| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Principles of Consolidation The accompanying consolidated financial statements include the accounts of EVI Industries, Inc. and its subsidiaries, all of which are wholly-owned. Intercompany transactions and balances have been eliminated in consolidation.
Revenue Recognition
Adoption of New Revenue
Standard In May 2014, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from
Contracts with Customers (Topic 606)” (“Topic 606”). Topic 606 supersedes the revenue requirements in ASU Topic
605, “Revenue Recognition” ("Topic 605"), and requires the recognition of revenues when promised goods or
services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods
or services. To recognize revenue, the Company does the following:
· identify the contract(s) with a customer;
· identify the performance obligations in the contract;
· determine the transaction price;
· allocate the transaction price to the performance obligations in the contract; and
· recognize revenue when, or as, the entity satisfies a performance obligation. The new standard also includes Subtopic
340-40, “Other Assets and Deferred Costs - Contracts with Customers” (“Subtopic 340-40”), which sets forth
requirements relating to the deferral of incremental costs of obtaining a contract with a customer, including the period of amortization
of such costs. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenues and cash
flows arising from contracts with customers. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as the "New
Revenue Standard." The Company adopted the New Revenue Standard on July 1, 2018 using the modified retrospective approach. The
New Revenue Standard did not have an impact on the amount and timing of the Company’s revenue recognition through July 1,
2018. Results for reporting periods beginning on and after July 1, 2018 are presented under the New Revenue Standard, while prior
period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods. Revenue Recognition Performance
Obligations Revenue primarily
consists of revenues from the sale or leasing of commercial and industrial laundry and dry cleaning equipment and steam and hot
water boilers manufactured by others; the sale of related replacement parts and accessories; and the provision of installation
and maintenance services. The Company generates revenue primarily from the sale of equipment and parts to customers. Therefore,
the majority of the Company’s contracts are short-term in nature and have a single performance obligation (to deliver products),
and the Company’s performance obligation is satisfied when control of the product is transferred to the customer. Other
contracts contain a combination of equipment sales and services expected to be performed in the near-term, which services are
distinct and accounted for as separate performance obligations. Revenue is recognized on these contracts when control transfers
to the Company’s customers via shipment of products or provision of services and the Company has the right to receive consideration
for these products and services. Additionally, from time to time, the Company enters into longer-termed contracts which provide
for the sale of the equipment by the Company and the provision by the Company of related installation and construction services.
The installation on these types of contracts is usually completed within six to twelve months. From time to time, the Company
also enters into maintenance contracts and ad hoc maintenance and installation service contracts. These longer-term contracts,
and maintenance and service contracts have a single performance obligation where revenue is recognized over time using the cost-to-cost
measure of progress, which best depicts the continuous transfer of control of goods or services to the customer. The Company measures revenue, including
shipping and handling fees charged to customers, as the amount of consideration it expects to be entitled to receive in exchange
for its goods or services, net of any taxes collected from customers and subsequently remitted to governmental authorities. Costs
associated with shipping and handling activities performed after the customer obtains control are accounted for as fulfillment
costs and are not promised services that have to be further evaluated under Topic 606. Revenue
from products transferred to customers at a point in time include commercial and vended laundry parts and equipment sales and
accounted for approximately 83% of the Company’s revenue for the fiscal year ended June 30, 2019. Revenue from products
transferred to customers at a point in time is recognized when obligations under the terms of the contract with the Company’s
customer are satisfied, which generally occurs with the transfer of control upon shipment. Revenues that
are recognized over time include (i) longer-termed contracts that include equipment purchase with installation and construction
services, (ii) maintenance contracts, and (iii) service contracts. Revenue from products and services that are recognized over
time accounted for approximately 17% of the Company’s revenue for both the fiscal year ended June 30, 2019. Contract Assets and Liabilities Contract
assets and liabilities are presented in the Company’s consolidated balance sheets. Contract assets consist of unbilled
amounts resulting from sales under longer-term contracts when the cost-to-cost method of revenue recognition is utilized and
revenue recognized exceeds the amount billed to the customer. The Company typically receives progress payments on sales under
longer-term contracts as work progresses, although for certain contracts, the Company may be entitled to receive an advance
payment. Contract assets also include retainage. Retainage represents a portion of the contract amount that has been billed,
but for which the contract allows the customer to retain a portion of the billed amount (generally, from 5% to 20% of
contract billings) until final contract settlement. Retainage amounts are generally classified as current assets within the
Company’s consolidated balance sheets. Retainage that has been billed, but is not due until completion of performance
and acceptance by customers, is generally expected to be collected within one year. Contract liabilities consist of advanced
payments, billings in excess of costs incurred and deferred revenue. Costs, estimated earnings
and billings on longer-term contracts when the cost-to-cost method of revenue recognition is utilized as of June 30, 2019 and 2018
consisted of the following (in thousands):
June 30, 2019 2018
Costs incurred on uncompleted contracts $ 19,285 $ 5,286
Estimated earnings 1,224 1,072
Less: revenues recognized to date (19,673 ) (5,605 )
Retainage 797 —
Ending balance $ 1,633 $ 753 These amounts are included in the
Company’s consolidated balance sheets under the following captions (in thousands):
June 30, 2019 2018
Contract assets $ 2,487 $ 1,012
Contract liabilities (854 ) (259 )
Ending balance $ 1,633 $ 753
Goodwill Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of net assets acquired in a business combination. The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss. This step compares the current implied goodwill in the reporting unit to its carrying amount. If the carrying amount of the goodwill exceeds the implied goodwill, an impairment is recorded for the excess. The Company performed its annual impairment test on April 1, 2019 and determined there was no impairment.
