RADIANT LOGISTICS, INC - Quarter Report: 2010 December (Form 10-Q)

 

l)	Revenue Recognition and Purchased Transportation Costs

 

The Company is the primary obligor responsible for providing the service desired by the customer and is responsible for fulfillment, including the acceptability of the service(s) ordered or purchased by the customer. At the Company’s sole discretion, it sets the prices charged to its customers, and is not required to obtain approval or consent from any other party in establishing its prices. The Company has multiple suppliers for the services it sells to its customers, and has the absolute and complete discretion and right to select the supplier that will provide the product(s) or service(s) ordered by a customer, including changing the supplier on a shipment-by-shipment basis. In most cases, the Company determines the nature, type, characteristics, and specifications of the service(s) ordered by the customer. The Company also assumes credit risk for the amount billed to the customer.

 

As a non-asset based carrier, the Company does not own transportation assets. The Company generates the major portion of its air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to its customers. Based upon the terms in the contract of carriage, revenues related to shipments where the Company issues a House Airway Bill ("HAWB") or a House Ocean Bill of Lading ("HOBL") are recognized at the time the freight is tendered to the direct carrier at origin. Costs related to the shipments are also recognized at this same time based upon anticipated margins, contractual arrangements with direct carriers, and other known factors. The estimates are routinely monitored and compared to actual invoiced costs. The estimates are adjusted as deemed necessary by the Company to reflect differences between the original accruals and actual costs of purchased transportation.

 

This method generally results in recognition of revenues and purchased transportation costs earlier than the preferred methods under generally accepted accounting principles ("GAAP") which do not recognize revenue until a proof of delivery is received or which recognize revenue as progress on the transit is made. The Company’s method of revenue and cost recognition does not result in a material difference from amounts that would be reported under such other methods.

 

12

---

 

m)	Share-Based Compensation

 

The Company accounts for share-based compensation under the fair value recognition provisions such that compensation cost is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the percentage of awards which will be forfeited, stock volatility, the expected life of the award, and other inputs. If actual forfeitures differ significantly from the estimates, share-based compensation expense and the Company's results of operations could be materially impacted.

 

For the three months ended December 31, 2010, the Company recorded share based compensation expense of $25,833, which, net of income taxes, resulted in a $16,016 reduction of net income. For the three months ended December 31, 2009, the Company recorded share based compensation expense of $54,696, which, net of income taxes, resulted in a $33,912 reduction of net income.

 

For the six months ended December 31, 2010, the Company recorded share based compensation expense of $80,771, which, net of income taxes, resulted in a $50,078 reduction of net income. For the six months ended December 31, 2009, the Company recorded share based compensation expense of $108,904, which, net of income taxes, resulted in a $67,520 reduction of net income.

 

n)	Basic and Diluted Income per Share

 

Basic income per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares, such as stock options, had been issued and if the additional common shares were dilutive.

 

For the three months ended December 31, 2010, the weighted average outstanding number of potentially dilutive common shares totaled 31,212,861 shares of common stock, including options to purchase 3,647,779 shares of common stock at December 31, 2010, of which 1,020,000 were excluded as their effect would have been anti-dilutive.  For the three months ended December 31, 2009, the weighted average outstanding number of potentially dilutive common shares totaled 32,723,181 shares of common stock, including options to purchase 3,620,000 shares of common stock at December 31, 2009, of which 3,060,000 were excluded as their effect would have been anti-dilutive.

 

For the six months ended December 31, 2010, the weighted average outstanding number of potentially dilutive common shares totaled 30,968,361 shares of common stock, including options to purchase 3,647,779 shares of common stock at December 31, 2010, of which 1,020,000 were excluded as their effect would have been anti-dilutive.  For the six months ended December 31, 2009, the weighted average outstanding number of potentially dilutive common shares totaled 33,135,684 shares of common stock, including options to purchase 3,620,000 shares of common stock at December 31, 2009, of which 3,060,000 were excluded as their effect would have been anti-dilutive.

 

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

		Three months ended December 31,								Six months ended December 31,
		2010				2009				2010				2009
Weighted average basic shares outstanding			30,122,700				32,533,680				30,296,880				32,950,810
Options			1,090,161				189,501				671,481				184,874
Weighted average dilutive shares outstanding			31,212,861				32,723,181				30,968,361				33,135,684

o)	Other Comprehensive Income

 

The Company has no components of Other Comprehensive Income and, accordingly, no Statement of Comprehensive Income has been included in the accompanying condensed consolidated financial statements.

 

13

---

 

p)	Reclassifications

 

Certain amounts for prior periods have been reclassified in the condensed consolidated financial statements to conform to the classification used in fiscal 2010.

 

q)	Subsequent events

 

On or about February 21, 2007, Team Air Express, Inc. d/b/a Team Worldwide ("Team") commenced an action against the Company, as well as Texas Time Express, Inc., Douglas K. Tabor, and Michael E. Staten, in the District Court of the State of Texas, Tarrant County (the “Court”) captioned Cause No. 017 222706 07; Team Air Express, Inc. d/b/a Team Worldwide v. Airgroup Corporation, Texas Time Express, Inc., Douglas K. Tabor, individually and as officer of Texas Time Express, Inc., and Michael E. Staten, individually and as officer of Texas Time Express, Inc.

