EVI INDUSTRIES, INC. Management's Discussion and Analysis of Financial Conditions and Results of Operations. (form 10-Q) | MarketScreener

2022-05-14 14:01:12 By : Mr. Kevin Zhong

Certain statements in this Quarterly Report on Form 10-Q are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, words such as "may," "should," "seek," "believe," "expect," "anticipate," "estimate," "project," "intend," "strategy" and similar expressions are intended to identify forward looking statements. Forward looking statements may relate to, among other things, events, conditions and trends that may affect the future plans, operations, business, strategies, operating results, financial position and prospects of the Company. Forward looking statements are subject to a number of known and unknown risks and uncertainties that may cause actual results, trends, performance or achievements of the Company, or industry trends and results, to differ materially from the future results, trends, performance or achievements expressed or implied by such forward looking statements. These risks and uncertainties include, among others, those associated with: general economic and business conditions in the United States and other countries where the Company operates or where the Company's customers and suppliers are located; industry conditions and trends; risks relating to the COVID-19 pandemic and the impact thereof on the Company and its business, financial condition, liquidity and results and on the Company's suppliers and customers, volatility in the economy, including in the credit markets, supply chain disruptions and resulting inflationary trends, labor shortages, reduced demand for products and services, delays in the fulfillment of orders, and risks related to potential audits of the loans received by the Company and certain of its subsidiaries under the Payroll Protection Program (the "PPP") established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")notwithstanding the previous forgiveness of the loans; risks associated with vaccine mandates, including the potential loss of employees, fines for noncompliance and loss of, or future inability to secure, certain contracts, including with the federal government; risks associated with international relations and international hostilities, including actions of foreign governments and the impact thereof on economic conditions, including supply chain constraints and inflationary trends; the Company's ability to implement its business and growth strategies and plans, including changes thereto; risks and uncertainties associated with the Company's "buy-and-build" growth strategy, including, without limitation, that the Company may not be successful in identifying or consummating acquisitions or other strategic opportunities, acquisitions which have been agreed to but not completed may not be consummated on the contemplated terms, when expected, or at all, integration risks, risks related to indebtedness incurred by the Company in connection with the financing of acquisitions, dilution experienced by the Company's existing stockholders as a result of the issuance of shares of the Company's common stock in connection with acquisitions, risks related to the business, operations and prospects of acquired businesses, risks that suppliers of the acquired business may not consent to the transaction or otherwise continue its relationship with the acquired business following the transaction and the impact that the loss of any such supplier may have on the results of the Company and the acquired business, risks that the Company's goals or expectations with respect to acquisitions and other strategic transactions may not be met, risks related to the accounting for acquisitions; risks related to supply chain delays and disruptions and the impact they may have on the Company's business, including the Company's ability to deliver products and services to its customers on a timely basis; risks relating to inflation, including the current inflationary trend in light of supply chain constraints, and the impact of inflation on the Company's costs and its ability to increase the price of its products and services to offset such costs, and on the market for the Company's products and services; risks related to labor shortages and the impact thereof on the Company, including its ability to deliver or service products or otherwise meet customers' expectations; risks relating to the impact of pricing concessions and other measures which the Company may take from time to time in connection with its expansion and pursuit of market share growth, including that they may not be successful and may adversely impact the Company's gross margin and other financial results; technology changes; competition, including the Company's ability to compete effectively and the impact that competition may have on the Company and its results, including the prices which the Company may charge for its products and services and on the Company's profit margins, and competition for qualified employees; to the extent applicable, risks relating to the Company's ability to enter into and compete effectively in new industries, as well as risks and trends related to those industries; risks relating to the Company's relationships with its principal suppliers and customers, including the impact of the loss of any such relationship; risks that equipment sales may not result in the ancillary benefits anticipated, including that they may not lead to increases in customers (or a stronger relationship with customers) or higher gross margin sales of parts, accessories, supplies, and technical services related to the equipment, and the risk that the benefit of lower gross margin equipment sales under longer-term contracts will not outweigh the possible short-term impact to gross margin; the risk that the Company's service operations may not expand to the extent anticipated, or at all; risks related to the Company's indebtedness; the availability, terms and deployment of debt and equity capital if needed for expansion or otherwise; changes in, or the failure to comply with, government regulation, including environmental regulations; litigation risks, including the costs of defending litigation and the impact of any adverse ruling; the availability and cost of inventory purchased by the Company; the relative value of the United States dollar to currencies in the countries in which the Company's customers, suppliers and competitors are located; risks relating to the recognition of revenue, including the amount and timing thereof (including potential delays resulting from delays in installation or in receiving required supplies) and that orders in the Company's backlog may not be fulfilled as or when expected; risks related to the adoption of new accounting standards and the impact it may have on the Company's financial statements and results; risks that the Company's decentralized operating model, and that product, end-user and geographic diversity, may not result in the benefits anticipated and may change over time; risks related to organic growth initiatives and market share and other growth strategies, including that they may not result in the benefits anticipated; risks that investments, initiatives and expenses, including, without limitation, investments in acquired businesses and modernization initiatives, expenses associated with the Company's implementation of its ERP system, and other investments, initiatives and expenses, may not result in the benefits anticipated; and other economic, competitive, governmental, technological and other risks and factors discussed in the Company's filings with the SEC, including, without limitation, those described in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2021. Many of these risks and factors are beyond the Company's control. Further, past performance and perceived trends may not be indicative of future results. The Company cautions that the foregoing factors are not exclusive. The reader should not place undue reliance on any forward looking statement, which speaks only as of the date made. The Company does not undertake to, and specifically disclaims any obligation to, update or supplement any forward looking statement, whether as a result of changes in circumstances, new information, subsequent events or otherwise, except as may be required by law.

