ITEM 1. BUSINESS.
Our corporate and business history.
“We”, “our” and “us", as used in this annual report, refer to Integrated Freight Corporation and our predecessor, PlanGraphics, Inc., and includes the following wholly owned subsidiaries, during the periods indicated:
· PlanGraphics, Inc., a Maryland corporation, (“PGI-MD”) our only subsidiary prior to December 27, 2009, when we sold it.
· Integrated Freight Corporation, a Florida corporation, (“Original IFC”) between December 3, 2009, when we acquired a controlling interest, and December 23, 2009, when we merged Original IFC into us.
· Morris Transportation, Inc., an Arkansas corporation, beginning December 23, 2009, when we acquired a controlling interest in Original IFC. Original IFC purchased all of Morris Transportation’s common stock as of September 1, 2008.
· Smith Systems Transportation, Inc., a Nebraska corporation, beginning December 23, 2009, when we acquired a controlling interest in Original IFC. Original IFC purchased all of Smith System’s common stock as of September 1, 2008.
· Triple C, Inc., a Nebraska corporation, beginning as of May 5, 2010, when we purchase all of its common stock. We have filed an action to rescind this acquisition. See Item 3. Legal Proceedings, below.
· Cross Creek Trucking, Inc., an Oregon corporation, beginning April 1, 2011, when we purchased all of its common stock. Financial information for Cross Creek is not include in our financial statements at and for the year ended March 31, 2011.
The address of our principal executive offices is Suite 200, 6371 Business Boulevard, Sarasota, FL 34240, and our telephone number at that address is (941) 907-8372. The address of our web site is www.integrated-freight.com.
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 PGI-MD. 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.
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. Mr. Henley is currently one of our directors and our chief executive officer. Mr. Henley founded Original IFC for the purpose of acquiring and consolidating operating motor freight companies. Original IFC acquired the following companies:
In 2010, we acquired a third motor freight carrier:
We have filed an action to rescind this acquisition, based on fraud and breach of representations and warrants by the sellers. See Item 3. Legal Proceedings, below. This company has no operations at the date of this annual report.
In 2011, after our fiscal year end, we acquired a fourth motor freight carrier:
Although we have begun to consolidate some operational functions of these subsidiaries, such as insurance and 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. We expect this management arrangement to continue until we are able to obtain sufficient debt or equity funding to cover the cost of combining and consolidating other operational functions of their operations that are duplicative. We estimate that this consolidating activity will cost approximately $1,000,000.
In February 2011, we incorporated Integrated Freight Services, Inc. to operate as a freight brokerage company.
Overview of Our Truck Transportation Business
We are, beginning December 27, 2009, the date of our acquisition of Original IFC, a holding company exclusively of motor freight carriers, providing truck load service throughout the 48 contiguous United States. We do not specialize in any specific types of freight or commodities. We carry dry freight, refrigerated freight and hazmat and certain hazardous materials to include hazardous waste. We provide long-haul, regional and local service to our customers. The following description of our business includes information about Cross Creek Trucking which we purchased after the end of our most recent fiscal year. Triple C Transport does not conduct any operations at the date of the filing of this annual report. Accordingly, we have not included any information, other than financial information, related to the operations of Triple C Transport during our 2011 fiscal year. All data in this Item 1 reflects our business at the date we have filed this annual report.
Our Strategy
Truck transportation in general has suffered during the recent economic recession. According to Transportation Topics (February 15, 2010), over 6,200 trucking companies are believed to have ceased operations between September 2007 and January 2010. Although the economy has staged a slow recovery since that time, carriers are presently dealing with both extraordinarily high fuel prices and a growing shortage of qualified drivers. We believe the trucking companies that have survived in the recent economic recession, whether presently profitable or marginally unprofitable, represent good future value at the prices for which we believe many of them can be acquired. Our management believes that many of them will require debt and equity funding and cost reductions which they may be unlikely to obtain individually. We believe that the demand for truck transportation services is returning to pre-recession levels, with an inadequate supply of trucks to meet demand. The American Trucking Association Tonnage Index reported a 3.5 percent increase in tonnage of freight shipped in the first two months of 2010. (Transportation Topics, March 29, 2010). According to the ATA tonnage has improved another 5.9% for the same period in 2011(ATA’s Monthly Truck Tonnage Report, March 31, 2011). We believe our strategy we will position us to fill part of the demand for over-the-road freight services.
We intend to continue acquiring well established trucking companies when we can do so at prices which we deem to be advantageous. In the alternative, we may acquire assets. We also plan to expand beyond our truckload service through acquisitions into logistics, less-than-truckload (LTL) and expedited/just-in-time services, as opportunities are presented to us.
We believe that we can achieve savings in operating costs by centralizing certain common functions of our subsidiaries, such as administration, insurance, fuel and tire purchasing, billing and collections, dispatching, maintenance scheduling and other functions. While some of these cost-saving actions can be taken without significant cost, others will require us to obtain additional funding, as noted above. We have begun our consolidating activities in insurance and fuel and tire purchasing. We believe that with a larger service territory and customer base than any one subsidiary would have working alone, we will be able to achieve greater efficiencies in route and equipment utilization.
Our Markets
Historically our subsidiary companies have operated in well-established geographic traffic lanes or routes. These lanes are defined by our customers’ distribution patterns. Because there is some overlap within the most heavily traveled lanes, especially between points in the upper Midwest and Texas, we believe we will realize increased cost and productivity improvements.
Our market is concentrated in the heartland of America, ranging from the Ohio Valley and North Central moving through the Mid & Southwest and more recently in the Pacific Northwest. We have light coverage in the Northeast. Our dry van and hazardous waste subsidiaries operate in regional areas, and thus have length of hauls typical of a day to two days of travel. Our refrigerated operations cover a larger geographic area with longer lengths of haul as compared to our dry van and hazardous waste operations. 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 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 drop yards in terminal facilities of other motor freight carriers, which provide security.
Our Customers and Marketing
We serve approximately 250 customers on a regular basis. Although we do not have contracts with any of these customers, we have long-standing relationships with most of them.
The following table presents information regarding the percentage-of-revenue concentration of the business with our customers.
The following table presents information regarding the average length of our trips.
All of the freight we hauled in FY2011 is dry van freight. The following table presents information regarding the approximate percentage makeup of the freight we haul.
Marketing
Mr. Morris, Mr. Smith, and one sales person constitute our sales and marketing force. We have no formal marketing plan at the present time. We attend relevant trade shows and trade association meetings, and seek to maintain good relations with our existing customers. As we grow our carrier base, of which there is no assurance, we plan to establish a central national account sales and marketing group that will support the operations and customer service efforts of each subsidiary.
Our People
We believe our employees are our most important asset. The following table presents information about our employees, other than drivers.
*This is an average number. The number of our contract drivers, who typically own or lease from third parties the tractors they drive, varies depending on our needs. The average number of contract drivers we employed during calendar 2009 was forty-six.
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.
Our Drivers
The following table presents information about our drivers.
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 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 twenty percent, compared to an industry average of forty-three percent as published in Transport Topics, January 4, 2010.
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 FY2011 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. We have begun to centralize many of these functions, as noted above. Centralization is subject to obtaining adequate internal or external financing, of which there is no assurance.
Our Revenue Equipment
The following table presents information regarding the mix of our revenue producing equipment.
The average age of our power units is approximately 3.1 years. All of our power units are GPS equipped. The majority of our power units are Freightliner and Peterbuilt 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 replace our power units at approximately four years of age. The average age of our trailers is approximately 3.9 years for general freight and twelve years (as needed) for hazmat and hazwaste which may sit idle for extended periods of time. 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 during the last three years. They 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 2011, over eighty-five percent of our fuel purchases were made at contracted locations.
To help further reduce fuel consumption, we began installing auxiliary power units in our tractors during 2007. These units reduce fuel consumption by providing quiet climate control and electrical power for our drivers without idling the tractor engines.
Our cost-cutting measures include utilizing technology such as Peoplenet and Carrierweb to monitor travel speed/idling/rpm/high overspeed operations. In addition, governing the top speed of our power units helps reduce our fuel costs. We are installing the newly designed roll resistant, and thus more fuel efficient, tires as replacements as needed.
We further manage our exposure to changes in fuel prices through fuel surcharge programs with our customers and other measures that we have implemented. We have historically been able to pass through most long-term increases in fuel prices and related taxes to customers in the form of fuel surcharges. These fuel surcharges, which adjust with the cost of fuel, enable us to recover a substantial portion of the higher cost of fuel as prices increase, except for non-revenue miles, out-of-route miles or fuel used while the tractor is idling. As of March 31, 2011, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Among the greatest challenges presented by high and relatively unstable diesel fuel prices is monitoring and maintaining the Company’s fuel costs and insuring that its fuel surcharge levels are adequate to recapture incremental costs. The Company monitors the weekly Department of Energy regional and national diesel fuel pricing information and regulates its 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.
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 68.8 percent of all freight, with estimated total revenues from this industry sector are $660.3 billion in 2008, according to American Transportation Research Institute. 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. 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-a-load, 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 service 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 227,000 for-hire motor freight companies on file with USDOT, with ninety-six percent operating twenty-eight or fewer trucks. 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. [Information obtained from the American Transportation Research Institute.] According to the American Trucking Associations June 2011 issue of ‘Trucklines’, “Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% 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. Our larger competitors, who include 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 may 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.
We believe that we do not compete with transportation by 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, 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 USDOT periodically conducts reviews and audits to ensure our compliance with all federal safety requirements, and we report certain accident and other information to the USDOT.
Our company drivers and independent contract drivers 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. 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. Motor freight carriers and drivers may restart calculations of weekly on-duty limits 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.
Terms of Our Acquisitions
We acquired Morris Transportation and Smith Systems Transportation in the merger with Original IFC. We acquired Triple C Transport after our merger with Original IFC. We have filed an action to rescind the Triple C Transportation transaction. See Item 3. Legal Proceedings, below. We acquired Cross Creek Trucking after our most recent fiscal year end. Prior to negotiations for these acquisitions, there were no prior or existing relationships between our management and the owners/management of the acquired companies. The final terms of each acquisition, which may differ from the original terms, are as follows:
(1) We have filed suit to rescind this acquisition. See Item 3. Legal Proceedings, below.
[deleted following paragraphs after extracting and updating information.]
Morris Transportation - We acquired Morris Transportation as of September 1, 2008. We issued 3,000,000 shares of our common stock and paid an aggregate of $1 million to Mr. Morris for the purchase of Morris Transportation. The cash portion of the price has been paid in two promissory notes, payable in installments with an interest rate of eight percent and a current final maturity of May 1, 2011. On January 19, 2009, Mr. Morris agreed to consolidate an installment payment with our $250,000 for a single note of $400,000 and we agreed to waive any reduction in the $250,000 portion of the note based on a short fall in Morris Transportation’s net revenues during the twelve months following our acquisition. All principal and accrued interest is unpaid. Mr. Morris has terminated his original security interest under one of the notes in the common stock of Morris Transportation. After an unrelated to the acquisition, Mr. Morris has advanced approximately $390,000 to Morris Transportation for working capital. We have issued 150,000 shares of our common stock either in partial payment of these advances or in satisfaction of other obligations, the application of which is to be determined, of which under the acquisition agreement. In the event the 150,000 shares do not have a market value of $150,000 on January 19, 2011, we are obligated to issue an additional number of shares needed to equal a market value of $150,000. An entity which is owned by Mr. Morris owns the real estate used by Morris Transportation. We have been paying the mortgage on this real estate to an unrelated lender, as rental for our use of the real estate without a formal lease. We intend to purchase the real estate or the owning entity at fair market value, to be determined by appraisal, which may require us to refinance the mortgage. Our agreement for the acquisition of Morris Transportation provides that Mr. Morris will serve as one of our directors, will be employed as the general manager of Morris Transportation for three years and serve with Mr. Henley on its board of directors.