 

In its complaint, Team alleged that the Company, in conjunction with the other named defendants, tortuously interfered with an existing contract Team had in place with VRC Express, Inc. ("VRC"), its then existing Chicago, Illinois station location.  In their petition, Team alleged that the Company and other defendants caused VRC to leave the Team network of companies, and become a branch office of Airgroup Corporation.  The suit sought unspecified damages for the loss of business opportunity and profits as a result of VRC leaving the Team system.

 

This litigation was resolved on January 11, 2011 by agreement amongst the parties to enter an Agreed Order of Dismissal with prejudice, without admission of guilt and with affirmation of the parties’ right to freely compete in the marketplace. In connection with the settlement of the matter, the Company agreed to make a $150,000 donation to a mutually agreeable IRC 503(c) charitable organization.  Neither the Company, the co-defendants, nor Team received any compensation in connection with the settlement of the matter.

 

NOTE 3 –

RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. The guidance in ASU 2010-06 provides amendments to literature on fair value measurements and disclosures currently within the Accounting Standards Codification ("ASC") by clarifying certain existing disclosures and requiring new disclosures for the various classes of fair value measurements.   ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The guidance in ASU 2010-29 provides amendments to clarify the acquisition date which should be used for reporting the pro forma financial information disclosures in Topic 805 when comparative financial statements are presented. The amendments also improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination(s). The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

NOTE 4 –

ACQUISITION OF ADCOM EXPRESS, INC.

 

On September 5, 2008, the Company entered into and closed a Stock Purchase Agreement (the "Agreement") pursuant to which it acquired 100% of the issued and outstanding stock of Adcom Express, Inc., d/b/a Adcom Worldwide ("Adcom"), a privately-held Minnesota corporation. Founded in 1978, Adcom provides a full range of domestic and international freight forwarding solutions to a diversified account base including manufacturers, distributors and retailers through a combination of three company-owned and twenty-seven independent agency locations across North America.

 

 

14

---

 

Contingent consideration associated with the acquisition of Adcom included "Tier-1 Earn-Out Payments" of up to $700,000 annually, covering the four year earn-out period through June 30, 2012, based upon Adcom achieving certain levels of "Gross Profit Contribution" (as defined in the Agreement), payable 50% in cash and 50% in shares of Company common stock (valued at delivery date); and a "Tier-2 Earn-Out Payment" of up to $2,000,000, equal to 20% of the amount by which the Adcom cumulative Gross Profit Contribution exceeds $16,560,000 during the four year earn-out period. The Tier-1 Earn-Out Payments and certain amounts of the Tier-2 Payments may be subject to acceleration upon occurrence of a "Corporate Transaction" (as defined in the Agreement), which includes a sale of Adcom or the Company, or certain changes in corporate control.

 

Mr. Friedman, the sole shareholder of Adcom, earned $517,019 in Tier-1 earn-out payment for the year ended June 30, 2010.  This amount was paid 50% in cash and 50% in stock to Mr. Friedman during the quarter ended December 31, 2010.

 

Assuming minimum targeted earnings levels are achieved, the following table summarizes our contingent base earn-out payments related to the acquisition of Adcom, for the fiscal years indicated based on achieving Gross Profit Contributions (in thousands):

 

Estimated payment anticipated for fiscal year(1):	2012				2013
Earn-out period:	7/1/2010 – 6/30/2011				7/1/2011 – 6/30/2012
Earn-out payments:
Cash		$	350			$	350
Equity			350				350
Total potential earn-out payments		$	700			$	700
Total gross margin targets		$	4,320			$	4,320

 

(1) Earn-out payments are paid October 1 following each fiscal year end in a combination of cash and Company common stock.

 

NOTE 5 –

ACQUIRED INTANGIBLE ASSETS

 

The table below reflects acquired intangible assets related to the acquisitions of Airgroup, Automotive Services Group and Adcom:

 

15

---

 

 

		As of December 31, 2010								As of June 30, 2010
		Gross  Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
Amortizable intangible assets:
Customer related		$	5,752,000			$	4,268,670			$	5,752,000			$	3,796,340
Covenants not to compete			190,000				147,148				190,000				125,903
Total		$	5,942,000			$	4,415,818			$	5,942,000			$	3,922,243
Aggregate amortization expense:
For six months ended December 31, 2010						$	493,575
For six months ended December 31, 2009						$	591,978
Aggregate amortization expense for the years ending June 30:
2011 – For the remainder of the year						$	334,185
2012							769,772
2013							374,344
2014							47,881
Total						$	1,526,182

 

NOTE 6 –

VARIABLE INTEREST ENTITY

 

Certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have the sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties are considered "variable interest entities". RLP is 40% owned by Radiant Global Logistics ("RGL"), qualifies as a variable interest entity and is included in the Company’s condensed consolidated financial statements (see Note 7). RLP commenced operations in February 2007. Non-controlling interest recorded as an expense on the statements of operations was $92,832 and $58,678 for the six months ended December 31, 2010 and 2009, respectively.

