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, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 000-21825
(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)
|
(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, 2010 there were 8,527,336 shares of the registrant’s common stock
outstanding.
SMF
ENERGY CORPORATION
FORM
10-Q
INDEX
Form 10-Q Part and Item No.
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Part
I
|
Financial
Information:
|
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|
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Item
1.
|
Condensed
Unaudited Consolidated Financial Statements
|
|
|
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|
|
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Condensed
Consolidated Balance Sheets as of September 30, 2010 (unaudited) and June
30, 2010
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3
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Condensed
Unaudited Consolidated Statements of Operations for the three-months ended
September 30, 2010 and 2009
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4
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Condensed
Unaudited Consolidated Statements of Cash Flows for the three-months ended
September 30, 2010 and 2009
|
5
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|
|
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Notes
to Condensed Unaudited Consolidated Financial Statements
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7
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|
Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
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Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28
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|
Item
4.
|
Controls
and Procedures
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29
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Part
II
|
Other
Information:
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|
Item
1.
|
Legal
Proceedings
|
30
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|
|
|
|
|
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Item
1A.
|
Risk
Factors
|
30
|
|
|
|
|
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|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
30
|
|
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
30
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|
|
|
|
|
|
|
Item
4.
|
Removed
and Reserved
|
30
|
|
|
|
|
|
|
|
Item
5.
|
Other
Information
|
31
|
|
|
|
|
|
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|
Item
6.
|
Exhibits
|
31
|
|
|
|
|
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|
Signatures
|
32
|
|
|
|
|
|
|
Certifications
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|
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
000’s, except share and per share data)
|
|
September
30,
2010
|
|
|
June
30,
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
77
|
|
|
$
|
115
|
|
Accounts
receivable, net of allowances of $970 and $1,025
|
|
|
16,176
|
|
|
|
17,530
|
|
Inventories,
net of reserves of $89 and $98
|
|
|
2,051
|
|
|
|
1,744
|
|
Prepaid
expenses and other current assets
|
|
|
359
|
|
|
|
644
|
|
Total
current assets
|
|
|
18,663
|
|
|
|
20,033
|
|
Property
and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
depreciation
of $17,441 and $16,947
|
|
|
6,862
|
|
|
|
7,226
|
|
Identifiable
intangible assets, net of accumulated
|
|
|
|
|
|
|
|
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amortization
of $1,880 and $1,790
|
|
|
1,573
|
|
|
|
1,662
|
|
Goodwill
|
|
|
228
|
|
|
|
228
|
|
Deferred
debt costs, net of accumulated amortization of $209 and
$169
|
|
|
315
|
|
|
|
355
|
|
Other
assets
|
|
|
74
|
|
|
|
74
|
|
Total
assets
|
|
$
|
27,715
|
|
|
$
|
29,578
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit payable
|
|
$
|
5,742
|
|
|
$
|
6,896
|
|
Current
portion of term loan
|
|
|
1,000
|
|
|
|
1,000
|
|
Accounts
payable
|
|
|
6,358
|
|
|
|
7,301
|
|
Accrued
expenses and other liabilities
|
|
|
3,583
|
|
|
|
3,191
|
|
Total
current liabilities
|
|
|
16,683
|
|
|
|
18,388
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Term
loan, net of current portion
|
|
|
2,833
|
|
|
|
3,083
|
|
Promissory
notes
|
|
|
800
|
|
|
|
800
|
|
Other
long-term liabilities
|
|
|
247
|
|
|
|
251
|
|
Total
liabilities
|
|
|
20,563
|
|
|
|
22,522
|
|
Contingencies
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 10,000 Series A shares
|
|
|
|
|
|
|
|
|
authorized,
0 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Preferred
stock, $0.01 par value; 2,000 Series B shares
|
|
|
|
|
|
|
|
|
authorized,
0 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Preferred
stock, $0.01 par value; 2,000 Series C shares
|
|
|
|
|
|
|
|
|
authorized,
0 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Preferred
stock, $0.01 par value; 5,000 Series D shares
|
|
|
|
|
|
|
|
|
authorized,
599 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.01 par value; 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
8,594,814
issued and 8,565,667 outstanding and 8,557,314 issued and outstanding,
respectively
|
|
|
86
|
|
|
|
86
|
|
Treasury
stock (at cost) 29,147 and 0, respectively
|
|
|
(39
|
)
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
36,678
|
|
|
|
36,657
|
|
Accumulated
deficit
|
|
|
(29,573
|
)
|
|
|
(29,687
|
)
|
Total
shareholders’ equity
|
|
|
7,152
|
|
|
|
7,056
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
27,715
|
|
|
$
|
29,578
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Petroleum
product sales and service revenues
|
|
$
|
45,057
|
|
|
$
|
38,125
|
|
Petroleum
product taxes
|
|
|
6,004
|
|
|
|
5,561
|
|
Total
revenues
|
|
|
51,061
|
|
|
|
43,686
|
|
|
|
|
|
|
|
|
|
|
Cost
of petroleum product sales and service
|
|
|
41,219
|
|
|
|
34,028
|
|
Petroleum
product taxes
|
|
|
6,004
|
|
|
|
5,561
|
|
Total
cost of sales
|
|
|
47,223
|
|
|
|
39,589
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,838
|
|
|
|
4,097
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
3,492
|
|
|
|
3,839
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
346
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(223
|
)
|
|
|
(230
|
)
|
Interest
and other income
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
125
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(11
|
)
|
|
|
(8
|
)
|
Net
income
|
|
$
|
114
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per share computation:
|
|
|
|
|
|
|
|
|
Net
income per share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,549
|
|
|
|
8,248
|
|
Diluted
|
|
|
8,683
|
|
|
|
8,681
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
114
|
|
|
$
|
20
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
266
|
|
|
|
236
|
|
Selling,
general and administrative
|
|
|
318
|
|
|
|
320
|
|
Amortization
of deferred debt costs
|
|
|
40
|
|
|
|
42
|
|
Amortization
of stock-based compensation
|
|
|
21
|
|
|
|
133
|
|
Write-off
of unamortized acquisition costs
|
|
|
-
|
|
|
|
187
|
|
Inventory
reserve provision (recovery)
|
|
|
(9
|
)
|
|
|
7
|
|
Provision
for doubtful accounts
|
|
|
(5
|
)
|
|
|
25
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
1,359
|
|
|
|
792
|
|
Increase
in inventories, prepaid expenses and other assets
|
|
|
(14
|
)
|
|
|
(65
|
)
|
Decrease
in accounts payable and other liabilities
|
|
|
(573
|
)
|
|
|
(930
|
)
|
Net
cash provided by operating activities
|
|
|
1,517
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(86
|
)
|
|
|
(42
|
)
|
Net
cash used in investing activities
|
|
|
(86
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from line of credit
|
|
|
53,472
|
|
|
|
45,916
|
|
Repayments
of line of credit
|
|
|
(54,626
|
)
|
|
|
(46,320
|
)
|
Principal
payments on term loan
|
|
|
(250
|
)
|
|
|
(167
|
)
|
Repurchase
of common stock
|
|
|
(39
|
)
|
|
|
-
|
|
Payment
of preferred stock dividends
|
|
|
(13
|
)
|
|
|
-
|
|
Capital
lease payments
|
|
|
(13
|
)
|
|
|
(17
|
)
|
Net
cash used in financing activities
|
|
|
(1,469
|
)
|
|
|
(588
|
)
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(38
|
)
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
115
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
77
|
|
|
$
|
260
|
|
(Continued)
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
000’s)
(Continued)
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
220
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income tax
|
|
$
|
40
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
|
$
|
45
|
|
|
$
|
22
|
|
The
accompanying notes to the condensed unaudited financial statements are an
integral part of these condensed unaudited 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.
