10QSB: EVANS SYSTEMS INC
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Edgar Online
1:47 p.m. 05/22/2006
(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the ability of the Company to successfully implement its turnaround strategy, changes in costs of raw materials, labor, and employee benefits, as well as general market conditions, competition and pricing. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as representation by the Company or any other person that the objectives and plans of the Company will be achieved. In assessing forward-looking statements included herein, readers are urged to carefully read those statements. When used in the Quarterly Report on Form 10-Q, the words "estimate," "anticipate," "expect," "believe," and similar expressions are intended to be forward-looking statements.
Application of Critical Accounting Policies
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circum-stances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
The Company's policy is to prepare its financial statements on the accrual basis of accounting in accordance with generally accepted accounting principles. Revenues from motor fuel sales to open dealer accounts are recognized when delivered. Revenues from motor fuel sales and retail sales at convenience stores are recognized when sold at the store. Expenses are recognized in the period in which they are incurred.
Environmental segment revenue from fixed-price contracts is recognized using the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost at completion for each contract. Profit recognition is deferred on each contract until progress reaches a level of completion sufficient to establish the probable outcome. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability that result in revisions to costs are recognized in the period in which the changes are determined. Because of the inherent uncertainties in estimating, it is at least reasonably possible that such changes will occur within the near term.
Inventories
Substantially all inventories are products held for sale. Inventories of gas, diesel and other fuels, oil and grease, automotive products and accessories utilize the first-in, first-out (FIFO) method of accounting and are stated at the lower of cost or market.
For a more comprehensive list of our accounting policies, including those that involve varying degrees of judgment, see Note 1 of Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
Results of Operations
Three Months Ended March 31, 2006 and 2005
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the condensed consolidated unaudited financial statements and notes thereto appearing elsewhere in this document.
The following table reflects the unaudited operating results of Evans Systems, Inc. ("Company") business segments for the three months ended March 31, 2006 and 2005. This is the first quarter of the Company's fiscal year, which begins on October 1 and ends on September 30.
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Three Months Three Months Ended Ended March 31, 2006 March 31, 2005 EDCO ENVIRONMENTAL Revenue $ 234 $ 318 Gross profit 83 62 Operating expenses 144 117 -------------- ------------- Operating income (loss) (61) (55) UNALLOCATED GENERAL AND ADMIN EXP. $ (76) $ - -------------- ------------- TOTAL CONTINUING OPERATIONS Revenue $ 234 $ 318 Gross profit 83 62 Operating expenses 220 117 -------------- ------------- Operating income (loss) (137) (55)
Consolidated revenues decreased $84,000 to $234,000 in the quarter ended March 31, 2006, as compared with revenues of $318,000 in the quarter ended March 31, 2005. The decrease in revenues in the Environmental segment is primarily due to decreased site closure reimbursement work as compared to the prior quarter, as the TCEQ funding deadline was approaching in the prior year.
Consolidated gross profit increased $21,000 in the quarter ended March 31, 2006, as compared with the quarter ended March 31, 2005. Gross profit expressed as a percentage of sales, "Gross Margin", increased to approximately 35% of sales in the quarter ended March 31, 2006 as compared to 20% of sales in the quarter ended March 31, 2005.
Operating expenses increased $103,000 in the quarter ended March 31, 2006, as compared with the quarter ended March 31, 2005. The increase in operating expenses was mainly attributable to the unallocated general and administrative costs incurred in the second quarter of fiscal 2006.
The Company had an operating loss of $137,000 in the quarter ended March 31, 2006, as compared to an operating loss of $55,000 in the quarter ended March 31, 2005. Net loss decreased to $140,000 in the quarter ended March 31, 2006, as compared with a loss of $231,000 in the quarter ended March 31, 2005. Net loss for the quarter ended March 31, 2006 includes interest expense of $67,000, rental income of $33,000 and other income of $31,000. Net loss for the quarter ended March 31, 2005 includes a charge for discontinued operations of $130,000 from the Texas Convenience store segment, interest expense of $75,000, rental income of $28,000 and other income of $1,000.
Environmental Segment
EDCO Environmental (dba Star Co.) provides environmental assessment and remediation services for the petroleum distribution industry in the southeast Texas market area.