 

The following table summarizes the balance sheets of RLP:

 

		December 31,				June 30,
		2010				2010
ASSETS
Accounts receivable		$	1,689			$	15,910
Accounts receivable – Radiant Logistics			138,464				110,336
Prepaid expenses and other current assets			401				950
Total assets		$	140,554			$	127,196
LIABILITIES AND PARTNERS' CAPITAL
Other accrued costs		$	4,920			$	16,284
Total liabilities		$	4,920			$	16,284
Partners' capital			135,634				110,912
Total liabilities and partners' capital		$	140,554			$	127,196

 

16

---

 

 

NOTE 7 –

RELATED PARTY

 

RLP is owned 40% by RGL and 60% by Radiant Capital Partners, LLC ("RCP"), a company for which the Chief Executive Officer of the Company is the sole member. RLP is a certified minority business enterprise which was formed for the purpose of providing the Company with a national accounts strategy to pursue corporate and government accounts with diversity initiatives. RCP’s ownership interest entitles it to a majority of the profits and distributable cash, if any, generated by RLP. The operations of RLP are intended to provide certain benefits to the Company, including expanding the scope of services offered by the Company and participating in supplier diversity programs not otherwise available to the Company. RGL currently provides administrative services necessary to operate RLP while RLP continues to develop. As the RLP operations mature, the Company will evaluate and approve all related service agreements between the Company and RLP, including the scope of the services to be provided by the Company to RLP and the fees payable to the Company by RLP, in accordance with the Company’s corporate governance principles and applicable Delaware corporation law. This process may include seeking the opinion of a qualified third party concerning the fairness of any such agreement or the approval of the Company’s shareholders. RLP is consolidated in the financial statements of the Company (see Note 6).

 

NOTE 8 –

FURNITURE AND EQUIPMENT

 

Furniture and equipment consists of the following:

 

		December 31,				June 30,
		2010				2010
Vehicles		$	33,788			$	33,788
Communication equipment			31,359				31,359
Office equipment			311,191				311,191
Furniture and fixtures			109,409				149,504
Computer equipment			643,689				606,405
Computer software			1,007,447				884,352
Leasehold improvements			448,502				439,197
			2,585,385				2,455,796
Less:  Accumulated depreciation and amortization			(1,704,707	)			(1,574,380	)
Furniture and equipment – net		$	880,678			$	881,416

 

Depreciation and amortization expense related to furniture and equipment was $158,491 and $203,739 for the six months ended December 31, 2010 and 2009, respectively.

 

NOTE 9 –

LONG TERM DEBT

 

In March 2010, the Company’s $15.0 million revolving credit facility, including a $0.5 million sublimit to support letters of credit (collectively, the "Facility"), was increased to $20.0 million with a maturity date of March 31, 2012. Advances under the Facility are available to fund future acquisitions, capital expenditures or for other corporate purposes, including the repurchase of the Company’s stock. Borrowings under the facility accrue interest, at the Company’s option, at the bank’s prime rate minus 0.75% to plus 0.50% or LIBOR plus 1.75% to 3.00%, and can be adjusted up or down during the term of the Facility based on the Company’s performance relative to certain financial covenants. The Facility is collateralized by accounts receivable and other assets of the Company and its subsidiaries and provides for advances of up to 80% of eligible domestic accounts receivable and for advances of up to 60% of eligible foreign accounts receivable.

 

The terms of the Facility are subject to certain financial and operational covenants which may limit the amount otherwise available under the Facility. The first covenant limits funded debt to a multiple of 4.00 times the Company’s consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted, measured on a rolling four quarter basis. The second financial covenant requires the Company to maintain a basic fixed charge coverage ratio of at least 1.1 to 1.0. The third financial covenant is a minimum profitability standard which requires the Company not to incur a net loss before taxes, amortization of acquired intangibles and extraordinary items in any two consecutive quarterly accounting periods.

 

17

---

 

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

 

The co-borrowers of the Facility include Radiant Logistics, Inc., RGL (f/k/a Airgroup Corporation), Radiant Logistics Global Services, Inc. ("RLGS"), RLP, and Adcom Express, Inc. (d/b/a Adcom Worldwide).  As a co-borrower under the Facility, the accounts receivable of RLP are eligible for inclusion within the overall borrowing base of the Company and all borrowers will be responsible for repayment of the debt associated with advances under the Facility, including those advanced to RLP.  At December 31, 2010, the Company was in compliance with all of its covenants.

 

As of December 31, 2010, the Company had $3,904,379 in advances under the Facility and $2,415,250 in outstanding checks, which had not yet been presented to the bank for payment. The outstanding checks have been reclassified from our cash, as they will be advanced from, or against, our Facility when presented for payment to the bank.  This results in total long term debt of $6,319,629.

