thereafter | 18,318 | |||
Total lease payments | 41,976 | |||
Less imputed interest | (8,745 | ) | ||
Present value of lease liabilities | $ | 33,231 |
For the 13-week and 26-week periods ended June 27, 2021, total rent expense under operating leases approximated $1,979 and $3,672.
In accordance with ASC 840, Leases, the aggregate minimum non-cancelable annual lease payments under operating leases in effect on December 31, 2021 were as follows:
2022 | $ | 8,517 | ||
2023 | 6,320 | |||
2024 | 4,766 | |||
2025 | 2,995 | |||
2026 | 2,813 | |||
Thereafter | 8,546 | |||
Total minimum lease commitments | $ | 33,957 |
15. | ACQUISITION, RESTRUCTURING AND MANAGEMENT FEE COSTS |
The following table summarizes the Company's total acquisition, restructuring and management fee costs:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Acquisitions (1) | $ | 1,372 | $ | 2,172 | $ | 1,621 | $ | 3,211 | ||||||||
Restructuring (2) | 319 | 504 | 360 | 1,125 | ||||||||||||
Management fees (3) | 0 | 1,658 | 0 | 2,539 | ||||||||||||
Earn out adjustment (4) | 0 | 0 | 0 | 17,173 | ||||||||||||
Total acquisition, restructuring and management fees | $ | 1,691 | $ | 4,334 | $ | 1,981 | $ | 24,048 |
(1) | Includes professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. |
(2) | Includes costs incurred as part of the restructuring of operations including professional and consulting services. |
(3) | Includes acquisition costs and management fees paid to Sentinel Capital Partners. |
(4) | A fair value adjustment to the contingent consideration payable from the Simpson acquisition. |
16. | COMMITMENTS AND CONTINGENCIES |
The Company is a party to various lawsuits and claims in the normal course of business. While the lawsuits and claims against the Company cannot be predicted with certainty, management believes that the ultimate resolution of the matters will not have required adjustmenta material effect on the consolidated financial position or disclosureresults of operations of the Company.
The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. The accrued product warranty costs are based primarily on historical experience of actual warranty claims and are recorded at the time of the sale.
The following table provides the changes in the Company's accrual for product warranties, which is classified as a component of accrued liabilities in the condensed financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSconsolidated balance sheets.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Beginning balance | $ | 3,816 | $ | 2,867 | $ | 3,994 | $ | 3,989 | ||||||||
Accrued for current year warranty claims | 446 | 2,479 | 3,034 | 3,436 | ||||||||||||
Settlement of warranty claims | (1,937 | ) | (2,418 | ) | (4,703 | ) | (4,497 | ) | ||||||||
Ending balance | $ | 2,325 | $ | 2,928 | $ | 2,325 | $ | 2,928 |
References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to Empower Ltd. References to our “management” or our “management team” refer to our officers and directors, and references to the “Sponsor” refer to Empower Sponsor Holdings LLC. The following discussion and analysis
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’sItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” regardingOperations.
Unless the Company’scontext requires otherwise, references to “Holley,”“we,”“us,”“our” and “the Company” in this section are to the business and operations of Holley Inc. The following discussion and analysis should be read in conjunction with Holley’s condensed consolidated financial position, business strategy, potential business combinationsstatements and the plans and objectives of management for future operations, are forward-looking statements. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and variations thereof and similar words and expressions are intendedrelated notes thereto included in this Quarterly Report on Form 10-Q. In addition to identify such forward-looking statements. Suchhistorical information, this discussion contains forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently availablethat involve risks, uncertainties, and are subject to risks and uncertainties. A number of factorsassumptions that could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements, including risks related to the impact of the COVID-19 global pandemic, including the actions of governments, businesses and individuals in response to the situation. For information identifying important factors that could causeHolley’s actual results to differ materially from those anticipatedmanagement’s expectations. Factors that could cause such differences are discussed herein and under the caption, “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a designer, marketer, and manufacturer of high performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the forward-looking statements, please referUnited States, Canada, Europe and China. Holley designs, markets, manufactures and distributes a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety.
Innovation is at the Risk core of our business and growth strategy with approximately 35% of our 2021 sales coming from products introduced by us into the market since 2016. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.
In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer (“DTC”) scale and connection, (iv) expand share in current product categories and (v) realize value-enhancing revenue and cost synergies. While we believe our business is positioned for continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that would complement our current business and expand our addressable target market.
Factors sectionAffecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below, under the Company’s final prospectuscaption, "Cautionary Note Regarding Forward-Looking Statements," in this Quarterly Report on Form 10-Q, under the caption, “Risk Factors,” in our Annual Report on Form 10-K for its Initial Public Offeringthe year ended December 31, 2021, as filed with the SEC on October 7, 2020. March 15, 2022, and in our subsequent filings with the SEC.
Business Combination
On July 16, 2021 we consummated a business combination (“Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021 (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc., a direct wholly owned subsidiary of Empower (“Merger Sub I”), Empower Merger Sub II LLC, a direct wholly owned subsidiary of Empower (“Merger Sub II”), and Holley Intermediate Holdings, Inc. ("Holley Intermediate").
