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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended March 31, 2012
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:
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Commission file number: 000–14273
INTEGRATED FREIGHT CORPORATION
(Exact name of registrant as specified in its charter)
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FLORIDA
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84–0868815
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State or other jurisdiction of
incorporation or organization
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I.R.S. Employer
Identification No.
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8374 Market Street #478
Bradenton, Florida
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34202
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(Address of principal executive offices)
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(Zip code)
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Issuer’s telephone number: (941) 320-0789
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
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Title of each class:
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Name of Exchange on which registered:
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Common Stock, $0.001 par value per share
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(None)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes
o
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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Yes
o
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Yes
o
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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o
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
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Yes
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No
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The aggregate market value of the voting and non-voting common equity held by non-affiliates on April 30, 2013 was: $371,512.
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The number of shares of the registrant’s common stock outstanding at April 30, 2013 was: 94,962,832 shares
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Table of Contents
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Page
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Part I
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| Item 1. | Business | 1 | |||
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Item 1A.
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Risk Factors
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Item 1B.
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Unresolved Staff Comments
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13 | |||
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Item 2.
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Properties
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14 | |||
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Item 3.
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Legal Proceedings
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15 | |||
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Item 4.
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Mine Safety Disclosures [not applicable]
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16 | |||
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Part II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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16 | |||
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Item 6.
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Selected Financial Data [not applicable]
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17 | |||
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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17 | |||
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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25 | |||
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Item 8.
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Financial Statements and Supplementary Data
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26 | |||
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure [not applicable]
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26 | |||
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Item 9A.
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Controls and Procedures
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26 | |||
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Item 9B.
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Other Information
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27 | |||
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Part III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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27 | |||
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Item 11.
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Executive Compensation
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29 | |||
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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30 | |||
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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31 | |||
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Item 14.
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Principal Accounting Fees and Services
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31 | |||
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Part IV
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Item 15.
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Exhibits, Financial Statement Schedules
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32 | |||
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Signatures
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33 | ||||
i
USE OF PRONOUNS
“We”, “our” and “us", as used in this annual report, refer to Integrated Freight Corporation, our wholly owned subsidiaries and our predecessor, PlanGraphics, Inc., The” Company”, as used in the notes to our financial statements, refers to us on a consolidated basis. “You” , as used in this annual report, refers to the reader.
DOCUMENTS INCORPORATED BY REFERENCE
We have not incorporated any documents by reference.
SUMMARIES OF REFERENCED DOCUMENTS
This annual report on Form 10-K contains references to, summaries of and selected information from agreements and other documents. These agreements and documents are not incorporated by reference; but, they are filed as exhibits to this annual report or to other reports we have filed with the U.S. Securities and Exchange Commission. Whenever we make reference in this annual report to any of our agreements and other documents, the references are not necessarily complete. The summaries of and selected information from those agreements and other documents are qualified in their entirety by reference to the full agreements and other documents. You may obtain the full text of the agreements and documents from the Public Reference Section of or online from the Commission. See “Where You Can Find Agreements And Other Documents Referred To In This Annual Report” for instructions as to how to access and obtain this information.
WHERE YOU CAN FIND AGREEMENTS AND OTHER DOCUMENTS REFERRED TO IN THIS ANNUAL REPORT
We file reports with the U.S. Securities and Exchange Commission pursuant to Section 15(d) of the Securities Exchange Act of 1934. You may read and copy any reports and other materials we have filed with the Commission at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site at which you may obtain all reports, proxy and information statements, and other information that we file with the Commission. The address of the Commission’s web site is http://www.sec.gov. Under “Forms and Filings”, select “Search for Company Filings”.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10–K and the information incorporated by reference, if any, includes “forward–looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. We intend the forward–looking statements to be covered by the safe harbor provisions for forward–looking statements in these sections.
This annual report on Form 10–K contains forward-looking statements that involve risks and uncertainties. We use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” or “may,” or other such words, verbs in the future tense and words and phrases that convey similar meaning and uncertainty of future events or outcomes to identify these forward-looking statements. There are a number of important factors beyond our control that could cause actual results to differ materially from the results anticipated by these forward-looking statements. While we make these forward–looking statements based on various factors and derived using numerous assumptions, you have no assurance the factors and assumptions will prove to be materially accurate when the events they anticipate actually occur in the future.
These important factors include those that we discuss in this annual report under the caption “Risk Factors”, as well as elsewhere in this annual report. You should read these factors and the other cautionary statements made in this annual report as being applicable to all related forward-looking statements wherever they appear in this annual report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
ii
PART I
ITEM 1. BUSINESS.
Our corporate and business history.
We have and have had the following wholly owned subsidiaries, during the periods indicated:
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● Integrated Freight Corporation, a Florida corporation, (“Original IFC”) between December 3, 2009, when we acquired a controlling interest in original IFC, and December 23, 2009, when we merged Original IFC into us.
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● Morris Transportation, Inc., an Arkansas corporation, beginning September 1, 2008, when we acquired a controlling interest in Original IFC. Original IFC purchased all of Morris Transportation’s common stock as of September 1, 2008.
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● Smith Systems Transportation, Inc., a Nebraska corporation, beginning September 1, 2008, when we acquired a controlling interest in Original IFC. Original IFC purchased all of Smith System’s common stock as of September 1, 2008.
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● Triple C Transport, Inc., a Nebraska corporation, beginning as of May 5, 2010, when we purchased all of its common stock, and June 30, 2012 when we sold Triple C Transport. See Item 3. Legal Proceedings, below.
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● Cross Creek Trucking, Inc., an Oregon corporation, beginning April 1, 2011, when we purchased all of its common stock, and June 30, 2012 when we sold Cross Creek Trucking. Financial information for Cross Creek Trucking is included in our financial statements as a discontinued operation for the year ended March 31, 2012.
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● Integrated Freight Services, a Florida corporation, beginning April 1, 2011, when we formed the Company and began operations.
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The address of our principal executive offices is 8374 Market Street, #478, Bradenton, FL 34202 and our telephone number at that address is (941) 320-0789. The address of our web site is www.integrated-freight.com. The information on our web site is not necessarily current, and may be out of date.
We were incorporated as Douglas County Industries, Inc. in Colorado in 1981. We underwent several name changes prior to 1997, our name at that time being DCX, Inc. In 1997, we acquired all of the outstanding shares of what is now PlanGraphics, Inc. headquarter in Frankfort, Kentucky and in which we have no interest. In 1998, we changed our name to Integrated Spatial Information Solutions, Inc. from DCX, Inc. In 2002, we changed our name to PlanGraphics, Inc. from Integrated Spatial Information Solutions, Inc. On August 18, 2010, we changed our name to Integrated Freight Corporation when we changed our corporate domicile to Florida from Colorado. We have been continuously engaged in a business since inception in 1981 and have never been a shell company, as defined in the regulations under the federal securities laws.
Original IFC was incorporated as Integrated Freight Systems, Inc. in Florida on May 13, 2008 by Paul A. Henley, its founder. Original IFC changed its name to Integrated Freight Corporation on July 27, 2009. Original IFC was founded for the purpose of acquiring and consolidating operating motor freight companies. We have acquired the following companies:
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Company Name
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Year Established
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Acquisition Date
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Morris Transportation, Inc.
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1998
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As of December 23, 2009
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Smith Systems Transportation, Inc.
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1992
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As of December 23, 2009
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Triple C Transport, Inc.
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2006
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As of May 5, 2010
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Cross Creek Trucking, Inc.
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1986
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As of April 1, 2011
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1
In February 2011, we incorporated Integrated Freight Services, Inc. to operate as a freight brokerage company. We sold Cross Creek Trucking, Triple C Transport, and Integrated Freight Services to Deep South, LLC of Pineville, and LA effective June 30, 2012. At the date of sale, Cross Creek Trucking, Triple C Transport, and Integrated Freight Services had no operations or assets.
Although we may eventually consolidate some operational functions of these subsidiaries, such as insurance, fuel and tire purchasing, we are operating these subsidiaries as independent companies under the management of their founders and stockholders from whom we purchased them. Such operations are currently being conducted pursuant to the terms of Exhibit “B” to an Engagement Agreement for Consulting Services with Fuselier Consulting LLC.
Overview of Our Truck Transportation Business
We are a holding company with two operating motor freight carriers, providing truck load service throughout the forty-eight contiguous United States. We do not specialize in any specific types of freight or commodities. We carry dry freight and certain hazardous materials (“hazmat”) including hazardous waste. We provide long-haul, regional and local service to our customers. During parts of the fiscal year ended March 31, 2012 and 2011, we also transported refrigerated freight. We have discontinued most of our refrigerated freight operations with the discontinuance of operations by Cross Creek Trucking and Triple C Transport.
Trucking Industry Background
Subsequent to the recession of 2008-2009, the trucking industry has staged a significant but difficult comeback. According to data from the American Trucking Associations Freight Tonnage Index and the Cass Information Systems Linehaul Rate Index (Supply Chain Digest, July 12, 2012), the decline in trucking volume and freight rates began with the recession in mid-2008. Total trucking shipment volume tracked with the recession by bottoming out in mid-2009 and recovering steadily through 2011 along with the economy. However, base freight rates, not including fuel surcharges or other adjustments, continued their downward slide until April 2010. Since that time, freight rates have recovered all of the ground lost during the recession and then some through the end of 2011--about 15%--from the bottom of the recession. It should be noted that the bulk of the freight demand and price rebound came in the last 2-3 months of 2011 which is believed to be attributable to end of year inventory and holiday shopping business.
In 2012 freight volumes are up approximately twenty percent through the end of May over the low point of the recession in mid-2009. However, according to the ATA Freight Index, both volume and rates are flat on a year-to- date basis. This reflects the generally consistent reports of another potential slowdown in the economy.
The effect and timing of the recession on the trucking industry was profound. In addition to the precipitous drop in freight volume, carriers had to contend with dramatically rising fuel prices which, unlike previous diesel price hikes, did not spike but remained at extraordinarily high levels. This was compounded further by new diesel engine emissions regulations promulgated by the U.S. Environmental Protection Agency that drove new truck prices to record high levels according to the ATA. Not surprisingly, thousands of motor carriers of all sizes, and in particular smaller carriers, ceased operations. Many carriers who did survive did so by laying off truck drivers, a practice that the chronically capacity-short industry had not seen in decades. Thousands of qualified truck drivers left the industry permanently.
We believe that the aftermath of the recession and the subsequent, albeit slow, recovery has created a substantial opportunity. The capacity shortage has enabled carriers to increase market rates further while excess diesel costs are being offset by fuel surcharges. Access to debt and equity capital remains difficult; particularly for small to medium sized motor carriers. As a result, we believe that there are multiple small carriers serving defensible niche markets that would be a good strategic "fit" with our business model. In addition to healthy organic growth, we intend to acquire other motor carriers whose freight lanes and operational specialties, such as our present hazardous waste segment, are compatible and mutually supportable. We expect to be able to improve customer service and reduce operating costs by centralizing key administrative functions such as accounting, human resources, billing and collections. Additional savings will be realized through operating improvements as well as bulk purchasing practices related to fuel, tires, insurance, and maintenance. This strategy is highly dependent upon our ability to obtain suitable acquisition financing. We have experienced difficulty obtaining such financing and there is no assurance that we will be able to secure acquisition financing in the future.
2
Our Markets
Historically, we have operated in well-established geographic traffic lanes or routes. These lanes are defined by our customers’ distribution patterns.
Our market is concentrated in the western half of the U.S., ranging from the Ohio Valley and North Central moving through the Midwest and Southwest and in the Pacific Coast. We have light coverage in the Northeast. Our dry van and hazardous materials subsidiaries operate in regional areas, and thus have length of hauls typical of a day to two days of travel. Our brokerage services enable us to expand our customer service offerings by providing the non-asset-based capability of arranging with other carriers to haul our customers' freight when the shipments do not fit our asset-based model.
*A yard facility, or drop yard, is a temporary or semi-permanent location we rent to store trailers when not in use between pick-ups and deliveries. Typically, we rent yard facilities as needed in terminal facilities of other motor freight carriers, which provide security.
Our Customers and Marketing
We serve approximately 125 customers on a regular basis. Like most truckload carriers, we do not have contracts with any of these customers. Instead, we have long-standing relationships with most of them which include fixed pricing terms on a per mile or fixed point-to-point basis.
The following table presents information regarding the percentage-of-revenue concentration of the business with our customers.
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Four customers
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Up to 43%
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All other customers
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57% or more
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3
The following table presents information regarding the average length of our trips.
