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 September 30, 2009
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)
|
|
|
|
(State
of Incorporation)
|
|
(IRS
Employer Identification
Number)
|
200
West Cypress Creek Road, Suite 400, Fort Lauderdale,
Florida
|
|
|
(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
November 10, 2009 there were shares 8,557,314 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 September 30, 2009 (unaudited) and June
30, 2009
|
3
|
|
|
|
|
|
|
Condensed
Unaudited Consolidated Statements of Operations for the three- months
ended September 30, 2009 and 2008
|
4
|
|
|
|
|
|
|
Condensed
Unaudited Consolidated Statements of Cash Flows for the three- months
ended September 30, 2009 and 2008
|
5
|
|
|
|
|
|
|
Notes
to Condensed Unaudited Consolidated Financial Statements
|
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
|
30
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
31
|
|
|
|
|
Part
II
|
Other
Information:
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
32
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
32
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
32
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
32
|
|
|
|
|
|
Item
5.
|
Other
Information
|
32
|
|
|
|
|
|
Item
6.
|
Exhibits
|
32
|
|
|
|
|
|
Signatures
|
33
|
|
|
|
|
Certifications
|
35-37
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
000’s, except share and per share data)
|
|
September 30, 2009
|
|
|
June 30, 2009
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
260
|
|
|
$
|
123
|
|
Accounts
receivable, net of allowances of $784 and $1,038
|
|
|
15,061
|
|
|
|
15,878
|
|
Inventories,
net of reserves of $89 and $82
|
|
|
2,152
|
|
|
|
1,959
|
|
Prepaid
expenses and other current assets
|
|
|
448
|
|
|
|
772
|
|
Total
current assets
|
|
|
17,921
|
|
|
|
18,732
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $15,616 and
$15,280
|
|
|
8,166
|
|
|
|
8,569
|
|
Identifiable
intangible assets, net of accumulated amortization of $1,523 and
$1,433
|
|
|
1,930
|
|
|
|
2,019
|
|
Goodwill
|
|
|
228
|
|
|
|
228
|
|
Deferred
debt costs, net of accumulated amortization of $572 and
$530
|
|
|
476
|
|
|
|
503
|
|
Other
assets
|
|
|
68
|
|
|
|
67
|
|
Total
assets
|
|
$
|
28,789
|
|
|
$
|
30,118
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit payable
|
|
$
|
7,441
|
|
|
$
|
7,845
|
|
Current
portion of term loan
|
|
|
1,000
|
|
|
|
917
|
|
Accounts
payable
|
|
|
5,252
|
|
|
|
5,807
|
|
Accrued
expenses and other liabilities
|
|
|
3,473
|
|
|
|
3,767
|
|
Total
current liabilities
|
|
|
17,166
|
|
|
|
18,336
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Promissory
notes
|
|
|
800
|
|
|
|
800
|
|
Term
loan, net of current portion
|
|
|
3,833
|
|
|
|
4,083
|
|
Other
long-term liabilities
|
|
|
348
|
|
|
|
370
|
|
Total
liabilities
|
|
|
22,147
|
|
|
|
23,589
|
|
Contingencies
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 5,000 Series D shares authorized, 598 and
3,228 issued and outstanding at September 30, 2009 and June 30, 2009,
respectively
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.01 par value; 50,000,000 shares
authorized; 8,557,314 and 7,963,302 issued and outstanding at
September 30, 2009 and June 30, 2009, respectively
|
|
|
86
|
|
|
|
80
|
|
Additional
paid-in capital
|
|
|
36,688
|
|
|
|
36,601
|
|
Accumulated
deficit
|
|
|
(30,132
|
)
|
|
|
(30,152
|
)
|
Total
shareholders’ equity
|
|
|
6,642
|
|
|
|
6,529
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
28,789
|
|
|
$
|
30,118
|
|
The accompanying notes to the condensed
unaudited financial statements are an integral part of these
condensed
consolidated balance
sheets
.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
000’s, except per share data)
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Petroleum
product sales and service revenues
|
|
$
|
38,125
|
|
|
$
|
72,962
|
|
Petroleum
product taxes
|
|
|
5,561
|
|
|
|
6,309
|
|
Total
revenues
|
|
|
43,686
|
|
|
|
79,271
|
|
|
|
|
|
|
|
|
|
|
Cost
of petroleum product sales and service
|
|
|
34,028
|
|
|
|
67,143
|
|
Petroleum
product taxes
|
|
|
5,561
|
|
|
|
6,309
|
|
Total
cost of sales
|
|
|
39,589
|
|
|
|
73,452
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,097
|
|
|
|
5,819
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
3,839
|
|
|
|
4,632
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
258
|
|
|
|
1,187
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(230
|
)
|
|
|
(683
|
)
|
Interest
and other income
|
|
|
-
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
28
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Net
income
|
|
$
|
20
|
|
|
$
|
512
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20
|
|
|
$
|
512
|
|
Less: Preferred
stock dividends
|
|
|
-
|
|
|
|
(196
|
)
|
Net
income attributable to common shareholders
|
|
$
|
20
|
|
|
$
|
316
|
|
|
|
|
|
|
|
|
|
|
Net
income per share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,248
|
|
|
|
3,254
|
|
Diluted
|
|
|
8,681
|
|
|
|
3,254
|
|
The
accompanying notes to the condensed unaudited financial statements are an
integral part of these condensed unaudited consolidated
statements
of operations.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
000’s)
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
20
|
|
|
$
|
512
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
236
|
|
|
|
342
|
|
Selling,
general and administrative
|
|
|
320
|
|
|
|
341
|
|
Amortization
of deferred debt costs
|
|
|
42
|
|
|
|
72
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
10
|
|
Amortization
of stock-based compensation
|
|
|
133
|
|
|
|
104
|
|
Write
off of unamortized acquisition costs
|
|
|
187
|
|
|
|
-
|
|
Gain
from sale of assets
|
|
|
-
|
|
|
|
(4
|
)
|
Inventory
reserve provision (recovery)
|
|
|
7
|
|
|
|
(16
|
)
|
Provision
for doubtful accounts
|
|
|
25
|
|
|
|
418
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
792
|
|
|
|
1,541
|
|
(Increase)
decrease in inventories, prepaid expenses and other assets
|
|
|
(65
|
)
|
|
|
106
|
|
(Decrease)
in accounts payable and other liabilities
|
|
|
(930
|
)
|
|
|
(379
|
)
|
Net
cash provided by operating activities
|
|
|
767
|
|
|
|
3,047
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(42
|
)
|
|
|
(153
|
)
|
Proceeds
from sale of equipment
|
|
|
-
|
|
|
|
91
|
|
Decrease
in restricted cash
|
|
|
-
|
|
|
|
56
|
|
Net
cash used in investing activities
|
|
|
(42
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from line of credit
|
|
|
45,916
|
|
|
|
80,625
|
|
Repayments
of line of credit
|
|
|
(46,320
|
)
|
|
|
(84,455
|
)
|
Principal
payments on term loan
|
|
|
(167
|
)
|
|
|
-
|
|
Proceeds
from issuance of promissory notes
|
|
|
-
|
|
|
|
725
|
|
Proceeds
from issuance of preferred stock
|
|
|
-
|
|
|
|
149
|
|
Debt
issuance costs
|
|
|
-
|
|
|
|
(33
|
)
|
Common
stock, preferred stock, and warrants issuance costs
|
|
|
-
|
|
|
|
(37
|
)
|
Capital
lease payments
|
|
|
(17
|
)
|
|
|
(12
|
)
|
Net
cash used in financing activities
|
|
|
(588
|
)
|
|
|
(3,038
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
137
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
123
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
260
|
|
|
$
|
51
|
|
(Continued)
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
000’s)
(Continued)
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
176
|
|
|
$
|
849
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
dividends related to preferred stock
|
|
$
|
-
|
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
|
$
|
22
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
Conversion
of promissory notes to common shares
|
|
$
|
-
|
|
|
$
|
210
|
|
The
accompanying notes to the condensed unaudited financial statements are an
integral part of these consolidated statements of cash flows.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SMF
Energy 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.