The Company’s securities filings can be accessedMerger Agreement provided for, among other things, the following transactions: (i) Merger Sub I merged with and into Holley Intermediate, the separate corporate existence of Merger Sub I ceased and Holley Intermediate became the surviving corporation, and (ii) Holley Intermediate merged with and into Merger Sub II, the separate corporate existence of Holley Intermediate ceased and Merger Sub II became the surviving limited liability company. Upon closing, Empower changed its name to Holley Inc. and its trading symbol on the EDGAR sectionNew York Stock Exchange (the “NYSE”) from “EMPW” to “HLLY.”
The Business Combination was accounted for as a reverse recapitalization. Holley Intermediate was deemed the accounting acquirer with Holley Inc. as the successor registrant. As such, Empower was treated as the acquired company for financial reporting purposes, and financial statements for periods prior to the Business Combination are those of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether asHolley Intermediate.
As a result of new information, future events or otherwise.
Overview
We are a blank check company incorporated in the Cayman Islands on August 19, 2020 formed for the purpose of effecting a merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or other similar Business Combination, with one or more businesses.Holley Inc. listed on the NYSE, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We intend to effectuate our Business Combination using cash derived from the proceeds of the Initial Public Offeringhave incurred and the sale of the Private Placement Warrants, our shares, debt or a combination of cash, shares and debt.
We expect to continue to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit and other professional service fees.
Acquisitions
Holley has historically pursued a growth strategy through both organic growth and acquisitions. The Company has pursued acquisitions that it believes will help drive profitability, cash flow and stockholder value. Holley targets companies that are market leaders, expand the Company’s geographic presence, provide a highly synergistic opportunity and/or enhance Holley’s ability to provide a wide array of its products to its customers through its distribution network.
In 2021 Holley completed eight acquisitions. The most significant acquisitions impacting the comparability of our operating results were:
● | Advance Engine Management Inc.: On April 14, 2021 Holley acquired Advance Engine Management Inc., doing business as AEM Performance Electronics, a developer and supplier of electronic control and monitoring systems for performance automotive applications. This acquisition increases Holley’s penetration into the import and other sport compact cars submarket. |
● | Brothers Mail Order Industries, Inc.: On December 16, 2021, Holley acquired Brothers Mail Order Industries, Inc., doing business as Brothers Trucks, a distributor of classic and custom vehicle restoration parts serving the Chevrolet and GMC truck aftermarket. This acquisition increases Holley's offerings in truck and SUV appearance items. |
● | Baer, Inc.: On December 23, 2021, Holley acquired Baer, Inc., doing business as Baer Brakes, a developer and supplier of brakes and brake systems. This acquisition moves Holley closer to its goal of providing complete vehicle solutions by adding a new product category and brake system expertise. |
The acquisitions have all been accounted for in accordance with FASB ASC Topic 805, Business Combinations, and the operations of the acquired entities are included in our historical results for the periods following the closing of the acquisition. See Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” and Note 2, “Business Combination and Acquisitions,” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Company’s acquisitions and investments.
COVID-19 Update
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has continued to experience disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. The full extent of the pursuitimpact of the COVID-19 pandemic on the Company's business and operational and financial performance and condition is currently uncertain and will depend on many factors outside the Company's control, including but not limited to the timing, extent, duration and effects of the virus and any of its mutations, the utilization and effectiveness of treatments and vaccines, the imposition of effective public safety and other protective measures, the further impact of COVID-19 on the global economy and demand for the Company's products and services. During the second quarter of 2022, we continued to experience supply chain headwinds, including microchip shortages and other supply chain challenges that prevented us from building and shipping many of our acquisition plans. We cannot assure you that our plansmost popular products, which has had, and may continue to completehave, a Business Combination willnegative impact on product availability. Should the ongoing COVID-19 pandemic, including any variants of COVID-19, not improve or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, financial condition and prospects may be successful.adversely affected.
Key Components of Results of Operations
We have neither engaged in any operations nor generated any operating revenues to date. Our only activitiesNet Sales
The principal activity from inception through September 30, 2020 were organizational activitieswhich the Company generates its sales is the designing, marketing, manufacturing and those necessary to preparedistribution of performance after-market automotive parts for the Initial Public Offering, described below. We do not expect to generate any operating revenues until after the completionits end consumers. Sales are displayed net of our initial Business Combination. We expect to generate non-operating incomerebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the formperiod in which the related sales are recognized.
Cost of Goods Sold
Cost of goods sold consists primarily of the Initial Public Offering. We expect that we willcost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.
Selling, General, and Administrative
Selling, general, and administrative consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, pre-production and start-up costs are also included within selling, general, and administrative. The Company expects to incur increasedadditional expenses as a result of beingoperating as a public company, (for legal, financialincluding expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting accountingobligations pursuant to the rules and auditing compliance),regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.
Acquisition and Restructuring Costs
Acquisition and restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. In addition, operational restructuring costs are included within this classification.
Related Party Acquisition and Management Fee Costs
Related party acquisition and management fee costs consist of fees paid to the Company’s private equity sponsor pursuant to a management services agreement for management services and consulting services directly attributable to potential acquisitions. Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated.
Interest Expense
Interest expense consists of interest due diligence expenseson the indebtedness under our credit facilities. Interest is based on LIBOR or the prime rate, plus the applicable margin rate. As of July 3, 2022, $652.4 million was outstanding under the Company's Credit Agreement.