The
Company is a Delaware corporation formed in 2006. In December 2006,
the shareholders of Streicher Mobile Fueling, Inc. (“Streicher”), a Florida
corporation formed in 1996, approved changing Streicher’s name to SMF Energy
Corporation and the reincorporation of Streicher in Delaware by merger into the
Company. The merger was effective February 14, 2007.
At
September 30, 2010, the Company was conducting operations through 34 service
locations in the eleven states of Alabama, California, Florida, Georgia,
Louisiana, Mississippi, Nevada, North Carolina, South Carolina, Tennessee and
Texas.
2.
|
CONDENSED
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis of
Presentation
-
The condensed unaudited consolidated financial statements include the accounts
of SMF Energy Corporation and its wholly owned subsidiaries, SMF Services, Inc.,
H & W Petroleum Company, Inc., and Streicher Realty, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The
condensed unaudited consolidated financial statements included herein have been
prepared in accordance with the instructions to Form 10-Q, and do not include
all the information and footnotes required by generally accepted accounting
principles; however, they do include all adjustments of a normal recurring
nature that, in the opinion of management, are necessary to present fairly the
financial position and results of operations of the Company as of and for the
interim periods presented.
Operating
results for the three months ended September 30, 2010 are not necessarily
indicative of the results that may be expected for any subsequent period or the
fiscal year ending June 30, 2011. These interim financial statements
should be read in conjunction with the Company’s audited consolidated financial
statements and related notes included in the Company’s Annual Report on Form
10-K for the year ended June 30, 2010, as filed with the United States
Securities and Exchange Commission (the “2010 Form 10-K”).
Fair
Value of Financial Instruments
The
Company carries certain of its assets and liabilities at fair value, measured on
a recurring basis, in the accompanying consolidated balance
sheets. In fiscal 2010, the Company adopted ASC 825
Financial Instruments
which
establish a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels which distinguish
between assumptions based on market data (observable inputs) and the Company’s
assumptions (unobservable inputs). The level in the fair value
hierarchy within which the respective fair value measurement falls is determined
based on the lowest level input that is significant to the measurement in its
entirety. Level 1 inputs are quoted market prices in active markets
for identical assets or liabilities, Level 2 inputs are other than quotable
market prices included in Level 1 that are observable for the asset or liability
either directly or indirectly through corroboration with observable market
data. Level 3 inputs are unobservable inputs for the assets or
liabilities that reflect management’s own assumptions about the assumptions
market participants would use in pricing the asset or
liability.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3.
|
CASH
AND CASH EQUIVALENTS
|
During
the first quarter of fiscal 2011, the Company paid down $1.2 million on its line
of credit payable. Total cash and cash availability was approximately
$3.3 million
and
$4.6 million at September 30, 2010 and June 30, 2010, respectively and was
approximately $4.3 million on November 10, 2010. Total cash and cash
availability includes cash and cash equivalents as presented in the Company’s
balance sheet and cash available to the Company through its line of credit,
described in Note 5 – 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.
4.
|
OUTSTANDING
SHARES AND NET INCOME PER SHARE
|
As of
Sempember 30, 2010 there were 8,594,814 issued shares of the Company's common
stock of which 29,147 shares were held in treasury, resulting in 8,565,667
outstanding shares. Included in the issued and outstanding shares were
31,500 shares of restricted shares which were issued on September 23,
2010. The weighted average common shares used to calculate basic
earnings per share does not include the restricted shares. The
restricted shares are evaluated under the treasury method for their dilutive
effect. Basic net income per share is computed by dividing the
net income attributable to common shareholders by the weighted average number of
common shares outstanding during the period.
Diluted
earnings per share is computed by dividing net earnings attributable to common
shareholders by the weighted-average number of common shares outstanding,
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued. Conversion or exercise of the potential common shares is not
reflected in diluted earnings per share unless the effect is
dilutive. The dilutive effect, if any, of outstanding common share
equivalents is reflected in diluted earnings per share by application of the
if-converted and the treasury stock method, as applicable. In
determining whether outstanding stock options, restricted stock, and common
stock warrants should be considered for their dilutive effect, the average
market price of the common stock for the period has to exceed the exercise price
of the outstanding common share equivalent.
Diluted
net income per share for the three months ended September 30, 2010 and 2009, was
diluted by additional common stock equivalents as follows (in
thousands):
|
|
For the Three Months ended,
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
Incremental
shares due to stock options
|
|
|
|
|
|
|
awarded
to employees and directors
|
|
|
1
|
|
|
|
2
|
|
Incremental
shares due to preferred stock
|
|
|
|
|
|
|
|
|
conversion
rights
|
|
|
133
|
|
|
|
431
|
|
Total
dilutive shares
|
|
|
134
|
|
|
|
433
|
|
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 net income per common share consisted of (in thousands):
|
|
For the Three Months ended,
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
413
|
|
|
|
410
|
|
Common
stock warrants
|
|
|
141
|
|
|
|
141
|
|
Promissory
note conversion rights
|
|
|
89
|
|
|
|
89
|
|
Restricted
shares
|
|
|
32
|
|
|
|
-
|
|
Total
common stock equivalents outstanding
|
|
|
675
|
|
|
|
640
|
|
The
following table sets forth the computation of basic and diluted income per share
(in thousands, except per share amounts):
|
|
For the Three Months ended,
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Per Share
|
|
|
|
|
|
Common
|
|
|
Per Share
|
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share attributable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common shareholders
|
|
$
|
114
|
|
|
|
8,549
|
|
|
$
|
0.01
|
|
|
$
|
20
|
|
|
|
8,248
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
Preferred
stock conversion rights
|
|
|
-
|
|
|
|
133
|
|
|
|
|
|
|
|
-
|
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share attributable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common shareholders
|
|
$
|
114
|
|
|
|
8,683
|
|
|
$
|
0.01
|
|
|
$
|
20
|
|
|
|
8,681
|
|
|
$
|
0.00
|
|
5.
|
LINE OF CREDIT
PAYABLE
|
The Company has a $25.0 million loan
facility, comprised of a three year $20.0 million asset based lending revolving
line of credit coupled with a $5.0 million, 60 month, fully amortized term
loan. The Company’s $20.0 million line of credit has a maturity date
of July 1, 2012 and permits the Company to borrow up to 85% of the total amount
of eligible accounts receivable and 65% of eligible inventory, both as
defined. Outstanding stand-by letters of credit reduce the maximum
amount available for borrowing. Outstanding borrowings under the loan
facility are secured by substantially all Company assets.
Interest is payable monthly based on a
LIBOR rate and a pricing matrix. At September 30, 2010, the interest
rate for the line of credit was 4.00%. This rate was priced using a
minimum LIBOR floor of 0.75%, plus the applicable margin of
3.25%. The applicable margin is determined quarterly based on a
predetermined fixed charge coverage ratio pricing matrix with the applicable
margins ranging from 3.00% to 3.75%.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of
September 30, 2010 and June 30, 2010, the Company had outstanding borrowings of
$5.7 million and $6.9 million, respectively, under its line of credit which does
not include stand-by letters of credit which reduces the
availability. The line of credit is classified as a current liability
in accordance with ASC 470, Debt. Based on eligible receivables and
inventories, and reduction from letters of credit outstanding at September 30,
2010 and June 30, 2010, the Company had $3.2 million and $4.6 million of cash
availability under the line of credit, respectively.
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, 2010, the financial covenants
included a minimum daily availability of $250,000, a fixed charge coverage ratio
of 1.1 to 1.0, and a capital expenditure limitation for fiscal year 2011 of
$750,000. At September 30, 2010 and June 30, 2010, the Company had a
sublimit of $1.75 million, on both dates, for which letters of credit could be
issued. At September 30, 2010 and June 30, 2010, $1.5 million had
been issued in letters of credit, for both periods. On October
14, 2010, the Company reduced its issued letters of credit to $1.150
million.
