UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212022
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________to__________to
Commission file number: 001-39599
HOLLEY INC.
(Exact name of registrant as specified in its charter)
Delaware | 87-1727560 | |
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1801 Russellville Road,, Bowling Green,, KY42101
(Address of principal executive offices)
(270) 782-2900
(270) 782-2900
(Registrant’sRegistrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report) N/A
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.0001
| HLLY
| New York Stock Exchange | ||
Warrants to Purchase Common Stock | HLLY WS | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
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Non-accelerated filer | ☐ |
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Emerging growth company | ☒ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit reportreport. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2021,July 1, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock outstanding of Empower Ltd. (the former name of the registrant), other than shares held by persons who may be deemed affiliates of the registrant,non-affiliates, computed by reference to the closing sales price for the ordinary shares of Empower Ltd. on such date, as$10.98 reported on the New York Stock Exchange, was $250,250,000. On July 19, 2021, the registrant’s common stock and warrants began trading on the New York Stock Exchange under the symbols “HLLY” and “HLLY WS,” respectively.approximately $560 million.
There were 117,993,139118,241,747 shares of Common Stock, including 2,187,5001,093,750 restricted earn-out shares, par value $0.0001 per share, issued and outstanding as of March 14, 2022.10, 2023.
Documents incorporated by reference: Parts of the registrant’s Proxy Statement for the registrant’s 20222023 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended.amended (the "Exchange Act"), that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by the Securities Act and Exchange Act, as well as protections afforded by other federal securities laws. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the Company’s business. TheseForward-looking statements may be precededaccompanied by followed by or include the words “believes,such as “believe,” “estimates,“estimate,” “expects,“expect,” “projects,“project,” “forecasts,“forecast,” “may,” “will,” “should,” “seeks,“seek,” “plans,“plan,” “scheduled,” “anticipates,“anticipate,” “intends”“intend” or similar expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control. Therefore, you should not place undue reliance on such statements. These forward-looking statements are subject to a number of risks and uncertainties and actual results could differ materially due to numerous factors, including, but not limited to, the Company’s ability to do any of the following:
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| execute its business strategy, including monetization of services provided and expansions in and into existing and new lines of business; |
• | anticipate and manage through disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain company products in distribution channels; |
• | anticipate and manage through supply shortages of key component parts used in our products and the |
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• | maintain key strategic relationships with partners and resellers; |
• | anticipate and manage through the rise in interest rates which would increase the cost of capital, as well as respond to inflationary pressures; |
• | enhance future operating and financial results; |
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• | attract and retain qualified employees and key personnel; |
• | protect and enhance the Company’s corporate reputation and brand awareness; |
• | effectively respond to general economic and business conditions; |
• | acquire and protect intellectual property; |
• | collect, store, process and use personal and payment information and other consumer data; |
• | comply with privacy and data protection laws and |
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| meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness; |
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| obtain additional capital, including use of the debt market; |
• | manage to finance operations on an economically viable basis; |
• | maintain Holley’s New York Stock Exchange (“NYSE”) listing of its common stock (“Common Stock”) and warrants to purchase Common Stock (“Warrants”); |
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| comply with laws and regulations applicable to its business, including laws and regulations related to environmental health and safety; |
• | respond to litigation, complaints, product liability claims and/or adverse publicity; |
• | stay abreast of modified or new laws and regulations; |
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• | anticipate the significance and timing of contractual obligations; |
• | anticipate the impact of, and response to, new accounting standards; |
• | maintain proper and effective internal controls; |
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| anticipate the impact of new U.S. federal income tax law, including the impact on deferred tax assets; |
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| anticipate the time during which we will be an emerging growth company under the |
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| anticipate the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, and demographic |
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| other risks and factors, listed under the caption “Risk Factors” included in this Annual Report. |
Forward-looking statements are based on information available as of the date of this Annual Report on Form 10-K and our management’s expectations, forecasts and assumptions, and involve a number of judgements, risks and uncertainties, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as mymay be required under applicable securities laws.
SUMMARY OF RISK FACTORS
The following summarizes the principal factors that make an investment in Holley speculative or risky. You should carefully consider the following risks as well as the other information included in this Annual Report on Form 10-K, including “Cautionary Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere herein, before investing in our securities. See “Risk Factors” for a more detailed discussion of the risk factors listed below.
Risk Related to Our Business and Industry
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| A downturn in consumer spending, including as a result of a severe or prolonged economic downturn, could adversely impact |
• | Inflation could result in higher costs and decreased profitability. |
• | Disruptions of supply or shortages of raw materials or components used in our products could harm our business and profitability, as well as the financial condition of our distributors. |
• | A significant disruption in the operations of our manufacturing facilities or distribution centers could have a material adverse effect on our business, sales, financial condition and results of operations. |
• | A global pandemic, such as the COVID-19 pandemic, could adversely affect our business, sales, financial condition and results of operations and our ability to access current or obtain new lending facilities. |
• | Failure to compete effectively or to develop and market new products and a reduction in demand for |
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| Increased electric vehicles ownership could impact |
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| Inaccurate forecasting of product demand could harm |
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• | Our disclosure controls and procedures may not prevent or detect all acts of fraud. |
• | Our business could be negatively impacted by the effects of global climate change or the increasing scrutiny and evolving expectations with respect to our environment, social and governance practices. |
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Risks Related to Ownership of Our Securities
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| Warrants are exercisable for Common Stock, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. |
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| The Warrants may never be in the money, |
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| The market price and trading volume of Common Stock and Warrants may be volatile. |
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| Reports published by analysts could adversely affect the market price and trading volume of Common Stock and Warrants. |
• | Future sales of our Common Stock and Warrants in the public market could cause our stock price to fall. |
• | We may redeem unexpired Warrants to their exercise at a time that is disadvantageous to the Warrant holders, thereby making the Warrants worthless. |
About Us
Founded in 1903, Holley, Inc. (“Holley” or the “Company”) has been a part of the automotive industry for well over a century. We are a leading designer, marketer, and manufacturer of high-performance automotive aftermarket products for car and truck enthusiasts. Our products span a number of automotive platforms and are sold across multiple channels. We attribute a major component of our success to our brands, including “Holley”, “APR”, “MSD” and “Flowmaster”, among others. In addition, we have recently added to our brand lineup through a series of strategic acquisitions, including our 20202022 acquisitions of Simpson Racing Products,substantially all the assets of John’s Ind., Inc. (“Simpson”John’s”), Drake Automotive Group LLCSouthern Kentucky Classics (“Drake”SKC”), and Detroit Speed,Vesta Motorsports USA, Inc., d.b.a. RaceQuip (“Detroit Speed”RaceQuip”) and, our 2021 acquisitions of substantially all the assets of AEM Performance Electronics (“AEM”), Finspeed, LLC (“Finspeed”), Classic Instruments LLC (“Classic Instruments”), ADS Precision Machining, Inc., d.b.a. Arizona Desert Shocks (“ADS”), Baer, Inc, d.b.a. Baer Brakes (“Baer”), Brothers Mail Order Industries, Inc., d.b.a. Brothers Trucks (“Brothers”), Rocket Performance Machine, Inc., d.b.a. Rocket Racing Wheels (“Rocket”), and Speartech Fuel Injections Systems, Inc. (“Speartech”), and our 2020 acquisitions of Simpson Racing Products, Inc. (“Simpson”), Drake Automotive Group LLC (“Drake”) and Detroit Speed, Inc. (“Detroit Speed”). Through these strategic acquisitions, we have increased our market position in the otherwise highly fragmented performance automotive aftermarket industry.
We operate in the performance automotive aftermarket parts industry. We believe there is ample opportunity to continue our expansion into new products and markets, such as exterior accessories and mobile electronics, representing a natural progression for us to grow market share as these adjacencies are driven by passionate enthusiasts, consistent with our core categories. See also “Risk Factors—Factors—Risks Relating to Holley’sHolley’s Business and Industry—Industry—If the Company is unable to successfully design, develop and market new products, the Company business may be harmed” for a discussion of the risks related to the Company’s new product development.
On July 16, 2021, we consummated a business combination (“Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021 (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc., a direct wholly owned subsidiary of Empower (“Merger Sub I”), Empower Merger Sub II LLC, a direct wholly owned subsidiary of Empower (“Merger Sub II”), and Holley Intermediate Holdings, Inc. ("Holdings"). The Merger Agreement provided for, among other things, the following transactions: (i) Merger Sub I merged with and into Holdings, the separate corporate existence of Merger Sub I ceased, and Holdings became the surviving corporation, and (ii) Holdings merged with and into Merger Sub II, the separate corporate existence of Holdings ceased, and Merger Sub II became the surviving limited liability company. Upon closing, Empower changed its name to Holley Inc. and its trading symbol on the New York Stock Exchange (the “NYSE”) from “EMPW” to “HLLY.”
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Business Strategy
Our vision is to be the most compelling and inclusive platform for automotive enthusiasts, to inspire and support enthusiasts’ transition to cleaner, more sustainable technologies, and to further accelerate the automotive lifestyle. Our aim is to provide a platform where automotive enthusiasts can purchase aftermarket auto parts for both old model restorations and new vehicle enhancements. We believe our consumers are enthusiastic and passionate about the performance and the personalization of their classic and modern cars. We aim to provide the products and service they need to pursue that passion. We will continue to drive growth and value for our shareholders through our key strategies:
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| Accelerate Growth Through Continued M&A: We |
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| Expand Direct-to-Consumer |
Competition
The performance automotive industry is highly competitive, and we face substantial competition in all the markets that we serve. The principal factors on which industry participants compete include technical features, performance, product design, innovation, reliability and durability, brand, time to market, customer service, reliable order execution, and price. Our success in the marketplace depends on our ability to execute our Business Strategy discussed above.
The performance automotive aftermarket parts industry in the United States is large and highly fragmented. In addition, we have seen consistent growth within the automotive aftermarket parts industry over the last two decades. Products in the performance automotive aftermarket parts industry range from functional products that enhance vehicle performance to products that improve safety, stability, handling and appearance.
Our core competitive set is comprised of four primary types of competitors with fragmentation across the majority of our major product categories:
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| Multi-product category providers: legacy brands with coverage across multiple performance aftermarket products with multiple brands often under one banner and built through acquisition. We are one of the largest multi-product category brands in the performance automotive aftermarket based on gross sales. |
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| Single-product category providers: established companies focused on one product category in the market primarily selling via resellers. Single-product category providers generally offer either lower priced products or higher-quality products focused within one product category. |
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| E-Tailer Private Labels: traditional online resellers sell other manufactured products and offer private label products, often at a lower price point. E-tailer private labels generally occupy the value end of the market and have a greater presence in less engineered categories with less product-specific brand strength. |
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| Niche custom manufacturers: while not our core competitors, smaller shops typically focus on fully customizing specific make or model vehicles. Niche custom manufacturers are typically local or regionally focused, and some also may resell customized products from other manufactured brands. |
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We believe the following factors distinguish Holley from its competitors:
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| Brand that resonates with enthusiasts: we actively engage enthusiasts at the platform level across multiple channels (e.g., events, digital media, online communities, etc.), creating reference networks for potential consumers. |
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| Innovative, product development: we invest heavily in product research, innovation and development, and introduce products that meet latest platform and use case-specific needs of our enthusiast consumers. |
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| Operational ability that enables efficient order execution: we make significant investments in sourcing, manufacturing and distribution excellence, enabling management of multiple product lines while maintaining scale and attractive relative pricing. |
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| Differentiated go-to-market strategy: we offer a mix of single product and platform-oriented solutions across DTC and reseller channels, delivering a strong overall consumer |
Brands
We have a strong portfolio of brands covering various product categories. Our portfolio consists of over 6070 brands spanning across 30 product categories. Our top seven brands generated 74%68% of our sales in 2021.2022.
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| Holley EFI: Currently our largest brand and represented |
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| Holley: Currently our second largest brand and represented 14% of our sales for |
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| MSD: Currently our third leading brand and represented 10% of our sales for |
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| Simpson: Currently our fourth leading brand and represented 9% of our sales for |
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| Powerteq: Currently our fifth leading brand and represented |
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| Accel: Currently our sixth largest brand and represented |
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| Flowmaster: Currently our seventh largest brand and represented |
We believe the popularity of our brands is the result of consistently delivering high quality, innovative products that resonate with our enthusiast consumers. Our brands have allowed us to build direct, trusted and long-lasting relationships with our consumers and resellers.
Product Development We have a history of developing innovative products, including new products in existing Suppliers We run a flexible sourcing model with a mix of global sourcing and in-house manufacturing. Our best value sourcing model decisions are based on a mix of cost, quality and service. We have a diverse global supplier base and no material supplier concentration. Our efficient sourcing model enables strong gross margins and cash conversion. We believe there is an adequate supply of raw materials and key components; however, there can be no assurance over the long term that the availability of materials and components or increases in commodity prices will not materially affect our business or results of operations. Ongoing supply chain disruptions, resulting in supply shortages and higher shipping charges, have and could continue to impact our ability to maintain supplies of products and the costs associated with obtaining raw materials and key components. We have experienced, and may continue to experience, disruptions due to the global supply shortage of automotive-grade microchips, which has resulted in increased microchip delivery lead times. Marketing We reach and engage our consumers where they participate in the performance automotive aftermarket – online and in person. Our marketing strategy is centered on strong brand equity, leading new product innovation capabilities and delivering consistently high-quality products. In In recent years, we have shifted our marketing efforts towards digital advertising and have increased investments in consumer engagement directly via digital and social media platforms and campaigns. Additionally, since mid-2020 we increased resources focused on expanding our e-commerce and digital platforms. These efforts have included turning Holley.com into a destination for automotive enthusiasts and launching We have also spent significant time and effort in creating engaging, in-person Sales and Distribution We have a diverse omni-channel distribution strategy led by our growing DTC channel. Our omni-channel model enables us to reach our consumers through DTC, E-tailer, warehouse distributor, traditional retailer, and jobber/ installer channels. We have mutually beneficial relationships with our resellers and are able to maintain strong pricing discipline across our channels with strict conformance to minimum advertised pricing. DTC channel: Consumers are increasingly meeting us online through our DTC channel. Our DTC channel provides consumers full access to all of our brands, our unique branded content and our full product assortment. We have turned Holley.com into our primary hub for consumer communication and continue to add features and brands that make it an increasingly attractive digital destination for our consumers. Our DTC channel enables us to directly interact with our customers, more effectively control our brand experience, better understand consumer behavior and preferences, and offer exclusive products, content, and customization capabilities. We believe our control over our DTC channel provides our customers with quality brand engagement and further builds customer loyalty, while generating attractive margins. Resellers: We have historically sold the majority of our products through resellers who purchase our products and resell them through various channels. These resellers consist of E-tailers, warehouse distributors, traditional retailers, and jobber/installers with We have established mutually beneficial and long-term relationships with our resellers. We believe resellers benefit from our broad suite of product offerings that they can leverage to meet consumer demand across multiple product categories. Based on the value that we offer to our resellers, we are able to operate with pricing discipline that supports the value of our products in the marketplace and buttresses our profit margins. We believe our approach to pricing allows us to better understand consumer demand and identify what our end consumers are buying. Intellectual Property Patents, trademarks, and other proprietary rights are important to the continued success of our business. We own and have licensing arrangements for a number of U.S. and foreign patents, trademarks, and other proprietary rights related to our products and business. We also rely upon continuing technological innovation and licensing opportunities to develop and maintain our competitive position. We protect our proprietary rights through a variety of methods, including the use of confidentiality and other similar agreements. We do not consider our business to be dependent on any single patent, nor is the expiration of any patent expected to materially affect our business. Our current patents will expire over various periods and we continue to file new patent applications on Seasonality Holley’s operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond the Company’s control. Traditionally, our sales in the first half of the year are generally higher than in the second half of the year. Due to these factors and others, which may be unknown to the Company at this time, operating results in future periods can be expected to fluctuate. Accordingly, the Company’s historical results of operations may not be indicative of future performance. Regulations We are subject to a variety of federal, state, local and foreign laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution. These permits are subject to modification, renewal and revocation by issuing authorities. We believe we are in substantial compliance with all material environmental laws and regulations applicable to our plants and operations. Historically, our annual costs of achieving and maintaining compliance with environmental, health and safety requirements have not been material to our financial results. Increasing global efforts to control emissions of carbon dioxide, methane, ozone, nitrogen oxide and other greenhouse gases and pollutants, as well as the shifting focus of regulatory efforts towards total emissions output, have the potential to impact our facilities, costs, products and customers. The U.S. Environmental Protection Agency (“EPA”) has taken action to control greenhouse gases from certain stationary and mobile sources. In addition, several states have taken steps, such as adoption of We also may be subject to liability as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act and similar state or foreign laws for contaminated properties that we currently own, lease or operate or that we or our predecessors have previously owned, leased or operated, and sites to which we or our predecessors sent hazardous substances. Such liability may be joint and several so that we may be liable for more than our share of any contamination, and any such liability may be determined without regard to causation or knowledge of contamination. We or our predecessors have been named potentially responsible parties at contaminated sites from time to time. We do not anticipate any potential liability relating to contaminated sites to be material to our financial results. Employees Holley’s employees are integral to our strategic growth and success. We consider our team members to be our most valuable asset and seek to attract and maintain the highest quality talent by offering competitive benefits and wellness services, opportunities to grow professionally, and regular evaluations, among other initiatives. As of December 31, Many of our employees are automotive Compensation and Benefits. We strive to hire, develop and retain top talent. We attract and reward our employees by providing competitive benefits, including market-competitive compensation, medical, dental and vision insurance, short-term and long-term disability insurance, basic life and accidental death and dismemberment insurance, voluntary supplemental coverages, flexible spending accounts, paid time off, and our 401(k) program. Holley matches employee contributions to the 401(k) Plan up to 3.5% each pay period, and an additional discretionary match of up to 1.5% is made based on company performance to targets. Health, Safety and Wellness. Holley is committed to the health and well-being of its employees and designs its compensation and benefit programs to demonstrate this commitment. Our programs are intended to support the physical and mental well-being of our employees and their families by providing the tools and resources for employees to improve or maintain their health and to lessen concerns about missing work and the potential financial impact. Employee health and safety in the workplace is one of our top priorities. We have implemented programs and training designed to eliminate workplace incidents, risks and hazards. The core training provided includes Emergency Response, OSHA Reporting, Fire Safety, and Office Ergonomics. We also review and monitor our performance closely. In response to the COVID-19 pandemic, we followed guidance from the Centers for Disease Control, the World Health Organization, and the various states and counties in which we operate in order to keep our employees safe. We will continue to make the health and wellbeing of our employees a priority. Inclusion. We know that diversity throughout our company creates stronger teams, leads to innovation, and results in an organization that provides the best service to our customers. We have a recruitment strategy that encourages diversity across the company. We leverage our employee referral program to identify diverse talent during the recruitment process. We also engage with a local development board and a local refugee center in Bowling Green, KY to increase our diverse talent candidate pool. We believe our employees should reflect the customers we serve. Notably, approximately 30% of Holley consumers are female. Accordingly, we recognize the benefits of female representation in our workforce, and in 2022 over 30% of our workforce were women. We are committed to closing the gender gap and our recruitment and retention strategies support improving women’s representation in leadership roles. Our Culture. At Holley, we believe that an engaged workforce leads to a more innovative, productive, and profitable organization. For this reason, we measure employee engagement through periodic culture surveys. These surveys allow our employees to provide confidential feedback on culture, company strategy and trust in their direct leaders. This feedback helps create action plans to improve the engagement of our employees. These survey results have demonstrated that our employees have a strong sense of belonging, trust in management, and confidence in Holley. These strengths provide a foundation for our success, and we are dedicated to enhancing the employee experience at Holley. Talent Development. The development of our employees’ skills and knowledge is critical to Holley’s success. Our educational assistance program is designed to encourage personal development by helping employees maintain and improve their skills or knowledge related to their current job or a potential future position at Holley through reimbursement of certain educational expenses, including external training programs or educational courses, pursuit and maintenance of job-related professional licenses and certifications, workshops, seminars, and professional conferences. Further, we are introducing an internship program designed to provide students in the community an opportunity to gain practical experience. We are committed to fostering an equitable work environment that seeks to ensure fair treatment, equality of opportunity, and fairness in access to information and resources. Social Responsibility. We are committed to social responsibility. Our socially responsible initiatives include donations to community organizations, sponsorship of local sports teams and weekend family events. Through these programs, Holley and its employees are able to give back to the community through monetary donations and by providing community services. Holley gives its subsidiaries the ability to lead their own community engagement initiatives through contributions to charities and participation in fundraising events. Available InformationOur top seven brands all experienced sales growth between 2020 and 2021 and we expect to continue our growth in these brands through new product development. We believe our continued marketing effort will support the continued growth7$18$20.5 million per year on research and development since 2016. New products are the lifeblood of our business with approx2017imately 35% of our 2021 sales coming from products introduced by us into the market since 2016. In addition, we introduced over 1,300 new products during 2021 out of approximately 40,000 total stock-keeping units offered, which accounted for approximately 3% of our 2021 sales.. We believe our product development capabilities will enable us to create sustainable long-term growth and margin enhancements for our business.product families,categories like Electronic Fuel Injection, product line expansions, and accessories, as well as products that bring us into new categories.markets including components for converting ICE vehicles to electric powertrains. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.needs and find solutions to new consumer demands. We expand our existing product families and enter new product categories by creating solutions grounded in our expert insights and relevant market knowledge. We believe we have a meaningful runway across our target product categories and product vintages, and we are well positioned for future growth by expanding in adjacent and transformational categories that present opportunities for further market penetration in the EFIPerformance Suspension, Braking and Powertrain Conversion Systems markets. We believe there are also opportunities to capitalize on newly enteredgrowing our powertrain agnostic categories like Performance & Appearance Packages, Wheels & Tires,Automotive and Performance Suspension.Motorcycle Safety.2021,2022, we spent approximately $10approximately $11.6 million (or approximately 1%2% of our 20212022 annual gross sales) on marketing and advertising. Going forward, consistent with our value creation strategies, we intend to meaningfully increasecontinue our investments in direct consumer marketing and advertising as well as refocusrefocus our current mix of spending towards activities believed to generate the highest return on investment. We believe these strategies will have a meaningfully positive impact across our brand portfolio and will result in the continuation of net sales growth.portfolio.MotorLife,Motor Life, our internal digital publication that is available to the public on our website. As a result, we have experienced a significant increase in social media and online engagement during 2020since that has continued to grow in 2021.time. Continued expansion of and investment in digital and social media are expected in the future, including focusing on strategies to grow the high margin DTC channel.events.events to build the Holley tribe. These events focus on creating memorable experiences for enthusiast consumers and encourage consumers to be among other enthusiasts, celebrate car culture, build community and show enthusiasts how Holley products can help them enjoy their vehicles.vehicles. Since 2015, our events have grown in total annual attendance from 14,000 to 77,000 106,000in 2021.2022. We currently host fiveseven annual self-funding events, (LSincluding LS Fest East, LS Fest West, Ford Fest, MoParty, and High Voltage) throughout the year that are rootedVoltage, Brother's Truck Show, plus a new event launched in popular engine and car platforms. We launched2022, LS Fest Texas, our first Electric Vehiclelargest inaugural event Holley High Voltage Experience, in November 2021.to date. 8(i) E-tailers and warehouse distributors accounting for 59%for 60% of our sales in 2021, (ii)2022, and our top ten resellers accounting for 42%for 39% of our sales in 2021, 2022 with our largest reseller making up 19% of our sales in 2021, and (iii) the top ten accounts growing 14% from 2020 to 2021.2022.newly-developednewly developed technology. We fromFrom time to time, we become aware of potential infringement of our patent, trademark, or other proprietary rights, and we investigate instances of alleged infringement where we believe it is merited and take appropriate actions under applicable intellectual property laws in response to such infringements where we determine it is valuable to do so. Similarly, from time to time we are the subject of intellectual property and other proprietary rights related suits and other litigation.9cap and tradecap-and-trade programs or other regulatory systems, to address greenhouse gases. There have also been international efforts seeking legally binding reductions in emissions of greenhouse gases. These developments and further actions that may be taken in the U.S. and in other countries, states or provinces could affect our operations both positively and negatively (e.g., by affecting the demand for or suitability of some of our products).2021,2022, we employed 1,7211,622 full-time employees and 137100 temporary employees. Our employees are not involved in any labor unions. Approximately 29%48% of our full-time employees are based primarily in our Bowling Green, KY headquarters.headquarters, distribution center and manufacturing plants. None of our employees are subject to collective bargaining agreements or represented by a labor union. We believe our facilities are in labor markets with ready access to adequate numbers of skilled and unskilled workers, and we believe our relations with our employees are good.enthusiasts themselves.enthusiasts. We pride ourselves on having a platform built for enthusiasts by enthusiasts. As of December 2021, we have over 1502022, our Engineering function includes approximately 203 employees, including many enthusiast-focused engineers many of whomwho are passionate about cars themselves.cars. We continue to seek out top level talent that will help accomplish our mission and vision moving forward. Our goal is to create an inclusive and safe environment for our employees that keeps them engaged in their work.
Our principal executive offices are located at 1801 Russellville Rd., Bowling Green, KY 42101, and our telephone number is (270) 782-2900. Our Internet address is www.holley.com. The information on our website is not, and should not be considered, part of this Form 10-K and is not incorporated by reference in this Form 10-K. The website is, and is only intended to be, for reference purposes only. We make available free of charge on or through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. These reports and other information are also available, free of charge, at www.sec.gov. In addition, we will provide, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests can be made in writing or by phone.
Item 1A. Risk Factors
The following discussion of "Risk Factors" identifies factors that may adversely affect our business, operations, financial condition or future performance. This information should be read in conjunction with "Management’s“Cautionary Note Regarding Forward-Looking Statements,” "Management’s Discussion and Analysis of Financial Condition and Result of Operations" and the consolidated financial statements and related notes. The following discussion of risks is not all-inclusive but is designed to highlight what we believe are the material factors to consider when evaluating our business and expectations. These factors could cause our future results to differ materially from our historical results and from expectations reflected in forward-looking statements.
Risks Relating to Our Business and Industry
The
Unfavorable economic conditions could have an adverse impact on consumer discretionary spending and therefore adversely impact our business, sales, financial condition and results of operations.
Our products are largely recreational in nature and are therefore discretionary purchases for consumers. Consumers are generally more willing to make discretionary purchases of automotive products during favorable economic conditions and when consumers are feeling confident and prosperous. Discretionary spending is also affected by many other factors, including general business conditions, inflation, interest rates, the availability of consumer credit, taxes, and consumer confidence in future economic conditions. Purchases of our products could decline during periods when disposable income is lower, or during periods of actual or perceived unfavorable economic conditions. A significant or prolonged decline in general economic conditions or uncertainties regarding future economic prospects that adversely affect consumer discretionary spending, whether in the United States or in our international markets, could result in reduced sales of our products, which in turn would have an adverse impact on our business, sales, financial condition and results of operations.
Inflation could result in higher costs and decreased profitability.
Rising inflation may continue to adversely affect us by increasing the cost of raw materials. Our products contain various raw materials, including corrosion-resistant steel, non-ferrous metals such as aluminum and nickel, and precious metals such as platinum and palladium. We use raw materials directly in manufacturing and in components that we purchase from our suppliers. We generally purchase components with significant raw material content on the open market. Volatility in the prices of raw materials such as steel, aluminum and nickel could continue to increase the cost of manufacturing our products. In some cases, those cost increases can be passed on to customers in the form of price increases, in other cases, they cannot. Recent inflationary pressures and other factors have also resulted in significant increases in transportation and freight service costs due to limited capacity and/or availability of containers, shipping vessels, and/or receiving port services. If the prices of raw material and other inputs increase, and we are not able to charge our customers higher prices to compensate, our results of operations would be adversely affected.
Many of the markets in which we sell have been experiencing high levels of inflation, which may depress consumer demand for our products and reduce our profitability. Even in the event that increased costs can be passed through to customers, our gross margin percentages may decline. Additionally, our suppliers are also subject to fluctuations in the prices of raw materials and may attempt to pass all or a portion of such increases on to us. In the event they are successful in doing so, our margins would decline. If prolonged, and if they cannot be passed on to customers in the form of price increases, these fluctuations in the price of raw materials, product components, other inputs, and/or transportation services could have a material adverse effect on our business, sales, financial condition and results of operations.
Disruptions of supply or shortages of raw materials or components used in our products could harm our business and profitability.
We have experienced, and may continue to experience, disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of steel, non-ferrous metals and precious metals. Additionally, we have been adversely impacted by the global supply shortage of automotive-grade microchips. This shortage has resulted in increased microchip delivery lead times, delays in production and increased costs to source available automotive-grade microchips. If our supply of these products continues to be adversely affected, there can be no assurance that we will be able to obtain adequate replacements for the existing components or that supplies will be available on terms and prices that are favorable to us, if at all.
Our success depends in part on our ability to anticipate and react to changes in supply costs and disruptions in the supply chain due to factors beyond our control. We have taken steps to minimize the adverse impacts of supply chain volatility and rising inflation by implementing cost savings initiatives, increasing prices to customers, increasing inventory levels of certain products, and working closely with our suppliers and customers to minimize disruptions in delivering products to customers. Despite the actions we have undertaken to minimize these impacts, there can be no assurance that unforeseen future events in the global supply chain and our ability to pass on inflationary costs to our customers could have a material adverse effect on our business, financial condition and results of operations.
Current global economic conditions, including inflation and supply chain disruptions, could continue to adversely affect our distributors’ financial condition, their levels of business activity and their ability to pay trade obligations.
We primarily sell our products to retailers directly and through our domestic and foreign subsidiaries, and to foreign distributors. We generally require no collateral from our customers. However, if the current economic conditions and macroeconomic trends, including heightened inflation, capital market volatility, and interest rate fluctuations, continue, our results of operations may be adversely affected. These disruptions and delays have strained certain domestic and international supply chains, which have affected and could continue to adversely affect the flow or availability of certain products or components. As a result, we have experienced, and could continue to experience, disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain of our products in distribution channels.
A prolonged or severe downturn in the general economy could adversely affect the retail market, which in turn, would adversely impact the liquidity and cash flows of our customers, including the ability of such customers to obtain credit to finance purchases of our products and to pay their trade obligations. This could result in increased delinquent or uncollectible accounts for some of our customers. A failure by our customers to pay on a timely basis a significant portion of outstanding account receivable balances would adversely impact our business, sales, financial condition and results of operations.
A significant disruption in the operations of our manufacturing facilities or distribution centers could have a material adverse effect on our business, sales, financial condition and results of operations.
A significant disruption at any of our manufacturing facilities or distribution centers could materially and adversely affect our business, sales, financial condition and results of operations. Our manufacturing facilities and distribution centers are highly automated, which means that our operations are complicated and may be subject to a number of risks related to computer viruses, the proper operation of software and hardware, electronic or power interruptions, and other system failures, including failures caused by factors outside of our control, such as hostilities, political unrest, terrorist attacks, war (including the ongoing conflict in Ukraine), natural disasters or extreme weather (including events that may be caused or exacerbated by climate change). Risks associated with upgrading or expanding these facilities may significantly disrupt or increase the cost of our operations, which may have an immediate, or in some cases prolonged, impact on our margins. Our risk management, business continuity and disaster recovery plans may not be effective at preventing or mitigating the effects of such disruptions, particularly in the case of catastrophic events or longer-term developments, such as the impacts of climate change.
A global pandemic, such as the COVID-19 pandemic could adversely affect the Company’sour business, sales, financial condition and results of operations and the Company’sour ability to access current or obtain new lending facilities.
The
A global pandemic, or the outbreak of a disease, such as the COVID-19 pandemic, andcould adversely affect our business. The preventative measures taken to contain or mitigate thea pandemic have caused,may cause, and are continuing to cause, business slowdowns or shutdowns in affected areas and significant disruption in the financial markets both globally and in the United States, which could lead to a decline in discretionary spending by consumers, and in turn impact, possibly materially, the Companyour business, sales, financial condition and results of operations. TheThese impacts could include, but are not limited to:
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| the possibility of renewed retail store closures or reduced operating hours and/or decreased retail traffic; |
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| disruption to |
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| significant disruption of global financial markets, which could have an adverse impact on |
The COVID-19outbreak of a different global pandemic, has significantly impactedor the global supply chain, with restrictions and limitations on related activities causing disruption and delay. These disruptions and delays have strained certain domestic and international supply chains, which have affected and could continue to adversely affect the flow or availability of certain products. As a result, the Company has experienced, and could continue to experience, disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels.
The further spread of COVID-19, and the requirements to take action to help limit the spread of the illness, could impact the Company’sour ability to carry out itsour business as usual and may materially adversely impact global economic conditions, the Company’sour business, sales, financial condition and results of operations. The extent of the impact of a global pandemic, such as COVID-19, on the Company’sour business and financial results will depend on future developments, including the duration and spread of thesuch outbreak (including new variants) within the markets in which the Company operates,we operate, the related impact on consumer confidence and spending, and the effect of governmental regulations imposed in response to the pandemic, all of which are highly uncertain and ever-changing. The sweeping natureduration of the COVID-19 pandemic makes it extremely difficultany such impacts cannot be predicted.
Failure to predict how the Company’s businesscompete effectively could reduce our market share and operations will be affected in the longer run. Any of the foregoing factors, or other cascading effects of the coronavirus pandemic, could materially increase the Company’s costs, adversely impact the Company’s sales and damage the Company’ssignificantly harm our business, sales, financial condition and results of operations, possibly to a significant degree. The duration of any such impacts cannot be predicted.operations.
Unfavorable economic conditions could have an adverse impact on consumer discretionary spending and therefore adversely impact the Company’s business, sales, financial condition and results of operations.
The Company’s products are recreational in nature and are therefore discretionary purchases for consumers. Consumers are generally more willing to make discretionary purchases of automotive products during favorable economic conditions and when consumers are feeling confident and prosperous. Discretionary spending is also affected by many other factors, including general business conditions, inflation, interest rates, inflation, the availability of consumer credit, taxes, and consumer confidence in future economic conditions. Purchases of the Company’s products could decline during periods when disposable income is lower, or during periods of actual or perceived unfavorable economic conditions. A significant or prolonged decline in general economic conditions or uncertainties regarding future economic prospects that adversely affect consumer discretionary spending, whether in the United States or in the Company’s international markets, could result in reduced sales of the Company’s products, which in turn would have an adverse impact on the Company’s business, sales, financial condition and results of operations.
A severe or prolonged economic downturn could adversely affect the Company’s distributors’ financial condition, their levels of business activity and their ability to pay trade obligations.
The Company primarily sells its products to retailers directly and through its domestic and foreign subsidiaries, and to foreign distributors. The Company generally requires no collateral from its customers. However, a severe or prolonged downturn in the general economy could adversely affect the retail market, which in turn, would adversely impact the liquidity and cash flows of the Company’s customers, including the ability of such customers to obtain credit to finance purchases of the Company’s products and to pay their trade obligations. This could result in increased delinquent or uncollectible accounts for some of the Company’s customers. A failure by the Company’s customers to pay on a timely basis a significant portion of outstanding account receivable balances would adversely impact the Company’s business, sales, financial condition and results of operations.
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Failure to compete effectively could reduce the Company’s market share and significantly harm the Company’s business, sales, financial condition and results of operations.
The Company’sOur industry is highly competitive, and the Company’sour success depends on the Company’sour ability to compete with suppliers of automotive aftermarket products, some of which may have substantially greater financial, marketing and other resources than the Company does.we do. Due to the diversity of the Company’sour product offering, the Company competeswe compete with several large and medium-sized companies and a large number of smaller regional and specialty companies and numerous category-specific competitors. In addition, the Company faceswe face competition from original equipment manufacturers, which, through their automotive dealerships, supply many of the same types of replacement parts the Company sells.that we sell. Existing competitors may expand their product offerings and sales strategies, and new competitors may enter the market.
Some of the Company’sour competitors may have larger customer bases and significantly greater financial, technical and marketing resources than the Company does.we do. These factors may allow the Company’sour competitors to:
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| respond more quickly than |
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| engage in more extensive research and development; and |
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| spend more money and resources on marketing and promotion. |
Increased competition could put additional pressure on the Companyus to reduce prices or take other actions, which may have an adverse effect on the Company’sour business, sales, financial condition and results of operations. The CompanyWe may also lose significant customers or lines of business to competitors.
If the Company iswe are unable to successfully design, develop and market new products, the Company’sour business may be harmed.
To maintain and increase sales, the Companywe must continue to introduce new products on a timely basis to respond to new and evolving consumer preferences and improve or enhance the Company’sour existing products. The success of the Company’sour new and enhanced products depends on many factors, including anticipating consumer preferences, finding innovative solutions to consumer problems, differentiating the Company’sour products from those of the Company’sour competitors, and maintaining the strength of the Company’sour brands. The design and development of the Company’sour products is costly, and the Companywe typically hashave several products in development at the same time. Problems in the design or quality of the Company’sour products, or delays in product introduction, may harm the Company’sour brands, business, sales, financial condition and results of operations. Any new products that the Company developswe develop and marketsmarket may not generate sufficient revenues to recoup theirour development, production, marketing, selling and other costs.
A drive toward electric vehicles or away from vehicle ownership in general could impact the Company’s and its subsidiaries’our business, sales, financial condition and results of operations.
The automotive industry is increasingly focused on the development of hybrid and electric vehicles and of advanced driver assistance technologies, with the goal of developing and introducing a commercially viable, fully automated driving experience, and many manufacturers have announced plans to transition from internal- combustion engines into electric vehicle platforms over the coming years. There has also been an increase in consumer preferences for mobility on demand services, such as car and ride sharing, as opposed to automobile ownership, which may result in a long-term reduction in the number of vehicles per capita. Accordingly, if we do not continue to innovate and develop, or acquire, new and compelling products that capitalize upon new technologies in response to original equipment manufacturer and consumer preferences, or if there is a future shift in consumer preferences towards ownership of more utilitarian vehicles or vehicles that are otherwise less interesting to a large portion of the Company’sour customers who are automotive enthusiasts, or if there is otherwise a future shift away from automobile ownership among consumers in general, the Company’sour and itsour subsidiaries’ business, sales, financial condition and results of operations could be impacted.
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The Company’sOur business depends on maintaining and strengthening itsour brands to generate and maintain ongoing demand for itsour products, and a significant reduction in such demand could harm the Company’sour business, sales, financial condition and results of operations.
The Company’s
Our success depends on the value and reputation of the Company’sour brands, which, in turn, depends on factors such as the quality, design, performance, functionality, and durability of the Company’sour products, the image of the Company’sour e-commerce platform and retail partner floor spaces, the Company’sour communication activities, including advertising, social media, and public relations, and the Company’sour management of the customer experience, including direct interfaces through customer service. Maintaining, promoting, and positioning the Company’sour brands are important to expanding itsour customer base, and will largely depend largely on the success of the Company’sour marketing and merchandising efforts and the Company’sour ability to provide consistent, high-quality customer experiences. The Company intendsWe intend to continue making investments in these areas in order to maintain and enhance the Company’sour brands, and such investments may not be successful. Ineffective marketing, negative publicity, product diversion to unauthorized distribution channels, product or manufacturing defects, counterfeit products, unfair labor practices, and failure to protect the intellectual property rights in the Company’sour brands are some of the potential threats to the strength of the Company’sour brands, and those and other factors could rapidly and severely diminish customer confidence in us. Furthermore, theseour relationships with customers and suppliers. These factors could cause the Company’sour customers to lose the personal connection they feel with the Company’s brands. The Company believesour brands and reduce our ability to attract new customers and lead to suppliers terminating their relationships with us. We believe that maintaining and enhancing the image of the Company’sour brands in itsour current markets and in new markets where it haswe have limited brand recognition is important to expanding itsour customer base. If the Company iswe are unable to maintain or enhance itsour brands in current or new markets, the Company’sour business, sales, financial condition and results of operations could be harmed.