EVI Industries, Inc., through its wholly-owned subsidiaries (collectively "EVI" or the "Company"), is a value-added distributor, and provides advisory and technical services. Through its vast sales organization, the Company provides its customers with planning, designing, and consulting services related to their commercial laundry operations. The Company sells and/or leases its customers commercial laundry equipment, specializing in washing, drying, finishing, material handling, water heating, power generation, and water reuse applications. In support of the suite of products it offers, the Company sells related parts and accessories. Additionally, through the Company's robust network of commercial laundry technicians, the Company provides its customers with installation, maintenance, and repair services.

The Company's customers include government, institutional, industrial, commercial and retail customers. Product purchases made by customers range from parts and accessories, to single or multiple units of equipment, to large complex systems. The Company also provides its customers with the services described above.

The Company's operating expenses consist primarily of (a) selling, general and administrative expenses, which are comprised primarily of salaries, and commissions and marketing expenses that are variable and correlate to changes in sales, (b) expenses related to the operation of warehouse facilities, including a fleet of installation and service vehicles, and facility rent, which are payable mostly under non-cancelable operating leases, and (c) operating expenses at the parent company, including compensation expenses, fees for professional services, other expenses associated with being a public company, and expenses in furtherance of the Company's "buy-and-build" growth strategy.

During 2015, the Company implemented a "buy-and-build" growth strategy. The "buy" component of the strategy includes the consideration and pursuit of acquisitions and other strategic transactions which management believes would complement the Company's existing business or otherwise offer growth opportunities for, or benefit, the Company. The Company generally seeks to structure acquisitions to include both cash and stock consideration. Acquisitions are effected through a wholly-owned subsidiary which acquires the business or assets of the acquired company, whether by an asset purchase or merger, and operates the acquired business following the transaction. In connection with each transaction, the Company, indirectly through its applicable wholly-owned subsidiary, also assumed certain of the liabilities of the acquired business. The financial position, including assets and liabilities, and results of operations of the acquired businesses following the respective closing dates of the acquisitions are included in the Company's consolidated financial statements. As described in greater detail in Note 4 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, on February 7, 2022, the Company acquired Consolidated Laundry Equipment, Inc. and Central Equipment Company, LLC (collectively "CLK"), a Carolina-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry. The financial condition and results of operations of Consolidated Laundry Equipment subsequent to the February 7, 2022 closing date of the acquisition are included within the Company's consolidated financial statements for the quarter ending March 31, 2022. See also Note 14 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for information regarding acquisitions consummated and a definitive purchase agreement entered into subsequent to March 31, 2022.