Accounts Receivable Accounts receivable are customer obligations due under what management believes to be customary trade terms.
The Company sells its products primarily to laundry plants, hotels, motels, cruise lines, hospitals, nursing homes, government
institutions, vended laundry facilities and distributors and dry cleaning stores and chains. The Company performs continuing credit
evaluations of its customers’ financial condition and depending on the terms of credit, the amount of the credit granted
and management’s history with a customer, the Company may require the customer to grant a security interest in the purchased
equipment as collateral for the receivable. Management reviews accounts receivable on a regular basis to determine whether it is
probable that any amounts are impaired. The Company includes any balances that are deemed probable to be impaired in its overall
allowance for doubtful accounts. The provision for doubtful accounts is recorded in selling, general and administrative expenses
in the consolidated statements of operations. If customary attempts to collect a receivable are not successful, the receivable
is then written off against the allowance for doubtful accounts. The Company’s allowance for doubtful accounts was $323,000
at June 30, 2019 and $233,000 at June 30, 2018. Actual write-offs may vary from the recorded allowance.
Cash and Cash Equivalents The Company considers all short term, highly liquid investments that are readily convertible to cash with an original maturity of three months or less when purchased to be cash equivalents. The Company has not experienced any losses in such accounts and believes it is not exposed to significant
credit risk due to the financial position of the depository institutions in which those deposits are held.
Inventories Inventories consist principally of equipment inventories and
spare part inventories. Equipment inventories are valued at the lower of cost, determined on the specific
identification method, or net realizable value. Spare part inventories are valued at the lower of average cost or
net realizable value. Lower of cost or net realizable value adjustments are recorded in cost of goods sold in the
consolidated statement of operations.
Equipment, Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are calculated on straight-line methods over useful lives of five to seven years for furniture and equipment and the
shorter of ten years or the remaining lease term (including renewal periods that are deemed reasonably assured) for leasehold improvements.
Depreciation and amortization of property and equipment is included in selling, general and administrative expenses in the consolidated
statements of operations. Repairs and maintenance costs are expensed as incurred.
Customer-Related Intangibles, Finite-lived intangibles are amortized over their estimated useful life while indefinite-lived intangibles
and goodwill are not amortized. Customer-related intangibles, non-compete, and other finite-lived intangible assets are stated
at cost less accumulated amortization, and are amortized on a straight-line basis over the estimated future periods to be benefited
(5-10 years). Amortization of finite-lived intangibles is included in selling, general and administrative expenses in the consolidated
statements of operations. The Company also evaluates indefinite-lived intangible assets each reporting period to determine whether
events and circumstances continue to support an indefinite useful life. The Company performed its annual impairment test on April
1, 2019 and determined there was no impairment.
Asset Impairments The Company periodically reviews the carrying amounts of its long-lived assets, including property, plant
and equipment and finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be generated by the asset. If an asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of are reported at the lower of their carrying amount or fair value less estimated costs
to sell. The Company has concluded that there was no impairment of long-lived assets in the fiscal year ended June 30, 2019 (sometimes
hereinafter referred to as “fiscal 2019”) or the fiscal year ended June 30, 2018 (sometimes hereinafter referred to
as “fiscal 2018”).
Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates on an ongoing basis. Estimates which may be particularly significant to the Company’s consolidated financial statements include those relating to the determination of impairment of assets (including goodwill and intangible assets), the useful life of property and equipment, net realizable value of inventory, the residual value of leased equipment, the recoverability of deferred income tax assets, allowances for doubtful accounts, intangible assets, estimates to complete on contracts where revenue is recognized over time, the carrying value of inventories and long-lived assets, the timing of revenue recognition, and sales returns and allowances. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the recognition of revenues and expenses and the carrying value of assets and liabilities that are not readily apparent from other sources. Assumptions and estimates may, however, prove to have been incorrect, and actual results may differ from these estimates.