 

At December 31, 2010, based on available collateral and $205,000 in outstanding letter of credit commitments, there was $7,850,888 available for borrowing under the Facility based on advances outstanding.

 

NOTE 10 –

PROVISION FOR INCOME TAXES

 

The acquisitions of Airgroup and Adcom resulted in $2,148,280 of long term deferred tax liability resulting from certain amortizable intangibles identified during the Company’s purchase price allocation which are not deductible for tax purposes. The long term deferred tax liability will be reduced as the non-deductible amortization of the intangibles is recognized. See Note 5.

 

For the three months ended December 31, 2010, the Company recognized net income tax expense of $413,319 which consisted of current income tax expense of $293,887 and deferred income tax expense of $119,432.  For the three months ended December 31, 2009, the Company recognized net income tax expense of $336,539 which consisted of current income tax expense of $538,008, and deferred income tax benefit of $201,469.

 

For the six months ended December 31, 2010, the Company recognized net income tax expense of $918,862 which consisted of current income tax expense of $917,869 and deferred income tax expense of $993.  For the six months ended December 31, 2009, the Company recognized net income tax expense of $407,665 which consisted of current income tax expense of $669,197, and deferred income tax benefit of $261,532.

 

Tax years which remain subject to examination by state authorities are the years ended June 30, 2008, 2009 and 2010.  Tax years which remain subject to examination by Federal authorities are the years ended June 30, 2008, 2009 and 2010.

 

NOTE 11 –

STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company is authorized to issue 5,000,000 shares of preferred stock, par value at $.001 per share. As of December 31, 2010 and 2009, none of the shares were issued or outstanding.

 

18

---

 

Common Stock Repurchase Program

 

During 2009, the Company's Board of Directors approved a stock repurchase program, pursuant to which up to 5,000,000 shares of its common stock could be repurchased under the program through December 31, 2010.  During the six months ended December 31, 2010, the Company purchased 1,490,740 shares of its common stock under this repurchase program at a cost of $471,265.

 

NOTE 12 –

SHARE-BASED COMPENSATION

 

During the six months ended December 31, 2010, the Company issued employee options to purchase 27,779 stock options at a $0.60 price per share in November, 2010.  The options vest 20% per year over a five year period.

 

Share based compensation costs recognized during the six months ended December 31, 2010, include compensation costs based on the fair value estimated on the grant-date for all share based payments granted to date. No options have been exercised as of December 31, 2010.

 

During the six months ended December 31, 2010, the weighted average fair value per share of employee options granted in November 2010 was $0.29.  The fair value of options granted were estimated on the date of grant using the Black-Scholes option pricing model, with the following assumptions for each issuance of options:

 

Risk-Free Interest Rate	0.22%
Expected Term	6.5 years
Expected Volatility	61.2%
Expected Dividend Yield	0.00%
Forfeiture Rate	0.00%

 

During the six months ended December 31, 2010 and 2009, the Company recognized stock option compensation expense of $80,771 and $108,904, respectively.  The following table summarizes activity under the plan for the six months ended December 31, 2010.

 

		Number of Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life - Years		Aggregate Intrinsic Value
Outstanding at June 30, 2010		3,620,000		$	0.503		6.29 years		$	50,400
Granted		27,779			0.600		9.89 years			13,890
Exercised		-			-		-			-
Forfeited		-			-		-			-
Expired		-			-		-			-
Outstanding at December 31, 2010		3,647,779		$	0.504		5.81 years		$	774,090
Exercisable at December 31, 2010		2,799,000		$	0.562		5.27 years		$	236,280

 

NOTE 13 –

OPERATING AND GEOGRAPHIC SEGMENT INFORMATION

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions regarding allocation of resources and assessing performance. The Company's chief decision-maker is the Chief Executive Officer. The Company continues to operate in a single operating segment.

 

The Company’s geographic operations outside the United States include shipments to and from Canada, Central America, Europe, Africa, Asia and Australia. The following data presents the Company’s revenue generated from shipments to and from these locations for the United States and all other countries, which is determined based upon the geographic location of a shipment's initiation and destination points (in thousands):

 

19

---

 

 

		United States								Other Countries								Total
		2010				2009				2010				2009				2010				2009
Three months ended December 31:
Revenue		$	25,537			$	19,385			$	18,960			$	19,731			$	44,497			$	39,116
Cost of transportation			16,295				11,554				14,020				16,058				30,315				27,612
Net revenue		$	9,242			$	7,831			$	4,940			$	3,673			$	14,182			$	11,504

 

		United Stated								Other Countries								Total
		2010				2009				2010				2009				2010				2009
Six months ended December 31:
Revenue		$	49,787			$	37,496			$	41,071			$	35,648			$	90,858			$	73,144
Cost of transportation			30,918				22,443				31,639				28,648				62,557				51,091
Net revenue		$	18,869			$	15,053			$	9,432			$	7,000			$	28,301			$	22,053

 

