UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the Quarterly Period Ended
or
For the Transition Period from _________ to _________
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” a “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
| ☒ | Smaller reporting company | ||||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act: ☐
Indicate
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As of October 18, 2021, there were shares of the registrant’s common stock outstanding.
UNIQUE LOGISTICS INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED August 31, 2021
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIQUE LOGISTICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| August 31, 2021 | May 31, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable – trade, net | ||||||||
| Contract assets | ||||||||
| Factoring reserve | - | |||||||
| Other prepaid expenses and current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment – net | ||||||||
| Other long-term assets: | ||||||||
| Goodwill | ||||||||
| Intangible assets – net | ||||||||
| Operating lease right-of-use assets – net | ||||||||
| Deposits and other assets | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable – trade | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Accrued freight | ||||||||
| Revolving credit facility | - | |||||||
| Current portion of notes payable – net of discount | ||||||||
| Current portion of long-term debt due to related parties | ||||||||
| Current portion of operating lease liability | ||||||||
| Total current liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Long-term-debt due to related parties, net of current portion | ||||||||
| Notes payable, net of current portion – net of discount | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred Stock, $ par value: shares authorized | ||||||||
| Series A Convertible Preferred stock, $ par value; issued and outstanding as of August 31, 2021 and May 31, 2021 | ||||||||
| Series B Convertible Preferred stock, $ par value; and shares issued and outstanding as of August 31, 2021 and May 31, 2021, respectively | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of August 31, 2021 and May 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See notes to accompanying condensed consolidated financial statements.
| F-1 |
UNIQUE LOGISTICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For the Three Months Ended August 31, 2021 | For the Three Months Ended August 31, 2020 | |||||||
| Revenues: | ||||||||
| Airfreight services | $ | $ | ||||||
| Ocean freight and ocean services | ||||||||
| Contract logistics | ||||||||
| Customs brokerage and other services | ||||||||
| Total revenues | ||||||||
| Costs and operating expenses: | ||||||||
| Airfreight services | ||||||||
| Ocean freight and ocean services | ||||||||
| Contract logistics | ||||||||
| Customs brokerage and other services | ||||||||
| Salaries and related costs | ||||||||
| Professional fees | ||||||||
| Rent and occupancy | ||||||||
| Selling and promotion | ||||||||
| Depreciation and amortization | ||||||||
| Fees on factoring agreements | ||||||||
| Other | ||||||||
| Total costs and operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Other income (expenses) | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Amortization of debt discount | ( | ) | - | |||||
| Gain on extinguishment of convertible notes payable | - | |||||||
| Gain on forgiveness of promissory note | - | |||||||
| Total other expenses | ( | ) | ( | ) | ||||
| Net income (loss) before income taxes | ( | ) | ||||||
| Income tax expense | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net income (loss) per common share | ||||||||
| – basic | $ | $ | ( | ) | ||||
| – diluted | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding | ||||||||
| – basic | ||||||||
| – diluted | ||||||||
See notes to accompanying condensed consolidated financial statements.
| F-2 |
UNIQUE LOGISTICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited)
For the Three Months Ended August 31, 2021
| Series A | Series B | Additional | ||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | Retained | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Total | ||||||||||||||||||||||||||||
| Balance, June 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Conversion of Preferred B to Common Stock | - | ( | ) | ( | ) | ( | ) | - | - | |||||||||||||||||||||||||||
| Issuance of Common Stock for the conversion of notes and accrued interest | - | - | - | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Balance, August 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
For the Three Months Ended August 31, 2020
| Series A | Series B | Additional | ||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance, June 1, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, August 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
See notes to accompanying condensed consolidated financial statements.
| F-3 |
UNIQUE LOGISTICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Three Months Ended August 31, 2021 | For the Three Months Ended August 31, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | - | |||||||
| Amortization of right of use assets | ||||||||
| Gain on forgiveness of note payable | ( | ) | - | |||||
| Gain on extinguishment of convertible notes payable | ( | ) | - | |||||
| Change in deferred tax asset | ( | ) | - | |||||
| Accretion of consulting agreement | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable - trade | ( | ) | ( | ) | ||||
| Contract assets | ( | ) | ( | ) | ||||
| Factoring reserve | ( | ) | ||||||
| Other prepaid expenses and current assets | ( | ) | ||||||
| Deposits and other assets | ||||||||
| Accounts payable - trade | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Accrued freight | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | - | |||||
| Net Cash Used in Investing Activities | ( | ) | - | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from notes payable | ||||||||
| Repayments of notes payable | ( | ) | - | |||||
| Repayments of long-term debt due to related parties | ( | ) | ( | ) | ||||
| Borrowings on revolving credit facility, net | - | |||||||
| Net Cash Provided by Financing Activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents - Beginning of Period | ||||||||
| Cash and cash equivalents - End of Period | $ | $ | ||||||
| SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
| Cash Paid During the Period for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest | $ | $ | ||||||
| SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Conversion of Series B Preferred to Common Stock | $ | $ | ||||||
| Issuance of common stock for the conversion of principal and accrued interest | $ | $ | ||||||
See notes to accompanying condensed consolidated financial statements.
