Form 10-Q/A for CARGO CONNECTION LOGISTICS HOLDING, INC.
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23-May-2008
Quarterly Report
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, those discussed in our annual report on Form 10-KSB for the fiscal year ended December 31, 2007. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
References in this Quarterly Report to "we," "us," "our," or the "Company" or similar terms refer to Cargo Connection Logistics Holding, Inc. and its consolidated subsidiaries unless the context otherwise requires.
Cautionary Statement Regarding Forward Looking Statements:
Certain statements contained in this Quarterly Report should be considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the current views of the Company with respect to the current events and financial performance. Readers can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimates," "plan," "could," "should," and "continue" or similar words. These forward-looking statements may also use different phrases. From time to time, the Company also provides forward-looking statements in other material the Company releases to the public or files with the SEC, as well as oral forward-looking statements. Readers should consult any further disclosures on related subjects in the Company's Annual Reports on Form 10-KSB and 10-KSB/A, Quarterly Reports on Form 10-QSB and 10-QSB/A and Current Reports on Form 8-K filed with the SEC. Effective January 1, 2008, the Company will no longer be filing Forms 10-KSB and 10-QSB, but instead will be filing Forms 10-K and 10-Q, due to a change in regulations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months ended March 31, 2008. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Such forward-looking statements are and will be subject to many risks, uncertainties and factors which may cause the Company's actual results to be materially different from any future results, express or implied, by such forward-looking statements. Factors that could cause the Company's actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
• the Company's operations will be severely curtailed as a result of the foreclosure by Pacer on substantially all the assets of Cargo Connection
• the ability to operate in compliance with the terms of its financing facilities (particularly the financial covenants), leases and other agreements
• the ability to maintain adequate liquidity and produce sufficient cash flow to meet the Company's needs
• the ability to attract and retain qualified management and other personnel
• the number and magnitude of customers, particularly in our Cargo International operations
• changes in the competitive environment in which the Company operates
• changes in, or the failure to comply with, government and regulatory policies
• the ability to obtain regulatory approvals and to maintain approvals previously granted
• uncertainty relating to economic conditions generally and particularly affecting the markets in which the Company operates
• changes in the Company's business strategy, development plans or cost savings plans
• the Company's ability to complete the development of, market and sell the RadRope™ product ("RadRope™")
• the Company requires additional financing in order to complete the acquisition of Fleet Global Services, Inc. a Florida corporation ("Fleet"), and may not be able to obtain such financing
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• the Company's letter of intent with Fleet has expired, and it is unlikely that the Company would be able to complete that acquisition even if financing could be obtained
• the ability to complete acquisitions or divestitures and to integrate any business or operation acquired
• the ability to enter into strategic alliances or other business relationships
• the ability to overcome significant operating losses
• the frequency and severity of accidents, particularly involving our trucking operations
• the ability to reduce costs, particularly in our Cargo International operations
• the ability to develop products and services and to penetrate existing and new markets
• the Company is delinquent in filing certain tax returns
• technological and other developments and changes in the industry
• the risks discussed in Item 1 of our Annual Report on Form 10-KSB
Statements in this Quarterly Report and the exhibits hereto should be evaluated in light of these important factors. The Company is not obligated to, and undertakes no obligation to, publicly update any forward-looking statement due to actual results, changes in assumptions, new information or as the result of future events. Readers should consult any further disclosures on related subjects in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007 and any subsequent filings with the SEC. Effective February 4, 2008, the Company will no longer be filing Form 10-KSB and 10-QSB, but instead will be filing Form 10-K and 10-Q, due to changes in the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended.
GENERAL
The Company has been a provider of logistics solutions for customers through its network of branch terminal locations and independent agents in North America. The Company's target customer base ranges from mid-sized to Fortune 100TM companies.