If the Companywe inaccurately forecastsforecast demand for itsour products, itwe may manufacture either insufficient or excess quantities, which, in either case, could adversely affect itsour financial performance.
The Company plans its
We plan our manufacturing capacity based upon the forecasted demand for itsour products. Forecasting the demand for the Company’sour products is very difficult given the manufacturing lead time and the amount of specification involved. Forecastinginvolved especially given the volatility of the markets and the economic downturn, including the impact of the COVID-19 pandemic. Aside from supply chain disruptions and inflationary pressures, forecasting demand for specific automotive part goodsparts can also be challenging due to changing consumer preferences and competitive pressures and longer supply lead times. The nature of the Company’sour business makes it difficult to quickly adjust quickly itsour manufacturing capacity if actual demand for itsour products exceeds or is less thanvaries from forecasted demand. If actual demand for itsour products exceeds the forecasted demand, the Companywe may not be able to produce sufficient quantities of new products in time to fulfill actual demand, which could limit the Company’sour sales and adversely affect itsour financial performance. On the other hand, if actual demand is less than the forecasted demand for itsour products, the Companywe could produce excess quantities, resulting in excess inventories and related obsolescence charges that could adversely affect the Company’sour financial performance.
The Company
We may not be able to effectively manage itsour growth.
As the Company grows itswe grow our business, slower growing or reduced demand for the Company’sour products, increased competition, a decrease in the growth rate of the Company’sour overall market, failure to develop and successfully market new products, or the maturation of the Companyour business or marketmarkets could harm the Company’sour business. The Company hasWe have made and expectsexpect to continue to make significant investments in the Company’sour research and development and sales and marketing organizations, expand the Company’sour operations and infrastructure both domestically and internationally, design and develop new products, and enhance the Company’sour existing products. In addition, in connection with operating as a public company, the Company will incur significant additional legal, accounting, and other expenses that the Company did not incur as a private company. If the Company’sour sales do not increase at a sufficient rate to offset these increases in the Company’sour operating expenses, itsour profitability may decline in future periods.
The Company
We only hashave a limited history operating the Company’sour business as a public company at its current scale. Consequently, if the Company’sour operations grow at a rapid pace in the future, the Companywe may experience difficulties in managing this growth and building the appropriate processes and controls. Future rapid growth may increase the strain on the Company’sour resources, and the Companywe could experience operating difficulties, including difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs. If the Company doeswe do not adapt to meet these evolving challenges, the strength of the Company’sour brands may erode, the quality of the Company’sour products may suffer, the Companywe may not be able to deliver products on a timely basis to the Company’sour customers, and the Company’sour corporate culture may be harmed.
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We have set certain growth initiatives for our business to meet long-term strategic objectives and improve stockholder value. We may incur certain costs to achieve our growth initiatives, and we may not meet anticipated implementation timetables or stay within budgeted costs. As these growth initiatives are undertaken, we may not achieve our expected results, which could adversely impact our customer retention or results of operation.
If the Company failswe fail to attract new customers, or failsfail to do so in a cost-effective manner, the Companywe may not be able to increase sales.
The Company’s
Our success depends, in part, on itsour ability to attract customers in a cost-effective manner. In order to expand the Company’sour customer base, the Companywe must appeal to and attract customers ranging from automotive enthusiasts to individuals who simply value products of uncompromising quality and design. The Company hasWe have made, and the Company expects that the Company willexpect to continue to make, significant investments in attracting new customers, including through the use of traditional, digital, and social media and participation in, and sponsorship of, community events. Marketing campaigns can be expensive and may not result in the cost- effectivecost-effective acquisition of customers. Further, as the Company’sour brands becomesbecome more widely known, future marketing campaigns may not attract new customers at the same rate as past campaigns. If the Company iswe are unable to attract new customers, or failsfail to do so in a cost-effective manner, the Company’sour growth could be slower than it expectswe expect, and the Company’sour business willmay be harmed.
The Company’s
Our growth depends, in part, on expanding into additional consumer markets, and the Companywe may not be successful in doing so.
The Company believes
We believe that itsour future growth depends not only on continuing to reach itsour current core demographic, but also continuing to broaden itsour retail partner and customer bases. The growth of the Company’sour business will depend, in part, on the Company’sour ability to continue to expand itsour retail partner and customer bases in the United States, as well as in international markets. In these markets, the Companywe may face challenges that are different from those the Companywe currently encounters,encounter, including competitive, merchandising, distribution, hiring, and other difficulties. The CompanyWe may also encounter difficulties in attracting customers due to a lack of consumer familiarity with or acceptance of the Company’sour brands, or a resistance to paying for premium products, particularly in international markets. The Company continuesWe continue to evaluate marketing efforts and other strategies to expand the customer base for itsour products. In addition, although the Company iswe are investing in sales and marketing activities to further penetrate newer regions, including expansion of itsour dedicated sales force, the Companywe cannot ensure that itwe will be successful. If the Company iswe are not successful, itsour business, sales, financial condition and results of operations may be harmed.
Competitors have attempted, and will likely continue to attempt to, imitate the Company’sour products and technology. If the Company iswe are unable to protect or preserve the image of the Company’sour brands and proprietary rights, the Company’sour business, sales, financial condition and results of operations may be harmed.
As the Company’sour business continues to expand, itsour competitors have imitated or attempted to imitate, and will likely continue to imitate or attempt to imitate, the Company’sour product designs and branding, which could harm the Company’sour business, sales, financial condition and results of operations. Only a portion of the intellectual property used in the manufacture and design of the Company’sour products is patented, and the Companywe, therefore, reliesrely significantly on trade secrets, trade and service marks, trade dress, and the strength of the Company’sour brands. The Company regards itsWe regard our patents, trade dress, trademarks, copyrights, trade secrets, and similar proprietary rights as critical to itsour success. The CompanyWe also reliesrely on trade secret protection and confidentiality agreements with itsour employees, consultants, suppliers, manufacturers, and others to protect itsour proprietary rights. Nevertheless, the steps the Company takeswe take to protect itsour proprietary rights against infringement or other violations may be inadequate, and itwe may experience difficulty in effectively limiting the unauthorized use of itsour patents, trademarks, trade dress, and other intellectual property and proprietary rights worldwide. The CompanyWe also cannot guarantee that others will not independently develop technology with the same or similar function to any proprietary technology the Company reliesthat we rely on to conduct itsour business and differentiate itselfour self from itsour competitors. Unauthorized use or invalidation of itsour patents, trademarks, copyrights, trade dress, trade secrets, or other intellectual property or proprietary rights may cause significant damage to the Company’sour brands and harm itsour business, sales, financial condition and results of operations.
While the Companywe actively developsdevelop and protects itsprotect our intellectual property rights, there can be no assurance that the Companywe will be adequately protected in all countries in which the Company conducts itswe conduct our business or that the Companywe will prevail when defending itsour patent, trademark, and proprietary rights. Additionally, the Companywe could incur significant costs and management distraction in pursuing claims to enforce itsour intellectual property rights through litigation and defending any alleged counterclaims. If the Company iswe are unable to protect or preserve the value of itsour patents, trade dress, trademarks, copyrights, or other intellectual property rights for any reason, or if the Company failswe fail to maintain the image of the Company’sour brands due to actual or perceived product or service quality issues, adverse publicity, governmental investigations or litigation, or other reasons, the Company’sour brands and reputation could be damaged, and the Company’sour business may be harmed.
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The Company’sOur profitability may decline as a result of increasing pressure on pricing.
The Company’s
Our industry is subject to significant pricing pressure caused by many factors, including unfavorable economic conditions, intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products, and changes in consumer demand. The current economic conditions and macroeconomic trends, including heightened inflation, capital market volatility, interest rate and current rate fluctuations, have had and may continue to have an impact on pricing. These factors may cause the Companyus to reduce itsour prices to retailers and customers or engage in more promotional activity than the Company anticipates,we anticipate, which could adversely impact itsour margins and cause the Company’sour profitability to decline if it iswe are unable to offset price reductions with comparable reductions in the Company’sour operating costs. This could materially harm the Company’sour business, sales, financial condition and results of operations. In addition, ongoing and sustained promotional activities could harm the image of the Company’sour brands.
A significant disruption in the operations of the Company’s manufacturing facilities or distribution centers could have a material adverse effect on the Company’s business, sales, financial condition and results of operations.
A significant disruption at any of the Company’s manufacturing facilities or distribution centers could materially and adversely affect the Company’s business, sales, financial condition and results of operations. The Company’s manufacturing facilities and distribution centers are highly automated, which means that their operations are complicated and may be subject to a number of risks related to computer viruses, the proper operation of software and hardware, electronic or power interruptions, and other system failures, including failures caused by factors outside of our control, such as hostilities, political unrest, terrorist attacks, war (including the ongoing conflict in Ukraine), natural disasters or extreme weather (including events that may be caused or exacerbated by climate change). Risks associated with upgrading or expanding these facilities may significantly disrupt or increase the cost of the Company’s operations, which may have an immediate, or in some cases prolonged, impact on the Company’s margins. Our risk management, business continuity and disaster recovery plans may not be effective at preventing or mitigating the effects of such disruptions, particularly in the case of catastrophic events or longer term developments, such as the impacts of climate change.
Increases in cost, disruption of supply or shortage of raw materials or components used in the Company’s products could harm its business and profitability.
The Company’s products contain various raw materials, including corrosion-resistant steel, non-ferrous metals such as aluminum and nickel, and precious metals such as platinum and palladium. The Company uses raw materials directly in manufacturing and in components that the Company purchases from its suppliers. The Company generally purchases components with significant raw material content on the open market. The prices for and availability of these raw materials fluctuate depending on market conditions. Volatility in the prices of raw materials such as steel, aluminum and nickel could increase the cost of manufacturing the Company’s products. The Company may not be able to pass on these costs to its customers, and this could have a material adverse effect on the Company’s business, sales, financial condition and results of operations. Even in the event that increased costs can be passed through to customers, the Company’s gross margin percentages would decline. Additionally, the Company’s suppliers are also subject to fluctuations in the prices of raw materials and may attempt to pass all or a portion of such increases on to the Company. In the event they are successful in doing so, the Company’s margins would decline.
The Company’s current and future products may experience quality problems from time to time that can result in negative publicity, litigation, product recalls, and warranty claims, which could result in decreased sales and operating margin, and harm to the Company’sour brand.
Although the Companywe extensively and rigorously teststest new and enhanced products, there can be no assurance the Companywe will be able to detect, prevent, or fix all defects. Defects in materials or components can unexpectedly interfere with the products’ intended use and safety and damage the Companyour reputation. Failure to detect, prevent, or fix defects could result in a variety of consequences, including a greater number of product returns than expected from customers and retail partners, litigation, product recalls, and credit claims, among others, which could harm the Company’sour business, sales, financial condition and results of operations. The occurrence of real or perceived quality problems or material defects in the Company’sour current and future products could expose the Companyus to product recalls, warranty, or other claims. In addition, any negative publicity or lawsuits filed against the Companyus related to the perceived quality and safety of the Companyour products could also harm the Companyour brand and decrease demand for the Company’sour products.
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The Company’sOur reliance on foreign suppliers for some of the automotive parts the Companywe sell to itsour customers or includedinclude in itsour products presents risks to the business.
A portion of automotive parts and components the Company useswe use in itsour manufacturing processprocesses are imported from suppliers located outside the U.S. As a result, the Company iswe are subject to various risks of doing business in foreign markets and importing products from abroad, such as:and these risks may become heightened as a result of unfavorable global economic conditions, including as a result of COVID-19. These risks may include, but are not limited to:
• | shortages of key component parts used in our products sourced from non-U.S. suppliers; |
• | increased transportation costs; |
• | significant delays in the delivery of cargo due to port security considerations; |
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| imposition of duties, taxes, tariffs or other charges on imports; |
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| potential recalls or cancellations of orders for any product that does not meet |
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| disruption of imports by labor disputes or strikes and local business practices; |
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| heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods; |
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| political tensions, conflicts, and wars, such as the ongoing conflict in Ukraine; |
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| natural disasters, disease, epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas; |
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| inability of |
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Any of the foregoing factors, or a combination of them, could increase the cost or reduce the supply of products available to the Companyus and materially and adversely impact the Company’sour business, sales, financial condition and results of operations.
The Company depends
We depend on retail partners to display and present itsour products to customers, and the Company’sour failure to maintain and further develop the Company’sour relationships with retail partners could harm the Company’sour business.
The Company sells
We sell a significant amount of itsour products through knowledgeable national, regional, and independent retail partners. The Company’sOur retail partners service customers by stocking and displaying the Company’sour products, explaining the Company product attributes of our products, and sharing the story of the Company’sour brands. The Company’sOur relationships with these retail partners are important to the authenticity of the Company’sour brands and the marketing programs the Company continueswe continue to deploy. The Company’sOur failure to maintain these relationships with itsour retail partners or financial difficulties experienced by these retail partners could harm itsour business.
The Company has
We have key relationships with national retail partners. If the Company loseswe lose any of the Company’sour key retail partners or any key retail partner reduces itstheir purchases of the Company’sour existing or new products or itstheir number of stores or operations, or promotes products of the Company’sour competitors over the Company’s, the Company’sours, our sales would be harmed. Because the CompanyHolley is a premium brand, itsour sales depend, in part, on retail partners effectively displaying itsour products, including providing attractive space and point of purchase displays in their stores, and training their sales personnel to sell itsour products. If the Company’sour retail partners reduce or terminate those activities, the Companywe may experience reduced sales of itsour products, resulting in lower gross margins, which would harm itsour business, sales, financial condition and results of operations.
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If the Company’sour plans to increase sales through itsour DTC channel are not successful, the Company’sour business, sales, financial condition and results of operations could be harmed.
For 2021, the Company2022, we generated through itsour DTC channel approximately $117$149.1 million in gross sales. Part of the Company’sour growth strategy involves increasing sales through itsour DTC channel. The level of customer traffic and volume of customer purchases through the Company’sour website is substantially dependent on the Company’sour ability to provide a content-rich and user-friendly website, a hassle- freehassle-free customer experience, sufficient product availability, and reliable, timely delivery of the Company’sour products. If the Company iswe are unable to maintain and increase customers’ use of itsour website, allocate sufficient product to the Company’sour website, and increase any sales through itsour website, the Company’sour business, sales, financial condition and results of operations could be harmed.
The Company’s
Our future success depends on the continuing efforts of the Company’sour management and key employees, and on the Company’sour ability to attract and retain highly skilled personnel and senior management.
The Company depends
We depend on the talents and continued efforts of itsour senior management and key employees. The loss of members of management or key employees may disrupt the Company’sour business and harm the Company’sour business, sales, financial condition and results of operations. Furthermore, the Company’sour ability to manage further expansion will require itus to continue to attract, motivate, and retain additional qualified personnel. Competition for this type of personnel is intense, and the Companywe may not be successful in attracting, integrating, and retaining the personnel required to grow and operate itsour business effectively. There can be no assurance that the Company’sour current management team or any new members of the management team will be able to successfully execute the Company’sour business and operating strategies.
The Company reliesOur results of operations may be adversely affected by labor shortages, turnover and labor cost increases.
An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, increase in federal or state minimum wages, or increase in general labor costs, caused by the COVID-19 pandemic or as a result of general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity or cash flows. During 2021, the country experienced an overall tightening and increasingly competitive labor market, and the labor market remained competitive throughout 2022. A sustained labor shortage or increased turnover rates within our employee base, caused by worsening economic conditions, increases in labor costs or the COVID-19 pandemic or other national or international emergencies, could lead to increased costs, such as increased overtime to meet demand and increased salaries and wage rates to attract and retain employees. Further, labor shortages or increased turnover rates could negatively affect our ability to efficiently operate our business if we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we take to respond to a decrease in labor availability have unintended negative consequences. If we are unable to hire or retain skilled personnel our results of operations would suffer.
We rely on complex information systems for management of itsour manufacturing, distribution, sales and other functions. If the Company’sour information systems fail to perform these functions adequately or if the Company experienceswe experience an interruption in their operation,our operations, including a breach in cyber security, itsour business, sales, financial condition and results of operations could suffer.
All of the Company’sour major operations, including manufacturing, distribution, sales and accounting, are dependent upon the Company’sour complex information systems. The Company’sOur information systems are vulnerable to damage or interruption from:
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| earthquake, fire, flood, hurricane and other natural disasters; |
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| power loss, computer systems failure, Internet and telecommunications or data network failure; and |
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| hackers, computer viruses, ransomware and other malware, software bugs or glitches. |
Any damage or significant disruption in the operation of such systems, the failure of the Company’sour information systems to perform as expected, the failure to successfully integrate the information technology systems of the businesses that the Company haswe have recently acquired or any security breach to the information systems (including financial or credit/payment frauds) would disrupt the Company’sour business, which may result in decreased sales, increased overhead costs, excess inventory and product shortages and otherwise adversely affect the Company’sour reputation, operations, financial performance and condition.
Our information systems are subject to security threats and sophisticated cyber-based attacks, including, but not limited to, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, employee or insider error, malfeasance, social engineering, or physical breaches, that can cause deliberate or unintentional damage, create system disruptions, unauthorized acquisition of our or customer information, or destruction or misuse, manipulation, denial of access to or disclosure of confidential or important information. We have experienced, and expect to continue to confront, efforts by hackers and other third parties to gain unauthorized access or deny access to, or otherwise disrupt, our information systems. For example, we were the target of an external cyber-attack in third quarter 2021, which resulted in a temporary suspension of services to our customers. To date these incidents have not had a material impact on the Company’sour reputation, operations, financial performance and condition; however, there is no assurance that such impacts will not be material in the future, and such incidents have in the past and may in the future have the impacts discussed below. Any future successful cyber-attack or catastrophic natural disaster could significantly affect our operating and financial systems and could temporarily disrupt our ability to provide services to our customers, impact our ability to manage our operations and perform vital financial processes, any of which could have a materially adverse effect on our business.
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Moreover, the threat of cyber-attacks is constantly evolving, thereby increasing the difficulty of successfully defending against them or implementing adequate preventative measures and we cannot ensure that we will be able to identify, prevent or contain the effects of future cyber-attacks or other cybersecurity risks that bypass our security measures or disrupt our information technology systems or business. While we have security technologies, processes and procedures in place to protect against cybersecurity risks and security breaches, the hardware, software or applications we develop or procure from third parties may contain defects in design, manufacturer defects or other problems that could unexpectedly compromise information security. In addition, because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, are becoming increasingly sophisticated, and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them or implement adequate preventative measures.
As a result of any such incidents, we could be subject to litigation and regulatory risk, civil and criminal penalties, additional costs and diversion of management attention due to investigation, remediation efforts and engagement of third party consultants and legal counsel in connection with such incidents, payment of “ransoms” to regain access to our systems and information, loss of customers, damage to customer relationships, reduced revenue and profits, refunds of customer charges and damage to our reputation, any of which could have a material adverse effect on our business, cash flows, financial condition and results of operations. While we have contingency plans and insurance coverage for potential liabilities of this nature, they may not be sufficient to cover all claims and liabilities and in some cases are subject to deductibles and layers of self-insured retention.
Cyber-attacks, unauthorized access to, or accidental disclosure of, consumer personally-identifiablepersonally identifiable information including credit card information, that the Company collectswe collect through itsour websites may result in significant expense and adversely impact the Company’sour reputation and business.
There is heightened concern and awareness over the security of personal information transmitted over the Internet, consumer identity theft and user privacy. While the Company haswe have implemented security measures, the Company’sour computer systems may nevertheless be susceptible to electronic or physical computer break-ins, viruses and other disruptions and security compromises. Any perceived or actual unauthorized or inadvertent disclosure of personally-identifiablepersonally identifiable information, whether through a compromise of the Company’sour network by an unauthorized party, employee theft, misuse or error or otherwise, could harm the Company’sour reputation, impair the Company’sour ability to attract website visitors, or subject the Companyus to claims or litigation arising from damages suffered by consumers, and adversely affect the Company’sour operations, financial performance and condition.
The Company depends
We depend on cash generated from itsour operations to support itsour growth, and the Companywe may need to raise additional capital, which may not be available on terms acceptable to the Companyus, or at all.
The Company
We primarily reliesrely on cash flow generated from itsour sales to fund itsour current operations and growth initiatives. As the Company expands itswe expand our business, the Companywe will need significant cash from operations to purchase inventory, increase product development, expand itsour manufacturer and supplier relationships, pay personnel, pay for the increased costs associated with operating as a public company and further invest in sales and marketing efforts. If the Company’sour business does not generate sufficient cash flow from operations to fund these activities and sufficient funds are not otherwise available from the Company’sour current or future credit facility, the Companywe may need additional equity or debt financing. If such financing is not available to the Companyus on satisfactory terms, the Company’sour ability to operate and expand the Company’sour business or to respond to competitive pressures could be harmed. Moreover, if the Company raiseswe raise additional capital by issuing equity securities or securities convertible into equity securities, the ownership of the Company’sour existing stockholders may be diluted. The holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of theour Common Stock. In addition, any indebtedness the Company incurswe incur may subject the Companyus to covenants that restrict the Company’sour operations and will require interest and principal payments that could create additional cash demands and financial risk for the Company.us.
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Indebtedness of the Company and its subsidiariesOur indebtedness may limit the Company’s and its subsidiaries’our ability to invest in the ongoing needs of itsour business and if the Company and its subsidiarieswe are unable to comply with the covenants in itsour current credit agreements, the Company’s and its subsidiaries’our business, sales, financial condition and results of operations could be harmed.
On November 18, 2021, the Companywe entered into a new credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consists of a seven-year $600On December 31, 2022, $659.4 million first-lien term loan, a five-year $125 million revolvingin principal was outstanding under the credit facility, and a $100 million delayed draw term loan. The Company isfacility. We are required to make quarterly payments of principal plus accrued interest. As of December 31, 2021, $655 million in principal was outstanding under the credit facility, including $600 million for the first-lien term loan, $30 million for the delayed draw term loan, and $25 million under the revolving credit facility. The Credit Agreement imposes various restrictions and contains customary affirmative and restrictive covenants, including, without limitation, certain reporting obligations, and certain limitations on restricted payments;payments, and limitations on liens, encumbrances and indebtedness. In addition, borrowings under the Credit Agreement are jointly and severally guaranteed by the Companyus and certain of its wholly-ownedour wholly owned material subsidiaries and the Company’sour future subsidiaries that become guarantors (collectively the “Loan Parties"). The First Lien Credit Agreement is secured by a first-priority lien on substantially all of the Loan Parties’ assets, in each case subject to certain customary exceptions. If we fail to comply with the covenants or payments specified in the Credit Agreement, the lender could declare an event of default, which would give it the right to declare all borrowings outstanding, together with any accrued and unpaid interest and fees, to be immediately due and payable.
The Credit Agreement places certain conditions on the Company,us including, subject to certain conditions, reductions and exceptions, requiring the Companyus to utilize a portion of itsour and itsour subsidiaries’ cash flow from operations to make payments on itsour and itsour subsidiaries’ indebtedness, reducing the availability of the Company’s and its subsidiaries’ cash flow to fund working capital, capital expenditures, development activity, return capital to the Company’sour stockholders, and other general corporate purposes. The Company’sOur and itsour subsidiaries’ compliance with this conditionthese conditions may limit the Company’sour and itsour subsidiaries’ ability to invest in the ongoing needs of the Company’s and its subsidiaries’ business.business needs. For example, complying with this condition:these conditions:
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| increases |
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| limits |
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| limits |
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| potentially places |
The Credit Agreement places certain limitations on the Company’sour and certain of itsour subsidiaries’ ability to incur additional indebtedness. However, subject to the certain exceptions and baskets in the Credit Agreement, the Companywe and itsour subsidiaries may incur substantial additional indebtedness under and outside of such credit agreement. The Credit Agreement also limits or prohibits, among other things, and in each case, subject to exceptions, materiality thresholds and baskets, the Company’sour and certain of itsour subsidiaries’ ability to: (a) pay dividends on, redeem or repurchase stock, or make other distributions; (b) incur or guarantee additional indebtedness; (c) sell stock in certain of the Company’sour subsidiaries; (d) create or incur liens; (e) make acquisitions or investments; (f) transfer or sell certain assets or merge or consolidate with or into other companies; (g) make certain payments or prepayments of indebtedness subordinated to the Company’sour obligations under the Credit Agreement; and (h) enter into certain transactions with the Company’sour affiliates.
In addition to the restrictions described above, the Credit Agreement requires the Companyus and certain of itsour subsidiaries to comply with certain other covenants, including a financial maintenance covenant regarding the Company’sour total net leverage ratio on the last day of each fiscal quarter, with step downs to lower total net leverage ratio levels at specified times as set forth therein. Failure to comply with these covenants and certain other provisions of the Credit Agreement, or the occurrence of a change of control, could result in an event of default and an acceleration of the Loan Parties’ obligations under the Credit Agreement or other indebtedness that the Companywe and itsour subsidiaries may incur in the future.
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In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending March 31, 2023 through the fiscal quarter ending March 31, 2024 (the “Covenant Relief Period”), to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter. As an ongoing condition to the Covenant Relief Period, the Company also agreed to (i) a minimum liquidity test, (ii) an interest coverage test, (iii) an anti-cash hoarding test at any time revolving loans are outstanding, and (iv) additional reporting obligations.
If such an event of default and acceleration of the Loan Parties’ obligations occurs, subject to intercreditor agreements agreed to by the lenders, the lenders under the Credit Agreement would have the right to proceed against the collateral the Loan Parties granted to them to secure such indebtedness. If the debt under the Credit Agreement were to be accelerated, the Companywe and itsour subsidiaries may not have sufficient cash or be able to sell sufficient collateral to repay this debt, which would immediately and materially harm the Company’sour and itsour subsidiaries’ business, sales, financial condition and results of operations. The threat of the Company’sour debt being accelerated in connection with a change of control could make it more difficult for the Companyus to attract potential buyers or to consummate a change of control transaction that would otherwise be beneficial to the Company’sour stockholders.
The announced upcoming discontinuance of publishing LIBOR rates may impact the cost or availability of financing for us.
A large portion of our variable rate indebtedness ($655659 million of outstanding principal as ofon December 31, 2021)2022) references the London interbank offered rates ("LIBOR") as a benchmark for establishing the interest rate. LIBOR is expected to be phased out by June 2023. With the expected discontinuation of LIBOR, the U.S. Federal Reserve has begun publishing a Secured Overnight Funding Rate (“SOFR”), an index based on transactions in the Treasury repurchase market. SOFR is a relatively new reference rate and with a limited history, and changes in SOFR have, on occasion, been more volatile than changes in other benchmark or market rates. At this time, it is uncertain whether SOFR or other alternative reference rates may become widely accepted alternatives for LIBOR. Although our LIBOR-based borrowings under the newour existing credit facility contemplate a transition from LIBOR to an alternative index, there is uncertainty as to the nature of alternative reference rates and as to potential changes or other reformsrelating to the replacement of LIBOR with SOFR. The transition may adverselyresult in an adverse impact on our interest expense, in which event our available cash flow for general corporate requirements maybe adversely affected.
The Company’s
Our failure to maintain effective internal controls over financial reporting could harm us.
The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal controls over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Under standards established by the Public Company Accounting Oversight Board (“PCAOB”), a deficiency in internal controls over financial reporting exists when the design or operation of a control does not allow management or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented, or detected and corrected, on a timely basis. The PCAOB defines a significant deficiency as a deficiency, or a combination of deficiencies, in internal controls over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s financial reporting.
As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. As an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event that it is not satisfied with the level at which our controls are documented, designed or operating.
To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. The efforts required to ensure that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis, and to remediate any existing material weakness, are costly and time-consuming, and may need to be re-evaluated frequently. Implementing appropriate changes to our internal controls may take a significant amount of time to complete, including that of directors, officers and employees, and may entail substantial costs in order to modify existing accounting systems.
Additionally, we may experience material weaknesses or significant deficiencies in our internal control over financial reporting in the future. For example, as previously disclosed we identified a material weakness in internal control over financial reporting related to Empower Ltd.’s accounting and reporting of complex financial instruments, including application of ASC 480-10-S99-3A to the Company’s accounting classification of public shares. Remediation efforts can be time-consuming and expensive and can place a significant burden on management, thereby increasing pressure on our financial resources and processes. We may not be successful in making the improvements necessary to remediate the existing or any future material weakness, or in doing so in a timely and cost-effective manner.
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Any failure to maintain internal control over financial reporting, or any failure to fully remediate the existing or any future material weaknesses that may be found to exist, could inhibit our ability to accurately and on a timely basis report our cash flows, results of operations or financial condition in compliance with applicable securities laws. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our Common Stock and Warrants could decline and we could be subject to sanctions or investigations by NYSE, the SEC or other regulatory authorities. Failure to remediate any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets and negatively impact the price and trading market for our Common Stock and Warrants.
Our disclosure controls and procedures may not prevent or detect all acts of fraud.
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to management and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Our management expects that our disclosure controls and procedures and internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within our company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. The Companydesign of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and we cannot assure that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We may acquire or invest in other companies, which itwe may not be able to integrate successfully, and which could divert the Company management’smanagement’s attention, result in dilution to the Company’sour stockholders, and otherwise disrupt the Company’sour operations and harm the Company’sour business, sales, financial condition and results of operations.
The Company's recent
Our growth has depended, and itsour future growth is likely to continue to depend, in part, on itsour acquisition strategy and the successful integration of acquired businesses into itsour existing operations. The Company intendsWe intend to continue to seek acquisition opportunities both to expand into new markets and to enhance itsour position in existing markets. The CompanyWe cannot assure that itwe will be able to successfully integrate acquired businesses into itsour existing operations or expand into new markets. In addition, the Companywe cannot assure that any acquisition, once successfully integrated, will perform as planned, be accretive to earnings, or prove to be beneficial to the Company'sour results of operations or cash flow. Additionally, we may be unable to identify suitable businesses to acquire, which could negatively impact our growth, or we may be unable to complete proposed transactions in a timely matter if we fail to obtain any requisite regulatory approvals.
In the future, the Companywe may acquire or invest in businesses, products, or technologies that the Companywe believe could complement or expand itsour business, enhance itsour capabilities, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause the Companyus to incur various costs and expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
In any future acquisitions, the Companywe may not be able to successfully integrate acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. The success of the Company'sour acquisition strategy is subject to other risks and uncertainties, including:
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| an ability to realize operating efficiencies, synergies or other benefits expected from an acquisition, and possible delays in realizing the benefits of the acquired company or products; |
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| the risks associated with the assumption of product liabilities or contingent or undisclosed liabilities of the acquired company; |
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| difficulties in maintaining uniform standards, controls, procedures and policies throughout acquired companies; |
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| diversion of |
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| difficulties in retaining key employees, customers or suppliers of the acquired business; |
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| the ability to generate future cash flows or the availability of |
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| the incurrence of acquisition-related costs; |
• | acquisition-related litigation; |
• | unexpected capital expenditure requirements; or |
• | the issuance of dilutive equity securities, the incurrence of debt, or the use of cash to fund such acquisitions. |
In addition, an acquisition could adversely impact the Company'sour operating performance as a result of the incurrence of acquisition-related debt, pre-acquisition potential tax liabilities, acquisition expenses, amortization of acquisition-related intangible assets, or possible future impairment of goodwill or intangible assets associated with the acquisitions. Even if an acquisition is integrated successfully, it may fail to realize expected revenues, gross and operating margins, net income and other returns.
The Company
We may also face liability with respect to acquired businesses for violations of environment laws occurring prior to the date of acquisition, which may not be covered by environment insurance secured to mitigate the risk or by indemnification from the sellers of the acquired businesses. The CompanyWe could also incur significant costs, including, but not limited to, remediation costs, natural resources damages, civil or criminal fines and sanctions, and third-party claims, as a result of past or future violations of, or liabilities, associated with environmental laws.
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Most members of the Company’sour management team do not have prior experience in operating a public company.
Most members of the Company’sour management team do not have prior experience in managing a publicly traded company. As such, the management team may encounter difficulties in successfully or effectively managing itsour transition to a public company and in complying with itsour reporting and other obligations under federal securities laws and other regulations and in connection with operating as a public company. Their lack of prior experience in dealing with the reporting and other obligations and laws pertaining to public companies could result thein management of the Company being required to devote significant time to these activities which may result in less time being devoted to the management and growth of the Company. In addition, the Company iswe are hiring additional personnel with the appropriate level of knowledge, experience, and training in the accounting policies, practices or internal controls over financial reporting required of public companies. The CompanyWe may be required to incur significant expense in connection with these efforts.
If the Company’sour goodwill, other intangible assets, or fixed assets become impaired, the Companywe may be required to record a charge to its earnings.
The Company
We may be required to record future impairments of goodwill, other intangible assets, or fixed assets to the extent the fair value of these assets falls below their book value. The Company’sOur estimates of fair value are based on assumptions regarding future cash flows, gross margins, expenses, discount rates applied to these cash flows, and current market estimates of value. Estimates used for future sales growth rates, gross profit performance, and other assumptions used to estimate fair value could cause the Companyus to record material non-cash impairment charges, which could harm the Company’s business, sales,our financial condition and results of operations.
During the third quarter of 2022, we concluded it was necessary to reevaluate goodwill and indefinite-lived intangible assets for impairment after supply chain challenges led to a downward revision of earnings estimates for 2022, which resulted in a decline in our market capitalization. Based on a quantitative assessment in the third quarter of 2022, we identified impairment of $2.4 million on certain indefinite-lived tradenames but did not identify any indicators of goodwill impairment. During the fourth quarter of 2022, we performed our annual impairment test for goodwill, and a quantitative analysis did not identify any indicators of impairment. Based on the annual impairment assessment, the estimated fair value exceeded the carrying value of the reporting unit by 15%. As of December 31, 2022, we concluded it was necessary to reevaluate goodwill for impairment due to a further downward revision of earnings estimates for 2022 and a continued decline in our market capitalization. Accordingly, we performed a qualitative assessment and did not identify any indicators of impairment. Goodwill was $418.1 million as of December 31, 2022, and is considered at higher risk of failing future quantitative impairment tests due to the narrow difference between fair value and carrying value.
Global climate change and related regulations could negatively affect our business.
The effects of climate change, such as extreme weather conditions, create financial risks to our business. For example, theThe demand for our products may be affected by unseasonableextreme weather conditions.conditions, such as droughts, wildfires and flooding. These types of extreme weather events have and may continue to adversely impact us, our suppliers, our customers and their ability to purchase our products and our ability to timely receive appropriate raw materials to manufacture and transport our products on a timely basis. The effects of climate change could also disrupt our operations by impacting the availability and cost of materials needed for manufacturing and could increase insurance and other operating costs. We could also face indirect financial risks passed through the supply chain and disruptions that could result in increased prices for our products and the resources needed to produce them.
Furthermore, the long-term impacts of climate change, whether involving physical risks (such as extreme weather conditions, drought, or rising sea levels) or transition risks (such as regulatory or technology changes) are expected to be widespread and unpredictable. Certain impacts of physical risk may include: temperature changes that increase the heating and cooling costs at our facilities; extreme weather patterns that affect the production or sourcing of certain components; flooding and extreme storms that damage or destroy our buildings and inventory; and heat and extreme weather events that cause long-term disruption or threats to the habitability of our customers’ communities. Relative to transition risk, certain impacts may include: changes in energy and commodity prices driven by climate-related weather events; prolonged climate-related events affecting macroeconomic conditions with related effects on consumer spending and confidence; stakeholder perception of our engagement in climate-related policies; and new regulatory requirements resulting in higher compliance risk and operational costs.
Climate change is continuing to receive ever increasing attention worldwide, which could lead to additional legislative and regulatory efforts to limitincrease transparency and standardization of reporting of greenhouse gas emissions. For example,emissions, energy policies, and renewable energy usage. Additionally, new federal or state restrictions on emissions of carbon dioxide that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell or lead to changes in automotive technology. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require increased capital expenditures to improve our product portfolio to meet such new laws, regulations and standards.
Increasing scrutiny and evolving expectations with respect to our environmental, social and governance (“ESG”) practices may impose additional costs on us or expose us to new or additional risks.
In addition to the increased legislative and regulatory attention to climate change, customer, investor, and employee expectations in ESG have been rapidly evolving and increasing. While we have been committed to continuous improvements to our product portfolio to meet anticipated regulatory standard levels, if customers, regulators or investors demand we increase our greenhouse gas emission or renewable energy disclosures or our ESG initiatives, we may have to implement additional reporting standards and reporting requirements. If we fail to meet customer, investor, or employee expectations, we may be unable to attract or retain our consumer base or talent. Further, there can be no assurance that our commitments will be successful, that our products will be accepted by the market, that proposed regulation or deregulation will not have a negative competitive impact or that economic returns will reflect our investments in new product development.
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The standards by which ESG efforts and related matters are measured are developing and evolving, and we could be criticized for the scope of our initiatives and goals, or lack thereof. If we fail to comply with the evolving customer or investor or employee expectations and standards, or if we are perceived to have failed to adequately respond to such expectations and standards, we may suffer from reputational damage, which could have an adverse impact on our business or financial condition.
Legal, Regulatory and Compliance Risks Related to Our Business
The Company
We may become involved in legal or regulatory proceedings and audits.
The Company’s
Our business requires compliance with many laws and regulations, including labor and employment, sales and other taxes, customs, and consumer protection laws and ordinances that regulate retailers generally and/or govern the importation, promotion, and sale of merchandise, and the operation of stores and warehouse facilities. Failure to comply with these laws and regulations could subject the Companyus to lawsuits and other proceedings, and could also lead to damage awards, fines, and penalties. The CompanyWe may become involved in a number of legal proceedings and audits, including government and agency investigations, and consumer, employment, tort, and other litigation. The outcome of some of these legal proceedings, audits, and other contingencies could require the Companyus to take, or refrain from taking, actions that could harm the Company’sour operations or require the Companyus to pay substantial amounts of money, harming the Company’sour business, sales, financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may be necessary, which could result in substantial costs and diversion of management’s attention and resources, harming the Company’sour business, sales, financial condition and results of operations. Any pending or future legal or regulatory proceedings and audits could harm the Company’sour business, sales, financial condition and results of operations.
The Company
We may become subject to intellectual property claims or lawsuits that could cause itus to incur significant costs or pay significant damages or that could prohibit itus from selling itsour products.
The Company’s
Our competitors also seek to obtain patent, trademark, copyright or other protection of their proprietary rights and designs for automotive products. From time to time, third parties have claimed or may claim in the future that the Company’sour products infringe upon their proprietary rights. The Company evaluatesWe evaluate any such claims and, where appropriate, hashave obtained or sought to obtain licenses or other business arrangements. To date, there have been no significant interruptions in the Company’sour business as a result of any claims of infringement. However, in the future, intellectual property claims could force the Companyus to alter itsour existing products or withdraw them from the market or could delay the introduction of new products.
Various patents have been issued to the Company’sour competitors in the automotive parts industry and these competitors may assert that the Company’sour products infringe their patent or other proprietary rights. If the Company’sour products are found to infringe third-party intellectual property rights, the Companywe may be unable to obtain a license to use such technology, and itwe could incur substantial costs to redesign itsour products, withdraw them from the market, and/or to defend legal actions.
Sales of the Company’sour products by unauthorized retailers or distributors could adversely affect the Company’sour authorized distribution channels and harm the Company’sour reputation.
Some of the Company’sour products may find their way to unauthorized outlets or distribution channels. This “gray market” for the Company’sour products can undermine authorized retailers and foreign wholesale distributors who promote and support the Company’sour products and can injure the Company’sour brands in the minds of itsour customers and consumers. On the other hand, stopping such commerce could result in a potential decrease in sales to those customers who are selling the Company’sour products to unauthorized distributors or an increase in sales returns over historical levels. While the Company haswe have taken some lawful steps to limit commerce of itsour products in the “gray market” in both the United States and abroad, it haswe have not stopped such commerce.
