Radiant Logistics - 10-Q quarterly report FY

 

 

 

For the quarterly period ended: March 31, 2007

 

 

For the transition period from ___________ to  _____________

 

Commission File Number: 000-50283

(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 Exchange Act during the past 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 x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

There were 33,961,639 issued and outstanding shares of the registrant’s common stock, par value $.001 per share, as of May 4, 2007.

 

 

 

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

 

Condensed Consolidated Statement of Stockholders’ Equity 

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

In September 2006, the Company issued 250,000 shares, of its common stock, at a market value of $1.01 per share, in exchange for $252,500, in value, of domestic and international freight training materials for the development of its employees and exclusive agent offices, and was included in the balance sheet as technology, furniture and equipment.

In October 2006, the Company issued 100,000 shares of common stock, at a market value of $1.01 a share, as incentive compensation to its senior managers which was recorded against other accrued costs.

In January 2007 the former shareholders of Airgroup agreed with the Company to make the first contingent payment of $600,000 payable in two installments with $300,000 payable on June 30, 2008 and $300,000 on January 1, 2009.

 

 

 

By implementing a growth strategy, the Company intends to build a leading global transportation and supply-chain management company offering a full range of domestic and international freight forwarding and other value added supply chain management services, including order fulfillment, inventory management and warehousing.

The Company’s growth strategy will focus on organic, as well as acquisitive features. From an organic perspective, the Company will focus on strengthening existing and expanding new customer relationships. One of the drivers of the Company’s organic growth will be the retention of existing, and securing of new exclusive agency locations.

The Company’s acquisition strategy relies upon two primary factors: first, the Company’s ability to identify and acquire target businesses that fit within its general acquisition criteria, and second, the continued availability of capital and financing resources sufficient to complete these acquisitions. The Company’s ability to secure additional financing will rely upon the sale of debt or equity securities, and the development of an active trading market for the Company’s securities, neither of which can be assured.

The Company’s strategy has been designed to take advantage of shifting market dynamics. The third party logistics industry continues to grow as an increasing number of businesses outsource their logistics functions to more cost effectively manage and extract value from their supply chains. Also, the industry is positioned for further consolidation as it remains highly fragmented, and as customers are demanding the types of sophisticated and broad reaching service offerings that can more effectively be handled by larger more diverse organizations.

Successful implementation of the Company’s growth strategy will rely on a number of factors, including the ability to efficiently integrate any acquired businesses, generate the anticipated economies of scale from the integration, and maintain the historic sales growth of the acquired businesses in order to generate continued organic growth. There are a variety of risks associated with the Company’s ability to achieve its strategic objectives, including the ability to acquire and profitably manage additional businesses and the intense competition in the Company’s industry for customers and for the acquisition of additional businesses.

 

The Company accomplished the first step in its strategy by completing the acquisition of Airgroup effective as of January 1, 2006. Airgroup is a non-asset based logistics company that provides domestic and international freight forwarding services through a network of, originally, 34, and presently 40 active, exclusive agent offices across North America. Airgroup, a Seattle, Washington based company, services a diversified account base including manufacturers, distributors and retailers using a network of independent carriers and over 100 international agents positioned strategically around the world.

 

The condensed consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company’s management believes that the disclosures are adequate to make the information presented not misleading. The Company’s management suggests that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/T for the year ended June 30, 2006.

The interim period information included in this Quarterly Report on Form 10-Q reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of the Company’s management, necessary for a fair statement of the results of the respective interim periods. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.

Historically, the Company had a fiscal year that ended December 31. After acquiring Airgroup in January 2006, the Company changed its fiscal year to June 30. The income statement and cash flow for the nine months ended March 31, 2006 include only three months of Airgroup as it was acquired during January 2006.

 

The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include revenue recognition, accruals for the cost of purchased transportation, accounting for the issuance of shares and share based compensation, the assessment of the recoverability of long-lived assets (specifically goodwill and acquired intangibles), the establishment of an allowance for doubtful accounts and the valuation allowance for deferred tax assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. Actual results could differ from those estimates.

For purposes of the statement of cash flows, cash equivalents include all highly liquid investments with original maturities of three months or less which are not securing any corporate obligations.

The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.

 

The Company’s receivables are recorded when billed and represent claims against third parties that will be settled in cash. The carrying value of the Company’s receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value.   The Company evaluates the collectability of accounts receivable on a customer-by-customer basis. The Company records a reserve for bad debts against amounts due to reduce the net recognized receivable to an amount the Company believes will be reasonably collected. The reserve is a discretionary amount determined from the analysis of the aging of the accounts receivables, historical experience, and knowledge of specific customers.