| F-4 |
UNIQUE LOGISTICS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
| 1. | NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Business
Unique Logistics International, Inc. (the “Company” or “Unique”) is a global logistics and freight forwarding company. The Company currently operates via its wholly owned subsidiaries, Unique Logistics International (NYC), LLC, a Delaware limited liability company (“UL NYC”), and Unique Logistics International (BOS) Inc, a Massachusetts corporation (“UL BOS”) and (collectively the “UL US Entities”). The Company provides a range of international logistics services that enable its customers to outsource sections of their supply chain process. This range of services can be categorized as follows:
| ● | Air Freight services | |
| ● | Ocean Freight services | |
| ● | Customs Brokerage and Compliance services | |
| ● | Warehousing and Distribution services | |
| ● | Order Management |
Liquidity
The accompanying condensed consolidated financial statements have been prepared on a going concern basis. Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.
From
the inception the Company experienced negative working capital and adverse cash flows from operations, primarily due to significant business
growth during the first twelve months in operations, entering new markets and products and repayment of an acquisition related debt.
As of August 31, 2021, the Company had negative working capital of approximately $
In response to such factors, the Company’s plans to alleviate the risk of substantial doubt are
| ● | Repaid significant portion of its acquisition related debt during the year ended May 31, 2021 | |
| ● | Entered
into a Second Amendment to the TBK Agreement to increase the credit
facility from $ | |
| ● | Entered into a Purchase Money Financing Agreement on September 8, 2021, with Corefund Capital, LLC to enable the Company to finance additional cargo charter flights for the peak shipping season. | |
| ● | Entered into an Exchange Agreement on August 4, 2021 to exchange all of its Convertible debt into shares of common stocks upon Financing Event (Note 5). |
In January 2020, the World Health Organization has declared the outbreak of a novel coronavirus (COVID-19) as a “Public Health Emergency of International Concern,” which continues to have an impact throughout the world and has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The coronavirus outbreak and government responses are creating disruption in global supply chains and adversely impacting many industries.
The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The extent of the impact of COVID-19 on our operational and financial performance will depend on the effect on our shippers and carriers, all of which are uncertain and cannot be predicted. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the coronavirus outbreak. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results. The Company has experienced increased air and ocean freight rates due to overall cargo restraints imposed by shippers and carriers and is in a position to pass these cost increases directly to the customers without significantly effecting its margins.
Due to impacts from the COVID-19 pandemic and the uncertain pace of recovery, seasonal variations in the availability of air and ocean carriers, the volatility of fuel prices and other supply and demand related factors, operating results for the three and six months ended August 31, 2021, are not necessarily indicative of operating results for the entire year.
While we continue to execute our strategic plan, the Company is also in a process of evaluating several other liquidity-oriented options such as raising additional capital, increasing credit limits of the revolving credit facilities, reducing cost of debt, controlling expenditures, and improving its cash collection processes. While many of the aspects of the Company’s plan involve management’s judgments and estimates that include factors that could be beyond our control and actual results could differ from our estimates. These and other factors could cause the strategic plan to be unsuccessful which could have a material adverse effect on our operating results, financial condition, and liquidity.
| F-5 |
As of August 31, 2021, we expect to alleviate our going concern needs for at least the next twelve months from the time these financial statements are made available with existing cash and cash equivalents and cash flows from operations. We expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements.
Basis of Presentation
The condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited interim financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for the periods presented. This report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended May 31, 2021. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The condensed consolidated balance sheet at May 31, 2021 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include determinations of the useful lives and expected future cash flows of long-lived assets, including intangibles, valuation of assets and liabilities acquired in business combinations, estimates of valuation assumptions for long-lived assets impairment, estimates and assumptions in valuation of debt and equity instruments and the calculation of share-based compensation. In addition, the Company makes significant judgments to recognize revenue – see policy note “Revenue Recognition” below.
| F-6 |
Fair Value Measurement
The Company follows the authoritative guidance that establishes a formal framework for measuring fair values of assets and liabilities in the consolidated financial statements that are already required by generally accepted accounting principles to be measured at fair value. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based on a hypothetical transaction in the principal or most advantageous market considered from the perspective of the market participant that holds the asset or owes the liability.
The Company utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborate or generally unobservable. The Company attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company is able to classify fair value balances based on the observability of those inputs. The guidance establishes a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to level 1 measurements and the lowest priority to level 3 measurements, and accordingly, level 1 measurement should be used whenever possible.
