UNIVERSAL POWER GROUP INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - UNIVERSAL POWER GROUP INC.	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - UNIVERSAL POWER GROUP INC.	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - UNIVERSAL POWER GROUP INC.	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - UNIVERSAL POWER GROUP INC.	ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2013

		OR

o		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: 001-33207

Universal Power Group, Inc.

(Exact name of registrant as specified in its charter)

TEXAS		75-1288690
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

488 S. Royal Lane, Coppell, Texas		75019
(Address of principal executive offices)		(Zip Code)

(469) 892-1122

(Registrant’s telephone number, including area code)

None

(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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of August 9, 2013, 5,020,000 shares of Common Stock were outstanding.

Table of Contents

			Page

PART I — Financial Information			1
	Item 1.	Condensed Consolidated Financial Statements	1
		Condensed Consolidated Balance Sheets at June 30, 2013 (Unaudited) and December 31, 2012	1
		Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)	5
		Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
	Item 4.	Controls and Procedures	16

PART II — Other Information			17
	Item 6.	Exhibits	17
Signatures			18

FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements”, as defined in the Private Securities Litigation Reform Act of 1995 or by the U.S. Securities and Exchange Commission (“SEC”) in its rules, regulations and releases. The term forward looking statements refers to, among other things, all statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors, described in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC (“Annual Report”) and elsewhere in this report, which could adversely affect our business and financial performance. In addition, our past results of operations do not necessarily indicate our future results. Finally, the third-party logistics services business and the battery and related power accessory supply and distribution business are highly competitive and rapidly changing. New risk factors emerge from time to time and it is not possible for us to anticipate all the relevant risks to our business. We cannot assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements.

Except as otherwise required by applicable laws and regulations, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this report or our Annual Report, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report. Neither the Private Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act of 1933 provides any protection to us for statements made in this report. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

The terms “we”, “our”, “us”, “UPG”, “Company”, or any derivative thereof, as used herein refer to Universal Power Group, Inc.

(i)

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

UNIVERSAL POWER GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(Amounts in thousands except share amounts)

	June 30, 2013			December 31, 2012
	(unaudited)

CURRENT ASSETS
Cash and cash equivalents	$	1,001		$	2,069
Accounts receivable:
Trade, net of allowance for doubtful accounts of $403 (unaudited) and $324		12,345			8,847
Other		141			455
Inventories – finished goods, net of allowance for obsolescence of $538 (unaudited) and $423		27,816			30,396
Current deferred tax assets		978			838
Income tax receivable		316			512
Prepaid expenses and other current assets		1,468			970
Total current assets		44,065			44,087

PROPERTY AND EQUIPMENT
Logistics and distribution systems		1,877			1,908
Machinery and equipment		484			709
Furniture and fixtures		911			518
Leasehold improvements		954			395
Vehicles		1			111
Total property and equipment		4,227			3,641
Less accumulated depreciation and amortization		(2,513	)		(3,173	)
Net property and equipment		1,714			468

GOODWILL		1,387			1,387
INTANGIBLES, net		504			593
OTHER ASSETS		165			155
NON-CURRENT DEFERRED TAX ASSET		277			357
		2,333			2,492

TOTAL ASSETS	$	48,112		$	47,047

See accompanying notes to unaudited condensed consolidated financial statements.

UNIVERSAL POWER GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND SHAREHOLDERS’ EQUITY

(Amounts in thousands except share amounts)

	June 30, 2013		December 31, 2012
	(unaudited)

CURRENT LIABILITIES
Line of credit	$	11,969	$	12,188
Accounts payable		6,662		7,231
Accrued liabilities		875		386
Current portion of capital lease and note obligations		730		620
Deferred rent		313		—
Total current liabilities		20,549		20,425

LONG-TERM LIABILITIES
Capital lease and note obligations, less current portion		3,517		3,608
Deferred rent, less current portion		816		—
Total long-term liabilities		4,333		3,608

TOTAL LIABILITIES		24,882		24,033

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Common stock - $0.01 par value, 50,000,000 shares authorized, 5,020,000 shares issued and outstanding		50		50
Additional paid-in capital		16,396		16,390
Retained earnings		6,784		6,574
Total shareholders’ equity		23,230		23,014

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	48,112	$	47,047

See accompanying notes to unaudited condensed consolidated financial statements.