The Company has predominately operated as a non-asset based transportation provider of truckload and less-than-truckload ("LTL") transportation services utilizing some Company equipment and dedicated owner operators, as well as in coordination with other transportation companies with whom the Company has established relationships. The Company also has provided a wide range of value-added logistics services, including those provided through its leased U.S. Customs Bonded warehouse facilities, U.S. Customs approved container freight station operations and a U.S. Customs approved General Order warehouse operation which the Company began operating during the latter part of the second quarter of 2006. All of these leased facilities enhanced and supported the supply chain logistics needs of the Company's customers. Some of the services provided have been pick-and-pack services, special projects that may include changing labels or tickets on items and assistance in the inspection of customers' shipments into the United States, as well as storage of goods and recovery of goods damaged in transit. The Company's provision of these services will be curtailed by the recent foreclosure by Pacer on substantially all the assets of Cargo Connection.
Cargo Connection
Cargo Connection was capable of being the domestic transportation partner for those international companies who require assistance throughout the United States as well as companies who require truckload LTL services for their freight shipments to be moved from one point (origin) to another point (destination). Cargo Connection operated line-haul services throughout the United States. It ran scheduled LTL services up and down the east coast and into the mid-west. It also offered truck-load and exclusive use vehicle service to anywhere in the United States. In addition, the Company's transportation network provided for transportation of goods throughout the United States, Canada and Mexico on behalf of its customers. Cargo Connection has facilities to assist other customers and companies with their freight by either holding the freight in its bonded facilities providing for the sorting of freight while the goods are clearing customs in our U.S. Customs-approved container freight stations.
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In 2006, Cargo Connection became one of an exclusive number of companies that work closely with the Department of Homeland Security and Customs and Border Patrol ("CBP"). Cargo Connection has become the operator of the sole General Order warehouse at John F. Kennedy International Airport ("JFK"). General Order warehouses operate under specific provisions of the CFR. Applicable provisions of the U.S. Code of Federal Regulations ("CFR") require merchandise to be considered General Order merchandise when it is taken into the custody by CBP. See "Foreclosure by Pacer."
Cargo International
Cargo International has become the international division of our Company. Cargo International intends to seek out opportunities internationally, cultivate those opportunities and to broaden our range of services, which can be directly by the Company or through joint ventures or business relationships with third party providers. The Company has sent representatives to the Pacific Rim and to Central America, including Costa Rica, on numerous occasions to seek out and explore the potential for the Company to open offices and establish personnel relationships in international markets. No assurance can be given that these efforts will be successful.
The Company expects that the addition of two handling agreements that the Company entered into in April 2007 will add to the revenue stream that had been lacking for the Cargo International's Illinois facility and positions the Company to perform its services for customers in industries outside its normal scope. These agreements are being handled through Cargo International as the revenue is from global organizations. The Company believes this will also assist Cargo International in achieving profitability.
NMDT
In December 2006, the Company acquired NMDT, in a tax-free stock-for-stock exchange for 168,539,326 shares of the Company's Common Stock valued at approximately $1,500,000. NMDT holds a license to a patented portable nuclear material detecting technology (the "License"). The license agreement provides for payments to the licensor of up to 7% of the net revenues from sales of products utilizing the patent rights, subject to minimum annual fees payable to the licensor, beginning in the second year of the licensing agreement, which range from $5,000 in year 2 to $30,000 in year five after the product is available for production. The Company is in the process of developing, with the licensor, a market-ready nuclear radiation detection device, called RadRope™, which inspectors at transportation hubs can utilize to rapidly detect the presence of nuclear material in sealed containers without the use of harmful x-rays, to service the logistics, transportation and general cargo industries.
There have been no material developments with respect to NMDT since the filing of the Company's report on Form 10-KSB for the year ended December 31, 2007.
ITG
The Company owns a 51% interest in ITG and Emplify owns a 49% interest. The financial statements of ITG are included in the Company's consolidated financial statements. The minority interest in operating results is reflected as an element of non-operating expense in the Consolidated Statements of Operations and the minority interest in the equity of ITG is reflected as a separate component on the Consolidated Balance Sheet. The Company believes that ITG will attract independent contractors and other carriers to perform work on behalf of the Company, and thus to assist the Company through increasing the size and scope of its driver fleet, while offering agents comprehensive packages for medical insurance, profit sharing plans, as well as other benefits for themselves as well as their driver pool.
