See accompanying notes to unaudited condensed consolidated financial statements.
UNIVERSAL POWER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A — BASIS OF PRESENTATION
The unaudited condensed consolidated interim unaudited financial statements of Universal Power Group, Inc. (“UPG” or the “Company”) included in this quarterly report have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included for the three month period ended March 31, 2010. The results for the three-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the full year. The unaudited condensed consolidated financial statements included in this filing should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s annual report on form 10-K for the year ended December 31, 2009. The condensed consolidated balance sheet of the Company as of December 31, 2009 has been derived from the audited consolidated balance sheet as of that date.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Monarch Outdoor Adventures LLC d/b/a Monarch Hunting (“Monarch”). All significant intercompany accounts and transactions have been eliminated in consolidation.
NOTE B — ORGANIZATION
UPG, a Texas corporation, is a distributor and supplier of batteries and related power accessories to a diverse range of industries and a provider of third-party fulfillment and logistics services and other value-added solutions. The Company’s primary logistics center is located in Carrollton, Texas and regional logistic centers are located in Oklahoma City, Oklahoma, Las Vegas, Nevada and Columbus, Georgia. The Company’s customers are primarily located in the United States. A small portion of the Company’s sales are to customers located in the United Kingdom, Australia, Ireland, China and Canada.
Until December 20, 2006, the Company was a wholly-owned consolidated subsidiary of Zunicom, Inc. (“Zunicom”), a Texas corporation, whose stock is traded on the OTC Bulletin Board under the symbol “ZNCM.OB.” On December 20, 2006, the U.S. Securities and Exchange Commission declared effective a registration statement filed by the Company registering the sale of 3,000,000 shares of its common stock of which 1,000,000 were owned by Zunicom (the “IPO”). As a result of the IPO, Zunicom’s interest in the Company was reduced to 40%. Zunicom no longer owns a controlling interest in UPG; however, as the largest shareholder, Zunicom does have significant influence over UPG.
In January 2009, the Company formed Monarch, a limited liability company, through which it acquired all of the tangible and intangible assets of a business for approximately $892,000. Monarch is a manufacturer and retailer of high-quality hunting products including battery and solar powered deer feeders, hunting blinds, stands and accessories. Monarch is located in Arlington, Texas and has customers throughout the United States.
NOTE C — STOCK-BASED COMPENSATION
At March 31, 2010, common shares reserved for future issuance include 2,000,000 shares issuable under the 2006 Stock Option Plan, as amended, 20,000 shares issuable upon exercise of options not granted under the 2006 Stock Option Plan and 300,000 shares issuable upon exercise of outstanding warrants. At March 31, 2010, there are 1,371,842 options outstanding under the 2006 Stock Option Plan, and 628,158 options are available for future grants.
There were no options granted during the three months ended March 31, 2010 or during the three months ended March 31, 2009.
At March 31, 2010, the aggregate intrinsic value of options outstanding and exercisable was $62,800.
At March 31, 2010, all outstanding options under the 2006 Stock Option Plan were fully vested with no remaining unrecognized compensation expense.
On June 25, 2007, Zunicom issued 645,133 shares of restricted stock to certain employees of UPG for past and future services. The Company is amortizing the fair value of these shares as compensation expense over the 48 month vesting period. In January 2009, 227,229 of these shares were forfeited when the Chief Executive Officer resigned as an officer and director of the Company. Accordingly, 417,904 restricted shares remain outstanding at March 31, 2010. Approximately $15,000 of compensation expense related to these shares was recorded during the three month periods ended March 31, 2010 and 2009, respectively. There is approximately $82,000 of unvested expense remaining as of March 31, 2010 which will be recognized as compensation expense through July 2011.
On March 21, 2007, the Company issued stock options to non-employees to purchase 20,000 shares of the Company’s common stock at an exercise price of $7.00 per share vesting over three years and expiring December 19, 2016. These stock options remain outstanding as of March 31, 2010.
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NOTE D — NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.
Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. The Company’s common stock equivalents include all common stock issuable upon the exercise of outstanding stock options and warrants.
For the three month period ended March 31, 2010, the dilutive effect of 40,000 stock options is included in the calculation and 1,354,842 stock options and 300,000 warrants are excluded from the calculation as they are antidilutive. For the three month period ended March 31, 2009, 1,355,478 stock options and 300,000 warrants are excluded from the calculation as they are antidilutive.
NOTE E — LINE OF CREDIT
On December 16, 2009, the Company entered into a Credit Agreement (“Credit Agreement”) with Wells Fargo for a $30 million revolving credit facility. Maximum borrowings under the facility may be increased to $40 million if the Company satisfies certain pre-defined conditions. Borrowings under the facility are secured by a first priority lien on all of the Company’s assets. Borrowing availability under the facility depends on the level of the Company’s accounts receivable and inventory. For each borrowing, the Company has the option to choose a “Base Rate” or “Eurodollar” loan. Interest on Base Rate loans is payable quarterly and interest on Eurodollar loans is generally payable monthly or quarterly as selected by the Company. The annual rate of interest payable on Base Rate and Eurodollar loans fluctuate depending upon a number of factors. At March 31, 2010, the interest rate was 2.75% on all outstanding borrowings. The Credit Agreement terminates on July 30, 2013.
The Credit Agreement contains customary negative covenants restricting the Company’s ability to take certain actions without Wells Fargo’s consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. If there is an “event of default”, including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the credit facility will become immediately due and payable In addition, the Company must maintain certain financial covenants on a quarterly basis.
At March 31, 2010, approximately $17.2 million was outstanding under the line of credit and approximately $1.8 million remained available for borrowings under the line of credit based on the borrowing formula.
Interest Rate Swap
In connection with the Credit Agreement, the Company terminated the Interest Swap Agreement (“ISA”) it had with its previous lender and, consequently, discontinued hedge accounting as of December 16, 2009. The Company continues to incur interest expense commensurate with its original, hedged risk, and there is currently no indication that interest payments on the hedged transaction would not continue. Therefore, the realized losses related to the ISA will not be recognized immediately and will remain in accumulated other comprehensive income (loss). These losses are reclassified into interest expense over the original contractual term of the ISA starting as of December 16, 2009.
NOTE F — CONCENTRATIONS
At March 31, 2010 and 2009, the Company had receivables due from Broadview Security in the amount of approximately $3.4 million and $5.0 million, respectively. During the three months ended March 31, 2010 and 2009, Broadview Security accounted for 36% and 35%, respectively, of net sales. The loss of Broadview Security as a customer would have a material adverse impact on the Company’s operations and financial condition. On May 12, 2010, the shareholders of Broadview Security approved a transaction pursuant to which Broadview Security would be acquired by Tyco International Ltd.. (Brinks Home Security is Broadview Security’s legal name.) This transaction is scheduled to close on May 14, 2010. The Company does not know what impact the merger will have on its relationship with Broadview Security.
NOTE G — LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of these matters will have a material adverse effect on the Company’s financial position, operating results, or cash flows. However, there can be no assurance that such legal proceedings will not have a material impact.
NOTE H — SETTLEMENT AGREEMENTS
In the first quarter of 2009, in an effort to improve efficiencies within its sourcing channels, the Company entered into an agreement with its primary independent sourcing agent canceling its relationship with that agent. Under the agreement, the Company agreed to pay its former sourcing agent a total of $2.565 million, including amounts owed with respect to purchases prior to the cancellation of the relationship, over a three-year period. The sourcing agent assigned to the Company all of his North American distribution rights on products manufactured by certain factories, including the Company’s primary battery supplier, and agreed to a three-year non-compete covenant. The Company does not believe that the cancellation of this relationship will impact its ability to source goods from its suppliers. The Company also entered into a settlement agreement with its former Chief Executive Officer relating to his resignation as an officer and director. Under the agreement, the Company agreed to pay a total of $0.55 million over a two-year period. At March 31, 2010, there is
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approximately $1.7 million recorded as settlement expenses in the accompanying balance sheet that are due and payable pursuant to these agreements.