UNIVERSAL POWER GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in thousands except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net sales	$	21,176		$	23,583		$	41,634		$	49,921
Cost of sales		17,073			19,392			33,097			41,077
Gross profit		4,103			4,191			8,537			8,844

Operating expenses		3,970			3,487			7,901			7,572

Operating income		133			704			636			1,272

Other income (expense)
Interest expense		(116	)		(153	)		(201	)		(296	)
Other, net		12			—			(38	)		127
Total other expense, net		(104	)		(153	)		(239	)		(169	)

Income from continuing operations before provision for income taxes		29			551			397			1,103
Provision for income taxes		(30	)		(145	)		(187	)		(361	)
Income (loss) from continuing operations		(1	)		406			210			742
Discontinued operations:
Loss from operations of discontinued Monarch Outdoor Adventures, LLC		—			(646	)		—			(707	)
Provision for income taxes		—			143			—			160
Loss on discontinued operations		—			(503	)		—			(547	)
Net income (loss)	$	(1	)	$	(97	)	$	210		$	195
Net income (loss) per share
Basic:
Income from continuing operations	$	0.00		$	0.08		$	0.04		$	0.15
Loss on discontinued operations	$	—		$	(0.10	)	$	—		$	(0.11	)
Net income (loss)	$	0.00		$	(0.02	)	$	0.04		$	0.04
Diluted:
Income from continuing operations	$	0.00		$	0.08		$	0.04		$	0.14
Loss on discontinued operations	$	—		$	(0.10	)	$	—		$	(0.10	)
Net income (loss)	$	0.00		$	(0.02	)	$	0.04		$	0.04
Weighted average shares outstanding
Basic		5,020			5,020			5,020			5,020
Diluted		5,094			5,194			5,112			5,198

See accompanying notes to unaudited condensed consolidated financial statements.

UNIVERSAL POWER GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Amounts in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013		2012
Net income (loss)	$	(1	)	$	(97	)	$	210	$	195
Amortization of hedging instrument		—			20			—		48
Comprehensive income (loss)	$	(1	)	$	(77	)	$	210	$	243

See accompanying notes to unaudited condensed consolidated financial statements.

UNIVERSAL POWER GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)


	Six Months Ended June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	210		$	195
Items not requiring (providing) cash:
Depreciation and amortization		219			239
Provision for bad debts		338			38
Provision for obsolete inventory		208			320
Deferred income taxes		(60	)		(249	)
Loss on disposal of Monarch		—			616
Loss on disposal of property and equipment		44			—
Stock-based compensation		6			6
Changes in operating assets and liabilities
Accounts receivable – trade		(3,836	)		(192	)
Accounts receivable – other		319			44
Inventories		2,372			(15,120	)
Income taxes receivable		196			413
Prepaid expenses and other assets		(508	)		(210	)
Accounts payable		(569	)		6,317
Accrued liabilities		489			(4	)
Settlement accrual		—			(241	)
Deferred rent		197			(14	)
Net cash used in operating activities		(375	)		(7,842	)

CASH FLOWS FROM INVESTING ACTIVITIES
Net cash received on Monarch sale		—			40
Purchases of property and equipment		(172	)		(51	)
Proceeds from sales of property and equipment		8			—
Net cash used in investing activities		(164	)		(11	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net activity on line of credit		(219	)		7,928
Payments on capital lease and note obligations		(310	)		(56	)
Net cash provided by (used in) financing activities		(529	)		7,872

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,068	)		19
Cash and cash equivalents at beginning of period		2,069			283
Cash and cash equivalents at end of period	$	1,001		$	302

SUPPLEMENTAL DISCLOSURES
Income taxes paid	$	50		$	65
Interest paid	$	200		$	297

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of property and equipment through landlord incentives	$	932		$	—
Acquisition of property and equipment through capital lease	$	345		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

UNIVERSAL POWER GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A — BASIS OF PRESENTATION

The condensed consolidated interim unaudited financial statements of Universal Power Group, Inc. (“UPG” or the “Company”), a Texas corporation, included in this quarterly report have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included for the three and six-month periods ended June 30, 2013 and 2012. The results for the three and six-month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the full year. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited condensed consolidated financial statements included in this filing should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2013. The condensed consolidated balance sheet of the Company as of December 31, 2012 has been derived from the audited consolidated balance sheet as of that date.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

NOTE B — ORGANIZATION

UPG is a distributor and supplier of batteries and related power accessories to a diverse range of industries, and a provider of third-party fulfillment and logistics services and value-added solutions. The Company’s primary logistics center is located in Coppell, Texas and regional logistic centers are located in Las Vegas, Nevada and Atlanta, Georgia. The Company’s customers are primarily located in the United States. A small portion of the Company’s sales is to customers located in the United Kingdom, Australia, Ireland, Japan, China, Canada and Latin America.

Until December 20, 2006, the Company was a wholly owned consolidated subsidiary of Zunicom, Inc. (“Zunicom”), a Texas corporation, whose stock is quoted on the OTC Bulletin Board under the symbol “ZNCM.OB.” On December 20, 2006, the U.S. Securities and Exchange Commission declared effective a registration statement filed by the Company registering the sale of 3,000,000 shares of its common stock, including 1,000,000 shares owned by Zunicom (the “IPO”). As a result of the IPO, Zunicom’s interest in the Company was reduced to 40%. Zunicom no longer owns a controlling interest in UPG; however, as the largest shareholder, Zunicom does have significant influence over UPG.