The Company is
We are subject to environmental, health and safety laws and regulations, which could subject the
Companyus to liabilities, increase itsour costs or restrict itsour operations in the future.
The Company’s
Our properties and operations are subject to a number of environmental, health and safety laws and regulations in each of the jurisdictions in which the Company operates,we operate, including, among others, regulations of the California Air Resources Board. These laws and regulations govern, among other things, air emissions, water discharges, handling and disposal of solid and hazardous substances and wastes, soil and groundwater contamination and employee health and safety. The Company’sOur failure to comply with such environmental, health and safety laws and regulations could result in substantial civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring remedial or corrective measures, installation of pollution control equipment or other actions.
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The CompanyWe may also be subject to liability for environmental investigations and cleanups, including at properties that the Companywe currently or previously owned or operated, even if such contamination was not caused by the Company,us, and the Companywe may face claims alleging harm to health or property or natural resource damages arising out of contamination or exposure to hazardous substances. The CompanyWe may also be subject to similar liabilities and claims in connection with locations at which hazardous substances or wastes the Company haswe have generated have been stored, treated, otherwise managed, or disposed. Environmental conditions at or related to the Company’sour current or former properties or operations, and/or the costs of complying with current or future environmental, health and safety requirements (which have become more stringent and complex over time) could materially adversely affect the Company’sour business, sales, financial condition and results of operations.
Changes in, or any failure to comply with, privacy laws, regulations, and standards may adversely affect theour business.
Company’s business.
Personal privacy and data security have become significant issues in the United States, Europe, and in many other jurisdictions in which the Company operates.we operate. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Furthermore, federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy, all of which may be subject to invalidation by relevant foreign judicial bodies.
Industry organizations also regularly adopt and advocate for new standards in this area. In the United States, these include rules and regulations promulgated under the authority of federal agencies and state attorneys general and legislatures and consumer protection agencies, including, but not limited to, the California Consumer Privacy Act (“CCPA”). Internationally, many jurisdictions in which the Company operateswe operate have established their own data security and privacy legal framework with which the Companywe or itsour customers must comply, including, but not limited to, the European General Data Protection Regulation (“GDPR”), which imposes certain privacy-related obligations and potential penalties and risks upon the Company’sour business. In many jurisdictions, enforcement actions and consequences for noncompliance are also rising. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to the Company.us. Any inability or perceived inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations, and policies, could result in additional cost and liability to the Company,us, damage itsour reputation and adversely affect itsour business.
The Company’sOur insurance policies may not provide adequate levels of coverage against all claims, and the Companywe may incur losses that are not covered by itsour insurance.
The Company maintains
We maintain insurance of the type and in amounts that the Company believes iswe believe are commercially reasonable and that is available to businesses in itsour industry. The Company carriesWe carry various types of insurance, including general liability, auto liability, workers’ compensation, cyber, and excess umbrella, from highly rated insurance carriers. Market forces beyond the Company’sour control could limit the scope of the insurance coverage that the Companywe can obtain in the future or restrict itsour ability to buy insurance coverage at reasonable rates. The CompanyWe cannot predict the level of the premiums that the Companywe may be required to pay for subsequent insurance coverage, the level of any deductible and/or self-insuranceself- insurance retention applicable thereto, the level of aggregate coverage available or the availability of coverage for specific risks. In the event of a substantial loss, the insurance coverage that the Company carrieswe carry may not be sufficient to compensate the Companyus for the losses the Company incurswe incur or any costs the Company iswe are responsible for.
The Company previously identified material weaknesses in its internal control over financial reporting. If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results.
We have identified material weaknesses in our internal control over financial reporting related to the accounting for complex financial instruments at Empower Ltd., which existed prior to the Business Combination. During 2021, the Company completed a series of actions that effectively remediated the material weaknesses. Subsequent to the Business Combination on July 16, 2021, and upon filing the 10-Q for the quarterly period ended September 26, 2021, the internal controls over financial reporting of Holley Inc. took the place of the internal controls over financial reporting of Empower Ltd. As a result, the internal control structure of Empower Ltd. is no longer in operation and, instead, the relevant internal control structure after completion of the Business Combination is that of Holley Inc. As of December 31, 2021 management has concluded that its internal control over financial reporting was effective. See Item 9A. – “Controls and Procedures” of this Form 10-K.
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The existence of material weaknesses in internal control over financial reporting could adversely affect our reputation or investor perceptions of us, which could have a negative effect on the trading price of our shares. We can give no assurance that additional material weaknesses or restatements of financial results will not arise in the future due to a failure to maintain adequate internal control over financial reporting or circumvention of these controls, and in the future our controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
The Company may face litigation and other risks as a result of Empower’s restatement of its historical financial statements and related matters.
On April 12, 2021, the Acting Director of the Division of Corporation Finance and Acting Chief Accountant of the SEC together issued a statement regarding the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Statement”). Specifically, the SEC Statement focused on certain settlement terms and provisions related to certain tender offers following a business combination, which terms are similar to those contained in the Warrant Agreement, dated October 6, 2020, between Continental Stock Transfer & Trust Company, as Warrant agent, and Empower (the “Warrant Agreement”). Following the issuance of the SEC Statement, after consultation with Empower’s independent registered public accounting firm, Empower’s management and audit committee concluded that it was appropriate to restate its previously issued audited financial statements as of December 31, 2020 and for the period from August 19, 2020 (inception) through December 31, 2020. As part of the restatement, Empower identified a material weakness in its internal controls over financial reporting.
Subsequent to the filing of Amendment No. 1 to Empower’s Annual Report on Form 10-K/A, based on SEC guidance, we identified a material weakness in Empower’s internal control over financial reporting related to Empower’s application of ASC 480-10-S99-3A to its accounting classification of the Empower Class A Shares. On December 14, 2021, our audit committee and management concluded that Empower’s internal control over financial reporting was not effective as of December 31, 2020, and, accordingly, our audit committee authorized management to restate Empower’s audited financial statements for the year ended December 31, 2020, where we concluded that the control deficiency that resulted in the incorrect classification of Empower Class A Shares constituted a material weakness as of December 31, 2020, resulting in the filing of Amendment No. 2 to Empower’s Annual Report on Form 10-K/A, filed with the SEC on February 4, 2022, and for the quarterly periods ended March 31, 2021 and June 30, 2021, resulting in the filing of Amendment No. 1 to Empower’s Quarterly Report for the period ended March 31, 2021 on Form 10-Q/A, filed with the SEC on February 4, 2022 and the filing of Amendment No. 1 to the Company’s Quarterly Report for the period ended June 30, 2021 on Form 10-Q/A, filed with the SEC on February 4, 2022 . Historically, a portion of the Empower Class A Shares was classified as permanent equity to maintain stockholders’ equity greater than $5 million on the basis that Empower would not redeem its Empower Class A Shares in an amount that would cause its net tangible assets to be less than $5,000,001, as described in Empower’s amended and restated memorandum and articles of association. Pursuant to the Company’s re-evaluation of Empower’s application of ASC 480-10-S99-3A to its accounting classification of Empower Class A Shares, the Company’s management has determined that the Empower Class A Shares include certain provisions that require classification of all Empower Class A Shares as temporary equity regardless of the net tangible assets redemption limitation contained in Empower’s amended and restated memorandum and articles of association.
As a result of such material weaknesses, the restatements, the change in accounting for the Warrants and the A&R FPA, reclassification of Empower Class A Shares, and other matters raised or that may in the future be raised by the SEC, the Company faces potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and material weaknesses in Empower’s internal control over financial reporting and the preparation of Empower’s financial statements. As of the date of this annual report, the Company has no knowledge of any such litigation or dispute. However, the Company can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on the Company’s business, results of operations and financial condition.
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Changes in tax lawslaw or regulation, effective tax rates and unanticipated tax liabilities could adversely affect the Company’sour effective income tax rate and profitability.
The Company is
We are subject to income taxes in the United States (federal and state) and various foreign jurisdictions. The Company’sOur future effective income tax rate could be subject to volatility or adversely affected in the future by a number of factors, including changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and regulations, accounting principles, or their interpretations and application and the outcome of income tax audits in various jurisdictions around the world.thereof. In particular, the Biden administration has proposed increasesU.S. government may enact significant changes to the U.S.taxation of business entities including, among others, an increase in the corporate income tax rate, the imposition of minimum taxes or surtaxes on certain types of income, significant changes to the taxation of income derived from 21%international operations, and an addition of further limitations on the deductibility of business interest. For example, the U.S. government enacted the Inflation Reduction Act which, among other things, imposes a minimum tax on certain corporations with book income of at least $1 billion, subject to 28%certain adjustments, and made other proposals. If anya 1% excise tax on certain stock buybacks and similar corporate actions. Any of these (or similar) proposalsor similar developments or changes in federal, state, or international tax laws or tax rulings could adversely affect our effective tax rate and our operating results.
We are ultimately enacted into law, in wholealso subject to the continuous examination of our income and other tax returns by the Internal Revenue Service and other tax authorities globally. It is possible that tax authorities may disagree with certain positions we have taken, and an adverse outcome of such a review or in part, theyaudit could have a negative impacteffect on our financial position and operating results. There can be no assurance that the outcomes from such examinations, or changes in tax law or regulation impacting our effective tax rate. We cannot predict the likelihood, timing or substancerates, will not have an adverse effect on our business, financial condition and results of U.S. tax proposals and will continue to monitor the progress of such proposals, as well as other global tax reform initiatives.operations.
Risks Related to Ownership of Our Securities
Certain of the Company’sour stockholders, including the Holley Stockholder and the Sponsor, may have conflicts of interest with other stockholders and may limit yourother stockholders' ability to influence corporate matters.
As of
At December 31, 2021, Holley Parent Holdings, LLC (the2022, the “Holley Stockholder”) andEmpower Sponsor Holdings LLC (the the "Sponsor")(together (together with its affiliates) beneficially own, in the aggregate, approximately 67.8%approximately 55% of our shares of Common Stock, excluding any warrantsWarrants exercisable for Common Stock held by Sponsor or its affiliates (or 69.5%57% inclusive of shares of Common Stock underlying Warrants held by Sponsor and its affiliates). As a result of this concentration of stock ownership, these parties acting together and, in the case of the Holley Stockholder, on its own, have sufficient voting power to effectively control all matters submitted to our stockholders for approval, including director elections and proposed amendments to our certificate of incorporation and bylaws. On July 16, 2021, (the “Closing” and such date, the “Closing Date”), the Company, the Sponsor, certain affiliates of the Sponsor, Investors, the Holley Stockholder and Sentinel Capital Partners V, L.P., Sentinel Capital Partners V-A, L.P. and Sentinel Capital Investors V, L.P., controlling affiliates of the Sentinel InvestorsHolley Stockholder entered into the Stockholders’ Agreement, pursuant to which the Holley Stockholder and the Sponsor have the right to designate nominees for election to the Company’sour board of directors subject to certain beneficial ownership requirements.
In addition, this concentration of ownership may delay or prevent a merger, consolidation or other business combination or change in control of our Companycompany and make some transactions that might otherwise give youstockholders the opportunity to realize a premium over the then-prevailing market price of our securities more difficult or impossible without their support. Because we have opted out of Section 203 of the Delaware General Corporation Law (“DGCL”) regulating certain business combinations with interested stockholders, these parties may transfer their shares of Common Stock and such control of us to a third party, which would not require the approval of our board of directors or other stockholders and may limit the price that investors are willing to pay in the future for shares of our Common Stock. The interests of these parties may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, these parties could cause us to enter into transactions or agreements of which you wouldother stockholders may not approve or make decisions with which youother stockholders would disagree. This concentration of ownership may also adversely affect the trading prices of our securities.
Each of the Holley Stockholder and the Sponsor is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with the Company.us. The certificate of incorporation provides that none of the Holley Stockholder, the Sponsor, any of their affiliates or any director who is not employed by the Companyus (including any non-employee director who serves as one of the Company’sour officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which the Company operates.we operate. Each of the Holley Stockholder and the Sponsor also may pursue acquisition opportunities that may be complementary to the Company’sour business and, as a result, those acquisition opportunities may not be available to the Company.us.
Warrants are exercisable for Common Stock, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
The Company has
On December 31, 2022, we had an aggregateaggregate of 14,666,644 Warrants14,633,311 Warrants issued and outstanding, representing the right to purchase an equivalent amount of shares of Common Stock. The Warrants became exercisable on October 9, 2021. The exercise price of the Warrants is $11.50 per share. To the extent such Warrants are exercised, additional shares of Common Stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such Warrants may be exercised could adversely affect the market price of our Common Stock. However, there is no guarantee that the Warrants will ever be in the money prior to their expiration, and as such, the Warrants may expire worthless.
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The Warrants may expire worthless, and the terms of the Warrants may be amended in a manner adverse to a holder if holders of at least 50% of the then-outstanding Warrants approve of such amendment.
The Warrant Agreement provides that the terms of the Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but it requires the approval by the holders of at least 50% of the then-outstanding Warrants to make any change that adversely affects the interests of the registered holders of the Warrants. Accordingly, we may amend the terms of the Warrants in a manner adverse to a holder if holders of at least 50% of the then-outstanding Warrants approve of such amendment. Although our ability to amend the terms of the Warrants with the consent of at least 50% of the then outstanding Warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the Warrants, shorten the exercise period or decrease the number of Common Stock purchasable upon exercise of a Warrant.
The market price and trading volume of Common Stock and Warrants may be volatile.
Stock markets, including the NYSE, have from time to timetime-to-time experienced significant price and volume fluctuations. Even if an active, liquid and orderly trading market develops and is sustained for Common Stock and Warrants, the market price of Common Stock and Warrants may be volatile and could decline significantly, whether or not any price changes are related to matters specific to the Company.us. In addition, the trading volume in Common Stock and Warrants may fluctuate and cause significant price variations to occur. If the market price of Common Stock and Warrants declines significantly, youstockholders may be unable to resell your shares of Common Stock and Warrants at or above the market price of Common Stock and Warrants. We cannot assure youguarantee that the market price of Common Stock and Warrants will not fluctuate widely or decline significantly in the future in response to a number of factors, including, among others, the following:
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| the realization of any of the risk factors presented in this |
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| actual or anticipated differences in |
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| additions and departures of key personnel; |
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| failure to comply with the requirements of the NYSE; |
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| failure to comply with the Sarbanes-Oxley Act or other laws or regulations; |
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| future issuances, sales or resales, or anticipated issuances, sales or resales, of Common Stock; |
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| perceptions of the investment opportunity associated with Common Stock relative to other investment alternatives; |
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| the performance and market valuations of other similar companies; |
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| future announcements concerning |
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| broad disruptions in the financial markets, including sudden disruptions in the credit markets; |
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| speculation in the press or investment community; |
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| actual, potential or perceived control, accounting or reporting problems; |
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| changes in accounting principles, policies and guidelines; and |
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| general economic and political conditions, such as |
In the past, securities class-action litigation has often been instituted against companies following periods of volatility in the market price of their securities. This type of litigation could result in substantial costs and divert the Company’sour management’s attention and resources, which could have a material adverse effect on the Company.us.
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Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the market price and trading volume of Common Stock and Warrants.
The market for Common Stock and Warrants depends in part on the research and reports that securities or industry analysts publish about the Companyus or itsour business. Securities research analysts may establish and publish their own periodic projections for Holley. These projections may vary widely and may not accurately predict the results we actually achieve. Our share price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for Common Stock and Warrants could decrease, which might cause the market price and trading volume of our Common Stock and Warrants to decline significantly.
Future sales of our Common Stock and Warrants in the public market could cause our stock price to fall.
The
On December 31, 2022, the Holley Stockholder and the Sponsor (together with its affiliates) beneficially own, in the aggregate, approximately 67.8%55% of our shares of Common Stock, excluding any warrants exercisable for Common Stock held by Sponsor or its affiliates (or 69.5%57% inclusive of shares of Common Stock underlying Warrants held by Sponsor and its affiliates). All shares held by our affiliates are eligible for resale in the public market, subject to applicable securities laws, including the Securities Act. Therefore, unless shares owned by any of our affiliates are registered under the Securities Act, these shares may only be resold into the public markets in accordance with the requirements of an exemption from registration or safe harbor, including Rule 144 and the volume limitations, manner of sale requirements and notice requirements thereof. However, pursuant to the terms the A&RAmended and Restated Registration Rights Agreement, of which the Company entered into with the Sponsor and the Holley Stockholder at the closing of the Business Combination, the Sponsor and the Holley Stockholder have the right to demand that we register their shares under the Securities Act as well as the right to include their shares in any registration statement that we file with the SEC, subject to certain exceptions. The registration statement, which was filed pursuant to these registration rights, and any registration of other shares we may file in the future, enables those securities to be sold in the public market. Any sale by the Holley Stockholder, the Sponsor or other affiliates and stockholders, or any perception in the public markets that such a transaction may occur could cause the market price of our Common Stock and Warrants to decline materially.
The Company is a “controlled company” within the meaning of the NYSE Listed Company Manual and, as a result, qualifies for exemptions from certain corporate governance requirements. If we rely on such exemptions, you will not have the same protections afforded to stockholders of companies that are subject to such requirements.
The Holley Stockholder owns a majority of our Common Stock, meaning that the Company is a controlled company within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, company or group of persons acting together is a controlled company and may elect not to comply with certain NYSE corporate governance requirements, including the requirements that:
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These requirements will not apply to us as long as we remain a controlled company. We are not utilizing these exemptions; however, if in the future we decide to rely on such exemptions, we may elect not to comply with the foregoing NYSE corporate governance requirements and, if we do, investors in our securities may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
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The Company may redeem your unexpired Warrants prior to their exercise at a time that is disadvantageous to you,the Warrant holders, thereby making yourthe Warrants worthless.
The Company has
We have the ability to redeem outstanding Warrants at any time prior to their expiration, at a price of $0.01 per Warrant, provided that the last reported sales price of Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) on the trading day prior to the date on which we send the notice of redemption to the Warrant holders. If and when the Warrants become redeemable by the Company, the Companyus, we may not exercise itsour redemption right if the issuance of shares of Common Stock upon exercise of the Warrants is not exempt from registration or qualification under applicable state blue sky laws or it iswe are unable to effect such registration or qualification. The CompanyWe will use itsour best efforts to register or qualify such shares of Common Stock under the blue skyblue-sky laws of the state of residence in those states in which the Warrants were offered. Redemption of the outstanding Warrants could force youstockholders (i) to exercise yourthe Warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) to sell yourthe Warrants at the then-current market price when youstockholders might otherwise wish to hold yourthe Warrants or (iii) to accept the nominal redemption price which, at the time the outstanding Warrants are called for redemption, is likely to be substantially less than the market value of yourthe Warrants. None of the Private Warrants will be redeemable by the Companyus so long as they are held by the Sponsor, or its permitted transferees.
The NYSE may delist the Company’sour securities from trading on its exchange, which could limit stockholders’stockholders’ ability to make transactions in itsour securities and subject the Companyus to additional trading restrictions.
Our Common Stock and Warrants are currently listed on NYSE. We cannot assure you that our securities will continue to be listed on the NYSE. In order to continue listing our securities on the NYSE, the Companywe will be required to maintain certain financial, distribution and stock price levels. Generally, the Companywe will be required to maintain a minimum amount in stockholders’ equity.
If the NYSE delists our securities from trading on its exchange for failure to meet the exchange's continued listing standards or otherwise, and we are not able to list our securities on another national securities exchange, our securities could be quoted on an over-the-counter market, but no assurance of this can be given. If this were to occur, we and our stockholders could face significant material adverse consequences including:
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| a limited availability of market quotations for our securities; |
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| reduced liquidity for our securities; |
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| a determination that our Common Stock is a “penny stock” which will require brokers trading in our Common Stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities; |
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| a limited amount of news and analyst coverage; and |
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| a decreased ability to issue additional securities or obtain additional financing in the future. |
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Since the Company’sour Common Stock and Warrants are listed on the NYSE, they are covered securities. Although the states are preempted from regulating the sale of itsour securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if the Company waswe were no longer listed on the NYSE, itsour securities would not be covered securities and itwe would be subject to regulation in each state in which it offers itswe offer our securities.
Future issuances of debt securities and equity securities may adversely affect the Company,us, including the market price of Common Stock and may be dilutive to existing stockholders.
There is no assurance that the Companywe will not incur debt or issue equity ranking senior to Common Stock. Those securities will generally have priority upon liquidation. Such securities also may be governed by an indenture or other instrument containing covenants restricting itstheir operating flexibility. Additionally, any convertible or exchangeable securities that the Company issues in the future may have rights, preferences and privileges more favorable than those of Common Stock. Separately, additional financing may not be available on favorable terms, or at all. Because the Company’sour decision to issue debt or equity in the future will depend on market conditions and other factors beyond the Company’sour control, itwe cannot predict or estimate the amount, timing, nature or success of the Company’sour future capital raising efforts. As a result, future capital raising efforts may reduce the market price of Common Stock and be dilutive to existing stockholders.
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The Company doesWe do not intend to pay cash dividends for the foreseeable future.
The Company
We currently intendsintend to retain itsour future earnings, if any, to finance the further development and expansion of itsour business and doesdo not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of the Company’sour board of directors and will depend on itsour financial condition, results of operations, capital requirements, restrictions contained in future agreements and financing instruments, business prospects and such other factors as itsour board of directors deems relevant.
The JOBS Act permits “emerging“emerging growth companies”companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.
The Company qualifies
We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, we take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. As a result, our stockholders may not have access to certain information they deem important. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year (a) following the fifth anniversary of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07$1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of the Common Stock and Warrants that are held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected to avail ourselves of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
We cannot predict if investors will find theour Common Stock and Warrants of the Company less attractive because we will rely on these exemptions. If some investors find theour Common Stock and Warrants of the Company less attractive as a result, there may be a less active trading market for theour Common Stock, and Warrants of the Company and more stock price volatility.
Delaware law and the Company’sour certificate of incorporation and bylaws contain certain provisions, including anti-takeoveranti- takeover provisions that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
The certificate of incorporation, bylaws and the DGCL contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our Common Stock, and therefore depress the trading price of Common Stock. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of the Company’sour board of directors or taking other corporate actions, including effecting changes in our management. Among other things, the certificate of incorporation and bylaws include provisions regarding:
• |
| a classified board of directors with staggered, three-year terms; |
• |
| prevent stockholders from acting by written consent; |
• |
| limit the ability of stockholders to amend our certificate of incorporation; |
30
• |
| limit the ability of stockholders to remove directors; |
• |
| prevent stockholders from calling special meetings of stockholders; |
• |
| the ability of the board of directors to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder; |
• |
| the certificate of incorporation prohibits cumulative voting in the election of directors; |
• |
| the limitation of the liability of, and the indemnification of, |
• |
| the ability of the board of directors to amend the bylaws; and |
• |
| advance notice procedures with which stockholders must comply to nominate candidates to the board of directors or to propose matters to be acted upon at a stockholders’ meeting. |
These provisions, alone or together, could discourage, delay or prevent hostile takeovers and changes in control, including transactions in which the acquirer may offer a premium price for our Common Stock and Warrants, or changes in the Company’sour board of directors or management.
In addition, our Incentive Plan provides for accelerated vesting of awards that are assumed or substituted in connection with a change in control of the Company as a result of the change in control if a participant experiences a qualifying termination within two years following the change in control, which could discourage, delay or prevent a merger or acquisition at a premium price.
The provisions of the certificate of incorporation requiring exclusive forum in the Court of Chancery of the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.
The certificate of incorporation provides that, unless the Company selectswe select or consentsconsent in writing to the selection of an alternative forum, to the fullest extent permitted by the applicable law: (a) the sole and exclusive forum for any complaint asserting any internal corporate claims, to the fullest extent permitted by law, and subject to applicable jurisdictional requirements, shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have, or declines to accept, jurisdiction, another state court or a federal court located within the State of Delaware); and (b) the sole and exclusive forum for any complaint asserting a cause of action arising under the Securities Act of 1933, to the fullest extent permitted by law, shall be the federal district courts of the United States of America. For purposes of the foregoing, “internal corporate claims” means claims, including claims in the right of the Company that are based upon a violation of a duty by a current or former director, officer, employee or stockholder in such capacity, or as to which the DGCL confers jurisdiction upon the Court of Chancery. Any person or entity purchasing or otherwise acquiring any interest in any shares of Common Stock will be deemed to have consented to (i) the personal jurisdiction of the state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce the certificate of incorporation’s exclusive forum provision (an “FSC Enforcement Action”), and (ii) having service of process made upon such holder of Common Stock in any such FSC Enforcement Action by service upon such holder of Common Stock’s counsel in such action as agent for such holder of Common Stock.
These provisions may have the effect of discouraging lawsuits against the Company’sour directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against the Company,us, a court could find the choice of forum provisions contained in the certificate of incorporation to be inapplicable or unenforceable in such action.
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Item 1B. Unresolved Staff Comments:Comments
None
Our corporate headquarters is located at 1801 Russellville Rd, Bowling Green, Kentucky 42101. We own the property and building where our headquarters is located. Our facility is approximately 200,000 square feet and includes approximately 68,50069,000 square feet for corporate office space, 88,30089,000 square feet for manufacturing and approximately 42,10042,000 square feet for product shipment and delivery acceptance.
We have a number of locations across the United States, Canada and Italy that serve multiple functions, including distribution, engineering, manufacturing, office space, R&D, and retail sales. We have 1714 facilities that perform manufacturing of our products and 1613 distribution locations. We also have 1518 R&D/Engineering facilities designed to grow our new product innovations.
We are currently not a party to any legal proceedings that would be expected to have a material adverse effect on our business or financial condition. From time to time, we are subject to litigation incidental to our business, as well as other litigation of a non-material nature in the ordinary course of business.
Item 4. Mine Safety Disclosures
Not applicable
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PART II
Item 5. Market for Registrant’sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The principal market on which our common stock and warrants are listed for trading is the New York Stock Exchange. Our common stock and warrants are traded on the New York Stock Exchangetrade under the symbols “HLLY” and “HLLY WS,” respectively.
Holders of Record
As of March 14, 2022,2023, there werewere approximately 20 stockholders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock, and we do not currently anticipate paying any cash dividends in the foreseeable future. We may consider declaring and paying a cash dividend in the future; however, there can be no assurance that we will do so.
Issuer Repurchase of Equity Securities
None
Unregistered Sales of Equity Securities
Except as previously disclosed in a Current Report on Form 8-K, no unregistered sales of the Company’s equity securities were made during the year ended December 31, 2021.2022.
Stock Performance Graph
The following graph shows a comparison from July 16, 2021 (the date the Company’s common stock commenced trading on the NYSE) through December 31, 2022, of the cumulative total return for the Company's common stock, the Standard & Poor's 500 Stock Index (S&P 500 Index), and the Standard & Poor’s Consumer Discretionary (Sector) Index. The graph assumes that $100 was invested in the Company’s common stock at the close of the market on July 16, 2021. In the case of the S&P 500 Index and the S&P Consumer Discretionary Index, the graph assumes that $100 was invested at the close of the market on June 30, 2021 and assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
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Item 7. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context requires otherwise, references to “Holley,“Holley,” “we,“we,” “us,“us,” “our”“our” and “the Company”“the Company” in this section are to the business and operations of Holley Inc. The following discussion and analysis should be read in conjunction with Holley’sHolley’s consolidated financial statements and related notes thereto included in this annual reportAnnual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause Holley’sHolley’s actual results to differ materially from management’smanagement’s expectations. Factors that could cause such differences are discussed herein and under the caption, “Cautionary“Cautionary Note Regarding Forward-Looking Statements.”
Overview
Overview
We are a designer, marketer, and manufacturer of high performancehigh-performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the United States, Canada, Europe and China. Holley designs, markets, manufactures and distributes a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. The Company’sOur products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety.
Innovation is at the core of our business and growth strategy with approximately 35%34% of our 20212022 sales coming from products introduced by us into the market since 2016.2017. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.
In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer (“DTC”)DTC scale and connection, (iv) expand share in current product categories and (v) realize value-enhancing revenue and cost synergies. While we believe our business is positioned for continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that would complement our current business and expand our addressable target market.
Factors Affecting our Performance
We believe that our performance and futurefuture success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of this Form 10-K titled “Risk Factors.”
Business Combination
On July 16, 2021, we consummated a business combination (“Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021, (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc., a direct wholly owned subsidiary of Empower (“Merger Sub I”), Empower Merger Sub II LLC, a direct wholly owned subsidiary of Empower (“Merger Sub II”), and Holley Intermediate Holdings, Inc. ("Holdings").
The Merger Agreement provided for, among other things, the following transactions: (i) Merger Sub I merged with and into Holdings, the separate corporate existence of Merger Sub I ceased and Holdings became the surviving corporation, and (ii) Holdings merged with and into Merger Sub II, the separate corporate existence of Holdings ceased, and Merger Sub II became the surviving limited liability company. Upon closing, Empower changed its name to Holley Inc. and its trading symbol on the New York Stock Exchange (the “NYSE”) from “EMPW” to “HLLY.”
The Business Combination was accounted for as a reverse recapitalization. Holdings was deemed the accounting acquirer with Holley Inc. as the successor registrant. As such, Empower was treated as the acquired company for financial reporting purposes, and financial statements for periods prior to the Business Combination are those of Holdings.
As a result of the Business Combination, Holley Inc. listed on the NYSE, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to continue to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit and other professional service fees.
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Acquisitions
Acquisitions
Holley has historically pursued a growth strategy through both organic growth and acquisitions. The Company has pursued acquisitions that it believes will help drive profitability, cash flow and stockholder value. Holley targets companies that are market leaders, expand the Company’s geographic presence, provide a highly synergistic opportunity and/or enhance Holley’s ability to provide a wide array of its products to its customers through its distribution network.
From 20192020 through 2021, we2022, Holley completed 1215 acquisitions. The most significant of these acquisitions impacting the comparability of our operating results were:
• | Baer, Inc.: On December 23, 2021, Holley acquired Baer, Inc. doing business as Baer Brakes, a developer and supplier of brakes and brake systems. This acquisition moves Holley closer to its goals of providing complete vehicle solutions by adding a new product category and brake system expertise. |
• | Brothers Mail Order Industries, Inc.: On December 16, 2021, Holley acquired Brothers Mail Order Industries, Inc., doing business as Brothers Trucks, a distributor of Classic and Custom vehicle restoration parts serving the Chevrolet and GMC truck aftermarket. This acquisition increases Holley’s offering in truck and SUV appearance items. |
• | Advance Engine Management Inc.: On April 14, 2021, Holley acquired Advance Engine Management Inc., doing business as AEM Performance Electronics, a developer and supplier of electronic control and monitoring systems for performance automotive applications. This acquisition increases Holley’s penetration into the import and other sport compact cars submarket. |
• | Simpson Performance Products: On November 16, 2020, Holley acquired Simpson Performance Products, Inc. (“Simpson”), a designer and seller of motorsport safety products including helmets head & neck restraints, seat belts, fire suits and more. This acquisition extended Holley’s footprint into the safety and racing segment. |
• | Drake Automotive Group: On November 11, 2020, Holley acquired Drake Automotive Group LLC (“Drake”), a designer and seller of automotive aftermarket appearance parts, wheels, chassis & suspension products and accessories. This acquisition increases Holley’s penetration within the Ford/Mustang platform where it has historically been under indexed relative to the market. |
The acquisitions have all been accounted for in accordance with FASB ASCFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations, and the operations of the acquired entities are included in our historical results for the periods following the closing of the acquisition. See Note 1, “Description“Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” and Note 2, “Business“Business Combination and Acquisitions,” in the Notes to the Consolidated Financial Statements included elsewhere in this annual reportAnnual Report on Form 10-K for additional information related to the Company’s acquisitions and investments.
COVID-19 Outbreak
Business Environment
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has experienced, and expects to continuecontinued to experience disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. In 2021 we continued to generate strong demand for our products; however, we have experienced and may continue to experience global supply constraints which affected our ability to deliver products to our customers in a timely manner and incremental costs from labor and material inflation, and expediting costs resulting from current-period supply chain shortages. The full extent of the impact of the COVID-19 pandemicCOVID-19's effect on the Company's business and operational and financial performance and condition is currently uncertain andin the future will depend on many factors outside the Company's control,future developments, including but not limited to the timing, extent, duration, spread, intensity and effectsphase of the viruspandemic in various countries; the emergence of COVID-19 variants and any of its mutations, the utilization and effectiveness of treatments and vaccines the imposition of effective public safety and other protective measures,against these variants; the further impact of COVID-19 on the global economyeconomy; and demand for the Company's products and services. Should the ongoing COVID-19 pandemic including variants such as Delta and Omicron, not improve, or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, and financial condition and prospects may be adversely affected. See Part I: Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our business.
The Company's business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, and disruption of the supply chain, as well as by geopolitical events, specifically the conflict in Ukraine. The Company's operations have been adversely impacted by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, the Company has attempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with its suppliers and customers to minimize disruptions in delivering products to customers. The Company's profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales to lower-margin products, and demands on our performance that increased our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate the impact on its supply chain, operations and costs is not successful, the Company's business, results of operations and financial condition may be adversely affected.
Key Components of Results of Operations
Net Sales
The principal activity from which the Company generates its sales is the designing, marketing, manufacturing and distribution of performance aftermarket automotive parts for its end consumers. Sales are displayed net of rebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized.
Cost of Goods Sold
Cost of goods sold consists primarily of the cost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.
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Selling, General, and Administrative
Selling, general, and administrative consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, outgoing shipping costs, pre-production and start-up costs are also included within selling, general, and administrative. The Company expects to incurhas incurred additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.
Acquisition and Restructuring Costs
Acquisition and restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. In addition, operational restructuring costs are included within this classification.
Related Party Acquisition and Management Fee Costs
Related party acquisition and management fee costs consist of fees paid to the Company’s historical private equity sponsor pursuant to a management services agreement for management services and consulting services directly attributable to potential acquisitions. Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated.
Interest Expense
Interest expense consists of interest due on the indebtedness under our credit facilities. On November 18, 2021, the Company entered into a new credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consists of a seven-year $600 million first-lien term loan, a five-year $125 million revolving credit facility, and a $100 million delayed draw term loan. As of December 31, 2021, $655.02022, $659.4 million was outstanding under the Credit Agreement. Interest is based on LIBOR or the prime rate, plus the applicable margin rate.
36
Results of Operations
Year Ended December 31, 2022 Compared With Year Ended December 31, 2021
The table below presents Holley’s results of operations for the years ended December 31, 2022 and 2021 (dollars in thousands):
For the years ended December 31, | ||||||||||||||||
2022 | 2021 | Change ($) | Change (%) | |||||||||||||
Net sales | $ | 688,415 | $ | 692,847 | $ | (4,432 | ) | (0.6 | %) | |||||||
Cost of goods sold | 434,757 | 406,040 | 28,717 | 7.1 | % | |||||||||||
Gross profit | 253,658 | 286,807 | (33,149 | ) | (11.6 | %) | ||||||||||
Selling, general, and administrative | 150,728 | 116,793 | 33,935 | 29.1 | % | |||||||||||
Research and development costs | 29,083 | 28,280 | 803 | 2.8 | % | |||||||||||
Amortization of intangible assets | 14,683 | 13,999 | 684 | 4.9 | % | |||||||||||
Impairment of indefinite-lived intangible assets | 2,395 | — | 2,395 | n/a | ||||||||||||
Acquisition and restructuring costs | 4,513 | 23,668 | (19,155 | ) | (80.9 | %) | ||||||||||
Related party acquisition and management fee costs | — | 25,789 | (25,789 | ) | (100.0 | %) | ||||||||||
Other expense | 1,514 | 755 | 759 | 100.5 | % | |||||||||||
Operating income | 50,742 | 77,523 | (26,781 | ) | (34.5 | %) | ||||||||||
Change in fair value of warrant liability | (57,021 | ) | 32,580 | (89,601 | ) | nm | ||||||||||
Change in fair value of earn-out liability | (10,731 | ) | 8,875 | (19,606 | ) | nm | ||||||||||
Loss on early extinguishment of debt | — | 13,650 | (13,650 | ) | (100.0 | %) | ||||||||||
Interest expense | 40,227 | 39,128 | 1,099 | 2.8 | % | |||||||||||
Income (loss) before income taxes | 78,267 | (16,710 | ) | 94,977 | nm | |||||||||||
Income tax expense | 4,493 | 10,429 | (5,936 | ) | (56.9 | %) | ||||||||||
Net income (loss) | 73,774 | (27,139 | ) | 100,913 | nm | |||||||||||
Foreign currency translation adjustment | (990 | ) | 30 | (1,020 | ) | nm | ||||||||||
Pension liability gain (loss) | 302 | 388 | (86 | ) | (22.2 | %) | ||||||||||
Total comprehensive income (loss) | $ | 73,086 | $ | (26,721 | ) | $ | 99,807 | nm |
Net Sales
Net sales for the year ended December 31, 2022, decreased $4.4 million, or 0.6%, to $688.4 million compared to $692.9 million for the year ended December 31, 2021. Non-comparable sales associated with acquisitions contributed $31.3 million to net sales in 2022, or year-over-year growth of 4.5%. The remaining comparable sales decreased by $35.7 million, or 5.2%. The decline in comparable sales was primarily driven by supply chain constraints that prevented the Company from building and shipping to orders received from customers and stabilizing demand due to a reduction in disposable income of our consumers. As a result, lower unit volume drove a decrease of approximately $88.5 million that was partially offset by improved price realization of approximately $52.8 million compared to 2021. Comparable year-over-year results by category include a decrease in electronic system sales of $28.1 million (9.1% category decline), a decrease in exhaust system sales of $11.4 million (14.6% category decline), a decrease in mechanical system sales of $4.6 million (3.0% category decline), a decrease in safety product sales of $3.2 million (4.9% category decline), and accessories sales growth of $11.6 million (13.6% category growth).
Cost of Goods Sold
Cost of goods sold for year ended December 31, 2022, increased $28.7 million, or 7.1%, to $434.8 million compared to $406.0 million for the year ended December 31, 2021. The increase in cost of goods sold during the year ended December 31, 2022, in which sales declined reflects compression in gross profit margin due to manufacturing inefficiencies driven by supply chain constraints, higher product rationalization charges, higher warranty costs, and inflationary pressures on certain other costs.
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2022, decreased $33.2 million, or 11.6%, to $253.7 million compared to $286.8 million for the year ended December 31, 2021. Gross margin for the year ended December 31, 2022, of 36.8% decreased from gross margin of 41.4% for the year ended December 31, 2021. The decrease in gross profit and gross profit margin was driven primarily by inflationary factors, higher expenses associated with product rationalization and warranty costs, and a shift in the mix of products sold towards products with lower margins due in part to limitations caused by supply chain challenges. In general, gross margin and margins on individual products will remain under pressure due to various factors, including potential increases in manufacturing costs and the shift of the Company's sales mix towards products with lower gross margins. Future gross margins could also be affected by the Company's ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products.
Selling, General and Administrative
Selling, general and administrative costs for the year ended December 31, 2022, increased $33.9 million, or 29.1%, to $150.7 million compared to $116.8 million for the year ended December 31, 2021. When expressed as a percentage of sales, selling, general and administrative costs increased to 21.9% of sales for the year ended December 31, 2022, compared to 16.9% of sales in 2021. The increase in costs was driven by a $19.4 million increase in compensation expense related to equity awards, which included an $11.4 million cumulative adjustment related to the early vesting of profit interest units granted by the Holley Stockholder prior to the Business Combination. Outbound shipping and handling costs increased $7.6 million, reflecting inflationary pressures on domestic shipping companies, and recent acquisitions contributed $3.7 million to the increase in selling, general and administrative costs.
