Envirostar Inc (DCU) SEC Quarterly Report (10-Q) for Q1 2015

WASHINGTON, D.C. 20549

FORM 10-Q

EnviroStar, Inc.

(Exact name of Registrant as Specified in Its charter)

290 N.E. 68 Street, Miami, Florida 33138

(Address of Principal Executive Offices)

(305) 754-4551

(Registrant's Telephone Number, Including Area Code)

Not Applicable

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.025 par value per share – 7,033,732 shares outstanding as of February 13, 2015.

PART 1. FINANCIAL INFORMATION

EnviroStar, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

See Notes to Condensed Consolidated Financial Statements

EnviroStar, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See Notes to Condensed Consolidated Financial Statements

EnviroStar, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See Notes to Condensed Consolidated Financial Statements

EnviroStar, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

See Notes to Condensed Consolidated Financial Statements

Note (1) - General: The accompanying unaudited condensed consolidated financial statements include the accounts of EnviroStar, Inc. and its subsidiaries (the "Company"). All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X related to interim period financial statements. Accordingly, these condensed consolidated financial statements do not include certain information and footnotes required by GAAP for complete financial statements. However, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary in order to make the financial statements not misleading. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements should be read in conjunction with the Summary of Significant Accounting Policies and other footnotes included in the Company's Annual Report on Form 10-K for the year ended June 30, 2014. The June 30, 2014 balance sheet information contained herein was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K as of that date.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note (2) - Earnings Per Share: Basic earnings per share for the nine and three months ended March 31, 2015 and 2014 are computed as follows:

At March 31, 2015 and 2014, the Company had no outstanding options to purchase shares of the Company's common stock or other dilutive securities.

Note (3) - Lease and Mortgage Receivables: Lease and mortgage receivables result from customer leases of equipment under arrangements which qualify as sales type leases. At March 31, 2015, future lease payments, net of deferred interest ($3,441 at March 31, 2015), due under these leases were $25,135. At June 30, 2014, future lease payments, net of deferred interest ($4,952 at June 30, 2014), due under these leases were $26,527.

Note (4) - Revolving Credit Line: Effective November 1, 2014, the Company's existing $2,250,000 revolving line of credit facility was extended to November 1, 2015. The Company's obligations under the credit facility are guaranteed by the Company's subsidiaries and collateralized by substantially all of the Company's assets. No amounts were outstanding under this facility at March 31, 2015 or June 30, 2014, nor were there any amounts outstanding at any time during fiscal 2014 or the first nine months of fiscal 2015. The loan agreement requires maintenance of certain debt service coverage and leverage ratios and contained other restrictive covenants, including limitations on the extent to which the Company and its subsidiaries could incur additional indebtedness, change of control, pay dividends, guarantee indebtedness of others, grant liens, sell assets and make investments. The Company was in compliance or received a waiver of these covenants at March 31, 2015 and June 30, 2014.

Note (5) - Income Taxes: Income tax expense varies from the federal corporate income tax rate of 34%, primarily due to state income taxes, net of federal income tax effect, and permanent differences.

As of March 31, 2015 and June 30, 2014, the Company had deferred tax assets of $117,594 and $107,744, respectively. Consistent with the guidance of the Financial Accounting Standards Board ("FASB") regarding accounting for income taxes, the Company regularly estimates its ability to recover deferred tax assets and establishes a valuation allowance against deferred tax assets to reduce the balance to amounts expected to be recoverable. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning strategies. As of March 31, 2015 and June 30, 2014, management believes that it is more-likely-than not that the results of future operations will generate sufficient taxable income to realize the net amount of the Company's deferred tax assets over the periods during which temporary differences reverse.

The Company follows FASB Accounting Standards Codification ("ASC") Topic 740-10-25, "Accounting for Uncertainty in Income Taxes" ("ASC 740"). ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. During the nine and three months ended March 31, 2015, this standard did not result in any adjustment to the Company's provision for income taxes.

As of March 31, 2015, the Company was subject to potential Federal and State tax examinations for the tax years 2011 through 2014.

