Exhibit 99.3

3PD HOLDING, INC. AND

SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of June 30, 2013 and December 31, 2012 and for the Six

Months Ended June 30, 2013 and 2012

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3PD HOLDING, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets			1
Consolidated Statements of Comprehensive Loss			2
Consolidated Statement of Changes in Stockholders’ Equity			3
Consolidated Statements of Cash Flows			4
Notes to Consolidated Financial Statements			5-19

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3PD HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

JUNE 30, 2013 AND DECEMBER 31, 2012

 

 

 

		2013				2012
ASSETS
Current Assets
Cash and cash equivalents		$	10,453,003			$	4,918,245
Restricted cash			1,672,393				2,512,091
Accounts receivable, net of allowance for doubtful accounts of $32,375 and $14,271 in 2013 and 2012, respectively			29,234,704				25,957,242
Prepaid expenses and other current assets			2,067,849				4,551,094
Deferred income taxes			257,881				—
Total Current Assets			43,685,830				37,938,672
Property and equipment, net			9,688,385				9,195,339
Other Assets
Other intangibles, net			96,300,817				101,785,432
Goodwill			109,696,658				109,696,658
Deferred financing costs, net			4,893,904				5,793,367
Other assets			484,227				500,401
Total Other Assets			211,375,606				217,775,858
Total Assets		$	264,749,821			$	264,909,869
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt		$	10,500,000			$	9,660,000
Accounts payable			14,746,664				12,400,293
Accrued expenses			11,995,124				6,243,813
Other current liabilities			169,421				192,413
Deferred income taxes			—				178,869
Total Current Liabilities			37,411,209				28,675,388
Deferred income taxes			23,352,484				25,027,710
Long-term debt, net of current portion			145,241,016				150,432,829
Other liabilities			3,778,760				3,464,283
Total Liabilities			209,783,469				207,600,210
Stockholders’ Equity
Common stock ($0.01 par value; 6,500,000 shares authorized; 5,171,830 shares in 2013 and 2012 issued and outstanding)			51,718				51,718
Additional paid-in capital			102,593,407				102,212,708
Accumulated other comprehensive loss			(106,039	)			(115,279	)
Accumulated deficit			(47,572,734	)			(44,839,488	)
Total Stockholders’ Equity			54,966,352				57,309,659
Total Liabilities and Stockholders’ Equity		$	264,749,821			$	264,909,869

The December 31, 2012 balances were derived from the audited consolidated financial statements referenced in Exhibit 99.2.

 

The accompanying notes are an integral part of these consolidated financial statements.		1

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3PD HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

		2013				2012
Net Revenue		$	166,144,845			$	147,686,332
Cost of Revenue			113,612,394				101,466,174
Gross Profit			52,532,451				46,220,158
Operating Expenses			46,780,820				42,214,457
Income from Operations			5,751,631				4,005,701
Other Expenses:
Interest expense			10,073,644				9,794,364
Net Loss Before Income Taxes			(4,322,013	)			(5,788,663	)
Benefit from (Provision for) Income Taxes:
Current			(528,691	)			(168,533	)
Deferred			2,117,458				2,087,103
			1,588,767				1,918,570
Net Loss			(2,733,246	)			(3,870,093	)
Other Comprehensive Income (Loss):
Foreign currency translation adjustment, net of tax			(85,364	)			2,848
Unrealized gain on interest rate swap, net of tax			94,604				26,764
Comprehensive Loss		$	(2,724,006	)		$	(3,840,481	)

 

The accompanying notes are an integral part of these consolidated financial statements.		2

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3PD HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2013

 

 

 

		Common Stock								Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit				Total Stockholders’ Equity
		Number of Shares				Amount
Balance, December 31, 2012			5,171,830			$	51,718			$	102,212,708			$	(115,279	)		$	(44,839,488	)		$	57,309,659
Stock-based compensation			—				—				380,699				—				—				380,699
Foreign currency translation adjustment, net of tax of $50,681			—				—				—				(85,364	)			—				(85,364	)
Unrealized gain on interest rate swap, net of tax of $(56,167)			—				—				—				94,604				—				94,604
Net loss			—				—				—				—				(2,733,246	)			(2,733,246	)
Balance, June 30, 2013			5,171,830			$	51,718			$	102,593,407			$	(106,039	)		$	(47,572,734	)		$	54,966,352

 

The accompanying notes are an integral part of these consolidated financial statements.		3

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3PD HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 

 

 

 