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Longest haul (overnight)
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2,200 miles
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Shortest haul
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100 miles
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Average haul
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707 miles
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All of the freight we hauled in fiscal year 2012 is dry van, hazmat and refrigerated freight. The following table presents information regarding the approximate percentage makeup of the freight we haul.
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Forest and paper products
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38%
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Hazmat and hazwaste
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30%
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Non-Haz waste
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4%
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All other freight (freight of all kinds, particularly food and refrigerated goods)
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28%
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Marketing
Our sales and marketing force currently consists of two individuals. We have no formal marketing plan at the present time. We attend selected relevant trade shows and trade association meetings, and seek to maintain good relations with our existing customers.
Our People
We believe our employees are our most important asset. The table on the following page presents information about our employees, other than drivers.
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Platform and warehouse
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0
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Fleet technicians
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8
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Dispatch
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7
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Sales
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2
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Office
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13
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Administrative and Executive
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6
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We also employ several persons in administrative and executive capacities on a part-time basis. None of our employees are represented by a collective bargaining unit. We consider relations with our employees to be good. We offer basic health insurance coverage to employees.
4
Our Drivers
The following table presents information about our drivers.
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Drivers – company
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77
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Drivers – independent contract
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33
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We believe that maintaining a safe and productive professional driver group is essential to providing excellent customer service and achieving profitability. All of our drivers must have three years of verifiable driving experience, a hazmat endorsement (if hauling hazmat), no major violations in the previous thirty-six months, and must comply with all requirements of employment by federal Department of Transportation and applicable state laws.
We select drivers, including independent contractors, using our specific guidelines for safety records, driving experience, and personal evaluations. We maintain stringent screening, training, and testing procedures for our drivers to reduce the potential for accidents and the corresponding costs of insurance and claims. We train new drivers in all phases of our policies and operations, as well as in safety techniques and fuel-efficient operation of the equipment. All new drivers also must pass DOT required tests prior to assignment to a vehicle.
We primarily pay company-employed drivers a fixed rate per mile. The rate increases based on length of service. Drivers also are eligible for bonuses based upon safe, efficient driving. We pay independent contractors on a fixed rate per mile. Independent contractors pay for their own fuel, insurance, maintenance, and repairs.
Competition in the trucking industry for qualified drivers is normally intense. Our operations have been impacted, and from time-to-time we have experienced under-utilization of equipment and increased expense, as a result of a shortage of qualified drivers. We place a high priority on the recruitment and retention of an adequate supply of qualified drivers. Our average annual turn-over rate is less than fifteen percent compared to an industry average of over one hundred percent as published in The Journal of Commerce, September 24, 2012. Low driver turnover avoids costly repetitive recruiting and training efforts, promotes a culture of safety, and offers customers better overall service.
Our Operations
We currently conduct all of our freight transportation operations, including dispatch and accounting functions, from the headquarters facilities of our operating subsidiaries. During fiscal year 2012 we continued using the legacy information management systems and personnel that were employed when our operating subsidiaries were acquired. These arrangements produce many overlaps and duplications in facilities, office systems and personnel. We believe that these operating arrangements provide less than optimal results and controls.
Our Revenue Equipment
The following table presents information regarding the mix of our revenue producing equipment.
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Power units (tractors) – sleeper
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110
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Power units (tractors) – day cab
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0
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Trailers
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Flatbed
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2
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Dry van
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270
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Refrigerated
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2
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Other specialized
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9
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Tanker
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9
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5
The average age of our power units is approximately 4.82 years. All of our power units are GPS equipped. The majority of our power units are Freightliner and Volvo vehicles. This uniformity allows for reduced inventory of parts required by our maintenance departments. In addition, the training required for our technicians is focused on limited equipment lines. We plan to replace our power units at approximately four to five years of age. The average age of our trailers is approximately 8.2 years. We maintain all of our revenue producing equipment in good order and repair.
We believe we have an optimal tractor to trailer ratio based upon our current and anticipated customer activity.
Diesel Fuel Availability and Cost
Our operations are heavily dependent upon the use of diesel fuel. The price and availability of diesel fuel can vary and are subject to political, economic, and market factors that are beyond our control. Fuel prices have fluctuated dramatically and quickly at various times since early 2008. Prices remain high based on historical standards and can be expected to increase with increased demand for truck transportation in a recovering economy. We actively manage our fuel costs with volume purchasing arrangements with national fuel centers that allow our drivers to purchase fuel at a discount while in transit. During fiscal 2012, over eighty-five percent of our fuel purchases were made at contracted locations.
Our cost-cutting measures include utilizing in-cab communications technology (PeopleNet) to monitor our drivers’ travel speed, excessive idling, engine RPM, and out of route miles. In addition, governing the top speed of our power units helps reduce our fuel costs. We are installing modern low rolling resistance tires as replacements as yet another means to improve fuel economy. In addition, our new revenue equipment features aerodynamically designed components and drivers receive training on fuel conserving driving techniques.
Among the greatest challenges presented by high and relatively unstable diesel fuel prices is monitoring and maintaining our fuel costs and insuring that the fuel surcharge levels are adequate to recapture incremental costs. We monitor the weekly U.S. Department of Energy regional and national diesel fuel pricing information and regulate our fuel surcharge levels accordingly. In addition, customer service representatives and operations personnel have been trained to take into account the cost of fuel (to include all empty miles) during the process of accepting and booking all shipments.
The federal fuel surcharge program cushions our exposure to increased fuel prices. This program has enabled us to pass through most long-term increases in fuel prices and related taxes to customers in the form of fuel surcharges. The fuel surcharge, which is adjusted weekly based upon US Energy Information Agency data, enables us to recover a substantial portion of fuel cost increases that occur from time to time above our base fuel cost. All fuel surcharges are based on US Department of Energy posted national averages. As of March 31, 2012 and to date, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Our Competition and Industry
Trucks provide transportation services to virtually every industry operating in the United States and generally offer higher levels of reliability and faster transit times than other surface transportation options. Trucks hauled sixty-seven percent of all freight and took in eighty-one percent of all freight transportation revenue in 2011, according to American Trucking Association. The transportation industry is highly competitive on the basis of both price and service. The trucking industry is comprised principally of two types of motor carriers: truckload and less-than-truckload generally identified as LTL. Truckload carriers generally provide an entire trailer to one customer from origin to destination. LTL carriers pick up multiple shipments from multiple customers on a single truck and then route those shipments through service centers, where freight may be transferred to other trucks with similar delivery destinations. All of our business is truckload service.
The surface freight transportation market in which we operate is frequently referred to as highly fragmented and competitive. There are an estimated 172,000 transportation and warehousing companies in the US, according to the National Cooperative Freight Research Program’s 2011 report. Even the largest motor freight companies haul a small percentage of the total freight. The following table presents information regarding the estimated percentage of freight hauled by the largest trucking companies compared to all other trucking companies.
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Ten largest trucking companies
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10.7%
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All other trucking companies
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89.3%
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*Transport Topics 2011 Top 100 Survey
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6
According to the American Trucking Association’s June 2011 issue of Trucklines, “Trucking serves as a barometer of the U.S. economy, representing sixty-seven percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled nine billion tons of freight in 2010. Motor carriers collected $563.4 billion, or eighty-one percent of total revenue earned by all transport modes.”
Competition in the motor freight industry is based primarily on service (including on-time pickup and delivery), price, equipment availability and business relationships. We believe that we are able to compete effectively in our markets by providing high-quality and timely service at competitive prices. We believe our relationships with our customers are good. We compete with smaller and several larger transportation service providers. Some of the largest truckload carriers, including JB Hunt Transport Services, Inc., C.R. England, Inc. and Knight Transportation, Inc., may have more equipment, a broader coverage network and a wider range of services than we have. They also have greater financial resources and, in general, the ability to reduce prices to gain business, especially during times of reduced growth rates in the economy. This could potentially limit our ability to maintain or increase prices, and could also limit our growth in shipments and tonnage in the same markets. However, we will continue to execute our strategy of confining our primary sales and operations efforts to defensible, niche markets (hazardous waste, specialty papers, etc.) as opposed to generic, high volume freight segments.
We believe that we do not compete with transportation by air, train, barge or ship, which we believe are not options for our existing customers.
Regulation
Our operations as a for-hire motor freight carrier are subject to regulation by the U.S. Department of Transportation (USDOT) and its agency, the Federal Motor Carrier Safety Administration (FMCSA), and certain business is also subject to state rules and regulations. These agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety and insurance requirements. The FMCSA periodically conducts reviews and audits to ensure our compliance with all federal safety requirements, and we report certain accident and other information to the FMCSA.
Our company drivers and independent contractor drivers also must comply with the safety and fitness regulations promulgated by the FMCSA, including those relating to drug and alcohol testing and hours-of-service. Drivers may drive up to eleven hours within a fourteen-hour non-extendable window from the start of the workday, following at least ten consecutive hours off duty. Further, drivers may drive up to a total of seventy hours in any eight consecutive days. However, motor freight carriers and drivers may restart calculations of the seventy hour on-duty limit after the driver has at least thirty-four consecutive hours off duty.
We are also subject to various environmental laws and regulations dealing with the handling of hazardous materials, air emissions from our vehicles and facilities, engine idling, and discharge and retention of storm water. These regulations have not had a significant impact on our operations or financial results and we do not expect a negative impact in the future
Item 1A Risk Factors
We have recently experienced a change in our senior management, which limits your ability to judge our performance under new management.
On August 2, 2012, we entered into a consulting agreement with Fuselier Consulting LLC and employed David Fuselier, the principal of Fuselier Consulting, as our Chief Executive Officer. Mr. Fuselier also is one of our directors and serves as Chairman of the Board. Until Mr. Fuselier has been incumbent for a period of time, you will not be able to judge our future performance based on prior performance.
7
Recent improvements in the motor freight industry may hinder or prevent our acquisition of additional trucking companies.
The motor freight industry, as a whole, has experienced an increased demand for trucks and an improvement in revenues, as our general economy appears to be recovering from the most recent recessionary period. (American Trucking Associations and Cass Information, July 12, 2012) While the growth in freight demand has been relatively flat through the first half of 2012, the May 2012 freight tonnage was up over twenty percent relative to tonnages at the bottom of the recession in mid-2009. Although not as robust an economic recovery as many have hoped for, the economy seems to be slowly recovering. If these improvements continue the financial viability of motor freight carriers who have survived the recession, it may decrease their interest in being acquired. Our acquisition and growth strategy has been based in part on depressed values for motor freight carriers and a desire to sell based on poorer than historical financial performance. Without these incentives, we may find it more difficult to locate trucking companies with an interest in being acquired, or if they have such an interest, being acquired for consideration that fits our financial model.
Our recent experience with two acquisitions may hinder future acquisitions.
Subsequent to our acquisitions of Cross Creek Trucking and Triple C Transport, both ceased operations and have been sold. Our lack of success in maintaining and expanding the business of these two subsidiaries may discourage owners of desirable acquisition targets from considering a sale of their companies to us. Our growth will be hindered if we cannot make additional acquisitions.
We have experienced difficulty in combining and consolidating the management and operations of our acquired companies which has had a material adverse impact on our operations and financial performance, as well as on our future acquisitions, if any.
We have purchased our operating subsidiaries and expect any additional subsidiaries we purchase to be made from the founders and management of the acquired companies, all of whom have been responsible for their own businesses and methods of operations as independent business owners. While these individuals will continue to be responsible entirely or to a lesser degree for the continuing operations of our operating subsidiaries, we intend to centralize and standardize many areas of operations. We have had limited success in consolidating operating functions between our two subsidiaries. We may be able to develop a cohesive corporate culture in the future. Our inability to successfully combine and consolidate the policies, procedures and operations of our subsidiaries can be expected to have a material adverse effect on our business and prospects, financial and otherwise.
Our information management systems are diverse, may prove inadequate and may be difficult to integrate or replace.
We depend upon our information management systems for many aspects of our business. Each operating subsidiary and each company we acquire will have its own information management system with which its employees are acquainted. None of these systems are adequate to our consolidated operations and may not be compatible with a centralized information management system. We expect to require additional software to initially integrate existing systems or to ultimately replace these diverse systems. Switching to new information management systems is often difficult, resulting in disruption, delays and lost productivity, which could impact our dispatching, collections and other operations. Our business will be materially and adversely affected if our information management systems are disrupted or if we are unable to improve, upgrade, integrate, expand or replace our systems as we continue to execute our growth strategy. We anticipate a need to make substantial ongoing investments in our management information systems in order to properly and efficiently consolidate the operations of our acquired subsidiaries.
Our management information systems are subject to certain risks that we cannot control.
