Holley Inc 8-K/A, filed Aug 12, 2021
Holley Inc. (HLLY)
About this 8-K/A
Holley Inc filed this 8-K/A on August 12, 2021, reporting on events of July 16, 2021.
Items reported
- Item 2.02: Financial results
- Item 9.01: Financial statements and exhibits
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Item 2.02. |
Results of Operations and Financial Condition. |
Item 9.01. |
Financial Statements and Exhibits. |
Exhibit No. |
Description | |
99.1 |
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99.2 |
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| 99.3 | Unaudited pro forma condensed combined balance sheet as of June 30, 2021 and the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 and the year ended December 31, 2020. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL). | |
HOLLEY INC. | ||
By: |
/s/ Dominic Bardos | |
Name: Dominic Bardos | ||
Title: Chief Financial Officer | ||
| As of June 27, 2021 |
As of December 31, 2020 |
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ASSETS |
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Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable, less allowance for credit losses of $ |
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Inventory |
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Prepaids and other current assets |
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Total current assets |
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Property, plant, and equipment, net |
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Goodwill |
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Other intangibles assets, net |
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Total assets |
$ | $ | ||||||
LIABILITIES AND STOCKHOLDER’S EQUITY |
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Accounts payable |
$ | $ | ||||||
Accrued interest |
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Accrued liabilities |
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Acquisition contingent consideration payable |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term debt, net of current portion |
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Long-term debt due to related party |
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Deferred taxes |
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Other noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies (Refer to Note 13 - Commitments and Contingencies) |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
Retained earnings |
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Total stockholder’s equity |
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Total liabilities and stockholder’s equity |
$ | $ | ||||||
| For the thirteen weeks ended | For the twenty-six weeks ended |
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| June 27, 2021 |
June 28, 2020 |
June 27, 2021 |
June 28, 2020 |
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Net sales |
$ | $ | $ | $ | ||||||||||||
Cost of goods sold |
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Gross profit |
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Selling, general, and administrative |
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Research and development costs |
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Amortization of intangibles |
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Acquisition and restructuring costs |
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Related party acquisition and management fee costs |
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Other expense (income) |
( |
) | ( |
) | ( |
) | ||||||||||
Total operating expenses |
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Operating income |
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Interest expense |
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Income before income taxes |
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Income tax expense |
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Net income |
$ | $ | $ | $ | ||||||||||||
Comprehensive income: |
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Foreign currency translation adjustment |
— | — | ||||||||||||||
Total comprehensive income |
$ | $ | $ | $ | ||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings (Accumulated Deficit) |
Total | |||||||||||||||||||
| Balance at December 31, 2019 |
$ | — | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
— | — | — | — | ||||||||||||||||||||
| Equity compensation |
— | — | — | — | ||||||||||||||||||||
| Balance at March 29, 2020 |
— | ( |
) | ( |
) | |||||||||||||||||||
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| Net income |
— | — | — | — | ||||||||||||||||||||
| Equity compensation |
— | — | — | — | ||||||||||||||||||||
| Capital distributions |
— | — | ( |
) | — | — | ( |
) | ||||||||||||||||
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| Balance at June 28, 2020 |
$ | — | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
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| Balance at December 31, 2020 |
$ | — | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Equity compensation |
— | — | — | — | ||||||||||||||||||||
| Foreign currency translation |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
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| Balance at March 28, 2021 |
— | ( |
) | |||||||||||||||||||||
| Net income |
— | — | — | — | ||||||||||||||||||||
| Equity compensation |
— | — | — | — | ||||||||||||||||||||
| Foreign currency translation |
— | — | — | — | ||||||||||||||||||||
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| Balance at June 27, 2021 |
$ | — | $ | $ | ( |
) | $ | $ | ||||||||||||||||
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For the twenty-six weeks ended |
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| June 27, 2021 | June 28, 2020 | |||||||
OPERATING ACTIVITIES |
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Net income |
$ | $ | ||||||
Adjustments to reconcile net income to net cash from operating activities: |
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Depreciation |
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Amortization of intangible assets |
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Amortization of deferred loan costs |
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Increase in acquisition earn out liability |
— | |||||||
Equity compensation |
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Change in deferred taxes |
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Loss (gain) on disposal of property, plant and equipment |
( |
) | ||||||
Allowance for credit losses |
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Change in operating assets and liabilities: |
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Accounts receivable |
( |
) | ( |
) | ||||
Inventories |
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Prepaids and other current assets |
( |
) | ||||||
Accounts payable |
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Accrued interest |
( |
) | ( |
) | ||||
Accrued liabilities |
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Net cash from operating activities |
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INVESTING ACTIVITIES |
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Capital expenditures |
( |
) | ( |
) | ||||
Proceeds from the disposal of fixed assets |
— | |||||||
Cash paid for acquisitions, net |
( |
) | — | |||||
Trademark acquisition |
— | ( |
) | |||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
FINANCING ACTIVITIES |
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Net change under revolving credit agreement |
— | |||||||
Principal payments on long-term debt |
( |
) | ( |
) | ||||
Capital distributions |
— | ( |
) | |||||
Net cash (used in) from financing activities |
( |
) | ||||||
Net change in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents: |
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Beginning of period |
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End of period |
$ | $ | ||||||
Supplemental disclosures of cash flow information: |
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Cash paid for interest |
$ | $ | ||||||
Cash paid for income taxes |
$ | $ | — | |||||
2. |
ACQUISITIONS |
Cash |
$ | |||
Accounts receivable |
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Inventory |
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Property, plant and equipment |
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Other assets |
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Tradenames |
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Customer relationships |
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Goodwill |
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Accounts payable |
( |
) | ||
Accrued liabilities |
( |
) | ||
| $ | ||||
| November 16, 2020 (as initially reported) |
Measurement Period Adjustments |
November 16, 2020 (as adjusted) |
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Cash |
$ | $ | $ | |||||||||
Accounts receivable |
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Inventory |
( |
) | ||||||||||
Property, plant and equipment |
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Other assets |
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Tradenames |
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Customer relationships |
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Patents |
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Goodwill |
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Accounts payable |
( |
) | ( |
) | ||||||||
Accrued liabilities |
( |
) | ( |
) | ||||||||
Deferred tax liability |
( |
) | ( |
) | ||||||||
Debt |
( |
) | ( |
) | ||||||||
| $ | $ | $ | ||||||||||
Cash |
$ | |||
Accounts receivable |
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Inventory |
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Property, plant and equipment |
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Other assets |
||||
Tradenames |
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Customer relationships |
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Goodwill |
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Accounts payable |
( |
) | ||
Accrued liabilities |
( |
) | ||
Deferred tax liability |
( |
) | ||
| $ | ||||
Accounts receivable |
$ | |||
Inventory |
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Property, plant and equipment |
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Other assets |
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Tradenames |
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Customer relationships |
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Patents |
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Technology intangibles |
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Goodwill |
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Accounts payable |
( |
) | ||
Accrued liabilities |
( |
) | ||
| $ | ||||
| For the thirteen weeks ended | For the twenty-six weeks ended |
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| June 27, 2021 |
June 28, 2020 |
June 27, 2021 |
June 28, 2020 |
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Pro forma net sales |
$ | $ | $ | $ | ||||||||||||
Pro forma net income |
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3. |
INVENTORY |
| June 27, 2021 |
December 31, 2020 |
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Raw materials |
$ | $ | ||||||
Work-in-process |
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Finished goods |
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| $ | $ | |||||||
4. |
PROPERTY, PLANT AND EQUIPMENT, NET |
| June 27, 2021 |
December 31, 2020 |
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Land |
$ | $ | ||||||
Buildings and improvements |
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Machinery and equipment |
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Construction in process |
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Total property, plant and equipment |
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Less: accumulated depreciation |
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Property, plant and equipment, net |
$ | $ | ||||||
| June 27, 2021 |
December 31, 2020 |
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United States |
$ | $ | ||||||
International |
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Total property, plant and equipment |
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5. |
INTANGIBLE ASSETS |
| June 27, 2021 | ||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
