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| CRGO.OB > SEC Filings for CRGO.OB > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, those discussed in our annual report on Form 10-KSB and 10-KSB/A for the fiscal year ended December 31, 2007, in our quarterly report on Form 10-Q/A for the period ended March 31, 2008 and our quarterly report on Form 10-Q for the period ending June 30, 2008. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
References in this Quarterly Report to "we," "us," "our," or the "Company" or similar terms refer to Cargo Connection Logistics Holding, Inc. and its consolidated subsidiaries unless the context otherwise requires.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the nine months ended September 30, 2008. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Such forward-looking statements are and will be subject to many risks, uncertainties and factors which may cause the Company's actual results to be materially different from any future results, express or implied, by such forward-looking statements. Factors that could cause the Company's actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
· the Company's operations have been severely curtailed as a result of the foreclosure by Pacer on substantially all the assets of Cargo Connection and the closing of Cargo International's Illinois facility
· the ability to maintain adequate liquidity and produce sufficient cash flow to meet the Company's needs
· the Company's ability to timely file its periodic reports as required by the Securities and Exchange Act of 1934, as amended (the "Exchange Act");
· the ability to attract and retain qualified management and other personnel
· changes in the competitive environment in which the Company operates
· changes in, or the failure to comply with, government and regulatory policies
· the ability to obtain regulatory approvals and to maintain approvals previously granted
· uncertainty relating to economic conditions generally and particularly affecting the markets in which the Company operates
· changes in the Company's business strategy, development plans or cost savings plans
· the Company's ability to complete the development of, market and sell the RadRope™ product ("RadRope™")
· the Company's letter of intent with Fleet has expired, and it is unlikely that the Company would be able to complete that acquisition even if financing could be obtained, which is unlikely.
· the ability to complete acquisitions or divestitures and to integrate any business or operation acquired
· the ability to enter into strategic alliances or other business relationships
· the ability to overcome significant operating losses
· the ability to reduce costs
· the ability to develop products and services and to penetrate existing and new markets
· the Company is delinquent in filing certain tax returns
· technological and other developments and changes in the industry
· the risks discussed in Item 1 of our Annual Report on Form 10-KSB
Statements in this Quarterly Report and the exhibits hereto should be evaluated in light of these important factors. The Company is not obligated to, and undertakes no obligation to, publicly update any forward-looking statement due to actual results, changes in assumptions, new information or as the result of future events. Readers should consult any further disclosures on related subjects in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007 and any subsequent filings with the SEC. Effective February 4, 2008, the Company will no longer be filing Form 10-KSB and 10-QSB, but instead will be filing Form 10-K and 10-Q, due to changes in the Securities Act of 1933, as amended and the Securities Exchange Act of 1934.
GENERAL
The Company had been a provider of logistics solutions for customers through its network of branch terminal locations and independent agents in North America. The Company had predominately operated as a non-asset based transportation provider of truckload and less-than-truckload ("LTL") transportation services utilizing some Company equipment and dedicated owner operators, as well as in coordination with other transportation companies with whom the Company had established relationships and offered a wide range of value-added logistics services, including those provided through its leased U.S. Customs Bonded warehouse facilities. The Company's provision of these services has ceased by the recent foreclosure by Pacer on substantially all the assets of Cargo Connection and related developments.
Foreclosure by Pacer
In March 2008, YA Global assigned to Pacer, all of YA Global's rights, title and interest in the debt and obligations owed by the Company, Cargo Connection, and Cargo International (collectively the "Companies"), with respect to certain convertible debentures in the aggregate outstanding principal amount of $2,084,400 originally issued by the Companies to YA Global and Montgomery Equity Partners, Ltd. ("Montgomery") and certain documents, instruments and agreements relating thereto.
On April 28, 2008, the Company entered into the Financing Arrangement Agreement with Pacer. Pursuant to the Financing Arrangement Agreement, the Company acknowledged that Pacer was assigned of all right, title and interest of YA Global, including as assignee of Montgomery, with respect to the Outstanding Obligations. In connection with such assignment, the Company acknowledged and consented to such assignment from YA Global to Pacer. The Financing Arrangement Agreement provided, among other things, that Pacer:
· loaned the Company $200,000, for working capital, on the same terms as the Financing Documents; and
· terminated the requirement for the Company to file a registration statement covering shares of the Company's Common Stock issuable pursuant to the Financing Documents.
