Attached files
file | filename |
---|---|
EX-31.2 - SMF ENERGY CORP | v211055_ex31-2.htm |
EX-32.1 - SMF ENERGY CORP | v211055_ex32-1.htm |
EX-31.1 - SMF ENERGY CORP | v211055_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 000-21825
SMF
ENERGY CORPORATION
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
65-0707824
|
|
(State
of Incorporation)
|
(IRS
Employer Identification Number)
|
200
West Cypress Creek Road, Suite 400, Fort Lauderdale,
Florida
|
33309
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(954) 308-4200
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes ¨ No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Smaller
reporting company x Large
accelerated filer ¨ Non-accelerated
filer ¨ (do not
check if a smaller reporting
company) Accelerated filer ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No
x
As of
February 9, 2011 there were 8,505,238 shares of the registrant’s common stock
outstanding.
SMF
ENERGY CORPORATION
FORM
10-Q
INDEX
Form 10-Q Part and Item
No.
Part
I
|
Financial
Information:
|
||
Item
1.
|
Condensed
Unaudited Consolidated Financial Statements
|
||
Condensed
Consolidated Balance Sheets as of December 31, 2010 (unaudited) and June
30, 2010
|
3
|
||
Condensed
Consolidated Statements of Operations (unaudited) for the three and
six-months ended December 31, 2010 and 2009
|
4
|
||
Condensed
Consolidated Statements of Cash Flows (unaudited) for the six-months ended
December 31, 2010 and 2009
|
5
|
||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
|
Item
4.
|
Controls
and Procedures
|
34
|
|
Part
II
|
Other
Information:
|
||
Item
1.
|
Legal
Proceedings
|
35
|
|
Item
1A.
|
Risk
Factors
|
35
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
35
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
35
|
|
Item
4.
|
(Removed
and Reserved)
|
35
|
|
Item
5.
|
Other
Information
|
36
|
|
Item
6.
|
Exhibits
|
36
|
|
Signatures
|
37
|
||
Certifications
|
39
|
2
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
000’s, except share and per share data)
December 31, 2010
|
June 30, 2010
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 47 | $ | 115 | ||||
Accounts
receivable, net of allowances of $964 and $1,025
|
17,496 | 17,530 | ||||||
Inventories,
net of reserves of $94 and $98
|
2,042 | 1,744 | ||||||
Prepaid
expenses and other current assets
|
367 | 644 | ||||||
Total
current assets
|
19,952 | 20,033 | ||||||
Property
and equipment, net of accumulated
|
||||||||
depreciation
of $17,739 and $16,947
|
7,141 | 7,226 | ||||||
Identifiable
intangible assets, net of accumulated
|
||||||||
amortization
of $1,919 and $1,790
|
1,534 | 1,662 | ||||||
Goodwill
|
228 | 228 | ||||||
Deferred
debt costs, net of accumulated amortization of $248 and
$169
|
275 | 355 | ||||||
Other
assets
|
79 | 74 | ||||||
Total
assets
|
$ | 29,209 | $ | 29,578 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Line
of credit payable
|
$ | 7,466 | $ | 6,896 | ||||
Current
portion of term loan
|
1,000 | 1,000 | ||||||
Accounts
payable
|
5,700 | 7,301 | ||||||
Accrued
expenses and other liabilities
|
3,923 | 3,191 | ||||||
Total
current liabilities
|
18,089 | 18,388 | ||||||
Long-term
liabilities:
|
||||||||
Term
loan, net of current portion
|
2,583 | 3,083 | ||||||
Promissory
notes
|
800 | 800 | ||||||
Other
long-term liabilities
|
513 | 251 | ||||||
Total
liabilities
|
21,985 | 22,522 | ||||||
Contingencies
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock, $0.01 par value; 10,000 Series A shares
|
||||||||
authorized,
0 issued and outstanding
|
- | - | ||||||
Preferred
stock, $0.01 par value; 2,000 Series B shares
|
||||||||
authorized,
0 issued and outstanding
|
- | - | ||||||
Preferred
stock, $0.01 par value; 2,000 Series C shares
|
||||||||
authorized,
0 issued and outstanding
|
- | - | ||||||
Preferred
stock, $0.01 par value; 5,000 Series D shares
|
||||||||
authorized,
599 issued and outstanding
|
- | - | ||||||
Common
stock, $0.01 par value; 50,000,000 shares authorized;
|
||||||||
8,505,238
and 8,557,314 issued and outstanding
|
85 | 86 | ||||||
Additional
paid-in capital
|
36,578 | 36,657 | ||||||
Accumulated
deficit
|
(29,439 | ) | (29,687 | ) | ||||
Total
shareholders’ equity
|
7,224 | 7,056 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 29,209 | $ | 29,578 |
The accompanying notes to the condensed
unaudited financial statements are an integral part of these condensed
consolidated balance sheets.
3
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in
000’s, except per share data)
For the Three Months
|
For the Six Months
|
|||||||||||||||
Ended December 31,
|
Ended December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Petroleum
product sales and service revenues
|
$ | 46,608 | $ | 40,458 | $ | 91,665 | $ | 78,583 | ||||||||
Petroleum
product taxes
|
5,956 | 5,847 | 11,960 | 11,408 | ||||||||||||
Total
revenues
|
52,564 | 46,305 | 103,625 | 89,991 | ||||||||||||
Cost
of petroleum product sales and service
|
42,820 | 37,077 | 84,039 | 71,105 | ||||||||||||
Petroleum
product taxes
|
5,956 | 5,847 | 11,960 | 11,408 | ||||||||||||
Total
cost of sales
|
48,776 | 42,924 | 95,999 | 82,513 | ||||||||||||
Gross
profit
|
3,788 | 3,381 | 7,626 | 7,478 | ||||||||||||
Selling,
general and administrative expenses
|
3,374 | 2,673 | 6,866 | 6,512 | ||||||||||||
Operating
income
|
414 | 708 | 760 | 966 | ||||||||||||
Interest
expense
|
(232 | ) | (261 | ) | (455 | ) | (491 | ) | ||||||||
Interest
and other income
|
10 | 6 | 12 | 6 | ||||||||||||
Income
before income taxes
|
192 | 453 | 317 | 481 | ||||||||||||
Income
tax expense
|
(58 | ) | (8 | ) | (69 | ) | (16 | ) | ||||||||
Net
income
|
$ | 134 | $ | 445 | $ | 248 | $ | 465 | ||||||||
Basic
and diluted net income per share computation:
|
||||||||||||||||
Net
income per share attributable to
|
||||||||||||||||
common
shareholders:
|
||||||||||||||||
Basic
|
$ | 0.02 | $ | 0.05 | $ | 0.03 | $ | 0.06 | ||||||||
Diluted
|
$ | 0.02 | $ | 0.05 | $ | 0.03 | $ | 0.05 | ||||||||
Weighted
average common shares outstanding:
|
||||||||||||||||
Basic
|
8,505 | 8,557 | 8,527 | 8,404 | ||||||||||||
Diluted
|
8,640 | 8,781 | 8,661 | 8,692 |
The
accompanying notes to the condensed unaudited financial statements are an
integral part of these condensed unaudited consolidated statements of
operations.
4
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in
000’s)
For the Six Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 248 | $ | 465 | ||||
Adjustments
to reconcile net income to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation
and amortization within:
|
||||||||
Cost
of sales
|
446 | 464 | ||||||
Selling,
general and administrative
|
594 | 636 | ||||||
Amortization
of deferred debt costs
|
80 | 87 | ||||||
Amortization
of stock-based compensation
|
70 | 164 | ||||||
Write-off
of unamortized acquisition costs
|
- | 187 | ||||||
Gain
from sale of assets
|
(7 | ) | - | |||||
Inventory
reserve (recovery) provision
|
(4 | ) | 11 | |||||
(Decrease)
increase to the provision for doubtful accounts
|
(113 | ) | 43 | |||||
Changes
in operating assets and liabilities:
|
||||||||
Decrease
in accounts receivable
|
147 | 710 | ||||||
(Increase)
decrease in inventories, prepaid expenses and other assets
|
(22 | ) | 137 | |||||
Decrease
in accounts payable, accrued expenses, and other
liabilities
|
(1,154 | ) | (980 | ) | ||||
Net
cash provided by operating activities
|
285 | 1,924 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases
of property and equipment, net of disposals
|
(251 | ) | (201 | ) | ||||
Proceeds
from sale of equipment
|
22 | - | ||||||
Net
cash used in investing activities
|
(229 | ) | (201 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from line of credit
|
107,391 | 94,364 | ||||||
Repayments
of line of credit
|
(106,821 | ) | (95,639 | ) | ||||
Principal
payments on term loan
|
(500 | ) | (417 | ) | ||||
Repurchase
and retirement of common stock
|
(140 | ) | - | |||||
Capital
lease payments
|
(31 | ) | (32 | ) | ||||
Payment
of preferred stock dividends
|
(13 | ) | - | |||||
Common
stock, preferred stock, and warrants issuance costs
|
(10 | ) | (52 | ) | ||||
Debt
issuance costs
|
- | (21 | ) | |||||
Net
cash used in financing activities
|
(124 | ) | (1,797 | ) | ||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(68 | ) | (74 | ) | ||||
CASH
AND CASH EQUIVALENTS, beginning of period
|
115 | 123 | ||||||
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 47 | $ | 49 |
(Continued)
5
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in
000’s)
(Continued)
|
For the Six Months Ended December 31,
|
|||||||
2010
|
2009
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for interest
|
$ | 402 | $ | 382 | ||||
Cash
paid for income tax
|
$ | 51 | $ | - | ||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH ACTIVITIES:
|
||||||||
Capital
leases
|
$ | 591 | $ | 32 |
The
accompanying notes to the condensed unaudited financial statements are an
integral part of these condensed unaudited consolidated statements of cash
flows.
6
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1.
|
NATURE
OF OPERATIONS
|
SMF
Energy Corporation, a Delaware corporation, (the “Company”) provides petroleum
product distribution services, transportation logistics and emergency response
services to the trucking, manufacturing, construction, shipping, utility,
energy, chemical, telecommunications, and government services
industries. The Company generates its revenues from commercial mobile
and bulk fueling; the packaging, distribution and sale of lubricants; integrated
out-sourced fuel management; transportation logistics, and emergency response
services. The Company’s fleet of custom specialized tank wagons,
tractor-trailer transports, box trucks and customized flatbed vehicles delivers
diesel fuel and gasoline to customers’ locations on a regularly scheduled or as
needed basis, refueling vehicles and equipment, re-supplying fixed-site and
temporary bulk storage tanks, and emergency power generation systems; and
distributes a wide variety of specialized petroleum products, lubricants and
chemicals to its customers.