Results of Operations
13-Week Period Ended July 3, 2022 Compared With 13-Week Period Ended June 27, 2021
The table below presents Holley’s results of operations for the 13-week periods ended July 3, 2022 and June 27, 2021 (dollars in thousands):
For the thirteen weeks ended | ||||||||||||||||
July 3, 2022 | June 27, 2021 | Change ($) | Change (%) | |||||||||||||
Net sales | $ | 179,420 | $ | 193,041 | $ | (13,621 | ) | (7.1 | %) | |||||||
Cost of goods sold | 104,132 | 111,841 | (7,709 | ) | (6.9 | %) | ||||||||||
Gross profit | 75,288 | 81,200 | (5,912 | ) | (7.3 | %) | ||||||||||
Selling, general, and administrative | 36,269 | 26,190 | 10,079 | 38.5 | % | |||||||||||
Research and development costs | 8,196 | 7,065 | 1,131 | 16.0 | % | |||||||||||
Amortization of intangible assets | 3,662 | 3,502 | 160 | 4.6 | % | |||||||||||
Acquisition and restructuring costs | 1,691 | 2,676 | (985 | ) | (36.8 | %) | ||||||||||
Related party acquisition and management fee costs | — | 1,658 | (1,658 | ) | (100.0 | %) | ||||||||||
Other expense | 325 | 47 | 278 | 591.5 | % | |||||||||||
Operating income | 25,145 | 40,062 | (14,917 | ) | (37.2 | %) | ||||||||||
Change in fair value of warrant liability | (23,168 | ) | — | (23,168 | ) | n/a | ||||||||||
Change in fair value of earn-out liability | (4,234 | ) | — | (4,234 | ) | n/a | ||||||||||
Interest expense | 8,961 | 11,174 | (2,213 | ) | (19.8 | %) | ||||||||||
Income before income taxes | 43,586 | 28,888 | 14,698 | 50.9 | % | |||||||||||
Income tax expense | 3,023 | 5,790 | (2,767 | ) | (47.8 | %) | ||||||||||
Net income | 40,563 | 23,098 | 17,465 | 75.6 | % | |||||||||||
Foreign currency translation adjustment | 501 | 35 | 466 | nm | ||||||||||||
Total comprehensive income | $ | 41,064 | $ | 23,133 | $ | 17,931 | 77.5 | % |
Net Sales
Net sales for the 13-week period ended July 3, 2022decreased $13.6 million, or 7.1%, to $179.4 million, as compared to $193.0 million for the 13-week period ended June 27, 2021. Non-comparable sales associated with acquisitions contributed $9.4 million, or 4.8% of year-over-year growth. The remaining comparable sales decreased by $23.0 million, or 11.9%, compared to the prior year quarter, offsetting the impact from the acquisitions. The decline in comparable sales was primarily driven by microchip shortages and other supply chain challenges that prevented us from building and shipping many of our most popular products, destocking from our resellers in response to the current economic environment as well as softening consumer demand, which resulted in a decrease of $37.0 million due to lower unit volume net of improved price realization of $14.0 million compared to the prior year period. Major categories driving the comparable year-over-year results include a decline of $16.3 million in electronic system sales (18.7% category decline), a decline of $1.1 million in mechanical system sales (2.6% category decline), and a decline of $0.5 million in safety product sales (2.7% category decline).
Cost of Goods Sold
Cost of goods sold for the 13-week period ended July 3, 2022 decreased$7.7 million, or 6.9%, to $104.1 million, as compared to $111.8 million for the 13-week period ended June 27, 2021. The decrease in cost of goods sold during the 13-week period ended July 3, 2022 was in line with a corresponding decrease in product sales during such period.
Gross Profit and Gross Margin
Gross profit for the 13-week period ended July 3, 2022 decreased $5.9 million, or 7.3%, to $75.3 million, as compared to $81.2 million for the 13-week period ended June 27, 2021. The decrease in gross profit was driven by the decrease in sales. Gross margin for the 13-week period ended July 3, 2022 of 42.0% was stable compared to a gross margin of 42.1% for the 13-week period ended June 27, 2021.
Selling, General and Administrative
Selling, general and administrative costs for the 13-week period ended July 3, 2022 increased $10.1 million, or 38.5%, to $36.3 million, as compared to $26.2 million for the 13-week period ended June 27, 2021. When expressed as a percentage of sales, selling, general and administrative costs increased to 20.2% of sales for the 13-week period ended July 3, 2022, as compared to 13.6% of sales in 2021. Recent acquisitions accounted for $1.4 million of the increase in selling, general and administrative costs. The increase in costs was also driven by a $3.4 million increase in compensation expense related to equity awards, a $2.3 million increase in personnel costs, reflecting company growth and the additional requirements of becoming a public company, and a $1.4 million increase in outbound shipping and handling costs related to domestic supply chain pressures.
Research and Development Costs
Research and development costs for the 13-week period ended July 3, 2022 increased $1.1 million, or 16.0%, to $8.2 million, as compared to $7.1 million for the 13-week period ended June 27, 2021. The increase in research and development costs was primarily due to headcount investments as we continue to pursue product innovation and new products.
Amortization of Intangible Assets
Amortization of intangible assets for the 13-week period ended July 3, 2022 increased $0.2 million, or 4.6%, to $3.7 million, as compared to $3.5 million for the 13-week period ended June 27, 2021 due to recent acquisitions.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 13-week period ended July 3, 2022 decreased $1.0 million, or 36.8%, to $1.7 million, as compared to $2.7 million for the 13-week period ended June 27, 2021.