At
September 30, 2009, the Company was conducting operations through 31 service
locations in the eleven states of Alabama, California, Florida, Georgia,
Louisiana, Mississippi, Nevada, North Carolina, South Carolina, Tennessee and
Texas.
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.
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 months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for any subsequent period or the
fiscal year ending June 30, 2010. 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, 2009, as filed with the United States Securities and
Exchange Commission (the “2009 Form 10-K”).
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Reverse Stock
Split
-
On
September 10, 2009, the Company amended its Certificate of Incorporation to
effect a 1-for-4.5 reverse stock split of the Company’s common stock, which
became effective on the Nasdaq Capital Market on October 1, 2009. As a result of
the reverse stock split, every 4.5 shares of the Company’s issued and
outstanding common stock was combined into 1 share of common stock with a par
value of $0.01 per share. The reverse stock split did not change the number of
authorized shares of the Company’s common stock, which remains at 50,000,000
authorized shares. No fractional shares were issued in connection with the
reverse stock split. If, as a result of the reverse stock split, a stockholder
would otherwise hold a fractional share, the number of shares to be received by
such stockholder were rounded up to the next highest number of shares. The
reverse stock split affected all shares of the Company’s common stock, including
common stock underlying stock options, warrants, convertible promissory notes
and convertible preferred stock that were outstanding on the effective date. All
share and per share information in the accompanying unaudited condensed
consolidated financial statements and the notes thereto has been retroactively
adjusted to give effect to the reverse stock split for all periods presented.
Prior to the reverse stock split the outstanding common shares were 38,498,544
and 35,825,488 at September 30, 2009 and June 30, 2009,
respectively.
Subsequent
Events
-
The
Company addressed the disclosure of subsequent events through the date of filing
of this Form 10Q on November 12, 2009.
Fair Value of
Financial Instruments -
The Company’s financial instruments, primarily
consisting of cash and cash equivalents, restricted cash, accounts receivable
and accounts payable approximate fair value due to the short term maturity of
these instruments. The promissory notes and long-term debt approximate fair
value as the borrowing rates currently available to the Company for bank loans
and average maturities are similar to those of June 29, 2009, the date in which
the promissory notes and long-term debt were recorded.
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
FASB Accounting
Standards Codification
(Accounting Standards Update (“ASU”)
2009-01)
In June
2009, the FASB issued the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the Company’s
financial statements as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. There have
been no changes to the content of the Company’s financial statements or
disclosures as a result of implementing the Codification during the quarter
ended September 30, 2009.
As a
result of the Company’s implementation of the Codification during the quarter
ended September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current quarter financial
statements, the Company will provide reference to both new and old guidance to
assist in understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal
year.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
Measurements
(Included in ASC 825 “Financial
Instruments”, previously FAS No. 157 “Fair Value
Measurements”)
In
September 2006, the FASB issued FAS Statement No. 157, “
Fair Value Measurements
”
(“FAS No. 157”). This standard provides guidance for using fair value to measure
assets and liabilities. Under FAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. In this standard, the FASB clarifies the principle that fair
value should be based on the assumptions that market participants would use when
pricing the asset or liability. In support of this principle, FAS No. 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable data,
for example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. Certain aspects of this standard were effective for the financial
statements issued for the Company since the beginning of fiscal year 2009. The
adoption of FAS No. 157 had no impact on the Company’s consolidated financial
position, results of operations or cash flows. FASB Staff Position (“FSP”) FAS
157-2, “Effective Date of FASB Statement No. 157,” issued in February 2008,
provides a one-year deferral to fiscal years beginning after November 15, 2008
of the effective date of FAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed in financial
statements at least annually at fair value on a recurring basis. The Company’s
adoption of the remaining provisions of FAS No. 157 did not have an impact on
the Company’s consolidated financial position, results of operations or cash
flows.
Business
Combinations
(Included in ASC 805 “Business
Combinations”, previously FAS No. 141R “Business
Combinations”)
In
December 2007, the FASB issued FAS Statement No. 141 (revised 2007), “
Business Combinations”
(“FAS
No. 141R”), which replaces FAS No. 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. In April, 2009, the FASB issued FSP FAS
141(R)-1, “
Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies
” (“FSP No. 131(R)-1”). This FSP amends and clarifies
FAS No. 141R to address application issues raised by preparers, auditors, and
members of the legal profession on initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination. FAS No. 141R is effective
for the Company beginning July 1, 2009 and was applied prospectively to business
combinations completed on or after that date. The adoption of FAS No. 141R
resulted in the write-off of $187,000, in the first quarter of fiscal year 2010,
of unamortized acquisition costs as of June 30, 2009, which are no longer
capitalized under FAS No. 141R.
Noncontrolling
Interests
(Included in ASC 810
“Consolidation”, previously FAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No.
51”)
In
December 2007, the FASB issued FAS Statement No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51
,” which changes
the accounting and reporting for minority interests (“FAS No. 160”). The
statement requires minority interests to be recharacterized as noncontrolling
interests and reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control to be accounted for as equity transactions. In addition, net
income attributable to the noncontrolling interest should be included in
consolidated net income on the face of the income statement and, upon a loss of
control, the interest sold, as well as any interest retained, should be recorded
at fair value with any gain or loss recognized in earnings. FAS No. 160 was
effective for the Company beginning July 1, 2009 and applied prospectively,
except for the presentation and disclosure requirements, which applied
retrospectively. The standard had no impact on our financial condition, results
of operations or cash flows.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Disclosures about
Derivatives and Hedging
(Included in ASC 815 “Derivatives
and Hedging”, previously FAS No. 161 “Disclosures about Derivative Instruments
and Hedging Activities — an amendment of FAS Statement No.
133”)
In March
2008, the FASB issued FAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FAS Statement No.
133
” (“FAS No. 161”). This Standard requires enhanced disclosures
regarding derivatives and hedging activities, including: (a) the manner in which
an entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under FAS No. 133, “
Accounting for Derivative
Instruments and Hedging Activities”
; and (c) the effect of derivative
instruments and related hedged items on an entity’s financial position,
financial performance, and cash flows. FAS No. 161 was effective for the Company
beginning July 1, 2009. As FAS No. 161 relates specifically to disclosures, the
standard had no impact on our financial condition, results of operations or cash
flows.
Determination of
the Useful Life of Intangible Assets
(Included in ASC 350-30 “Intangibles
– Goodwill and Other – General Intangibles Other than Goodwill”, previously FSP
FAS No. 142-3 “Determination of the Useful Lives of Intangible
Assets”)
In April
2008, the FASB issued FSP FAS No. 142-3, “
Determination of the Useful Life of
Intangible Assets
” (“FSP No. 142-3”). This standard amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 was effective for
the Company beginning July 1, 2009. The standard had no impact on our financial
condition, results of operations or cash flows.
Accounting for
Convertible Debt Instruments
(Included
in ASC 470-20 “Debt – Debt with Conversion and Other Options”, previously FSP
APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement)”)
In May
2008, the FASB issued FSP APB 14-1, “
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)
” (“FSP No. 14-1”). This standard clarifies that convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.
Additionally, this FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP No. 14-1 was effective for the Company
beginning July 1, 2009. The standard had no impact on our financial condition,
results of operations or cash flows.
Interim
Disclosures about Financial Instruments
(Included in ASC 825 ‘Financial
Instruments”, previously FSP FAS No. 107-1 and APB No. 28-1, “Interim
Disclosures About Fair Value of Financial Instruments”
)
In April
2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1
, “Interim Disclosures About Fair
Value of Financial Instruments”.
This FSP amends FAS No. 107,
“
Disclosures about Fair Value
of Financial Instruments”,
to require disclosures about fair value of
financial instruments for interim reporting periods as well as in annual
financial statements, and also amends APB No. 28, “
Interim Financial Reporting”,
to require those disclosures in summarized financial information at
interim reporting periods. This FSP was effective for the Company beginning July
1, 2009. This FSP does not require disclosures for earlier periods presented for
comparative purposes at initial adoption. In periods after initial adoption,
this FSP requires comparative disclosures only for periods ending after initial
adoption. The adoption of this standard had no impact on our financial
condition, results of operations or cash flows.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 has not determined the
impact, if any, on its financial statements of this accounting
standard.