The consolidated continuing operating income (loss) discussed above only includes the operations of the environmental segment as it is the only remaining segment of the Company in operations. Thus, the results of operations as reflected in consolidated continuing operating income (loss) represents the operations of the environmental segment.
Star Co. will continue to focus its attention on environmental remediation projects that have been pre-approved for reimbursement by the TCEQ fund as well as projects by private insurers. Management intends to expand the Environmental Segment by creating a Testing Division. The Company is currently exploring the feasibility of acquiring through merger a company currently performing line, tank, and soil testing. Financial institutions have become increasingly aware of potential environmental hazards and the cost associated there with, on properties they finance. The need for testing to determine if any pollution exist on properties will continue for an unforeseeable time into the future. For this reason management believes adding a testing segment will increase the revenues and profitability of the Environmental Segment.
Discontinued Operations - Texas Convenience Store Segment
On December 19, 2005, the Company closed its only remaining operating convenience store. The Company is actively seeking an outside operator to either purchase or lease three convenience stores and the related store equipment. Thus, the Company effectively discontinued its Texas Convenience Store Segment operations. The results of operations of the Texas Convenience Store segment were classified as discontinued operations and prior periods were restated.
Unallocated General and Administrative Expenses
General and Administrative expenses were $76,000 in the quarter ended March 31, 2006, which is comprised primarily of general and administrative expenses incurred at the parent company which are not allocable to the environmental segment.
Six Months Ended March 31, 2006 and 2005
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the condensed consolidated unaudited financial statements and notes thereto appearing elsewhere in this document.
The following table reflects the unaudited operating results of Evans Systems, Inc. ("Company") business segments for the six months ended March 31, 2006 and 2005. This is the first quarter of the Company's fiscal year, which begins on October 1 and ends on September 30.
Six Months Six Months Ended Ended March 31, 2006 March 31, 2005 EDCO ENVIRONMENTAL Revenue $ 411 $ 626 Gross profit 118 136 Operating expenses 246 189 -------------- ------------- Operating income (loss) (128) (53) UNALLOCATED GENERAL AND ADMIN EXP. $ (120) $ (35) -------------- ------------- TOTAL CONTINUING OPERATIONS Revenue $ 411 $ 626 Gross profit 118 136 Operating expenses 366 224 -------------- ------------- Operating income (loss) (248) (88)
Consolidated revenues decreased $215,000 to $411,000 in the six months ended March 31, 2006, as compared with revenues of $626,000 in the six months ended March 31, 2005. The decrease in revenues in the Environmental segment is primarily due to decreased site closure reimbursement work as compared to the prior quarter, as the TCEQ funding deadline was approaching in the prior year.
Consolidated gross profit decreased $18,000 in the six months ended March 31, 2006, as compared with the six months ended March 31, 2005. Gross profit expressed as a percentage of sales, "Gross Margin", increased marginally to approximately 29% of sales in the six months ended March 31, 2006 as compared to 22% of sales in the six months ended March 31, 2005.
Operating expenses increased $142,000 in the six months ended March 31, 2006, as compared with the six months ended March 31, 2005. The increase in operating expenses was mainly attributable to the unallocated general and administrative costs incurred in the second quarter of fiscal 2006.
The Company had an operating loss of $248,000 in the six months ended March 31, 2006, as compared to an operating loss of $88,000 in the six months ended March 31, 2005. Net loss decreased to $377,000 in the six months ended March 31, 2006, as compared with a loss of $498,000 in the six months ended March 31, 2005. Net loss for the six months ended March 31, 2006 includes a charge for
discontinued operations of $101,000 from the Texas Convenience store segment interest expense of $133,000, rental income of $73,000 and other income of $32,000. Net loss for the six months ended March 31, 2005 includes a charge for discontinued operations of $310,000 from the Texas Convenience store segment, interest expense of $151,000, rental income of $54,000 and other expenses of $3,000.
Environmental Segment
EDCO Environmental (dba Star Co.) provides environmental assessment and remediation services for the petroleum distribution industry in the southeast Texas market area.
The consolidated continuing operating income (loss) discussed above only includes the operations of the environmental segment as it is the only remaining segment of the Company in operations. Thus, the results of operations as reflected in consolidated continuing operating income (loss) represents the operations of the environmental segment.