		2013				2012
Cash flows from operating activities:
Net loss		$	(2,733,246	)		$	(3,870,093	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			8,468,358				7,836,650
Provision for doubtful accounts			18,104				—
Stock-based compensation			380,699				75,531
Interest paid in kind			3,268,187				2,934,050
Loss (gain) on sale of property and equipment			34,843				(11,153	)
Deferred income taxes			(2,111,976	)			(2,069,538	)
Changes in operating assets and liabilities:
Accounts receivable			(3,295,566	)			(604,485	)
Prepaid expenses and other assets			2,499,419				(124,673	)
Accounts payable and accrued expenses			8,097,255				2,296,918
Other liabilities			386,089				54,059
Net cash provided by operating activities			15,012,166				6,517,266
Cash flows from investing activities:
Proceeds from sale of property and equipment			46,691				33,750
Purchases of property and equipment			(2,658,433	)			(1,898,357	)
Restricted cash			839,698				391,133
Net cash used in investing activities			(1,772,044	)			(1,473,474	)
Cash flows from financing activities:
Repayments of long-term debt			(7,620,000	)			(3,461,593	)
Net cash used in financing activities			(7,620,000	)			(3,461,593	)
Effect of exchange rate changes on cash			(85,364	)			2,848
Net change in cash and cash equivalents			5,534,758				1,585,047
Cash and Cash Equivalents at Beginning of Period			4,918,245				5,914,344
Cash and Cash Equivalents at End of Period		$	10,453,003			$	7,499,391
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes, net		$	265,463			$	—
Interest		$	6,421,877			$	6,743,478

 

The accompanying notes are an integral part of these consolidated financial statements.		4

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND  2012

 

 

Note 1 – Nature of business

3PD Holding, Inc. (3PD Holding), formerly known as 3PD, Inc. and Last Mile Holding Company, Inc., a Delaware corporation, was formed on October 4, 2006. On November 30, 2006, 3PD Holding entered into an agreement with an investor for the acquisition and merger of 3P Delivery, Inc. (3P Delivery) and General Transportation Services, Inc. (GTS). On June 12, 2007, 3PD Holding entered into an agreement to acquire all of the issued and outstanding shares of capital stock of CRT Corporation (CRT) and Affinity Holdings, Inc. (Affinity Holdings). Effective January 1, 2008, 3P Delivery, GTS, and CRT merged; CRT being the surviving entity and a subsidiary of 3PD Holding, Inc. The names of CRT and Affinity Holdings were changed to 3PD, Inc. and 3PDIC, Inc., respectively.

Effective July 6, 2009, 3PD, Inc. acquired 100% of the outstanding shares of Penchant Software, Inc. (Penchant). Penchant’s primary software product, dispatchOffice, and other services are utilized by 3PD.

Effective November 9, 2011, 3PD, Inc. acquired the net assets of The Home Delivery Group LLC (HDG), a Nevada limited liability company that provided last mile delivery services across the United States.

3PD Holding and its wholly owned subsidiaries (collectively the “Company”) provide last mile delivery and logistics services across the United States and Canada.

Note 2 – Summary of significant accounting policies

Principles of Consolidation - The accompanying consolidated financial statements present the financial position and results of operations of 3PD Holding and its wholly owned subsidiaries, 3PD, Inc.; 3PDIC, Inc. and 3PD Canada. The consolidated financial statements also include SD Logistics, LLC (SD), a Delaware limited liability company that provides freight shipping services across the United States. SD is owned by certain individual stockholders of 3PD Holding.

Although 3PD Holding has no ownership interest in SD, it is considered the primary beneficiary of SD through its wholly-owned subsidiary, 3PD, Inc. Prior to the transfer of SD’s interests to certain individual stockholders of 3PD Holding, SD was a division of GTS. Because 3PD, Inc. effectively carries all of the risks and rewards of ownership of SD, it is considered the primary beneficiary. Therefore, 3PD Holding consolidates the results of SD’s operations. Significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition - Revenues are recognized at the time (1) the services are performed, (2) evidence of an arrangement exists, (3) the fee is fixed or determinable and (4) collection is probable. Certain locations have a guaranteed fee regardless of the amount of services provided, and the related revenue is recognized in the period to which it applies.

 

5

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 2 – Summary of significant accounting policies (continued)

 

Cash and Cash Equivalents - The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.

Restricted Cash - Restricted cash represents cash held as security under insurance contracts.