NOTE I — INCOME TAXES
The Company recorded income tax expense on continuing operations of approximately $0.3 million for each of the three month periods ended March 31, 2010 and 2009, respectively. The effective rate for 2010 differed from the statutory rate of 34 percent, primarily due to the impact of state income taxes and nondeductible expenses. The Company’s effective tax rate for the three month period ended March 31, 2009 was higher than expected as a result of recording a valuation allowance of $0.8 million on a portion of the Company’s deferred tax assets related to stock-based compensation. The valuation allowance was established to reduce the deferred tax assets to the amount expected to be realized.
The Company files income tax returns in the U.S. federal jurisdiction and various states. With a few exceptions, the Company is no longer subject to U.S. state and local income tax examinations by tax authorities for years before 2006. During 2009 the Internal Revenue Service (“IRS”) commenced an examination of the Company’s U.S. income tax returns for 2007 and 2008, which is expected to be completed in 2010.
As of March 31, 2010, the IRS has proposed certain significant adjustments to the Company’s inventory capitalization, bad debts and depreciation deductions. Management is currently evaluating those proposed adjustments to determine if it agrees. Management believes that appropriate provisions for all outstanding issues have been recorded for all open years.
Included in the tax balances at March 31, 2010, are approximately $0.56 million of tax positions for which the ultimate deductibility is certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred income tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
NOTE J — SEGMENT AND GEOGRAPHIC INFORMATION
The accounting standard for segment reporting requires enterprises to report financial information and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company evaluated the accounting standard for segment reporting and determined that the Company operates in only one segment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. See “Forward-Looking Statements” following the Table of Contents of this Form 10-Q. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.
Business Overview
We are (i) a leading supplier and distributor of batteries and related power accessories and (ii) a third-party logistics services provider, specializing in supply chain management and value-added services. We sell, distribute and market batteries and related power accessories under various manufacturer brands, private labels and our own proprietary brands. We are one of the leading domestic distributors of sealed, or “maintenance-free,” lead-acid batteries (“SLA batteries”). Our principal product lines include:
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| • | batteries of a wide variety of chemistries, battery chargers and related accessories; |
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| • | portable battery-powered products, such as jump starters and 12-volt DC power accessories; |
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| • | security system components, such as alarm panels, perimeter access controls, horns, sirens, speakers, transformers, cable and wire. |
Our customers include original equipment manufacturers (OEMs), distributors and both online and traditional retailers. Our products represent basic energy solutions to a wide variety of existing applications in a broad market spectrum. They are used in a diverse and growing range of industries and applications including automotive, medical mobility, consumer goods, electronics, marine, hunting, security and surveillance, telecommunications, uninterruptible power supply, power sports, solar and portable power.
The demand for batteries and related power accessories is impacted by consumer preferences, technological developments, fuel costs, which impact manufacturing and shipping, the cost of lead and copper, the two principal raw materials used to manufacture batteries and general economic conditions. We believe that technological change drives growth as new product introductions accelerate sales and provide us with new opportunities. At the same time, battery chemistries are also evolving due to changes in consumer demands and preferences that are driven, in part, by environmental and safety concerns and the need for greater density power and longer life. Therefore, we continue to stay current regarding advances and changes in battery technology.
We are also a third-party logistics services provider specializing in supply chain management and value-added services, designed to help customers optimize performance by allowing them to outsource supply chain management functions. Our supply chain management services include inventory sourcing, procurement, warehousing and fulfillment. Our value-added services include custom battery pack assembly, custom kitting, private labeling, product development and engineering, graphic design and sales and marketing.