The "build" component of the Company's "buy-and-build" growth strategy involves implementing a growth culture at acquired businesses based on the exchange of ideas and business concepts among the management teams of the Company and the acquired businesses as well as through certain initiatives, which may include investments in additional sales and service personnel, new product lines, enhanced service operations and capabilities, new and improved facilities, and advanced technologies.

The Company pursues market share growth using a variety of strategies aimed at increasing the installed base of the wide range of commercial laundry equipment the Company represents. Certain market share growth tactics may, from time to time, result in lower gross margins. However, the Company believes that a greater installed base of equipment strengthens the Company's existing customer relationships and may lead to increases in the total number of customers, consequently creating a larger and stronger customer base to which the Company may sell products and services. These may include certain higher margin products and services and any additional products and services which the Company may offer or sell from time to time as a result of any business acquisitions, the sale or lease of complementary products, and expansion of its service operations. From time to time, the Company also enters into longer-term contracts, including to fulfill large complex laundry projects for divisions of the federal government, where the nature of, and competition for, such contracts may result in a lower gross margin as compared to other equipment sales. Despite the potential for a lower gross margin from such longer-term contracts, the Company believes that the long-term benefit from the increase in its installed equipment will outweigh the possible short-term impact to gross margin.

Further, as a value-added distributor and a provider of technical services in the commercial laundry industry, the Company partners with its customers to plan, design, install, and maintain their commercial laundry operations. The nature of the Company's business not only requires an experienced and well-trained sales organization to procure customer orders, but also requires proper, timely, and cost-effective installation ranging from single units of equipment to complex multimillion dollar laundry systems. Such installations also require coordination and collaboration with the Company's customers and any third parties they may retain. Consequently, the recognition of revenue and profit may from time to time be impacted by delays in construction and/or the preparation of customer facilities for the installation of purchased commercial laundry equipment and systems. This may result in decreased revenue and profit in a current period but a source of future revenue and profit through the ultimate fulfillment of the orders.

Impact of COVID-19 on the Company's Business

The COVID-19 pandemic has negatively impacted, and may continue to negatively impact, the Company's business and results. Specifically, beginning at the end of the quarter ended March 31, 2020, the COVID-19 pandemic and accompanying economic disruption caused delays and declines in the placement of customer orders, the completion of equipment and parts installations, and the fulfillment of parts orders. In response to the economic and business disruption during 2020, the Company took actions to reduce costs and spending across the organization, including changes to inventory stock levels, renegotiating payment terms with suppliers, and reducing hiring activities. During the fiscal year ended June 30, 2021, the COVID-19 pandemic had a resurgence with the increased presence and spread of the Delta variant. In addition, the Omicron variant emerged as a variant of concern towards the end of the quarter ended December 31, 2021 and had adverse effects. Factors arising from the COVID-19 pandemic that have impacted, or may in the future negatively impact, the Company's business and results, including sales and gross margin, include, but are not limited to: supply chain disruptions, which resulted in, and may continue to result in, delays in delivering products or services to the Company's customers; labor shortages; limitations on the ability of the Company's employees to perform their work due to sickness or other impacts caused by the pandemic or local, state, federal or foreign orders that may restrict the Company's operations or the operations of its customers, or require that employees be quarantined; limitations on the ability of carriers to deliver products to the Company's facilities and customers; risks associated with vaccine mandates, including the potential loss of employees, fines for noncompliance and loss of, or future inability to secure, certain contracts, including with the federal government; adverse impacts of the pandemic on certain industries and customers of the Company which operate in those industries, including the hospitality industry; and potential decreased demand for products and services, including potential limitations on the ability of, or adverse changes in the desire of, the Company's customers to conduct their business, purchase products and services, and pay for purchases on a timely basis or at all. Further, the Company may continue to experience adverse impacts to its business as a result of, among other things, any adverse impact that has occurred or may occur in the future in the economy or markets generally, and changes in customer or supplier behavior, in each case, in connection with the pandemic.