Our management information systems, including dispatching and accounting systems, are dependent upon third-party software, global communications providers, telephone systems and other aspects of technology and Internet infrastructure that are susceptible to failure. Our management information systems is susceptible to outages, computer viruses, break-ins and similar disruptions that may inhibit our ability to provide services to our customers and the ability of our customers to access our systems. This may result in the loss of customers or a reduction in demand for our services.
8
If we are unable to successfully execute our growth strategy, our business and future results of operations may suffer.
Our growth strategy includes the acquisition of additional motor freight companies to increase revenues, to selectively expand our geographic footprint and to broaden the scope of our service offerings. If we are unable to acquire additional motor freight companies at prices that meet our financial model, our growth will be limited to expanding sales and reducing expenses in our existing subsidiaries. In connection with our growth strategy, we may purchase additional equipment, expand and upgrade service centers, hire additional personnel and increase our sales and marketing efforts.
Our growth strategy exposes us to a number of risks, including the following:
|
●
|
Geographic expansion and acquisitions require start-up costs that could expose us to temporary losses;
|
|
●
|
Growth and geographic expansion is dependent on the availability of freight and customer needs. Shortages of suitable real estate that accommodates both customers’ and carriers’ needs may limit our geographic expansion and might cause congestion in our service center network, which could result in increased operating expenses;
|
|
●
|
Growth may strain our management, capital resources, information systems and customer service;
|
|
●
|
Hiring new employees may increase training costs and may result in temporary inefficiencies until those employees become proficient in their jobs;
|
|
●
|
Expanding our service offerings may require us to enter into new markets and encounter new competitive challenges;
|
|
●
|
Growth through acquisition could require us to temporarily match existing freight rates of the acquiree’s markets, which may be lower than the rates that we would typically charge for our services; and
|
|
●
|
We may be unable to obtain financing of the cash portion of an acquisition price or to provide a working capital infusion for an acquisition.
|
We have no assurance we will overcome the risks associated with our growth. If we fail to overcome these risks, we may not be able to make additional acquisitions, realize additional revenue or profits from our efforts, we may incur additional expenses and therefore our financial position and results of operations could be materially and adversely affected.
The effect of the “Fiscal Cliff” “Sequester” and the resulting effects on the economy could have a material adverse impact on our replacement of revenue producing equipment and ability to meet our financial obligations.
Recently, there has been widespread concern over the current federal deficit and the effect of possible solutions on the economy. In the event the federal “fiscal cliff” and “sequester” triggers significant difficulties, we may experience an increase in our costs of borrowing. If the economy and credit markets do not recover quickly, or even weaken further for any reason, our business, financial results, and results, of operations could be materially and adversely affected, especially if consumer confidence declines and domestic spending decreases. We are highly dependent on borrowing and leasing to fund the cost of new and replacement revenue producing equipment and to fund our cash flow shortfalls. An increase in general interest rates can be expected to increase our cost of borrowing, potentially delaying our ability to replace tractors and trailers and to expand our fleet to meet increased demand, if any, to pay our operating expenses, including litigation expenses, and to meet our obligations. Additionally, the stresses in the credit market have caused uncertainty in the equity markets, which may result in volatility of the market price for our securities.
We operate in a highly competitive and fragmented industry, and our business will suffer if we are unable to adequately address potential downward pricing pressures and other factors that may adversely affect our operations and profitability.
We compete with many other truckload carriers of varying size that provide dry-van and temperature-sensitive service of varying sizes and, to a lesser extent, with less-than-truckload carriers, air freight, railroads and other transportation companies, many of which have more equipment, a wider range of services and greater capital resources than we do or have other competitive advantages. We expect to experience difficulty in competing with larger companies. Numerous other competitive factors could impair our ability to maintain our revenues and achieve profitability. These factors include, but are not limited to, the following:
|
●
|
We compete with many other transportation service providers of varying sizes, some of which may have more equipment, a broader coverage network, a wider range of services, greater capital resources or have other competitive advantages;
|
|
●
|
Some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase prices or maintain revenue growth;
|
|
●
|
Many customers reduce the number of carriers they use by selecting “core carriers,” as approved transportation service providers, and in some instances we may not be selected;
|
|
●
|
Many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress prices or result in the loss of some business to competitors;
|
|
●
|
The trend towards consolidation in the ground transportation industry may create other large carriers with greater financial resources and other competitive advantages relating to their size;
|
|
●
|
Advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments; and
|
|
●
|
Competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and pricing policies.
|
9
If our employees were to unionize, our operating costs would increase and our ability to compete would be impaired.
None of our employees are currently represented under a collective bargaining agreement. From time to time there may be efforts to organize our employees. There is no assurance that our employees will not unionize in the future, particularly if legislation is passed that facilitates unionization, such as the Employee Free Choice Act. The unionization of our employees could have a material adverse effect on our business, financial condition and results of operations because:
|
●
|
Some shippers have indicated that they intend to limit their use of unionized trucking companies because of the threat of strikes and other work stoppages;
|
|
●
|
Restrictive work rules could hamper our efforts to improve and sustain operating efficiency;
|
|
●
|
Restrictive work rules could impair our service reputation and limit our ability to provide next-day services;
|
|
●
|
A strike or work stoppage would negatively impact our profitability and could damage customer and employee relationships; and
|
|
●
|
An election and bargaining process could divert management’s time and attention from our overall objectives and impose significant expenses.
|
Insurance and claims expenses could significantly reduce our profitability.
We are exposed to claims related to cargo loss and damage, property, damage, personal injury, workers’ compensation, long-term disability and group health. We have insurance coverage with third-party insurance carriers, but retain or self-insure a portion of the risk associated with these claims. If the number or severity of claims increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessment, our operating results would be adversely affected. Insurance companies may require us to obtain letters of credit to collateralize our self-insured retention. If these requirements increase, our borrowing capacity could be adversely affected. Our future insurance and claims expense might exceed historical levels, which could reduce our earnings. We expect our growth strategy to require a periodic reassessment or our insurance strategy, including self-insurance of a greater portion of our claims exposure resulting from workers’ compensation, auto liability, general liability, cargo and property damage claims, as well as employees’ health insurance under pending federal legislation, which we are unable to predict. We may also become responsible for our legal expenses relating to such claims. With growth, we will be required to periodically evaluate and adjust our claims reserves to reflect our experience. However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts. We maintain insurance above the amounts for which we self-insure with licensed insurance carriers. Although we believe the aggregate insurance limits should be sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed our aggregate coverage limits. Insurance carriers have raised premiums for many businesses, including trucking companies. As a result, our insurance and claims expense could increase, or we could raise our self-insured retention when our policies are renewed. If these expenses increase, or if we experience a claim in excess of our coverage limits, or we experience a claim for which coverage is not provided, results of our operations and financial condition could be materially and adversely affected.
Our customers and suppliers’ business may be slow to recover from the recent downturn in the world wide economy and disruption of financial markets. We cannot predict the impact on the national and worldwide economy of an economic downturn.
Our business is dependent on a number of general economic and business factors that may have a materially adverse effect on our results of operations, many of which are beyond our control, table terms, because of the disruptions to the capital and credit markets. These customers represent a greater potential for bad debt losses, which may require us to increase our reserve for bad debt. Economic conditions resulting in bankruptcies of one or more of our large customers could have a significant impact on our financial position, results of operations or liquidity in particular year or quarter. Our suppliers’ business levels have also been and may continue to be adversely affected by current economic conditions or financial constraints, which could lead to disruptions in the supply and availability of equipment, parts and services critical to our operations. A significant interruption in our normal supply chain could disrupt our operations, increase our costs and negatively impact our ability to serve our customers.
10
We may be adversely impacted by fluctuations in the price and availability of diesel fuel.
We require large amounts of diesel fuel to operate our tractors and to power the temperature-control units on our trailers. Fuel is one of our largest operating expenses. Fuel prices tend to fluctuate and prices and availability of all petroleum products are subject to political, economic and market factors that are beyond our control. We do not hedge against the risk of diesel fuel price increases. We depend primarily on fuel surcharges, auxiliary power units for our tractors, volume purchasing arrangements with truck stop chains and bulk purchases of fuel at our terminals to control and recover our fuel expenses. We have no assurance that we will be able to collect fuel surcharges or enter into volume purchase agreements in the future. An increase in diesel fuel prices or diesel fuel taxes, or any change in federal or state regulations that results in such an increase, could have a material adverse effect on our operating results, unless the increase is offset by increases in freight rates or fuel surcharges charged to our customers. Historically, we have been able to offset significant increases in diesel fuel prices through fuel surcharges to our customers, and we were able to minimize the negative impact on our profitability in fiscal 2011 that resulted from the rapid and significant increase to the cost of diesel fuel. Depending on the base rate and fuel surcharge levels agreed upon by individual shippers, a rapid and significant decline in the cost of diesel fuel could also have a material adverse effect on our operating results. We continuously monitor the components of our pricing, including base freight rates and fuel surcharges, and address individual account profitability issues with our customers when necessary. While we have historically been able to adjust our pricing to offset changes to the cost of diesel fuel, through changes to base rates and/or fuel surcharges, we cannot be certain that we will be able to do so in the future. The absence of meaningful fuel price protection through these measures, fluctuations in fuel prices, or a shortage of diesel fuel, could materially and adversely affect our results of operations.
Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.
We are subject to various federal, state and local environmental laws and regulations dealing with the handling and transportation of hazardous materials (“hazmat”) and waste (“hazwaste”) (which accounts for approximately twenty percent of our current business). We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. If a spill or other accident involving fuel, oil or hazardous substances occurs, or if we are found to be in violation of applicable laws or regulations, it could have a material adverse effect on our business and operating results. One of our subsidiaries specializes in transport of hazardous materials and waste. If we should fail to comply with applicable environmental laws and regulations, we could be subject to substantial fines or penalties, to civil and criminal liability and to loss of our licenses to transport the hazardous materials and waste. Under certain environmental laws, we could also be held responsible for any costs relating to contamination at our past facilities and at third-party waste disposal sites. Any of these consequences from violation of such laws and regulations could be expected to have a material adverse effect on our business and prospects, financial and otherwise.
Increased prices, reduced productivity, and restricted availability of new revenue equipment could cause our financial condition, results of operations and cash flows to suffer.
Prices for new tractors have increased over the past few years, primarily as a result of higher commodity prices, better pricing power among equipment manufacturers, and government regulations applicable to newly manufactured tractors and diesel engines. We expect to continue to pay increased prices for revenue equipment and incur additional expenses and related financing costs for the foreseeable future. Our business could be harmed if we are unable to continue to obtain an adequate supply of new tractors and trailers or if we have to pay increased prices for new revenue equipment. We face increasing prices for new power units.
Seasonality and the impact of weather can adversely affect our profitability.
Our tractor productivity generally decreases during the winter season because inclement weather impedes operations and some shippers reduce their shipments. At the same time, operating expenses generally increase with harsh weather creating higher accident frequency, increased claims and more equipment repairs. We can also suffer short-term impacts from weather-related events such as hurricanes, blizzards, ice-storms, and floods that could harm our results or make our results more volatile.
11
Increases in driver compensation, difficulty in attracting drivers and driver turn-over could affect our profitability and ability to grow.
We periodically experience difficulties in attracting and retaining qualified drivers, including independent contract drivers. With increased competition for drivers, we could experience greater difficulty in attracting sufficient numbers of qualified driers. Our competitors may offer better compensation plans, and thus increase the driver turnover we experience. Due to current economic conditions and regulatory changes which have recently increased the demand for drivers and the cost of fuel and insurance, the available pool of independent contractor drivers is smaller than it was during 2008 through 2010. Accordingly, we may and periodically do face difficulty in attracting and retaining drivers for all of our current tractors and for those we may add. We may face difficulty in increasing the number of our independent contractor drivers. In addition, our industry suffers from high turnover rates if drivers. Our turnover rate requires us to recruit a substantial number of drivers. Moreover, our turnover rate could increase. If we are unable to continue to attract drivers and contract with independent contractors, we could be required to continue adjusting our driver compensation package beyond the norm or let equipment sit idle. An increase in our expenses or in the number of power units without drivers could materially and adversely affect our growth and profitability. Our operations may be affected in other ways y a shortage of qualified drivers in the future, such as temporary under-utilization of our fleet, difficulty in meeting shipper demands and increases in compensation levels for our drivers. When we encounter difficulty in attracting or retaining qualified drivers, our ability to service our customers and increase our revenue could be adversely affected. A shortage of qualified drivers in the future could cause us to temporarily under-utilize our fleet, face difficulty in meeting shipper demands and increase our compensation levels for drivers.