Terms of our sale of PGI-MD
The agreement to sell PGI-MD to Mr. Antenucci was made in an arm’s length transaction in connection with Original IFC’s purchase of our preferred stock in connection with the original structure of our business combination transaction in which we would have merged into the Original IFC. The agreement included the following provisions, as modified due to delays in completing the original combination transaction and the revised combination transaction, which were satisfied in the completion of the sale on December 27, 2009:
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We transferred all of our assets to PGI-MD with a depreciated book value of nil, excluding the stock we owned in PGI and the assets we acquired by merger with Integrated Freight.
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PGI-MD assumed all of our operating debts and obligations as of May 1, 2009, totaling $88,340, excluding $28,000 in accrued auditing fees and our operating costs incurred subsequent to May 1, 2009.
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We issued a promissory note to PGI-MD for $22,345 of our operating costs incurred subsequent to May 1, 2009 which PGI-MD had paid.
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We are subject, as a result of the merger, to Integrated Freight’s obligation to issue 177,170 shares of common stock and 177,170 common stock purchase warrants good for two years at a price of $0.50 per share in consideration for PGI-MD’s release of us from our obligation to repay inter-company loans totaling $684,311.
We accepted Mr. Antenucci’s termination of his employment agreement as our chief executive officer, which included an obligation for us to pay him approximately $335,000 in severance, as full payment for his purchase of PGI-MD.
As a result of the merger, we are subject to Integrated Freight’s obligation to issue to Mr. Antenucci 59,327 shares of common stock and 59,327 common stock purchase warrants good for two years at a price of $0.50 per share in consideration for Mr. Antenucci’s release from payment of his deferred compensation and expense reimbursement in the amount of $88,954.
As a result of the merger, we are subject also to Integrated Freight’s obligation to issue to Frederick G. Beisser, our former senior vice president - finance, 75,525 shares of common stock and 75,525 common stock purchase warrants good for two years at a price of $0.50 per share in consideration for Mr. Beisser’s release of us from payment of his deferred compensation in the amount of $112,830 (but not including unpaid wages, automobile allowance and reimbursable expenses totaling $24,126 owed to him at November 9, 2009).
We are also required to maintain directors and officers’ tail coverage for three years for the benefit of Messrs. Antenucci and Beisser.
We had no interest in maintaining, managing and funding the business of PGI-MD as a subsidiary company after our acquisition of Original IFC. The transactions outlined above resulted in our relief from liabilities in an aggregate amount of $1,309,435, in consideration for common stock which Original IFC valued at the time of negotiations at $0.10 per share (the price at which it was selling its common stock at that time in private placements), for an aggregate value of $31,175, before valuing the warrants. Furthermore, the sale of PGI-MD removed approximately $3,281,679 in liabilities from our consolidated balance sheet that were liabilities of PGI-MD and relieve us of all the operational and business difficulties centered in PGI-MD. We did not obtain an independent appraisal of PGI-MD. Nor, did we seek other buyers for PGI-MD or its business and technologies. We believe that our management composed of Mr. Antenucci during our negotiations with Original IFC would have been less interested or uninterested in entering into the transactions with Original IFC, as compared to declaring bankruptcy or terminating our reporting status under the Securities Exchange Act if the transactions had not involved our sale of PGI-MD to Mr. Antenucci. Notwithstanding the foregoing, at May 1, 2009, our management, the management of Original IFC and Mr. Antenucci believed that these related transactions were fair and acceptable to all parties. We believe the negotiations for our sale of PGI-MD were conducted at arms’ length, because fundamentally Mr. Antenucci was not negotiating against us, when he was our sole director and chief executive officer, but was negotiating against Original IFC.
ITEM 1A.
ITEM 1A. RISK FACTORS.
In addition to the forward-looking statements described previously in this annual report and other comments regarding risks and uncertainties included in the description of our business, the following risk factors should be carefully considered when evaluating our business. Our business, financial condition or financial results could be materially and adversely affected by any of these risks.
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 truck and an improvement in revenues, as our general economy seems to be emerging from the recent recessionary period. (Heavy Duty Trucking, May 2010) For April and May 2011 the truck tonnage increases were 4.8% and 2.7% above the same times last year according to the American Trucking Associations’ monthly tonnage report. Although not as robust an economic recovery as hoped, the economy is slowly recovering. Not only can these improvements be expected to improve the financial viability of motor freight carriers who have survived the recession, but also 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 acquire, or if they have such an interest, being acquired for consideration that fits our financial model.
We may experience difficulty in combining and consolidating the management and operations of our acquired companies which could have a material adverse impact on our operations and financial performance.
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 to a degree for the continuing operations of our operating subsidiaries, we intend to centralize and standardize many areas of operations. Notwithstanding that many of these individuals from whom we have and plan to acquire our operating subsidiaries will serve on our board of directors, we may be unable to develop a cohesive corporate culture in which these individuals will be willing to forego their former independence. 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 company we acquire will have its own information management system with which its employees are acquainted. None of these systems may be 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 the cost of consolidating our management systems and duplicative operations of our acquired subsidiaries will be approximately $1 million.
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.
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:
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geographic expansion and acquisitions require start-up costs that could expose us to temporary losses;
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growth and geographic expansion is dependent on the availability of real estate. Shortages of suitable real estate may limit our geographic expansion and might cause congestion in our service center network, which could result in increased operating expenses;
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growth may strain our management, capital resources, information systems and customer service;
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hiring new employees may increase training costs and may result in temporary inefficiencies until those employees become proficient in their jobs;
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expanding our service offerings may require us to enter into new markets and encounter new competitive challenges; and
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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.
We have no assurance we will overcome the risks associated with our growth. If we fail to overcome those risks, we may not 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.
We are significantly dependent on the continued services of Paul A. Henley to realize our growth strategy.
We are dependent upon the vision and efforts of Mr. Henley, our founder and principal stockholder, for the realization of our growth strategy. In the event Mr. Henley’s services were to be unavailable to us, our continued activity to expand our business operations through acquisition could be substantially impaired or be abandoned.
Our management owns more than a majority of our outstanding common stock and outside stockholders will be unable to influence management decisions or elect their nominees to our board of directors, if they should so desire.
Our management will control approximately fifty-five percent of our common stock after the reverse stock split and the issue of the additional shares required by our plan of merge with Integrated Freight. All corporate actions involving amendment of our articles of incorporation (such as name change and increase in authorized shares), election of directors and other extraordinary actions and transactions such as certain mergers, consolidations and recapitalizations and sales of all or substantially all of our assets, require the approval of only a majority of the issued and outstanding shares of our common stock. Accordingly, our management will be able to approve any such actions and transactions and elect all directors even if all of the outside stockholders oppose such transactions, or in the case of directors, nominate other persons for election. Our minority stockholders will be unable to effect changes in our management or in our business.
We have significant ongoing cash requirements and expect to incur additional cash requirements that could limit our growth and adversely affect our profitability if we are unable to obtain sufficient financing.
We anticipate that we may spend as much as $2,400,000 in new equipment in fiscal year 2011. In addition, we have issued promissory notes to cover part of the costs of our acquisitions and expect to continue issuing promissory notes for part of the cost of future acquisitions. Due to the existing uncertainty in the capital and credit markets, capital and loans may not be available on terms acceptable to us. If we are unable in the future to generate sufficient cash flow from operations or borrow the necessary capital to fund our operations and acquisitions, we will be forced to operate our equipment for longer periods of time and to limit our growth, which could have a material adverse effect on our operating results. In addition, our business has significant operating cash requirements. If our cash requirements are high or our cash flow from operations is low during particular periods, we may need to seek additional financing, which may be costly or difficult to obtain. If any of the financial institutions that have extended credit commitments to us are or continue to be adversely affected by current economic conditions and disruption to the capital and credit markets, they may become unable to fund borrowings under their credit commitments or otherwise fulfill their obligations to us, which could have a material and adverse impact on our financial condition and our ability to borrow additional funds, if needed, for working capital, capital expenditures, acquisitions and other corporate purposes.
Recent instability of the credit markets and the resulting effects on the economy could have a material adverse effect on our operating results.
Recently, there has been widespread concern over the instability of the credit markets and the current credit market effects on the economy. If the economy and credit markets do not recover quickly, or even weaken further, our business, financial results, and results of operations could be materially and adversely affected, especially if consumer confidence declines and domestic spending decreases. 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 have experienced difficulty in obtaining debt and equity funding for operations, acquisitions and the costs associated with acquisitions, which can be expected to have an adverse impact on our growth and cause us to issue more common stock at lower values.
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We derive twenty-one percent of our revenue from four customers, the loss of one or more of which could have a material adverse effect on our business.
For the year ended March 31, 2010, our top four customers, based on revenue, accounted for approximately twenty-one percent of our revenue. A reduction in or termination of our services by one or more of our major customers could have a material adverse effect on our business and operating results. A default in payments of invoices by one or more of these customers could have a material adverse effect on our financial condition. See “Our Business - Our customers and marketing”.
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 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. In particular, several of the largest truckload carriers that offer primarily dry-van service also offer temperature-sensitive service, and these carriers could attempt to increase their business in the temperature-sensitive market. 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:
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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;
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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;
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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;
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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;
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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.
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 worldwide economy and disruption of financial markets.
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. These factors include excess capacity in the trucking industry, strikes or other work stoppages, and significant increases or fluctuations in interest rates, fuel taxes, and license and registration fees. We are affected by recessionary economic cycles and downturns in customers’ business cycles, particularly in market segments and industries where we have a significant concentration of customers. Economic conditions may adversely affect our customers and their ability to pay for our services. Current economic conditions have adversely affected and may continue to adversely affect our customers’ business levels, the amount of transportation services they need and their ability to pay for our services. Customers encountering adverse economic conditions may be unable to obtain additional financing, or financing under acceptable 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 a particular year or quarter. Our supplier’s 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.
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 2010 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 nineteen 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. The EPA adopted revised emissions control regulations, which require progressive reductions in exhaust emissions from diesel engines through 2010, for engines manufactured in October 2002, and thereafter. Some manufacturers have significantly increased new equipment prices, in part to meet new engine design requirements imposed by the EPA, increasing the cost of our new tractors. The revised regulations decrease the amount of emissions that can be released by tractor engines and affect tractors produced after the effective date of the regulations. Compliance with these regulations has, lowered fuel mileage and increased our operating expenses and maintenance costs. These adverse effects combined with the uncertainty as to the reliability of the vehicles equipped with the newly designed diesel engines and the residual values that will be realized from the disposition of older vehicles are expected increase our costs or otherwise adversely affect our business or operations. There is no assurance that continued increases in pricing or costs will not have an adverse effect on our business and operations.
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.