Accounts Receivable - Accounts receivable consist of trade accounts receivable due from customers. Accounts receivable are stated at cost, less an allowance for doubtful accounts. The allowance is based on collection experience, management’s analysis of specific accounts receivable, current economic conditions, delinquency experience, and other risks inherent in the accounts receivable portfolio. Accounts receivable are written off against the allowance account when the Company has exhausted all reasonable collection efforts.

Concentrations of Credit Risk - The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (FDIC) covers $250,000 for substantially all depository accounts and temporarily provides unlimited coverage for certain qualifying and participating non-interest bearing transaction accounts through December 31, 2012; however, effective January 1, 2013, the FDIC discontinued the additional unlimited coverage. From time to time during the year, the Company had amounts on deposit in excess of the insured limits. As of June 30, 2013, the Company had approximately $10.2 million in cash and cash equivalents which exceed these insured amounts.

The Company had four major customers which accounted for approximately $117.3 million and $103.1 million or 70.7% and 69.8% of the Company’s consolidated net revenues for the six months ended June 30, 2013 and 2012, respectively. These customers accounted for approximately 70% and 58% of the consolidated accounts receivable as of June 30, 2013 and December 31, 2012, respectively.

Property and Equipment - Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Useful lives range from 3 to 10 years. Leasehold improvements are amortized over the shorter of the remaining lease term or the useful life of the asset. Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Expenditures for maintenance and repairs are charged to expense as incurred. When an asset is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the account and any gain or loss is included in the results of operations.

Capitalized Software Development Costs - Cost in the preliminary project stage of developing or acquiring internal use software is expensed as incurred. Once the preliminary assessment is complete and it is probable that the project will be completed, will result in new software or added functionality of existing software, and will be used for the function intended, subsequent software development costs are capitalized. The capitalized costs are amortized on a straight-line basis over the estimated useful life of the software of 3 years.

 

6

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 2 – Summary of significant accounting policies (continued)

 

Accounting for Business Combinations - The Company allocates the purchase price of acquired companies to the assets acquired and liabilities assumed based on their estimated fair values. Such valuations require management to make significant estimates and assumptions. Management makes estimates of fair value based upon historical experience, as well as information obtained from the management of the acquired companies. These estimates are inherently uncertain. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. In certain business combinations that have been treated as stock purchases for income tax purposes, the Company has recorded deferred taxes relating to differences between the book and tax bases of acquired assets and liabilities. These business combinations resulted in deferred tax liabilities as the book values were reflected at fair values whereas the tax basis was carried over from the acquired company. Such deferred taxes were initially estimated based on preliminary information and are subject to change as valuations and tax returns are finalized.

Goodwill and Other Intangible Assets - Goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. Intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Intangible assets subject to amortization consist of acquired customer relationships, non-compete agreements and developed technology. Acquired customer relationships and developed technology are amortized by the straight-line method over the estimated useful lives and non-compete agreements are amortized by the straight-line method over the term of the related agreements. The Company evaluates the estimated useful lives each reporting period when events or changes in circumstances indicate a potential change.

Deferred Financing Costs - Deferred financing costs are amortized over the terms of the related loans using the straight-line method which approximates the effective interest method.

Amortization expense was approximately $899,000 and $897,000 for the six months ended June 30, 2013 and 2012, respectively.

Fair Value of Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions.

The interest rate swap as of June 30, 2013 and December 31, 2012 was measured using widely accepted valuation techniques including a discounted cash flow analysis on the expected cash flows. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs including interest rate curves. The fair value of the interest rate swap was determined using the market standard methodology and accordingly is classified in Level 2 of the fair value hierarchy.

 

7

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 2 – Summary of significant accounting policies (continued)

 

Stock-Based Compensation - The Company accounts for stock-based compensation for all share-based payment awards in accordance with the methodology defined in FASB Accounting Standards Codification 718, Compensation - Stock Compensation. The compensation costs related to all new grants and any unvested portion of prior grants have been measured based on the grant-date fair value of the award. Consistent with the authoritative guidance, awards are considered granted when all required approvals are obtained and when the participants have reached a mutual understanding of the key terms of the performance conditions. Additionally, compensation costs for share-based awards with performance conditions are based on the probability of the achievement of such performance conditions.

Income Taxes - Deferred tax assets and liabilities (tax benefits and liabilities expected to be realized in the future) are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carry forwards.

The carrying value of the Company’s deferred tax assets assumes that it will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, it may be required to establish a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income tax expense. On a periodic basis the Company assesses the need for adjustment of the valuation allowance. Based on the forecasted and prior years’ taxable income, no valuation allowance has been established at June 30, 2013 and December 31, 2012 because the Company believes that it is more likely than not that the future benefit associated with the deferred tax assets will be realized.

