RESULTS OF OPERATIONS
---------------------
------------------------------------------- -------------------------------------------
THREE MONTHS ENDED JUNE 30, 2008 THREE MONTHS ENDED JUNE 30, 2007
------------------------------------------- -------------------------------------------
US Mexico TOTAL US Mexico TOTAL
----------- ----------- ----------- ----------- ----------- -----------
Net sales and rental income 879,153 5,990,514 6,869,667 2,066,766 8,077,549 10,144,315
Cost of sales and operating leases (878,226) (5,319,194) (6,197,421) (2,050,325) (7,373,226) (9,423,551)
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 927 671,320 672,246 16,441 704,323 720,764
MARGIN % 0.1% 11.2% 9.8% 0.8% 8.7% 7.1%
------------------------------------------- -------------------------------------------
SIX MONTHS ENDED JUNE 30, 2008 SIX MONTHS ENDED JUNE 30, 2007
------------------------------------------- -------------------------------------------
US Mexico TOTAL US Mexico TOTAL
----------- ----------- ----------- ----------- ----------- -----------
Net sales and rental income 2,148,632.00 6,807,569.00 8,956,201 4,042,401 16,766,816 20,809,217
Cost of sales and operating leases (2,112,322) (5,983,727) (8,096,049) (3,965,275) (15,420,358) (19,385,633)
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 36,310 823,842 860,152 77,126 1,346,458 1,423,584
MARGIN % 1.7% 12.1% 9.6% 1.9% 8.0% 6.8%
For the second quarter ended June 30, 2008, our consolidated net sales
decreased by 32.3%, or $3,274,648, to $6,869,667 compared to $10,144,315 for the
same period last year. Net sales is made up of two components: trailer and parts
sales and lease rental income. Trailer sales decreased in the second quarter of
2008 by $3,272,102, a decrease of 33.0% over the same period of 2007 while
parts sales increased in the second quarter of 2008 by $30,585 over the same
three month period in 2007; and lease/rental income, which decreased by
$8,868.00, a decrease of 7.0% compared to the same period last year
For the six months ended June 30, 2008, our consolidated net sales
decreased by 57.0% to $8,956,201 compared to $20,809,217 for the same period of
2007. This decrease resulted from a 55.1% reduction in sales volume in 2008, or
$10,187,440, of which $8,738,461 was due to sales volume decrease in Mexico as
well as a decrease of $1,448,979 sales volume at our California location. The
decline in sales for the period ended June 30, 2008 was due in part to the
decline of the overall economy, the tightening of credit markets and related
deferral of scheduled capital improvement and maintenance programs practiced by
freight carriers. Management believes that a trend of increasing freight volumes
coupled with a deferral in capital expenditure will present an opportunity to
grow the sales of the company in the future. We have continued to concentrate
our working capital in trailer inventory and facilities.
Gross profit consists of net sales and rental income less cost of sales
and operating leases. For the second quarter ended June 30, 2008, gross profit
decreased $48,518, or 6.7%, to $672,246 compared to $720,764 for the same period
of 2007. This decrease in gross profit was due to a decline in the profit per
unit. This is driven by a combination of downward pressure on pricing and price
increases related to the raw materials used to produce the trailers.
For the six months ended June 30, 2008, gross profit decreased
$563,432, or 39.6%, to $860,152 compared to $1,423,584 for the same period of
2007. This was due, in part, to continued downward pressure on pricing
throughout the second quarter of 2008.
Selling, general and administrative expense for the second quarter
ended June 30, 2008 was $1,148,680 compared to $822,116 for the same period of
2007, an increase of 39.7%. Excluding a one-time charge of $103,108 related to
the severance agreement of Steven Kutcher, expenses increased by $223,456, or
27.2%. This increase was due, in part, to a cost of living increase for our
employees in Mexico, in line with local government regulations that apply to
remuneration of employees.
For the six months ended June 30, 2008, selling, general and
administrative expense was $1,998,430 compared to $1,717,844 for the same period
of 2007. This increase was due, in part, to an increase in headcount in our
California and Texas locations. We also incurred additional legal and consulting
expenses in first and second quarters of 2008 related to the divestiture of
REMEX.
13
Operating loss consists of net sales less cost of sales and operating
leases and selling, general and administrative expenses. In the second quarter
of 2008, we recognized an operating loss of $476,434 compared to $101,352 for
the same period of 2007. Excluding a one-time charge of $103,108 related to the
severance agreement of Steven Kutcher, our operating loss increased by $271,974
or 268.35%. This increase in operating loss resulted from a decrease in sales
and increase in selling, general and administrative expense.
For the six months ended June 30, 2008, we recognized an operating loss
of $1,138,278, compared to $294,260 for the same period of 2007. This increase
in operating loss resulted from a decrease in sales and increase in selling,
general and administrative expense.