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We believe that the demand for third-party logistics and supply chain management solutions is growing, particularly with globalization. To be successful, businesses have not only to excel in their core competencies, but they must also execute their supply chain processes quickly and accurately. To remain competitive, businesses strive to identify ways to more efficiently manage their supply chain and streamline their logistics processes by minimizing inventory levels, reducing order and cash-to-cash cycle lengths and outsourcing manufacturing and assembly operations to low-cost locations. An efficient supply chain has become a critical element to improving financial performance. As a result, businesses are increasingly turning to organizations that provide a broad array of logistics and supply chain solutions. These trends have been further facilitated by the rapid growth of technology enabling seamless electronic interfaces between systems of service providers and their customers.
Operations Overview
Challenging market conditions, including the lingering effects of the global recession, price volatility in the commodities markets and weak consumer demand, continue to impact our business as reflected by the fact that net sales and gross margins for the first quarter of 2010 were lower than for the corresponding period in 2009. Although we reported operating income, pre-tax net income and net income for the 2010 period compared to an operating loss, a pre-tax loss and a net loss for the corresponding 2009 period, the 2009 period included a $2.5 million charge for settlement expenses. On a Non-GAAP basis, after adjusting 2009 results for the settlement expenses, operating income, pre-tax income and net income for 2010 were lower than their counterparts in 2009. (See “Reconciliation of GAAP Operating Income (Loss) to Adjusted Operating Income (Unaudited)” below.) On the other hand, we maintained control over our operating expenses, which were lower than they were in the first quarter of 2009, and we continued to execute our long-term strategic plan to develop new, higher-margin products, penetrate new markets and increase our market share in existing markets, while enhancing our already strong relationships with our network of suppliers. In addition, we believe that our financial condition continues to improve as we continue to execute on our strategy to reduce our inventory levels (approximately $2.1 million), accounts receivable (approximately $0.8 million) and accounts payable (approximately $3.4). Although, these improvements were offset, in part, by increased borrowings under our credit facility by $2.0 million, our cash position still improved by approximately $2.5 million, working capital increased by approximately $0.8 million and total shareholders’ equity increased by approximately $0.6 million. As a result, we believe we are well-positioned to improve our operating performance as the general economy consumer demand improves.
In terms of our outlook for the balance of 2010, despite some recent improvements in the economy, we still face considerable uncertainty surrounding consumer demand, which has a direct impact on our business. Recent trends in retail sales and consumer confidence suggest that the early signs of economic recovery have yet to prove they are sustainable for the long run. The lack of robust economic recovery makes us cautious over the near term. As the economy continues to grow and as the recovery takes a firmer hold, we expect our net sales will improve. Some of this improvement will be driven by new products, including those marketed under the “Energizer” brand and the K2 lithium iron phosphate battery. We had hoped to have initial product deliveries of Energizer products in October 2009 so that we would be able to showcase the product and generate sales for the 2010 holiday shopping season. Because we insisted on maintaining the highest level of quality in this new product line, the initial deliveries of acceptable production units did not arrive until late December. We are continuing to work with larger retail accounts, alternative distribution channels and with Internet retailers to increase exposure and spur demand. The lithium iron phosphate battery is a new battery chemistry that promises to deliver more power and longer battery life at lower cost. Although there is a significant amount of interest in this product, that interest has not translated into sales as yet. Finally, we are cautiously optimistic that growth will also be driven by international markets in Asia and the Pacific basin.
Reconciliation of GAAP Operating Income (Loss) to Adjusted Operating Income (Unaudited)
The following table reconciles GAAP Operating Income (Loss), as reported, to Non-GAAP operating income. We believe that Non-GAAP operating income, which is generally operating income less costs related to settlement agreements, represents our operating efficiency. Non-GAAP operating income, which is a Non-GAAP financial measure, should not be considered an alternative to, or more meaningful than, net income prepared on a GAAP basis. Additionally, Non-GAAP operating income may not be comparable to similar metrics used by others in the industry.