The Company’s loan agreement for the
line of credit and the Term Loan requires the Company to obtain the consent of
the lender prior to incurring additional debt, paying any cash dividends or
distributions, or entering into mergers, consolidations or sales of assets
outside the ordinary course of business. Failure to comply with one
or more of the covenants in the future could affect the amount the Company can
borrow and thereby adversely affect the Company’s liquidity and financial
condition. At September 30, 2010, the Company was in compliance with
its covenants under the loan facility agreement.
6.
|
LONG-TERM
DEBT (INCLUDES TERM LOAN AND PROMISSORY
NOTES)
|
Long-term
debt consists of the following (in thousands):
|
|
As of
|
|
|
|
September 30, 2010
|
|
|
June 30, 2010
|
|
June
2009 term loan (the
“
Term Loan”), fully
amortized, 60 monthly principal payments of approximately $83,333
commencing on August 1, 2009; variable interest due monthly, 4.75% at
September 30, 2010; secured by substantially all Company
assets. For additional details, see below.
|
|
$
|
3,833
|
|
|
$
|
4,083
|
|
|
|
|
|
|
|
|
|
|
June
2009 unsecured convertible subordinated promissory note (the “June 2009
Note”) (5.5% interest due semi-annually, January 15 and July 15, beginning
January 15, 2011; interest accrued for the first 13 months was deferred
and paid on August 12, 2010); matures July 1, 2014 in its
entirety. For additional details, see below.
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
|
4,633
|
|
|
|
4,883
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion (Term Loan)
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net
|
|
$
|
3,633
|
|
|
$
|
3,883
|
|
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 loan agreement to provide for a $25.0 million loan facility, which
included $5.0 million fully amortized 60 month term loan (the “Term
Loan”). The proceeds of the Term Loan were used to pay down $4.867
million of the August 2007 Notes and $125,000 of the September 2008
Notes. 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, 2010, 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 5.5% interest only, unsecured convertible subordinated
promissory note in the principal amount of $800,000 (the “June 2009
Note”). The June 2009 Note is subordinated to all other existing debt
of the Company, including any amounts owed now or in the future to our principal
lender. The holder of the June 2009 Note entered into a debt
subordination agreement (the “Subordination Agreement”) with the Company and our
principal lender, whereby it expressly subordinated its rights under the June
2009 Note to our principal lender.
The
principal balance of the June 2009 Note is due at maturity on July 1,
2014. Subject to the limitations in the Subordination
Agreement, interest will be paid semi-annually, except that the interest payment
for the first thirteen months was paid on August 12,
2010. Thereafter, starting January 15, 2011, semi-annual
interest payments will be scheduled on or about each January 15th and July
15th. The amounts due under the June 2009 Note will become due and
payable upon the occurrence of customary events of default, provided,
however, that the deferral of any payment in accordance with the Subordination
Agreement will not constitute an event of default. If permitted under
the Subordination Agreement, the Company may pre-pay the June 2009 Note, in
whole or in part, without prepayment penalty or premium.
Twenty-five percent (25%) of the
original principal amount of the June 2009 Note, or $200,000, may be converted
into shares of the Company’s Common Stock at $2.25 per share (the “Conversion
Price”) at the option of the noteholder. The 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.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following reflects the change in
shareholders’ equity for the three months ended September 30, 2010 (in
thousands, except share data):
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Series D
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Total
|
|
Balance
at June 30, 2010
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
599
|
|
|
$
|
-
|
|
|
|
8,557,314
|
|
|
$
|
86
|
|
|
$
|
36,657
|
|
|
$
|
(29,687
|
)
|
|
$
|
-
|
|
|
$
|
7,056
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
114
|
|
|
|
-
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of vested restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of unvested restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
amortization
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
Balance
at September 30, 2010
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
599
|
|
|
$
|
-
|
|
|
|
8,594,814
|
|
|
$
|
86
|
|
|
$
|
36,678
|
|
|
$
|
(29,573
|
)
|
|
$
|
(39
|
)
|
|
$
|
7,152
|
|
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Repurchase
Program
On July 28, 2010, the Board of
Directors of the Company approved a share repurchase program (the “Program”)
under which the Company may elect to purchase up to five percent of its
outstanding capital stock, or approximately 435,000 shares of common stock or
common stock equivalents, with available cash to the extent permitted by its
revolving line of credit with its principal lender.
On July
1, 2010, the lender had approved such repurchases, conditioned upon the
Company’s maintenance of (i) a ratio of EBITDA to Fixed Charges of 1.3 to 1.0,
based on the most recent twelve month period for which financial statements have
been provided to the Lender, after giving pro forma effect to any repurchases;
and (ii) Excess Availability of at least $2.25 million (A) immediately after
making any repurchase and (B) for the ninety (90) days preceding any
repurchase. Subject to these conditions, the Lender approved a total
of $840,000 in capital stock repurchases by the Company under the Program,
including up to $200,000 in any one fiscal quarter.
During
the first quarter of fiscal 2011, the Company purchased an aggregate of 29,147
shares of the Company’s common stock for an aggregate amount of approximately
$39,000 at an average cost of $1.29 per share. These shares and their
corresponding cost is reflected as Treasury Stock in the Shareholders’ Equity
section of the Balance Sheet. During the second quarter of fiscal 2011, the
Company has continued making purchases of its common stock.
Shared-Based
Compensation
The
Company currently has the authority to grant stock options to employees and
others under its 2009 Equity Incentive Plan which currently has 2,004 options
outstanding. The Company no longer grants stock options under its
2000 Employee Stock Option Plan (“2000 Plan”) but stock options to purchase
325,573 shares of Common Stock remain outstanding under the 2000
Plan. Options granted under the 2000 Plan generally vest over three
years of continuous service and expire no later than ten years from the date of
grant. As of September 30, 2010, 311,394 of the 325,573 options that
remain outstanding under the 2000 Plan are vested and exercisable.
The
Company also no longer grants any stock options under its Directors Stock
Options Plan but stock options to purchase 85,777 shares of Common Stock remain
outstanding under the Directors Plan. All outstanding stock options
under the Directors Plan are fully vested and presently
exercisable.
In
September 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 $2.48
per share (the “Amendments”), which was $0.77 above the $1.71
official closing price on the Nasdaq Capital Market on the last trading day
before the Amendments. The Amendments did not change the vesting
schedules or any of the other terms of the respective stock
options. As a result of the repricing of the options effected by the
Amendments, the Company incurred a non-cash charge of $93,000 to stock-based
compensation amortization expense during the first quarter of fiscal year 2010
and an additional $5,000 which is being amortized over the remaining vesting
period of the related options. The Amendments affected 31 employees
holding 327,614 stock options on June 30, 2009.
In
September 2010, the Company issued 6,000 shares of restricted and fully vested
shares to each of the six non-employee members of the Board of Directors under
the Company’s 2009 Equity Incentive Plan. These shares were valued at
$1.40 per share, the market closing price on the last trading day prior to their
issuance. Also in September 2010, the Company issued 31,500 shares of
unvested restricted stock to the Company’s Chairman, Chief Executive Officer and
President, which were valued at $1.31 per share, the market closing price on the
last trading day prior to their issuance. These shares will vest when
the Chief Executive Officer’s 111,113 stock options expire on December 21, 2010,
and their cost is being recognized ratably as stock-based compensation expense
over their vesting period.
During
the three months ended September 30, 2010, and September 30, 2009, the Company
recorded amortization of share-based compensation expense related to the stock
option plans and the restricted shares for an aggregate of $21,000 and $133,000,
respectively.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, 2010. Therefore no
contingency gains or losses have been recorded as of September 30,
2010.
