Daseke, Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2017


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

For the transition period from ________ to _________

DASEKE, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or Other Jurisdiction of Incorporation)	001-37509 (Commission File Number)	47-3913221 (IRS Employer Identification No.)

15455 Dallas Parkway, Suite 440 Addison, Texas		75001
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (972) 248-0412 Not applicable (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ☒ No ☐

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


☐ Large accelerated filer				☒ Accelerated filer
☐ Non-accelerated filer (Do not check if a smaller reporting company)
☐ Smaller reporting company				☒ Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Common shares of the registrant outstanding at November 6, 2017 were 44,392,349.

Table of Contents

DASEKE, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2017

INDEX


		Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)		1
Consolidated Balance Sheets		1
Consolidated Statements of Operations and Comprehensive Income (Loss)		2
Consolidated Statement of Changes in Stockholders' Equity		3
Consolidated Statements of Cash Flows		4
Notes to Consolidated Financial Statements		6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		51
Item 4. Controls and Procedures		51
Part II. Other Information
Item 1. Legal Proceedings		53
Item 1A. Risk Factors		53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		53
Item 6. Exhibits Index		54
Signatures		55

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this Report) of Daseke, Inc. (Daseke or the Company) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding the Company’s future financial results, operating results, business strategies, projected costs, management’s plans and objectives for future acquisitions, and industry trends.

These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. Accordingly, forward-looking statements should not be relied upon as representing the Company’s views as of any subsequent date, and the Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

Forward-looking statements are subject to risks and uncertainties (many of which are beyond our control) that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, general economic risks (such as downturns in customers’ business cycles and disruptions in capital and credit markets), driver shortages and increases in driver compensation or owner-operator contracted rates, loss of senior management or key operating personnel, our ability to identify and execute future acquisitions successfully, seasonality and the impact of weather and other catastrophic events, fluctuations in the price or availability of diesel fuel, increased prices for, or decreases in the availability of, new revenue equipment and decreases in the value of used revenue equipment, our ability to generate sufficient cash to service all of our indebtedness, restrictions in our existing and future debt agreements, increases in interest rates, the impact of governmental regulations and other governmental actions related to the Company and its operations, litigation and governmental proceedings, and insurance and claims expenses. For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see the Company’s filings with the Securities and Exchange Commission (the SEC), particularly the section titled “Risk Factors” in the Company’s Current Report on Form 8-K, filed with the SEC on March 3, 2017, as amended on March 16, 2017 and May 4, 2017.

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Part I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)


	September 30,		December 31,
	2017		2016
ASSETS
Current assets:
Cash and cash equivalents	$	112,510	$	3,695
Accounts receivable, net of allowance of $382 and $321 at September 30, 2017 and December 31, 2016, respectively		106,081		54,177
Drivers’ advances and other receivables		2,809		2,632
Current portion of net investment in sales-type leases		6,022		3,516
Parts supplies		4,365		1,467
Income tax receivable		111		719
Prepaid and other current assets		20,321		13,504
Total current assets		252,219		79,710

Property and equipment, net		369,199		318,747
Intangible assets, net		77,541		71,653
Goodwill		139,889		89,035
Other long-term assets		18,573		11,090
Total assets		857,421		570,235

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Checks outstanding in excess of bank balances		1,479		1,166
Accounts payable		12,493		4,788
Accrued expenses and other liabilities		24,660		16,104
Accrued payroll, benefits and related taxes		12,027		7,835
Accrued insurance and claims		10,248		9,840
Current portion of long-term debt		26,514		52,665
Total current liabilities		87,421		92,398

Line of credit		—		6,858
Long-term debt, net of current portion		395,841		208,372
Deferred tax liabilities		114,900		92,815
Other long-term liabilities		1,342		286
Subordinated debt		—		66,443
Total liabilities		599,504		467,172

Commitments and contingencies (Note 15)

Stockholders’ equity:
Series A convertible preferred stock, $0.0001 par value; 10,000,000 shares authorized; 650,000 shares issued with liquidation preference of $65,000		65,000		—
Series B convertible preferred stock, $0.01 par value; 75,000 shares authorized; zero and 64,500 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		—		1
Common stock, par value $0.0001 per share; 250,000,000 shares authorized, 44,480,232 and 20,980,961 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		4		1
Additional paid-in-capital		222,102		117,807
Accumulated deficit		(30,221)		(14,694)
Accumulated other comprehensive income (loss)		1,032		(52)
Total stockholders’ equity		257,917		103,063
Total liabilities and stockholders’ equity	$	857,421	$	570,235

The accompanying notes are an integral part of the consolidated financial statements.

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DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except share and per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Revenues:
Freight	$	171,245	$	135,415	$	446,454	$	398,466
Brokerage		34,198		25,977		83,723		68,358
Logistics		7,871		—		10,571		—
Fuel surcharge		18,008		12,756		48,331		34,562
Total revenue		231,322		174,148		589,079		501,386

Operating expenses:
Salaries, wages and employee benefits		64,955		49,298		174,253		149,861
Fuel		24,734		17,296		64,423		49,076
Operations and maintenance		35,132		27,874		86,332		72,933
Communications		539		370		1,491		1,208
Purchased freight		61,598		42,541		148,945		120,501
Administrative expenses		8,619		5,221		24,019		17,711
Sales and marketing		488		435		1,425		1,280
Taxes and licenses		2,963		2,268		7,855		6,946
Insurance and claims		6,351		5,065		15,516		13,648
Acquisition-related transaction expenses		773		—		2,255		18
Depreciation and amortization		19,805		16,998		53,758		50,515
(Gain) loss on disposition of revenue property and equipment		(339)		(495)		(513)		158
Impairment of revenue property and equipment		—		1,195		—		1,195
Total operating expenses		225,618		168,066		579,759		485,050
Income from operations		5,704		6,082		9,320		16,336

Other (income) expense:
Interest income		(76)		(4)		(130)		(40)
Interest expense		8,624		6,724		21,064		17,521
Write-off of unamortized deferred financing fees		—		—		3,883		—
Other		(32)		(64)		(247)		(266)
Total other expense		8,516		6,656		24,570		17,215

Loss before provision (benefit) for income taxes		(2,812)		(574)		(15,250)		(879)
Provision (benefit) for income taxes		(2,862)		683		(3,448)		607
Net income (loss)		50		(1,257)		(11,802)		(1,486)

Other comprehensive income (loss):
Unrealized income (loss) on interest rate swaps		—		61		52		(1)
Foreign currency translation adjustments		526		—		1,032		—
Comprehensive income (loss)		576		(1,196)		(10,718)		(1,487)

Net income (loss)		50		(1,257)		(11,802)		(1,486)
Less dividends to Series A convertible preferred stockholders		(1,225)		—		(2,919)		—
Less dividends to Series B convertible preferred stockholders		—		(1,243)		(806)		(3,729)
Net loss attributable to common stockholders	$	(1,175)	$	(2,500)	$	(15,527)	$	(5,215)

Net loss per common share:
Basic and Diluted	$	(0.03)	$	(0.12)	$	(0.45)	$	(0.25)
Weighted-average common shares outstanding:
Basic and Diluted		39,359,523		20,980,961		34,790,861		20,980,961

Dividends declared per Series A convertible preferred share	$	1.91	$	—	$	2.59	$	—
Dividends declared per Series B convertible preferred share	$	—	$	18.75	$	12.50	$	18.75

The accompanying notes are an integral part of the consolidated financial statements.

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DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2017

(Unaudited)

(In thousands, except share data)


	Series A Convertible			Series B Convertible										Accumulated
	Preferred Stock			Preferred Stock			Common Stock							Other
					Par			Par		Additional		Accumulated		Comprehensive
	Shares	Amount		Shares	Value		Shares	Value		Paid- In Capital		Deficit		Income (Loss)		Total
Balance, January 1, 2017 as previously reported	—	$	—	64,500	$	1	145,495	$	1	$	117,807	$	(14,694)	$	(52)	$	103,063
Effect of reverse acquisition	—		—	—		—	20,835,466		1		—		—		—		1
Balance at January 1, 2017	—		—	64,500		1	20,980,961		2		117,807		(14,694)		(52)		103,064
Income on interest rate swaps	—		—	—		—	—		—		—		—		52		52
Series B convertible preferred stock dividend	—		—	—		—	—		—		—		(806)		—		(806)
Repurchase of common shares	—		—	—		—	(3,616,781)		(1)		(36,167)		—		—		(36,168)
Conversion of Series B convertible preferred stock to common shares	—		—	(64,500)		(1)	9,301,150		1		—		—		—		—
Shares assumed by legal acquirer	—		—	—		—	11,050,630		1		83,639		—		—		83,640
Settlement of legal acquirer transaction costs	—		—	—		—	—		—		(19,063)		—		—		(19,063)
Issuance of Series A convertible preferred stock	650,000		65,000	—		—	—		—		—		—		—		65,000
Issuance of common stock	—		—	—		—	6,764,272		1		74,685		—		—		74,686
Series A convertible preferred stock dividend	—		—	—		—	—		—		—		(2,919)		—		(2,919)
Stock-based compensation expense	—		—	—		—	—		—		1,201		—		—		1,201
Foreign currency translation adjustments	—		—	—		—	—		—		—		—		1,032		1,032
Net loss	—		—	—		—	—		—		—		(11,802)		—		(11,802)
Balance at September 30, 2017	650,000	$	65,000	—	$	—	44,480,232	$	4	$	222,102	$	(30,221)	$	1,032	$	257,917

The accompanying notes are an integral part of the consolidated financial statements.

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DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine months ended
	September 30,
	2017		2016
Cash flows from operating activities
Net loss	$	(11,802)	$	(1,486)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation		49,109		45,973
Amortization of intangible assets		4,649		4,542
Amortization of deferred financing fees		1,330		934
Write-off of deferred financing fees		3,883		—
Stock-based compensation expense		1,201		—
Deferred taxes		(4,849)		(245)
Bad debt expense		347		176
Non-cash interest expense		92		805
(Gain) loss on disposition of property and equipment		(513)		158
Deferred gain recognized on sales-type leases		(793)		(532)
Impairment of revenue equipment		—		1,195
Changes in operating assets and liabilities
Accounts receivable		(28,567)		(7,156)
Drivers’ advances and other receivables		547		(274)
Payments received on sales-type leases		3,774		2,776
Other current assets		(339)		3,524
Accounts payable		2,911		894
Accrued expenses and other liabilities		5,478		(2,176)
Net cash provided by operating activities		26,458		49,108

Cash flows from investing activities
Purchase of property and equipment		(15,565)		(3,143)
Proceeds from sale of property and equipment		5,252		4,424
Cash paid in acquisitions, net of cash acquired		(91,133)		—
Net cash provided by (used in) investing activities		(101,446)		1,281

Cash flows from financing activities:
Checks outstanding in excess of bank balances		313		317
Advances on line of credit		543,404		528,664
Repayments on line of credit		(550,261)		(528,603)
Principal payments on and payoff of long-term debt		(231,817)		(59,656)
Proceeds from Term Loan Facility		350,000		14,188
Deferred financing fees		(14,411)		(1,788)
Pay off of subordinated debt		(66,715)		—
Issuance of common stock		128,184		—
Repurchase of common stock		(36,168)		—
Issuance of Series A convertible preferred stock		65,000		—
Series A convertible preferred stock dividends		(1,680)		—
Series B convertible preferred stock dividends		(2,016)		(3,628)
Net cash provided by (used in) financing activities		183,833		(50,506)

Effect of exchange rates on cash and cash equivalents		(30)		—

Net increase (decrease) in cash and cash equivalents		108,815		(117)
Cash and cash equivalents – beginning of period		3,695		4,886
Cash and cash equivalents – end of period	$	112,510	$	4,769

The accompanying notes are an integral part of the consolidated financial statements.

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DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Unaudited)

(in thousands)


	Nine months ended
	September 30,
	2017		2016
Supplemental disclosure of cash flow information
Cash paid for interest	$	20,916	$	15,637
Cash paid for income taxes	$	629	$	942

Noncash investing and financing activities
Property and equipment acquired with debt or capital lease obligations	$	13,609	$	32,517
Property and equipment sold for notes receivable	$	412	$	408
Property and equipment transferred to sales-type lease	$	7,042	$	6,193
Assets held for sale returned to property and equipment	$	—	$	351
Sales-type lease returns to property and equipment	$	724	$	1,188
Sales-type lease assets sold for notes receivable	$	21,488	$	18,609
Sales-type lease returns to sales-type lease assets	$	13,795	$	12,026
Common stock issued in acquisitions	$	11,079	$	—
Accrued Series A convertible preferred dividends	$	1,239	$	—
Accrued Series B convertible preferred dividends	$	—	$	1,378

The accompanying notes are an integral part of the consolidated financial statements.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The registrant was originally formed in April 2015 as a special purpose acquisition company (SPAC) under the name Hennessy Capital Acquisition Corp. II (Hennessy). As a SPAC, Hennessy had no operations and its purpose was to go public with the intention of merging with or acquiring an operating company with the proceeds of the SPAC’s initial public offering (the IPO).

On February 27, 2017, Hennessy consummated the Business Combination (as defined and described in Note 2) with Daseke, Inc. Upon consummation of the Business Combination, Daseke, Inc. changed its name to Daseke Companies, Inc. and Hennessy changed its name to Daseke, Inc.

Daseke, Inc. was formed in December 2008 and began operations on January 1, 2009. Daseke is engaged in full service open-deck trucking that specializes primarily in flatbed truckload and heavy haul transportation of specialized items throughout the United States and Canada and into Mexico with trailers. The Company also provides logistical planning and warehousing services to customers. The Company is subject to regulation by the Department of Transportation and various state regulatory authorities. Additionally, due to the recent acquisition of R&R Trucking Holdings, LLC (see Note 3), the Company is also subject to regulations by the Department of Defense and the Department of Energy.

Unless expressly stated otherwise, references to the Company or Daseke refers to Daseke, Inc. and its wholly owned subsidiaries, Hennessy refers to the registrant prior to the closing of the Business Combination, and Private Daseke refers to Daseke, Inc. and its subsidiaries prior to the closing of the Business Combination.

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.

The consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes for the year ended December 31, 2016 as set forth in the Company’s Current Report on Form 8-K/A, filed with the SEC on March 16, 2017.

Principles of Consolidation

The consolidated financial statements include the accounts of Daseke, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in accordance with GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Deferred Financing Fees

In conjunction with obtaining long-term debt, the Company incurred financing costs which are being amortized using the straight-line method, which approximates the effective interest rate method, over the terms of the obligations. As of September 30, 2017 and December 31, 2016, the balance of deferred financing fees was $13.3 million and $4.1 million, respectively, which is included as a reduction of long-term debt, net of current portion in the consolidated balance sheets. Amortization expense was $0.5 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $1.3 million and $0.9 million for the nine months ended September 30, 2017 and 2016, respectively, which is included in interest expense. In February 2017, in conjunction with new term loan financing discussed in Note 9, the Company incurred deferred financing costs of $14.2 million and expensed unamortized deferred financing fees totaling $3.9 million.

Fair Value Measurements

The Company follows the accounting guidance for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures about fair value measurements. The three levels of the fair value framework are as follows:

Level 1 - Quoted market prices in active markets for identical assets or liabilities.

Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 - Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.

A financial asset or liability’s classification within the framework is determined based on the lowest level of input that is significant to the fair value measurement.

The fair value of the Company’s interest rate swaps is determined using cash flow computer models with unobservable inputs, therefore the liability for interest rate swaps is classified within Level 3 of the fair value framework. In conjunction with the Business Combination discussed in Note 2, the Company’s lone interest rate swap was terminated. At December 31, 2016, the fair value of this liability was $51,871 and is classified in accrued expenses and other liabilities on the consolidated balance sheets. The tables below are a summary of the changes in the fair value of this liability for the three and nine months ended September 30, 2017 and 2016 (in thousands):


	2016
Balance at January 1, 2016	$	(124)
Change in fair value		(63)

Balance at June 30, 2016		(187)
Change in fair value		72
Balance at September 30, 2016	$	(115)


	2017
Balance at January 1, 2017	$	(52)
Change in fair value		52

Balance at June 30, 2017		—
Change in fair value		—
Balance at September 30, 2017	$	—

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Stock-Based Compensation

Awards of equity instruments issued to employees and directors are accounted for under the fair value method of accounting and recognized in the consolidated statements of operations. Compensation cost is measured for all stock-based awards at fair value on the date of grant and recognized using the straight-line method over the service period over which the awards are expected to vest.

Fair value of all time-vested options as of the date of grant is estimated using the Black-Scholes option valuation model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Since the Company does not have a sufficient history of exercise behavior, expected term is calculated using the assumption that the options will be exercised ratably from the date of vesting to the end of the contractual term for each vesting tranche of awards. The risk-free interest rate is based on the U.S. Treasury yield curve for the period of the expected term of the stock option. Expected volatility is calculated using an index of publicly traded peer companies.

Fair values of nonvested stock awards (restricted stock units) are equal to the market value of the common stock on the date of the award with compensation costs amortized over the vesting period of the award.

Segment Reporting

The Company determines its operating segments based on the information utilized by the chief operating decision maker to allocate resources and assess performance. Based on this information, the Company has determined it has twelve operating segments as of September 30, 2017 and eight operating segments as of September 30, 2016 that are aggregated into two reportable segments: Flatbed Solutions, which delivers its services using primarily flatbed transportation equipment to meet the needs of high-volume, time-sensitive shippers, and Specialized Solutions, which delivers transportation and logistics solutions for super heavy haul, high-value customized and over-dimensional loads, many of which require engineering and customized equipment.

Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share reflect the potential dilution of earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the Company’s earnings (loss).

For the three and nine months ended September 30, 2017, shares of the Company’s 7.625% Series A Convertible Cumulative Preferred Stock (Series A Preferred Stock) were not included in the computation of diluted loss per share as their effects were anti-dilutive. For the three and nine months ended September 30, 2017 and 2016, shares of Private Daseke’s Series B Convertible Preferred Stock (Series B Preferred Stock) were not included in the computation of diluted earnings per share as their effects were anti-dilutive. For the three and nine months ended September 30, 2017, there was no dilutive effect from the Merger Agreement earn-out provision (see Note 2) or the outstanding warrants to purchase shares of the Company’s common stock (the common stock purchase warrants).

Common Stock Purchase Warrants

The Company accounts for the issuance of common stock purchase warrants in connection with equity offerings in accordance with the provisions of the Accounting Standards Codification (ASC) 815, Derivatives and Hedging (ASC 815). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). See Note 11 for additional details on the common stock purchase warrants.

The Company assessed the classification of its common stock purchase warrants and determined that such instruments meet the criteria for equity classification at the time of issuance.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Foreign Currency Gains and Losses

The local currency is the functional currency for the Company’s operations in Canada. For these operations, assets and liabilities are translated at the rates of exchange on the consolidated balance sheet date, while income and expense items are translated at average rates of exchange during the period. The resulting gains or losses arising from the translation of accounts from the functional currency into U.S. dollars are included as a separate component of stockholders’ equity in accumulated other comprehensive income (loss) until a partial or complete liquidation of the Company’s net investment in the foreign operation.