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 drivers. Our competitors may offer better compensation plans, and thus increase the driver turnover we experience. Due to current economic conditions 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 has been historically. 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 of 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 by a shortage of qualified drivers in the future, such as temporary under-utilize our fleet and difficulty in meeting shipper demands. 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 soon to be implemented Comprehensive Safety Analysis, often referred to as CSA 2010, is projected to reduce the driver pool. Every driver will receive a score based upon his or her individual performance in six categories, which are then combined into a single score, and this score will be compared to the scores of all other drivers to determine how “safe” the driver is. (BigRigDriving.com, January 19, 2010) Drivers with lower scores will less hirable or not hirable.(Transport Topics, June 14, 2010) 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.
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. The State of California has recently enacted legislation which requires tractors weighing more than 10,000 pounds to use alternative sources, such as auxiliary power units, when powering their cabs at idle for more than five minutes. The State of California has also enacted legislation requiring compliance with exhaust emissions standards for refrigeration units on trailers. Compliance is being phased in by the state, beginning with 2001 and earlier models. Given our investment in auxiliary power units for our tractors and the average age of our trailer fleet, we do not expect these regulations will have a significant impact on our operations or financial results.
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.
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 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.
Our financial results may be adversely impacted by potential future changes in accounting practices.
Future changes in accounting standards or practices, and related legal and regulatory interpretations of those changes, may adversely impact public companies in general, the transportation industry or our operations specifically. New accounting standards or requirements, such as a conversion from U.S. generally accepted accounting principles to International Financial Reporting Standards, could change the way we record revenues, expenses, assets and liabilities or could be costly to implement. These types of regulations could have a negative impact on our financial position, liquidity, results of operations or access to capital.
"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 stockholder from 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. Under current rules, commencing with our annual report for the fiscal year ending September 30, 2011, our independent registered accounting firm must attest to and report on management's assessment of the effectiveness of our 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.
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.
ITEM 2.
ITEM 2. PROPERTIES.
We lease our corporate headquarters office is located in Sarasota, Florida. Our lease expires in ___. We currently pay $___ per month subject to annual adjustments related to __________. We lease ___ square feet of general office space at this location. We believe this facility will be adequate for our needs for six to nine months. (I have new lease proposal from Goda/RTI)
The headquarters of our operating subsidiaries are located in Hamburg, Arkansas; Scotts Bluff, Nebraska and Doniphan, Nebraska. The following table presents information regarding these facilities.
*Number indicates square feet.
We own the Scotts Bluff facility. We lease the other facilities under terms described in the following table.
We also have terminals in Pine Bluff, Arkansas, Arcadia, California, Kimble, Nebraska and Ponca City, Oklahoma. [are any of the terminals sufficiently large or material that we should include them in the two tables above?] We rent drop yards on a short term basis as the seasonal and operational needs of our customers require. These drop yards are routinely located in Eldorado, Arkansas, Sacramento, California, Chicago, Illinois, Iowa City, Iowa, Denton and Houston, Texas and Dell, Utah. Drop yards are a specific number of truck parking places 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 there is no assurance.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
[We need to summarize the White and Triple C related litigation. I will work with Angela and David on this.]
[We need to summarize Lusty litigation or claim]
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.
The following table presents information regarding our claims experience during fiscal year 2011. [update]
*Includes estimated amounts of pending claims, which are expected to settle in 2009.
We require our contract drivers to carry their own occupational accidental insurance, which is similar to workers’ compensation insurance.
The following table presents our accident experience during fiscal year 2011. [update]
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to our stockholders for action or approval during the last quarter of our fiscal year.
PART II
ITEM 5.
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, PGRA. 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:
On June __, 2010, the last reported sales price of our common stock was $___
Holders. Based on information provided by our transfer agent, at June __, 2011, we had approximately 1,995 record owners of our common stock, not including securities broker-dealers who hold shares in “street name” on behalf of their customers. [now that we have DTCC subscription, can we get number of street name holders or is this a NOBO/OBO issue?]
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 future.
Transfer Agent. Our transfer agent is Island Stock Transfer, Suite 705S, 100 Second Avenue South, St. Petersburg, Florida 33701. The telephone number of our transfer agent is 727-289-0010.
DTCC Eligibility. Our stock is eligible for deposit by securities broker-dealers into Cede & Co, for “street name” stockholders.
Securities authorized for issuance under equity compensation plans. Our employment agreement with Steven E. Lusty requires us to issue 25,000 shares (after our planned reverse stock split on 1:244.8598) for each month we are not able to pay his compensation in cash beginning August 2009. At June 30, 2010, he has not received any shares issued by Integrated Freight or by us and we are now obligated to issue 200,000 shares to him after approval of the reverse stock split.
Performance graph. We are not required to include this information in our annual report.
Recent sales of unregistered securities. All sales of equity securities during our 2011 fiscal year have been reported on Form 8-K and Form 10-Q.
ITEM 6.
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.
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. The results of our brokerage activities, which we initiated in February 2011, were relatively insignificant for the fiscal year 2011 and, therefore, a detailed discussion of the financial results of these operations will not be separately presented.
Fuel surcharges tended to be a volatile source of revenue; therefore, measured freight revenue is calculated with the removal of such surcharges, providing a more consistent basis for comparing results of operations from period to period.
Operating Results
The following table presents and compares the results of our operations for the fiscal years ended March 31,2011 and 2010.
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 2011, but significant expenses related to noncash compensation resulted in increased overall expenses and operating losses. We believe a reduction in these noncash expenses and the results of the results 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 fiscal first and second quarters of each fiscal year because of the trucking industry's seasonal shortage of equipment on traffic related to produce and because of general increases in shipping demand during those months.
Revenues
For the fiscal year ended March 31, 2011, we reported revenues of $18,827,367 as compared to revenues of $17,330,079 for the fiscal year ended March 31, 2010 an increase of $ 1,497,288 or 8.64%. The increase is due to the increase in freight revenue in correlation to the US economy.
Operating Expenses
Our total operating expenses increased16.682% to $22,682,191 for the fiscal year ended March 31, 2011, as compared to $19,602,773 for the fiscal year ended March 31, 2010. These changes include:
Rents and Transportation. For the fiscal year ended March 31, 2011, rents and transportation costs were $4,301,170 as compared to $4,900,107 for the fiscal year ended March 31, 2010, a decrease of $598,347 or 12.211%. The increase 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 $5,364,224 for the fiscal year ended March 30, 2010, an increase of $226,947 or 4.231%. 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 $4,310,349 for the fiscal year ended March 31, 2010, an increase of $1,216,574 or 28.244%. The increase was due primarily to fuel price instability.
Depreciation and amortization. For the fiscal year ended March 31, 2011, depreciation and amortization costs were $2,179,827 as compared to $2,234,234 for the fiscal year ended March 31, 2010, a decrease of $54,407 or 2.435%. We have removed older vehicles from our fleet which is offset by an increase in rents and transportation expense.
Insurance and claims .For the fiscal year ended March 31, 2011, insurance claims costs were $725,995 as compared to $745,308 for the fiscal year ended March 31, 2010, a decrease of $19,313 or 2.591%.
Operating taxes and licenses For the fiscal year ended March 31, 2011, operating taxes and licenses costs were $198,853 as compared to $142,786 for the fiscal year ended March 30, 2010, an increase of $56,067 or 39.266%.
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. For the fiscal year ended March 31, 2011, general and administrative expenses costs were $4,020,941 as compared to $1,913,765 for the fiscal year ended March 31, 2010, an increase of $2,107,176 or 110.106%. This increase resulted primarily from increased noncash compensation and noncash professional services expenses.
Loss from Continuing Operations
We reported a loss from continuing operations of $4,054,,964 for the fiscal year ended March 31, 2010 as compared to a loss from operations of $2,280,694 the fiscal year ended March 31, 2010, a decrease of $1,774,270 or 77.373%. The increased loss was a result of decreased sales and higher operating expenses as a percentage of sales offset by the increased noncash expenses in general and administrative discussed above.
Discontinued Operations - Triple C Transportation
As more fully discussed in Note 2 to our financial statements, we shut down Triple C 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 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 notified us in writing that entities controlled by them and receiving lease payments from Triple C 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, which were filed on December 21, 2010 and have been assigned case numbers 10-43797 and 10-43798.
On May 2, 2011, we filed a complaint against Craig White and Vonnie White in the District Court for Douglas County, Nebraska and served notice on the defendants pursuant to the Stock Purchase Agreement under which we acquired Triple C from the defendants on or about May 14, 2010. In the complaint, we ask the court to rescind the Stock Purchase Agreement, alleging multiple, material breaches of representations and warranties which individually and in the aggregate constitute fraud upon us. We are also seeking damages in unspecified amounts. We intend to pursue this litigation aggressively. Because of actions taken by the defendants subsequent to closing of our acquisition, undisclosed liabilities of Triple C, breaches of the defendants’ representations and warranties, and the bankruptcies of entities they control and which were Triple C’s equipment lessors, we believe that rescission will not have a materially negative impact on our financial performance going forward; even though we will not enjoy the benefits of the acquisition which we expected at the time of the transaction but which do not seem now available in fiscal year 2012 in view of the fact that Triple C has lost its licenses to operate based on actions by Mr. and Mrs. White and other entities they control both before and after the closing of the transaction.
We incurred a loss of $1,529,034associated with this transaction and have reserved $1,765,313 to cover any liabilities incurred in relation to it.
Other Income (Expenses)
We reported total other expense of $2,184,563 for the fiscal year ended March 31, 2011 as compared to total other expenses of $827,553 for the fiscal year ended March 31, 2010, an increase of $1,357,010 or 163.979%. 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, 2011 was $1,536,646 compared to $941,992 for the fiscal year ended March 31, 2010, an increase of 594,654 or 63.127%. Interest expense to related parties for the fiscal year ended March 31, 2011 rose to $351,031 from $110,438 for the fiscal year ended March 31, 2010, an increase of $240,593 or 217.853%. This was due to greater debt levels and expenses incurred to renegotiate and extend existing debt.
We had interest expense and derivative expense of $513,471on the sale of convertible notes for the fiscal year ended March 31, 2011 compared to $-0- for the fiscal year ended March 31, 2010, when we sold no significant such convertible notes.
Net Loss
We reported a net loss of $7,761,200 for the fiscal year ended March 31, 2011 as compared to a net loss of $3,140,423 for the fiscal year ended March 31, 2010, an increase of $4,620,777. The increase was a result of increased sales and lower operating expenses as a percentage of sales offset by increased corporate level general and administrative expenses and increased interest and derivative expense associated with raising capital. The derivative losses resulted from our sale of convertible debentures, as explained in Notes 1 and 6 of the financial statements.
Segments
Morris Transportation
For the fiscal year ended March 31, 2011, Morris Transportation had revenues of $11,135,967 compared with revenues of 10,537,602 for the fiscal year ended March 31, 2010, an increase of $598,365 or 5.67%. This increase is primarily due to a general improvement in the trucking industry.
For the fiscal year ended March 31, 2011, Morris Transportation had net income of $297,047 compared with net income of $12,403 for the fiscal year ended March 31, 2010, an increase of $284,644. This increase is primarily due to increased sales combined with contained expenses.
Total assets at March 31, 2011, were $3,621,863, as compared to total assets of $4,329,888 at of March 31, 2010, a decrease of $708,021. This decrease is primarily due to the sale of several tractors and continued depreciation of other existing equipment.
Smith Systems Transportation
For the fiscal year ended March 31, 2011, Smith Systems Transportation had revenues of $7,691,400 compared with revenues of $6,792,477 for the fiscal year ended March 31, 2010, an increase of $898,923 or 13.23%. This increase is primarily due to a general improvement in the trucking industry.