Note (6) – Cash Dividends : On November 14, 2014, the Company's Board of Directors declared a $.20 per share cash dividend (an aggregate of $1,406,746), which was paid on December 19, 2014 to shareholders of record at the close of business on December 5, 2014.

Note (7) - Segment Information: The Company's reportable segments are strategic businesses that offer different products and services. They are managed separately because each business requires different marketing strategies. The Company primarily evaluates the operating performance of its segments based on the categories noted in the table below. The Company has no sales between segments. Financial information for the Company's business segments is as follows:

Note (8) – Recently Issued Accounting Guidance : In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers." The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. We do not expect this standard to have a material effect on our financial statements.

Management believes the impact of other issued standards and updates, which are not yet effective, will not have a material impact on the Company's consolidated financial position, results of operations or cash flows upon adoption.

Note (9)-Subsequent Events : The Company received a waiver of an event of default under its existing revolving line of credit agreement resulting from the change in control of the Company that occurred on March 9, 2015.

Item 2.   Management's Discussion and Analysis of Financial Conditions and Results of Operations

Overview

Revenues for the first nine months of fiscal 2015 decreased by 7.6%, however, revenues for the third quarter increased by 6.7%, compared to the same periods of fiscal 2014. Net earnings increased by 13.4% and 37.3% for the nine and three month periods ended March 31, 2015, when compared to the same periods of fiscal 2014. The improved earnings performance were attributable to better operating margins, both in equipment and spare parts sales and installations. Foreign sales for the first nine months of fiscal 2015 increased by 77.9% due to a large contract shipped to the Caribbean during the first quarter.

The Company's cash position decreased to $4,073,013 at March 31, 2015 from $9,224,340 at June 30, 2014. The reduction was due to the payment of a $.20 per share special dividend, aggregating $1,406,746 in December 2014. In addition accounts payable and accrued expenses were substantially reduced from the high point at June 30, 2014. Contributing to cash was a reduction in inventories, however this was offset by a reduction in customer deposits as shipments were made from the Company's backlog.

Liquidity and Capital Resources

For the nine month period ended March 31, 2015, cash decreased by $5,151,327 compared to a decrease of $1,010,308 during the same period of fiscal 2014. The following summarizes the Company's Condensed Consolidated Statements of Cash Flows:

For the nine months ended March 31, 2015, operating activities used cash of $3,386,560 compared to $1,821,182 of cash provided during the same period of fiscal 2014. The cash used was primarily attributable to a $3,254,053 reduction in accounts payable and accrued expenses as invoices from last fiscal year became due and were paid in July, 2014. Additional cash was used by an increase of $1,314,813 in accounts and trade notes receivable due to heavy shipments in March 2015, which were not yet due for payment. Cash of $948,401 was used by a reduction in customer deposits as shipments were made from the Company's backlog. The payment of fiscal 2014 year-end bonuses and commissions of $390,050, which were in accrued employee expenses also reduced cash. Contributing to cash were the Company's net earnings of $1,380,334 and non-cash expenses for depreciation and amortization of $44,666. In addition cash was provided by a reduction in inventories of $494,044 and other current assets of $323,525 mostly for specialized equipment which was received and paid for. All other changes in cash were of a minor nature caused by the ordinary fluctuations in business activities.

For the nine month period ended March 31, 2014, operating activities provided cash of $1,821,182 compared to $3,948,006 of cash provided during the same period of fiscal 2013. The increase in cash provided by operating activities during the first nine months of fiscal 2014 was primarily due to the Company's net earnings of $1,217,754 and non-cash expenses for depreciation and amortization of $42,908. Cash was provided by a reduction in accounts and trade notes receivable of $935,769. Additional cash was provided by an increase in customer deposits of $545,496 to finance new orders and a decrease of $186,265 in other assets mostly for specialized equipment which was received and already prepaid. Other cash was provided by a decrease in lease and mortgages receivable of $46,754 and an increase in accounts payable and accrued expenses of $50,702. These increases in cash were offset by a decrease in accrued employee expenses of $667,945 primarily to pay fiscal 2013 year-end bonuses and sales commissions which were paid during the first quarter of fiscal 2014. Cash was also used to increase inventories by $230,991 to support the Company's backlog of orders. In addition, $294,173 was used to pay the remaining balance of the Company's fiscal 2013 tax liability and is currently over deposited on its income tax requirements. All other changes in cash were due to the ordinary fluctuations in business activities.