From time to time, the Company’s foreign operations may enter into transactions that are denominated in a currency other than their functional currency (U.S. dollars). These transactions are initially recorded in the functional currency of the operating company based on the applicable exchange rate in effect on the date of the transaction. Monthly, these transactions are remeasured to an equivalent amount of the functional currency based on the applicable exchange rate in effect on the remeasurement date. Any adjustment required to remeasure a transaction to the equivalent amount of functional currency is recorded in the consolidated statements of operations of the foreign operating company as a component of foreign exchange gain or loss.

Assets Held for Sale

Assets held for sale is comprised of revenue equipment in our lease purchase program and is recorded as a component of prepaid and other current assets on the consolidated balance sheets. Assets held for sale at September 30, 2017 and December 31, 2016, totaled $7.1 million and $2.8 million, respectively. Assets held for sale are not subject to depreciation, and are recorded at the lower of depreciated carrying value or fair market value less selling costs. The Company expects to sell these assets in its lease purchase program within twelve months of being classified as assets held for sale.

New Accounting Pronouncements

In July 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). ASU 2017-11 provides guidance on accounting for financial instruments with down round features and clarify the deferral of certain provisions in Topic 480. ASU 2017-11 will become effective for annual periods beginning after December 15, 2018 and interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award requires the application of modification accounting. Modification accounting will apply unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. ASU 2017-09 will become effective for annual periods beginning after December 15, 2017 and interim periods within those periods. Early adoption is permitted. The Company does not expect ASU 2017-09 to have a material impact on its consolidated results of operations, financial condition, cash flows, or financial statement disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years beginning December 15, 2019, with early adoption permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017, and applied prospectively. The Company does not expect ASU 2017-04 to have a material impact on its consolidated results of operations, financial condition, cash flows, or financial statement disclosures.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 provides new guidance intended to reduce diversity in practice in how certain cash receipts and payments are classified in the statement of cash flows, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investees. ASU 2016-05 will become effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 31, 2019. Early adoption is permitted. ASU 2016-15 requires application using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.

In June 2016, the FASB issued ASU No. 2016-13, Accounting for Credit Losses (Topic 326). ASU 2016-13 requires the use of an “expected loss” model on certain types of financial instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718). ASU 2016-09 requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. ASU 2016-09 also allows for the Company to repurchase more of the Company’s shares for tax withholding purposes without triggering liability accounting. In addition, ASU 2016-09 allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company adopted this pronouncement on April 1, 2017 and election to account for forfeitures as they occur did not have a material impact on the Company’s consolidated results of operations, financial condition, cash flows or financial statement disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 amends various aspects of existing guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The main difference between previous GAAP and the amended standard is the recognition of lease assets and lease liabilities of lessees on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial position and results of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued updated guidance with ASU 2015-14 and deferred the effective date of ASU 2014-09 by one year. The guidance in ASU 2014-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.

In March 2016, the FASB issued an ASU that further clarifies guidance under ASU 2014-09 with respect to principal versus agent considerations in revenue from contracts with customers. In the second quarter of 2016, the FASB issued two ASUs that provide additional guidance when identifying performance obligations and licenses as well as allowing for certain narrow scope improvements and practical expedients. In May 2017, the FASB issued an ASU that provides guidance on the identification of the customer in a service concession arrangement. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective). The Company plans to adopt this new guidance in the first quarter of 2018 and would apply the modified retrospective method, which may result in a cumulative-effect adjustment to opening retained earnings with an insignificant change to revenue on a go-forward basis. The Company has completed its review of a sample of revenue contracts for all revenue sources and has concluded that the new guidance will not have a material impact on its revenue recognition practices, business processes, systems and controls. The new guidance will result in changes to the timing of recognition for certain revenue streams, namely freight revenue, where a contract has not been completed by the end of a reporting period. Based on a review of our customer shipping arrangements, we currently believe the implementation of this standard will change our revenue recognition policy from recognizing revenue upon shipment completion to recognizing revenue over time based on the progress toward completion of shipments in transit at each period end.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 2 – BUSINESS COMBINATION

On February 27, 2017, Hennessy consummated the merger of Hennessy’s wholly-owned subsidiary with and into Daseke, Inc., with Daseke, Inc. surviving as a direct wholly-owned subsidiary of Hennessy (the Business Combination) pursuant to the Agreement and Plan of Merger, dated December 22, 2016 (the Merger Agreement). The aggregate consideration received by Private Daseke stockholders upon closing was $266.7 million, consisting of newly issued shares of common stock at a value of $10.00 per share. The Merger Agreement contains an earn-out provision through which Private Daseke stockholders could receive up to 15 million additional shares of common stock (with up to 5 million shares payable annually with respect to 2017, 2018 and 2019 performance). The full 15 million shares are only payable if (i) the annualized Adjusted EBITDA (giving effect to acquisitions and as defined in the Merger Agreement) for 2017, 2018 and 2019 is at least $140.0 million, $170.0 million and $200.0 million, respectively, and (ii) the closing share price of the Company’s common stock is at least $12.00, $14.00 and $16.00 for any 20 trading days in a consecutive 30 trading day period in 2017, 2018 and 2019, respectively. For each year, the 5 million earn-out shares will be prorated to the extent the annualized Adjusted EBITDA (giving effect to acquisitions and as defined in the Merger Agreement) exceeds 90% but represents less than 100%, of the applicable earn-out target.

Following the consummation of the Business Combination on February 27, 2017 (the Closing), there were 37,715,960 shares of common stock issued and outstanding, consisting of (i) 26,665,330 shares issued to Private Daseke stockholders pursuant to the Merger Agreement, (ii) 419,669 shares issued in a private placement that closed in conjunction with the Business Combination, (iii) 2,288,043 shares originally issued to Hennessy Capital Partners II LLC (the Sponsor) in a private placement that closed simultaneously with the consummation of the IPO, and (iv) 8,342,918 shares, following redemptions, which shares were originally issued in the IPO. In connection with the Business Combination, $65.0 million of Series A Preferred Stock (650,000 shares) were issued in a private placement.

In conjunction with the Closing, the Company entered into (i) a $350.0 million term loan credit facility (the Term Loan Facility), which consists of a $250.0 million term loan funded on the closing date of the Term Loan Facility and up to $100.0 million of term loans to be funded from time to time under a delayed draw term loan facility, and (ii) an asset-based revolving credit facility (the ABL Facility), in an aggregate maximum credit amount equal to $70.0 million (subject to availability under a borrowing base). See Note 9 for more information regarding the Term Loan Facility and the ABL Facility. Prior to the Closing, the Company had a credit facility consisting of a term loan (Senior Term Loan) and a revolving line of credit (Line of Credit).

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 2 – BUSINESS COMBINATION – (Continued)

The following table is a summary of cash proceeds and utilization of proceeds in the Business Combination (in thousands):


Proceeds

Public share proceeds(1)	$	83,429
Issuance of Series A Preferred Stock		65,000
Term Loan Facility		250,000
Cash(2)		3,209
Total proceeds		401,638

Use of Proceeds

Repayment of Line of Credit(3)		16,717
Repayment of Senior Term Loan(4)		122,724
Repayment of equipment loans(5)		89,488
Repayment of subordinated debt(6)		67,460
Payment of deferred financing fees(7)		14,148
Repurchase Main Street and Prudential shares(8)		36,168
Hennessy transaction costs		19,063
Daseke transaction costs(9)		1,204
Total use of proceeds		366,972

Net cash received	$	34,666

(1) - 8,342,918 public shares outstanding valued at $10.00 per share

(2) - Daseke cash utilized for payment of deferred financing fees and transaction costs

(3) - includes payment of $59 accrued interest recognized in interest expense

(4) - includes payment of $422 accrued interest recognized in interest expense

(5) - includes payment of $731 accrued interest recognized in interest expense

(6) - includes payment of $745 accrued interest recognized in interest expense

(7) - excludes $81 paid subsequent to the Closing

(8) - Hennessy repurchased Private Daseke shares held by Main Street Capital II, LP, Main Street Mezzanine Fund, LP, Main Street Capital Corporation, Prudential Capital Partners IV, L.P., Prudential Capital Partners (Parallel Fund) IV, L.P. and Prudential Capital Partners Management Fund IV, L.P.

(9) - $0.8 million and $0.4 million expensed in fourth quarter 2016 and first quarter 2017, respectively

The Business Combination was accounted for as a reverse merger in accordance with GAAP. Under this method of accounting, Hennessy is treated as the “acquired” company. This determination was primarily based on Private Daseke comprising the ongoing operations of the combined company, Private Daseke’s senior management comprising the senior management of the combined company, and Private Daseke stockholders having a majority of the voting power of the combined company. For accounting purposes, Private Daseke is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of Private Daseke (i.e., a capital transaction involving the issuance of stock by Hennessy for the stock of Private Daseke). Accordingly, the consolidated assets, liabilities and results of operations of Private Daseke are the historical financial statements of the combined company, and Hennessy’s assets, liabilities and results of operations are consolidated with Private Daseke beginning on the acquisition date.

In connection with the Closing, Daseke, Inc. changed its name to Daseke Companies, Inc. and Hennessy Capital Acquisition Corp. II changed its name to Daseke, Inc. Daseke, Inc.’s common stock and warrants began trading under the ticker symbols DSKE and DSKEW, respectively, on February 28, 2017.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 3 – ACQUISITIONS

The Company is a leading consolidator of the open-deck freight market in North America. From its inception in late 2008, the Company has successfully acquired twelve open-deck trucking companies. Negotiations and discussions with potential targets are an integral part of the Company’s operations, and the Company may be in varying stages of the acquisition process, from infancy to very mature, at any point in time.

The following is a summary of the preliminary allocation of the purchase price paid to the fair values of the net assets of the Company’s recent acquisitions (in thousands):


(all amounts in U.S. dollars)
		R&R		Steelman		Schilli	Big Freight
Accounts receivable	$	5,129	$	4,383	$	8,798	$	4,914
Parts supplies		149		90		1,681		—
Prepaid and other current assets		1,515		2,296		4,701		576
Property and equipment		16,887		11,100		41,423		11,492
Goodwill & Intangibles		22,560		14,318		12,989		10,551
Other long-term assets		156		5,013		—		121
Deferred tax liabilities		(5,238)		(2,763)		(14,598)		(3,571)
Accounts payable and other liabilities		(2,920)		(15,612)		(27,634)		(6,294)
Total	$	38,238	$	18,825	$	27,360	$	17,789

The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed at estimated fair values as of the acquisition date, which were based, in part, upon outside preliminary appraisals for certain assets and subject to change when additional information concerning final asset and liability values is obtained.

The Company has not completed its assessments of the fair value of purchased intangible assets for the R&R and Steelman acquisitions, and no value has been allocated to them at this time. The Company has completed its assessments for the Schilli and Big Freight acquisitions and allocated the resulting fair values to intangible assets. The final purchase price allocations may result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill.

R&R Trucking Holdings, LLC

On September 1, 2017 the Company acquired 100% of the outstanding stock of R&R Trucking Holdings, LLC (R&R), based in Duenweg, Missouri. Total consideration paid was $38.4 million, consisting of $24.6 million in cash and the Company assumed and repaid of $13.8 million of long-term debt. The cash consideration was funded through a delayed draw on September 1, 2017 under the Term Loan Facility. The acquisition was a stock purchase, therefore the values assigned to the intangible assets and goodwill are not deductible for tax purposes. Approximately $0.4 million of transaction expenses were incurred in the acquisition, which are not deductible for tax purposes.

The Steelman Companies

On July 1, 2017, the Company acquired 100% of the outstanding stock of The Steelman Companies (Steelman), based in Springfield, Missouri, for consideration of $18.8 million, consisting of $11.2 million in cash and 746,170 shares of Daseke common stock valued at $7.6 million. The fair value of the 746,170 shares issued was determined based on the closing price of the stock on the acquisition close date. The cash consideration was funded through cash on hand. The acquisition was a stock purchase under GAAP. A Section 338(h)(10) election is being filed for certain of the entities acquired which will deem those acquisitions as an asset purchase for tax purposes, therefore approximately $13.0 million of the values assigned to the intangible assets and goodwill are expected to be deductible for tax purposes. Approximately $0.3 million of transaction expenses were incurred in the acquisition, which are not deductible for tax purposes.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 3 – ACQUISITIONS – (Continued)

Schilli Transportation Services, Inc.

On May 1, 2017, the Company acquired 100% of the outstanding stock of Schilli Transportation Services, Inc. and certain of its affiliates (Schilli), based in Remington, Indiana. Total consideration paid was $27.4 million, consisting of $21.0 million in cash, 232,885 shares of Daseke common stock valued at $2.3 million and $4.0 million of long-term debt refinanced by the Company. The fair value of the 232,885 shares issued was determined based on the closing price of the stock on the acquisition close date. The cash consideration was funded through a delayed draw on May 1, 2017 under the Term Loan Facility. The acquisition was a stock purchase, therefore the values assigned to the intangible assets and goodwill are not deductible for tax purposes. Approximately $0.4 million of transaction expenses were incurred in the acquisition, which are not deductible for tax purposes.

Big Freight Systems, Inc.

On May 1, 2017, the Company acquired 100% of the outstanding stock of Big Freight Systems, Inc. (Big Freight), based in Steinbach, Manitoba. Total consideration paid was $16.7 million consisting of $12.4 million in cash, 109,248 shares of Daseke common stock valued at $1.1 million and, the Company assumed approximately $3.2 million of outstanding debt. The fair value of the 109,248 shares issued was determined based on the closing price of the stock on the acquisition close date. Big Freight’s purchase agreement also contains an earn-out for additional cash consideration to be paid on the excess of each of 2017, 2018 and 2019’s earnings before interest, taxes, depreciation and amortization (EBITDA Amount) over 2016’s EBITDA Amount (as defined in the purchase agreement), multiplied by 0.4. A contingent liability of $1.1 million was included in the allocation of the purchase price for this earn-out. The cash consideration was funded through a delayed draw on May 1, 2017 under the Term Loan Facility and cash on hand. The acquisition was a stock purchase, therefore the values assigned to the intangible assets and goodwill are not deductible for tax purposes. Approximately $0.6 million of transaction expenses were incurred in the acquisition, which are not deductible for tax purposes.

Supplemental Pro Forma Information (Unaudited)

The following supplemental pro forma financial information reflects the R&R, Steelman, Schilli and Big Freight acquisitions as if they occurred on January 1, 2016. This pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on January 1, 2016. Further, the pro forma financial information does not purport to project the future operating results of the consolidated company.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016

Pro forma revenue	$	241,135	$	230,092	$	690,449	$	666,014
Pro forma net income (loss)	$	285	$	(1,167)	$	(11,323)	$	810

NOTE 4 – PREPAID AND OTHER CURRENT ASSETS

The components of prepaid expenses and other current assets are as follows as of September 30, 2017 and December 31, 2016 (in thousands).


	2017		2016
Assets held for sale	$	7,112	$	2,812
Other assets		2,529		3,546
Insurance		4,564		2,246
Other prepaids		1,562		1,104
Licensing, permits and tolls		3,031		2,772
Highway and fuel taxes		1,523		1,024
	$	20,321	$	13,504

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 5 – GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price of all acquisitions over the estimated fair value of the net assets acquired. The Company performs an impairment test of goodwill annually as of October 31 or when impairment indicators arise. There was no goodwill impairment identified for the three and nine months ended September 30, 2017. The preliminary summary of changes in goodwill follows for the nine months ended September 30, 2017 (in thousands).


	Flatbed		Specialized		Total
Goodwill balance at December 31, 2016		46,660		42,375		89,035
Goodwill acquired and adjustments to previously recorded goodwill		—		50,207		50,207
Foreign currency translation adjustment		—		647		647
Goodwill balance at September 30, 2017	$	46,660	$	93,229	$	139,889

Intangible assets consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):


	As of September 30, 2017						As of December 31, 2016
	Intangible		Accumulated		Intangible		Intangible		Accumulated		Intangible
	Assets		Amortization		Assets, net		Assets		Amortization		Assets, net
Non-competition agreements	$	10,900	$	(5,175)	$	5,725	$	8,350	$	(3,929)	$	4,421
Customer relationships		59,190		(22,471)		36,719		56,210		(19,078)		37,132
Trade names		34,780		—		34,780		30,100		—		30,100
Foreign currency translation adjustment		—		317		317		—		—		—
Total intangible assets	$	104,870	$	(27,329)	$	77,541	$	94,660	$	(23,007)	$	71,653

As of September 30, 2017, non-competition agreements and customer relationships had weighted average remaining useful lives of 2.63 and 7.81 years, respectively.

Amortization expense for intangible assets with definite lives was $1.8 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively, and $4.6 million and $4.5 million for the nine months ended September 30, 2017 and 2016, respectively. Projected amortization expense for the next five fiscal years ending December 31, 2017, 2018, 2019, 2020 and 2021 will be $6.3 million, $6.5 million, $6.4 million, $5.6 million and $5.1 million, respectively.

NOTE 6 – PROPERTY AND EQUIPMENT

The components of property and equipment are as follows at September 30, 2017 and December 31, 2016 (in thousands):


	2017		2016
Revenue equipment	$	474,544	$	398,394
Buildings and improvements		50,546		43,000
Furniture and fixtures, office and computer equipment and vehicles		17,292		14,421
		542,382		455,815
Accumulated depreciation		(173,183)		(137,068)
	$	369,199	$	318,747

Depreciation expense on property and equipment was $18.0 million and $15.5 million for the three months ended September 30, 2017 and 2016, respectively, and $49.1 million and $46.0 million for the nine months ended September 30, 2017 and 2016, respectively.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 7 – SALES-TYPE LEASES

The Company leases revenue equipment to certain of its owner-operators and accounts for these transactions as sales-type leases. These leases have terms of 30 to 72 months and are collateralized by a security interest in the related revenue equipment. A minimum lease receivable is recorded, net of unearned interest income and deferred gain on sale of the equipment. The gain is recognized as payments are collected, rather than in the period the lease is recorded due to the uncertainty of collection.

The components of the net investment in sales-type leases are as follows at September 30, 2017 and December 31, 2016 (in thousands):


	2017		2016
Minimum lease receivable	$	35,120	$	21,055
Deferred gain		(7,092)		(3,049)
Net minimum lease receivable		28,028		18,006
Unearned interest income		(3,848)		(3,671)

Net investment in sales-type leases		24,180		14,335
Current portion		(6,022)		(3,516)
	$	18,158	$	10,819

The long-term portion of sales-type leases is classified in other long-term assets on the consolidated balance sheets at September 30, 2017 and December 31, 2016.

Gain or loss on disposition of revenue equipment leased to owner-operators is included as a component of purchased freight in the consolidated statements of operations. The gains totaled approximately $0.5 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $0.8 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively.