For the fiscal year ended March 31, 2011, Smith Systems Transportation had net income of $338,000 compared with a net incomeof $16,807 for the fiscal year ended March 31, 2010, an improvement of $321,193. This increase is primarily due to a general sales increase and successful cost reduction programs.
Total assets at March 31, 2010, totaled $2,681,427, as compared to total assets of $2,853,776 at March 31, 2010, a decrease of $172,349, due to equipment disposals..
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, 2011 and March 31, 2010.
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, 2011 and March 31, 2010:
Our cash flow from operations is insufficient to meet current obligations. In fiscal year2011 and 2010, 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.
Cash Flows and Working Capital
As a result of losses we have incurred to date, we have financed our operations primarily through equity and debentures. At March 31, 2011, we had $54,158 in cash and cash equivalents. We had receivables, net of allowances, of $2,564,352 and our current liabilities were $7,263,669.
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 $855,000 from the sale of common stock to investors for the fiscal year ended March 31, 2011.
Operating Activities
Net cash used in operating activities for the fiscal year ended March 31, 2011 totaled $296,195. as compared to $694,386 for the fiscal year ended March 31, 2010, an improvement of $398,191. 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, 2011offset by the larger noncash expenses in the same period. For the fiscal year ended March 31, 2011, we had a net loss of $7,561,200, along with non-cash items such as depreciation and amortization expense of $1,979,827, 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, 2010, we experienced a net loss of $3,140,423; along with non-cash items such as depreciation and amortization expense $2,234,234.
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 $-0- for the fiscal year ended March 31, 2010. During the fiscal year ended March 31, 2010, we used cash of $100,000 for the purchase of Triple C. 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 $584,045 for the fiscal year ended March 31, 2010. For the fiscal year ended March 31, 2011, net cash provided by financing activities related to proceeds received from notes payable of $906,240 which were funds received from various lenders, proceeds from sale of common stock of $855,000, offset by repayments on notes payable of $1,478,123 which were to pay down the balances on various notes related to the trucks and trailers. In the prior period there were proceeds from notes payable of $1,042,180 and repayment of notes payable of $582,987.
Cash Requirements
At July 13, 2011, 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.
Outlook
We believe that we are in a recovering truckload freight market as the operating environment grew increasingly positive during the last fiscal year. This is reflected in an increased fiscal year over fiscal year average miles per tractor. We expect the upward trend to continue in future quarters.
Even though management is optimistic about the economic recovery, the transportation industry is generally cash lean with over-leveraged balance sheets. We intend to invest more heavily as demand for truckload services improves. We believe we are well-positioned to grow our business as the recovery continues to develop.
We believe that our level of profitability, fleet renewal strategy, and use of independent contractors will enable us to internally finance attractive levels of fleet growth when demand conditions are right. Based on our growing network and anticipated access to substantial capital resources, we believe we have the competitive position and ability to perpetuate our model based on leading growth and profitability.
Notwithstanding our operating losses in the comparative years covered by this annual report on Form 10-K, we have experienced positive cash flows and improvements in our net income, working capital positions at the subsidiary level during the year ended March 31, 2011 compared to fiscal 2010. As we begin to consolidate the duplicated functions among our subsidiaries, we expect to achieve further savings which will be reflected in improved cash flows and working capital positions, and profitable operations of which there is no assurance. The expenses associated with maintaining our reporting under the Securities Exchange Act at the parent level have significantly contributed to our consolidated negative cash flow and working capital positions. In particular, the legal and accounting expenses associated with acquisitions and first-time audits of acquisition candidates and lititgation from the Triple C discontinued operation have resulted in greater cash outflows and expenses in these categories than we expect to experience when our acquisition program matures in the future. We do not expect a positive change in these factors until we complete additional acquisitions, if any, which will enable us to spread the parent’s expenses, associated with being a publicly traded and reporting company and costs of future acquisition over a larger revenue and cash flow base.
We believe that we are in a recovering truckload freight market and that the loss of capacity in the market due to the recent recession creates growth operations for us. Likewise, the recession has weakened many companies in the industry, which we believe creates opportunities for us to acquire good companies at prices we believe are fair.
Even though our management is optimistic about the economic recovery, the transportation industry is generally cash lean with over-leveraged balance sheets. We intend to invest more heavily as demand for truckload services improves. We believe we are well-positioned to grow our business as the recovery continues to develop.
We believe that our level of profitability, fleet renewal strategy, and use of independent contractors will enable us to internally finance attractive levels of fleet growth in the future. Based on our growing network, a history of low cost operations and anticipated access to substantial capital resources, we believe we have the competitive position and ability to perpetuate our model based on leading growth and profitability.
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.
Determination of the Useful Life of Intangible Assets (Included in ASC 350 “Intangibles - Goodwill and Other”, previously FSP SFAS No. 142-3 “Determination of the Useful Lives of Intangible Assets”)
FSP SFAS No. 142-3 amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under previously issued goodwill and intangible assets topics. This change was intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under topics related to business combinations and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP SFAS No. 142-3 became effective for financial statements issued for fiscal years beginning after March 15, 2008, and interim periods within those fiscal years. The adoption of FSP SFAS No. 142-3 did not impact our financial statements included in this report on Form 10-K.
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 1fifteen 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.
The freight environment negatively impacted every subsidiary's freight revenues during our fiscal year ended March 2010 but began a turnaround for theyear ended March 31,2011.. Fuel surcharges tended to be a volatile source of revenue; therefore, measured freight revenue is calculated with the removal of such surcharges, providing a more consistent basis for comparing results of operations from period to period. In anticipation of lower freight volumes, we reduced our average tractor fleet. With the assistance of the fleet reduction, we did experience an increase in average miles per tractor.
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 toto 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:
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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.
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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.
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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.
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We are beginning the integration of the subsidiaries, allowing for increased buying power (lower costs) and elimination of redundant tasks (saving the company significant money). This integration is expected also to help our subsidiaries become more efficient than they are now, acting as independent companies.
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 the 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.
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.
Quantitative and Qualitative Disclosures about Market Risk
We have no material exposure to interest rate changes
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are not required to provide information under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item, including an index to the financial statements, begin on page (following page __) of this annual report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
We have not had any change in or disagreement with our accountants during the past two fiscal years or the subsequent interim period.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES. [CHECK AND UPDATE]
We are subject to the requirements of Item 9A(T), at the date of this report.
ITEM 9A(T).
307 - Disclosure controls and procedures: As of March 31, 2011, 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.”
308T(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.
308T(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.
308T(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:
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Until we can consolidate our accounting and banking functions, our ability to implement internal controls over financial reporting will be limited.
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We do not have adequate software systems, personnel and other resources to assure that significant transactions are timely analyzed and reviewed.
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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.
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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.
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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.
308T(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. Our independent auditors will be required to attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting in their audit of our annual report for the year ending March 31, 2012.
308T(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, 2011 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.
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.
PART III
ITEM 10.
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. These persons (not including Mr. White) held the same offices with Integrated Freight at the date of their election as our directors and officers and through the date of the merger of Integrated Freight into us on December 23, 2009.
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 have identified our 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 [need to update for any changes]
John E. Bagalay is one of our independent directors.
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2005 to present- Mr. Bagalay is executive-in-residence at EuroUS Ventures LLC, a venture capital firm located in Newton, Massachusetts that invests exclusively in European based technology companies that wish to establish a US market. Our investment is committed to facilitate that expansion.
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2003 to 2005 - He was Director of Special Projects in the Life Sciences at the Boston University Technology Commercialization Institute
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2003 to present - Mr. Bagalay has been a director and Chairman of Wave Systems Corp, a publicly traded company. Wave develops, produces and markets products for hardware-based digital security, including security applications and services that are complementary to and work with the specifications of the Trusted Computing Group.
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1989 to 2003 - Mr. Bagalay was Senior Advisor to the Chancellor of Boston University from January 1998 to November 2003.
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1989 to 1998 - He Managing Director of BU Ventures, a university venture capital company.
Mr. Bagalay is an independent director of the following publicly traded, registered companies: Wave Systems Corp. and Cytogen Corp. He serves on various committees of the boards of directors of these corporations. Mr. Bagalay earned a B.A. degree in philosophy, history and economics (1954) from Baylor University, a J.D. degree (1964) from the University of Texas at Austin and a Ph.D. degree (1957) from Yale University.
Kimberly B. Bors is one of our independent directors.
[I will pull bio info from 8-K]
Paul A. Henley is the chairman of our board, chief executive officer, chief financial and accounting officer.
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May 2008 to present - Mr. Henley is the founder of Integrated Freight Corporation and has served as its chairman of the board and chief executive officer since its inception. He now also serves as its chief financial and accounting officer.
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June 2002 to June 2006 - He was President of Henley Capital Group, a consulting company that worked with private companies and early stage public companies in the area of business development. He assisted companies in the following areas; writing of business plans, the preparing of budgets, corporate communications (public relations/investor relations), corporate presentations at various types of events, assisting in the development of board of directors, hiring of market makers, attorneys and auditors, merger and acquisition consulting and the planning and implementation of capital programs.
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October 2006 to May 2007 - Mr. Henley was engaged in a joint venture with Friedland Capital doing business under the name of Friedland-Henley Advisers which was engaged in developing a venture capital fund for early stage companies. Mr. Henley terminated his relationship before the fund began to raise capital.
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June 2006 to 2007 - He was a consultant to Friedland Capital of Denver, Colorado in the areas of product development and investment seminars.
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June 2006 - 2008 - Mr. Henley was engaged on a part time basis in planning a business to acquire trucking companies, efforts to obtain funding and efforts to identify potential acquisition targets. This activity culminated in his founding of High Point Transport, Inc. in 2006, which filed a registration statement on Form 10 in August 2007. High Point Transport acquired Cannon Freight Systems, Inc., located in Harrison Township, Michigan, in November 2007 that continued to be operated on a daily basis by its founder and president. Due to operating losses and breach of financial covenants by Cannon Freight, unforeseen and unexpected by High Point Transport at the time of acquisition, Cannon Freight was forced to cease operations in or about February 2008. This circumstance prevented High Point Transport from satisfying its covenants with Cannon Freight’s founder and selling stockholder, who as a consequence became the controlling stockholder of High Point Transport. Management of Integrated Freight believes, under the new controlling stockholder, High Point Transport also terminated its business activities in or about February 2008.
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May 2008 to present - He is the founder of Integrated Freight Corporation and has served as its chairman of the board and chief executive officer since its inception. He now also serves as its chief financial and accounting officer.
Mr. Henley earned a B.A. degree in business management and marketing (1981) from Florida State University.
Henry P. (“Hank”) Hoffman is director, our president and chief operating officer..
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February 2000 to May 2006 - Mr. Hoffman was founder, President & CEO, and chairman of the board of SiriCOMM, Inc. an applications service provider and wireless networking business serving the U.S. truckload industry. The company installed its VSAT-based network technology in the major truck stop chain facilities throughout the U.S. to support its applications and those of third party partners.
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June 2006 to May 2007 - He served as chairman of the board of SiriCOMM. Upon his departure in May 2007, the company subsequently changed its business model to a pure Internet service provider. The company filed for bankruptcy in 2008.
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June 2007 to ___________ - Mr. Hoffman was President & CEO and a director of SeaBridge Freight, Inc., a tug and barge transportation company that provided short sea service between Port Manatee, FL and Brownsville, TX and has ceased operations.