Investing activities used cash of $58,021 and $17,997 during the nine month periods ended March 31, 2015 and 2014, respectively, for capital expenditures of equipment and improvements.

Financing activities used cash of $1,406,746 and $2,813,493 during the nine month periods ended March 31, 2015 and 2014, respectively, to pay cash dividends to shareholders.

Effective November 1, 2014, the Company's existing $2,250,000 revolving line of credit facility was extended to November 1, 2015. The Company's obligations under the credit facility are guaranteed by the Company's subsidiaries and collateralized by substantially all of the Company's and its subsidiaries' assets. No amounts were outstanding under this facility at March 31, 2015 or June 30, 2014, nor were there any amounts outstanding at any time during fiscal 2014 or the first nine months of fiscal 2015.

The Company believes that its existing cash, cash equivalents, net cash from operations and available credit facillity will be sufficient to fund its operations and anticipated capital expenditures for at least the next twelve months and to meet its long-term liquidity needs.

Off-Balance Sheet Financing

The Company has no off-balance sheet financing arrangements within the meaning of Item 303(a)(4) of Regulation S-K.

Results of Operations

Revenues .

The following table sets forth certain information with respect to changes in the Company's revenues for the periods presented:

Net sales for the nine month period ended March 31, 2015 decreased by $1,951,778 (7.9%) from the same period of fiscal 2014, caused mostly by construction delays. For the third quarter of fiscal 2015, sales increased by $309,984 (4.8%) when compared to the third quarter of fiscal 2014. This increase was the result of the shipment of smaller orders from the Company's backlog.

Revenues for development fees, franchise fees, commissions and other income increased by $71,949 (22.2%) and $129,991 (217.1%) for the nine and three month periods, respectively, of fiscal 2015 when compared to the same periods of fiscal 2014. The increase for both periods is attributable to cancellation and restocking charges recognized by the Company on past contracts.

Operating Expenses.

Costs of sales, expressed as a percentage of sales, decreased to 75.0% and 75.2% for the nine and three month periods ended March 31, 2015, respectively, from 77.6% and 75.7% for the first nine months and third quarter of fiscal 2014. The increase in margins realized for both periods were mostly due to product mix as smaller orders historically carry higher margins.

Selling, general and administrative expenses decreased by $20,743 (.5%) in the first nine months of fiscal 2015, but increased by $52,504 (4.6%) for the third quarter when compared to the same periods of fiscal 2014. The decrease during the first nine months of fiscal 2015 can be attributed to decreased payroll costs as commissions were much higher during the same period of fiscal 2014, however, this decrease in payroll expenses was offset by higher insurance costs and commissions paid to individuals outside our territory during the first six months of fiscal 2015. The increased expenses for the third quarter of fiscal 2015 was due mostly to increased professional fees and stockholder expenses. As a percentage of revenues, selling, general and administrative expenses increased to 16.7% from 15.5% for the first nine months of fiscal 2015, but decreased slightly during the third quarter to 17.0% from 17.3% when compared to the same period of fiscal 2014. The percentages vary due to the absorption of these expenses over varying revenues.

Interest income decreased by $1,449 (29.7%) and $330 (20.9%) for the nine and three month periods of fiscal 2015, respectively from the same periods of fiscal 2014, due to lower interest rates and a reduction in average outstanding cash balances.

The Company's effective tax rate decreased to 37.7% for the nine and three month periods ended March 31, 2015 from 37.8% for the nine and three month periods ended March 31, 2014. The slight variation reflects changes in permanent and temporary adjustments to taxable income.