On May
26, 2009, the Company filed a Demand for Arbitration with the American
Arbitration Association in Broward County, Florida, under which the Company
brought claims against various members of the Harkrider family arising out of
the Company’s October 1, 2005 purchase of H & W Petroleum Company, Inc. (“H
& W”) from the Harkrider family and H & W’s purchase of certain assets
of Harkrider Distributing Company, Inc. (“HDC”) immediately prior to the
Company’s purchase of H & W. In that action, Case No. 32 198 Y
00415 09 (the “Arbitration”), the Company and H & W, which is now the
Company’s wholly owned subsidiary, sought damages for breaches of, and
indemnification under, the October 1, 2005, Stock Purchase Agreement between
various Harkrider family members and the Company and under the September 29,
2005, Asset Purchase Agreement between HDC and various members of the Harkrider
family, on the one hand, and H & W on the other, along with various other
claims arising from the transaction. Also on May 26, 2009, H & W
filed a second action against various members of the Harkrider family in the
District Court in Harris County, Texas, Civil Action No. 2009-32909 (the “Harris
County Action”), seeking damages and declaratory relief for various breaches of
H & W’s lease of its Houston, Texas facility by H & W’s landlord, the
Harkrider Family Partnership, and other related claims. On June 24,
2009, the parties to the Arbitration and the Harris County Action agreed that
all of the claims brought in the Arbitration would be dismissed and all of those
claims would be added to the Harris County Action. On June 29, 2009,
in accordance with the stipulation of the parties to consolidate the Arbitration
with the Harris County Action, the American Arbitration Association closed the
Arbitration. The Harris County Action is currently in the discovery
phase but the case is inactive, since the parties have entered into a standstill
agreement while they engage in settlement discussions.
9.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
Accounting for
Transfers of Financial Assets
(Included in ASC 860 “Transfers and
Servicing”, previously FAS No. 166, “Accounting for Transfers of Financial
Assets, an amendment to FAS No. 140”
)
In
June 2009, the FASB issued FAS Statement No. 166,
“Accounting for Transfers of
Financial Assets, an amendment to FAS No. 140”
(“FAS No.
166”). FAS No. 166 eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial
assets including limiting the circumstances in which a company can derecognize a
portion of a financial asset, and requires additional
disclosures. FAS No. 166 is effective for financial statements issued
for fiscal years beginning after November 15, 2009, and interim periods within
those fiscal years. The Company’s adoption of this standard in the first
quarter of fiscal 2011 had no impact on the Company’s consolidated financial
condition, results of operations or cash flows.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair
Value Measurement and Disclosures Topic 820 – Improving Disclosures about Fair
Value Measurements
In
January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06
“Fair Value Measurement and
Disclosures Topic 820 – Improving Disclosures about Fair Value Measurements”
(“ASU No. 2010-06”)
, which provides amendments to subtopic 820-10, Fair
Value Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. This update provides amendments to Topic 820 that will
provide more robust disclosures about (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs
used, (3) the activity in Level 3 fair value measurements, and (4) the transfers
between Levels 1, 2, and 3. The new disclosures and clarification of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlement in the rollforward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company’s adoption of the ASU No. 2010-06 in the first
quarter of fiscal 2011 did not have an impact on the Company’s consolidated
financial position, results of operations or cash flows.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking
Statements
This report, including but not limited
to this Item 2 and the notes to the condensed consolidated financial statements
in Item 1, contains “forward looking statements” within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). These statements concern expectations, beliefs, projections,
future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical
facts. Statements preceded by, followed by, or that include the words
“believes,” “expects,” “anticipates,” or similar expressions are generally
considered to be forward-looking statements.
The
forward-looking statements reflect our current view about future events and are
subject to risks, uncertainties and assumptions. A number of
important factors may affect our actual results and could cause them to differ
significantly from those expressed in any forward-looking
statement. In addition to the Risk Factors included in Part I, Item
1A, of the Company’s Annual Report on Form 10-K for the year ended June 30,
2010, as filed with the United States Securities and Exchange Commission, the
inaccuracy of any of the following assumptions could prevent us from achieving
our goals, and cause the assumptions underlying the forward-looking statements
and the actual results to differ materially from those expressed in or implied
by those forward-looking statements:
|
·
|
The
avoidance of unanticipated net
losses;
|
|
·
|
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 execution of our acquisition and diversification strategy,
including the availability of sufficient capital to acquire additional
businesses and to support the infrastructure requirements of a larger
combined company;
|
|
·
|
Our
success in responding to competition from other providers of similar
services; and
|
|
·
|
Our
continuing success in minimizing of the negative impact on our operations,
revenues and profitability from current and future unfavorable 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, 2010, the
Company was conducting operations through 34 service locations in the eleven
states of Alabama, California, Florida, Georgia, Louisiana, Mississippi, Nevada,
North Carolina, South Carolina, Tennessee and Texas.
We
provide commercial mobile and bulk fueling, integrated out-sourced fuel
management, packaging, distribution and sale of lubricants and chemicals,
transportation logistics, and emergency response services. Our
specialized equipment fleet distributes diesel fuel and gasoline to customer
locations on a regularly scheduled or as needed basis, refueling vehicles and
equipment, re-supplying bulk storage tanks, and providing fuel for emergency
power generation systems. Our fleet also handles the movement of
customer equipment 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 distribution
services particularly to prevent business interruptions during
emergencies. We believe that certain factors, such as our ability to
provide a range of services and petroleum based products and services, create
advantages for us when compared to our competitors.
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 begin fiscal 2011 with an expected
positive trend of financial performance, achieving during the first quarter of
fiscal 2011, net income of $114,000, operating income of $346,000, and
EBITDA
1
, a
non-GAAP measure, of $953,000 compared to net income of $20,000, operating
income of $258,000 and EBITDA of $1.1 million a year ago. While the
economic environment continues to be challenging, we have increased our volumes
by 6% from 16.9 million during the first quarter of fiscal 2010 to 17.9 million
during the first quarter this fiscal year. The increase in volumes is
primarily the result of the expansion into three new markets that we initiated
during the second quarter of last year. We continue to seek new
customers in our existing markets, and expansion of our services to our existing
customers in markets where we may not be currently serving
them. Additionally, since we have yet to see any recovery of the 14%
drop off in demand from existing customers that we saw the fall of 2008, we
continue to believe that, when the economy strengthens, the resulting growth in
the business of those existing customers will result in further volume increases
for us.
We achieved net margin of $4.1 million
and net margin per gallon of 22.9 cents during the first quarter of fiscal 2011
compared to $4.3 million, and 25.6 cents, respectively, a year
ago. The $230,000 decrease in net margin was primarily due to higher
repair and maintenance expenses of our fleet, which is also the principal cause
of the $181,000 decrease in EBITDA. These higher expenses help
explain why we have recently invested in new trucks and equipment to modernize
and increase the size of our fleet. The new trucks will create
additional capacity, permitting us to expand in new or existing markets, reduce
our repair and maintenance costs, improve fleet fuel economy and satisfy new
emission standards.
During
the first quarter of this fiscal year, we offset the lower net margin with a
decrease in selling, general and administrative expenses, which were $347,000
lower when compared to the prior year, due to the lack of unamortized
acquisition costs and lower legal expenses, property taxes and other fees in
fiscal 2011.
At
September 30, 2010, our balance sheet remained strong, as evidenced by our debt
to equity ratio of 1.5 this quarter compared to 1.7 at June 30,
2010. We continue to reduce our long term debt, paying down an
additional $250,000 of our term loan this quarter. Our fixed coverage
ratio as of September 30, 2010 was 1.61 and 1.66 as of September 30, 2009, well
above the 1.1 required by our bank covenants
1
. During the
most recent trailing twelve months ended September 30, 2010, we made increased
capital expenditures to further improve our business operations. Our
trailing twelve months EBITDA exceeded the trailing twelve months fixed charges
by $1.5 million at both September 30, 2010 and 2009.