The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities or published net asset value for alternative investments with characteristics similar to a mutual fund.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs for the asset or liability.
The methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while management believes its valuation methods are appropriate, the fair value of certain financial instruments could result in a difference fair value measurement at the reporting date. There were no changes in the Company’s valuation methodologies from the prior year.
For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts for financial assets and liabilities such as cash and cash equivalents, accounts receivable - trade, contract assets, factoring reserve, other prepaid expenses and current assets, accounts payable – trade and other current liabilities, including contract liabilities, current portion of long-term debt due to related party payables, convertible notes, net and current portion of promissory loans approximate fair value due to their short-term nature as of August 31, 2021 and May 31, 2021. The carrying amount of the debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company. Lease liabilities approximate fair value based on the incremental borrowing rate used to discount future cash flows. The Company had no Level 3 assets or liabilities as of August 31, 2021, and May 31, 2021. There were no transfers between levels during the reporting period.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. No loss had been experienced, and management believes it is not exposed to any significant risk on credit.
| F-7 |
Accounts Receivable – Trade
Accounts
receivable - trade from revenue transactions are based on invoiced prices which the Company expects to collect. In the normal course
of business, the Company extends credit to customers that satisfy pre-defined credit criteria. The Company generally does not require
collateral to support customer receivables. Accounts receivable - trade, as shown on the consolidated balance sheets, is net of allowances
when applicable. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of
the consolidated financial statements, assessments of collectability based on an evaluation of historic and anticipated trends, the financial
condition of the Company’s customers, and an evaluation of the impact of economic conditions. The maximum accounting loss from
the credit risk associated with accounts receivable is the amount of the receivable recorded, net of allowance for doubtful accounts.
As of August 31, 2021 and May 31, 2021, the Company recorded an allowance for doubtful accounts of approximately $
Concentrations
Three
major customers represented approximately
| Customer | For the Three Months Ended August 31, 2021 | For the Three Months Ended August 31, 2020 | ||||||
| A | % | % | ||||||
| B | % | % | ||||||
| C | % | |||||||
| Total: | % | % | ||||||
Off Balance Sheet Arrangements
On
August 30, 2021, the Company terminated its agreement with an unrelated third party (the “Factor”) for factoring of specific
accounts receivable. The factoring under this agreement was treated as a sale in accordance with FASB ASC 860, Transfers and Servicing,
and is accounted for as an off-balance sheet arrangement. Proceeds from the transfers reflected the face value of the account less a
fee, which is presented in costs and operating expenses on the Company’s condensed consolidated statements of operations in the
period the sale occurs. Net funds received are recorded as an increase to cash and a reduction to accounts receivable outstanding in
the condensed consolidated balance sheets. The Company reported the cash flows attributable to the sale of receivables to third parties
and the cash receipts from collections made on behalf of and paid to third parties, on a net basis as trade accounts receivables in cash
flows from operating activities in the Company’s condensed consolidated statements of cash flows. The net principal balance of
trade accounts receivable outstanding in the books of the factor under the factoring agreement was
During the factoring agreement in place, the Company acted as the agent on behalf of the Factor for the arrangements and had no significant retained interests or servicing liabilities related to the accounts receivable sold. The agreement provided the Factor with security interests in purchased accounts until the accounts have been repurchased by the Company or paid by the customer. In order to mitigate credit risk related to the Company’s factoring of accounts receivable, the Company may purchase credit insurance, from time to time, for certain factored accounts receivable, resulting in risk of loss being limited to the factored accounts receivable not covered by credit insurance, which the Company does not believe to be significant.
During
the three months ended August 31, 2021 and 2020, the Company factored accounts receivable invoices totaling approximately $
| F-8 |
Income Taxes
The Company files a consolidated income tax return for federal and most state purposes.
Management has determined that there are no uncertain tax positions that would require recognition in the consolidated financial statements. If the Company were to incur an income tax liability in the future, interest and penalties on any income tax liability would be reported as interest expense. Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based on ongoing analysis of tax laws, regulations, and interpretations thereof as well as other factors. Generally, federal, state, and local authorities may examine the Company’s tax returns for three to four years from the filing date and the current and prior three to four years remain subject to examination as of December 31, 2020 for the UL US Entities, January 31, 2020 for the Company and May 31, 2020 for UL HI.
The
Company uses the assets and liability method of accounting for deferred taxes. Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between the balance sheet carrying amounts of existing assets and liabilities
and their respective tax basis. As of August 31, 2021 and May 31, 2021, the Company recognized a deferred tax asset of $
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for services. The Company recognizes revenue upon meeting each performance obligation based on the allocated amount of the total consideration of the contract to each specific performance obligation.
