EVI INDUSTRIES, INC. (EVI) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

The following discussion
should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto contained in Item 8 of this
Report. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I, Item 1 of this Report.

Overview

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

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

Beginning in 2015, the
Company implemented a “buy-and-build” growth strategy which includes (i) the consideration and pursuit of acquisitions and
other strategic transactions which management believes may complement the Company’s existing business or otherwise offer growth
opportunities for, or benefit, the Company and (ii) the implementation of a growth culture at acquired businesses based on the exchange
of ideas and business concepts among the management teams of the Company and the acquired businesses as well as through certain additional
initiatives, which may include investments in additional sales and service personnel, new product lines, enhanced service operations and
capabilities, new and improved facilities, and advanced technologies. See “Buy-and-Build Growth Strategy” below for additional
information regarding the Company’s “buy-and-build” growth strategy, including information regarding certain acquisitions
consummated by the Company since its implementation of the “buy-and-build” growth strategy.

The Company reports its
results of operations through a single operating and reportable segment.

Total revenues for the
fiscal year ended June 30, 2023 (“fiscal 2023”) increased by 32% compared to the fiscal year ended June 30, 2022 (“fiscal
2022”). The increase in revenues during fiscal 2023 is attributable to increases in revenues at certain of the Company’s
legacy businesses due to improved conditions in connection with the continued recovery from the COVID-19 pandemic (which negatively impacted
the Company’s business and results beginning at the end of the quarter ended March 31, 2020; specifically, due to delays and declines
in the placement of customer orders, the completion of equipment and parts installations, and the fulfillment of parts orders), the completion
during fiscal 2023 of projects previously delayed by the COVID-19 pandemic, price increases established throughout the Company’s
product lines and service offerings aimed at maintaining or increasing margins to cover incremental product and operating cost increases,
and revenues generated by businesses acquired by the Company during fiscal 2023. The increase in revenues was also attributable to the
revenues of businesses acquired by the Company during fiscal 2022 whose results were consolidated in the Company’s financial statements
for all of fiscal 2023 as compared to just the period of fiscal 2022 from the respective closing date of the acquisition through the
end of fiscal 2022.

Net income for fiscal 2023
increased by 137% from fiscal 2022. The increase in net income was attributable primarily to the increases in revenue and the resulting
gross profit, partially offset by the increases in selling, general and administrative expenses and interest expense.

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

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Buy-and Build Growth Strategy

The Company’s acquisitions
under its “buy-and-build” growth strategy described above since its implementation in 2015 include, without limitation, those
set forth below. The acquired companies generally distribute commercial, industrial, and vended laundry products and provide installation
and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry.

In addition to the CLK Acquisition
and the CDL Acquisition, during fiscal 2022, the Company acquired Mississippi-based LS Acquisition, LLC d/b/a Laundry South Systems and
Repair (“LSS”), and Spynr, Inc. (“SPR”), a Delaware-based digital marketing and technology company which provides
digital marketing services to customers and vendors within the commercial, industrial and vended laundry industries. The total consideration
for these transactions consisted of $3.2 million in cash and the issuance of 34,391 shares of the Company’s common stock.

During fiscal 2023, the Company
acquired Massachusetts-based Aldrich Clean-Tech Equipment Corp. (“ACT”), North Carolina-based K&B Laundry Service, LLC
(“K&B”), Alabama-based Wholesale Commercial Laundry Equipment Company SE, LLC (“WCL”), and Maryland-based
Gluno, Inc. d/b/a Express Parts and Services (“EXP”). The total consideration for these transactions consisted of $2.4 million
in cash and the issuance of 24,243 shares of the Company’s common stock.

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See Note 3 to the Consolidated
Financial Statements included in Item 8 of this Report for additional information about the acquisitions completed by the Company during
fiscal 2023 and fiscal 2022.

Acquisitions are generally effected
by the Company through a separate wholly-owned subsidiary formed by the Company for the purpose of effecting the transaction, whether
by an asset purchase or merger, and operating the acquired business following the transaction. In connection with each transaction, the
Company, indirectly through its applicable wholly-owned subsidiary, also assumed certain of the liabilities of the acquired business.
The financial position, including assets and liabilities, and results of operations of the acquired businesses following the respective
closing dates of the acquisitions are included in the Company’s consolidated financial statements.