Star Co. will continue to focus its attention on environmental remediation projects that have been pre-approved for reimbursement by the TCEQ fund as well as projects by private insurers. Management intends to expand the Environmental Segment by creating a Testing Division. The Company is currently exploring the feasibility of acquiring through merger a company currently performing line, tank, and soil testing. Financial institutions have become increasingly aware of potential environmental hazards and the cost associated there with, on properties they finance. The need for testing to determine if any pollution exist on properties will continue for an unforeseeable time into the future. For this reason management believes adding a testing segment will increase the revenues and profitability of the Environmental Segment.
Discontinued Operations - Texas Convenience Store Segment
On December 19, 2005, the Company closed its only remaining operating convenience store. The Company is actively seeking an outside operator to either purchase or lease three convenience stores and the related store equipment. Thus, the Company effectively discontinued its Texas Convenience Store Segment operations. The results of operations of the Texas Convenience Store segment were classified as discontinued operations and prior periods were restated.
Unallocated General and Administrative Expenses
General and Administrative expenses were $120,000 in the six months ended March 31, 2006, which is comprised primarily of general and administrative expenses incurred at the parent company which are not allocable to the environmental segment.
Capital Resources and Liquidity
Cash and cash equivalents were $18,000 and $184,000 at March 31, 2006 and 2005, respectively. The Company had a net working capital deficit of $3,743,000 at March 31, 2006, as compared with a deficit of $810,000 at September 30, 2005.
Cash used by operating activities was $113,000 for the six months ended March 31, 2006. During that period, cash used by investing activities was $172,000, which was comprised of repayments of notes receivable of $1,000 offset by capital expenditures of $173,000. Cash provided by financing activities was $117,000, which was comprised of debt repayments of $34,000 offset by proceeds from new notes of $151,000.
Cash used by operating activities was $207,000 for the six months ended March 31, 2005. During that period, cash provided by investing activities was $98,000, which was comprised of repayments of notes receivable of $97,000 and proceeds from the sale of assets of $15,000 offset by new note issuances of $14,000. Cash used by financing activities was $48,000, which was comprised entirely of repayments of notes payable.
As of March 31, 2006, the Company had an aggregate of approximately $2,817,000 in principal outstanding under various note agreements. Of this total, one note dated June 24, 2002 for $2,600,000, payable to CSS, has amended terms that call for payments of interest only at an annual rate of 10% commencing June 1, 2004, with the principal balance and accrued but unpaid interest due by December 24, 2007. At March 31, 2006, the Company had accrued interest of approximately $371,000. The Company has been notified by the debt holder that the note is in default for failure of the Company to make the required monthly interest payments (Note I).
Of the remaining principal outstanding aggregating an approximate $217,000, approximately $31,000 is due to Travelers Express Co. under a forbearance note agreement dated June 24, 2002 in the original amount of $183,000 that calls for payment of principal and interest over 36 months beginning June 22, 2003. Interest is calculated at prime plus 50 basis points.
Concurrent with the Company's purchase of various drilling equipment and assets from PSG Technical Services, Inc. (Note C), the Company entered into a note agreement for $151,500 with PSG Technical Services that calls for interest only payments until April 2006 with principal and interest payments beginning May 5, 2005 for 84 months
The remaining outstanding principal balance of $35,000 is due under 2 note agreements with various terms to unrelated third parties. At March 31, 2006, the 2 notes were due within one year, and accordingly, those notes have been reflected as currently due on the accompanying condensed consolidated balance sheet.
At March 31, 2006, the Company had an aggregate 10,471,831 shares of common stock issued, with 10,430,196 issued and outstanding after consideration of treasury stock. The Company is authorized to issue up to 15,000,000 shares of common stock. Of the 4,569,804 shares of common stock available for issuance, approximately 302,600 shares are reserved for vested stock options and 4,136,167 shares are reserved for Warrants.
To continue as a going concern, the Company intends to finance its working capital requirements through a combination of funds from operations and selling of non-income producing assets. There can be no assurance that management's plans will be successful implemented or that the Company will continue as a going concern.
May 22, 2006
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