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Operating income (loss) and income (loss) before provision for income taxes as reported: | | | | | | | |
Operating expenses | | $ | 3,473,275 | | $ | 3,634,890 | |
Settlement expenses | | | — | | | 2,529,345 | |
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Total operating expenses | | | 3,473,275 | | | 6,164,235 | |
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Operating income (loss) | | | 959,692 | | | (1,206,471 | ) |
Other expense, net | | | (161,360 | ) | | (247,550 | ) |
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Income (loss) before provision for income taxes | | $ | 798,332 | | $ | (1,454,021 | ) |
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NON-GAAP measures to exclude settlement expenses from operating expenses: | | | | | | | |
Settlement expenses | | $ | — | | $ | 2,529,345 | |
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Non-GAAP operating income | | $ | 959,692 | | $ | 1,322,874 | |
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Non-GAAP income before provision for income taxes | | $ | 798,332 | | $ | 1,075,324 | |
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Results of Operations
The following table compares our statement of operations data for the three months ended March 31, 2010 and 2009. The trends suggested by this table may not be indicative of future operating results, which will depend on various factors including the nature of revenues (sales of batteries and other power accessory products versus logistics or value added services) and the relative mix of products sold (batteries versus other power supply products), which can vary from quarter to quarter, as well as the state of the general economy. In addition, our operating results in future periods may also be affected by acquisitions.
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Net sales | | $ | 26,035 | | | 100.0 | % | $ | 27,689 | | | 100.0 | % |
Cost of sales | | | 21,602 | | | 83.0 | % | | 22,731 | | | 82.1 | % |
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Gross profit | | | 4,433 | | | 17.0 | % | | 4,958 | | | 17.9 | % |
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Operating expenses | | | 3,473 | | | 13.3 | % | | 3,635 | | | 13.1 | % |
Settlement expenses | | | — | | | — | | | 2,529 | | | 9.1 | % |
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Total operating expenses | | | 3,473 | | | 13.3 | % | | 6,164 | | | 22.3 | % |
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Operating income (loss) | | | 960 | | | 3.7 | % | | (1,206 | ) | | (4.4 | %) |
Interest expense, net | | | (161 | ) | | (0.6 | %) | | (248 | ) | | (0.9 | %) |
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Income (loss) before provision for income taxes | | | 799 | | | 3.1 | % | | (1,454 | ) | | (5.3 | %) |
Provision for income taxes | | | (293 | ) | | (1.1 | %) | | (295 | ) | | (1.1 | %) |
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Net income (loss) | | $ | 506 | | | 1.9 | % | $ | (1,749 | ) | | (6.3 | %) |
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For the three months ended March 31, 2010 and 2009
Net sales
For the three month period ended March 31, 2010, we generated consolidated net sales of $26.0 million compared to $27.7 million for 2009, a decrease of $1.7 million or 6.0%. Net sales to customers other than Broadview Security and its authorized dealers decreased to $15.0 million in the 2010 period from $15.1 million in 2009 period. Net sales to Broadview Security and its authorized dealers, our largest customer, were $11.0 million in the 2010 period compared to $12.5 million in the 2009 period, a decrease of approximately 12%. On May 12, 2010, the shareholders of Broadview Security approved a transaction pursuant to which it would be acquired by Tyco International Ltd.. (Brinks Home Security is Braodview Security’s legal name.) This transaction is expected to close on May 14, 2010. We do not know what impact the merger will have on its relationship with Broadview Security and we plan to monitor the situation closely.
Cost of sales
For the three month period ended March 31, 2010, our cost of sales decreased to $21.6 million compared to $22.7 million for 2009, or 5.0%. However, as a percentage of net sales, cost of sales in the first quarter of 2010 increased to 83.0% compared to 82.1% in the first quarter of 2009 as a result of increased inventory reserves and tooling costs for new products.
Operating expenses
For the three month period ended March 31, 2010, our operating expenses, including selling, general and administrative expenses, and depreciation and amortization expenses, decreased by approximately $161,000, or 4.4%, compared to the first quarter of 2009. The decrease in operating expenses is attributable to a reduction of (i) $70,000 in professional fees, (ii) $60,000 in insurance costs, (iii) $60,000 in personnel costs, and (iv) $50,000 in marketing expenses, offset by an increase of $40,000 in travel and entertainment expenses and $30,000 in accounting, filing fees, printing and other miscellaneous expenses.