Net interest expense for the second quarter and six months ended June
30, 2008 was $155,038 and $279,733, respectively, compared to $193,148 and
$299,582, respectively, for the same periods of 2007. These decreases of $38,110
and $19,849, respectively, resulted from lower debt levels associated with a
lower level of floor plan credit. The floor plan credit line of the Mexican
operation was reduced due a tightening of overall lending on the part of
Navistar Mexico.
Other income/(expense), net, which is primarily a one-time gain from
the sale of REMEX and foreign exchange gains/(loss), was $391,469 and of
$391,864 in the second quarter and six months ended June 30, 2008, respectively,
compared to $23,051 and $ 4,499, respectively, for the same periods of 2007. The
increase was due, in part, to a recognized gain of $171,897 from the divestiture
of 80% of REMEX.
Income taxes of $14,123 and $39,004 were accrued for the three months
and six months ended June 30, 2008, respectively, compared to $18,325 and
$40,334, respectively, for the same periods of 2007.
Our net loss for the second quarter ended June 30, 2008 was $254,126,
or $0.01 per diluted share, compared to a net loss of $289,774, or $0.01 per
diluted share for the same period of 2007.
Our net loss for the six months ended June 30, 2008 was $1,065,151, or
$0.05 per diluted share, compared to a net loss of $629,677, or $0.03 per
diluted share for the same period of 2007.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity primarily have been from debt and
equity funding provided by our majority stockholder, as well as through our
initial public offering that concluded in July 2003, and through a private
equity placement that took place on May 1, 2006.
In addition, we completed the sale of 80% of our REMEX subsidiary in
July 2008. The total proceeds were $1,200,000. The proceeds were used to repay
debt and to fund operations.
Our principal uses of capital have been to fund our operating losses,
to expand our operations, and increase sales by adding to equipment inventory
all pursuant to our strategic business plan. On May 1, 2006, we acquired and
began operating the trailer sales business of Prime Time Equipment, Inc., for a
total purchase price of approximately $1,970,000, of which approximately
$955,000 was funded by the assumption of certain liabilities, and the remainder
of $1,014,290 paid in cash. The purchase price included $498,390 for
identifiable intangible assets.
Net cash used in operating activities was $1,746,244 for the first six
months of 2008, compared to $ 3,136,061 for the same period of 2007. This
decrease of $1,389,817 was due primarily to a decrease of $496,854 in deposits
and advance payments along with a decrease of $560,302 in advances to vendors
and other current assets.
During the six months ended June 30, 2008, we acquired property and
equipment of $182,389, which primarily was equipment for our Mexican operation,
offset by proceeds of $68,913 from disposals. This compares to $124,340 and
$52,795, respectively, for the six months ended June 30, 2007.
During the six months ended June 30, 2008 and 2007, we received
proceeds from issuance of shareholder debt of $466,000 and $302,693
respectively. In addition, during the same periods, we received proceeds from
notes payable and credit line of $4,663502 and $9,914,664, respectively, which
included $4,655,912 and $9,631,210, respectively, in conjunction with the floor
plan lines of credit from Navistar Financial Corporation. During the six months
ended June 30, 2008, we repaid debt of $4,063,730 and $ 7,077,585, respectively,
including repayments of $3,703,645 and $6,870,086, respectively, against the
floor plan lines of credit. We repaid $400,000 to our Chairman and majority
stockholder, Randolph Pentel, in principal and interest on the loans during the
six months ended June 30, 2008. During the six months ended June 30, 2008, we
received no proceeds from the sale of common stock. As a result, net cash
provided by financing activities for the six months ended June 30, 2008 and 2007
was $1,808,433 and $3,139,772, respectively.
14
On May 1, 2006, the Company's Chairman and largest stockholder
converted $871,866 of Company notes payable into 2,179,664 shares of Company
common stock at the conversion price of $0.40 per share.
As of June 30, 2008, we had committed to purchase additional trailers
from Hyundai Translead, at a total purchase price of approximately $13,032,468,
towards which we had made no down payments. Under the terms of the commitment,
we must pay Hyundai the remaining balance due of approximately $13,032,468 upon
taking delivery of the trailers. We increased our inventory levels during the
first six months of 2008,in order to ensure an uninterrupted supply sufficient
to meet customer demand.
On a long-term basis, liquidity is dependent on an adequate supply of
inventory available for sale, continuation and expansion of operations, the sale
of equipment, the renewal of leases and the receipt of revenue, as well as
additional infusions of equity and debt capital. Subsequent to June 30, 2008,
and as of August 14, 2008, the Company's Chairman advanced the Company an
additional $25,000 under a working capital credit line under which he had loaned
the Company a total of $1,009,000 since February 28, 2007.
Since its inception, the Company has generated losses from operations,
and as of June 30, 2008, we had an accumulated deficit of $15,989,493 and
working capital of $304,542. We believe that the cash on hand as of June 30,
2008, together with the floor plan financing arrangements effective May 1, 2006
and October 23, 2006, cash expected to be generated by operations and loans from
our Chairman will provide us with sufficient operational funds for the next
twelve months, and will satisfy obligations as they become due. If we experience
occasional cash short-falls, we expect to cover them with funds provided by the
Company's Chairman. However, until such time that we achieve profitability, we
will need to seek additional debt and/or equity funding to continue operations.