To determine revenue recognition, the Company applies the following five steps:
| 1. | Identify the contract(s) with a customer; | |
| 2. | Identify the performance obligations in the contract; | |
| 3. | Determine the transaction price; | |
| 4. | Allocate the transaction price to the performance obligations in the contract; and | |
| 5. | Recognize revenue as or when the performance obligation is satisfied. |
Revenue is recognized as follows:
| i. | Freight income - export sales | |
| Freight income from the provision of air, ocean, and land freight forwarding services are recognized over time based on a relative transit time basis thru the sail or departure from origin port. The Company is the principal in these transactions and recognizes revenue on a gross basis. | ||
| ii. | Freight income - import sales | |
| Freight income from the provision of air, ocean, and land freight forwarding services are recognized over time based on a relative transit time basis thru the delivery to the customer’s designated location. The Company is the principal in these transactions and recognizes revenue on a gross basis. | ||
| iii. | Customs brokerage and other service income | |
| Customs brokerage and other service income from the provision of other services are recognized at the point in time the performance obligation is met. |
| F-9 |
The Company’s business practices require, for accurate and meaningful disclosure, that it recognizes revenue over time. The “over time” policy is the period from point of origin to arrival of the shipment at US Port of entry (or in the case when the customer requires delivery to a designated point, the arrival at that delivery point). This over time policy requires the Company to make significant judgements to recognize revenue over the estimated duration of time from port of origin to arrival at port of entry. The point in the process when the Company meets its obligation in the port of entry and the subsequent transfer of the goods to the customer is when the customer has the obligation to pay, has taken physical possession, has legal title, risk and awards (ownership) and has accepted the goods. The Company has elected to not disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied as of the end of the period as the Company’s contracts with its customers have an expected duration of one year or less.
The Company uses independent contractors and third-party carriers in the performance of its transportation services. The Company evaluates who controls the transportation services to determine whether its performance obligation is to transfer services to the customer or to arrange for services to be provided by another party. The Company determined it acts as the principal for its transportation services performance obligation since it is in control of establishing the prices for the specified services, managing all aspects of the shipments process and assuming the risk of loss for delivery and collection.
Revenue billed prior to realization is recorded as contract liabilities on the condensed consolidated balance sheets and contract costs incurred prior to revenue recognition are recorded as contract assets on the condensed consolidated balance sheets.
Contract Assets
Contract assets represent amounts for which the Company has the right to consideration for the services provided while a shipment is still in-transit but for which it has not yet completed the performance obligation and has not yet invoiced the customer. Upon completion of the performance obligations, which can vary in duration based upon the method of transport and billing the customer, these amounts become classified within accounts receivable - trade.
Contract Liabilities
Contract liabilities represent the amount of obligation to transfer goods or services to a customer for which consideration has been received. There were no contract liabilities outstanding as of August 31, 2021 and May 31, 2021.
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates gross revenue by significant geographic area for the three months ended August 31, 2021 and 2020 based on origin of shipment (imports) or destination of shipment (exports):
| For
the Three Months Ended August 31, 2021 |
For
the Three Months Ended August 31, 2020 |
|||||||
| China, Hong Kong & Taiwan | $ | $ | ||||||
| Southeast Asia | ||||||||
| United States | ||||||||
| India Sub-continent | ||||||||
| Other | ||||||||
| Total revenue | $ | $ | ||||||
| F-10 |
Segment Reporting
Based on the guidance provided by ASC Topic 280, Segment Reporting, management has determined that the Company currently operates in one geographical segment and consists of a single reporting unit given the similarities in economic characteristics between its operations and the common nature of its products, services and customers.
The Company adopted ASC 260, Earnings per share, guidance from the inception. Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding, including warrants exercisable for less than a penny, (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the consolidated statements of operations) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
For the Three Months Ended | ||||
| Numerator: | ||||
| Net income | $ | |||
| Effect of dilutive securities | ||||
| Diluted net income | $ | |||
| Denominator: | ||||
| Weighted average common shares outstanding – basic | ||||
| Dilutive securities (a): | ||||
| Series A Preferred | ||||
| Series B Preferred | ||||
| Convertible notes | ||||
| Weighted average common shares outstanding and assumed conversion – diluted | ||||
| Basic net income per common share | $ | |||
| Diluted net income per common share | $ | |||
| (a) - Anti-dilutive securities excluded: | - | |||
The Company did not have anti-dilutive securities for the three months ended August 31, 2020.