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Finite-lived intangible assets: |
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Customer relationships |
$ | $ | ( |
) | $ | |||||||
Tradenames |
( |
) | ||||||||||
Technology |
( |
) | ||||||||||
Total finite-lived intangible assets |
$ | $ | ( |
) | $ | |||||||
Indefinite-lived intangible assets: |
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Tradenames |
$ | $ | — | $ | ||||||||
| December 31, 2020 | ||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
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Finite-lived intangible assets: |
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Customer relationships |
$ | $ | ( |
) | $ | |||||||
Tradenames |
( |
) | ||||||||||
Technology |
( |
) | ||||||||||
Total finite-lived intangible assets |
$ | $ | ( |
) | $ | |||||||
Indefinite-lived intangible assets: |
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Tradenames |
$ | $ | — | $ | ||||||||
2021 (excluding the twenty-six weeks ended June 27, 2021) |
$ | |||
2022 |
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2023 |
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2024 |
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2025 |
6. |
DEBT |
| June 27, 2021 |
December 31, 2020 |
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First lien note |
$ | $ | ||||||
Second lien note |
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Other |
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Less unamortized debt issuance costs |
( |
) | ( |
) | ||||
Less current portion of long-term debt |
( |
) | ( |
) | ||||
| $ | $ | |||||||
| Debt | Debt Issuance Costs |
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2021 (remaining six months) |
$ | $ | ||||||
2022 |
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2023 |
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2024 |
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2025 |
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Thereafter |
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| $ | $ | |||||||
7. |
REVENUE |
| For the thirteen weeks ended | For the twenty-six weeks ended |
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| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| Electronic systems |
$ | $ | $ | $ | ||||||||||||
| Mechanical systems |
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| Exhaust |
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| Accessories |
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| Safety |
— | — | ||||||||||||||
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| Total sales |
$ | $ | $ | $ | ||||||||||||
| |
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| For the thirteen weeks ended | For the twenty-six weeks ended |
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| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| United States |
$ | $ | $ | $ | ||||||||||||
| Italy |
— | — | ||||||||||||||
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| Total sales |
$ | $ | $ | $ | ||||||||||||
| |
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8. |
INCOME TAXES |
| For the thirteen weeks ended | For the the twenty-six weeks ended |
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| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| Provision for income taxes |
$ | $ | $ | $ | ||||||||||||
| Effective tax rates |
% | % | % | % | ||||||||||||
| For the thirteen weeks ended | For the twenty-six weeks ended |
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| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| Components of Expense |
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| Service cost |
$ | $ | $ | $ | ||||||||||||
| Interest cost |
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| Expected return on plan assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Amortization of net loss |
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| Net periodic benefit cost |
$ | $ | $ | $ | ||||||||||||
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10. |
EQUITY-BASED COMPENSATION PLANS |
11. |
LEASE COMMITMENTS |
| 2021 (excluding the twenty-six weeks ended June 27, 2021) |
$ | |||
| 2022 |
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| 2023 |
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| 2024 |
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| 2025 |
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| Thereafter |
12. |
ACQUISITION, RESTRUCTURING AND MANAGEMENT FEE COSTS |
13. |
COMMITMENTS AND CONTINGENCIES |
| For the thirteen weeks ended | For the twenty-six weeks ended |
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| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
Beginning balance |
$ | $ | $ | $ | ||||||||||||
Accrued for current year warranty claims |
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Settlement of warranty claims |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Ending balance |
$ | $ | $ | $ | ||||||||||||
14. |
SUBSEQUENT EVENTS |
Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references to “Holley,” “Holdings,” “we,” “us,” “our” and “the Company” in this section are to the business and operations of Holley Intermediate Holdings, Inc. and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with Holley’s condensed consolidated financial statements and related notes thereto included in this current report on Form 8-K filing. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause Holley’s actual results to differ materially from management’s expectations. Factors which could cause such differences are discussed herein and under the caption, “Cautionary Note Regarding Forward-Looking Statements,” in our registration statement, as filed with the SEC on July 21, 2021, and those in our subsequent filings with the SEC.
Overview
We are a designer, marketer, and manufacturer of high 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’s 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. Approximately 40%, 40% and 36%, of our annual sales for fiscal 2020, 2019 and 2018, respectively, were generated by products that we first introduced in just the last five years. 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”) 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. Between 2014 and the end of 2020 we completed eight acquisitions, which, in total, have generated $35 million of cost saving synergies through reductions in product cost, elimination of headcount, facility costs and other SG&A expenses.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and those under the caption, “Risk Factors,” in our registration statement, as filed with the SEC on July 21, 2021, and those in our subsequent filings with the SEC.
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 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 will be accounted for as a reverse recapitalization. Holdings was deemed the accounting acquirer with Holley Inc. as the successor registrant. As such, Empower will be treated as the acquired company for financial reporting purposes, and financial statements for periods prior to the Business Combination will be 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 expect 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.
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 enhance Holley’s ability to provide a wide array of its products to its customers through its distribution network.
The most significant of these acquisitions impacting the comparability of our operating results were:
| • | AEM Performance Electronics: On April 14, 2021 Holley acquired AEM Performance Electronics (“AEM”), 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. |
| • | 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. |
| • | 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, firesuits and more. This acquisition extended Holley’s footprint into the safety and racing segment. |
The acquisitions have all been accounted for in accordance with FASB 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 of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” and Note 2, “Acquisitions,” in the condensed consolidated financial statements included in this current report on Form 8-K for additional information related to the Company’s acquisitions and investments.
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. 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.
Geopolitical
Geopolitical factors could adversely impact the U.S. and other economies, with specific impacts felt by the automotive sector. In particular, changes to international trade agreements, such as the United States-Mexico-Canada Agreement or other political pressures could affect the operations of the Company’s customers, resulting in reduced automotive production in certain regions or shifts in the mix of production to higher cost regions.
Competition
The performance automotive industry is highly competitive. 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. Existing competitors may expand their product offerings and sales strategies, and new competitors may enter the market. If Holley’s market share decreases due to increased competition, its revenue and ability to generate profits in the future may be impacted.
Regulatory Environment
Holley is subject to federal, state and local regulations including consumer laws and regulations, tax laws and regulations, and engineering and environmental laws and regulations. Holley’s current business plan assumes no material change in these laws and regulations. In the event any such change occurs, compliance with new laws and regulations might significantly affect Holley’s operations and cost of doing business.
COVID-19
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has experienced 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 pandemic on the Company’s business and operational and financial performance and condition is currently uncertain and will depend on many factors outside the Company’s control, including but not limited to the timing, extent, duration and effects of the virus and any of its mutations, the utilization and effectiveness of treatments and vaccines, the imposition of effective public safety and other protective measures, the further impact of COVID-19 on the global economy and demand for the Company’s products and services. Should the COVID-19 pandemic, including variants such as Delta, not improve or worsen, or if the Company’s attempt to mitigate its impact on its operations and costs is not successful, the Company’s business, results of operations, financial condition and prospects 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 after-market 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, 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.
Gross Profit and Gross Margin
Gross profit consists of Holley’s net sales less its cost of goods sold. Gross margin is gross profit as a percentage of net sales.
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, pre-production and start-up costs are also included within selling, general, and administrative. The Company expects to incur 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.
Research and Development Costs
Research and development costs consist of personnel expenses and other costs associated with the development and innovation of new products as well as the maintenance of existing products.
Amortization of Intangibles
Amortization of intangibles consists of amortization of definite-lived intangible assets over their respective useful lives.
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 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.
Other Expense (Income)
Other expenses consist of foreign currency transaction gains and losses, gains and losses on the disposal of fixed asset and other miscellaneous items.
Operating Income
Operating income consists of Holley’s gross profit less selling, general and administrative expenses, amortization of intangibles, acquisition, restructuring and management fee costs and other expenses.
Interest Expense
Interest expense consists of interest due on the indebtedness under our credit facilities. Interest is based on LIBOR or the prime rate, plus the applicable margin rate. As of June 27, 2021, $540.6 million was outstanding under the First Lien Credit Agreement and $145.0 million outstanding under our Second Lien Credit Agreement.
Income Tax Expense
Income tax expense consists of the Company’s current income tax expense less the deferred income tax benefit.
Foreign Currency Translation Adjustment
Foreign currency translation adjustment is based on the translation of assets and liabilities translated using period end exchange rates and revenue and expenses translated using average exchange rates.