The Financing Arrangement Agreement provided, among other things, that the Company:
· waived any defense or counterclaim under Financing Documents;
· would cooperate with Pacer to expedite the entry of a foreclosure judgment and a judgment to collect the obligations, and to expedite the sale or transfer of the Collateral (as defined in the Financing Documents); and
· would not voluntarily file or seek the entry of an order for relief under the Bankruptcy Code, as amended.
On May 5, 2008, the Company received a Default Notice from Pacer pursuant to the Montgomery Security Agreement, which stated that the balance due on three convertible debentures payable to Pacer was in excess of $4,000,000. The Notice provided that Pacer would conduct a "self-help" foreclosure ten days from the date of the Default Notice.
On May 13, 2008, the Company entered into a Strict Foreclosure Agreement with Pacer, pursuant to which the Company acknowledged that it is in default of certain obligations, in the aggregate amount of $3,670,389 to Pacer as assignee of all right, title and interest of YA Global, including as assignee of Montgomery, with respect to the Outstanding Obligations under:
· the 2005 Montgomery Debenture;
· the Registration Rights Agreement;
· the 2006 Montgomery Debenture;
· the Montgomery Security Agreement; and
· the YA Global Debenture;
The Outstanding Obligations were secured by certain assets of the Company and its subsidiaries. Pursuant to the Strict Foreclosure Agreement and a related assumption agreement, all of the Outstanding Obligations have been extinguished, and Pacer foreclosed on substantially all the operating assets of the Company and Cargo Connection and assumed certain liabilities of the Company, Cargo Connection and Cargo International, including:
· all obligations to WFBA;
· the obligations to HSBC in connection with the HSBC Loan, including in connection with all collateral provided in connection therewith; and
· the obligations pursuant to SBA Loan.
As a result of this foreclosure, the Company's operations have been severely curtailed, and now consist only of:
· Cargo International and its assets;
· NMDT and its assets;
· ITG and its assets; and
· the stock of Cargo Connection, without its former assets.
Also in connection with the Strict Foreclosure Agreement, the Company, Cargo Connection and Cargo International entered into a General Release Agreement dated May 13, 2008 with Emplify, pursuant to which Emplify released the Company and its subsidiaries of all obligations and liabilities in connection with the promissory note, in the principal amount of $800,000 issued to Emplify.
As a result of the Strict Foreclosure Agreement, the Company extinguished secured convertible debt in the amount of $3,826,068, which consisted of $2,084,400 in principal, accrued interest of $598,513 and accumulated liquid damages of $1,143,155 incurred as of the foreclosure date. Additionally, in connection with the Strict Foreclosure Agreement and the discontinued operations, the Company was also relieved of $2,083,623 of additional liabilities. Those liabilities primarily arise from:
· $800,000 of notes payable;
· $444,000 of with respect to certain outstanding obligations of the Company existing as of May 13, 2008 (the "Cash Overflows");
· $187,946 of accounts payable and credit card obligations;
· $210,000 from the Pacer loan;
· $148,000 of derivative liabilities;
· $71,000 of other notes;
· $179,287 of capital leases; and
· $43,428 of other remaining liabilities.
The Company has discontinued the operations of Cargo Connection in connection with the Strict Foreclosure Agreement. Cargo Connection could no longer operate without its assets, including but not limited to its cash, accounts, accounts receivable, factoring availability, fixed assets such as its machinery and equipment and the operating leases on the trucks, trailers, and warehouse equipment, along with its customers. Cargo Connection represented a majority of the operations and sources of revenue for the Company.
