Radiant Logistics - 10-Q quarterly report FY

 

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2008

 

o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to  _____________

 

Commission File Number: 000-50283

(Address of Principal Executive Offices)

N/A

(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, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

(Do not check if a smaller reporting company)

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

There were 34,401,696 issued and outstanding shares of the registrant’s common stock, par value $.001 per share, as of May 8, 2008.

 

 

 

 

 

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

 

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

 

 

 

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

 

 

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 $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 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 March, 2008 the Company issued 356,724 shares of common stock, in satisfaction of the $214,000 earnout obligation due to former Airgroup shareholders for the earnout period ended June 30, 2007.

 

 

Radiant Logistics, Inc. (the “Company”) is executing a strategy to build a global transportation and supply chain management company through organic growth and the strategic acquisition of regional best-of-breed non-asset based transportation and logistics providers to offer its customers domestic and international freight forwarding and an expanding array of value added supply chain management services, including order fulfillment, inventory management and warehousing.

The Company completed the first step in its business strategy through the acquisition of Airgroup Corporation (“Airgroup”) effective as of January 1, 2006. Airgroup is a Seattle, Washington based non-asset based logistics company providing domestic and international freight forwarding services through a network of exclusive agent offices across North America.  Airgroup has a diversified account base including manufacturers, distributors and retailers using a network of independent carriers and international agents positioned strategically around the world.

 

By implementing a growth strategy based on the operations of Airgroup as a platform, 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 both organic growth and acquisitions. 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 retaining existing, and securing new exclusive agency locations. Since the acquisition of Airgroup in January 2006, management focused its efforts on the build-out of the Company’s network of exclusive agency offices, as well as enhancing its back-office infrastructure and transportation and accounting systems.

The Company’s growth 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. 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 depends upon a number of factors, including management’s ability to: (i) continue developing new agency locations; (ii) locate acquisition opportunities; (iii) secure adequate funding to finance identified acquisition opportunities; (iv) efficiently integrate the businesses of the companies acquired; (v) generate the anticipated economies of scale from the integration; and (vi) maintain the historic sales growth of the acquired businesses in order to generate continued organic growth. There are a variety of risks associated with management’s ability to achieve the Company’s strategic objectives, including the ability to acquire and profitably manage additional businesses and the intense competition in the industry for customers and for acquisition candidates.

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 for the year ended June 30, 2007.

The interim period information included in this Quarterly Report on Form 10-Q reflects all adjustments, including the recognition of $1.4M in non-recurring income resulting from a change in estimate of liabilities of accrued transportation costs assumed in connection with the Company’s acquisition of Airgroup (See Note 3) and other 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.

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.

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 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 2012. Future annual commitments for years ending June 30, 2008 through 2012, respectively, are $79,790, $294,686, $117,278, $62,825, and $2,432.

The Company recognizes revenue on a gross basis, in accordance with Emerging Issues Task Force ("EITF") 91-9, "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.

 

 

The Company follows the provisions of SFAS No. 123R, "Share Based Payment,” a revision of FASB Statement 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, the Company follows the guidance of the Securities and Exchange Commission ("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. 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.

For the three months ended March 31, 2008, the Company recorded a share based compensation expense of $57,282, which, net of income taxes, resulted in a $37,806 net reduction of net income. 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, 2008, the Company recorded a share based compensation expense of $150,384, which, net of income taxes, resulted in a $99,253 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.

The Company uses SFAS No. 128, Earnings Per Share for calculating the basic and diluted income per share. Basic income per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted income per share is computed similar to basic income 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 three months ended March 31, 2008 and 2007, the weighted average outstanding number of dilutive common shares totaled 34,134,454 and 34,162,532 shares of common stock. Options to purchase 2,580,000 shares of common stock were not included in the diluted EPS computation for the three months ended March 31, 2008 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 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.

For the nine months ended March 31, 2008 and 2007, the weighted average outstanding number of dilutive common shares totaled 34,218,416 and 34,363,106 shares of common stock. Options to purchase 2,580,000 shares of common stock were not included in the diluted EPS computation for the nine months ended March 31, 2008 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 1,145,000 shares of common stock were not included in the diluted EPS computation for the nine 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.

The following table reconciles the numerator and denominator of the basic and diluted per share computations for earnings per share as follows.

Certain amounts for prior periods have been reclassified in the consolidated financial statements to conform to the classification used in fiscal 2008.