The Company recognizes and measures benefits for uncertain tax positions, which requires significant judgment from management. The Company first determines whether it is “more likely than not” that it would be able to sustain its position if it were analyzed with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, the Company measures the amount of tax benefit based on the largest amount of tax benefit that the Company has a greater than 50% chance of realizing in a final settlement with the relevant authority.

Those tax positions failing to qualify for initial recognition are recognized in the first period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense in its consolidated statements of comprehensive loss.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With the exception of net operating loss carry forwards, the Company is no longer subject to U.S. federal or state tax examinations by tax authorities for years before 2009 due to the expiration of the statute of limitations.

 

8

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 2 – Summary of significant accounting policies (continued)

 

Interest Rate Swap - The Company uses a financial based derivative contract to manage exposure to interest rate risks. GAAP requires companies to recognize all derivative instruments as either assets or liabilities on the consolidated balance sheet at fair value. As such, the derivative instrument of the Company is recorded on the consolidated balance sheet at fair value in non-current liabilities. The recognition and classification of gains and losses that result from changes in the fair value of a derivative depends on the purpose for issuing and holding the derivative. For a derivative instrument designated as a cash-flow hedge, the effective portion of the gains and losses of the derivative is recorded in the consolidated balance sheet in accumulated other comprehensive income(loss) until the hedge transaction is recognized in earnings. The ineffective portion of the gain or loss of the derivative is recognized immediately in earnings. Gains or losses from changes in the fair value of derivatives that are not accounted for as hedges are recognized immediately in earnings.

See Note 8 for further information on the Company’s interest rate swap.

Advertising Costs - Advertising costs are expensed as incurred. Advertising expense amounts are approximately $207,000 and $453,000 for the six months ended June 30, 2013 and 2012, respectively.

Foreign Currency Translation - The functional currency of 3PD Canada is the applicable local currency. Accounts of 3PD Canada are translated into U.S. dollars using year-end exchange rates for assets and liabilities and average exchange rates for revenue and expense accounts. Adjustments resulting from translation are included in accumulated other comprehensive loss, a separate component of stockholders’ equity.

New Accounting Pronouncements - In February 2013, the Financial Accounting Standards Board (FASB) issued guidance relating to the disclosure of items reclassified out of accumulated other comprehensive income. The new guidance requires that for those items that are reclassified out of accumulated other comprehensive income and into net income in their entirety, the effect of the reclassification on each affected net income line item be disclosed. For accumulated other comprehensive income reclassification items that are not reclassified in their entirety into net income, a cross reference must be made to other required disclosures. The guidance is effective prospectively for annual reporting periods beginning after December 15, 2012, and interim periods within those annual periods. Early adoption is permitted. The adoption of the guidance impacts presentation only and did not affect the Company’s financial condition.

In July 2013, the FASB issued guidance relating to the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of the guidance impacts presentation only and is not expected to affect the Company’s financial condition.

 

9

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 3 – Property and equipment

Property and equipment at June 30, 2013 and December 31, 2012 consist of:

 

		June 30, 2013				December 31, 2012
Equipment		$	9,232,384			$	7,716,970
Vehicles			3,030,143				3,216,989
Leasehold improvements			2,237,921				1,970,367
Furniture and fixtures			729,423				669,165
Software			7,573,719				6,842,789
			22,803,590				20,416,280
Less accumulated depreciation and amortization			(13,115,205	)			(11,220,941	)
		$	9,688,385			$	9,195,339

Depreciation expense was approximately $2,084,000 and $1,455,000 for the six months ended June 30, 2013 and 2012, respectively.

Note 4 – Acquisition

In November 2011, 3PD, Inc. acquired the net assets of HDG. The total purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed based on the fair market values at the acquisition date. HDG’s operating results have been included in the Company’s consolidated financial results of operations since the acquisition date.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

 

Assets:
Accounts receivable		$	1,075,234
Other assets			61,787
Property and equipment			80,166
Customer lists			17,831,000
Goodwill (final)			423,732
Total assets acquired		$	19,471,919
Liabilities:
Bank overdraft		$	(255,884	)
Accounts payable			(501,652	)
Deferred tax liability			(26,447	)
Accrued expenses			(323,822	)
Net assets acquired		$	18,364,114

The Company recorded an intangible asset for the customer list in the amount of $17,831,000 that will be amortized over 15 years on a straight-line basis.