Research and Development Costs
Research and development costs for the year ended December 31, 2022, increased $0.8 million, or 2.8%, to $29.1 million compared to $28.3 million for the year ended December 31, 2021. The increase in research and development costs reflects our pursuit of product innovation and new products.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets for the year ended December 31, 2022, increased $0.7 million, or 4.9%, to $14.7 million compared to $14.0 million for the year ended December 31, 2021, due to recent acquisitions. Additionally, an impairment charge of $2.4 million was recognized on certain indefinite-lived tradenames during 2022 (see Note 5, “Goodwill and Other Intangible Assets” in the Notes to the Consolidated Financial Statements included elsewhere in the Annual Report on Form 10-K for additional information related to the Company’s recognition of impairment charges).
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the year ended December 31, 2022, decreased $19.2 million to $4.5 million, as compared to $23.7 million for the year ended December 31, 2021. The year ended December 31, 2021, included an adjustment of $17.2 million for contingent consideration payable for the acquisition of Simpson Performance Products (“Simpson”).
Related Party Acquisition and Management Fee Costs
Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated. Related party acquisition and management fee costs for the year ended December 31, 2021, were $25.8 million, of which $23.3 million represents a fee paid upon the Closing of the Business Combination.
Operating Income
As a result of factors described above, operating income for the year ended December 31, 2022, decreased $26.8 million, or 34.5%, to $50.7 million compared to $77.5 million for the year ended December 31, 2021.
Change in Fair Value of Warrant Liability
For the year ended December 31, 2022, we recognized a gain of $57.0 million from the change in fair value of the warrant liability as compared to a loss of $32.6 million for the year ended December 31, 2021. The warrant liability reflects the fair value of the warrants issued in connection with the Business Combination.
Change in Fair Value of Earn-Out Liability
For the year ended December 31, 2022, we recognized a gain of $10.7 million from the change in fair value of the earn-out liability as compared to a loss of $8.9 million for the year ended December 31, 2021. The earn-out liability reflects the fair value of the earn-out shares resulting from the Business Combination.
Interest Expense
Interest expense for the year ended December 31, 2022, increased $1.1 million, or 2.8%, to $40.2 million compared to $39.1 million for the year ended December 31, 2021, due to a higher effective interest rate.
Income (Loss) before Income Taxes
As a result of factors described above, we recognized net income of $78.3 million before income taxes for the year ended December 31, 2022, compared to a net loss before income taxes of $(16.7) million for the year ended December 31, 2021.
Income Tax Expense
We recognized income tax expense of $4.5 million for the year ended December 31, 2022, compared to $10.4 million for the year ended December 31, 2021. The effective tax rate for the year ended December 31, 2022, was 5.7%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. The difference between the effective tax rate for the year ended December 31, 2021, and the federal statutory rate in 2021 was due to the permanent difference resulting from the adjustment to the Simpson earn-out liability during the period and the change in fair value of the warrant and earn-out liabilities.
Net Income (Loss) and Total Comprehensive Income (Loss)
As a result of factors described above, we recognized net income of $73.8 million for the year ended December 31, 2022, compared to a net loss of $(27.1) million for the year ended December 31, 2021. Additionally, we recognized total comprehensive income of $73.1 million for the year ended December 31, 2022, compared to total comprehensive loss of $(26.7) million for the year ended December 31, 2021. Comprehensive income (loss) includes the effect of foreign currency translation and pension liability adjustments.
Year Ended December 31, 2021 Compared With Year Ended December 31, 2020
The table below presents Holley’s results of operations for the years ended December 31, 2021 and 2020:2020 (dollars in thousands):
|
| For the years ended |
|
| Change |
| ||||||||||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| $ |
|
| % |
| For the years ended December 31, | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| 2021 | 2020 | Change ($) | Change (%) | ||||||||||||||||||
Net sales |
| $ | 692,847 |
| $ | 504,179 |
| $ | 188,668 |
| 37.4 | % | $ | 692,847 | $ | 504,179 | $ | 188,668 | 37.4 | % | ||||||||||||
Cost of goods sold |
|
| 406,040 |
|
|
| 295,935 |
|
|
| 110,105 |
|
| 37.2 | % | 406,040 | 295,935 | 110,105 | 37.2 | % | ||||||||||||
Gross profit |
| 286,807 |
| 208,244 |
| 78,563 |
| 37.7 | % | 286,807 | 208,244 | 78,563 | 37.7 | % | ||||||||||||||||||
Selling, general, and administrative |
| 116,793 |
| 70,875 |
| 45,918 |
| 64.8 | % | 116,793 | 70,875 | 45,918 | 64.8 | % | ||||||||||||||||||
Research and development costs |
| 28,280 |
| 23,483 |
| 4,797 |
| 20.4 | % | 28,280 | 23,483 | 4,797 | 20.4 | % | ||||||||||||||||||
Amortization of intangible assets |
| 13,999 |
| 11,082 |
| 2,917 |
| 26.3 | % | 13,999 | 11,082 | 2,917 | 26.3 | % | ||||||||||||||||||
Acquisition and restructuring costs |
| 23,668 |
| 9,743 |
| 13,925 |
| 142.9 | % | 23,668 | 9,743 | 13,925 | 142.9 | % | ||||||||||||||||||
Related party acquisition and management |
| 25,789 |
| 6,089 |
| 19,700 |
| 323.5 | % | 25,789 | 6,089 | 19,700 | 323.5 | % | ||||||||||||||||||
Other operating expense |
|
| 755 |
|
|
| 1,517 |
|
|
| (762 | ) |
| (50.2 | %) | 755 | 1,517 | (762 | ) | (50.2 | %) | |||||||||||
Operating income |
| 77,523 |
| 85,455 |
| (7,932 | ) |
| (9.3 | %) | 77,523 | 85,455 | (7,932 | ) | (9.3 | %) | ||||||||||||||||
Change in fair value of warrant liability |
| 32,580 |
| — |
| 32,580 |
| n/a |
| 32,580 | — | 32,580 | n/a | |||||||||||||||||||
Change in fair value of earn-out liability |
| 8,875 |
| — |
| 8,875 |
| n/a |
| 8,875 | — | 8,875 | n/a | |||||||||||||||||||
Loss on early extinguishment of debt |
| 13,650 |
| — |
| 13,650 |
| n/a |
| 13,650 | — | 13,650 | n/a | |||||||||||||||||||
Interest expense |
|
| 39,128 |
|
|
| 43,772 |
|
|
| (4,644 | ) |
| (10.6 | %) | 39,128 | 43,772 | (4,644 | ) | (10.6 | %) | |||||||||||
Income (loss) before income taxes |
| (16,710 | ) |
| 41,683 |
| (58,393 | ) |
| n/a |
| (16,710 | ) | 41,683 | (58,393 | ) | n/a | |||||||||||||||
Income tax expense |
|
| 10,429 |
|
|
| 8,826 |
|
|
| 1,603 |
|
| 18.2 | % | 10,429 | 8,826 | 1,603 | 18.2 | % | ||||||||||||
Net income (loss) |
| (27,139 | ) |
| 32,857 |
| (59,996 | ) |
| n/a |
| (27,139 | ) | 32,857 | (59,996 | ) | n/a | |||||||||||||||
Foreign currency translation adjustment |
| 30 |
| 16 |
| 14 |
| 87.5 | % | 30 | 16 | 14 | 87.5 | % | ||||||||||||||||||
Pension liability loss |
|
| 388 |
|
|
| (293 | ) |
|
| 681 |
|
| n/a |
| |||||||||||||||||
Pension liability gain (loss) | 388 | (293 | ) | 681 | n/a | |||||||||||||||||||||||||||
Total comprehensive income (loss) |
| $ | (26,721 | ) |
| $ | 32,580 |
|
| $ | (59,301 | ) |
| n/a |
| $ | (26,721 | ) | $ | 32,580 | $ | (59,301 | ) | n/a |
Net Sales
Net sales for the year ended December 31, 2021, increased $188.6 million, or 37.4%, to $692.8 million compared to $504.2 million for the year ended December 31, 2020. Non-comparable sales associated with acquisitions contributed $116.4$116.4 million or 23.1% of year-over-year growth. The remainder of the increase was driven by a $37.3 million, or 25.1%, increase in electronic systems products sold and aan $18.4 million, or 18.1%, increase in mechanical systems products sold.
Cost of Goods Sold
Cost of goods sold for year ended December 31, 2021, increased $110.1 million, or 37.2%, to $406.0 million compared to $295.9 million for the year ended December 31, 2020. The increase in cost of goods sold during the year ended December 31, 2021, was in line with a corresponding increase in product sales during such period.
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2021, increased $78.5 million, or 37.7%, to $286.8 million compared to $208.3 million for the year ended December 31, 2020. The increase in gross profit was driven by the increase in sales. Gross margin for the year ended December 31, 2021, was 41.4% compared to a gross margin of 41.3% for the year ended December 31, 2020.
Selling, General and Administrative
Selling, general and administrative costs for the year ended December 31, 2021, increased $45.9 million, or 64.8%, to $116.8 million compared to $70.9 million for the year ended December 31, 2020. When expressed as a percentage of sales, selling, general and administrative costs increased to 16.9% of sales for the year ended December 31, 2021, compared to 14.1% of sales in 2020. Recent acquisitions accounted for $18.5 million of the increase in selling, general and administrative costs. The increase in costs was also driven by a $4.5 million increase in compensation expense related to equity awards, a $5.4 million increase in outbound shipping costs related to higher sales and domestic supply chain pressure, and a $5.9 million increase in professional fees, primarily due to the Business Combination and as a result of becoming a public company.
37
Research and Development Costs
Research and development costs for the year ended December 31, 2021, increased $4.8 million, or 20.4%, to $28.3 million compared to $23.5 million for the year ended December 31, 2020. The increase in research and development costs was primarily due to headcount investments as we continue to pursue product innovation and new products.
Amortization of Intangible Assets
Amortization of intangible assets for the year ended December 31, 2021, increased $2.9 million, or 26.3%, to $14.0 million compared to $11.1 million for the year ended December 31, 2020, due to recent acquisitions.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the year ended December 31, 2021, increased $14.0 million to $23.7 million, which includes $17.2 million in contingent consideration related to the Simpson acquisition, $4.8 million in professional fees associated with the eight acquisitions completed in 2021, and $1.4 million of restructuring costs related to recent acquisitions. Acquisition and restructuring costs for the year ended December 31, 2020, were $9.7 million, which includes $2.3 million in professional fees associated with the Simpson, Drake and Detroit Speed acquisitions completed in 2020 and $3.2 million in restructuring costs incurred with the move of the West Sacramento, CA operations to our Bowling Green, KY facilities.
Related Party Acquisition and Management Fees
Related party acquisition and management fees for the year ended December 31, 2021, were $25.8 million, of which $23.3 million represents a fee paid upon the Closing of the Business Combination. Related party acquisition and management fees for the year ended December 31, 2020, were $6.1 million, which includesincludes $4.2 million in management fees paid to the Company’s former private equity sponsor and $1.9 million that was attributable to the Drake and Simpson acquisitions,
Operating Income
As a result of factors described above, operating income for the year ended December 31, 2021, decreased $8.0 million, or 9.3%, to $77.5 million compared to $85.5 million for the year ended December 31, 2020.
Change in Fair Value of Warrant Liability
For the year ended December 31, 2021, we recognized a loss of $32.6 million from the change in fair value of the warrant liability. The warrant liability reflects the fair value of the warrants issued in connection with the Business Combination.
Change in Fair Value of Earn-Out Liability
For the year ended December 31, 2021, we recognized a loss of $8.9 million from the change in fair value of the earn-out liability. The earn-out liability reflects the fair value of the earn-out shares resulting from the Business Combination.
Loss on Early Extinguishment of Debt
For the year ended December 31, 2021, we recognized a $13.6 million loss on the early extinguishment of debt. The extinguishment loss includes a write off of $12.2 million in unamortized debt issuance costs associated with our previous first lien and second lien notes due to the refinancing of our previous credit facility (refer to Note 6, - “Debt” for further discussion). Additionally, we wrote off $1.4 million of unamortized debt issuance costs when $100 million of the net proceeds from the Business Combination were used to reduce the outstanding principal balance of our second lien note.
Interest Expense
Interest expense for the year ended December 31, 20212021, decreased 4.7$4.7 million, or 10.6%, to $39.1 million compared to $43.8 million for the year ended December 31, 2020,2020, due to a lower effective interest rate combine with the favorable impact of the $100 million paydown on our second lien note in July 2021.
Income (Loss) before Income Taxes
As a result of factors described above, we recognized a loss of $(16.7) million before income taxes for the year ended December 31, 2021, compared to income before income taxes of $41.7 million for the year ended December 31, 2020.
38
Income Tax Expense
We recognized income tax expense of $10.4 million for the year ended December 31, 2021, compared to $8.8 million for the year ended December 31, 2020.2020. We recognized tax expense on a net loss for the year ended December 31, 2021, due to permanent differences resulting from the Business Combination, change in fair value of the warrant and earn-out liabilities, and the adjustment to the Simpson earnout during the period.
Net Income (Loss) and Total Comprehensive Income (Loss)
As a result of factors described above, we recognized a net loss of $(27.1) million for the year ended December 31, 2021, compared to net income of $32.9 million for the year ended December 31, 2020. Additionally, we recognized total comprehensive loss of $(26.7) million for the year ended December 31, 2021, compared to total comprehensive income of $32.6 million for the year ended December 31, 2020. Comprehensive income (loss) includes the effect of foreign currency translation and pension liability adjustments.
Year Ended December 31, 2020 Compared With Year Ended December 31, 2019
The table below presents Holley’s results of operations for the years ended December 31, 2020 and 2019:
|
| For the years ended |
|
| Change |
| ||||||||||
|
| December 31, 2020 |
|
| December 31, 2019 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 504,179 |
|
| $ | 368,663 |
|
| $ | 135,516 |
|
|
| 36.8 | % |
Cost of goods sold |
|
| 295,935 |
|
|
| 219,884 |
|
|
| 76,051 |
|
|
| 34.6 | % |
Gross profit |
|
| 208,244 |
|
|
| 148,779 |
|
|
| 59,465 |
|
|
| 40.0 | % |
Selling, general, and administrative |
|
| 70,875 |
|
|
| 62,371 |
|
|
| 8,504 |
|
|
| 13.6 | % |
Research and development costs |
|
| 23,483 |
|
|
| 20,630 |
|
|
| 2,853 |
|
|
| 13.8 | % |
Amortization of intangible assets |
|
| 11,082 |
|
|
| 10,456 |
|
|
| 626 |
|
|
| 6.0 | % |
Acquisition and restructuring costs |
|
| 9,743 |
|
|
| 4,942 |
|
|
| 4,801 |
|
|
| 97.1 | % |
Related party acquisition and management |
|
| 6,089 |
|
|
| 3,662 |
|
|
| 2,427 |
|
|
| 66.3 | % |
Other income |
|
| 1,517 |
|
|
| 644 |
|
|
| 873 |
|
| n/a |
| |
Operating income |
|
| 85,455 |
|
|
| 46,074 |
|
|
| 39,381 |
|
|
| 85.5 | % |
Change in fair value of warrant liability |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Change in fair value of earn-out liability |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Loss on early extinguishment of debt |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Interest expense |
|
| 43,772 |
|
|
| 50,386 |
|
|
| (6,614 | ) |
|
| (13.1 | %) |
Income (loss) before income taxes |
|
| 41,683 |
|
|
| (4,312 | ) |
|
| 45,995 |
|
| n/a |
| |
Income tax expense (benefit) |
|
| 8,826 |
|
|
| (4,873 | ) |
|
| 13,699 |
|
| n/a |
| |
Net income |
|
| 32,857 |
|
|
| 561 |
|
|
| 32,296 |
|
| n/a |
| |
Foreign currency translation adjustment |
|
| 16 |
|
|
| — |
|
|
| 16 |
|
| n/a |
| |
Pension liability loss |
|
| (293 | ) |
|
| (123 | ) |
|
| (170 | ) |
|
| 138.2 | % |
Total comprehensive income |
| $ | 32,580 |
|
| $ | 438 |
|
| $ | 32,142 |
|
| n/a |
|
Net Sales
Net sales for the year ended December 31, 2020 increased $135.5 million, or 36.8%, to $504.2 million compared to $368.7 million for the year ended December 31, 2019. The increase in net sales during 2020 was primarily due to a $33.5 million, or 64.3%, increase in EFI products sold, a $20.1 million, or 38.8%, increase in exhaust products sold and a $16.3 million, or 31.4%, increase in ignition products sold. These product lines increased as we continued to see growth in new product introductions.
Cost of Goods Sold
Cost of goods sold for the year ended December 31, 2020 increased $76.0 million, or 34.6%, to $295.9 million compared to $219.9 million for the year ended December 31, 2019. The increase in cost of goods sold during the year ended December 31, 2020 was in line with a corresponding increase in product sales during such period.
39
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2020 increased $59.5 million, or 40.0%, to $208.3 million compared to $148.8 million for the year ended December 31, 2019. The increase in gross profit was driven by the increase in sales. Gross margin for the year ended December 31, 2020 was 41.3% compared to a gross margin of 40.4% for the year ended December 31, 2019. The higher gross margin was primarily due to increased fixed cost leverage from increased sales and integration activities.
Selling, General and Administrative
Selling, general and administrative costs for the year ended December 31, 2020 increased $8.5 million, or 13.6%, to $70.9 million compared to $62.4 million for the year ended December 31, 2019. When expressed as a percentage of sales, selling, general and administrative costs decreased to 14.1% of sales for the year ended December 31, 2020 compared to 16.9% of sales in 2019. The increase in costs was driven by a $3.6 million increase in shipping and handling costs related to higher sales and a $2.4 million increase in costs associated with the significant growth in our DTC business as we focused our efforts in growing this business.
Research and Development Costs
Research and development costs for the year ended December 31, 2020 increased $2.9 million, or 13.8%, to $23.5 million compared to $20.6 million for the year ended December 31, 2019. The increase in research and development costs were primarily due to headcount investments of $2.3 million as we continue to pursue product innovation and new products.
Amortization of Intangible Assets
Amortization of intangible assets for the year ended December 31, 2020 increased $0.6 million, or 6.0%, to $11.1 million compared to $10.5 million for the year ended December 31, 2019 due to the full-year amortization of the Range Technologies Inc. acquisition intangible assets.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the year ended December 31, 2020 increased $4.8 million, or 97.1%, to $9.7 million compared to $4.9 million for the year ended December 31, 2019. The increase was primarily due to $2.3 million in professional fees associated with the Simpson, Drake and Detroit Speed acquisitions completed in 2020 and $3.2 million in restructuring costs incurred with the move of the West Sacramento, CA operations to Bowling Green, KY facilities.
Related Party Acquisition and Management Fees
Related party acquisition and management fees for the year ended December 31, 2020 increased $2.4 million, or 66.3%, to $6.1 million compared to $3.7 million for the year ended December 31, 2019. The increase in costs was due to one-time costs associated with acquisition, integration and restructuring activities. The acquisition costs were primarily attributable to the Drake and Simpson acquisitions.
Operating Income
As a result of factors described above, our operating income increased $39.4 million, or 85.5%, to $85.5 million for the year ended December 31, 2020 compared to $46.1 million for the year ended December 31, 2019.
Interest Expense
Interest expense for the year ended December 31, 2020 decreased $(6.6) million, or (13.1%), to $43.8 million compared to $50.4 million for the year ended December 31, 2019. The decrease was due to lower outstanding debt for much of 2020 and lower interest rates.
Income (Loss) before Income Taxes
As a result of factors described above, we recognized income before income taxes of $41.7 million for the year ended December 31, 2020 compared to a loss before income taxes of $(4.3) million for the year ended December 31, 2019.
Income Tax Expense (Benefit)
Income tax expense was $8.8 million for the year ended December 31, 2020 compared to an income tax benefit of $(4.8) million for the year ended December 31, 2019. The increase in tax expense was due to an increase in income from the growth in sales. The effective tax rates were 21.2% and 113.0% for the years ended December 31, 2020 and 2019, respectively.
40
Net Income and Total Comprehensive Income
As a result of factors described above, net income increased $32.4 million to $32.9 million for the year ended December 31, 2020 compared to $0.5 million for the year ended December 31, 2019. Additionally, total comprehensive income for the year ended December 31, 2020 increased $32.2 million to $32.6 million compared to $0.4 million for the year ended December 31, 2019. Comprehensive income includes the effect of foreign currency translation and pension liability adjustments.
Non-GAAP Financial Measures
Holley believes EBITDA and Adjusted EBITDA are useful to investors in evaluating the Company’s financial performance. In addition, Holley uses these measures internally to establish forecasts, budgets and operational goals to manage and monitor its business. Holley believes that these non-GAAP financial measures help to depict a more realistic representation of the performance of the underlying business, enabling the Company to evaluate and plan more effectively for the future. Holley believes that investors should have access to the same set of tools that its management uses in analyzing operating results.
Holley defines EBITDA as earnings before (a) depreciation, (b) amortization of intangible assets, (c) interest expense, (b)and (d) income taxes and (c) depreciation and amortization.tax expense. Holley defines Adjusted EBITDA as EBITDA plus (i) notable items that in 2021 consist primarily of the amortization of the fair market value increase in inventory and in 2020 consist primarily of the amortization of the fair market value increase in inventory and a legal settlement, (ii) compensation expense related to equity awards (iii) acquisition and restructuring costs, which for 2021 includes a $17.2 million adjustment due to a change in the fair value of the Simpson acquisition contingent consideration payable, (iv)(ii) impairment of indefinite-lived intangible assets, (iii) changes in the fair value of the warrant liability, (v)(iv) changes in the fair value of the earn-out liability, (v) compensation expense related to equity awards, (vi) losses fromproduct rationalization initiatives aimed at eliminating unprofitable or slow-moving stock keeping units, (vii) loss on the early extinguishment of debt (vii)(viii) related party acquisition and management fee costs, (ix) notable items that consist primarily of non-cash adjustments related to the adoption of ASC Topic 842, "Leases," in 2022,amortization of the fair market value increase in inventory due to acquisitions in 2021, and (viii)the amortization of the fair market value increase in inventory due to acquisitions and a legal settlement in 2020, and (x) other expenses, which for 2022 includes a $1.0 million loss on the sale of a business (see Note 2, "Business Combination, Acquisitions, and Divestiture," in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information related to the divestiture) and for all periods includes net losses from disposal of fixed assets and foreign currency transactions. We have included within the definition of Adjusted EBITDA theimpairment of indefinite-lived intangible assets, changes in the fair value of the warrant liability,liabilities, changes in the fair value of the earn-out liability, and losses from the early extinguishment of debt, as management believes such matters, when they occur, do not directly reflect the performance of the underlying business.
EBITDA and Adjusted EBITDA are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of financial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing Holley’s financial performance. These metrics should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.
The following unaudited table presents the reconciliation of net income (loss), the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the years ended December 31, 2022, 2021 and 2020 and 2019:(dollars in thousands):
|
| For the years ended |
| |||||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| For the years ended December 31, | ||||||||||||||
|
|
|
|
|
|
|
| 2022 | 2021 | 2020 | ||||||||||||||
Net income (loss) |
| $ | (27,139 | ) |
| $ | 32,857 |
| $ | 561 |
| $ | 73,774 | $ | (27,139 | ) | $ | 32,857 | ||||||
Adjustments: |
|
|
|
|
|
|
| |||||||||||||||||
Depreciation |
| 11,527 |
| 7,886 |
| 8,827 |
| 10,107 | 11,527 | 7,886 | ||||||||||||||
Amortization of intangible assets |
| 13,999 |
| 11,082 |
| 10,456 |
| 14,683 | 13,999 | 11,082 | ||||||||||||||
Interest expense |
| 39,128 |
| 43,772 |
| 50,386 |
| 40,227 | 39,128 | 43,772 | ||||||||||||||
Income tax expense (benefit) |
|
| 10,429 |
|
|
| 8,826 |
|
|
| (4,873 | ) | ||||||||||||
Income tax expense | 4,493 | 10,429 | 8,826 | |||||||||||||||||||||
EBITDA |
| 47,944 |
| 104,423 |
| 65,357 |
| 143,284 | 47,944 | 104,423 | ||||||||||||||
Notable items |
| 11,270 |
| 3,891 |
| 6,742 |
| |||||||||||||||||
Equity-based compensation expense |
| 4,963 |
| 487 |
| 437 |
| |||||||||||||||||
Acquisition and restructuring costs |
| 23,668 |
| 9,743 |
| 4,942 |
| 4,513 | 23,668 | 9,743 | ||||||||||||||
Impairment of indefinite-lived intangible assets | 2,395 | — | — | |||||||||||||||||||||
Change in fair value of warrant liability |
| 32,580 |
| — |
| — |
| (57,021 | ) | 32,580 | — | |||||||||||||
Change in fair value of earn-out liability |
| 8,875 |
| — |
| — |
| (10,731 | ) | 8,875 | — | |||||||||||||
Equity-based compensation expense | 24,395 | 4,963 | 487 | |||||||||||||||||||||
Product rationalization | 4,519 | — | — | |||||||||||||||||||||
Loss on early extinguishment of debt |
| 13,650 |
| — |
| — |
| — | 13,650 | — | ||||||||||||||
Related party acquisition and management fees |
| 25,789 |
| 6,089 |
| 3,662 |
| |||||||||||||||||
Related party acquisition and management fee costs | — | 25,789 | 6,089 | |||||||||||||||||||||
Notable items | 1,838 | 11,270 | 3,891 | |||||||||||||||||||||
Other expense |
|
| 755 |
|
|
| 1,517 |
|
|
| 644 |
| 1,514 | 755 | 1,517 | |||||||||
Adjusted EBITDA |
| $ | 169,494 |
|
| $ | 126,150 |
|
| $ | 81,784 |
| $ | 114,706 | $ | 169,494 | $ | 126,150 |
41
Liquidity and Capital Resources
Holley’s primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. The Company has generally financed its historical needs with operating cash flows, capital contributions and borrowings under its credit facilities. These sources of liquidity may be impacted by various factors, including demand for Holley’s products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of
On December 31, 2021,2022, the Company had cash of $36.3$26.2 million and availability of $98.8$113.8 million under its revolving credit facility. The Company has a senior secured revolving credit facility with $125 million in borrowing capacity. As ofOn December 31, 2021, $252022, the Company had $10.0 million wasin borrowings and $1.2 million of letters of credit outstanding under the revolving credit facility. In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, contains a minimum liquidity financial covenant of $45 million, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. The Companyamendment also had $1.2 million of outstanding letters of creditincreases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of Decemberthe fiscal quarter ending March 31, 2021.2023 through the fiscal quarter ending March 31, 2024 (the “Covenant Relief Period”), to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter.
The Company is obligated under various operating leases for facilities, equipment, and automobiles with estimated lease payments of approximately $8.5$7.2 million, including short-term leases, due in fiscal year 2022.2023. See Note 14, "Lease"Lease Commitments" in the Notes to the Consolidated Financial Statements included elsewhere in this annual reportAnnual Report on Form 10-K for additional information related to the Company’s lease obligations.
Holley's capital expenditures for the year ended December 31, 2022 of $13.6 million are primarily related to ongoing maintenance and improvements, including investments related to upgrading and maintaining our information technology systems, tooling for new products, vehicles for product development, and machinery and equipment for operations. We expect capital expenditures in the range of $14$10 million to $16$15 million in fiscal year 2022.2023.
See Note 6, "Debt""Debt" in the Notes to the Consolidated Financial Statements included elsewhere in this annual reportAnnual Report on Form 10-K for further detail of our credit facility and the timing of principal maturities. As ofOn December 31, 2021,2022, based on the then current weighted average interest rate of 4.5%8.4%, expected interest payments associated with outstanding debt totaled approximately $30$55.7 million for fiscal year 2022.2023.
The
As discussed under “Business Environment” above, although the future impact of supply chain disruptions and inflationary pressures are highly uncertain, the Company believes that its current operating performance, operating plan, cash on hand, cash from operationsposition, and borrowings available under its revolving credit facility will be sufficient to satisfy its liquidity needs and capital expenditure requirements for at least the next twelve months.months and thereafter for the foreseeable future.
Cash Flows
The following table provides a summary of cash flows from operating, investing, and financing activities for the periods presented:presented (dollars in thousands):
|
| For the years ended |
| |||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||
Cash provided by operating activities |
| $ | 21,583 |
|
| $ | 88,413 |
|
| $ | 9,418 |
|
Cash used in investing activities |
|
| (134,089 | ) |
|
| (165,618 | ) |
|
| (14,479 | ) |
Cash provided by financing activities |
|
| 77,157 |
|
|
| 140,544 |
|
|
| 2,433 |
|
Net increase (decrease) in cash and cash equivalents |
| $ | (35,349 | ) |
| $ | 63,339 |
|
| $ | (2,628 | ) |
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Cash flows provided by operating activities | $ | 12,312 | $ | 21,583 | $ | 88,413 | ||||||
Cash flows used in investing activities | (25,037 | ) | (134,089 | ) | (165,618 | ) | ||||||
Cash flows provided by financing activities | 2,850 | 77,157 | 140,544 | |||||||||
Effect of foreign currency rate fluctuations on cash | (300 | ) | — | — | ||||||||
Net decrease in cash and cash equivalents | $ | (10,175 | ) | $ | (35,349 | ) | $ | 63,339 |
Year EndedOperating Activities. Cash provided by operating activities for the year ended December 31, 2021 Compared With Year Ended2022, was $12.3 million compared to cash provided by operating activities of $21.6 million for the year ended December 31, 20202021. Cash provided by prepaids and other current assets, accrued interest and accounts receivable increased by $14.6 million, $5.9 million, and $3.3 million, respectively. Offsetting these increases were decreases in cash provided by inventory, accrued liabilities and accounts payable of $13.3 million, $13.0 million, and $9.5 million, respectively. The changes in accounts receivable, accounts payable, and inventory are impacted by fluctuations in sales and accrued interest, accounts receivable and accounts payable are impacted by the timing of receipts and payments.
Operating Activities.
Cash provided by operating activities for the year ended December 31, 2021, was $21.6 million compared to cash provided by operating activities of $88.4 million for the year ended December 31, 2020. Cash provided by accounts receivable, accrued liabilities and accounts payable increased by $11.8 million, $9.2 million, and $0.3 million, respectively. Offsetting these increases were decreases in cash provided by inventory and prepaids and other current assets of $67.1 million and $15.3 million, respectively. The changes in accounts receivable, accounts payable and inventory reflect the growth in the business in 2021.
Investing Activities. Cash used in investing activities for the year ended December 31, 2022, was $25.0 million, primarily relating to acquisitions of $14.3 million and capital expenditures of $13.6 million. For the year ended December 31, 2021, cash used in investing activities was $134.1 million, primarily relating to acquisitions of $119.2 million and capital expenditures of $15.2 million. For the year ended December 31, 2020, cash used in investing activities was $165.6 million, primarily relating to acquisitions of $156.8 million and capital expenditures of $9.4 million.
42
Financing Activities. Cash provided by financing activities for the year ended December 31, 2022, was $2.9 million, which primarily reflected net borrowings on long-term debt. Cash provided by financing activities for the year ended December 31, 2021, was $77.2 million, which included $630.0 million fromin proceeds offrom long-term debt, $132.3 million in cash received due to the recapitalization, and $25.0 million in net borrowings under the revolving credit agreement, largely offset by $687.5 million in principal payments on long-term debt, $13.4 million in deferred financing fees, and $9.2 million in payment of contingent consideration on acquisitions. Cash provided by financing activities for the year ended December 31, 2020, was $140.5 million, comprised ofwhich included $170.0 million fromof proceeds offrom long-term debt, partially offset by net payments of $20.5$24.6 million under the revolving credit agreement, principalin debt payments on long-term debt of $4.1 million, and $4.7 million in deferred financing fees.
Working Capital. On December 31, 2022, working capital was $223.7 million compared to $199.9 million on December 31, 2021. For the year ended December 31, 2022, inventories increased by $48.5 million. Offsetting this increase in working capital were a decrease in cash of $10.2 million, an increase in accrued liabilities of $8.5 million, and a decrease in accounts receivable of $4.3 million,
Holley’s working capital as ofon December 31, 2021, was $199.9increased $23.9 million compared tofrom $176.0 million as ofat December 31, 2020. For the year ended December 31, 2021, inventories increased by $51.1 million, prepaid and other current assets increased by $13.9 million, while acquisition contingent consideration payable decreased by $9.2 million. Offsetting these items were a decrease in Holley's cash balance of $35.3 million and an increase in accounts payable of $11.1 million.
Year Ended December 31, 2020 Compared With Year Ended December 31, 2019
Operating Activities. Cash provided by operating activities for the year ended December 31, 2020 was $88.4 million compared to cash provided by operating activities of $9.4 million during the year ended December 31, 2019. The year-over-year increase was primarily due to a net increase in non-cash items of $19.6 million, an increase in net income of $32.3 million and cash provided by inventory of $25.0 million. Cash provided by increases in accrued liabilities and accounts payable increased by $0.9 million and $8.2 million, respectively. Offsetting these increases were a decrease in cash provided by accounts receivable of $13.5 million. The changes in accounts receivable, inventory and accounts payable reflect the growth in the business in 2020.
Investing Activities. Cash used in investing activities for the year ended December 31, 2020 was $165.6 million, primarily relating to acquisitions of $156.8 million and capital expenditures of $9.4 million. For the year ended December 31, 2019, cash used in investing activities was $14.5 million, primarily relating to capital expenditures of $7.4 million and acquisitions of $5.9 million.
Financing Activities. Cash provided by financing activities for the year ended December 31, 2020 was $140.5 million, comprised of $170.0 million from proceeds of long-term debt, partially offset by net payments of $20.5 million under the revolving credit agreement, principal payments on long-term debt of $4.1 million, and $4.7 million in deferred financing fees. Cash provided by financing activities for the year ended December 31, 2019 was $2.4 million, primarily comprised of cash inflows of $6.5 million related to borrowings under the revolving credit agreement, offset by cash outflows of $3.8 million related to principal payments on long-term debt.
Working Capital. Holley’s working capital as of December 31, 2020 was $176.0 million, compared to $117.3 million as of December 31, 2019. For the year ended December 31, 2020, Holley’s cash balance increased by $63.3 million, accounts receivable increased by $18.0 million and inventories increased by $11.9 million. Offsetting these items were increases in accounts payable of $14.1 million, accrued liabilities of $9.0 million and acquisition contingent consideration payable of $9.2 million.
Critical Accounting Estimates
Our
The discussion and analysis of Holley's financial condition and results of operations are based upon its consolidated financial statements, arewhich have been prepared in accordance with GAAP. See Note 1, "Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies", in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a complete summary of the significant accounting policies used in the presentation of Holley's financial statements. The preparation of these consolidated financial statements requires usmanagement to make estimates judgements and assumptionsjudgments that affect the reported amounts and related disclosures of assets, liabilities, sales, expensesrevenue, and related disclosures. We evaluate ourexpenses. Holley evaluates its estimates judgements and assumptions on an ongoing basis. OurThe estimates and assumptions used by management are based on historical experience and various other assumptions that we believefactors, which are believed to be reasonable under the circumstances. Our actualActual results couldmay differ from these estimates. We believe that theestimates under different assumptions judgementsor conditions, impacting Holley's reported results of operations and financial condition.
Critical accounting policies and estimates associated withare those that management considers the following have the greatest potential impact on, and are criticalmost important to the understandingportrayal of ourHolley's financial condition and results of operations:operations because they require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Holley believes that its most critical accounting estimates are related to accounting for inventory reserve andreserves, the fair value of assets and liabilities acquired in the Business Combination and acquisitions. For further information see Note 1, “Descriptionacquisitions, and accounting for goodwill and intangible assets. These critical accounting policies are addressed below.
Inventory Reserve
The Company’s inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence or impaired balances. See Part IV, Item 15 in this annual reportAnnual Report on Form 10-K for additional information related to the Company's inventory valuation reserve.
We regularly monitor inventory quantities on hand and on order and record write-downs for excess and obsolete inventories based on our estimate of the demand for our products, potential obsolescence of technology, product life cycles, and when
43
pricing trends or forecast indicate that the carrying value of inventory exceeds our estimated selling price. These factors are affected by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on our gross margin. If inventory is written down, a new cost basis will be established that cannot be increased in future periods.
Fair Value of Acquired Assets and Liabilities
Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values and the values of assets in use, and often requires the application of significant judgment regarding estimates and assumptions. The same applies to assigning fair market values to the liabilities assumed in the Business Combination at the date of the transaction and at each reporting date thereafter. While the ultimate responsibility resides with management, for certain acquisitions the Company retains the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets, tangible long-livedlong- lived assets, and liabilities assumed in the Business Combination. Acquired intangible assets, excluding goodwill, are valued using various methodologies including discounted cash flows, relief from royalty, and multiperiod excess earnings depending on the type of intangible asset purchased. These methodologies incorporate various estimates and assumptions, such as projected revenue growth rates, profit margins and forecasted cash flows based on discount rates and terminal growth rates. The Company uses a Monte Carlo simulation model to estimate the fair value of its private warrants and earn-out liability assumed in the Business Combination, which requires certain subjective inputs and assumptions, including expected common stock price volatility, expected term, and risk-free interest rates. These estimates and assumptions could vary significantly, which could result in material differences in the fair values assigned to the assets and liabilities. See Note 2, "Business"Business Combination, Acquisitions, and Acquisitions"Divestiture" and Note 8, "Fair"Fair Value Measurements"Measurements" in the Notes to the Consolidated Financial Statements included elsewhere in this annual reportAnnual Report on Form 10-K for additional information related to the Company’s assets and liabilities measured at fair value.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of the net tangible and identifiable intangible assets of businesses acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually or more often if circumstances indicate that the carrying value may not be recoverable. During the third quarter of 2022, management concluded it was necessary to reevaluate goodwill and indefinite-lived intangible assets for impairment after supply chain challenges led to management revising its earnings estimate for 2022, which resulted in a decline in the Company's market capitalization. Based on a quantitative assessment in the third quarter of 2022, we did not identify any indicators of goodwill impairment. During the fourth quarter of 2022, management performed the annual impairment test for goodwill, and a quantitative analysis did not identify any indicators of impairment. Based on the annual impairment assessment, the estimated fair value exceeded the carrying value of the reporting unit by 15%. As of December 31, 2022, management concluded it was necessary to reevaluate goodwill for impairment due to a further downward revision of its earnings estimate for 2022 and a continued decline in the Company's market capitalization. Accordingly, management performed a qualitative assessment and did not identify any indicators of impairment. Goodwill was $418.1 million as of December 31, 2022, and is considered at higher risk of failing future quantitative impairment tests due to the narrow difference between fair value and carrying value. No goodwill impairment changes were incurred during 2022 and 2021.
Intangible assets include trade names, customer relationships and developed technology obtained through business acquisitions. Acquired finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. Indefinite life intangible assets are not amortized but are tested for impairment at least annually or more often if circumstances indicate that the carrying amounts may not be recoverable. During the third quarter of 2022, a quantitative assessment of indefinite life intangible assets identified certain tradenames for which the carrying amounts might not be recoverable. As a result of this evaluation, a pre-tax impairment of $2.4 million was recognized on certain indefinite-lived tradenames. Management did not identify any circumstances to indicate that it was necessary to reevaluate indefinite-lived intangible assets for impairment in the fourth quarter of 2022. No impairment was recognized on intangible assets in 2021.
The fair value of the indefinite-lived tradenames was estimated using the relief from royalty method, a form of the income approach. Significant judgement is required in estimating the fair value of a reporting unit and in performing impairment tests. The most significant assumptions utilized in the determination of the estimated fair values of the indefinite-lived tradenames were the sales projections and long-term earnings growth rates, the royalty rate and the discount rate. The long-term earnings growth rate represents the expected rate at which the brands are expected to grow beyond the shorter-term business planning period. The royalty rate is based on observed market royalty rates for various industrial, consumer and commercial trademarks. The discount rate is based on our weighted average cost of capital adjusted for risk.