Should our Chairman fail to provide additional financial support to the Company
if needed, or should we be unsuccessful in obtaining funding from third parties,
the Company could be forced to dramatically scale back its operations and
activities.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have
or are reasonably likely to have a material current or future effect on its
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item not applicable
ITEM 4T. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of the
principal executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is (i) accumulated and communicated
to our management, including our chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure, and (ii)
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
All internal control systems no matter how well designed have inherent
limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements and can provide only reasonable assurance with
respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
However, our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and our chief executive
officer and our chief financial officer concluded that our disclosure controls
and procedures are effective at the level of reasonable assurance.
15
COMPLIANCE WITH SECTION 404 OF SARBANES-OXLEY ACT
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act),
beginning with our Annual Report on Form 10-K for the fiscal year ending
December 31, 2007, our management furnished a report on our internal control
over financial reporting. This report contained, among other matters, an
assessment of the effectiveness of our internal control over financial reporting
as of the end of our fiscal year ended December 31, 2007, including a statement
as to whether or not our internal control over financial reporting is effective.
This assessment includes disclosure of any material weaknesses in our internal
control over financial reporting identified by management. We did not identify
material weaknesses in our internal control over financial reporting and we were
able to assert that our internal control over financial reporting is effective.
Management acknowledges its responsibility for internal controls over
financial reporting and seeks to continually improve those controls in order to
achieve compliance with Section 404 of the Act.
16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Item not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
John Ramos, 42, was appointed as the Company's Chief Financial Officer
on June 3, 2008. Prior to joining CapSource Financial, Mr. Ramos served as a
management consultant with Centennial Business Solutions, LLC, a Denver-based
consulting firm. While at Centennial, among other activities, Mr. Ramos provided
consulting services to Anatolia Minerals Development, Ltd and Comcast Digital
Voice Division.
Mr. Ramos spent six years at Media One International (formerly US WEST
International) in various financial management positions. In his final
assignment Mr. Ramos was posted in Jakarta as Director of Finance for a joint
venture between Media One International (formerly US WEST International) and PT
Telkom Indonesia.
Mr. Ramos also served as an advisor to Qwest Communications regarding
their expansion into Asia. Later, Mr. Ramos served as Chief Financial Officer
for a Hong Kong-based media entertainment business where he supervised a staff
of financial professionals in Hong Kong, Taiwan and Shanghai. Mr. Ramos holds a
Bachelor of Arts and a Master of Science from the University of Colorado.
Mr. Ramos' employment is at will, and he and the Company did not enter
into an employment agreement. There is no arrangement or understanding between
Mr. Ramos and any other person pursuant to which he was selected as Chief
Financial Officer of the Company, nor is there any family relationship between
Mr. Ramos and any of the Company's directors or executive officers.
ITEM 6. EXHIBITS
LIST OF EXHIBITS
The following exhibits are filed with this Form 10-Q:
EXHIBIT
NO. DESCRIPTION
------- -----------
*3.1 Articles of Incorporation
*3.1.1 Articles of Amendment to the Articles of Incorporation (Name Change)
*3.1.2 Articles of Amendment to the Articles of Incorporation (Authorized Capital)
*3.2 By-laws
**31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 filed October 7, 2002, as amended by the Company's
Amendment No. 1 to Form SB-2 filed December 9, 2002.
** Filed herewith.
The financial statements filed as part of this report are listed separately in
the Index to Financial Statements.
17
SIGNATURE
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.
CAPSOURCE FINANCIAL, INC.
Date: August 19, 2008 By: /s/ Fred C. Boethling
----------------------------------
Fred C. Boethling
President, Chief Executive Officer
and Director
18
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Fred C. Boethling, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended
June 30, 2008 of CapSource Financial, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial data; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's control over financial reporting.
Date: August 19, 2008 By: /s/ Fred C. Boethling
------------------------------
Fred C. Boethling
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John J. Ramos, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended
June 30, 2008 of CapSource Financial, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial data; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's control over financial reporting.
Date: August 19, 2008 By: /s/ John J. Ramos
------------------------------
John J. Ramos
Chief Financial Officer and
Principal Accounting Officer
EXHIBIT 32.1
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report by CapSource Financial,
Inc. ("Registrant") on Form 10-Q for the quarterly period ended June 30, 2008 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Fred C. Boethling, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Registrant.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Date: August 19, 2008 By: /s/ Fred C. Boethling
------------------------------
Fred C. Boethling
Chief Executive Officer
EXHIBIT 32.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report by CapSource Financial,
Inc. ("Registrant") on Form 10-Q for the quarterly period ended June 30 2008 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, John J. Ramos, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Registrant.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Date: August 19, 2008 By: /s/ John J. Ramos
------------------------------
Name: John J. Ramos
Chief Financial Officer and
Principal Accounting Officer
Capsource Financial (CE) (USOTC:CPSO)
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