In the quarter ended December 31, 2007, the Company reduced the estimate of accrued transportation costs assumed in the acquisition of Airgroup. This adjustment was made with the benefit of 2 years of operating experience and resulted in the recognition of approximately $1.4 million in non-recurring income. Pursuant to the acquisition agreement, the former shareholders of Airgroup have indemnified the Company for taxes of $487,000 associated with the income recognized in connection with this change in estimate. The tax indemnity has been reflected as a reduction of the additional base payment otherwise payable to the former shareholders of Airgroup.

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, 2008 and year ended June 30, 2007. Prior to the Company’s acquisition of Airgroup, there were no intangible assets for prior years as this was the Company’s first acquisition.

 

For the nine months ended March 31, 2008, the Company recorded an expense of $410,520 from amortization of intangibles and an income tax benefit of $139,578 from amortization of the long term deferred tax liability; both arising from the acquisition of Airgroup. For the nine months ended March 31, 2007, the Company recorded an expense of $458,871 from amortization of intangibles and an income tax benefit of $156,016 from amortization of the long term deferred tax liability; both arising from the acquisition of Airgroup. The Company expects the net reduction in income, from the combination of amortization of intangibles and long term deferred tax liability, will be $361,257 in 2008, $394,079 in 2009, $318,862 in 2010, and $107,052 in 2011.

The total estimated purchase price of the acquired assets is $1.925 million, which is comprised of the $1.56 million purchase price along with an additional $365,000 in estimated acquisition expenses. The following table summarizes the preliminary allocation of the purchase price based on the estimated fair value of the acquired assets at November 1, 2007. No liabilities were assumed in connection with the transaction:

 

The above allocation is still preliminary and the Company expects to finalize it prior to the November 2008 anniversary of the acquisition of Purchased Assets as required per SFAS 141.

FIN46(R) clarifies 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 LLC (“RLP”) 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. Minority interest income for the three and nine months ending March 31, 2008 was $13,696 and $45,642, respectively. RLP commenced operations in February 2007. Minority interest expense for the three and nine months ending March 31, 2007 was $18.

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 6).

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, 2008 was $238,822 and $720,426, respectively, and for the three and nine months ended March 31, 2007 was $209,348 and $600,295, respectively.

As of March 31, 2008, the Company had approximately $2.3 million outstanding under the Facility and had eligible accounts receivable sufficient to support approximately $7.4 million in borrowings. 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 basic fixed charge coverage ratio of at least 1.1 to 1.0. The third 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 the Company’s ability to achieve the critical mass it may need to achieve our strategic objectives. At March 31, 2008, the Company was in compliance with all of its covenants.

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’s consolidated effective tax rate during the three and nine month periods ended March 31, 2008 and March 31, 2007 was 34.0%.

The Company is authorized to issue 5,000,000 shares of preferred stock, par value at $.001 per share. As of March 31, 2008, none of the shares were issued or outstanding (unaudited).

In September 2006, the Company issued 250,000 shares of our common stock, at $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 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 February of 2008, the Company agreed to issue 250,000 shares of common stock to a financial advisor to provide investor relations and financial advisory services to the Company. These shares are to vest ratably over the six month engagement and will be issued in a transaction exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act.

The Company issued its first employee options in October of 2005 and adopted the fair value recognition provisions of SFAS123R concurrent with this initial grant.

 

For the three and nine months ended March 31, 2008, the Company issued employees options to purchase 175,000 shares of common stock at $0.48 per share in December 2007, and 50,000 shares of common stock at $.35 per share in March 2008. The options vest 20% per year over a five year term.

 

Share based compensation costs recognized during the three and nine months ended March 31, 2008, 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, 2008.

For the nine months ended March 31, 2008, the weighted average fair value per share of employee options granted in December 2007 was $.29. The weighted average fair value per share of employee options granted in March 2008 was $.21. 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 nine months ended March 31, 2008 and 2007, the Company recognized stock option compensation costs of $150,384 and $141,876, respectively, in accordance with SFAS 123R. The following table summarizes activity under the plan for the nine months ended March 31, 2008.

 

The aggregate intrinsic value for all outstanding options as of March 31, 2008 was $1,500. The aggregate intrinsic value for all vested options was $0 due to the strike price of all vested options exceeding the market price of the Company’s stock.