Consolidation of
Variable Interest Entities — Amended
(Included in ASC 810
“Consolidation”, FAS No. 167 “Amendments to FASB Interpretation No.
46(R)”)
In June
2009, the FASB issued FAS Statement No. 167, “
Amendments to FASB Interpretation
No. 46(R)”
(“FAS No. 167”). FAS No. 167 revises the approach to determine
when an entity that is insufficiently capitalized or not controlled through
voting rights (referred to as a variable interest entity or VIE) should be
consolidated. The new consolidation model for VIEs considers whether the
enterprise has the power to direct the activities that most significantly impact
the VIE’s economic performance and shares in the significant risks and rewards
of the entity. FAS No. 167 requires companies to continually reassess their
involvement with VIEs to determine if consolidation is appropriate and provide
additional disclosures about their involvement with them. FAS No. 167 is
effective for financial statements issued for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal years. The Company
has not determined the impact, if any, on its financial statements of this
accounting standard.
Fair
Value Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair
Value
In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-05
“Fair Value
Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair
Value”
, which provides amendments to subtopic 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. This Update provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1. A valuation technique that uses: a. The
quoted price of the identical liability when traded as an asset b. Quoted prices
for similar liabilities or similar liabilities when traded as assets. 2. Another
valuation technique that is consistent with the principles of topic 820; two
examples would be an income approach, such as a present value technique, or a
market approach, such as a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer the identical
liability or would receive to enter into the identical liability. The
amendments in this Update also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. The amendments in this Update
also clarify that both a quoted price in an active market for the identical
liability when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required are Level 1 fair value
measurements. The Company does not expect the adoption of this update
to have a material impact on its consolidated financial position, results of
operations or cash flows.
4.
|
CASH
AND CASH EQUIVALENTS
|
During
the three months ended September 30, 2009, the Company paid down $404,000 on its
line of credit payable. Total cash and cash availability was $2.6 million
and $2.5 million at September
30, 2009 and June 30, 2009, respectively, and was approximately $3.1 million on
November 10, 2009. 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 6 – Line of Credit
Payable.
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.
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
net income per share is computed by dividing net income 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 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. Diluted net income per share for the three months ended
September 30, 2009 and 2008, was diluted by an additional 433,000 and 0 common
stock equivalents, adjusted per reverse stock-split, respectively, of which
approximately 2,000 is related to stock options awarded to employees and
directors, and approximately 431,000 is related to preferred stock conversion
rights.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Anti-dilutive
common stock equivalents outstanding and not included in the computation of
diluted earnings per common share consisted of (in thousands):
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
410
|
|
|
|
445
|
|
Common
stock warrants
|
|
|
141
|
|
|
|
197
|
|
Promissory
note conversion rights
|
|
|
89
|
|
|
|
922
|
|
Preferred
stock conversion rights
|
|
|
-
|
|
|
|
1,426
|
|
Total
common stock equivalents outstanding
|
|
|
640
|
|
|
|
2,990
|
|
The
following table sets forth the computation of basic and diluted income per share
(in thousands, except per share amounts):
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Common
|
|
|
Per Share
|
|
|
|
|
|
Common
|
|
|
Per Share
|
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
20
|
|
|
|
|
|
|
|
|
$
|
512
|
|
|
|
|
|
|
|
Less: Preferred
stock dividends
|
|
|
-
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
Basic
net income per share attributable to common shareholders
|
|
$
|
20
|
|
|
|
8,248
|
|
|
$
|
0.00
|
|
|
$
|
316
|
|
|
|
3,254
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Preferred
stock conversion rights
|
|
|
-
|
|
|
|
431
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Diluted
net income per share attributable to common shareholders
|
|
$
|
20
|
|
|
|
8,681
|
|
|
$
|
0.00
|
|
|
$
|
316
|
|
|
|
3,254
|
|
|
$
|
0.10
|
|
6.
|
LINE OF CREDIT
PAYABLE
|
The Company has a $25.0 million loan
facility, comprised of a three year $20.0 million revolver 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 letters of credit reduce the
maximum amount available for borrowing. Outstanding borrowings under the line
are secured by substantially all Company assets.
Interest is payable monthly based on a
pricing matrix agreed upon by the Company and the bank. At September 30, 2009,
the interest rate for the line of credit was at LIBOR Floor of 0.75% plus 3.25%,
or 4.00%. The applicable margin is determined quarterly based on a matrix with
margins of 3.00% to 3.75% over the LIBOR lending rate determined by the Company
meeting certain EBITDA to fixed charge coverage ratios, as defined.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of
September 30, 2009 and June 30, 2009, the Company had outstanding borrowings of
$7.4 million and $7.8 million, respectively, under its line of credit. The line
of credit is classified as a current liability in accordance with ASC 470, Debt
which requires current liability classification under the revolving credit
agreements. Based on eligible receivables and inventories, and letters of credit
outstanding at September 30, 2009 and June 30, 2009, the Company had $2.4
million of cash availability under the line of credit on both
dates.
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 September 30, 2009, the financial covenants included a
minimum daily availability of $750,000, a fixed charge coverage ratio of 1.1 to
1.0, and a capital expenditure limitation for fiscal year 2010 of $250,000. At
September 30, 2009 and June 30, 2009, the Company had a maximum amount of $1.75
million, on both dates, for which letters of credit could be issued. At
September 30, 2009 and June 30, 2009, $1.5 million and $1.6 million,
respectively, had been issued in letters of credit.
The Company’s $25.0 million loan
facility agreement requires the Company to obtain the consent of the lender
prior to incurring additional debt, 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 September 30, 2009, the Company was in compliance with all the
requirements of its covenants under the loan facility agreement.
7.
|
LONG-TERM
DEBT (INCLUDES TERM LOAN AND PROMISSORY
NOTES)
|
Long-term
debt consists of the following (in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2009
|
|
June
2009 Term loan (the
“
Term Loan”), fully
amortized, 60 monthly
principal
payments of approximately $83,000 commencing on August 1,
2009;
variable interest due monthly, 4.75% at September 30, 2009; secured by
substantially
all Company assets; effective interest rate of 6.57%. For
additional
details, see below.
|
|
$
|
4,833
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
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 deferred and due on
or about August 15, 2010); matures July 1, 2014 in its entirety; effective
interest rate of 6.30%. For additional details, see
below.
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
5,633
|
|
|
|
5,800
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
(1,000
|
)
|
|
|
(917
|
)
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net
|
|
$
|
4,633
|
|
|
$
|
4,883
|
|
On June 29, 2009, as a result of the
Recapitalization, the Company restructured all of its debt and equity. In
connection therewith, the Company and its principal lender, Wachovia Bank, N.A.
(the “Bank”), amended the Company’s existing $25.0 million revolving line of
credit agreement to provide for a new $25.0 million loan facility, which
included a new $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. The interest on
the Term Loan is payable monthly and the interest rate is based on a pricing
matrix with margins of 3.75% to 4.50% over the LIBOR lending rate determined by
the Company meeting certain EBITDA to fixed charge coverage ratios, as defined.
At September 30, 2009, the interest rate was 4.75%.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Also in connection with the
Recapitalization, the Company extinguished $800,000 of the August 2007 Notes
through the issuance of a new, 5.5% interest only, unsecured convertible
subordinated promissory note in the principal amount of $800,000 (the “New
Unsecured Note”). The New Unsecured Note is subordinated to all other existing
debt of the Company, including any amounts owed now or in the future to the
Bank. The holder of the New Unsecured Note entered into a debt subordination
agreement (the “Subordination Agreement”) with the Company and the Bank, whereby
it expressly subordinated its rights under the New Unsecured Note to the Bank.
The
principal balance of the New Unsecured Note is due at maturity on July 1, 2014.