Mr. Hoffman earned his BS degree (1973) from the United States Military Academy and a MBA degree (1985) from the University of Wisconsin.
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 LL.M. from Georgetown Law School in 1974.
T. Mark Morris is one of our directors and is the general manager of one of Integrated Freight’s subsidiaries, Morris Transportation, Inc., which he founded in 1998 and has been its chief executive officer from inception to the present. Mr. Morris earned a BA degree in business administration (1988) from Ouachita Baptist University in Arkadelphia, Arizona.
Robert Papiri is one of our independent directors.
[I will pull bio info from 8-K]
Monte W. Smith is one of our directors and is the general manager of one of Integrated Freight’s subsidiaries, Smith Systems Transportation, Inc., which he founded in 1992 and has been its chief executive officer from inception to the present. Mr. Smith attended the University of Nebraska at Kearney, studying finance.
Audit Committee/Audit Committee Financial Expert
Our audit committee is composed of John E. Bagalay and Kimberly B. Bors, our two independent directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 filed with the SEC, and other information known to the us, during and with respect to the fiscal year ended March 31, 2010, 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.
ITEM 11.
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.
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(1) For Messrs. Antenucci, Chen and Kevany, who are no longer employed by us, the fiscal year end is September 30. For all other named executive officers, the fiscal year end is March 31.
(2) Includes annual salary, prior to the respective date of our acquisitions, but excludes distributed and undistributed S-corporation earnings.
(3) Mr. Hoffman was employed beginning ____ 2011.
(4) Mr. Lusty resigned in ____ 2011.
(5) Mr. White resigned from Triple C Transport in ______ 2010.
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, except (i) Mr. Henley who received a bonus of $50,000 provided in his employment agreement as a result of Integrated Freight achieving a public market for its common stock as a result of its merger into us and (ii) Mr. Lusty whose employment agreement provides that he will receive 25,000 shares of our common stock on a post reverse split basis for every month in which we have been unable to pay his salary in cash - an aggregate of 200,000 shares at March 31, 2010. The salaries of Messrs. Morris, Smith, and White were paid by their respective, employing companies.
The following table sets forth certain information at March 31, 2011 with respect to outstanding equity awards granted to the named executive officers: [table seems out of alignment.]
Outstanding Equity Awards at Fiscal Year End September 30, 2011
2009 Option Exercises and Stock Vested [do we even need this?]
During fiscal year 2011, there no options exercised by named executive officers to acquire shares of our common stock; accordingly the total intrinsic value of options exercised during fiscal year 2010 is nil.
Employment Agreements
We have employment agreements with the named executive officers identified in the following table.
_________________
(1) Subject to subsequent automatic annual renewals.
(2) Eligible for discretionary bonuses, upon board review and approval.
(3) Achievement of a public market for our shares -bonus equal to one-tenth of one percent (.0015) of the revenue from operations generated by acquired company.
(4) 25,000 shares of our common stock per month for every month in which salary is not paid beginning August 1, 2009.
Each employment agreement provides for payment of benefits provided to other employees, an automobile allowance, and an opportunity to earn a performance bonus.
Director Compensation
Directors who are not our employees will receive 25,000 shares of our common stock each quarter.
Compensation Committee
We do not have a compensation committee. These functions are provided by its full board of directors. As a privately owned company with Mr. Henley as the sole director, a compensation committee was neither possible nor necessary as he has approved his own compensation. The compensation of executive officers other than Mr. Henley was approved by the full board of directors, except the compensation of the general managers of our operating subsidiaries has been negotiated in the acquisition from the respective director/officers/controlling stockholders of those companies by Mr. Henley as the sole director at the time of such negotiations. We plan to have a compensation committee when we elect additional independent persons to our board of directors.
ITEM 12.
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 following table sets forth information with respect to the beneficial ownership of the Common Stock as of July 8, 2011 by (i) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock; (ii) each director of the Company; (iii) each officer of the Company and (iv) all executive officers and directors as a group. Except as otherwise indicated below, each of the entities or persons named in the table has sole voting and investment powers with respect to all shares of Common Stock beneficially owned by it or him as set forth opposite its or his name.
_______________
* Less than 1%.
** Executive officer and/or director.
(1)
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of April 1, 2011 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.
(2)
Based on 37,632, 082 shares of common stock issued and outstanding as of July 13, 2011.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
During the 2011 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, except we contracted to sell PGI-MD to Mr. Antenucci as of May 1, 2009. This sale was completed on December 27, 2009. This transaction is described under “Terms of Our Sale of PGI-MD”, under Item 1, above. We maintain that this transaction was negotiated at arms’ length, in that it was negotiated between Original IFC and Mr. Antenucci.
[update] In January 2010, we renegotiated with T. Mark Morris the nature and timing of our payments for the acquisition of Morris Transportation. In general, Mr. Morris extended the scheduled payment dates on our promissory note and accepted a promissory note in place of a delinquent installment payment. The interest rate on the new note is the same as our original note negotiated in the acquisition. In consideration for the extension and acceptance of the new note, we agreed to waive any reduction in our note for $250,000 based on a short fall in the net revenues of Morris Transportation during the twelve months following our acquisition. Mr. Morris has advanced approximately $390,000 in working capital to Morris Transportation. We also issued 150,000 shares of our common stock, which we valued at $1.00 per share for this purpose, in consideration for adjustments to the acquisition agreement for Morris Transportation. If these shares have a value of less than $1.00 twelve months from the issue date, we are obligated to issue such additional number of shares that the total shares issued will have a value in January 2011 of $150,000. We anticipate in acquiring the real estate used by Morris Transportation from Mr. Morris or the owning entity he owns at an appraised fair market value.
We have renegotiated extensions of the maturity dates of our notes to Mr. and Mrs. Smith for the acquisition of Smith Systems Transportation.
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.
ITEM 14.
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:
___________________
Percentage of hours on audit engagement performed by non-full time employees: less than 50% of total time
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
CONSOLIDATED FINANCIAL STATEMENTS OF
INTEGRATED FREIGHT CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Integrated Freight Corporation
We have audited the accompanying consolidated balance sheets of Integrated Freight Corporation and Subsidiaries as of March 31, 2011and 2010 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the years 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 audits 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 2010 and the consolidated results of their operations and their cash flows for the years 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 14. 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
INTEGRATED FREIGHT CORPORATION
Consolidated Balance Sheets
See notes to consolidated financial statements
INTEGRATED FREIGHT CORPORATION
Consolidated Statements of Operations
See notes to consolidated financial statements
INTEGRATED FREIGHT CORPORATION
Consolidated Statement of Changes in Stockholders’ Deficit
For the Year Ended March 31, 2010 and 2011
See notes to consolidated financial statements
INTEGRATED FREIGHT CORPORATION
Consolidated Statements of Cash Flows
See notes to consolidated financial statements
INTEGRATED FREIGHT CORPORATION
Consolidated Statement of Cash Flows - (Continued)
See notes to consolidated financial statements
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Note 1 Nature of Operations and Summary of Significant Accounting Policies
Nature of Business
Integrated Freight Corporation (a Florida corporation) [formerly PlanGraphics, Inc (a Colorado corporation)] and subsidiaries (the “Company”) is a short to medium-haul truckload carrier of general commodities headquartered in Sarasota, Florida. The Company provides dry van, hazardous materials, and temperature controlled truckload services. The Company is subject to regulation by the Department of Transportation and various state regulatory authorities.
Pursuant to an agreement in connection with Integrated Freight Corporation’s (“Original IFC”) acquisition of control of the Company on May 1, 2009, the Company completed the sale of its historic operations to its former director and chief executive officer. This transaction closed on December 27, 2009. As part of the acquisition, the Company executed a 244.8598 for 1 reverse split in August, 2010, and all amounts have been presented on a post-split basis. Since the Company had, due to the sale of its historical operations, minimal assets and limited operations, the recapitalization has been accounted for as the sale of 404,961 shares of Original IFC common stock for the net liabilities of the Company. Therefore, the historical financial information prior to the date of the recapitalization is the financial information of IFC. Costs of the transaction have been charged to the period in which they are incurred
Following are the terms of the merger agreement:
On December 24, 2009, Original IFC filed articles of merger in the State of Florida; and, on December 23, 2009, the Company filed articles of merger in the State of Colorado. Pursuant to these articles of merger, Original IFC merged into the Company and the Company is the legal surviving corporation.
Original IFC acquired 1,639,957 shares of the Company’s common stock, or 80.2 percent of the Company’s issued and outstanding common stock, as of May 1, 2009, for the purpose of merging the Company into Original IFC, with Original IFC being the surviving corporation. Uncertainty as to when Original IFC could obtain an effective registration statement on Form S-4 (which it filed and has now withdrawn) to complete the merger caused delays in Original IFC obtaining debt and equity funding and completing negotiations for additional acquisitions. On November 11, 2009, Original IFC and the Company agreed to restructure the transaction to provide for the Company’s acquisition of more than ninety percent of Original IFC’s issued and outstanding common stock and its merger into the Company. Colorado corporation law permits the merger of a subsidiary company owned ninety percent or more by a parent company into the parent company without stockholder approval.
In furtherance of this change to the plan to combine Original IFC and the Company, 20,228,246 shares of Original IFC’s outstanding common stock were transferred by its stockholders to Jackson L. Morris, trustee for The Integrated Freight Stock Exchange Trust, a Florida business trust (“Trust”). Original IFC also transferred the 1,639,957 shares of the Company’s common stock it owned to the Trust. The Company then exchanged 18,899,666 shares of its unissued common stock for the 20,228,246 shares of Original IFC held in the Trust. As a result of this transfer and exchange, the Trust held 20,539,623 of the Company’s shares. The number of shares of the Company’s common stock that it exchanged for the number of shares of Original IFC stock was not based on any financial or valuation considerations, but solely on the number of shares of the Company’s authorized but unissued shares in relation to the percentage of Original IFC’s outstanding common stock included in the exchange and the requirements of Colorado law that the Company own ninety percent or more of Original IFC in order to complete the merger without stockholder approval.
As part of the merger, the Company executed a 244.8598 for 1 reverse split effective August 17, 2010. All share amounts have been presented on a post-split basis.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Accordingly, the Company accounted for the acquisition and merger as a recapitalization because Original IFC stockholders gained control of a majority of the Company’s common stock upon completing these transactions. Accordingly, Original IFC is deemed to be the acquirer for accounting purposes. The consolidated financial statements have been retroactively restated to give effect to these transactions for all periods presented, except the statement of stockholders’ deficit with regard to common shares outstanding.
Certain items in the 2010 consolidated financial statements have been reclassified to conform to the presentation in the 2011 consolidated financial statements. Such reclassifications did not have a material impact on the presentation of the overall consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company, and its wholly owned subsidiaries, Morris Transportation, Inc. (“Morris”), Smith Systems Transportation, Inc. (“Smith”) and Triple C Transportation, Inc. (“Triple C”).- although Triple C is shown as a discontinued operation - See Notes 2, 10, 11 and 13. Smith holds a 60% ownership interest in SST Financial Group, LLC (“SSTFG”). All significant intercompany balances and transactions within the Company have been eliminated upon consolidation. In February, 2011 the Company incorporated a new entity, Integrated Freight Services, Inc., a Florida Corporation, to handle brokerage business. No significant activity was conducted by this new entity prior to March 31, 2011. The nominal accounts at March 31, 2011 are included within the Company.
