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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: December 31, 2005
or
|_| Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to _______________
Commission file number: 001-15035
ABLE ENERGY, INC.
(An exact name of registrant as specified in its charter)
DELAWARE 22-3520840
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
198 GREEN POND ROAD
ROCKAWAY, NJ 07866
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (973) 625-1012
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. |X| Yes |_| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer:
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). |_| Yes |X| No
As of February 10, 2006, 2,993,155 shares of common stock, $.001 Par value per
share, of Able Energy, Inc. were issued and outstanding.
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ABLE ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended December 31, 2005
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 2005 (unaudited) and June 30, 2005...... 1
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended December 31, 2005
and 2004 (unaudited)................................. 2
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the Six Months Ended
December 31, 2005 (unaudited)........................ 3
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31 2005 and 2004
(unaudited).......................................... 4
Notes to Condensed Consolidated Financial Statements
(unaudited).......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 18
Item 4. Controls and Procedures................................ 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................... 19
Item 2. Unregistered sales of equity securities and use
of proceeds.......................................... 19
Item 5. Other Information...................................... 19
Item 6. Exhibits............................................... 20
SIGNATURES ....................................................... 20
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ABLE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2005 2005
---------------- ----------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash $ 2,931,568 $ 1,754,318
Accounts receivable, net of allowance for doubtful accounts of approximately $356,000
and $238,000 at December 31, 2005 and June 30, 2005, respectively 4,061,274 2,876,900
Inventories 2,177,898 726,987
Notes receivable - current portion 280,255 282,826
Deferred income taxes - 64,776
Notes receivable - related parties 1,899,372 -
Prepaid expenses and other current assets 797,779 591,840
---------------- ----------------
TOTAL CURRENT ASSETS 12,148,146 6,297,647
---------------- ----------------
Property and equipment, net 4,489,221 4,284,147
Deferred income taxes - 45,091
Deposits 59,918 54,918
Notes receivable - less current portion 1,074,182 1,099,435
Intangible assets, net 560,712 683,416
Deferred financing costs, net 333,719 357,246
Prepaid acquisition costs 361,940 -
---------------- ----------------
TOTAL ASSETS $ 19,027,838 $ 12,821,900
================ ================
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,823,709 $ 2,306,626
Line of credit 1,452,225 1,015,468
Notes payable, current portion 73,741 516,610
Capital leases payable, current portion 307,716 321,602
Customer pre-purchase payments 4,711,695 2,457,384
Deferred income 230,542 79,679
---------------- ----------------
TOTAL CURRENT LIABILITIES 10,599,628 6,697,369
---------------- ----------------
Convertible debentures, net of unamortized discount of $1,014,463 308,037 -
Deferred income taxes - 104,517
Notes payable less current portion 3,214,886 3,307,103
Capital leases payable less current portion 742,303 654,796
---------------- ----------------
TOTAL LIABILITIES 14,864,854 10,763,785
---------------- ----------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock; authorized 10,000,000 shares par value $.001 per share issued - none - -
Common stock $.001 par value; 10,000,000 shares authorized; 2,760,285 and 2,457,320
shares issued and outstanding at December 31, 2005 and June 30, 2005, respectively 2,760 2,457
Additional paid in capital 12,000,214 6,481,102
Accumulated deficit (7,667,983) (4,425,444)
Deferred compensation (172,007) -
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 4,162,984 2,058,115
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,027,838 $ 12,821,900
================ ================
See accompanying notes to Condensed Consolidated financial statements.
1
ABLE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
NET SALES $ 22,340,176 $ 18,988,098 $ 35,471,589 $ 27,209,943
COST OF SALES 20,313,766 17,197,867 32,522,010 24,807,725
-------------- -------------- -------------- --------------
GROSS PROFIT 2,026,410 1,790,231 2,949,579 2,402,218
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Selling, general and administrative 2,061,930 1,417,276 3,626,150 2,543,926
Depreciation and amortization 358,058 306,339 653,266 603,930
-------------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES 2,419,988 1,723,615 4,279,416 3,147,856
-------------- -------------- -------------- --------------
(LOSS) INCOME FROM OPERATIONS (393,578) 66,616 (1,329,837) (745,638)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSES):
Interest and other income 42,205 84,039 88,191 103,478
Interest expense (215,820) (89,054) (385,711) (166,878)
Note conversion expense (125,000) - (125,000) -
Amortization of discount on debt (1,207,004) - (1,485,537) -
-------------- -------------- -------------- --------------
TOTAL OTHER EXPENSES (1,505,619) (5,015) (1,908,057) (63,400)
-------------- -------------- -------------- --------------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (1,899,197) 61,601 (3,237,894) (809,038)
PROVISION FOR INCOME TAXES 1,310 7,720 4,645 9,980
-------------- -------------- -------------- --------------
NET (LOSS) INCOME $ (1,900,507) $ 53,881 $ (3,242,539) $ (819,018)
============== ============== ============== ==============
BASIC PER COMMON SHARE
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,579,754 2,013,250 2,584,026 2,013,250
============== ============== ============== ==============
BASIC (LOSS) INCOME PER COMMON SHARE $ (.74) $ .03 $ (1.25) $ (.41)
============== ============== ============== ==============
DILUTED PER COMMON SHARE
WEIGHTED AVERAGE SHARES OUTSTANDING 2,579,754 2,038,786 2,584,026 2,013,250
============== ============== ============== ==============
DILUTED (LOSS) INCOME PER COMMON SHARE $ (.74) $ .03 $ (1.25) $ (.41)
============== ============== ============== ==============
See accompanying notes to Condensed Consolidated financial statements.
2
ABLE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2005
(unaudited)
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY
------------ ------------ --------------- --------------- ---------------- ------------------
Balance - July 1, 2005 2,457,320 $ 2,457 $ 6,481,102 $ (4,425,444) $ -- $ 2,058,115
Discounts on convertible
debentures -- -- 2,500,000 -- -- 2,500,000
Option exercises 200,000 200 1,067,800 -- -- 1,068,000
Note conversion 57,604 58 624,942 -- -- 625,000
Conversion of convertible
debentures and related
accrued interest 188,218 188 1,223,226 -- -- 1,223,414
Shares cancelled in connection
with termination of
consulting agreement (142,860) (143) (71,286) -- -- (71,429)
Options granted in connection
with consulting agreement -- -- 174,430 -- (174,430) --
Amortization of deferred
compensation -- -- -- -- 2,423 2,423
Net loss -- -- -- (3,242,539) -- (3,242,539)
------------ ------------ --------------- --------------- ---------------- ------------------
Balance - December 31, 2005 2,760,282 $ 2,760 $ 12,000,214 $ (7,667,983) $ (172,007) $ 4,162,984
============ ============ =============== =============== ================ ==================
See accompanying notes to Condensed Consolidated financial statements.