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

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding future operating performance, events, trends and plans. All statements other than statements of historical fact contained herein, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues and costs, and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expects," "intends," "plans," "projects," "estimates," "anticipates," or "believes" or the negative thereof or any variation thereon or similar terminology or expressions. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. While it is impossible to identify all of the factors that may cause our actual operating performance, events, trends or plans to differ materially from those set forth in such forward-looking statements, such factors include the inherent risks associated with our ability to: (i) use our current infrastructure as a "platform" upon which we can build a profitable global transportation and supply chain management company; (ii) retain and build upon the relationships we have with our exclusive agency offices; (iii) continue the development of our back office infrastructure and transportation and accounting systems in a manner sufficient to service our expanding revenues and base of exclusive agency locations; (iv) continue growing our business and maintain historical or increased gross profit margins; (v) locate suitable acquisition opportunities; (vi) secure the financing necessary to complete any acquisition opportunities we locate; (vii) assess and respond to competitive practices in the industries in which we compete; (viii) mitigate, to the best extent possible, our dependence on current management and certain of our larger exclusive agency locations; (ix) assess and respond to the impact of current and future laws and governmental regulations affecting the transportation industry in general and our operations in particular; and (x) assess and respond to such other factors which may be identified from time to time in our Securities and Exchange Commission ("SEC") filings and other public announcements including those set forth under the caption “Risk Factors” in Part 1 Item 1A of our annual report on Form 10-K for the year ended June 30, 2010. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing.  Readers are cautioned not to place undue reliance on our forward-looking statements, as they speak only as of the date made. Except as required by law, we assume no duty to update or revise our forward-looking statements.

 

20

---

 

The following discussion and analysis of our financial condition and result of operations should be read in conjunction with the financial statements and the related notes and other information included elsewhere in this report.

 

Overview

 

We are a Bellevue, Washington based non-asset based logistics company providing domestic and international freight forwarding services through a network which includes a combination of company-owned and exclusive agent offices across North America.  Operating under the Airgroup, Adcom & Radiant brands, we service a diversified account base including manufacturers, distributors and retailers using a network of independent carriers and international agents positioned strategically around the world.

 

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

 

We continue to identify a number of additional companies as suitable acquisition candidates and have completed two material acquisitions since our initial acquisition of Airgroup in January of 2006.  In November 2007, we acquired certain assets formerly used in the operations of the automotive division of Stonepath Group, Inc. in Detroit, Michigan to service the automotive industry. In September 2008, we acquired Adcom Express, Inc. d/b/a Adcom Worldwide ("Adcom"), adding an additional 30 locations across North America and augmenting our overall domestic and international freight forwarding capabilities. In connection with the acquisition of Adcom, we changed the name of Airgroup Corporation to Radiant Global Logistics, Inc. ("RGL") in order to better position its centralized back-office operations to service both the Airgroup and Adcom network brands.  RGL, through the Airgroup and Adcom network brands, has a diversified account base including manufacturers, distributors and retailers using a network of independent carriers and international agents positioned strategically around the world. We have built a global transportation and supply chain management company offering our customers domestic and international freight forwarding services and an expanding array of value-added supply chain management services, including order fulfillment, inventory management, and warehousing.

 

Our growth strategy will continue to focus on both organic growth and acquisitions.  From an organic perspective, we will focus on strengthening existing and expanding new customer relationships. One of the drivers of our organic growth will be retaining existing, and securing new exclusive agency locations. Since our acquisition of Airgroup, we have focused our efforts on the build-out of our network of exclusive agency offices, as well as enhancing our back-office infrastructure and transportation and accounting systems.  We will continue to search for targets that fit within its acquisition criteria. Our ability to secure additional financing will rely upon the sale of debt or equity securities, and the development of an active trading market for our securities.

 

21

---

 

As we continue to build out our network of exclusive agent locations to achieve a level of critical mass and scale, we are executing an acquisition strategy to develop additional growth opportunities. Our acquisition strategy relies upon two primary factors:  first, our ability to identify and acquire target businesses that fit within our general acquisition criteria; and second, the continued availability of capital and financing resources sufficient to complete these acquisitions.

 

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

 

We will continue to search for targets that fit within our acquisition criteria. Our ability to secure additional financing will rely upon the sale of debt or equity securities, and the development of an active trading market for our securities.  Although we can make no assurance as to our long term access to debt or equity securities or our ability to develop an active trading market, in March of 2010, we were successful in increasing our credit facility from $15.0 million to $20.0 million.

 

Performance Metrics

 

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

 

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

 

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

 

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

 

Further, the financial covenants of our credit facility adjust EBITDA to exclude costs related to share based compensation expense, extraordinary items and other non-cash charges.

 

22

---

 

Our compliance with the financial covenants of our credit facility is particularly important given the materiality of the credit facility to our day-to-day operations and overall acquisition strategy. Our debt capacity, subject to the requisite collateral at an advance rate of 80% of eligible domestic accounts receivable and up to 60% of eligible foreign receivables, is limited to a multiple of 4.00 times our consolidated EBITDA (as adjusted) as measured on a rolling four quarter basis. If we fail to comply with the covenants in our credit facility and are unable to secure a waiver or other relief, our financial condition would be materiality weakened and our ability to fund day-to-day operations would be materially and adversely affected.  Accordingly, we intend to employ EBITDA and adjusted EBITDA as management tools to measure our historical financial performance and as a benchmark for future financial flexibility.