Use of Estimates
The consolidated financial statements contained in this report have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these statements requires us to make estimates and assumptions that directly affect the amounts reported in such statements and accompanying notes. Management evaluates these estimates on an ongoing basis utilizing historical experience, consulting with experts and using other methods we consider reasonable in the particular circumstances. Nevertheless, the Company’s actual results may differ significantly from the estimates.
Management believes that certain accounting policies and estimates are of more significance in the Company’s financial statement preparation process than others. Management believes the most critical accounting policies and estimates include the economic useful lives and salvage values of our assets, provisions for uncollectible accounts receivable, and estimates of exposures under our insurance and claims plans. To the extent that actual, final outcomes are different than our estimates, or additional facts and circumstances cause us to revise our estimates, the Company’s earnings during that accounting period will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company had no cash equivalents at March 31, 2011 and 2010.
Accounts Receivable Allowance
The Company makes estimates of the collectability of accounts receivable. The Company specifically analyzes accounts receivable and historical bad debts, client credit-worthiness, current economic trends, and changes in our client payment terms and collection trends when evaluating the adequacy of our allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific account receivable may result in additional allowance for doubtful accounts being recognized in the period in which the change occurs.
Accordingly, the Company has a $50,000 allowance for uncollectible accounts and revenue adjustments as of March 31, 2011 and 2010.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is calculated on the straight-line method over the following estimated useful lives:
The Company expenses repairs and maintenance as incurred. The Company periodically reviews the reasonableness of its estimates regarding useful lives and salvage values for revenue equipment and other long-lived assets based upon, among other things, the Company's experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Salvage values are typically 15% to 20% for tractors and trailer equipment and consider any agreements with tractor suppliers for residual or trade-in values for certain new equipment. The Company capitalizes tires placed in service on new revenue equipment as a part of the equipment cost. Replacement tires and costs for recapping tires are expensed at the time the tires are placed in service. Gains and losses on the sale or other disposition of equipment are recognized at the time of the disposition.
Intangible Assets
The Company accounts for business combinations in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, which requires that the purchase method of accounting be used for all business combinations. ASC 805 requires intangible assets acquired in a business combination to be recognized and reported separately from goodwill.
Goodwill represents the cost of the acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased. The Company assigns all the assets and liabilities of the acquired business, including goodwill, to reporting units in accordance with ASC 350, Intangible - Goodwill and Other. Our business combinations did not result in any goodwill as of March 31, 2011 and 2010.
The Company evaluates intangible assets for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.
Furthermore, ASC 350 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost less accumulated amortization. See Notes 2, 10, and 11 for the treatment of intangibles related to Triple C. No other impairment of intangibles has been identified since the date of acquisition.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Impairment of Long-lived Assets
In accordance with ASC 360, Property, Plant and Equipment, long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment as of March 31, 2011 and 2010.
Revenue Recognition
The Company recognizes revenues on the date the shipments are delivered to the customer. Revenue includes transportation revenue, fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services. Revenue is recorded on a gross basis, without deducting third party purchased transportation costs, as the Company acts as a principal with substantial risks as primary obligor.
Advertising Costs
The Company charges advertising costs to expense as incurred. During the year ended March 31, 2011 and 2010, advertising expense was approximately $27,633 and $69,709.
Derivative Liability
The Company issued warrants to purchase the Company’s common stock in connection with the issuance of common stock and convertible debt, which contain certain anti-dilution provisions that reduce the exercise price of the warrants in certain circumstances. Upon the Company’s adoption of the Derivative and Hedging Topic of the FASB Accounting Standards Codification (“ASC 815”) on January 1, 2009, the Company determined that the warrants with provisions that reduce the exercise price of the warrants did not qualify for a scope exception under ASC 815 as they were determined not to be indexed to the Company’s stock as prescribed by ASC 815.
Derivatives are required to be recorded on the balance sheet at fair value (see Note 6). These derivatives, including embedded derivatives in the Company’s structured borrowings, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates. In addition, additional disclosures is required about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.
Fair Value of Financial Instruments
The Company’s financial instruments, including cash and cash equivalents, receivables, accounts payable and accrued liabilities and notes payable are carried at cost, which approximates their fair value, due to the relatively short maturity of these instruments.
Common stock redemption is carried at cost, which approximates their fair value, because it is anticipated that it will be redeemed at this specific amount. The carrying value of the Company’s long-term debt approximates fair value based on borrowing rates currently available to the Company for loans with similar terms.
Our derivative financial instruments, consisting of embedded conversion features in our convertible debt, which are required to be measured at fair value on a recurring basis under FASB ASC 815-15-25 or FASB ASC 815 as of March 31, 2010 and 2009, are all measured at fair value, using a Black-Scholes valuation model which approximates a binomial lattice valuation methodology utilizing Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities (see Note 6). Significant assumptions used in this model as of March 31, 2011 included a remaining expected life of 1 year, an expected dividend yield of zero, estimated volatility of 172%, and risk-free rates of return of approximately 1-2%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the feature and volatility is based on a trucking company with characteristics comparable to our own.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of their short maturities. At March 31, 2011 and 2010, the Company had $895,153 and $755,044 outstanding under its revolving credit agreement, and $8,245,340 and $10,214,960, including $1,300,987 and $1,651,740 with related parties, outstanding under promissory notes with various lenders. The carrying amount of the revolving credit agreement approximates fair value as the rate of interest on the revolving credit facility approximate current market rates of interest for similar instruments with comparable maturities, and the interest rate is variable. The fair value of notes payable to various lenders is based on current rates at which the Company could borrow funds with similar remaining maturities.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
Stock-based Compensation
The Company has adopted the fair value recognition provisions of ASC 505, Equity and ASC 718, Compensation - Stock Compensation, using the modified prospective application method. Under ASC 505 and ASC 718, stock-based compensation expense is measured at the grant date based on the value of the option or restricted stock and is recognized as expense, less expected forfeitures, over the requisite service period.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, include cash and trade receivables. For the year ended March 31, 2011 and 2010, the Company’s top four customers, based on revenue, accounted for approximately 43% and 48%, of total revenue. The Company’s top four customers, based on revenue, accounted for approximately 37% and 34% of total trade accounts receivable at March 31, 2011 and 2010.
Financial instruments with significant credit risk include cash. The Company deposits its cash with high quality financial institutions in amounts less than the federal insurance limit of $250,000 in order to limit credit risk. As of March 31, 2011 and 2010, the Company's bank deposits did not exceed insured limits.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Claims Accruals
Losses resulting from personal liability, physical damage, workers' compensation, and cargo loss and damage are covered by insurance subject to deductible, per occurrence. Losses resulting from uninsured claims are recognized when such losses are known and can be estimated. We estimate and accrue a liability for our share of ultimate settlements using all available information. We accrue for claims reported, as well as for claims incurred but not reported, based upon our past experience. Expenses depend on actual loss experience and changes in estimates of settlement amounts for open claims which have not been fully resolved. These accruals are based on our evaluation of the nature and severity of the claim and estimates of future claims development based on historical trends. Insurance and claims expense will vary based on the frequency and severity of claims and the premium expense. At March 31, 2011 and 2010, management estimated $-0- in claims accrual above insurance deductibles.
However, from time to time the various business units are subject to premium audits on workers compensation. When the results of these audits are available, the various business units record the additional premiums due when they are advised by the respective carriers. Such amounts are generally amortized over the following 12 months.
Earnings per Share
The Company calculates earnings per share in accordance with ASC, Earnings per Share. Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
At March 31, 2011 and 2010, there was no variance between the basic and diluted loss per share. The 12,403,890 and 8,053,717 warrants to purchase common shares outstanding at March 31, 2011 and 2010, were not included in the weighted-average number of shares computation for diluted earnings per common share, as the warrants are anti-dilutive.
Recent Accounting Pronouncements
The Company has reviewed recent accounting pronouncements through June 2011 (Update 2011-05) and does not believe that any recently issued accounting pronouncements will have a material impact on its financial statements.
Note 2. Discontinued Operations
As previously reported, on May 14, 2010, the Company had acquired 100% of the common stock of Triple C Transportation, Inc. (“Triple C”). As was our practice with previous acquisitions, the former owners continued to manage the day to day operations of Triple C 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 make on its financing agreements for that equipment, which was approximately $300,000 a month. Triple C headquarters was leased from another company owned by the former owners for approximately $5,250 per month. The acquisition agreement provided that one of the former owners would serve on the Company’s Board of Directors and he would be employed as the general manager of Triple C for three years.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
During the latter part of October, 2010, the former owners of Triple C notified the Company in writing that entities controlled by them and receiving lease payments from Triple C 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, which were filed on December 21, 2010 and have been assigned case numbers 10-43797 and 10-43798.
During November, 2010 both the former owners resigned as officers and directors of Triple C, but one of the former owners continued to serve on our (IFC) Board of Directors through April, 2011. Triple C installed new management to operate the business on a day to day basis and in an effort to insure Triple C’s continued operations with minimum disruption from potential bankruptcy related issues, moved substantially all of the Triple C ongoing operations away from the facility it leased from one of the related entities. The physical move occurred in Mid-January 2011. In order to preserve liquidity, Triple C had temporarily suspended lease payments for the equipment leased by Triple C from WFT/CCC. Under the terms of the May 14, 2010 “Stock Purchase Agreement” IFC executed a corporate guaranty for all lease and other payments arising from the leases between WFT/CCC and Triple C.
On May 2, 2011, we filed a complaint against Craig White and Vonnie White in the District Court for Douglas County, Nebraska and served notice on the defendants pursuant to the Stock Purchase Agreement under which we acquired Triple C Transport, Inc. from the defendants on or about May 14, 2010. In the complaint, we ask the court to rescind the Stock Purchase Agreement, alleging multiple, material breaches of representations and warranties which individually and in the aggregate constitute fraud upon us. We are also seeking damages in unspecified amounts. We intend to pursue this litigation aggressively. Because of actions taken by the defendants subsequent to closing of our acquisition, undisclosed liabilities of Triple C Transport, breaches of the defendants’ representations and warranties, and the bankruptcies of entities they control and which were Triple C Transport’s equipment lessors, we believe that rescission will not have a materially negative impact on our financial performance going forward; even though we will not enjoy the benefits of the acquisition which we expected at the time of the transaction but which do not seem now available in fiscal year 2012, in view of the fact that Triple C Transport has lost its licenses to operate based on actions by Mr. and Mrs. White and other entities they control both before and after the closing of the transaction.
In June 2011, the Company estimated a loss in the amount of $1,765,313 to be realized upon completion of the rescission of this business unit, as well as an estimated operating loss of $236,279 to be incurred during the phase-out period. For the period May 14, 2010 through March 31, 2011 the Company incurred actual operating losses associated with this discontinued unit of $1,529,034.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Summarized operating results for discontinued operations is as follows:
The gain (loss) from discontinued operations above do not include any income tax effect as the Company was not in a taxable position due to its continued losses and a full valuation allowance
Summary of assets and liabilities of discontinued operations is as follows:
Note 3. Property and Equipment
Property and equipment consist of the following at March 31, 2011:
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Depreciation expense totaled $1,405,181 for the years ended March 31, 2011.
Property and equipment consist of the following at March 31, 2010:
Depreciation expense totaled $1,511,372 for the year ended March 31, 2010.