NOTE 8 – ACCRUED EXPENSES AND OTHER LIABILITIES

The components of accrued expenses and other liabilities are as follows at September 30, 2017 and December 31, 2016 (in thousands):


	2017		2016
Brokerage and escorts	$	6,732	$	3,559
Unvouchered payables		4,892		2,587
Other accrued expenses		5,339		3,956
Owner-operator deposits		4,779		2,032
Interest		255		1,705
Dividends		1,239		1,209
Fuel		995		711
Fuel taxes		429		345
	$	24,660	$	16,104

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 9 – LONG-TERM DEBT

Long-term debt consists of the following at September 30, 2017 and December 31, 2016 (in thousands):


	2017		2016
Senior debt

Line of credit	$	—	$	6,858
Term loan facility		348,462		—
Senior term loan		—		125,682
Equipment term loans		82,668		111,882
Real estate term loan		—		13,772
Capital leases		4,540		13,818
		435,670		272,012
Less current portion		(26,514)		(52,665)
Less unamortized debt issuance costs		(13,315)		(4,117)
Long-term portion		395,841		215,230

Subordinated debt

Main Street Capital Corporation		—		21,660
Prudential Capital Partners		—		21,492
LST Seller notes		—		22,000
DTR Seller notes		—		1,000
BHE Seller notes		—		291
Total subordinated debt		—		66,443

Total long-term debt	$	395,841	$	281,673

Term Loan Facility

In conjunction with the close of the Business Combination on February 27, 2017, the Company entered into the $350.0 million Term Loan Facility under a loan agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the lenders party thereto. The Term Loan Facility consists of (i) a $250.0 million term loan funded on the closing date of the Term Loan Facility (the Closing Date Term Loan) and up to $100.0 million of term loans to be funded from time to time under a delayed draw feature available until February 27, 2018.

The size of the Term Loan Facility could increase from time to time pursuant to an uncommitted incremental facility in an aggregate amount for all such incremental loans and commitments up to the sum of (a) $65.0 million and (b) an uncapped amount based on the maximum first lien, secured and total leverage ratio-based formulas depending upon the security and ranking of the relevant incremental facility. The proceeds from the Closing Date Term Loan were used to partially refinance certain of the Company’s capital leases, purchase money debt, equipment and real estate financings and to pay transaction costs associated with the Business Combination and refinance the Line of Credit and the Senior Term Loan.

The Term Loan Facility has a scheduled maturity date of February 27, 2024. Term loans under the Term Loan Facility are, at the Company’s election from time to time, comprised of alternate base rate loans (an ABR Borrowing) or adjusted LIBOR loans (a Eurodollar Rate Borrowing), with the applicable margins of interest being an alternate base rate (subject to a 2.00% floor) plus 4.50% per annum for ABR Borrowings and LIBOR (subject to a 1.00% floor) plus 5.50% per annum for Eurodollar Rate Borrowings. At September 30, 2017, the average interest rate on the Term Loan Facility was 6.6%.

The Term Loan Facility is secured by all assets of the Company, except those assets collateralizing equipment and certain real estate lenders debt and subject to certain customary exceptions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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NOTE 9 – LONG-TERM DEBT – (Continued)

As amended on August 16, 2017, the Term Loan Facility contains a financial covenant requiring the Company to maintain a consolidated total leverage ratio as of the last day of any fiscal quarter of less than or equal to 4.25 to 1.00 commencing on June 30, 2017, stepping up to 4.75 to 1.00 on September 30, 2017, stepping down to 4.25 to 1.00 on March 31, 2018, stepping down to 4.00 to 1.00 on March 31, 2019 and stepping down to 3.75 to 1.00 on March 31, 2021. Additionally, as amended on August 16, 2017, the Term Loan Facility contains a pro forma total leverage ratio of less than or equal to 4.25 to 1.00 for term loans funded from the delayed draw feature. The consolidated total leverage ratio is defined as the ratio of (i) consolidated total debt minus unrestricted cash and cash equivalents and cash and cash equivalents restricted in favor of the administrative agent and the lenders not to exceed $5 million, to (ii) consolidated adjusted EBITDA for the trailing 12 month period (with customary add-backs permitted to consolidated adjusted EBITDA, including in respect of synergies and cost-savings reasonably identifiable and factually supportable that are anticipated to be realized in an aggregate amount not to exceed 25% of consolidated adjusted EBITDA and subject to other customary limitations).

The Term Loan Facility permits voluntarily prepayments of borrowings. In certain circumstances (subject to exceptions, exclusions and, in the case of excess cash flow, step-downs described below), the Company may also be required to make an offer to prepay the Term Loan Facility if it receives proceeds as a result of certain asset sales, debt issuances, casualty or similar events of loss, or if it has excess cash flow (defined as an annual amount calculated using a customary formula based on consolidated adjusted EBITDA, including, among other things, deductions for (i) the amount of certain voluntary prepayments of the Term Loan Facility and (ii) the amount of certain capital expenditures, acquisitions, investments and restricted payments). The percentage of excess cash flow that must be applied as a mandatory prepayment is 50% with respect to the initial excess cash flow period (the fiscal year ending on December 31, 2018) and will be 50%, 25% or 0% for future excess cash flow periods depending upon the first lien leverage ratio.

The Term Loan Facility contains (i) certain customary affirmative covenants that, among other things, require compliance with applicable laws, periodic financial reporting and notices of material events, payment of taxes and other obligations, maintenance of property and insurance, and provision of additional guarantees and collateral, and (ii) certain customary negative covenants that, among other things, restrict the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, mergers, consolidations, liquidations and dissolutions, asset sales, acquisitions, the payment of distributions, dividends, redemptions and repurchases of equity interests, transactions with affiliates, prepayments and redemptions of certain other indebtedness, burdensome agreements, holding company limitations, changes in fiscal year and modifications of organizational documents.

ABL Facility

Also, in conjunction with the Closing on February 27, 2017, the Company entered into a five-year, senior secured asset-based revolving line of credit with an aggregate maximum credit amount equal to $70.0 million (subject to availability under a borrowing base equal to 85% of the Company’s eligible accounts receivable, 80% of the Company’s eligible unbilled accounts receivable and 50% of parts supplies) under a credit agreement with PNC Bank, National Association, as administrative agent and the lenders party thereto. The size of the ABL Facility could increase from time to time pursuant to an uncommitted accordion by an aggregate amount for all such increases of up to $30 million. The ABL Facility matures on February 27, 2022. The ABL Facility also provides for the issuance of letters of credit subject to certain restrictions and a sublimit of $20 million, as defined in the credit agreement. As of September 30, 2017, the Company had no borrowings and $8.9 million in letters of credit outstanding under the ABL Facility and could incur approximately $70.0 million of additional indebtedness under the ABL Facility.

Borrowings under the ABL Facility bear interest at rates based upon the Company’s fixed charge coverage ratio and, at the Company’s election from time to time, either a base rate plus an applicable margin or an adjusted LIBOR rate plus an applicable margin. Margins on the ABL Facility are adjusted, if necessary to the applicable rates set forth in the following table corresponding to the fixed charge coverage ratio for the trailing 12 month period on the last day of the most recently completed fiscal quarter.


Fixed Charge Coverage Ratio	Base Rate Margins		LIBOR Rate Margins
Less than 1.25 to 1.00	2.25	%	3.25	%
Greater than or equal to 1.25 to 1.00, but less than 1.50 to 1.00	1.75	%	2.75	%
Greater than or equal to 1.50 to 1.00, but less than 1.75	1.25	%	2.25	%
Greater than or equal to 1.75 to 1.00	0.75	%	1.75	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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NOTE 9 – LONG-TERM DEBT – (Continued)

The ABL Facility is secured by all of the Company’s U.S. based accounts receivable, parts supplies, cash and cash equivalents excluding proceeds of Term Loan Facility, securities and deposit accounts and other general assets not included in the Term Loan Facility collateral.

The ABL Facility contains (i) a financial covenant similar to the consolidated total leverage ratio required under the Term Loan Facility (but, as amended on August 31, 2017, in any event requiring a leverage ratio of less than or equal to 4.75 to 1.00 for the fiscal quarter ended September 30, 2017, stepping down to 3.75 to 1.00 on March 31, 2021, in the same increments as the Term Loan Facility noted above) and (ii) during any period after a default or event of default or after excess availability falling below the greater of (x) $15.0 million and (y) 20% of the maximum credit amount, continuing until such time as no default or event of default has existed and excess availability has exceeded such amounts for a period of 60 consecutive days, a financial covenant requiring the Company to maintain a minimum consolidated fixed charge coverage ratio of 1.00x, tested on a quarterly basis. The Company’s fixed charge coverage ratio is defined as the ratio of (1) consolidated adjusted EBITDA minus unfinanced capital expenditures, cash taxes and cash dividends or distributions, to (2) the sum of all funded debt payments for the four quarter period then ending (with customary add-backs permitted to consolidated adjusted EBITDA).

The ABL Facility contains affirmative and negative covenants similar to those in the Term Loan Facility, together with such additional terms as are customary for a senior secured asset-based revolving credit facility.

As of September 30, 2017, the Company was in compliance with all covenants contained in the Term Loan and ABL Facilities.

Line of Credit and Senior Term Loan

Prior to the Closing, the Company had a credit facility under a credit agreement with PNC, as agent, and other lenders party thereto (the PNC Credit Agreement), which included a revolving line of credit and a term loan. In August 2016, the PNC Credit Agreement was amended, increasing the borrowing capacity to an aggregate $212.1 million from $150.0 million, consisting of a $75.0 million revolving line of credit and a $137.1 million senior term loan. In conjunction with the amendment, the Company refinanced $73.0 million of equipment notes with various lenders under the PNC Credit Agreement. The line of credit was subject to a borrowing base equal to 85% of the Company’s eligible accounts receivable, 80% of the Company’s eligible unbilled accounts receivable and 50% of parts supplies.

As of December 31, 2016, borrowings on the line of credit bore interest at either (a) the Libor Rate (as defined in the credit agreement), plus a margin of 3.25%, or (b) the Base Rate (as defined in the credit agreement), plus a margin of 2.25%. The PNC revolving credit facility also provided for the issuance of up to $10 million in letters of credit. As of December 31, 2016, the Company had outstanding letters of credit thereunder totaling $4.1 million. Total availability under the line of credit was $33.0 million as of December 31, 2016. At December 31, 2016, the average interest rate on the line of credit was 4.5%.

As of December 31, 2016, the Senior Term Loan was due in monthly installments of $1,690,154, plus applicable interest at either (a) the Libor Rate (as defined in the credit agreement), plus a margin of 4.00%, or (b) the Base Rate (as defined in the PNC Credit Agreement), plus a margin of 3.00%. At December 31, 2016, the average interest rate on the Senior Term Loan was 4.4%.

Prior to the amendment in August 2016, debt on the Senior Term Loan had interest rates of either (a) the Libor Rate (as defined in the credit agreement), plus a margin of 3.75%, or (b) the Base Rate (as defined in the credit agreement), plus a margin of 2.75%.

Margins on the line of credit and Senior Term Loan were adjusted, if necessary to the applicable rates set forth in the following table corresponding to the fixed charge coverage ratio for the trailing twelve month period on the last day of the most recently completed fiscal quarter.


	Base Rate Margins				LIBOR Rate Margins
Fixed Charge Coverage Ratio	Line of Credit		Senior Term Loan		Line of Credit		Senior Term Loan
Less than 1.25 to 1.00	2.25	%	3.00	%	3.25	%	4.00	%
Greater than or equal to 1.25 to 1.00, but less than 1.50 to 1.00	1.75	%	2.50	%	2.75	%	3.50	%
Greater than or equal to 1.50 to 1.00, but less than 1.75	1.25	%	2.00	%	2.25	%	3.00	%
Greater than or equal to 1.75 to 1.00	0.75	%	1.50	%	1.75	%	2.50	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 9 – LONG-TERM DEBT – (Continued)

The PNC Credit Agreement also contained a subjective acceleration clause, which permitted the lender to demand payment in the event of a material adverse change. Only the scheduled principal payments are being presented in the current portion of long-term obligations as the lender did not exercise the acceleration clause.

Borrowings under the PNC Credit Agreement were secured by all assets of the Company, except those assets collateralizing equipment and certain real estate lenders debt. The PNC Credit Agreement contained certain financial covenants, including a minimum fixed charge coverage ratio, a senior secured debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) ratio and a funded debt to consolidated EBITDA ratio.

Additionally, the PNC Credit Agreement contained negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements. As of December 31, 2016, the Company was in compliance with all covenants contained in the PNC Credit Agreement.

The PNC Credit Agreement contained a required principal payment based on excess cash flow (as defined) beginning in fiscal 2016 and due 15 days following the delivery of the audited financial statements to PNC. No excess cash flow payment was required prior to refinancing in conjunction with the Business Combination.

Equipment Term Loans and Mortgages

As of September 30, 2017, the Company had term loans collateralized by equipment in the aggregate amount of $79.0 million with thirty (30) lenders (Equipment Term Loans). The Equipment Term Loans bear interest at rates ranging from 1.5% to 6.8%, require monthly payments of principal and interest and mature at various dates through July 2024. Certain of the Equipment Term Loans contain conditions, covenants, representations and warranties, events of default, and indemnification provisions applicable to the Company and certain of its subsidiaries that are customary for equipment financings, including, but not limited to, limitations on the incurrence of additional debt and the prepayment of existing indebtedness, certain payments (including dividends and other distributions to persons not party to its credit facility) and transfers of assets.

The Company had a construction loan with a balance of $8.8 million incurred to finance the construction of a new headquarters and terminal in Arlington, Washington which was repaid in February 2017 in conjunction with the Business Combination. See Note 2 for additional details on the Business Combination. The construction loan was collateralized by such property and buildings. The initial principal amount on February 19, 2015 of $7.8 million was increased on April 26, 2016 to $8.8 million. The construction loan earned interest at 3.25% payable monthly.

As of September 30, 2017, the Company has a bank mortgage loan with a balance of $3.7 million incurred to finance the construction of the headquarters and terminal in Redmond, Oregon. The mortgage loan is collateralized by such property and buildings. The mortgage is payable in monthly installments of $15,776, including interest at 3.7% through November 2017.

The interest rate and monthly payments will be adjusted on November 1, 2017 and 2020 to a rate of 2.5%, plus the three-year advance rate published by the Federal Home Loan Bank of Seattle in effect 45 days prior to November 1, 2017 and 2020 (which will not be less than 3.7%). The bank mortgage loan matures November 1, 2023.

Real Estate Term Loan

In April 2016, the Company refinanced $14.2 million of its Line of Credit with bank debt (Real Estate Term Loan) utilizing nine wholly-owned real estate assets which previously served as collateral on the PNC Term Loan. The Real Estate Term Loan was subordinate to the PNC Credit Agreement and Equipment Term Loans and was due in monthly installments of $59,109 (based on 20 year amortization schedule), plus applicable interest at either (a) the Libor Rate (as defined in the loan agreement), plus a margin of 2.75%, or (b) the Default Rate (as defined in the loan agreement). The Company incurred debt issuance costs of $0.4 million, which were being amortized to interest expense over five years using the straight-line method. In conjunction with the Business Combination, the Real Estate Term Loan was repaid and all unamortized debt issuance costs written off to interest expense. See Note 2 for additional details on the Business Combination.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 9 – LONG-TERM DEBT – (Continued)

Capital Leases

The Company leases certain equipment under long-term capital lease agreements that expire on various dates through June 2024. As of September 30, 2017 and December 31, 2016, the book value of the property and equipment recorded under capital leases was $5.6 million and $24.1 million, net of accumulated depreciation of $5.0 million and $17.0 million, respectively. Depreciation expense related to leased equipment was $0.6 million and $1.8 million for the three months ended September 30, 2017 and 2016, respectively, and $1.8 million and $5.3 million for the nine months ended September 30, 2017 and 2016, respectively.

Main Street Capital Corporation

In 2013, Main Street Capital Corporation (Main Street) loaned the Company $20.0 million under a senior subordinated secured term loan (the Main Street Loan). The Main Street Loan was subordinate to the PNC Credit Agreement and Equipment Term Loans. Interest payments were due monthly through maturity at the rate of 12% per annum. Paid-in kind (PIK) interest, at a rate of 2.5% per annum, could have been paid monthly or accrued and added to the principal balance quarterly, at the option of the Company. For the nine months ended September 30, 2017 and year ended December 31, 2016, $0.1 million and $0.5 million, respectively, of accrued PIK interest was added to the principal balance and accrued PIK interest of $0.1 million was recorded in accrued expenses as of December 31, 2016. In conjunction with Business Combination, the Main Street Loan was repaid in February 2017. See Note 2 for additional details on the Business Combination.

Prudential Capital Partners

In 2013, the Company issued senior secured subordinated promissory notes in the initial aggregate principal amount of $20.0 million (PCP Subordinated Notes) to Prudential Capital Partners IV, L.P., Prudential Capital Partners (Parallel Fund) IV, L.P. and Prudential Capital Partners Management Fund IV, L.P. (collectively, the PCP Investors) pursuant to the Securities Purchase Agreement, dated as of November 12, 2013, by and among the Company, certain of its subsidiaries and the PCP Investors. The PCP Subordinated Notes were subordinate to the PNC Credit Agreement and Equipment Term Loans. Interest payments were due monthly through maturity at the rate of 12% per annum. PIK interest, at a rate of 2.5% per annum, could have been paid monthly or accrued and added to the principal balance quarterly, at the option of the Company. For the nine months ended September 30, 2017 and year ended December 31, 2016, $0.1 million and $0.5 million, respectively, of accrued PIK interest was added to the principal balance and $0.1 million accrued PIK interest was recorded in accrued expenses as of December 31, 2016. In conjunction with Business Combination, the PCP Subordinated Notes were repaid in February 2017. See Note 2 for additional details on the Business Combination.

The Main Street Loan and the PCP Subordinated Notes (Subordinated Debt) were collateralized by all assets of the Company, except those assets collateralizing the Equipment Term Loans. The Main Street Loan and the PCP Subordinated Notes contained certain financial covenants, including a minimum fixed charge coverage ratio, a senior secured debt to consolidated EBITDA ratio and a funded debt to consolidated EBITDA ratio. Additionally, they contained negative covenants limiting, among other things, additional indebtedness, capital expenditures, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements. The Main Street Loan and the PCP Subordinated Notes were subject to a make-whole payment of 5.0% of the prepayment amount if such prepayment was made before the third anniversary of the agreements.

LST Seller

As part of the consideration paid to the seller of Lone Star Transportation, LLC and affiliates (LST), Daseke Lone Star, Inc. (a subsidiary of the Company) issued $22.0 million of subordinated notes (the LST Seller Notes). The LST Seller Notes bore interest at 10% payable monthly and were subordinate to the PNC Credit Agreement, Main Street Loan and PCP Subordinated Notes. In conjunction with the Business Combination, the LST Seller Notes were repaid in February 2017. See Note 2 for additional details on the Business Combination.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 9 – LONG-TERM DEBT – (Continued)

DTR Sellers

As part of the consideration paid to the sellers of Davenport Transport & Rigging, LLC, LST issued $1.0 million of subordinated notes (the DTR Seller Notes). The DTR Seller Notes bore interest at 5% payable monthly and were subordinate to the PNC Credit Agreement, Main Street Loan and PCP Subordinated Notes. In conjunction with Business Combination, the DTR Seller Notes were repaid in February 2017. See Note 2 for additional details on the Business Combination.