 

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

 

Results of Operations

 

Three months ended December 31, 2010 (actual and unaudited) and December 31, 2009 (actual and unaudited)

 

We generated transportation revenue of $44.5 million and $39.1 million and net transportation revenue of $14.2 million and $11.5 million for the three months ended December 31, 2010 and 2009, respectively.  Net income was $0.7 million for the three months ended December 31, 2010, compared to net income of $0.5 million for the three months ended December 31, 2009.

 

We had adjusted EBITDA of $1.7 million and $1.0 million for three months ended December 31, 2010 and 2009, respectively. EBITDA is a non-GAAP measure of income and does not include the effects of interest and taxes and excludes the "non-cash" effects of depreciation and amortization on current assets. Companies have some discretion as to which elements of depreciation and amortization are excluded in the EBITDA calculation. We exclude all depreciation charges related to property, plant and equipment, and all amortization charges, including amortization of leasehold improvements and other intangible assets. We then further adjust EBITDA to exclude extraordinary items and costs related to share based compensation expense, goodwill impairment charges and other non-cash charges consistent with the financial covenants of our credit facility. As explained above, we believe that EBITDA is useful to us and to our investors in evaluating and measuring our financial performance.  While management considers EBITDA and adjusted EBITDA useful in analyzing our results, it is not intended to replace any presentation included in our consolidated financial statements.  Set forth below is a reconciliation of EBITDA and adjusted EBITDA to net income, the most directly comparable GAAP measure for the three months ended December 31, 2010 and 2009.

 

The following table provides a reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP measure in accordance with SEC Regulation G (in thousands), for the three months ended December 31, 2010 and 2009:

 

		Three months ended December 31,								Change
		2010				2009				Amount				Percent
Net income		$	716			$	549			$	167				30.4	%
Income tax expense			414				337				77				22.8	%
Net interest expense			36				27				9				33.3	%
Depreciation and amortization			327				386				(59	)			(15.3	)%
EBITDA		$	1,493			$	1,299			$	194				14.9	%
Share based compensation and other non-cash costs			29				82				(53	)			(64.6	)%
Loss (gain) on litigation settlement			150				(355	)			505				(142.3	)%
Adjusted EBITDA		$	1,672			$	1,026			$	646				63.0	%

 

 

23

---

 

 

The following table summarizes transportation revenue, cost of transportation and net transportation revenue (in thousands) for the three months ended December 31, 2010 and 2009 (actual and unaudited):

 

	Three months ended December 31,								Change
	2010				2009				Amount				Percent
Transportation revenue		$	44,497			$	39,116			$	5,381				13.8	%
Cost of transportation			30,315				27,612				2,703				9.8	%
Net transportation revenue		$	14,182			$	11,504			$	2,678				23.3	%
Net transportation margins			31.9	%			29.4	%

 

Transportation revenue was $44.5 million for the three months ended December 31, 2010, an increase of 13.8% over transportation revenue of $39.1 million for the three months ended December 31, 2009.  Domestic transportation revenue increased by 31.4% to $25.5 million for the three months ended December 31, 2010, from $19.4 million for the three months ended December 31, 2009.  International transportation revenue decreased by 3.6% to $19.0 million for the three months ended December 31, 2010, from $19.7 million for the comparable prior year period.   These increases in revenue were due to a stronger demand for domestic services.

 

Cost of transportation increased to $30.3 million for the three months ended December 31, 2010, compared to $27.6 million for the three months ended December 31, 2009.  The increase is due to increased volume as reflected in our increased transportation revenues.

 

Net transportation margins increased to 31.9% of transportation revenue for the three months ended December 31, 2010, as compared to 29.4% of transportation revenue for the three months ended December 31, 2009.  The margin expansion was attributed to higher domestic sales, which typically yield higher margins.

 

The following table compares certain condensed consolidated statement of operations data as a percentage of our net transportation revenue (in thousands) for the three months ended December 31, 2010 and 2009 (actual and unaudited):

 

		Three months ended December 31,
		2010								2009								Change
		Amount				Percent				Amount				Percent				Amount				Percent
Net transportation revenue		$	14,182				100.0	%		$	11,504				100.0	%		$	2,678				23.3	%
Agent commissions			9,850				69.5	%			7,838				68.1	%			2,012				25.7	%
Personnel costs			1,561				11.0	%			1,532				13.3	%			29				1.9	%
Selling, general and administrative			1,140				8.0	%			1,153				10.0	%			(13	)			(1.1	)%
Depreciation and amortization			327				2.3	%			386				3.4	%			(59	)			(15.3	)%
Total operating expenses			12,878				90.8	%			10,909				94.8	%			1,969				18.0	%
Income from operations			1,304				9.2	%			595				5.2	%			709				119.2	%
Other income (expense)			(123	)			(0.9	)%			328				2.8	%			(451	)			(137.5	)%
Income before income taxes and non-controlling interest			1,181				8.3	%			923				8.0	%			258				27.9	%
Income tax expense			(414	)			(2.9	)%			(337	)			(2.9	)%			(77	)			22.8	%
Income before non-controlling interest			767				5.4	%			586				5.1	%			181				30.9	%
Non-controlling interest			(51	)			(0.4	)%			(37	)			(0.3	)%			(14	)			37.8	%
Net income		$	716				5.0	%		$	549				4.8	%		$	167				30.4	%