Refer to Note 3 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a description of Recently Issued Accounting Guidance.

Nine and Three-Month Periods Ended March 31, 2022 Compared to the Nine and Three-Month Periods Ended March 31, 2021

Revenues for the nine and three-month periods ended March 31, 2022 increased $7.0 million, or 4%, and decreased $2.4 million, or 4%, respectively, compared to the same periods of the prior fiscal year. The increase in revenue for the nine-month period is due to improved conditions in connection with the recovery from the COVID-19 pandemic during the nine-month period ended March 31, 2022 and the completion during such period of projects previously delayed by the COVID-19 pandemic. Additionally, the increase in revenue was partially attributable to price increases established throughout the Company's product lines and service offerings aimed at maintaining or increasing margins to cover incremental product and operating costs. The decrease in revenue for the three-month period is due primarily to supply chain constraints, which impacted both the Company's timing of receipt and delivery of products to the Company's customers, as well as other delays, including due to construction or other delays which inhibited a customer's ability to receive products. In addition, the Company's revenues for the nine and three-month periods ended March 31, 2022 benefited from the results of businesses acquired during the nine month period ended March 31, 2021, including primarily Yankee Equipment Systems, LLC ("Yankee Equipment Systems") which was acquired during November 2020, and from the results of CLK, which was acquired during February 2022.

Gross profit for the nine and three-month periods ended March 31, 2022 increased $8.0 million, or 18%, and $1.3 million, or 8%, compared to the same periods of the prior fiscal year. The increase in the nine-month period was primarily the result of increased revenues and more favorable product and customer mix. The increase in gross profit for the three-month period was primarily the result of a more favorable product and customer mix as well as reduced discounting and promotional pricing due to increased demand and supply constraints. This resulted in increases in gross margins from 24.5% and 25.2% for the nine and three-month periods ended March 31, 2021, respectively, to 27.9% and 28.4% for the nine and three-month periods ended March 31, 2022, respectively.

Selling, General and Administrative Expenses

Operating expenses increased by approximately $6.4 million, or 15%, and $1.8 million, or 12%, for the nine and three-month periods ended March 31, 2022, respectively, compared to the same periods of the prior fiscal year. These increases are primarily attributable to (a) operating expenses of acquired businesses, including additional operating expenses at the acquired businesses in pursuit of future growth and in connection with the Company's optimization initiatives, (b) increases in selling costs, including commissions, from increases in revenues during the nine-month period, (c) increases in operating expenses and investments at the parent company level in connection with the Company's optimization initiatives, including expenses related to the consolidation of the Company's operations and the modernization of the Company's operations through the implementation of advanced technologies, including a new ERP software system, a new customer relations management system, and a completely digital sales and service operating platform, and (d) increased operating expenses in support of the Company's "buy-and-build" growth strategy.

Interest and Other (Expense) Income, Net

Net interest and other expense for the nine month period ended March 31, 2022 was $390,000 compared to $122,000 for the same period of the prior fiscal year. Net interest and other expense for the three month period ended March 31, 2022 was $125,000 compared to net interest and other income of $197,000 for the same period of the prior fiscal year. The increase in net interest and other expense for the nine and three-month periods was attributable primarily to the $361,000 bargain purchase gain recognized in connection with an acquisition completed by the Company during the prior fiscal year, partially offset by a decrease in net interest expense primarily due to a decrease in average outstanding borrowings and a decrease in the average effective interest rate.

The Company's effective tax rate was 24.8% and 36.5% for the nine and three-month periods ended March 31, 2022, respectively, compared to 20.4% and 32.5% for the same periods of the prior fiscal year. The increase in the effective tax rate for the nine month period ended March 31, 2022 is mostly attributable to the recognition in during the nine-month period ended March 31, 2021 of an income tax benefit of $379,000 relating to an NOL carryback under the CARES Act, partially offset by a decrease in the net impact of permanent book-tax differences resulting primarily from nondeductible compensation. The increase in the effective tax rate for the three month period ended March 31, 2022 is attributable to an increase in the net impact of permanent book-tax differences resulting primarily from nondeductible compensation.