Shrinkage in the pool of eligible drivers could affect our profitability and ability to grow.
The ongoing Comprehensive Safety Analysis, often referred to as CSA 2010, is projected to reduce the driver pool. Every driver receives a score based upon his or her individual performance in six categories, which are then combined into a single score, and this score is compared to the scores of all other drivers to determine how “safe” the driver is. (BigRigDriving.com, January 19, 2010) Drivers with lower scores are less hirable or not hirable. (Transport Topics, June 14, 2010) A shortage of qualified drivers from time to time could cause us to temporarily under-utilize our fleet, face difficulty in meeting shipper demands and increase our compensation levels for drivers.
We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on our business.
The USDOT and various state and local agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety and insurance requirements. Our company drivers and independent contractors also must comply with the safety and fitness regulations promulgated by the USDOT, including those relating to drug and alcohol testing and hours-of-service. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers’ hours-of-service, ergonomics, or other matters affecting safety or operating methods. Other agencies, such as the EPA and the Department of Homeland Security, or DHS, also regulate our equipment, operations, and drivers. Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices could adversely affect our results of operations.
In the aftermath of the September 11, 2001 terrorist attacks, federal, state, and municipal authorities have implemented and continue to implement various security measures, including checkpoints and travel restrictions on large trucks. As a result, it is possible we may fail to meet the needs of our customers or may incur increased expenses to do so. These security measures could negatively impact our operating results.
Some states and municipalities have begun to restrict the locations and amount of time where diesel-powered tractors, such as ours, may idle, in order to reduce exhaust emissions. From time to time, various federal, state, or local taxes are increased, including taxes on fuels. We cannot predict whether, or in what form, any such increase applicable to us will be enacted, but such an increase could adversely affect our profitability.
12
Higher interest rates on borrowed funds would adversely impact our results of operations.
We rely on borrowings to finance our revenue equipment and receivables. We are subject to interest rate risk to the extent of our borrowings. Even though we attempt to manage our interest rate risk by managing the amount of debt we carry, our debt levels are not entirely within our control in the short term. An increase in the rates of interest we incur on borrowings and financing we cannot decrease in the short term without adversely impacting our level of service to our customers and expansion of our business will adversely affect our results of operations.
"Penny stock” rules may make buying and selling our common stock difficult.
Trading in our common stock is subject to the "penny stock" rules of the Securities and Exchange Commission. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Our securities are subject to the penny stock rules, and investors may find it more difficult to sell their securities.
We do not have controls and procedures in place as required by Section 404 of the Sarbanes-Oxley Act of 2002.
As noted above, the operational and financial control of our subsidiaries has remained under the management of the founders of and stockholders from whom we acquired the respective companies. We do not have controls and procedures in place from a parent company level or the subsidiary level to satisfy Section 404 of the Sarbanes-Oxley Act of 2002. While we expect to put controls and procedures in place for these purpose in the process of consolidating and centralizing overlapping and duplicative elements of these companies, doing so will require debt or equity funding you have no assurance we will be able to obtain. Until we are able to put these controls and procedures in place, we expect to devote additional management time to confirming the accuracy and timeliness of our reports.
We will incur significant expense in complying with Section 404 of the Sarbanes-Oxley Act of 2002 on a timely basis.
The SEC, as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally requiring each public company to include a report of management on the company's internal controls over financial reporting in its annual report on Form 10-K that contains an assessment by management of the effectiveness of the company's internal controls over financial reporting. We expect that we may need to hire and/or engage additional personnel and incur incremental costs in order to complete the work as required by Section 404. We have initially concluded that our internal controls are not effective; in the event that in the future we conclude that our internal controls are effective, our independent accountants may disagree with our assessment and may issue a report that is qualified. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
We are not an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the Exchange Act (§240.12b-2 of this chapter), or a well-known seasoned issuer as defined in Rule 405 of the Securities Act (§230.405 of this chapter); and, we are not subject to this item. Nevertheless, we do not have any unresolved comments from the SEC staff.
13
ITEM 2. PROPERTIES.
Currently we do not maintain a corporate or headquarters office. Our senior management are providing services from their respective residences and offices without charge to us. Under new management, we anticipate that we will establish a corporate headquarters, but you have no assurance as to when or if we will do so.
The headquarters of our operating subsidiaries are located in Hamburg, Arkansas and Scotts Bluff, Nebraska. The following table presents information regarding these facilities.
|
Location
|
Acres
|
Under Roof*
|
Office*
|
Warehouse*
|
Service*
|
Trucks Accommodated
|
|||||||||||||||
|
Hamburg facility (Morris)
|
10 | 15,000 | 3,000 |
none
|
12,000 |
170 trucks
|
|||||||||||||||
|
Scotts Bluff facility (Smith)
|
10 | 36,500 | 3,000 | 30,000 | 3,500 |
400 trucks
|
|||||||||||||||
_____________
*Number indicates square feet.
We lease both of these facilities. Terms of the leases are described in the following table:
|
Location
|
Lessor
|
Lease ends
|
Annual rental
|
Annual adjustment
|
|||||||
|
Hamburg facility (Morris)
|
T. Mark Morris
|
(1)
|
(1)
|
none
|
|||||||
|
Scotts Bluff facility (Smith)
|
Colorado Holdings
|
(2)
|
(2)
|
none
|
|
(1)
|
We have been paying the mortgage payments to an unrelated lender on behalf of an entity controlled by Mr. Morris as rent without a formal lease and intend to purchase the property at fair market value, as determined by appraisal, which may require us to refinance the mortgage. We are currently indebted to Logan Properties of Ashley County, LLC, the entity controlled by Mr. Morris, in the amount of $99,935.85.
|
|
(2)
|
The facility is owned by Colorado Holdings, a company controlled by Mr. Smith, Annual rental rate is $48,000, which we accrue but are not being required to pay until Smith Systems Transportation’s cash flow is adequate.
|
We also have a rented terminal operation in Arcadia, California principally to serve the Smith Systems Transportation eastbound shipments. We also rent yard facilities or drop yards on a short term basis as the seasonal and operational needs of our customers require. These yard facilities are routinely located in Pine Bluff and Eldorado, Arkansas, Sacramento, California, Chicago, Illinois, Kimball, Nebraska, Tacoma, Washington, Reno, Nevada, and Houston, Texas. In most cases yard facilities are limited to leasing a specific number of secure (fenced) trailer parking places. Typically we rent on an as-needed basis in terminal facilities of other trucking companies.
We believe all of these facilities are adequate for our operations for the foreseeable future. We expect to acquire additional facilities for operations when we make future acquisitions, of which you have no assurance.
14
ITEM 3. LEGAL PROCEEDINGS
Our ability to aggressively defend and to prosecute the litigation described under this item depend significantly on our ability to fund legal fees and related costs of litigation.
Active litigation:
|
Plaintiff Name
|
Defendant Name(s)
|
Case No.
|
Court
|
Basis of Claim and Amount
|
||||
|
Hillair Capital
Investments, L.P.
|
Integrated Freight
Corporation, Smith
Systems Transportation, |
12-Civ-7164
|
U.S. District Court
|
default on two notes
totaling $339,660
|
||||
|
Datum Corporation
|
Integrated Freight
|
2012 CA 003737 NC
|
Twelve Judicial
|
Unpaid and future
|
||||
|
Corporation
|
Circuit
|
rents under
|
||||||
|
Sarasota County,
|
agreement
|
|||||||
|
Florida
|
$174,463.69.
|
|||||||
|
Judgment entered in
|
||||||||
|
favor of plaintiff.
|
||||||||
|
Batten Capital
|
Integrated Freight
|
12OV1983-08
|
Superior Court,
|
Break-up fee for
|
||||
|
Group, LLC
|
Corporation
|
DeKalb
|
unconsummated
|
|||||
|
County, Georgia
|
financing $60,000.
|
|||||||
| Judgment entered in | ||||||||
| favor of plaintiff. | ||||||||
|
Integrated Freight
|
Craig White and
|
11-248
|
District Court
|
Rescission of Stock
|
||||
|
Corporation
|
Vonnie White
|
Douglas, Nebraska
|
Exchange
|
|||||
|
Agreement and
|
||||||||
|
unspecified
|
||||||||
|
damages. Summary
|
||||||||
|
judgment entered
|
||||||||
|
against defendant
|
||||||||
|
due to lack of
|
||||||||
|
defense.
|
||||||||
|
Chapman
|
Integrated Freight
|
12-2302
|
U.S. District Court
|
Unpaid acquisition
|
||||
|
Associates General
|
Corporation
|
Northern District of
|
fees and costs.
|
|||||
|
Business, Inc.
|
Illinois
|
Judgment for
|
||||||
| $835,971.19 entered | ||||||||
| in favor of plaintiff. | ||||||||
|
Alan Stone &
|
Integrated Freight
|
2012CA003801
|
15th Circuit Court,
|
Unpaid acquisition
|
||||
|
Company, LLC
|
Corporation
|
MB
|
Palm Beach County,
|
fees and costs
|
||||
|
Florida
|
$31,000.00
|
|||||||
|
Judgment for
|
||||||||
|
$31,000 entered in
|
||||||||
|
favor of plaintiff.
|
|
Luberski, Inc.
|
Integrated Freight
|
30-2012-00601745-
|
Superior Court for
|
IFCR's default on
|
||||
|
Corporation, Paul
|
CU-BC-CJC
|
State of California
|
two notes totaling
|
|||||
|
Henley, Smith
|
$400,000 plus
|
|||||||
|
Systems
|
interest
|
|||||||
|
Transportation, Inc.,
|
||||||||
|
Morris
|
||||||||
|
Transportation, Inc.,
|
||||||||
|
Cross Creek
|
||||||||
|
Trucking, Inc., and
|
||||||||
|
DOEs 1-100,
|
||||||||
|
inclusive
|
||||||||
|
Weiss, as receiver for
|
Integrated Freight
|
11-CV-03130
|
U.S. District Court
|
Judgment for
|
||||
|
the
|
Corporation
|
Northern District of
|
$167,000 entered in
|
|||||
|
Nutmeg/Fortuna
|
Illinois
|
favor of plaintiff.
|
||||||
|
Fund
|
||||||||
| Robins Consulting, LLC | Integrated Freight | DC13-00432 | 191st Judicial District | 900,201.39 for | ||||
| Corporation | Dallas County | unpaid note accrued | ||||||
| Texas | interest and decline | |||||||
| in value of stock | ||||||||
| Morris Transportation, Inc. | Integrated Freight | CV13-52-4 | In the Circuit Court of | Rescission and | ||||
| Corporation | Ashley County, Arkansas | Damages | ||||||
| Terry Brown Corporation | Integrated Freight | 2012 OA868 3NC | Circuit Court | $59,502.70 | ||||
| Corporation | in and for | plus interest | ||||||
| Sarasota County, Florida | ||||||||
| Hampton Growth | Integrated Freight | SC119965 | Superior Court of the | $135,835 | ||||
| Resources | Corporation | State of California | plus interest | |||||
| County of Los Angeles | ||||||||
| West Judicial District |
15
The suit by Nutmeg/Fortuna Fund is for collection on a promissory note that Original Integrated Freight issued in purchase of our preferred stock from the plaintiff in a transaction in which Original Integrated Freight acquired control of us. We will endeavor to negotiate a settlement of this litigation or the purchase of the note from the plaintiff by another party who will restructure the note.
Other settlements:
On August 25, 2011 we entered into a confidential settlement with Steven E. Lusty, our former chief operating officer, for breach of his employment agreement and unspecified damages. As part of the settlement we issued 50,000 common shares to Mr. Lusty and as of December 31, 2011 had paid a portion of the amounts outlined in the agreement. All other amounts have been previously recorded on our financial statements. Since December 31, 2011 we have been delinquent in a portion of the payments outlined in the agreement.
On April 16, 2012 we entered into a forbearance agreement with Michael S. DeSimone, former owner of Cross Creek Trucking, Inc. As part of the agreement we issued a confession of judgment to Mr. DeSimone in the amount of $3,745,415.54 plus accrued interest. All other amounts have been previously recorded on our financial statements. We agreed to pay $5,000 per month commencing September 1, 2012 and are currently in compliance with the agreement.