Technology (computer software, hardware, and communications), furniture, and equipment are stated at cost, less accumulated depreciation over the estimated useful lives of the respective assets. Depreciation is computed using five to seven year lives for vehicles, communication, office, furniture, and computer equipment and the double declining balance method. Computer software is depreciated over a three year life using the straight line method of depreciation. For leasehold improvements, the cost is depreciated over the shorter of the lease term or useful life on a straight line basis. Upon retirement or other disposition of these assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in other income or expense. Expenditures for maintenance, repairs and renewals of minor items are charged to expense as incurred. Major renewals and improvements are capitalized.

 

Under the provisions of Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, the Company capitalizes costs associated with internally developed and/or purchased software systems that have reached the application development stage and meet recoverability tests. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software, payroll and payroll-related expenses for employees who are directly associated with and devote time to the internal-use software project and capitalized interest, if appropriate. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose.

Costs for general and administrative, overhead, maintenance and training, as well as the cost of software that does not add functionality to existing systems, are expensed as incurred.

The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires an annual impairment test for goodwill and intangible assets with indefinite lives. Under the provisions of SFAS No. 142, the first step of the impairment test requires the Company to determine the fair value of each reporting unit, and compare the fair value to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform a second more detailed impairment assessment. The second impairment assessment involves allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill as of the assessment date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date. In the future, the Company will perform its annual impairment test effective as of April 1 of each year, unless events or circumstances indicate an impairment may have occurred before that time. As of March 31, 2007 there are no indications of an impairment.

 

Acquired intangibles consist of customer related intangibles and non-compete agreements arising from the Company’s acquisitions. Customer related intangibles are amortized using accelerated methods over approximately 5 years and non-compete agreements are amortized using the straight line method over a 5 year period.

The Company recognizes revenue on a gross basis, in accordance with Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross versus Net," as a result of the following: The Company is the primary obligor responsible for providing the service desired by the customer and is responsible for fulfillment, including the acceptability of the service(s) ordered or purchased by the customer. At the Company’s sole discretion, it sets the prices charged to its customers, and is not required to obtain approval or consent from any other party in establishing its prices. The Company has multiple suppliers for the services it sells to its customers, and has the absolute and complete discretion and right to select the supplier that will provide the product(s) or service(s) ordered by a customer, including changing the supplier on a shipment-by-shipment basis. In most cases, the Company determines the nature, type, characteristics, and specifications of the service(s) ordered by the customer. The Company also assumes credit risk for the amount billed to the customer.

 

 

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R, "Share Based Payment,” a revision of FASB Statements No. 123 ("SFAS 123R"). This statement requires that the cost resulting from all share-based payment transactions be recognized in the Company’s consolidated financial statements. In addition, in March 2005 the Securities and Exchange Commission ("SEC") released SEC Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"). SAB 107 provides the SEC’s staff’s position regarding the application of SFAS 123R and certain SEC rules and regulations, and also provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition, as prescribed under SFAS 123, is no longer an alternative. The Company adopted Statement 123R in October 2005 using the modified prospective approach.

For the three months ended March 31, 2007, the Company recorded a share based compensation expense of $49,255, which, net of income taxes, resulted in a $32,508 net reduction of net income. For the nine months ended March 31, 2007, the Company recorded a share based compensation expense of $141,876, which, net of income taxes, resulted in a $93,638 net reduction of net income. Prior to October 2005, the Company did not have a stock option plan therefore no expense was recorded. For the three and nine months ended March 31, 2006, the Company recorded a share based compensation expense of $42,810 and $72,048, respectively, which, net of taxes, resulted in reduction of net income by $28,255 and $47,552.

The Company uses SFAS No. 128, Earnings Per Share for calculating the basic and diluted income (loss) per share. Basic income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted income per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. For the three months ending March 31, 2007 and 2006, there were 2,720,000 and 2,425,000, respectively, of options granted to purchase shares of common stock. For three months ended March 31, 2007 and 2006, the outstanding number of potentially dilutive common shares totaled 34,162,532 and 32,754,957 shares of common stock. Options to purchase 1,145,000 shares of common stock were not included in the diluted EPS computation for the three months ended March 31, 2007 as the exercise prices of those options were greater than the market price of the common shares and are thus anti-dilutive. Options to purchase 2,425,000 shares of common stock were not included in the diluted EPS computation for the three months ended March 31, 2006 as there was a loss in this period and thus the shares would be anti-dilutive.

For the nine months ended March 31, 2007 and 2006, the outstanding number of potentially dilutive common shares totaled 34,363,106 and 28,895,750 shares of common stock. For the nine months ended March 31, 2007, dilutive common shares included options to purchase shares of common stock computed by calculating the weighted average of the number of incremental dilutive shares added to each quarter.