Net income for the nine and three months ended March 31, 2022 was $2.6 million and $40,000, respectively, compared to net income of $1.6 million and $625,000 for the same periods of the prior fiscal year, respectively. The change in net income for the nine and three-month periods ended March 31, 2022 was attributable primarily to the changes in revenue and increases gross profit, partially offset by an increase in selling, general and administrative expenses, all as described in further detail above.

The Company's total assets increased from $177.9 million at June 30, 2021 to $205.2 million at March 31, 2022. The increase in total assets was primarily attributable to an increase in current assets, as described below under "Liquidity and Capital Resources - Working Capital." The Company's total liabilities increased from $71.1 million at June 30, 2021 to $90.2 million at March 31, 2022, which was primarily attributable to an increase in customer deposits and long-term debt, partially offset by a decrease in contract liabilities and accrued employee expenses. The increase in long-term debt was attributable to borrowings under the Company's existing credit facility in excess of optional repayments. The changes in current liabilities, including the increase in customer deposits and decrease in contract liabilities, are described under "Liquidity and Capital Resources - Working Capital" below.

For the nine-month period ended March 31, 2022, cash decreased by approximately $453,000 compared to a decrease of approximately $6.9 million during the nine-month period ended March 31, 2021.

Working capital increased from $15.8 million at June 30, 2021 to $32.5 million at March 31, 2022, primarily reflecting increases in inventory, accounts receivable and other current assets, and decreases in contract liabilities, partially offset by increases in customer deposits. The increase in inventory was primarily due to an increase in inventory stock levels and adjustments to timing of inventory procurement in light of extended inventory lead times due to supply chain constraints. The decrease in contract liabilities was due in large part to the completion of certain large complex laundry projects for divisions of the federal government. The increase in customer deposits was due primarily to increased orders and delays in fulfilling certain orders in light of extended inventory lead times and supply chain constraints, as well as other delays, including construction or other delays which inhibited a customer's ability to receive products, as described above.

The following table summarizes the Company's cash flow activity for the nine months ended March 31, 2022 and 2021 (in thousands):

Net cash provided (used) by: Operating activities $ (6,054 ) $ 5,490 Investing activities $ (6,253 ) $ (6,752 ) Financing activities $ 11,854 $ (5,608 )

The individual items contributing to cash flow changes for the periods presented are detailed in the unaudited condensed consolidated statements of cash flows included in Item 1 of this Quarterly Report on Form 10-Q.

For the nine months ended March 31, 2022, operating activities used cash of $6.1 million compared to $5.5 million of cash provided by operating activities during the nine months ended March 31, 2021. This $11.5 million increase in cash used by operating activities was primarily attributable to changes in working capital, including increases in cash used from operating activities from changes in operating assets such as accounts receivable and inventory and from changes in operating liabilities such as contract liabilities and accounts payable and accrued expenses, partially offset by decreases to the cash used by operating activities from changes in operating assets such as contract assets and from changes in operating liabilities such as customer deposits.

Net cash used in investing activities decreased $499,000 to $6.3 million during the nine months ended March 31, 2022 compared to $6.8 million during the nine months ended March 31, 2021. This $499,000 decrease was attributable primarily to a decrease in cash used in connection with acquisitions, partially offset by an increase in capital expenditures.

For the nine months ended March 31, 2022, financing activities provided cash of $11.9 million compared to $5.6 million of cash used by financing activities during the nine months ended March 31, 2021. This $17.5 million increase in cash provided by financing activities was attributable primarily to an increase in proceeds from borrowings during the nine months ended March 31, 2022 in excess of optional debt payments to fund changes in working capital.