Litigation in the normal course of business
We expect to be engaged in litigation from time to time in the normal course of our business as a motor freight carrier. Claims for worker’s compensation, auto accident, general liability and cargo and property damage are routine occurrences in the motor transportation industry. We have programs and policies which are designed to minimize the events that result in such claims. We maintain insurance against workers’ compensation, auto liability, general liability, cargo and property damage claims. We are responsible for deductible amounts up to $3,000 per accident. We periodically evaluate and adjust our insurance and claims reserves to reflect our experience. Our workers’ compensation claims are entirely covered by our insurance. Insurance carriers have raised premiums for many businesses, including truck transportation companies. As a result, our insurance and claims expense could increase, or we could raise our deductible when our policies are renewed. We believe that our policy of self-insuring up to set limits, together with our safety and loss prevention programs, are effective means of managing insurable costs.
ITEM 4. MINE SAFETY DISCLOSURES.
We are not engaged in any mining operations and this item does not apply to us.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market information. Our common stock trades on OTC Bulletin Board under the symbol, IFCR. The following quotations reflect inter–dealer prices without retail markup, markdown, or commission, and may not necessarily represent actual transactions. The quarterly ranges of high and low sales prices per share for the past two fiscal years have been as follows:
|
Sales Price
|
||||||||
|
Quarters Ended
|
High
|
Low
|
||||||
|
June 30, 2010
|
$ | 1.20 | $ | .49 | ||||
| September 30, 2010 | 1.01 | .51 | ||||||
| December 31, 2010 | .90 | .36 | ||||||
|
March 31, 2011
|
.85 | .41 | ||||||
|
June 30, 2011
|
$ | .45 | $ | .15 | ||||
|
September 30, 2011
|
.25 | .09 | ||||||
|
December 31, 2011
|
.25 | .04 | ||||||
|
March 31, 2012
|
.09 | .02 | ||||||
16
On April 26, 2013, the last reported sales price of our common stock was $.01.
Holders. Based on information provided by our transfer agent, at July 13, 2012, we had 2,733 record owners of our common stock. We have not requested any information regarding the number of beneficial holders.
Dividends. We have never declared or paid any dividends on our common stock. Because we currently intend to retain any future earnings to finance operations and growth, we do not anticipate paying any cash dividends in the foreseeable.
Transfer Agent. We have engaged Direct Transfer LLC, 500 Perimeter Park Drive, Suite D, Morrisville, NC, 27560 as our transfer agent. The telephone number of our transfer agent is 919-481-4000.
Recent Sales of Unregistered Securities. All sales of equity securities during our 2012 fiscal year have been reported on Form 8-K and Form 10-Q, with the exception of 247,500 sharesthat were issued in April 2013, to be applied against interst owed to creditors valued at $0.1 per share. These shares were issued in a transaction deemed exempt from the registration requirements of the Securities Act, in reliance of either or both Regulation D or Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
ITEM 6. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to include the disclosure under this Item 6 Selected Financial Data.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following information in conjunction with our financial statements and related notes contained elsewhere in this report. You should consider the risks and difficulties frequently encountered by early-stage companies, particularly those engaged in new and rapidly evolving markets and technologies. Our limited operating history provides only a limited historical basis to assess the impact that critical accounting policies may have on our business and our financial performance.
Overview
The main factors that affect our results of operations are the number of tractors we operate, our revenue per tractor (which includes primarily our revenue per total mile and our number of miles per tractor), and our ability to control our costs.
Because of the extraordinary and rapid increase in the market price of diesel fuel beginning in the first fiscal quarter, fuel surcharges tended to be a volatile source of revenue. However, measured freight revenue is included with such surcharges, providing a basis for comparing results of operations from period to period that also reflects our ability to capture such charges. Management routinely compares market fuel price fluctuations relative to the Company base fuel price in an effort to insure that its fuel surcharge level is adequate and that it is properly applied to all freight invoices.
17
Operating Results
The following table presents and compares the results of our operations for the fiscal years ended March 31, 2012 and 2011.
|
Year Ended
|
%
|
|||||||||||||||
|
March 31,
|
Increase
|
Increase
|
||||||||||||||
|
2012
|
2011
|
(Decrease)
|
(Decrease)
|
|||||||||||||
|
Revenue
|
$ | 20,714,998 | 18,827,367 | $ | 1,887,631 | 10.0 | % | |||||||||
|
Operating Expenses
|
||||||||||||||||
|
Rents and transportation
|
4,109,906 | 4,301,760 | (191,854 | ) | (4.5 | %) | ||||||||||
|
Wages, salaries and benefits
|
5,967,553 | 5,591,171 | 376,382 | 6.7 | % | |||||||||||
|
Fuel and fuel taxes
|
6,949,144 | 5,526,923 | 1,422,221 | 25.7 | % | |||||||||||
|
Depreciation and amortization
|
2,605,052 | 2,179,827 | 425,225 | 19.5 | % | |||||||||||
|
Insurance and claims
|
1,038,593 | 725,995 | 312,598 | 43.1 | % | |||||||||||
|
Operating taxes and licenses
|
227,776 | 198,853 | 28,923 | 14.5 | % | |||||||||||
|
General and administrative
|
3,395,729 | 4,020,941 | (625,212 | ) | (15.5 | %) | ||||||||||
|
Total Operating Expenses
|
24,293,753 | 22,545,470 | 1,748,283 | 7.8 | % | |||||||||||
|
Loss from continuing operations
|
(3,578,755 | ) | (3,718,103 | ) | 139,348 | (3.7 | %) | |||||||||
|
(Loss)/Gain from discontinued operations
|
(8,950,653 | ) | (1,865,895 | ) | (7,084,758 | ) | 379.7 | % | ||||||||
|
Other Income (Expense)
|
||||||||||||||||
|
Gain/(loss) on change of fair value of derivative liability
|
207,956 | (513,471 | ) | 721,427 | (140.5 | ) | ||||||||||
|
Interest
|
(2,098,459 | ) | (1,887,677 | ) | (210,782 | ) | 11.2 | % | ||||||||
|
Other income (expense)
|
91,744 | 216,585 | (124,841 | ) | (57.6 | %) | ||||||||||
|
Total Other Income (Expense)
|
(1,798,759 | ) | (2,184,563 | ) | 385,804 | (17.7 | %) | |||||||||
|
Net loss before noncontrolling interest
|
(14,328,167 | ) | (7,768,561 | ) | (6,559,606 | ) | 84.4 | % | ||||||||
|
Noncontrolling interest share of subsidiary net income
|
(9,089 | ) | 7,361 | (16,450 | ) | (223.5 | %) | |||||||||
|
Net loss
|
$ | (14,337,256 | ) | (7,761,200 | ) | $ | (6,576,056 | ) | 84.7 | % | ||||||
18
Our large expenses, for example truck lease and financing costs, tend to be fixed. These expenses represent a significant use of cash flow. Our driver payroll fluctuates with the freight shipped; however, we do have fixed payroll expenses for the office, management and the shop that do not decline in correlation to the reduction on freight income. We attempted to reduce operating expenses during fiscal 2012, but significant expenses related to noncash compensation resulted in increased overall expenses and operating losses. We believe a reduction in these noncash expenses and of cost reduction efforts will be reflected in the future.
Seasonality
Typically, revenue generally decreases as customers reduce shipments during the winter holiday season and as inclement weather impedes operations. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and weather, creating more equipment repairs. For the reasons stated, our fiscal fourth quarter results have historically has been lower than results in each of the other three quarters of the fiscal year excluding charges. Our equipment utilization typically improves substantially in the first and second fiscal quarters of each fiscal year because of the trucking industry's seasonal shortage of equipment. It is during these periods that most U.S. manufacturing firms conduct the heaviest shipment volumes of the year. Moreover, industry capacity is further stretched during these periods by agriculture-related seasonal demand for trucking services.
Revenues
For the fiscal year ended March 31, 2012, we reported revenues of $20,714,998 as compared to revenues of $18,827,367 for the fiscal year ended March 31, 2011, an increase of $ 1,887,631 or 10%. The increase is due to the combination of fuel surcharge assessments (75%) as well as an increase in freight revenue related to the slowly recovering U. S. economy (25%).
Operating Expenses
Our total operating expenses increased 7.8% to $24,293,753 for the fiscal year ended March 31, 2012, as compared to $22, 545,470 for the fiscal year ended March 31, 2011. These changes include:
Rents and Transportation. For the fiscal year ended March 31, 2012, rents and transportation costs were $4,109,906 as compared to $4,301,760 for the fiscal year ended March 31, 2011, a decrease of $191,854 or 4.5%. The decrease was primarily due to increased brokerage of trucks and trailers to supplement our existing fleet.
Wages, salaries and benefits. For the fiscal year ended March 31, 2011, wages, salaries and benefits costs were $5,591,171 as compared to $5,967,553 for the fiscal year ended March 31, 2012, an increase of $376,382 or 6.7%. The increase was due primarily to the increased miles driven.
Fuel and fuel taxes. For the fiscal year ended March 31, 2011, the cost of fuel and fuel taxes were $5,526,923 as compared to $6,949,144 for the fiscal year ended March 31, 2012, an increase of $1,422,221 or 25.7%. The increase was due primarily to fuel price instability. The operating companies recouped virtually all of this added cost by charging their shippers a fuel surcharge.
Depreciation and amortization. For the fiscal year ended March 31, 2012, depreciation and amortization costs were $2,605,052 as compared to $2,179,827 for the fiscal year ended March 31, 2011, an increase of $425,225 or 19.5%. This increase is due to the impairment of certain business property that we sold for less than book value in July 2012.
Insurance and claims. For the fiscal year ended March 31, 2012, insurance and claims costs were $1,038,593 as compared to $725,995 for the fiscal year ended March 31, 2011, an increase in of $312,548 or 43.1%, which we believe is in line with industry-wide insurance rate increases for the period.
19
Operating taxes and licenses For the fiscal year ended March 31, 2011, operating taxes and licenses costs were $198,853 as compared to $227,766 for the fiscal year ended March 30, 2012, an increase of $28,923 or 14.5%. We believe this is, in part related to the increase in mileage and numbers of trucks described above.
General and administrative expenses. General and administrative expenses are the expenses of operating the business on a daily basis that are not related directly to cost of services and include managerial salaries, legal fees and rent and utilities. General and Administrative expenses were $3,395,729 for the fiscal year ended March 31, 2012 as compared to fiscal year ended March 31, 2011, when general and administrative expenses costs were $4,020,941 , a decrease of $625,212 or 15.5%. This decrease resulted primarily from decreased noncash compensation and noncash professional services expenses.
Loss from Continuing Operations
We reported a loss from continuing operations of $3,578,755 for the fiscal year ended March 31, 2012 as compared to a loss from operations of $3,718,103 for the fiscal year ended March 31, 2011, a decrease of $139,348 or 3.7%. The decreased loss was a result of increased sales and lower non-general and administrative operating expenses as discussed above.
Discontinued Operations
Triple C Transport
As more fully discussed in Note 2 to our financial statements, we shut down Triple C Transport’s operations due to the loss of the tractor and trailer fleet it was leasing from the former owners. As was our practice with previous acquisitions, the former owners continued to manage the day to day operations of Triple C Transport and it was leasing approximately ninety-one power units and ninety-nine trailers from companies owned by the former owners for payments equal to the payment those companies were making on their financing agreements for that equipment, which was approximately $300,000 a month. During the latter part of October 2010, the former owners of Triple C Transport notified us in writing that entities controlled by them and receiving lease payments from Triple C Transport were having difficulty servicing the debt of the related entities. Two of those entities White Farms Trucking, Inc. (“WFT”) and Craig Carrier Corporation, LLC (“CCC”) ultimately filed Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Nebraska, on December 21, 2010 which have been assigned case numbers 10-43797 and 10-43798.
We incurred a loss of $335,769 and $1,529,034 for the years ended March 31, 2012 and 2011, respectively, associated with this transaction and have reserved $1,893,269 to cover any liabilities incurred in relation to it.
Additionally, Effective June 30, 2012, we sold 100% of the issued and outstanding shares of common stock of Triple C Transport to Deep South, LLC, of Pineville, LA. Under the terms of the purchase agreement, Deep South receives all right, title, and interest to the shares for a total purchase price of $1.00 and the issuance to Deep South of an aggregate of 5,000,000 shares of our common stock.
Integrated Freight Services
In February 2011, we formed Integrated Freight Services ("IFS") in Sarasota, Florida. IFS was a startup company whose initial mission was to function as a freight broker that could serve the needs of all our subsidiary companies. Shortly after IFS commenced freight operations, Triple C Transport began the wind down of its operations (above) and IFS was forced to change its mission to brokering the refrigerated cargo previously hauled by Triple C.