Expansion Plans
The Company intends to continue to explore other areas that would be expected to complement the needs of customers within the industries in which it operates, either by adding additional services, helping to form entities that have specific attributes or through acquisitions.
On August 29, 2007, the Company entered into a letter agreement with Fleet and its sole stockholder to acquire all of the issued and outstanding shares of capital stock of Fleet for an aggregate purchase price of $1 million, 270,000,000 shares of common stock of the Company and additional shares of common stock based upon the earnings before interest, taxes, depreciation and amortization of Fleet for the two-year period ending on the second
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anniversary of the closing date. The Company expects that if the acquisition is completed, the combined business synergies that would be accomplished through the addition of Fleet would favorably impact the Company's operating profitability. The Company also expects that this transaction would benefit ITG. The consummation of this transaction has been delayed because, among other things, the Company has been unable to raise the capital necessary for this transaction. No assurance can be given that this transaction will be consummated, or that financing necessary for the transaction will be obtained.
In order to maintain operating stability or growth over next year, management believes that the Company will still have to manage many conditions, including the loss of the Cargo Connection business, and other conditions which are outside of its control, such as a general decrease in demand for consumer products within the domestic economy, which decreases demand for shipping, along with higher energy costs, including fuel for the transportation-related equipment and the energy required to operate our facilities.
The Company believes it is beginning to see the results of two handling agreements it has obtained for Cargo International's Illinois facility that became effective during the second quarter of 2007. In addition to those agreements, however, Cargo International's operations will need to generate significant increased revenue in order for that operation to generate profitability.
Foreclosure by Pacer
In March 2008, YA Global assigned to Pacer Logistics, LLC, a Florida limited liability company ("Pacer"), all of YA Global's rights, title and interest in the debt and obligations owed by the Company, Cargo Connection, and Cargo International (collectively the "Cargo Companies"), with respect to convertible debentures in the aggregate outstanding principal amount of $2,084,400 originally issued by the Cargo Companies to YA Global and Montgomery Equity Partners, Ltd. ("Montgomery") and certain documents, instruments and agreements relating thereto.
On April 28, 2008, the Cargo Companies entered into an agreement with Pacer (the "Financing Arrangement Agreement"). Pursuant to the Financing Arrangement Agreement, the Company acknowledged that Pacer was assigned of all right, title and interest of YA Global, including as assignee of Montgomery, with respect to the Cargo Companies' Outstanding Obligations. In connection with such assignment, the Cargo Companies acknowledged and consented to such assignment from YA Global to Pacer. The Financing Arrangement Agreement provided, among other things, that Pacer:
• loaned the Company $200,000, for working capital, on the same terms as the Financing Documents; and
• terminated the requirement for the Company to file a registration statement covering shares of the Company's Common Stock issuable pursuant to the Financing Documents.
The Financing Arrangement Agreement provided, among other things, that the Cargo Companies:
• waived any defense or counterclaim under Financing Documents;
• would cooperate with Pacer to expedite the entry of a foreclosure judgment and a judgment to collect the obligations, and to expedite the sale or transfer of the Collateral (as defined in the Financing Documents); and
• would not voluntarily file or seek the entry of an order for relief under the Bankruptcy Code, as amended.
On May 5, 2008, the Company received a Default Notice from Pacer pursuant to the Montgomery Security Agreement, which stated that the balance due on three convertible debentures payable to Pacer was in excess of $4,000,000. The Notice provided that Pacer would conduct a "self-help" foreclosure ten days from the date of the Default Notice.
On May 13, 2008, the Company entered into a Strict Foreclosure Agreement with Pacer, pursuant to which the Company acknowledged that it is in default of certain obligations, in the aggregate amount of $3,670,389 to Pacer, as assignee of all right, title and interest of YA Global, including as assignee of Montgomery, with respect to the Cargo Companies' Outstanding Obligations.