On November 2, 2018, the Company entered into a syndicated credit agreement (the "Credit Agreement") for a five-year revolving credit facility in the maximum aggregate principal amount of up to $100 million, with an accordion feature to increase the revolving credit facility by up to $40 million for a total of $140 million. A portion of the revolving credit facility is available for swingline loans of up to a sublimit of $5 million and for the issuance of standby letters of credit of up to a sublimit of $10 million.

Prior to the amendment described below, borrowings (other than swingline loans) under the Credit Agreement accrued interest at a rate, at the Company's election at the time of borrowing, equal to (a) LIBOR plus a margin that ranged from 1.25% to 1.75% depending on the Company's consolidated leverage ratio, which is a ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the "Consolidated Leverage Ratio") or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the one month LIBOR rate plus 100 basis points, plus a margin that ranged from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. Swingline loans accrued interest calculated at the base rate determined in accordance with clause (b) of the preceding sentence plus a margin that ranged from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. The Credit Agreement had an initial term of five years with a scheduled maturity date of November 2, 2023. As of March 31, 2022, $27.5 million was available to borrow under the revolving credit facility.

On May 6, 2022, the Company entered into an amendment to the Credit Agreement which, among other things, (i) in connection with the phasing out of LIBOR, replaced LIBOR with the Bloomberg Short-Term Bank Yield Index ("BSBY"), and (ii) extended the maturity date from November 2, 2023 to May 6, 2027. See Part II, Item 5 of this Quarterly Report on Form 10-Q for additional information relating to the amendment to the Credit Agreement.

The Credit Agreement contains certain covenants, including financial covenants requiring the Company to comply with maximum leverage ratios and minimum interest coverage ratios. The Credit Agreement also contains other provisions which may restrict the Company's ability to, among other things, dispose of or acquire assets or businesses, incur additional indebtedness, make certain investments and capital expenditures, pay dividends, repurchase shares and enter into transactions with affiliates. As of March 31, 2022 and the date of the amendment, the Company was in compliance with its covenants under the Credit Agreement.

The obligations of the Company under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries, and are guaranteed, jointly and severally, by certain of the Company's subsidiaries.

The Company believes that its existing cash, anticipated cash from operations and funds available under the Company's Credit Agreement will be sufficient to fund its operations and anticipated capital expenditures for at least the next twelve months from the filing of this Report, and thereafter. The Company may also seek to raise funds through the issuance of equity and/or debt securities or the incurrence of additional secured or unsecured indebtedness, including in connection with acquisitions or other transactions pursued by the Company as part of its "buy-and-build" growth strategy.

The Company had no off-balance sheet financing arrangements within the meaning of Item 303(a)(4) of Regulation S-K at March 31, 2022.

Inflation did not have a significant effect on the Company's results during any of the reported periods. However, the Company faces risks relating to inflation, including the current inflationary trend in light of supply chain constraints, which may have an adverse impact on the market for the Company's products and services, including that there is no assurance that the Company will be able to effectively increase the price of its products and services to offset increased costs.

Certain of the Company's subsidiaries lease warehouse and office space from one or more of the principals of those subsidiaries. These leases include the following:

During October 2016, the Company's wholly-owned subsidiary, Western State Design, Inc. ("Western State Design"), entered into a lease agreement pursuant to which it leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a director and Executive Vice President, Corporate Strategy of the Company, and Tom Marks, Executive Vice President, Business Development and President of the West Region of the Company. The lease had an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Monthly base rental payments were $12,000 during the initial term of the lease. The Company exercised its option to renew the lease for the first three-year renewal term, which commenced in October 2021. Base rent for the first renewal term is $19,000 per month. In addition to base rent, Western State Design is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Payments under this lease totaled approximately $150,000 and $108,000 during the nine months ended March 31, 2022 and 2021, respectively, and $57,000 and $36,000 during the three months ended March 31, 2022 and 2021, respectively.