 

10

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 4 – Acquisition (continued)

 

The following table presents a summary of the purchase price consideration for HDG:

 

Cash paid		$	16,000,000
Deferred payments			3,079,947
Estimated contingent consideration			(589,495	)
Resolved contingent consideration			(126,338	)
		$	18,364,114

Pursuant to the acquisition agreement, $3.0 million of the cash consideration was placed in escrow until May 2014 to compensate the Company for potential losses arising from, among other things, legal claims and litigation, breaches of representations, warranties, covenants and other financial metrics as defined in the agreement. Contingent consideration has been recognized as a reduction in purchase price for a financial metric that was resolved in March 2012 and for an estimated resolution for a separate financial metric that was measured for the twelve months ending November 2012. The estimated contingent consideration was resolved in November 2012 and resulted in a $2,426,281 reduction of the escrow accounts that was paid in February 2013. The $2,426,281 receivable from the escrow is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet at December 31, 2012.

The deferred payment is the estimated fair value of a $2,000,000 deferred payment to be paid based on the earliest of a change in control as defined in the agreement or November 2021 and an additional deferred payment of $2,000,000 to be paid on the latest of a change in control as defined in the agreement or May 2014. The additional deferred payment is also subject to the escrow provisions if the potential losses exceed the escrow balance. The deferred payments are included in other liabilities in the accompanying consolidated balance sheets at the estimated fair value at June 30, 2013 of $3,378,517 and December 31, 2012 of $3,284,762. The estimated value is based on management’s estimate of the payout date discounted at 5.79%.

Note 5 – Goodwill and intangible assets

Changes in the carrying amount of goodwill at June 30, 2013 and December 31, 2012 are as follows:

 

		June 30, 2013				December 31, 2012
Beginning balance		$	109,696,658			$	116,339,195
Purchase price adjustment of HDG			—				(6,642,537	)
Ending balance		$	109,696,658			$	109,696,658

The purchase price adjustment in 2012 for HDG was due to new information that presented itself which allowed for the same book and tax treatment of intangibles. The noncurrent deferred tax liability was adjusted for the same amount. There was no impact on the consolidated statements of comprehensive loss.

 

11

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 5 – Goodwill and intangible assets (continued)

 

A summary of intangible assets at June 30, 2013 and December 31, 2012 is as follows:

 

		June 30, 2013				December 31, 2012
Amortized intangible assets
Customer relationships		$	171,891,000			$	171,891,000
Non-compete agreements			290,000				290,000
Developed technology			1,898,430				1,898,430
			174,079,430				174,079,430
Less: Accumulated amortization			(66,199,946	)			(60,715,331	)
Less: Accumulated impairment charges			(11,578,667	)			(11,578,667	)
		$	96,300,817			$	101,785,432

The estimated useful lives of these intangible assets range from 4 to 15 years, based upon historical experience, customer attrition rates, and the contractual term of underlying agreements.

Amortization expense was approximately $5,485,000 for the six months ended June 30, 2013 and 2012. Estimated annual amortization expense for the next five years is as follows:

 

Years ending December 31,
July 1 to December 31, 2013		$	5,484,419
2014			10,779,387
2015			10,589,544
2016			10,589,544
2017			10,589,544
Thereafter			48,268,379
		$	96,300,817

Note 6 – Accrued expenses

A summary of accrued expenses at June 30, 2013 and December 31, 2012 is as follows:

 

		June 30, 2013				December 31, 2012
Accrued insurance claims payable		$	938,000			$	918,925
Accrued compensation and benefits			2,385,903				1,075,619
Accrued interest			840,277				825,453
Other accrued expenses (see Note 10)			7,830,944				3,423,816
		$	11,995,124			$	6,243,813

 

12

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 7 – Long-term debt

Long-term debt at June 30, 2013 and December 31, 2012 consists of:

 