Earnings Per Share
The Company computes earnings
per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that
determines earnings per share for common stock and any participating securities according to dividends declared (whether paid
or unpaid) and participation rights in undistributed earnings. Shares of the Company’s common stock subject to unvested
restricted stock awards are considered participating securities because these awards contain a non-forfeitable right to dividends
paid prior to forfeiture of the restricted stock, if any, irrespective of whether the awards ultimately vest. During fiscal 2019
and fiscal 2018, the Company issued awards of 34,345 and 66,226 shares of restricted stock, respectively, under the EVI Industries,
Inc. 2015 Equity Incentive Plan (see Note 19). Such shares are deemed to constitute a second class of stock for accounting purposes.
Basic and diluted earnings per share for fiscal 2019 and fiscal 2018 are computed as follows (in thousands, except per share data):
For the years ended
2019 2018
Net income $ 3,743 $ 3,966
Less: distributed and 260 295
Net income allocated to EVI $ 3,483 $ 3,671
Weighted average shares 11,533 10,840
Dilutive common share 489 437
Weighted average shares 12,022 11,277
Basic earnings per share $ 0.30 $ 0.34
Diluted earnings per share $ 0.29 $ 0.33 At June 30, 2019, other than 813,610 unvested shares subject to
restricted stock awards, there were no potentially dilutive securities outstanding. The remaining 69,744 shares of restricted common
stock were not included in the calculation of diluted earnings per share because their impact was anti-dilutive. At June 30, 2018,
other than 437,000 shares subject to restricted stock awards, there were no potentially dilutive securities outstanding. The remaining
466,148 shares of restricted common stock were not included in the calculation of diluted earnings per share because their impact
was anti-dilutive.
Supplier Concentration The Company purchases laundry, dry cleaning equipment, boilers and other products from a number of manufacturers and suppliers. Purchases from three of these manufacturers accounted for a total of approximately 62% of the Company’s purchases for fiscal 2019 and purchases from four manufacturers accounted for approximately 76% of the Company’s purchases for fiscal 2018.
Advertising Costs The Company expenses the cost of advertising as of the first date an advertisement is run. The Company incurred approximately $355,000 and $164,000 of advertising costs for fiscal 2019 and 2018, respectively, which are included in selling, general and administrative expenses in the consolidated statements of operations.
Shipping and Handling Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through cost of sales as inventories are sold. Shipping and handling costs associated with the delivery of products is included in selling, general and administrative expenses.
Fair Value of Certain Current Assets and Current Liabilities
Fair value is the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants at the measurement date. The inputs used to measure
fair value are prioritized based on a three-level hierarchy. The three levels of inputs used to measure fair value are as follows:
· Level 1 - Quoted prices in active markets for identical assets and liabilities.
· Level 2 - Observable inputs other than quoted prices included in Level 1. This includes dealer
and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are
observable or can be corroborated by observable market data.
· Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities. This includes discounted cash flow methodologies and similar techniques that use
significant unobservable inputs. The Company has no assets or liabilities that
are adjusted to fair value on a recurring basis. The Company did not have any assets or liabilities measured at fair value on a
nonrecurring basis during fiscal 2019 or 2018, except for certain assets acquired and liabilities assumed in a business combination
(as described in Note 3). The Company’s cash and cash equivalents,
accounts receivable and accounts payable are reflected in the accompanying consolidated financial statements at cost, which approximated
estimated fair value, using Level 1 inputs, as they are maintained with various high-quality financial institutions and have original
maturities of three months or less. The fair value of the Company’s indebtedness was estimated using Level 2 inputs based
on quoted prices for those or similar debt instruments using applicable interest rates as of June 30, 2019 and approximate the
carrying value of such debt because it accrues interest at variable rates that are repriced frequently.
Customer Deposits Customer deposits represent advances paid by customers when placing orders for equipment with the Company.
Net Investment in Sales Type Leases The Company derives a portion of its revenue from leasing arrangements. Such arrangements provide for monthly payments covering the equipment sales, maintenance, and interest. These arrangements meet the criteria to be accounted for as sales type leases. Accordingly, the equipment sale is recognized upon delivery of the system and acceptance by the customer. Upon the recognition of revenue, an asset is established for the investment in sales type leases. Maintenance revenue and interest are recognized monthly over the lease term.