BHE Sellers

As part of the consideration paid to the sellers of Bulldog Hiway Express (BHE), the Company issued $2.0 million of subordinated notes (the BHE Seller Notes). The BHE Seller Notes bore interest at 7% payable monthly. On December 19, 2016, a portion of the outstanding principal amount under the BHE Seller Notes was forgiven in exchange for the payment by the Company of certain pension liabilities of BHE. The BHE Seller Notes were subordinate to the PNC Credit Agreement and the Main Street Loan and the PCP Subordinated Notes. In conjunction with Business Combination, the BHE Seller Notes were repaid in February 2017. See Note 2 for additional details on the Business Combination.

Future Payments

Future principal payments on long-term debt as of September 30, 2017 are as follows (in thousands):


	Term Loan Facility		Equipment Term Loans		Capital Leases		Total

2017	$	3,485	$	20,875	$	2,387	$	26,747
2018		3,485		20,802		1,410		25,697
2019		3,485		17,226		822		21,533
2020		3,485		11,516		152		15,153
2021		3,485		5,037		61		8,583
Thereafter		331,037		7,212		81		338,330

Total minimum lease payments						4,913
Loan amount attributable to interest						(373)		(373)

Total (Present value of minimum lease payments on capital leases)	$	348,462	$	82,668		4,540	$	435,670
Less current portion						(2,154)
Long-term capital leases					$	2,386

NOTE 10 – INCOME TAXES

The Company’s statutory federal tax rate is 35%. State tax rates vary among states and range from approximately 1% to 6%, although some state rates are higher and a small number of states do not impose an income tax. The effective tax rates for the three months ended September 30, 2017 and 2016 were 101.8% and (119.0%), respectively, and 22.6% and (69.1%) for the nine months ended September 30, 2017 and 2016, respectively. The difference between the Company’s effective tax rate and the federal statutory rate primarily results from state income taxes and nondeductible expenses, including the effect of the per diem pay structure for drivers, transaction expenses and withdrawn Private Daseke IPO expenses. There were no changes in uncertain tax positions during the three and nine months ended September 30, 2017. As a result of the Business Combination, the Company had an Internal Revenue Code of 1986, as amended, section 382 ownership change, which will not impair the Company’s ability to utilize the net operating losses.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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NOTE 11 – STOCKHOLDERS’ EQUITY

Common Stock

On September 19, 2017, the Company and certain stockholders of the Company (the Selling Stockholders) entered into an underwriting agreement (the Underwriting Agreement) with Stifel, Nicolaus & Company, Incorporated and Cowen and Company, LLC, as representatives of the several underwriters named therein (collectively, the Underwriters), in connection with an underwritten public offering (the Offering) of 5,292,000 shares of the Company’s common stock, par value $0.0001 per share, including 4,882,167 shares of common stock to be sold by the Company and 409,833 shares of common stock to be sold by the Selling Stockholders, at a price to the public of $12.00 per share ($11.34 per share net of underwriting discounts and commissions). Pursuant to the Underwriting Agreement, the Company granted the Underwriters a 30-day option to purchase up to an additional 793,800 shares of common stock, which was exercised in full on September 20, 2017 and closed simultaneously with the Offering on September 22, 2017. Net proceeds received by the Company from its sale of 5,675,967 shares of common stock were approximately $63.6 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. As described in the prospectus supplement, dated September 19, 2017, filed with the SEC on September 20, 2017, the Company intends to use the net proceeds from the Offering for general corporate purposes, which may include, among other things, working capital, capital expenditures, debt repayment or refinancing or the financing of possible future acquisitions.

Preferred Stock

At the Closing, the Company issued 650,000 shares of Series A Preferred Stock for cash of $65.0 million. Proceeds from the sales were part of the consideration received as part of a recapitalization and reverse acquisition completed in the Business Combination. See Note 2 for additional details about the Business Combination. The par value of Series A Preferred Stock is $0.0001 per share. Additional features of this preferred stock are as follows:

Under the Certificate of Designations, Preferences, Rights and Limitations of the Series A Preferred Stock (the Certificate of Designations), each share of Series A Preferred Stock will be convertible, at the holder’s option at any time, initially into approximately 8.6957 shares of the Company’s common stock (assuming a conversion price of approximately $11.50 per share), subject to specified adjustments as set forth in the Certificate of Designations. If any holder elects to convert its Series A Preferred Stock after the seven-year anniversary of the issue date, if the then-current Conversion Price (as defined in the Certificate of Designations) exceeds the Weighted Average Price (as defined in the Certificate of Designations) for the common stock during any ten consecutive Trading Days (as defined in the Certificate of Designations), at its option by delivery of a Notice of Conversion in accordance with Section 8(b) of the Certificate of Designations no later than five business days following such tenth consecutive Trading Day, to convert any or all of such holder’s shares of Series A Preferred Stock into, at the Company’s sole discretion, either common stock, cash or a combination of common stock and cash; provided, that the Company shall provide such converting holder notice of its election within two Trading Days of receipt of the Notice of Conversion; provided further, that in the event the Company elects to issue common stock for all or a portion of such conversion, the Conversion Rate for such conversion (subject to the limitations set forth in Section 11 of the Certificate of Designations) shall mean the quotient of the Liquidation Preference (as defined in the Certificate of Designations) divided by the average Weighted Average Price for the common stock during the 20 consecutive Trading Days commencing on the Trading Day immediately following the Trading Day on which the Company provided such notice. If the Company does not elect a settlement method prior to the deadline set forth in the Certificate of Designations, the Company shall be deemed to have elected to settle the conversion entirely in common stock. Based on the assumed conversion rate, a total of 5,652,171 shares of Series A Preferred Stock would be issuable upon conversion of all of the currently outstanding shares of Series A Preferred Stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 11 – STOCKHOLDERS’ EQUITY – (Continued)

On or after the third anniversary of the initial issuance date but prior to the fifth anniversary of the initial issuance date, the Company will have the right, at its option, to give notice of its election to cause all outstanding shares of the Series A Preferred Stock to be automatically converted into shares of the Company’s common stock at the then-effective conversion rate, if the Weighted Average Price of Company’s common stock equals or exceeds 140% of the then-current conversion price for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days. On or after the fifth anniversary of the initial issuance date but prior to the seventh anniversary of the initial issuance date, the Company will have the right, at its option, to give notice of its election to cause all outstanding shares of the Series A Preferred Stock to be automatically converted into shares of Company’s common stock at the then-effective conversion rate, if the Weighted Average Price of Company’s common stock equals or exceeds 115% of the then-current conversion price for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days. On or after the seventh anniversary of the initial issuance date, the Company will have the right, at its option, to give notice of its election to cause all outstanding shares of the Series A Preferred Stock to be automatically converted into shares of Company’s common stock at the then-effective conversion rate, if the Weighted Average Price of Company’s common stock equals or exceeds the then-current conversion price for at least 10 consecutive trading days. If the Company undergoes certain fundamental changes (as more fully described in the Certificate of Designations but including, among other things, certain change-in-control transactions, recapitalizations, asset sales and liquidation events), each outstanding share of Series A Preferred Stock may, within 15 days following the effective date of such fundamental change and at the election of the holder, be converted into Company’s common stock at a conversion rate (subject to certain adjustments) equal to (i) the greater of (A) the sum of the conversion rate on the effective date of such fundamental change plus the additional shares received by holders of Series A Preferred Stock following such fundamental change (as set forth in the Certificate of Designations) and (B) the quotient of (x) $100.00, divided by (y) the greater of (1) the applicable holder stock price and (2) 66 2/3% of the closing sale price of the Company’s common stock on the issue date plus (ii) the number of shares of Company’s common stock that would be issued if any and all accumulated and unpaid dividends were paid in shares of Company’s common stock.

The Series A Preferred Stock contains limitations that prevent the holders thereof from acquiring shares of the Company’s common stock upon conversion that would result in (i) the number of shares beneficially owned by such holder and its affiliates exceeding 9.99% of the total number of shares of the Company’s common stock then outstanding or (ii) the Series A Preferred Stock being converted into more than 19.99% of the shares of the Company’s common stock outstanding on the initial issue date of the Series A Preferred Stock (subject to appropriate adjustment in the event of a stock split, stock dividend, combination or other similar recapitalization) without, in the latter instance, stockholder approval of such issuance.

Additional features of the Series A Preferred Stock are as follows:

Liquidation – In the event of liquidation, holders of Series A Preferred Stock have preferential rights to liquidation payments over holders of common stock. Holders of Series A Preferred Stock shall be paid out of the assets of the Company at an amount equal to $100 per share plus all accumulated and unpaid dividends.

Dividends – Dividends on the Series A Preferred Stock are cumulative at the Dividend Rate. The “Dividend Rate” is the rate per annum of 7.625% per share of Series A Preferred Stock on the liquidation preference ($100 per share). Dividends are payable quarterly in arrears in cash or, at the Company’s election and subject to the receipt of the necessary shareholder approval (to the extent necessary), in shares of the Company’s common stock. The Company’s board of directors declared quarterly dividends of $0.68 per share on April 24, 2017, and $1.91 per share on July 18, 2017, which were both then paid on July 28, 2017. As of September 30, 2017, accrued dividends of $1.2 million were recorded in accrued expenses and other liabilities.

Voting rights – Except as required by Delaware law, holders of the Series A Preferred Stock will have no voting rights except with respect to the approval of any material and adverse amendment to the Company’s certificate of incorporation, and certain significant holders of Series A Preferred Stock may have approval rights with respect to certain key economic terms of the Series A Preferred Stock, as set forth in the Certificate of Designations.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 11 – STOCKHOLDERS’ EQUITY – (Continued)

As of December 31, 2016, 64,500 shares of Series B Preferred Stock were issued and outstanding. Private Daseke’s board of directors declared quarterly dividends on the Series B Preferred Stock of $18.75 per share on October 13, 2016 and $12.50 per share on February 21, 2017. Both the October 13, 2016 and February 21, 2017 dividends were paid on February 27, 2017. As of December 31, 2016, accrued dividends of $1.2 million were recorded in accrued expenses and other liabilities.

In February 2017, in connection with, and immediately prior to, the Closing, the Series B Preferred Stock were converted into 9,301,150 shares of Private Daseke’s common stock.

Warrants

At September 30, 2017, there were a total of 35,040,664 warrants outstanding to purchase 17,520,332 shares of the Company’s common stock.

Hennessy has issued warrants to purchase its common stock which were originally issued as part of units in the IPO (the Public Warrants). There are 19,959,908 Public Warrants outstanding. Hennessy has also issued 15,080,756 warrants (the Private Placement Warrants) to Sponsor in a private placement that closed simultaneously with the consummation of the IPO.

Each warrant entitles the registered holder to purchase one-half of one share of the Company’s common stock at a price of $5.75 per one-half of one share ($11.50 per whole share), subject to adjustment. The warrants may be exercised only for a whole number of shares of the Company’s common stock. No fractional shares will be issued upon exercise of the warrants. The warrants will expire on February 27, 2022, five years after the completion of the Business Combination, or earlier upon redemption or liquidation. The Warrants are listed on the NASDAQ market under the symbol DSKEW.

The Company may call the Public Warrants for redemption at a price of $0.01 per warrant if, and only if, the reported last sale price of the Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the Public Warrant holders.

NOTE 12 – STOCK-BASED COMPENSATION

On February 27, 2017, the Company and Hennessy’s common stockholders approved the 2017 Omnibus Incentive Plan (the Plan), whereby the Company may grant awards of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and performance awards. Under the Plan, the Company is authorized to issue up to 4.5 million shares of common stock. All awards granted were authorized under the Plan.

Stock Options

The following table summarizes stock option grants under the Plan during the nine months ended September 30, 2017:


Grantee Type	# of Options Granted	Issued and Outstanding	Vesting Period	Weighted Average Exercise Price		Weighted Average Grant Date Fair Value

Director Group	150,000	150,000	5 years	$	9.98	$	654,000
Employee Group	1,305,500	1,296,500	5 years	$	9.99	$	5,652,740
Total		1,446,500

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 12 – STOCK-BASED COMPENSATION – (Continued)

The Company’s calculations of the fair value of stock options granted during the nine months ended September 30, 2017 were made using the Black-Scholes option-pricing model. The fair value of the Company’s stock option grants was estimated utilizing the following assumptions for the nine months ended September 30, 2017:


Weighted average expected life		6.5 years
Risk-free interest rate		1.95% to 2.09%
Expected volatility		40.4% to 40.6%
Expected dividend yield		0.00%

Since the Company does not have a sufficient history of exercise behavior, expected term is calculated using the assumption that the options will be exercised ratably from the date of vesting to the end of the contractual term for each vesting tranche of awards. Risk-free interest rate is based on the U.S. Treasury yield curve for the period of the expected term of the stock option. Expected volatility is calculated using an index of publicly traded peer companies.

Restricted Stock Units

Restricted stock units are nontransferable until vested and the holders are entitled to receive dividends with respect to the non-vested units. Prior to vesting, the grantees of restricted stock units are not entitled to vote the shares. Restricted stock unit awards vest in equal annual increments over the vesting period.

The following table summarizes restricted stock unit grants under the Plan during the nine months ended September 30, 2017:


Grantee Type	# of Restricted Stock Units Granted	Vesting Period	Grant Date Fair Value

Employee Group	876,123	5 years	$	8,340,691

All stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized on a straight-line basis as expense over the employees’ requisite service period. Forfeitures will be recorded as a cumulative adjustment to stock-based compensation expense in the period forfeitures are incurred.

Stock Options

A summary of option activity under the Plan as of September 30, 2017 and changes during the nine months then ended are as follows:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value (in thousands)

Outstanding as of January 1, 2017	—	$	—	—	$	—
Granted	1,455,500		9.99	10.0		—
Exercised	—		—	—		—
Forfeited or expired	(9,000)		9.98	—		20
Outstanding as of September 30, 2017	1,446,500		9.99	9.4		4,425

Exercisable as of September 30, 2017	—	$	—	—	$	—

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 12 – STOCK-BASED COMPENSATION – (Continued)

Restricted Stock Units

A summary of restricted stock unit awards activity under the Plan as of September 30, 2017 and changes during the nine months then ended are as follows:


	Units	Weighted Average Grant Date Fair Value (Per Unit)

Outstanding as of January 1, 2017	—	$	—
Granted	876,123		9.52
Vested	—		—
Forfeited	(155,334)		9.66
Outstanding as of September 30, 2017	720,789	$	9.49

Aggregate stock-based compensation charges were $0.7 million and $1.2 million during the three and nine months ended September 30, 2017 and included as a component of salaries, wages and employee benefits on the accompanying consolidated statements of operations. As of September 30, 2017, there was $5.6 million of unrecognized stock-based compensation expense related to stock options which will be recognized over a weighted average period of 4.4 years.

NOTE 13 – DEFINED CONTRIBUTION PLAN

On January 1, 2015, the Company established the Daseke, Inc. 401(k) Retirement Plan (the Retirement Plan) and merged six separate plans into the Retirement Plan. The Retirement Plan is a defined contribution plan and intended to qualify under ERISA provisions of 401(k). Under the safe harbor matching requirements, the Company had expenses of $0.6 million and $0.5 million for the three months ended September 30, 2017 and 2016 and $1.8 million and $1.7 million for the nine months ended September 30, 2017 and 2016, respectively. Matching contributions for 401(k) defined contribution plans not yet merged into the Retirement Plan totaled approximately $47,000 for both the three and nine months ended September 30, 2017.

NOTE 14 – INTEREST RATE SWAP

The Company, from time to time, uses interest rate swaps to manage risks related to interest rate movements. These interest rate swaps are reported at fair value on the consolidated balance sheets in accrued expenses and other liabilities.

The Company had an interest rate swap agreement which qualified for hedge accounting and accordingly was designated as a cash flow hedge. For this interest rate swap, the change in fair value on the effective portion of the hedge was recognized as a component of other comprehensive income. In conjunction with the Business Combination discussed in Note 2, this interest rate swap was terminated. At December 31, 2016, the fair value of this interest rate swap was a liability of $51,871.

The terms of the interest rate swap designated as a cash flow hedge at December 31, 2016 were as follows:


	Notional		Termination	Interest Rate		Interest Rate
Effective Date	Amount		Date	Received		Paid
11/12/2013	$	12,000,000	4/30/2018	0.6	%	3.63	%

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain office building facilities, terminal locations and revenue equipment under non-cancelable operating leases. Building and terminal rent expense under operating leases was $2.1 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and $4.5 million and $2.0 million for the nine months ended September 30, 2017 and 2016, respectively. Tractor, trailer and other revenue equipment rent expense under operating leases was $4.7 million and $3.5 million for the three months ended September 30, 2017 and 2016, respectively, and $12.7 million and $9.2 million for the nine months ended September 30, 2017 and 2016, respectively.

Letters of Credit

The Company had outstanding letters of credit at September 30, 2017 totaling approximately $11.1 million, including those disclosed in Note 9. These letters of credit cover liability insurance claims.

Contingencies

The Company is involved in certain claims and pending litigation arising in the normal course of business. These proceedings primarily involve claims for personal injury or property damage incurred in the transportation of freight or for personnel matters. The Company maintains liability insurance to cover liabilities arising from these matters but is responsible for deductibles on such matters up to a certain threshold before the insurance is applied.

NOTE 16 – REPORTABLE SEGMENTS

The Company evaluates the performance of the segments primarily based on their respective revenues and operating income. Accordingly, interest expense and other non-operating items are not reported in segment results. In addition, the Company has disclosed a corporate segment, which is not an operating segment and includes acquisition transaction expenses, corporate salaries, interest expense and other corporate administrative expenses and intersegment eliminations.

The Company’s operating segments also provide transportation and related services for one another. Such services are generally billed at cost, and no profit is earned. Such intersegment revenues and expenses are eliminated in the Company’s consolidated results. Intersegment revenues and expenses for the Flatbed Solutions segment totaled $0.7 million and $0.8 million for the three months ended September 30, 2017 and 2016, respectively, and $2.4 million and $1.5 million for the nine months ended September 30, 2017 and 2016, respectively.

Intersegment revenues and expenses for the Specialized Solutions segment totaled $1.2 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively and $2.6 million and $2.0 million for the nine months ended September 30, 2017 and 2016.