Subject to the limitations in the Subordination Agreement, interest will be paid
semi-annually, except that accrued interest payments for the first thirteen
months will be deferred until on or about August 15, 2010. Thereafter, starting
January 15, 2011, semi-annual interest payments will be scheduled on or about
each January 15th and July 15th. The amounts due under the New Unsecured 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 New Unsecured
Note, in whole or in part, without prepayment penalty or premium.
Twenty-five percent (25%) of the
original principal amount of the New Unsecured 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 Conversion Price has
been adjusted as a result of the October 1, 2009, reverse stock split. 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.
The following reflects the change in
shareholders’ equity for the three months ended September 30, 2009 (in
thousands, except share data):
|
|
Preferred
Stock
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Series D
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance
at June 30, 2009
|
|
|
3,228
|
|
|
$
|
-
|
|
|
|
7,963,302
|
|
|
$
|
80
|
|
|
$
|
36,601
|
|
|
$
|
(30,152
|
)
|
|
$
|
6,529
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series D Preferred Stock to common stock
|
|
|
(2,630
|
)
|
|
|
-
|
|
|
|
594,012
|
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
Costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
133
|
|
|
|
-
|
|
|
|
133
|
|
Balance
at September 30, 2009
|
|
|
598
|
|
|
$
|
-
|
|
|
|
8,557,314
|
|
|
$
|
86
|
|
|
$
|
36,688
|
|
|
$
|
(30,132
|
)
|
|
$
|
6,642
|
|
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In July
2009, the Company was informed by two previous noteholders (the “Holders”) of
the August 2007 Notes that, notwithstanding the terms of their original exchange
agreements related to the Recapitalization completed in June 2009, they had
intended to exchange more of their August 2007 Notes for shares of common stock
than was reflected in their original exchange agreements. Accordingly, in
response to a request from the Holders to remedy their mistake, on July 6, 2009,
the Company entered into two additional exchange agreements (the “New Exchange
Agreements”) with the Holders by which the Holders exchanged 824 shares of
Series D Preferred Stock for an aggregate of 192,680 shares of the Company’s
Common Stock based on an aggregate value of $329,000. The New Exchange
Agreements provided the Holders with the terms originally offered to them in the
Recapitalization, including the $1.71 price per share of Common Stock, rather
than the $1.80 conversion price that would have been available to them upon a
conversion of the Series D Preferred Stock that they received in the
Recapitalization. The $1.71 price used in the New Exchange Agreements was not
less than the closing bid price for the Common Stock on the Nasdaq Capital
Market on the last trading day preceding the July 6, 2009 New Exchange
Agreements. The issuance of the additional 36,997 shares resulted in a non-cash
inducement on extinguishment of convertible notes of $166,000 which was recorded
in the financial statements for the year ended June 30, 2009. All share and
price per share amounts discussed above have been adjusted to reflect the
reverse stock split of October 1, 2009.
In
September 2009 some of the holders of the Series D Preferred Stock converted an
aggregate of 1,806 shares into 401,332 shares of Common Stock for an aggregate
value of $722,000. Since this is an exchange of an equity instrument into
another equity instrument, the net impact to shareholder’s equity is zero, with
a decrease of $6,000 in APIC and an equal increase to Common Stock reflecting
the par value of the issued common shares. The shares amount discussed above
have been adjusted to reflect the reverse stock split of October 1,
2009.
Employee
Stock Options
On
September 10, 2009, the exercise prices of all outstanding employee stock
options previously granted under the 2000 Plan were amended by the Compensation
Committee of the Company’s Board of Directors to have an exercise price of $0.55
per share or $2.48 per share reflecting the reverse stock split (the
“Amendment”). The original new exercise price of $0.55 set by the Amendment was
$0.17 above the $0.38 official closing price on the Nasdaq Capital Market on the
trading day immediately preceding the date of the Amendment. The Amendment 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 by the Amendment, the
Company incurred a non-cash charge of $93,000 to compensation 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 of the stock options
outstanding on June 30, 2009 adjusted to reflect the reverse stock split of
October 1, 2009.
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 September
30, 2009. Therefore no contingency gains or losses have been recorded as of
September 30, 2009. However, based on management’s knowledge at the time of this
filing, management believes that the final resolution of such matters pending at
the time of this report, individually and in the aggregate, will not have a
material adverse effect upon the Company’s consolidated financial position,
results of operations or cash flows.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On
October 10, 2006, the Company commenced a civil action in Broward County,
Florida Circuit Court against Financial Accounting Solutions Group, Inc.
(“FAS”), Kramer Professional Staffing, Inc. (“KPS”), and Mitchell Kramer, an
officer, director, shareholder and control person of FAS and KPS (“Kramer”),
alleging that Kramer, FAS and KPS (collectively, the “Defendants”) induced the
Company to engage FAS to provide services with respect to (a) the implementation
of certain Information Technology (“IT”) functions; (b) the modernization and
expansion of the Company’s accounting and business technology capabilities, and
(c) compliance with public company accounting requirements and the
Sarbanes-Oxley Act (the “IT Projects”) by making numerous misrepresentations
concerning the experience, capabilities and background of FAS and FAS’
personnel. FAS subsequently filed a countersuit in the same court seeking
payment of additional fees allegedly due from the Company. The court is jointly
administering the countersuit with the Company’s action. The Company amended its
complaint to add Alex Zaldivar, the managing director and a principal of FAS, as
an additional Defendant and to make new claims for accounting malpractice,
negligent IT implementation, negligent training and supervision, negligent
placement and breach of fiduciary duty against the Defendants. The amount of
damages recoverable from the Defendants in this action will depend on a number
of factors, including but not limited to the costs incurred by the Company in
completing the IT Projects, the amount of consequential damages suffered by the
Company as a result of the delays and poor performance by FAS in implementing
the IT projects, potential counterclaims or countersuit by FAS for amounts
billed to the Company which the Company has refused to pay, and the assessment
by the Company, based on input from the new vendor engaged by the Company to
replace FAS, of the estimated costs to complete the IT Projects. The Company
believes that, based on all available information, the likelihood of FAS
prevailing in any litigation against the Company is remote and the chance of
recovery by FAS against the Company is slight. The case is currently in the
discovery stage and settlement discussions are ongoing.
By the
filing of a Demand for Arbitration with the American Arbitration Association in
Broward County, Florida on May 26, 2009, the Company brought claims against
various members of the Harkrider family arising out of the 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 and settlement
discussions are ongoing.
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 footnotes 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 include, but are not limited, to the
following:
|
·
|
Our
beliefs regarding our position in the market for commercial mobile fueling
and bulk fueling; lubricant and chemical packaging, distribution and
sales; integrated out-sourced fuel management services; and transportation
logistics;
|
|
·
|
Our
strategies, plan, objectives and expectations concerning our future
operations, cash flows, margins, revenues, profitability, liquidity and
capital resources;
|
|
·
|
Our
efforts to improve operational, financial and management controls and
reporting systems and procedures;
and
|
|
·
|
Our
plans to expand and diversify our business through acquisitions of
existing companies or their operations and customer
bases.
|
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, 2009, 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:
|
·
|
The
avoidance of unanticipated net
losses;
|
|
·
|
The
avoidance of adverse consequences relating to our outstanding
debt;
|
|
·
|
Our
continuing ability to pay interest and principal on our debt instruments,
and to pay our accounts payable and other liabilities when
due;
|
|
·
|
Our
continuing ability to comply with financial covenants contained in our
debt agreements and to replace, extend or refinance the debts evidenced by
those agreements as they mature;
|
|
·
|
Our
continuing ability to obtain all necessary waivers of covenant violations,
if any, in our debt agreements;
|
|
·
|
The
avoidance of significant provisions for bad debt reserves on our accounts
receivable;
|
|
·
|
The
continuing demand for our products and services at competitive prices and
acceptable margins;
|
|
·
|
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;
|
|
·
|
The
successful integration of acquired companies and/or organic geographic
expansion into our existing operations, and enhancing the profitability of
the integrated businesses or new
markets;
|
|
·
|
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;
|
|
·
|
The
success in responding to competition from other providers of similar
services; and
|
|
·
|
The
avoidance of a substantial adverse impact from recent generally negative
economic and market conditions.
|
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 September 30, 2009, the Company was
conducting operations through 31 service locations in the eleven states of
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 delivers 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
and 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.