On January 8, 2009, the Company formed a limited liability company under the name Monarch Outdoor Adventures LLC d/b/a Monarch Hunting (“Monarch”), through which it acquired all of the tangible and intangible assets of a manufacturer and retailer of high-quality hunting products including battery and solar powered deer feeders, hunting blinds, stands and accessories for approximately $892,000. Monarch is located in Arlington, Texas and has customers throughout the United States. Monarch’s revenue and assets are not material to the Company’s consolidated financial statements On May 4, 2012, the Company sold Monarch for $130,000. See Note K.

On April 20, 2011, the Company completed an acquisition of substantially all of the business assets of Progressive Technologies, Inc. (“PTI”), a North Carolina company that designs and builds custom battery packs. The acquisition consideration totaled approximately $3.3 million. PTI’s expertise in lithium-ion battery packs, among other chemistries, further enhances the Company’s product and service offerings. In addition, PTI’s products will strengthen the Company’s position in the medical field and other market segments. On September 1, 2011, PTI changed its legal name to ProTechnologies, Inc.

On January 9, 2013, the Company became the sole member of a newly formed entity, SAM Security, LLC (“SAM”). SAM provides a do-it-yourself (“DIY”) home security system to retailers throughout the U.S.

UNIVERSAL POWER GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE C — STOCK-BASED COMPENSATION

At June 30, 2013, common shares reserved for future issuance include 1,980,000 shares issuable under the 2006 Stock Option Plan, as amended, as well as 20,000 shares issuable upon exercise of options not granted under the 2006 Stock Option Plan. At June 30, 2013, there were 1,433,842 options outstanding under the 2006 Stock Option Plan, and 546,158 options are available for future grants.

There were no options granted during the six months ended June 30, 2013 or 2012.

At June 30, 2013, the aggregate intrinsic value of options outstanding and exercisable was $0.

At June 30, 2013, all outstanding options under the 2006 Stock Option Plan were fully vested with no remaining unrecognized compensation expense.

On June 25, 2007, Zunicom issued restricted stock to certain employees of UPG for past and future services. The Company amortized the fair value of 398,144 shares, which had not been forfeited, and all compensation expense has been previously recorded.

On June 24, 2011, Zunicom issued an additional 99,538 restricted shares of its common stock to the same Company employees who received a grant in June 2007 and who were still employed by the Company. As a condition to this grant, the grantees agreed to extend the restricted period on the shares issued in June 2007 for an additional three years. As a result, all 497,682 shares will vest on June 24, 2014. The Company is amortizing the fair value as compensation expense over the 36-month vesting period in accordance with ASC Topic 718, Compensation – Stock Compensation. Approximately $5,700 compensation expense related to these shares was recorded during the six-month periods ended for both June 30, 2013 and 2012. At June 30, 2013, there is approximately $11,400 of remaining unrecognized compensation expense associated with this grant.

On March 21, 2007, the Company issued stock options to non-employees to purchase 20,000 shares of the Company’s common stock at an exercise price of $7.00 per share vesting over three years and expiring December 19, 2016. These stock options remain outstanding as of June 30, 2013.

NOTE D — NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.

Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. The Company’s common stock equivalents include all common stock issuable upon the exercise of outstanding stock options and warrants.

For the three-month and six-month periods ended June 30, 2013, the dilutive effect of 852,592 stock options is included in the calculation and 601,250 stock options are excluded from the calculation as they are antidilutive.

For the three-month and six-month periods ended June 30, 2012, the dilutive effect of 852,592 stock options is included in the calculation and 571,250 stock options are excluded from the calculation as they are antidilutive.

UNIVERSAL POWER GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE E — CREDIT AGREEMENT

Effective December 20, 2012, the Company entered into a credit agreement with Comerica Bank under which it may borrow up to $34.0 million, including a $30.0 million revolving line of credit (“Credit Line”) and $4.0 million term loan (“Term Loan”). The Credit Line replaced the credit facility that the Company had with Wells Fargo. All borrowings are secured by a first lien on all of the Company’s assets. In addition, the Company may request an increase in the maximum Credit Line to $40.0 million. Its borrowing availability is dependent upon its level of accounts receivable and inventory. With respect to the interest rate for each borrowing, the Company has the option to choose a “LIBOR-base Rate” or “Daily Adjusted LIBOR-based Rate” plus an “Applicable LIBOR Margin.” Under the Credit Line, interest is payable monthly and the outstanding principal is due at maturity, on December 20, 2016 (the “Maturity Date”). Under the Term Loan, principal is payable in equal monthly installments of $47,619, plus interest beginning on February 1, 2013 with the entire unpaid principal amount due on the Maturity Date. At June 30, 2013, approximately $12.0 million was outstanding under the Credit Line and $3.8 million was outstanding under the Term Loan. Both the Credit Line and Term Loan were accruing interest at the rate of 2.07% per annum at June 30, 2013.