3
ABLE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------------
2005 2004
---------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (3,242,539) $ (819,018)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 653,266 603,930
(Gain) loss on disposal of equipment (5,000) 35,722
Provision for loss on accounts receivable 117,678 -
Note conversion expenses 125,000 -
Amortization of discount on convertible debentures 1,485,537 -
Amortization of non-employee deferred stock compensation 2,423 -
(Increase) decrease in:
Accounts receivable (1,302,052) (1,489,630)
Inventories (1,450,911) (625,086)
Prepaid expenses and other current assets (272,018) (134,031)
Increase (decrease) in:
Accounts payable and accrued expenses 1,562,997 1,173,895
Customer pre-purchase payments 2,254,311 858,591
Deferred revenue 150,863 -
---------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 79,555 (395,627)
---------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Advances to related parties (1,899,372) 1,463
Collection of notes receivables 27,824 10,106
Capital expenditures (279,605) (443,185)
Proceeds from sale of property and equipment 5,000 234,690
Acquisition costs (361,940) -
Other (5,000) 211,016
---------------- ----------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,513,093) 14,090
---------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 2,500,000 -
Deferred financing costs (217,175) -
Net borrowings under line of credit 436,757 -
Payments on capital leases (141,708) (174,729)
Repayments of notes payable (35,086) -
Proceeds from option exercises 1,068,000 -
---------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,610,788 (174,729)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH 1,177,250 (556,266)
Cash - Beginning of Year 1,754,318 1,309,848
---------------- ----------------
Cash - End of Period $ 2,931,568 $ 753,582
================ ================
Cash paid during the period for interest $ 273,249 $ 150,031
Cash paid during the period for income taxes $ - $ 15,949
See accompanying notes to Condensed Consolidated financial statements.
4
ABLE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Able
Energy, Inc. and Subsidiaries (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America
applicable for interim financial information. Accordingly, these financial
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended December 31, 2005 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2006. These Condensed Consolidated financial statements include the accounts of
Able Energy, Inc. and its wholly owned subsidiaries (Able Oil Company, Able Oil
Melbourne, Inc., Able Energy New York, Inc., Able Energy Terminal LLC and
PriceEnergy Franchising LLC) and majority owned (70.6%) subsidiary
(PriceEnergy.com Inc.). These Condensed Consolidated financial statements should
be read in conjunction with the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K filed on September 28, 2005
for the year ended June 30, 2005.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales of fuel and heating equipment are recognized at the time of delivery to
the customer, and sales of equipment are recognized at the time of installation.
Revenue from repairs and maintenance service is recognized upon completion of
the service. Payments received from customers for heating equipment service
contracts are deferred and amortized into income over the term of the respective
service contracts, on a straight-line basis, which generally do not exceed one
year.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period's condensed
consolidated financial statements in order to conform to the current period
presentation.
NOTE 3 - EARNINGS (LOSS) PER SHARE
Basic net income or loss per share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net income or
loss per share is computed based on the weighted average number of common shares
outstanding during the period plus dilutive securities outstanding such as stock
options, warrants or convertible instruments. Total options and warrants
outstanding as of December 31, 2005 were 55,000 and 5,442,309, respectively.
(Loss) earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- -----------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net (loss) income $ (1,900,507) $ 53,881 $ (3,242,539) $ (819,018)
================ ================ ================ ================
Weighted average common
shares outstanding 2,579,754 2,013,250 2,584,026 2,013,250
Dilutive effect of stock options
and warrants - 25,536 - -
---------------- ---------------- ---------------- ----------------
Diluted common shares outstanding 2,579,754 2,038,786 2,584,026 2,013,250
================ ================ ================ ================
Income (loss) per common share:
Basic $ (.74) $ .03 $ (1.25) $ (.41)
================ ================ ================ ================
Diluted $ (.74) $ .03 $ (1.25) $ (.41)
================ ================ ================ ================
5
Potentially dilutive options and warrants to purchase 472,474 and 614,748 shares
of the common stock were outstanding for the three and six months ending
December 31, 2005, respectively, and potentially dilutive debentures convertible
into 210,517 shares of common stock were also outstanding for the three and six
months ended December 31, 2005 but were not included in the computation of
diluted loss per share because the effect of their inclusion would have been
anti-dilutive.
NOTE 4 - INVENTORIES
Inventories consisted of the following at December 31, 2005:
Liquid fuel $ 1,847,935
Parts, Supplies and Equipment 329,963
----------------
Total $ 2,177,898
================
NOTE 5 - NOTES RECEIVABLE
On March 1, 2004, the Company entered into two notes receivable totaling $1.4
million related to the sale of its subsidiary, Able Propane LLC. The notes are
secured by substantially all the assets of Able Propane LLC. The outstanding
balance bears interest at a rate of 6% per annum. Principal is payable in annual
installments with interest being paid in quarterly installments through their
maturity date of March 1, 2008. The balance outstanding of these two notes as of
December 31, 2005 was $1.175 million.
The Company has a Note from Able Montgomery, Inc. and Andrew Schmidt (the owner
of Able Montgomery, Inc.) related to the sale of Able Montgomery, Inc. and
certain assets to Mr. Schmidt. The note was dated June 15, 2000 for $170,000.
The note bears interest at 9.5% per annum and payments commenced October 1,
2000. No payments of principal or interest have been received for more than 36
months. The note is secured by stock of Able Montgomery, Inc. and a personal
guarantee of Andrew Schmidt. The Company believes the value of the collateral
will cover the amount due if foreclosure is required. The balance outstanding on
this note at December 31, 2005 was approximately $168,000.
The Company has a note Receivable related to the sale of oil delivery trucks to
an independent driver. This independent driver also delivers oil for the
Company. The note bears interest at the rate of 9% per annum. This note was
issued in January 2004 and is payable in eight monthly installments each year
during the period from September through April, the oil delivery season. The
balance on this note at December 31, 2005 was approximately $10,700.
Maturities of the notes receivable at December 31, 2005 are as follows:
For the Year Principal
Ending December 31, Amount
------------------------- --------------
2006 $ 280,255
2007 269,519
2008 769,519
2009 35,144
--------------
Total $ 1,354,437
==============
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following at December 31, 2005:
Land $ 479,346
Buildings 1,331,214
Trucks 3,724,651
Fuel tanks 836,224
Machinery and equipment 1,004,462
Leasehold improvements 579,301
Cylinders 347,412
Office furniture and equipment 212,856
--------------
8,515,466
Less: accumulated depreciation
and amortization 4,026,245
--------------
Property and equipment, net $ 4,489,221
==============
At December 31, 2005, the equipment under the capital leases had a net book
values of approximately $1,046,000.
Depreciation and amortization expense of property and equipment was $61,584 and
$280,261 for the three and six months ended December 31, 2005, respectively.
6
NOTE 7 - INTANGIBLE ASSETS
Intangible assets was comprised of the following at December 31, 2005:
Website development $ 2,400,187
Customer list 610,850
Non-compete 100,000
--------------
3,111,037
Less: accumulated amortization 2,550,325
--------------
Intangible assets, net $ 560,712
==============
Amortization expense for intangible assets was $120,009 and $132,303 for the
three and six months ended December 31, 2005, respectively.
NOTE 8 - LINE OF CREDIT
On May 13, 2005, the Company entered into a $1,750,000 line-of-credit agreement
with Entrepreneur Growth Capital, LLC. The loan is secured by accounts
receivable, inventory and certain other assets as defined in the agreement. The
line carries interest at Citibank's prime rate, plus 4% (11.25% at December 31,
2005) per annum not to exceed 24% with a minimum interest of $11,000 per month.
The line also requires an annual facility fee of 2% of the total available
facility limit and monthly collateral management fees equal to .025%. The
outstanding balance fluctuates over time. The balance due as of December 31,
2005 is $1,452,225 and $297,775 was available under this credit line.
NOTE 9 - NOTES PAYABLE
On May 13, 2005, the Company entered into a term loan with Northfield Savings
Bank for $3,250,000. Principal and interest are payable in monthly installments
of approximately $21,400 which commenced July 1, 2005. The initial interest rate
is 6.25% per annum on the unpaid principal balance for the first five years, to
be reset every fifth anniversary date at 3% over the five year treasury rate,
but not lower than the initial rate; at that time the monthly payment will be
reset. At the maturity date of June 1, 2030, all remaining amounts are due. As
of December 31, 2005 the Company was in default of two non-financial covenants
under this agreement for which the Company has reviewed a waiver. The balance
outstanding on this note at December 31, 2005 was approximately $3,223,000.