20
Cross Creek Trucking
On April 1, 2011 we acquired Cross Creek Trucking of Central Point, Oregon. At the date of acquisition, Cross Creek had marginal cash flow due to its extremely aggressive equipment financing terms. During that same period, market fuel prices spiked upward sharply and remain high. Although Cross Creek employed a fuel surcharge program, it was unable to recover the increased fuel costs from its customers resulting in insufficient cash flow. Portions of the Cross Creek fleet were redeployed to Nebraska to haul IFS cargo in order to maintain those customer relationships and to recapture a higher level of fuel surcharge. In December 2011 we discontinued operations at Cross Creek and IFS. For the year ended March 31, 2012 we lost $8,588,445 in the discontinued operations for Cross Creek Trucking. We continue be liable to the former owner of Cross Creek in the amount of $3,821,758, including $76,144 of accrued interest at March 31, 2012.
Effective June 30, 2012, we sold 100% of the issued and outstanding shares of common stock of both Cross Creek Trucking of Central Point, OR and Integrated Freight Services of Sarasota, FL to Deep South, LLC of Pineville, LA. Under the terms of the purchase agreement, Deep South receives all right, title, and interest to the shares for a total purchase price of $1.00 and the issuance to Deep South of an aggregate of 5,000,000 shares of our common stock.
We have reserved $2,127,582 to cover any liabilities associated with this transaction .
Other Income (Expenses)
We reported total other expense of $1,798,759 for the fiscal year ended March 31, 2012 as compared to $2,184,563 for the fiscal year ended March 31, 2011 , a decrease of $385,804 or 17.7%. While interest expense continues to increase due to a greater debt level, other income from disposition of revenue equipment also decreased during the period. Other income and expense reflects interests costs (net of interest income), including derivatives, as discussed below.
Interest expense for the fiscal year ended March 31, 2012 was $2,098,459 compared to $1,887,677 for the fiscal year ended March 31, 2011, an increase of $210,782 or 11.2%. This was due to greater debt levels associated with the Cross Creek discontinued operation.
We had a gain on derivatives of $207,956 for the year ended March 31, 2012, as compared to derivative expense of $513,471on the sale of convertible notes for the fiscal year ended March 31, 2011.
Net Loss
We reported a net loss of $14,337,256 for the fiscal year ended March 31, 2012 as compared to a net loss of $7,761,200 for the fiscal year ended March 31, 2011, an increase of $6,756,056. The increase was a result discontinued operations, offset partially by derivative gains resulting from our sale of convertible debentures, operating gains, and gains from the sale of equipment.
Segments
Morris Transportation
For the fiscal year ended March 31, 2011, Morris Transportation had revenues of $11,135,967 compared with revenues of $11,322,844 for the fiscal year ended March 31, 2012, an increase of $186,877 or 2%. This increase is primarily due to a general improvement in market demand for the trucking industry.
21
For the fiscal year ended March 31, 2011, Morris Transportation had net income of $297,047 compared with net loss of $56,620 for the fiscal year ended March 31, 2012, a decrease of $353,667. This decrease is primarily due to fuel and insurance expenses.
Total assets at March 31, 2011, were $3,621,863, as compared to total assets of $4,293,671 as of March 31, 2012, an increase of $671,808. This increase is primarily due to the purchase of new tractors.
Smith Systems Transportation
For the fiscal year ended March 31, 2011, Smith Systems Transportation had revenues of $7,691,400 compared with revenues of $9,392,154 for the fiscal year ended March 31, 2012, an increase of $1,700,754 or 22%. This increase is primarily due to increased petroleum charges. a general improvement in the trucking industry in the Central and Mountain Time zones of the United States and specifically to much stronger demand in the hazardous waste market. Smith was able to service this significant increase in demand by rapidly expanding its capacity with independent contractor drivers.
Smith Systems Transportation had net income of $55,605 for the fiscal year ended March 31, 2012 compared with a net income of $338,000 for the fiscal year ended March 31, 2011, decrease of $282,395. This decrease is primarily due to compensation expenses.
Total assets were $4,455,051 at March 31, 2012 as compared to total assets of $2,681,427 at March 31, 2011, an increase of $1,773,624.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. The following table provides an overview of certain selected balance sheet comparisons related to continuing operations between March 31, 2012and March 31, 2011.
|
March 31, 2012
|
March 31, 2011
|
$ change
|
% change
|
|||||||||||||||||
|
Working Capital
|
$ | (12,145,973 | ) | $ | (4,099,229 | ) | $ | (8,046,744 | ) | (66 | )% | |||||||||
|
Cash
|
83,152 | 54,158 | 28,994 | 35 | % | |||||||||||||||
|
Accounts receivables, net
|
3,179,851 | 2,564,352 | 615,499 | 19 | % | |||||||||||||||
|
Prepaid expenses and other assets
|
372,654 | 545,930 | (173,276 | ) | (46 | )% | ||||||||||||||
|
Property and equipment, net
|
5,075,682 | 4,141,067 | 934,615 | 18 | % | |||||||||||||||
|
Intangible assets, net
|
0 | 268,785 | (268,785 | ) | (100 | )% | ||||||||||||||
|
Total Assets
|
8,791,942 | 7,810,572 | 981,370 | 11 | % | |||||||||||||||
|
Bank overdraft
|
693,403 | 214,303 | 479,100 | 69 | % | |||||||||||||||
|
Accounts payable
|
2,179,762 | 1,151,337 | 1,028,425 | 47 | % | |||||||||||||||
|
Accrued liabilities
|
2,382,480 | 1,112,778 | 1,269,702 | 53 | % | |||||||||||||||
|
Other liabilities
|
556,000 | 0 | 556,000 | 100 | % | |||||||||||||||
|
Derivative liability
|
65,651 | 513,471 | (447,820 | ) | (682 | )% | ||||||||||||||
|
Line of credit
|
740,236 | 895,153 | (154,917 | ) | (21 | )% | ||||||||||||||
|
Notes payable
|
15,436,653 | 8,245,340 | 7,191,313 | 47 | % | |||||||||||||||
|
Total Liabilities
|
26,269,061 | 13,897,695 | 12,371,366 | 47 | % | |||||||||||||||
|
Common stock
|
43,868 | 31,575 | 12,293 | 28 | % | |||||||||||||||
|
Additional paid-in capital
|
8,948,878 | 6,013,911 | 2,934,967 | 33 | % | |||||||||||||||
|
Accumulated deficit
|
(26,803,706 | ) | (12,475,539 | ) | (14,328,167 | ) | 53 | % | ||||||||||||
|
Non-controlling interest
|
333,841 | 342,930 | (9,089 | ) | (3 | )% | ||||||||||||||
|
Total Liabilities and Stockholders’ Deficit
|
$ | 8,791,942 | $ | 7,810,572 | $ | 981,370 | 11 | % | ||||||||||||
22
Cash Flows and Working Capital
Our cash flow from operations is insufficient to meet current obligations. In fiscal year 2012 and 2011, we relied upon additional investment through sales of common stock and debentures in order to fund its operations. We anticipate the need to raise significant amounts of capital in order to fund its operations in the next fiscal year.
As a result of losses we have incurred to date, we have financed our operations primarily through equity and debentures. At March 31, 2012, we had $83,152 in cash and cash equivalents. We had receivables, net of allowances, of $3,179,851 and our current liabilities were $15,781,630.
Our sales cycle can be several weeks or longer, followed by a period of time in which to collect our receivables, with some costs incurred immediately, making our business working-capital intensive. We do not anticipate a profitability level that would resolve its cash flow issues in the foreseeable future and expects to rely upon acquisitions and capital contributed by investors to fund its operations.
We have significant capital expenditures, although leasing can reduce our equipment cost when justified by the level of sales.
We raised $82,500 from the sale of common stock to investors for the fiscal year ended March 31, 2012.
Operating Activities
Net cash used in operating activities for the fiscal year ended March 31, 2011 totaled $467,173 as compared to $296,195 for the fiscal year ended March 31, 2012, a decrease of $170,978. This change resulted primarily from the greater level of commercial activity in 2011, which resulted in the much greater net loss for the year ended March 31, 2011 offset by the larger noncash expenses in the same period. For the fiscal year ended March 31, 2011, we had a net loss of $7,761,200, along with non-cash items such as depreciation and amortization expense of $2,179,287, stock issued for services of $746,346, warrants issued for services of $318,750, stock based compensation of $177,000, stock issued for interest of $873,519, and debt discount amortization expense of $258,682,. During the fiscal year ended March 31, 2012, we experienced a net loss of $14,337,256; along with non-cash items such as depreciation and amortization expense $2,605,052.
Investing Activities
Net cash used in investing for the fiscal year ended March 31, 2011 was $168,311 as compared to no net cash used in investing activities of $1,613,368 (for equipment) for the fiscal year ended March 31, 2012. During the fiscal year ended March 31, 2011, we used cash of $100,000 for the purchase of Triple C Transport. We also purchased equipment for $68,311.
Financing Activities
Net cash provided by financing activities for the fiscal year ended March 31, 2011, was $470,563 as compared to net cash provided of $2,109,535 for the fiscal year ended March 31, 2012. For the fiscal year ended March 31, 2012, net cash provided by financing activities related to proceeds received from notes payable of $3,075,868 which were funds received from various lenders, proceeds from sale of common stock of $82,500, and repayments of $1,373,006 which were to pay down the balances on various notes related to the trucks and trailers.
Cash Requirements
At April 17, 2013, we had a nominal balance in cash and cash equivalents. As discussed below, this amount and our current accounts receivable collections may be adequate to maintain our current level of operations for 30 to 60 days, after which we would need additional capital or face a significant curtailment of operations.
23
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with United States Generally Accepted Accounting Principles ("GAAP") requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements and accompanying notes. Our management evaluates these estimates and assumptions on an ongoing basis, utilizing historical experience, consulting with experts, and using other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts would be reported using differing estimates or assumptions. We consider our critical accounting policies to be those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates. A summary of the significant accounting policies followed in preparation of the financial statements is contained in Note 1 to our consolidated financial statements.
Property and Equipment
Property and equipment are entered at acquisition cost and depreciated on a straight-line basis over their anticipated life. We estimate the salvage value of our equipment to be fifteen to twenty percent for tractors and trailers, if the equipment is kept in service for its entire useful life. This life expectancy is based upon our management’s past experience of operations. The useful life of a typical tractor is seven fiscal years and a typical trailer is nine fiscal years. Our structures are forty fiscal years and leasehold improvements are the lesser of the economic life of the leasehold improvements or the remaining life of the lease.
Going Concern
We have suffered recurring losses from operations and are dependent on additional capital to execute our business plan.
With our present cash and cash equivalents, management expects to be able to continue some of our operations for at least the next twelve months. However, we have suffered losses from operations. Our continuation is dependent upon attaining and maintaining profitable operations and raising additional capital as needed. In this regard, we have raised additional capital through the debt and equity offerings noted above. We do, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. We plan to sell additional equity securities, debt securities or borrow from lending institutions. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The issuance of additional equity securities, including convertible debt securities, by us could result in a significant dilution in the equity interests of our current stockholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer. In such event, we will be forced to scale down or perhaps even cease our operations.
We have undertaken steps as part of a plan to improve operating results with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) increasing our revenues and gross profits; and (c) reducing expenses. Additionally, we are implementing a four part strategy to bring us to financial stability, which is as follows:
|
●
|
A significant portion of our short term debt is in the hands of our subsidiary managers who, under the right circumstances, we believe may be willing to rework terms and to lengthen the maturity dates, as they have in the past, if that becomes necessary, lessening the short term debt on our balance sheet.
|
|
●
|
A significant amount of short term debt on our balance sheet is convertible into common shares and we are optimistic a meaningful amount of this debt will ultimately be converted, thus eliminating a meaningful amount of debt from our balance sheet.
|
|
●
|
We expect to continue to grow through acquisitions involving stock payments in lieu of cash. We expect this larger business base will give us an ever larger “platform” in order to more easily offset the corporate overhead and costs of being public.
|
|
●
|
In early 2012 as management was pursuing turnaround strategies and new sources of working capital, we were introduced to Fuselier and Company, a New Jersey-based turnaround company specializing in strategic investments in troubled companies. On August 2, 2012 the IFCR board approved two actions: 1) an employment agreement in which Mr. David Fuselier became Chairman and CEO of IFCR and 2) a three-year consulting engagement agreement with Fuselier Consulting. As a result of these agreements, the board approved a change of management of the Company. Management believes that this restructuring is necessary to enabling the company to raise necessary working capital and achieve long-term profitability/viability.
|
24
You have no assurance that we will successfully accomplish these steps and it is uncertain whether we will achieve a profitable level of operations and/or obtain additional financing. You have no assurance that any additional financings will be available to us on satisfactory terms and conditions, if at all.