| F-11 |
| 2. | PROPERTY AND EQUIPMENT |
Major classifications of property and equipment are summarized below:
| August 31, 2021 | May 31, 2021 | |||||||
| Furniture and fixtures | $ | $ | ||||||
| Computer equipment | ||||||||
| Software | ||||||||
| Leasehold improvements | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense charged to income for the three months ended August 31, 2021 and 2020 amounted to $
| 3. | INTANGIBLE ASSETS |
Intangible assets consist of the following:
| August 31, 2021 | May 31, 2021 | |||||||
| Trade names / trademarks | $ | $ | ||||||
| Customer relationships | ||||||||
| Non-compete agreements | ||||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Amortizable
intangible assets, including tradenames and non-compete agreements, are amortized on a straight-line basis over
Estimated amortization expense for the next five years and thereafter is as follows:
| Twelve Months Ending August 31, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| $ | ||||
| F-12 |
| 4. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consisted of the following:
| August 31, 2021 | May 31, 2021 | |||||||
| Accrued salaries and related expenses | $ | $ | ||||||
| Accrued sales and marketing expense | ||||||||
| Accrued professional fees | ||||||||
| Accrued income tax | ||||||||
| Accrued overdraft liabilities | ||||||||
| Accrued interest expense | - | |||||||
| Other accrued expenses and current liabilities | ||||||||
| $ | $ | |||||||
Other accrued expenses represent an advance customer deposit for charter flight program. Revenue would be recognized once the flight is completed.
| 5. | FINANCING ARRANGEMENTS |
Financing arrangements on the consolidated balance sheets consists of:
| August 31, 2021 | May 31, 2021 | |||||||
| Revolving Credit Facility | $ | $ | ||||||
| Promissory note (PPP) | ||||||||
| Promissory notes (EIDL) | ||||||||
| Notes payable | ||||||||
| Convertible notes – net of discount of $ | ||||||||
| Less: current portion (1) | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| (1) |
Revolving Credit Facility
On
June 1, 2021, the Company entered into a Revolving Purchase, Loan and Security Agreement (the “TBK Agreement”) with TBK BANK,
SSB, a Texas State Savings Bank (“Purchaser”), for a facility under which Purchaser will, from time to time, buy approved
receivables from the Seller. The TBK Agreement provides for Seller to have access to the lesser of (i) $
The
Core Facility provided Core with security interests in purchased accounts until the accounts have been repurchased by the Company or
paid by the customer. As of June 1, 2021, the Core Facility has been terminated along with all security interests granted to Core and
replaced with the TBK Agreement. This facility temporarily renewed on June 17, 2021, under the same terms and conditions as the original
agreement and the credit line was set at $
| F-13 |
On
August 4, 2021, the parties to the TBK Agreement entered into a First Amendment Agreement to increase the credit facility from $
On
September 17, 2021, (Note 13, Subsequent Events), the parties to the TBK Agreement entered into a Second Amendment to the TBK Agreement
primarily to increase the credit facility from $
Promissory Note (PPP)
On
March 9, 2021, the Company was granted a loan in the aggregate amount of $
Notes Payable
On
May 29, 2020, the Company entered into a $
On
May 29, 2020, the Company entered into a non-compete, non-solicitation and non-disclosure agreement with a former owner of ATL. The amount
payable under the agreement is $
On
March 19, 2021 the Company issued to an accredited investor a
On
August 31, 2021, the
Company received $
| F-14 |
Convertible Notes
Trillium SPA
On
October 8, 2020, the Company entered into a Securities Purchase Agreement (the “Trillium SPA”) with Trillium Partners (“Trillium”)
pursuant to which the Company sold to Trillium (i) a
The Company initially determined the fair value of the warrant and the beneficial conversion feature of the note using the Black-Scholes model and recorded an adjustment to the carrying value of the note liability with an equal and offsetting adjustment to Stockholders’ Equity.
The
note was amended on October 14, 2020, to adjust the conversion price to $
On
June 1, 2021, this Note maturity was extended to
On August 19, 2021, Trillium entered into a Securities Exchange Agreement as discussed below.
During
the three months ended August 31, 2021, a noteholder converted $
3a SPA
On
October 14, 2020, the Company entered into a Securities Purchase Agreement (the “3a SPA”) with 3a Capital Establishment (“3a”)
pursuant to which the Company sold to 3a (i) a
The
Company determined the fair value of the warrant using the Black-Scholes model and recorded an adjustment to the carrying value of the
note liability with an equal and offsetting adjustment to Stockholders Equity. The warrant had a grant date fair value of $
On
June 1, 2021, this Note maturity was extended to
On August 19, 2021, 3a entered into a Securities Exchange Agreement as discussed below.
As
of August 31, 2021 and May 31, 2021 the total unamortized debt discount related to the 3a SPA was $
During
the three months ended August 31, 2021, a noteholder converted $
| F-15 |
Trillium and 3a January Convertible Notes
On
January 28, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Trillium Partners
LP (“Trillium”) and 3a Capital Establishment (“3a” together with Trillium, the “Investors”) pursuant
to which the Company sold to each of the Investors (i) a
The
Notes mature on
On
June 1, 2021, maturity of these Notes was extended to
On August 19, 2021, investors entered into a Securities Exchange Agreement as discussed below.