The Note is secured by Company-owned real property located in Rockaway, New
Jersey and an assignment of leases and rents at such location. The interest rate
on default is 4% per annum above the interest rate then in effect.
On August 27, 1999, the Company entered into a note related to the purchase of
equipment and facilities from B & B Fuels Inc. The total principal of the note
originally was $145,000. The note is payable in the monthly amount of principal
and interest of $1,721 with an interest rate of 7.5% per year through August 27,
2009. The note is secured by a mortgage granted by Able Energy New York, Inc. on
property at 2 and 4 Green Terrace and 4 Horicon Avenue, Town of Warrensburg,
Warren County, New York. The balance due on this note at December 31, 2005 was
approximately $ 66,000.
Maturities of the notes payable as of December 31, 2005 are as follows:
For the Year Principal
Ending December 31, Amount
------------------------- --------------
2006 $ 73,741
2007 78,701
2008 83,996
2009 82,700
2010 73,769
Thereafter 2,895,720
--------------
Total $ 3,288,627
==============
NOTE 10 - CAPITAL LEASES PAYABLE
The Company has entered into various capital leases for equipment expiring
through December 2010, with aggregate monthly payments of approximately $34,000.
During the six months ended December 31, 2005 the Company purchased equipment
under capital lease of approximately $215,000.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 2005:
For the Year
Ending December 31, Amount
------------------------- --------------
2006 $ 381,253
2007 324,441
2008 301,611
2009 157,872
2010 55,934
--------------
Total minimum lease payments 1,221,111
Less amount representing interest 171,092
--------------
Present value of net minimum
lease payments 1,050,019
--------------
Less current maturities 307,716
--------------
Long-term maturities $ 742,303
==============
7
NOTE 11 - CONVERTIBLE DEBENTURES
On July 12, 2005, the Company consummated a financing in the amount of $2.5
million. Under such financing the Company sold debentures evidenced by a
Variable Rate Convertible Debenture (the "Convertible Debentures"). The
Convertible Debentures had a term of two years from the date of issuance,
amended November 18, 2005 to 25 months, subject to the occurrence of an event of
default, with interest payable at the rate per annum equal to LIBOR for the
applicable interest period, plus 4% payable on a quarterly basis. The
Convertible Debentures may be converted at the option of the holders into shares
of the Company's common stock at a conversion price of $6.50 per share. In
addition, the purchasers received five year warrants to purchase 192,308 shares
of common stock at an exercise price of $7.15 per share. The Company has an
optional redemption right (which right shall be mandatory upon the occurrence of
an event of default) to repurchase all of the Convertible Debentures for 125% of
the face amount of the Convertible Debentures plus all accrued and outstanding
interest and expenses, as well as a right to repurchase all of the Convertible
Debentures in the event of the consummation of a new financing in which the
Company sells securities at a purchase price that is below the $6.50 conversion
price. Closing expenses relating to this transaction totaled $315,000, including
a $250,000 broker fee and $65,000 in various legal expenses.
The Company allocated the proceeds from the issuance of the Convertible
Debentures and warrants based on their respective fair values and included
$900,000 in additional paid in capital related to the warrants. In addition, the
conversion feature of the Convertible Debentures is characterized as a
"beneficial conversion feature." Pursuant to Emerging Issues Task Force Issue
No. 00-27, the Company has determined that the value of the beneficial
conversion feature is $1,600,000. Accordingly, the Company has discounted the
balance of the Convertible Debentures as of the date of issuance and included
$1,600,000 in additional paid in capital. The beneficial conversion feature is
amortized from the date of issuance to the stated redemption date of July 12,
2007, of which $1,207,004 and $1,485,537 was amortized to expense during the
three and six months ended December 31, 2005, respectively.
During December 2005 debentures totaling $1,177,500 in principal amount plus
accrued interest totaling $45,914 were converted into 188,218 shares of the
Company's common stock. The amortization of discounts on debt included $902,238
for both the three and six months ended December 31, 2205 in connection with the
conversion.
The Company also originally granted to the purchasers who acquired the
Convertible Debentures an additional investment right, for a period of eighteen
months from the date the resale prospectus was to be declared effective, to
purchase units consisting of convertible debentures in the aggregate amount of
up to $15,000,000 (the "Additional Debentures") and common stock purchase
warrants equal to 50% of the face amount of such Additional Debentures (the
"Additional Warrants"). On November 18, 2005, the rights of the Company and the
purchasers relating to the Additional Debentures and Additional Warrants were
eliminated as of November 16, 2005, and the purchase agreement was amended to
issue the purchasers a series of warrants (the "New Warrants") with an exercise
price of $7.50 per share. In the aggregate, the New Warrants permit the holders
to acquire up to 5.25 million shares of the Company's common stock upon proper
exercise. Notwithstanding the foregoing, until the required stockholder
approvals are obtained, the purchasers have agreed not to convert any Debentures
or exercise any Additional Warrants or New Warrants which in the aggregate would
exceed 19.999% of the number of shares of the Company's common stock on the
trading day prior to the date of the purchase agreement.
NOTE 12 - DEFERRED COMPENSATION
During December 2005, the Company entered into a consulting agreement, which
included the issuance of options to purchase 25,000 shares of the Company's
common stock at an excercise price of $8.09, the market price on the day of
grant (December 15, 2005). The company recorded these options as deferred
compensation at a fair value of $174,430 using the Black-Scholes option pricing
model. The fair value of these options are being amortized over the 2 year life
of the consulting agreement. The related assumptions used to develop the
estimates are as follows:
Risk-free interest rate 3.8%
Expected volatility 207.2%
Dividend yield -
Expected life 2 years
8
NOTE 13 - COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company is obligated to purchase number 2 oil under various contracts with
its suppliers, all of which are expected to be fulfilled with no adverse
consequences material to the Company's operations or financial condition. As of
December 31, 2005 total open commitments under these contracts, through April
2006 are approximately $3,776,000.
SECURITIES ISSUES
On October 13, 2005, the Company received a letter from the Nasdaq Listing
Qualifications Staff ("Nasdaq"), notifying the Company that it was not in
compliance with Marketplace Rule 4310(c)(2)(B)(ii) (the "Rule"). The Rule
requires the Company to have a minimum $35 million in market value of listed
securities, or $2.5 million in shareholders' equity or $500,000 in net income
from continuing operations for the most recently completed fiscal year or two of
the three most recently completed fiscal years. Nasdaq informed the Company that
it would be provided 30 calendar days, or until November 14, 2005, to regain
compliance with the Rule.
The Company was required to demonstrate compliance with the Rule by November 14,
2005 by either:
|X| showing aggregate market value of its common stock in excess of
$35 million for a minimum of 10 consecutive business days, or
|X| increasing its shareholders' equity to an amount which exceeds
$2.5 million.
The shareholders' equity reported in the Company's Quarterly Report on Form
10-QA, Amendment Number 3 for the quarter ended September 30, 2005 was
$4,784,084, which exceeded the $2.5 million required under the Rule. Nasdaq has
determined that the matters set forth in its October 13, 2005 letter to the
Company have been closed.