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DASEKE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

NOTE 16 – REPORTABLE SEGMENTS– (Continued)

The following tables reflect certain financial data of the Company’s reportable segments for the three and nine months ended September 30, 2017 and 2016 (in thousands):


	Flatbed		Specialized
	Solutions		Solutions		Corporate/		Consolidated
	Segment		Segment		Eliminations		Total
Three Months Ended September 30, 2017
Total revenue	$	85,592	$	147,631	$	(1,901)	$	231,322
Operating income		4,755		7,159		(6,210)		5,704
Depreciation		6,713		11,290		37		18,040
Amortization of intangible assets		437		1,328		—		1,765
Income (loss) before income tax		2,997		5,060		(10,869)		(2,812)
Total assets		272,686		472,761		111,974		857,421

Three Months Ended September 30, 2016
Total revenue	$	78,975	$	96,534	$	(1,361)	$	174,148
Operating income		3,794		5,739		(3,451)		6,082
Depreciation		7,161		8,303		40		15,504
Amortization of intangible assets		489		1,005		—		1,494
Income (loss) before income tax		1,708		3,917		(6,199)		(574)
Total assets		295,286		304,623		8,946		608,855


	Flatbed		Specialized
	Solutions		Solutions		Corporate/		Consolidated
	Segment		Segment		Eliminations		Total
Nine Months Ended September 30, 2017
Total revenue	$	253,794	$	340,289	$	(5,004)	$	589,079
Operating income		14,955		12,756		(18,391)		9,320
Depreciation		20,619		28,375		115		49,109
Amortization of intangible assets		1,310		3,339		—		4,649
Income (loss) before income tax		9,725		7,004		(31,979)		(15,250)

Nine Months Ended September 30, 2016
Total revenue	$	237,169	$	267,651	$	(3,434)	$	501,386
Operating income		14,041		14,689		(12,394)		16,336
Depreciation		21,219		24,637		117		45,973
Amortization of intangible assets		1,468		3,074		—		4,542
Income (loss) before income tax		9,517		9,907		(20,303)		(879)

NOTE 17 – SUBSEQUENT EVENTS

On October 17, 2017 the Company’s board of directors declared a quarterly dividend of $1.91 per share on 650,000 shares of Series A Preferred Stock outstanding as of August 15, 2017, or $1.2 million, which was paid on October 20, 2017.

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

Overview

Daseke, Inc. is a leading provider and consolidator of transportation and logistics solutions focused exclusively on open deck freight in North America. The transportation and logistics market is one of the largest industries in the United States. The open deck freight market represented an approximately $133 billion subset of the broader transportation and logistics market in 2016. The U.S. open deck freight market is expected to grow to approximately $150 billion in 2017-2018 and to approximately $174 billion in 2019.

The Company believes it is the largest owner of open deck equipment and the second largest provider of flatbed, open deck transportation and logistics solutions by revenue in North America. The Company delivers a comprehensive and diverse offering of flatbed and specialized transportation and logistics solutions to approximately 4,800 customers across the continental United States, Canada and Mexico through two reportable segments: Flatbed Solutions and Specialized Solutions. The Flatbed Solutions segment focuses on delivering transportation and logistics solutions that principally require the use of flatbed and retractable-sided transportation equipment, and the Specialized Solutions segment focuses on delivering transportation and logistics solutions that principally include super heavy haul, high-value customized, over-dimensional, step deck and removable gooseneck trailer solutions.

Both of the Company’s reportable segments operate highly flexible business models comprised of company-owned tractors and asset-light operations (which consist of owner-operator transportation and freight brokerage). The Company’s asset-based operations have the benefit of providing shippers with certainty of delivery and continuity of operations. Alternatively, the Company’s asset-light operations offer flexibility and scalability to meet customers’ dynamic needs and have lower capital expenditure requirements and fixed costs. Approximately 62.0% of freight, logistics and brokerage revenue for the nine months ended September 30, 2017 was derived from company-owned equipment and approximately 38.0% was derived from asset-light services.

Business Combination and Other Recent Developments

On February 27, 2017, Hennessy consummated the merger of Hennessy’s wholly-owned subsidiary with and into Private Daseke, with Private Daseke surviving as a direct wholly-owned subsidiary of Hennessy. The aggregate consideration received by Private Daseke stockholders upon closing was $266.7 million, consisting of newly issued shares of common stock at a value of $10.00 per share. The Merger Agreement contains an earn-out provision through which Private Daseke stockholders could receive up to 15 million additional shares of common stock (with up to 5 million shares payable annually with respect to 2017, 2018 and 2019 performance). See Note 2 of Notes to Consolidated Financial Statements for more information regarding the Business Combination.

On May 1, 2017, the Company completed mergers with two leading open-deck specialized transportation companies: the Schilli Companies (Schilli), headquartered in Remington, Indiana, and Big Freight Systems Inc. (Big Freight), headquartered in Steinbach, Manitoba. On July 1, 2017, the Company completed a merger with The Steelman Companies (Steelman), headquartered in Springfield, Missouri. On September 1, 2017, the Company completed a merger with R&R Trucking Holdings, LLC (R&R), based in Duenweg, Missouri.

How The Company Evaluates Its Operations

The Company uses a number of primary indicators to monitor its revenue and expense performance and efficiency, including Adjusted EBITDA, Adjusted EBITDAR, free cash flow and adjusted operating ratio, and its key drivers of revenue quality, growth, expense control and operating efficiency. Adjusted EBITDA, Adjusted EBITDAR, free cash flow and adjusted operating ratio are not recognized measures under GAAP and should not be considered alternatives to, or more meaningful than, net income (loss), cash flows from operating activities, operating income, operating ratio, operating margin or any other measure derived in accordance with GAAP. See “Non-GAAP Financial Measures” for more information on the Company’s use of these non-GAAP measures, as well as a description of the computation and reconciliation of the Company’s Adjusted EBITDA, Adjusted EBITDAR and free cash flow to net income (loss) and adjusted operating ratio to operating ratio.

Revenue

The Company records four types of revenue: freight, brokerage, logistics and fuel surcharge. Freight revenue is generated by hauling freight for the Company’s customers using its trucks or its owner-operators’ equipment. Generally, the Company’s customers pay for its services based on the number of miles in the most direct route between pick-up and delivery locations and other ancillary services the Company provides. Freight revenue is the product of the number of revenue-generating miles driven and the rate per mile the Company receives from customers plus accessorial charges, such as loading and unloading freight for its customers, cargo protection, fees for detaining its equipment or fees for route planning and supervision. Freight revenue is affected by fluctuations in North American economic activity as well as changes in specific customer demand, the level of capacity in the industry and driver availability.

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The Company’s brokerage revenue is generated primarily by its use of third-party carriers when it needs capacity to move its customers’ loads. The main factor that affects brokerage revenue is the availability of the Company’s drivers and owner-operators (and hence the need for third-party carriers) and the rate for the load. Brokerage revenue is also affected by fluctuations in North American economic activity as well as changes in the level of capacity in the industry and driver availability.

Logistics revenue is generated from a range of services, including vehicle maintenance and repair, fuel management services, value-added warehousing and packaging, and other fleet management solutions. Logistics revenue is primarily driven by specific customer requirements for additional services and may fluctuate depending on customers’ utilization of these services due to changes in cargo specifications, delivery staging and fluctuations in the North American economic activity. The Company began recording logistics revenue as a result of the Recent Acquisitions.

Fuel surcharges are designed to compensate the Company for fuel costs above a certain cost per gallon base. Generally, the Company receives fuel surcharges on the miles for which it is compensated by customers. However, the Company continues to have exposure to increasing fuel costs related to empty miles, fuel efficiency due to engine idle time and other factors and to the extent the surcharge paid by the customer is insufficient. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of loaded miles. In general, a declining energy and fuel price environment, such as in 2015 and most of 2016, negatively affects the Company’s fuel surcharge revenues, and conversely, an environment with rising fuel and energy prices benefits its fuel surcharge revenues. Although the Company’s surcharge programs vary by customer, they typically involve a computation based on the change in national or regional fuel prices. The Company’s fuel surcharges are billed on a lagging basis, meaning it typically bills customers in the current week based on a previous week’s applicable index. Therefore, in times of increasing fuel prices, the Company does not recover as much as it is currently paying for fuel. In periods of declining prices, the opposite is true. Also, its fuel surcharge programs typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue.

Expenses

The Company’s most significant expenses vary with miles traveled and include driver wages, services purchased from owner-operators and other transportation providers (which are recorded on the “Purchased freight” line of the Company’s consolidated statements of operations) and fuel. Although driver-related expenses vary with miles traveled, the Company currently expects that its expenses relating to driver wages, as a percentage of operating revenues, will increase in the near-term, with or without changes in total miles, due to expected increases in average driver wages paid per mile in the general trucking industry. The expected increases in driver wages per mile are due to current market conditions caused by a lack of qualified drivers in the industry.

Maintenance and tire expenses and cost of insurance and claims generally vary with the miles the Company travels but also have a controllable component based on safety improvements, fleet age, efficiency and other factors. The Company’s primary fixed costs are depreciation of long-term assets (such as tractors, trailers and terminals), interest expense, rent and non-driver compensation.

The Company’s fuel surcharge programs help to offset increases in fuel prices but typically do not offset empty miles, idle time and out of route miles driven. As discussed above under “Revenue,” its fuel surcharge programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue. Due to this time lag, the Company’s fuel expense, net of fuel surcharge, negatively impacts its operating income during periods of sharply rising fuel costs and positively impacts its operating income during periods of falling fuel costs. In general, due to the fuel surcharge programs, its operating income is less negatively affected by an environment with higher, stable fuel prices than an environment with lower fuel prices. In addition to its fuel surcharge programs, the Company believes the most effective protection against fuel cost increases is to maintain a fuel-efficient fleet by incorporating fuel efficiency measures. Also, the Company has arrangements with some of its significant fuel suppliers to buy the majority of its fuel at contracted pricing schedules that fluctuate with the market price of diesel fuel. The Company has not used derivatives as a hedge against higher fuel costs in the past but continues to evaluate this possibility.

Factors Affecting the Comparability of the Company’s Financial Results

Acquisitions

The Company has a long history of and intends to continue to acquire appropriate flatbed and specialized trucking companies. Negotiations and discussions with potential target companies are an integral part of the Company’s operations. These negotiations and discussions can be

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in varying stages from infancy to very mature. Therefore, investors in Daseke’s stock should assume the Company is always evaluating, negotiating and performing diligence on potential acquisitions.

The comparability of the Company’s results of operations among the periods presented is impacted by the acquisitions listed below, which were completed in the second and third quarters of 2017. Also, as a result of the below acquisitions, the Company’s historical results of operations may not be comparable or indicative of future results.

Schilli Acquisition – Effective as of May 1, 2017, the Company acquired all of the outstanding stock of Schilli to expand its presence in the Midwestern U.S. Schilli is part of the Company’s Specialized Solutions segment.

Big Freight Acquisition – Effective as of May 1, 2017, the Company acquired all of the outstanding stock of Big Freight to expand its presence into Canada and the power sports industry. Big Freight is part of the Company’s Specialized Solutions segment.

Steelman Acquisition – Effective as of July 1, 2017, the Company acquired all of the outstanding stock of Steelman to expand its presence in the Midwest and in both the power sports and heavy haul industries. Steelman is part of the Company’s Specialized Solutions segment.

R&R Acquisition – Effective as of September 1, 2017, the Company acquired all of the outstanding stock of R&R to expand the Company’s capabilities to include government and commercial arms, ammunition and explosives. R&R is part of the Company’s Specialized Solutions segment.

The Schilli, Big Freight, Steelman and R&R Acquisitions are collectively referred to as the Recent Acquisitions.

The Business Combination

The Company’s historical results of operations may not be comparable or indicative of results after the consummation of the Business Combination as a result of the following:

Decreased Leverage. As of December 31, 2016, after giving pro forma effect to the Business Combination, the Company would have had approximately $295.0 million of outstanding total indebtedness compared to the actual outstanding total indebtedness of $338.5 million, in each case, prior to debt issuance costs. For the year ended December 31, 2016, the Company’s pro forma interest expense would have been approximately $3.4 million lower than its historical interest expense.

Public Company Expenses. The Company incurred, and will continue to incur, direct, incremental general and administrative expenses as a result of being a publicly traded company, including, but not limited to, costs associated with annual and quarterly reports to stockholders, tax return preparation, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and independent director compensation. These direct, incremental general and administrative expenses, which the Company’s management estimates will total approximately $0.5 million annually, are not included in the Company’s historical financial results of operations.

Transaction Costs. During the nine months ended September 30, 2017, the Company expensed $2.0 million of transaction costs related to the Business Combination, compared to $0.3 million for the same period in 2016.

Deferred Financing Fees. During the first quarter of 2017, the Company expensed $3.9 million of unamortized deferred financing fees associated with debt refinanced in conjunction with the Business Combination. There were no such expenses for the nine months ended September 30, 2016.

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Results of Operations

The following table sets forth items derived from the Company’s consolidated statements of operations for the three months ended September 30, 2017 and 2016 in dollars and as a percentage of total revenue and the increase or decrease in the dollar amounts of those items.


	Three Months Ended September 30,
	2017			2016			Increase (Decrease)
(Dollars in thousands)	$		%	$		%	$		%

REVENUE:
Freight	$	171,245	74.0	$	135,415	77.8	$	35,830	26.5
Brokerage		34,198	14.8		25,977	14.9		8,221	31.6
Logistics		7,871	3.4		—	*		7,871	*
Fuel surcharge		18,008	7.8		12,756	7.3		5,252	41.2
Total revenue		231,322	100.0		174,148	100.0		57,174	32.8

OPERATING EXPENSES:
Salaries, wages and employee benefits		64,955	28.1		49,298	28.3		15,657	31.8
Fuel		24,734	10.7		17,296	9.9		7,438	43.0
Operations and maintenance		35,132	15.2		27,874	16.0		7,258	26.0
Communications		539	0.2		370	0.2		169	45.7
Purchased freight		61,598	26.6		42,541	24.4		19,057	44.8
Administrative expenses		8,619	3.7		5,221	3.0		3,398	65.1
Sales and marketing		488	0.2		435	0.2		53	12.2
Taxes and licenses		2,963	1.3		2,268	1.3		695	30.6
Insurance and claims		6,351	2.7		5,065	2.9		1,286	25.4
Acquisition-related transaction expenses		773	0.3		—	*		773	*
Depreciation and amortization		19,805	8.6		16,998	9.8		2,807	16.5
Loss on disposition		(339)	(0.1)		(495)	(0.3)		156	(31.5)
Impairment		—	*		1,195	0.7		(1,195)	(100.0)
Total operating expenses		225,618	97.5		168,066	96.5		57,552	34.2
Operating ratio		97.5%			96.5%
Adjusted operating ratio(1)		95.4%			94.1%
INCOME FROM OPERATIONS		5,704	2.5		6,082	3.5		(378)	(6.2)

Other (income) expense:
Interest income		(76)	*		(4)	*		(72)	1,800.0
Interest expense		8,624	3.7		6,724	3.9		1,900	28.3
Write-off of unamortized deferred financing fees		—	*		—	*		—	*
Other		(32)	*		(64)	*		32	(50.0)
Total other expense		8,516	3.7		6,656	3.8		1,860	27.9

Loss before provision for income taxes		(2,812)	(1.2)		(574)	(0.3)		(2,238)	389.9
Provision for income taxes		(2,862)	(1.2)		683	0.4		(3,545)	(519.0)
Net income (loss)	$	50	-	$	(1,257)	(0.7)	$	1,307	(104.0)

*indicates not meaningful.

(1)

Adjusted operating ratio is not a recognized measure under GAAP. For a definition of adjusted operating ratio and reconciliation of adjusted operating ratio to operating ratio, see “Non-GAAP Financial Measures” below.

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The following table sets forth the Company’s Flatbed Solutions segment’s revenue, operating expenses, operating ratio, adjusted operating ratio and operating income for the three months ended September 30, 2017 and 2016 in dollars and as a percentage of its Flatbed Solutions segment’s total revenue and the increase or decrease in the dollar amounts of those items. The following table also sets forth certain operating statistics for the Company’s Flatbed Solutions segment for the three months ended September 30, 2017 and 2016.

FLATBED SOLUTIONS


	Three Months Ended September 30,
	2017			2016			Increase (Decrease)
(Dollars in thousands)	$		%	$		%	$		%

REVENUE(1):
Freight	$	67,807	79.2	$	64,281	81.4	$	3,526	5.5
Brokerage		9,385	11.0		7,410	9.4		1,975	26.7
Logistics		—	-		—	-		—	*
Fuel surcharge		8,400	9.8		7,284	9.2		1,116	15.3
Total revenue		85,592	100.0		78,975	100.0		6,617	8.4

OPERATING EXPENSES(1):
Salaries, wages and employee benefits		23,538	27.5		23,233	29.4		305	1.3
Fuel		10,212	11.9		9,401	11.9		811	8.6
Operations and maintenance		9,584	11.2		8,710	11.0		874	10.0
Purchased freight		24,536	28.7		20,169	25.5		4,367	21.7
Depreciation and amortization		7,150	8.4		7,650	9.7		(500)	(6.5)
Impairment		—	-		—	-		—	*
Other operating expenses		5,817	6.8		6,018	7.6		(201)	(3.3)
Total operating expenses		80,837	94.4		75,181	95.2		5,656	7.5
Operating ratio		94.4%			95.2%
Adjusted operating ratio(2)		93.5%			93.9%
INCOME FROM OPERATIONS	$	4,755	5.6	$	3,794	4.8	$	961	25.3

OPERATING STATISTICS:
Total miles		36,646,345			37,767,726			(1,121,381)	(3.0)
Company-operated tractors		1,144			1,162			(18)	(1.5)
Owner-operated tractors		469			441			28	6.3
Number of trailers		2,881			2,842			39	1.4

*indicates not meaningful.

(1)

Includes intersegment revenues and expenses, as applicable, which are eliminated in the Company’s consolidated results.

(2)

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The following table sets forth the Company’s Specialized Solutions segment’s revenue, operating expenses, operating ratio, adjusted operating ratio and operating income for the three months ended September 30, 2017 and 2016 in dollars and as a percentage of its Specialized Solutions segment’s total revenue and the increase or decrease in the dollar amounts of those items. The following table also sets forth certain operating statistics for the Company’s Specialized Solutions segment for the three months ended September 30, 2017 and 2016.

SPECIALIZED SOLUTIONS


	Three Months Ended September 30,
	2017			2016			Increase (Decrease)
(Dollars in thousands)	$		%	$		%	$		%

REVENUE(1):
Freight	$	105,137	71.2	$	72,367	75.0	$	32,770	45.3
Brokerage		24,852	16.8		18,579	19.2		6,273	33.8
Logistics		7,886	5.3		—	-		7,886	*
Fuel surcharge		9,756	6.6		5,588	5.8		4,168	74.6
Total revenue		147,631	100.0		96,534	100.0		51,097	52.9

OPERATING EXPENSES(1):
Salaries, wages and employee benefits		39,507	26.8		24,714	25.6		14,793	59.9
Fuel		14,521	9.8		7,895	8.2		6,626	83.9
Operations and maintenance		25,180	17.1		18,927	19.6		6,253	33.0
Purchased freight		38,965	26.4		23,733	24.6		15,232	64.2
Depreciation and amortization		12,618	8.5		9,308	9.6		3,310	35.6
Impairment		—	-		1,195	1.2		(1,195)	(100.0)
Other operating expenses		9,681	6.6		5,023	5.2		4,658	92.7
Total operating expenses		140,472	95.2		90,795	94.1		49,677	54.7
Operating ratio		95.2%			94.1%
Adjusted operating ratio(2)		92.6%			91.2%
INCOME FROM OPERATIONS	$	7,159	4.8	$	5,739	5.9	$	1,420	24.7

OPERATING STATISTICS:
Total miles		38,948,331			24,266,511			14,681,820	60.5
Company-operated tractors		1,638			1,109			529	47.7
Owner-operated tractors		408			236			172	72.9
Number of trailers		4,813			3,394			1,419	41.8

*indicates not meaningful.