1
EBITDA, fixed charges and fixed
coverage ratio are non-GAAP measures within the meaning of SEC Regulation
G. See "Non-GAAP Measures and Definitions
"
below.
We
recently began a stock repurchase program, and during the first quarter of 2011,
we purchased 29,147 shares of our common shares for an aggregate amount of
approximately $39,000. We are authorized to purchase up to $840,000
of capital stock. We have continued making purchases pursuant to the
program during the second quarter of fiscal 2011 and intend to continue doing
so, subject to limitations imposed by law, since we believe that the cost for
the acquisition of our shares, at current prices of our common shares, is a
reasonable and prudent allocation of our financial resources.
Our net
income is reduced by a series of charges that do not represent cash outlays
during the period. We are reporting net income for the first quarter
of fiscal 2011 of $114,000. The $114,000 net income included $631,000
in non-cash charges, such as depreciation and amortization of assets, debt
costs, stock-based compensation, slow moving inventory reserve, and provision
for doubtful accounts. Additionally, the net income also included
stated interest expense associated with servicing of our debt of $223,000, legal
expenses of $186,000 and public company costs of $221,000.
The
following table presents certain operating results for the last eight sequential
quarters (in thousands, except net margin per gallon):
|
|
For
the
Three
Months
Ended,
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
51,061
|
|
|
$
|
53,704
|
|
|
$
|
49,152
|
|
|
$
|
46,305
|
|
|
$
|
43,686
|
|
|
$
|
39,884
|
|
|
$
|
34,982
|
|
|
$
|
45,112
|
|
Gross
profit
|
|
$
|
3,838
|
|
|
$
|
4,320
|
|
|
$
|
3,398
|
|
|
$
|
3,381
|
|
|
$
|
4,097
|
|
|
$
|
3,539
|
|
|
$
|
3,790
|
|
|
$
|
3,292
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
|
|
$
|
3,492
|
|
|
$
|
3,678
|
|
|
$
|
3,555
|
|
|
$
|
2,673
|
|
|
$
|
3,839
|
|
|
$
|
3,401
|
|
|
$
|
3,455
|
|
|
$
|
3,267
|
|
Operating
income (loss)
|
|
$
|
346
|
|
|
$
|
642
|
|
|
$
|
(157
|
)
|
|
$
|
708
|
|
|
$
|
258
|
|
|
$
|
138
|
|
|
$
|
335
|
|
|
$
|
25
|
|
Interest
expense and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
income, net
|
|
$
|
(221
|
)
|
|
$
|
(215
|
)
|
|
$
|
(254
|
)
|
|
$
|
(255
|
)
|
|
$
|
(230
|
)
|
|
$
|
(454
|
)
|
|
$
|
(570
|
)
|
|
$
|
(677
|
)
|
Non-cash
ASC 470-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(formerly
FAS No. 84)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inducement on extinguishment
2
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,651
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain
on extinguishment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
promissory notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net
income (loss)
|
|
$
|
114
|
|
|
$
|
419
|
|
|
$
|
(419
|
)
|
|
$
|
445
|
|
|
$
|
20
|
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
Less: Non-cash
write-off of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unamortized
acquisition costs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
187
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Less: Non-cash
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
repricing
costs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
93
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Less: Non-cash
ASC 470-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(formerly
FAS No. 84)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inducement on extinguishment
1
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,651
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Adjusted
net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
non-cash, non-recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges
1
|
|
$
|
114
|
|
|
$
|
419
|
|
|
$
|
(419
|
)
|
|
$
|
445
|
|
|
$
|
300
|
|
|
$
|
(297
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
1
|
|
$
|
953
|
|
|
$
|
1,189
|
|
|
$
|
398
|
|
|
$
|
1,289
|
|
|
$
|
1,134
|
|
|
$
|
876
|
|
|
$
|
974
|
|
|
$
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
margin
|
|
$
|
4,103
|
|
|
$
|
4,529
|
|
|
$
|
3,616
|
|
|
$
|
3,609
|
|
|
$
|
4,333
|
|
|
$
|
3,795
|
|
|
$
|
4,027
|
|
|
$
|
3,534
|
|
Net margin per gallon
1
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.26
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
Gallons
sold
|
|
|
17,912
|
|
|
|
18,385
|
|
|
|
17,382
|
|
|
|
16,956
|
|
|
|
16,945
|
|
|
|
16,709
|
|
|
|
16,041
|
|
|
|
16,602
|
|
1
Non-GAAP
measure. See “Non-GAAP Measures and Definitions” below.
2
See
“Non-GAAP Measures and Definitions” below.
Non-GAAP
Measures and Definitions
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 and the
non-cash ASC 470-20 (formerly FAS No. 84) inducement on extinguishment of
promissory notes constitutes the recognition of previously deferred
interest or finance cost, it is considered interest expense for the calculation
of certain interest expense amounts. Both stock-based compensation
amortization expense and the write-off of unamortized acquisition costs are
considered amortization items to be excluded in the EBITDA
calculation. We believe that EBITDA provides useful information to
investors because it excludes transactions not related to the core cash
operating business activities, allowing meaningful analysis of the performance
of our core cash operations.
The
following table reconciles EBITDA (non-GAAP measure) to the reported Net income
(loss) for each of the eight quarterly periods presented above (in
thousands):
|
|
For
the
Three
Months
Ended,
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
114
|
|
|
$
|
419
|
|
|
$
|
(419
|
)
|
|
$
|
445
|
|
|
$
|
20
|
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
223
|
|
|
|
227
|
|
|
|
260
|
|
|
|
261
|
|
|
|
230
|
|
|
|
545
|
|
|
|
575
|
|
|
|
680
|
|
Income
tax expense
|
|
|
11
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
Depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
266
|
|
|
|
208
|
|
|
|
218
|
|
|
|
228
|
|
|
|
236
|
|
|
|
254
|
|
|
|
239
|
|
|
|
242
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
318
|
|
|
|
316
|
|
|
|
316
|
|
|
|
316
|
|
|
|
320
|
|
|
|
344
|
|
|
|
334
|
|
|
|
342
|
|
Stock-based
compensation expense
|
|
|
21
|
|
|
|
11
|
|
|
|
15
|
|
|
|
31
|
|
|
|
133
|
|
|
|
49
|
|
|
|
61
|
|
|
|
78
|
|
Write-off
of unamortized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
187
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-cash
ASC 470-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(formerly
FAS No. 84)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
inducement
on extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,651
|
|
|
|
-
|
|
|
|
-
|
|
Gain
on extinguishment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
promissory notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
EBITDA
|
|
$
|
953
|
|
|
$
|
1,189
|
|
|
$
|
398
|
|
|
$
|
1,289
|
|
|
$
|
1,134
|
|
|
$
|
876
|
|
|
$
|
974
|
|
|
$
|
690
|
|
Adjusted net income (loss) before
non-cash, non-recurring charges is a non-GAAP measure that demonstrates the
economic performance of the Company before the impact of charges that do not
reflect the ongoing performance of its operations, such as the non-cash
accounting charge of $1.7 million in the fourth quarter of fiscal 2009 resulting
from the Company’s June 2009 recapitalization, non cash stock option repricing
costs and the write-off incurred in the first quarter of fiscal 2010 as the
result of a new accounting ruling was applied. We believe that this
is a meaningful non-GAAP representation of the ongoing performance of the
operations.