On March 1, 2005, the Company entered into an amendment (the "Agreement") to an
existing consultant agreement with Summitt Ventures, Inc. ("Summitt"). The value
of the consideration contemplated to be rendered by Summitt to the Company under
the Agreement was $71,428 and the Company issued 142,857 shares of the Company's
common stock (the "Shares"), valued at $0.50 per share, as payment. The Shares
at the time of issue were unregistered, restricted shares of the Company and not
subject to any registration requirement. The shares were offered only to Summitt
in connection with the Agreement and, thus, were exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, as not being a part of
any public offering. The Shares are not convertible into any other class or
series of equity of the Company. No proceeds were received by the Company at the
time of issuance of the Shares and no proceeds have been received by the Company
on account of the Agreement. On September 22, 2005, the Company terminated the
Agreement with Summitt, with cause, and on October 13, 2005, the Company
notified Summitt that it was canceling the certificate evidencing the Shares on
the grounds that, among other things, Summitt induced the Company to enter into
the Agreement through misrepresentation.
EMPLOYMENT AGREEMENTS
On October 12, 2005, the Company entered into a one year employment agreement
with Gregory Frost, the Company's CEO. Pursuant to the agreement, he will be
paid an annual salary $250,000 and will be eligible for an annual bonus and
stock option grants which will be separately determined by the Compensation
Committee of the Board of Directors. The agreement also allows for a one-year
automatic renewal unless notice of non-renewal is given.
On July 1, 2004, the Company entered into a three-year employment agreement with
Christopher Westad, the Company's President. Pursuant to the agreement, he will
be paid an annual salary $141,600 and will be eligible for an annual bonus and
stock option grants which will be separately determined by the Compensation
Committee of the Board of Directors.
On July 1, 2004, the Company entered into a three-year employment agreement with
John Vrabel, the President of PriceEnergy.com, Inc. Pursuant to the agreement,
he will be paid an annual salary $141,600 and will be eligible for an annual
bonus and stock option grants which will be separately determined by the
Compensation Committee of the Board of Directors.
LITIGATION
The Company is subject to laws and regulations relating to the protection of the
environment. While it is not possible to quantify with certainty the potential
impact of actions regarding environmental matters, in the opinion of management,
compliance with the present environmental protection laws will not have a
material adverse effect on the financial condition, competitive position, or
capital expenditures of the Company.
Related to its 1999 purchase of the property on Route 46, Rockaway, New Jersey,
the Company settled a lawsuit with a former tenant of the property and received
a lump sum settlement of $397,500. This sum was placed in an attorney's escrow
account for payment of all environmental remediation costs. Able Energy
Terminal, LLC has paid costs of $102,956 through December 31, 2005, which are
included in prepaid expenses and must be presented to the attorney for
reimbursement. The environmental remediation is currently in progress on this
property with the majority of the remediation is to be completed within this
calendar year.
Following an explosion and fire that occurred at the Company's Facility in
Newton, NJ on March 14, 2003, and through the subsequent clean up efforts, the
Company has cooperated fully with all local, state and federal agencies in their
investigations into the cause of this accident.
All violation charges with the New Jersey Department of Community Affairs and
OSHA have been settled and paid as of December 31, 2005.
The Sussex County, New Jersey, Prosecutor's Office conducted an investigation as
a result of the March 14, 2003 explosion and fire. At a hearing on July 27,
2005, the Company entered a guilty plea to one count of negligently damaging
property, a fourth degree offense, and paid a $20,000 fine. The Company's guilty
plea cannot be used against it in any civil action. In addition, the Company's
President, former CEO and a propane delivery driver entered into a pre-trial
intervention agreement, conditioned upon 250 hours of community service over a
two year period.
9
A lawsuit (known as Hicks vs. Able Energy, Inc.) has been filed against the
Company by residents who allegedly suffered property damages as a result of the
March 14, 2003 explosion and fire. The Company's insurance carrier is defending
the Company as it related to compensatory damages. The Company has retained
separate legal counsel to defend the Company against the punitive damage claim.
On June 13, 2005, the Court granted a motion certifying a plaintiff class action
which is defined as "All Persons and Entities that on and after March 14, 2003,
residing within a 1,000 yard radius of Able Oil Company's fuel depot facility
and were damaged as a result of the March 14, 2003 explosion". The class
certification is limited to economic loss and specifically excludes claims for
personal injury from the Class Certification. The Company believes that the
Class Claims for compensatory damages is within the available limits of its
insurance.
After the March 14, 2003, fire and explosion, the town of Newton changed its
zoning requirements and made fuel oil and propane distribution prohibited uses.
The Company appealed a denial of a request for building permits to reconstruct
damaged and destroyed buildings and sought a Non-Conforming Use Certificate to
permit the fuel oil distribution use only. On August 20, 2004, the Superior
Court of New Jersey ruled that the Company may continue to use the site as a
non-conforming use, but stayed its decision subject to Newton's appellate
rights. The decision was upheld in May 2005 by the court upon the appeal of the
Town of Newton. The Company is planning to use the property in the manner
approved by the decision.
In addition to the class action, seven property owners, who were unable to reach
satisfactory settlements with the Company's insurance carrier, have filed
lawsuits for alleged property damages suffered as a result of the March 14, 2003
explosion and fire. Also, the Company's insurance carrier is defending the
Company as it related to the property damage claims. Punitive damage claims are
being defended by the Company's separate counsel. The Company believes that
compensatory damage claims are within the available limits of insurance and
reserves for losses have been established, as deemed appropriate, by the
insurance carrier. There was a total of approximately 227 claims filed against
the Company for property damages and approximately 220 claims have been settled
by the Company's insurance carrier resulting in the remaining seven lawsuits as
described in this paragraph.
The Company in the normal course of business has been involved in lawsuits.
Current suits are being defended by the insurance carrier and should be covered
by insurance and legal counsel is defending on punitive damage claims as noted
above. The Company believes that the outcome of the above mentioned legal
matters will not have a material effect on the Company's condensed consolidated
Financial Statements.
NOTE 14 - RELATED PARTY TRANSACTIONS
The following officers of this Company own stock in the subsidiary,
PriceEnergy.Com, Inc., which they incorporated in November 1999:
Former Chief Executive Officer 23.5%
President 3.6%
Chief Operating Officer 2.3%
No capital contributions have been made by these officers (See Notes 1 and 7).
The Company entered into a consulting agreement with its former Chief Executive
Officer ("CEO") on February 16, 2005. The agreement is for two years and
provides for annual fees of $60,000 to be paid in monthly installments. In
addition, the former CEO received options, which were fully vested upon grant,
to purchase 100,000 shares of the Company's common stock at $4.00 per share. The
options were exercised on July 7, 2005. The former CEO was paid $15,000 and
$30,000 related to this agreement during the three and six months ended December
31, 2005, respectively.
On February 22, 2005, the Company borrowed the sum of $500,000 from Able Income
Fund, LLC ("Able Income"). The loan was evidenced by a promissory note (the
"Note") issued by the Company to the order of Able Income in the principal
amount of $500,000 bearing interest at the rate of 14% per annum payable
interest only in the amount of $5,833 per month with the principal balance and
any accrued unpaid interest due and payable on May 22, 2005. The Note was
secured by a mortgage on property located in Warrensburg Industrial Park,
Warrensburg, New York, owned by Able Energy New York, Inc. One of the owners of
Able Income is Timothy Harrington, the former Chief Executive Officer of the
Company. The maturity date of the Note was extended to August 22, 2005. Able
Income agreed to surrender the note as of September 30, 2005, in exchange for
57,604 shares of the Company's common stock. The number of shares exchanged was
determined by dividing the principal balance of the Note, together with all
accrued and unpaid interest thereon as of December 31, 2005, by $8.68,
representing a 20% discount off the average closing price of the Company's stock
as listed on the Nasdaq SmallCap Market for the period from October 3, 2005
through October 14, 2005. Note conversion expense of $125,000 was recorded
during the period related to this transaction. Interest expense related to the
note payable paid to Able Income during the three and six months period ended
December 31, 2005 was approximately $35,000.