As
of August 31, 2021 and May 31, 2021 the total unamortized debt discount related these Notes was $
Covenants
As of August 31, 2021 and May 31, 2020, the Company was in compliance with all covenants and debt agreements except for Trillium and 3a where the Company was deemed to be in default. On January 29, 2021, the Company and the investors (Trillium and 3a) entered into a waiver agreement which waived any and all defaults underlying the 3a, Trillium and 3a SPA’s and the Trillium and 3a Notes for a period of six months. Subsequently, the Company signed the Securities Exchange Agreement extending this waiver until a Termination Date event as described below.
Securities Exchange Agreement
On
August 4, 2021, the Company entered into a securities exchange agreement (the “Exchange Agreement”) with the investors (Trillium
and 3a) holding the above listed notes and warrants of the Company (each, including its successors and assigns, a “Holder”
and collectively the “Holders”). Pursuant to the Exchange Agreement,
To extent that any events that have occurred prior to the date hereof that could have resulted in an event of default under the Old Notes the Holders hereby waive the occurrence of any such event of default. From the date hereof through the earlier of date of (i) the Closing of the Exchange, or (ii) the Termination Date, the Holders agree to forebear from declaring any such event of default and further agree that will not take any steps to collect on the Old Notes and collect any liquidated damages owed under the Old Registration Rights Agreement (“RRA”). In the event the Exchange closes on or before the Termination Date, the defaults under the Old Notes will be permanently waived and any liquidated damages accrued under the Old RRAs will be forgiven. If the Exchange does not close on or before the Termination Date, the Company will be required to pay all the liquidated damages accrued under the Old RRAs as if this Agreement was never executed and the Holders will be entitled to all of the rights and remedies under the Old Transaction Documents.
| F-16 |
Future maturities related to the above promissory notes, notes payable and convertible notes are as follows:
| Twelve Months Ending August 31, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Less: current portion | ( | ) | ||
| Less: unamortized discount | ( | ) | ||
| $ | ||||
| 6. | RELATED PARTY TRANSACTIONS |
Related party debt consisted of the following:
| August 31, 2021 | May 31, 2021 | |||||||
| Due to Frangipani Trade Services (1) | $ | $ | ||||||
| Due to employee (2) | ||||||||
| Due to employee (3) | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| (1) | ||
| (4) | ||
| (5) |
Consulting Agreements
Unique
entered into a Consulting Services Agreement on May 29, 2020 for a term of three years with Great Eagle Freight Limited (“Great
Eagle” or “GEFD”), a Hong Kong Company (the “Consulting Services Agreement”).where the Company pays $
The
Company utilizes financial reporting services from the firm owned and controlled by David Briones, a member of the Board of Directors.
The service fees are $
| F-17 |
Accounts Receivable - trade and Accounts Payable - trade
Transactions
with related parties account for $
Revenue and Expenses
Revenue
from related party transactions is for export services from related parties or for delivery at place imports nominated by such related
parties. For the three months ended August 31, 2021, these transactions represented $
Direct
costs are services billed to the Company by related parties for shipping activities. For the three months ended August 31, 2021,
these transactions represented $
| 7. | RETIREMENT PLANS |
We
have two savings plans that qualify under Section 401(k) of the Internal Revenue Code. Eligible employees may contribute a portion of
their salary into the savings plans, subject to certain limitations.
| 8. | STOCKHOLDERS’ EQUITY |
Common Stock
On
June 28, 2021, a noteholder converted $
On
July 8, 2021, a noteholder converted $
On
August 3, 2021, a noteholder converted $
On
August 9, 2021, a noteholder converted $
Preferred Shares
Series B Convertible Preferred
On
August 13, 2021, Unique Logistics International, Inc. (the “Company”) issued shares of the Company’s common
stock (the “Preferred Conversion Shares”) pursuant to the conversion of shares of Series B Convertible Preferred Stock
held by Frangipani Trade Services Inc, an entity
| F-18 |
Warrants
The following is a summary of the Company’s warrant activity:
| Weighted Average | ||||||||
| Warrants | Exercise Price | |||||||
| Outstanding – May 31, 2021 | $ | |||||||
| Exercisable – May 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Outstanding – August 31, 2021 | $ | |||||||
| Exercisable – August 31, 2021 | $ | |||||||
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
At
August 31, 2021, the total intrinsic value of warrants outstanding and exercisable was $
| 9. | COMMITMENTS AND CONTINGENCIES |
Pending acquisitions
On
August 23, 2021, the Company and Unique Logistics Limited, Hong Kong (“ULHK”) entered into a Non-Binding Term Sheet for
The purchase of ULHK Entities is subject to, among other things, due diligence, receipt and review of definitive agreements, receipt of certain regulatory approvals, audited financial statements, material third part consents and consent of minority shareholders of ULHK Entities
Litigation
From time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of the business. There are no claims or actions pending or threatened against the Company that, if adversely determined, would in the Company’s management’s judgment have a material adverse effect on the Company.