Note 4. Intangible Assets
The Company purchased the stock of Morris and Smith, which resulted in the recognition of intangible assets. These intangible assets include the “employment and non-compete agreements” which are critical to the Company because of the management team’s business intelligence and customer relationship value which is required to execute the Company’s business plan. The intangibles also include their “company operating authority” and “customer lists.” The Company operating authorities are tied to their motor carrier numbers that are issued and monitored by the U.S. Department of Transportation (FDOT). The FDOT issues a rating to each company which has a direct impact on that company’s ability to attract and maintain a stable customer base as well as reduce the company’s insurance costs, one of the most significant expenditures for freight companies. Morris and Smith have the DOT’s highest rating, “Satisfactory,” which provides the Company with significant value. The customer lists adds value to the Company by providing an established cliental with established rates as well as predictable freight volume. These intangible are as follows:
In addition, when the Company originally purchased Triple C (see Notes 2 and 11) $466,424 of identified intangible assets were recognized. However, when the Company rescinded the Triple C purchase and reported Triple C as a “discontinued operation” previously identified intangible assets of Triple C were
reported as impaired.
Amortization expense totaled $774,646 for the year ended March 31, 2011. Amortization expense for the year ended March 31, 2010 was $722,862.
Future amortization of intangible assets is as follows:
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Note 5. Line of Credit
Morris Revolving Credit
At March 31, 2011 and 2010, Morris has $895,153 and $755,044 outstanding under a revolving credit line agreement that allows it to borrow up to a total of $1,200,000. The line of credit is secured by accounts receivable, guaranteed by a previous owner and is due August 27, 2012. The applicable interest rate under this agreement is based on the Prime Rate, plus 3.5% with a floor of 4.00%.
Note 6. Notes Payable
Notes payable owed by Morris consisted of the following:
Notes payable owed by Smith consisted of the following:
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Notes payable owed by IFC consisted of the following:
The Company valued the Notes Payable at their face value and calculated the beneficial conversion feature of the warrants using Black Scholes in deriving a discount that is being amortized over the term of the Notes as interest expense using a straight line method.
The Company maintains debt obligations in which the maturity dates have passed. The Company is currently in negotiation with these debt holders and intends to extend the terms of the maturity dates or convert the debt into equity.
Summary of notes payable:
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Future maturities of notes payable for the five years subsequent to March 31, 2011, are as follows:
During the fiscal years ended March 31, 2011 and 2010, the Company entered into a series of Promissory notes, convertible notes, and convertible debentures (the “Agreements”) with investors (the “Investors”) pursuant to which the Investors purchased an aggregate principal amount of $1,022,240 (the “Convertible notes”). The convertible notes bear interest at 4% to 20% and mature at dates ranging from one month to eighteen months from the date of issuance, plus extensions. The convertible notes are convertible at the option of the holder at any time into shares of common stock, at a conversion price equal to $0.30 to $.40, depending on the note.
The conversion price of the convertible notes is subject to full ratchet and anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.
As a result of the convertible notes, the Company has determined that the conversion feature of the convertible notes and the warrants issued with the convertible debentures are embedded derivative instruments pursuant to ASC 815-40-05 “Derivatives and Hedging-Contracts in Entity’s Own Equity” and ASC 815-10-05 “Derivatives and Hedging - Overall,” the accounting treatment of these derivative financial instruments requires that the Company record the derivatives at their fair values as of the inception date of the note agreements and at fair value as of each subsequent balance sheet date as a liability. Any change in fair value is recorded as non-operating, non-cash income or expense at each balance sheet date.
The fair value of the embedded conversion option at March 31, 2011 was $1,535,711, which exceeds the face value of the convertible notes by $513,471. The fair value of the embedded conversion option at March 31, 2010 was $74,530, which did not materially exceed the fair value of the convertible notes at that time. The amount of the fair value that exceeds the face value of $1,022,240 of the convertible notes is shown as a warrant liability with a corresponding charge to income during the year ended March 31, 2010.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Note 7. Notes Payable - Related Parties
Notes payable owed by the Company to related parties are as follows:
Note 8. Income Taxes
The Company accounts for income taxes under ASC 740, which requires use of the liability method. ASC 740 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.
Deferred tax assets and liabilities at the end of each period are determined using the currently effective tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized. The reconciliation of enacted rates for the year ended March 31, 2011 and 2010, is as follows:
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
A valuation allowance equal to the net deferred tax asset has been recorded as management of the Company has not been able to determine that it is more likely than not that the net deferred tax asset will be realized.
During the year ended March 31, 2011, the deferred tax asset (and the related valuation allowance) increased by $2,524,000.
At March 31, 2011, the Company estimated that it had approximately $28,000,000 of net operating loss carry forwards, which if unused will expire through 2031. Of the $28 million, approximately $20.8 million is subject to limitations under IRC Section 382 due to owner shifts during the period.
The Company and some of its operating entities have undergone tax status changes and is delinquent in filing certain of its income and payroll tax returns in certain jurisdictions, but the company believes it has sufficient loss carryforwards available for any income tax liability that may be due and has set aside sufficient reserves in accounts payable, accrued expenses and other liabilities for any payroll tax obligations.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Note 9. Shareholders’ Deficit
Common Stock
On June 28, 2010, the Company issued 2,042 shares of common stock as compensation under contract. The stock was valued at $0.49 per share, its fair market value at the date of issuance.
On July 7, 2010, the Company issued 69,381 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.30 per share
On July 8, 2010, the Company issued 127,888 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.30 per share
On August 16, 2010, the Company sold 10,000 shares of common stock. These shares were sold at $0.50 per share.
On September 7, 2010, the Company issued 135,679 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.30 per share
On September 16, 2010, the Company issued 5,333 shares of common stock as compensation for legal services. The stock was valued at $0.89 per share, its fair market value at the date of issuance.
On September 16, 2010, the Company issued 150,000 shares of common stock as a bonus for an extension on a loan from a stockholder. The stock was valued at $0.89 per share, its fair market value at the date of issuance.
On September 30, 2010, the Company issued 333,333 shares of common stock to an investor as a bonus for financing. The stock was valued at $0.89 per share, its fair market value at the date of issuance.
On September 30, 2010, the Company issued 2,000,000 shares of common stock for the acquisition of Triple C Transportation. These shares were valued at $0.10 per share, the fair market value at the time of the acquisition.
On October, 27, 2010, the Company issued 390,000 shares of common stock to an investor as a bonus for financing. The stock was valued at $0.82 per share, its fair market value at the date of issuance.
On November 29, 2010, the Company sold 2,400,000 shares of common stock. These shares were sold at $0.40 per share.
On December 22, 2010, the Company issued 32,780 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.40 per share
On December 22, 2010, the Company issued 250,000 shares of common stock as compensation for consulting services. The stock was valued at $0.88 per share, its fair market value at the date of issuance.
On December 22, 2010, the Company issued 265,000 shares of common stock as compensation for consulting services. The stock was valued at $0.88 per share, its fair market value at the date of issuance.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
On December 22, 2010, the Company issued 25,000 shares of common stock as compensation for accounting services. The stock was valued at $0.88 per share, its fair market value at the date of issuance
On December 22, 2010, the Company issued 64,592 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.30 per share
On December 22, 2010, the Company sold 10,000 shares of common stock. These shares were sold at $0.50 per share.
On December 22, 2010, the Company issued 75,000 shares of common stock as compensation. The stock was valued at $0.88 per share, its fair market value at the date of issuance.
On December 22, 2010, the Company issued 125,000 shares of common stock as compensation for consulting services. The stock was valued at $0.88 per share, its fair market value at the date of issuance.
On December 22, 2010, the Company issued 250,000 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.40 per share. The Company issued 185,185 shares of common stock upon “cashless” exercise of warrants.
On March 18, 2011, the Company issued 888,000 shares of common stock as compensation for professional services. The stock was valued at $0.30 per share, its fair market value at the date of issuance.
On March 18, 2011, the Company issued 89,306 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.30 per share.
On March 18, 2011, the Company issued 2,281,458 shares of common stock as a result of the conversion of a promissory note. The stock was converted at $0.53 per share.
On March 18, 2011, the Company issued 227,548 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.30 per share
On March 18, 2011, the Company issued 93,024 shares of common stock as a result of the conversion of debentures. The stock was converted at $0.30 per share.
On December 30, 2009, a holder of an 8.0%, $7,500 debenture exercised the conversion feature and converted the debenture and accrued interest into 26,489 shares of common stock. A holder of a 9.9%, $5,000 debenture exercised the conversion feature and converted the debenture and accrued interest into 18,266 shares of common stock.
On January 8, 2010, a holder of a 9.9%, $48,000 debenture exercised the conversion feature and converted $30,000 of the debenture into 100,000 shares of common stock.
Warrants to Purchase Common Stock
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
For the nine months ended December 31, 2010, the Company issued 1,009,433 common stock warrants to various holders, at an exercise price ranging from $0.30 to $0.50, with a termination period from 3 to 5 years, relating to the issuance of debt obligations.
The Company issued 620,883 common stock warrants, with an exercise price of $0.30, an expiration date of 5 years, relating to services provided to the Company.
The Company issued 10,000 common stock warrants, with an exercise price of $1.00, an expiration date of 3 years, relating to the purchase of the Company’s common stock.
The Company issued 375,000 common stock warrants, with an exercise price of $0.40, an expiration date of 5 years, relating to services provided to the Company.
The Company issued 2,400,000 common stock warrants, with an exercise price of $0.75, an expiration date of 5 years, as a bonus for financing.
The Company issued 830,000 common stock warrants to various holders, at an exercise price ranging from $0.30 to $0.50, with a termination period of 5 years, relating to the issuance of debt obligations.
On March 7, 2011, the Company issued 234,720 common stock warrants, with an exercise price of $0.40, an expiration date of 5 years, as a bonus for financing.
On March 17, 2011, the Company issued 100,000 common stock warrants, with an exercise price of $0.40, an expiration date of 5 years, as a bonus for financing.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
For the year ended March 31, 2010, the Company issued 1,647,680 common stock warrants to various holders, at an exercise price ranging from $0.40 to $0.50, with a termination period from 3 to 5 years, relating to the issuance of debt obligations.
For the year ended March 31, 2010, the Company issued 1,036,749 common stock warrants to various holders, at an exercise of price ranging from $0.01 to $0.50, with a termination period ranging from 2 to 5 years, relating to services provided to the Company.
The fair value for the warrants was estimated at the date of valuation using the Black-Scholes option-pricing model with the following assumptions:
The relative fair value of the warrants issued for the year ended March 31, 2011, calculated in accordance with ASC 470-20, Debt with Conversion and Other Options; totaled $219,480. The relative fair value of the warrants issued with the debenture has been charged to additional paid-in capital with a corresponding discount on the note payable. The discount is amortized over the life of the debt. As the discount is amortized, the reported outstanding principal balance of the notes will approach the remaining unpaid value.
AA summary of the grant activity for the year ended March 31, 2011 is presented below:
As of March 31, 2011 and 2010, the number of warrants that were currently vested and expected to become vested was 12,403,890 and 8,053,717, respectively.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Note 10. Commitments and Contingencies
Operating Leases
The Company leases office space in Sarasota, Florida under a one year operating lease with two additional one year extensions at the option of the Company. Beginning August 1, 2010, the Company entered into a new lease for more space at $1,200 per month. The Company also entered into a 60-month lease, at $7,700 per month; relating to IT hardware infrastructure.