The Company entered into a Stock Purchase Agreement in June 2005 ("Purchase
Agreement") with all of the stockholders (the "Sellers") of All American Plazas,
Inc. ("All American") to purchase substantially all of the business of All
American. The transaction is expected to be consummated during the first half of
2006, upon receipt of the required approval by our stockholders. All American
currently owns approximately 35% of the Company's outstanding shares. The
Company's CEO, Chairman and General Counsel, Gregory D. Frost, formerly served
as a director and the General Counsel of All American until his resignation on
March 31, 2005, and the Company's Vice President Business Development, Frank
Nocito, is Vice President of All American. In addition, one of the
10
Company's directors, Stephen Chalk, performs certain paid consulting services in
the area of real estate development for All American. At the closing, the
Company will deliver to the Sellers 11,666,667 shares of the Company's
restricted common stock, par value $.001 per share, at $3.00 per share for an
aggregate purchase price of $35,000,000.
All American consummated a financing that, if the acquisition of All American is
consummated, will impact the Company. Pursuant to the terms of the Securities
Purchase Agreement dated June 1, 2005 (the "Agreement") between All American and
certain purchasers, the purchasers loaned All American an aggregate of
$5,000,000, evidenced by Secured Debentures also dated June 1, 2005 (the
"Debentures"). It is currently contemplated that if the Able/All American
transaction is consummated, the stockholders of All American will escrow a
sufficient number of shares to satisfy the conversion of the $5,000,000 in
outstanding Debentures in full. Pursuant to the terms of the Securities Purchase
Agreement dated January 20, 2006 (the "Agreement") between All American and
certain purchasers, the purchasers loaned All American an aggregate of
$2,500,000, evidenced by Secured Debentures also dated January 20, 2006 (the
"Debentures"). It is currently contemplated that if the Able/All American
transaction is consummated, the shareholders of All American will escrow a
sufficient number of shares to satisfy the exchange of the $2,500,000 in
outstanding Debentures for convertible debentures to purchase our common stock
at $3.00 per share, 50% warrant coverage at $3.75 exercise price and certain
additional pro rata investment rights.
If the Company consummates the acquisition of All American, upon such
consummation, the Company will assume the obligations of All American under the
Agreement, the Debentures and the Additional Investment Rights Agreement through
the execution of a Securities Assumption, Amendment and Issuance Agreement,
Registration Rights Agreement, Common Stock Purchase Warrant Agreement and
Variable Rate Secured Convertible Debenture Agreement, each between the
Purchasers and the Company.
On July 27, 2005, as amended January 13, 2006, the Company made a loan in the
amount of $1,730,000 to All American Plazas, Inc. ("All American"), and All
American executed and delivered a promissory note for the full amount of the
loan in favor of the Company. Under the terms of the promissory note, the
outstanding principal of the loan bears interest at the rate of 3.5% per annum.
All payments of principal and accrued interest are payable in full by March 20,
2006. However, All American has the right to extend the repayment of principal
and interest for thirty days upon written request. The promissory note is
secured by certain real estate of All American and a lien on 1,000,000 shares of
the Company's common stock held by All American. These shares have a
pre-existing lien held by the Company's former Chief Executive Officer.
In connection with two loans entered into by the Company in May 2005 (see Notes
8 and 9), fees in the amount of $167,500 were paid to Unison Capital Corporation
("Unison"), a company owned by an officer of the Company. This individual also
has a related party interest to All American.
Subsequent to the payments being made and based on discussions with Unison it
was determined the $167,500 was an inappropriate payment to a related party and
Unison has agreed to reimburse this amount to the Company. On October 3, 2005,
The Company entered into a note agreement with Unison whereby Unison will repay
the balance plus interest at 6% per year. Interest is due in monthly
installments with the principal being due in full on September 29, 2006.
During the three months ended December 31, 2005 the Company paid consulting fees
amounting to approximately $39,000 to a company owned by a member of the
Company's board of directors. During the six months ended December 31, 2005 the
Company paid consulting fees amounting to approximately $44,000 to a company
owned by a member of the Company's board of directors. At December 31, 2005 the
balance of consulting fees payable to this related party was approximately
$10,000.
NOTE 15 - PRODUCT INFORMATION
The Company sells several types of products and provides services. Following are
sales by product groups and services:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- -----------------------------------
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
Number 2 heating oil $ 14,432,409 $ 12,140,035 $ 21,230,872 $ 15,539,948
Gasoline, Diesel Fuel, Kerosene,
Propane and Lubricants 7,021,614 5,749,849 12,632,114 9,876,896
Equipment Sales, Services and
Installation 886,153 1,098,214 1,608,604 1,793,099
---------------- ---------------- ---------------- ----------------
Net Sales $ 22,340,176 $ 18,988,098 $ 35,471,589 $ 27,209,943
================ ================ ================ ================
11
NOTE 16 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation."
Statement 123(R) supersedes Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement
of Cash Flows." Generally, the approach in Statement 123(R) is similar to the
approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The Statement is effective for fiscal
years beginning after June 15, 2005.
Statement 123(R) permits public companies to adopt its requirements using one of
two methods:
A. "Modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to
employees prior to the effective date of Statement 123(R) that
remain unvested on the effective date.
B. "Modified retrospective" method which includes the requirements
of the modified prospective method described above, but also
permits entities to restate, based on the amounts previously
recognized under Statement 123 for purposes of pro forma
disclosures, either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.
The Company has adopted Statement 123(R) on July 1, 2005 using the modified
prospective method. The impact of this Statement was immaterial to our Condensed
Consolidated financial statements.
In June 2005, the FASB published Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154
establishes new standards on accounting for changes in accounting principles.
Pursuant to the new rules, all such changes must be accounted for by
retrospective application to the financial statements of prior periods unless it
is impracticable to do so. SFAS 154 completely replaces Accounting Principles
Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
pronouncements with respect to accounting for changes in estimates, changes in
the reporting entity, and the correction of errors. The requirements in SFAS 154
are effective for accounting changes made in fiscal years beginning after
December 15, 2005. The Company will apply these requirements to any accounting
changes after the implementation date. The application of this pronouncement is
not expected to have an impact on the Company's Consolidated financial position,
results of operations, or cash flows.
The Emerging Issues Task Force ("EITF") reached a tentative conclusion on EITF
No. 05-1, "Accounting for the Conversion of an Instrument That Becomes
Convertible upon the Issuer's Exercise of a Call Option" ("EITF No. 05-1") that
no gain or loss should be recognized upon the conversion of an instrument that
becomes convertible as a result of an issuer's exercise of a call option
pursuant to the original terms of the instrument. The consensus for EITF No.
05-1 has not been finalized. The adoption of this pronouncement is not expected
to have an impact on our Consolidated financial position, results of operations,
or cash flows.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF No. 00-19, `Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered `conventional' for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.
EITF No. 05-2 is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. The Company has applied the
requirements of EITF No. 05-2 since the required implementation date. The
adoption of this pronouncement did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, `Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" ("EITF No. 05-4") addresses financial instruments, such as stock purchase
warrants, which are accounted for under EITF 00-19 that may be issued at the
same time and in contemplation of a registration rights agreement that includes
a liquidated damages clause. The consensus for EITF No. 05-4 has not been
finalized. In July 2005, the Company entered into a private placement agreement
for convertible debentures, a registration rights agreement and warrants in
connection with the private placement (see Note 11). Based on the interpretive
guidance in EITF Issue No. 05-4, view C, since the registration rights agreement
includes provisions for uncapped liquidated damages, the Company determined that
the registration rights is a derivative liability. However due to various
factors including substantial conversion of these debentures and the
registration statement becoming effective in December 2005, the value of the
registration rights was deemed to be de minimus and therefore no liability was
recorded in the Condensed Consolidated financial statements.