Results of Operations
Thirteen Weeks Ended June 27, 2021 Compared With Thirteen Weeks Ended June 28, 2020
The table below presents Holley’s results of operations for the thirteen weeks ended June 27, 2021 and June 28, 2020:
| For the thirteen weeks ended | Change | |||||||||||||||
| June 27, 2021 |
June 28, 2020 |
$ | % | |||||||||||||
| Net sales |
$ | 193,041 | $ | 125,296 | $ | 67,745 | 54.07 | % | ||||||||
| Cost of goods sold |
111,841 | 70,468 | 41,373 | 58.71 | % | |||||||||||
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| Gross profit |
81,200 | 54,828 | 26,372 | 48.10 | % | |||||||||||
| Selling, general, and administrative |
26,190 | 16,294 | 9,896 | 60.73 | % | |||||||||||
| Research and development costs |
7,065 | 5,595 | 1,470 | 26.27 | % | |||||||||||
| Amortization of intangibles |
3,502 | 2,701 | 801 | 29.66 | % | |||||||||||
| Acquisition and restructuring costs |
2,676 | 3,118 | (442 | ) | (14.18 | %) | ||||||||||
| Related party acquisition and management fee costs |
1,658 | 880 | 778 | 88.41 | % | |||||||||||
| Other expense (income) |
47 | (109 | ) | 156 | n/a | |||||||||||
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| Operating income |
40,062 | 26,349 | 13,713 | 52.04 | % | |||||||||||
| Interest expense |
11,174 | 11,013 | 161 | 1.46 | % | |||||||||||
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| Income before income taxes |
28,888 | 15,336 | 13,552 | 88.37 | % | |||||||||||
| Income tax expense |
5,790 | 2,827 | 2,963 | 104.81 | % | |||||||||||
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| Net income |
23,098 | 12,509 | 10,589 | 84.65 | % | |||||||||||
| Foreign currency translation adjustment |
35 | — | 35 | n/a | ||||||||||||
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| Total comprehensive income |
$ | 23,133 | $ | 12,509 | $ | 10,624 | 84.93 | % | ||||||||
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Net Sales
Net sales for the thirteen weeks ended June 27, 2021 increased $67.7 million, or 54.1%, to $193.0 million, as compared to $125.3 million for the thirteen weeks ended June 28, 2020. Net sales during the thirteen weeks ended June 27, 2021 increased $37.3 million due to our recent business acquisitions. In addition our electronic products increased $15.4 million, or 22.1%, and our exhaust products increased $3.8 million, or 20.1%, primarily due to higher sales volume reflecting the continued success of our new product introductions.
Cost of Goods Sold
Cost of goods sold for thirteen weeks ended June 27, 2021 increased $41.4 million, or 58.7%, to $111.8 million, as compared to $70.5 million for the thirteen weeks ended June 28, 2020. The increase in cost of goods sold during the thirteen weeks ended June 27, 2021 was in line with a corresponding increase in product sales during such period.
Gross Profit and Gross Margin
Gross profit for the thirteen weeks ended June 27, 2021 increased $26.4 million, or 48.1%, to $81.2 million, as compared to $54.8 million for the thirteen weeks ended June 28, 2020. The increase in gross profit was driven by the increase in sales. Gross margin for the thirteen weeks ended June 27, 2021 was 42.16% compared to a gross margin of 43.86% for the thirteen weeks ended June 28, 2020.
Selling, General and Administrative
Selling, general and administrative costs for the thirteen weeks ended June 27, 2021 increased $9.9 million, or 60.7%, to $26.2 million, as compared to $16.3 million for the thirteen weeks ended June 28, 2020. When expressed as a percentage of sales, selling, general and administrative costs increased to 13.6% of sales for the thirteen weeks ended June 27, 2021, as compared to 13.0% of sales in 2020. $5.2 million of the increase is related to selling, general and administrative costs of recent acquisitions. The increase in costs was also driven by a $1.8 million increase in shipping costs related to higher sales and a $0.9 million increase in costs associated with the Business Combination.
Research and Development Costs
Research and development costs for the thirteen weeks ended June 27, 2021 increased $1.5 million, or 26.3%, to $7.1 million, as compared to $5.6 million for the thirteen weeks ended June 28, 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 Intangibles
Amortization of intangible assets for the thirteen weeks ended June 27, 2021 increased $0.8 million, or 29.7%, to $3.5 million, as compared to $2.7 million for the thirteen weeks ended June 28, 2020 due to recent acquisitions.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the thirteen weeks ended June 27, 2021 decreased $0.4 million, to $2.7 million, as compared to $3.1 million for the thirteen weeks ended June 28, 2020, reflecting ongoing restructuring costs related to the businesses recently acquired.
Related Party Acquisition and Management Fee Costs
Related party acquisition and management fee costs for the thirteen weeks ended June 27, 2021 increased $0.8 million to $1.7 million as compared to $0.9 million for the prior year, primarily due to management fees related to the acquisition of Advance Engine Management, Inc (“AEM”).
Operating Income
As a result of factors described above, operating income for the thirteen weeks ended June 27, 2021 increased $13.7 million, or 52.0%, to $40.1 million, as compared to $26.3 million for the thirteen weeks ended June 28, 2020.
Interest Expense
Interest expense of $11.2 million for the thirteen weeks ended June 27, 2021 was comparable to $11.0 million for the prior year.
Income before Income Taxes
As a result of factors described above, income before income taxes for the thirteen weeks ended June 27, 2021 increased $13.6 million to $28.9 million, as compared to $15.3 million for the thirteen weeks ended June 28, 2020.
Income Tax Expense
Income tax expense for the thirteen weeks ended June 27, 2021 increased $3.0 million to $5.8 million, as compared to $2.8 million for the thirteen weeks ended June 28, 2020. The increase was due to an increase in taxable income from the growth in sales. The effective tax rates were 20.1% and 18.4% for the thirteen weeks ended June 27, 2021 and June 28, 2020, respectively.
Net Income
As a result of factors described above, net income for the thirteen weeks ended June 27, 2021 increased $10.6 million to $23.1 million, as compared to $12.5 million for the thirteen weeks ended June 28, 2020.
Total Comprehensive Income
As a result of factors described above, total comprehensive income for the thirteen weeks ended June 27, 2021 increased $10.6 million to $23.1 million, as compared to $12.5 million for the thirteen weeks ended June 28, 2020.
Twenty-six Weeks Ended June 27, 2021 Compared With Twenty-six Weeks Ended June 28, 2020
The table below presents Holley’s results of operations for the twenty-six week periods ended June 27, 2021 and June 28, 2020:
| For the twenty-six weeks ended | Change | |||||||||||||||
| June 27, 2021 | June 28, 2020 | $ | % | |||||||||||||
| Net sales |
$ | 353,373 | $ | 232,453 | $ | 120,920 | 52.02% | |||||||||
| Cost of goods sold |
206,494 | 134,292 | 72,202 | 53.76% | ||||||||||||
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| Gross profit |
146,879 | 98,161 | 48,718 | 49.63% | ||||||||||||
| Selling, general, and administrative |
50,202 | 31,487 | 18,715 | 59.44% | ||||||||||||
| Research and development costs |
13,034 | 11,216 | 1,818 | 16.21% | ||||||||||||
| Amortization of intangibles |
6,838 | 5,400 | 1,438 | 26.63% | ||||||||||||
| Acquisition and restructuring costs |
21,509 | 4,532 | 16,977 | 374.60% | ||||||||||||
| Related party acquisition and management fee costs |
2,539 | 1,771 | 768 | 43.37% | ||||||||||||
| Other income |
(86 | ) | (268 | ) | 182 | (67.91%) | ||||||||||
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| Operating income |
52,843 | 44,023 | 8,820 | 20.03% | ||||||||||||
| Interest expense |
21,245 | 22,518 | (1,273 | ) | (5.65%) | |||||||||||
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| Income before income taxes |
31,598 | 21,505 | 10,093 | 46.93% | ||||||||||||
| Income tax expense |
10,556 | 4,144 | 6,412 | 154.73% | ||||||||||||
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| Net income |
21,042 | 17,361 | 3,681 | 21.20% | ||||||||||||
| Foreign currency translation adjustment |
19 | — | 19 | n/a | ||||||||||||
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| Total comprehensive income |
$ | 21,061 | $ | 17,361 | $ | 3,700 | 21.31% | |||||||||
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Net Sales
Net sales for the twenty-six weeks ended June 27, 2021 increased $120.9 million, or 52.0%, to $353.4 million, as compared to $232.5 million for the twenty-six weeks ended June 28, 2020. Net sales during the twenty-six weeks ended June 27, 2021 increased $63.2 million due to our recent business acquisitions. In addition our electronic products increased $31.7 million, or 25.0%, and our exhaust products increased $8.5 million, or 24.8%, primarily due higher sales volume reflecting the continued success of our new product introductions.
Cost of Goods Sold
Cost of goods sold for the twenty-six weeks ended June 27, 2021 increased $72.2 million, or 53.8%, to $206.5 million, as compared to $134.3 million for the twenty-six weeks ended June 28, 2020. The increase in cost of goods sold during the twenty-six weeks ended June 27, 2021 was in line with a corresponding increase in product sales during such period.
Gross Profit and Gross Margin
Gross profit for the twenty-six weeks ended June 27, 2021 increased $48.7 million, or 49.6%, to $146.9 million, as compared to $98.2 million for the twenty-six weeks ended June 28, 2020. The increase in gross profit was driven by the increase in sales. Gross margin of 41.6% for the twenty-six weeks ended June 27, 2021 was comparable to 42.2% for the prior year period.