| F-19 |
Leases
The Company leases office space, warehouse facilities and equipment under non-cancellable lease agreements expiring on various dates through October 2028. Office leases contain provisions for future rent increases. The Company adopted ASC 842 from inception, requiring the Company to recognize an asset and liability on the consolidated balance sheets for lease arrangements with terms longer than 12 months. The Company has elected the practical expedient to not apply the recognition requirement to leases with a term of less than one year (short term leases). The Company uses its incremental borrowing rate to discount lease payments to present value. The incremental borrowing rate is based on the estimated interest rate the Company could obtain for borrowing over a similar term of the lease at commencement date. Rental escalations, renewal options and termination options, when applicable, have been factored into the Company’s determination of lease payments when appropriate. The Company does not separate lease and non-lease components of contracts. Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are not included in the measurement of the lease liability or asset and are expensed as incurred.
The components of lease expense were as follows:
| For the Three Months Ended | For the Three Months Ended | |||||||
| August 31, 2021 | August 31, 2020 | |||||||
| Operating lease | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total net lease cost | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
| August 31, 2021 | May 31, 2021 | |||||||
| Operating leases: | ||||||||
| Operating lease ROU assets – net | $ | $ | ||||||
| Current operating lease liabilities, included in current liabilities | $ | $ | ||||||
| Noncurrent operating lease liabilities, included in long-term liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
Supplemental cash flow and other information related to leases was as follows:
| For the Three Months Ended August 31, 2021 | For the Three Months Ended August 31, 2020 | |||||||
| ROU assets obtained in exchange for lease liabilities: | ||||||||
| Operating leases | $ | $ | ||||||
| Weighted average remaining lease term (in years): | ||||||||
| Operating leases | ||||||||
| Weighted average discount rate: | ||||||||
| Operating leases | % | % | ||||||
| F-20 |
As of August 31, 2021, future minimum lease payments under noncancelable operating leases are as follows:
| Twelve Months Ending August 31, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease obligations | $ | |||
| 10. | INCOME TAX PROVISION |
The income tax expense consists of the following:
| August 31, 2021 | August 31, 2020 | |||||||
| Federal | ||||||||
| Current | $ | $ | ||||||
| Deferred | ||||||||
| State and Local | - | |||||||
| Current | ||||||||
| Deferred | ||||||||
| Income tax expense | $ | $ | ||||||
The expected tax expense based on the statutory rate is reconciled with actual tax expense benefit as follows:
| For the Three Months Ended August 31, 2021 |
Three Months Ended August 31, 2020 | |||||||
| US Federal statutory rate (%) | % | % | ||||||
| State income tax, net of federal benefit | % | % | ||||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Other permanent differences, net | % | |||||||
| Income tax provision (%) | % | |||||||
As of August 31, 2020, the Company recorded a full valuation allowance against the deferred tax assets due to insufficient evidence to support the utilization of these benefits.
| 11. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through the date the condensed consolidated financial statements were available to be issued. Based on this evaluation, the Company has identified the following reportable subsequent events other than those disclosed elsewhere in these condensed consolidated financial statements.
Purchase Money Financing
On September 8, 2021 (the “Effective Date”), the Company entered into a Purchase Money Financing Agreement (the “Financing Agreement”) with Corefund Capital, LLC (“Corefund”) in order to enable the Company to finance additional cargo charter flights for the peak shipping season.
Pursuant to the Financing Agreement, the Company may, from time to time, request financing from Corefund to enable the Company to engage Company’s suppliers to provide chartered cargo flights for the Company’s clients. The Company may also request that Corefund tender payments directly to a supplier. Corefund requires payments from a buyer to be made to a Deposit Account Control Agreement account at an agreed upon bank where Corefund is the sole director and accessor to the account for the term of the relationship.