NMDT
In December 2006, the Company acquired NMDT, in a tax-free stock-for-stock exchange for 168,539,326 shares of the Company's Common Stock valued at approximately $1,500,000. NMDT holds a license to a patented portable nuclear material detecting technology (the "License"). The license agreement provides for payments to the licensor of up to 7% of the net revenues from sales of products utilizing the patent rights, subject to minimum annual fees payable to the licensor, beginning in the second year of the licensing agreement, which range from $5,000 in year 2 to $30,000 in year five after the product is available for production. The Company is in the process of developing, with the licensor, a market-ready nuclear radiation detection device, called RadRope™, which inspectors at transportation hubs can utilize to rapidly detect the presence of nuclear material in sealed containers without the use of harmful x-rays, to service the logistics, transportation and general cargo industries.
The Company anticipates that the device, to which modifications are being made based upon the input received from potential customers, should be completed by the end of 2008 or within the 1st quarter of 2009. It also believes that its marketing of the device should occur by the the 3rd quarter of 2009 with delivery by the end of 2009, though there can be no assurances that the revised product will be marketable without additional revisions, improvements and possible resulting expenses to the Company. It may become necessary for the Company to find alternative sources of funding to cover the expense of marketing the product. In the event this does occur, the Company may attempt to sell its patent license.
The Company has begun investigating the production process with vendors on the manufacturing of the device and expects to complete negotiations by the end of the 2nd quarter of 2009. The Company also believes the marketing of the RadRope™ product will not be exclusive to the governmental agencies noted above. The technology itself can be transferred from a portable device to accommodate fixed portals in airports, train stations, ports of embarkation for ocean vessels, etc. The Company believes that as the functionality of the device and its uses increases, it will be deployable in diverse applications, and that potential customers include government and private purchases, both domestically in the U.S. and internationally. The Company expects that when the deployment of the RadRope™ product commences, the Company will generate revenues through product sales and software licensing and support, software upgrades for the device and the sale of spare parts. The Company believes that once an order for the RadRope™ product is placed with NMDT, the required deposits associated with the device would fund the Company's preparation for the initial setup and production of both manufacturing and support operations. The production and deployment time of the device is expected to be between 90 and 120 days. This includes the purchasing of all components and the required waterproof housing necessary for the device for its most complex application.
The Company anticipates that NMDT's cash flow needs will be addressed through deposits to be received for products which are sold to customers. Research and development and preliminary selling, general and administrative costs have been paid for by the patent owner. The Company believes that it will be able to sell each unit of the RadRope™ product, in its most complex application, for approximately $10,000, as compared to approximately $100,000 for any roughly competitive product. As the RadRope™ product evolves and the applications diversify, the Company expects that the costs of each application will vary depending upon the size and scope of the application needed. The Company's estimates of future cash flows are based on the RadRope™ product's cost-effectiveness and the interest already communicated to the Company. The Company estimates that its cost to create one unit of the RadRope™ devices will be approximately $2,000 (including material costs, labor, lab testing, field testing, and transportation costs). The Company believes that it should be able to sell at least 250 units per year, which would represent sales of approximately $2,500,000 per year, with potential net profit of $1,900,000 per year, from the sale of the RadRope™ product, after taking into account an estimate of approximately $100,000 in selling, general and administrative expenses for this business in its first year of product sales. The Company is examining potential marketing and cross marketing opportunities with other technology companies with respect to the RadRope™. In the event the prototype is not marketable or additional funding sources are not identified, the value of the patent rights may become impaired.
There have been no material developments with respect to NMDT since the filing of the Company's report on Form 10-Q for the period ended June 30, 2008.
ITG
The Company owns a 51% interest in ITG and Emplify owns a 49% interest. The financial statements of ITG are included in the Company's consolidated financial statements. The minority interest in operating results is reflected as an element of non-operating expense in the Consolidated Statements of Operations and the minority interest in the equity of ITG is reflected as a separate component on the Consolidated Balance Sheet. Cargo International
Cargo International was set up to seek out opportunities internationally, cultivate those opportunities and to broaden our range of services, which can be done directly by the Company or through joint ventures or business relationships with third party providers. The Company had sent representatives to the Pacific Rim and to Central America, including Costa Rica, on numerous occasions to seek out and explore the potential for the Company to open offices and establish personnel relationships in international markets. No assurance can be given that these efforts will be successful. To date, no continuous new business has been received through these efforts.