Consolidated Financial Condition

The Company’s total assets
increased from $230.8 million at June 30, 2022 to $253.8 million at June 30, 2023. The increase in total assets was primarily attributable
to an increase in current assets, as described below under “Liquidity and Capital Resources.” The Company’s total liabilities
increased from $113.1 million at June 30, 2022 to $122.9 million at June 30, 2023, primarily due to increases in accrued employee expenses,
customer deposits and long-term debt, partially offset by a decrease in accounts payable and accrued expenses. The increase in long-term
debt was attributable to borrowings under the Company’s credit facility in excess of optional repayments.

Liquidity and Capital
Resources

The Company had approximately
$5.9 million of cash at June 30, 2023 compared to $4.0 million of cash at June 30, 2022. The increase in cash was primarily due to cash
borrowed in excess of optional debt repayments under the Company’s credit facility used to fund the cash consideration paid in connection
with the Company’s business acquisitions during fiscal 2023 and capital expenditures. The Company’s primary sources of cash
are sales of products and services, and borrowings under its credit facility. The Company’s primary uses of cash are purchases of
the products sold by the Company, employee related costs, and the cash consideration paid in connection with business acquisitions.

The following table summarizes
the Company’s Consolidated Statements of Cash Flows (in thousands):

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For fiscal 2023, operating
activities provided cash of approximately $0.9 million compared to cash used by operating activities of approximately $1.9 million in
fiscal 2022. The $2.8 million increase in cash provided by operating activities was primarily attributable to increases in net income,
partially offset by increases in the cash used by operating activities from changes in operating assets and liabilities.

Investing activities used
cash of approximately $6.0 million during fiscal 2023 compared to approximately $15.9 million in fiscal 2022. The $9.9 million decrease
in cash used by investing activities is due primarily to a greater amount of cash consideration paid in connection with acquisitions during
fiscal 2022 as compared to fiscal 2023.

Financing activities provided
cash of approximately $7.0 million in fiscal 2023 compared to cash provided by financing activities of approximately $15.7 million in
fiscal 2022. The decrease in cash provided by financing activities was attributable primarily to a decrease in net borrowings to fund
acquisitions during fiscal 2023.

The Company is a party, as borrower,
to a syndicated credit agreement (the “Credit Agreement”) in the maximum aggregate principal amount of up to $100 million,
with an accordion feature to increase the revolving credit facility by up to $40 million for a total of $140 million. A portion of the
revolving credit facility is available for swingline loans of up to a sublimit of $5 million and for the issuance of standby letters of
credit of up to a sublimit of $10 million. As of June 30, 2023, $57.3 million was available to borrow under the revolving credit facility.

On May 6, 2022, the Company entered
into an amendment to the Credit Agreement. The amendment amended the Credit Agreement to, among other things, replace LIBOR with in connection
with the phasing out of LIBOR. As a result, borrowings (other than swingline loans) under the Credit Agreement bear interest, at a rate
based on (a) the Bloomberg Short-Term Bank Yield Index rate (the “BSBY rate”) plus a margin that ranges between 1.25% and
1.75% depending on the Company’s consolidated leverage ratio, which is a ratio of consolidated funded indebtedness to consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Consolidated Leverage Ratio”) or (b) the highest
of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the BSBY rate plus 100 basis points (such highest rate, the
“Base Rate”), plus a margin that ranges between 0.25% and 0.75% depending on the Consolidated Leverage Ratio. Swingline loans
generally bear interest calculated at the Base Rate plus a margin that ranges between 0.25% and 0.75% depending on the Consolidated Leverage
Ratio. The maturity date of the Credit Agreement is May 6, 2027.

The Credit Agreement contains
certain covenants, including financial covenants requiring the Company to comply with maximum leverage ratios and minimum interest coverage
ratios. The Credit Agreement also contains other provisions which may restrict the Company’s ability to, among other things, dispose
of or acquire assets or businesses, incur additional indebtedness, make certain investments and capital expenditures, pay dividends, repurchase
shares and enter into transactions with affiliates. As of June 30, 2023, the Company was in compliance with its covenants under the Credit
Agreement.

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

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

Off-Balance Sheet Financing

As of June 30, 2023, the
Company had no off-balance sheet financing arrangements within the meaning of Item 303(a)(4) of Regulation S-K.