Our consolidated financial statements do not give effect to any adjustments which would be necessary should we be unable to continue as a going concern and therefore be required to realize our assets and discharge our liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.
Recent Accounting Pronouncements
See Consolidated Financial Statements beginning on page F-1.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
We have not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under which we have:
· An obligation under a guaranty contract, although we do have obligations under certain sales arrangements including purchase obligations to vendors,
· A retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets,
· Any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument or,
· Any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.
Effect of Changes in Prices
Changes in prices in the past few fiscal years have not been a significant factor in the trucking industry. Prices to the end customer do vary with fuel prices, which are affected by means of a fuel surcharge that is set by the U S. Department of Energy and is common to all companies in the industry. The surcharge may affect the industry and the economy as a whole but does not differentiate between companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are not required to provide information under this item.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item, including an index to the financial statements, begin on page F–1 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Although we changed our independent accountant in August 2012 as reported on Form 8-K, we have not had any disagreement with our independent accountants during the past two fiscal years or the subsequent interim period.
ITEM 9A. CONTROLS AND PROCEDURES.
307 – Disclosure controls and procedures: As of March 31, 2012, our principal executive and our acting principal financial officer, the same person, evaluated the effectiveness of our disclosure controls and procedures, and determined that we do not have any effective disclosure controls and procedures. Disclosure controls and procedures are defined in Exchange Act Rule 15d–15(e) as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms [and] include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.”
308(a)(1) – Management’s responsibility: Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Exchange Act Rule 15d–15(f) “as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.” Because of inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
308(a)(2) – Framework to be used for evaluation: In its evaluation of our internal control over financial reporting, our management is required to use the Internal Control - Integrated Framework (1992) and Internal Control Over Financial Reporting Guidance for Smaller Public Companies (2006), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
308(a)(3) – Evaluation of our internal control over financial reporting: Pursuant to Rule 15d–15 of the Exchange Act, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2010. Based on this evaluation, our management, with the participation of our principal executive and acting principal financial officer, who is the same person, concluded that our internal control over financial reporting was not effective. Management has identified the following material weakness in our internal control over financial reporting:
|
●
|
Until we can consolidate our accounting and banking functions, our ability to implement internal controls over financial reporting will be limited.
|
|
●
|
We do not have adequate software systems, personnel and other resources to assure that significant transactions are timely analyzed and reviewed.
|
|
●
|
We do not have adequate personnel and financial resources available to plan, develop, and implement disclosure and procedure controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.
|
|
●
|
Our limited financial resources restrict our employment of adequate personnel needed and desirable to separate the various receiving, recording, reviewing and oversight functions for the exercise of effective control over financial reporting.
|
|
●
|
Our limited resources restrict our ability to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure.
|
26
308 (a)(4) – Absence of auditor’s attestation: This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002. Our management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
308(b) – Changes in internal control over financial reporting: Based upon an evaluation by our management of our internal control over financial reporting, with the participation of our principal executive and acting principal financial officer, who is the same person, we did not make any changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Limitations on the Effectiveness of Internal Control: Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting, when implemented, will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about risks and the likelihood of future events, and there is no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances and the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost-effective internal control system, financial reporting misstatements due to error or fraud may occur and not be detected on a timely basis.
ITEM 9B. OTHER INFORMATION.
We believe we have filed reports on Form 8-K during the fourth fiscal year providing all information required to be reported on Form 8-K which occurred during that period.
27
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table and biographical information following the table provide information about our directors and executive officers.
|
NAME
|
AGE
|
POSITION
|
DIRECTOR SINCE
|
|||
|
David N. Fuselier
|
52
|
Director, Chairman and Chief Executive Officer
|
2012
|
|||
|
Henry P. Hoffman
|
62
|
Director, President and Chief Operating Officer
|
2008
|
|||
|
Jackson L. Morris
|
68
|
Corporation Secretary
|
n/a
|
|||
|
Matthew A. Veal
|
54
|
Interim Chief Financial Officer
|
n/a
|
Our stockholders elect our directors. Our directors serve terms of one year and are generally elected at each annual stockholders meeting; provided, that there is no assurance we will hold a stockholders’ meeting annually. We do not have any independent directors using the definition of independence contained in the NASDAQ listing rules. Our executive officers are elected by the board of directors and their terms of office are at the discretion of the board of directors, subject to terms and conditions of their respective employment agreements which we expect to enter into after the registration of which this prospectus is a part is effective. We have the authority under Florida law and our bylaws to indemnify our directors and officers against certain liabilities. We have been informed by the U.S. Securities and Exchange Commission that indemnification against violations of federal securities law is against public policy and therefore unenforceable.
Biographical Information About Our Directors And Executive Officers
David N. Fuselier has been elected as a director and chairman and been appointed to fill the vacancy in the position of chief executive officer, on a part-time basis. We expect Mr. Fuselier to devote a substantial portion of his working time to our business and affairs. For the last fifteen years, Mr. Fuselier has been the principal of Fuselier and Co., a private merchant banking firm engaged in corporate turnarounds. He is chairman and chief executive officer on a part-time basis of New Leaf Brands, Inc., a publicly traded company, beginning February 15, 2012. He is a graduate of Louisiana State University (MSJ) and Louisiana College (BA).
Henry P. (“Hank”) Hoffman serves as our director, president and chief operating officer and has over twenty-five years of executive management experience in the transportation industry. Prior to joining IFCR, he was founder and President of SeaBridge Freight, a short sea intermodal barge business. Before joining SeaBridge, he was founder and Chairman of SiriCOMM, Inc., a wireless networking and applications service provider dedicated to the commercial trucking industry. He served as an officer in the United States Army for six years where he completed two successful command assignments. He earned a Bachelor of Science degree from the United States Military Academy, West Point, NY and an MBA from the University of Wisconsin, Oshkosh, WI.
Jackson L. Morris fills the statutory position of corporation secretary as a courtesy and incidental to his services as our independent corporate and securities counsel. He has served in these capacities with Integrated Freight since inception. Mr. Morris has been engaged in the private practice of law since 1982, maintaining his own practice in the Tampa Bay area since 1993. Mr. Morris focuses his practice in corporate, securities and business transaction law. Mr. Morris earned a B.A. degree in economics from Emory University in 1966, a J.D. degree from Emory University Law School in 1969 and an L.L.M. from Georgetown Law School in 1974.
Matthew A. Veal fills the statutory position of interim chief financial officer as a consultant. He has served in these capacities with Integrated Freight since August 2011. Veal has served as chief financial officer for several public companies in the Sarasota, Florida area including his service at Evolucia, Inc. from its inception in 2004 through 2011. Veal earned a Bachelor of Science degree in accounting from the University of Florida in 1980.
Audit Committee/Audit Committee Financial Expert
We do not have an audit committee or an audit committee financial expert.
Section 16(a) Beneficial Ownership Reporting Compliance
We believe that none of our directors, officers and beneficial owners of more than ten percent of our common stock have filed any reports required by Section 16(a) of the Exchange Act.
Code of Ethics
Although our former board of directors approved a code of ethics for senior financial officers on October 7, 2002, as filed it with our September 30, 2002 report on Form 10–KSB as Exhibit 99.3, our current board of directors has neither rescinded nor confirmed that code of ethics.
28
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table presents information about cash compensation we paid to our chief executive officer and each of our highest paid executive officers who have compensation exceeding $100,000 per year, and lists all capacities in which cash compensation was paid. The amounts in the table include compensation paid by PGI-MD, Integrated Freight and each of our subsidiaries we acquired in the merger with Integrated Freight, both before and after the respective acquisitions, as the case may be.
|
Name and principal position
|
Year
|
Base
|
Bonus
|
Total
|
||||||||||||
|
Paul A. Henley, Chief Executive Officer (1)
|
2012 | $ | 175,000 |
none
|
$ | 175,000 | ||||||||||
|
Henry P. Hoffman, President and Chief Operating Officer
|
2012 | $ | 175,000 |
none
|
$ | 175,000 | ||||||||||
|
T. Mark Morris, General Manager of Morris Transportation
|
2012 | $ | 110,000 |
none
|
$ | 110,000 | ||||||||||
|
Monte W. Smith, General Manager of Smith Systems Transportation (1)
|
2012 | $ | 110,000 |
none
|
$ | 110,000 | ||||||||||
(1) Mr. Henley resigned effective February 29, 2012. Messrs. Smith and Morris resigned from our board of directors in August 2012 but continue to serve as officers of their respective, employing subsidiary companies.
Neither our chief executive officer nor our other highest paid executives received any form of compensation other than cash salary and bonus during the periods indicated. The salaries of Messrs. Morris and Smith were paid by their respective, employing subsidiary companies.
Employment Agreements
We have employment agreements with the named executive officers identified in the following table.
|
Name
|
Began
|
Ends (1)
|
Annual
Cash Salary
|
Annual
Increase
|
Bonus
|
Other
|
||||||||||||||
|
David N. Fuselier
|
August 2, 2012
|
August 2017
|
$ |
150,000
|
5
|
% |
–
|
(2)
|
–
|
|||||||||||
|
Henry P. Hoffman
|
July 3, 2012
|
July, 2014
|
$
|
125,000
|
10
|
%
|
–
|
–
|
||||||||||||
|
T. Mark Morris
|
September 1, 2008
|
August 31, 2012
|
$
|
110,000
|
–
|
$
|
25,000
|
(2)
|
–
|
|||||||||||
|
Monte W. Smith
|
September 1, 2008
|
August 31, 2012
|
$
|
110,000
|
–
|
–
|
(2)
|
–
|
||||||||||||
________________
(1) Subject to subsequent automatic annual renewals.
(2) Eligible for discretionary bonuses, upon board review and approval. Mr. Fuselier’s annual bonus award based on the achievement of established financial goals as set forth annually by the Board. Our Board will research and establish an executive option pool, under which Mr. Fuselier will be a number of options to be determined to purchase shares of our common stock at an exercise price equal to the current market price (as defined) on the date of grant. The options will vest twenty percent on the date of grant and twenty percent on each subsequent anniversary date
29
Each employment agreement provides for payment of benefits provided to other employees, an automobile allowance, and an opportunity to earn a performance bonus.
On August 2, 2012, in connection with our employment of Mr. Fuselier, our board of directors approved a two-year consulting agreement with Fuselier Consulting LLC renewable for one year, to advise us on a corporate turnaround strategy. The compensation arrangement gives Fuselier the right to earn up to 13,330,000 shares of our common stock in 2012 and ten million shares thereafter annually through the term of the agreement. Under the terms of the consulting agreement, management of the two currently operating subsidiaries have full decision-making authority and operational control until such time as the personal guaranties by their respective management of their respective equipment financing are eliminated, which we have an obligation to accomplish as quickly as may be reasonable.
We have entered into a five-year employment agreement with Mr. Fuselier, which provides an initial annual base salary of $150,000 with five percent annual increases, as reported on Form 8-K for the event date of August 2, 2012 .
Director Compensation
Directors who are not our employees will receive 25,000 shares of our common stock each quarter.
Compensation and Nominating Committees
We do not have compensation and nominating committees. These functions are provided by our full board of directors.
Shareholder communications.
We do not have a process for security holders to send communications to our board of directors and, we have not made a determination that it is appropriate for us not to have such a process. Any shareholder communications addressed to the board or any director will be provided to all directors for consideration.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Beneficial Ownership of Common Stock of Principal Stockholders, Directors and Management
The principal holders of our common stock are set forth in the following table. These principal stockholders include:
|
●
|
each of our directors and executive officers,
|
|
●
|
our directors and executive officers as a group, and
|
|
●
|
others who we know own more than five percent of our issued and outstanding common stock.
|
30
We believe each of these persons has sole voting and investment power over the shares they own, unless otherwise noted. The address of our directors and executive officers is our address.
|
NAME OF BENEFICIAL OWNER
|
NUMBER OF
SHARES OWNED (1)
|
PERCENTAGE OF CLASS (2)
|
||||||
|
David N. Fuselier (1)
|
12,500,000 | 15.04 | % | |||||
|
Henry P. Hoffman
|
10,175,000 | 12.242 | % | |||||
|
Jackson L. Morris
|
5,500,000 | 6.618 | % | |||||
|
T. Mark. Morris (2)
|
5,431,458 | 6.535 | % | |||||
|
Matthew A. Veal
|
5,000,000 | 6.016 | % | |||||
|
Monte W. Smith (3)
|
930,000 | 1.119 | % | |||||
|
All Officers and Directors As a Group (6 persons) (3)
|
39,536,458 | 47.57 | % | |||||
|
Robert W. Papiri (4)
|
3,208,674 | 3.861 | % | |||||
|
[address - Note that all of the above use the Company’s address except Mr. Papiri whose address is 402 South Broadway, Suite 400 San Diego, CA 92101.]
|
|||||||
______________
* Less than 1%.