		June 30, 2013				December 31, 2012
Senior term loan, payable in quarterly principal installments, bearing interest at LIBOR + an additional rate which varies between 5% and 6% (5.2% and 5.7% at June 30, 2013 and December 31, 2012, respectively), expiring December 2015		$	44,040,000			$	48,660,000
$10 million revolving line of credit, payable upon expiration, bearing interest at LIBOR + an additional rate which varies between 5% and 6% (5.2% and 5.7% at June 30, 2013 and December 31, 2012, respectively) and unfunded fee of 0.5%, expiring December 2015			2,000,000				5,000,000
Senior subordinated term loan, payable upon expiration, bearing interest at 14.5% (12% paid quarterly in cash and 2.5% paid in kind), expiring June 2016			62,308,102				61,532,245
Senior subordinated additional term loan, payable upon expiration, bearing interest at 14.5% (12% paid quarterly in cash and 2.5% paid in kind), expiring and due June 2016			18,762,172				18,528,547
Mezzanine Facility, payable upon expiration, bearing interest at 17.00% (paid in kind) at June 30, 2013 and December 31, 2012, expiring and due December 2016			28,539,695				26,280,990
Unsecured promissory notes with maturity date at exit as defined in the promissory notes or July 2019			91,047				91,047
Total			155,741,016				160,092,829
Less: current maturities			(10,500,000	)			(9,660,000	)
Long-term debt		$	145,241,016			$	150,432,829

In November 2011, in conjunction with the acquisition described in Note 4, the Company entered into an additional senior subordinated term loan of $18 million.

As of June 30, 2013, the Company had $8 million available to borrow under the line of credit.

 

13

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 7 – Long-term debt (continued)

 

The outstanding senior term loan, senior revolving credit facility, senior subordinated term loans, and mezzanine facility are collateralized by all of the outstanding shares of stock and substantially all of the assets, including intangible assets, of the Company and its subsidiaries. In addition, the agreements contain certain restrictions and covenants that require the Company to maintain certain financial covenants such as fixed charge coverage and leverage ratios as defined in the agreements. The Company is also subject to certain restrictions on its expenditures, transfers of common stock, and banking activities, among others.

Contractual maturities of long-term debt over the next five years are as follows:

 

Years ending December 31,
July 1 to December 31, 2013		$	5,040,000
2014			11,340,000
2015			29,660,000
2016			109,701,016
Total		$	155,741,016

Note 8 – Interest rate swap

On June 1, 2011, the Company entered into an interest rate swap agreement in order to hedge the risk of variability of cash flows caused by changes in interest rates. The derivatives are held only for the purpose of hedging such risks, not for speculation. Any payments made or received under the swap agreements are recognized when due as an increase or decrease in interest expense.

Significant terms of the swap agreement are as follows:

 

Effective date:			June 14, 2011
Notional amount:		$	30,000,000
Interest rate paid by the Company:			6.73250	%
Interest rate earned by the Company:			1 month LIBOR plus 5	%
Expiration date:			December 31, 2015

The fair value of the interest rate swap as of June 30, 2013 and December 31, 2012 totaled $(28,750) and ($179,521), respectively, and is included in other liabilities in the accompanying consolidated balance sheets. The change in fair value, net of tax, for the interest rate swap for the six months ended June 30, 2013 and 2012 totaled $(94,604) and $(26,763), respectively. These amounts are included in the interest rate swap valuation within accumulated other comprehensive income (loss) in the accompanying consolidated statements of changes in stockholders’ equity. Swap interest expense, net of swap interest income, totaled $180,618 and $204,795 for the six months ended June 30, 2013 and 2012, respectively.

 

14

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 9 – Stock option plan

The Company’s 2006 Stock Option Plan (the “Plan”) allows for the issuance of stock options to purchase up to 1,163,156 shares of the Company’s common stock. Under the Plan, stock options may be granted to employees and directors of the Company with an exercise price on the date of grant that is no less than the fair market value of the Company’s common stock as defined in the Plan. The Company values its stock options at the time of grant using a Black-Scholes option pricing model and records that fair market value as compensation expense over the estimated vesting period of the stock option (the requisite service period).

Vesting for certain stock options granted to employees and directors is subject only to a specified service condition (or the passage of a specified period of time), while other options vest based upon the achievement of certain financial targets or internal rates of return for the Company’s shareholders. The Company recognizes compensation expense on options that vest based upon the achievement of performance conditions only when the achievement of such conditions is determined to be probable. All of the Company’s outstanding options issued prior to 2012 have limitations on exercisability such that options are exercisable only upon a change of control, a qualified public offering, or the passage of nine years as defined in the Plan. The 2012 modified options have the same limitations with the exception of the passage of 5 years as opposed to 9 years.

Certain options that vested based on performance conditions were modified, thus reducing the number of options previously granted. The performance conditions for these modified options were also changed in 2008. In October 2012, the Company modified certain options from performance based vesting to service based vesting. The weighted-average grant date fair value for options modified during the year ended December 31, 2012 was approximately $8.43.

Service Vesting Share Options

Service vesting share options are generally granted with an exercise price equal to the fair value of the Company’s stock at the date of grant; those options generally vest over 4 to 9 years and have a 6 to 9 year contractual term.