Options to purchase 2,425,000 shares of common stock were not included in the diluted EPS computation for the nine months ended March 31, 2006 as the exercise prices of those options were greater than the market price of the common shares and thus are anti-dilutive. Options to purchase 2,425,000 shares of common stock were not included in the diluted EPS computation for the nine months ended March 31, 2006 as there was a loss in this period and thus the shares would be anti-dilutive.

In January of 2006, the Company acquired 100 percent of the outstanding stock of Airgroup Corporation (“Airgroup”). Airgroup is a non-asset based logistics company that provides domestic and international freight forwarding services through a network of, originally, 34, and presently 40 active, exclusive agent offices across North America. Airgroup, a Seattle, Washington based company, services a diversified account base including manufacturers, distributors and retailers using a network of independent carriers and over 100 international agents positioned strategically around the world. See the Company’s Form 8-K filed on January 18, 2006 for additional information.

 

The acquisition, which provided the platform operation for the Company’s consolidation strategy, was accounted for as a purchase and accordingly, the results of operations and cash flows of Airgroup have been included in the Company’s condensed consolidated financial statements prospectively from the date of acquisition. The total purchase price, including acquisition expenses of $104,779, but excluding the contingent consideration, was $10,704,779. The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and liabilities assumed at January 1, 2006:

The following information for the three and nine months ended March 31, 2007 (actual and unaudited) and three months ended March 31, 2006 (actual and unaudited) and nine months ended March 31, 2006 (pro forma and unaudited) is presented as if the acquisition of Airgroup had occurred on July 1, 2005 (in thousands, except earnings per share):

 

The table below reflects acquired intangible assets related to the acquisition of Airgroup on January 1, 2006. The information is for the nine months ended March 31, 2007 and the year ended June 30, 2006. Prior to the Company’s acquisition of Airgroup, there were no intangible assets for prior years as this is the Company’s first acquisition.

In January 2003, the FASB issued FIN46, and revised it in December 2003 FIN46(R), which clarified the application of Accounting Research Bulletin No. 51 “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have the sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties (“variable interest entities”). Radiant Logistics Partners is 40% owned by Airgroup Corporation and qualifies under FIN46(R) as a variable interest entity and is included in the Company’s consolidated financial statements.

 

Radiant Logistics Partners (RLP) is owned 40% by Airgroup and 60% by an affiliate of the Chief Executive Officer of the Company, Radiant Capital Partners (RCP). RLP is a certified minority business enterprise which was formed for the purpose of providing the Company with a national accounts strategy to pursue corporate and government accounts with diversity initiatives. As currently structured, RCP’s ownership interest entitles it to a majority of the profits and distributable cash, if any, generated by RLP. The operations of RLP are intended to provide certain benefits to the Company, including expanding the scope of services offered by the Company and participating in supplier diversity programs not otherwise available to the Company. As the RLP operations mature, the Company will evaluate and approve all related service agreements between the Company and RLP, including the scope of the services to be provided by the Company to RLP and the fees payable to the Company by RLP, in accordance with the Company’s corporate governance principles and applicable Delaware corporation law. This process may include seeking the opinion of a qualified third party concerning the fairness of any such agreement or the approval of the Company’s shareholders. Under FIN46(R), RLP is consolidated in the financial statements of the Company (see Note 5).

The Company, prior to acquiring Airgroup, did not carry any fixed assets since its inception. Property and equipment consists of the following:

 

Depreciation and amortization expense for the three and nine months ended March 31, 2006 was $49,239 and $119,964, respectively, and for year ended June 30, 2006 was $68,759.

The Company entered into a $10 million two year revolving credit facility with Bank of America, N.A. (the “Facility”) effective February 13, 2007. This replaces a January 2006 Facility with Bank of America, N.A. The Facility is collateralized by our accounts receivable and other assets of the Company, its subsidiaries and affiliates. Advances under the Facility are available to fund future acquisitions, capital expenditures or for other corporate purposes. Borrowings under the Facility bear interest, at the Company’s option, at the Bank’s prime rate minus .15% to 1.00% or LIBOR plus 1.55% to 2.25% and can be adjusted up or down during the term of the Facility based on the Company’s performance relative to certain financial covenants. The facility provides for advances of up to 80% of the Company’s eligible accounts receivable.