(1) Includes 12,500,000 shares to be issued to Fuselier Consulting LLC, which is wholly owned by Mr. Fuselier.
(2) Does not include the number of common shares into which 40,000,000 shares of our preferred stock because the terms of such preferred have yet to be established.
(3) Does not include the number of common shares into which 50,000,000 shares of our preferred stock because the terms of such preferred have yet to be established.
(4) Mr. Papiri is no longer a director of the company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
During the 2012 fiscal year, we did not enter into any transactions with our directors, executive officers and persons who own more than five percent of our common stock, or with their relatives and entities they control.
We do not anticipate entering into any future transactions with our directors, officers and affiliates apart from normal employment transactions.
Jackson L. Morris and T. Mark Morris are not related.
We do not have any independent directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Aggregate fees billed by our principal independent registered public accounting firm for audits of the financial statements for the fiscal years indicated:
|
2012
|
2011
|
|||||||
|
Audit Fees
|
$ | 82,790 | $ | 82,000 | ||||
|
Audit–Related Fees(1)
|
0 | – | ||||||
|
Tax Fees
|
– | – | ||||||
|
All Other Fees
|
34,000 | 70,000 | ||||||
|
Total
|
$ | 116,790 | $ | 152,000 | ||||
Percentage of hours on audit engagement performed by non–full time employees: less than 50% of total time.
31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
|
Exhibit Number
|
Description of Exhibit
|
|
|
3.1
|
Articles of Domestication*
|
|
|
3.2
|
Articles of Incorporation*
|
|
|
3.3
|
Amended and Restated Bylaws*
|
|
|
4.1
|
Specimen Stock Certificate (not filed)
|
|
|
21
|
List of Subsidiaries.
|
|
|
Sarbanes–Oxley Certification for the principal executive officer, dated June 25, 2013.
|
||
|
Sarbanes–Oxley Certification for the principal financial officer, dated June 25, 2013.
|
||
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 which is dated June 25, 2013.
|
* Previously Filed
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Integrated Freight Corporation | |||
|
Date: June 25, 2013
|
By:
|
/s/ David N. Fuselier | |
|
David N. Fuselier
|
|||
|
Principal Executive Officer and Principal Accounting Officer
|
|||
|
Signature and Name:
|
Capacity in which signed:
|
Date:
|
||
|
/s/ David N. Fuselier
|
Director, Chairman, Chief Executive Officer
|
June 25, 2013
|
||
|
David N. Fuselier
|
and Principal Accounting Officer | |||
|
/s/ Henry P. Hoffman
|
Director, President and Chief Operating Officer
|
June 25, 2013
|
||
|
Henry P. Hoffman
|
33
CONSOLIDATED FINANCIAL STATEMENTS OF
INTEGRATED FREIGHT CORPORATION
|
Page
|
||||
| Independent Registered Accountants Reports | F-2 | |||
|
Consolidated Balance Sheets as of March 31, 2012 and March 31, 2011
|
F-4
|
|||
|
Consolidated Statements of Operations For Years ended March 31, 2012 and 2011
|
F-5
|
|||
| Consolidated Statements of Stockholders' Equity for the Years ended March 31, 2012 and 2011 | F-6 | |||
|
Consolidated Statements of Cash Flows for the Years ended March 31, 2012 and 2011
|
F-7
|
|||
|
Notes to Consolidated Financial Statements
|
F-9
|
|||
F-1
 |
 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Integrated Freight Corp.
We have audited the accompanying balance sheet of Integrated Freight Corp as of March 31, 2012, and the related statement of operations, stockholders’ deficiency, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements as of and for the year ended March 31, 2011 were audited by another auditor who expressed an unqualified opinion on July 13, 2011.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Integrated Freight Corp. as of March 31, 2012, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has significant net losses and cash flow deficiencies. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ DKM Certified Public Accountants
DKM Certified Public Accountants
Clearwater, Florida
June 24, 2013
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Integrated Freight Corporation
We have audited the accompanying consolidated balance sheet of Integrated Freight Corporation and Subsidiaries as of March 31, 2011 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Freight Corporation and Subsidiaries, as of March 31, 2011 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses and has a negative working capital position and a stockholders’ deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
July 13, 2011
F-3
INTEGRATED FREIGHT CORPORATION
Consolidated Balance Sheets
|
March 31, 2012
|
March 31, 2011
|
|||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash
|
$ | 83,152 | $ | 54,158 | ||||
|
Accounts receivables, net of allowance for doubtful accounts of $50,000
|
3,179,851 | 2,564,352 | ||||||
|
Prepaid expenses and other assets
|
372,654 | 545,930 | ||||||
|
Total current assets
|
3,635,657 | 3,164,440 | ||||||
|
Property and equipment, net of accumulated depreciation
|
5,075,682 | 4,141,068 | ||||||
|
Intangible assets, net of accumulated amortization
|
- | 268,785 | ||||||
|
Assets of discontinued operations
|
80,603 | 236,279 | ||||||
|
Total assets
|
$ | 8,791,942 | $ | 7,810,572 | ||||
|
Liabilities and Stockholders’ Deficit
|
||||||||
|
Current liabilities:
|
||||||||
|
Bank overdraft
|
$ | 693,403 | $ | 214,303 | ||||
|
Accounts payable
|
2,179,762 | 1,151,337 | ||||||
|
Accrued expenses and other liabilities
|
2,382,480 | 1,112,778 | ||||||
|
Other Liabilities
|
556,000 | - | ||||||
|
Line of credit
|
740,236 | 895,153 | ||||||
|
Notes payable - related parties
|
5,116,595 | 1,180,987 | ||||||
|
Current portion of notes payable
|
4,113,154 | 2,709,111 | ||||||
|
Total current liabilities
|
15,781,630 | 7,263,669 | ||||||
|
Derivative liability
|
65,651 | 513,471 | ||||||
|
Notes payable - related parties
|
206,412 | 120,000 | ||||||
|
Notes payable, net of current portion and debt discount
|
6,168,077 | 4,235,242 | ||||||
|
Liabilities of discontinued operations
|
4,047,291 | 1,765,313 | ||||||
|
Total long-term liabilities
|
10,487,431 | 6,634,026 | ||||||
|
Total liabilities
|
26,269,061 | 13,897,695 | ||||||
|
Stockholders’ deficit:
|
||||||||
|
Common stock, $0.001 par value, 2,000,000,000 shares authorized,
|
||||||||
|
43,865,606 and 31,574,883 shares issued and outstanding at March 31, 2012 and
|
43,868 | 31,575 | ||||||
|
March 31, 2011, respectively
|
||||||||
|
Additional paid-in capital
|
8,948,878 | 6,013,911 | ||||||
|
Accumulated deficit
|
(26,803,706 | ) | (12,475,539 | ) | ||||
|
Total Integrated Freight Corporation stockholders’ deficit
|
(17,810,960 | ) | (6,430,053 | ) | ||||
|
Non controlling interest
|
333,841 | 342,930 | ||||||
|
Total stockholders’ deficit
|
(17,477,119 | ) | (6,087,123 | ) | ||||
|
Total liabilities and stockholders’ deficit
|
$ | 8,791,942 | $ | 7,810,572 | ||||
See notes to consolidated financial statements
F-4
INTEGRATED FREIGHT CORPORATION
Consolidated Statements of Operations
|
Year Ended
|
||||||||
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Revenue
|
$ | 20,714,998 | $ | 18,827,367 | ||||
|
Operating Expenses
|
||||||||
|
Rents and transportation
|
4,109,906 | 4,301,760 | ||||||
|
Wages, salaries and benefits
|
5,967,553 | 5,591,171 | ||||||
|
Fuel and fuel taxes
|
6,949,144 | 5,526,923 | ||||||
|
Depreciation and amortization
|
2,605,052 | 2,179,827 | ||||||
|
Insurance and claims
|
1,038,593 | 725,995 | ||||||
|
Operating taxes and licenses
|
227,776 | 198,853 | ||||||
|
General and administrative
|
3,395,729 | 4,020,941 | ||||||
|
Total Operating Expenses
|
24,293,753 | 22,545,470 | ||||||
|
Loss from continuing operations
|
(3,578,755 | ) | (3,718,103 | ) | ||||
|
(Loss)/Gain from discontinued operations
|
(8,950,653 | ) | (1,865,895 | ) | ||||
|
Other Income (Expense)
|
||||||||
|
Gain/(loss) on change of fair value of derivative liability
|
207,956 | (513,471 | ) | |||||
| Interest | (2,098,459 | ) | (1,887,677 | ) | ||||
| Other income (expense) | 91,744 | 216,585 | ||||||
|
Total Other Income (Expense)
|
(1,798,759 | ) | (2,184,563 | ) | ||||
|
Net loss before noncontrolling interest
|
(14,328,167 | ) | (7,768,561 | ) | ||||
|
Noncontrolling interest share of subsidiary net income (loss)
|
(9,089 | ) | 7,361 | |||||
|
Net loss
|
$ | (14,337,256 | ) | $ | (7,761,200 | ) | ||
|
Net loss per share - basic and diluted
|
||||||||
|
Loss from continuing operations
|
$ | (0.14 | ) | $ | (0.24 | ) | ||
|
Loss from discontinued operations
|
(0.23 | ) | (0.08 | ) | ||||
|
Net loss per common share-basic and diluted
|
$ | (0.37 | ) | $ | (0.31 | ) | ||
|
Weighted average common shares outstanding - basic and diluted
|
38,729,546 | 24,662,809 | ||||||
See notes to consolidated financial statements.
F-5
INTEGRATED FREIGHT CORPORATION
Consolidated Statement of Changes in Stockholders’ Deficit
For the Year Ended March 31, 2012 and 2011
|
Additional
|
||||||||||||||||||||||||
|
Common Stock
|
Paid-in
|
Accumulated
|
Noncontrolling
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Interest
|
Total
|
|||||||||||||||||||
|
Balance at March 31, 2010
|
21,089,333
|
$
|
21,089
|
$
|
1,171,790
|
$
|
(4,714,339)
|
$
|
335,569
|
(3,185,891)
|
||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Issuance of common stock for compensation
|
202,042
|
202
|
176,798
|
—
|
—
|
177,000
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Noncontrolling interest share of subsidiary's net income
|
—
|
—
|
—
|
—
|
7,361
|
7,361
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Warrants issued as compensation for services rendered
|
—
|
—
|
318,750
|
—
|
—
|
318,750
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Debt discount attributable to convertible notes payable
|
—
|
—
|
223,553
|
—
|
—
|
223,553
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Sale of common stock
|
2,420,000
|
2,420
|
851,580
|
—
|
—
|
854,000
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Issuance of stock as part of debt agreement
|
723,333
|
723
|
615,743
|
—
|
—
|
616,466
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Issuance of stock for maturity extension of note payable
|
150,000
|
150
|
133,350
|
—
|
—
|
133,500
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Common stock issued to acquire Triple C Transport
|
2,000,000
|
2,000
|
214,424
|
—
|
—
|
216,424
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Common stock issued upon exercise of warrants
|
185,185
|
185
|
(185)
|
—
|
—
|
-
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Common stock issued in exchange for services
|
1,433,333
|
1,433
|
744,913
|
—
|
—
|
746,346
|
||||||||||||||||||
|
-
|
||||||||||||||||||||||||
|
Issue of common stock upon conversion of debentures
|
3,371,657
|
3,372
|
1,563,195
|
—
|
—
|
1,566,567
|
||||||||||||||||||
|
Net loss
|
—
|
—
|
(7,761,200)
|
—
|
(7,761,200)
|
|||||||||||||||||||
| Balance at March 31, 2011 |
31,574,883
|
$
|
31,574
|
$
|
6,013,911
|
$
|
(12,475,539)
|
$
|
342,930
|
(6,087,124)
|
||||||||||||||
|
Issuance of common stock for compensation
|
616,000
|
616
|
196,054
|
—
|
—
|
196,670
|
||||||||||||||||||
|
300,000 Warrants issued as compensation for extension of note payable
|
—
|
—
|
73,038
|
—
|
-
|
73,038
|
||||||||||||||||||
|
400,000 Warrants issued as compensation for services rendered
|
—
|
—
|
79,600
|
—
|
—
|
79,600
|
||||||||||||||||||
|
Issuance of stock in escrow as part of agreement to acquire Discontued Operation
|
1,056,320
|
1,056
|
408
|
—
|
—
|
|||||||||||||||||||