Selling, General and Administrative
Selling, general and administrative costs for the twenty-six weeks ended June 27, 2021 increased $18.7 million, or 59.4%, to $50.2 million, as compared to $31.5 million for the twenty-six weeks ended June 28, 2020. When expressed as a percentage of sales, selling, general and administrative costs increased to 14.2% of sales for the twenty-six weeks ended June 27, 2021, as compared to 13.6% of sales in 2020. $8.9 million of the increase is related to selling, general and administrative costs of recent acquisitions. The increase in costs was driven by a $3.4 million increase in shipping and handling costs related to higher sales and a $2.6 million increase in costs associated with the Business Combination.
Research and Development Costs
Research and development costs for the twenty-six weeks ended June 27, 2021 increased $1.8 million, or 16.2%, to $13.0 million, as compared to $11.2 million for the twenty-six weeks ended June 28, 2020. 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 Intangibles
Amortization of intangible assets for the twenty-six weeks ended June 27, 2021 increased $1.4 million, or 26.7%, to $6.8 million, as compared to $5.4 million for the twenty-six weeks ended June 28, 2020 due to recent acquisitions.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the twenty-six weeks ended June 27, 2021 increased $17.0 million, or 374.6%, to $21.5 million, as compared to $4.5 million for the twenty-six weeks ended June 28, 2020. The increase was primarily due to an increase of $17.2 million to the contingent consideration payable from the Simpson acquisition.
Related Party Acquisition and Management Fee Costs
Related party acquisition and management fee costs for the twenty-six weeks ended June 27, 2021 increased $0.8 million, or 43.4%, to $2.5 million as compared to $1.8 million for the prior year, primarily due to management fees related to the acquisition of AEM.
Operating Income
As a result of factors described above, operating income for the twenty-six weeks ended June 27, 2021 increased $8.8 million, or 20.0%, to $52.8 million, as compared to $44.0 million for the twenty-six weeks ended June 28, 2020.
Interest Expense
Interest expense for the twenty-six weeks ended June 27, 2021 decreased $1.3 million, or 5.7%, to $21.2 million, as compared to $22.5 million for the twenty-six weeks ended June 28, 2020. The decrease was due to a lower effective interest rate.
Income before Income Taxes
As a result of factors described above, income before income taxes for the twenty-six weeks ended June 27, 2021 increased $10.1 million, or 46.9%, to $31.6 million, as compared to $21.5 million for the twenty-six weeks ended June 28, 2020.
Income Tax Expense
Income tax expense for the twenty-six weeks ended June 27, 2021 increased $6.4 million to $10.6 million, as compared to $4.1 million for the twenty-six weeks ended June 28, 2020. The increase was due to an increase in taxable income from the growth in sales. The effective tax rates were 33.4% and 19.3% for the twenty-six weeks ended June 27, 2021 and June 28, 2020, respectively. The significant difference between the effective tax rate and the federal statutory rate in 2021 was due to the permanent difference resulting from the adjustment to the Simpson earnout during the period.
Net Income
As a result of factors described above, net income for the twenty-six weeks ended June 27, 2021 increased $3.7 million to $21.1 million, as compared to $17.4 million for the twenty-six weeks ended June 28, 2020.
Total Comprehensive Income
As a result of factors described above, total comprehensive income for the twenty-six weeks ended June 27, 2021 increased $3.7 million to $21.1 million, as compared to $17.4 million for the twenty-six weeks ended June 28, 2020.
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) interest expense, (b) income taxes and (c) depreciation and amortization. Holley defines Adjusted EBITDA as EBITDA plus (i) unusual or nonrecurring expenses that consist primarily of the addback of the amortization of the fair market value increase in inventory in 2019 and 2018 (for 2020, the addbacks consist of the amortization of the fair market value increase in inventory and legal settlement) (ii) acquisition and restructuring costs, which for the twenty-six weeks ended June 27, 2021 includes a $17.2 million adjustment due to a change in the fair value of the Simpson acquisition contingent consideration payable, (iii) related party acquisition and management fee costs, and (iv) other expenses, which includes losses from disposal of fixed assets and foreign currency transactions.
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 thirteen weeks ended June 27, 2021 and June 28, 2020 and for the twenty-six weeks ended June 27, 2021 and June 28, 2020:
| For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||
| Net income (loss) |
$ | 23,098 | $ | 12,509 | $ | 21,042 | $ | 17,361 | ||||||||
| Adjustments: |
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| Depreciation |
2,201 | 1,988 | 4,453 | 4,013 | ||||||||||||
| Amortization of intangibles |
3,502 | 2,701 | 6,838 | 5,400 | ||||||||||||
| Interest expense |
11,174 | 11,013 | 21,245 | 22,518 | ||||||||||||
| Income tax expense (benefit) |
5,790 | 2,827 | 10,556 | 4,144 | ||||||||||||
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| EBITDA |
45,765 | 31,038 | 64,134 | 53,436 | ||||||||||||
| Unusual or nonrecurring expenses |
3,993 | 1,435 | 9,837 | 1,673 | ||||||||||||
| Acquisition and restructuring costs |
2,676 | 3,118 | 21,509 | 4,532 | ||||||||||||
| Related party acquisition and management fee costs |
1,658 | 880 | 2,539 | 1,771 | ||||||||||||
| Other expense |
47 | (109 | ) | (86 | ) | (268 | ) | |||||||||
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| Adjusted EBITDA |
$ | 54,139 | $ | 36,362 | $ | 97,933 | $ | 61,144 | ||||||||
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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.
The Company believes that its cash on hand, cash from operations 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.
Cash Flows
The following table provides a summary of cash flows from operating, investing, and financing activities for the periods presented:
Twenty-six Weeks Ended June 27, 2021 Compared With Twenty-six Weeks Ended June 28, 2020
| For the twenty-six weeks ended | ||||||||
| June 27, 2021 | June 28, 2020 | |||||||
| Cash flows from operating activities |
$ | 46,397 | $ | 43,449 | ||||
| Cash flows used in investing activities |
(60,867 | ) | (3,485 | ) | ||||
| Cash (used in) from financing activities |
(1,539 | ) | 26,450 | |||||
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| Net increase (decrease) in cash and cash equivalents |
$ | (16,009 | ) | $ | 66,414 | |||
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Operating Activities. Cash provided by operating activities for the twenty-six weeks ended June 27, 2021 was $46.4 million compared to cash provided by operating activities of $43.4 million during the twenty-six weeks ended June 28, 2020. Cash provided by accrued liabilities, accounts payable and accounts receivable increased by $29.9 million, $5.2 million, and $4.3 million, respectively. Offsetting these increases were decreases in cash provided by inventory of $22.6 million and prepaids and other current assets of $2.9 million. The changes in accrued liabilities, accounts receivable, inventory and accounts payable reflect the growth in the business in 2021. Additionally, the change in accrued liabilities includes the $17.2 million adjustment to the acquisition contingent consideration payable.
Investing Activities. Cash used in investing activities for the twenty-six weeks ended June 27, 2021 was $60.9 million, which included $54.0 million relating to acquisitions and $7.1 million relating to capital expenditures. During the twenty-six weeks ended June 28, 2020, cash used in investing activities was $3.5 million, primarily relating to capital expenditures.
Financing Activities. Cash used by financing activities for the twenty-six weeks ended June 27, 2021 was for payments on long-term debt. Cash provided by financing activities for the twenty-six weeks ended June 28, 2020 related to net borrowings under the revolving credit agreement.
Off-Balance Sheet Arrangements
Holley does not have any off-balance sheet financing arrangements at June 27, 2021, June 28, 2020, or December 31, 2021.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgements and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures. We evaluate our estimates, judgements and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions, judgements and estimates associated with the following have the greatest potential impact on, and are critical to the understanding of, our results of operations: revenue recognition, accounts receivable and allowance for credit losses, inventory, goodwill and intangible assets, income taxes, business combinations and purchase accounting. For further information see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,”
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 delivered 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.
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
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.
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 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.
Goodwill and Intangible Assets
Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Goodwill represents the excess of the purchase price paid over the fair value of its identifiable net assets acquired. If the carrying amount of the goodwill exceeds the fair value, then an impairment loss will be recognized in the amount equal to the excess. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Accounting guidance on the testing of goodwill for impairment allows entities testing goodwill for impairment, the option of performing a qualitative assessment to determine the likelihood of goodwill impairment and whether it is necessary to perform such impairment test.
Under Accounting Standards Update (“ASU”) No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, step 2 of the goodwill impairment test has been eliminated. Step 2 of the goodwill impairment test required companies to determine the implied fair value of the reporting unit’s goodwill. Under the new standard, an entity recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Intangible assets include trade names, customer relationships and developed technology obtained through business acquisitions. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible assets acquired. Intangible assets with finite lives are amortized over their estimated useful life and are reported net of accumulated amortization, separately from goodwill. Indefinite life intangibles are not amortized but are subject to testing for impairment annually.
Income Taxes
We are subject to income taxes in the U.S. (federal and state) and foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The income tax effects of these differences are classified as long-term deferred tax assets and liabilities in our consolidated balance sheets.
Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including but not limited to, historical operating results, forecasted earnings, estimates of future taxable income of a character necessary to realize the deferred asset, relative proportions of revenue and pre-tax income in the various domestic and jurisdictions in which we operate, and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.
Business Combinations and Purchase Accounting
Business combinations are accounted for using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. 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 judgment regarding estimates and assumptions. 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 and tangible long-lived assets. 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.
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 current report on Form 8-K.
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. The Company had $691.7 million of debt outstanding as of June 27, 2021. A hypothetical 100 basis point increase or decrease in interest rates would result in an approximately $6.9 million change 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 of June 27, 2021, the majority the Company’s cash and cash equivalents consisted of cash balances in non-interest bearing checking accounts which exceed the insurance coverage provided on such deposits. The Company does not believe that its cash equivalents present significant credit risks because the counterparties to the instruments consist of major financial institutions. 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 of June 27, 2021, the Company is 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.
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Defined terms included below shall have the same meaning as terms defined and included elsewhere in the Current Report on Form 8-K (the “Form 8-K’) filed with the Securities and Exchange Commission (the “SEC’) on July 21, 2021 and, if not defined in the Form 8-K, the Proxy Statement filed with the SEC on June 21, 2021.
The following unaudited pro forma condensed combined balance sheet as of June 30, 2021 and the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2021 and the year ended December 31, 2020 present the combination of the financial information of Empower and Holley Intermediate after giving effect to the Business Combination, the PIPE Financing, the A&R FPA, and the partial repayment of Holley Intermediate’s debt (“Debt Paydown”), and have been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”.
The unaudited pro forma condensed combined balance sheet as of June 30, 2021 combines the unaudited historical condensed balance sheet of Empower as of June 30, 2021 with the unaudited historical condensed consolidated balance sheets of Holley Intermediate as of June 27, 2021 giving effect to the Business Combination, the PIPE Financing, the A&R FPA, and the Debt Paydown described in the accompanying notes, on a pro forma basis as if each had been completed as of June 30, 2021.
The unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2021 and the year ended December 31, 2020 combines the unaudited historical condensed statements of operations of Empower for the six months ended June 30, 2021 and the period from August 19, 2020 (inception) through December 31, 2020 with the unaudited historical condensed consolidated statements of comprehensive income (loss) of Holley Intermediate for the 26 weeks ended June 27, 2021 and the year ended December 31, 2020 on a pro forma basis giving effect to the Business Combination, the PIPE Financing, the A&R FPA, and the Debt Paydown described in the accompanying notes, on a pro forma basis as if each had been completed on January 1, 2020.
The unaudited pro forma condensed combined financial statements do not give effect to the potential impact of any integration costs, tax deductibility of transaction costs, or anticipated synergies in the pre-acquisition period of entities acquired by Holley Intermediate. These synergies are effective starting on the date of each acquisition and therefore, are not fully captured in the results for the six months ended June 30, 2021 and the year ended December 31, 2020.
The unaudited pro forma condensed combined financial statements have been presented for illustrative purposes only and do not necessarily reflect what the Company’s financial condition or results of operations would have been had the Business Combination occurred on the dates indicated. Further, the unaudited pro forma condensed combined financial information also may not be useful in predicting the future financial condition and results of operations of the Company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma adjustments represent management’s estimates based on information available as of the date of these unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and analyses are performed.
On March 11, 2021, Empower entered into the Merger Agreement with Merger Sub I, Merger Sub II and Holley Intermediate, pursuant to which, among other things, following the Domestication, (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 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.
The Business Combination will be accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Empower has been treated as the “acquired” company for financial reporting purposes. This determination was primarily based on current shareholders of Holley Intermediate having a relative majority of the voting power of the Company, the operations of Holley Intermediate prior to the acquisition comprising the only ongoing operations of the Company, and senior management of Holley Intermediate comprising the majority of the senior management of the Company. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of Holley Intermediate with the acquisition being treated as the equivalent of Holley Intermediate issuing stock for the net assets of Empower, accompanied by a recapitalization. The net assets of Empower have been stated at historical cost, with no goodwill or other intangible assets recorded.
In connection with the execution of the Merger Agreement, Empower entered into the PIPE Subscription Agreements with the PIPE Investors to sell an additional 24,000,000 shares of Common Stock (at a price of $10.00 per share) at Closing, for a total aggregate purchase price of up to $240.0 million. Per the Merger Agreement, $100.0 million of the PIPE Financing proceeds were used for the Debt Paydown.
Pursuant to the A&R FPA, Empower entered into an agreement to issue 5,000,000 Empower Units to the A&R FPA Investor, which was subsequently assigned to the New FPA Purchasers, and consummated concurrently with the Closing, for total proceeds for $50.0 million.
Unaudited Pro forma Condensed Combined Balance Sheet
As of June 30, 2021
(in USD thousands)
| Empower (Historical) |
Holley (Historical) |
Pro Forma Transaction Accounting Adjustments |
Financing Transaction Accounting Adjustments |
Pro Forma Adjustments for A&R FPA |
Pro Forma Consolidated |
Note | ||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||
| Cash and cash equivalents |
$ | 704 | $ | 55,665 | $ | (154,308 | ) | $ | 133,012 | $ | 50,000 | $ | 85,073 | a | ||||||||||||
| Accounts receivable, less allowance for credit losses |
— | 62,873 | — | — | — | 62,873 | ||||||||||||||||||||
| Inventory |
— | 134,833 | — | — | — | 134,833 | ||||||||||||||||||||
| Prepaids and other current assets |
260 | 7,836 | — | — | — | 8,096 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total current assets |
964 | 261,207 | (154,308 | ) | 133,012 | 50,000 | 290,875 | |||||||||||||||||||
| Property, plant and equipment, net |
— | 49,692 | — | — | — | 49,692 | ||||||||||||||||||||
| Goodwill |
— | 377,368 | — | — | — | 377,368 | ||||||||||||||||||||
| Cash and marketable securities held in Trust Account |
250,112 | — | (250,112 | ) | — | — | — | a | ||||||||||||||||||
| Other intangible assets, net |
— | 425,423 | — | — | — | 425,423 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total assets |
251,076 | 1,113,690 | (404,420 | ) | 133,012 | 50,000 | 1,143,358 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Liabilities and stockholders’ equity |
||||||||||||||||||||||||||
| Accounts payable |
— | 42,744 | — | — | — | 42,744 | ||||||||||||||||||||
| Accrued interest |
— | 5,687 | — | — | — | 5,687 | ||||||||||||||||||||
| Accrued liabilities |
— | 29,096 | — | — | — | 29,096 | ||||||||||||||||||||
| Acquisition contingent consideration payable |
— | 24,373 | — | — | — | 24,373 | ||||||||||||||||||||
| Other Accrued expenses |
4,271 | — | (4,271 | ) | — | — | — | a | ||||||||||||||||||
| Current portion of long-term debt |
— | 5,528 | — | — | 5,528 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total current liabilities |
4,271 | 107,428 | (4,271 | ) | — | — | 107,428 | |||||||||||||||||||
| Warrant liability |
25,233 | — | — | — | 1,967 | 27,200 | a | |||||||||||||||||||
| A&R FPA liability |
3,250 | — | — | — | (1,750 | ) | 1,500 | a | ||||||||||||||||||
| Earn-out liability |
— | — | 19,009 | — | — | 19,009 | b | |||||||||||||||||||
| Deferred underwriting fee payable |
8,750 | — | (8,750 | ) | — | — | — | a | ||||||||||||||||||
| Long-term debt, net of current portion |
— | 649,874 | — | (100,000 | ) | — | 549,874 | c | ||||||||||||||||||
| Long-term debt due to related party |
— | 20,000 | — | — | — | 20,000 | ||||||||||||||||||||
| Deferred taxes |
— | 72,538 | — | — | — | 72,538 | ||||||||||||||||||||
| Other noncurrent liabilities |
— | 2,146 | — | — | — | 2,146 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total liabilities |