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 deliveries 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.
An
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
We
concluded fiscal 2009 with a complex recapitalization of all of our debt and
equity securities which strengthened our balance sheet and financial position by
lowering our total debt by $4.5 million, increasing shareholders’ equity by $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 extinguished all of our
maturing debt while providing us with a new 5 year term loan and a minimum 3
year bank line of credit, both of which carry significantly lower interest rates
than our previous debt instruments. The recapitalization transaction
reduced our annual cash interest expense as evidenced by the decrease in
interest expense during this first quarter of fiscal 2010. During the
first quarter of fiscal 2010, we continued to deliver improvements in our
financial results.
|
Three months ended,
|
|
(In Thousands, except
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September
30,
|
|
per gallon data)
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
4,097
|
|
|
$
|
3,539
|
|
|
$
|
3,790
|
|
|
$
|
3,292
|
|
|
$
|
5,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
20
|
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 costs
|
|
$
|
300
|
|
|
$
|
(297
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
- Non GAAP Measure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(reconciliation
below)
|
|
$
|
1,134
|
|
|
$
|
876
|
|
|
$
|
974
|
|
|
$
|
690
|
|
|
$
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
margin
|
|
$
|
4,333
|
|
|
$
|
3,795
|
|
|
$
|
4,027
|
|
|
$
|
3,534
|
|
|
$
|
6,161
|
|
Net
margin per gallon
|
|
$
|
0.26
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.33
|
|
Gallons
sold
|
|
|
16,945
|
|
|
|
16,709
|
|
|
|
16,041
|
|
|
|
16,602
|
|
|
|
18,550
|
|
|
·
|
The
first quarter of the prior year, fiscal 2009, showed stronger financial
results as emergency storm response work that year contributed to the
operating performance as well as, we believe, the efficiencies generated
by the ERP system, which was a significant factor in facilitating our
focus on higher margin business. In response to a decreased
demand resulting from the deteriorating national economy beginning in
November 2008, we responded with various cost cutting
measures. Our results after the second quarter of fiscal 2009
reflect the reduction of operating and administrative personnel, increased
productivity from efficiency changes made to our route structures, and
reductions in direct and office operating expenses. This timely
cost cutting gave us leverage when customer demand began to stabilize at
these lower levels in the third quarter of fiscal 2009. Even as
the national economy contracted, we continued to add new customers seeking
to reduce their costs of operations with mobile fueling or to replace
their prior service providers for our higher value solution, which, we
believe, includes greater reliability, fewer service issues and better
reporting metrics. The addition of these new customers
partially mitigated lower volume from our existing customers; however, we
have not seen any recovery to prior levels of pre-recessionary volumes
consumed by our existing customers.
|
|
·
|
Financial
results from commercial mobile and bulk fueling services continue to be
largely dependent on the number of gallons of fuel sold and the net margin
per gallon achieved. During the first three months of fiscal
2010, we have achieved a slight increase of 1% in gallons delivered over
the prior quarter due to new customer additions and the continuation of
the stabilization of volumes which began in the third quarter of fiscal
2008. While our volumes in the first quarter of fiscal 2010
represent a 9% decrease versus the same period in fiscal 2009, we are
pleased with the shorter term trend of a modest increase from quarter to
quarter. While there can be no assurance that the stabilized
demand post the recessionary reductions in customer volumes has in fact
bottomed out or is turning upward, we remain cautiously optimistic that
our operations and financial performance will continue to improve as they
have over the past few quarters.
|
|
·
|
In
the second quarter of 2010, we announced new business additions which we
expect to add over 4.3 million gallons of incremental business on an
annualized basis, which would represent a 6% increase to the 67.9 million
gallons reported in fiscal 2009. This new business will be
delivered from three existing locations in North Carolina and Tennessee
together with three new locations in South Carolina and
Tennessee. The three new locations are increasing our service
locations from 31 to 34.
|
|
·
|
We
are reporting net income for the first quarter of fiscal 2010 of $20,000
compared to a net income of $512,000 a year ago. However, the
first quarter of fiscal 2010 included non-cash, non-recurring charges of
$187,000 for the write-off of unamortized acquisition costs per
application of ASC 805, and $93,000 related to stock option expense
incurred as a result of the stock options repricing, and did not include
income from emergency response work which did occur in the prior
year. The adjusted net income before non-cash, non-recurring charges
was $300,000 during this first quarter of fiscal 2010. The $20,000
net income included $951,000 in non-cash charges, such as depreciation and
amortization of assets, debt costs, debt discounts, stock-based
compensation, write-off of unamortized acquisition costs due to
application of ASC 805, and provision for doubtful
accounts. The net income also included stated interest expense
associated with servicing of our debt of $188,000, legal expenses of
$339,000 and public company costs of
$167,000.
|
|
·
|
In
the first quarter of fiscal 2010, as compared to the fourth quarter of
fiscal 2009, we experienced an improvement in gross profit of $558,000, or
16%, an increase in operating income of $120,000, or 87% and an EBITDA
increase of $258,000, or 29%. The net margin per gallon
increased to 25.6 cents in the first quarter of fiscal 2010 from 22.7
cents in the fourth quarter of fiscal 2009. In the first
quarter of fiscal 2010, we have net income of $20,000.
The
adjusted net income before non-cash, non-recurring charges was $300,000
during this first quarter of fiscal 2010,
which
is a $597,000 improvement from the fourth quarter of fiscal
2009 in which we had a net loss of $297,000 before the $1.7 million
non-cash ASC 470-20 (formerly FAS No. 84) inducement charge for the
extinguishment of the convertible debt
securities.
|
|
·
|
The
net margin in the first quarter of fiscals 2010 and 2009 was $4.3 million
and $6.2 million, respectively, on 16.9 million and 18.6 million gallons
sold during those periods. The net margins per gallon in the
first quarter of fiscals 2010 and 2009 were 25.6 cents and 33.2 cents,
respectively. The decrease in net margin per gallon can be
attributed partially to lower emergency response services provided during
this period as compared to the same period in the previous year when we
provided emergency response services in Louisiana and
Texas. The decrease is also partially due to lower volumes
demanded by some of our existing customers in response to the weaker
economy, with the overall decrease partially offset by the volume
generated from new customers.
|
|
·
|
As
a result of our June 2009 recapitalization, our interest expense was
substantially lower in the first quarter of fiscal
2010. We incurred interest expense of $230,000 this
quarter compared to $683,000 in the same quarter in the prior year, a
decrease of $453,000 of which $198,000 is related to lower debt and lower
costs to service our existing debt. Compared to the prior
quarter, the fourth quarter of fiscal 2009, interest expense decreased
$316,000.
|
|
·
|
In
2008, our shareholders approved a 1 for 4.5 reverse stock split, which
took effect on October 1, 2009. The reverse stock split
preserved our Nasdaq Stock Market listing by increasing the market price
of our common stock above the $1.00 minimum bid price for the required
period of time. All share and per share information within
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations’’ section and in the accompanying financial statements was
retroactively adjusted to give effect to the reverse stock
split.
|
|
·
|
During
this quarter, $1.1 million of the Series D Preferred stock, which was
issued during the June 2009 Recapitalization, was converted into 594,012
shares of Common Stock, further reducing our fixed charge cash
requirements as future dividend payments are
reduced.
|
|
·
|
As
discussed above, we continue to see increases in new customer business and
prospective business as companies seek to reduce their costs of operation
with mobile fueling and our other services. Naturally, we
cannot be certain that this will continue in the future or that any new
business will be sufficient to offset possible future decreases in demand
from our existing customer base. We currently expect the
stabilization of customer demand that we saw emerging in the third quarter
of fiscal 2009 to continue in fiscal 2010 and believe that the demand from
new customers for our services is
strong.