The
Company is a Delaware corporation formed in 2006. In December 2006,
the shareholders of Streicher Mobile Fueling, Inc. (“Streicher”), a Florida
corporation formed in 1996, approved changing Streicher’s name to SMF Energy
Corporation and the reincorporation of Streicher in Delaware by merger into the
Company. The merger was effective February 14, 2007.
At
December 31, 2010, the Company was conducting operations through 34 service
locations in the eleven states of Alabama, California, Florida, Georgia,
Louisiana, Mississippi, Nevada, North Carolina, South Carolina, Tennessee and
Texas.
2.
|
CONDENSED
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis of
Presentation - The condensed unaudited consolidated financial statements
include the accounts of SMF Energy Corporation and its wholly owned
subsidiaries, SMF Services, Inc., H & W Petroleum Company, Inc., and
Streicher Realty, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
The
condensed unaudited consolidated financial statements included herein have been
prepared in accordance with the instructions to Form 10-Q, and do not include
all the information and footnotes required by generally accepted accounting
principles; however, they do include all adjustments of a normal recurring
nature that, in the opinion of management, are necessary to present fairly the
financial position and results of operations of the Company as of and for the
interim periods presented.
Operating
results for the three and six months ended December 31, 2010 are not necessarily
indicative of the results that may be expected for any subsequent period or the
fiscal year ending June 30, 2011. These interim financial statements
should be read in conjunction with the Company’s audited consolidated financial
statements and related notes included in the Company’s Annual Report on Form
10-K for the year ended June 30, 2010, as filed with the United States
Securities and Exchange Commission (the “2010 Form 10-K”).
7
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Fair
Value of Financial Instruments
The
Company carries certain of its assets and liabilities at fair value, measured on
a recurring basis, in the accompanying consolidated balance
sheets. In fiscal 2010, the Company adopted ASC 825 Financial Instruments which
establish a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels which distinguish
between assumptions based on market data (observable inputs) and the Company’s
assumptions (unobservable inputs). The level in the fair value
hierarchy within which the respective fair value measurement falls is determined
based on the lowest level input that is significant to the measurement in its
entirety. Level 1 inputs are quoted market prices in active markets
for identical assets or liabilities, Level 2 inputs are other than quotable
market prices included in Level 1 that are observable for the asset or liability
either directly or indirectly through corroboration with observable market
data. Level 3 inputs are unobservable inputs for the assets or
liabilities that reflect management’s own assumptions about the assumptions
market participants would use in pricing the asset or liability.
3.
|
CASH
AND CASH EQUIVALENTS
|
Total
cash and cash availability was approximately $3.1 million and $4.7 million at
December 31, 2010 and June 30, 2010, respectively, and was approximately $4.0
million on February 9, 2011. Total cash and cash availability
includes cash and cash equivalents as presented in the Company’s balance sheet
and cash available to the Company through its line of credit, described in Note
5 – $25 Million Loan Facility.
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company
maintains its cash balances at financial institutions, which at times may exceed
federally insured limits. The Federal Deposit Insurance Corporation
currently insures balances up to $250,000. The Company has not
experienced any losses in such bank accounts.
4.
|
OUTSTANDING
SHARES AND NET INCOME PER SHARE
|
As of
December 31, 2010 there were 8,505,238 issued and outstanding
shares. Basic net income per share is computed by dividing the net
income attributable to common shareholders by the weighted average number of
common shares outstanding during the period.
Diluted
earnings per share is computed by dividing net earnings attributable to common
shareholders by the weighted-average number of common shares outstanding,
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued. Conversion or exercise of the potential common shares is not
reflected in diluted earnings per share unless the effect is
dilutive. The dilutive effect, if any, of outstanding common share
equivalents is reflected in diluted earnings per share by application of the
if-converted and the treasury stock method, as applicable. In
determining whether outstanding stock options, restricted stock, and common
stock warrants should be considered for their dilutive effect, the average
market price of the common stock for the period has to exceed the exercise price
of the outstanding common share equivalent.
8
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Diluted
net income per share for the three and six months ended December 31, 2010 and
2009 was diluted by additional common stock equivalents as follows (in
thousands):
For the Three Months
|
For the Six Months
|
|||||||||||||||
ended December 31,
|
ended December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Incremental
shares due to stock options
|
||||||||||||||||
awarded
to employees and directors
|
2 | 2 | 1 | 2 | ||||||||||||
Incremental
shares due to preferred stock
|
||||||||||||||||
conversion
rights
|
133 | 133 | 133 | 286 | ||||||||||||
Incremental
shares due to debt
|
||||||||||||||||
conversion
rights
|
- | 89 | - | - | ||||||||||||
Total
dilutive shares
|
135 | 224 | 134 | 288 |
Anti-dilutive
common stock equivalents outstanding and not included in the computation of
diluted net income per common share consisted of (in thousands):
For the Three Months
|
For the Six Months
|
|||||||||||||||
ended December 31,
|
ended December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Stock
options
|
288 | 418 | 288 | 418 | ||||||||||||
Common
stock warrants
|
141 | 141 | 141 | 141 | ||||||||||||
Promissory
note conversion rights
|
89 | - | 89 | 89 | ||||||||||||
Total
common stock equivalents outstanding
|
518 | 559 | 518 | 648 |
9
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The
following table sets forth the computation of basic and diluted income per share
(in thousands, except per share
amounts):
For the Three Months Ended,
|
||||||||||||||||||||||||
December 31, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||
Average
|
Average
|
|||||||||||||||||||||||
Common
|
Per Share
|
Common
|
Per Share
|
|||||||||||||||||||||
Earnings
|
Shares
|
Amount
|
Earnings
|
Shares
|
Amount
|
|||||||||||||||||||
Basic
net income per share attributable to common
shareholders
|
$ | 134 | 8,505 | $ | 0.02 | $ | 445 | 8,557 | $ | 0.05 | ||||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||||||||||
Stock
options
|
- | 2 | - | 2 | ||||||||||||||||||||
Preferred
stock conversion rights
|
- | 133 | - | 133 | ||||||||||||||||||||
Debt
conversion rights
|
- | - | 3 | 89 | ||||||||||||||||||||
Diluted
net income per share attributable to common
shareholders
|
$ | 134 | 8,640 | $ | 0.02 | $ | 448 | 8,781 | $ | 0.05 |
For the Six Months Ended,
|
||||||||||||||||||||||||
December 31, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||
Average
|
Average
|
|||||||||||||||||||||||
Common
|
Per Share
|
Common
|
Per Share
|
|||||||||||||||||||||
Earnings
|
Shares
|
Amount
|
Earnings
|
Shares
|
Amount
|
|||||||||||||||||||
Basic
net income per share attributable to common
shareholders
|
$ | 248 | 8,527 | $ | 0.03 | $ | 465 | 8,404 | $ | 0.06 | ||||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||||||||||
Stock
options
|
- | 1 | - | 2 | ||||||||||||||||||||
Preferred
stock conversion rights
|
- | 133 | - | 286 | ||||||||||||||||||||
Diluted
net income per share attributable to common
shareholders
|
$ | 248 | 8,661 | $ | 0.03 | $ | 465 | 8,692 | $ | 0.05 |
On
February 11, 2011, the Company’s Board of Directors extended the exercise period
for certain of the Company’s outstanding common stock purchase warrants (the
“Warrants”). The Warrants were originally issued by the Company in
connection with private placements of debt and equity securities in February
2007 (the “February 2007 Warrants”) and August 2007 (the “August 2007 Warrants”)
and were scheduled to expire on February 15, 2011 and August 8, 2011,
respectively. No further action by holders of the Warrants are
necessary to obtain the extension, and new Warrants reflecting the extended
exercise period will not be issued by the Company.
There are
123,297 February 2007 Warrants currently outstanding, each bearing an exercise
price of $8.55 per share after the Company’s October 1, 2009 1 for 4.5 reverse
stock split. The exercise period for the February 2007 Warrants, which was
scheduled to expire on February 15, 2011, was extended by the Board’s action for
two (2) years, or until February 15, 2013.
The
17,575 August 2007 Warrants currently outstanding bear an exercise price of
$7.884 per share after the reverse stock split. The exercise period for
the August 2007 Warrants, which was scheduled to expire on August 8, 2011, was
also extended for two (2) years, or until August 8, 2013.
5.
|
$25 MILLION LOAN
FACILITY
|
The Company has a $25.0 million loan
facility, comprised of a three year $20.0 million asset based lending revolving
line of credit coupled with a $5.0 million, 60 month, fully amortized term
loan. The Company’s $20.0 million line of credit has a maturity date
of July 1, 2012 and permits the Company to borrow up to 85% of the total amount
of eligible accounts receivable and 65% of eligible inventory, both as
defined. Outstanding stand-by letters of credit reduce the maximum
amount available for borrowing. Outstanding borrowings under the loan
facility are secured by substantially all Company assets.
Interest is payable monthly based on a
LIBOR rate and a pricing matrix. At December 31, 2010, the interest
rate for the line of credit was 4.00%. This rate was priced using a
minimum LIBOR floor of 0.75%, plus the applicable margin of
3.25%.
10
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As of
December 31, 2010 and June 30, 2010, the Company had outstanding borrowings of
$7.5 million and $6.9 million, respectively, under its line of credit which does
not include stand-by letters of credit which reduces the
availability. The line of credit is classified as a current liability
in accordance with ASC 470, Debt. Based on eligible receivables and
inventories, and reduction from letters of credit outstanding at December 31,
2010 and June 30, 2010, the Company had $3.0 million and $4.6 million of cash
availability under the line of credit, respectively. The line of
credit primarily enables the Company to satisfy its obligations during the time
gap created between the payment for its products and the time when it collect
from its customers. As such, due to the volatile nature of the petroleum
products, the outstanding borrowings fluctuate as the petroleum market prices
change as well as any change in demand from its customers.
The
Company’s line of credit provides for certain affirmative and negative covenants
that may limit the total availability based upon the Company’s ability to meet
these covenants. At December 31, 2010, the financial covenants
included a minimum daily availability of $250,000, a fixed charge coverage ratio
of 1.1 to 1.0, and a capital expenditure limitation for fiscal year 2011 of
$750,000. At December 31, 2010 and June 30, 2010, the Company had a
sublimit of $1.75 million, on both dates, for which letters of credit could be
issued. At December 31, 2010 and June 30, 2010, $1.2 million and $1.5
million, respectively, had been issued in letters of credit. The line
of credit was not limited at any time during either period by these
covenants.
The Company’s loan agreement for the
line of credit and the term loan requires the Company to obtain the consent of
the lender prior to incurring additional debt, paying any cash dividends or
distributions, or entering into mergers, consolidations or sales of assets
outside the ordinary course of business. Failure to comply with one
or more of the covenants in the future could affect the amount the Company can
borrow and thereby adversely affect the Company’s liquidity and financial
condition. At December 31, 2010, the Company was in compliance with
its covenants under the loan facility agreement. See Note 6 for
further details on the $5 million term loan which balance was $3.583 million at
December 31, 2010.