41,504 | 851,986 | 5,988 | (100,000 | ) | 217 | 799,695 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ordinary shares subject to possible redemption |
204,572 | — | (204,572 | ) | — | — | — | d | ||||||||||||||||||
| Shareholders’ Equity |
||||||||||||||||||||||||||
| Class A ordinary shares |
— | — | 82 | 22 | 5 | 109 | d | |||||||||||||||||||
| Class B ordinary shares |
1 | — | (1 | ) | — | — | — | d | ||||||||||||||||||
| Common stock |
— | — | — | — | — | — | ||||||||||||||||||||
| Additional paid-in capital |
25,320 | 239,152 | (207,229 | ) | 232,990 | 49,778 | 340,011 | d | ||||||||||||||||||
| Accumulated other comprehensive loss |
— | (655 | ) | — | — | — | (655 | ) | d | |||||||||||||||||
| Retained earnings (accumulated deficit) |
(20,321 | ) | 23,207 | 1,312 | — | — | 4,198 | d | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total stockholders’ equity |
5,000 | 261,704 | (205,836 | ) | 233,012 | 49,783 | 343,663 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 251,076 | $ | 1,113,690 | $ | (404,420 | ) | $ | 133,012 | $ | 50,000 | $ | 1,143,358 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
2
Unaudited Pro forma Condensed Combined Statement of Comprehensive Income (Loss)
For the six months ended June 30, 2021
(in USD thousands, except share and per share amounts)
| Empower (Historical) |
Holley (Historical) |
Pro Forma Transaction Accounting Adjustments |
Financing Transaction Accounting Adjustments |
Pro Forma Adjustments For A&R FPA |
Pro Forma Consolidated |
Note | ||||||||||||||||||||
| Revenue |
— | $ | 353,373 | — | — | — | $ | 353,373 | ||||||||||||||||||
| Cost of goods sold |
— | 206,494 | — | — | — | 206,494 | ||||||||||||||||||||
| Operating Expenses |
— | — | — | — | — | — | ||||||||||||||||||||
| Selling, general and administrative |
— | 50,202 | — | — | — | 50,202 | ||||||||||||||||||||
| Research and development costs |
— | 13,034 | — | — | — | 13,034 | ||||||||||||||||||||
| Formation and operational costs |
4,593 | — | — | — | — | 4,593 | ||||||||||||||||||||
| Amortization of intangibles |
— | 6,838 | — | — | — | 6,838 | ||||||||||||||||||||
| Acquisition, restructuring and management fee costs |
— | 21,509 | — | — | — | 21,509 | ||||||||||||||||||||
| Related party acquisition and management fee costs |
— | 2,539 | — | — | — | 2,539 | ||||||||||||||||||||
| Other income (loss) |
— | (86 | ) | — | — | — | (86 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total operating expenses |
4,593 | 94,036 | — | — | — | 98,629 | ||||||||||||||||||||
| Income (loss) before interest expense and income taxes |
(4,593 | ) | 52,843 | — | — | — | 48,250 | |||||||||||||||||||
| Interest expense |
— | 21,245 | — | (4,252 | ) | — | 16,993 | AA | ||||||||||||||||||
| Interest income |
59 | — | (59 | ) | — | — | — | AB | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Income (loss) before income taxes |
(4,534 | ) | 31,598 | (59 | ) | 4,252 | — | 31,257 | ||||||||||||||||||
| Unrealized gain (loss) on other marketable securities |
— | — | — | — | — | — | ||||||||||||||||||||
| Change in fair value of warrant liability |
(10,143 | ) | — | — | — | — | (10,143 | ) | ||||||||||||||||||
| Change in fair value of forward purchase agreement liability |
(1,200 | ) | — | — | — | 1,200 | — | AC | ||||||||||||||||||
| Transaction costs |
— | — | — | — | — | — | ||||||||||||||||||||
| Income tax expense |
— | 10,556 | — | 1,072 | — | 11,628 | AD | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) |
$ | (15,877 | ) | $ | 21,042 | $ | (59 | ) | $ | 3,180 | $ | 1,200 | $ | 9,486 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Comprehensive income (loss): |
— | — | — | |||||||||||||||||||||||
| Foreign currency translation adjustment |
— | 19 | — | — | — | 19 | ||||||||||||||||||||
| Pension liability loss |
— | — | — | — | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total comprehensive income (loss) |
$ | (15,877 | ) | $ | 21,061 | $ | (59 | ) | $ | 3,180 | $ | 1,200 | $ | 9,505 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Weighted average shares outstanding, basic and diluted |
9,363,928 | 115,805,639 | ||||||||||||||||||||||||
| Basic and diluted net income (loss) per share |
$ | (1.70 | ) | $ | 0.08 | |||||||||||||||||||||
Unaudited Pro forma Condensed Combined Statement of Comprehensive Income (Loss)
For the year ended December 31, 2020
(in USD thousands, except share and per share amounts)
| Empower (Historical) |
Holley (Historical) |
Pro Forma Transaction Accounting Adjustments |
Financing Transaction Accounting Adjustments |
Pro Forma Adjustments for A&R FPA |
Pro Forma Consolidated |
Note | ||||||||||||||||||||
| Revenue |
— | 504,179 | — | — | — | 504,179 | ||||||||||||||||||||
| Cost of goods sold |
— | 295,935 | — | — | — | 295,935 | ||||||||||||||||||||
| Operating Expenses |
— | — | — | — | — | — | ||||||||||||||||||||
| Selling, general and administrative |
— | 70,875 | — | — | — | 70,875 | ||||||||||||||||||||
| Research and development costs |
— | 23,483 | — | — | — | 23,483 | ||||||||||||||||||||
| Formation and operational costs |
274 | — | — | — | — | 274 | ||||||||||||||||||||
| Amortization of intangibles |
— | 11,082 | — | — | — | 11,082 | ||||||||||||||||||||
| Acquisition, restructuring and management fee costs |
— | 9,743 | — | — | — | 9,743 | ||||||||||||||||||||
| Related party acquisition and management fee costs |
— | 6,089 | — | — | — | 6,089 | ||||||||||||||||||||
| Other income |
— | 1,517 | — | — | — | 1,517 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total operating expenses |
274 | 122,789 | — | — | — | 123,063 | ||||||||||||||||||||
| Income (loss) before interest expense and income taxes |
(274 | ) | 85,455 | — | — | — | 85,181 | |||||||||||||||||||
| Interest expense |
— | 43,772 | — | (9,513 | ) | — | 34,259 | AA | ||||||||||||||||||
| Interest income |
49 | — | (49 | ) | — | — | — | AB | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Income (loss) before income taxes |
(225 | ) | 41,683 | (49 | ) | 9,513 | — | 50,922 | ||||||||||||||||||
| Unrealized gain (loss) on other marketable securities |
4 | — | — | — | — | 4 | ||||||||||||||||||||
| Change in fair value of warrant liability |
(1,690 | ) | — | — | — | — | (1,690 | ) | ||||||||||||||||||
| Change in fair value of purchase agreement liability |
(2,050 | ) | — | — | — | 2,050 | — | AC | ||||||||||||||||||
| Transaction costs |
(483 | ) | — | — | — | — | (483 | ) | ||||||||||||||||||
| Income tax expense |
— | 8,826 | — | 2,399 | — | 11,225 | AD | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) |
(4,444 | ) | 32,857 | (49 | ) | 7,114 | 2,050 | 37,528 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Comprehensive income (loss): |
— | — | — | |||||||||||||||||||||||
| translation adjustment |
— | 16 | — | — | — | 16 | ||||||||||||||||||||
| Pension liability loss |
— | (293 | ) | — | — | — | (293 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total comprehensive income (loss) |
(4,444 | ) | 32,580 | (49 | ) | 7,114 | 2,050 | 37,251 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Weighted average shares outstanding, basic and diluted |
7,850,413 | 115,805,639 | ||||||||||||||||||||||||
| Basic and diluted net income per share |
(0.58 | ) | 0.32 | |||||||||||||||||||||||
4
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Note 1 — Basis of Presentation
The pro forma adjustments have been prepared as if the Business Combination had been consummated on June 30, 2021 in the case of the unaudited pro forma condensed combined balance sheet and on January 1, 2020, the beginning of the earliest period presented in the unaudited pro forma condensed combined statement of operations.
The unaudited pro forma condensed combined financial information has been prepared assuming the following methods of accounting in accordance with GAAP.
The pro forma adjustments reflecting the consummation of the Business Combination, the PIPE Financing, and the transactions contemplated by the A&R FPA are based on currently available information and assumptions and methodologies that management believes are reasonable under the circumstances. The unaudited condensed pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. The assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination and related transactions based on information available to management at the current time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.
Notwithstanding the legal form of the Business Combination pursuant to the Merger Agreement, the Business Combination will be accounted for as a reverse capitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, Empower is treated as the “acquired” company for financial reporting purposes. The net assets of Empower are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are those of Holley Intermediate.
The Business Combination will be accounted for as a reverse recapitalization because Holley Intermediate has been determined to be the accounting acquirer under Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). The determination is primarily based on the evaluation of the following facts and circumstances taking into consideration that:
| • | As of the date of the Closing the pre-merger equity holders of Holley Intermediate hold 57.35% of voting rights in the Company; |
| • | The pre-merger equity holders of Holley Intermediate have the right to appoint the majority of members of the Company’s board of directors; |
| • | Senior management of Holley Intermediate comprise the senior management of the Company; and |
| • | Operations of Holley Intermediate comprise the ongoing operations of the Company. |
Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of Holley Intermediate issuing stock for the net assets of Empower, accompanied by a recapitalization.