The Company had two handling agreements which it had entered into in April 2007. These agreements had added revenue to the revenue stream that had been lacking for Cargo International's Illinois facility and had repositioned the Company to perform its services for customers in industries outside its normal scope. However, lacking the complementary efforts of its sister division, Cargo Connection, which had been able to add additional revenue from its services and its customer base, Cargo International was not able to pay its rent at the Illinois facility beginning in May 2008. The landlord, MP Cargo ORD, obtained an order of eviction against the Cargo International and Cargo International agreed to vacate the facility on July 18, 2008, after it assured that its customers' goods were moved from the premises. As of that date, Cargo International ceased its operations performed at the Illinois facility. On September 19, 2008, the Company received notification of MP Cargo's Request for Judicial Intervention, brought in New York State Supreme Court, Nassau County on September 11, 2008, seeking a judgment in the amount of $258,551.Further, the Company is considering whether to discontinue the operations of Cargo International as a whole and will consider the feasibility of continuing its operations.
Cargo Connection
Cargo Connection is now a discontinued operation subsequent to the assets of Cargo Connection being assigned to Pacer pursuant to the Strict Foreclosure Agreement (See "Foreclosure by Pacer").
RESULTS OF OPERATIONS
The Company reports its results as one segment for reporting purposes. In the future, if NMDT and/or any other component of the Company's operations become a significant part of the Company's overall business, the Company will report results on a segmented basis.
Overview
As a result of the foreclosure by Pacer on substantially all of assets of Cargo Connection and management's decision to cease operations of Cargo International's Illinois facility, and Cargo Connection becoming a discontinued operation and the feasibility that Cargo International may become one, the Company expects its future revenues to decline significantly and expects NMDT to constitute the Company's core operations in the future. As a result, despite related decrease in debt and operating expenses, the Company expects to generate losses from operations unless and until the Company's operations begin to generate positive cash flow in amounts exceeding the Company's overhead. The Company also intends to pursue opportunities to acquire additional business.
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Revenues.
Revenues from operations for the nine months ended September 30, 2008, were $829,502, compared with $404,679 for the nine months ended September 30, 2007, an increase of $424,823, or 105%, due to an increase in revenue generated through Cargo International's Illinois facility and the two handling agreements that the Company entered into in April 2007.
Direct Operating Expenses.
Direct operating expenses for the nine months ended September 30, 2008 were $448,222, as compared to $289,349 for the nine months ended September 30, 2007, an increase of $158,873 or 54.9%, primarily due to:
· an increase of $195,395 in outside carrier and handling costs, and
· an increase of $10,000 in direct labor costs,
· an increase of 2,525 in truck and trailer expenses
which was offset by:
· a decrease of $45,784 in warehouse expenses.
As a percentage of revenue, the direct expenses decreased to 54% in 2008 from 71.5% in 2007.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses were $1,281,213 for the nine months ended September 30, 2008, compared with $988,659 for the nine months ended September 30, 2007, an increase of $292,554, or 29.6%, primarily as a result of:
· an increase of $246,100 in our rent expense, which is mostly derived from the expense associated with our Illinois facility,
· an increase of $140,616 in consulting and professional fees associated with being a public entity and defending lawsuits against the Company,
· an increase in utilities of 33,594 ,
· an increase in depreciation expense of $24,089,
· an increase of $19,090 in wages,
· an increase of $16,187 in associated benefits and taxes, due to an increase in the number of employees at the Illinois facility for the business that began in May 2007,
· an increase in bad debt expense of $11,899,
· an increase of $8,096 in repairs and maintenance, and
· Other SG&A expenses of 5,530.
which more than offset:
· a decrease of $180,000 in Guaranteed Rental Expense which was associated with the former MP Cargo Lease that has now been cancelled,
· a decrease of $17,796 in insurance expenses, and
· a decrease in selling, promotional and travel expenses of $14,851.
Depreciation and Amortization.
Depreciation and amortization expense for the nine months ended September 30, 2008 was $24,089, as compared to $-0- in the nine months ended September 30, 2007 for continuing operations, due to the addition of forklifts in the Illinois facility.