Related Party Acquisition and Management Fee Costs
Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated. Related party acquisition and management fee costs for the 13-week period ended June 27, 2021 were $1.7 million.
Operating Income
As a result of factors described above, operating income for the 13-week period ended July 3, 2022 decreased $14.9 million, or 37.2%, to $25.2 million, as compared to $40.1 million for the 13-week period ended June 27, 2021.
Change in Fair Value of Warrant Liability
For the 13-week period ended July 3, 2022 we recognized a gain of $23.2 million from the change in fair value of the warrant liability. The warrant liability reflects the fair value of the warrants issued in connection with searchingthe Business Combination.
Change in Fair Value of Earn-Out Liability
For the 13-week period ended July 3, 2022 we recognized a gain of $4.2 million from the change in fair value of the earn-out liability. The earn-out liability reflects the fair value of the earn-out shares resulting from the Business Combination.
Interest Expense
Interest expense for the 13-week period ended July 3, 2022 decreased $2.2 million, or 19.8%, to $9.0 million, as compared to $11.2 million for the 13-week period ended June 27, 2021. The decrease was primarily due to a lower effective interest rate combined with the favorable impact of the $100 million paydown on our second lien note in July 2021.
Income before Income Taxes
As a result of factors described above, we recognized $43.6 million of income before income taxes for the 13-week period ended July 3, 2022, as compared to $28.9 million for the 13-week period ended June 27, 2021.
Income Tax Expense
Income tax expense for the 13-week period ended July 3, 2022 decreased $2.8 million to $3.0 million, as compared to $5.8 million for the 13-week period ended June 27, 2021. The effective tax rate for the 13-week period ended July 3, 2022 was 6.9%. The difference between the effective tax rate and completing,the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. The effective tax rate for the 13-week period ended June 27, 2021 was 20.0%. The difference between the effective tax rate and the federal statutory rate in 2021 was primarily due to permanent differences.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $40.6 million for the 13-week period ended July 3, 2022, as compared to$23.1 million for the 13-week period ended June 27, 2021. Additionally, we recognized total comprehensive income of $41.1 million for the 13-week period ended July 3, 2022, as compared to $23.1 million for the 13-week period ended June 27, 2021. Comprehensive income includes the effect of foreign currency translation adjustments.
26-week period ended July 3, 2022 Compared With 26-week period ended June 27, 2021
The table below presents Holley’s results of operations for the 26-week periods ended July 3, 2022 and June 27, 2021 (dollars in thousands):
For the twenty-six weeks ended | ||||||||||||||||
July 3, 2022 | June 27, 2021 | Change ($) | Change (%) | |||||||||||||
Net sales | $ | 379,475 | $ | 353,373 | $ | 26,102 | 7.4 | % | ||||||||
Cost of goods sold | 221,466 | 206,494 | 14,972 | 7.3 | % | |||||||||||
Gross profit | 158,009 | 146,879 | 11,130 | 7.6 | % | |||||||||||
Selling, general, and administrative | 70,611 | 50,202 | 20,409 | 40.7 | % | |||||||||||
Research and development costs | 16,357 | 13,034 | 3,323 | 25.5 | % | |||||||||||
Amortization of intangible assets | 7,323 | 6,838 | 485 | 7.1 | % | |||||||||||
Acquisition and restructuring costs | 1,981 | 21,509 | (19,528 | ) | (90.8 | %) | ||||||||||
Related party acquisition and management fee costs | — | 2,539 | (2,539 | ) | (100.0 | %) | ||||||||||
Other expense (income) | 547 | (86 | ) | 633 | (736.0 | %) | ||||||||||
Operating income | 61,190 | 52,843 | 8,347 | 15.8 | % | |||||||||||
Change in fair value of warrant liability | (20,941 | ) | — | (20,941 | ) | n/a | ||||||||||
Change in fair value of earn-out liability | (1,853 | ) | — | (1,853 | ) | n/a | ||||||||||
Interest expense | 16,352 | 21,245 | (4,893 | ) | (23.0 | %) | ||||||||||
Income before income taxes | 67,632 | 31,598 | 36,034 | 114.0 | % | |||||||||||
Income tax expense | 10,211 | 10,556 | (345 | ) | (3.3 | %) | ||||||||||
Net income | 57,421 | 21,042 | 36,379 | 172.9 | % | |||||||||||
Foreign currency translation adjustment | 742 | 19 | 723 | nm | ||||||||||||
Total comprehensive income | $ | 58,163 | $ | 21,061 | $ | 37,102 | 176.2 | % |
Net Sales
Net sales for the 26-week period ended July 3, 2022 increased $26.1 million, or 7.4%, to $379.5 million, as compared to $353.4 million for the 26-week period ended June 27, 2021. Non-comparable sales associated with acquisitions contributed $27.4 million, or 7.8% of total year-over-year growth. The remaining comparable sales for the year-to-date period decreased by $1.3 million, or 0.4%. The comparable sales reflect a decrease of $32.0 million due to lower unit volume net of improved price realization of $30.7 million compared to the prior year period. Major categories driving the comparable year-over-year results include a decrease in electronic system sales of $5.6 million (3.5% category decline), mechanical system growth of $4.0 million (5.1% category growth), and safety product growth of $3.7 million (11.0% category growth).