6.
|
LONG-TERM
DEBT (INCLUDES TERM LOAN AND PROMISSORY
NOTES)
|
Long-term
debt consists of the following (in thousands):
As of
|
||||||||
December 31, 2010
|
June 30, 2010
|
|||||||
June
2009 term loan (the “Term Loan”), fully amortized, 60 monthly principal
payments of approximately $83,333 commencing on August 1, 2009; variable
interest due monthly, 4.75% at December 31, 2010; secured by substantially
all Company assets. For additional details, see
below.
|
$ | 3,583 | $ | 4,083 | ||||
June
2009 unsecured convertible subordinated promissory note (the “June 2009
Note”) (5.5% interest due semi-annually, January 15 and July 15, beginning
January 15, 2011; interest accrued for first 13 months was deferred and
paid on August 12, 2010); matures July 1, 2014 in its
entirety. For additional details, see below.
|
800 | 800 | ||||||
Total
long-term debt
|
4,383 | 4,883 | ||||||
Less:
current portion (Term Loan)
|
(1,000 | ) | (1,000 | ) | ||||
Long-term
debt, net
|
$ | 3,383 | $ | 3,883 |
11
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
On June 29, 2009, the Company
restructured all of its investor debt and preferred equity (the
“Recapitalization”). In connection therewith, the Company and its
principal lender, Wachovia Bank, N.A., amended the Company’s existing $25.0
million loan agreement to provide for a $25.0 million loan facility, which
included $5.0 million fully amortized 60 month term loan (the “Term
Loan”). The proceeds of the Term Loan were used to pay down $4.867
million of the August 2007 Notes and $125,000 of the September 2008
Notes. At December 31, 2010, the interest rate was
4.75%.
In the Recapitalization, the Company
also extinguished $800,000 of the August 2007 Notes through the issuance of a
5.5% interest only, unsecured convertible subordinated promissory note in the
principal amount of $800,000 (the “June 2009 Note”). The June 2009
Note is subordinated to all other existing debt of the Company, including any
amounts owed now or in the future to its principal lender. The holder
of the June 2009 Note entered into a debt subordination agreement (the
“Subordination Agreement”) with the Company and its principal lender, whereby it
expressly subordinated its rights under the June 2009 Note to its principal
lender.
The
principal balance of the June 2009 Note is due at maturity on July 1,
2014. Subject to the limitations in the Subordination
Agreement, interest is paid semi-annually, except that the interest payment for
the first thirteen months was paid on August 12, 2010. Thereafter,
starting January 15, 2011, semi-annual interest payments are scheduled on or
about each January 15th and July 15th. Unpaid amounts under the June
2009 Note will become due and payable upon the occurrence of customary
events of default, provided, however, that the deferral of any payment in
accordance with the Subordination Agreement will not constitute an event of
default. If permitted under the Subordination Agreement, the Company
may pre-pay the June 2009 Note, in whole or in part, without prepayment penalty
or premium.
Twenty-five percent (25%) of the
original principal amount of the June 2009 Note, or $200,000, may be converted
into shares of the Company’s Common Stock at $2.25 per share (the “Conversion
Price”) at the option of the noteholder. The number and kind of
securities purchasable upon conversion and the Conversion Price remain subject
to additional adjustments for stock dividends, stock splits and other similar
events.
7.
|
CAPITAL
LEASE COMMITMENTS
|
Certain noncancelable leases are
capital leases and recorded in other long-term liabilities, and the leased
assets are included as part of property and equipment, at cost. Such
leasing arrangements include machinery, computer equipment and
trucks. As of December 31, 2010 and June 30, 2010, $90,000 and
$45,000, respectively, of the capital leases were classified in accrued expenses
and other liabilities, and $349,000 and $33,000, respectively, were classified
in other long-term liabilities. During fiscal 2011, the increase in
capital leases is primarily due to the purchase of four new
trucks.
12
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8.
|
SHAREHOLDERS’
EQUITY
|
The following reflects the change in
shareholders’ equity for the six months ended December 31, 2010 (in thousands,
except share data):
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Additional
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A
|
Series B
|
Series C
|
Series D
|
Common Stock
|
Paid-In
|
Accumulated
|
Treasury
|
|||||||||||||||||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Stock
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||
Balance
at June 30, 2010
|
- | $ | - | - | $ | - | - | $ | - | 599 | $ | - | 8,557,314 | $ | 86 | $ | 36,657 | $ | (29,687 | ) | $ | - | $ | 7,056 | ||||||||||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | - | - | - | - | - | - | 248 | - | 248 | ||||||||||||||||||||||||||||||||||||||||||
Repurchase
of common stock
|
- | - | - | - | - | - | - | - | - | - | - | - | (140 | ) | (140 | ) | ||||||||||||||||||||||||||||||||||||||||
Retirement
of common stock
|
- | - | - | - | - | - | - | - | (95,576 | ) | (1 | ) | (139 | ) | - | 140 | - | |||||||||||||||||||||||||||||||||||||||
Issuance
cost related to repurchase
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
of
common stock
|
- | - | - | - | - | - | - | - | - | - | (10 | ) | - | - | (10 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance
of common shares as stock-based
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
compensation
|
- | - | - | - | - | - | - | - | 43,500 | - | 59 | - | - | 59 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based
compensation
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
amortization
expense
|
- | - | - | - | - | - | - | - | - | - | 11 | - | - | 11 | ||||||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2010
|
- | $ | - | - | $ | - | - | $ | - | 599 | $ | - | 8,505,238 | $ | 85 | $ | 36,578 | $ | (29,439 | ) | $ | - | $ | 7,224 |
13
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Repurchase
Program
On July 28, 2010, the Board of
Directors of the Company approved a share repurchase program (the “Program”)
under which the Company may elect to purchase up to five percent of its
outstanding capital stock, or approximately 435,000 shares of common stock or
common stock equivalents, with available cash to the extent permitted by its
revolving line of credit with its principal lender.
The
Company’s principal lender had consented to such repurchases on July 1,
2010, conditioned upon the Company’s maintenance of (i) a ratio of
EBITDA to Fixed Charges of 1.3 to 1.0, based on the most recent twelve month
period for which financial statements have been provided to the Lender, after
giving pro forma effect to any repurchases; and (ii) Excess Availability of at
least $2.25 million (A) immediately after making any repurchase and (B) for the
ninety (90) days preceding any repurchase. Subject to these
conditions, the Lender approved a total of $840,000 in capital stock repurchases
by the Company under the Program, including up to $200,000 in any one fiscal
quarter. The Company’s repurchases of its shares are limited by SEC
regulation requirements, namely Reg M, and by blackout periods.
During
the first six months of fiscal year 2011, the Company purchased an aggregate of
95,576 shares of its common stock for an aggregate purchase price of $140,000 at
an average cost of $1.46 per share. The Board of Directors has
elected to retire all of the repurchased shares and any future shares
repurchased, so those shares are no longer outstanding and their cost is
reflected as a reduction to Additional Paid-in Capital in the Shareholders’
Equity section of the Balance Sheet.
Shared-Based
Compensation
The
Company currently has the authority to grant stock options to employees and
others under its 2009 Equity Incentive Plan (the “2009 Plan”), which currently
has 2,004 options outstanding. The Company no longer grants stock
options under its 2000 Employee Stock Option Plan (“2000 Plan”) but stock
options to purchase 202,345 shares of Common Stock remain outstanding under the
2000 Plan. Options granted under the 2000 Plan generally vest over
three years of continuous service and expire no later than ten years from the
date of grant. As of December 31, 2010, 201,011 of the 202,345
options that remain outstanding under the 2000 Plan are vested and
exercisable.
The
Company also no longer grants any stock options under its Directors Stock
Options Plan but stock options to purchase 85,777 shares of Common Stock remain
outstanding under the Directors Plan. All outstanding stock options
under the Directors Plan are fully vested and presently
exercisable.
In
December 2009, the Company’s shareholders approved the Board of Directors’
adoption of the 2009 Plan, with a total of 900,000 shares of common stock
reserved for issuance under the Plan in the form of stock options, stock
appreciation rights, performance stock units or restricted
stock. After the 2009 Plan was approved by the shareholders and
became effective on December 10, 2009, the Company’s Board of Directors resolved
that it would make no further grants of stock options under the Company’s
existing stock option plans, the 2001 Director Stock Option Plan and the 2000
Stock Option Plan (the “Existing Plans”).
In
September 2009, the exercise prices of all outstanding employee stock options
previously granted under the 2000 Stock Option Plan were amended by the
Compensation Committee of the Company’s Board of Directors to have an exercise
price of $2.48 per share after the reverse stock split, or $0.55 per share
before the reverse stock split (the “Amendments”). The new exercise
price of $2.48 set by the Amendments was, as adjusted for the reverse stock
split, $0.77 above the $1.71 official closing price on the Nasdaq Capital Market
on the trading day immediately preceding the date of the
Amendment. The Amendments did not change the vesting schedules or any
of the other terms of the respective stock options. As a result of
the repricing of the options effected by the Amendments, the Company incurred a
non-cash charge of $93,000 to stock-based compensation amortization expense
during the first quarter of fiscal year 2010 and an additional $5,000 which is
being amortized over the remaining vesting period of the related
options. This modification affected 31 employees who held 327,614
stock options on June 30, 2009, adjusted to reflect the reverse stock split of
October 1, 2009.
14
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
In
September 2010 and December 2010, the Company issued a total of 12,000 (6,000 in
each of those months) fully vested shares to each of the six non-employee
members of the Board of Directors under the Company’s 2009 Equity Incentive Plan
valued at $1.40 and $1.47 per share, respectively, the market closing price on
the last trading day prior to their issuance. The Company also issued
31,500 shares of restricted stock to the Company’s Chief Executive Officer,
valued at $1.31 per share, the market closing price on the last trading day
prior to their issuance, which shares became fully vested on December 21,
2010. On that date, 111,113 stock options previously granted to the
Chief Executive Officer under the 2000 Plan expired. The cost of the
grant of restricted stock was recognized as stock-based compensation expense
over their vesting period. In order to encourage the directors and
the Chief Executive Officer to retain the stock when it vested notwithstanding
the tax burden created thereby, the Company made aggregate payments of $4,200
and $25,043 in the first and second quarters of fiscal 2011, respectively, to
grantees equal to 50% of the market value of the shares on the vesting
date.