Expected volatility was estimated using historical volatility of publicly traded companies in the Company’s peer group considering the industry, stage of life cycle, size, and financial leverage of the Company. The risk-free interest rates were determined based on the yield for U.S. Treasuries with a term corresponding to the expected life of the options. The expected life of the options was estimated based on the estimated vesting period of the option, estimated cancellations, and the contractual term of the option, including consideration of limitations on exercisability. The fair value of the Company’s stock price on the date of grant was determined by the Board of Directors in good faith considering market comparables for similarly situated companies.

For the six months ended June 30, 2013, there were no options issued, modified, exercised, or cancelled. At June 30, 2013, 485,163 service vesting share options are outstanding and nonvested with a weighted average exercise price of $20, fair value of $7.45, and remaining contractual term of 3.7 years.

For the six months ended June 30, 2013 and 2012, the Company recognized stock-based compensation expense related to the service vesting share option of approximately $381,000 and $76,000, respectively. As of June 30, 2013, there was approximately $1,216,000 of total unrecognized compensation cost related to the service vesting share options granted under the Plan, which are vesting over a weighted average remaining estimated vesting period of 4 years.

Performance Vesting Share Options

Performance vesting share options are generally granted with an exercise price equal to the fair value of the Company’s stock at the date of grant; those options generally vest upon the achievement of the performance condition and have a 6 to 10 year contractual term.

 

15

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 9 – Stock option plan (continued)

 

For the six months ended June 30, 2013, there were no options issued, modified, exercised, or cancelled. At June 30, 2013, 503,020 performance vesting share options are outstanding and nonvested with a weighted average exercise price of $20, fair value of $7.86, and remaining contractual term of 3.5 years.

No compensation expense was recorded related to the performance vesting share options since the vesting was not determined to be probable.

At June 30, 2013 and December 31, 2012, the Company has 59,908 warrants outstanding that were recognized as consideration paid in connection with an acquisition. The warrant, which carried an exercise price of $20 per share, was valued using the Black Scholes option pricing model using a risk-free interest rate of 4.46%, implied volatility of 35%, and an expected term of 10 years.

As of June 30, 2013 and December 31, 2012, one shareholder had a right to require the Company to repurchase 640,870 shares for an amount based on a financial metric. The put can only be exercised between January 31, 2017 and April 1, 2017. Approximately $10.9 million would be paid to the shareholder if the put were exercisable and exercised as of June 30, 2013. This amount would be paid in three equal annual installments. Management believes the value of the put is not material to the consolidated financial statements.

Note 10 – Commitments and contingencies

Operating Leases

The Company occupies facilities at various locations under lease agreements that expire at various dates through 2018. Rent expense under these arrangements was approximately $2,434,000 and $2,486,000 for the six months ended June 30, 2013 and 2012, respectively.

Future minimum annual rental commitments for these arrangements at June 30, 2013 are as follows:

 

Years ending December 31,
July 1 to December 31, 2013		$	2,118,980
2014			3,964,260
2015			2,742,490
2016			2,031,520
2017			1,486,530
Thereafter			66,240
Total		$	12,410,020

Legal

The Company has received notice of other claims and is involved in other litigation arising in the ordinary course of business. In the opinion of management upon consultation with legal counsel, the ultimate resolution and disposition of these other matters will not have a material adverse effect on the financial position or results of operations of the Company. However, were an unfavorable ruling to occur, there exists the possibility of a material adverse effect on the Company’s financial position and results of operations.

 

16

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 10 – Commitments and contingencies (continued)

 

Other

Management has entered into an agreement with one shareholder to provide a contingent payment of $400,000 if an exit does not occur by November 30, 2015 and additional payments of $300,000 and $200,000 if the exit does not occur by November 30, 2016 and January 15, 2017, respectively. These payments have not been recorded in the consolidated financial statements as the contingency is considered remote.

In June 2013, the Company accrued $2,795,000 based on a matter with a vendor that would result in the Company funding a shortage in third party funds held by the vendor due to the contractual relationship with third parties and the Company. This amount is included in Other accrued expenses (see Note 6).

Note 11 – Income taxes

The benefit from (provision for) income taxes for the six months ended June 30, 2013 and 2012 consists of the following:

 

		Six Months Ended June 30,
		2013				2012
Current
State		$	(72,121	)		$	(120,887	)
Foreign			(456,570	)			(47,646	)
			(528,691	)			(168,533	)
Deferred
Federal			1,890,684				1,899,336
State			226,774				187,767
			2,117,458				2,087,103
		$	1,588,767			$	1,918,570

A reconciliation of the statutory federal income tax benefit (provisions) to the benefit (provision) from income taxes of the Company is presented in the table below.