 

The terms of the Facility are subject to certain financial and operational covenants which may limit the amount otherwise available under the Facility. The first covenant limits funded debt to a multiple of 3.00 times the Company’s consolidated EBITDA measured on a rolling four quarter basis (or a multiple of 3.25 at a reduced advance rate of 75.0%). The second financial covenant requires the Company to maintain a funded debt to EBDITA ratio of 3.25 to 1.0. The third financial covenant requires the Company to maintain a basic fixed charge coverage ratio of at least 1.1 to 1.0. The fourth financial covenant is a minimum profitability standard that requires the Company not to incur a net loss before taxes, amortization of acquired intangibles and extraordinary items in any two consecutive quarterly accounting periods.

Under the terms of the Facility, the Company is permitted to make additional acquisitions without the lender's consent only if certain conditions are satisfied. The conditions imposed by the Facility include the following: (i) the absence of an event of default under the Facility, (ii) the company to be acquired must be in the transportation and logistics industry, (iii) the purchase price to be paid must be consistent with the Company’s historical business and acquisition model, (iv) after giving effect for the funding of the acquisition, the Company must have undrawn availability of at least $1.0 million under the Facility, (v) the lender must be reasonably satisfied with projected financial statements the Company provides covering a 12 month period following the acquisition, (vi) the acquisition documents must be provided to the lender and must be consistent with the description of the transaction provided to the lender, and (vii) the number of permitted acquisitions is limited to three per calendar year and shall not exceed $7.5 million in aggregate purchase price financed by funded debt. In the event that the Company is not able to satisfy the conditions of the Facility in connection with a proposed acquisition, it must either forego the acquisition, obtain the lender's consent, or retire the Facility. This may limit or slow our ability to achieve the critical mass we may need to achieve our strategic objectives.

The co-borrowers of the Facility include Radiant Logistics, Inc., Airgroup Corporation, Radiant Logistics Global Services Inc. (“RLGS”) and Radiant Logistics Partners, LLC (“RLP”). RLGS is a newly formed, wholly owned subsidiary of the Company that intends to focus on the Company’s agenda for international expansion. RLP is owned 40% by Airgroup and 60% by an affiliate of the Chief Executive Officer of the Company, Radiant Capital Parnters. RLP has been certified as a minority business enterprise, and intends to focus on corporate and government accounts with diversity initiatives. As a co-borrower under the Facility, the accounts receivable of RLP and RLGS are eligible for inclusion within the overall borrowing base of the Company and all borrowers will be responsible for repayment of the debt associated with advances under the Facility, including those advanced to RLP. At March 31, 2007, the Company was in compliance with all of its covenants.

In December 2006, the Company entered into finders fee arrangements with third parties to assist the Company in locating logistics businesses that could become additional exclusive agent operations of the Company and/or candidates for acquisition. Any amounts due under these arrangements are payable as a function of the financial performance of any newly acquired operation and contingently payable upon, among other things, the retention of any newly acquired operations for a period of not less than 12 months. Payment of the finders fee may be paid in cash, Company shares, or a combination of cash and shares. For the three and nine months ended March 31, 2007 there was $11,025 recorded as an accrued liability and other services expense.

 

The Company has operating lease commitments some of which are for office and warehouse space and are under non-cancelable operating leases expiring at various dates through December 2010. Annual commitments, fiscal year 2007 through 2011, respectively, are $258,804, $126,581, $111,341, $81,518, and $35,310.

Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company accumulated a net federal operating loss carryforward of $342,272 from inception though its transition into the logistics business in January of 2006 which expires in 2025. Utilization of the net operating loss and tax credit carryforwards is subject to significant limitations imposed by the change in control under I.R.C. 382, limiting its annual utilization to the value of the Company at the date of change in control times the federal discount rate. A significant portion of the NOL may expire before it can be utilized. The Company is maintaining a valuation allowance of approximately $116,000 to off-set the deferred tax asset associated with these net operating losses until when, in the opinion of management, utilization is reasonably assured.

The Company is authorized to issue 5,000,000 shares of preferred stock, par value at $.001 per share. As of March 31, 2007, none of the shares were issued or outstanding (unaudited).

In September 2006, the Company issued 250,000 shares of our common stock, at a market value of $1.01 per share, in exchange for $252,500, in value, of domestic and international freight training materials for the development of its employees and exclusive agent offices.

In October 2006, the Company issued of 100,000 shares of common stock, at a market value of $1.01 a share, as incentive compensation to its senior managers.

The Company issued its first employee options in October of 2005 and adopted the fair value recognition provisions of SFAF123R concurrent with this initial grant.

 

 

For the three months ended March 31, 2007, the Company issued an employee options to purchase 150,000 shares of common stock at $0.55 per share in February 2007. During the nine months ended March 31, 2007, the Company issued employees options to purchase 150,000 shares of common stock at $0.55 per share in February 2007, 100,000 shares of common stock at $0.74 per share in August 2006, and 45,000 shares of common stock at $1.01 per share in September 2006. The options vest 20% a year over a five year term.

