Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies

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Summary of Significant Accounting Policies
12 Months Ended
Jun. 30, 2015
Summary of Significant Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

1. Summary of Significant
Accounting Policies

 

Nature of Business EnviroStar, Inc. and its subsidiaries (collectively, the “Company”) sell commercial and industrial laundry and dry cleaning equipment, steam and hot water boilers manufactured by others, as well as replacement parts and accessories and provides maintenance services.  The Company also sells individual and area franchises under the DRYCLEAN USA name and develops new turn-key dry cleaning establishments for resale to third parties.
  The Company primarily sells to customers located in the United States, the Caribbean and Latin America.
Principles of
Consolidation
The accompanying consolidated financial statements include the accounts of EnviroStar, Inc. and its wholly-owned subsidiaries.  Intercompany transactions and balances have been eliminated in consolidation.
Revenue
Recognition

Products are generally shipped Free on Board (“FOB”) from the Company's warehouse or drop shipped from the Company's vendor as FOB, at which time risk of loss and title passes to the purchaser. Sales are reported net of any discounts. Revenue is recognized when there is persuasive evidence of the arrangement, shipment or delivery has occurred, the price is fixed and determinable and collectability is reasonably assured. In some cases, the Company collects non-income related taxes, including sales and use tax, from its customers and remits those taxes to governmental authorities. The Company presents revenues net of these taxes. Shipping, delivery and handling fee income of approximately $1,052,000 and $1,069,000 for the years ended June 30, 2015 and 2014, respectively, are included in revenues in the consolidated financial statements. Shipping, delivery and handling costs are included in cost of sales.

Individual franchise arrangements include a license and provide for payment of initial franchise fees, as well as continuing royalties. Initial franchise fees are generally recognized upon the opening of the franchised store, which is evidenced by a certificate from the franchisee, indicating that the store has opened, substantial performance has been completed and collectability is reasonably assured. Continuing royalties represent regular contractual payments received for the use of the “DRYCLEAN USA” marks, which are recognized as revenue when earned, generally on a straight line basis. Royalty fees recognized during the years ended June 30, 2015 and 2014 were approximately $116,000 and $169,000, respectively. License and initial fees recognized in fiscal 2015 and 2014 were approximately $43,000 and $415,000, respectively.

Commissions and development fees are recorded when earned, generally when the services are performed or the transaction is closed.

Accounts and Trade
Notes Receivable
Accounts and trade notes receivable are customer obligations due under normal trade terms. The Company sells its products primarily to independent and franchise dry cleaning stores and chains, laundry plants, hotels, motels, cruise lines, hospitals, nursing homes, government institutions, coin laundry stores and distributors.  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. Senior management reviews accounts and trade notes receivable on a regular basis to determine if any amounts will potentially be uncollectible. The Company includes any balances that are determined to be uncollectible in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. The Company's allowance for doubtful accounts was $134,000 at June 30, 2015 and $140,000 at June 30, 2014.  However, actual write-offs might vary from the recorded allowance. 
Cash and cash
Equivalents

  The Company considers all short term instruments with an original maturity of three months or less to be cash equivalents.
Leases and
Mortgages
Receivable
The Company sells products to certain customers under lease and mortgage arrangements for terms typically ranging from one to five years.  The Company accounts for these sales-type leases according to the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 840, “Leases,” and, accordingly, recognizes current and long-term leases and mortgages receivable, net of unearned income, on the accompanying consolidated balance sheets.  The present value of all payments is recorded as sales and the related cost of the equipment is charged to cost of sales.  The associated interest is recorded over the term of the lease or mortgage using the effective interest method.
Inventories Inventories consist principally of equipment and spare parts.  Equipment is valued at the lower of cost, determined on the specific identification method, or market.  Spare parts are valued at the lower of average cost or market.  
Equipment,
Improvements and
Depreciation
Property and equipment are stated at cost.  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 remaining lease term (including renewal periods that are deemed reasonably assured) for leasehold improvements for financial reporting purpose.  Repairs and maintenance costs are expensed as incurred.
Franchise License,
Trademark and
Other Intangible
Assets
The Company follows ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC 350”), which requires that finite-lived intangibles be amortized over their estimated useful life while indefinite-lived intangibles and goodwill are not amortized.  Franchise license, trademark, 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 (10-15 years).  Patents are amortized over the shorter of the patent's useful life or legal life from the date the patent is granted.
Asset Impairments ASC Topic 360, “Property, Plant, and Equipment” (“ASC 360”) and ASC 350 require the Company to periodically review the carrying amounts of its long-lived assets, including property, plant and equipment and certain identifiable 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 the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. 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 fiscal 2015 or fiscal 2014.
Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates. Estimates which are particularly significant to the consolidated financial statements include estimates relating to the determination of impairment of assets, the useful life of property and equipment, recoverability of deferred income tax assets, allowance for doubtful accounts and inventory valuations.
Earnings Per Share Basic earnings per share are computed on the basis of the weighted average number of common shares outstanding during each year. Diluted earnings per share are computed on the basis of the weighted average number of common shares and dilutive securities outstanding during each year.  The Company had no dilutive securities outstanding during fiscal 2015 or fiscal 2014.  
Supplier
Concentration
The Company purchases laundry, drycleaning machines, boilers and other products from a number of manufacturers and suppliers.  Two of these manufacturers each accounted for approximately 27%, respectively, of the Company's purchases for fiscal 2015 and approximately 35% and 15%, respectively, of the Company's purchases for fiscal 2014.  
Advertising Costs The Company expenses the cost of advertising as of the first date an advertisement is run.  The Company expensed approximately $18,400 and $54,000 of advertising costs for the years ended June 30, 2015 and 2014, respectively.
Fair Value of
Financial
Instruments

The Company's financial instruments consist principally of cash and cash equivalents and accounts and trade notes receivable. Due to their relatively short-term nature or variable rates, the carrying amounts of those financial instruments, as reflected in the accompanying consolidated balance sheets, approximate their estimated fair value. Their estimated fair value is not necessarily indicative of the amounts the Company could realize from those assets in a current market exchange or of future earnings or cash flows.

 

Customer Deposits Customer deposits represent advances paid by certain customers when placing orders for equipment with the Company.
Income Taxes

The Company follows ASC Topic 740, “Income Taxes” (“ASC 740”).  Under the asset and liability method of ASC 740, 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.  Under ASC 740, 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 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 its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is more likely than not that the asset will not be realized.   There were no valuation allowances during fiscal 2015 or fiscal 2014.

The Company follows ASC Topic 740-10-25 “Accounting for Uncertainty in Income” which contains 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 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 anticipate actual outcomes.  The Company does not believe that there are any unrecognized tax benefits related to certain tax positions taken on its various 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 statement of operations.

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, 2017. Early application is not permitted. The Company is currently evaluating the impact, if any, that adopting this standard will have on our consolidated 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.