Cost of Goods Sold
Cost of goods sold for the 26-week period ended July 3, 2022 increased $15.0 million, or 7.3%, to $221.5 million, as compared to $206.5 million for the 26-week period ended June 27, 2021. The increase in cost of goods sold during the 26-week period ended July 3, 2022 was in line with a corresponding increase in product sales during such period.
Gross Profit and Gross Margin
Gross profit for the 26-week period ended July 3, 2022 increased $11.1 million, or 7.6%, to $158.0 million, as compared to $146.9 million for the 26-week period ended June 27, 2021. The increase in gross profit was driven by the increase in sales. Gross margin for the 26-week period ended July 3, 2022 of 41.6% was comparable to gross margin of 41.6% for the 26-week period ended June 27, 2021.
Selling, General and Administrative
Selling, general and administrative costs for the 26-week period ended July 3, 2022 increased $20.4 million, or 40.7%, to $70.6 million, as compared to $50.2 million for the 26-week period ended June 27, 2021. When expressed as a percentage of sales, selling, general and administrative costs increased to 18.6% of sales for the 26-week period ended July 3, 2022, as compared to 14.2% of sales in 2021. Recent acquisitions accounted for $3.3 million of the increase in selling, general and administrative costs. The increase in costs was also driven by a $6.4 million increase in compensation expense related to equity awards, a $3.6 million increase in administrative and sales personnel costs, reflecting company growth and the additional requirements of becoming a public company, and a $2.3 million increase in outbound shipping and handling costs related to higher sales and domestic supply chain pressure.
Research and Development Costs
Research and development costs for the 26-week period ended July 3, 2022 increased $3.3 million, or 25.5%, to $16.4 million, as compared to $13.0 million for the 26-week period ended June 27, 2021. The increase in research and development costs were primarily due to headcount investments as we continue to pursue product innovation and new products.
Amortization of Intangible Assets
Amortization of intangible assets for the 26-week period ended July 3, 2022 increased $0.5 million, or 7.1%, to $7.3 million, as compared to $6.8 million for the 26-week period ended June 27, 2021 due to recent acquisitions.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 26-week period ended July 3, 2022 decreased $19.5 million, or 90.8%, to $2.0 million, as compared to $21.5 million for the 26-week period ended June 27, 2021. The 26-week period ended June 27, 2021 included an adjustment of $17.2 million for contingent consideration payable for the acquisition of Simpson Performance Products ("Simpson").
Related Party Acquisition and Management Fee Costs
Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated. Related party acquisition and management fee costs for the 26-week period ended June 27, 2021 were $2.5 million.
Operating Income
As a result of factors described above, operating income for the 26-week period ended July 3, 2022 increased $8.4 million, or 15.8%, to $61.2 million, as compared to $52.8 million for the 26-week period ended June 27, 2021.
Change in Fair Value of Warrant Liability
For the 26-week period ended July 3, 2022 we recognized a gain of $20.9 million from the change in fair value of the warrant liability. The warrant liability reflects the fair value of the warrants issued in connection with the Business Combination.
For the period from August 19, 2020 (inception) through September 30, 2020, we had a net lossChange in Fair Value of $5,000, which consisted of formation costs.Earn-Out Liability
LiquidityFor the 26-week period ended July 3, 2022 we recognized a gain of $1.9 million from the change in fair value of the earn-out liability. The earn-out liability reflects the fair value of the earn-out shares resulting from the Business Combination. During the first quarter of 2022, the first tranche, representing half of the Earn-Out Shares, met the required market share price criteria and Capital Resourceswere issued. This issuance of the Company's common stock resulted in a reduction of the earn-out liability of $14.7 million, representing the fair value of the earn-out shares on the vesting date, which was reclassified from liabilities to equity. At July 3, 2022, there are 1,093,750 potential future Earn-Out Shares remaining.
Interest Expense
Interest expense for the 26-week period ended July 3, 2022 decreased $4.9 million, or 23.0%, to $16.4 million, as compared to $21.3 million for the 26-week period ended June 27, 2021. The decrease was primarily due to a lower effective interest rate combined with the favorable impact of the $100 million paydown on our second lien note in July 2021.
Income before Income Taxes
As a result of September 30, 2020,factors described above, we had no cash. Untilrecognized income before income taxes of $67.6 million for the consummation26-week period ended July 3, 2022, as compared to $31.6 million for the 26-week period ended June 27, 2021.
Income Tax Expense
Income tax expense of $10.2 million for the 26-week period ended July 3, 2022 decreased by $0.4 million compared to $10.6 million for the 26-week period ended June 27, 2021. The effective tax rate for the 26-week period ended July 3, 2022 was 15.1%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the Initial Public Offering, our only source of liquiditywarrant and earn-out liabilities. The effective tax rate for the 26-week period ended June 27, 2021 was an initial purchase of ordinary shares by33.4%. The difference between the Sponsoreffective tax rate and loansthe federal statutory rate in 2021 was due to the permanent difference resulting from our Sponsor.the adjustment to the Simpson earn-out liability during the period.
SubsequentNet Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $57.4 million for the 26-week period ended July 3, 2022, as compared to $21.0 million for the 26-week period ended June 27, 2021. Additionally, we recognized total comprehensive income of $58.2 million for the 26-week period ended July 3, 2022, as compared to $21.1 million for the 26-week period ended June 27, 2021. Comprehensive income includes the effect of foreign currency translation adjustments.