 

		Six Months Ended June 30,
		2013				2012
Statutory federal income tax benefit		$	1,469,484			$	1,968,149
State income tax benefit, net of federal benefit			179,653				109,506
Non-deductible items and other			(195,077	)			(173,144	)
Foreign tax benefit, net of federal benefit			134,704				14,059
Benefit from income taxes		$	1,588,764			$	1,918,570

Income tax expense (benefit) differed from the amounts computed by applying the statutory U.S. federal income tax rate of 37% to net loss before provision for income taxes primarily due to foreign dividends and acquisition costs.

 

17

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 11 – Income taxes (continued)

 

Management believes it is more likely than not the deferred tax assets will be fully realized, and has not established a valuation allowance at June 30, 2013 and December 31, 2012.

The Company’s deferred tax assets and liabilities as of June 30, 2013 and December 31, 2012 are as follows:

 

		June 30, 2013				December 31, 2012
Deferred tax assets
Accrued expenses		$	1,650,174			$	166,415
Provision for doubtful accounts			12,060				5,316
Stock-based compensation			808,893				667,070
Deferred revenue			857				2,246
Non-deductible reserve			69,671				69,671
Net operating loss			4,731,100				6,148,115
Other			330,590				347,288
			7,603,345				7,406,121
Deferred tax liabilities
Amortization			(29,533,239	)			(30,759,203	)
Depreciation			(812,991	)			(1,365,377	)
Prepaid expenses			(267,129	)			(352,846	)
Other			(84,589	)			(135,274	)
			(30,697,948	)			(32,612,700	)
Net deferred tax liabilities		$	(23,094,603	)		$	(25,206,579	)

For the six months ended June 30, 2013 and year end December 31, 2012, the Company had net operating loss carry forwards for federal income tax purposes of approximately $12,790,000 and $16,724,000, respectively. These net operating loss carry forwards expire in varying amounts beginning in the year 2028.

Note 12 – Employee benefit plan

The Company maintains a 401(k) retirement plan for its employees. Eligible employees may make contributions to the plan up to maximum limits prescribed under the Internal Revenue Code and Regulations. In accordance with the terms of the plan, the Company contributed approximately $28,000 and $30,000 to the plan for the six months ended June 30, 2013 and 2012, respectively.

 

18

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3PD HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

 

 

 

Note 13 – Other comprehensive income (loss)

The accumulated balances, net of income tax, related to each component of other comprehensive income (loss) were as follows:

 

		Foreign Currency Translation				Interest Rate Swap				Accumulated Other Comprehensive Income (Loss)
Ending balance - December 31, 2012		$	(2,561	)		$	(112,718	)		$	(115,279	)
Other comprehensive income (loss)			(85,364	)			94,604				9,240
Ending balance - June 30, 2013		$	(87,925	)		$	(18,114	)		$	(106,039	)

Note 14 – Related party transactions

The Company has management agreements with certain shareholders and incurred a total of $417,000 in management fees during the six months ended June 30, 2013 and 2012.

The Company leases a building in Marietta, Georgia. The lessor was related through common ownership until the lessor sold the building in 2012. The base rent paid for the six months ended June 30, 2012 while under common ownership was approximately $324,000.

Note 15 – Subsequent events

The Company has evaluated subsequent events through August 2, 2013, the date the consolidated financial statements were available to be issued.

On July 12, 2013, XPO Logistics, Inc. (“XPO”) entered into a stock purchase agreement to acquire all the common stock of 3PD Holding in a transaction valued at approximately $365 million, payable in cash, deferred payments (including an escrow), $8 million of restricted shares of the XPO’s common stock, and the payoff of certain indebtedness. The closing of the transaction contemplated in the stock purchase agreement is subject to customary closing conditions, including Hart-Scott-Rodino clearance. The stock purchase agreement includes customary representations, warranties and covenants. Subject to certain limitations, each party has agreed to indemnify the other for breaches of representations, warranties and covenants and other matters. The transactions contemplated by the stock purchase agreement are not subject to any financing condition. The stock purchase agreement contains certain termination rights for both XPO and the sellers and provides that if XPO fails to close the transaction after all of its conditions to close have been satisfied or waived, XPO may be required to pay 3PD Holding a termination fee in the amount of $18 million.

 

19