Settlement expenses
We had no settlement expenses in the 2010 period compared to settlement expenses of $2.5 million in the 2009 period. The settlement expenses in the 2009 period relate a settlement agreement we entered into with our former chief executive officer and an agreement with our former principal independent sourcing agent cancelling his relationship with us. The aggregate amounts payable by us under these agreements is $3.1 million, of which $0.5 million payable to the settlement with the sourcing agent was applied to an existing payable balance related to prior year inventory purchases and an aggregate of $0.1 million under both agreements is being expensed as interest over the respective terms of the agreements. The payments due to the former chief executive officer are payable over a two-year period beginning in January 2009 and the payments to the former sourcing agent are due over a three-year period beginning in March 2009. Except for the interest expense, which will be amortized over the respective terms of the agreements, we do not expect to incur any additional costs in connection with these settlement agreements.
Operating income
For the three month period ended March 31, 2010, our operating income was approximately $1.0 million compared to an operating loss of $1.2 million in the corresponding 2009 period. However, on a Non-GAAP basis, we had operating income of $1.3 million in the 2009 period. The Non-GAAP measure eliminates the 2009 settlement expenses.
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Interest expense
Our interest expense totaled approximately $161,000 for the three month period ended March 31, 2010 compared to $248,000 for the corresponding 2009 period, a decrease of approximately $87,000. This reduction is attributable to the lower cost of funds under our new credit facility and the settlement of the two notes held by Zunicom in December 2009. The average outstanding loan balance on the line of credit for the 2010 and 2009 periods was $15.8 million and $16.3 million, respectively, with an interest rate of 2.75% on all 2010 borrowings and weighted average interest of 3.99% on 2009 borrowings.
Income before provision for income taxes
For the three month period ended March 31, 2010, pre-tax income was approximately $0.8 million compared to a pre-tax loss of approximately $1.45 million in the corresponding 2009 period. However, on a Non-GAAP basis, pre-tax income in the 2009 period was approximately $1.1 million. The Non-GAAP measure eliminates the 2009 settlement expense.
Income taxes
Income tax expense for each of the three-month periods ended March 31, 2010 and 2009 totaled approximately $0.3 million. Our effective tax rate was higher than expected for the three month period ended March 31, 2009 as a result of recording a valuation allowance of $0.8 million on a portion of our deferred tax asset related to stock-based compensation. The valuation allowance was established to reduce the deferred tax asset to the amount expected to be realized.
Liquidity
We had cash and cash equivalents of approximately $4.5 million and $2.1 million at March 31, 2010 and December 31, 2009, respectively.
On December 16, 2009, we entered into a Credit Agreement with Wells Fargo for a $30 million revolving credit facility. Maximum borrowing under the facility may be increased to $40 million if we satisfy certain pre-defined conditions. Borrowings under the facility are secured by a first priority lien on all of our assets. Borrowing availability under the facility depends on the level of our accounts receivable and inventory. For each borrowing, we have the option to choose a “Base Rate” or “Eurodollar” loan. Interest on Base Rate loans is payable quarterly and interest on Eurodollar loans is generally payable monthly or quarterly as selected by us. The annual rate of interest payable on Base Rate and Eurodollar loans fluctuate depending upon a number of factors. At March 31, 2010, the interest rate on all outstanding borrowings was 2.75%. The Credit Agreement terminates on July 30, 2013.
The Credit Agreement contains negative covenants restricting our ability to take certain actions without Wells Fargo’s consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. If there is an “event of default”, including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the credit facility will become immediately due and payable. In addition, we must maintain certain financial covenants on a quarterly basis.
At March 31, 2010, approximately $17.2 million was outstanding under the line of credit and approximately $1.8 million remained available for borrowings under the line of credit based on the borrowing formula.