The
following table reconciles Adjusted net income (loss) before non-cash,
non-recurring charges
(non-GAAP measure) to the
reported Net income (loss) for each of the eight quarterly periods presented
above (in thousands):
|
|
For
the
Three
Months
Ended,
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
114
|
|
|
$
|
419
|
|
|
$
|
(419
|
)
|
|
$
|
445
|
|
|
$
|
20
|
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
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
|
|
$
|
114
|
|
|
$
|
419
|
|
|
$
|
(419
|
)
|
|
$
|
445
|
|
|
$
|
300
|
|
|
$
|
(297
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
Fixed
charges and fixed coverage ratio are non-GAAP measures that are used by our
principal lender and others to help assess the Company’s ability to satisfy cash
payments other than those made for operating activities. Fixed
charges are comprised of repayments of principal on debt, purchases of property
and equipment, cash paid for interest, payments for dividends and repurchases of
stock. The fixed charge coverage ratio is used to measure the extent
to which EBITDA exceeds the cash requirements, or fixed charges, of the
business. These measurements are made on a rolling trailing twelve
month basis.
The
following table reconciles fixed charges and fixed coverage ratio (non-GAAP
measures) to the Net income (loss) for each of the trailing twelve months ended
September 30 (in thousands):
|
|
Trailing Twelve Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
559
|
|
|
$
|
(2,831
|
)
|
Add
back:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
971
|
|
|
|
2,030
|
|
Income
tax expense
|
|
|
35
|
|
|
|
32
|
|
Depreciation
and amortization expense within:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
920
|
|
|
|
971
|
|
Selling,
general and administrative expenses
|
|
|
1,266
|
|
|
|
1,340
|
|
Stock-based
compensation amortization expense
|
|
|
78
|
|
|
|
321
|
|
Write-off
of unamortized acquisition costs
|
|
|
-
|
|
|
|
187
|
|
Non-cash
ASC 470-20 (formerly FAS No. 84) inducement on
|
|
|
|
|
|
|
|
|
extinguishment
|
|
|
-
|
|
|
|
1,651
|
|
Gain
on extinguishment of promissory notes
|
|
|
-
|
|
|
|
(27
|
)
|
EBITDA
|
|
$
|
3,829
|
|
|
$
|
3,674
|
|
|
|
|
|
|
|
|
|
|
Less
fixed charges:
|
|
|
|
|
|
|
|
|
Principal
payments on term and promissory notes
|
|
|
1,000
|
|
|
|
5,160
|
|
Purchases
of property and equipment
|
|
|
459
|
|
|
|
187
|
|
Capital
lease payments
|
|
|
58
|
|
|
|
63
|
|
Cash
paid for interest
|
|
|
809
|
|
|
|
1,452
|
|
Payment
of dividends
|
|
|
13
|
|
|
|
390
|
|
Principal
and interest payments made as a result of the
Recapitalization
|
|
|
-
|
|
|
|
(5,045
|
)
|
Repurchase
of common shares
|
|
|
39
|
|
|
|
-
|
|
Total
fixed charges
|
|
$
|
2,378
|
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
Difference
(EBITDA less fixed charges)
|
|
$
|
1,451
|
|
|
$
|
1,467
|
|
|
|
|
|
|
|
|
|
|
Fixed
charge coverage ratio (EBITDA divided by fixed charges)
|
|
|
1.61
|
|
|
|
1.66
|
|
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.
Non-cash
ASC 470-20 inducement on extinguishment is a non-cash charge we incurred as a
result of the June 29, 2009 Recapitalization. The Company
extinguished a portion of the August 2007 and the September 2008 Notes (“the
Notes”) through the issuance of approximate 1.2 million shares and approximate
278,000 shares, respectively, at the negotiated price of $1.71 per share, which
was greater than the $1.67 per share closing bid price the day prior to the
Recapitalization, but lower than the conversion price applicable to the
convertible debt instruments, which resulted in the issuance of more shares in
the exchange than would have been issued upon a
conversion. The prevalent interpretation of ASC 470-20 is
that an inducement occurs any time when additional shares are issued in the
extinguishment of convertible debt regardless of the absence of an economic loss
or economic intent of the parties to the transaction. As a result,
irrespective of the economic reality of the transaction, ASC 470-20 required the
recording of a non-cash “conversion inducement” charge of $1.7 million, based on
the difference between the approximate aggregate 471,000 common shares issuable
to the applicable note holder under the original conversion rights that existed
upon a conversion and the approximate 1.5 million common shares exchanged at
$1.71 cents in the transaction that extinguished all of the
Notes. This non-cash charge is deemed a financing expense to
extinguish the Notes. To the extent that the ASC 470-20 inducement on
extinguishment of promissory notes constitutes the recognition of a finance
cost, it is considered interest expense for the calculation of EBITDA and other
interest expense amounts.
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, 2010 (“first quarter of fiscal 2011”) to
Three Months Ended September 30, 2009 (“first quarter of fiscal
2010”)
Revenues
Revenues
were $51.1 million in the first quarter of fiscal 2011, as compared to $43.7
million in the same period of the prior year, an increase of $7.4 million, or
17%. Price variances in market prices of petroleum products provided
$4.6 million of the increase in revenues. The $2.8 million remainder
of the increase is due to a 6% increase in gallons sold compared to a year ago
as a result of the stabilization in the demand for our services from existing
customers and an increase in new customer business. We remain
optimistic that we can maintain or increase present volume levels by continuing
to attract new customers.
Gross
Profit
Gross
profit was $3.8 million in the first quarter of fiscal 2011, as compared to $4.1
million in the same period of the prior year, a decrease of $259,000, or
6%. The net margin per gallon for the first quarters of fiscal 2011
and 2010 was 22.9 cents and 25.6 cents, respectively, a decrease of 2.7
cents. The decrease in gross profit and net margin per gallon is
attributed primarily to an increase in direct operating expenses, mostly related
to an increase of $175,000 in repairs and maintenance of our fleet and an
increase of $62,000 in employee expenses attributable to additional operations
management personnel.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses were $3.5 million in the first
quarter of fiscal 2011 and $3.8 million in the first quarter of fiscal 2010, a
decrease of $347,000, or 9%. The decrease in SG&A is primarily
due to the write-off of $187,000 of unamortized acquisition costs that we
incurred last year as a result of the adoption of ASC 805, lower professional
fees of $119,000 this year, and lower property taxes and other fees of $37,000
in fiscal 2011.
Interest
Expense
Interest
expense was $223,000 in the first quarter of fiscal 2011, as compared to
$230,000 in the same period of the prior year, a decrease of
$7,000. Our interest rate terms remain basically the same for both
periods, which is currently around 4.5%.
The
components of interest expense were as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Stated
Rate Interest Expense:
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
116
|
|
|
$
|
110
|
|
Long-term
debt
|
|
|
59
|
|
|
|
69
|
|
Other
|
|
|
8
|
|
|
|
9
|
|
Total
stated rate interest expense
|
|
|
183
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Interest Amortization:
|
|
|
|
|
|
|
|
|
Amortization
of deferred debt costs
|
|
|
40
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
$
|
223
|
|
|
$
|
230
|
|
Income
Taxes
State
income tax expense of $11,000 and $8,000 was recorded for the first
quarters of fiscal 2011 and 2010, respectively. No federal income tax
expense was recorded for these periods. The federal net operating
loss carryforward at September 30, 2010 was $29.5 million, which includes a $2.2
million net operating loss carryforward acquired in connection with the H &
W acquisition. Although net income was generated in the first
quarters of fiscal 2011 and 2010, there is no provision for federal income taxes
due to the availability of net operating loss carryforwards. The $9.1
million net deferred tax asset remains fully reserved at September 30,
2010.
Net
Income
Net
income was $114,000 in the first quarter of fiscal 2011, as compared to net
income of $20,000 in the same period in the prior year. The $94,000
or 470% increase was primarily attributable to the lower selling, general and
administrative expenses of $347,000 described above. The decrease in
SG&A was offset by the lower gross profit of $259,000.