 

Share based compensation costs recognized during the nine months ended March 31, 2007, includes compensation cost for all share-based payments granted to date, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. No options have been exercised as of March 31, 2007.

For the nine months ended March 31, 2007, the weighted average fair value per share of employee options granted in August 2006 was $.60, $.81 in September 2006, and $.55 in February 2007. The fair value of options granted were estimated on the date of grant using the Black-Scholes option pricing model, with the following assumptions for each issuance of options:

 

In accordance with SFAS123R, the Company is required to estimate the number of awards that are ultimately expected to vest. Due to the lack of historical information, the Company has not reduced its share based compensation costs for any estimated forfeitures. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

 

For the three months ended March 31, 2007 and 2006, the Company recognized stock option compensation costs of $49,255 and $42,810, respectively, in accordance with SFAS 123R. For the nine months ended March 31, 2007 and 2006, the Company recognized stock option compensation costs of $141,876 and $72,048, respectively, in accordance with SFAS 123R.

 

The following table summarizes activity under the plan for the nine months ended March 31, 2007.

 

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157 “Fair Value Measurements” which relate to the definition of fair value, the methods used to estimate fair value, and the requirement of expanded disclosures about estimates of fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact this interpretation will have on our consolidated financial statements.

 

 

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding future operating performance, events, trends and plans. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation thereon or similar terminology or expressions. We have based these forward-looking statements on our current expectations, projections and assumptions about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that, if not realized, may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. While it is impossible to identify all of the factors that may cause our actual operating performance, events, trends or plans to differ materially from those set forth in such forward-looking statements, such factors include the inherent risks associated with: (i) our ability to use Airgroup as a “platform” upon which we can build a profitable global transportation and supply chain management company, which itself relies upon expanding our network of exclusive agents and implementation of a successful acquisition strategy, neither of which can be assured; (ii) our dependence upon our network of exclusive agents; (iii) our ability to at least maintain historical levels of transportation revenue, net transportation revenue (gross profit margins) and related operating expenses at Airgroup; (iv) competitive practices in the industries in which we compete, (v) our dependence on current management; (vi) the impact of current and future laws and governmental regulations affecting the transportation industry in general and our operations in particular; and (vii) other factors which may be identified from time to time in our Securities and Exchange Commission (SEC) filings and other public announcements. Furthermore, the general business assumptions used for purposes of the forward-looking statements included within this report represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.

 

We accomplished the first step in our new business strategy by completing the acquisition of Airgroup effective as of January 1, 2006. Airgroup is a non-asset based logistics company providing domestic and international freight forwarding services through a network of, originally, 34, and presently 40 active, exclusive agent offices across North America. Airgroup, a Seattle-Washington based company, services a diversified account base including manufacturers, distributors and retailers using a network of independent carriers and over 100 international agents positioned strategically around the world.

By implementing a growth strategy, we intend to build a leading global transportation and supply-chain management company offering a full range of domestic and international freight forwarding and other value added supply chain management services, including order fulfillment, inventory management and warehousing.

 

As a non-asset based provider of third-party logistics services, we seek to limit our investment in equipment, facilities and working capital through contracts and preferred provider arrangements with various transportation providers who generally provide us with favorable rates, minimum service levels, capacity assurances and priority handling status. Our non-asset based approach allows us to maintain a high level of operating flexibility and leverage a cost structure that is highly variable in nature while the volume of our flow of freight enables us to negotiate attractive pricing with our transportation providers.

Our principal source of income is derived from freight forwarding services provided through a network of exclusive agent offices. Through our agents, we arrange for the shipment of customers' freight from point of origin to point of destination, and provide a turn key cost for the movement of their freight. Our price quote will often depend upon the customer's time-definite needs (first day through fifth day delivery), special handling needs (heavy equipment, delicate items, environmentally sensitive goods, electronic components, etc.) and the means of transport (truck, air, ocean or rail). In turn, we assume the responsibility for arranging and paying for the underlying means of transportation.

 

Our transportation revenue represents the total dollar value of services we sell to our customers through our network of exclusive agents. Our cost of transportation includes direct costs of transportation, including motor carrier, air, ocean and rail services. We act principally as the service provider to add value in the execution and procurement of these services to our customers. Our net transportation revenue (gross transportation revenue less the direct cost of transportation) is the primary indicator of our ability to source, add value and resell services provided by third parties, and is considered by management to be a key performance measure. In addition, management believes measuring its operating costs as a function of net transportation revenue provides a useful metric, as our ability to control costs as a function of net transportation revenue directly impacts operating earnings.