 

 

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 our ability to: (i) to use Airgroup as a “platform” upon which we can build a profitable global transportation and supply chain management company; (ii) retain and build upon the relationships we have with our exclusive agency offices; (iii) continue the development of our back office infrastructure and transportation and accounting systems in a manner sufficient to service our expanding revenues and base of exclusive agency locations; (iv) continue growing our business and maintain historical or increased gross profit margins; (v) locate suitable acquisition opportunities; (vi) secure the financing necessary to complete any acquisition opportunities we locate; (vii) assess and respond to competitive practices in the industries in which we compete, (viii) mitigate, to the best extent possible, our dependence on current management and certain of our larger exclusive agency locations; (ix) assess and respond to the impact of current and future laws and governmental regulations affecting the transportation industry in general and our operations in particular; and (x) assess and respond to such other factors which may be identified from time to time in our Securities and Exchange Commission (SEC) filings and other public announcements including those set forth in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2007. Furthermore, the general business assumptions underlying the forward-looking statements included herein represent estimates of future events and are subject to uncertainty due to, among other things, changes in economic, legislative, industry, and other circumstances. As a result, the identification, interpretation and use of data and other information 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, we can provide no assurance regarding the achievability of the results identified in such forward-looking statements. Except as required by law, 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.

Radiant Logistics, Inc. (the “Company”) is executing a strategy to build a global transportation and supply chain management company through organic growth and the strategic acquisition of regional best-of-breed non-asset based transportation and logistics providers to offer its customers domestic and international freight forwarding and an expanding array of value added supply chain management services, including order fulfillment, inventory management and warehousing.

 

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. As a freight forwarder, we arrange for the shipment of our customers’ freight from point of origin to point of destination. Generally, we quote our customers 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. 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 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 of our acquisition strategy, 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 actually be 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 expense and other non-cash charges. Accordingly, we intend to employ EBITDA and adjusted EBITDA as management tools 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.

 

We generated transportation revenue of $25.8 million and $19.4 million and net transportation revenue of $9.5 million and $7.1 million for the three months ended March 31, 2008 and 2007 respectively. Net income was $87,000 for the three months ended March 31, 2008 compared to net income of $24,000 for the three months ended March 31, 2007.

 

 

Transportation revenue was $25.8 million for the three months ended March 31, 2008, an increase of 32.9% over transportation revenue of $19.4 million for the three months ended March 31, 2007. Domestic transportation revenue increased by 20.8% to $15.0 million for the three months ended March 31, 2008 from $12.4 million for the three months ended March 31, 2007. The increase was primarily due to increased volume handled by us in 2008. International transportation revenue increased by 54.3% to $10.7 million for the three months ended March 31, 2008 from $7.0 million for the comparable prior year period, mainly attributed to increased air and ocean export freight volume.

Cost of transportation increased to $16.3 million for the three months ended March 31, 2008 compared to $12.3 million for the three months ended March 31, 2007 as a result of the increased transportation volumes described above.

Net transportation margins remained relatively unchanged at 36.9% of transportation revenue for the three months ended March 31, 2008 as compared to 36.7% of transportation revenue for the three months ended March 31, 2007.

 

Agent commissions were $6.6 million for the three months ended March 31, 2008, an increase of 22% from $5.4 million for the three months ended March 31, 2007. Agent commissions as a percentage of net transportation revenue decreased to 69.6% for three months ended March 31, 2008 from 76.2% for the comparable prior year period as a result of the introduction of Company owned operations in Detroit where operations were not subject to agent commissions.

Personnel costs were $1.2 million for the three months ended March 31, 2008, an increase of 81.9% from $659,000 for the three months ended March 31, 2007. Personnel costs as a percentage of net transportation revenue increased to 12.6% for three months ended March 31, 2008 from 9.3% for the comparable prior year period primarily as a result of the increased head-count associated with operations in Detroit.

Other selling, general and administrative costs were $1,269,000 for the three months ended March 31, 2008, an increase of 71.0% from $742,000 for the three months ended March 31, 2007. As a percentage of net transportation revenue, other selling, general and administrative costs increased to 13.4% for three months ended March 31, 2008 from 10.4% for the comparable prior year period.

Depreciation and amortization costs were approximately $239,000 and $209,000 for the three months ended March 31, 2008 and 2007, respectively. Depreciation and amortization as a percentage of net transportation revenue decreased for three months ended March 31, 2008 to 2.5% from 2.9% for the same period last year.

Income from operations was $183,000 for the three months ended March 31, 2008 compared to income from operations of $86,000 for the three months ended March 31, 2007.

Other expense was $74,000 for the three months ended March 31, 2008 compared to other expense of $25,000 for the three months ended March 31, 2007.

Net income was $87,000 for the three months ended March 31, 2008, compared to net income of $24,000 for the three months ended March 31, 2007.

 

We generated transportation revenue of $74.4 million and $52.2 million and net transportation revenue of $26.3 million and $18.8 million for the nine months ended March 31, 2008 and 2007, respectively. Net income was $1,499,000 for the nine months ended March 31, 2008 compared net income of $248,000 for the nine months ended March 31, 2007.