Determining the fair value of the reporting unit requires significant judgment, including judgements about the appropriate terminal growth rates, weighted average costs of capital and the amounts and timing of projected future cash flows. Fair value determinations are sensitive to changes in underlying assumptions, estimates, and market factors. Projected future cash flows are based on our most recent forecasts and strategic plans as well as certain growth rate assumptions. Potential changes in our costs and operating structure, the implementation of synergies, and overall performance in the automotive aftermarket industry, could negatively impact our near-term cash-flow projections and could trigger a potential impairment of our goodwill. In addition, failure to execute our strategic plans as well as increases in weighted average costs of capital could negatively impact the fair value of the reporting unit and increase the risk of future impairment charges.
Recent Accounting Pronouncements
For a discussion of Holley’s new or recently adopted accounting pronouncements, see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements included elsewhere in this annual reportAnnual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. Holley is exposed to market risk in the normal course of business due to the Company’s ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Holley has established policies and procedures governing the Company’s management of market risks and the use of financial instruments to manage exposure to such risks. The Company generally does not hedge its interest rate exposure. TheOn December 31, 2022 the Company had $658.8$659.4 million of floating-rate debt outstanding as of December 31, 2021.under the Credit Agreement. A hypothetical 100 basis point increase or decrease in interest rates would result in an approximatelyapproximately $6.6 million changechange to Holley’s annual interest expense.
Credit and other Risks. Holley is exposed to credit risk associated with cash and cash equivalents and trade receivables. As ofOn December 31, 2021,2022, the majority the Company’s cash and cash equivalents consisted of cash balances in non-interest bearingnon-interest-bearing checking accounts which exceed the insurance coverage provided on such deposits. Substantially all trade receivable balances of the business are unsecured. The credit risk with respect to trade receivables is concentrated by the number of significant customers that the Company has in its customer base and a prolonged economic downturn could increase exposure to credit risk on the Company’s trade receivables. To manage exposure to such risks, Holley performs ongoing credit evaluations of the Company’s customers and maintains an allowance for potential credit losses.
Exchange Rate Sensitivity. As ofOn December 31, 2021,2022, the Company iswas exposed to changes in foreign currency exchange rates. While historically this exposure to changes in foreign currency exchange rates has not had a material effect on the Company’s financial condition or results of operations, foreign currency fluctuations could have an adverse effect on business and results of operations in the future. Historically, Holley’s primary exposure has been related to transactions denominated in the Euros and Canadian dollars. The majority of the Company’s sales, both domestically and internationally, are denominated in U.S. Dollars. Historically, the majority of the Company’s expenses have also been in U.S. Dollars and we have been somewhat insulated from currency fluctuations. However, Holley may be exposed to greater exchange rate sensitivity in the future. Currently, the Company does not hedge foreign currency exposure; however, the Company may consider strategies to mitigate foreign currency exposure in the future if deemed necessary.
44
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and accompanying notes listed in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K are included immediately following Part IV hereof and incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Interim President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Our management under the supervision and with the participation of the Company’s Interim President and Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, as ofon December 31, 2021.2022. Based on their evaluation the Interim President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as ofon December 31, 2021.2022.
(b) | Management’s Annual Report on Internal Control Over Financial Reporting |
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with U.S. GAAP and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of its assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of its financial statements in accordance with U.S. GAAP, and that its receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on its financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management's projections of any evaluation of the effectiveness of internal control over financial reporting as to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management, under the oversight of the Interim President and Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as ofon December 31, 20212022 and in making this assessment used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control-Integrated Framework (2013). Based on this assessment, the Company’s management, under the oversight of the Interim President and Chief Executive Officer and Chief Financial Officer, determined that the Company’s internal control over financial reporting was effective as ofon December 31, 2021.
2022.
(c) | Changes in Internal Control Over Financial Reporting |
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)15d- 15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company identified a material weakness in internal controls related to the accounting for complex financial instruments at Empower Ltd. on their Form 10-K, as amended, which existed prior to the Business Combination. Subsequent to the Business Combination on July 16, 2021, and upon filing the 10-Q for the quarterly period ended September 26, 2021, the internal controls over financial reporting of Holley Inc. took the place of the internal controls over financial reporting of Empower Ltd. As a result, the internal control structure of Empower Ltd. is no longer in operation, and, instead, the relevant internal control structure after completion of the Business Combination is that of Holley Inc.
45
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.applicable
46
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 will appear in the Company’s Proxy Statement for its 20222023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will appear in the Company’s Proxy Statement for its 20222023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 will appear in the Company’s Proxy Statement for its 20222023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 will appear in the Company’s Proxy Statement for its 20222023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 will appear in the Company’s Proxy Statement for its 20222023 Annual Meeting of Stockholders and is incorporated herein by reference.
47
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this Annual Report on Form 10-K:
(1) | Financial Statements: |
The financial statements are filed as part of this Annual Report on Form 10-K under “Item 8. Financial Statements and Supplementary Data.”
(2) | Financial Statement Schedules: |
Schedule II-Valuation and Qualifying Accounts is included below. The rest of the schedules required by this item have been omitted as they are either not required, not applicable or the information required is presented in the financial statements and notes thereto under "Item 8. Financial Statements and Supplementary Data" of this report.
Holley Inc. and Subsidiaries |
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Schedule II - Valuation and Qualifying Accounts |
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Years Ended December 31, 2021, 2020, and 2019 |
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| Charged |
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| Charged |
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| Balance at |
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| (Credited) |
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| Reserves |
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| Against |
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| Balance at |
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| Beginning of |
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| to Costs and |
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| from |
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| Allowances |
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| End of |
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| Period |
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| Expenses |
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| Acquisitions |
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| (1) (2) |
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| Period |
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Accounts receivable reserve: |
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Year ended December 31, 2019: |
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Bad debt reserve |
| $ | 334 |
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| $ | 103 |
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| $ | — |
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| $ | 229 |
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| $ | 208 |
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Cash discount reserve |
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| 406 |
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| 3,751 |
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| — |
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| 3,915 |
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| 242 |
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Year ended December 31, 2020: |
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Bad debt reserve |
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| 208 |
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| 1,597 |
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| — |
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| 992 |
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| 813 |
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Cash discount reserve |
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| 242 |
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| 5,289 |
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| — |
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| 5,105 |
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| 426 |
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Year ended December 31, 2021: |
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Bad debt reserve |
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| 813 |
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| 809 |
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| — |
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|
| 666 |
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| 956 |
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Cash discount reserve |
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| 426 |
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|
| 6,173 |
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| — |
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| 6,169 |
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| 430 |
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Inventory valuation reserve: |
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Year ended December 31, 2019: |
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Expired and obsolete reserve |
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| 16,177 |
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| 2,792 |
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| — |
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| 99 |
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| 18,870 |
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Year ended December 31, 2020: |
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Expired and obsolete reserve |
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| 18,870 |
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| 2,293 |
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| 480 |
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| (409 | ) |
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| 22,052 |
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Year ended December 31, 2021: |
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Expired and obsolete reserve |
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| 22,052 |
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| 3,806 |
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| 1,226 |
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| 804 |
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| 26,280 |
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(1) Write-off of uncollectible accounts, net of recoveries. |
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(2) Write-off of obsolete inventory, net of inventory adjustments. |
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Holley Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Years Ended December 31, 2022, 2021, and 2020
Charged | Charged | |||||||||||||||||||
Balance at | (Credited) | Reserves | Against | Balance at | ||||||||||||||||
Beginning of | to Costs and | from | Allowances | End of | ||||||||||||||||
Period | Expenses | Acquisitions | (1) (2) | Period | ||||||||||||||||
Accounts receivable reserve: | ||||||||||||||||||||
Year ended December 31, 2020: | ||||||||||||||||||||
Bad debt reserve | $ | 208 | $ | 1,597 | $ | — | $ | 992 | $ | 813 | ||||||||||
Cash discount reserve | 242 | 5,289 | — | 5,105 | 426 | |||||||||||||||
Year ended December 31, 2021: | ||||||||||||||||||||
Bad debt reserve | 813 | 809 | — | 666 | 956 | |||||||||||||||
Cash discount reserve | 426 | 6,173 | — | 6,169 | 430 | |||||||||||||||
Year ended December 31, 2022: | ||||||||||||||||||||
Bad debt reserve | 956 | 878 | — | 672 | 1,162 | |||||||||||||||
Cash discount reserve | 430 | 5,941 | — | 5,983 | 388 | |||||||||||||||
Inventory valuation reserve: | ||||||||||||||||||||
Year ended December 31, 2020: | ||||||||||||||||||||
Expired and obsolete reserve | 18,870 | 2,293 | 480 | (409 | ) | 22,052 | ||||||||||||||
Year ended December 31, 2021: | ||||||||||||||||||||
Expired and obsolete reserve | 22,052 | 3,806 | 1,226 | 804 | 26,280 | |||||||||||||||
Year ended December 31, 2022: | ||||||||||||||||||||
Expired and obsolete reserve | 26,280 | 13,410 | — | 1,156 | 38,534 | |||||||||||||||
(1) Write-off of uncollectible accounts, net of recoveries. | ||||||||||||||||||||
(2) Write-off of obsolete inventory, net of inventory adjustments. |
(3) | Exhibits: |
See Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
None
48
HOLLEY INC.
INDEX TO FINANCIAL STATEMENTS
Page | ||
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Report of Independent Registered Public Accounting Firm | ||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
49
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Holley Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Holley Inc. (a(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 20212022 and 2020,2021, the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021,2022, and the related notes and financial statement schedule included under Item 1515(a) (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021,2022, in conformity with accounting principles generally accepted in the United States of America.
Change in accounting principle
As discussed in Note 14 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2022 due to the adoption of ASC Topic 842, Leases.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinionopinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020
Cincinnati, Ohio
March 15, 20222023
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 36,325 |
|
| $ | 71,674 |
|
Accounts receivable, less allowance for credit losses of |
|
| 51,390 |
|
|
| 47,341 |
|
Inventory |
|
| 185,040 |
|
|
| 133,928 |
|
Prepaids and other current assets |
|
| 18,962 |
|
|
| 5,037 |
|
Total current assets |
|
| 291,717 |
|
|
| 257,980 |
|
Property, plant, and equipment, net |
|
| 51,495 |
|
|
| 43,729 |
|
Goodwill |
|
| 411,383 |
|
|
| 359,099 |
|
Other intangibles assets, net |
|
| 438,461 |
|
|
| 404,522 |
|
Total assets |
| $ | 1,193,056 |
|
| $ | 1,065,330 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
| ||
Accounts payable |
| $ | 45,708 |
|
| $ | 34,601 |
|
Accrued interest |
|
| 3,359 |
|
|
| 6,588 |
|
Accrued liabilities |
|
| 34,853 |
|
|
| 26,092 |
|
Acquisition contingent consideration payable |
|
| 0 |
|
|
| 9,200 |
|
Current portion of long-term debt |
|
| 7,875 |
|
|
| 5,528 |
|
Total current liabilities |
|
| 91,795 |
|
|
| 82,009 |
|
|
|
|
|
|
|
| ||
Long-term debt, net of current portion |
|
| 637,673 |
|
|
| 649,458 |
|
Long-term debt due to related party |
|
| 0 |
|
|
| 20,000 |
|
Warrant liability |
|
| 61,293 |
|
|
| — |
|
Earn-out liability |
|
| 26,596 |
|
|
| — |
|
Deferred taxes |
|
| 70,045 |
|
|
| 71,336 |
|
Other noncurrent liabilities |
|
| 1,167 |
|
|
| 2,146 |
|
Total liabilities |
|
| 888,569 |
|
|
| 824,949 |
|
Commitments and contingencies (Refer to Note 17 - Commitments and Contingencies) |
|
|
|
|
|
| ||
Stockholders' equity: |
|
|
|
|
|
| ||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, 0ne issued and |
|
| 0 |
|
|
| 0 |
|
Common stock, $0.0001 par value, 550,000,000 shares authorized, 115,807,337 and |
|
| 12 |
|
|
| 7 |
|
Additional paid-in capital |
|
| 329,705 |
|
|
| 238,883 |
|
Accumulated other comprehensive loss |
|
| (256 | ) |
|
| (674 | ) |
Retained earnings (accumulated deficit) |
|
| (24,974 | ) |
|
| 2,165 |
|
Total stockholders' equity |
|
| 304,487 |
|
|
| 240,381 |
|
Total liabilities and stockholders' equity |
| $ | 1,193,056 |
|
| $ | 1,065,330 |
|
December 31, | ||||||||
2022 | 2021 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 26,150 | $ | 36,325 | ||||
Accounts receivable, less allowance for credit losses of $1,550 and $1,387, respectively | 47,083 | 51,390 | ||||||
Inventory | 233,573 | 185,040 | ||||||
Prepaids and other current assets | 18,157 | 18,962 | ||||||
Total current assets | 324,963 | 291,717 | ||||||
Property, plant, and equipment, net | 52,181 | 51,495 | ||||||
Goodwill | 418,121 | 411,383 | ||||||
Other intangibles assets, net | 424,855 | 438,461 | ||||||
Right-of-use assets | 29,522 | — | ||||||
Total assets | $ | 1,249,642 | $ | 1,193,056 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Accounts payable | $ | 44,948 | $ | 45,708 | ||||
Accrued interest | 5,994 | 3,359 | ||||||
Accrued liabilities | 43,317 | 34,853 | ||||||
Current portion of long-term debt | 7,000 | 7,875 | ||||||
Total current liabilities | 101,259 | 91,795 | ||||||
Long-term debt, net of current portion | 643,563 | 637,673 | ||||||
Warrant liability | 4,272 | 61,293 | ||||||
Earn-out liability | 1,176 | 26,596 | ||||||
Deferred taxes | 58,390 | 70,045 | ||||||
Other noncurrent liabilities | 24,992 | 1,167 | ||||||
Total liabilities | 833,652 | 888,569 | ||||||
Commitments and contingencies (Refer to Note 17 - Commitments and Contingencies) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding on December 31, 2022 and 2021 | — | — | ||||||
Common stock, $0.0001 par value, 550,000,000 shares authorized, 117,147,997 and 115,807,337 shares issued and outstanding on December 31, 2022 and 2021, respectively | 12 | 12 | ||||||
Additional paid-in capital | 368,122 | 329,705 | ||||||
Accumulated other comprehensive loss | (944 | ) | (256 | ) | ||||
Retained earnings (accumulated deficit) | 48,800 | (24,974 | ) | |||||
Total stockholders' equity | 415,990 | 304,487 | ||||||
Total liabilities and stockholders' equity | $ | 1,249,642 | $ | 1,193,056 |
See accompanying notes to consolidatedfinancial statements.
��
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
| For the years ended |
| For the years ended December 31, | ||||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| 2022 | 2021 | 2020 | ||||||||||||
Net sales |
| $ | 692,847 |
|
| $ | 504,179 |
|
| $ | 368,663 |
| $ | 688,415 | $ | 692,847 | $ | 504,179 | ||||||
Cost of goods sold |
|
| 406,040 |
|
|
| 295,935 |
|
|
| 219,884 |
| 434,757 | 406,040 | 295,935 | |||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Gross profit |
| 286,807 |
|
|
| 208,244 |
|
|
| 148,779 |
| 253,658 | 286,807 | 208,244 | ||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Selling, general, and administrative |
| 116,793 |
|
|
| 70,875 |
|
|
| 62,371 |
| 150,728 | 116,793 | 70,875 | ||||||||||
Research and development costs |
| 28,280 |
|
|
| 23,483 |
|
|
| 20,630 |
| 29,083 | 28,280 | 23,483 | ||||||||||
Amortization of intangible assets |
| 13,999 |
|
|
| 11,082 |
|
|
| 10,456 |
| 14,683 | 13,999 | 11,082 | ||||||||||
Impairment of indefinite-lived intangible assets | 2,395 | — | — | |||||||||||||||||||||
Acquisition and restructuring costs |
| 23,668 |
|
|
| 9,743 |
|
|
| 4,942 |
| 4,513 | 23,668 | 9,743 | ||||||||||
Related party acquisition and management fee costs |
| 25,789 |
|
|
| 6,089 |
|
|
| 3,662 |
| — | 25,789 | 6,089 | ||||||||||
Other operating expense |
|
| 755 |
|
|
| 1,517 |
|
|
| 644 |
| 1,514 | 755 | 1,517 | |||||||||
Total operating expense |
|
| 209,284 |
|
|
| 122,789 |
|
|
| 102,705 |
| 202,916 | 209,284 | 122,789 | |||||||||
Operating income |
| 77,523 |
|
|
| 85,455 |
|
|
| 46,074 |
| 50,742 | 77,523 | 85,455 | ||||||||||
Change in fair value of warrant liability |
| 32,580 |
|
|
| — |
|
|
| — |
| (57,021 | ) | 32,580 | — | |||||||||
Change in fair value of earn-out liability |
| 8,875 |
|
|
| — |
|
|
| — |
| (10,731 | ) | 8,875 | — | |||||||||
Loss on early extinguishment of debt |
| 13,650 |
|
|
| — |
|
|
| — |
| — | 13,650 | — | ||||||||||
Interest expense |
|
| 39,128 |
|
|
| 43,772 |
|
|
| 50,386 |
| 40,227 | 39,128 | 43,772 | |||||||||
Total non-operating expense |
|
| 94,233 |
|
|
| 43,772 |
|
|
| 50,386 |
| ||||||||||||
(Loss) income before income taxes |
| (16,710 | ) |
|
| 41,683 |
|
|
| (4,312 | ) | |||||||||||||
Income tax expense (benefit) |
|
| 10,429 |
|
|
| 8,826 |
|
|
| (4,873 | ) | ||||||||||||
Net (loss) income |
| $ | (27,139 | ) |
| $ | 32,857 |
|
| $ | 561 |
| ||||||||||||
Comprehensive (loss) income: |
|
|
|
|
|
|
| |||||||||||||||||
Total non-operating (income) expense | (27,525 | ) | 94,233 | 43,772 | ||||||||||||||||||||
Income (loss) before income taxes | 78,267 | (16,710 | ) | 41,683 | ||||||||||||||||||||
Income tax expense | 4,493 | 10,429 | 8,826 | |||||||||||||||||||||
Net income (loss) | $ | 73,774 | $ | (27,139 | ) | $ | 32,857 | |||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||
Foreign currency translation adjustment |
| 30 |
|
|
| 16 |
|
|
| — |
| (990 | ) | 30 | 16 | |||||||||
Pension liability gain (loss) |
|
| 388 |
|
|
| (293 | ) |
|
| (123 | ) | 302 | 388 | (293 | ) | ||||||||
Total comprehensive (loss) income |
| $ | (26,721 | ) |
| $ | 32,580 |
|
| $ | 438 |
| ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Weighted average shares of outstanding common stock, |
| 89,959,993 |
|
|
| 67,673,884 |
|
|
| 67,673,884 |
| |||||||||||||
Basic net (loss) income per share |
| $ | (0.30 | ) |
| $ | 0.49 |
|
| $ | 0.01 |
| ||||||||||||
Diluted net (loss) income per share |
| $ | (0.30 | ) |
| $ | 0.49 |
|
| $ | 0.01 |
| ||||||||||||
Total other comprehensive income (loss) | (688 | ) | 418 | (277 | ) | |||||||||||||||||||
Total comprehensive income (loss) | $ | 73,086 | $ | (26,721 | ) | $ | 32,580 | |||||||||||||||||
Common Share Data: | ||||||||||||||||||||||||
Weighted average common shares outstanding - basic | 116,762,928 | 89,959,993 | 67,673,884 | |||||||||||||||||||||
Weighted average common shares outstanding - diluted | 117,248,296 | 89,959,993 | 67,673,884 | |||||||||||||||||||||
Basic net income (loss) per share | $ | 0.63 | $ | (0.30 | ) | $ | 0.49 | |||||||||||||||||
Diluted net income (loss) per share | $ | 0.14 | $ | (0.30 | ) | $ | 0.49 |
See accompanying notes to consolidatedfinancial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
| Accumulated | Retained | |||||||||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Additional |
|
| Accumulated Other Comprehensive Loss |
|
| Retained Earnings (Accumulated Deficit) |
|
| Total |
| Additional | Other | Earnings | |||||||||||||||||||||||||||
Balance at December 31, 2018 |
| 100 |
| $ | 0 |
| $ | 236,333 |
| $ | (274 | ) |
| $ | (31,253 | ) |
| $ | 204,806 |
| ||||||||||||||||||||||||||||
Retroactive application of |
|
| 67,673,784 |
|
|
| 7 |
|
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||
Adjusted balance at |
| 67,673,884 |
| 7 |
| 236,326 |
| (274 | ) |
|
| (31,253 | ) |
| 204,806 |
| ||||||||||||||||||||||||||||||||
Net income |
| — |
| — |
| — |
| — |
|
|
| 561 |
| 561 |
| |||||||||||||||||||||||||||||||||
Equity compensation |
| — |
| — |
| 437 |
| — |
| — |
| 437 |
| |||||||||||||||||||||||||||||||||||
Pension liability adjustment |
| — |
| — |
| — |
| (123 | ) |
|
| — |
| (123 | ) | |||||||||||||||||||||||||||||||||
Capital distributions, net |
|
| — |
|
|
| — |
|
|
| (267 | ) |
|
| — |
|
|
| — |
|
|
| (267 | ) | ||||||||||||||||||||||||
Balance at December 31, 2019 |
| 67,673,884 |
| $ | 7 |
| $ | 236,496 |
| $ | (397 | ) |
| $ | (30,692 | ) |
| $ | 205,414 |
| ||||||||||||||||||||||||||||
Paid-In | Comprehensive | (Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Gain (Loss) | Deficit) | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance on December 31, 2019 | 67,673,884 | $ | 7 | $ | 236,496 | $ | (397 | ) | $ | (30,692 | ) | $ | 205,414 | |||||||||||||||||||||||||||||||||||
Net income |
| — |
| — |
| — |
| — |
|
|
| 32,857 |
| 32,857 |
| — | — | — | — | 32,857 | 32,857 | |||||||||||||||||||||||||||
Equity compensation |
| — |
| — |
| 487 |
| — |
| — |
| 487 |
| — | — | 487 | — | — | 487 | |||||||||||||||||||||||||||||
Foreign currency translation |
| — |
| — |
| — |
| 16 |
|
|
| — |
| 16 |
| — | — | — | 16 | — | 16 | |||||||||||||||||||||||||||
Pension liability adjustment |
| — |
| — |
| — |
| (293 | ) |
|
| — |
| (293 | ) | — | — | — | (293 | ) | — | (293 | ) | |||||||||||||||||||||||||
Capital contributions, net |
|
| — |
|
|
| — |
|
|
| 1,900 |
|
|
| — |
|
|
| — |
|
|
| 1,900 |
| — | — | 1,900 | — | — | 1,900 | ||||||||||||||||||
Balance at December 31, 2020 |
| 67,673,884 |
| $ | 7 |
| $ | 238,883 |
| $ | (674 | ) |
| $ | 2,165 |
| $ | 240,381 |
| |||||||||||||||||||||||||||||
Balance on December 31, 2020 | 67,673,884 | 7 | 238,883 | (674 | ) | 2,165 | 240,381 | |||||||||||||||||||||||||||||||||||||||||
Net loss |
| — |
| — |
| — |
| — |
|
|
| (27,139 | ) |
| (27,139 | ) | — | — | — | — | (27,139 | ) | (27,139 | ) | ||||||||||||||||||||||||
Equity compensation |
| — |
| — |
| 4,963 |
| — |
|
|
| — |
| 4,963 |
| — | — | 4,963 | — | — | 4,963 | |||||||||||||||||||||||||||
Foreign currency translation |
| — |
| — |
| — |
| 30 |
|
|
| — |
| 30 |
| — | — | — | 30 | — | 30 | |||||||||||||||||||||||||||
Pension liability adjustment |
| — |
| — |
| — |
| 388 |
|
|
| — |
| 388 |
| — | — | — | 388 | — | 388 | |||||||||||||||||||||||||||
Recapitalization transaction, net |
|
| 48,133,453 |
|
|
| 5 |
|
|
| 85,859 |
|
|
| — |
|
|
| — |
|
|
| 85,864 |
| 48,133,453 | 5 | 85,859 | 85,864 | ||||||||||||||||||||
Balance at December 31, 2021 |
|
| 115,807,337 |
|
| $ | 12 |
|
| $ | 329,705 |
|
| $ | (256 | ) |
| $ | (24,974 | ) |
| $ | 304,487 |
| ||||||||||||||||||||||||
Balance on December 31, 2021 | 115,807,337 | 12 | 329,705 | (256 | ) | (24,974 | ) | 304,487 | ||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 73,774 | 73,774 | ||||||||||||||||||||||||||||||||||||||||||
Equity compensation | — | — | 24,395 | — | — | 24,395 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | (990 | ) | — | (990 | ) | ||||||||||||||||||||||||||||||||||||||||
Pension liability adjustment | — | — | — | 302 | — | 302 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of earn-out shares | 1,093,750 | — | 14,689 | — | — | 14,689 | ||||||||||||||||||||||||||||||||||||||||||
Warrants exercised | 33,333 | — | 383 | — | — | 383 | ||||||||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units | — | — | (1,050 | ) | — | — | (1,050 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of shares for restricted stock units | 213,577 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Balance on December 31, 2022 | 117,147,997 | $ | 12 | $ | 368,122 | $ | (944 | ) | $ | 48,800 | $ | 415,990 |
See accompanying notes to consolidatedfinancial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended December 31, | ||||||||||||||||||||||||
|
| For the years ended |
| 2022 | 2021 | 2020 | ||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||||||||||||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
| |||||||||||||||||
Net (loss) income |
| $ | (27,139 | ) |
| $ | 32,857 |
| $ | 561 |
| |||||||||||||
Adjustments to reconcile net (loss) income to net cash from operating |
|
|
|
|
|
|
| |||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||||||||||
Net income (loss) | $ | 73,774 | $ | (27,139 | ) | $ | 32,857 | |||||||||||||||||
Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||||||||||||||||||
Depreciation |
|
| 11,527 |
| 7,886 |
| 8,827 |
| 10,107 | 11,527 | 7,886 | |||||||||||||
Amortization of intangible assets |
|
| 13,999 |
| 11,082 |
| 10,456 |
| 14,683 | 13,999 | 11,082 | |||||||||||||
Impairment of indefinite-lived intangible assets | 2,395 | — | — | |||||||||||||||||||||
Amortization of deferred loan costs |
|
| 3,182 |
| 3,092 |
| 3,097 |
| 1,707 | 3,182 | 3,092 | |||||||||||||
Increase in warrant liability |
|
| 32,580 |
|
| — |
|
|
| — |
| |||||||||||||
Increase in earn-out liability |
|
| 8,875 |
| — |
| — |
| ||||||||||||||||
Amortization of right of use assets | 5,666 | — | — | |||||||||||||||||||||
Gain on termination of leases | (279 | ) | — | — | ||||||||||||||||||||
(Decrease) increase in warrant liability | (57,021 | ) | 32,580 | — | ||||||||||||||||||||
(Decrease) increase in earn-out liability | (10,731 | ) | 8,875 | — | ||||||||||||||||||||
Equity compensation |
|
| 4,963 |
| 487 |
| 437 |
| 24,395 | 4,963 | 487 | |||||||||||||
Change in deferred taxes |
|
| (66 | ) |
| 6,750 |
| (11,489 | ) | (11,655 | ) | (66 | ) | 6,750 | ||||||||||
Loss on sale of business | 1,037 | — | — | |||||||||||||||||||||
Loss on early extinguishment of long-term debt |
|
| 13,650 |
|
| — |
|
|
| — |
| — | 13,650 | — | ||||||||||
Loss (gain) on disposal of property, plant and equipment |
|
| (82 | ) |
| 943 |
| 833 |
| 253 | (82 | ) | 943 | |||||||||||
Inventory reserves |
|
| 4,228 |
| 3,003 |
| 2,873 |
| ||||||||||||||||
Allowance for credit losses |
|
| 147 |
| 1,597 |
| 103 |
| ||||||||||||||||
Provision for inventory reserves | 13,410 | 4,228 | 3,003 | |||||||||||||||||||||
Provision for credit losses | 878 | 147 | 1,597 | |||||||||||||||||||||
Change in operating assets and liabilities: |
|
|
|
|
|
|
| |||||||||||||||||
Accounts receivable |
|
| 464 |
| (11,349 | ) |
| 2,110 |
| 3,777 | 464 | (11,349 | ) | |||||||||||
Inventories |
|
| (45,073 | ) |
| 22,006 |
| (7,058 | ) | (58,406 | ) | (45,073 | ) | 22,006 | ||||||||||
Prepaids and other current assets |
|
| (13,408 | ) |
| 1,884 |
| (378 | ) | 1,142 | (13,408 | ) | 1,884 | |||||||||||
Accounts payable |
|
| 8,727 |
| 8,399 |
| 181 |
| (740 | ) | 8,727 | 8,399 | ||||||||||||
Accrued interest |
|
| (3,229 | ) |
| 737 |
| (2,489 | ) | 2,635 | (3,229 | ) | 737 | |||||||||||
Accrued and other liabilities |
|
| 8,238 |
|
|
| (961 | ) |
|
| 1,354 |
| (4,715 | ) | 8,238 | (961 | ) | |||||||
Net cash provided by operating activities |
|
| 21,583 |
| 88,413 |
| 9,418 |
| 12,312 | 21,583 | 88,413 | |||||||||||||
INVESTING ACTIVITIES |
|
|
|
|
|
|
| |||||||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||||||||||
Capital expenditures |
| (15,233 | ) |
| (9,433 | ) |
| (7,421 | ) | (13,590 | ) | (15,233 | ) | (9,433 | ) | |||||||||
Proceeds from the disposal of fixed assets |
| 364 |
| 698 |
| — |
| 888 | 364 | 698 | ||||||||||||||
Proceeds from sale of business | 1,966 | — | — | |||||||||||||||||||||
Cash paid for acquisitions, net |
| (119,220 | ) |
| (156,833 | ) |
| (5,937 | ) | (14,301 | ) | (119,220 | ) | (156,833 | ) | |||||||||
Trademark acquisition |
|
| — |
|
|
| (50 | ) |
|
| (1,121 | ) | — | — | (50 | ) | ||||||||
Net cash used in investing activities |
|
| (134,089 | ) |
| (165,618 | ) |
| (14,479 | ) | (25,037 | ) | (134,089 | ) | (165,618 | ) | ||||||||
FINANCING ACTIVITIES |
|
|
|
|
|
|
| |||||||||||||||||
Net change under revolving credit agreement |
| 25,000 |
| (20,500 | ) |
| 6,500 |
| ||||||||||||||||
Proceeds from long-term debt |
| 630,000 |
| 170,000 |
| 0 |
| |||||||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||||||||||
Proceeds from issuance of long-term debt | 37,000 | 655,000 | 205,000 | |||||||||||||||||||||
Principal payments on long-term debt |
| (687,529 | ) |
| (4,146 | ) |
| (3,800 | ) | (33,483 | ) | (687,529 | ) | (59,646 | ) | |||||||||
Proceeds from Business Combination and PIPE financing, |
| 132,299 |
| — |
| — |
| |||||||||||||||||
Deferred financing fees |
| (13,413 | ) |
| (4,710 | ) |
| — |
| — | (13,413 | ) | (4,710 | ) | ||||||||||
Payment of acquisition contingent consideration |
| (9,200 | ) |
|
| — |
| — |
| — | (9,200 | ) | — | |||||||||||
Capital contributions |
| — |
| — |
| 150 |
| |||||||||||||||||
Proceeds from Business Combination and PIPE financing, net of issuance costs paid | — | 132,299 | — | |||||||||||||||||||||
Payments from stock-based award activities | (1,050 | ) | — | — | ||||||||||||||||||||
Proceeds from issuance of common stock in connection with the exercise of warrants | 383 | — | — | |||||||||||||||||||||
Capital distributions |
|
| — |
|
|
| (100 | ) |
|
| (417 | ) | — | — | (100 | ) | ||||||||
Net cash provided by financing activities |
|
| 77,157 |
|
|
| 140,544 |
|
|
| 2,433 |
| 2,850 | 77,157 | 140,544 | |||||||||
Effect of foreign currency rate fluctuations on cash | (300 | ) | — | — | ||||||||||||||||||||
Net change in cash and cash equivalents |
| (35,349 | ) |
| 63,339 |
| (2,628 | ) | (10,175 | ) | (35,349 | ) | 63,339 | |||||||||||
Cash and cash equivalents: |
|
|
|
|
|
|
| |||||||||||||||||
Beginning of period |
|
| 71,674 |
|
|
| 8,335 |
|
|
| 10,963 |
| 36,325 | 71,674 | 8,335 | |||||||||
End of period |
| $ | 36,325 |
|
| $ | 71,674 |
|
| $ | 8,335 |
| $ | 26,150 | $ | 36,325 | $ | 71,674 | ||||||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
| |||||||||||||||||
Cash paid for interest |
| $ | 38,067 |
| $ | 39,945 |
| $ | 49,778 |
| $ | 36,868 | $ | 38,067 | $ | 39,945 | ||||||||
Cash paid for income taxes |
| $ | 10,648 |
| $ | 3,239 |
| $ | 4,434 |
| 6,834 | 10,648 | 3,239 | |||||||||||
Noncash investing and financing activities: |
|
|
|
|
|
|
| |||||||||||||||||
Earn-out shares issued to Empower Sponsor Holdings LLC | $ | 14,689 | $ | — | $ | — | ||||||||||||||||||
Assumption of warrant liability |
| $ | 28,713 |
| $ | — |
| $ | — |
| — | 28,713 | — | |||||||||||
Assumption of earn-out liability |
| $ | 17,722 |
| $ | — |
| $ | — |
| — | 17,722 | — | |||||||||||
Units exchanged in Detroit Speed transaction |
| $ | — |
| $ | 2,000 |
| $ | — |
| — | — | 2,000 |
See accompanying notes to consolidatedfinancial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
1. | Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies |
1. Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies
Holley Inc., a Delaware corporation headquartered in Bowling Green, Kentucky (the “Company” or “Holley”), conducts operations through its wholly-ownedwholly owned subsidiaries. These operating subsidiaries are comprised of Holley Performance Products Inc. (“Holley Performance”), Hot Rod Brands, Inc. (“Hot Rod Brands”), Simpson Safety Solutions, Inc., B&M Racing and Performance Products, Inc., and Speedshop.com, Inc. Investment funds managed by Sentinel Capital Partners hold a controlling interest in Holley.
On July 16, 2021, (the(the “Closing” and such date, the “Closing Date”) the Company consummated the business combination (the “Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021, (the(the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc. (“Merger Sub I”), Empower Merger Sub II LLC (“Merger Sub II”), and Holley Intermediate Holdings, Inc. (“Holley Intermediate”). On the Closing Date, Empower changed its name to Holley Inc. See Note 2, “Business Combination, Acquisitions, and Acquisitions,Divestiture,”for more information.
Holley Intermediate, the predecessor to Holley, was incorporated on October 25, 2018, to effect the merger of Driven Performance Brands, Inc. (“Driven”) and the purchase of High Performance Industries, Inc. (“HPI”). The Company designs, manufactures and distributes performance automotive products to customers primarily in the United States, Canada and Europe. The Company is a leading manufacturer of a diversified line of performance automotive products, including carburetors, fuel pumps, fuel injection systems, nitrous oxide injection systems, superchargers, exhaust headers, mufflers, distributors, ignition components, engine tuners and automotive performance plumbing products that are produced through its two major subsidiaries, Holley Performance and Hot Rod Brands. The Company is also a leading manufacturer of exhaust products as well as shifters, converters, transmission kits, transmissions, tuners and automotive software. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance through increased horsepower, torque and drivability. The Company has locations in North America, Canada, Italy and China.
Emerging Growth Company Status
Section 102(b)(1)102(b)(1) of the Jumpstart Our Business StartupsJOBS Act of 2012 (“JOBS Act”), exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company is an emerging growth company, and, as such, has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.
Risks and Uncertainties
COVID-19COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has experiencedcontinued to experience disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. The full extent of the impact of the COVID-19 pandemicCOVID-19's effect on the Company's business and operational and financial performance and condition is currently uncertain andin the future will depend on many factors outside the Company's control,future developments, including but not limited to the timing, extent, duration, spread, intensity and effectsphase of the viruspandemic in various countries; the emergence of COVID-19 variants and any of its mutations, the utilization and effectiveness of treatments and vaccines the imposition of effective public safety and other protective measures,against these variants; the further impact of COVID-19COVID-19 on the global economyeconomy; and demand for the Company's products and services. Should the COVID-19ongoing COVID-19 pandemic including variants such as Delta and Omicron, not improve, or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, and financial condition may be adversely affected. See Part I: Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our business.
The Company's business and results of operations, financial condition, and prospects liquidity are impacted by broad economic conditions including inflation, labor shortages, and disruption of the supply chain, as well as by geopolitical events, including the conflict in Ukraine. The Company's operations have been adversely impacted by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, the Company has attempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with its suppliers and customers to minimize disruptions in delivering products to customers. Should the ongoing macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate the impact on its supply chain, operations and costs is not successful, the Company’s business, results of operations and financial condition may be adversely affected.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or “GAAP”) and include the accounts of the Company and its wholly-ownedwholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
55
Summary of Significant Accounting Policies
Use of Estimates
The preparation of 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. These estimates require the use of judgment as future events, and the effect of these events, cannot be predicted with certainty. The estimates will change as new events occur, as more experience is acquired and as more information is obtained. The Company evaluates and updates assumptions and estimates on an ongoing basis and may consult outside experts to assist as considered necessary.
Cash and Cash Equivalents
Cash and cash equivalents include cash and deposits with financial institutions with original maturities less than 90 days. The Federal Deposit Insurance Corporation insures financial institution deposits up to $250.$250. The Company maintains deposits exceeding $250$250 in certain accounts at financial institutions. At On December 31, 2021 2022 and 2020,2021, the Company had cash in foreign bank accounts of $5,765$5,878 and $4,607,$5,765, respectively.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable represent amounts due from customers in the ordinary course of business. The receivables are stated at the amount management expects to collect. The Company is subject to risk of loss from uncollectible receivables in excess of its allowance. The Company maintains an allowance for credit losses for estimated losses from customers’ inability to make required payments. In order to estimate the appropriate level of this allowance, the Company analyzes historical bad debts, customer concentrations, current customer credit worthiness, current economic trends and changes in customer payment patterns. Accounts are written off when management determines the account is uncollectable. Interest is not charged on past due accounts.
Inventory Valuation
The Company's inventories are stated at the lower of cost or net realizable value using the first-in, first-outfirst-in, first-out (FIFO) method. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence or impaired balances.
Segments
Segments
The Company's operations are managed and reported to its Chief Executive Officer (“CEO”), the Company’s chief operating decision maker, on a consolidated basis. The CEO assesses performance and allocates resources based on the consolidated results of operations. Under this organizational and reporting structure, the Company has 1one reportable segment.
Goodwill
Goodwill
Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. On an annual basis or whenever events or changes in circumstances indicate the carrying value of goodwill may have been impaired, the Company may perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that the fair value of the reporting unit is less than its carrying amount or elects not to perform a qualitative assessment, it will perform a quantitative analysis; otherwise, no further evaluation is necessary. For the quantitative impairment assessment, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company will recognize a loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. Impairments, if any, are charged directly to earnings. In 2021, the Company performed a qualitative assessment and did not identify any indicators
56
Intangible Assets Other Than Goodwill
Tradenames acquired in certain business combinations were determined to have indefinite useful lives and are not amortized, but instead are tested for impairment on an annual basis and when facts and circumstances indicate that the carrying values of the assets may be impaired. If such review indicates an asset’s carrying value may not be recoverable, an impairment loss is recognized for the excess of the carrying value over the fair value of the asset.