Following the Closing, holders of Empower Class A Shares that exercised their redemption rights received their per share redemption price out of the funds in the trust account. Each holder of Empower Class A Shares was able to elect to redeem all or a portion of its Empower Class A Shares at a per-share price, payable in cash, equal to a pro rata share of the aggregate amount on deposit in the trust account (including any interest earned on the funds held in the trust account).
The 2,187,500 Earn-Out Shares issued to Sponsor at Closing are carried as a liability on the pro forma balance sheet. The Earn-Out shares do not have an income statement impact as the fair value of the Earn-Out liability has not materially changed. Please see the section entitled “Proposal No. 1 — The Business Combination Proposal — Other Agreements — Sponsor Agreement” for additional information on vesting and forfeiture of the Earn-Out Shares.
Note 2 — Description of the Business Combination
On March 11, 2021, Empower entered into the Merger Agreement with Merger Sub I, Merger Sub II and Holley Intermediate, pursuant to which, among other things, following the Domestication, (i) Merger Sub I merged with and into Holley Intermediate, the separate corporate existence of Merger Sub I ceased and Holley Intermediate became the surviving corporation and a wholly owned subsidiary of Empower, and (ii) Holley Intermediate merged with and into Merger Sub II, the separate corporate existence of Holley Intermediate ceased and Merger Sub II became the surviving limited liability company and a wholly owned subsidiary of Empower.
At the Closing, Empower ceased to exist, and the Company will operate under the name “Holley Inc.”
As a result of and upon the Closing, among other things, all outstanding shares of Holley Intermediate common stock as of immediately prior to the effective time of Merger I were cancelled in exchange for the right to receive an aggregate of $264.7 million in cash (subject to adjustment) and 67,673,884 shares (subject to adjustment) of Common Stock (at a deemed value of $10.00 per share). Cash Merger Consideration was reduced by COVID-19 related deferral taxes and accrued and unpaid income tax liabilities for any tax period prior to the Closing (but giving effect to certain transaction tax deductions and prepayments not less than zero). Because redemptions of Empower Class A Shares resulted in the trust account having an amount less than $540 million at the Closing (after giving effect to proceeds received from the PIPE Financing and A&R FPA, but before payment of the unpaid transaction expenses of the parties), (i) Cash Merger Consideration was proportionally reduced by the shortfall of $99.4 million and (ii) Securities Merger Consideration was proportionally increased at a price of $10.00 per share of Common Stock.
An additional 24,000,000 shares of Common Stock were purchased (at a price of $10.00 per share) at the Closing by the PIPE Investors, for a total aggregate purchase price of $240.0 million. Per the Merger Agreement, $100.0 million of the PIPE Financing proceeds were used to partially pay off Holley Intermediate’s debt.
Pursuant to the A&R FPA, Empower issued 5,000,000 Empower Units to the New FPA Purchasers concurrently with the Closing, for total proceeds for $50.0 million.
Pursuant to the Cayman Constitutional Documents, holders of Empower Class A Shares were offered the opportunity to redeem, upon the Closing, all or a portion of such holder’s Empower Class A Shares then held by them for cash equal to their pro rata share of the aggregate amount on deposit in the trust account (as of two business days prior to the Closing).
Subject to the terms and conditions set forth in the Merger Agreement, the Holley Stockholder received aggregate consideration with a value equal to $1,155,000,000, which consists of (a) $264,717,627 of Cash Merger Consideration and (b) $676,738,839 in shares of Common Stock based on an assumed price of $10.00 per share. This consideration was determined given (i) the trust account value at redemption of $250,113,825, (ii) the per share redemption amount is equal to approximately $10.005, (iii) that 9,930,745 Empower Class A Shares were redeemed for an aggregate payment of approximately $99.4 million from the trust account, and (iv) there is an upward adjustment to the Securities Merger Consideration issued to the Holley Stockholder pursuant to the Merger Agreement.
The following table summarizes the pro forma Common Stock issued and outstanding immediately after the Closing, excluding the potential dilutive effect of the exercise of the Warrants and Earn-Out Shares.
| Shares | % | |||||||
| Empower public shareholders |
15,069,255 | 13.01 | % | |||||
| Holley Stockholder |
67,673,884 | 58.44 | % | |||||
| Sponsor and related parties |
9,062,500 | 7.83 | % | |||||
| PIPE Investors |
24,000,000 | 20.72 | % | |||||
| Closing Shares |
115,805,639 | 100.00 | % | |||||
Note 3 — Pro Forma Adjustments
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheets
The adjustments included in the unaudited pro forma condensed combined balance sheet as of June 30, 2021 are as
follows:
a. Cash. Represents the impact of the Business Combination on the cash balance of Holley. The table below represents the sources and uses of funds related to the Business Combination:
| Note | ||||||
| Cash balance of Empower prior to the Business Combination |
$ | 704 | ||||
| Cash balance of Holley Intermediate prior to the Business Combination |
$ | 55,665 | ||||
| Total Pre-adjustment cash balance |
56,369 | |||||
| Proceeds from cash held in Trust Account |
1 | 250,112 | ||||
| PIPE proceeds |
2 | 240,000 | ||||
| A&R FPA proceeds |
3 | 50,000 | ||||
| Payment to redeeming Empower public shareholders |
4 | (99,353 | ) | |||
| Payment to the Sellers |
5 | (264,718 | ) | |||
| Payment of accrued expenses |
6 | (2,998 | ) | |||
| Payment of deferred offering costs |
7 | (8,750 | ) | |||
| Payment of transaction costs |
7 | (35,589 | ) | |||
| Debt paydown from PIPE proceeds |
8 | (100,000 | ) | |||
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|
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| Adjustment to cash in connection with the Business Combination |
28,704 | |||||
| Ending cash and restricted cash balance |
85,073 | |||||
| (1) | Represents the amount of the restricted investments and cash held in the trust account upon consummation of the Business Combination. |
| (2) | Represents the issuance, pursuant to the PIPE Financing consummated concurrently with the Closing, to the PIPE Investors of 24.0 million shares of Common Stock at a price of $10 per share. |
| (3) | Represents the issuance of 5,000,000 Empower Units under the A&R FPA to the New FPA Purchasers, consummated concurrently with the Closing. |
| (4) | Represents the amount paid to and the Class A Shares redeemed by Empower public shareholders who exercised their redemption rights. |
| (5) | Represents the amount of cash paid to the existing equity holders of the Holley Stockholder upon the consummation of the Business Combination. |
| (6) | Represents payment of Empower’s accrued expenses. |
| (7) | Reflects the settlement of $35.6 million of transaction costs and $8.8 million of Empower’s deferred underwriting fees at close in connection with the Business Combination. The $35.6 million of transaction fees relates to advisory, legal, accounting, printing and other fees to be incurred, including $7.0 million of PIPE Financing expenses. |
| (8) | Reflects Debt Repayment of Holley Intermediate ’s debt with net cash proceeds from the PIPE Financing in an aggregate principal amount of $100.0 million. See Note 3(b) below. |
b. Earn-Out Liability. Represents recognition of earn-out related to 2,187,500 shares of Common Stock as required under terms of the Merger Agreement. The earn-out is classified as a liability in the unaudited pro forma condensed combined balance sheet and becomes issuable upon achieving certain market share price milestones as outlined in the Merger Agreement during the earn-out period. The earn-out liability was recognized at its estimated fair value of $19,009,375 as of June 30, 2021. This liability will be remeasured to its fair value at the end of each reporting period, and subsequent changes in the fair value post-Business Combination will be recognized in the Company’s statement of operations within other income/expense.