 

 

24

---

 

 

Agent commissions were $9.9 million for the three months ended December 31, 2010, an increase of 25.7% from $7.8 million for the three months ended December 31, 2009.  Agent commissions as a percentage of net transportation revenue increased to 69.5% for the three months ended December 31, 2010, from 68.1% for the comparable prior year period as a result of increased domestic sales, which typically yield higher margins and consequently higher commissions.

 

Personnel costs were $1.6 million for the three months ended December 31, 2010, an increase of 1.9% from $1.5 million for the three months ended December 31, 2009.  Personnel costs as a percentage of net transportation revenue decreased to 11.0% for the three months ended December 31, 2010, from 13.3% for the comparable prior year period.  The decrease is primarily attributed to an increase in net transportation revenues (particularly domestic) due to strong demand for our services, without the need to increase corporate personnel proportionately.

 

Selling, general and administrative costs were $1.1 million for the three months ended December 31, 2010, a decrease of 1.1% from $1.2 million for the three months ended December 31, 2009.  As a percentage of net transportation revenue, selling, general and administrative costs decreased to 8.0% for the three months ended December 31, 2010, from 10.0% for the comparable prior year period.

 

Depreciation and amortization costs for the three months ended December 31, 2010, were approximately $0.3 million, a decrease of 15.3% from $0.4 million for the three months ended December 31, 2009.  Depreciation and amortization as a percentage of net transportation revenue decreased to 2.3% for the three months ended December 31, 2010, from 3.4% for the comparable prior year period, primarily due to lower amortization costs associated with the Airgroup & Adcom acquisitions.

 

Income from operations was $1.3 million for the three months ended December 31, 2010, compared to income from operations of $0.6 million for the three months ended December 31, 2009.

 

Other expense was $0.1 million for the three months ended December 31, 2010, compared to other income of $0.3 million for the three months ended December 31, 2009.  The decrease is primarily due to a loss on litigation of $150k in the current quarter versus a gain on litigation of $355k in the prior year period.

 

Net income was $0.7 million for the three months ended December 31, 2010, compared to net income of $0.5 million for the three months ended December 31, 2009.

 

Six months ended December 31, 2010 (actual and unaudited) and December 31, 2009 (actual and unaudited)

 

We generated transportation revenue of $90.9 million and $73.1 million and net transportation revenue of $28.3 million and $22.1 million for the six months ended December 31, 2010 and 2009, respectively.  Net income was $1.5 million for the six months ended December 31, 2010, compared to net income of $0.7 million for the six months ended December 31, 2009.

 

We had adjusted EBITDA of $3.4 million and $1.8 million for six months ended December 31, 2010 and 2009, respectively. EBITDA is a non-GAAP measure of income and does not include the effects of interest and taxes and excludes the "non-cash" effects of depreciation and amortization on current assets. Companies have some discretion as to which elements of depreciation and amortization are excluded in the EBITDA calculation. We exclude all depreciation charges related to property, plant and equipment, and all amortization charges, including amortization of leasehold improvements and other intangible assets. We then further adjust EBITDA to exclude extraordinary items and costs related to share based compensation expense, goodwill impairment charges and other non-cash charges consistent with the financial covenants of our credit facility. As explained above, we believe that EBITDA is useful to us and to our investors in evaluating and measuring our financial performance.  While management considers EBITDA and adjusted EBITDA useful in analyzing our results, it is not intended to replace any presentation included in our consolidated financial statements.  Set forth below is a reconciliation of EBITDA and adjusted EBITDA to net income, the most directly comparable GAAP measure for the six months ended December 31, 2010 and 2009.

 

25

---

 

The following table provides a reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP measure in accordance with SEC Regulation G (in thousands), for the six months ended December 31, 2010 and 2009:

		Six months ended December 31,								Change
		2010				2009				Amount				Percent
Net income		$	1,499			$	665			$	834				125.4	%
Income tax expense			920				408				512				125.5	%
Net interest expense			72				82				(10	)			(12.2	)%
Depreciation and amortization			652				796				(144	)			(18.1	)%
EBITDA		$	3,143			$	1,951			$	1,192				61.1	%
Share based compensation and other non-cash costs			88				154				(66	)			(42.9	)%
Loss (gain) on litigation settlement			150				(355	)			505				(142.3	)%
Adjusted EBITDA		$	3,381			$	1,750			$	1,631				93.2	%

 

The following table summarizes transportation revenue, cost of transportation and net transportation revenue (in thousands) for the six months ended December 31, 2010 and 2009 (actual and unaudited):