|
The
following table presents certain operating results for the last seven sequential
quarters (in thousands, except net margin per gallon):
|
|
For the three months
ended
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
43,686
|
|
|
$
|
39,884
|
|
|
$
|
34,982
|
|
|
$
|
45,112
|
|
|
$
|
79,271
|
|
|
$
|
82,036
|
|
|
$
|
64,162
|
|
Gross
profit
|
|
$
|
4,097
|
|
|
$
|
3,539
|
|
|
$
|
3,790
|
|
|
$
|
3,292
|
|
|
$
|
5,819
|
|
|
$
|
4,290
|
|
|
$
|
2,875
|
|
Selling,
general and administrative
|
|
$
|
3,839
|
|
|
$
|
3,401
|
|
|
$
|
3,455
|
|
|
$
|
3,267
|
|
|
$
|
4,632
|
|
|
$
|
3,845
|
|
|
$
|
3,445
|
|
Operating
income (loss)
|
|
$
|
258
|
|
|
$
|
138
|
|
|
$
|
335
|
|
|
$
|
25
|
|
|
$
|
1,187
|
|
|
$
|
445
|
|
|
$
|
(570
|
)
|
Interest
expense and other income, net
|
|
$
|
(230
|
)
|
|
$
|
(454
|
)
|
|
$
|
(570
|
)
|
|
$
|
(677
|
)
|
|
$
|
(667
|
)
|
|
$
|
(811
|
)
|
|
$
|
(720
|
)
|
Non-cash
ASC 470-20 (formerly FAS No. 84) inducement on
extinguishment
|
|
$
|
-
|
|
|
$
|
(1,651
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain
(loss) on extinguishment of promissory notes
|
|
$
|
-
|
|
|
$
|
27
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(108
|
)
|
Net
income (loss)
|
|
$
|
20
|
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
$
|
(366
|
)
|
|
$
|
(1,398
|
)
|
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
3
|
|
$
|
-
|
|
|
$
|
1,651
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Adjusted net income (loss)
before
non-cash, non recurring charges
4
|
|
$
|
300
|
|
|
$
|
(297
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
$
|
(366
|
)
|
|
$
|
(1,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
1
|
|
$
|
1,134
|
|
|
$
|
876
|
|
|
$
|
974
|
|
|
$
|
690
|
|
|
$
|
1,990
|
|
|
$
|
1,154
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
margin
|
|
$
|
4,333
|
|
|
$
|
3,795
|
|
|
$
|
4,027
|
|
|
$
|
3,534
|
|
|
$
|
6,161
|
|
|
$
|
4,611
|
|
|
$
|
3,228
|
|
Net margin per gallon
2
|
|
$
|
0.26
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.33
|
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
Gallons
sold
|
|
|
16,945
|
|
|
|
16,709
|
|
|
|
16,041
|
|
|
|
16,602
|
|
|
|
18,550
|
|
|
|
19,024
|
|
|
|
18,102
|
|
1
|
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. To the extent that gain or loss and the non-cash
ASC 470-20 (formerly FAS No. 84) inducement on extinguishment of
promissory notes constitute 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 calcualtion. 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.
|
2
|
Net margin
per gallon is calculated by adding gross profit to the cost of sales
depreciation and amortization and dividing that sum by the number of
gallons sold.
|
3
|
Non-cash
ASC 470-20 (formerly FAS No. 84) inducement on extiguishment is a charge
we incurred strictly 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 practice of accounting in the
interpretation of FAS No. 84 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. Irrespective of the economic
reality of the transaction, FAS No. 84 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 non cash
FAS 84 inducement on extinguishment of promissory notes constitutes
the recognition of a finance cost, it is considered interest expense
for the calculation of certain interest expense
amounts.
|
4
|
Adjusted
net income (loss) before non-cash, non-recurring changes is
shown to provide the reader with information regarding the true economic
performance of the Company before the impact of charges that do not
reflect the on-going performance of the operations such
as of the technical non-economic substantive accounting charge
of $1.7 million in the fourth quarter of fiscal 2009 and the first
quarter of fiscal 2010 write-off incurred as new accounting ruling was
applied and stock compensation expense that resulted from repricing
stock options. We believe that this is a meaningful Non-GAAP
representation of the ongoing performance of the
operations.
|
The
following chart reconciles Adjusted net income (loss) before non-cash,
non-recurring charges (Non-GAAP measure) to the Net income (loss) for each of
the seven quarterly periods presented above (in thousands):
|
|
For the three months
ended
|
|
|
|
September 30
,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
20
|
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
$
|
(366
|
)
|
|
$
|
(1,398
|
)
|
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
1
|
|
$
|
300
|
|
|
$
|
(297
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
$
|
(366
|
)
|
|
$
|
(1,398
|
)
|
|
1
|
Adjusted
net income (loss) before non-cash, non-recurring charges is shown to
provide the reader with information regarding the economic performance of
the Company before the impact of charges that do not reflect the on-going
performance of the operations such as the technical non-economic
substantive accounting treatment charge of $1.7 million in the fourth
quarter of fiscal 2009, and the first quarter of fiscal 2010 write-off
incurred as new accounting ruling was applied and stock compensation
expense that resulted from the repricing of stock options. We believe that
this is a meaningful Non-GAAP representation of the ongoing performance of
the operations.
|
The
following chart reconciles EBITDA (Non-GAAP measure) to the reported net income
(loss) for each of the seven quarterly periods presented above (in
thousands):
|
|
For
the three months ended
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
20
|
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
$
|
(366
|
)
|
|
$
|
(1,398
|
)
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
230
|
|
|
|
545
|
|
|
|
575
|
|
|
|
680
|
|
|
|
683
|
|
|
|
720
|
|
|
|
780
|
|
Income
tax expense
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and
amortization expense within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
236
|
|
|
|
254
|
|
|
|
239
|
|
|
|
242
|
|
|
|
342
|
|
|
|
321
|
|
|
|
353
|
|
Selling,
general and administrative expenses
|
|
|
320
|
|
|
|
344
|
|
|
|
334
|
|
|
|
342
|
|
|
|
341
|
|
|
|
357
|
|
|
|
311
|
|
Stock-based
compensation expense
|
|
|
133
|
|
|
|
49
|
|
|
|
61
|
|
|
|
78
|
|
|
|
104
|
|
|
|
122
|
|
|
|
123
|
|
Write-off
of unamortized acquisition costs
|
|
|
187
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-cash
ASC 470-20 (formerly FAS No. 84) inducement on
extinguishment
|
|
|
-
|
|
|
|
1,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Gain)
loss on extinguishment of promissory notes
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
EBITDA
|
|
$
|
1,134
|
|
|
$
|
876
|
|
|
$
|
974
|
|
|
$
|
690
|
|
|
$
|
1,990
|
|
|
$
|
1,154
|
|
|
$
|
277
|
|
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 September 30, 2009 (“first quarter of fiscal 2010”) to
Three Months Ended September 30, 2008 (“first quarter of fiscal
2009”)
Revenues
Revenues
were $43.7 million in the first quarter of fiscal 2010, as compared to $79.3
million in the same period of the prior year, a decrease of $35.6 million, or
45%. The decrease in revenues is primarily due to price variances in
market prices of petroleum products, which resulted in a decrease of $31.4
million in revenues stemming from a 47% decrease in average market fuel prices
in the first quarter of fiscal 2010 compared to the same period in the prior
year (based on Energy Information Administration spot prices for low-sulfur
Diesel). The decrease is also partially due to a 9% reduction in
gallons sold compared to a year ago as a result of a decreased demand from
existing customers as a result of the contraction of the economy which impacted
us dramatically beginning in November 2008. Towards the end of fiscal
2009, we began to see a stabilization in the demand for our services from
existing customers and a strong increase in new customer business as companies
seek to reduce their costs of operation. This trend, which began to
emerge in the third quarter of fiscal 2009, has continued in the first quarter
of fiscal 2010. We remain cautiously optimistic that overall customer
demand for our services will not decline further and that we can maintain or
increase present volume levels by continuing to attract new
customers.