(1)

Includes intersegment revenues and expenses, as applicable, which are eliminated in the Company’s consolidated results.

(2)

Revenue. Total revenue increased 32.8% to $231.3 million for the three months ended September 30, 2017 from $174.1 million for the three months ended September 30, 2016, primarily due to the Recent Acquisitions. The change in total revenue, excluding the effect of the Recent Acquisitions, was an increase of $8.8 million, or 5.1%, due to increases in freight revenue, fuel surcharge and brokerage revenue. Freight revenue, excluding the effect of the Recent Acquisitions, increased $5.7 million, or 4.2%, from $135.4 million for the three months ended September 30, 2016 to $141.1 million for the three months ended September 30, 2017. Fuel surcharges, excluding the effect of the Recent Acquisitions, increased from $12.7 million for the three months ended September 30, 2016 to $14.9 million for the three months ended September 30, 2017, an increase of 17.1%. Brokerage revenue, excluding the effect of the Recent Acquisitions, increased $0.9 million, or 3.6%, from $26.0 million for the three months ended September 30, 2016 to $26.9 million for the three months ended September 30, 2017.

The Company’s Flatbed Solutions segment’s revenue was $85.6 million for the three months ended September 30, 2017 and $79.0 million for the three months ended September 30, 2016, an increase of 8.4%. This increase was primarily a result of increases in rates, which produced increases of $3.5 million, or 5.5%, in freight revenue and $2.0 million, or 26.7%, in brokerage revenues despite 1.1 million fewer miles compared to the same period in 2016. The $1.1 million, or 15.3%, increase in fuel surcharge revenue also contributed to the increase in the Flatbed Solutions segment’s revenue.

The Company’s Specialized Solutions segment’s revenue was $147.6 million for the three months ended September 30, 2017 and $96.5 million for the three months ended September 30, 2016, an increase of 52.9%, which was primarily due to the Recent Acquisitions. The

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increase in revenue, excluding the effect of the Recent Acquisitions, was an increase of $2.8 million, or 2.9%, primarily due to increases in freight revenue and fuel surcharge, partially offset by a slight decrease in brokerage revenues. Freight revenue, excluding the effect of the Recent Acquisitions, increased to $75.0 million for the three months ended September 30, 2017 from $72.3 million for the same period in 2016, an increase of 3.7%. Fuel surcharges, excluding the effect of the Recent Acquisitions, increased to $6.7 million for the three months ended September 30, 2017 from $5.6 million for the same period in 2016, an increase of 19.6%. Brokerage revenue, excluding the effect of the Recent Acquisitions, decreased to $17.6 million for the three months ended September 30, 2017 from $18.6 million for the same period in 2016, a decrease of 5.5%.

In both segments, the increase in fuel surcharge revenue was the result of increases in fuel prices, which commenced in the fourth quarter of 2016 and continued through the third quarter of 2017 with only a less than 1% decrease in fuel prices in the second quarter of 2017.

Salaries, Wages and Employee Benefits. Salaries, wages and employee benefits expense, which consists of compensation for all employees, is primarily affected by the number of miles driven by company drivers, the rate per mile paid to company drivers, employee benefits including, but not limited to, health care and workers’ compensation, and to a lesser extent, the number of, and compensation and benefits paid to, non-driver employees. In general, the Specialized Solutions segment drivers receive a higher driver pay per total mile than Flatbed Solutions segment drivers due to the former requiring a higher level of training and expertise.

Salaries, wages and employee benefits expense increased 31.8% to $65.0 million for the three months ended September 30, 2017 from $49.3 million for the three months ended September 30, 2016, primarily due to the Recent Acquisitions. The increase in salaries, wages and employee benefits expense, excluding the effect of the Recent Acquisitions, was 5.5%, or $2.7 million, and was primarily due to increased employee compensation, workers’ compensation premiums, and stock-based compensation, partially offset by a decrease in workers’ compensation claims.

The Company’s Flatbed Solutions segment’s salaries, wages and employee benefits expense was relatively flat for the three months ended September 30, 2017 compared to the three months ended September 30, 2016.

The Company’s Specialized Solutions segment had a $14.8 million, or 59.9%, increase in salaries, wages and employee benefits expense for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to the Recent Acquisitions. This increase, excluding the effect of the Recent Acquisitions, was 7.5%, or $1.9 million, and was primarily due to increased employee compensation and stock-based compensation.

Fuel. Fuel expense consists primarily of diesel fuel expense for company-owned tractors and fuel taxes. The primary factors affecting fuel expense are the cost of diesel fuel, the miles per gallon realized with company equipment and the number of miles driven by company drivers.

Total fuel expense increased $7.4 million, or 43.0%, to $24.7 million for the three months ended September 30, 2017 from $17.3 million for the three months ended September 30, 2016. This increase was primarily a result of the Recent Acquisitions and higher fuel prices. Excluding the effect of the Recent Acquisitions, fuel expense increased 11.3%, or $2.0 million. The U.S. national average diesel fuel price, as published by the U.S. Department of Energy, was $2.615 for the three months ended September 30, 2017, compared to $2.381 for the same period in 2016, a 9.9% increase.

The Company’s Flatbed Solutions segment’s fuel expense increased 8.6% to $10.2 million for the three months ended September 30, 2017 from $9.4 million for the three months ended September 30, 2016, primarily as a result of higher fuel prices, partially offset by a 3.0% decrease in total miles.

The Company’s Specialized Solutions segment’s fuel expense increased 83.9% to $14.5 million for the three months ended September 30, 2017 from $7.9 million for the three months ended September 30, 2016, primarily as a result of the Recent Acquisitions, higher fuel prices and an increase in total miles. Excluding the effect of the Recent Acquisitions, fuel expense in the Specialized Solutions segment increased 14.5% to $9.0 million and total miles increased 2.3%.

Operations and Maintenance. Operations and maintenance expense consists primarily of ordinary vehicle repairs and maintenance, costs associated with preparing tractors and trailers for sale or trade-in, driver recruiting, training and safety costs, permitting and pilot car fees and other general operations expenses. Operations and maintenance expense is primarily affected by the age of company-owned tractors and trailers, the number of miles driven in a period and driver turnover.

Operations and maintenance expense increased 26.0% to $35.1 million for the three months ended September 30, 2017 from $27.9 million for the three months ended September 30, 2016, primarily as a result of the Recent Acquisitions. Operating and maintenance expense increased 4.7% after adjusting for the effect of the Recent Acquisitions.

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The Company’s Flatbed Solutions segment’s operations and maintenance expense increased $0.9 million, or 10.0%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, primarily from increased maintenance and tire costs.

The Company’s Specialized Solutions segment’s operations and maintenance expense increased $6.3 million, or 33.0%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, primarily as a result of the Recent Acquisitions. Excluding the effect of the Recent Acquisitions, operations and maintenance expense was relatively flat for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.

Purchased Freight. Purchased freight expense consists of the payments to owner-operators, including fuel surcharge reimbursements, and payments to third-party capacity providers that haul loads brokered to them. Purchased freight expense generally takes into account changes in diesel fuel prices, resulting in lower payments during periods of declining fuel prices.

Total purchased freight expense increased 44.8% from $42.5 million during the three months ended September 30, 2016 to $61.6 million during the three months ended September 30, 2017, primarily as a result of the Recent Acquisitions. Excluding the effect of the Recent Acquisitions on purchased freight expense, total purchased freight expense increased 9.5% to $46.6 million for the three months ended September 30, 2017. Purchased freight expense from owner-operators, excluding the Recent Acquisitions, increased 13.1% from $23.0 million during the three months ended September 30, 2016 to $26.0 million during the three months ended September 30, 2017, primarily as a result of increases in fuel surcharge reimbursements made to owner-operators as a result of higher fuel prices. Purchased freight expense from third-party capacity providers, excluding the Recent Acquisitions, increased 6.3% from $18.9 million during the three months ended September 30, 2016 to $20.0 million during the three months ended September 30, 2017, primarily as a result of the increase in rates on brokered loads.

The Company’s Flatbed Solutions segment’s purchased freight expense increased 21.7% to $24.5 million for the three months ended September 30, 2017 from $20.2 million for the three months ended September 30, 2016, primarily due to higher utilization of owner-operators and third party capacity providers in the Company’s Flatbed Solutions segment. Purchased freight expense from owner-operators increased 15.8% to $17.3 million for the three months ended September 30, 2017 from $14.9 million for the three months ended September 30, 2016 due to an increase in owner-operator loads. Purchased freight expense from third-party capacity providers increased 43.8% from $4.7 million during the three months ended September 30, 2016 to $6.7 million during the three months ended September 30, 2017, primarily as a result of the increase in brokered loads in the Company’s Flatbed Solutions segment.

The Company’s Specialized Solutions segment’s purchased freight expense increased 64.2% to $39.0 million during the three months ended September 30, 2017 from $23.7 million during the three months ended September 30, 2016, primarily as a result of the Recent Acquisitions. Excluding the effect of the Recent Acquisitions on purchased freight expense, total purchased freight expense increased 1.0% to $24.0 million for the three months ended September 30, 2017. Purchased freight expense from owner-operators, excluding the Recent Acquisitions, increased 8.1% to $8.8 million for the three months ended September 30, 2017 from $8.1 million for the three months ended September 30, 2016. Purchased freight expense from third-party capacity providers, excluding the Recent Acquisitions, decreased 6.1% from $14.2 million during the three months ended September 30, 2016 to $13.3 million during the three months ended September 30, 2017, primarily as a result of increased utilization of company drivers during the quarter.

Depreciation and Amortization. Depreciation and amortization expense consists primarily of depreciation for company-owned tractors and trailers or amortization of those financed with capital leases. The primary factors affecting these expense items include the size and age of company-owned tractors and trailers and the cost of new equipment.

Depreciation and amortization expense increased 16.5% to $19.8 million during the three months ended September 30, 2017 from $17.0 million during the three months ended September 30, 2016, primarily as a result of the Recent Acquisitions. After adjusting for the effect of the Recent Acquisitions, depreciation and amortization expense decreased 7.0%, primarily as a result of a 1.2% reduction in company-owned tractors, excluding company-owned tractors of the Recent Acquisitions, combined with an increasing shift in utilization of operating leases to finance capital expenditures.

The Company’s Flatbed Solutions segment had a 6.5% decrease in depreciation and amortization expense for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 primarily as a result of a 1.5% reduction in company-owned tractors.

The Company’s Specialized Solutions segment had a 35.6% increase in depreciation and amortization expense for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 primarily as a result of the Recent Acquisitions. After adjusting for the effect of the Recent Acquisitions, depreciation and amortization expense decreased 7.4%, primarily as a result of a 0.9% reduction in company-owned tractors, excluding company-owned tractors of the Recent Acquisitions, combined with an increasing shift in utilization of operating leases to finance capital expenditures.

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Taxes and Licenses. Operating taxes and licenses expense primarily represents the costs of taxes and licenses associated with the Company’s fleet of equipment and will vary according to the size of its equipment fleet. Taxes and license expense increased from $2.3 million for the three months ended September 30, 2016 to $3.0 million for the three months ended September 30, 2017. Excluding the effect of the Recent Acquisitions, operating taxes and license expense, as a percentage of revenue, was 1.2% for the three months ended September 30, 2017 and 1.3% for the three months ended September 30, 2016.

Insurance and Claims. Insurance and claims expense consists of insurance premiums and the accruals the Company makes for estimated payments and expenses for claims for bodily injury, property damage, cargo damage and other casualty events. The primary factors affecting the Company’s insurance and claims expense are seasonality (the Company typically experiences higher accident frequency in winter months), the frequency and severity of accidents, trends in the development factors used in its accruals and developments in large, prior-year claims. The frequency of accidents tends to increase with the miles the Company travels. Insurance and claims expense increased 25.4% to $6.3 million during the three months ended September 30, 2017 from $5.1 million during the three months ended September 30, 2016, primarily as a result of the Recent Acquisitions. Excluding the effect of the Recent Acquisitions, insurance and claims, as a percentage of revenue, was 2.8% for the three months ended September 30, 2017 and 2.9% for the three months ended September 30, 2016.

Interest Expense. Interest expense consists of cash interest, non-cash paid-in-kind interest, amortization of related issuance costs and fees and prepayment penalties. Interest expense increased 28.3% to $8.6 million during the three months ended September 30, 2017 from $6.7 million during the three months ended September 30, 2016. This increase was primarily attributable to an increase in amortization of debt issuance costs and higher interest rates on the Term Loan Facility as compared to debt outstanding in 2016 under the Senior Term Loan and Equipment Term Loans.

Income Tax. Provision for income taxes decreased from $0.7 million for the three months ended September 30, 2016 to a benefit of $2.9 million for the three months ended September 30, 2017. The decrease is primarily the result of the increase in loss before provision for income tax of $2.2 million for the three months ended September 30, 2017 compared to the same period in 2016. The effective tax rate was 101.8% for the three months ended September 30, 2017, compared to (119.0%) for the three months ended September 30, 2016. The effective income tax rate varies from the federal statutory rate of 35% primarily due to state income taxes and the impact of nondeductible permanent differences, including driver per diems, transaction expenses and withdrawn Private Daseke IPO expenses.

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The following table sets forth items derived from the Company’s consolidated statements of operations for the nine months ended September 30, 2017 and 2016 in dollars and as a percentage of total revenue and the increase or decrease in the dollar amounts of those items.


	Nine Months Ended September 30,
	2017			2016			Increase (Decrease)
(Dollars in thousands)	$		%	$		%	$		%

REVENUE:
Freight	$	446,454	75.8	$	398,466	79.5	$	47,988	12.0
Brokerage		83,723	14.2		68,358	13.6		15,365	22.5
Logistics		10,571	1.8		—	*		10,571	*
Fuel surcharge		48,331	8.2		34,562	6.9		13,769	39.8
Total revenue		589,079	100.0		501,386	100.0		87,693	17.5

OPERATING EXPENSES:
Salaries, wages and employee benefits		174,253	29.6		149,861	29.9		24,392	16.3
Fuel		64,423	10.9		49,076	9.8		15,347	31.3
Operations and maintenance		86,332	14.7		72,933	14.5		13,399	18.4
Communications		1,491	0.3		1,208	0.2		283	23.4
Purchased freight		148,945	25.3		120,501	24.0		28,444	23.6
Administrative expenses		24,019	4.1		17,711	3.5		6,308	35.6
Sales and marketing		1,425	0.2		1,280	0.3		145	11.3
Taxes and licenses		7,855	1.3		6,946	1.4		909	13.1
Insurance and claims		15,516	2.6		13,648	2.7		1,868	13.7
Acquisition-related transaction expenses		2,255	0.4		18	*		2,237	*
Depreciation and amortization		53,758	9.1		50,515	10.1		3,243	6.4
(Gain) loss on disposition		(513)	(0.1)		158	*		(671)	(424.7)
Impairment		—			1,195	0.2		(1,195)	(100.0)
Total operating expenses		579,759	98.4		485,050	96.7		94,709	19.5
Operating ratio		98.4%			96.7%
Adjusted operating ratio(1)		96.2%			94.2%
INCOME FROM OPERATIONS		9,320	1.6		16,336	3.3		(7,016)	(42.9)

Other (income) expense:
Interest income		(130)	*		(40)	*		(90)	225.0
Interest expense		21,064	3.6		17,521	3.5		3,543	20.2
Write-off of unamortized deferred financing fees		3,883	0.7		—	*		3,883	*
Other		(247)	*		(266)	(0.1)		19	(7.1)
Total other expense		24,570	4.2		17,215	3.4		7,355	42.7

Loss before benefit for income taxes		(15,250)	(2.6)		(879)	(0.2)		(14,371)	1,634.9
Benefit for income taxes		(3,448)	(0.6)		607	0.1		(4,055)	(668.0)
Net loss	$	(11,802)	(2.0)	$	(1,486)	(0.3)	$	(10,316)	694.2

*indicates not meaningful.

(1)

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The following table sets forth the Company’s Flatbed Solutions segment’s revenue, operating expenses, operating ratio, adjusted operating ratio and operating income for the nine months ended September 30, 2017 and 2016 in dollars and as a percentage of its Flatbed Solutions segment’s total revenue and the increase or decrease in the dollar amounts of those items. The following table also sets forth certain operating statistics for the Company’s Flatbed Solutions segment for the nine months ended September 30, 2017 and 2016.

FLATBED SOLUTIONS


	Nine Months Ended September 30,
	2017			2016			Increase (Decrease)
(Dollars in thousands)	$		%	$		%	$		%

REVENUE(1):
Freight	$	200,670	79.1	$	194,855	82.2	$	5,815	3.0
Brokerage		27,979	11.0		22,482	9.5		5,497	24.5
Logistics		—	-		—	-		—	*
Fuel surcharge		25,145	9.9		19,832	8.4		5,313	26.8
Total revenue		253,794	100.0		237,169	100.0		16,625	7.0

OPERATING EXPENSES(1):
Salaries, wages and employee benefits		71,723	28.3		71,325	30.1		398	0.6
Fuel		30,594	12.1		26,708	11.3		3,886	14.5
Operations and maintenance		27,475	10.8		24,599	10.4		2,876	11.7
Purchased freight		70,211	27.7		59,775	25.2		10,436	17.5
Depreciation and amortization		21,929	8.6		22,687	9.6		(758)	(3.3)
Impairment		—	-		—	-		—	*
Other operating expenses		16,907	6.7		18,034	7.6		(1,127)	(6.2)
Total operating expenses		238,839	94.1		223,128	94.1		15,711	7.0
Operating ratio		94.1%			94.1%
Adjusted operating ratio(2)		93.1%			92.2%
INCOME FROM OPERATIONS	$	14,955	5.9	$	14,041	5.9	$	914	6.5

OPERATING STATISTICS:
Total miles		112,318,418			114,115,490			(1,797,072)	(1.6)
Company-operated tractors		1,158			1,173			(15)	(1.3)
Owner-operated tractors		454			442			12	2.7
Number of trailers		2,916			2,877			39	1.4

*indicates not meaningful.

(1)

Includes intersegment revenues and expenses, as applicable, which are eliminated in the Company’s consolidated results.

(2)

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The following table sets forth the Company’s Specialized Solutions segment’s revenue, operating expenses, operating ratio, adjusted operating ratio and operating income for the nine months ended September 30, 2017 and 2016 in dollars and as a percentage of its Specialized Solutions segment’s total revenue and the increase or decrease in the dollar amounts of those items. The following table also sets forth certain operating statistics for the Company’s Specialized Solutions segment for the nine months ended September 30, 2017 and 2016.