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The Outstanding Obligations are secured by certain assets of the Cargo Companies. Pursuant to the Strict Foreclosure Agreement and a related assumption agreement, all of the Outstanding Obligations have been extinguished, and Pacer foreclosed on substantially all the operating assets of the Company and Cargo Connection and assumed certain liabilities of the Company, Cargo Connection and Cargo International, including:
• all obligations to WFBA;
• the obligations to HSBC in connection with the HSBC Loan, including in connection with all collateral provided in connection therewith; and
• the obligations pursuant to SBA Loan.
As a result of this foreclosure, the Company's operations will be severely curtailed, and now will consist only of:
• Cargo International and its assets;
• NMDT and its assets;
• ITG and its assets; and
• the stock of Cargo Connection, without its former assets.
Also in connection with the Strict Foreclosure Agreement, the Company, Cargo Connection and Cargo International entered into a General Release Agreement, pursuant to which Emplify released the Cargo Companies of all obligations and liabilities under the Emplify Documents.
RESULTS OF OPERATIONS
The Company reports its results as one segment for reporting purposes. In the future, if NMDT and/or any other component of the Company's operations become a significant part of the Company's overall business, the Company will report results on a segmented basis.
Overview
As a result of the foreclosure by Pacer on substantially all of assets of Cargo Connection, the Company expects its future revenues to decline significantly. As a result, despite related decrease in debt and operating expenses, the Company expects to generate losses from operations unless and until the Cargo International operations and other operations begin to generate positive cash flow in amounts exceeding the Company's overhead as a public company. The Company's Cargo International operation has begun to generate revenues but in light of the foreclosure will need to continue to increase the revenue stream from its operations for the Company to remain viable.
For the Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007
Revenues.
Revenues from operations for the three months ended March 31, 2008, were $3,816,505, compared with $4,158,826 for the three months ended March 31, 2007, a decrease of $342,321, or 8.2%, due to a decrease in direct trucking revenue, which more than offset additional revenue from the General Order warehouse business at the JFK facility, which Cargo Connection commenced operating in June 2006. This decrease in trucking revenue was due to a general decrease in demand for consumer products which has decreased sales volumes from our current customer base. In addition, the Company has discontinued providing certain low margin services and its reliance on certain low-margin customers in an effort to broaden its customer base at higher margins.
Cargo Connection's revenues for the three months ended March 31, 2008, were $3,529,514, compared with $4,154,621 for the three months ended March 31, 2007, a decrease of $625,107 or 15%, as a result of the factors described above.
Cargo International's revenues for the three months ended March 31, 2008, were $286,991, compared with $-0- for the three months ended March 31, 2007, an increase of $286,991, due to the addition of two handling agreements that the Company entered into in April 2007 that are utilizing Cargo International's Illinois facility.
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Operating Expenses.
Direct operating expenses for the three months ended March 31, 2008 were $2,749,471, as compared to $2,839,653 for the three months ended March 31, 2007, a decrease of $90,182 or 3.2%, primarily due to:
• a $424,828 decrease in Cargo Connection outside trucking and handling expenses,
which more than offset increases of:
• $118,064 in truck and trailer expenses,
• $45,958 in direct labor,
• $3,194 in warehouse expenses, and
• $168,611 in direct expenses associated with Cargo International
As a percentage of revenue, the direct expenses increased slightly to 72% in 2008 from 68.3% in 2007.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses were $2,390,412 for the three months ended March 31, 2008, compared with $1,926,600 for the three months ended March 31, 2007, an increase of $463,812, or 24.1%, primarily as a result of:
• an increase of approximately $115,466 in consulting and professional fees associated with being a public entity,
• an increase of over $223,000 in our rent expense, which is mostly derived from the renegotiation of our Illinois lease,
• a collective increase in insurance, telephone and utilities costs of approximately $187,300, and
• increases in repairs and maintenance for computers and office equipment of $113,426,
which more than offset:
• a decrease in sales expenses of 11,362.