The credit agreement contains customary negative covenants restricting the Company’s ability to take certain actions without Comerica’s consent, including incurring additional indebtedness, transferring or encumbering assets, and acquiring other businesses. If there is an “event of default”, including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the Credit Agreement will become immediately due and payable. In addition, the Company must maintain certain financial covenants on a quarterly basis.

Interest Rate Swap

In connection with the Credit Agreement, the Company terminated an Interest Swap Agreement (“ISA”) it had with its previous lender and, consequently, discontinued hedge accounting as of December 16, 2009. The Company incurred interest expense commensurate with its original, hedged risk. The realized losses related to the ISA was not recognized immediately and was in accumulated other comprehensive income (loss). These losses are reclassified into interest expense over the original contractual term of the ISA starting as of December 16, 2009 through July 5, 2012.

NOTE F — CONCENTRATIONS

At June 30, 2013, there were no customers with 10% or more of accounts receivable. For the three and six months ended June 30, 2013 and 2012, there were no customers with 10% or more of net sales.

NOTE G — LEGAL PROCEEDINGS

The Company is not currently party to any legal proceedings than those arising in the ordinary course of business, which management does not believe will have a material adverse effect on the Company’s financial position, operating results, or cash flows.

UNIVERSAL POWER GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE H — INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction and various states. With a few exceptions, the Company is no longer subject to U.S. state and local income tax examinations by tax authorities for the years before 2008.

The Company recorded income expense of approximately $30,000 and $2,000 for the three-month periods ended June 30, 2013 and 2012, respectively. The income tax expense for the six-month periods ended June 30, 2013 and 2012 was $187,000 and $201,000, respectively. The Company’s effective tax rate was 103.4% and 1.0% for the three months ended June 30, 2013 and 2012, respectively. The Company’s effective tax rate was 47.1% and 50.6% for the six months ended June 30, 2013, and 2012, respectively. The taxes are different than the federal statutory rate of 34% primary as a result of state income taxes and items not deductible for income tax reporting.

NOTE I— GOODWILL

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired business. Goodwill is tested annually for impairment and when events or circumstances change to suggest that the carrying amount may not be recoverable. For purposes of impairment testing, goodwill is allocated to reporting units, which are either at the operating segment level or one reporting level below the operating segment. Goodwill is recorded in the financial statements at cost less accumulated impairment losses. In the second quarter of 2013, management performed the required annual impairment test under the qualitative assessment methodology and determined that goodwill was not impaired.

NOTE J — SEGMENT AND GEOGRAPHIC INFORMATION

The accounting standard for segment reporting requires enterprises to report financial information and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company evaluated the accounting standard for segment reporting and determined that the Company operates in only one segment.

NOTE K — DISCONTINUED OPERATIONS

On May 4, 2012, pursuant to a Securities Purchase Agreement, dated as of May 4, 2012 (the “Agreement”), the Company sold all of the issued and outstanding membership interests of Monarch for $130,000. Of the purchase price, $50,000 was paid in cash at closing and $80,000 was evidenced by a 6% secured promissory note maturing May 1, 2014. The principal amount of the note and all accrued interest thereon is payable in 24 equal monthly installments of $3,692 beginning on June 1, 2012. The note is secured by a pledge of all of the membership interests in Monarch as well as a lien on all of Monarch’s assets. The purchasers also agreed to sublet from the Company for a minimum term of two years the premises used by Monarch at an annual rental of $42,000. The Agreement contains representations and warranties, covenants and indemnification provisions typical of those in these types of transactions. UPG realized a pre-tax loss of approximately $600,000 related to the sale of Monarch including lease obligations retained for the manufacturing facility.

********

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this report.

Business Overview

We are (i) a leading supplier and distributor of batteries, related power accessories and security accessories and (ii) a third-party logistics services provider, specializing in supply chain management and value-added services.

We purchase both finished goods and components from domestic and international suppliers. We add value to products and components by packaging them in customer specified “kits” or tailor made units that are convenient for the customer to order and ship. Additionally, we have several customers that require specific battery pack assemblies. We obtain batteries and components and reconfigure finished goods based upon customer specifications. We refer to this process as battery pack assemblies.

Distribution Business

We sell, distribute and market batteries, related power accessories, low voltage wire and cable products and security accessories under various manufacturer brands, private labels and our own proprietary brands. We are one of the leading domestic distributors of sealed, or “maintenance-free,” lead-acid batteries (“SLA batteries”). We also assemble lithium-ion and other custom battery packs. Our principal product lines include:

batteries and custom battery packs of a wide variety of chemistries, battery chargers and related accessories;

portable battery-powered products, such as jump starters;

low voltage wire and cable products;

security system components, such as alarm panels, perimeter access controls, horns, sirens, speakers, transformers, cable and wire; and

renewable power products such as solar power generators and solar products.