Inflation

Inflation has not had a significant effect on the Company's operations during any of the reported periods.

Transactions with Related Parties

The Company's wholly-owned subsidiary, Steiner-Atlantic Corp. ("Steiner Atlantic") leases warehouse and office space under an operating lease from 290 NE 68 Street, LLC (the "Landlord"), which is owned by Michael S. Steiner and Robert Steiner. Michael S. Steiner is Executive Vice President, Chief Operating Officer, and a director of the Company. Michael S. Steiner, individually, is also a shareholder of the Company. Robert Steiner is the brother of Michael S. Steiner and is also a shareholder of the Company.

On November 1, 2014, Steiner-Atlantic entered into a new three year lease, commencing on November 1, 2014, with the Landlord. Annual rental payments under the lease will be $123,300 in lease year one, $126,960 in lease year two and $130,800 in lease year three. Steiner-Atlantic bears the cost of real estate taxes, utilities, maintenance, repairs and insurance. The Company believes that the terms of the lease are comparable to terms that would be obtained from an unaffiliated third party for similar property in a similar locale. Rental expense under this lease was approximately $97,400 and $94,800 in the first nine months of fiscal 2015 and 2014, respectively.

Critical Accounting Policies

The accounting policies that the Company has identified as critical to its business operations and to an understanding of the Company's results of operations remain unchanged from those described in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2014. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities, and the reported amounts of revenues and expenses during the reported period. Therefore, there can be no assurance that the actual results will not differ from those estimates.

Recently Adopted Accounting Guidance

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers." The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. We do not expect this standard to have a material effect on our financial statements.

Management believes the impact of issued standards and updates, which are not yet effective, will not have a material impact on the Company's consolidated financial position, results of operations or cash flows upon adoption.

Forward Looking Statements

Certain statements in this Report are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report, words such as "may," "should," "seek," "believe," "expect," anticipate," "estimate," "project," "intend," "strategy" and similar expressions are intended to identify forward looking statements regarding events, conditions and financial trends that may affect the Company's future plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that may cause actual results, trends, performance or achievements of the Company, or industry trends and results, to differ materially from the future results, trends, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, among others: general economic and business conditions in the United States and other countries in which the Company's customers and suppliers are located; industry conditions and trends; technology changes; competition and other factors which may affect prices which the Company may charge for its products and its profit margins; the availability and cost of the inventory purchased by the Company; the relative value of the United States dollar to currencies in the countries in which the Company's customers, suppliers and competitors are located; changes in, or the failure to comply with, government regulation, principally environmental regulations; the Company's ability to implement changes in its business strategies and development plans; and the availability, terms and deployment of debt and equity capital if needed for expansion. These and certain other factors are discussed in this Report and from time to time in other Company reports filed with the Securities and Exchange Commission. The Company does not assume an obligation to update the factors discussed in this Report or such other reports.

Item 3.   Quantitative and Qualitative Disclosures About Market Risks

All of the Company's export sales require the customer to make payment in United States dollars. Accordingly, foreign sales may be affected by the strength of the United States dollar relative to the currencies of the countries in which their customers and competitors are located, as well as the strength of the economies of the countries in which the Company's customers are located. The Company has, at times in the past, paid certain suppliers in Euros. The Company had no foreign exchange contracts outstanding at March 31, 2015 or June 30, 2014.

The Company's cash and cash equivalents are maintained in interest-bearing bank accounts, including a money market account, each of which bear interest at prevailing interest rates.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, management of the Company, with the participation of the Company's principal executive officer and the Company's principal financial officer, evaluated the effectiveness of the Company's "disclosure controls and procedures." As defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), "disclosure controls and procedures" means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Based on that evaluation, the Company's principal executive officer and principal financial officer concluded that, as of the date of their evaluation, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's periodic filings under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and is accumulated and communicated to the Company's management, including those officers, to allow timely decisions regarding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company's periodic reports.

Changes in Internal Controls

During the period covered by this Report, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Exhibit Index

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