 

Our operating results will be affected as acquisitions occur. Since all acquisitions are made using the purchase method of accounting for business combinations, our financial statements will only include the results of operations and cash flows of acquired companies for periods subsequent to the date of acquisition.

 

Our GAAP based net income will be affected by non-cash charges relating to the amortization of customer related intangible assets and other intangible assets arising from completed acquisitions. Under applicable accounting standards, purchasers are required to allocate the total consideration in a business combination to the identified assets acquired and liabilities assumed based on their fair values at the time of acquisition. The excess of the consideration paid over the fair value of the identifiable net assets acquired is to be allocated to goodwill, which is tested at least annually for impairment. Applicable accounting standards require that we separately account for and value certain identifiable intangible assets based on the unique facts and circumstances of each acquisition. As a result, when and as we make acquisitions, our net income will include material non-cash charges relating to the amortization of customer related intangible assets and other intangible assets acquired in our acquisitions. Although these charges may increase as we complete more acquisitions, we believe we will be actually growing the value of our intangible assets (e.g., customer relationships). Thus, we believe that earnings before interest, taxes, depreciation and amortization, or EBITDA, is a useful financial measure for investors because it eliminates the effect of these non-cash costs and provides an important metric for our business. Further, the financial covenants of our credit facility adjust EBITDA to exclude costs related to share based compensation and other non-cash charges. Accordingly, we intend to employ EBITDA and adjusted EBITDA as a management tool to measure our historical financial performance and as a benchmark for future financial flexibility.

 

Our operating results are also subject to seasonal trends when measured on a quarterly basis. The impact of seasonality on our business will depend on numerous factors, including the markets in which we operate, holiday seasons, consumer demand and economic conditions. Since our revenue is largely derived from customers whose shipments are dependent upon consumer demand and just-in-time production schedules, the timing of our revenue is often beyond our control. Factors such as shifting demand for retail goods and/or manufacturing production delays could unexpectedly affect the timing of our revenue. As we increase the scale of our operations, seasonal trends in one area of our business may be offset to an extent by opposite trends in another area. We cannot accurately predict the timing of these factors, nor can we accurately estimate the impact of any particular factor, and thus we can give no assurance that historical seasonal patterns will continue in future periods.

The results of operations discussion that appears below has been presented utilizing a combination of historical and, where relevant, pro forma information to include the effects on our consolidated financial statements of our: (i) equity offerings completed during 2005 and 2006; and (ii) acquisition of Airgroup Corporation. Historical financial data has been supplemented, where appropriate, with pro forma financial data since historical data which merely reflects the prior period results of the Company on a stand-alone basis, would provide no meaningful data with respect to our ongoing operations since we were in the development stage prior to our acquisition of Airgroup. The pro forma information has been presented for three and nine months ended March 31, 2007 and 2006 as if we had completed our equity offerings and acquired Airgroup as of July 1, 2005. The pro forma results are also adjusted to reflect a consolidation of the historical results of operations of Airgroup and the Company as adjusted to reflect the amortization of acquired intangibles and are also provided in the condensed consolidated financial statements included within this report.

The pro forma financial data are not necessarily indicative of results of operations that would have occurred had this acquisition been consummated at the beginning of the periods presented or that might be attained in the future.

 

We generated transportation revenue of $19.4 million and $11.8 million and net transportation revenue of $7.1 million and $4.4 million for the three months ended March 31, 2007 and 2006 respectively. Net income was $24,000 for the three months ended March 31, 2007 compared to a net loss of $27,000 for the three months ended March 31, 2006.

We had adjusted earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) of $328,000 and $122,000 for three months ended March 31, 2007 and 2006, respectively. EBITDA, is a non-GAAP measure of income and does not include the effects of interest and taxes, and excludes the “non-cash” effects of depreciation and amortization on current assets. Companies have some discretion as to which elements of depreciation and amortization are excluded in the EBITDA calculation. We exclude all depreciation charges related to property, plant and equipment, and all amortization charges, including amortization of goodwill, leasehold improvements and other intangible assets. We further adjust EBITDA to exclude costs related to share based compensation expense and other non-cash charges consistent with the financial covenants of our credit facility. While management considers EBITDA and adjusted EBITDA useful in analyzing our results, it is not intended to replace any presentation included in our consolidated financial statements.