Non-GAAP Financial Measures
Holley believes EBITDA and Adjusted EBITDA are useful to investors in evaluating the Company’s financial performance. In addition, Holley uses these measures internally to establish forecasts, budgets and operational goals to manage and monitor its business. Holley believes that these non-GAAP financial measures help to depict a more realistic representation of the performance of the underlying business, enabling the Company to evaluate and plan more effectively for the future. Holley believes that investors should have access to the endsame set of the quarterly period covered by this Quarterly Report, on October 9, 2020, we consummated the Initial Public Offering of 25,000,000 Units, at a price of $10.00 per Unit, generating gross proceeds of $250,000,000. Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 4,666,667 Private Placement Warrants to the Sponsor at a price of $1.50 per Private Placement Warrant generating gross proceeds of $7,000,000.tools that its management uses in analyzing operating results.
Following the Initial Public Offering,Holley defines EBITDA as earnings before (a) interest expense, (b) income taxes and the sale(c) depreciation and amortization. Holley defines Adjusted EBITDA as EBITDA plus (i) notable items that in 2022 consist primarily of the Private Placement Warrants, a total of $250,000,000 was placed in the Trust Account, and we had $1,122,742 of cash held outside of the Trust Account, after payment of costsnon-cash adjustments related to the Initial Public Offering,adoption of ASC 842, "Leases," and availablein 2021 consist primarily of the amortization of the fair market value increase in inventory due to acquisitions, (ii) compensation expense related to equity awards (iii) acquisition and restructuring costs, which for working capital purposes.the 13-week period ended March 28, 2021 includes a $17.2 million adjustment due to a change in the fair value of the Simpson acquisition contingent consideration payable, (iv) changes in the fair value of the warrant liability, (v) changes in the fair value of the earn-out liability, (vi) related party acquisition and management fee costs, and (vii) other expenses, which includes losses from disposal of fixed assets and foreign currency transactions. We incurred $14,215,163have included within the definition of Adjusted EBITDA the changes in transaction costs, including $5,000,000the fair value of underwriting fees, $8,750,000the warrant liability and changes in the fair value of deferred underwriting fees and $465,163the earn-out liability, as management believes such matters, when they occur, do not directly reflect the performance of other costs.the underlying business.
We intend to use substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account, which interest shall be net of taxes payableEBITDA and excluding deferred underwriting commissions, to complete our Business Combination. We may withdraw interest from the Trust Account to pay taxes, if any. To the extent that our share capital or debt is used, in whole or in part, as consideration to complete a Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.
We intend to use the funds held outside the Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, structure, negotiate and complete a Business Combination.
In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, our Sponsor or an affiliate of our Sponsor or certain of our officers and directors may, butAdjusted EBITDA are not obligated to, loan us funds as may be required. If we complete a Business Combination, we may repay such loaned amounts out of the proceeds of the Trust Account released to us. In the event that a Business Combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts, but no proceeds from our Trust Account would be used for such repayment. Up to $2,000,000 of such loans may be convertible into warrants, at a price of $1.50 per warrant, at the option of the lender. The warrants would be identical to the Private Placement Warrants.
We do not believe we will need to raise additional fundsprepared in order to meet the expenditures required for operating our business for at least the next 12 months. However, if our estimate of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our initial Business Combination. Moreover, we may need to obtain additional financing either to complete our Business Combination or because we become obligated to redeem a significant number of our public shares upon completion of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of September 30, 2020. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than described below.
The underwriter is entitled to a deferred fee of $0.35 per Unit, or $8,750,000 in the aggregate (or $10,062,500 if the underwriters’ over-allotment is exercised in full). The deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of the underwriting agreement.
Critical Accounting Policies
The preparation of condensed financial statements and related disclosures in conformityaccordance with accounting principles generally accepted in the United States (“GAAP”) and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of Americafinancial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing Holley’s financial performance. These metrics should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.
The following unaudited table presents the reconciliation of net income (loss), the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the 13-week and 26-week periods ended July 3, 2022 and June 27, 2021 (dollars in thousands):
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Net income | $ | 40,563 | $ | 23,098 | $ | 57,421 | $ | 21,042 | ||||||||
Adjustments: | ||||||||||||||||
Depreciation | 2,523 | 2,201 | 4,663 | 4,453 | ||||||||||||
Amortization of intangible assets | 3,662 | 3,502 | 7,323 | 6,838 | ||||||||||||
Interest expense | 8,961 | 11,174 | 16,352 | 21,245 | ||||||||||||
Income tax expense | 3,023 | 5,790 | 10,211 | 10,556 | ||||||||||||
EBITDA | 58,732 | 45,765 | 95,970 | 64,134 | ||||||||||||
Acquisition and restructuring costs | 1,691 | 2,676 | 1,981 | 21,509 | ||||||||||||
Change in fair value of warrant liability | (23,168 | ) | — | (20,941 | ) | — | ||||||||||
Change in fair value of earn-out liability | (4,234 | ) | — | (1,853 | ) | — | ||||||||||
Equity-based compensation expense | 3,483 | 131 | 6,645 | 262 | ||||||||||||
Related party acquisition and management fee costs | — | 1,658 | — | 2,539 | ||||||||||||
Notable items | 378 | 3,862 | 884 | 9,575 | ||||||||||||
Other expense (income) | 325 | 47 | 547 | (86 | ) | |||||||||||
Adjusted EBITDA | $ | 37,207 | $ | 54,139 | $ | 83,233 | $ | 97,933 |
Liquidity and Capital Resources
Holley’s primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. The Company has generally financed its historical needs with operating cash flows, capital contributions and borrowings under its credit facilities. These sources of liquidity may be impacted by various factors, including demand for Holley’s products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of July 3, 2022, the Company had cash of $30.6 million and availability of $123.8 million under its revolving credit facility. The Company has a senior secured revolving credit facility with $125 million in borrowing capacity. As of July 3, 2022, the Company had $1.2 million of letters of credit outstanding under the revolving credit facility.