9.
|
CONTINGENCIES
|
The
Company and its subsidiaries are from time to time parties to legal proceedings,
lawsuits and other claims incident to their business activities. Such
matters may include, among other things, assertions of contract breach, claims
for indemnity arising in the course of the business and claims by persons whose
employment with us has been terminated. Such matters are subject to
many uncertainties, and outcomes are not predictable with
assurance. Consequently, management is unable to ascertain the
ultimate aggregate amount of monetary liability, amounts which may be covered by
insurance or recoverable from third parties, or the financial impact with
respect to these matters as of December 31, 2010. Therefore no
contingency gains or losses have been recorded as of December 31,
2010.
On May
26, 2009, the Company filed a Demand for Arbitration with the American
Arbitration Association in Broward County, Florida, under which the Company
brought claims against various members of the Harkrider family arising out of
the Company’s October 1, 2005 purchase of H & W Petroleum Company, Inc. (“H
& W”) from the Harkrider family and H & W’s purchase of certain assets
of Harkrider Distributing Company, Inc. (“HDC”) immediately prior to the
Company’s purchase of H & W. In that action, Case No. 32 198 Y
00415 09 (the “Arbitration”), the Company and H & W, which is now the
Company’s wholly owned subsidiary, sought damages for breaches of, and
indemnification under, the October 1, 2005, Stock Purchase Agreement between
various Harkrider family members and the Company and under the September 29,
2005, Asset Purchase Agreement between HDC and various members of the Harkrider
family, on the one hand, and H & W on the other, along with various other
claims arising from the transaction. Also on May 26, 2009, H & W
filed a second action against various members of the Harkrider family in the
District Court in Harris County, Texas, Civil Action No. 2009-32909 (the “Harris
County Action”), seeking damages and declaratory relief for various breaches of
H & W’s lease of its Houston, Texas, facility by H & W’s landlord, the
Harkrider Family Partnership, and other related claims. On June 24,
2009, the parties to the Arbitration and the Harris County Action agreed that
all of the claims brought in the Arbitration would be dismissed and all of those
claims would be added to the Harris County Action. On June 29, 2009,
in accordance with the stipulation of the parties to consolidate the Arbitration
with the Harris County Action, the American Arbitration Association closed the
Arbitration. The Harris County Action is currently in the discovery
phase but the case is inactive, since the parties have entered into a standstill
agreement while they engage in settlement discussions.
15
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
Accounting
for Transfers of Financial Assets
(Included in ASC 860 “Transfers and
Servicing”, previously FAS No. 166, “Accounting for Transfers of Financial
Assets, an amendment to FAS No. 140”)
In
June 2009, the FASB issued FAS Statement No. 166, “Accounting for Transfers of
Financial Assets, an amendment to FAS No. 140” (“FAS No.
166”). FAS No. 166 eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial
assets including limiting the circumstances in which a company can derecognize a
portion of a financial asset, and requires additional
disclosures. FAS No. 166 is effective for financial statements issued
for fiscal years beginning after November 15, 2009, and interim periods within
those fiscal years. The Company’s adoption of this standard in the first
quarter of fiscal 2011 had no impact on the Company’s consolidated financial
condition, results of operations or cash flows.
Fair
Value Measurement and Disclosures Topic 820 – Improving Disclosures about Fair
Value Measurements
In
January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06
“Fair Value Measurement and
Disclosures Topic 820 – Improving Disclosures about Fair Value Measurements”
(“ASU No. 2010-06”), which provides amendments to subtopic 820-10, Fair
Value Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. This update provides amendments to Topic 820 that will
provide more robust disclosures about (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs
used, (3) the activity in Level 3 fair value measurements, and (4) the transfers
between Levels 1, 2, and 3. The new disclosures and clarification of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlement in the rollforward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company’s adoption of the ASU No. 2010-06 in the first
quarter of fiscal 2011 did not have an impact on the Company’s consolidated
financial position, results of operations or cash flows.
16
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking
Statements
This report, including but not limited
to this Item 2 and the notes to the financial statements in Item 1, contains
“forward looking statements” within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). These
statements concern expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Statements preceded by,
followed by, or that include the words “believes,” “expects,” “anticipates,” or
similar expressions are generally considered to be forward-looking
statements.
The
forward-looking statements reflect our current view about future events and are
subject to risks, uncertainties and assumptions. A number of
important factors may affect our actual results and could cause them to differ
significantly from those expressed in any forward-looking
statement. In addition to the Risk Factors included in Part I, Item
1A, of the Company’s Annual Report on Form 10-K for the year ended June 30,
2010, as filed with the United States Securities and Exchange Commission, the
inaccuracy of any of the following assumptions could prevent us from achieving
our goals, and cause the assumptions underlying the forward-looking statements
and the actual results to differ materially from those expressed in or implied
by those forward-looking statements:
|
·
|
Our
continuing success in minimizing the negative impact on our operations,
revenues and profitability from current and future unfavorable economic
and market conditions;
|
|
·
|
The
avoidance of significant provisions for bad debt reserves on our accounts
receivable;
|
|
·
|
The
avoidance of negative customer reactions to new or existing marketing
strategies;
|
|
·
|
The
avoidance of significant inventory reserves for slow moving
products;
|
|
·
|
Our
continuing ability to acquire sufficient trade credit from fuel and
lubricants suppliers and other vendors;
and
|
|
·
|
The
successful execution of our acquisition and diversification strategy,
including the availability of sufficient capital to acquire additional
businesses and to support the infrastructure requirements of a larger
combined company.
|
OUR
BUSINESS
We are a
supplier of specialized transportation and distribution services for petroleum
products and chemicals. We provide commercial mobile and bulk
fueling, lubricant and chemical distribution, emergency response services and
transportation logistics to the trucking, manufacturing,
construction, shipping, utility, energy, chemical, telecommunications and
government services industries. At December 31, 2010, we were
conducting operations through 34 service locations in eleven
states: Alabama, California, Florida, Georgia, Louisiana,
Mississippi, Nevada, North Carolina, South Carolina, Tennessee and
Texas.
We
provide commercial mobile and bulk fueling, integrated out-sourced fuel
management, packaging, distribution and sale of lubricants and chemicals,
transportation logistics, and emergency response services. Our
specialized equipment fleet distributes diesel fuel and gasoline to customer
locations on a regularly scheduled or as needed basis, refueling vehicles and
equipment, re-supplying bulk storage tanks, and providing fuel for emergency
power generation systems. Our fleet also handles the movement of
customer equipment as well as storage tanks we provide for use by our
customers. We also distribute a wide variety of specialized petroleum
products, lubricants and chemicals to our customers in Texas and in certain
other markets.
17
We
compete with several large and numerous small distributors, jobbers and other
companies offering services and products in the same markets in which we
operate. We believe that the industry and these markets offer us
opportunities for consolidation, as customers increasingly demand one-stop
shopping for their petroleum based needs and seek reliable supply distribution
services particularly to prevent business interruptions during
emergencies. We believe that certain factors, such as our ability to
provide a range of services and petroleum based products and services, create
advantages for us when compared to our competitors.
A
principal objective of our business strategy is to become the leading “single
source” provider of petroleum products and services in the markets we currently
operate in, as well as expanding into additional contiguous
markets. To achieve this objective, we plan to focus on increasing
revenues in our core operations and in expanding through selective
acquisitions.
OVERVIEW
During
the second quarter of fiscal year 2011, we achieved net income of $134,000,
operating income of $414,000, and EBITDA1, a
non-GAAP measure of $929,000. These positive financial results for
our normal seasonally weak period in a moribund economy reflect the continuation
of the steady progress that began when we began investing in the development of
an infrastructure capable of supporting significant growth and enhancing
efficiencies in 2006 and then supported the financial resources for that growth
with our June 2009 Recapitalization of $40 million in bank debt and debt and
equity securities.
As we
anticipated, the June 2009 Recapitalization was a pivotal event in terms of
moving us to the next phase of our growth plan. The Recapitalization
immediately strengthened our financial balance sheet by reducing debt and
enhancing shareholders’ equity and has thereby allowed us to concentrate on
growing our business organically notwithstanding the worst economic conditions
since the Great Depression. While we continue to add new customers
and new locations for existing customers, we have yet to recover the 14 percent
drop in volumes that occurred in 2008 as our then existing customer’s businesses
contracted with the economic recession. We anticipate that, as these
longstanding customers’ activity improves in tandem with the economy, our sales
to this established customer base will return to prior levels. For example,
in fiscal 2010, we significantly reduced our interest expense and used some of
those savings to expand into three new locations, which locations then
materially contributed to our profitability for that year. The
ability to expand into new markets afforded by our more sophisticated
infrastructure and enhanced financial condition has enabled us to achieve net
income for five of the last six quarters, generating an aggregate of $5.9
million in EBITDA and net income of $713,000 during those six
quarters. During the same period, we have increased our shareholders’
equity by $695,000, or 11%, and reduced our long term debt by $1.5 million, or
25%.
We are
steadfast in our resolve to fully execute our growth strategy. We
believe that we are effectively positioned to integrate both significant organic
and acquisition growth. Organically, we continue to add new
customers, adding 3% to our volume during the first six months of this fiscal
year versus the same period last year. We have already received four of the 10
new fueling trucks that we ordered. When it is all received and fully
implemented, this new equipment will support an even higher level of organic
growth in both existing and potential new markets, while reducing operating
expenses, improving efficiencies and satisfying new California emissions
standards. We are also actively evaluating opportunities for growth
through acquisitions. We continue to believe that, notwithstanding
the continuing weakness in economic conditions, we can take advantage of the
opportunities for synergies presented by our scalable front and back office
system and management structure which was built for a high level of
growth.
We also
continue to seek other ways to enhance shareholder value. During
fiscal 2011, we began a market based stock repurchase
program. Through December 31, 2010, we had purchased a total of
95,576 shares of our common stock for approximately $140,000. We are
authorized to purchase up to $840,000 of capital stock. We have
continued making purchases during the third quarter of fiscal 2011, subject to
limitations imposed by our bank covenants and applicable securities
regulations. We plan to continue this program since we believe that
the cost of acquiring shares of our common stock at current prices is a
reasonable and prudent allocation of our financial resources. The
Company’s repurchases of its shares are limited by SEC regulation requirements,
namely Reg M, and by blackout periods.
18
The $1.5
million reduction in principal of our long-term debt over the past six quarters
includes $250,000 during the second quarter and $500,000 for the fiscal
year. With the paydown, our debt to equity ratio was 1.6 at December
31, 2010, versus 1.7 at June 30, 2010. Our fixed charge coverage
ratio1 was 1.38
for the trailing twelve months ended December 31, 2010, compared to our covenant
requirement of 1.1, and our trailing twelve months EBITDA exceeded the trailing
twelve months fixed charges by $954,000 at December 31, 2010. During
the most recent trailing twelve months ended December 31, 2010, we increased
capital expenditures to further improve our business operations.