 

 

Transportation revenue was $19.4 million for the three months ended March 31, 2007, an increase of 63.8% over total transportation revenue of $11.8 million for the three months ended March 31, 2006. Domestic transportation revenue increased by 64.9% to $12.4 million for the three months ended March 31, 2007 from $7.5 million for the three months ended March 31, 2007. The increase was primarily due to increased volume handled by the Company over 2006. International transportation revenue increased by 61.8% to $7.0 million for the three months ended March 31, 2006 from $4.3 million for the comparable prior year period, mainly attributed to increased air and ocean import freight volume.

Cost of transportation as a percentage of transportation revenue for the three months ended March 31, 2007 remained unchanged when compared to the three months ended March 31, 2006.

Net transportation margins as a percentage of transportation revenue for the three months ended March 31, 2007 remained unchanged when compared to the three months ended March 31, 2006.

 

 

Agent commissions were $5.4 million for the three months ended March 31, 2007, an increase of 69.5% from $3.2 million for the three months ended March 31, 2006. Agent commissions as a percentage of net transportation revenue increased to 76.2% for three months ended March 31, 2007 from 73.3% when compared to the same period last year as both grew at the same rate except for concessions incurred for new agent offices for three months ended March 31, 2007.

Personnel costs were $659,000 for the three months ended March 31, 2007, a increase of 3.1% from $639,000 for the three months ended March 31, 2006. Personnel costs as a percentage of net transportation revenue decreased to 9.3% for three months ended March 31, 2007 from 14.7% for the comparable prior year period as a result of increased net revenue over the prior year causing the percent relative to net transportation revenue to be lower. The increase in costs over the same period last year reflects a modest increase in headcount.

Other selling, general and administrative costs were $742,000 for the three months ended March 31, 2007, an increase of 66.0% from $447,000 for the three months ended March 31, 2006. As a percentage of net transportation revenue, other selling, general and administrative costs for three months ended March 31, 2007 remained unchanged when compared to the comparable prior year period. The increased costs, compared to the same period last year, are a result of professional fees associated with operating as a public company as well as increased expenses in temporary help for back office services, legal, and marketing costs.

Depreciation and amortization costs were approximately $209,000 and $206,000 for the three months ended March 31, 2007 and 2006 respectively. Depreciation and amortization as a percentage of net transportation revenue decreased for three months ended March 31, 2007 to 2.9% from 4.7% for the same period last year.

Income from operations was $86,000 for the three months ended March 31, 2007 compared to loss from operations of $127,000 for the three months ended March 31, 2006.

Net income was $24,000 for the three months ended March 31, 2007, compared to net loss of $27,000 for the three months ended March 31, 2006.

 

We generated transportation revenue of $52.2 million and net transportation revenue of $18.8 million for the nine months ended March 31, 2007. For the nine months ended March 31, 2006, we generated transportation revenue of $11.8 million and net transportation revenue of $4.4 million as we were in the developmental stage for six months prior to the acquiring Airgroup during January 2006. Net income was $248,000 for the nine months ended March 31, 2007 compared to a net loss of $153,000 for the nine months ended March 31, 2006.

 

We had adjusted earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) of $1,063,000 and $11,000 for nine months ended March 31, 2007 and 2006, respectively. EBITDA, is a non-GAAP measure of income and does not include the effects of interest and taxes, and excludes the “non-cash” effects of depreciation and amortization on current assets. Companies have some discretion as to which elements of depreciation and amortization are excluded in the EBITDA calculation. We exclude all depreciation charges related to property, plant and equipment, and all amortization charges, including amortization of goodwill, leasehold improvements and other intangible assets. We then further adjust EBITDA to exclude costs related to share based compensation expense and other non-cash charges consistent with the financial covenants of our credit facility. While management considers EBITDA and adjusted EBITDA useful in analyzing our results, it is not intended to replace any presentation included in our consolidated financial statements.

 

 

Transportation revenue was $52.2 million for nine months ended March 31, 2007. Domestic and International transportation revenue was $32.7 million and $19.5 million, respectively. For the nine months ended March 31, 2006, transportation revenue was $11.8 million comprised of $7.5 million of domestic and $4.3 million of international transportation revenue, reflecting only three months of Airgroup operations.

 

Cost of transportation was 64.0% of transportation revenue for nine months ended March 31, 2007 and 63.2% for the nine months ended March 31, 2007.

 

Net transportation margins were 36.0% and 36.8% of transportation revenue for ended nine months ended March 31, 2007 and 2006 respectively.

 

Agent commissions were $14.4 million and $3.2 million for the nine months ended March 31, 2007 and 2006, respectively, or 76.5% and 73.3% of net transportation revenue. There was only three months of Airgroup’s operations included in the nine months ended March 31, 2006 as the Company acquired Airgroup in January 2006.

Personnel costs were $1.7 million for the nine months ended March 31, 2007, or 9.3% of net transportation revenue, and $693,000, or 15.9% of net transportation revenue, for the nine months ended March 31, 2006.