As part of separate business acquisitions, the Company’s customer relationships, technology and certain tradenames were identified as definite-lived intangible assets. The customer relationship intangible assets are being amortized over a ten to twenty-five year life based on the attrition rate of customers.customers with a weighted-average amortization period of 23.6 years. The technology intangible assets are being amortized over a five to fourteen year life based on the lifecycle of previous technology.technology with a weighted-average amortization period of 12.1 years. The tradenames are being amortized over a fifteen to twenty year life based on the estimated life of the tradename.tradename with a weighted-average amortization period of 19.2 years. The weighted-average amortization period for all amortizable intangibles on a combined basis is 22.5 years.
Property, Plant and Equipment
Property, plant and equipment acquired in various acquisitions have been recorded at fair value. All other property, plant and equipment is recorded at cost. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for new property, plant and equipment additions are seven years to twenty-five years for buildings and improvements and three to ten years for machinery and equipment. Maintenance, repairs, and betterments which do not enhance the value of or increase the life of the assets are expensed as incurred.
Leases
Operating lease right of use ("ROU") assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company's leases may include options to extend or terminate the lease. These options to extend are included in the lease term when it is reasonably certain that the Company will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Since the Company's leases generally do not provide an implicit rate, the Company applies a portfolio approach using an estimated incremental borrowing rate based on the lease term and other information available at the commencement date in determining the present value of lease payments. The rate applied is based on the currency of the lease. Leases having a lease term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease. In addition, the Company has applied the practical expedient to account for the lease and non-lease components as a single lease component for all of the Company's leases. See Note 14, "Lease Commitments," for further details.
Debt Issuance Costs
Debt issuance costs include fees and costs incurred to obtain financing. Debt issuance costs related to the Company's term loans are presented in the consolidated balance sheet as a direct deduction from the carrying amount of the term loans. These fees and costs are being amortized using the effective interest method over the term of the related debt. Asloans and are included in interest expense in the Company's consolidated statements of December 31, 2021 and 2020comprehensive income (loss). If the debt is retired before its scheduled maturity date, any remaining unamortized debt issuance costs were $13,264 and $16,684, respectively, and are includedwritten off in the period the debt is retired as a reductionnon-operating expense in the statement of debt. In connection with the Company's refinancing of its existing credit facility in 2021, aoperations as loss on the early extinguishment of debtdebt. For the years ended 2022, 2021 and 2020, the amortization of $13,650 was recognized for the write-off of unamortized debt issuance costs. Additionally, the Company paid $13,413 in original issue discount and issuance costs related to the new credit facility. Amortization expense for debt issuance costs was $3,182, $3,092, and $3,097 in 2021, 2020 and 2019, respectively, which is included in interest expense in the accompanying consolidated statements of comprehensive income (loss).
Self-Insurancewas $1,707, $3,182, and $3,092, respectively.
Self-Insurance
The Company is self-insured for employee medical and prescription drug benefits up to certain stop loss coverage amounts. The Company accrues an estimate for unpaid claims, as well as incurred but not reported claims, based upon the Company’s claim experience and expectations of future claim activity. The resulting liability and expense are reflected as a component of accrued expenses, cost of sales and selling, general and administrative expenses in the accompanying consolidated balance sheets and consolidated statements of comprehensive income (loss), respectively.
Revenue Recognition
The Company recognizes revenue with customers when control of the promised goods transfers to the customer. This generally occurs when the product is shipped to the customer. Revenue is recorded at the amount of consideration the Company expects to be entitled to in exchange for the delivered goods, which includes an estimate of variable consideration, expected returns, or refunds when applicable. The Company estimates variable consideration, such as sales incentives, by using the most likely amount approach, which considers the single most likely amount from a range of possible consideration amounts. Estimates of variable consideration result in an adjustment to the transaction price such that it is probable that a significant reversal of cumulative revenue would not occur in the future. Sales incentives and allowances are recognized as a reduction to revenue at the time of the related sale. Revenue is recorded net of sales tax. Shipping and handling fees billed to customers are included in net sales, while costs of shipping and handling are included in selling, general and administrative costs.
For more information about the Company’s revenue from contracts with customers, refer tosee Note 9, Revenue. “Revenue”.
Customer Sales Incentives
Sales incentives provided take the form of either sales discounts or rebates and are treated as a reduction of net sales. The Company also maintains a cooperative advertising program with its customers and provides sales incentives to the extent of the estimated value of advertising provided by the customer on behalf of the Company. The costs incurred under the cooperative advertising program are included as a reduction of net sales.
57
Product Warranty
The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. The accrued product warranty costs are based primarily on historical experience of actual warranty claims and are recorded at the time of the sale. These obligations are recorded within accrued liabilities in the consolidated balance sheets (see also Note 17, “Commitments and Contingencies” for additional information on warranty reserves). Significant judgments and estimates must be made and used in connection with establishing warranty allowances in any accounting period. Revision to these estimates is made, when necessary, based upon changes in these factors.
Sales Returns
Estimated sales returns and allowances are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. The Company allowsCompany’s customers are permitted to return new, undamaged products when certain Company-established criteriawithin customer-specific limits (which are met.generally limited to a specified percentage of their annual purchases) in the event that they have overstocked their inventories. The Company estimates sales returns based primarily upon actual historical returns, planned product discontinuances, and promotional sales. Returned products, which are recorded as inventories, are valued at the lower of cost or net realizable value. The physical condition and marketability of the returned products are the major factors considered in estimating realizable value.
Cost of Goods Sold
Cost of goods sold primarily consists of materials and labor expense in the manufacturing of the Company’s products sold to its customers. Cost of goods sold also includes provisions for excess and obsolete inventory, warranty costs, certain allocated costs for facilities, depreciation and other manufacturing overhead.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include personnel costs for employees in selling, general and administrative functions (including equity-based compensation); costs to operate branch locations, corporate offices and back-office support centers; costs to transport products from facilities to our customers; and other selling, general and administrative expenses, such as professional fees, supplies, and advertising expenses.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable 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.
The Company recognizes income tax positions only if those positions are “more likely than not” of being sustained upon examination by taxing authorities. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company recognizes interest on liabilities for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in its consolidated income statements. The Company has 0no amounts accrued for such interest or penalties as of onDecember 31, 2021 2022 and 2020.2021. The Company files income tax returns in the U.S. federal jurisdiction and various foreign and state jurisdictions.
As of On December 31, 2021 2022 and 2020, 2021, the Company did 0tnot have any unrecognized tax benefits. The statute of limitations remains open for U.S. federal income tax examinations for the years ended December 31, 2018 2019, through December 31, 2020. 2021. U.S. state jurisdictions have statues of limitations generally ranging from three to eight years. years. The Company does 0tnot expect the total amount of unrecognized tax benefits to significantly change in the next 12 months.
Impairment or Disposal of Long-Lived Assets
The Company accounts for long-lived assets, including intangible assets subject to amortization, in accordance with the provisions that require long-lived assets, such as property and equipment, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an 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 the sum of undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized 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 the carrying amount or fair value less costs to sell.
Advertising
Advertising
Advertising production costs are expensed the first time the advertising takes place. Total advertising expenses were $6,299, $4,379,$7,159, $6,299, and $3,921$4,379 for the years ended December 31, 2022, 2021 2020,, and 2019,2020, respectively. Advertising costs are classified as a component of selling, general and administrative costs in the accompanying consolidated statements of comprehensive income (loss).
Research and Development Costs
Research, development, pre-production and start-up costs related to both present and future products are expensed as incurred. Such costs amount to $28,280, $23,483,$29,083, $28,280, and $20,630$23,483 for the years ended December 31, 2022, 2021 2020,, and 2019,2020, respectively.
58
Other Comprehensive Income (Loss)
Comprehensive loss encompasses all changes in stockholder’s equity and includes net income, change in the foreign currency translation adjustment and minimum pension liability. The Company’s accumulated other comprehensive loss shown on the consolidated balance sheets as of on December 31, 2021 2022 and 20202021 consists of minimum pension loss of $302$0 and $690,$302, respectively, and foreign currency translation adjustments of $(46)$ 944 and $(16)$(46), respectively.
Foreign Currencies
The functional currency of the Company’s Italian subsidiary is the Euro. Assets and liabilities of foreign operations are translated using period end exchange rates. Revenue and expenses are translated using average exchange rates during each period reported. Translation gains are reported in accumulated other comprehensive loss as a component of shareholders equity and were $30$990, $30, and $16 as of $16 for the years ended December 31, 2022, 2021 and 2020, respectively. The Company recognizes foreign currency transaction gains (losses) on certain assets and liabilities. These transaction (gains) losses are reported in other expense in the consolidated statements of comprehensive income (loss) and were $44$(97), $(284),$44, and $(27)$(284) for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively.
Earnings per Share
Earnings per share is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.
Warrants
Warrants
The Company reviews the terms ofaccounts for warrants to purchase its common stock to determine whether warrants should be classified as liabilitieseither equity-classified or stockholders' equity in its consolidated balance sheet. In order for a warrant to be classified in stockholders' equity,liability-classified instruments based on an assessment of the warrant must be (a) indexed to the Company's equitywarrant’s specific terms and (b) meet the conditions for equity classificationapplicable authoritative guidance in Accounting Standards Codification ("ASC") Subtopic 815-40, Topic 480,Distinguishing Liabilities from Equity, and ASC Topic 815,Derivatives and Hedging-ContractsHedging. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC Topic 480, meet the definition of a liability pursuant to ASC Topic 480, and whether the warrants meet all of the requirements for equity classification under ASC Topic 815, including whether the warrants are indexed to the Company’s own shares and whether the warrant holders could potentially require “net cash settlement” in an Entity's Own Equity. If a warrant does not meetcircumstance outside of the Company’s control, among other conditions for equity classification, itclassification. This assessment, which requires the use of professional judgment, is carried inconducted at the consolidated balance sheettime of warrant issuance and as a warrant liability measured at fair value, withof each subsequent changes inquarterly period end date while the fair value of the warrant recorded in the consolidated statements of comprehensive income as a non-operating expense. If a warrant meets both conditions for equity classification, the warrant is initially recorded in additional paid-in capital on the consolidated balance sheet, and the amount initially recorded is not subsequently re-measured at fair value.warrants are outstanding.
Equity-Based Compensation
The Company accounts for equity-based awards granted to employees and nonemployees under the fair value method prescribed by ASC Subtopic 718-10, 718-10,Stock Compensation.Compensation. Equity-based compensation cost is measured based on the estimated grant date fair value of the award and is recognized as expense over the requisite service period (generally the vesting period). The Company accounts for forfeitures as they occur.
The fair value of stock options is estimated using the Black Scholes option-pricing model. Restricted stock units are valued at the stock price on the grant date. The fair value of profit interest units ("PIUs") granted by the Holley Parent Holdings, LLC (the “Holley Stockholder” or “Parent”)Stockholder is estimated based on the Company’s estimated equity value for each unit class at the time of granting using the Black-Scholes option-pricing model, discounted to reflect market considerations for illiquidity.
Fair ValueMeasurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs to the extent possible. The inputs used to measure fair value are prioritized based on a three-levelthree-level hierarchy, which are defined as follows:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
59
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “DerivativesDerivatives and Hedging”Hedging. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. Derivative liabilities are classified on the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and accounts receivable. The Company controls its exposure to credit risk associated with these instruments by (i) placing cash and cash equivalents with several major financial institutions and (ii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures. For more information on the Company’s net sales to its three largest customers, see Note 15, “Major Reseller Customers”.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
The FASB issued 2016-13,In February 2016, the Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2016-13 will provide more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU is effective for annual reporting periods beginning after December 15, 2022. The Company early adopted the standard in 2020. There was no material impact of adopting this guidance on its financial statements.
Accounting Standards Not Yet Adopted
In February 2016, the FASBBoard ("FASB") issued ASU 2016-02, Accounting Standards Update ("ASU") 2016-02,Leases (Topic 842)842), which requires lessees to recognize right-of-use assets, representing their right to use the underlying asset for the lease term, and lease liabilities on the balance sheet for all leases with terms greater than 12 months. The Company has substantially completed its preparation foradopted the provisions of this guidance effective January 1, 2022, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2022, and prior periods were not restated. The adoption of this new accounting standard. This included assessing the completenessstandard did not result in a cumulative-effect adjustment to the opening balance of our lease arrangements, evaluating practical expedients and accounting policy elections, and executing changes to our business process. ASU 2016-02 is effective for the Company beginning January 1, 2022. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply.retained earnings. The Company expects to elect certain practical expedients, includingelected the package of practical expedients and implemented internal controls and executed changes to not reassess prior conclusionsbusiness processes to enable the preparation of financial information upon adoption. The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company's consolidated balance sheet related to contracts containing leases, lease classification and initial direct costs, and is evaluating the other practical expedients available under the guidance. The Company also plans to elect the optional transition method that will give companies the option to use the effective date as the date of initial application on transition, and as a result, we will not adjust our comparative period financial information or make the new required lease disclosures for periods before the effective date. The Company anticipatesoperating leases. In addition, the adoption of this newthe standard will result in an increase of approximately 3 percent of total assets and approximately 4 percent of total liabilities on our consolidated balance sheet. We do did not expect the new standard to have a material impact on the Company's consolidated statementresults of incomeoperations or consolidated statement of cash flows. While we are substantially complete with the process of quantifying the impacts that will result from applying the new guidance, our assessment will be finalized during the first quarter of 2022.See Note 14,"Lease Commitments," for further details.
In August 2018, the FASB issued ASU 2018-14, 2018-14,Compensation – Retirements Benefits – Defined Benefit Plans – General (Subtopic 715-20)715-20). The ASU is effective for the Company for annual reporting periods beginning after December 15, 2021 with early adoption permitted. This guidance should be applied on a retrospective basis to all periods presented. The ASU will update disclosure requirements for employers that sponsor defined benefit pension or other post retirement plans. The Company isadopted ASU 2018-14 on a retrospective basis as of January 1, 2022. Adoption did not result in the process of terminating its defined benefit pension plan and does not expect this guidance to have a significant impact on itschange to the Company's consolidated financial statements or relatedstatement disclosures.
In December 2019, the FASB issued ASU 2019-12, 2019-12,Simplifying the Accounting for Income Taxes (Topic 740)740), which is intended to simplify various aspects related to accounting for income taxes. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2021 and interim periods therein, with early adoption permitted. The ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 on a prospective basis as of January 1, 2022. Adoption of the ASU did not have a material effect on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06,Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 470-20). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. The new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The Company adopted ASU 2020-06 on January 1, 2022. Adoption of the ASU did not impact the Company's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04,Reference Rate Reform (Topic 848), as further modified by ASU 2021-01 and ASU 2022-06 (collectively, the "ASUs"). The ASUs provide temporary optional expedients and exceptions, if certain conditions are met, for applying GAAP to contracts, hedging relationships, and other transactions affected by the transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). The standard is currently applicable to contracts entered into before January 1, 2025. The ASUs were effective upon issuance and allowed companies to adopt the amendments on a prospective basis through December 31, 2022. The Company has not adopted any expedients or exceptions under ASU 2020-04.
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08,Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to apply the definition of a performance obligation under ASC Topic 606,Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current U.S. GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No.2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. Adoption of the provisions of ASU 2021-08 are effective for the Company's fiscal year beginning after December 15, 2022, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.
60
2. | BUSINESS COMBINATION, ACQUISITIONS, AND DIVESTITURE BUSINESS COMBINATION |
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. As of December 31, 2021, the Company did not adopt any expedients or exceptions under ASU 2020-04. The Company will continue to evaluate the impact of ASU 2020-04 and whether it will apply the optional expedients and exceptions.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 470-20). The ASU is effective for the Company for annual reporting periods beginning after December 15, 2023 and interim periods therein, with early adoption permitted as of the beginning of the Company's annual fiscal year. The ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, the ASU requires entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. When adopted, the ASU will result in changes in the fair value of its public warrants being recognized through equity rather than through the statement of income. The Company plans to early adopt the standard as of January 1, 2022.
2. BUSINESS COMBINATION AND ACQUISITIONS
BUSINESS COMBINATION
On July 16, 2021, Holley consummated the Business Combination pursuant to the terms of the Merger Agreement, whereby (i) Merger Sub I, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Holley Intermediate surviving such merger as a wholly owned subsidiary of Holley (“Merger I”) and (ii) Merger Sub II, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Merger Sub II surviving such merger as a wholly owned subsidiary of Holley (“Merger II”).
Pursuant to the Merger Agreement, at the Closing, all outstanding shares of Holley Intermediate common stock as of immediately prior to the effective time of Merger I were cancelled and the Holley Stockholder, the sole stockholder of Holley Intermediate, received $264,718$264,718 in cash and 67,673,884 shares of common stock (at a deemed value of $10.00$10.00 per share). The Company’s common stock is listed on the NYSE under the symbol “HLLY.”
In connection with the Business Combination, a number of subscribers purchased from the Company an aggregate of 24,000,000 shares of common stock (the “PIPE”), for a purchase price of $10.00$10.00 per share, or $240,000$240,000 in the aggregate. Per the Merger Agreement, $100,000$100,000 of the PIPE proceeds were used to partially pay off Holley’s debt.
Pursuant to the Amended and Restated Forward Purchase Agreement (“A&R FPA”), at the Closing, 5,000,000 shares of the Company’s common stock and 1,666,667 warrants were issued to certain investors for an aggregate purchase price of $50,000.$50,000. Pursuant to the A&R FPA, each warrant entitles the holder to purchase one share of the Company’s common stock at a price of $11.50$11.50 per share (the ”Public Warrants”), subject to certain conditions.
The Company also assumed 8,333,310 Public Warrants and 4,666,667 private placement warrants (the “Private Warrants”, and together with the Public Warrants, the “Warrants”) upon the Business Combination, all of which were issued in connection with Empower’s initial public offering. Each Warrant represents the right to purchase one share of the Company’s common stock at a price of $11.50$11.50 per share, subject to certain conditions. The Warrants are exercisable commencing on October 9, 2021 (the one-year(the one-year anniversary of Empower’s initial public offering) and expire on July 16, 2026 (five years after the Closing Date). The Public Warrants are listed on the NYSE under the symbol “HLLY WS.”
Additionally, Empower Sponsor Holdings LLC (the "Sponsor") may be entitled to receive up to received 2,187,500 shares of the Company’s common stock, vestingwhich vest in two equal tranches upon achieving certain market share price milestones as outlined in the Merger Agreement during the earn-out period (“the “Earn-Out Shares”). The first tranche of Earn-Out Shares vested during the first quarter of 2022. Upon vesting, the first tranche of the Earn-Out Shares, or 1,093,750 shares, were issued and a liability of $14,689, representing the fair value of the shares on the date of vesting, was reclassified from liabilities to equity. The remaining tranche of Earn-Out Shares will be forfeited if the applicable conditions are not satisfied before July 16, 2028 (seven(seven years after the Closing Date). The earnout isremaining Earn-Out Shares are classified as a liability inon the condensed consolidated balance sheet and is re-measuredare remeasured at fair value with changes in the post-Business Combination fair value recognized in the Company’s condensed consolidated statement of comprehensive income (loss) as non-operating expense.
61
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. This determination was primarily based on the Holley Stockholder having a relative majority of the voting power of the Company, the operations of Holley prior to the acquisition comprising the only ongoing operations of the Company, and senior management of Holley comprising the majority of the senior management of the Company. Under this method of accounting, Empower was treated as the acquired company for financial reporting. Accordingly, the Business Combination was accounted for as the equivalent of Holley issuing stock for the net assets of Empower, accompanied by a recapitalization. The net assets of Empower are stated at historical cost, with no goodwill or other intangible assets recorded. Reported amounts from operations included herein prior to the Business Combination are those of Holley Intermediate. The shares and corresponding capital amounts and earnings per share, prior to the Business Combination, have been retroactively restated based on shares received by the Holley Stockholder.
The following table reconciles the elements of the Business Combination to the consolidated statements of cash flows for the year ended December 31, 2021:
|
| Recapitalization |
| |
Cash - Empower's trust and cash (net of redemptions of $99,353 and |
| $ | 107,017 |
|
Cash - Forward Purchase Agreement |
|
| 50,000 |
|
Cash - PIPE Financing |
|
| 240,000 |
|
Net cash provided by Business Combination and PIPE Financing |
|
| 397,017 |
|
Less: cash consideration paid to Holley Stockholder |
|
| (264,718 | ) |
Net contributions from Business Combination and PIPE Financing |
| $ | 132,299 |
|
Recapitalization | ||||
Cash - Empower's trust and cash (net of redemptions of $99,353 and transaction costs of $44,314) | $ | 107,017 | ||
Cash - Forward Purchase Agreement | 50,000 | |||
Cash - PIPE Financing | 240,000 | |||
Net cash provided by Business Combination and PIPE Financing | 397,017 | |||
Less: cash consideration paid to Holley Stockholder | (264,718 | ) | ||
Net contributions from Business Combination and PIPE Financing | $ | 132,299 |
ACQUISITIONS
During the three years ended December 31, 2021,2022, the Company completed 1214 acquisitions. These acquisitions are expected to enhance the Company's portfolio of products and services in the automotive aftermarket and automotive safety solutions market.
The companyCompany accounts for acquisitions using the acquisition method, and accordingly, the purchase price has been allocated based upon the fair value of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the Company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected. Goodwill generated by the acquisitions is primarily attributable to the strong market position of the entities acquired.
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions were for 100 percent of the acquired business and are reported in the Consolidated Statements of Cash Flows, net of acquired cash and cash equivalents. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in acquisition and restructuring costs. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
In 2022, the Company acquired substantially all the assets of John's Ind., Inc. ("John's"), Southern Kentucky Classics ("SKC"), and Vesta Motorsports USA, Inc., doing business as RaceQuip ("RaceQuip"). These acquisitions were immaterial business combinations. Cash paid for the three acquisitions, net of cash acquired, was $14,863, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and nonamortizable intangibles and goodwill totaling $9,618. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. Pro forma results of operations and the results of operations since the acquisition dates for these immaterial acquisitions have not been separately disclosed because the effects were not significant compared to the consolidated financial statements, individually or in the aggregate.
The final allocation of the purchase price to specific assets acquired and liabilities assumed may change in future periods as the fair value estimates of inventory and intangibles are completed. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Measurement | ||||||||||||
2022 | Period | 2022 | ||||||||||
(as initially reported) | Adjustments | �� | (as adjusted) | |||||||||
Accounts receivable | $ | 959 | $ | (397 | ) | $ | 562 | |||||
Inventory | 3,481 | 1,081 | 4,562 | |||||||||
Property, plant and equipment | 275 | — | 275 | |||||||||
Other assets | 1,132 | (1,108 | ) | 24 | ||||||||
Tradenames | 1,689 | — | 1,689 | |||||||||
Customer relationships | 1,512 | — | 1,512 | |||||||||
Goodwill | 5,858 | 559 | 6,417 | |||||||||
Accounts payable | (25 | ) | (133 | ) | (158 | ) | ||||||
Accrued liabilities | (18 | ) | (2 | ) | (20 | ) | ||||||
$ | 14,863 | $ | — | $ | 14,863 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
In 2021, the Company acquired substantially all the assets of Finspeed, LLC (“Finspeed”), Classic Instruments LLC (“Classic Instruments”), ADS Precision Machining, Inc., doing business as Arizona Desert Shocks (“ADS”), Rocket Performance Machine, Inc., doing business as Rocket Racing Wheels (“Rocket”), and Speartech Fuel Injections Systems, Inc. (“Speartech”). These five acquisitions were individually immaterial business combinations that are material in the aggregate. Cash paid for the five immaterial acquisitions, net of cash acquired, was $19,685,$19,909, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and non-amortizable intangibles and goodwill totaling $13,145.$13,247. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. Pro forma results of operations and the results of operations since the acquisition dates for these immaterial acquisitions have not been separately disclosed because the effects were not significant compared to the consolidated financial statements, individually or in the aggregate.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed may change in future periods aswas adjusted to reflect the final fair value estimatesestimate of inventoryacquired assets and intangibles are completed.
liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Measurement | ||||||||||||
2021 | Period | 2021 | ||||||||||
(as initially reported) | Adjustments | (as adjusted) | ||||||||||
Cash | $ | 122 | $ | — | $ | 122 | ||||||
Accounts receivable | 618 | — | 618 | |||||||||
Inventory | 3,975 | — | 3,975 | |||||||||
Property, plant and equipment | 2,274 | — | 2,274 | |||||||||
Other assets | 23 | — | 23 | |||||||||
Tradenames | 2,608 | — | 2,608 | |||||||||
Customer relationships | 2,450 | — | 2,450 | |||||||||
Goodwill | 11,017 | (2,828 | ) | 8,189 | ||||||||
Accounts payable | (343 | ) | — | (343 | ) | |||||||
Accrued liabilities | (129 | ) | 122 | (7 | ) | |||||||
$ | 22,615 | $ | (2,706 | ) | $ | 19,909 |
62
Cash |
| $ | 122 |
|
Accounts receivable |
|
| 618 |
|
Inventory |
|
| 3,975 |
|
Property, plant and equipment |
|
| 2,274 |
|
Other assets |
|
| 23 |
|
Tradenames |
|
| 2,608 |
|
Customer relationships |
|
| 2,450 |
|
Goodwill |
|
| 8,087 |
|
Accounts payable |
|
| (343 | ) |
Accrued liabilities |
|
| (129 | ) |
|
| $ | 19,685 |
|
The fair value of the acquired customer relationship intangible assets werewas estimated using the excess earnings approach. The customer relationship intangible assets are being amortized based on the attrition rate of customers which have an estimated weighted average life of 18 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The remaining sevensix acquisitions completed during the three years ended December 31, 2021 and 2020are described below.
Baer, Inc.
On December 23, 2021,, the Company acquired substantially all the assets and liabilities of Baer, Inc., doing business as Baer Brakes ("Baer"). Consideration for the assets acquired was cash payments of $22,170.$22,170. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill totaling $19,068.$18,989. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded with borrowings from the Company's credit facility and cash on hand.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed may change in future periods aswas adjusted to reflect the final fair value estimatesestimate of inventoryacquired assets and intangibles are completed.
liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Accounts receivable |
| $ | 627 |
|
Inventory |
|
| 1,813 |
|
Property, plant and equipment |
|
| 695 |
|
Other assets |
|
| 76 |
|
Tradenames |
|
| 4,630 |
|
Customer relationships |
|
| 6,075 |
|
Goodwill |
|
| 8,363 |
|
Accounts payable |
|
| (81 | ) |
Accrued liabilities |
|
| (28 | ) |
|
| $ | 22,170 |
|
Measurement | ||||||||||||
December 23, 2021 | Period | December 23, 2021 | ||||||||||
(as initially reported) | Adjustments | (as adjusted) | ||||||||||
Accounts receivable | $ | 627 | $ | — | $ | 627 | ||||||
Inventory | 1,813 | — | 1,813 | |||||||||
Property, plant and equipment | 695 | — | 695 | |||||||||
Other assets | 76 | — | 76 | |||||||||
Tradenames | 4,630 | — | 4,630 | |||||||||
Customer relationships | 6,075 | — | 6,075 | |||||||||
Goodwill | 8,363 | (79 | ) | 8,284 | ||||||||
Accounts payable | (81 | ) | 79 | (2 | ) | |||||||
Accrued liabilities | (28 | ) | — | (28 | ) | |||||||
$ | 22,170 | $ | — | $ | 22,170 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $800.$800.
The Company incurred transaction costs in the amount of $222,$222, which are reflected in operating expenses for the year ended December 31, 2021.
63
Brothers Mail Order Industries, Inc.
On December 16, 2021,, the Company acquired substantially all the assets and liabilities of Brothers Mail Order Industries, Inc., doing business as Brothers Trucks ("Brothers"). Consideration for the assets acquired was cash payments of $25,836.$26,135. The acquisition resulted in non-amortizable intangibles and goodwill totaling $24,536.$24,835. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded with borrowings from the Company's credit facility and cash on hand. The determination
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Accounts receivable |
| $ | 22 |
|
Inventory |
|
| 1,682 |
|
Property, plant and equipment |
|
| 20 |
|
Other assets |
|
| 13 |
|
Tradenames |
|
| 4,975 |
|
Goodwill |
|
| 19,561 |
|
Accounts payable |
|
| (34 | ) |
Accrued liabilities |
|
| (403 | ) |
|
| $ | 25,836 |
|
The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $22.
The Company incurred transaction costs in the amount of $191, which are reflected in operating expenses for the year ended December 31, 2021.
Advance Engine Management Inc.
On April 14, 2021, the Company acquired substantially all the assets and liabilities of Advance Engine Management Inc. doing business as AEM Performance Electronics (“AEM”). Consideration for the assets acquired was cash payments of $51,243. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $44,486. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded from cash on hand.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Measurement | ||||||||||||
December 16, 2021 | Period | December 16, 2021 | ||||||||||
(as initially reported) | Adjustments | (as adjusted) | ||||||||||
Accounts receivable | $ | 22 | $ | — | $ | 22 | ||||||
Inventory | 1,682 | — | 1,682 | |||||||||
Property, plant and equipment | 20 | — | 20 | |||||||||
Other assets | 13 | — | 13 | |||||||||
Tradenames | 4,975 | — | 4,975 | |||||||||
Goodwill | 19,561 | 299 | 19,860 | |||||||||
Accounts payable | (34 | ) | — | (34 | ) | |||||||
Accrued liabilities | (403 | ) | — | (403 | ) | |||||||
$ | 25,836 | $ | 299 | $ | 26,135 |
The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $22.
The Company incurred transaction costs in the amount of $191, which are reflected in operating expenses for the year ended December 31, 2021.
Advance Engine Management Inc.
On April 14, 2021, the Company acquired substantially all the assets and liabilities of Advance Engine Management Inc. doing business as AEM Performance Electronics (“AEM”). Consideration for the assets acquired was cash payments of $51,243. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $44,486. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded from cash on hand.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Measurement | ||||||||||||
April 14, 2021 | Period | April 14, 2021 | ||||||||||
(as initially reported) | Adjustments | (as adjusted) | ||||||||||
Accounts receivable | $ | 3,454 | $ | (61 | ) | $ | 3,393 | |||||
Inventory | 3,892 | — | 3,892 | |||||||||
Property, plant and equipment | 1,342 | — | 1,342 | |||||||||
Other assets | 493 | (91 | ) | 402 | ||||||||
Tradenames | 10,760 | — | 10,760 | |||||||||
Customer relationships | 14,640 | — | 14,640 | |||||||||
Patents | 1,970 | — | 1,970 | |||||||||
Technology intangibles | 110 | — | 110 | |||||||||
Goodwill | 17,426 | (420 | ) | 17,006 | ||||||||
Accounts payable | (2,032 | ) | 110 | (1,922 | ) | |||||||
Accrued liabilities | (489 | ) | 139 | (350 | ) | |||||||
$ | 51,566 | $ | (323 | ) | $ | 51,243 |
|
| April 14, 2021 |
|
| Measurement |
|
| April 14, 2021 |
| |||
Accounts receivable |
| $ | 3,454 |
|
| $ | (61 | ) |
| $ | 3,393 |
|
Inventory |
|
| 3,892 |
|
|
| — |
|
|
| 3,892 |
|
Property, plant and equipment |
|
| 1,342 |
|
|
| — |
|
|
| 1,342 |
|
Other assets |
|
| 493 |
|
|
| (91 | ) |
|
| 402 |
|
Tradenames |
|
| 10,760 |
|
|
| — |
|
|
| 10,760 |
|
Customer relationships |
|
| 14,640 |
|
|
| — |
|
|
| 14,640 |
|
Patents |
|
| 1,970 |
|
|
| — |
|
|
| 1,970 |
|
Technology intangibles |
|
| 110 |
|
|
| — |
|
|
| 110 |
|
Goodwill |
|
| 17,426 |
|
|
| (420 | ) |
|
| 17,006 |
|
Accounts payable |
|
| (2,032 | ) |
|
| 110 |
|
|
| (1,922 | ) |
Accrued liabilities |
|
| (489 | ) |
|
| 139 |
|
|
| (350 | ) |
|
| $ | 51,566 |
|
| $ | (323 | ) |
| $ | 51,243 |
|
64
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames and patents intangible assets were estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life. The patents are being amortized over 13 years based on the weighted average remaining life of the patent portfolio.
The contractual value of the accounts receivable acquired was $3,454.$3,454.
The Company’s results for the year ended December 31, 2021, include $16,593$16,593 of net sales and $2,664$2,664 of net income from AEM since the date of acquisition. The Company incurred transaction costs in the amount of $2,264,$2,264, which are reflected in operating expenses for the year ended December 31, 2021.
Drake Automotive Group LLC
On November 11, 2020,, the Company acquired Drake Automotive Group LLC (“Drake”). The purchase price was $49,104.$49,104. The Company acquired 100%100% of the outstanding member units of Drake. Consideration for the assets acquired consisted of cash payments of $47,104$47,104 plus an estimated earn-out payment of $2,000$2,000 based on expected 2020 performance. The earn-out payment of $2,000$2,000 was paid in March 2021. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $32,441.$32,441. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded from the proceeds of debt and cash on hand.
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Cash | $ | 205 | ||
Accounts receivable | 3,947 | |||
Inventory | 14,198 | |||
Property, plant and equipment | 1,296 | |||
Other assets | 189 | |||
Tradenames | 7,715 | |||
Customer relationships | 17,175 | |||
Goodwill | 7,551 | |||
Accounts payable | (2,524 | ) | ||
Accrued liabilities | (648 | ) | ||
$ | 49,104 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years.years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $4,155.$4,155.
Simpson Performance Products, Inc.
On November 16, 2020,, the Company acquired Simpson Performance Products, Inc. (“Simpson”). The purchase price was $117,409.$117,409. The Company acquired 100%100% of the outstanding common stock of Simpson. Consideration for the assets acquired consisted of cash payments of $110,209$110,209 and an earnout initially valued at $7,200.$7,200. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $107,618.$105,882. The goodwill and intangibles generated as a result of this acquisition are not deductible for income tax purposes. The purchase price was funded from the proceeds of debt and cash on hand.
The purchase agreement included a potential contingent payment based on the performance for the twelve months ended October 3, 2021. The seller could earn up to an additional $25,000.$25,000. The fair value of this contingent payment was initially determined to be $7,200$7,200 using the “Bull Call” option strategy utilizing the option values from the Black-Scholes Option Pricing Model. Based on actual performance and updated projections of Simpson’s performance for the earn-out period, the fair value of the contingent payment was determined to be $24,373,$24,373, resulting in an adjustment of $17,173,$17,173, which is recognized in acquisition and restructuring costs in the consolidated statement of comprehensive income for the year ended December 31, 2021.
65
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of finished goods inventory, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
|
| November 16, 2020 |
|
| Measurement |
|
| November 16, 2020 |
| |||
Cash |
| $ | 7,715 |
|
| $ | 0 |
|
| $ | 7,715 |
|
Accounts receivable |
|
| 3,894 |
|
|
| 0 |
|
|
| 3,894 |
|
Inventory |
|
| 19,265 |
|
|
| (770 | ) |
|
| 18,495 |
|
Property, plant and equipment |
|
| 5,952 |
|
|
| 0 |
|
|
| 5,952 |
|
Other assets |
|
| 1,613 |
|
|
| 0 |
|
|
| 1,613 |
|
Tradenames |
|
| 23,980 |
|
|
| 0 |
|
|
| 23,980 |
|
Customer relationships |
|
| 28,770 |
|
|
| 0 |
|
|
| 28,770 |
|
Patents |
|
| 2,720 |
|
|
| 0 |
|
|
| 2,720 |
|
Goodwill |
|
| 51,305 |
|
|
| (893 | ) |
|
| 50,412 |
|
Accounts payable |
|
| (2,483 | ) |
|
| 0 |
|
|
| (2,483 | ) |
Accrued liabilities |
|
| (7,787 | ) |
|
| 361 |
|
|
| (7,426 | ) |
Deferred tax liability |
|
| (12,993 | ) |
|
| 1,375 |
|
|
| (11,618 | ) |
Debt |
|
| (4,615 | ) |
|
| 0 |
|
|
| (4,615 | ) |
|
| $ | 117,336 |
|
| $ | 73 |
|
| $ | 117,409 |
|
Measurement | ||||||||||||
November 16, 2020 | Period | November 16, 2020 | ||||||||||
(as initially reported) | Adjustments | (as adjusted) | ||||||||||
Cash | $ | 7,715 | $ | - | $ | 7,715 | ||||||
Accounts receivable | 3,894 | — | 3,894 | |||||||||
Inventory | 19,265 | (770 | ) | 18,495 | ||||||||
Property, plant and equipment | 5,952 | — | 5,952 | |||||||||
Other assets | 1,613 | — | 1,613 | |||||||||
Tradenames | 23,980 | — | 23,980 | |||||||||
Customer relationships | 28,770 | — | 28,770 | |||||||||
Patents | 2,720 | — | 2,720 | |||||||||
Goodwill | 51,305 | (893 | ) | 50,412 | ||||||||
Accounts payable | (2,483 | ) | — | (2,483 | ) | |||||||
Accrued liabilities | (7,787 | ) | 361 | (7,426 | ) | |||||||
Deferred tax liability | (12,993 | ) | 1,375 | (11,618 | ) | |||||||
Debt | (4,615 | ) | — | (4,615 | ) | |||||||
$ | 117,336 | $ | 73 | $ | 117,409 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames and patents intangible assets were estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life. The patents are being amortized over 10 years based on the weighted average remaining life of the patent portfolio.
The contractual value of the accounts receivable acquired was $3,894.$3,894.
Detroit Speed, Inc.
On December 18, 2020,, the Company acquired Detroit Speed, Inc. (“Detroit Speed”). The purchase price was $11,297.$11,632. The Company acquired substantially all of the assets and liabilities of Detroit Speed. Consideration for the assets acquired includes cash payments of $9,297$9,297 and Class A Units of Parentthe Holley Stockholder of $2,000.$2,000. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $4,323.$4,482. The goodwill and intangibles generated as a result of this acquisition are partially deductible for income tax purposes. The purchase price was funded from cash on hand and distribution of Class A Units of Parent.the Holley Stockholder.
66
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
|
| November 16, 2020 |
|
| Measurement |
|
| November 16, 2020 |
| |||
Cash |
| $ | 1,784 |
|
| $ | — |
|
| $ | 1,784 |
|
Accounts receivable |
|
| 418 |
|
|
| — |
|
|
| 418 |
|
Inventory |
|
| 3,478 |
|
|
| (324 | ) |
|
| 3,154 |
|
Property, plant and equipment |
|
| 3,040 |
|
|
| — |
|
|
| 3,040 |
|
Other assets |
|
| 215 |
|
|
| — |
|
|
| 215 |
|
Tradenames |
|
| 1,127 |
|
|
| — |
|
|
| 1,127 |
|
Customer relationships |
|
| 560 |
|
|
| — |
|
|
| 560 |
|
Goodwill |
|
| 2,636 |
|
|
| 159 |
|
|
| 2,795 |
|
Accounts payable |
|
| (668 | ) |
|
| — |
|
|
| (668 | ) |
Accrued liabilities |
|
| (1,019 | ) |
|
| 500 |
|
|
| (519 | ) |
Deferred tax liability |
|
| (274 | ) |
|
| — |
|
|
| (274 | ) |
|
| $ | 11,297 |
|
| $ | 335 |
|
| $ | 11,632 |
|
Measurement | ||||||||||||
December 18, 2020 | Period | December 18, 2020 | ||||||||||
(as initially reported) | Adjustments | as adjusted) | ||||||||||
Cash | $ | 1,784 | $ | — | $ | 1,784 | ||||||
Accounts receivable | 418 | — | 418 | |||||||||
Inventory | 3,478 | (324 | ) | 3,154 | ||||||||
Property, plant and equipment | 3,040 | — | 3,040 | |||||||||
Other assets | 215 | — | 215 | |||||||||
Tradenames | 1,127 | — | 1,127 | |||||||||
Customer relationships | 560 | — | 560 | |||||||||
Goodwill | 2,636 | 159 | 2,795 | |||||||||
Accounts payable | (668 | ) | — | (668 | ) | |||||||
Accrued liabilities | (1,019 | ) | 500 | (519 | ) | |||||||
Deferred tax liability | (274 | ) | — | (274 | ) | |||||||
$ | 11,297 | $ | 335 | $ | 11,632 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 10 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $418.$418.