1EBITDA,
fixed charges and fixed coverage ratio are non-GAAP measures within the meaning
of SEC Regulation G. See “Non-GAAP Measures and Definitions”
below.
The
following table presents certain operating results for the last eight sequential
quarters (in thousands, except net margin per gallon):
For the Three Months Ended,
|
||||||||||||||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||||||||||
2010
|
2010
|
2010
|
2010
|
2009
|
2009
|
2009
|
2009
|
|||||||||||||||||||||||||
Revenues
|
$ | 52,564 | $ | 51,061 | $ | 53,704 | $ | 49,152 | $ | 46,305 | $ | 43,686 | $ | 39,884 | $ | 34,982 | ||||||||||||||||
Gross
profit
|
$ | 3,788 | $ | 3,838 | $ | 4,320 | $ | 3,398 | $ | 3,381 | $ | 4,097 | $ | 3,539 | $ | 3,790 | ||||||||||||||||
Selling,
general and
|
||||||||||||||||||||||||||||||||
administrative
|
$ | 3,374 | $ | 3,492 | $ | 3,678 | $ | 3,555 | $ | 2,673 | $ | 3,839 | $ | 3,401 | $ | 3,455 | ||||||||||||||||
Operating
income (loss)
|
$ | 414 | $ | 346 | $ | 642 | $ | (157 | ) | $ | 708 | $ | 258 | $ | 138 | $ | 335 | |||||||||||||||
Interest
expense and
|
||||||||||||||||||||||||||||||||
other
income, net
|
$ | (222 | ) | $ | (221 | ) | $ | (215 | ) | $ | (254 | ) | $ | (255 | ) | $ | (230 | ) | $ | (454 | ) | $ | (570 | ) | ||||||||
Non-cash
ASC 470-20
|
||||||||||||||||||||||||||||||||
(formerly
FAS No. 84)
|
||||||||||||||||||||||||||||||||
inducement on extinguishment 2
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (1,651 | ) | $ | - | |||||||||||||||
Gain
on extinguishment
|
||||||||||||||||||||||||||||||||
of
promissory notes
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 27 | $ | - | ||||||||||||||||
Net
income (loss)
|
$ | 134 | $ | 114 | $ | 419 | $ | (419 | ) | $ | 445 | $ | 20 | $ | (1,948 | ) | $ | (243 | ) | |||||||||||||
Less: Non-cash
write-off of
|
||||||||||||||||||||||||||||||||
unamortized
acquisition costs
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 187 | $ | - | $ | - | ||||||||||||||||
Less: Non-cash
stock options
|
||||||||||||||||||||||||||||||||
repricing
costs
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 93 | $ | - | $ | - | ||||||||||||||||
Less: Non-cash
ASC 470-20
|
||||||||||||||||||||||||||||||||
(formerly
FAS No. 84)
|
||||||||||||||||||||||||||||||||
inducement on extinguishment 1
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 1,651 | $ | - | ||||||||||||||||
Adjusted
net income (loss)
|
||||||||||||||||||||||||||||||||
before
non-cash, non-recurring
|
||||||||||||||||||||||||||||||||
charges 1
|
$ | 134 | $ | 114 | $ | 419 | $ | (419 | ) | $ | 445 | $ | 300 | $ | (297 | ) | $ | (243 | ) | |||||||||||||
EBITDA 1
|
$ | 929 | $ | 953 | $ | 1,189 | $ | 398 | $ | 1,289 | $ | 1,134 | $ | 876 | $ | 974 | ||||||||||||||||
Net
margin
|
$ | 3,969 | $ | 4,103 | $ | 4,529 | $ | 3,616 | $ | 3,609 | $ | 4,333 | $ | 3,795 | $ | 4,027 | ||||||||||||||||
Net margin per gallon 1
|
$ | 0.23 | $ | 0.23 | $ | 0.25 | $ | 0.21 | $ | 0.21 | $ | 0.26 | $ | 0.23 | $ | 0.25 | ||||||||||||||||
Gallons
sold
|
17,025 | 17,912 | 18,385 | 17,382 | 16,956 | 16,945 | 16,709 | 16,041 |
1 Non-GAAP
measure. See “Non-GAAP Measures and Definitions” below.
2 See
“Non-GAAP Measures and Definitions” below.
19
Non-GAAP
Measures and Definitions
EBITDA. EBITDA
is defined as earnings before interest, taxes, depreciation, and amortization, a
non-GAAP financial measure within the meaning of Regulation G promulgated by the
Securities and Exchange Commission. We believe that EBITDA provides
useful information to investors because it excludes transactions not related to
the core cash operating business activities, allowing meaningful analysis of the
performance of our core cash operations. To the extent that gain and
the non-cash ASC 470-20 (formerly FAS No. 84) inducement on extinguishment of
promissory notes constitutes the recognition of previously deferred
interest or finance cost, it is considered interest expense for the calculation
of certain interest expense amounts. Both stock-based compensation
amortization expense and the write-off of unamortized acquisition costs are
considered amortization items to be excluded in the EBITDA
calculation.
The
following table reconciles EBITDA (non-GAAP measure) to the reported Net income
(loss) for each of the eight quarterly periods presented above (in
thousands):
For the Three Months Ended,
|
||||||||||||||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||||||||||
2010
|
2010
|
2010
|
2010
|
2009
|
2009
|
2009
|
2009
|
|||||||||||||||||||||||||
Net
income (loss)
|
$ | 134 | $ | 114 | $ | 419 | $ | (419 | ) | $ | 445 | $ | 20 | $ | (1,948 | ) | $ | (243 | ) | |||||||||||||
Add
back:
|
||||||||||||||||||||||||||||||||
Interest
expense
|
232 | 223 | 227 | 260 | 261 | 230 | 545 | 575 | ||||||||||||||||||||||||
Income
tax expense
|
58 | 11 | 8 | 8 | 8 | 8 | 8 | 8 | ||||||||||||||||||||||||
Depreciation and
amortization
|
||||||||||||||||||||||||||||||||
expense
within:
|
||||||||||||||||||||||||||||||||
Cost
of sales
|
180 | 266 | 208 | 218 | 228 | 236 | 254 | 239 | ||||||||||||||||||||||||
Selling,
general and
|
||||||||||||||||||||||||||||||||
administrative
expenses
|
276 | 318 | 316 | 316 | 316 | 320 | 344 | 334 | ||||||||||||||||||||||||
Stock-based
compensation expense
|
49 | 21 | 11 | 15 | 31 | 133 | 49 | 61 | ||||||||||||||||||||||||
Write-off
of unamortized
|
||||||||||||||||||||||||||||||||
acquisition
costs
|
- | - | - | - | - | 187 | - | - | ||||||||||||||||||||||||
Non-cash
ASC 470-20
|
||||||||||||||||||||||||||||||||
(formerly
FAS No. 84)
|
||||||||||||||||||||||||||||||||
inducement
on extinguishment
|
- | - | - | - | - | - | 1,651 | - | ||||||||||||||||||||||||
Gain
on extinguishment
|
||||||||||||||||||||||||||||||||
of
promissory notes
|
- | - | - | - | - | - | (27 | ) | - | |||||||||||||||||||||||
EBITDA
|
$ | 929 | $ | 953 | $ | 1,189 | $ | 398 | $ | 1,289 | $ | 1,134 | $ | 876 | $ | 974 |
Adjusted Net
Income (Loss). Adjusted net income (loss) before non-cash,
non-recurring charges is a non-GAAP measure that demonstrates the economic
performance of the Company before the impact of charges that do not reflect the
ongoing performance of its operations, such as the non-cash accounting charge of
$1.7 million in the fourth quarter of fiscal 2009 resulting from the Company’s
June 2009 recapitalization, non cash stock option repricing costs and the
write-off incurred in the first quarter of fiscal 2010 resulting from the
application of a new accounting ruling. We believe that this non-GAAP
measure, like EBITDA, is a meaningful representation of the ongoing performance
of the operations.
20
The
following table reconciles Adjusted net income (loss) before non-cash,
non-recurring charges (non-GAAP measure) to the
reported Net income (loss) for each of the eight quarterly periods presented
above (in thousands):
For the Three Months Ended,
|
||||||||||||||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||||||||||
2010
|
2010
|
2010
|
2010
|
2009
|
2009
|
2009
|
2009
|
|||||||||||||||||||||||||
Net
income (loss)
|
$ | 134 | $ | 114 | $ | 419 | $ | (419 | ) | $ | 445 | $ | 20 | $ | (1,948 | ) | $ | (243 | ) | |||||||||||||
Less: Non-cash
write-off of
|
||||||||||||||||||||||||||||||||
unamortized
acquisition costs
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 187 | $ | - | $ | - | ||||||||||||||||
Less: Non-cash
stock options
|
||||||||||||||||||||||||||||||||
repricing
costs
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 93 | $ | - | $ | - | ||||||||||||||||
Less: Non-cash
ASC 470-20
|
||||||||||||||||||||||||||||||||
(formerly
FAS No. 84)
|
||||||||||||||||||||||||||||||||
inducement
on extinguishment
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 1,651 | $ | - | ||||||||||||||||
Adjusted
net income (loss)
|
||||||||||||||||||||||||||||||||
before
non-cash, non-recurring
|
||||||||||||||||||||||||||||||||
charges
|
$ | 134 | $ | 114 | $ | 419 | $ | (419 | ) | $ | 445 | $ | 300 | $ | (297 | ) | $ | (243 | ) |
Fixed Charges
Coverage Ratio. Fixed charges and the fixed charges coverage
ratio are non-GAAP measures that are used by our principal lender and others to
help assess the Company’s ability to satisfy cash payments other than those made
for operating activities. Fixed charges are comprised of repayments
of principal on debt, purchases of property and equipment, cash paid for
interest, payments for dividends and repurchases of stock. The fixed
charge coverage ratio generally measures the extent to which EBITDA exceeds the
cash requirements, or fixed charges, of the business. These
measurements are typically made on a rolling trailing twelve month
basis.