Results of Operations

Revenues

Revenues for fiscal 2023 increased
by approximately $86.9 million (32%) from fiscal 2022. The increase in revenues during fiscal 2023 is attributable to increases in revenues
at certain of the Company’s legacy businesses due to improved conditions in connection with the continued recovery from the COVID-19
pandemic, the completion during fiscal 2023 of projects previously delayed by the COVID-19 pandemic, price increases established throughout
the Company’s product lines and service offerings aimed at maintaining or increasing margins to cover incremental product and operating
cost increases, and revenues generated by businesses acquired by the Company during fiscal 2023. The increase in revenues was also attributable
to the revenues of businesses acquired by the Company during fiscal 2022 whose results were consolidated in the Company’s financial
statements for all of fiscal 2023 as compared to just the period of fiscal 2022 from the respective closing date of the acquisition through
the end of fiscal 2022.

From time to time the Company
enters into longer-term contracts to fulfill large complex laundry projects for divisions of the federal government where the nature of,
and competition for, such contracts may result in a lower gross margin as compared to other equipment sales. During fiscal 2023, the Company
entered into a number of such lower-margin equipment sales. The Company believes that the increase in equipment sales provides a strong
foundation for the Company to further strengthen its customer relationships, including that they may in the future result in higher gross
margin opportunities from the sale of parts, accessories, supplies, and technical services related to the equipment. Despite the lower
gross margin from such longer-term contracts, the Company believes that the long-term benefit from the increase in its installed equipment
base will outweigh the possible short-term impact to gross margin.

Cost of Sales and
Selling, General and Administrative Expenses

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Cost of sales, expressed
as a percentage of revenues, decreased to 70.7% in fiscal 2023 from 72.4% in fiscal 2022, representing gross margins of 29.3% in fiscal
2023 and 27.6% in fiscal 2022. The decrease in cost of sales, as a percentage of revenues, and increase in gross margin were primarily
attributable to favorable changes in product and customer mix. The increase in gross margin is also attributable to the Company’s
efforts to drive higher quality sales opportunities from promoting solution selling as a value-added distributor. Longer-term federal
government contracts entered into during fiscal 2023 lowered gross margins by 30 basis points.

Selling, general and administrative
expenses increased by approximately $19.9 million (30%) in fiscal 2023 compared to fiscal 2022, primarily due to (a) operating expenses
of acquired businesses, including additional operating expenses at the acquired businesses in pursuit of future growth and in connection
with the Company’s optimization initiatives, (b) increases in selling costs, including commissions, from increases in revenues during
fiscal 2023, and (c) increases in operating expenses and investments at the parent company level in connection with the Company’s
optimization initiatives, including expenses related to the consolidation of the Company’s operations and the modernization of the
Company’s operations through the implementation of advanced technologies. As a percentage of revenues, selling, general and administrative
expenses decreased to 24.6% in fiscal 2023 from 25.2% in fiscal 2022.

Interest Expense

Interest and other expense,
net increased by approximately $1.8 million (269%) in fiscal 2023 compared to fiscal 2022. The increase is due primarily to increases
in the average outstanding debt balance and average effective interest rate incurred on outstanding borrowings.

Provision for Income
Taxes

The Company’s effective
income tax rate was 30.6% for fiscal 2023 compared to 28.3% in fiscal 2022. The increase in the effective income tax rate in fiscal 2023
reflects an increase in the total state tax expense in higher rate jurisdictions.

Inflation

Inflation did not have a
significant effect on the Company’s results during fiscal 2023 or fiscal 2022. However, the Company faces risks relating to inflation,
including the current inflationary trend, which may have an adverse impact on the market for the Company’s products and services,
including that there is no assurance that the Company will be able to effectively increase the price of its products and services to offset
increased costs.

Transactions with Related Parties

Certain of the Company’s
subsidiaries lease warehouse and office space from one or more of the principals (or former principals) of the Company or its subsidiaries.
These leases include the following:

On October 10, 2016, the
Company’s wholly-owned subsidiary, Western State Design, entered into a lease agreement pursuant to which it leases 17,600 square
feet of warehouse and office space from an affiliate of Dennis Mack, a director and Executive Vice President, Corporate Strategy of the
Company, and Tom Marks, Executive Vice President, Business Development and President of the West Region of the Company. The lease had
an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Monthly base rental
payments were $12,000 during the initial term of the lease. The Company exercised its option to renew the lease for the first three-year
renewal term, which commenced in October 2021. Base rent for the first renewal term is $19,000 per month. In addition to base rent, Western
State Design is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Payments
under this lease totaled approximately $228,000 and $207,000 during fiscal 2023 and fiscal 2022, respectively.