12
NOTE 17 - SUBSEQUENT EVENTS
During the period from January 1, 2006 through February 6, 2006 a total of
$1,117,000 in principal amount of convertible debentures were converted into
171,864 shares of the Company's common stock (which, together with the
debentures converted in December 2005, brought the aggregate principal amount of
convertible debentures converted to $2,294,500).
On February 3, 2006, 60,500 shares were issued upon the exercise of warrants
sold in the July 12, 2005 private placement, as amended on November 16, 2005,
for an aggregate exercise price of $453,750.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Statements in this Quarterly Report on Form 10-Q concerning the Company's
outlook or future economic performance, anticipated profitability, gross
billings, expenses or other financial items, and statements concerning
assumptions made or exceptions to any future events, conditions, performance or
other matters are "forward looking statements," as that term is defined under
the Federal Securities Laws. Forward-looking statements are subject to risks,
uncertainties, and other factors that would cause actual results to differ
materially from those stated in such statements. Such risks, and uncertainties
and factors include, but are not limited to: (i) changes in external competitive
market factors or trends in the Company's results of operation; (ii)
unanticipated working capital or other cash requirements and (iii) changes in
the Company's business strategy or an inability to execute its competitive
factors that may prevent the Company from competing successfully in the
marketplace.
OVERVIEW
Able Energy Inc. ("Able") was incorporated in Delaware in 1997. Able Oil, a
wholly owned subsidiary of Able, was established in 1989 and sells both
residential and commercial its heating oil and complete HVAC service to it
heating oil customers. Able Energy NY, a wholly owned subsidiary of Able, sells
residential and commercial heating oil, propane diesel fuel, and kerosene to
customers around the Warrensburg NY area. Able Melbourne, a wholly owned
subsidiary of Able, was established in 1996 and sells various grades of diesel
fuel around the Cape Canaveral FL area. PriceEnergy.com, Inc., a majority owned
subsidiary of Able, was established in 1999 and has developed an internet
platform that has extended the Company's ability to sell and deliver liquid
fuels and related energy products.
Management's Discussion and Analysis of Financial Condition and Results of
Operation contains forward-looking statements, which are based upon current
expectations and involve a number of risks and uncertainties. In order for us to
utilize the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, investors are hereby cautioned that these statements may be
affected by the important factors, among others, set forth below, and
consequently, actual operations and results may differ materially from those
expressed in these forward-looking statements. The important factors include:
|X| Commodity Supply
|X| Commodity Pricing
|X| Customers Converting to Natural Gas
|X| Alternative Energy Sources
|X| Winter Temperature Variations (Degree Days)
|X| Customers Moving Out of The Area
|X| Legislative Changes
|X| The Availability (Or Lack of) Acquisition Candidates
|X| The Success of Our Risk Management Activities
|X| The Effects of Competition
|X| Changes in Environmental Law
|X| General Economic, Market, or Business Conditions
We undertake no obligation to update or revise any such forward-looking
statements.
CRITICAL ACCOUNTING POLICIES
We consider the following policies to be the most critical in understanding the
judgments involved in preparing the condensed consolidated financial statements
and the uncertainties that could impact our results of operations, financial
condition and cash flows.
REVENUE RECOGNITION
Sales of fuel and heating equipment are recognized at the time of delivery to
the customer, and sales of equipment are recognized at the time of installation.
Revenue from repairs and maintenance service is recognized upon completion of
the service. Payments received from customers for heating equipment service
contracts are deferred and amortized into income over the term of the respective
service contracts, on a straight-line basis, which generally do not exceed one
year.
RESULTS OF OPERATIONS
The following table presents the percentage of total revenues for the periods
indicated and changes from period to period of certain items included in our
Condensed Consolidated Statements of Operations.
14
FOR THE FOR THE
THREE SIX
MONTHS MONTHS
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED
ENDED DECEMBER 31, ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------------- ---------------------------- ------------- -------------
2005 VS. 2005 VS.
2005 2004 2005 2004 2004 2004
------------ ------------ ------------ ------------ ------------- -------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 17.7 % 30.4 %
Cost of sales 90.9 90.6 91.7 91.2 18.1 31.1
------------ ------------ ------------ ------------
Gross Profit 9.1 9.4 8.3 8.8 13.2 22.8
Selling general and
administrative 9.2 7.5 10.2 9.3 45.5 42.5
Depreciation and
amortization 1.6 1.7 1.8 2.2 16.9 8.2
------------ ------------ ------------ ------------
(Loss) income from
operations (1.7) 0.4 (3.7) (2.7) (690.8) 78.3
Interest and other income 0.2 0.4 0.2 0.4 (49.8) (14.8)
Interest expense (1.0) (0.5) (1.1) (0.6) 142.3 131.1
Note conversion expense (0.6) - (0.4) - * *
Amortization of discount on debt (5.4) - (4.2) - * *
------------ ------------ ------------ ------------
(Loss) income before
provision for income taxes (8.5) 0.3 (9.1) (3.0) * *
Provision for income taxes (0.0) (0.0) (0.0) (0.0) * *
------------ ------------ ------------ ------------
Net (Loss) Income (8.5) 0.3 (9.1) (3.0) * *
============ ============ ============ ============
* Not meaningful
THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2004
Revenue for the three months ended December 31, 2005 increased approximately
$3.4 million or 17.7% over the three months ended December 31, 2004. This
increase can be attributed primarily to the pass-through of fuel oil costs to
customers and an increase in the volume sold of number 2 heating oil of
approximately 2%, offset by the impact of marketing changes in the way the
Company sells to its discount customers.
Gross profit margins for the three months ended December 31, 2005 decreased to
9.1% from 9.4% for the three months ended December 31, 2004. The decrease in
gross profit margin was the result of the dramatically rising product costs
during the period. Retail pricing was adjusted as necessary to cover most of the
increases while continuing to maintain the Company's competitive position in the
marketplace. Gross profit margin was also affected by a strong increase in sales
of our PriceEnergy subsidiary in our present market area as a result of
PriceEnergy's contractual relationship with BJ's Wholesale Club, the amendment
of which is being negotiated by the Company.
Selling, general and administrative expenses for the three months ended December
31, 2005 increased by approximately $645,000 or 45.5% compared to the three
months ended December 31, 2004. The Company attributes this increase primarily
to an increase in professional fees of approximately $192,000 related to general
corporate matters, including SEC filings and potential acquisitions, an increase
in payroll costs related to the addition of key management positions of
approximately $156,000, an increase in credit card processing fees of
approximately $92,000 which relates partly to the increase in revenue and the
shift of customer payment methods to more credit card based payment, and an
increase of approximately $109,000 in the Company's reserve related to
uncollectable accounts receivable.
Depreciation and amortization expense for the three months ended December 31,
2005 increased by approximately $52,000 or 16.9% compared to the three months
ended December 31, 2004. This increase was primarily related to the amortization
of deferred financing costs related to the conversion of debentures during the
period.
Operating loss for the three months ended December 31, 2005 was approximately
$394,000 compared to operating income of approximately $67,000 for the three
months ended December 31, 2004. The net increase in the operating loss for the
period was directly related to an increase in selling, general and
administrative expenses partially offset by an overall improvement in gross
margin dollars.