Operating Loss.
The Company reported a loss from continuing operations before other income (expense) of $899,933 for the nine months ended September 30, 2008, compared to a loss from continuing operations of $873,329 for the nine months ended September 30, 2007, an increase of $26,604 or 3%. As a percentage of revenue, the loss from operations represented 108.5% of revenues in 2008, as compared to 215.8% in 2007. Of the $899,933 loss from operations for the nine months ended September 30, 2008, Cargo International had a loss of $366,908, Cargo Holdings had a loss of $532,690, and NMDT had a loss of $335.
Net Interest Expense.
The Company's net interest and financing expenses was $242,941 for the nine months ended September 30, 2008, as compared to $1,850,560 for the nine months ended September 30, 2007, a decrease of $1,607,619, or 86.9%, primarily from lower associated interest costs due to debenture conversions that occurred in the nine months ended September 30, 2007 and note repayments this year, which reduced the aggregate principal balance of outstanding convertible notes, along with a decrease in interest financing expenses in accordance with EITF 00-19-02.
Net Income (Loss)
For the nine months ended September 30, 2008, the Company incurred a net gain of $3,669,442, compared to a net loss of ($1,905,782) for the nine months ended September 30, 2007, an increase in income of $5,575,224, or 292.5%, primarily as a result of:
· a gain of $4,626,577 relating to debt forgiveness in connection with the Strict Foreclosure Agreement,
· a decrease of $1,607,619 relating to interest expense,
· an increase in revenue of $424,823 from operations, and
· a decrease of $396,000 relating to the cumulative effect on prior years change in accounting principles
which more than offset:
· an increase in direct operating expenses of $158,873,
· an increase in indirect operating expenses of $292,554,
· an increase in loss from debt extinguishment of $38,153, and
· a decrease of $989,900 in gains associated with the discontinued operations of Cargo Connection.
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
Revenues.
Revenues from continuing operations for the three months ended September 30, 2008, were $150,684, compared with $284,488 for the three months ended September 30, 2007, a decrease of $133,804, or 47%, mostly due to an decrease in direct warehousing revenue of 90,574 and decreased transportation related revenue in excess of $42,530.
Direct Operating Expenses.
Direct operating expenses for the three months ended September 30, 2008 were $19,649, as compared to $197,848 for continued operations for the three months ended September 30, 2007, a decrease of $178,199 or 90.1%, primarily due to:
· a decrease of $78,530 in direct labor costs,
· a decrease of $65,250 in warehouse expenses,
· a decrease of $25,894 in transportation related costs, and
· a decrease of $8,525 in truck and trailer expenses,
As a percentage of revenue, the direct expenses decreased to 13.0% in 2008 from 69.5% in 2007.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses were $232,774 for the three months ended September 30, 2008, compared with $218,879 for the three months ended September 30, 2007, an increase of $13,895, or 6.3%, primarily as a result of:
· an increase of $32,319 in wages and associated benefits and taxes,
· an increase of 90,000 in guaranteed rental expenses,
· an increase of $11,649 of bad debt allowance and
· an increase in depreciation of $8,030,
which more than offset:
· a decrease of $63,700 in rent expenses,
· a decrease of approximately $27,920 in consulting and professional fees,
· a decease of $16,654 in utilities,
· a decrease in payroll related benefits and taxes of $9,558,
· a decrease in insurance expense of $6,796 and
· a decrease in travel expenses of $3,471.
Depreciation and Amortization.
Depreciation and amortization expense for the three months ended September 30, 2008 was $8,030, as compared to $-0- in the three months ended September 30, 2007.
Operating Loss.
The Company reported a loss from continuing operations before other income (expense) of $101,739 for the three months ended September 30, 2008, compared to a loss from continuing operations of $132,239 for the three months ended September 30, 2007, a decrease of $30,500 or 23.1%. As a percentage of revenue, the loss from operations represented 67.5% of revenues in 2008, as compared to 46.5% in 2007. Of the $101,739 loss from continuing operations for the three . . .
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