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On October 31, 2017, the
Company’s wholly-owned subsidiary, Tri-State Technical Services, entered into lease agreements pursuant to which it leases a total
of 81,000 square feet of warehouse and office space from an affiliate of Matt Stephenson, President of Tri-State. Monthly base rental
payments total $21,000 during the initial terms of the leases. Each lease had an initial term of five years and provides for two successive
three-year renewal terms at the option of the Company. The Company exercised its option to renew the leases for the first three-year renewal
term, which commenced in October 2022. Base rent for the first renewal term is $25,000. In addition to such leases, since May 1, 2023,
Tri-State Technical Services has also leased an additional 50,000 square feet of space from Mr. Stephenson. Monthly base rental payments
for the additional space total $15,000. The term of this lease will expire upon the expiration of the other leases with Mr. Stephenson
described above. In addition to base rent, Tri-State is responsible under the leases for costs related to real estate taxes, utilities,
maintenance, repairs and insurance. Payments under these leases totaled approximately $306,000 and $252,000 during fiscal 2023 and fiscal
2022, respectively.

On November 1, 2018, the
Company’s wholly-owned subsidiary, AAdvantage Laundry Systems, entered into a lease agreement pursuant to which it leases warehouse
and office space from an affiliate of Mike Zuffinetti, former Chief Executive Officer of AAdvantage. Monthly base rental payments under
this lease were $26,000 initially. Pursuant to the lease agreement, on January 1, 2019, the lease expanded to cover additional warehouse
space and, in connection therewith, monthly base rental payments under this lease increased to $36,000. In addition to base rent, AAdvantage
is responsible under each of these leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The
lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company, and
the Company currently expects to exercise its option to renew this lease for the first three-year renewal term. Payments under the leases
described in this paragraph totaled approximately $432,000 during fiscal 2023 and fiscal 2022.

On November 3, 2020, the
Company’s wholly-owned subsidiary, Yankee Equipment Systems, entered into a lease agreement pursuant to which it leases a total
of 12,500 square feet of warehouse and office space from an affiliate of Peter Limoncelli, President of Yankee Equipment Systems. Monthly
base rental payments total $11,000 during the initial term of the lease. In addition to base rent, Yankee Equipment Systems is responsible
under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial term of
three years and provides for three successive three-year renewal terms at the option of the Company, and the Company currently expects
to exercise its option to renew this lease for the first three-year renewal term. Payments under this lease totaled approximately $146,000
and $142,000 during fiscal 2023 and fiscal 2022, respectively.

Critical Accounting Estimates

Use of Estimates

In
connection with the preparation of its financial statements in accordance with generally accepted accounting principles in the United
States of America (“GAAP”), the Company makes estimates and assumptions, including those that affect the reported amounts
of assets and liabilities, contingent assets and liabilities, and the reported amounts of revenues and expenses during the reported periods.
Estimates and assumptions made may not prove to be correct, and actual results may differ from the estimates. The accounting policies
that the Company has identified as critical to its business operations and to an understanding of the Company’s financial statements
are set forth below. The critical accounting policies discussed below are not intended to be a comprehensive list of all of the Company’s
accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need
for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result.

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Revenue Recognition

Performance Obligations and Revenue Over
Time

Revenue primarily consists of
revenues from the sale or leasing of commercial and industrial laundry and dry cleaning equipment and steam and hot water boilers manufactured
by others; the sale of related replacement parts and accessories; and the provision of installation and maintenance services. The Company
generates revenue primarily from the sale of equipment and parts to customers. Therefore, the majority of the Company’s contracts
are short-term in nature and have a single performance obligation (to deliver products), and the Company’s performance obligation
is satisfied when control of the product is transferred to the customer. Other contracts contain a combination of equipment sales and
services expected to be performed in the near-term, which services are distinct and accounted for as separate performance obligations.
Judgment may be required by management to identify the distinct performance obligations within each contract. Revenue is recognized on
these contracts when control transfers to the Company’s customers via shipment of products or provision of services and the Company
has the right to receive consideration for these products and services. Additionally, from time to time, the Company enters into longer-termed
contracts which provide for the sale of equipment by the Company and the provision by the Company of related installation and construction
services. The installation on these types of contracts is usually completed within six to twelve months. The Company recognizes a portion
of its revenue over time using the cost-to-cost measure of progress, which measures a contract’s progress toward completion based
on the ratio of actual contract costs incurred to date to the Company’s estimated costs at completion adjusted for uninstalled
materials, as necessary.  Significant judgment may be required by management in the cost estimation process for these contracts,
which is based on the knowledge and experience of the Company’s project managers, subcontractors and financial professionals. Changes
in job performance and job conditions are factors that influence estimates of the total contract transaction price, total costs to complete
those contracts and the Company’s revenue recognition.  The determination of the total
estimated cost and progress toward completion requires management to make significant estimates and assumptions. Total estimated costs
to complete projects include various costs such as direct labor, material and subcontract costs. Changes in these estimates can have
a significant impact on the revenue recognized each period. From time to time, the Company also enters into maintenance and service contracts.
These longer-term contracts, maintenance and service contracts have a single performance obligation where revenue is recognized over
time using the cost-to-cost measure of progress, which best depicts the continuous transfer of control of goods or services to the customer.