15
Other income (expenses) increased to a net expense of approximately $1.5 million
in the three months ended December 31, 2005 from approximately $5,000 in the
three months ended December 31, 2004. The increase is primarily related to an
increase in interest expense of approximately $127,000 related to debt financing
and issuance of convertible debentures entered into during July 2005, a non-cash
charge of approximately $1.2 million related to the amortization of the
beneficial value ascribed to conversion rights of the convertible debentures and
value of warrants issued in connection with the convertible debentures and a
non-cash charge of $125,000 related to the note conversion.
Our effective tax rate for the three months ended December 31, 2005 and the
three months ended December 31, 2004 is negligible. The difference in the
Company's effective tax rate from the federal statutory rate is primarily due to
a 100% valuation allowance provided for all deferred tax assets.
Net loss for the three months ended December 31, 2005 was approximately $1.9
million compared to net income of approximately $54,000 for the three months
ended December 31, 2004. The net change is directly related to an increase in
selling, general and administrative expenses and the increase in interest and
other expenses, partially offset by an overall improvement in gross margin
dollars.
SIX MONTHS ENDED DECEMBER 31, 2005 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2004
Revenue for the six months ended December 31, 2005 increased approximately $8.3
million or 30.5% over the six months ended December 31, 2004. This increase can
be attributed primarily to the pass-through of fuel oil costs to customers and
an increase in the volume sold of number 2 heating oil of approximately 4%,
offset by the impact of marketing changes in the way the Company sells to its
discount customers.
Gross profit margins for the six months ended December 31, 2005 decreased to
8.3% from 8.8% for the six months ended December 31, 2004. The decrease in gross
profit margin was the result of the dramatically rising product costs during the
period. Retail pricing was adjusted as necessary to cover most of the increases
while continuing to maintain the Company's competitive position in the
marketplace. Gross profit margin was also affected by a strong increase in sales
of our PriceEnergy subsidiary in our present market area.
Selling, general and administrative expenses for the six months ended December
31, 2005 increased by approximately $1.1 million or 42.5% compared to the six
months ended December 31, 2004. The Company attributes this increase primarily
to an increase in professional fees of approximately $368,000 related to general
corporate matters, including SEC filings and potential acquisitions, an increase
in payroll costs related to the addition of key management positions of
approximately $312,000, an increase in credit card processing fees of
approximately $204,000 which relates partly to the increase in revenue and the
shift of customer payment methods to more credit card based payment, and an
increase of approximately $109,000 in the Company's reserve related to
uncollectable accounts receivable.
Depreciation and amortization expense for the six months ended December 31, 2005
increased by approximately $49,000 or 8.2% compared to the six months ended
December 31, 2004. This increase was primarily related to the amortization of
deferred financing costs related to the conversion of debentures during the
period.
Operating loss for the six months ended December 31, 2005 was approximately $1.3
million compared to approximately $746,000 for the six months ended December 31,
2004. The net increase in the operating loss for the period was directly related
to an increase in selling, general and administrative expenses partially offset
by an overall improvement in gross margin dollars.
Other income (expenses) increased to a net expense of approximately $1.9 million
in the six months ended December 31, 2005 from approximately $63,000 in the six
months ended December 31, 2004. The increase is primarily related to an increase
in interest expense of approximately $119,000 related to debt financing and
issuance of convertible debentures entered into during July 2005, a non-cash
charge of approximately $1.5 million related to the amortization of the
beneficial value ascribed to conversion rights of the convertible debentures and
value of warrants issued in connection with the convertible debentures and a
non-cash charge of $125,000 related to the note conversion.
Our effective tax rate for the six months ended December 31, 2005 and the six
months ended December 31, 2004 is negligible. The difference in the Company's
effective tax rate from the federal statutory rate is primarily due to a 100%
valuation allowance provided for all deferred tax assets.
Net loss for the six months ended December 31, 2005 was approximately $3.2
million compared to approximately $819,000 for the six months ended December 31,
2004. The net change is directly related to an increase in selling, general and
administrative expenses and the increase in interest and other expenses,
partially offset by an overall improvement in gross margin dollars.
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LIQUIDITY AND CAPITAL RESOURCES
We had working capital of approximately $1.5 million at December 31, 2005
compared to a working capital deficit of approximately $400,000 at June 30,
2005. The working capital increase of approximately $1.9 million was primarily
due to issuance of convertible debentures of $2.5 million, the issuance of
common stock through the exercise of outstanding options and warrants of
approximately $1.1 million, and the conversion of note payable into equity of
$0.5 million. This increase was partially offset by a net loss of approximately
$3.2 million.
In May 2005, we entered into a $1,750,000 line of credit agreement with
Entrepreneurs Growth Capital, LLC. The line is collateralized by accounts
receivable and inventories. Outstanding balances under the loan bear interest at
an annual rate equal to the Citibank's prime rate plus 4%. As of December 31,
2005, approximately $1.5 million was outstanding and $250,000 was available
under this credit line.
On July 12, 2005, the Company consummated a financing with a group of lenders.
Pursuant to the terms of the Securities Purchase Agreement, the Company sold
variable rate convertible debentures in the amount of $2.5 million. The
debentures shall be repaid within two years from the date of issuance with
interest payable at a rate per annum equal to Libor, plus 4%, which on July 12,
2005 was 3.57% plus 4%, or 7.57%. The interest is payable quarterly on the first
of January, April, July, and October. The debentures may be converted at the
option of the purchasers into shares of the Company's Common Stock at a
conversion price of $6.50 per share. The amount of shares to be issued at such
conversion will be 384,618. In addition, the purchasers shall have the right to
receive five-year warrants to purchase 192,308 shares of Common Stock at $7.15
per share. The market value of the Company's Common Stock on July 12, 2005 was
$17.90 per share. The debenture conversion price of $6.50 is 36.31% of the
market value. Closing expenses related to this transaction totaled $315,000,
including a $250,000 broker fee and $65,000 in various legal expenses.
On July 27, 2005, as amended January 13, 2006 the Company made a loan of
$1,730,000 to All American Plazas, Inc. which currently owns approximately 35%
of the Company's outstanding shares. The funds were disbursed from the financing
proceeds of $2.5 million described above. Under the note, the loan bears
interest at 3.50% per annum and is secured by certain real estate of All
American and the 1,000,000 shares of Able Energy, Inc. Common Stock owned by All
American Plazas, Inc.
We anticipate that funds generated from operations, together with cash and
investments, and availability under our credit line will be sufficient to fund
our current level of growth and our existing commitments at least through fiscal
2006. However, to the extent the expansion of our operations requires
significant additional resources, we may be required to seek additional
financing. No assurance can be given that such financing would be available on
terms that would be acceptable to us.
MATERIAL COMMITMENTS
The following schedule summarizes our contractual obligations as of December 31,
2005 in the periods indicated.
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PAYMENTS DUE BY PERIOD
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CONTRACTUAL LESS THAN MORE THAN
OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 4,741,000 $ 1,526,000 $ 163,000 $ 156,000 $ 2,896,000
-------------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations 1,221,000 381,000 626,000 214,000
-------------------------------------------------------------------------------------------------------------------------
Operating Leases 98,000 93,000 5,000 -
-------------------------------------------------------------------------------------------------------------------------
Unconditional Purchase Obligations 3,776,000 3,776,000 - -
-------------------------------------------------------------------------------------------------------------------------
Other Long-Term Obligations 688,000 548,000 140,000 -
-------------------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $ 10,524,000 $ 6,324,000 $ 934,000 $ 370,000 $ 2,896,000
-------------------------------------------------------------------------------------------------------------------------
As of December 31, 2005, there were no other off balance sheet arrangements.
SEASONALITY
The Company's business is directly related to the heating needs of its
customers. Accordingly, the weather can have a material effect on the Company's
sales in any particular year. Generally, however, the temperatures in the past
thirty years have been relatively stable, and as a result, have not had a
significant impact on the Company's performance, except on a short-term basis.