21
The
following table reconciles fixed charges and the fixed charges coverage ratio
(non-GAAP measures) to the Net income for the trailing twelve months ended
December 31, 2010 (in thousands):
Trailing Twelve Months
|
||||
Ended December 31, 2010
|
||||
Net
income
|
$ | 248 | ||
Add
back:
|
||||
Interest
expense
|
942 | |||
Income
tax expense
|
85 | |||
Depreciation
and amortization expense within:
|
||||
Cost
of sales
|
872 | |||
Selling,
general and administrative expenses
|
1,226 | |||
Stock-based
compensation amortization expense
|
96 | |||
Write-off
of unamortized acquisition costs
|
- | |||
Non-cash
ASC 470-20 (formerly FAS No. 84) inducement on
|
||||
extinguishment
|
- | |||
Gain
on extinguishment of promissory notes
|
- | |||
EBITDA
|
$ | 3,469 | ||
Less
fixed charges:
|
||||
Principal
payments on term and promissory notes
|
1,000 | |||
Purchases
of property and equipment
|
465 | |||
Capital
lease payments
|
61 | |||
Cash
paid for interest
|
785 | |||
Payment
of preferred stock dividends
|
13 | |||
Principal
and interest payments made as a result of the
Recapitalization
|
- | |||
Repurchase
of common shares
|
140 | |||
Cash
paid for income tax
|
51 | |||
Total
fixed charges
|
$ | 2,515 | ||
Difference
(EBITDA less fixed charges)
|
$ | 954 | ||
Fixed
charge coverage ratio (EBITDA divided by fixed charges)
|
1.38 |
Non-cash
ASC 470-20 inducement on extinguishment is a non-cash charge we incurred as a
result of the June 29, 2009 Recapitalization. The Company
extinguished a portion of the August 2007 and the September 2008 Notes (“the
Notes”) through the issuance of approximate 1.2 million shares and approximate
278,000 shares, respectively, at the negotiated price of $1.71 per share, which
was greater than the $1.67 per share closing bid price the day prior to the
Recapitalization, but lower than the conversion price applicable to the
convertible debt instruments, which resulted in the issuance of more shares in
the exchange than would have been issued upon a conversion. The
prevalent interpretation of ASC 470-20 is that an inducement occurs any time
when additional shares are issued in the extinguishment of convertible debt
regardless of the absence of an economic loss or economic intent of the parties
to the transaction. As a result, irrespective of the economic reality
of the transaction, ASC 470-20 required the recording of a non-cash “conversion
inducement” charge of $1.7 million, based on the difference between the
approximate aggregate 471,000 common shares issuable to the applicable note
holder under the original conversion rights that existed upon a conversion and
the approximate 1.5 million common shares exchanged at $1.71 cents in the
transaction that extinguished all of the Notes. This non-cash charge
is deemed a financing expense to extinguish the Notes. To the extent
that the ASC 470-20 inducement on extinguishment of promissory notes constitutes
the recognition of a finance cost, it is considered interest expense for
the calculation of EBITDA and other interest expense amounts.
22
Net Margin Per
Gallon. Net margin per gallon is one of the most important measures
of our financial performand. It is calculated by adding gross profit to
the cost of sales depreciation and amortization and dividing that sum by the
number of gallons sold.
RESULTS
OF OPERATIONS:
To
monitor our results of operations, we review key financial information,
including net revenues, gross profit, selling, general and administrative
expenses, net income or losses, and non-GAAP measures, such as EBITDA. We
continue to seek ways to more efficiently manage and monitor our business
performance. We also review other key operating metrics, such as the
number of gallons sold and net margins per gallon sold. As our business is
dependent on the supply of fuel and lubricants, we closely monitor pricing and
fuel availability from our suppliers in order to purchase the most cost
effective products. We calculate our net margin per gallon by adding gross
profit and the depreciation and amortization components of cost of sales, and
dividing that sum by the number of gallons sold.
Comparison
of Three Months ended December 31, 2010 (“second quarter of fiscal 2011”) to
Three Months ended December 31, 2009 (“second quarter of fiscal
2010”)
Revenues
Revenues
were $52.6 million in the second quarter of fiscal 2011, as compared to $46.3
million in the same period of the prior year, an increase of $6.3 million, or
14%. Price variances in market prices of petroleum products provided $6.1
million of the increase in revenues. The $200,000 remainder of the
increase is due to a 69,000 gallons sold increase compared to a year ago. We are
encouraged by the 4% increase in volume for the quarter as it reflects our
continuing success in attracting new customers notwithstanding challenging
economic conditions, particularly for our customer base.
Gross
Profit
Gross
profit was $3.8 million in the second quarter of fiscal 2011, as compared to
$3.4 million in the same period of the prior year, an increase of approximately
$407,000 or 12%. The net margin per gallon for the second quarters of
fiscal 2011 and 2010 was 23.3 cents and 21.3 cents, respectively, an increase of
2.0 cents resulting primarily from lower direct operating expenses as we
experienced decreases in employee and travel expense. We continue to
identify opportunities through the use of our back office system to reduce costs
and obtain further operational efficiency. Additionally we incurred
certain costs last year for water removal in our Houston facility related to a
high number of rain storms.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses were $3.4 million in the second
quarter of fiscal 2011 and $2.7 million in the second quarter of fiscal 2010, an
increase of $701,000, or 26%. The increase in SG&A is primarily due to
last year’s litigation settlement which we recovered some of our expended legal
and professional fees, thereby lowering our prior year’s quarterly SG&A
costs by approximately $748,000. Without the legal settlement, SG&A
for the second quarter of fiscal 2011 was slightly down versus the same period a
year ago.
23
Interest
Expense
Interest
expense was $232,000 in the second quarter of fiscal 2011, as compared to
$261,000 in the same period of the prior year, a decrease of $29,000, or
11%. Since the end of the second quarter of fiscal 2010, we have paid down
approximately $1.0 million of our term loan. Our interest rate terms
remain basically the same for both periods, which is currently 4.0% for our line
of credit, 4.75% for our term loan, and 5.50% for our unsecured convertible
subordinated promissory note.
The
components of interest expense were as follows (in thousands):
For
the Three Months
|
||||||||
ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Stated
Rate Interest Expense:
|
||||||||
Line
of credit
|
$ | 112 | $ | 114 | ||||
Long-term
debt
|
56 | 67 | ||||||
Other
|
25 | 35 | ||||||
Total
stated rate interest expense
|
193 | 216 | ||||||
Non-Cash
Interest Amortization:
|
||||||||
Amortization
of deferred debt costs
|
39 | 45 | ||||||
Total
non-cash interest amortization
|
39 | 45 | ||||||
Total
interest expense
|
$ | 232 | $ | 261 |
Income
Taxes
Total
income tax expense of $58,000 and $8,000 was recorded for the second quarters of
fiscal 2011 and 2010, respectively. We adopted the provisions of ASC No.
740 “Income Taxes” on January 1, 2007. As of December 31, 2010, we had no
material unrecognized tax benefits and no adjustments to our financial position,
results of operations or cash flows were required. We do not expect that
unrecognized tax benefits will increase within the next twelve months. In
the event we were to recognize interest and penalties related to uncertain tax
positions, it would be recognized in the financial statements as income tax
expense. Tax years 2007 through 2010 and 2006 through 2010 are subject to
examination by the federal and state taxing authorities, respectively. To
our knowledge, there are no income tax examinations currently in
process.
In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. We consider the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based on
these factors, we established a deferred tax valuation allowance that has a
balance of approximately $9.2 million at December 31, 2010. Our deferred
tax assets and tax carryforwards remain available to offset taxable income,
thereby lowering any future cash tax obligations. Our intent is to maintain the
valuation allowance until sufficient positive evidence exists to support its
reversal.
As of
December 31, 2010, we had net operating loss carryforwards for state income tax
purposes of approximately $35.2 million expiring from 2012 through 2031 and for
federal income tax purposes of approximately $25.2 million expiring from
2012 through 2031.
24
Net
Income
Net
income was $134,000 in the second quarter of fiscal 2011, as compared to net
income of $445,000 in the same period in the prior year. The $311,000 or
70% decrease was partially attributable to last year’s litigation settlement
which we recovered some of our expended legal and professional fees, thereby
lowering our SG&A costs during the second quarter last fiscal year by
approximately $748,000, which was partially offset by a higher gross profit this
year of $407,000 primarily due to lower direct costs as we reduced employee,
travel and running equipment costs.
EBITDA
EBITDA
was $929,000 in the second quarter of fiscal 2011, as compared to $1.3 million
in the same period of the prior year, a decrease of approximately $360,000, or
28%. The decrease was primarily attributed to the last year’s $748,000
recovery as discussed above partially offset by $407,000 in higher gross profit
this fiscal year.
The
reconciliation of EBITDA to Net income for the second quarters of fiscal 2011
and 2010 is as follows (in thousands):
For
the Three Months
|
||||||||
ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Net
income
|
$ | 134 | $ | 445 | ||||
Add
back:
|
||||||||
Interest
expense
|
232 | 261 | ||||||
Income
tax expense
|
58 | 8 | ||||||
Depreciation
and amortization expense within:
|
||||||||
Cost
of sales
|
180 | 228 | ||||||
Selling,
general and administrative expenses
|
276 | 316 | ||||||
Stock-based
compensation amortization expense
|
49 | 31 | ||||||
EBITDA
|
$ | 929 | $ | 1,289 |
As noted above, EBITDA is a non-GAAP
financial measure within the meaning of Regulation G promulgated by the
Securities and Exchange Commission. We believe that EBITDA provides useful
information to investors because it excludes transactions not related to the
core cash operating business activities. We believe that excluding these
transactions allows investors to meaningfully trend and analyze the performance
of our core cash operations. EBITDA is defined as earnings before
interest, taxes, depreciation, and amortization, a non-GAAP financial measure
within the meaning of Regulation G. Recapture of previously deferred
interest expense is considered interest expense and stock-based compensation
amortization is considered an amortization item for purposes of the EBITDA
calculation.
25
Comparison
of Six Months ended December 31, 2010 to Six Months ended December 31,
2009
Revenues
Revenues
were $103.6 million in the six months ended December 31, 2010, as compared to
$90.0 million in the same period of the prior year, an increase of $13.6
million, or 15%, primarily as a result of price variances due to higher market
prices of petroleum products during the first six months of fiscal 2011.
Price variances resulted in an increase of $10.5 million in revenues. The
increases in revenues were also partially due to an increase of approximately
1.0 million gallons sold, which resulted in an increase of approximately $3.1
million in revenues compared to the same period in the prior year, reflecting
the expansion of our business as some of our new and existing customers
continued to increase their demand for our services as a means of reducing their
operating costs.
Gross
Profit
Gross
profit was $7.6 million in the six months ended December 31, 2010, as compared
to $7.5 million in the same period of the prior year, an increase of $148,000,
or 2%. The increase in gross profit relates primarily to the increase of
approximately 1.0 million gallons sold offset by an increase of $87,000 in
direct operating expenses, mostly related to an increase of $168,000 in repairs
and maintenance of our fleet, offset by a decrease in employee expenses of
$64,000. The net margin per gallon for the six months ended December 31,
2010 and 2009 were 23.1 cents and 23.4 cents,
respectively, a decrease of 0.3 cents.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses were $6.9 million in the six
months ended December 31, 2010, as compared to $6.5 million in the same period
of the prior year, an increase of $354,000, or 5.4%. The increase in
SG&A is primarily due to last year’s recovery of our previously expended
legal and professional fees in a litigation settlement, thereby lowering our
SG&A costs last year by approximately $587,000. The difference from
year to year also reflects $110,000 in higher employee expense in 2011, offset
by a $156,000 decrease in fiscal 2011 of the bad debt reserve versus a year ago
and the absence of a write-off of unamortized costs in fiscal 2011, versus the
$187,000 of unamortized acquisition costs that we incurred last year as a result
of the adoption of ASC 805.