 

 

Transportation revenue was $74.4 million for the nine months ended March 31, 2008, an increase of 42.7% over transportation revenue of $52.2 million for the nine months ended March 31, 2007. Domestic transportation revenue increased by 43.5% to $46.9 million for the nine months ended March 31, 2008 from $32.7 million for the nine months ended March 31, 2007. The increase was primarily due to increased volume handled by us in 2008. International transportation revenue increased by 41.4% to $27.5 million for the nine months ended March 31, 2008 from $19.5 million for the comparable prior year period, mainly attributed to increased air and ocean export freight volume.

Cost of transportation increased to $48.1 million for the nine months ended March 31, 2008 from $33.4 million for the nine months ended March 31, 2007 as a result of the additional volumes described above.

Net transportation margins decreased slightly to 35.4% of transportation revenue for the nine months ended March 31, 2008 from 36.0% of transportation revenue for the nine months ended March 31, 2007 as a result of increased international volumes which traditionally provide lower margins.

 

Agent commissions were $18.6 million for the nine months ended March 31, 2008, an increase of 29.4% from $14.4 million for the nine months ended March 31, 2007. Agent commissions as a percentage of net transportation revenue decreased to 70.7% for nine months ended March 31, 2008 from 76.6% for the comparable prior year period as a result of the introduction of Company owned operations in Detroit where operations were not subject to agent commissions.

Personnel costs were $3.8 million for the nine months ended March 31, 2008, an increase of 119.6% from $1.7 million for the nine months ended March 31, 2007. Personnel costs as a percentage of net transportation revenue increased to 14.6% for nine months ended March 31, 2008 from 9.3% for the comparable prior year period primarily as a result of the increased head-count associated with new company owned stations.

Other selling, general and administrative costs were $2.7 million for the nine months ended March 31, 2008, an increase of 53.6% from $1.8 million for the nine months ended March 31, 2007. As a percentage of net transportation revenue, other selling, general and administrative costs increased to 10.3% for nine months ended March 31, 2008 from 9.4% for the comparable prior year period. The $2.7 million in other selling, general and administrative costs is net of $804,000 in expenses associated with the Detroit operations which we recorded as an asset on our balance sheet as an offset against payments to be made for the acquired assets.

Depreciation and amortization costs were approximately $720,000 and $600,000 for the nine months ended March 31, 2008 and 2007, respectively. Depreciation and amortization as a percentage of net transportation revenue decreased for nine months ended March 31, 2008 to 2.7% from 3.2% for the same period last year.

Income from operations was $460,000 for the nine months ended March 31, 2008 compared to income from operations of $300,000 for the nine months ended March 31, 2007.

Other income was $1.8 million for the nine months ended March 31, 2008 compared to other expense of $33,000 for the nine months ended March 31, 2007. Other income for the nine months ended March 31, 2008 was driven principally by the $1.4 million change in estimate of the liabilities assumed in the acquisition of Airgroup combined with an additional $487,000 income recognized as a result of the related tax indemnity.

Net income was $1,499,000 for the nine months ended March 31, 2008, compared to net income of $248,000 for the nine months ended March 31, 2007.

 

 

In the quarter ended December 31, 2007, we adjusted the estimate of accrued transportation costs assumed in the acquisition of Airgroup which resulted in the recognition of approximately $1.4 million in non-recurring income. Pursuant to the acquisition agreement, the former shareholders of Airgroup have indemnified us for taxes of $487,000 associated the income recognized in connection with this change in estimate which has been reflected as a reduction of the additional base payment otherwise payable to the former shareholders of Airgroup.

 

Assuming minimum targeted earnings levels are achieved, the following table summarizes our contingent base earn-out payments related to the acquisition of Airgroup for the fiscal years indicated based on results of the prior year (in thousands):

 

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.

Cash used for investing activities for the nine months ended March 31, 2008, totaled $2,160,000 of which approximately $1.9 million related to the acquisition of the automotive assets in Detroit with the remaining $200,000 related to investments in technology. For the nine months ended March 31, 2007, cash used for investing was $187,000 and principally related to investments in technology.

Net cash provided by financing activities for the nine months ended March 31, 2008 was $832,000 which includes advances under our credit facility of $1,337,000 and $120,000 in notes payable to Mass Financial issued in connection with the acquisition of the automotive assets. These amounts were off-set by $500,000 paid to former Airgroup shareholders, and a note receivable issued for $125,000. For the comparable prior year period, net cash provided by financing activities was limited to repayments to our credit facility of $759,000.