Other selling, general and administrative costs were $1.7 million and 9.4% of net transportation revenues for the nine months ended March 31, 2007, compared to $533,000, or 12.2% of net transportation revenue, for the nine months ended March 31, 2006.

Depreciation and amortization costs were $600,000 and 3.2% of net transportation revenues for the nine months ended March 31, 2007, compared to $206,000, or 4.7% of net transportation revenue, for the nine months ended March 31, 2006.

Income from operations was $300,000 for the nine months ended March 31, 2007, compared to a loss from operations of $267,000 for the nine months ended March 31, 2006.

Net income was $248,000 for nine months ended March 31, 2007, compared to a net loss of $153,000 for the nine months ended March 31, 2006.

 

We generated transportation revenue of $52.2 million and $40.0 million and net transportation revenue of $18.8 million and $14.2 million for the nine months ended March 31, 2007 and 2006, respectively. Net income was $248,000 for the nine months ended March 31, 2007, compared to a net income of $153,000 for the nine months ended March 31, 2006.

We had adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $1,063,000 and $690,000 for the nine months ended March 31, 2007 and 2006, respectively. EBITDA, is a non-GAAP measure of income and does not include the effects of interest and taxes, and excludes the “non-cash” effects of depreciation and amortization on current assets. Companies have some discretion as to which elements of depreciation and amortization are excluded in the EBITDA calculation. We exclude all depreciation charges related to property, plant and equipment, and all amortization charges, including amortization of goodwill, leasehold improvements and other intangible assets. We then further adjust EBITDA to exclude costs related to share based compensation expense and other non-cash charges consistent with the financial covenants of our credit facility. While management considers EBITDA and adjusted EBITDA useful in analyzing our results, it is not intended to replace any presentation included in our consolidated financial statements.

 

Transportation revenue was $52.2 million for the nine months ended March 31, 2007, an increase of 30.5% over total transportation revenue of $40.0 million for the nine months ended March 31, 2006. Domestic transportation revenue increased by 34.6% to $32.7 million for the nine months ended March 31, 2007 from $24.3 million for the nine months ended March 31, 2006. The increase was primarily due to increased volume handled by the Company over 2006. International transportation revenue increased by 24.3% to $19.5 million for the nine months ended March 31, 2007 from $15.7 million for the comparable prior year period, mainly attributed to increased air and ocean import freight volume.

Cost of transportation decreased to 64.0% of transportation revenue for the nine months ended March 31, 2007 from 64.3% of transportation revenue for the nine months ended March 31, 2006. This reflects increased domestic volume over international volume which historically has higher transportation cost as a percentage of sales.

Net transportation margins increased to 36.0% of transportation revenue for the nine months ended March 31, 2007 from 35.7% of transportation revenue for the nine months ended March 31, 2006 as a result of factors described above.

Agent commissions were $14.4 million for the nine months ended March 31, 2007, an increase of 37.0% from $10.5 million for the nine months ended March 31, 2006. Agent commissions as a percentage of net transportation revenue increased to 76.5% for nine months ended March 31, 2007 from 73.7% for the comparable prior year period as a result of concessions incurred for new agent offices for nine months ended March 31, 2007.

 

Personnel costs were $1.7 million for the nine months ended March 31, 2007, a decrease of 9.1% from $1.9 million for the nine months ended March 31, 2006. Personnel costs as a percentage of net transportation revenue decreased to 9.3% for nine months ended March 31, 2007 from 13.5% for the comparable prior year period as a result of lower average headcount and compensation costs for the nine months ended March 31, 2007.

Other selling, general and administrative costs were $1.7 million for the nine months ended March 31, 2007, an increase of 45.2% from $1.2 million for the nine months ended March 31, 2006. As a percentage of net transportation revenue, other selling, general and administrative costs increased to 9.3% for nine months ended March 31, 2007 from 8.4% for the same period last year, are a result of professional fees associated with operating as a public company as well as increased expenses in temporary help for back office services, legal, and marketing costs.

Depreciation and amortization costs were approximately $600,000 and $581,000 for the nine months ended March 31, 2007 and 2006, respectively. Depreciation and amortization as a percentage of net transportation revenue decreased for nine months ended March 31, 2007 to 3.2% from 4.1% for the same period last year due to lower amortization of intangibles.

Income from operations was $300,000 for the nine months ended March 31, 2007, compared to income from operations of $45,000 for the nine months ended March 31, 2006.

Net income was $248,000 for the nine months ended March 31, 2007, compared to net income of $153,000 for the nine months ended March 31, 2006.