Our customers include original equipment manufacturers (OEMs), distributors and both online and traditional retailers. Our products represent basic power solutions to a wide variety of existing applications in a broad market spectrum. They are used in a diverse and growing range of markets and applications including automotive, medical mobility, consumer goods, electronics, marine, hunting, powersports, solar, portable power, security and surveillance, fire, energy management, electrical and telecommunications.

The demand for our products is impacted by consumer and market preferences, technological developments, fuel costs, which impact manufacturing and shipping, the cost of lead and copper, the two principal raw materials used to manufacture batteries and wire and cable products, and general economic conditions. We believe that technological change drives growth as new product introductions accelerate sales and provide us with new opportunities. At the same time, product needs are also evolving due to changes in consumer demands and preferences that are driven, in part, by environmental and safety concerns and the need for greater density power and longer life. Therefore, we continue to stay current regarding advances and changes in our product segments.

Third-Party Logistics

We are also a third-party logistics services provider specializing in supply chain management and value-added services, designed to help customers optimize performance by allowing them to outsource supply chain management functions. Our supply chain management services include inventory sourcing, procurement, warehousing and fulfillment. Our value-added services include custom kitting, private labeling, product development and engineering, graphic design and sales and marketing.

We believe that the demand for third-party logistics and supply chain management solutions is growing, particularly with globalization. To be successful, businesses must excel in their core competencies and execute their supply chain processes quickly and accurately. To remain competitive, businesses strive to identify ways to more efficiently manage their supply chain and streamline their logistics processes by minimizing inventory levels, reducing order and cash-to-cash cycle lengths and outsourcing manufacturing and assembly operations to low-cost locations. An efficient supply chain has become a critical element to improving financial performance. As a result, businesses are increasingly turning to organizations that provide a broad array of logistics and supply chain solutions. These trends have been further facilitated by the rapid growth of technology enabling seamless electronic interfaces between systems of service providers and their customers.

Operations Overview

We continue to focus on executing upon our long-term strategic plan to penetrate new markets, developing new higher-margin products and diversifying product mix to minimize our exposure to the broader economy.

The acquisition of ProTechnologies, Inc. (“PTI”) is indicative of this strategy. PTI is a lithium-ion battery pack assembler and distributer; and holds several ISO certifications required by medical and other specialized purchasers of battery packs. As a result, the acquisition of PTI expands our product and service offerings, adds to our technical capabilities and enables us to penetrate new markets such as medical, military, metering, mining, hobby, handheld communications and OEM applications.

On May 4, 2012, pursuant to a Securities Purchase Agreement, dated as of May 4, 2012 (“Agreement”), we sold all of the issued and outstanding membership interests of Monarch for $130,000. Of the purchase price, $50,000 was paid in cash at closing and $80,000 was evidenced by a 6% secured promissory note due May 1, 2014. We realized a pre-tax loss of approximately $600,000 related to the sale of Monarch in our second-quarter financial results. When we first purchased Monarch in January 2009, we believed that it held promise in terms of the variety of Monarch’s battery-powered products that might be enhanced by UPG’s supply chain infrastructure. Over the past three years we determined there was not enough overlap and opportunity for growth in Monarch to justify continued investment in the business. During that time, Monarch generated operating losses, and we were unable to generate profit or positive cash flow from its operations, however as a result of the sale, we expect improved cash flows for our overall business because the ongoing investment demands from Monarch will no longer be required.

Results of Operations

The following table compares our statement of operations data for the three and six months ended June 30, 2013 and 2012. The trends suggested by this table may not be indicative of future operating results, which will depend on various factors including the nature of revenues (sales of batteries, power accessories, wire and cable products, security products versus logistics or value added services) and the relative mix of products sold (batteries versus security products, wire and cable products and power accessories), which can vary from quarter to quarter, as well as the state of the general economy. In addition, our operating results in future periods may also be affected by acquisitions.