The Company measures revenue,
including shipping and handling fees charged to customers, as the amount of consideration it expects to be entitled to receive in exchange
for its products or services, net of any taxes collected from customers and subsequently remitted to governmental authorities. Costs associated
with shipping and handling activities performed after the customer obtains control are accounted for as fulfillment costs.

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Revenue from products transferred
to customers at a point in time is recognized when obligations under the terms of the contract with the Company’s customer are satisfied,
which generally occurs with the transfer of control upon shipment.

Revenues that are recognized
over time include (i) longer-termed contracts that include an equipment purchase with installation and construction services, (ii) maintenance
contracts, and (iii) service contracts.

Contract Assets and Liabilities

Contract assets and liabilities
are presented in the Company’s condensed consolidated balance sheets. Contract assets consist of unbilled amounts resulting from
sales under longer-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount
billed to the customer. As noted above, the cost estimation process for these contracts may require significant judgment by management.
The Company typically receives progress payments on sales under longer-term contracts as work progresses, although for some contracts
the Company may be entitled to receive an advance payment. Contract assets also include retainage. Retainage represents a portion of the
contract amount that has been billed, but for which the contract allows the customer to retain a portion of the billed amount (generally,
from 5% to 20% of contract billings) until final contract settlement. Retainage amounts are generally classified as current assets within
the Company’s consolidated balance sheets. Retainage that has been billed, but is not due until completion of performance and acceptance
by customers, is generally expected to be collected within one year. Contract liabilities consist of advanced payments, billings in excess
of costs incurred and deferred revenue.

Goodwill

The Company evaluates
goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value
may not be recoverable. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to
determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting
unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. If the fair value
is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss. This step compares
the current implied goodwill in the reporting unit to its carrying amount. If the carrying amount of the goodwill exceeds the implied
goodwill, an impairment is recorded for the excess. The identification and measurement of goodwill impairment involves the estimation
of the fair value of the reporting unit and involves uncertainty because management must use judgment in determining appropriate assumptions
to be used in the measurement of fair value. The Company performed its annual impairment test on April 1, 2023 and determined there was
no impairment.

Customer Relationships, Tradenames and Other Intangible
Assets

Customer relationships,
tradenames, non-competes, and other intangible assets are stated at cost less accumulated amortization. These assets with a finite-life
are amortized on a straight-line basis over the estimated future periods to be benefited (5-10 years). The estimates of fair value of
the Company’s indefinite-lived intangibles are based on information available as of the date of the assessment and take into account
management’s assumptions about expected future cash flows and other valuation techniques. The Company reviews the recoverability
of intangible assets that are amortized based primarily upon an analysis of undiscounted cash flows from the intangible assets. In the
event the expected future cash flows become less than the carrying amount of the assets, an impairment loss would be recorded in the
period the determination is made based on the fair value of the related assets.

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Income Taxes

The Company follows Financial
Accounting Standards Board (“FASB”) ASC Topic 740, “Income Taxes” (“ASC 740”). Under the asset and
liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. If it is determined that it is more likely than not that some portion
of a deferred tax asset will not be realized, a valuation allowance is recognized.

Significant judgment is
required in developing the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowances
that might be required against the deferred tax assets. Management evaluates the Company’s ability to realize its deferred tax assets
on a quarterly basis and adjusts its valuation allowance when it believes that it is more likely than not that the asset will not be realized.

See Note 10 to the Consolidated
Financial Statements included in Item 8 of this Report for additional information regarding income taxes.

Recently Issued Accounting Guidance

See Note 2 to the Consolidated
Financial Statements included in Item 8 of this Report for a description of Recently Issued Accounting Guidance.