In the years 1997 and 2001, "El Nino" caused two of the warmest winters on
record, which impacted home heating oil sales during the 1997-1998 and 2001-2002
winter seasons. The winter of 2004-2005 recorded temperatures for the season
which were normal for New Jersey, the Company's primary delivery area.
Approximately 65% of the Company's revenues are earned and received from October
through March, and the overwhelming majority of such revenues are derived from
the sale of home heating oil. During the spring and summer months, revenues from
the sale of diesel and gasoline fuels increase due to the increased use of
automobiles and construction apparatus.
Each of the Company's divisions is seasonal. From May through September, Able
Oil experiences considerable reduction of retail heating oil sales.
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Able Energy NY's propane operation can experience up to 80% decrease in heating
related propane sales during the months of April to September, which is offset
somewhat by an increase of pool heating and cooking fuel.
Over 90% of Able Melbourne's revenues are derived from the sale of diesel fuel
for construction vehicles, and commercial and recreational sea-going vessels
during Florida's fishing season, which begins in April and ends in November.
Only a small percentage of Able Melbourne's revenues are derived from the sale
of home heating fuel. Most of these sales occur from December through March,
Florida's cooler months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not issue or invest in financial instruments or derivatives for
trading or speculative purposes. All of the operations of the Company are
conducted in the United States, and, as such, are not subject to material
foreign currency exchange rate risk. At December 31, 2005, the Company had
approximately $5.0 million of outstanding long-term debt and convertible
debentures. Although the Company's assets included approximately $2.9 million in
cash and cash equivalents, the market rate risk associated with changing
interest rates in the United States is not material.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the acting chief executive officer ("Acting
CEO") (who ceased performing the duties of Acting CEO on October 13, 2005),
current chief executive officer ("Current CEO") (who became the Current CEO on
October 13, 2005) and chief financial officer ("CFO"), of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, which included full consideration of the facts
surrounding the accounting errors described below, the Company's management,
including the Acting CEO, current CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2005. The
occurrence of the errors relating to the allocation of proceeds from,
recognition of a beneficial conversion feature, balance sheet classification of
the discount recorded and footnote disclosure relating to, the convertible
debentures and warrants sold by the Company in a private placement on July 12,
2005, the correction of each of which resulted in a restatement of the Company's
consolidated financial statements for the three-month period ended September 30,
2005, was determined to have resulted from errors in the application of
applicable accounting principles as opposed to inadequacies in the Company's
disclosure controls and procedures.
There were no significant changes in the Company's internal control over
financial reporting in the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceeding that is likely to
have a material adverse effect on the results of operations or the financial
condition of the Company. From time to time, the Company may become a party to
litigation incidental to its business. There can be no assurance that any
financial legal proceedings will not have a material adverse affect on the
Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) On July 12, 2005, the Company consummated a financing with certain
purchasers identified in the Securities Purchase Agreement dated as of July 12,
2005 (collectively the "Purchasers"), in a transaction permitted under section
4(2) of the Securities Act of 1933, in the amount of $2.5 million.
Pursuant to the terms of the Securities Purchase Agreement dated as of July 12,
2005 (the "Agreement") among Able Energy, Inc., and the Purchasers, the
Purchasers purchased Debentures in the aggregate amount of $2.5 million
evidenced by a Variable Rate Convertible Debenture also dated July 12, 2005 (the
"Debenture"). The Debentures shall be repaid within two years from the date of
issuance, subject to the occurrence of an event of default, with interest
payable at the rate per annum equal to LIBOR for the applicable interest period,
plus 4% payable on a quarterly basis on April 1st, July 1st, October 1st and
January 1st, beginning on the first such date after the date of issuance of the
Debentures.
The Debentures may be converted at the option of the Purchasers into shares of
our common stock at a conversion price of $6.50 per share. In addition, the
Purchasers shall have the right to receive five (5) year warrants to purchase
192,308 of common stock at an exercise price of $7.15 per share. Pursuant to the
Agreement, we shall also have an optional redemption right (which right shall be
mandatory upon the occurrence of an event of default) to repurchase all of the
Debentures for 125% of the face amount of the Debentures plus all accrued and
outstanding interest and expenses, as well as a right to repurchase all of the
Debentures in the event of the consummation of a new financing in which we sell
securities at a purchase price that is below the Conversion Price.
In December 2005, debentures totaling $1,177,500 in principal amount plus
accrued interest thereon of $45,914 were converted into 188,218 shares of the
Company's common stock.
(b) Non-applicable
(c) None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) 1. On March 1, 2005, the Company entered into an amendment (the "Agreement")
to an existing consultant agreement with Summitt Ventures, Inc. ("Summitt"). The
value of the consideration contemplated to be rendered by Summitt to the Company
under the Agreement was $71,428 and the Company issued 142,857 shares of the
Company's common stock (the "Shares"), valued at $0.50 per share, as payment.
The Shares at the time of issue were unregistered, restricted shares of the
Company and not subject to any registration requirement. The shares were offered
only to Summitt in connection with the Agreement and, thus, were exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as
not being a part of any public offering. The Shares are not convertible into any
other class or series of equity of the Company. No proceeds were received by the
Company at the time of issuance of the Shares and no proceeds have been received
by the Company on account of the Agreement. On September 22, 2005, the Company
terminated the Agreement with Summitt, with cause, and on October 13, 2005, the
Company notified Summitt that it was canceling the certificate evidencing the
Shares on the grounds that, among other things, Summitt induced the Company to
enter into the Agreement through misrepresentation.
2. On October 13, 2005, the Company received a letter from the Nasdaq Listing
Qualifications Staff ("Nasdaq"), notifying the Company that it was not in
compliance with Marketplace Rule 4310(c)(2)(B)(ii) (the "Rule"). The Rule
requires the Company to have a minimum $35 million in market value of listed
securities, or $2.5 million in shareholders' equity or $500,000 in net income
from continuing operations for the most recently completed fiscal year or two of
the three most recently completed fiscal years. Nasdaq
19
informed the Company that it would be provided 30 calendar days, or until
November 14, 2005, to regain compliance with the Rule.
The Company was required to demonstrate compliance with the Rule by November 14,
2005 by either:
|X| showing aggregate market value of its common stock in excess of
$35 million for a minimum of 10 consecutive business days, or
|X| increasing its shareholders' equity to an amount which exceeds
$2.5 million.
The shareholders' equity reported in the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 was $4,784,084, which exceeded the $2.5
million required under the Rule. Nasdaq has determined that the matters set
forth in its October 13, 2005 letter to the Company have been closed.
(b) None.
ITEM 6. EXHIBITS
10.1 Employment Agreement between Able Energy, Inc. and Gregory D.
Frost, dated as of October 13, 2005 (incorporated by reference
to exhibit 99.1 to the registrant's Current Report on Form 8-K
filed October 19, 2005).
10.2 Amendment Agreement between Able Energy, Inc. and the Holders
signatory thereto, dated as of November 16, 2005 (incorporated
by reference to exhibit 99.1 to the registrant's Current Report
on Form 8-K filed November 18, 2005).
31.1 Certification of Chief Executive Officer of Periodic Report
pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic Report
pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
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.
ABLE ENERGY, INC.
BY: /s/ GREGORY D. FROST
--------------------
GREGORY D. FROST
CHIEF EXECUTIVE OFFICER, CHAIRMAN AND
GENERAL COUNSEL
BY: /s/ STEVEN M. VELLA
-------------------
STEVEN M. VELLA
CHIEF FINANCIAL OFFICER
FEBRUARY 16, 2006
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