• a decrease of $125,000 of bad debt allowance, and
• a decrease of $78,594 in wages and associated benefits and taxes, due to an increase in the number of employees at the Illinois facility for the business that began in May 2007, which was more than offset a full year of controlling wages at the other facilities through reducing the number of managers, supervisors and administrative personnel.
Depreciation and Amortization.
Depreciation and amortization expense for the three months ended March 31, 2008 was $42,248, as compared to $46,626 in the three months ended March 31, 2007, an increase of $4,378 or 9%, due to the additional of forklifts in the Illinois facility.
Operating Loss.
The Company reported a loss from operations before other income (expense) of $1,323,378 for the three months ended March 31, 2008, compared to a loss from operations of $607,427 for the three months ended March 31, 2007, an increase of $715,951 or 117%. As a percentage of revenue, the loss from operations represented 34% of revenues in 2008, as compared to 14% in 2007. Of the $1,323,378 loss from operations for the three months ended March 31, 2008, Cargo Connection had a loss of $901,650, Cargo International had a loss of $218,845, The Company had a loss of $202,549, and NMDT had a loss of $335.
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Net Interest Expense.
The Company's net interest and financing expenses was $84,541 for the three months ended March 31, 2008, as compared to $547,584 for the three months ended March 31, 2007, a decrease of $463,043, or 85%, primarily due to lower associated interest costs due to debenture conversions that occurred in the three months ended March 31, 2007 which reduced the aggregate principal balance of outstanding convertible notes, along with a decrease in interest financing expenses in accordance with EITF 00-19-02
Net (Loss) Income.
For the three months ended March 31, 2008, the Company incurred a net loss of $1,011,136, compared to a net loss of $822,143 for the three months ended March 31, 2007, an increase of $188,993, or 23%, as a result of:
• a decrease in revenue of $342,321 from operations, and
• an increase in minority interest adjustment of $1,646,
• an increase in indirect operating expenses of $463,812, and
• an increase in other expenses of $391,958.
• a decrease in rental income of $4,450
which more than offset:
• a decrease of $463,043 in financing expenses (which includes an adjustment to comply with EITF 00-19-2)
• a decrease of $140,434 due to derivative liability instrument valuations, (See Note 4 to the financial statements),
• a gain of $81,847 relating to debt extinguishment expenses, and
• a decrease in direct operating expenses of $90,182.
• a decrease of $135,000 related to guaranteed rental expenses
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency of approximately $11,964,185 as of March 31, 2008. The Company has devoted substantially all of its efforts to increasing revenues, attempting to achieve profitability, obtaining long-term financing and raising capital. The Company tried to increase its revenues since its acquisition of Cargo Connection and Cargo International in May 2005 and has raised capital to assist in meeting its working capital needs. The Company is continuing to seek available capital. If the Company is unable to raise working capital through equity and debt financing, the Company could be materially and adversely affected and there would be substantial doubt about the Company's ability to continue as a going concern. The Company's condensed consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern.
On May 13, 2008, the Company entered into a Strict Foreclosure Agreement with Pacer pursuant to which the Company acknowledged that it is in default of certain obligations, in the aggregate amount of $3,670,389 to Pacer as assignee of all right, title and interest of YA Global, including as assignee of Montgomery, with respect to the Cargo Companies' Outstanding Obligations.
The Outstanding Obligations are secured by certain assets of the Cargo Companies. Pursuant to the Strict Foreclosure Agreement and a related assumption agreement, all of the Outstanding Obligations have been extinguished, and Pacer foreclosed on substantially all the operating assets of the Company and Cargo Connection and assumed certain liabilities of the Company, Cargo Connection and Cargo International, including:
• all obligations to WFBA;
• the obligations to HSBC in connection with the HSBC Loan, including in connection with all collateral provided in connection therewith; and
• the obligations pursuant to SBA Loan.
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As a result of this foreclosure, the Company's operations will be severely curtailed, and now will consist only of:
• Cargo International and its assets;