EBITDA
EBITDA
was $953,000 in the first quarter of fiscal 2011, as compared to $1.1 million in
the same period of the prior year, a decrease of $181,000, or
16%. The decrease was primarily due to the decrease in gross profit,
partially offset by the reduction in selling, general and administrative
expenses.
The
reconciliation of EBITDA to Net income for the first quarters of fiscals 2011
and 2010 was as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
114
|
|
|
$
|
20
|
|
Add
back:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
223
|
|
|
|
230
|
|
Income
tax expense
|
|
|
11
|
|
|
|
8
|
|
Depreciation
and amortization expense within:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
266
|
|
|
|
236
|
|
Selling,
general and administrative expenses
|
|
|
318
|
|
|
|
320
|
|
Stock-based
compensation amortization expense
|
|
|
21
|
|
|
|
133
|
|
Write-off
of unamortized acquisition costs
|
|
|
-
|
|
|
|
187
|
|
EBITDA
|
|
$
|
953
|
|
|
$
|
1,134
|
|
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. Recapture of previously deferred interest
expense is considered interest expense and stock-based compensation amortization
is considered an amortization item for purposes of the EBITDA
calculation. 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, 2010, we had total cash and cash availability of $3.3 million,
which consisted of cash and cash equivalents of $77,000 and additional cash
availability of approximately $3.2 million through our line of
credit. As of November 10, 2010, our cash and cash availability was
approximately $4.3 million. We are able to draw on our line of credit
on a daily basis subject to debt covenant requirements.
At
September 30, 2010, our trailing twelve months EBITDA was $3.8 million and our
fixed charge coverage ratio was 1.61 and the trailing twelve months EBITDA after
fixed charges was $1.5 million. We have a $9.1 million deferred tax
asset at September 30, 2010 that remains fully reserved but we have used
approximately $1.0 million of the net operating loss carryforward to offset
taxable income due in the last two years.
We have
recently ordered new trucks on order to modernize and increase the size of our
fleet. This additional equipment will generate expanded capacity to
our system, help us improve fuel economy and satisfy new emission standards,
give us further opportunity to expand in new markets and reduce our repairs and
maintenance. Our principal lender has given us approval to incur up
to $2.0 million in new debt to finance this fleet expansion, conditioned upon
our continuing satisfaction of specified financial thresholds.
On July 28, 2010, our Board of
Directors approved a share repurchase program (the “Program”) under
which we may elect to purchase up to five percent of our outstanding capital
stock, or approximately 435,000 shares of common stock or common stock
equivalents. Repurchases of capital stock, including shares of common
stock and Series D convertible preferred stock, may be made on the open market
at prevailing market prices or in block trades, subject to the restrictions
relating to volume, price, and timing set forth in Securities Exchange Act of
1934 Rule 10b-18, or in privately negotiated transactions. We will
fund the repurchases from our available cash under our revolving line of credit
with our principal lender. During the first quarter of fiscal 2011,
we began the Program by purchasing 29,147 shares of our common stock for an
aggregate purchase price of approximately $39,000. We have made
additional purchases pursuant to the Program during the second quarter of fiscal
2011 and intend to continue doing so.
Our principal lender has approved a
total of $840,000 in capital stock repurchases under the Program, including up
to $200,000 in any one fiscal quarter, conditioned upon
our maintenance of (i) a ratio of EBITDA to Fixed Charges of 1.3 to
1.0, based on the most recent twelve (12) month period for which financial
statements have been provided to the lender, after giving pro forma effect to
any repurchases; and (ii) Excess Availability of at least $2.25 million (A)
immediately after making any repurchase and (B) for the ninety (90) days
preceding any repurchase.
We do not
believe that our purchases of capital stock under the Program will meaningfully
impair our capital resources or our ability to support the cash needs of our
business. Moreover, while there can be no certainty in today’s
volatile and uncertain economy, we believe that, as a result of the current
trend and last year’s net income, EBITDA and cash flow as well as the June 2009
Recapitalization, we have established adequate credit enhancements to
meaningfully respond to potential increases in volumes, irrespective of whether
they are accompanied by fuel price increases.
Sources
and Uses of Cash
We
currently have a loan facility with our principal lender, comprised of a $20.0
million revolver coupled with a $5.0 million, 60 month, fully amortized term
loan.
Our $20.0
million line of credit permits us to borrow up to 85% of the total amount of
eligible accounts receivable and 65% of eligible inventory, both as
defined. Outstanding letters of credit reduce the maximum amount
available for borrowing. Outstanding borrowings under the line are
secured by substantially all Company assets including our transportation fleet
and related field equipment. Our line of credit finances the timing
difference between petroleum product purchases, payable generally in 10 to 12
days from date of delivery, and the collection of receivables from our
customers, generally in 10 to 45 days from date of delivery. The line
of credit has a renewal date of July 1, 2012.
Interest
is payable monthly based on a pricing matrix. At September 30, 2010,
the interest rate for the line of credit was 4.0%. This rate was
priced using a minimum LIBOR floor of 0.75%, plus the applicable margin of
3.25%. The applicable margin is determined quarterly based on a
predetermined fixed charge coverage ratio pricing matrix with the applicable
margins ranging from 3.00% to 3.75%.
As
of September 30, 2010, we have outstanding letters of credit for an aggregate
amount of $1.5 million. On October 14, 2010, we reduced our issued
letter of credit to $1.150 million. These letters of credit were
issued so that we could obtain better purchasing terms and pricing than were
otherwise available in certain markets. The letters of credit have
twelve-month expirations and renew automatically. No amounts have
been drawn on any of the letters of credit; however, as described above,
outstanding letters of credit reduce our cash availability under our line of
credit facility.
As of
September 30, 2010 and June 30, 2010, we had outstanding borrowings of $5.7
million and $6.9 million, respectively, under our line of
credit. Outstanding borrowings under the line of credit are classified as a
current liability in accordance with ASC 470, Debt. Based on eligible
receivables and inventories, and letters of credit outstanding at September 30,
2010 and June 30, 2010, we had $3.2 million and $4.6 million respectively, of
cash availability under the line of credit.
The term
loan, with an original amount of $5.0 million is fully amortized, 60 monthly
principal payments of approximately $83,333 commencing on August 1, 2009 with
variable interest due monthly (4.75% at September 30, 2010) is secured by
substantially all Company assets. During the first quarter of fiscal
2011, we have paid down $250,000 of the principal balance, and at September 30,
2010, the outstanding balance was $3.8 million.
In
addition to the loan facility described above, we have an $800,000 unsecured
5.5% interest only, subordinated promissory note (the “June 2009 Note”) issued
to an existing institutional investor in exchange for $800,000 of one of the
Secured Notes during the June 2009 Recapitalization. The June 2009
Note is subordinated to all our other existing debt, including any amounts owed
now or in the future to our principal lender. The holder of the June
2009 Note entered into a debt subordination agreement (the “Subordination
Agreement”) with us and our principal lender, whereby it expressly subordinated
its rights under the June 2009 Note to our principal lender. The
principal balance of the June 2009 Note is due at maturity on July 1,
2014. Subject to the limitations in the Subordination
Agreement, interest is payable semi-annually, except that accrued interest
payments for the first thirteen months was deferred until, and paid on, August
12, 2010. Thereafter, starting in 2011, semi-annual interest payments
will be made on or about each January 15
th
and
July 15
th
until
maturity. The amounts due under the June 2009 Note will become due
and payable upon the occurrence of customary events of default, provided,
however, that the deferral of any payment in accordance with the Subordination
Agreement will not constitute an event of default. If permitted under
the Subordination Agreement, we may pre-pay the June 2009 Note, in whole or in
part, without prepayment penalty or premium. Twenty-five percent (25%) of the
original principal amount of the June 2009 Note, or $200,000, may be converted
into shares of our Common Stock at $2.25 per share (the “Conversion Price”) at
the option of the noteholder. The number and kind of securities
purchasable upon conversion and the Conversion Price are subject to customary
adjustments for stock dividends, stock splits and other similar
events.
