Business Context and Reporting Period
Company: Express-1 Expedited Solutions, Inc. (Registrant) acquired assets of Concert Group Logistics, LLC (Seller) on January 31, 2008. The filing is a Form 8-K Current Report dated January 31, 2008.
Transaction: The acquisition was executed through a wholly-owned subsidiary, Concert Group Logistics, Inc. (Buyer). The Seller operates as a domestic freight forwarder utilizing a network of independent participants.
Key Financial Metrics
Acquisition Consideration
- Cash: $9,000,000
- Stock: 4,800,000 shares of Express-1 common stock
- Debt Assumption: Certain indebtedness of the Seller
- Contingent Consideration: Up to $2,000,000 in cash earn-out payments based on 2008 and 2009 EBITDA targets
Acquired Entity Financials (Concert Group Logistics, LLC)
Years Ended December 31, 2007 vs. 2006
| Metric | 2007 | 2006 |
|---|---|---|
| Net Sales | $47,214,962 | $36,643,865 |
| Gross Profit | $4,472,476 | $3,715,915 |
| Gross Margin | 9.47% | 10.14% |
| Net Income | $321,962 | $307,345 |
| Net Margin | 0.68% | 0.85% |
| Operating Cash Flow | $790,411 | $1,065,296 |
| Total Assets | $8,530,206 | $6,573,256 |
| Total Liabilities | $8,457,651 | $6,382,663 |
| Members' Equity | $72,555 | $190,593 |
Debt and Liquidity (Acquired Entity)
- Short-term Borrowings (Bank): $2,355,533 (outstanding as of Dec 31, 2007)
- Cash and Equivalents: $257,696 (as of Dec 31, 2007)
- Working Capital: Negative $992,446 (Current Assets $7.39M vs. Current Liabilities $8.39M)
Material Changes and New Obligations
New Financing Arrangements
On January 31, 2008, Express-1 entered into new loan agreements with National City Bank to fund the acquisition and operations:
- Term Note: $3,600,000 at LIBOR + 150 basis points.
- Revolving Note: $11,000,000 receivables-based facility at LIBOR + 125 basis points.
- Security: Guaranteed by subsidiaries; secured by a blanket security interest in all assets of the Company and subsidiaries.
- Previous Debt: The Company's prior loan facility with Chemical Bank was fully paid and terminated.
Acquired Entity Performance Trends
- Revenue Growth: Net sales increased 28.8% year-over-year.
- Margin Compression: Gross margin declined from 10.14% to 9.47%, and net margin declined from 0.85% to 0.68%.
- Cash Flow: Operating cash flow decreased by 25.8% despite revenue growth, driven by a $1.04M increase in receivables.
Guidance, Risks, and Unusual Items
Management and Governance Changes
- Board Expansion: Daniel Para appointed to the Board of Directors.
- Executive Appointment: Gerry Post appointed President of the acquired subsidiary (Buyer) with a base salary of $180,000 and a 3-year employment agreement.
- Non-Compete: Daniel Para and John Musolino entered into non-competition agreements.
Risks and Contingencies
- Earn-Out Risk: Up to $2,000,000 in future cash payments depends on achieving specific EBITDA targets in 2008 and 2009.
- Credit Risk: The acquired entity grants credit to customers and independent participants. Allowance for doubtful accounts increased to $70,989 in 2007.
- Related Party Transactions: The acquired entity leases facilities from a related party and has outstanding notes receivable from members and independent participants.
- Variable Interest Entity: The acquired entity holds a 40% interest in Flyer Logistics, LLC, with a maximum exposure to loss of $287,608.
Investor Verification Checklist
- Verify the valuation of the 4,800,000 shares issued as part of the purchase price.
- Review the specific EBITDA targets required to trigger the $2,000,000 earn-out payments.
- Assess the impact of the new $14.6M debt facility (National City Bank) on Express-1's consolidated leverage ratios.
- Examine the quality of the acquired entity's receivables, noting the $1.04M increase in 2007 and the $52,068 reserve for notes receivable from independent participants.
- Confirm the integration plan for the acquired entity's negative working capital position.