Employment Agreements
From time to time since 2008, the Company has entered into three year employment agreements with two executives of the Company. The Company is committed to pay the executives a total of approximately $450,000 per year, with certain guaranteed bonuses and increases. The agreements also call for bonuses if the executives meet certain goals which are to be set by the board of directors. A third executive left the Company in January, 2011 with certain portions of his employment agreement not yet funded. That former executive has commenced legal action against the Company - see Litigation-Note 10.
Purchase Commitments
The Company’s purchase commitments for revenue equipment are always under negotiation and review. Upon execution of the purchase commitments, the Company anticipates that purchase commitments under contract will have a net purchase price of approximately $1.MM to $3.00MM and are expected to be financed over an average of 4 to 7 years.
Litigation
Former COO Litigation
Our former Chief Operating Officer resigned from the Company in late December, 2010 with certain amounts of salary and stock awards still owed to him. The Company was unable to fund amounts owed because of other working capital requirements. The Company did allow the former COO to continue to use his company provided vehicle which has been classified on the accompanying balance sheets within Prepaid Expenses and Other Assets. In April, 2011 the former COO filed suit against the Company for unpaid wages, unissued stock, and up to date payroll tax reporting. The amount of wages and unfunded payroll taxes are not in dispute and recorded within Accounts Payable and Other Accrued Liabilities on the accompanying balance sheets. The litigation is entering the discovery phase and the company continues to believe the resolution of this claim will not have a material adverse effect on our financial condition or results of operations, but the ultimate payout may affect our liquidity.
Nutmeg/Fortuna Fund LLLP Litigation
As part of the reverse merger described in Note 1, the Company paid $167,000 to Nutmeg/Fortuna Fund LLLP (“Nutmeg”) in the form of a one-year promissory note which was due on May 15, 2010. The note is past due and Nutmeg filed suit against the Company in May, 2011. The amount of the Note has been classified in the accompanying balance sheet within Notes Payable and the accrued interest within Accrued Expenses and Other Liabilities. The litigation is in the initial stage and the company continues to believe the resolution of this claim will not have a material adverse effect on our financial condition or results of operations, but the ultimate payout may affect our liquidity.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
People’s United Equipment Finance Corp.
As part of the Triple C acquisition and subsequent Chapter 11 filings discussed in Note 2, one of the revenue equipment supplies to the former owner’s companies is attempting to execute against our Company with regard to any corporate guaranty for any lease and other payments arising from the leases between WFT/CCC and Triple C as part of the original May 14, 2010 acquisition. The litigation is in the initial stage and the Company continues to believe the resolution of this claim will not have a material adverse effect on our financial condition, results of operations, or affect our liquidity.
Triple C Transportation, Inc Owners
As discussed briefly in Notes 2 the Company is party to a series of proceedings and actions arising out of the Company’s Purchase of Triple C from Craig and Vonnie White in May 2010. The Company has filed a rescission Action in Nebraska seeking to rescind the May 2010 purchase of Triple C. If successful, the transaction of triple C would be rescinded, the Company would have no liability and the Company would be awarded judgment against the Whites for the consideration paid to the former owners in connection with the contract. If the Rescission Action is unsuccessful, Triple C would remain owned by the Company, which has since ceased all operations of Triple C. Although this would not have any material impact on the Company, the Company may have guaranteed some of the obligations of triple C, and as a result it may have some potential exposure. At the date of this report, it is not possible for the Company to quantify the potential exposure. The Company holds valid defenses to some or all of the claimed damages and management has expressed its intention to vigorous defend these claims by the Debtors in the Adversary Complaint.
Some of the related actions include:
White Farms trucking, United States Bankruptcy court for the District of Nebraska. Case No. 10-43797-TJM. This relates to a bankruptcy filed by a company that loaned equipment to subsidiary Triple C and to which the Company guaranteed a debt.
Craig Carrier Corp, LLC, United States Bankruptcy Court for the District of Nebraska. Case No 10-43798-TJM. This relates to a bankruptcy filed by a company that loaned equipment to subsidiary Triple C and to which the Company guaranteed a debt.
Craig carrier Corp., LLC and White farms trucking, Inc. v Triple C Transport, Inc and Integrated Freight Corporation in the United States Bankruptcy Court for the District of Nebraska. Case No. A11-04035. This litigation is an adversary complaint filed by the two bankrupt entities which are controlled by the Triple C owners for unpaid rents on the equipment against Triple C for lack of payment and against IFC for its guaranty for the rent payments.
C & V, LLV v. Triple C Transport, Inc. in the District Court of Hall County, Nebraska. Case No. 11-316.
This litigation was brought for unpaid rent of the building Triple C formerly rented from an entity controlled by the Triple C owners prior to moving.
Claims and Assessments
We are involved in certain claims and pending litigation arising from the normal conduct of business. Based on the present knowledge of the facts and, in certain cases, opinions of outside counsel, we believe the resolution of these claims and pending litigation will not have a material adverse effect on our financial condition, our results of operations or our liquidity.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Related Party Transactions
The Company has not entered into any transactions with the Company’s directors and executive officers, outside of normal employment transactions, or with their relatives and entities they control, and in the day to day operations of our business.
Note 11. Business Combinations
Smith Systems Transportation, Inc.
On August 28, 2008, the Company acquired 100% of the common stock of Smith Systems Transportation, Inc. (“Smith”), a Nebraska-based hazardous waste carrier, under the terms of a Stock Exchange Agreement. The accounting date of the acquisition was September 1, 2008 and the transaction was accounted for under the purchase method in accordance with ASC 805. Smith’s results of operations have been included in our consolidated financial statements since the date of acquisition. Identifiable intangible assets acquired as part of the acquisition included definite-lived intangibles which totaled $783,570, with a weighted average amortization period of 3 years.
The aggregate purchase price was $332,500, including 825,000 shares of the Company’s common stock valued at $0.10 per share. Below is a summary of the total purchase price:
The Company was originally introduced to the owners of Smith by a third party finder and agreed to be responsible for those fees when the transaction was complete, all contingencies were satisfied, and the amount of the fees were fixed and determinable. Accordingly, the Company recorded $322,307 in such fees at 3/31/2011 and are included in General and Administrative expenses in the Consolidated Statement of operations and Accounts Payable. The Company believes a portion of those fees will be ultimately paid by company stock in amounts to be determined.
Morris Transportation, Inc.
On August 28, 2008, the Company acquired 100% of the common stock of Morris Transportation, Inc. (“Morris”), an Arkansas-based dry van truckload carrier, under the terms of a Stock Exchange Agreement. The accounting date of the acquisition was September 1, 2008, and the transaction was accounted for under the purchase method in accordance with ASC 805. Morris’ results of operations have been included in our consolidated financial statements since the date of acquisition. Identifiable intangible assets acquired as part of the acquisition included definite-lived intangibles which totaled $1,151,681, with a weighted average amortization period of 3 years.
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
The aggregate purchase price was $1,300,000, including 3,000,000 shares of the Company’s common stock valued at $0.10 per share. Below is a summary of the total purchase price:
The Company was originally introduced to the owners of Morris by a third party finder and agreed to be responsible for those fees when the transaction was complete, all contingencies were satisfied, and the amount of the fees were fixed and determinable. Accordingly, the Company recorded $377,270 in such fees at 3/31/2011 and are included in General and Administrative expenses in the Consolidated Statement of operations and Accounts Payable. The Company believes a portion of those fees will be ultimately paid by company stock in amounts to be determined.
Triple C Transportation, Inc.
On May 14, 2010, the Company acquired 100% of the common stock of Triple C Transportation, Inc. (“Triple C”), a Nebraska-based refrigerated motor freight business, under the terms of a Stock Exchange Agreement. The accounting date of the acquisition was May 14, 2010 and the transaction was accounted for under the purchase method in accordance with ASC 805. Initially, Triple C’s results of operations were included in our consolidated financial statements since the date of acquisition. Identifiable intangible assets acquired as part of the acquisition included definite-lived intangibles which totaled $466,424, with a weighted average amortization period of 3 years.
However, because of events during the past several months (as fully described in Note 2) the Company fully impaired the $466,424 intangible assets, rescinded the Triple C purchase and reported Triple C as a “discontinued operation”
Note 12. Business Segment Information
The Company follows the provisions of ASC 280, Segment Reporting, which established standards for the reporting of information about operating segments in annual and interim financial statements. Operating segments are defined as components of an enterprise for which financial information is available that is evaluated regularly by the chief operating decision makers(s) in deciding how to allocate resources and in assessing performance. The Company operates its subsidiaries (Morris Transportation and Smith Systems) as independent companies under separate management of their respective founders. Management of the Company makes decisions about allocating resources based on these operating segments. The following tables depict the information expected by ASC 280:
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
Note 13. Subsequent Events
On April 1, 2010, the Company acquired all of the issued and outstanding stock of Cross Creek Trucking, Inc. (“Cross Creek”) an Oregon corporation, as a wholly owned subsidiary. Cross Creek is a motor freight business and operates a fleet of approximately 115 power units from its headquarters office (which it leases from the former owner) in Central Point, Oregon. The Company has issued 2.5 million common shares, a $4,000,000 promissory note, and 1.5 million common stock purchase warrants to the former owner of Cross Creek. In addition, we issued a $422,500 promissory note and 556,250 shares of common stock in payment of a business broker’s fees. The former owner has a consulting agreement and the ability to be paid an additional consideration of $500,000 after six months based on performance.
In July 2011, the Company entered into a Securities Purchase Agreement in connection with the issuance of an 8% Convertible Note for $103,500. The Note is due April 11, 2012 and has various prepayment, share conversion, share reservation, and penalty interest provisions. The proceeds were used for general corporate purposes.
Management has evaluated events and transactions that occurred subsequent to March 31, 2011, through July 14, 2011, the date at which the consolidated financial statements were available to be issued. Other than the disclosures shown, management did not identify any events or transactions that should be recognized or disclosed in the consolidated financial statements.
See Note 10 - Litigation - for Summary of recent legal activity.
Note 14. Board’s Plan for Integrated Freight Corporation
We have suffered recurring losses from operations and are dependent on additional capital to execute our business plan
INTEGRATED FREIGHT CORPORATION
Notes to Consolidated Financial Statements
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 throughout the past twelve months. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. We may seek 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 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 portion of our short term debt is in the hands of our subsidiary managers who 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.
·
We are beginning the integration of the subsidiaries, allowing for increased buying power (lower costs) and elimination of redundant tasks (saving the company significant money). This integration is expected also to help our subsidiaries become more efficient than they are now, acting as independent companies.
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.
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: July 14, 2011
By:
/s/ Paul A. Henley
Paul A. Henley
Principal Executive Officer and Principal Accounting and Financial Officer
Signature and Name:
Capacity in which signed:
Date:
/s/ John E. Bagalay
Director
July 14, 2011
John E. Bagalay
Kimberly B. Bors
Director
/s/ Paul A. Henley
Director, Principal Executive Officer
July 14, 2011
Paul A. Henley
Principal Accounting and Financial Officer
/s/ Henry P. Hoffman
Director, President and Chief Operating Officer
July 14, 2011
Henry P. Hoffman
/s/ T. Mark Morris
Director
July 14, 2011
T. Mark Morris
Robert Papiri
Director
/s/ Monte W. Smith
Director
July 14, 2011
Monte W. Smith