The June
2009 Recapitalization of all of our debt and equity securities strengthened our
balance sheet and financial position, immediately lowering our total debt by
$4.5 million, increasing shareholders’ equity by approximately $4.1 million and
reducing our debt to equity ratio from approximately 9:1 to 2:1 over the prior
year. The June 2009 Recapitalization reduced our cash interest
expense and dividends cash usage, as reflected in our results for fiscal 2010
and the first quarter of fiscal 2011.
We
continue to concentrate our efforts on reducing costs and conserving cash
availability in order to meet the challenges of the ongoing recession and
economic downturn. We believe the improvements in our balance sheet
from the Recapitalization helped us establish credit enhancements in fiscal 2010
and continuing in fiscal 2011 that will permit us to effectively respond to
potential increases in volumes and fuel prices. We have also sought
to offset the reduced demand from existing customers by aggressively seeking new
customers, including our investment in three new service locations during fiscal
2010.
Our debt
agreements have covenants that define certain financial requirements and
operating restrictions. Our failure to comply with any covenant or
material obligation contained in these debt agreements, absent a waiver or
forbearance from the lenders, would result in an event of default which could
accelerate debt repayment terms under the debt agreements. Due to
cross-default provisions contained in our debt agreements, an event of default
under one agreement could accelerate repayment terms under the other agreements,
which would have a material adverse effect on our liquidity and capital
resources. At the date of this filing, we are in compliance with the
requirements of the applicable covenants required by our debt
agreements.
Cash
Flows
During
the three months ended September 30, 2010 and 2009, cash and cash equivalents
decreased $38,000 and increased $137,000, respectively.
We
generated cash from the following sources (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$
|
1,517
|
|
|
$
|
767
|
|
We used
cash primarily for (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
payments on line of credit payable
|
|
$
|
(1,154
|
)
|
|
$
|
(404
|
)
|
Principal
payments on term loan
|
|
|
(250
|
)
|
|
|
(167
|
)
|
Purchases
of property and equipment
|
|
|
(86
|
)
|
|
|
(42
|
)
|
Repurchase
of common stock
|
|
|
(39
|
)
|
|
|
-
|
|
Capital
lease payments
|
|
|
(13
|
)
|
|
|
(17
|
)
|
Payment
of dividends
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
$
|
(1,555
|
)
|
|
$
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
$
|
(38
|
)
|
|
$
|
137
|
|
As of
September 30, 2010, we had $5.7 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, 2010 include the cumulative activity of the daily borrowings and
repayments, $53.5 million and $54.6 million, respectively, under the line of
credit. The net cash borrowings from, or repayments of, the line of
credit during the three months ended September 30, 2010 and 2009, respectively,
have been included as sources or uses of cash in the tables above.
Adequacy
of Capital Resources
Our
liquidity and ability to meet financial obligations is dependent on, among other
things, the generation of cash flow from operating activities, obtaining or
maintaining sufficient trade credit from vendors, complying with our debt
covenants, continuing renewal of our line of credit facility, and/or raising any
required additional capital through the issuance of debt or equity securities or
additional borrowings.
Our
sources of cash during the remainder of fiscal 2011 are expected to be cash on
hand, cash generated from operations, borrowings under our revolving line of
credit, and any other capital sources that may be deemed
necessary. There is no assurance, however, that if additional capital
is required, it will be available to us or available on acceptable
terms.
Our uses
of cash over the next twelve months are expected to be principally for operating
working capital needs, maintaining our line of credit, servicing any
principal and interest on our debt, our ongoing stock repurchase program,
payment of preferred stock dividends, and costs incurred to expand or enhance
our operations including the purchase of new trucks. Our line of
credit with our principal lender matures on July 1, 2012.
Off-Balance
Sheet Arrangements
At
September 30, 2010, we do not have any material off-balance sheet
arrangements.
Recent
Accounting Pronouncements
See Note
9 in the footnotes to financial statements included in this Form 10-Q for
accounting pronouncements that have been already effective.
Critical
Accounting Policies
We
believe there are several accounting policies that are critical to understanding
our historical and future performance as these policies affect the reported
amount of revenues and expenses and other significant areas involving
management's judgments and estimates. On an ongoing basis, management
evaluates and adjusts its estimates and judgments, if necessary. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of
contingencies. Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods may be materially different
from those estimates. There were no changes to our critical
accounting policies as previously disclosed in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2010.
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, 2010.
Changes
in Internal Control 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, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Due to
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate.
A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be
met. The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Furthermore, due to the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of a simple error or mistake. Controls can also be circumvented by
the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any system’s design will succeed in
achieving its stated goals under all potential future
conditions.
PART
II. Other Information
ITEM 1. LEGAL PROCEEDINGS
Not
applicable.
ITEM
1A. RISK FACTORS
Not
applicable.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On July 28, 2010, our Board of
Directors approved a share repurchase program (the “Program”) under
which we may elect to purchase up to five percent of our outstanding capital
stock, or approximately 435,000 shares of common stock or common stock
equivalents. Repurchases of capital stock, including shares of common
stock and Series D convertible preferred stock, may be made on the open market
at prevailing market prices or in block trades, subject to the restrictions
relating to volume, price, and timing set forth in Securities Exchange Act of
1934 Rule 10b-18, or in privately negotiated transactions. We will
fund the repurchases from our available cash under our revolving line of credit
with our principal lender. During the first quarter of fiscal 2011,
we began the Program by purchasing 29,147 shares of our common stock for an
aggregate purchase price of approximately $39,000.
Stock
repurchases for the quarter ended September 30, 2010 were as
follows:
|
|
|
|
|
|
Total number of
|
|
Approximate dollar
|
|
|
|
|
|
|
shares purchased
|
|
value of shares that
|
|
|
Total number of
|
|
Average price
|
|
as part of publicly
|
|
may yet be
purchased
|
Period
|
|
shares
purchased
|
|
paid per share
|
|
announced programs
|
|
under the program
|
August
1 through August 31, 2010
|
|
8,141
|
|
$
|
1.24
|
|
8,141
|
|
|
|
September
1 through September 30, 2010
|
|
21,006
|
|
$
|
1.31
|
|
21,006
|
|
$
|
579,592
|
Total
|
|
29,147
|
|
$
|
1.29
|
|
29,147
|
|
|
|
In September 2010, each of the six
non-employee members of the Company’s Board of Directors received a grant of
1,000 shares of restricted stock under the Company’s 2009 Equity Incentive Plan
pursuant to an automatic grant program calling for such a grant on the last day
of each fiscal quarter. The Company’s Chairman, Chief Executive
Officer and President was granted 31,500 shares of restricted stock that will
vest on December 21, 2010, when his existing stock options
expire. These grant were made pursuant to the Company’s 2009 Equity
Incentive Plan and were exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM
4. REMOVED AND RESERVED
ITEM
5. OTHER INFORMATION
Not
applicable.
ITEM
6. EXHIBITS
Exhibits
Exhibit
No.
|
|
Description
|
10.66
|
|
Third
amended and Restated Employment Agreement by and between SMF Energy
Corporation and Richard E. Gathright executed effective September 23,
2010
|
|
|
|
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
15, 2010
|
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)
|
10.66
|
|
Third
amended and Restated Employment Agreement by and between SMF Energy
Corporation and Richard E. Gathright executed effective September 23,
2010
|
|
|
|
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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