	Three months ended June 30,												Six months ended June 30,
	2013						2012						2013						2012
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(dollars in thousands)
Net sales	$	21,176			100.0	%	$	23,583			100.0	%	$	41,634			100.0	%	$	49,921			100.0	%
Cost of sales		17,073			80.6	%		19,392			82.2	%		33,097			79.5	%		41,077			82.3	%
Gross profit		4,103			19.4	%		4,191			17.8	%		8,537			20.5	%		8,844			17.7	%
Operating expenses		3,970			18.7	%		3,487			14.8	%		7,901			19.0	%		7,572			15.2	%
Operating income		133			0.6	%		704			3.0	%		636			1.5	%		1,272			2.5	%
Interest expense		(116	)		(0.5	%)		(153	)		(0.6	%)		(201	)		(0.5	%)		(296	)		(0.6	%)
Other, net		12			0.1	%		—			—			(38	)		(0.1	%)		127			0.3	%
Income from continuing operations before provision for income taxes		29			0.1	%		551			2.3	%		397			1.0	%		1,103			2.2	%
Provision for income taxes		(30	)		(0.1	%)		(145	)		(0.6	%)		(187	)		(0.4	%)		(361	)		(0.7	%)
Income (loss) from continuing operations		(1	)		(0.0	%)		406			1.7	%		210			0.5	%		742			1.5	%
Loss on discontinued operations		—			0.0	%		(646	)		(2.7	%)		—			0.0	%		(707	)		(1.4	%)
Provision for income taxes		—			0.0	%		143			0.6	%		—			0.0	%		160			0.3	%
Loss on discontinued operations		—			0.0	%		(503	)		(2.1	%)		—			0.0	%		(547	)		(1.1	%)
Net income (loss)	$	(1	)		(0.0	%)	$	(97	)		(0.4	%)	$	210			0.5	%	$	195			0.4	%

Comparison of the three months ended June 30, 2013 and 2012

Net sales

Consolidated net sales for the three-month period ended June 30, 2013 was $21.2 million compared to $23.6 million for same period in 2012, a decrease of $2.4 million or 10.2%. This decrease was attributable to a $2.9 million decrease in sales to ADT and its authorized dealers which was offset by an increase in existing customers.

Cost of sales

Cost of sales is comprised of the base product cost, freight, duty and servicing fees where applicable. Cost of sales totaled $17.1 million for the three-month period ended June 30, 2013 compared to $19.4 million in the comparable 2012 period, a decrease of $2.3 million, or 11.9%. Cost of sales as a percentage of sales decreased to 80.6% in the 2013 period from 82.2% for 2012. Our overall gross margin for the three-month period ended June 30, 2013, was approximately 19.4% compared to a gross margin of 17.8% for the comparable period in 2012. The increase in gross profit margin was attributable to a shift in product mix.

Operating expenses

Operating expenses for the three-month period ended June 30, 2013 increased by approximately $483,000, or 13.9%, compared to the same period in 2012. For the 2013 period, the increase in operating expenses was attributable to increases of (i) $245,000 of bad debt expense which is mostly related to one customer that has filed bankruptcy during the second quarter of 2013 and management has assessed an estimated reserve on the outstanding balance (ii) $224,000 in facilities costs associated with the new location and depreciation and amortization expense; (iii) $45,000 in personnel and travel costs; and (iv) $35,000 in insurance costs which were offset by decreases in legal fees and marketing and trade show costs in the aggregate of $66,000.

Operating income

For the three-month period ended June 30, 2013, our operating income decreased by approximately $571,000, or 81.1%, compared to the second quarter of 2012.

Interest expense

Interest expense totaled approximately $116,000 for the three-month period ended June 30, 2013 compared to $153,000 for the corresponding 2012 period, a decrease of approximately $37,000. The average outstanding loan balance on the line of credit for the 2013 and 2012 periods was $12.4 million and $18.0 million, respectively, with a weighted average interest rate of 2.07% on all 2013 borrowings and a weighted average interest rate of 2.50% on 2012 borrowings. The 2012 period included $19,000 of interest expense related to the interest rate swap which was fully expensed in June 2012.

Discontinued Operations

For the three-month period ended June 30, 2013 we did not have any gain or loss from discontinued operations compared to a loss of approximately $600,000 for the three-month period ended June 30, 2012. We sold Monarch for $130,000 of which approximately $50,000 was net cash and $80,000 was in a two-year secured promissory note. The proceeds from the sale were offset by $100,000 in inventory, $200,000 in property and equipment and $400,000 in rent. The total remaining contractual estimated lease obligation amounted to $700,000 accrued in connection with the sale, including future estimated property taxes, until the expiration of the Monarch lease on August 31, 2018 offset by sublease income and estimated fair rental value for the remainder of the Monarch lease term of $300,000.

Income taxes

We recorded an income tax expense on continuing operations of approximately $30,000 and $145,000 for each of the three-month periods ended June 30, 2013 and 2012, respectively. Our effective tax rate was 103.4% and 26.3% for the three-month periods ended June 30, 2013 and 2012, respectively. The taxes reflect federal as well as state taxes. The effective tax rates for both periods are different from the statutory rate of 34% which is driven by state income taxes and amounts not deductible for tax reporting purposes.

For the six months ended June 30, 2013 and 2012

Net Sales

For the six-month period ended June 30, 2013, we had net sales of $41.6 million compared to $49.9 million for the same period in 2012, a decrease of $8.3 million, or 16.6%. This decrease was primarily attributable to the decrease in sales to ADT and its authorized dealers and reduction in sales to retail customers.