The Company is obligated under various operating leases for facilities, equipment and automobiles with estimated lease payments of approximately $4.4 million, including short term leases, due during the remainder of fiscal year 2022. See Note 14, "Lease Commitments" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Company’s lease obligations.
Holley's capital expenditures are primarily related to ongoing maintenance and improvements, including investments related to upgrading and maintaining our information technology systems, tooling for new products, vehicles for product development, and machinery and equipment for operations. We expect capital expenditures in the range of $14 million to $16 million in fiscal year 2022.
See Note 6, "Debt" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for further detail of our credit facility and the timing of principal maturities. As of July 3, 2022, based on the then current weighted average interest rate of 5.2%, expected interest payments associated with outstanding debt totaled approximately $17.1 million for the remainder of fiscal year 2022.
The Company believes that its cash on hand, cash from operations and borrowings available under its revolving credit facility will be sufficient to satisfy its liquidity needs and capital expenditure requirements for at least the next twelve months and thereafter for the foreseeable future.
Cash Flows
The following table provides a summary of cash flows from operating, investing, and financing activities for the periods presented (dollars in thousands):
26-week period ended July 3, 2022 Compared With 26-week period ended June 27, 2021
For the twenty-six weeks ended | ||||||||
July 3, 2022 | June 27, 2021 | |||||||
Cash flows from operating activities | $ | 20,831 | $ | 46,397 | ||||
Cash flows used in investing activities | (23,442 | ) | (60,867 | ) | ||||
Cash flows used in financing activities | (2,716 | ) | (1,539 | ) | ||||
Effect of foreign currency rate fluctuations on cash | (443 | ) | — | |||||
Net decrease in cash and cash equivalents | $ | (5,770 | ) | $ | (16,009 | ) |
Operating Activities. Cash provided by operating activities for the 26-week period ended July 3, 2022 was $20.8 million compared to $46.4 million for the 26-week period ended June 27, 2021. Significant components of the year-over-year change in cash provided by operating activities included negative fluctuations from inventories and accounts payable of $28.8 million and $11.8 million, respectively. Offsetting these decreases were increases in cash provided by accounts receivable and prepaids and other current assets of $6.1 million and $6.1 million, respectively. The changes in inventory, accounts payable and accounts receivable reflect the fluctuations in sales during 2022 while accounts payable and accounts receivable are also impacted by the timing of payments.
Investing Activities. Cash used in investing activities for the 26-week period ended July 3, 2022 was $23.4 million, which included $9.4 million relating to capital expenditures and $14.0 million relating to acquisitions. During the 26-week period ended June 27, 2021, cash used in investing activities was $60.9 million which included $54.0 million relating to acquisitions and $6.8 million due to capital expenditures.
Financing Activities. Cash used in financing activities for the 26-week period ended July 3, 2022 was $2.7 million due to net principal payments on long-term debt. Cash used in financing activities for the 26-week period ended June 27, 2021 reflected principal payments on long-term debt.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires managementus to make estimates, judgements and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and liabilities, disclosurerelated disclosures. We evaluate our estimates, judgements and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For a discussion of contingent assets and liabilities atour critical accounting estimates, refer to the datesection entitled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022. For further information see also Note 1, “Description of the condensed financial statements,Business, Basis of Presentation, and income and expenses duringSummary of Significant Accounting Policies” in the periods reported. Actual results could materially differ from those estimates. We have not identified any critical accounting policies.Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Recent accounting standardsAccounting Pronouncements
ManagementFor a discussion of Holley’s new or recently adopted accounting pronouncements, see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. Holley is exposed to market risk in the normal course of business due to the Company’s ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Holley has established policies and procedures governing the Company’s management of market risks and the use of financial instruments to manage exposure to such risks. The Company generally does not hedge its interest rate exposure. The Company had $655.5 million of debt outstanding as of July 3, 2022. A hypothetical 100 basis point increase or decrease in interest rates would result in an approximately $6.6 million change to Holley’s annual interest expense.
Credit and other Risks. Holley is exposed to credit risk associated with cash and cash equivalents and trade receivables. As of July 3, 2022, the majority the Company’s cash and cash equivalents consisted of cash balances in non-interest bearing checking accounts which exceed the insurance coverage provided on such deposits. The Company does not believe that any recently issued, butits cash equivalents present significant credit risks because the counterparties to the instruments consist of major financial institutions. Substantially all trade receivable balances of the business are unsecured. The credit risk with respect to trade receivables is concentrated by the number of significant customers that the Company has in its customer base and a prolonged economic downturn could increase exposure to credit risk on the Company’s trade receivables. To manage exposure to such risks, Holley performs ongoing credit evaluations of the Company’s customers and maintains an allowance for potential credit losses.