Interest
Expense
Interest
expense was $455,000 in the six months ended December 31, 2010, as compared
to $491,000 in the same period of the prior year, a decrease of approximately
$36,000, or 7%. Since the end of the second quarter of fiscal 2010, we
have paid down approximately $1.0 million of our term loan. Our interest
rate terms remain basically the same for both periods, which is currently around
4.0% for our line of credit, 4.75% for our term loan, and 5.50% for our
unsecured convertible subordinated promissory note
26
The
components of interest expense were as follows (in thousands):
For
the Six Months
|
||||||||
ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Stated
Rate Interest Expense:
|
||||||||
Line
of credit
|
$ | 228 | $ | 224 | ||||
Long-term
debt
|
115 | 136 | ||||||
Other
|
33 | 44 | ||||||
Total
stated rate interest expense
|
376 | 404 | ||||||
Non-Cash
Interest Amortization:
|
||||||||
Amortization
of deferred debt costs
|
79 | 87 | ||||||
Total
non-cash interest amortization
|
79 | 87 | ||||||
Total
interest expense
|
$ | 455 | $ | 491 |
Income
Taxes
Total
income tax expense of $69,000 and $16,000 was recorded for the six months ended
December 31, 2010 and 2009. We adopted the provisions of ASC No. 740
“Income Taxes” on January 1, 2007. As of December 31, 2010, we had no
material unrecognized tax benefits and no adjustments to our financial position,
results of operations or cash flows were required. We do not expect that
unrecognized tax benefits will increase within the next twelve months. In
the event we were to recognize interest and penalties related to uncertain tax
positions, it would be recognized in the financial statements as income tax
expense. Tax years 2007 through 2010 and 2006 through 2010 are subject to
examination by the federal and state taxing authorities, respectively. To
our knowledge, there are no income tax examinations currently in
process.
In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. We consider the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based on
these factors, we established a deferred tax valuation allowance that has a
balance of approximately $9.2 million at December 31, 2010. Our deferred
tax assets and tax carryforwards remain available to offset taxable income,
thereby lowering any future cash tax obligations. Our intent is to maintain the
valuation allowance until sufficient positive evidence exists to support its
reversal.
As of
December 31, 2010, we had net operating loss carryforwards for state income tax
purposes of approximately $35.2 million expiring from 2012 through 2031 and for
federal income tax purposes of approximately $25.2 million expiring from
2012 through 2031.
27
Net
Income
Net
income was $248,000 in the six months ended December 31, 2010, as compared to a
net income of $465,000 in the same period in the prior year. The $217,000
or 47% decrease was partially attributable to last year’s recovery in a
litigation settlement of our previously expended legal and professional fees,
resulting in a net reduction of our SG&A costs last year by approximately
$587,000, which reduction was then partially offset by a $187,000 of
unamortized acquisition costs that we incurred last year as a result of the
adoption of ASC 805 and higher gross profit this year of $148,000 reflecting the
expansion of our business.
EBITDA
EBITDA
was $1.9 million in the six months ended December 31, 2010, as compared to $2.4
million in the same period of the prior year, a decrease of approximately
$500,000. The decrease in EBITDA was primarily due to last year’s recovery
as we settled a lawsuit by which we recovered some of our expended legal and
professional fees, thereby lowering our SG&A costs last year by
approximately $587,000, which was partially offset by a higher gross profit this
year of $148,000 due to the expansion of our business.
The
reconciliation of EBITDA to Net income for the six months ended December 31,
2010 and 2009 was as follows (in thousands):
For
the Six Months
|
||||||||
ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Net
income
|
$ | 248 | $ | 465 | ||||
Add
back:
|
||||||||
Interest
expense
|
455 | 491 | ||||||
Income
tax expense
|
69 | 16 | ||||||
Depreciation
and amortization expense within:
|
||||||||
Cost
of sales
|
446 | 464 | ||||||
Selling,
general and administrative expenses
|
594 | 636 | ||||||
Stock-based
compensation amortization expense
|
70 | 164 | ||||||
Write-off
of unamortized acquisition costs
|
- | 187 | ||||||
EBITDA
|
$ | 1,882 | $ | 2,423 |
As noted
above, EBITDA is a non-GAAP financial measure within the meaning of Regulation
G. Also as noted above, we believe that EBITDA provides useful information
to investors because it excludes transactions not related to the core cash
operating business activities. We believe that excluding these
transactions allows investors to meaningfully trend and analyze the performance
of our core cash operations. EBITDA is defined as earnings before
interest, taxes, depreciation, and amortization, a non-GAAP financial measure
within the meaning of Regulation G promulgated by the Securities and Exchange
Commission. Recapture of previously deferred interest expense is
considered interest expense and stock-based compensation amortization is
considered an amortization item for purposes of the EBITDA calculation.
Capital
Resources and Liquidity
At
December 31, 2010, we had total cash and cash availability of approximately $3.1
million, which consisted of cash and cash equivalents of $47,000 and additional
cash availability of approximately $3.0 million through our line of
credit. As of February 9, 2011, our cash and cash availability was
approximately $4.0 million. We are able to draw on our line of credit on a
daily basis subject to debt covenant requirements.
28
At
December 31, 2010, our trailing twelve months EBITDA was $3.5 million and our
fixed charge coverage ratio was 1.38 and the trailing twelve months EBITDA after
fixed charges was $954,000. We have a $9.2 million deferred tax asset at
December 31, 2010 that remains fully reserved but we have used approximately
$1.0 million of the net operating loss carryforward to offset taxable income due
in the last two years.
We have
recently purchased under capital lease obligations four new mobile fueling
trucks to modernize and increase the size of our fleet and we plan to purchase
six more trucks during this fiscal year. This additional equipment has
expanded capacity to our system, helped us improve fuel economy and satisfies
new California emission standards, giving us further opportunity to expand in
new markets and reduce our repairs and maintenance. Our principal lender
has given us approval to incur up to $2.0 million in new debt to finance this
fleet expansion, conditioned upon our continuing satisfaction of specified
financial thresholds.
On July 28, 2010, our Board of
Directors approved a share repurchase program (the “Program”) under
which we may elect to purchase up to five percent of our outstanding capital
stock, or approximately 435,000 shares of common stock or common stock
equivalents. Repurchases of capital stock, including shares of common
stock and Series D convertible preferred stock, may be made on the open market
at prevailing market prices or in block trades, subject to the restrictions
relating to volume, price, and timing set forth in Securities Exchange Act of
1934 Rule 10b-18, or in privately negotiated transactions. We will fund
the repurchases from our available cash under our revolving line of credit with
our principal lender. During the six months ended December 31, 2010, we
purchased 95,576 shares of our common stock for an aggregate purchase price of
approximately $140,000. We intend to continue to purchase additional
shares pursuant to the Program. The Board of Directors stipulated that each
share repurchased shall be immediately retired.
Our principal lender has approved a
total of $840,000 in capital stock repurchases under the Program, including up
to $200,000 in any one fiscal quarter, conditioned upon
our maintenance of (i) a ratio of EBITDA to Fixed Charges of 1.3 to
1.0, based on the most recent twelve (12) month period for which financial
statements have been provided to the lender, after giving pro forma effect to
any repurchases; and (ii) Excess Availability of at least $2.25 million (A)
immediately after making any repurchase and (B) for the ninety (90) days
preceding any repurchase.
We do not
believe that our purchases of capital stock under the Program will meaningfully
impair our capital resources or our ability to support the cash needs of our
business. Moreover, while there can be no certainty in today’s difficult
economy, we believe that, as a result of the current trend and last year’s net
income, EBITDA and cash flow as well as the June 2009 Recapitalization, we have
established adequate credit enhancements to meaningfully respond to potential
increases in volumes, irrespective of whether they are accompanied by fuel price
increases.
Sources
and Uses of Cash
We
currently have a $25 million loan facility with our principal lender, comprised
of a $20.0 million revolver coupled with a $5.0 million, 60 month, fully
amortized term loan.
Our $20.0 million line of credit
permits us to borrow up to 85% of the total amount of eligible accounts
receivable and 65% of eligible inventory, both as defined. Outstanding
letters of credit reduce the maximum amount available for borrowing.
Outstanding borrowings under the line are secured by substantially all Company
assets including our transportation fleet and related field equipment. Our
line of credit finances the timing difference between petroleum product
purchases payable generally in 10 to 12 days from date of delivery and the
collection of receivables from our customers, generally in 10 to 45 days from
date of service. The line of credit has a renewal date of July 1,
2012.
Interest
is payable monthly based on a pricing matrix. At December 31, 2010, the
interest rate for the line of credit was 4.0%. This rate was priced using
a minimum LIBOR floor of 0.75%, plus the applicable margin of 3.25%. The
applicable margin is determined quarterly based on a predetermined fixed charge
coverage ratio pricing matrix with the applicable margins ranging from 3.00% to
3.75%.
29
As of
December 31, 2010, we have outstanding letters of credit for an aggregate amount
of $1.2 million. These letters of credit were issued so that we could
obtain better purchasing terms and pricing than were otherwise available in
certain markets. The letters of credit have twelve-month expirations and
renew automatically. No amounts have been drawn on any of the letters of
credit; however, as described above, outstanding letters of credit reduce our
cash availability under our line of credit facility.
As of
December 31, 2010 and June 30, 2010, we had outstanding borrowings of $7.5
million and $6.9 million, respectively, under our line of credit.
Outstanding borrowings under the line of credit are classified as a current
liability in accordance with ASC 470, Debt. Based on eligible receivables
and inventories, and letters of credit outstanding at December 31, 2010, and
June 30, 2010, we had approximately $3.0 million and $4.6 million of cash
availability under the line of credit. The line of credit primarily
enables us to satisfy our obligations during the time gap created between the
payment for our products and the time when we collect from our customers. As
such, due to the volatile nature of the petroleum products, the outstanding
borrowings fluctuate as the petroleum market prices change as well as any change
in demand from our customers.
The term
loan, with an original amount of $5.0 million is fully amortized, 60 monthly
principal payments of approximately $83,333 commencing on August 1, 2009 with
variable interest due monthly (4.75% at December 31, 2010) is secured by
substantially all Company assets. During the first six months of fiscal
2011, we have paid down $500,000 of the principal balance, and at December 31,
2010, the outstanding balance was $3.58 million.