For the three-month period ended March 31, 2010, net cash provided by operating activities was approximately $0.5 million compared to $2.3 million used in operating activities for the three month period ended March 31, 2009. The net cash provided by operating activities for 2010 reflects net income of $0.5 million, decreases in (i) inventories of $1.9 million, (ii) accounts receivable of $0.7 million, (iii) accounts payable and accrued liabilities of $3.0 million, and (iv) settlement expenses of $0.2 million as well as non-cash charges for depreciation, amortization, provision for bad debts and obsolete inventory, deferred taxes totaling approximately $0.6 million.
Cash used in investing activities for the three month periods ended March 31, 2010 and 2009 was approximately $18,000 and $17,000, respectively. The cash in both periods was used primarily for purchases of property and equipment.
Net cash provided by financing activities for the three month periods ended March 31, 2010 and 2009 was approximately $2.0 million and $2.5 million, respectively. The net cash provided by financing activities for 2010 included approximately $2.0 million in net borrowings on our line of credit. For the 2009 period the net amount represents approximately $2.8 million of net borrowings under our line of credit and approximately $0.4 million of debt repayment to Zunicom. The Zunicom notes were settled in full in December 2009.
We believe that cash provided by operations and cash available under our line of credit will be sufficient to meet our operational needs over the next year.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide the information required by this item.
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Item 4. | Controls and Procedures |
Management, with the participation of our chief executive officer/interim chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer/interim chief financial officer has concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management, including our chief executive/interim chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
The following exhibits are furnished as part of this report or incorporated herein as indicated.
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Exhibit No. | Description |
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3(i) | Amended and Restated Certificate of Formation (including Amended and Restated Articles of Incorporation) (1) |
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3(ii) | Amended and Restated Bylaws (1) |
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4.1 | Specimen stock certificate (1) |
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4.2 | Form of representatives’ warrant (1) |
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10.1(a)** | Form of 2006 Stock Option Plan (1) |
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10.1(b) | Form of Stock Option Agreement (1) |
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10.1(c)** | Amendment to the 2006 Stock Option Plan(6) |
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10.2 | Separation Agreement between UPG and Randy Hardin(2) |
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10.3** | Form of Ian Edmonds Employment Agreement (1) |
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10.5 | Amended and Restated Revolving Credit and Security Agreement with Compass Bank dated June 19, 2007 (1) |
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10.6 | Asset Purchase Agreement for Monarch Hunting Products dated September 19, 2008. (5) |
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10.7 | Real Property Lease for 1720 Hayden Drive, Carrollton, Texas (1) |
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10.8 | Real Property Lease for 11605-B North Santa Fe, Oklahoma City, Oklahoma (1) |
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10.9 | Real Property Lease for Las Vegas, Nevada (1) |
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10.10 | Termination Agreement with Stan Battat a/b/a Import Consultants(3) |
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10.13 | Third Party Logistics & Purchase Agreement, dated as of November 3, 2008, with Brinks Home Security, Inc. (4) |
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10.14 | Credit Agreement with Wells Fargo Bank, National Association (8) |
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10.15 | Security Agreement with Wells Fargo Bank, National Association (8) |
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31.1 | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
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31.2 | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
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32.1 | Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
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* | Filed herewith. |
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** | Management Contract, compensatory plan or arrangement. |
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(1) | Incorporated by reference to the Exhibit with the same number to our Registration Statement on Form S-1 (SEC File No. 333-137265) effective as of December 20, 2006. |
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(2) | Incorporated by reference to Exhibit 10.1 to our Current report on Form 8-K filed on January 23, 2009. |
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(3) | Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 17, 2009. |
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(4) | Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2008. |
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(5) | Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 25, 2008. |
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(6) | Incorporated by reference to Exhibit 10.1(c) to our Annual Report on Form 10-K for the year ended December 31, 2009. |
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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 thereunto duly authorized.
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| Universal Power Group, Inc. |
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Date: May 14, 2010 | /s/Ian Edmonds |
|
|
| Ian Edmonds |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
| /s/Ian Edmonds |
|
|
| Ian Edmonds |
| Interim Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
12