 

	Six months ended December 31,								Change
	2010				2009				Amount				Percent
Transportation revenue		$	90,858			$	73,144			$	17,714				24.2	%
Cost of transportation			62,557				51,091				11,466				22.4	%
Net transportation revenue		$	28,301			$	22,053			$	6,248				28.3	%
Net transportation margins			31.1	%			30.2	%

 

Transportation revenue was $90.9 million for the six months ended December 31, 2010, an increase of 24.2% over transportation revenue of $73.1 million for the six months ended December 31, 2009.  Domestic transportation revenue increased by 32.8% to $49.8 million for the six months ended December 31, 2010, from $37.5 million for the six months ended December 31, 2009.  International transportation revenue increased by 15.4% to $41.1 million for the six months ended December 31, 2010, from $35.6 million for the comparable prior year period.   These increases in revenue were due to a stronger domestic and international demand for our services.

 

Cost of transportation increased to $62.6 million for the six months ended December 31, 2010, compared to $51.1 million for the six months ended December 31, 2009 as a result of increased volume as reflected in our increased transportation revenues.

 

Net transportation margins increased to 31.1% of transportation revenue for the six months ended December 31, 2010, as compared to 30.2% of transportation revenue for the six months ended December 31, 2009.  The margin expansion was attributed to a higher proportion of domestic sales, which typically yield higher margins.

 

The following table compares certain condensed consolidated statement of operations data as a percentage of our net transportation revenue (in thousands) for the six months ended December 31, 2010 and 2009 (actual and unaudited):

 

		Six months ended December 31,
		2010								2009								Change
		Amount				Percent				Amount				Percent				Amount				Percent
Net transportation revenue		$	28,301				100.0	%		$	22,053				100.0	%		$	6,248				28.3	%
Agent commissions			19,683				69.5	%			15,293				69.3	%			4,390				28.7	%
Personnel costs			3,118				11.0	%			2,954				13.4	%			164				5.6	%
Selling, general and administrative			2,203				7.8	%			2,249				10.2	%			(46	)			(2.0	)%
Depreciation and amortization			652				2.3	%			796				3.6	%			(144	)			(18.1	)%
Total operating expenses			25,656				90.6	%			21,292				96.5	%			4,364				20.5	%
Income from operations			2,645				9.4	%			761				3.5	%			1,884				247.6	%
Other income (expense)			(133	)			(0.5	)%			371				1.7	%			(505	)			(142.3	)%
Income before income taxes and non-controlling interest			2,512				8.9	%			1,132				5.1	%			1,380				121.9	%
Income tax expense			(920	)			(3.3	)%			(408	)			(1.9	)%			(512	)			125.5	%
Income before non-controlling interest			1,592				5.6	%			724				3.3	%			868				119.9	%
Non-controlling interest			(93	)			(0.3	)%			(59	)			(0.3	)%			(34	)			57.6	%
Net income		$	1,499				5.3	%		$	665				3.0	%		$	834				125.4	%

 

 

26

---

 

 

Agent commissions were $19.7 million for the six months ended December 31, 2010, an increase of 28.7% from $15.3 million for the six months ended December 31, 2009.  Agent commissions as a percentage of net transportation revenue increased slightly to 69.5% for the six months ended December 31, 2010, from 69.3% for the comparable prior year period.  The increase is due to increased domestic sales, which typically yield higher margins and consequently higher commissions.

 

Personnel costs were $3.1 million for the six months ended December 31, 2010, an increase of 5.6% from $3.0 million for the six months ended December 31, 2009.  Personnel costs as a percentage of net transportation revenue decreased to 11.0% for the six months ended December 31, 2010, from 13.4% for the comparable prior year period. The decrease is primarily attributable to an increase in net transportation revenues due to strong demand for our services, without the need to increase corporate personnel proportionately.

 

Selling, general and administrative costs remain unchanged at $2.2 million for the six months ended December 31, 2010 and 2009.  As a percentage of net transportation revenue, other selling, general and administrative costs decreased to 7.8% for the six months ended December 31, 2010, from 10.2% for the comparable prior year period.

 

Depreciation and amortization costs for the six months ended December 31, 2010, were approximately $0.7 million, a decrease of 18.1% from $0.8 million for the six months ended December 31, 2009.  Depreciation and amortization as a percentage of net transportation revenue decreased to 2.3% for the six months ended December 31, 2010, from 3.6% for the comparable prior year period, primarily due to lower amortization costs associated with the Airgroup & Adcom acquisitions.

 

Income from operations was $2.6 million for the six months ended December 31, 2010, compared to income from operations of $0.8 million for the six months ended December 31, 2009.

 

Other expense was $0.1 million for the six months ended December 31, 2010, compared to other income of $0.4 million for the six months ended December 31, 2009, primarily due to a loss on litigation of $150k in the current period versus a gain on litigation of $355k in the prior year period.

 

Net income was $1.5 million for the six months ended December 31, 2010, compared to net income of $0.7 million for the six months ended December 31, 2009.