As restructured, the purchase price has been reduced to $1.56 million, consisting of cash of $560,000 and a $1.0 million credit in satisfaction of indemnity claims asserted by us arising from our interim operation of the Purchased Assets since May 22, 2007. Of the cash component of the transaction, $100,000 was paid in May of 2007, $265,000 was paid at closing and a final payment of $195,000 is to be paid in November of 2008, subject to off-set of up to $75,000 for certain qualifying expenses incurred by the Company.

During the early portion of fiscal 2008, our cash flow was adversely affected as a result of the garnishment proceeding instituted by a judgment creditor of the prior owner of the Purchased Assets which temporarily frustrated our ability to collect outstanding customer receivables and service new and existing customers. The garnishment action was ultimately brought to a standstill in September of 2007. For the period from May 22, 2007 through October 31, 2007, while operating the Purchased Assets under the Management Services Agreement (the “MSA”) with Mass, we incurred an aggregate of $1,000,000 of reimbursable operating expenses (of which approximately $196,000, $392,000 , $412,000 were incurred in the quarters ended June 30, 2007, September 30, 2007 and December 31, 2007, respectively). These expenses were, to a large extent, influenced by the decrease in revenue caused by the garnishment proceedings, and in any event, were recaptured in the form of an indemnity claim against Mass which was satisfied via an off-set to amounts otherwise payable to Mass in connection with the acquisition of the automotive assets in Detroit. While operating the Purchased Assets we have exited certain low margin business and secured additional new business. While we believe we have secured a profitable core group of customers from which to operate in Detroit going forward, we may be required to make further cash outlays in the development of our automotive services group which would require increased draws against our Facility.

Given our continued focus on the build-out of our network of exclusive agency locations, we believe that our current working capital and anticipated cash flow from operations are adequate to fund existing operations. However, should we attempt to build the business through strategic acquisitions; we will require additional sources of financing as our existing working capital is not sufficient to finance our operations and an acquisition program. Thus, our ability to finance future acquisitions will be limited by the availability of additional capital. We may, however, finance acquisitions using our common stock as all or some portion of the consideration. In the event that our common stock does not attain or maintain a sufficient market value or potential acquisition candidates are otherwise unwilling to accept our securities as part of the purchase price for the sale of their businesses, we may be required to utilize more of our cash resources, if available, in order to continue our acquisition program. If we do not have sufficient cash resources through either operations or from debt facilities, our growth could be limited unless we are able to obtain such additional capital. In this regard and in the course of executing our acquisition strategy, we expect to pursue an additional equity offering within the next twelve months.

 

 

Accounting policies, methods and estimates are an integral part of the consolidated financial statements prepared by management and are based upon management's current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management's current judgments. While there are a number of accounting policies, methods and estimates that affect our financial statements, the areas that are particularly significant include the assessment of the recoverability of long-lived assets, specifically goodwill, acquired intangibles, and revenue recognition.

We follow 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 that we 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 we 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, we will perform our annual impairment test during our fiscal fourth quarter unless events or circumstances indicate an impairment may have occurred before that time.

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

We follow the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes accounting standards for the impairment of long-lived assets such as property, plant and equipment and intangible assets subject to amortization. We review long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, we estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

We recognize revenue on a gross basis, in accordance with EITF 99-19, "Reporting Revenue Gross versus Net", as a result of the following: We are the primary obligor responsible for providing the service desired by the customer and are responsible for fulfillment, including the acceptability of the service(s) ordered or purchased by the customer. We, at our sole discretion, set the prices charged to our customers, and are not required to obtain approval or consent from any other party in establishing our prices. We have multiple suppliers for the services we sell to our customers, and have 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, we determine the nature, type, characteristics, and specifications of the service(s) ordered by the customer. We also assume credit risk for the amount billed to the customer.

 

 

Our exposure to market risk for changes in interest rates relates primarily to our short-term cash investments and our line of credit. We are averse to principal loss and ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. We invest our excess cash in institutional money market accounts. We do not use interest rate derivative instruments to manage our exposure to interest rate changes. If market interest rates were to change by 10% from the levels at December 31, 2007, the change in interest expense would have had an immaterial impact on our results of operations and cash flows.

 

An evaluation of the effectiveness of our "disclosure controls and procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of March 31, 2008 was carried out by our management under the supervision and with the participation of our Chief Executive Officer ("CEO") who also serves as our Chief Financial Officer ("CFO"). Based upon that evaluation, our CEO/CFO concluded that, as of March 31, 2008, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our CEO/CFO, as appropriate to allow timely decisions regarding disclosure. There were no changes to our internal control over financial reporting during the fiscal quarter ended March 31, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

From time to time, our operating subsidiary, Airgroup, is involved in legal matters or named as a defendant in legal actions arising in its ordinary course of business. Management believes that these matters will not have a material adverse effect on our financial statements.

 

 

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.