Exchange Rate Sensitivity. As of July 3, 2022, the Company is exposed to changes in foreign currency exchange rates. While historically this exposure to changes in foreign currency exchange rates has not yet effective, accounting standards, if currently adopted, would havehad a material effect on our condensedthe Company’s financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKcondition or results of operations, foreign currency fluctuations could have an adverse effect on business and results of operations in the future. Historically, Holley’s primary exposure has been related to transactions denominated in the Euros and Canadian dollars. The majority of the Company’s sales, both domestically and internationally, are denominated in U.S. Dollars. Historically, the majority of the Company’s expenses have also been in U.S. Dollars and we have been somewhat insulated from currency fluctuations. However, Holley may be exposed to greater exchange rate sensitivity in the future. Currently, the Company does not hedge foreign currency exposure; however, the Company may consider strategies to mitigate foreign currency exposure in the future if deemed necessary.
Not required for a smaller reporting company.Item 4. Controls and Procedures.
ITEM 4. CONTROLS AND PROCEDURES
EvaluationBased on an evaluation under the supervision and with the participation of Disclosure Controlsthe Company’s management, the Company’s Chief Executive Officer and Procedures
DisclosureChief Financial Officer have concluded that the Company’s disclosure controls and procedures are controlsas defined in Rules 13a-15(e) and other procedures that are designed15d-15(e) under the Exchange Act were effective as of July 3, 2022 to ensureprovide reasonable assurance that information required to be disclosed by the Company in our reports filedthat it files or submittedsubmits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC rules and forms. Disclosure controlsforms and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is(ii) accumulated and communicated to ourthe Company’s management, including ourits Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were effective.
Changes in Internal Control Overover Financial Reporting
There were no changes in ourthe Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) underof the Exchange Act) that occurred during the period covered by this reportmost recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, ourthe Company's internal control over financial reporting.
PARTPart II - OTHER INFORMATIONOther Information
ITEMItem 1. LEGAL PROCEEDINGS.Legal Proceedings
We are currently not a party to any legal proceedings that would be expected to have a material adverse effect on our business or financial condition. From time to time, we are subject to litigation incidental to our business, as well as other litigation of a non-material nature in the ordinary course of business.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. Factors that could materially affect our actual results, levels of activity, performance or achievements include, but are not limited to, those under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022. Such risks, uncertainties and other factors may cause our actual results, performance and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.
There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K as filed with the SEC on March 15, 2022, for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Factors that could cause our actual results to differ materially from those in this Quarterly Report include the risk factors described in our final prospectus filed with the SEC on October 7, 2020. As of the date of this Quarterly Report, other than as described below, there have been no material changes to the risk factors disclosed in our final prospectus filed with the SEC.
The securities in which we invest the funds held in the Trust Account could bear a negative rate of interest, which could reduce the value of the assets held in trust such that the per-share redemption amount received by public shareholders may be less than $10.00 per share.
The proceeds held in the Trust Account are invested only in U.S. government treasury obligations with a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act, which invest only in direct U.S. government treasury obligations. While short-term U.S. government treasury obligations currently yield a positive rate of interest, they have briefly yielded negative interest rates in recent years. Central banks in Europe and Japan pursued interest rates below zero in recent years, and the Open Market Committee of the Federal Reserve has not ruled out the possibility that it may in the future adopt similar policies in the United States. In the event that we are unable to complete our initial business combination or make certain amendments to our Amended and Restated Memorandum and Articles of Association our public shareholders are entitled to receive their pro-rata share of the proceeds held in the Trust Account, plus any interest income not released to us, net of taxes payable. Negative interest rates could impact the per-share redemption amount that may be received by public shareholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On October 9, 2020, we consummated our Initial Public Offering of 25,000,000 Units at a price of $10.00 per Unit, generating total gross proceeds of $250,000,000. J.P. Morgan Securities LLC and Jefferies LLC acted as the book-running managers. The securities sold in the offering were registered under the Securities Act on registration statements on Form S-1 (No. 333-248899). The registration statements became effective on October 6, 2020 and registered the sale of a maximum of 28,750,000 Units. Additionally, we granted the underwriters in the Initial Public Offering a 45-day option from October 6, 2020 to purchase up to 3,750,000 additional Units.
Simultaneously with the consummation of the Initial Public Offering, we consummated a private placement of 4,666,667 Private Placement Warrants to our Sponsor at a price of $1.50 per Private Placement Warrant, generating total proceeds of $7,000,000. Such securities were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants are not transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions.
Of the gross proceeds received from the Initial Public Offering and the sale of the Private Placement Warrants, $250,000,000 (consisting of $245,000,000 of net proceeds from the Initial Public Offering, which amount includes $8,750,000 in the form of deferred underwriting commissions, and $5,000,000 of proceeds from the sale of the Private Placement Warrants) was placed in the Trust Account.
We paid a total of $5,000,000 in underwriting discounts and commissions and $465,163 for other costs and expenses related to the Initial Public Offering. In addition, the underwriter agreed to defer $8,750,000 in underwriting discounts and commissions.
For a description of the use of the proceeds generated in our Initial Public Offering, see Part I, Item 2 of this Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.Defaults Upon Senior Securities
None.
ITEMItem 4. MINE SAFETY DISCLOSURES.Mine Safety Disclosures
Not applicable.
ITEMItem 5. OTHER INFORMATION.Other Information
None.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.Item 6. Exhibits
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | ||
Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | Inline XBRL Taxonomy Extension | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
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.
/s/ Dominic Bardos | ||
Dominic Bardos | ||
Chief Financial Officer (Duly Authorized Officer) | ||
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