SPECIALIZED SOLUTIONS


	Nine Months Ended September 30,
	2017			2016			Increase (Decrease)
(Dollars in thousands)	$		%	$		%	$		%

REVENUE(1):
Freight	$	250,255	73.5	$	206,641	77.2	$	43,614	21.1
Brokerage		55,820	16.4		45,986	17.2		9,834	21.4
Logistics		10,594	3.1		—	-		10,594	*
Fuel surcharge		23,620	6.9		15,024	5.6		8,596	57.2
Total revenue		340,289	100.0		267,651	100.0		72,638	27.1

OPERATING EXPENSES(1):
Salaries, wages and employee benefits		97,880	28.8		74,430	27.8		23,450	31.5
Fuel		33,829	9.9		22,368	8.4		11,461	51.2
Operations and maintenance		57,990	17.0		47,686	17.8		10,304	21.6
Purchased freight		83,704	24.6		64,161	24.0		19,543	30.5
Depreciation and amortization		31,714	9.3		27,711	10.4		4,003	14.4
Impairment		—	-		1,195	0.4		(1,195)	(100.0)
Other operating expenses		22,416	6.6		15,411	5.8		7,005	45.5
Total operating expenses		327,533	96.3		252,962	94.5		74,571	29.5
Operating ratio		96.3%			94.5%
Adjusted operating ratio(2)		94.0%			92.5%
INCOME FROM OPERATIONS	$	12,756	3.7	$	14,689	5.5	$	(1,933)	(13.2)

OPERATING STATISTICS:
Total miles		94,967,882			74,273,172			20,694,710	27.9
Company-operated tractors		1,382			1,091			291	26.7
Owner-operated tractors		294			241			53	22.0
Number of trailers		4,100			3,332			768	23.0

*indicates not meaningful.

(1)

Includes intersegment revenues and expenses, as applicable, which are eliminated in the Company’s consolidated results.

(2)

Revenue. Total revenue increased 17.5% to $589.1 million for the nine months ended September 30, 2017 from $501.4 million for the nine months ended September 30, 2016, primarily as a result of the Recent Acquisitions. The change in total revenue, excluding the effect of the Recent Acquisitions, was an increase of $19.9 million, or 4.0%, due to increases in fuel surcharge, freight and brokerage revenue. Fuel surcharge revenue, excluding the effect of the Recent Acquisitions, increased from $34.6 million for the nine months ended September 30, 2016 to $43.9 million for the nine months ended September 30, 2017, an increase of 26.9%. Freight revenue, excluding the effect of the Recent Acquisitions, increased 1.6% to $404.7 million for the nine months ended September 30, 2017 from $398.5 million for the nine months ended September 30, 2016. Brokerage revenue, excluding the effect of the Recent Acquisitions, increased 6.3% to $72.7 million for the nine months ended September 30, 2017 from $68.3 million for the nine months ended September 30, 2016 due to less capacity.

The Company’s Flatbed Solutions segment’s revenue was $253.8 million for the nine months ended September 30, 2017 and $237.2 million for the nine months ended September 30, 2016, an increase of 7.0%. This increase was primarily a result of increases in rates, which produced increases of $5.8 million, or 3.0%, in freight revenue and $5.5 million, or 24.5%, in brokerage revenues despite 1.8 million fewer miles compared to the same period in 2016. The $5.3 million, or 26.8%, increase in fuel surcharge revenue also contributed to the increase in the Flatbed Solutions segment.

The Company’s Specialized Solutions segment’s revenue was $340.3 million for the nine months ended September 30, 2017 and $267.7 million for the nine months ended September 30, 2016, an increase of 27.1%, primarily as a result of the Recent Acquisitions. The increase in revenue, excluding the effect of the Recent Acquisitions, was $4.8 million, or 1.8%, primarily due to increases in fuel surcharge. Fuel

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surcharges, excluding the effect of the Recent Acquisitions, increased 27.6% to $19.2 million for the nine months ended September 30, 2017 from $15.0 million for the same period in 2016. Freight revenue, excluding the effect of the Recent Acquisitions, increased less than 1.0% for the nine months ended September 30, 2017 compared to the same period in 2016 and brokerage revenue, excluding the effect of the Recent Acquisitions, decreased by 2.6% for the nine months ended September 30, 2017 compared to the same period in 2016.

In both segments, the increase in fuel surcharge revenue was the result of increases in fuel prices which commenced in the fourth quarter of 2016 and continued through the third quarter of 2017, with only a less than 1% decrease in fuel prices in the second quarter of 2017.

Salaries, Wages and Employee Benefits. Salaries, wages and employee benefits expense increased 16.3% to $174.3 million for the nine months ended September 30, 2017 from $149.9 million for the nine months ended September 30, 2016, primarily as a result of the Recent Acquisitions. The increase in salaries, wages and employee benefits expense, excluding the effect of the Recent Acquisitions, was 3.2%, or $4.9 million, and was primarily due to increased employee compensation, workers’ compensation premiums, and stock-based compensation, partially offset by a decrease in workers’ compensation claims.

The Company’s Flatbed Solutions segment’s salaries, wages and employee benefits expense was relatively flat for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

The Company’s Specialized Solutions segment had a $23.5 million, or 31.5%, increase in salaries, wages and employee benefits expense for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily as a result of the Recent Acquisitions. This increase, excluding the effect of the Recent Acquisitions, was 5.3%, or $3.9 million, and was primarily due to increased employee compensation, workers’ compensation premiums, and stock-based compensation, partially offset by a decrease in employee health insurance costs.

Fuel. Total fuel expense increased $15.3 million, or 31.3%, to $64.4 million for the nine months ended September 30, 2017 from $49.1 million for the nine months ended September 30, 2016. This increase was primarily a result of the Recent Acquisitions and higher fuel prices. Excluding the effect of the Recent Acquisitions, fuel expense increased 15.8% or $7.8 million. The U.S. national average diesel fuel price, as published by the U.S. Department of Energy, was $2.578 for the nine months ended September 30, 2017, compared to $2.250 for the same period in 2016, a 14.6% increase.

The Company’s Flatbed Solutions segment’s fuel expense increased 14.5% to $30.6 million for the nine months ended September 30, 2017 from $26.7 million for the nine months ended September 30, 2016, primarily as a result of higher fuel prices and partially offset by a 1.6% decrease in total miles.

The Company’s Specialized Solutions segment’s fuel expense increased 51.2% to $33.8 million for the nine months ended September 30, 2017 from $22.4 million for the nine months ended September 30, 2016, primarily as the result of the Recent Acquisitions and higher fuel prices. Excluding the effect of the Recent Acquisitions, fuel expense in the Specialized Solutions segment increased 17.4% to $26.3 million as a result of higher fuel prices and an increase in total miles.

Operations and Maintenance. Operations and maintenance expense increased 18.4% to $86.3 million for the nine months ended September 30, 2017 from $72.9 million for the nine months ended September 30, 2016, primarily as a result of the Recent Acquisitions. Operating and maintenance expense increased 6.9% after adjusting for the effect of the Recent Acquisitions.

The Company’s Flatbed Solutions segment’s operations and maintenance expense increased $2.9 million, or 11.7%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of increased shop supplies, road maintenance, tire replacements, and tractor lease costs as the Company’s utilization of operating leases to finance tractor purchases increased in 2017.

The Company’s Specialized Solutions segment’s operations and maintenance expense increased $10.3 million, or 21.6%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of the Recent Acquisitions. Excluding the effect of the Recent Acquisitions, operations and maintenance expense increased $2.0 million, or 4.1%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of increased tractor lease costs as the Company’s utilization of operating leases to finance tractor purchases increased in 2017 and higher pilot car expenses for alternative energy projects and other over-dimension loads, partially offset by decreases in in-house maintenance, road maintenance, and tire replacement costs.

Purchased Freight. Total purchased freight expense increased 23.6% from $120.5 million during the nine months ended September 30, 2016 to $148.9 million during the nine months ended September 30, 2017, primarily as a result of the Recent Acquisitions. Excluding the effect of the Recent Acquisitions on purchased freight expense, total purchased freight expense increased 7.0% to $128.9 million for the nine months ended September 30, 2017. Purchased freight expense from owner-operators, excluding the Recent Acquisitions, increased

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7.2% from $69.1 million during the nine months ended September 30, 2016 to $74.1 million during the nine months ended September 30, 2017, primarily as a result of increases in fuel surcharge reimbursements made to owner-operators as a result of higher fuel prices. Purchased freight expense from third-party capacity providers, excluding the Recent Acquisitions, increased 8.0% from $49.1 million during the nine months ended September 30, 2016 to $53.0 million during the nine months ended September 30, 2017, primarily as a result of the increase in rates on brokered loads.

The Company’s Flatbed Solutions segment’s purchased freight expense increased 17.5% to $70.2 million for the nine months ended September 30, 2017 from $59.8 million for the nine months ended September 30, 2016, primarily due to increases in total loads requiring higher utilization of owner-operators and third party capacity providers in the Company’s Flatbed Solutions segment. Purchased freight expense from owner-operators increased 10.6% to $49.2 million for the nine months ended September 30, 2017 from $44.4 million for the nine months ended September 30, 2016. Purchased freight expense from third-party capacity providers increased 39.1% from $13.5 million during the nine months ended September 30, 2016 to $18.8 million during the nine months ended September 30, 2017, primarily as a result of the increase in brokered loads in the Company’s Flatbed Solutions segment.

The Company’s Specialized Solutions segment’s purchased freight expense increased 30.5% to $83.7 million during the nine months ended September 30, 2017 from $64.2 million during the nine months ended September 30, 2016, as a result of the Recent Acquisitions. Excluding the effect of the Recent Acquisitions on purchased freight expense, total purchased freight expense decreased slightly to $63.7 million for the nine months ended September 30, 2017. Purchased freight expense from owner-operators, excluding the Recent Acquisitions, was relatively flat, increasing only 1.0% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. Purchased freight expense from third-party capacity providers, excluding the Recent Acquisitions, decreased 4.0% from $35.5 million during the nine months ended September 30, 2016 to $34.1 million during the nine months ended September 30, 2017, primarily as a result of increased utilization of company drivers during the current year.

Depreciation and Amortization. Depreciation and amortization expense increased 6.4% to $53.8 million during the nine months ended September 30, 2017 from $50.5 million during the nine months ended September 30, 2016, as a result of the Recent Acquisitions. After adjusting for the effect of the Recent Acquisitions, depreciation and amortization expense decreased 4.9%, primarily as a result of an increasing shift in utilization of operating leases to finance capital expenditures.

The Company’s Flatbed Solutions segment had a 3.3% decrease in depreciation and amortization expense for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 primarily as a result of a 1.3% reduction in company-owned tractors.

The Company’s Specialized Solutions segment had a 14.4% increase in depreciation and amortization expense for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 as a result of the Recent Acquisitions. After adjusting for the effect of the Recent Acquisitions, depreciation and amortization expense decreased 6.1%, primarily as a result of an increasing shift in utilization of operating leases to finance capital expenditures.

Taxes and Licenses. Taxes and license expense increased from $6.9 million for the nine months ended September 30, 2016 to $7.9 million for the nine months ended September 30, 2017. Excluding the effect of the Recent Acquisitions, operating taxes and license expense, as a percentage of revenue, was 1.3% for the nine months ended September 30, 2017 and 1.4% for the nine months ended September 30, 2016.

Insurance and Claims. Insurance and claims expense increased 13.7% to $15.5 million during the nine months ended September 30, 2017 from $13.6 million during the nine months ended September 30, 2016, primarily as a result of the Recent Acquisitions. Excluding the effect of the Recent Acquisitions, insurance and claims increased 1.6%, or $0.2 million. This increase can be primarily attributed to an increase in insurance premium rates, partially offset by a marginal decrease in total miles of 0.8% excluding miles from the Recent Acquisitions.

Interest Expense. Interest expense consists of cash interest, non-cash paid-in-kind interest, amortization of related issuance costs and fees and prepayment penalties. Interest expense increased 20.2% to $21.1 million during the nine months ended September 30, 2017 from $17.5 million during the nine months ended September 30, 2016. This increase was primarily attributable to an increase in amortization of debt issuance costs and higher interest rates on the Term Loan Facility as compared to debt outstanding in 2016 under the Senior Term Loan and Equipment Term Loans.

Income Tax. Income tax expense decreased from $0.6 million for the nine months ended September 30, 2016 to a benefit of $3.4 million for the nine months ended September 30, 2017. Excluding the effect of the Recent Acquisitions, the increase was primarily the result of the increase in loss before provision (benefit) for income taxes of $13.4 million for the nine months ended September 30, 2017 compared to the same period in 2016. The effective tax rate was 22.6% for the nine months ended September 30, 2017, compared to (69.1%) for the nine months ended September 30, 2016. The effective income tax rate varies from the federal statutory rate of 35% primarily due to state income taxes and the impact of nondeductible permanent differences, including driver per diems, transaction expenses and withdrawn Private Daseke IPO expenses.

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Non-GAAP Financial Measures

Adjusted EBITDA, Adjusted EBITDAR and Free Cash Flow

Adjusted EBITDA, Adjusted EBITDAR and free cash flow are not recognized measures under GAAP. The Company uses these non-GAAP measures as supplements to its GAAP results in evaluating certain aspects of its business, as described below.

The Company defines Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, including other fees and charges associated with indebtedness, net of interest income, (iii) income taxes, (iv) acquisition-related transaction expenses (including due diligence costs, legal, accounting and other advisory fees and costs, retention and severance payments and financing fees and expenses), (v) non-cash impairments, (vi) losses (gains) on sales of defective revenue equipment out of the normal replacement cycle, (vii) impairments related to defective revenue equipment sold out of the normal replacement cycle, (viii) initial public offering-related expenses (which offering Private Daseke withdrew at the end of 2015), (ix) expenses related to the Business Combination and related transactions, (x) non-cash stock and equity-compensation expense, and (xi) accounting charges resulting from accounting for the possible earn-out pursuant to the Business Combination. The Company defines Adjusted EBITDAR as Adjusted EBITDA plus tractor operating lease charges.

The Company’s board of directors and executive management team use Adjusted EBITDA and Adjusted EBITDAR as key measures of its performance and for business planning. Adjusted EBITDA and Adjusted EBITDAR assist them in comparing its operating performance over various reporting periods on a consistent basis because they remove from the Company’s operating results the impact of items that, in their opinion, do not reflect the Company’s core operating performance. Adjusted EBITDA and Adjusted EBITDAR also allow the Company to more effectively evaluate its operating performance by allowing it to compare the results of operations against its peers without regard to its or its peers’ financing method or capital structure. Adjusted EBITDAR is used to view operating results before lease charges as these charges can vary widely among trucking companies due to differences in the way that trucking companies finance their fleet acquisitions. The Company’s method of computing Adjusted EBITDA is substantially consistent with that used in its debt covenants and also is routinely reviewed by its management for that purpose.

The Company believes its presentation of Adjusted EBITDA and Adjusted EBITDAR is useful because they provide investors and industry analysts the same information that the Company uses internally for purposes of assessing its core operating performance. However, Adjusted EBITDA and Adjusted EBITDAR are not substitutes for, or more meaningful than, net income (loss), cash flows from operating activities, operating income or any other measure prescribed by GAAP, and there are limitations to using non-GAAP measures such as Adjusted EBITDA and Adjusted EBITDAR. Certain items excluded from Adjusted EBITDA and Adjusted EBITDAR are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital, tax structure and the historic costs of depreciable assets. Also, other companies in its industry may define Adjusted EBITDA and Adjusted EBITDAR differently than the Company does, and as a result, it may be difficult to use Adjusted EBITDA, Adjusted EBITDAR or similarly named non-GAAP measures that other companies may use to compare the performance of those companies to its performance. Because of these limitations, Adjusted EBITDA and Adjusted EBITDAR should not be considered measures of the income generated by the Company’s business or discretionary cash available to it to invest in the growth of its business. The Company’s management compensates for these limitations by relying primarily on the Company’s GAAP results and using Adjusted EBITDA and Adjusted EBITDAR supplementally.

The Company defines free cash flow as Adjusted EBITDA less net capital expenditures (capital expenditures less proceeds from equipment sales). Its board of directors and executive management team use free cash flow to assess its performance and ability to fund operations and make additional investments. Free cash flow represents the cash that its business generates from operations, before taking into account cash movements that are non-operational. The Company believes its presentation of free cash flow is useful because it is one of several indicators of its ability to service debt, make investments and/or return capital to its stockholders. The Company also believes that free cash flow is one of several benchmarks used by investors and industry analysts for comparison of performance in its industry, although its measure of free cash flow may not be directly comparable to similar measures reported by other companies. Furthermore, free cash flow is not a substitute for, or more meaningful than, net income (loss), cash flows from operating activities, operating income or any other measure prescribed by GAAP, and there are limitations to using non-GAAP measures such as free cash flow. Accordingly, free cash flow should not be considered a measure of the income generated by its business or discretionary cash available to it to invest in the growth of its business. The Company’s management compensates for these limitations by relying primarily on the Company’s GAAP results and using free cash flow supplementally.

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A reconciliation of Adjusted EBITDA, Adjusted EBITDAR and free cash flow to net income (loss) for the three and nine months ended September 30, 2017 and 2016 is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2017		2016		2017		2016

Net income (loss)	$	50	$	(1,257)	$	(11,802)	$	(1,486)
Depreciation and amortization		19,805		16,998		53,758		50,515
Interest income		(76)		(4)		(130)		(40)
Interest expense		8,624		6,724		24,947		17,521
Income tax provision (benefit)		(2,862)		683		(3,448)		607
Acquisition-related transaction expenses		773		16		2,255		289
Impairment		—		1,195		—		1,195
Stock based compensation		663		—		1,201		—
Withdrawn initial public offering-related expenses		—		259		—		3,050
Net losses on sales of defective revenue equipment out of the normal replacement cycle		—		22		—		718
Impairment on sales of defective revenue equipment out of the normal replacement cycle		—		—		—		190
Expenses related to the Business Combination and related transactions		—		344		2,034		344
Tractor operating lease charges		4,448		3,610		12,366		9,324
Adjusted EBITDAR	$	31,425	$	28,590	$	81,181	$	82,227
Less tractor operating lease charges		(4,448)		(3,610)		(12,366)		(9,324)
Adjusted EBITDA	$	26,977	$	24,980	$	68,815	$	72,903
Net capital expenditures		(14,930)		(10,549)		(23,922)		(31,236)
Free cash flow	$	12,047	$	14,431	$	44,893	$	41,667

Adjusted Operating Ratio

Adjusted operating ratio is not a recognized measure under GAAP. The Company uses adjusted operating ratio as a supplement to its GAAP results in evaluating certain aspects of its business, as described below. The Company defines adjusted operating ratio as (a) total operating expenses (i) less fuel surcharges, acquisition-related transaction expenses, non-cash impairment charges and initial public offering-related expenses (which offering Daseke withdrew at the end of 2015) and (ii) further adjusted for the net impact of the step-up in basis resulting from acquisitions (such as increased depreciation and amortization expense), as a percentage of (b) total revenue excluding fuel surcharge revenue.

The Company’s board of directors and executive management team view adjusted operating ratio, and its key drivers of revenue quality, growth, expense control and operating efficiency, as a very important measure of the Company’s performance. The Company believes fuel surcharge is often volatile and eliminating the impact of this source of revenue (by eliminating fuel surcharge from revenue and by netting fuel surcharge against fuel expense) affords a more consistent basis for comparing its results of operations between periods. The Company also believes excluding acquisition-related transaction expenses, additional depreciation and amortization expenses as a result of acquisitions, non-cash impairments and withdrawn initial public offering-related expenses enhances the comparability of its performance between periods.