During October 2017, the Company's wholly-owned subsidiary, Tri-State Technical Services, LLC ("Tri-State"), entered into lease agreements pursuant to which it leases a total of 81,000 square feet of warehouse and office space from an affiliate of Matt Stephenson, President of Tri-State. Monthly base rental payments total $21,000 during the initial terms of the leases. In addition to base rent, Tri-State is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $189,000 during each of the nine months ended March 31, 2022 and 2021 and $63,000 during each of the three months ended March 31, 2022 and 2021.

During February 2018, the Company's wholly-owned subsidiary, AAdvantage Laundry Systems, LLC ("AAdvantage"), entered into a lease agreement pursuant to which it leases a total of 5,000 square feet of warehouse and office space from an affiliate of Mike Zuffinetti, former Chief Executive Officer of AAdvantage. Monthly base rental payments are $4,000 during the initial term of this lease. In addition, during November 2018, AAdvantage entered into an additional lease agreement pursuant to which it leases warehouse and office space from an affiliate of Mike Zuffinetti. Monthly base rental payments under this lease were $26,000 initially. Pursuant to the lease agreement, on January 1, 2019, the lease expanded to cover additional warehouse space and, in connection therewith, monthly base rental payments under this lease increased to $36,000. In addition to base rent, AAdvantage is responsible under each of these leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under the leases described in this paragraph totaled approximately $360,000 during each of the nine months ended March 31, 2022 and 2021 and $120,000 during each of the three months ended March 31, 2022 and 2021.

During September 2018, the Company's wholly-owned subsidiary, Scott Equipment, LLC ("Scott Equipment"), entered into lease agreements pursuant to which it leases a total of 18,000 square feet of warehouse and office space from an affiliate of Scott Martin, former President of Scott Equipment. Monthly base rental payments total $11,000 during the initial terms of the leases. In addition to base rent, Scott Equipment is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $103,000 during each of the nine months ended March 31, 2022 and 2021 and $35,000 during each of the three months ended March 31, 2022 and 2021.

During February 2019, the Company's wholly-owned subsidiary, PAC Industries, LLC ("PAC Industries"), entered into two lease agreements pursuant to which it leases a total of 29,500 square feet of warehouse and office space from an affiliate of Frank Costabile, former President of PAC Industries, and Rocco Costabile, former Director of Finance of PAC Industries. Monthly base rental payments total $15,000 during the initial terms of the leases. In addition to base rent, PAC Industries is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of four years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $137,000 and $135,000 during the nine months ended March 31, 2022 and 2021, respectively, and $46,000 and $45,000 during the three months ended March 31, 2022 and 2021, respectively.

During November 2020, the Company's wholly-owned subsidiary, Yankee Equipment Systems, LLC ("Yankee Equipment Systems"), entered into a lease agreement pursuant to which it leases a total of 12,500 square feet of warehouse and office space from an affiliate of Peter Limoncelli, President of Yankee Equipment Systems. Monthly base rental payments are $11,000 during the initial term of the lease. In addition to base rent, Yankee Equipment Systems is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial term of three years and provides for three successive three-year renewal terms at the option of the Company. Payments under this lease totaled approximately $106,000 and $57,000 during the nine months ended March 31, 2022 and 2021, respectively, and $36,000 and $35,000 during the three months ended March 31, 2022 and 2021, respectively.

During February 2022, the Company's wholly-owned subsidiary, Consolidated Laundry Equipment, LLC ("Consolidated Laundry Equipment"), entered into two lease agreements pursuant to which it leases a total of 20,300 square feet of warehouse and office space from an affiliate of William Kincaid, President of Consolidated Laundry Equipment. Monthly base rental payments total $20,000 during the initial terms of the leases. In addition to base rent, Consolidated Laundry Equipment is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of three years and provides for three successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $20,000 during the nine and three months ended March 31, 2022.

In connection with the preparation of its financial statements, the Company makes estimates and assumptions, including those that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenues and expenses during the reported periods. Estimates and assumptions made may not prove to be correct, and actual results may differ from the estimates. The accounting policies that the Company has identified as critical to its business operations and to an understanding of the Company's financial statements remain unchanged from those described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2021.

See Note 3 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a description of recently issued accounting guidance.

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