Gross
Profit
Gross
profit was $4.1 million in the first quarter of fiscal 2010, as compared to $5.8
million in the same period of the prior year, a decrease of $1.7 million, or
30%. The net margin per gallon for the first quarters of fiscal 2010
and 2009 was 25.6 cents and 33.2 cents, respectively, a decrease of 7.6
cents. The decrease in gross profit and margin can be attributed
primarily to incremental margin contribution from the emergency response
services provided in the first quarter of fiscal 2009 in Louisiana and Texas for
Hurricanes Gustav and Ike and to the decrease in volumes resulting from the
contraction of the economy which impacted us starting in November of
2008. The decreases were partially offset by the improved
efficiencies related to our route structure consolidation and other steps we
have taken to increase productivity since we recognized the lowering of customer
volumes in the second quarter of fiscal 2009.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses were $3.8 million in the first
quarter of fiscal 2010 and $4.6 million in the first quarter of fiscal 2009, a
decrease of $793,000, or 17%. SG&A has decreased as a result of
the cost cutting and business restructuring steps taken beginning in late
November 2008 to meet the decrease in customer demand as well as higher costs in
the prior year associated with the emergency response services provided during
Hurricanes Gustav and Ike. We experienced decreases in the provision
for doubtful accounts of $393,000, employee expense of $270,000, traveling
expense of $120,000, credit card fees of $99,000, and facilities and office
expense of $65,000. These decreases were partially offset by the
write-off of $187,000 of unamortized acquisition costs in the first quarter of
fiscal year 2010 as a result of the adoption of ASC 805, which no longer allows
the capitalization of such costs.
Interest
Expense
Interest
expense was $230,000 in the first quarter of fiscal 2010, as compared to
$683,000 in the same period of the prior year, a decrease of $453,000, or
66%. The decrease was primarily due to lower interest expense as a
result of the reduction in our long term-debt outstanding, and improved interest
rate terms due to the June 2009 Recapitalization. Our interest rate
terms have improved, as we replaced the high 11.5% former Secured and Unsecured
debt with the term loan which is at interest rates currently around
4.5%. We also negotiated for more favorable rates on the line of
credit. In addition, the average outstanding balance on the line of
credit was $10.1 million lower period over period primarily due to lower fuel
prices, and the reduction of debt service requirements from our former debt that
was extinguished with the June 2009 Recapitalization.
The
components of interest expense were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Stated
Rate Interest Expense:
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
110
|
|
|
$
|
313
|
|
Long-term
debt
|
|
|
69
|
|
|
|
267
|
|
Other
|
|
|
9
|
|
|
|
21
|
|
Total
stated rate interest expense
|
|
|
188
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Interest Amortization:
|
|
|
|
|
|
|
|
|
Amortization
of deferred debt costs
|
|
|
42
|
|
|
|
72
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
10
|
|
Total
non-cash interest amortization
|
|
|
42
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
$
|
230
|
|
|
$
|
683
|
|
Income
Taxes
State
income tax expense of $8,000 was recorded for the first quarters of fiscal 2010
and 2009. No federal income tax expense was recorded for these
periods. The federal net operating loss carryforward at June 30, 2009
was $28.1 million, which includes a $2.2 million net operating loss carryforward
acquired in connection with the H & W acquisition.
Net
Income
Net
income was $20,000 in the first quarter of fiscal 2010, as compared to a net
income of $512,000 in the same period in the prior year. The $492,000
or 96% decrease was primarily attributable to the lower gross profit of $1.7
million resulting from the decrease in margin contribution from the emergency
response services provided in the first quarter of fiscal 2009 in Louisiana and
Texas for Hurricanes Gustav and Ike and to the decrease in volumes resulting
from the contraction of the economy which impacted us starting in November of
2008. The decrease was offset by lower selling, general and
administrative expenses of $793,000 as a result of the cost cutting and business
restructuring steps taken beginning in late November 2008 to meet the decrease
in customer demand, and by lower interest expense of $453,000 as a result of the
reduction in our long term-debt outstanding and lower balances in the line of
credit primarily the result of the June 2009 Recapitalization and lower fuel
prices.
EBITDA
EBITDA
was $1.1 million in the first quarter of fiscal 2010, as compared to $2.0
million in the same period of the prior year, a decrease of $856,000, or
43%. The decrease was primarily due to the decrease in gross profit
discussed above, partially offset by the reduction in selling, general and
administrative expenses also discussed above.
The
reconciliation of EBITDA to net income for the first quarters of fiscals 2010
and 2009 was as follows (in thousands):
|
|
Three
Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20
|
|
|
$
|
512
|
|
Add
back:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
230
|
|
|
|
683
|
|
Income
tax expense
|
|
|
8
|
|
|
|
8
|
|
Depreciation
and amortization expense within:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
236
|
|
|
|
342
|
|
Selling,
general and administrative expenses
|
|
|
320
|
|
|
|
341
|
|
Stock-based
compensation amortization expense
|
|
|
133
|
|
|
|
104
|
|
Write-off
of unamortized acquisition costs
|
|
|
187
|
|
|
|
-
|
|
EBITDA
|
|
$
|
1,134
|
|
|
$
|
1,990
|
|
As noted above, EBITDA is a Non-GAAP
financial measure within the meaning of Regulation G promulgated by the
Securities and Exchange Commission. 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. 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. 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.
Capital
Resources and Liquidity
At
September 30, 2009, we had total cash and cash availability of $2.6 million,
which consisted of cash and cash equivalents of $260,000 and additional cash
availability of approximately $2.4 million through our line of
credit. As of November 10, 2009, our cash and cash availability was
approximately $3.1 million. We are able to draw on our line of credit
on a daily basis subject to debt covenant requirements.
During
the fourth quarter of fiscal 2009, we completed a comprehensive $40 million
recapitalization program that restructured all of our debt and
equity. After the Recapitalization, our total debt was
immediately decreased by $4.5 million, our cash requirements for interest and
dividends are expected to be reduced by over $1 million per year and our
shareholders’ equity increased by approximately $4.1 million at June 30,
2009. A critical component of the June 2009 Recapitalization was the
conversion of our existing $25.0 million revolving line of credit into a new,
significantly more favorable, $25.0 million loan facility, comprised of a three
year $20.0 million revolver coupled with a new $5.0 million, 5.5%, 60 month,
fully amortized term loan and the extension of our revolving line of credit to
July 1, 2012.
We
believe that, as a result of our 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. However, in light of current economic market uncertainties
and price volatility, we cannot be certain that we will be successful in
responding to unanticipated market forces in the future.
Sources
and Uses of Cash
Debt Financing and Equity
Offerings
As noted
above, on June 29, 2009, we completed a comprehensive $40 million
recapitalization program that restructured all of our debt and equity, providing
us with substantial short term and long term financial benefits, including the
conversion of our then existing $25.0 million revolving line of credit into a
new, significantly more favorable, $25.0 million loan facility, comprised of a
three year $20.0 million revolver coupled with a $5.0 million, 5.5%, 60 month,
fully amortized term loan. The Eighteenth Amendment to our Loan and
Security Agreement with our principal lender also extended the renewal date of
the revolving line of credit from July 1, 2009 to July 1, 2012, added our
vehicles and field operating equipment as additional collateral for the bank,
and modified several covenants in the loan agreement in a manner favorable to
the Company.
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 its 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 30 to 45 days from date of delivery.
Interest
is payable monthly based on a pricing matrix agreed with the bank. At
September 30, 2009, the interest rate for the line of credit was at LIBOR Floor
of 0.75% plus 3.25%, or 4.00%. The applicable margin is determined
quarterly based on a matrix with margins of 3.00% to 3.75% over the LIBOR
lending rate determined by the Company meeting certain EBITDA to fixed charge
coverage ratios, as defined.