The Company believes its presentation of adjusted operating ratio is useful because it provides investors and industry analysts the same information that it uses internally for purposes of assessing its core operating profitability. However, adjusted operating ratio is not a substitute for, or more meaningful than, operating ratio, operating margin or any other measure derived solely from GAAP measures, and there are limitations to using non-GAAP measures such as adjusted operating ratio. Although the Company believes that adjusted operating ratio can make an evaluation of its operating performance more consistent because it removes items that, in its opinion, do not reflect its core operations, other companies in its industry may define adjusted operating ratio differently than it does. As a result, it may be difficult to use adjusted operating ratio or similarly named non-GAAP measures that other companies may use to compare the performance of those companies to the Company’s performance. The Company’s management compensates for these limitations by relying primarily on its GAAP results and using adjusted operating ratio supplementally.

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A reconciliation of adjusted operating ratio to operating ratio for each of the three and nine months ended September 30, 2017 and 2016 is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2017		2016		2017		2016

Total revenue	$	231,322	$	174,148	$	589,079	$	501,386
Fuel surcharge		18,008		12,756		48,331		34,562
Operating revenue, net of fuel surcharge	$	213,314	$	161,392	$	540,748	$	466,824

Total operating expenses	$	225,618	$	168,066	$	579,759	$	485,050
Fuel surcharge		18,008		12,756		48,331		34,562
Acquisition-related transaction expenses		773		16		2,255		289
Impairment		—		1,195		—		1,195
Withdrawn initial public offering-related expenses		—		259		—		3,050
Expenses related to the Business Combination and related transactions		—		344		2,034		344
Net impact of step-up in basis of acquired assets		3,260		1,637		7,088		5,911
Adjusted operating expenses	$	203,577	$	151,859	$	520,051	$	439,699

Operating ratio		97.5%		96.5%		98.4%		96.7%
Adjusted operating ratio		95.4%		94.1%		96.2%		94.2%

A reconciliation of the Company’s Flatbed Solutions segment’s adjusted operating ratio to operating ratio for the three and nine months ended September 30, 2017 and 2016 is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2017		2016		2017		2016

Total revenue(1)	$	85,592	$	78,975	$	253,794	$	237,169
Fuel surcharge		8,400		7,284		25,145		19,832
Operating revenue, net of fuel surcharge	$	77,192	$	71,691	$	228,649	$	217,337

Total operating expenses	$	80,837	$	75,181	$	238,839	$	223,128
Fuel surcharge		8,400		7,284		25,145		19,832
Net impact of step-up in basis of acquired assets		227		596		888		2,835
Adjusted operating expenses	$	72,210	$	67,301	$	212,806	$	200,461

Operating ratio		94.4%		95.2%		94.1%		94.1%
Adjusted operating ratio		93.5%		93.9%		93.1%		92.2%

(1)

Includes intersegment revenues and expenses, as applicable, which are eliminated in the Company’s consolidated results.

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A reconciliation of the Company’s Specialized Solutions segment’s adjusted operating ratio to Operating Ratio for the three and nine months ended September 30, 2017 and 2016 is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2017		2016		2017		2016

Total revenue(1)	$	147,631	$	96,534	$	340,289	$	267,651
Fuel surcharge		9,756		5,588		23,620		15,024
Operating revenue, net of fuel surcharge	$	137,875	$	90,946	$	316,669	$	252,627

Total operating expenses	$	140,472	$	90,795	$	327,533	$	252,962
Fuel surcharge		9,756		5,588		23,620		15,024
Impairment		—		1,195		—		1,195
Net impact of step-up in basis of acquired assets		3,033		1,040		6,200		3,076
Adjusted operating expenses	$	127,683	$	82,972	$	297,713	$	233,667

Operating ratio		95.2%		94.1%		96.3%		94.5%
Adjusted operating ratio		92.6%		91.2%		94.0%		92.5%

(1)Includes intersegment revenues and expenses, as applicable, which are eliminated in the Company’s consolidated results.

Liquidity and Capital Resources and Capital Requirements

Overview

The Company’s business requires substantial amounts of cash to cover operating expenses as well as to fund items such as cash capital expenditures on its fleet and other assets, working capital changes, principal and interest payments on debt obligations, letters of credit to support insurance requirements and tax payments. The Company expects net capital expenditures to be approximately $35.0 million for 2017.

The Company’s primary sources of liquidity have been provided by operations, issuances of capital stock and borrowings under its credit facility. The Company had the following sources of liquidity available at September 30, 2017 and December 31, 2016.


(In thousands)	September 30, 2017		December 31, 2016

Cash	$	112,510	$	3,695
Availability under line of credit		70,000		32,958
Total	$	182,510	$	36,653

Cash increased by $108.8 million from December 31, 2016 to September 30, 2017. This increase primarily resulted from proceeds of new debt financing and equities issued, net of debt repayments and share repurchases, in conjunction with the Business Combination. Net proceeds totaled $34.7 million. See Note 2 of Notes to Consolidated Financial Statements for more information. Additionally, on September 19, 2017, the Company raised $63.6 million from an offering of 5,675,967 shares of its common stock. See Note 11 of the Notes to the Consolidated Financial Statements for more information.

As of September 30, 2017, the Company has (i) a $350.0 million senior secured term loan credit facility, consisting of a $250.0 million term loan and up to $100.0 million of term loans funded under a delayed draw term loan facility, and (ii) an asset-based senior secured revolving credit facility with an aggregate maximum credit amount equal to $70.0 million (subject to availability under a borrowing base). The delayed draw term loans are available to support the Company’s acquisition activities. See Note 9 of Notes to Consolidated Financial Statements for more information regarding the Term Loan Facility, the ABL Facility, the Senior Term Loan and the Line of Credit.

On August 16, 2017, the Company obtained an amendment of the Term Loan Facility that increased the delayed draw incurrence condition relating to pro forma total leverage ratio to 4.25x from 3.50x, effective August 16, 2017 through the maturity of the delayed draw term loan facility in February 2018, which enabled the Company to access $60.5 million from the delayed draw term loan facility in the three months ended September 30, 2017. The Term Loan Facility amendment also increased the total leverage ratio covenant for the test periods ending September 30, 2017 and December 31, 2017 to 4.75x from 4.25x, with step-downs reverting to pre-amendment levels beginning in the test period ending March 31, 2018. On August 31, 2017, the Company obtained an amendment to the ABL Facility that, among other things, similarly modified the total leverage ratio covenant thereunder.

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The Company believes it can finance its expected cash needs, including debt repayment, in the short-term with cash flows from operations and borrowings available under the ABL Facility. The Company expects that the Term Loan Facility and ABL Facility will provide sufficient credit availability to support its ongoing operations, fund its new debt service requirements, capital expenditures, and working capital needs. Over the long-term, the Company will continue to have significant capital requirements, and expects to devote substantial financial resources to grow its operations and fund its acquisition activities. As a result of these funding requirements, the Company likely will need to sell additional equity or debt securities or seek additional financing through additional borrowings, lease financing or equity capital. The availability of financing or equity capital will depend upon the financial condition and results of operations as well as prevailing market conditions. If such additional borrowings, lease financing or equity capital is not available at the time it needs to incur such expenditures, then the Company may be required to extend the maturity of then outstanding indebtedness, rely on alternative financing arrangements or engage in asset sales.

Cash Flows

The Company’s summary statements of cash flows information for the nine months ended September 30, 2017 and 2016 is set forth in the table below:


	Nine Months Ended September 30,
(In thousands)	2017		2016

Net cash provided by operating activities	$	26,458	$	49,108
Net cash provided by (used in) investing activities	$	(101,446)	$	1,281
Net cash provided by (used in) financing activities	$	183,833	$	(50,506)

Operating Activities. Cash provided by the Company’s operating activities consists of net loss adjusted for certain non-cash items, including depreciation and amortization, deferred interest, gain/loss on disposal of property and equipment, deferred income taxes, deferred gain and interest recognized on sales-type leases, stock-based compensation, bad debt expense and the effect of changes in working capital and other activities.

Cash provided by operating activities was $26.5 million during the nine months ended September 30, 2017 and consisted of $11.8 million of net loss plus $59.3 million of non-cash items, consisting primarily of depreciation, amortization and stock-based compensation, partially offset by $4.8 million in deferred taxes, less $16.2 million of net cash used for working capital and other activities. Cash used for working capital and other activities during the nine months ended September 30, 2017 primarily reflect a $28.6 million increase in accounts receivable, $3.8 million in payments received on sales-type leases, and a $8.4 million increase in accounts payable and accrued expenses. Cash provided by operating activities was $49.1 million during the nine months ended September 30, 2016 and consisted of $1.5 million of net loss plus $53.3 million of non-cash items, consisting primarily of depreciation and amortization, less $2.4 million of net cash used for working capital and other activities. Cash used for working capital and other activities during the nine months ended September 30, 2016 primarily reflect a $7.2 million increase in accounts receivable, driver advances and other receivables, a $1.3 million decrease in accounts payable and accrued expenses, offset by a $3.5 million decrease in prepaid expenses and other assets and $2.8 million in payments received on sales-type leases.

The $22.9 million decrease in cash provided by operating activities during the nine months ended September 30, 2017 as compared with the nine months ended September 30, 2016, excluding the Recent Acquisitions, was primarily the result of a $4.7 million increase in net loss, a $4.1 million decrease in deferred tax liabilities, a $2.2 million decrease in depreciation, and a $10.9 million increase in net cash used for working capital and other activities.

Investing Activities. Cash flows from investing activities decreased from $1.3 million provided by investing activities for the nine months ended September 30, 2016 to $101.4 million used in investing activities for the nine months ended September 30, 2017 due to net cash paid for acquisitions of $91.1 million and an increase in net purchases of revenue equipment of $11.6 million in the nine months ended September 30, 2017 compared to the same period in 2016.

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Total net capital expenditures for the nine months ended September 30, 2017 and 2016 are shown below:


	Nine Months Ended September 30,
(In thousands)	2017		2016

Revenue equipment (tractors, trailers and trailer accessories)	$	14,391	$	1,904
Buildings and building improvements		174		401
Other		1,000		838
Total cash capital expenditures	$	15,565	$	3,143
Less: Proceeds from sales of property and equipment		5,252		4,424
Net cash capital (proceeds) expenditures(1)	$	10,313	$	(1,281)

(1)

The Company acquires property and revenue equipment with debt and capital lease obligations. For the nine months ended September 30, 2017 and 2016, the Company incurred $13.6 million and $32.5 million, respectively, of debt and capital lease obligations to acquire property and revenue equipment.

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The following tables provide details on the cash and noncash components of gross capital expenditures for the Company’s reportable segments for the three and nine months ended September 30, 2017 and 2016 (in thousands):


	Flatbed		Specialized
	Solutions		Solutions		Corporate/		Consolidated
	Segment		Segment		Eliminations		Total
Three Months Ended September 30, 2017
Cash flows from investing activities
Purchases of property and equipment	$	2,297	$	6,407	$	55	$	8,759
Proceeds from sale of property and equipment		(110)		(2,190)		—		(2,300)

Noncash investing and financing activities
Property and equipment acquired with debt or capital lease obligations		2,298		6,172		—		8,470
Gross capital expenditures	$	4,485	$	10,389	$	55	$	14,929


Three Months Ended September 30, 2016
Cash flows from investing activities
Purchases of property and equipment	$	326	$	1,029	$	19	$	1,374
Proceeds from sale of property and equipment		(164)		(281)		—		(445)

Noncash investing and financing activities
Property and equipment acquired with debt or capital lease obligations		7,698		1,922		—		9,620
Gross capital expenditures	$	7,860	$	2,670	$	19	$	10,549


	Flatbed		Specialized
	Solutions		Solutions		Corporate/		Consolidated
	Segment		Segment		Eliminations		Total
Nine Months Ended September 30, 2017
Cash flows from investing activities
Purchases of property and equipment	$	2,521	$	12,941	$	103	$	15,565
Proceeds from sale of property and equipment		(707)		(4,545)		—		(5,252)

Noncash investing and financing activities
Property and equipment acquired with debt or capital lease obligations		4,839		8,770		—		13,609
Gross capital expenditures	$	6,653	$	17,166	$	103	$	23,922


Nine Months Ended September 30, 2016
Cash flows from investing activities
Purchases of property and equipment	$	688	$	2,299	$	156	$	3,143
Proceeds from sale of property and equipment		(2,756)		(1,668)		—		(4,424)

Noncash investing and financing activities
Property and equipment acquired with debt or capital lease obligations		15,019		17,498		—		32,517
Gross capital expenditures	$	12,951	$	18,129	$	156	$	31,236

Financing Activities. Cash flows from financing activities increased from $50.5 million used in financing activities for the nine months ended September 30, 2016 to $183.8 million provided by financing activities for the nine months ended September 30, 2017. This increase was primarily a result of a recapitalization and refinancing of outstanding long-term debt in conjunction with the Business Combination. The recapitalization included $64.6 million of proceeds upon issuance of common stock and $65.0 million of proceeds upon issuance of Series A Preferred Stock, partially offset by $36.2 million in repurchases of common stock. Cash inflows from the recapitalization and proceeds from a new $250.0 million term loan (discussed under Material Debt below) were utilized in part for repayments of $66.7 million in subordinated debt, $211.1 million in long-term debt, $16.7 million on the line of credit and $14.2 million in financing fees. Excluding cash flows from the Business Combination, cash flows from financing activities included $6.9 million net repayments on the line of credit, $100.0 million advance on the delayed draw term loan facility, net of $16.6 million in repayments of long-term debt, $3.7 million Series A and Series B Preferred Stock dividends and proceeds of $63.6 million for the September 2017 issuance of common stock.

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Material Debt

Overview

As of September 30, 2017, the Company had the following material debt:

the Term Loan Facility and the ABL Facility;

secured equipment loans and capital lease agreements; and

bank mortgage secured by real estate

The amounts outstanding under such agreements were as follows as of September 30, 2017 (in thousands):


Term Loan Facility	$	348,462
Mortgages		3,730
Equipment term loans and capital leases		83,478
Total long-term debt and capital leases		435,670
Less: current portion		(26,514)
Long-term debt and capital leases, less current portion	$	409,156

See Note 9 of Notes to Consolidated Financial Statements for information regarding the Company’s material debt.

Off-Balance Sheet Arrangements

The Company’s financial condition, results of operations, liquidity, capital expenditures and capital resources are not materially affected by off-balance sheet transactions. Daseke had stand-by letters of credit in the amount of $11.1 million at September 30, 2017. The letters of credit provide collateral primarily for liability insurance claims. Also, the Company leases certain revenue equipment, terminals and office building facilities under non-cancelable operating leases. Daseke’s rent expense under these leases for the nine months ended September 30, 2017 was approximately $17.2 million.

At September 30, 2017, there were 17,520,332 shares of common stock issuable upon exercise of outstanding warrants.

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements in the Company’s Current Report on Form 8-K/A filed on March 16, 2017. The Company considers certain of these accounting policies to be “critical” to the portrayal of the Company’s financial position and results of operations, as they require the application of significant judgment by management. As a result, they are subject to an inherent degree of uncertainty. The Company identifies and discusses these “critical” accounting policies in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Current report on Form 8-K/A filed on March 16, 2017. Management bases its estimates and judgments on historical experience and on various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, management evaluates its estimates and judgments, including those considered “critical.” Management has discussed the development, selection and evaluation of accounting estimates, including those deemed “critical,” and the associated disclosures in this Quarterly Report on Form 10-Q with the Audit Committee of the Company’s board of directors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Company’s market risk since December 31, 2016. For further information on the Company’s market risk, refer to “Item 2.01. Completion of Acquisition or Disposition of Assets—Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk—Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Current Report on Form 8-K/A filed March 16, 2017.

Item 4. Controls and Procedures

On February 27, 2017, Hennessy consummated the merger of Hennessy’s wholly-owned subsidiary, HCAC Merger Sub, Inc., with and into Daseke, Inc., with Daseke, Inc. surviving as a direct wholly-owned subsidiary of Hennessy. Upon the closing of the Business Combination on February 27, 2017, the sole business conducted by the Company is the business conducted by Daseke. Also, as a result of the Business

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Combination, the internal control over financial reporting utilized by Daseke prior to the Business Combination became the internal control over financial reporting of the Company.

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the nine months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to a variety of legal proceedings arising in the normal course of business. While the results of these proceedings cannot be predicted with certainty, the final outcome of these proceedings are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes in the risks facing the Company as described in the Company’s Current Report on Form 8-K filed on March 3, 2017, as amended on March 16, 2017 and May 4, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2017, in connection with, and as partial consideration for, certain acquisitions, the Company issued shares of common stock that were not registered under the Securities Act of 1933, as amended (the Securities Act), in reliance on the private offering exemption of Section 4(a)(2) of the Securities Act or the private offering safe harbor provision of Rule 506 of Regulation D promulgated thereunder based on the following factors: (i) the number of offerees or purchasers, as applicable, (ii) the absence of general solicitation, (iii) investment representations obtained from those receiving shares of the Company’s common stock, including with respect to their status as accredited investors, (iv) the provision of appropriate disclosure, and (v) the placement of restrictive legends on the certificates reflecting the securities. For additional information, see Note 3 of Notes to Consolidated Financial Statements.

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Item 6. Exhibits

EXHIBIT INDEX


Exhibit No.		Exhibit
3.1		Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the registrant on March 3, 2017).

3.2		Certificate of Designations, Preferences, Rights and Limitations of 7.625% Series A Convertible Cumulative Preferred Stock (incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed by the registrant on March 3, 2017).

3.3		Bylaws (incorporated by reference to Exhibit 3.3 to the registrant’s registration statement on Form S-1 (File No. 333-205152) filed by the registrant on June 22, 2015).

10.1		Amendment No. 1 to Term Loan Agreement, dated as of August 16, 2017, among Daseke Companies, Inc., Daseke, Inc., Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on August 22, 2017).

10.2*		First Amendment to Fifth Amended and Restated Revolving Credit and Security Agreement, dated as of August 31, 2017, by and among Daseke, Inc. Daseke Companies, Inc., each of its subsidiaries party thereto, the lenders party thereto and PNC Bank, National Association.

31.1*		Chief Executive Officer certification under Section 302 of Sarbanes-Oxley Act of 2002.

31.2*		Chief Financial Officer certification under Section 302 of Sarbanes-Oxley Act of 2002.

32.1**		Chief Executive Officer certification under Section 906 of Sarbanes-Oxley Act of 2002.

32.2**		Chief Financial Officer certification under Section 906 of Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema Document.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

_____________________________

Filed herewith.

Furnished herewith.

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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.


Date November 9, 2017	DASEKE, INC.

	By:	/s/ R. Scott Wheeler
	Name:	R. Scott Wheeler
	Title:	Executive Vice President and Chief Financial Officer
		(On behalf of the Registrant and as the Registrant’s Principal Financial
		Officer)