c. Debt. Represents the impact of the Business Combination on the debt balance, specifically in respect of the net cash proceeds from the PIPE Financing in an aggregate principal amount of $100.0 million (as also indicated above per pro forma adjustment (a)(8)). The following table represents the impact of the Debt Paydown by Empower shareholders:
| Debt paydown from PIPE proceeds |
$ | 100,000 | ||
| Allocated to: |
||||
| Long-term debt, net of current portion and deferred loan costs |
$ | 100,000 |
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d. Equity
The following table represents the impact of the Business Combination on total equity section:
| Common Stock | ||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | |||||||||||||||||||||||||||||||||||
| Note | Class A Stock |
Class B Stock |
Class A Stock |
Class B Stock |
Common Stock |
Additional Paid in Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings Accumulated Deficit |
||||||||||||||||||||||||||||
| Pre Business Combination—Empower |
3,266,381 | 6,250,000 | — | 1 | — | 25,320 | — | (20,321 | ) | |||||||||||||||||||||||||||
| Pre Business Combination—Holley |
— | — | — | — | — | 239,152 | (655 | ) | 23,207 | |||||||||||||||||||||||||||
| Founder Shares |
1 | 4,062,500 | (6,250,000 | ) | — | (1 | ) | — | — | — | — | |||||||||||||||||||||||||
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| Balances after share transaction of the Company |
7,328,881 | — | — | — | — | 264,472 | (655 | ) | 2,886 | |||||||||||||||||||||||||||
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| Reclassification of redeemable shares to Class A shares |
2 | 21,733,619 | — | 22 | — | — | 214,539 | — | — | |||||||||||||||||||||||||||
| Less: Redemption of redeemable stock |
10 | (9,930,745 | ) | — | (10 | ) | — | — | (99,307 | ) | — | — | ||||||||||||||||||||||||
| Cash to the Holley Stockholder at Business Combination |
3 | — | — | — | — | — | (264,718 | ) | — | — | ||||||||||||||||||||||||||
| Shares issued to the Holley Stockholder as consideration |
4 | 67,673,884 | — | 68 | — | — | (68 | ) | ||||||||||||||||||||||||||||
| PIPE Financing Proceeds |
5 | 24,000,000 | — | 24 | — | — | 232,987 | — | — | |||||||||||||||||||||||||||
| Forward purchase agreement proceeds |
6 | 5,000,000 | — | 5 | — | — | 49,778 | — | — | |||||||||||||||||||||||||||
| Earn-out liability |
7 | — | — | — | — | — | — | — | (19,009 | ) | ||||||||||||||||||||||||||
| Holley transaction costs |
8 | — | — | — | — | — | (27,965 | ) | — | — | ||||||||||||||||||||||||||
| Empower transaction costs |
8 | — | — | — | — | — | (9,386 | ) | — | — | ||||||||||||||||||||||||||
| Elimination of historical accumulated deficit of Empower |
9 | — | — | — | — | — | (20,321 | ) | — | 20,321 | ||||||||||||||||||||||||||
| Elimination of historical common stock of Holley |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
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| Post-Business Combination |
115,805,639 | — | 109 | — | — | 340,011 | (655 | ) | 4,198 | |||||||||||||||||||||||||||
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| (1) | Represents the automatic conversion of Empower Class B ordinary shares, par value $0.0001, into Common Stock at Closing; 2,187,500 shares of Common Stock classified as Earn-Out Shares will be restricted from transfer at Closing subject to vesting and forfeiture. |
| (2) | Represents redeemable shares of Empower prior to the Closing, which became permanent equity of the Company at Closing. |
| (3) | Represents Cash Merger Consideration received by the Holley Stockholder at Closing subject to the terms and conditions set forth in the Merger Agreement. |
| (4) | Represents shares of Common Stock that were issued to the Holley Stockholder at Closing subject to the terms and conditions set forth in the Merger Agreement; 67,673,884 shares of Common Stock were issued to the Holley Stockholder. |
8
| (5) | Represents the issuance, in the PIPE Financing consummated concurrently with the Closing, to the PIPE Investors of 24,000,000 shares of Common Stock at a price of $10 per share. |
| (6) | Represents the issuance of 5,000,000 Empower Units under the A&R FPA to the New FPA Purchasers, consummated concurrently with the Closing. |
| (7) | Represents recognition of the earn-out liability under the terms of the Merger Agreement. |
| (8) | Represents capitalized expenses related to the Business Combination as a reduction to equity proceeds. |
| (9) | Represents the equity reclassification of the historical accumulated deficit of Empower to the combined additional paid-in capital of the Company. |
| (10) | Represents the amount paid to and the Empower Class A Shares redeemed by Empower public shareholders who exercised their redemption rights. |
Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations
The adjustments included in the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2021 and twelve months ended December 31, 2020 are as follows:
Represents the estimated changes in historical interest expense following the partial repayment of the existing debt in the amount of $100.0 million in connection with the Business Combination. The impact of the partial repayment was calculated as follows for the six months ended June 30, 2021 and the year ended December 31, 2020, respectively.
| Period | Amount | Rate | Interest | |||||||||
| 1/1/2021 to 2/26/2021 |
$ | 100,000 | 8.73 | % | $ | 1,383 | ||||||
| 2/27/2021 to 5/28/2021 |
100,000 | 8.61 | % | 2,153 | ||||||||
| 5/29/2021 to 6/30/2021 |
100,000 | 8.59 | % | 716 | ||||||||
|
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| Total |
$ | 4,252 | ||||||||||
| Period | Amount | Rate | Interest | |||||||||
| 1/1/2020 to 2/28/2020 |
$ | 100,000 | 10.41 | % | $ | 1,706 | ||||||
| 3/1/2020 to 5/29/2020 |
100,000 | 10.11 | % | 2,528 | ||||||||
| 5/30/2020 to 8/28/2020 |
100,000 | 8.86 | % | 2,240 | ||||||||
| 8/28/2020 to 11/30/2020 |
100,000 | 8.76 | % | 2,287 | ||||||||
| 12/1/2020 to 12/31/2020 |
100,000 | 8.73 | % | 752 | ||||||||
|
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|
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| Total |
$ | 9,513 | ||||||||||
| (AB) | Represents elimination of investment income and unrealized loss on marketable securities related to the investment held in the trust account. |
| (AC) | Represents the elimination of the loss on Empower’s A&R FPA liability whereby New FPA Purchasers purchased, on a private placement basis, an aggregate of 5,000,000 Empower Units, consisting of one share of Common Stock and one-third of one Public Warrant at the Closing. |
| (AD) | Represents the income tax expense resulting from the pro forma adjustment on interest expense. The impact on the income tax expense due to the partial debt repayment was calculated as follows for the six months ended June 30, 2021 and the year ended December 31, 2020, respectively: |
| Adjustment |
Amount | Tax Rate | Tax Expense | |||||||||
| Partial debt paydown |
$ | 4,252 | 25.22 | % | $ | 1,072 | ||||||
| Adjustment |
Amount | Tax Rate | Tax Expense | |||||||||
| Partial debt paydown |
$ | 9,513 | 25.22 | % | $ | 2,399 | ||||||
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The estimated tax impacts of the pro forma adjustments have been reflected in Income tax expense in the unaudited pro forma condensed combined statement of comprehensive income (loss) for the year ended December 31, 2020 and for the six months ended June 30, 2021, by using a tax rate which was determined using the weighted average statutory tax rate of the jurisdictions expected to be impacted. The total effective tax rate of the Company could be significantly different depending on the post-acquisition geographical mix of income and other factors. Because the tax rate used for these pro forma condensed combined financial statements is an estimate, it will likely vary from the actual rate in periods subsequent to the consummation of the Business Combination and those differences may be material.
4. Net Income (Loss) per Share
Represents the net income (loss) per share calculated using the historical weighted average shares outstanding and the issuance of additional shares in connection with the Business Combination and other related events, assuming such additional shares were outstanding since January 1, 2020. As the Business Combination is being reflected as if it had occurred as of January 1, 2020, the calculation of weighted average shares outstanding for basic and diluted net income (loss) per share assumes the shares issued in connection with the Business Combination have been outstanding for the entire periods presented.
| Six months ended June 30, 2021 |
||||
| Numerator |
||||
| Pro forma total comprehensive income |
$ | 9,505 | ||
| Denominator |
||||
| Empower public shareholders |
15,069,255 | |||
| Sellers |
67,673,884 | |||
| Sponsor and related parties |
9,062,500 | |||
| PIPE Investors |
24,000,000 | |||
| Basic and diluted weighted average shares outstanding |
115,805,639 | |||
| Earnings per share—basic and diluted |
$ | 0.08 | ||
| Year ended December 31, 2020 |
||||
| Numerator |
||||
| Pro forma total comprehensive income |
$ | 37,251 | ||
| Denominator |
||||
| Empower public shareholders |
15,069,255 | |||
| Sellers |
67,673,884 | |||
| Sponsor and related parties |
9,062,500 | |||
| PIPE Investors |
24,000,000 | |||
| Basic and diluted weighted average shares outstanding |
115,805,639 | |||
| Earnings per share—basic and diluted |
$ | 0.32 | ||
Pursuant to the Sponsor Agreement, 2,187,500 Earn-Out Shares vest in two equal tranches; 1,093,750 of the Earn-Out Shares will vest the earlier of the date (x) the closing price of the Common Stock equals or exceeds $13.00 per share for any twenty (20) trading days within any thirty-trading day period or (y) Holley completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Holley’s stockholders having the right to exchange their Common Stock at a price per share equal to or exceeding $13.00 per share. The other 1,093,750 of Earn-Out Shares will be subject to the same conditions but will vest at a target price that equals or exceeds $15.00 per share.
The additional 2,187,500 Earn-Out Shares and warrants are not included in the computation of diluted earnings per share as the share price as of the Closing is less than $13.00 per share.
10