In
addition to the loan facility described above, we have an $800,000 unsecured
5.5% interest only, subordinated promissory note (the “June 2009 Note”) issued
to an existing institutional investor in exchange for $800,000 of one of the
Secured Notes during the June 2009 Recapitalization. The June 2009 Note is
subordinated to all our other existing debt, including any amounts owed now or
in the future to our principal lender. The holder of the June 2009 Note
entered into a debt subordination agreement (the “Subordination Agreement”) with
us and our principal lender, whereby it expressly subordinated its rights under
the June 2009 Note to our principal lender. The principal balance of the
June 2009 Note is due at maturity on July 1, 2014. Subject to the
limitations in the Subordination Agreement, interest is payable
semi-annually, except that accrued interest payments for the first thirteen
months was deferred until, and paid on, August 12, 2010. Thereafter,
semi-annual interest payments will be made on or about each January 15th and
July 15th until
maturity. The first such payment was made on January 15, 2011. The
amounts due under the June 2009 Note will become due and payable upon the
occurrence of customary events of default, provided, however, that the deferral
of any payment in accordance with the Subordination Agreement will not
constitute an event of default. If permitted under the Subordination
Agreement, we may pre-pay the June 2009 Note, in whole or in part, without
prepayment penalty or premium. Twenty-five percent (25%) of the original
principal amount of the June 2009 Note, or $200,000, may be converted into
shares of our Common Stock at $2.25 per share (the “Conversion Price”) at the
option of the noteholder. The number and kind of securities purchasable
upon conversion and the Conversion Price are subject to customary adjustments
for stock dividends, stock splits and other similar events.
The June
2009 Recapitalization of all of our debt and equity securities strengthened our
balance sheet and financial position, immediately lowering our total debt by
$4.5 million, increasing shareholders’ equity by approximately $4.1 million and
reducing our debt to equity ratio from approximately 9:1 to 2:1 over the prior
year. The June 2009 Recapitalization reduced our cash interest expense and
dividends cash usage, as reflected in our results for fiscal 2010 and the first
six months of fiscal 2011.
We
continue to concentrate our efforts on reducing costs and conserving cash
availability in order to meet the challenges of the ongoing difficult economic
environment. We believe the improvements in our balance sheet from the
Recapitalization helped us establish credit enhancements in fiscal 2010 and
continuing in fiscal 2011 that will permit us to effectively respond to
potential increases in volumes and fuel prices. We have also sought to
offset the reduced demand from existing customers experienced in 2008, and not
yet recovered, by aggressively seeking new customers, including our investment
in three new service locations during fiscal 2010.
Our debt
agreements have covenants that define certain financial requirements and
operating restrictions. Our failure to comply with any covenant or
material obligation contained in these debt agreements, absent a waiver or
forbearance from the lenders, would result in an event of default which could
accelerate debt repayment terms under the debt agreements. Due to
cross-default provisions contained in our debt agreements, an event of default
under one agreement could accelerate repayment terms under the other agreements,
which would have a material adverse effect on our liquidity and capital
resources. At the date of this filing, we are in compliance with the
requirements of the applicable covenants required by our debt
agreements.
30
On
November 23, 2009, the Company entered into a confidential settlement agreement
(the “Agreement”) finally resolving all claims in the lawsuit entitled, SMF Energy Corporation vs. Financial
Accounting Solutions Group, Inc., Mitchel Kramer, Alex Zaldivar and Kramer
Professional Staffing, Inc. Pursuant to the Agreement, SMF received
a payment of $1,050,000 during the quarter ended December 31, 2009. The
payment was a partial recovery of the professional fees incurred in connection
with the lawsuit. The proceeds from the settlement were used to pay down
the line of credit and then in turn used to pay for the professional fees
incurred with the settlement, and for working capital purposes. The
settlement of this lawsuit had a positive impact on our operating performance
and our working capital requirements.
Cash
Flows
During
the six months ended December 31, 2010 and 2009, cash and cash equivalents
decreased $68,000 and $74,000, respectively.
We generated cash from the following
sources (in thousands):
For the Six Months ended December
31,
|
||||||||
2010
|
2009
|
|||||||
Cash
provided by operating activities
|
$ | 285 | $ | 1,924 | ||||
Net
proceeds from line of credit payable
|
570 | - | ||||||
Proceeds
from sale of equipment
|
22 | - | ||||||
$ | 877 | $ | 1,924 |
We used cash primarily for (in
thousands):
For the Six Months ended December
31,
|
||||||||
2010
|
2009
|
|||||||
Principal
payments on term loan
|
500 | 417 | ||||||
Purchases
of property and equipment
|
251 | 201 | ||||||
Repurchase
and retirement of common stock
|
140 | - | ||||||
Payments
of debt and equity issuance costs
|
10 | 73 | ||||||
Capital
lease payments
|
31 | 32 | ||||||
Payment
of dividends
|
13 | - | ||||||
Net
payments on line of credit payable
|
- | 1,275 | ||||||
$ | 945 | $ | 1,998 | |||||
Net
change in cash and cash equivalents
|
$ | (68 | ) | $ | (74 | ) |
31
As of
December 31, 2010, we had $7.5 million outstanding under our line of
credit. The amounts disclosed in the captions titled “Proceeds from
line of credit” and “Repayments of line of credit” in the accompanying condensed
unaudited consolidated statements of cash flows for the six months ended
December 31, 2010 include the cumulative activity of the daily borrowings and
repayments, $107.4 million and $106.8 million, respectively, under the line of
credit. The net cash borrowings from, or repayments of, the line of credit
during the six months ended December 31, 2010 and 2009, respectively, have been
included as sources or uses of cash in the tables above.
Adequacy
of Capital Resources
Our
liquidity and ability to meet financial obligations is dependent on, among other
things, the generation of cash flow from operating activities, obtaining or
maintaining sufficient trade credit from vendors, complying with our debt
covenants, continuing renewal of our line of credit facility, and/or raising any
required additional capital through the issuance of debt or equity securities or
additional borrowings.
Our
sources of cash during the remainder of fiscal 2011 are expected to be cash on
hand, cash generated from operations, borrowings under our revolving line of
credit, and any other capital sources that may be deemed necessary. There
is no assurance, however, that if additional capital is required, it will be
available to us or available on acceptable terms.
Our uses
of cash over the next twelve months are expected to be principally for operating
working capital needs, maintaining our line of credit, servicing any principal
and interest on our debt, our ongoing stock repurchase program, payment of
preferred stock dividends, and costs incurred to expand or enhance our
operations including the purchase of new trucks. Our line of credit with
our principal lender matures on July 1, 2012.
Off-Balance
Sheet Arrangements
At
December 31, 2010, we do not have any material off-balance sheet
arrangements.
Recent
Accounting Pronouncements
See Note
10 in the notes to financial statements included in this Form 10-Q for
accounting pronouncements that have been already effective.
Critical
Accounting Policies
We
believe there are several accounting policies that are critical to understanding
our historical and future performance as these policies affect the reported
amount of revenues and expenses and other significant areas involving
management’s judgments and estimates. On an ongoing basis, management
evaluates and adjusts its estimates and judgments, if necessary. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingencies.
Due to the inherent uncertainty involved in making estimates, actual results
reported in future periods may be materially different from those
estimates. There were no changes to our critical accounting policies as
previously disclosed in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2010.
32
ITEM
3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
33
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures
We
carried out an evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in the Exchange Act Rules 13a-15(e) and
15d-15(e), as of the end of the period covered by this Quarterly Report on Form
10-Q. Based upon this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2010.
Changes
in Internal Controls over Financial Reporting
No change
in our internal control over financial reporting, as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act, occurred during the quarter ended December
31, 2010 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Due to
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate.
A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met.
The design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Furthermore, due to the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of a simple
error or mistake. Controls can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override
of the controls. The design of any system of controls is based in part on
certain assumptions about the likelihood of future events, and there can be no
assurance that any system’s design will succeed in achieving its stated goals
under all potential future conditions.
34
PART
II Other Information
ITEM
1. LEGAL PROCEEDINGS
Not
applicable.
ITEM
1A. RISK FACTORS
Not
applicable.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On July 28, 2010, our Board of
Directors approved a share repurchase program (the “Program”) under
which we may elect to purchase up to five percent of our outstanding capital
stock, or approximately 435,000 shares of common stock or common stock
equivalents. Repurchases of capital stock, including shares of common
stock and Series D convertible preferred stock, may be made on the open market
at prevailing market prices or in block trades, subject to the restrictions
relating to volume, price, and timing set forth in Securities Exchange Act of
1934 Rule 10b-18, or in privately negotiated transactions. We will fund
the repurchases from our available cash under our revolving line of credit with
our principal lender. During the first six months of fiscal 2011, we began
the Program by purchasing 95,576 shares of our common stock for an aggregate
purchase price of $140,000.
Stock repurchases for the six months
ended December 31, 2010 were as follows:
Total
number of
|
Approximate
dollar
|
|||||||||||||||
shares
purchased
|
value
of shares that
|
|||||||||||||||
Total
number of
|
Average
price
|
as
part of publicly
|
may
yet be purchased
|
|||||||||||||
Period
|
shares purchased
|
paid per share
|
announced programs
|
under the program
|
||||||||||||
August
1 through August 31, 2010
|
8,141 | $ | 1.30 | 8,141 | ||||||||||||
September
1 through September 30, 2010
|
21,006 | $ | 1.37 | 21,006 | ||||||||||||
October
1 through October 31, 2010
|
38,331 | $ | 1.41 | 38,331 | ||||||||||||
December
1 through December 31, 2010
|
28,098 | $ | 1.66 | 28,098 | $ | 498,953 | ||||||||||
Total
|
95,576 | $ | 1.46 | 95,576 |
During the first six months of fiscal
2011, each of the six non-employee members of the Company’s Board of Directors
received a grant of 2,000 shares of restricted stock under the Company’s 2009
Equity Incentive Plan pursuant to an automatic grant program calling for such a
grant on the last day of each fiscal quarter. The Company’s Chairman,
Chief Executive Officer and President was granted 31,500 shares of restricted
stock that vested on December 21, 2010, when his existing stock options
expired. These grant were made pursuant to the Company’s 2009 Equity
Incentive Plan and were exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM
4. (REMOVED AND RESERVED)
35
ITEM
5. OTHER INFORMATION
Not
applicable.
ITEM
6. EXHIBITS
Exhibits
Exhibit No.
|
Description
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
36
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
SMF
ENERGY CORPORATION
|
||
February
14, 2011
|
By:
|
/s/ Richard E.
Gathright
|
Richard
E. Gathright
|
||
Chairman
of the Board, Chief Executive Officer and
|
||
President
(Principal Executive Officer)
|
||
By:
|
/s/ Michael S.
Shore
|
|
Michael
S. Shore
|
||
Chief
Financial Officer, Treasurer and Senior Vice
|
||
President
(Principal Financial
Officer)
|
37
INDEX
OF EXHIBITS
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
38