Income Taxes
The Company recognizes
income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. If it is determined that it is more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized. Significant judgment
is required in developing the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation
allowances that might be required against the deferred tax assets. Management evaluates the Company’s ability to realize
its deferred tax assets on a quarterly basis and adjusts the valuation allowance when it believes that it is more likely than not
that the asset will not be realized. There were no valuation allowance adjustments during fiscal 2019 or fiscal 2018. The Company accounts for uncertainty
in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The
Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments
and which may not accurately reflect actual outcomes. The Company does not believe that there are any unrecognized tax benefits
as of June 30, 2019 or 2018 related to tax positions taken on its income tax returns. The Company’s policy is to classify
interest and penalties related to unrecognized tax benefits, if and when required, as part of interest expense and general and
administrative expense, respectively, in the consolidated statements of operations. On December 22,
2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the
"Tax Act"). The Tax Act represents significant U.S. federal tax reform legislation that includes a permanent reduction
to the U.S. federal corporate income tax rate. Pursuant to Staff Accounting Bulletin (“SAB”) No. 118 (“SAB 118”),
the Company’s measurement period for implementing the accounting changes required by the Tax Act closed on December 22,
2018. The Company completed the accounting for the effects of the Tax Act in the second quarter of fiscal 2019, which did not
result in any changes to previously reported amounts, and there were no adjustments to the preliminary
amounts previously recognized.
Recently Issued
In February 2016, the FASB issued
ASU No. 2016-02, “Leases (Topic 842)” (“Topic 842”), which is designed to increase transparency and comparability
by requiring the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of certain additional
information about leasing arrangements. The new standard will require an entity to recognize the following for all leases (with
the exception of short-term leases) at the commencement date (i) a lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use (ROU) asset, which is an asset that
represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Topic 842 is effective
for fiscal years beginning after December 15, 2018 (i.e., the fiscal year ending June 30, 2020 for the Company). In July 2018,
updated guidance was issued which provides an additional transition method of adoption that allows entities to initially apply
the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in
the period of adoption. The Company adopted Topic 842 utilizing this modified retrospective adoption method with an effective
date of July 1, 2019. Consequently, the accompanying financial statements and footnotes have not been updated to comply with Topic
842. The Company has completed scoping reviews
to identify a complete population of leases, and determined its population of leases is comprised largely of real estate leases.
While the Company continues to assess all of the effects of adopting Topic 842, the Company currently believes the most significant
effects will relate to the recognition of new ROU assets and lease liabilities on the consolidated balance sheet for its real estate
operating leases. The Company does not expect that the adoption of Topic 842 will have a significant impact on the Company’s
consolidated statements of operations or cash flows. Topic 842 provides a number of optional practical
expedients and policy elections in transition. The Company expects to elect the ‘package of practical expedients’,
which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification
and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land
easements. Topic 842
also provides practical expedients for an entity’s ongoing accounting. The Company expects to elect the short-term lease
recognition exemption for all leases that qualify (i.e., leases of 12 months or less). This means, for those leases that qualify,
the Company, if it elects such exemptions, will not recognize ROU assets or lease liabilities, including ROU assets or lease liabilities
for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient
to not separate lease and non-lease components for all of the Company’s leases. In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which is designed
to simplify the subsequent measurement of goodwill. The new guidance will eliminate the second step from the goodwill impairment
test required in computing the implied fair value of goodwill. Instead, under the amendment, an entity will be required to perform
its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and, if
applicable, the entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the charge recognized should not exceed the total amount of goodwill allocated to that reporting
unit. If applicable, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the
reporting unit when performing the goodwill impairment test. The amendments in this guidance are effective for public business
entities for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 (the fiscal
year ending June 30, 2021 for the Company), with early adoption permitted. The Company is currently evaluating the impact, if any,
that adopting this guidance may have on its consolidated financial statements. In August 2018, the FASB issued ASU 2018-15,
“Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), to reduce diversity in
practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. ASU 2018-15 aligns
the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with
the requirements for internal-use software. Accounting for the service element of the cloud computing arrangement is not affected
by the new guidance. Under ASU 2018-15, amortization expense and payments for, and asset balances related to, such capitalized
implementation costs are to be presented within the same line items of the entity’s balance sheets and statements of operations
and cash flows, as the related balances and service fee activity would be presented. ASU 2018-15 is effective for fiscal years,
and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company
is currently evaluating the potential effect of the adoption of ASU 2018-15 on its consolidated financial statements. Management does not believe the impact of other
issued accounting standards and updates, which are not yet effective, will have a material impact on the Company’s consolidated
financial position, results of operations or cash flows upon adoption. |