As of
September 30, 2009, we have outstanding letters of credit for an aggregate
amount of $1.5 million. These letters of credit were issued to obtain
better purchasing terms and pricing than was then 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
September 30, 2009 and June 30, 2009, we had outstanding borrowings of $7.4
million and $7.8 million, respectively, under our line of credit. The
line of credit is classified as a current liability in accordance with ASC 470,
Debt, due to certain provisions in the agreement providing for subjective
acceleration rights and requiring us to maintain a lockbox arrangement whereby
cash deposits are automatically utilized to reduce amounts outstanding under the
line of credit. Based on eligible receivables and inventories, and
letters of credit outstanding at September 30, 2009, we had $2.4 million, of
cash availability under the line of credit.
In
addition to obtaining funds through the line of credit, in the past, we have
obtained funds through the issuance of promissory notes, common stock, preferred
stock and warrants to purchase our common stock. We have also
concurrently or subsequently restructured our debt and equity to secure better
terms and to reduce our cash requirements for interest and
dividends. As a result of the Recapitalization effected in the fourth
quarter of fiscal 2009, we believe that we have established adequate credit
enhancements for fiscal 2010 to meaningfully respond to potential increases in
volumes and fuel prices.
During
the three months ended September 30, 2008, we responded to our working capital
needs by securing debt financing and effecting an equity offering, as described
below. These transactions were restructured as part of the
Recapitalization effected in the fourth quarter of fiscal 2009 and are no longer
outstanding.
On August
15, 2008, we issued 229 shares of our Series C Convertible Preferred Stock,
$0.01 par value, at a price of $650 per share, or an aggregate of $148,850 (the
“Series C Preferred Stock”). Each share of Series C Preferred Stock
was convertible into approximately 222 shares of the Company’s common stock at a
price per share of $2.93 per share, which was greater than the $2.21 closing
price of the Company’s common stock on August 14, 2008.
On
September 2, 2008, we sold $725,000 in 12% unsecured convertible promissory
notes maturing on September 1, 2010. The promissory notes were
unsecured and were expressly subordinated to any amounts owed to our primary
lender pursuant to a subordination agreement between the note holders and the
lender. Interest on the notes was payable semi-annually, on each
March 1 and September 1, beginning March 1, 2009. The notes could
have been redeemed by us, in whole or in part, without prepayment penalty or
premium, except that, if such pre-payment was proposed to be made before
September 2, 2009, a 1% prepayment penalty applied. The unpaid
principal amount of the promissory notes and the accrued but unpaid interest
thereon was convertible into shares of our common stock at $2.93 per
share.
Dividends
on the outstanding shares of Series D Preferred Stock, which shares were issued
in the June 2009 Recapitalization, are payable when, as and if declared by the
Board of Directors, but only out of funds that are legally available, in annual
cash or equity dividends, at the Company’s election, at the rate of 5.5% per
annum of the sum of the Original Issue Price per share. Per the
Certificate of Designation for the Series D, the first dividend declaration for
the outstanding Series D Preferred Stock is expected to be approximately in
August 2010 and may, at the Company’s election, be paid in shares of the
Company’s common stock. Subsequent dividends on the Series D are
payable in cash except that, under specified circumstances, dividends may be
paid in the form of shares of a new series of nonvoting Preferred Stock, the
terms, rights and privileges of which are, other than the voting rights,
substantially identical to those of the Series D. Dividends on any of
the Company’s Series of Preferred Stock are cumulative from the date of the
original issuance of the Preferred Stock. Accumulated unpaid
dividends on Preferred Stock do not bear interest.
During
fiscal 2009, we declared $577,000 in cumulative dividends on the Series A,
Series B, and Series C Preferred Stock, which have been paid or satisfied as of
June 30, 2009. The Series A, Series B, and Series C Preferred Stock
are no longer outstanding as a result of the Recapitalization effected on June
29, 2009. During this quarter, $1.1 million of the Series D Preferred
stock was converted into 594,012 shares of Common Stock further reducing our
future financing costs as future dividend payments were reduced.
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.
Cash
Flows
During
the three months ended September 30, 2009 and 2008, cash and cash equivalents
increased $137,000 and $3,000, respectively.
We
generated cash from the following sources (in thousands):
|
|
Three
Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$
|
767
|
|
|
$
|
3,047
|
|
Proceeds
from issuance of promissory notes
|
|
|
-
|
|
|
|
725
|
|
Proceeds
from issuance of preferred stock
|
|
|
-
|
|
|
|
149
|
|
Decrease
in restricted cash
|
|
|
-
|
|
|
|
56
|
|
Proceeds
from sale of equipment
|
|
|
-
|
|
|
|
91
|
|
|
|
$
|
767
|
|
|
$
|
4,068
|
|
We used
cash primarily for (in thousands):
|
|
Three
Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
payments on line of credit payable
|
|
$
|
(404
|
)
|
|
$
|
(3,830
|
)
|
Principal
payments on term loan
|
|
|
(167
|
)
|
|
|
-
|
|
Purchases
of property and equipment
|
|
|
(42
|
)
|
|
|
(153
|
)
|
Capital
lease payments
|
|
|
(17
|
)
|
|
|
(12
|
)
|
Payments
of debt and equity issuance costs
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
$
|
(630
|
)
|
|
$
|
(4,065
|
)
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
$
|
137
|
|
|
$
|
3
|
|
As of
September 30, 2009, we had $7.4 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 three months ended
September 30, 2009 include the cumulative activity of the daily borrowings and
repayments, $45.9 million and $46.3 million, respectively, under the line of
credit. The availability under the line of credit at September 30,
2009 and June 30, 2009, amounted to $2.4 million. The net cash
borrowings from, or repayments of, the line of credit during the three months
ended September 30, 2009 and 2008, 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 2010 are expected to be cash on
hand, cash generated from operations, borrowings under our credit facility, 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.
In
November 2008, we recognized the significant impact the current economic crisis
was having on our business; so we implemented an extensive program of cost
reductions and business restructuring steps to improve margins in order to
offset reductions in the volumes of fuel, lubricants, chemicals and other
products and services sold to our customers and, further, completed our $40
million June 2009 Recapitalization. Poor economic conditions have
significantly impacted the businesses of our customers, as less freight is being
transported and manufacturing demand is down, correspondingly reducing the
consumption of fuel and other petroleum products. Although our
volumes of petroleum products and chemicals sold began to stabilize in the third
quarter of fiscal 2009 and continued through the first quarter of fiscal 2010,
we cannot be certain that this will continue in the future or that any new
business will be sufficient to offset possible future decreases in demand from
our existing customer base.
We
concluded fiscal 2009 with the $40 million Recapitalization of all of our debt
and equity securities. We strengthened our balance sheet and
financial position immediately lowering our total debt by $4.5 million,
increasing shareholder’s equity by $4.1 million and reducing our debt to equity
ratio from approximately 9:1 to 2:1 over the prior year. We
extinguished all of our maturing debt and obtained a new 5 year term loan and a
minimum 3 year bank line of credit, both of which carry highly competitive lower
interest rates than our previous debt instruments. We have reduced
our cash interest expense and dividends cash usage. We also continue
to concentrate our efforts on reducing costs and conserving cash availability in
order to meet the challenges of the recession. We believe the
improvements in our balance sheet as a result of the Recapitalization resulted
in establishing adequate credit enhancements for fiscal 2010 to meaningfully
respond to potential increases in volumes and fuel prices. We have
also sought to offset the reduced demand from existing customers by aggressively
seeking new customers, with some success.
Our uses
of cash over the next twelve months are expected to be principally for operating
working capital needs, maintaining our line of credit, and servicing any
principal and interest on our debt. Our line of credit with our
principal lender matures on July 1, 2012.
Off-Balance
Sheet Arrangements
At
September 30, 2009, we do not have any material off-balance sheet
arrangements.
Recent
Accounting Pronouncements
See Note
3 in the footnotes to financial statements included in this Form
10-Q.
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, 2009.
ITEM
3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable.
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 September 30, 2009.
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 September 30, 2009 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.
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
Not applicable.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
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
|
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
|
|
|
November
12, 2009
|
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)
|
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
|
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