Cost of sales

Cost of sales totaled $33.1 million for the six-month period ended June 30, 2013 compared to $41.1 million in the comparable 2012 period, a decrease of $8.0 million, or 19.5%. Cost of sales as a percentage of sales decreased to 79.5% in the 2013 period from 82.3% for 2012. Our overall gross margin for the six-month period ended June 30, 2013, was approximately 20.5% compared to a gross margin of 17.7% for the comparable period in 2012. The increase in gross profit margin was attributable to a shift in product mix.

Operating expenses

Operating expenses for the six-month period ended June 30, 2013 increased by approximately $329,000, or 4.3%, compared to the same period in 2012. For the 2013 period, the increase in operating expenses was attributable to increases of (i) $300,000 in bad debt expense which is mostly related to one customer that has filed bankruptcy during the second quarter of 2013 and management has assessed an estimated reserve on the outstanding balance (ii) $177,000 in facilities costs from the new location and depreciation and amortization expense (iii) $86,000 in personnel and travel costs; and (iii) $131,000 in insurance costs and general company costs which were offset by decreases of $248,000 in legal fees and $117,000 in marketing and trade show costs.

Operating income

For the six-month period ended June 30, 2013, our operating income decreased to approximately $636,000 compared to $1.3 million for the same period in 2012.

Interest expense

Interest expense totaled approximately $201,000 for the six-month period ended June 30, 2013 compared to $296,000 for the corresponding 2012 period, a decrease of approximately $95,000. The average outstanding loan balance on the line of credit for the 2013 and 2012 periods was $12.1 million and $15.6 million, respectively, with a weighted average interest rate of 2.07% on all 2013 borrowings and a weighted average interest rate of 2.51% on 2012 borrowings. The 2012 period included $48,000 of interest expense related to the interest rate swap which was fully expensed in June 2012.

Discontinued Operations

For the six-month period ended June 30, 2013 we did not have any gain or loss from discontinued operations compared to a loss of approximately $600,000 for the six-month period ended June 30, 2012. We sold Monarch for $130,000 of which approximately $50,000 was net cash and $80,000 was in a two-year secured promissory note. The proceeds from the sale were offset by $100,000 in inventory, $200,000 in property and equipment and $400,000 in rent. The total remaining contractual estimated lease obligation amounted to $700,000 accrued in connection with the sale, including future estimated property taxes, until the expiration of the Monarch lease on August 31, 2018 offset by sublease income and estimated fair rental value for the remainder of the Monarch lease term of $300,000.

Income taxes

We recorded income tax expense on continuing operations of approximately $187,000 and $361,000 for the six-month periods ended June 30, 2013 and 2012, respectively. Our effective tax rate was 47.1% and 32.7% for the six-month periods ended June 30, 2013 and 2012, respectively. The rates reflect federal as well as state taxes. The high effective tax rates for June 30, 2013 period is driven by state income taxes and amounts not deductible for tax reporting purposes.

Liquidity and capital resources

We had cash and cash equivalents of approximately $1.0 million and $2.1 million at June 30, 2013 and December 31, 2012, respectively.

For the six-month period ended June 30, 2013, net cash used in operating activities was approximately $375,000 compared to $7.8 million used in operating activities for the same period in 2012. The net cash used in operating activities for 2013 reflects an increase in trade accounts receivable of $3.8 million, an increase in prepaid expenses and other assets of $508,000, and a decrease in accounts payable of $569,000 which were offset by decreases in inventory of $2.4 million, increases of accrued liabilities of $489,000 and deferred rent of $197,000 and decreases of accounts receivable other of $319,000 and income tax receivable of $196,000. During the second quarter of 2013, a customer that had outstanding receivables with us filed Chapter 11 bankruptcy. Management has recorded an estimate reserve for a portion of the receivable for this customer. This estimate is subject to change. Accounts receivable increased significantly from December 31, 2012. Management continues to monitor receivables and adjust reserves accordingly.

Net cash used in investing activities for the six-month period ended June 30, 2013 was $164,000 compared to $11,000 used in investing activities for the same period in 2012. The increase in cash used in investing activities was due to purchases of property and equipment in 2013 of $172,000 which was offset by proceeds of $8,000 from the sale of property and equipment.

Net cash used in financing activities for the six-month period ended June 30, 2013 was approximately $529,000 as compared to $7.9 million provided by financing activities for the corresponding period in 2012. The decrease in cash provided by financing activities was primarily due to a reduced draw down our line of credit offset by payments on capital lease and note obligations.

There was non cash activity related to the acquisition of property and equipment through a landlord incentive of $932,000 and through a capital lease of $345,000 during the period ended June 30, 2013.