Range Technologies Inc.
On October 18, 2019, the Company acquired Range Technologies Inc. (“Range”). The Company acquired 100% of the issued and outstanding common stock of Range. The purchase price was cash consideration of $7,239. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $8,277. The goodwill and intangibles generated as a result of this acquisition are not deductible for income tax purposes. The purchase price was cash funded.
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Cash |
| $ | 218 |
|
Accounts receivable |
|
| 94 |
|
Inventory |
|
| 231 |
|
Property, plant and equipment |
|
| 7 |
|
Other assets |
|
| 60 |
|
Tradename |
|
| 510 |
|
Technology intangible |
|
| 5,695 |
|
Goodwill |
|
| 2,072 |
|
Accounts payable |
|
| (64 | ) |
Accrued liabilities |
|
| (4 | ) |
Deferred tax liability |
|
| (1,580 | ) |
|
| $ | 7,239 |
|
The fair value of the acquired technology intangible asset was estimated using the relief from royalty method, a form of the income approach. The technology intangible asset is being amortized over the estimated lifecycle of the technology which was determined to be 14 years. The fair value of the acquired tradename intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradename was determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $94.
67
The following table provides the unaudited consolidated pro forma results for the periods presented as if Baer, Brothers, AEM, Drake, Simpson, and Detroit SpeedAEM had been acquired as of January 1, 2020.
| For the years ended |
| |||||
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Pro forma net sales | $ | 727,369 |
|
| $ | 631,560 |
|
Pro forma net income (loss) |
| (8,464 | ) |
|
| 31,435 |
|
For the years ended December 31, | ||||||||
2021 | 2020 | |||||||
Pro forma net sales | $ | 727,369 | $ | 551,469 | ||||
Pro forma net income | (16,248 | ) | 35,969 |
The following table presents the supplemental and unaudited pro forma results as if Range, Drake, Simpson and Detroit Speed had been acquired as of January 1, 2019:
| For the years ended |
| |||||
| December 31, 2020 |
|
| December 31, 2019 |
| ||
Pro forma net sales | $ | 584,270 |
|
| $ | 461,418 |
|
Pro forma net income (loss) |
| 37,304 |
|
|
| (8,799 | ) |
The pro forma results include the effects of the amortization of purchased intangible assets and acquired inventory step-up.step- up. The pro forma results are based upon unaudited financial information of the acquired entity and are presented for informational purposes only and are not necessarily indicative of the results of future operations or the results that would have occurred had the acquisitions taken place in the periods noted.
DIVESTITURE
In the fourth quarter of 2022, in connection with a strategic review of its product portfolio, the Company made the decision to sell Finspeed. Finspeed generated approximately $426 in net sales in 2022. The Company received $1,966 cash consideration and recorded a pre-tax loss of $1,037 on the sale of the business, which included a $268 write-down of intangible assets, and was reported as other operating expense in the Consolidated Statements of Comprehensive Income (Loss).
3. | INVENTORY |
3. INVENTORY
Inventories of the Company consisted of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Raw materials |
| $ | 54,818 |
|
| $ | 44,474 |
|
Work-in-process |
|
| 21,728 |
|
|
| 12,946 |
|
Finished goods |
|
| 108,494 |
|
|
| 76,508 |
|
|
| $ | 185,040 |
|
| $ | 133,928 |
|
December 31, | ||||||||
2022 | 2021 | |||||||
Raw materials | $ | 78,586 | $ | 54,818 | ||||
Work-in-process | 23,906 | 21,728 | ||||||
Finished goods | 131,081 | 108,494 | ||||||
$ | 233,573 | $ | 185,040 |
4. | BALANCE SHEET DETAILS |
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, Plant and Equipment, net
Property, plant and equipment of the Company consisted of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Land |
| $ | 1,330 |
|
| $ | 1,330 |
|
Buildings and improvements |
|
| 10,623 |
|
|
| 8,594 |
|
Machinery and equipment |
|
| 56,824 |
|
|
| 44,690 |
|
Construction in process |
|
| 12,859 |
|
|
| 8,088 |
|
Total property, plant and equipment |
|
| 81,636 |
|
|
| 62,702 |
|
Less: accumulated depreciation |
|
| 30,141 |
|
|
| 18,973 |
|
Property, plant and equipment, net |
| $ | 51,495 |
|
| $ | 43,729 |
|
December 31, | ||||||||
2022 | 2021 | |||||||
Land | $ | 3,426 | $ | 1,330 | ||||
Buildings and improvements | 11,051 | 10,623 | ||||||
Machinery and equipment | 66,140 | 56,824 | ||||||
Construction in process | 9,563 | 12,859 | ||||||
Total property, plant and equipment | 90,180 | 81,636 | ||||||
Less: accumulated depreciation | 37,999 | 30,141 | ||||||
Property, plant and equipment, net | $ | 52,181 | $ | 51,495 |
The Company’s long-lived assets by geographic locations are as follows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
United States |
| $ | 49,547 |
|
| $ | 42,264 |
|
International |
|
| 1,948 |
|
|
| 1,465 |
|
Total property, plant and equipment, net |
| $ | 51,495 |
|
| $ | 43,729 |
|
December 31, | ||||||||
2022 | 2021 | |||||||
United States | $ | 50,434 | $ | 49,547 | ||||
International | 1,747 | 1,948 | ||||||
Total property, plant and equipment, net | $ | 52,181 | $ | 51,495 |
68
Accrued Liabilities
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Accrued liabilities of the Company consisted of the following:
December 31, | ||||||||
2022 | 2021 | |||||||
Accrued freight | $ | 6,861 | $ | 3,866 | ||||
Accrued employee compensation and benefits | 6,259 | 9,043 | ||||||
Accrued returns and allowances | 5,214 | 6,135 | ||||||
Accrued taxes | 5,222 | 1,412 | ||||||
Current portion of operating lease liabilities | 5,112 | - | ||||||
Accrued other | 14,649 | 14,397 | ||||||
Accrued liabilities | $ | 43,317 | $ | 34,853 |
5. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following presents changes to goodwill for the periods indicated:
Balance at December 31, 2019 |
| $ | 297,607 |
|
Drake acquisition |
|
| 7,551 |
|
Simpson acquisition |
|
| 51,305 |
|
Detroit Speed acquisition |
|
| 2,636 |
|
Balance at December 31, 2020 |
|
| 359,099 |
|
AEM acquisition |
|
| 17,426 |
|
Classic Instruments acquisition |
|
| 4,912 |
|
Speartech acquisition |
|
| 2,705 |
|
ADS acquisition |
|
| 1,260 |
|
Baer acquisition |
|
| 8,363 |
|
Brothers acquisition |
|
| 19,561 |
|
Rocket acquisition |
|
| 2,141 |
|
Measurement period adjustments* |
|
| (4,084 | ) |
Balance at December 31, 2021 |
| $ | 411,383 |
|
Balance on December 31, 2020 | $ | 359,099 | ||
AEM acquisition | 17,426 | |||
Classic Instruments acquisition | 4,912 | |||
Speartech acquisition | 2,705 | |||
ADS acquisition | 1,260 | |||
Baer acquisition | 8,363 | |||
Brothers acquisition | 19,561 | |||
Rocket acquisition | 2,141 | |||
Measurement period adjustments* | (4,084 | ) | ||
Balance on December 31, 2021 | $ | 411,383 | ||
John's acquisition | 240 | |||
SKC acquisition | 1,270 | |||
RaceQuip acquisition | 4,348 | |||
Measurement period adjustments* | 880 | |||
Balance on December 31, 2022 | $ | 418,121 |
* See Note 2, "Business Combination, Acquisitions, and Acquisitions - Simpson Performance Products, Inc. and Advance Engine Management Inc.Divestiture"
Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company's business combinations. The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes available, not to exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. In the third quarter and fourth quarters of 2022, the Company performed quantitative and qualitative assessments and did not identify any indicators of impairment. No impairment changes were incurred during 2022 and 2021.
Intangible assets consisted of the following:
December 31, 2022 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 269,950 | $ | (44,178 | ) | $ | 225,772 | |||||
Tradenames | �� | 13,775 | (4,843 | ) | 8,932 | |||||||
Technology | 26,676 | (11,523 | ) | 15,153 | ||||||||
Total finite-lived intangible assets | $ | 310,401 | $ | (60,544 | ) | $ | 249,857 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 174,998 | — | $ | 174,998 |
December 31, 2021 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 268,438 | $ | (32,662 | ) | $ | 235,776 | |||||
Tradenames | 13,775 | (4,119 | ) | 9,656 | ||||||||
Technology | 26,675 | (9,080 | ) | 17,595 | ||||||||
Total finite-lived intangible assets | $ | 308,888 | $ | (45,861 | ) | $ | 263,027 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 175,434 | — | $ | 175,434 |
|
| December 31, 2020 |
| |||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
| |||
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
Customer relationships |
| $ | 245,274 |
|
| $ | (21,819 | ) |
| $ | 223,455 |
|
Tradenames |
|
| 13,775 |
|
|
| (3,369 | ) |
|
| 10,406 |
|
Technology |
|
| 24,595 |
|
|
| (6,674 | ) |
|
| 17,921 |
|
Total finite-lived intangible assets |
| $ | 283,644 |
|
| $ | (31,862 | ) |
| $ | 251,782 |
|
|
|
|
|
|
|
|
|
|
| |||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
Tradenames |
| $ | 152,740 |
|
|
| — |
|
| $ | 152,740 |
|
69
The following outlines the estimated future amortization expense related to intangible assets held as of on December 31, 2021:2022:
2022 |
| $ | 14,644 |
| ||||
2023 |
|
| 14,481 |
| $ | 14,557 | ||
2024 |
|
| 13,668 |
| 13,744 | |||
2025 |
|
| 13,638 |
| 13,714 | |||
2026 |
|
| 13,532 |
| 13,608 | |||
2027 | 13,493 | |||||||
Thereafter |
|
| 193,064 |
| 180,741 | |||
Total |
| $ | 263,027 |
| $ | 249,857 |
In the third quarter of 2022, management concluded it was necessary to reevaluate indefinite-lived intangible assets for impairment after supply chain challenges led to the Company revising its earnings estimate for 2022, which resulted in a decline in the Company's market capitalization. As a result of this evaluation, a pre-tax impairment of $2,395 was recognized on certain indefinite-lived tradenames. In the fourth quarter of 2022, the Company performed a qualitative assessment of indefinite-lived intangible assets and did not identify any indicators of impairment.
The fair value of the indefinite-lived tradenames was estimated using the relief from royalty method, a form of the income approach. Significant judgement is required in estimating the fair value of intangible assets and in performing impairment tests. The most significant assumptions utilized in the determination of the estimated fair values of the indefinite-lived tradenames were the sales projections and long-term earnings growth rates, the royalty rate and the discount rate. The long-term earnings growth rate represents the expected rate at which the brands are expected to grow beyond the shorter-term business planning period. The royalty rate is based on observed market royalty rates for various industrial, consumer and commercial trademarks. The discount rate is based on the Company's weighted average cost of capital adjusted for risk. Due to the inherent uncertainty in forecasting future sales, actual results in the future may vary significantly from the forecasts.
Potential changes in our costs and operating structure, the implementation of synergies, and overall performance in the automotive aftermarket industry, could negatively impact our near-term cash-flow projections and could trigger a potential impairment of the Company's goodwill and / or indefinite-lived intangible assets. In addition, failure to execute the Company's strategic plans as well as increases in weighted average costs of capital could negatively impact the fair value of the reporting unit and increase the risk of future impairment charges.
6. | DEBT |
6. DEBT
Debt of the Company consisted of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
First lien term loan due November 17, 2028 |
| $ | 630,000 |
|
| $ | — |
|
Revolver |
|
| 25,000 |
|
|
| — |
|
First lien note |
|
| — |
|
|
| 541,969 |
|
Second lien note |
|
| — |
|
|
| 145,000 |
|
Other |
|
| 3,812 |
|
|
| 4,701 |
|
Less unamortized debt issuance costs |
|
| (13,264 | ) |
|
| (16,684 | ) |
|
|
| 645,548 |
|
|
| 674,986 |
|
Less current portion of long-term debt |
|
| (7,875 | ) |
|
| (5,528 | ) |
|
| $ | 637,673 |
|
| $ | 669,458 |
|
December 31, | ||||||||
2022 | 2021 | |||||||
First lien term loan due November 17, 2028 | $ | 649,350 | $ | 630,000 | ||||
Revolver | 10,000 | 25,000 | ||||||
Other | 2,770 | 3,812 | ||||||
Less unamortized debt issuance costs | (11,557 | ) | (13,264 | ) | ||||
650,563 | 645,548 | |||||||
Less current portion of long-term debt | (7,000 | ) | (7,875 | ) | ||||
$ | 643,563 | $ | 637,673 |
On November 18, 2021, the Company entered into a new credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consists of a seven-year seven-year$600,000first lien term loan, a fivefive-year $125,000-year $125,000 revolving credit facility, and a $100,000$100,000 delayed draw term loan. AsThe proceeds of December 31, 2021, any delayed draw loans made after closing were available to the Company to finance acquisitions. Upon the expiration of the delayed draw term loan in May 2022, the Company had drawn $30,000$57,000, which is included in the amount outstanding under the delayed draw term loan.
The delayed drawfirst lien term loan is available for six months and is subject to the satisfaction of certain conditions precedent, including, but not limited to, the consent of the lenders providing the delayed draw term loan. In addition, thedue November 17, 2028.
The revolving credit facility includes a letter of credit facility in the amount of $10,000,$10,000, pursuant to which letters of credit may be issued as long as revolving loans may be advanced and subject to availability under the revolving credit facility. The Company had $1,200$1,200 in outstanding letters of credit at on December 31, 2021.2022.
Proceeds from the new credit facility were used to repay in full the Company’s obligations outstanding under both the Company’sits existing first lien and second lien notes and to pay $13,413$13,413 in original issue discount and issuance costs related to the refinancing.
The proceeds of any delayed draw loans made after closing may be used by the Company to finance acquisitions.
The first lien term loan is to be repaid in quarterly payments of $1,500 from December 31, 2021 to $1,643 through September 30, 2028, with the balance due upon maturity on November 17, 2028. 2028. Beginning with the fiscal year ending on ended December 31, 2022, at the end of each fiscal year, the Company is required to make a payment based on its available freepay down the term loan by an amount equal to 50% of annual excess cash flow, (asas defined in the Credit Agreement).Agreement. This percentage requirement may decrease or be eliminated if certain leverage ratios are achieved. Based on our results for 2022,no excess cash flow payment is expected to be required in 2023. Any such payments offset future mandatory quarterly payments.
70
Amounts outstanding under the new credit facility will accrue interest at a rate equal to either LIBORthe London Interbank Offering Rate ("LIBOR") or base rate, at the Company's election, plus a specified margin. LIBOR is expected to be phased out by June 2023. The Company's LIBOR-based borrowings under the credit facility contemplate a transition from LIBOR to an alternative index. In the case of revolving credit loans and letter of credit fees, the specified margin is based on the Company's Total Leverage Ratio, as defined in the Credit Agreement. Commitment fees payable under the revolving credit facility are based on the Company's Total Leverage Ratio. At On December 31, 2021,2022, the weighted average interest rate on the Company's borrowings under the credit facility was 4.5%8.4%.
Obligations under the Credit Agreement are secured by substantially all of the Company’s assets. The Credit Agreement includes representations and warranties, and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales. ItThe Credit Agreement also requires that Holley maintain on the last day of each quarter, a Total Leverage Ratio not to exceed a maximum amount. At On December 31, 2021,2022, the Company was in compliance with all financial covenants.
In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending March 31, 2023 through the fiscal quarter ending March 31, 2024 (the “Covenant Relief Period”), to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter. As an ongoing condition to the covenant relief period, the Company also agreed to (i) a minimum liquidity test, (ii) an interest coverage test, (iii) an anti-cash hoarding test at any time revolving loans are outstanding, and (iv) additional reporting obligations. Under the amended Credit Agreement, the revolving credit facility contains a minimum liquidity financial covenant of $45 million, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility.
Some of the lenders that are parties to the Credit Agreement, and their respective affiliates, have various relationships with the Company in the ordinary course of business involving the provision of financial services, including cash management, commercial banking, investment banking or other services.
In 2021, as a result of prepayments of the Company’s existing first lien and second lien notes, losses of $13,650$13,650 were recognized on the early extinguishment of debt due to the write-off of unamortized debt issuance costs.
The first lien note totaled $600,000, comprised of two parts: a revolving component with maximum borrowings of $50,000, and a $550,000 term loan. The proceeds of the new first lien term loan were used to repay the $537,820 outstanding principal balance of the existing first lien note, which resulted in a loss of $11,638 from the write-off of unamortized debt issuance costs. The interest rate for the first lien note LIBOR rate loans was 5.2% at December 31, 2020. There were 0 prime rate loans as of December 31, 2020. The Company had $1,200 in outstanding letters of credit under the first lien note at December 31, 2020.
The second lien note totaled $145,000. On July 16, 2021, the Company used a portion of the net proceeds from the Business Combination to repay $100,000 of the outstanding principal of the second lien note, which resulted in a loss of $1,425 from the write-off of unamortized debt issuance costs. The remaining $45,000 outstanding balance was repaid with proceeds from the new first lien term loan, which resulted in a loss of $587 from the write-off of unamortized debt issuance costs. The interest rate for the second lien note LIBOR rate loan was 8.7% at December 31, 2020. Sentinel Capital Partners Junior Fund I, a related party, held $20,000 of the second lien note at December 31, 2020.
Future maturities of long-term debt and amortization of debt issuance costs as of on December 31, 20212022, are as follows:
Debt | Debt Issuance Costs | |||||||||||||||
|
| Debt |
|
| Debt Issuance Costs |
| ||||||||||
2022 |
| $ | 8,774 |
| $ | 1,769 |
| |||||||||
2023 |
| 7,207 |
| 1,817 |
| $ | 7,851 | $ | 1,782 | |||||||
2024 |
| 7,215 |
| 1,708 |
| 7,430 | 1,847 | |||||||||
2025 |
| 7,391 |
| 1,912 |
| 7,632 | 1,915 | |||||||||
2026 |
| 31,300 |
| 1,964 |
| 6,571 | 1,987 | |||||||||
2027 | 6,571 | 2,061 | ||||||||||||||
Thereafter |
|
| 596,925 |
|
|
| 4,094 |
| 626,065 | 1,965 | ||||||
|
| $ | 658,812 |
|
| $ | 13,264 |
| $ | 662,120 | $ | 11,557 |
7. | COMMON STOCK WARRANTS |
71
7. COMMON STOCK WARRANTS
Upon the Closing, there were 14,666,644 Warrants, consisting of 9,999,977 Public Warrants and 4,666,667 Private Warrants, outstanding to purchase shares of the Company's common stock that were issued by Empower prior to the Business Combination. Each warrant entitles the registered holder to purchase one1 share of the Company's common stock at a price of $11.50$11.50 per share, subject to adjustments, commencing on October 9, 2021 (the one-year (the one-year anniversary of Empower’s initial public offering), provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. The Warrants may be exercised only for a whole number of shares of the Company’s common stock. The Warrants expire on July 16, 2026,, the date that is five years after the Closing date, or earlier upon redemption or liquidation. Additionally, the Private Warrants will be non-redeemable and are exercisable on a cashless basis so long as they are held by the Sponsor or any of its permitted transferees. If the Private Warrants are held by someone other than the Sponsor or its permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Company may redeem the Public Warrants at a price of $0.01$0.01 per warrant upon 30 days' notice if the closing price of the Company’s common stock equals or exceeds $18.00$18.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given, provided there is an effective registration statement and current prospectus in effect with respect to the ordinary shares underlying such Warrants throughout the 30-day30-day redemption period. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the Warrants, the Warrant holder is entitled to exercise his, her or its Warrant prior to the scheduled redemption date. Any such exercise requires the Warrant holder to pay the exercise price for each Warrant being exercised.
Further, the Company may redeem the Public Warrants at a price of $0.10$0.10 per warrant upon 30 days' notice if the closing price of the Company’s common stock equals or exceeds $10.00$10.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given. Beginning on the date the notice of redemption is given until the Warrants are redeemed or exercised, holders may elect to exercise their Warrants on a cashless basis and receive that number of shares of the Company’s common stock as determined by reference to a table in the warrant agreement.
If a registration statement is not effective within 60 days following the Closing, warrant holders may, until such time as there is an effective registration statement and duringDuring any period when the Company has failed to maintain an effective registration statement, warrant holders may exercise warrants on a cashless basis in accordance with Section 3(a)(9)3(a)(9) of the Securities Act or another exemption, but the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
The Company’s Warrants were accounted for as liabilities in accordance with ASC 815-40Subtopic 815-40,Derivatives and Hedging - Contracts in Entity's Own Equity, and are presented as warrant liability on the balance sheet. The warrant liability was measured at fair value at inception and on a recurring basis, with changes in fair value recognized as non-operating expense. As of On December 31, 2022 and 2021, a warrant liability with a fair value of $61,293$4,272 and $61,293, respectively, was reflected as a long-term liability in the consolidated balance sheet, sheet. As of December 31, 2022 and 2021, there were 14,633,311 and 14,666,644 Warrants outstanding, respectively. For the year ended December 31, 2022, a $32,580 increasedecrease of $57,021 in the fair value of the warrant liability as compared to an increase of $32,580 in the fair value of the warrant liability for the year ended December 31, 2021, was reflected as change in fair value of warrant liability in the consolidated statements of comprehensive income for year ended December 31, 2021.income.
8. | FAIR VALUE MEASUREMENTS |
8. FAIR VALUE MEASUREMENTS
The Company’s financial liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows:
|
| Fair Value Measured as of December 31, 2021 |
| Fair Value Measured on December 31, 2022 | ||||||||||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Liabilities included in: |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Warrant liability (Public) |
| $ | 39,500 |
| $ | 0 |
| $ | 0 |
| $ | 39,500 |
| $ | 2,691 | $ | — | $ | — | $ | 2,691 | |||||||||||
Warrant liability (Private) |
| 0 |
|
|
| 0 |
|
|
| 21,793 |
|
|
| 21,793 |
| — | — | 1,581 | 1,581 | |||||||||||||
Earn-out liability |
|
| 0 |
|
|
| 0 |
|
|
| 26,596 |
|
|
| 26,596 |
| — | — | 1,176 | 1,176 | ||||||||||||
Total fair value |
| $ | 39,500 |
|
| $ | 0 |
|
| $ | 48,389 |
|
| $ | 87,889 |
| $ | 2,691 | $ | — | $ | 2,757 | $ | 5,448 |
Fair Value Measured on December 31, 2021 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities included in: | ||||||||||||||||
Warrant liability (Public) | $ | 39,500 | $ | — | $ | — | $ | 39,500 | ||||||||
Warrant liability (Private) | — | — | 21,793 | 21,793 | ||||||||||||
Earn-out liability | — | — | 26,596 | 26,596 | ||||||||||||
Total fair value | $ | 39,500 | $ | — | $ | 48,389 | $ | 87,889 |
72
As of On December 31, 2022 and 2021, the Company's derivative liabilities for its private and public warrants and the earn-out liability (see Note 2, “Business “Business Combination, Acquisitions, and Acquisitions,Divestiture,” for more details), and the acquisition contingent consideration payable are measured at fair value on a recurring basis. The fair value for the private warrants, earn-out liability, and acquisition contingent consideration payable are determined based on significant inputs not observable in the market (Level 3)3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its private warrants and earn-out liability. The fair value of the public warrants is determined using publicly traded prices (Level 1)1). Changes in the fair value of the derivative liabilities related to warrants and the earn-out liability are recognized as non-operating expense in the consolidated statements of comprehensive income (loss). Changes in the fair value of acquisition contingent consideration payable are recognized as acquisition and restructuring costs in the consolidated statements of comprehensive income (loss). As of December 31, 2020, the Company's financial liabilities subject to fair value measurement on a recurring basis consisted of acquisition contingent consideration payables of $9,200, for which the fair value was determined based on significant inputs not observable in the market (Level 3).
The fair value of private warrants was estimated as of at December 31, 2022 and 2021 using the Monte Carlo simulation model with the following assumptions:
2022 | 2021 | ||||||||||||
Valuation date price |
| $ | 12.99 |
| $ | 2.12 | $ | 12.99 | |||||
Strike price |
| $ | 11.50 |
| $ | 11.50 | $ | 11.50 | |||||
Remaining life |
| 4.54 years |
| ||||||||||
Remaining life (in years) | 3.54 | 4.54 | |||||||||||
Expected dividend |
| $ | — |
| $ | — | $ | — | |||||
Risk-free interest rate |
| 1.19 | % | 4.06 | % | 1.19 | % | ||||||
Price threshold |
| $ | 18.00 |
| $ | 18.00 | $ | 18.00 |
The fair value of the earn-out liability was estimated as of at December 31, 2022 and 2021 using the Monte Carlo simulation model with the following assumptions:
2022 | 2021 | ||||||||||||
Valuation date price |
| $ | 12.99 |
| $ | 2.12 | $ | 12.99 | |||||
Expected term |
| 6.54 years |
| ||||||||||
Expected term (in years) | 5.54 | 6.54 | |||||||||||
Expected volatility |
|
| 40.59 | % | 70.33 | % | 40.59 | % | |||||
Risk-free interest rate |
|
| 1.40 | % | 3.88 | % | 1.40 | % | |||||
Price hurdle 1 |
| $ | 13.00 |
| not applicable | $ | 13.00 | ||||||
Price hurdle 2 |
| $ | 15.00 |
| $ | 15.00 | $ | 15.00 |
As
On December 31, 2021 2022 and 2020,2021, the Company had accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.
The reconciliation of changes in Level 3 during the yearyears ended December 31, 2022 and 2021 is as follows:
|
| For the year ended December 31, 2021 |
| |||||||||||||||||||||||||||||
|
| Private Warrants |
|
| Acquisition Contingent Consideration |
|
| Earn-Out Liability |
|
| Total |
| Private Warrants | Acquisition Contingent Consideration | Earn-Out Liability | Total | ||||||||||||||||
Balance on December 31, 2020 |
| $ | 0 |
| $ | 9,200 |
| $ | 0 |
| $ | 9,200 |
| $ | — | $ | 9,200 | $ | — | $ | 9,200 | |||||||||||
Cash paid for contingent consideration |
|
| 0 |
|
|
| (26,573 | ) |
|
| 0 |
|
|
| (26,573 | ) | — | (26,573 | ) | — | (26,573 | ) | ||||||||||
Liabilities assumed in recapitalization |
| 9,613 |
|
|
| 0 |
|
|
| 17,722 |
|
|
| 27,335 |
| 9,613 | — | 17,722 | 27,335 | |||||||||||||
Losses included in earnings |
|
| 12,180 |
|
|
| 17,373 |
|
|
| 8,874 |
|
|
| 38,427 |
| 12,180 | 17,373 | 8,874 | 38,427 | ||||||||||||
Balance on December 31, 2021 |
| $ | 21,793 |
|
| $ | — |
|
| $ | 26,596 |
|
| $ | 48,389 |
| 21,793 | — | 26,596 | 48,389 | ||||||||||||
Liabilities reclassed to equity | — | — | (14,689 | ) | (14,689 | ) | ||||||||||||||||||||||||||
Gains included in earnings | (20,212 | ) | — | (10,731 | ) | (30,943 | ) | |||||||||||||||||||||||||
Balance on December 31, 2022 | $ | 1,581 | $ | — | $ | 1,176 | $ | 2,757 |
9. | REVENUE |
73
9. REVENUE
The principal activity from which the Company generates its revenue is the manufacturing and distribution of after-market automotive parts for its customers, comprised of resellers and end users. The Company recognizes revenue at a point in time, rather than over time, as the performance obligation is satisfied when customer obtains control of the product upon title transfer and not as the product is manufactured or developed. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e., estimated rebates, co-op advertising, etc.).
The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.
The Company allows customers to return products when certain Company-established criteria are met. These sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. Returned products, which are recorded as inventories, are valued at the lower of cost or net realizable value. The physical condition and marketability of the returned products are the major factors considered in estimating realizable value. The Company also estimates expected sales returns and records the necessary adjustment as a charge against gross sales.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 365 days. The Company elected the practical expedient to disregard the possible existence of a significant financing component related to payment on contracts, as the Company expects that customers will pay for the products within one year. The Company has evaluated the terms of our arrangements and determined that they do not contain significant financing components. Additionally, as all contracts with customers have an expected duration of one year or less, the Company has elected the practical expedient to exclude disclosure of information regarding the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. The Company provides limited warranties on most of its products against certain manufacturing and other defects. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 17, “Commitments and Contingencies” for more information.
The following table summarizes total revenue by product category:category. The Company's product category definitions have been revised by management in 2022. The prior-year periods have been revised to conform with the current presentation. There is no change to total sales.
|
| For the years ended |
| |||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||
Electronic systems |
| $ | 324,522 |
|
| $ | 266,742 |
|
| $ | 199,295 |
|
Mechanical systems |
|
| 161,836 |
|
|
| 119,784 |
|
|
| 92,498 |
|
Exhaust |
|
| 76,971 |
|
|
| 71,915 |
|
|
| 51,802 |
|
Accessories |
|
| 63,427 |
|
|
| 38,543 |
|
|
| 25,068 |
|
Safety |
|
| 66,091 |
|
|
| 7,195 |
|
|
| — |
|
Total sales |
| $ | 692,847 |
|
| $ | 504,179 |
|
| $ | 368,663 |
|
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Electronic systems | $ | 282,865 | $ | 309,233 | $ | 262,164 | ||||||
Mechanical systems | 165,007 | 154,878 | 120,893 | |||||||||
Exhaust | 66,767 | 78,179 | 72,294 | |||||||||
Accessories | 108,150 | 85,280 | 41,805 | |||||||||
Safety | 65,626 | 65,277 | 7,023 | |||||||||
Total sales | $ | 688,415 | $ | 692,847 | $ | 504,179 |
The following table summarizes total revenue based on geographic location from which the product is shipped:
|
| For the years ended |
| For the years ended December 31, | ||||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| 2022 | 2021 | 2020 | ||||||||||||
United States |
| $ | 674,491 |
| $ | 502,661 |
| $ | 368,663 |
| $ | 669,187 | $ | 674,491 | $ | 502,661 | ||||||||
Italy |
|
| 18,356 |
|
|
| 1,518 |
|
|
| — |
| 19,228 | 18,356 | 1,518 | |||||||||
Total sales |
| $ | 692,847 |
|
| $ | 504,179 |
|
| $ | 368,663 |
| $ | 688,415 | $ | 692,847 | $ | 504,179 |
10. | INCOME TAXES |
74
10. INCOME TAXES
Income tax expense (benefit) of the Company consisted of:of the following:
|
| For the years ended |
| |||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||
Current income tax expense (benefit): |
|
|
|
|
|
|
|
|
| |||
Federal |
| $ | 7,422 |
|
| $ | (530 | ) |
| $ | 4,420 |
|
State |
|
| 323 |
|
|
| 1,174 |
|
|
| 302 |
|
Foreign |
|
| 2,602 |
|
|
| 1,668 |
|
|
| 1,894 |
|
Total current income tax expense (benefit) |
|
| 10,347 |
|
|
| 2,312 |
|
|
| 6,616 |
|
Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
| |||
Federal |
|
| 823 |
|
|
| 7,136 |
|
|
| (9,663 | ) |
State |
|
| (552 | ) |
|
| (622 | ) |
|
| (1,826 | ) |
Foreign |
|
| (189 | ) |
|
| — |
|
|
| — |
|
Total deferred income tax expense (benefit) |
|
| 82 |
|
|
| 6,514 |
|
|
| (11,489 | ) |
Total income tax expense (benefit) |
| $ | 10,429 |
|
| $ | 8,826 |
|
| $ | (4,873 | ) |
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Current income tax expense (benefit): | ||||||||||||
Federal | $ | 12,356 | $ | 7,422 | $ | (530 | ) | |||||
State | 1,253 | 323 | 1,174 | |||||||||
Foreign | 2,450 | 2,602 | 1,668 | |||||||||
Total current income tax expense (benefit) | 16,059 | 10,347 | 2,312 | |||||||||
Deferred income tax expense (benefit): | ||||||||||||
Federal | (8,679 | ) | 823 | 7,136 | ||||||||
State | (2,591 | ) | (552 | ) | (622 | ) | ||||||
Foreign | (296 | ) | (189 | ) | — | |||||||
Total deferred income tax expense (benefit) | (11,566 | ) | 82 | 6,514 | ||||||||
Total income tax expense (benefit) | $ | 4,493 | $ | 10,429 | $ | 8,826 |
The Company’s income before income taxes was subject to taxes in the following jurisdictions:
|
| For the years ended |
| |||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||
United States |
| $ | (24,772 | ) |
| $ | 37,548 |
|
| $ | (7,879 | ) |
Foreign |
|
| 8,062 |
|
|
| 4,135 |
|
|
| 3,567 |
|
Income (loss) before income taxes |
| $ | (16,710 | ) |
| $ | 41,683 |
|
| $ | (4,312 | ) |
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
United States | $ | 72,276 | $ | (24,772 | ) | $ | 37,548 | |||||
Foreign | 5,991 | 8,062 | 4,135 | |||||||||
Income (loss) before income taxes | $ | 78,267 | $ | (16,710 | ) | $ | 41,683 |
Reported income tax expense (benefit) for the year ended December 31, 2022, 2021 2020 and 20192020 differs from the “expected” tax expense (benefit), computed by applying the U.S. Federal statutory income tax rate of 21%21% to income before income taxes as follows:
|
| For the years ended |
| For the years ended December 31, | ||||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| 2022 | 2021 | 2020 | ||||||||||||
Expected tax expense (benefit) at U.S. Federal statutory rates |
| $ | (3,510 | ) |
| $ | 8,753 |
| $ | (906 | ) | $ | 16,479 | $ | (3,510 | ) | $ | 8,753 | ||||||
State income tax expense (benefit) |
| (180 | ) |
| 335 |
| (1,005 | ) | (1,057 | ) | (180 | ) | 335 | |||||||||||
Permanent tax differences |
| 825 |
| (53 | ) |
| 494 |
| 4,275 | 825 | (53 | ) | ||||||||||||
Foreign-derived intangible income deduction | (298 | ) | — | — | ||||||||||||||||||||
Global intangible low-taxed income |
| 375 |
| 220 |
| — |
| — | 375 | 220 | ||||||||||||||
Foreign rate differential |
| 719 |
| 389 |
| 369 |
| 560 | 719 | 389 | ||||||||||||||
Tax credit |
| (1,620 | ) |
| (646 | ) |
| (750 | ) | (1,393 | ) | (1,620 | ) | (646 | ) | |||||||||
Earn-outs |
| 5,470 |
| — |
| — |
| (2,254 | ) | 5,470 | — | |||||||||||||
Change in fair value of warrants |
| 6,842 |
| — |
| — |
| (11,974 | ) | 6,842 | — | |||||||||||||
Transaction costs |
| 1,465 |
| 280 |
| — |
| — | 1,465 | 280 | ||||||||||||||
Other differences, net |
|
| 43 |
|
|
| (452 | ) |
|
| (3,075 | ) | 155 | 43 | (452 | ) | ||||||||
Total income tax expense (benefit) |
| $ | 10,429 |
|
| $ | 8,826 |
|
| $ | (4,873 | ) | $ | 4,493 | $ | 10,429 | $ | 8,826 |
75
The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and deferred tax liabilities consisted of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Deferred tax assets: |
|
|
|
|
|
| ||
Reserves on assets |
| $ | 8,140 |
|
| $ | 6,435 |
|
Liabilities not yet deductible |
|
| 3,040 |
|
|
| 3,786 |
|
Interest expense limitation |
|
| 7,863 |
|
|
| 5,491 |
|
Other |
|
| 1,764 |
|
|
| 2,570 |
|
Total gross deferred tax assets |
|
| 20,807 |
|
|
| 18,282 |
|
Deferred tax liabilities: |
|
|
|
|
|
| ||
Tradename |
|
| 32,713 |
|
|
| 31,962 |
|
Intangible assets |
|
| 43,965 |
|
|
| 45,956 |
|
Goodwill |
|
| 7,969 |
|
|
| 5,743 |
|
Inventory |
|
| 0 |
|
|
| 832 |
|
Property, plant and equipment |
|
| 6,205 |
|
|
| 5,125 |
|
Total gross deferred tax liabilities |
|
| 90,852 |
|
|
| 89,618 |
|
Net deferred tax liabilities |
| $ | 70,045 |
|
| $ | 71,336 |
|
December 31, | ||||||||
2022 | 2021 | |||||||
Deferred tax assets: | ||||||||
Reserves on assets | $ | 12,305 | $ | 8,220 | ||||
Liabilities not yet deductible | 3,371 | 3,040 | ||||||
Interest expense limitation | 9,624 | 7,863 | ||||||
Right-of-use liability | 6,899 | — | ||||||
Section 174 expenses | 6,197 | — | ||||||
Net operating losses | 1,493 | 1,431 | ||||||
Other | 526 | 253 | ||||||
Total gross deferred tax assets | 40,415 | 20,807 | ||||||
Deferred tax liabilities: | ||||||||
Tradename | 33,770 | 32,713 | ||||||
Intangible assets | 41,126 | 43,965 | ||||||
Goodwill | 10,037 | 7,969 | ||||||
Property, plant and equipment | 7,110 | 6,205 | ||||||
Right-of-use asset | 6,762 | — | ||||||
Total gross deferred tax liabilities | 98,805 | 90,852 | ||||||
Net deferred tax liabilities | $ | 58,390 | $ | 70,045 |
Based on the Company’s projected pretax earnings, reversal of deferred tax liabilities and other relevant factors, management believes that it is more likely than not that the Company’s deferred tax assets at on December 31, 2021 2022 and 20202021 will be realized.
As of On December 31, 2021,2022, the Company's federal and state net operating loss carryforwards for income tax purposes were immaterial. A majority of the U.S. net operating loss carryforwards have no expiration date. The remaining state net operating loss carryforwards expire at variousvarious dates through 2035.2035. The entire amount of federal net operating loss carryforward of $865$625 and a significant portion of state net operating loss carryforward of $566$868 relate to acquisitions, and, as a result, are limited in the amount that can be recognized in any one year.
Uncertain Tax Positions
Under the accounting rules for income taxes, the Company is not permitted to recognize the tax benefit attributable to a tax position unless such position is more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals and litigation processes, based solely on the technical merits of the position. The Company did not have any uncertain tax positions for the year ended December 31, 2021.2022.
The Company recognizes interest on liabilities for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in its consolidated statements of comprehensive income (loss). In 20212022 and 2020,2021, the Company has not0t recognized any amount of interest and penalties for uncertain tax positions in its consolidated statements of comprehensive income (loss).