Effective December 20, 2012, we entered into a credit agreement with Comerica Bank under which we may borrow up to $34.0 million, including a $30.0 million revolving line of credit (“Credit Line”) and $4.0 million term loan (“Term Loan”). The Credit Line replaced the credit facility that we had with Wells Fargo. All borrowings are secured by a first lien on all of our assets. In addition, we may request an increase in the maximum Credit Line to $40.0 million. Our borrowing availability is dependent upon our level of accounts receivable and inventory. With respect to the interest rate for each borrowing, we have the option to choose a “LIBOR-base Rate” or “Daily Adjusted LIBOR-based Rate” plus an “Applicable LIBOR Margin.” Under the Credit Line, interest is payable monthly and the outstanding principal is due at maturity, on December 20, 2016 (the “Maturity Date”). Under the Term Loan, principal is payable in equal monthly installments of $47,619, plus interest beginning on February 1, 2013 with the entire unpaid principal amount due on the Maturity Date. At June 30, 2013, approximately $12.0 million was outstanding under the Credit Line and $3.8 million was outstanding under the Term Loan. Both the Credit Line and Term Loan were accruing interest at the rate of 2.07% per annum at June 30, 2013.

We believe that our cash and cash equivalents, cash provided by operations and cash available under our line of credit will be sufficient to meet our operational needs over the next 12 months.

Capital Resources

We have committed expenses to our new corporate office and warehouse facilities in Coppell, Texas that we moved into in March 2013. We may enter into various commitments during 2013 if expansion opportunities arise. We will disclose material items in press releases and other appropriate filings as they develop. We have no off balance sheet financing arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information required by this item.

Item 4. Controls and Procedures

Management, with the participation of our chief executive officer/interim chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer/interim chief financial officer has concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management, including our chief executive/interim chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2013, covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 6. Exhibits

The following exhibits are furnished as part of this report or incorporated herein as indicated:

Exhibit No.		Description

3(i)		Amended and Restated Certificate of Formation (including Amended and Restated Articles of Incorporation) (1)
3(ii)		Amended and Restated Bylaws (1)
4.1		Specimen stock certificate (1)
4.2		Form of representatives’ warrant (1)
4.3		$4,000,000 Installment Note dated December 20, 2012 (11)
4.4		$30,000,000 Master Revolving Note dated December 20, 2012 (11)
10.1(a)**		Form of 2006 Stock Option Plan (1)
10.1(b)		Form of Stock Option Agreement (1)
10.1(c)**		Amendment to the 2006 Stock Option Plan (6)
10.2		Separation Agreement between UPG and Randy Hardin (2)
10.3**		Form of Ian Edmonds Employment Agreement (7)
10.7		Real Property Lease for 1720 Hayden Drive, Carrollton, Texas (1)
10.9		Real Property Lease for Las Vegas, Nevada (1)
10.10		Real Property Lease for Atlanta, GA (9)
10.11		Termination Agreement with Stan Battat d/b/a Import Consultants (3)
10.12		Third-Party Logistics & Purchase Agreement, dated as of November 3, 2008, with Brinks Home Security, Inc., (currently ADT Security Services (formerly Broadview Security), Inc.) (4)
10.13		Credit Agreement with Wells Fargo Bank, National Association (8)
10.14		Security Agreement with Wells Fargo Bank, National Association (8)
10.15		Real Property Lease for 488 S. Royal Lane, Coppell, Texas (10)
10.16		Credit Agreement, effective as of December 20, 2012 between the Company and Comerica Bank (11)
10.17		Security Agreement, effective as of December 20, 2012 between the Company and Comerica Bank (11)
31.1		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

*	Filed herewith.
**	Management Contract, compensatory plan or arrangement.
(1)	Incorporated herein by reference to the Exhibit with the same number to our Registration Statement on Form S-1 (SEC File No. 333-137265) effective as of December 20, 2006.
(2)	Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 23, 2009.
(3)	Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 17, 2009.
(4)	Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2008.
(6)	Incorporated herein by reference to Exhibit 10.1(c) to our Annual Report on Form 10-K for the year ended December 31, 2008.
(7)	Incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period ended September 30, 2009.
(8)	Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 23, 2009.
(9)	Incorporated herein by reference to Exhibit 10.10 to our Annual Report on Form 10-K for the year ended December 31, 2010.
(10)	Incorporated herein by reference to our Quarterly Report on Form 10-Q for the period ended September 30, 2012, filed on November 9, 2012.
(11)	Incorporated herein by reference to our Current Report on Form 8-K filed on December 31, 2012

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.


	Universal Power Group, Inc.

Date: August 14, 2013	/s/ Ian Edmonds
	Ian Edmonds
	President and Chief Executive Officer
	(Principal Executive Officer)

	/s/Ian Edmonds
	Ian Edmonds
	Interim Chief Financial Officer
	(Principal Financial and Accounting Officer)

UNIVERSAL POWER GROUP INC. - FORM 10-Q - August 14, 2013

Attached files

UNIVERSAL POWER GROUP INC. Reports