The Company files federal, state, and non-U.S. tax returns in various foreign jurisdictions. For state and non-U.S. tax returns, the Company is generally no longer subject to tax examinations for years prior to 2012.2013. For federal tax returns, the Company is no longer subject to tax examination for years prior to 2018. The federal tax returns for 20182019 through 20202021 remain open for examinations. State income tax returns remain open for examination in various states for tax years 20122013 through 2020.2021.
The Company's tax policy is to comply with the laws, regulations, and filing requirements of all jurisdictions in which it conducts business. Management regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible, that certain U.S. federal and non-U.S. tax audits may be concluded within the next 12 months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits. However, the estimated impact of income tax expense and net income is not expected to be significant.
11. | EARNINGS PER SHARE |
76
11. EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted earnings per share:
|
| For the years ended |
| |||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||
Numerator: |
|
|
|
|
|
|
|
|
| |||
Net (loss) income |
| $ | (27,139 | ) |
| $ | 32,857 |
|
| $ | 561 |
|
Denominator: |
|
|
|
|
|
|
|
|
| |||
Basic and diluted weighted average common shares |
|
| 89,959,993 |
|
|
| 67,673,884 |
|
|
| 67,673,884 |
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
| |||
Basic |
| $ | (0.30 | ) |
| $ | 0.49 |
|
| $ | 0.01 |
|
Diluted |
| $ | (0.30 | ) |
| $ | 0.49 |
|
| $ | 0.01 |
|
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Numerator: | ||||||||||||
Net income (loss) - basic | $ | 73,774 | $ | (27,139 | ) | $ | 32,857 | |||||
Less: fair value adjustment for warrants | (57,021 | ) | — | — | ||||||||
Net income (loss) - diluted | $ | 16,753 | $ | (27,139 | ) | $ | 32,857 | |||||
Denominator: | ||||||||||||
Weighted average common shares outstanding - basic | 116,762,928 | 89,959,993 | 67,673,884 | |||||||||
Dilutive effect of potential common shares from RSUs | 101,290 | — | — | |||||||||
Dilutive effect of potential common shares from warrants | 384,078 | — | — | |||||||||
Weighted average common shares outstanding - diluted | 117,248,296 | 89,959,993 | 67,673,884 | |||||||||
Earnings (loss) per share: | ||||||||||||
Basic | $ | 0.63 | $ | (0.30 | ) | $ | 0.49 | |||||
Diluted | $ | 0.14 | $ | (0.30 | ) | $ | 0.49 |
The following outstanding shares of common stock equivalents were excluded from the calculation of diluted earnings per share due to the anti-dilutive effect such shares would have on net loss per common share.
For the years ended December 31, | ||||||||||||||||||||||||
|
| For the years ended |
| 2022 | 2021 | 2020 | ||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||||||||||||||
Anti-dilutive securities excluded from calculation of |
|
|
|
|
|
|
| |||||||||||||||||
Anti-dilutive shares excluded from calculation of diluted EPS: | ||||||||||||||||||||||||
Warrants |
|
| 14,666,644 |
|
|
| — |
|
|
| — |
| — | 14,666,644 | — | |||||||||
Stock options |
|
| 1,386,974 |
|
|
| — |
|
|
| — |
| 1,709,690 | 1,386,974 | — | |||||||||
Restricted stock units |
|
| 656,485 |
|
|
| — |
|
|
| — |
| 540,344 | 656,485 | — | |||||||||
Earn-out shares |
|
| 2,187,500 |
|
|
| — |
|
|
| — |
| 1,093,750 | 2,187,500 | — | |||||||||
Total anti-dilutive securities |
|
| 18,897,603 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||
Total anti-dilutive shares | 3,343,784 | 18,897,603 | — |
12. | BENEFIT PLANS |
12. BENEFIT PLANS
The Company has a defined benefit pension plan (the “Plan”) for its employees. The Projected Unit Credit Actuarial Cost Method is used to determine the normal cost of the Plan and estimated pension benefit obligation. During 2002, the Plan was amended to curtail accrual of future benefits under the Plan. The pension plan assets are managed to maximize total return over the long term while providing sufficient liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day investment decisions are managed by our outside investment manager; however, overall investment strategies are discussed with our employee benefits committee. Our investment strategy is to weight our portfolio towards large-cap, high-quality, dividend-growing equities that we have historically favored. As our plan matures and interest rates normalize, we expect a greater allocation to fixed-income securities to better align asset and liability market risks. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions.
On January 28, 2022, the Company approved the termination of ourits defined benefit pension plan, effective March 31, 2022. The final distribution of the Plan assets pursuant to the termination will was not be made until the plan termination satisfiessatisfied all regulatory requirements which is expected to be completed byin the fourth quarter of 2022. Plan participants will receivereceived their full accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-partythird-party annuity provider. The resulting settlement effect of the Plan termination will bewas determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at the date of distribution. As a result, we are currently unable to reasonably estimate either the timing or the final amount of such settlement charges. Based on the valuation performed as of December 31, 2021, the Plan has an underfunded statusrecognized a final settlement loss of $862.$154.
77
The following table shows the changes in the benefit obligation and plan assets and the plan’s funded status.
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Change in Projected Benefit Obligation: |
|
|
|
|
|
| ||
Benefit obligation, January 1 |
| $ | 6,551 |
|
| $ | 5,993 |
|
Service cost |
|
| 143 |
|
|
| 159 |
|
Interest cost |
|
| 152 |
|
|
| 190 |
|
Benefits paid |
|
| (349 | ) |
|
| (339 | ) |
Expenses paid |
|
| (135 | ) |
|
| (142 | ) |
Actuarial (gain) loss |
|
| (258 | ) |
|
| 690 |
|
Benefit obligation, December 31 |
| $ | 6,104 |
|
| $ | 6,551 |
|
Change in Plan Assets: |
|
|
|
|
|
| ||
Fair value of plan assets, January 1 |
| $ | 4,756 |
|
| $ | 4,089 |
|
Actual return on plan assets |
|
| 499 |
|
|
| 559 |
|
Employer contributions |
|
| 471 |
|
|
| 589 |
|
Benefits paid from plan assets |
|
| (349 | ) |
|
| (339 | ) |
Expenses paid |
|
| (135 | ) |
|
| (142 | ) |
Fair value of plan net assets, December 31 |
| $ | 5,242 |
|
| $ | 4,756 |
|
Underfunded status at end of period |
| $ | (862 | ) |
| $ | (1,795 | ) |
Amounts recognized in the consolidated balance sheet: |
|
|
|
|
|
| ||
Current liabilities |
| $ | — |
|
| $ | 0 |
|
Non-current liabilities |
|
| (862 | ) |
|
| (1,795 | ) |
Net amount recorded |
| $ | (862 | ) |
| $ | (1,795 | ) |
December 31, | ||||||||
2022 | 2021 | |||||||
Change in Projected Benefit Obligation: | ||||||||
Benefit obligation, January 1 | $ | 6,104 | $ | 6,551 | ||||
Service cost | 113 | 143 | ||||||
Interest cost | 138 | 152 | ||||||
Plan curtailments | (5,185 | ) | — | |||||
Benefits paid | (299 | ) | (349 | ) | ||||
Expenses paid | (149 | ) | (135 | ) | ||||
Actuarial (gain) loss | (722 | ) | (258 | ) | ||||
Benefit obligation, December 31 | $ | — | $ | 6,104 | ||||
Change in Plan Assets: | ||||||||
Fair value of plan assets, January 1 | $ | 5,242 | $ | 4,756 | ||||
Actual return on plan assets | (374 | ) | 499 | |||||
Employer contributions | 765 | 471 | ||||||
Plan settlements | (5,185 | ) | — | |||||
Benefits paid from plan assets | (299 | ) | (349 | ) | ||||
Expenses paid | (149 | ) | (135 | ) | ||||
Fair value of plan net assets, December 31 | $ | — | $ | 5,242 | ||||
Underfunded status at end of period | $ | — | $ | (862 | ) | |||
Amounts recognized in the consolidated balance sheet: | ||||||||
Current liabilities | $ | — | $ | — | ||||
Non-current liabilities | — | (862 | ) | |||||
Net amount recorded | $ | — | $ | (862 | ) |
There was no remaining accumulated benefit obligation for the Plan as of December 31, 2022. The accumulated benefit obligation for the Plan was $6,104 and $6,551 at $6,104 on December 31, 2021 and 2020. 2021. The Company made contributions of $471, $589$765, $471, and $285$589 in 2022, 2021 2020 and 2019,2020, respectively. There were 0no participant contributions in 2022, 2021 2020 or 2019.2020.
Unrecognized actuarial losses are recognized as a component of accumulated other comprehensive income. The following table shows the balances reflected in accumulated other comprehensive income on a pre-tax basis for the periods presented:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Amounts recognized in accumulated other comprehensive loss (pre-tax): |
|
|
|
|
|
| ||
Net actuarial loss |
| $ | 283 |
|
| $ | 822 |
|
December 31, | ||||||||
2022 | 2021 | |||||||
Amounts recognized in accumulated other comprehensive loss (pre-tax): | ||||||||
Net actuarial loss | $ | — | $ | 283 |
The pre-tax amounts recognized in other comprehensive income were as follows:
|
|
|
| For the years ended |
| |||||
|
|
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Actuarial (gain) loss arising during measurement period |
|
|
| $ | (513 | ) |
| $ | 386 |
|
Amortization of actuarial loss |
|
|
|
| (25 | ) |
|
| — |
|
Total recognized in other comprehensive (income) loss |
|
|
| $ | (538 | ) |
| $ | 386 |
|
December 31, | ||||||||
2022 | 2021 | |||||||
Actuarial (gain) loss arising during measurement period | $ | (129 | ) | $ | (513 | ) | ||
Amortization of actuarial loss | (154 | ) | (25 | ) | ||||
Total recognized in other comprehensive (income) loss | $ | (283 | ) | $ | (538 | ) |
The following summarizes the components of net periodic benefit cost for the defined benefit pension plan:
|
| For the years ended |
| For the years ended December 31, | ||||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| 2022 | 2021 | 2020 | ||||||||||||
Components of expense: |
|
|
|
|
|
|
| |||||||||||||||||
Service cost |
| $ | 143 |
|
| $ | 159 |
|
| $ | 142 |
| $ | 113 | $ | 143 | $ | 159 | ||||||
Interest cost |
| 152 |
| 190 |
| 231 |
| 138 | 152 | 190 | ||||||||||||||
Expected return on plan assets |
| (240 | ) |
| (255 | ) |
| (232 | ) | (218 | ) | (240 | ) | (255 | ) | |||||||||
Settlement loss recognized | 154 | — | — | |||||||||||||||||||||
Amortization of net loss |
|
| 25 |
|
|
| 0 |
|
|
| 0 |
| — | 25 | — | |||||||||
Net periodic benefit cost |
| $ | 80 |
|
| $ | 94 |
|
| $ | 141 |
| $ | 187 | $ | 80 | $ | 94 |
78
Weighted-average assumptions used to determine net cost:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Discount rate |
|
| 2.38 | % |
|
| 3.25 | % |
Expected return on plan assets |
|
| 6.35 | % |
|
| 6.35 | % |
December 31, | ||||||||
2022 | 2021 | |||||||
Discount rate | 2.78 | % | 2.38 | % | ||||
Expected return on plan assets | 5.20 | % | 6.35 | % |
The Company uses a measurement date of December 31 for its defined benefit pension plan.
Weighted-average assumptions used to determine the benefit obligation:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Discount rate |
|
| 2.78 | % |
|
| 2.38 | % |
December 31, | ||||||||
2022 | 2021 | |||||||
Discount rate | not applicable | 2.78 | % |
In order to develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. The fair value of the Plan assets at on December 31, 2022, was zero. The fair value of Plan assets on December 31, 2021, and 2020, by asset category are as follows:
|
|
|
| For the years ended |
| |||||
|
|
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
|
|
|
|
|
|
|
|
| ||
Common stock |
|
|
| $ | 789 |
|
| $ | 1,562 |
|
Mutual funds |
|
|
|
| 2,171 |
|
|
| 2,202 |
|
Corporate / government bonds |
|
|
|
| 2,354 |
|
|
| 982 |
|
Cash and cash equivalents |
|
|
|
| 20 |
|
|
| 10 |
|
Total |
|
|
| $ | 5,334 |
|
| $ | 4,756 |
|
using the Fair Value measurement hierarchy is shown in the table below. See Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” for more details about fair value measurements.
79
December 31, 2021 | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Common stock | $ | 789 | $ | 789 | $ | — | $ | — | ||||||||
Mutual funds | 2,171 | 2,171 | — | — | ||||||||||||
Corporate / government bonds | 2,354 | — | 2,354 | — | ||||||||||||
Cash and cash equivalents | 20 | — | 20 | — | ||||||||||||
Total | $ | 5,334 | $ | 2,960 | $ | 2,374 | $ | — |
Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis as well as the general classification of such assets pursuant to the valuation hierarchy.
Common Stock: The fair value of common stock investments is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs).
Mutual Funds: The fair value of mutual fund investments is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs).
Corporate/government bonds: The fair value of corporate/government bonds is based upon recent bid prices or the average of the recent bid and ask prices when available (Level 2 inputs) and if not available, they are valued through matrix pricing models developed by sources considered by management to be reliable. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
The fair value of Holley’s pension plan assets at December 31, 2021 and 2020, by asset category using the Fair Value measurement hierarchy is shown in the table below. See Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” for more details about fair value measurements.
|
| December 31, 2021 |
| |||||||||||||
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Common stock |
| $ | 789 |
|
| $ | 789 |
|
| $ | — |
|
| $ | — |
|
Mutual funds |
|
| 2,171 |
|
|
| 2,171 |
|
|
| — |
|
|
| — |
|
Corporate / government bonds |
|
| 2,354 |
|
|
| 0 |
|
|
| 2,354 |
|
|
| — |
|
Cash and cash equivalents |
|
| 20 |
|
|
| — |
|
|
| 20 |
|
|
| — |
|
Total |
| $ | 5,334 |
|
| $ | 2,960 |
|
| $ | 2,374 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| December 31, 2020 |
| |||||||||||||
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Common stock |
| $ | 1,562 |
|
| $ | 1,562 |
|
| $ | 0 |
|
| $ | 0 |
|
Mutual funds |
|
| 2,202 |
|
|
| 2,022 |
|
|
| 0 |
|
|
| 0 |
|
Corporate / government bonds |
|
| 982 |
|
|
| 0 |
|
|
| 982 |
|
|
| 0 |
|
Cash and cash equivalents |
|
| 10 |
|
|
| 0 |
|
|
| 10 |
|
|
| 0 |
|
Total |
| $ | 4,756 |
|
| $ | 3,584 |
|
| $ | 992 |
|
| $ | 0 |
|
401(k) Plan
Plan contributions are made and the actuarial present value of accumulated Plan benefits are reported based on certain assumptions pertaining to interest rates, inflation rates and employee demographics, all of which are subject to change. Due to uncertainties inherent in the estimation and assumption process, it is at least reasonably possible that changes in these estimates and assumptions in the near term would be material to the consolidated financial statements.
The Company generally funds accrued pension cost based on minimum Employee Retirement Income Security Act funding requirements.
Benefit payments are anticipated to be as follows:
2022 |
|
|
| $ | 372 |
|
2023 |
|
|
|
| 374 |
|
2024 |
|
|
|
| 371 |
|
2025 |
|
|
|
| 371 |
|
2026 |
|
|
|
| 371 |
|
2027 - 2031 |
|
|
|
| 1,850 |
|
401(k) Plan
The Company has 401(k)401(k) savings plan for salaried and non-salaried employees. Participation in the plan is optional. The Company matches employee contributions up to 3.5%3.5% each pay period. The CompanyCompany's matching contributions for the years ended December 31, 2022, 2021, and 2020, include additional discretionary matching contributions of 1% based on the Company's performance targets for 2021,2020 and 2019, respectively. The Company made matching contributions of $2,579, $1,997,$2,990, $2,579, and $1,141$1,997 for the years ended December 31, 2022, 2021 2020,, and 2019,2020, respectively. The Company had accrued $725 for Company match as
13. | EQUITY-BASED COMPENSATION PLANS |
80
13. EQUITY-BASED COMPENSATION PLANS
In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021“2021 Plan”), which provides for the grant of restricted stock awards, incentive and nonqualified stock options, and other share basedshare-based awards to employees, directors and non-employees. The 2021 Plan authorized 8,850,000 new shares of the Company’s common stock to be available for award grants. As of On December 31, 2021, 6,797,1012022, the Company had 8,850,000 shares of common stock remainedreserved for issuance and 5,816,705 shares available for future issuancegrants under the 2021 Plan.
Stock Options
Stock option grants generally have an exercise price at least equal to the market value of the underlying common stock on the date of grant, have tenten-year-year terms, and vest ratably over three years of continued employment. In general, vested options expire if not exercised at termination of service. On July 16, 2021, the Company granted 1,394,008 options to purchase sharesThe weighted-average grant-date fair value of the Company’s common stock to key employees. These stock options had a weighted-average grant date fair value $3.88 per share and remain outstanding and unvested as of granted during the years ended December 31, 2021. 2022 and 2021, was $4.65 and $3.88, respectively.
The following table presents a summary of stock option activity for the year ended December 31, 2022:
Weighted | Weighted Average | Aggregate | ||||||||||||||
Number of | Average | Remaining Contractual | Intrinsic Value | |||||||||||||
Stock Options | Exercise Price | Term (years) | (in millions) | |||||||||||||
Options outstanding on December 31, 2021 | 1,386,974 | $ | 10.50 | |||||||||||||
Granted | 592,056 | 12.12 | ||||||||||||||
Forfeited | (209,417 | ) | 11.20 | |||||||||||||
Expired | (59,923 | ) | 10.50 | |||||||||||||
Options outstanding on December 31, 2022 | 1,709,690 | $ | 10.97 | 8.73 | $ | — | ||||||||||
Options exercisable on December 31, 2022 | 399,840 | $ | 10.50 | 8.55 | $ | — |
Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period.
A summary of stock option activity during the year ended On December 31, 2021 is presented below:
|
|
|
|
|
|
|
| Weighted |
|
|
|
| ||||
|
|
|
|
|
|
|
| Average |
|
|
|
| ||||
|
|
|
|
| Weighted |
|
| Remaining |
|
| Aggregate |
| ||||
|
| Outstanding |
|
| Average |
|
| Contractual |
|
| Intrinsic Value |
| ||||
|
| Stock Options |
|
| Exercise Price |
|
| Term |
|
| (in millions) |
| ||||
December 31, 2020 |
|
| 0 |
|
| $ | 0 |
|
|
|
|
|
|
| ||
Granted |
|
| 1,394,008 |
|
|
| 10.50 |
|
|
|
|
|
|
| ||
Forfeited |
|
| (7,034 | ) |
|
| 10.50 |
|
|
|
|
|
|
| ||
December 31, 2021 |
|
| 1,386,974 |
|
| $ | 10.50 |
|
|
| 2.54 |
|
| $ | 3.5 |
|
As of December 31, 2021,2022, there was $4,582$4,085 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a remaining weighted-average period of 2.51.79 years.
The fair value of each stock option granted on July 16, in 2022 and 2021 was estimated on the grant date using thea Black-Scholes option pricing model with the following assumptions:
For the years ended December 31, | ||||||||||||
2022 | 2021 | |||||||||||
Weighted-average expected term |
|
| 6.0 |
| 6.0 | 6.0 | ||||||
Expected volatility |
| 40.3 | % | 36.0% - 40.0 | % | 40.3 | % | |||||
Expected dividend |
| $ | 0 |
| — | — | ||||||
Risk-free interest rate |
| 0.94 | % | 1.98% - 3.06 | % | 0.94 | % |
The expected term has been estimated using a simplified method, which calculates the expected term as the mid-point between the vesting date and the contractual life of the awards since the Company does not have an extended history of actual exercises. The expected dividend yield is assumed to be zero0 since the Company has never paid dividends and does not have current plans to pay any dividends. The risk-free interest rate is based on yields of U.S. Treasury securities with maturities similar to the expected term of the options. Expected volatility is based on an evenly weighted blend of implied volatility and historical volatility of publicly-tradedpublicly traded peer companies since the Company has limited historical volatility.
81
Restricted Stock Units
Restricted stock units (“RSUs”) vest ratably over one to three years from the anniversary of the Closing Date, or July 16, 2021, and expire ten years from the date of grant.continued employment. The fair value of a RSU at the grant date is equal to the market price of the Company’s common stock on the grant date. On September 23, 2021, the Company granted 658,891 RSUs to key employees and directors. These RSUs had aThe weighted-average grant dategrant-date fair value of $12.06 per unit and remain outstanding and unvested as of RSUs granted during the years ended December 31, 2021. 2022 and 2021, was $5.87 and $12.06, respectively. The total fair value of shares vested on the vesting date during the year ended December 31, 2022, was $3,497.
The following table summarizes activities for the Company’s unvested RSUs for the year ended December 31, 2022:
Unvested Restricted Stock Units | ||||||||
Weighted | ||||||||
Number of | Average Grant | |||||||
RSUs | Date Fair Value | |||||||
December 31, 2021 | 656,485 | $ | 12.06 | |||||
Granted | 868,853 | 5.87 | ||||||
Vested | (303,283 | ) | 12.06 | |||||
Forfeited | (113,725 | ) | 12.13 | |||||
December 31, 2022 | 1,108,330 | $ | 9.43 |
Compensation expense for RSUs is recorded based on amortization of the grant date fair market value over the period the restrictions lapse.
A summary of RSU activity during the year ended On December 31, 2021 is presented below:
|
| Unvested Restricted Stock Units |
| |||||
|
|
|
|
| Weighted |
| ||
|
| Number of |
|
| Average Grant |
| ||
|
| Shares |
|
| Date Fair Value |
| ||
December 31, 2020 |
|
| 0 |
|
| $ | 0 |
|
Granted |
|
| 658,891 |
|
|
| 12.06 |
|
Forfeited |
|
| (2,406 | ) |
|
| 12.06 |
|
December 31, 2021 |
|
| 656,485 |
|
| $ | 12.06 |
|
As of December 31, 2021,2022, there was $6,875$6,262 of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a remaining weighted averageweighted-average period of 2.31.77 years.
Profit Interest Units
The Holley Stockholder has authorized an incentive pool of 41.4 million41,400,000 units of ParentHolley Stockholder that its management has the right to grant to certain employees of the Company. As of December 31, 2022, no units are available for grant. The units, which are designated as PIUs. Holley Stockholder grants certain employees of the Company PIU's, which are a special type of limited liability company equity unit that allows the recipient to potentially participate in a future increase in the value of the Company. The PIUs arewere issued for no consideration and generally provideprovided for vesting over thea requisite service period, subject to the recipient remaining an employee of the Company through each vesting date. During 2021, the Holley Stockholder granted 6,546 PIUs that contained both time-based vesting criteria and performance-based vesting criteriaCompensation expense related to PIUs is recorded based on the attainment of specified levels of return for certain other investors in Parent and the occurrence of certain events. The weighted-average grant dategrant-date fair value of the PIUs granted in 2021 with performance-based vesting criteria was $1.25 and is being expensed over the requisite service period. During 2020 and 2019,
In October 2022, the Holley Stockholder amended the vesting criteria to allow for immediate vesting of all outstanding and unvested units. The changes to these awards were deemed to be modification events under ASC Subtopic 718-10,Stock Compensation. Accordingly, during the year ended December 31, 2022, the Company recognized catch-up equity-based compensation expense, including incremental fair value resulting from the modification, as applicable to each award grant, amounting to a cumulative adjustment of $11,351 presented in selling, general and administrative expenses.
The following table summarizes activities for unvested PIUs for the year ended December 31, 2022:
Unvested Profit Interest Units | ||||||||
Weighted | ||||||||
Number of | Average Grant | |||||||
PIUs | Date Fair Value | |||||||
December 31, 2021 | 36,506,814 | $ | 0.56 | |||||
Vested | (36,506,814 | ) | 0.56 | |||||
December 31, 2022 | $ | — |
For the years ended December 31, 2022, 2021 and 2020, 36,506,814, 1,693,804, and 1,697,071 PIUs vested with total grant-date fair values of $20,276, $535, and $487, respectively. On December 31, 2022, all PIUs were vested and all compensation expense related to the PIUs has been recognized.
The Holley Stockholder's previously granted 4,507 and 2,967PIUs respectively,included 24,074,944 units that contained certain performance vesting criteria related to the attainment of specified levels of return for certain other investors in Parentthe Holley Stockholder and the occurrence of certain events. The weighted-average grant date fair value ofCompensation expense for these performance based PIUsperformance-based awards was $0.27 and $0.24 for grants in 2020 and 2019, respectively. NaN expense has been recorded for the 2020 or 2019 grants,not previously recognized, as meeting the necessary performance conditions for vesting is was not considered probable. Compensation expense relatedThe early vesting of these awards was classified as a Type III: Improbable to PIUs is recorded based onProbable modification event under ASC Subtopic 718-10, and the grant date fair value over the requisite service period.
The table below summarizes the PIU activity for the years ended December 31, 2021, 2020 and 2019:
|
| Profit Interest Units |
| |||||
|
|
|
|
| Weighted |
| ||
|
| Outstanding |
|
| Average Grant |
| ||
|
| Units |
|
| Date Fair Value |
| ||
December 31, 2018 |
|
| 27,925 |
|
| $ | 0.27 |
|
Granted |
|
| 3,906 |
|
|
| 0.25 |
|
December 31, 2019 |
|
| 31,831 |
|
|
| 0.27 |
|
Granted |
|
| 5,932 |
|
|
| 0.28 |
|
Forfeited |
|
| (2,193 | ) |
|
| 0.27 |
|
December 31, 2020 |
|
| 35,570 |
|
|
| 0.27 |
|
Granted |
|
| 8,445 |
|
|
| 1.31 |
|
Forfeited |
|
| (2,921 | ) |
|
| 0.30 |
|
December 31, 2021 |
|
| 41,094 |
|
| $ | 0.50 |
|
82
As of December 31, 2021, 2020 and 2019, the amount of unvested PIUs was 34,302, 32,383 and 30,323, respectively, with a weighted average grant date fair value of $0.48, $0.26 and $0.28 as of December 31, 2021, 2020 and 2019, respectively. For the years ended December 31, 2021, 2020 and 2019, 3,629, 1,679 and 1,508 PIUs were fully vested, respectively, with a total grant-date fair value of $3,069, $487 and $437 in 2021, 2020 and 2019, respectively.
As of December 31, 2021, theremodified awards was $9,637 of total unrecognized compensation cost related to unvested time-based PIUs that is expected to be recognized over a remaining weighted-average period of 1.6 years.
The fair value of PIUs is estimated on the grantmodification date with the following assumptions:
| For the years ended |
| |||||||||
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||
Weighted-average expected term |
| 2.0 |
|
|
| 3.4 |
|
|
| 4.1 |
|
Expected volatility |
| 55.0 | % |
|
| 72.5 | % |
|
| 72.5 | % |
Expected dividend | $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
Risk-free interest rate |
| 0.3 | % |
|
| 0.3 | % |
|
| 1.5 | % |
PIUs are measured at the estimated fair value on the measurement date, which is typically the grant date. The fair value of PIUs is estimated using thea Black-Scholes option pricing model. Determining the fair value of PIUs at the grant date is affected by estimates involving inherent uncertainties, as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of the equity unit classes, value adjustments for a reduction in marketability, expected unit price volatility over the expected term of the units, unit redemption and cancellation behaviors, risk-free interest rates and expected dividends. The fair value of PIUs was estimated on the grant date with the following assumptions:
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Weighted-average expected term | 3.0 | 2.0 | 3.4 | |||||||||
Expected volatility | 65.0 | % | 55.0 | % | 72.5 | % | ||||||
Expected dividend | — | — | — | |||||||||
Risk-free interest rate | 4.3 | % | 0.3 | % | 0.3 | % |
The expected term has been estimated based on the contractual terms, vesting schedules and expectations of future unit holder behavior. The expected dividend yield is assumed to be zero0 since the Company has never paid dividends and does not have current plans to pay any dividends. The risk-free interest rate is based on yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group. As the ParentHolley Stockholder is a private company and does not have a trading history for its equity units, the expected price volatility for the equity units is estimated by taking the average historical price volatility for industry peers. Industry peers, which the Company has designated, consist of several public companies in the industry similar in size, stage of life cycle and financial leverage.
Compensation Expense
Equity-basedThe components of share-based compensation expense, included the following components:
|
| For the years ended |
| |||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||
Stock options |
| $ | 824 |
|
| $ | 0 |
|
| $ | 0 |
|
Restricted stock units |
|
| 1,070 |
|
|
| 0 |
|
|
| 0 |
|
Profit interest units |
|
| 3,069 |
|
|
| 487 |
|
|
| 437 |
|
All equity-based compensation expense is recorded inwithin selling, general and administrative costs in the consolidated statements of comprehensive income.
income, is as follows:
83
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Stock options | $ | 2,349 | $ | 824 | $ | — | ||||||
Restricted stock units | 4,304 | 1,070 | — | |||||||||
Profit interest units | 17,742 | 3,069 | 487 |
14. | LEASE COMMITMENTS |
14. LEASE COMMITMENTS
On January 1, 2022, the Company adopted ASC Topic 842,Leases, using the modified retrospective optional transition method provided by ASU 2018-11,Leases (Topic 842). The effect of applying this guidance resulted in an increase in noncurrent assets for right-of-use assets of$33,887 and an increase in liabilities for associated lease obligations of $34,579, most of which were classified as noncurrent. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings.
Under the transition option elected by the Company, ASC Topic 842 is applied only to the most current period and reporting for comparative periods presented in the financial statements continues to be in accordance with ASC Topic 840,Leases, including disclosures. Upon adoption, the Company elected the following practical expedients related to ASC 842:
• | not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases; |
• | to account for the lease and non-lease components as a single lease component for all of the Company's leases; and |
• | to apply accounting similar to ASC Topic 840 to leases that meet the definition of short-term leases. |
The Company is obligated under various operating leases for facilities, equipment and automobiles. Leased facilities serve functions includingretail stores, manufacturing, distribution, engineering, manufacturing, office space,and research and development facilities, office space, equipment, and retail sales.automobiles under operating lease agreements. Leases have a remaining termlease terms of one to ten14 years, some inclusive of which have an option to renew. The aggregate future minimum fixed lease obligations under operating leases forrenewal options that the Company as of December 31, 2021, are as follows:
2022 |
| $ | 8,517 |
|
2023 |
|
| 6,320 |
|
2024 |
|
| 4,766 |
|
2025 |
|
| 2,995 |
|
2026 |
|
| 2,813 |
|
Thereafter |
|
| 8,546 |
|
For the years ended December 31, 2021, 2020 and 2019, total rent expense under operating leases approximated $8,412, $4,688 and $4,737, respectively.is reasonably certain to exercise. Taxes, insurance and maintenance expenses relating to all leases are obligations of the Company.
The following table summarizes operating lease assets and obligations:
December 31, | ||||
2022 | ||||
Assets: | ||||
Operating right of use assets | $ | 29,522 | ||
Liabilities: | ||||
Current operating lease liabilities - Accrued liabilities | $ | 5,112 | ||
Long-term operating lease liabilities - Other noncurrent liabilities | 24,992 | |||
Total lease liabilities | $ | 30,104 |
The following summarizes the components of operating lease expense and provides supplemental cash flow information for operating leases:
For the year ended December 31, | ||||
2022 | ||||
Components of lease expense: | ||||
Operating lease expense | $ | 7,294 | ||
Short-term lease expense | 2,402 | |||
Variable lease expense | 763 | |||
Total lease expense | $ | 10,459 | ||
Supplemental cash flow information related to leases: | ||||
Cash paid for amounts included in measurement of operating lease liabilities | $ | 7,311 | ||
Right-of-use assets obtained in exchange for new operating lease liabilities | 13,942 | |||
Decapitalization of right-of-use assets upon lease termination and/or modification | 12,658 |
15. MAJOR RESELLER CUSTOMERSInformation associated with the measurement of operating lease obligations as of December 31, 2022, is as follows:
Weighted average remaining lease term (in years) | 7.9 | |||
Weighted average discount rate | 5.77 | % |
The following table summarizes the maturities of the Company's operating lease liabilities as of December 31, 2022:
2023 | $ | 6,683 | ||
2024 | 5,440 | |||
2025 | 3,861 | |||
2026 | 3,665 | |||
2027 | 3,612 | |||
Thereafter | 14,713 | |||
Total lease payments | 37,974 | |||
Less imputed interest | (7,870 | ) | ||
Present value of lease liabilities | $ | 30,104 |
For the years ended December 31, 2021 and 2020, total rent expense under operating leases approximated $8,412, and $4,688, respectively.
Prior to the Company's adoption of ASC Topic 842 on January 1, 2022, the maturity schedule of future minimum non-cancelable lease payments under the Company's operating leases in effect as of December 31, 2021 were as follows:
2022 | $ | 8,517 | ||
2023 | 6,320 | |||
2024 | 4,766 | |||
2025 | 2,995 | |||
2026 | 2,813 | |||
Thereafter | 8,546 | |||
Total minimum lease commitments | $ | 33,957 |
15. | MAJOR RESELLER CUSTOMERS |
The Company's reseller customers include many large and well-known automotive parts retailers and distributors. The following table summarizes resellers that individually account for more than 5%5% of the Company’s net sales in any of the periods presented:
|
| For the years ended |
| |||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||
Customer A |
|
| 19.3 | % |
|
| 21.5 | % |
|
| 20.0 | % |
Customer B |
|
| 4.1 | % |
|
| 5.4 | % |
|
| 5.7 | % |
Customer C |
|
| 3.5 | % |
|
| 4.5 | % |
|
| 5.6 | % |
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Customer A | 19.2 | % | 19.3 | % | 21.5 | % | ||||||
Customer B | 3.4 | % | 4.1 | % | 5.4 | % |
The following reseller customers accounted for 10%10% or more of the Company’s account receivable balance in any of the periods presented:
|
|
|
| For the years ended |
| |||||
|
|
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Customer A |
|
|
|
| 7.4 | % |
|
| 13.2 | % |
December 31, | ||||||||
2022 | 2021 | |||||||
Customer A | 11.3 | % | 7.4 | % |
16. | ACQUISITION, RESTRUCTURING AND MANAGEMENT FEE COSTS |
84
16.ACQUISITION, RESTRUCTURING AND MANAGEMENT FEE COSTS
The following table summarizes total acquisition, restructuring and management fee costs:
|
| For the years ended |
| |||||||||||||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| For the years ended December 31, | ||||||||||||||
|
|
|
|
|
|
|
| 2022 | 2021 | 2020 | ||||||||||||||
Acquisitions (1) |
| $ | 5,074 |
| $ | 4,434 |
| $ | 1,404 |
| $ | 1,887 | $ | 5,074 | $ | 4,434 | ||||||||
Restructuring (2) |
| 1,465 |
| 5,309 |
| 3,538 |
| 2,626 | 1,421 | 5,309 | ||||||||||||||
Management fees (3) |
| 25,789 |
| 6,089 |
| 3,662 |
| — | 25,789 | 6,089 | ||||||||||||||
Earn out adjustment (4) |
|
| 17,173 |
|
|
| — |
|
|
| — |
| — | 17,173 | — | |||||||||
Total acquisition, restructuring |
| $ | 49,501 |
|
| $ | 15,832 |
|
| $ | 8,604 |
| $ | 4,513 | $ | 49,457 | $ | 15,832 |
(1) | Includes professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to acquisitions. |
(2) | Includes costs incurred as part of the restructuring of operations including professional and consulting services. |
(3) | Includes acquisition costs and management fees paid to Sentinel Capital Partners, including a fee of $23,275 paid in 2021 upon the Closing of the Business Combination. Director compensation of $180 and $90 attributable to Mr. Basham's and Mr. Coady's service on Holley's Board of Directors paid to Sentinel Capital Partners is included in selling, general, and administrative cost for the years ended December 31, 2022 and 2021. |
(4) | A fair value adjustment to the contingent consideration payable from the Simpson acquisition. |
17. | COMMITMENTS AND CONTINGENCIES |
17. COMMITMENTS AND CONTINGENCIES
The Company is a party to various lawsuits and claims in the normal course of business. While the lawsuits and claims against the Company cannot be predicted with certainty, management believes that the ultimate resolution of the matters will not have a material effect on the consolidated financial position or results of operations of the Company.
The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. The accrued product warranty costs are based primarily on historical experience of actual warranty claims and are recorded at the time of the sale.
The following table provides the changes in the Company's accrual for product warranties, which is classified as a component of accrued liabilities in the consolidated balance sheets.
For the years ended December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Beginning balance | $ | 3,994 | $ | 3,989 | $ | 3,454 | ||||||
Accrued for current year warranty claims | 12,261 | 10,185 | 11,251 | |||||||||
Settlement of warranty claims | (12,671 | ) | (10,180 | ) | (10,716 | ) | ||||||
Ending balance | $ | 3,584 | $ | 3,994 | $ | 3,989 |
18. | SUBSEQUENT EVENT |
In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending March 31, 2023 through the fiscal quarter ending March 31, 2024 (the “Covenant Relief Period”), to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter. As an ongoing condition to the Covenant Relief Period, the Company also agreed to (i) a minimum liquidity test, (ii) an interest coverage test, (iii) an anti-cash hoarding test at any time revolving loans are outstanding, and (iv) additional reporting obligations.
|
| For the thirteen weeks ended |
|
| For the years ended |
| ||||||||||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||||
Beginning balance |
| $ | 2,645 |
|
| $ | 3,496 |
|
| $ | 3,989 |
|
| $ | 3,454 |
|
Accrued for current year |
|
| 4,722 |
|
|
| 3,614 |
|
|
| 10,185 |
|
|
| 11,251 |
|
Settlement of warranty claims |
|
| (3,373 | ) |
|
| (3,121 | ) |
|
| (10,180 | ) |
|
| (10,716 | ) |
Ending balance |
| $ | 3,994 |
|
| $ | 3,989 |
|
| $ | 3,994 |
|
| $ | 3,989 |
|
Refer to Note 6 - Debt for more information regarding the Company's debt and Credit Agreement.
85
Exhibit Index
Exhibit No. | Description | |
|
| |
|
3.1 |
3.2 |
4.1 | ||
|
4.3 |
4.4 |
10.2 |
10.3 |
|
|
|
|
10.8 |
|
|
|
|
10.16 |
86
|
|
|
|
|
|
21.1 |
23.1 |
24.1 |
31.1 |
31.2 |
32.1 |
32.2 | ||
101.INS | Inline XBRL Instance Document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
# Indicates management contract or compensatory plan or arrangement.
87
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Holley Inc.
Holley Inc. | ||
|
| |
| /s/ Michelle Gloeckler | |
|
Michelle Gloeckler
March 15, 2022
��
| ||
| Interim President and Chief Executive Officer | |
(Principal Executive Officer) | ||
March 15, 2023 | ||
/s/ Jesse Weaver | ||
Jesse Weaver | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) | ||
March 15, 2023 |
March 15, 2022
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Tom Tomlinson and Dominic Bardos, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue thereof.
88
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | |||
|
|
| |||
/ | Michelle Gloeckler | ||||
Michelle Gloeckler | Director and Interim President and Chief Executive Officer | March 15, | |||
| |||||
/ | Jesse Weaver | ||||
Jesse Weaver | Chief Financial Officer (principal financial and accounting officer) | March 15, | |||
| |||||
/ | James Coady |
| |||
James Coady | Director | March 15, | |||
| |||||
/ | Owen Basham |
| |||
Owen Basham | Director | March 15, | |||
| |||||
/ | Anita Sehgal |
| |||
Anita Sehgal | Director | March 15, | |||
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/ | Graham Clempson |
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Graham Clempson | Director | March 15, | |||
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/ | Matthew Rubel |
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Matthew Rubel | Director and Executive Chairman | March 15, | |||
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/ | Ginger Jones |
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Ginger Jones | Director | March 15, | |||
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