| F-21 |
As
collateral securing its obligations under the Financing Agreement, the Company granted Corefund a continuing security interest in all
of the Company’s now owned and hereafter acquired Accounts Receivable (“Collateral”) subject to the security interest
granted pursuant to that certain Revolving Purchase, Loan and Security Agreement, dated as of June 2, 2021. Immediately upon an Event
of Default (as defined in the Financing Agreement), all outstanding obligations shall accrue interest at the rate of
Revolving credit facility
On
September 17, 2021, the parties to the TBK Agreement entered into a Second Amendment to the TBK Agreement primarily to increase the credit
facility from $
Amendment of a Note Payable
On
New bridge notes
On
October 1, 2021, the Company entered into a Securities Purchase Agreement with Trillium Partners LP and Carpathia LLC (each a “Buyer”)
pursuant to which the Company issued to each Buyer a Note in the aggregate principal amount of $
Note Conversion
On September 28, 2021, a noteholder converted
$
| F-22 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) that reflect management’s current views with respect to future events and financial performance. These statements are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by the Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report. The forward-looking statements made in this report are based only on events or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. These risks include, by way of example and without limitation:
● The company provides services to customers engaged in international commerce. Everything that affects international trade has the potential to expand or contract our primary market and adversely impact our operating results
●·We depend on operators of aircrafts, ships, trucks, ports and airports
● We derive a significant portion of our total revenues and net revenues from our largest customers
● Due to our dependence on a limited number of customers, we are subject to a concentration of credit risk
● Our earnings may be affected by seasonal changes in the transportation industry
| 3 |
● Our business is affected by ever increasing regulations from a number of sources in the United States and in foreign locations in which we operate
● As a multinational corporation, we are subject to formal or informal investigations from governmental authorities or others in the countries in which we do business
● The global economy and capital and credit markets continue to experience uncertainty and volatility
● Our business is subject to significant seasonal fluctuations driven by market demands and each quarter is affected by seasonal trends.
● Our revenue and direct costs are subject to significant fluctuations depending on supply and demand for freight capacity.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”). We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.
As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms “Company,” “we,” “us,” and “our” refer to Unique Logistics International, Inc. (formerly known as Innocap, Inc.), and our wholly subsidiaries, Unique Logistics International (ATL) LLC, a Georgia limited liability company (“UL ATL”), Unique Logistics International (BOS) Inc, a Massachusetts corporation (“UL BOS”) and Unique Logistics International (NYC) LLC, a Delaware limited liability company (“UL NYC”).”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.
Business Overview
The Company provides a range of international logistics services that enable its customers to outsource to the Company sections of their supply chain process. The services provided by the Company are seamlessly managed by its network of trained employees and integrated information systems. We enable our customers to share data regarding their international vendors and purchase orders with us, execute the flow of goods and information under their operating instructions, provide visibility to the flow of goods from factory to distribution center or store and when required, update their inventory records.
Our range of services can be categorized as follows:
| ● | Air Freight services | |
| ● | Ocean Freight services | |
| ● | Customs Brokerage and Compliance services | |
| ● | Warehousing and Distribution services | |
| ● | Order Management |
| 4 |
Results of Operations
Revenue
The Company’s recorded total revenue from operations for the three months ended August 31, 2021 and 2020 in the amounts of $189.8 million and $57.4 million, respectively. This increase represents management’s success in combining the acquired entities, achievement of synergies, as well as significant increase in a number of customers, shipping volumes and the market prices, for both air and ocean freight services. Management is also projecting strong demand for international logistics services driven by a recovering US economy. The Company is in a strong position to deliver on its strategy, ensuring growth both organically and through acquisitions in strategic geographic areas of our business.
Costs and Operating Expenses
Costs and operating expenses were $186.6 million for the three months ended August 31, 2021, compared with $58.0 million for the three months ended August 31, 2020. This increase in cost was attributable to a significant increase in shipping volume and market prices. The Company is focused on product gross margins and is anticipating to retain and improve its margins as it continues to grow its customer base.
Other Income (Expense)
Other income (expense) is comprised of interest expense, gain on forgiveness of promissory notes, gain on extinguishment of debt and Amortization of debt discount on convertible notes. During the three months ended August 31, 2021, interest expense and bank fees totalled approximately $1.3 million. The Company recorded approximately $0.4 million amortization of debt discount related to the convertible notes and approximately $0.8 million on extinguishment of debt. In addition, during the three months ended August 31, 2021, the Company was granted forgiveness of the Paycheck Protection Program loans under the CARES Act, (the “PPP Loan”) and recorded a gain on forgiveness of approximately $0.4 million.
Net Income (Loss)
Net income was $2.0 million for the three months ended August 31, 2021, compared to a net loss of $0.6 million for the three months ended August 31, 2020. The change was primarily due to the Company’s management successfully combining acquired entities, achieved synergies, and strategically growing new business.
Adjusted EBITDA
We define adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, factoring fees, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items.
Consolidated adjusted EBITDA for the three months ended August 31, 2021 was approximately $3.4 million, an compared to $0.1 million for the three months ended August 31, 2020.
Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. We present adjusted EBITDA because we believe that adjusted EBITDA is a useful supplement to net income from operations as an indicator of operating performance. We use adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe adjusted EBITDA will also be useful to others, including our stockholders, as a valuable financial metric.
| 5 |
We believe that adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net income from continuing operations and adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net income from operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Following is the reconciliation of our consolidated net income to adjusted EBITDA:
For the Three Months Ended August 31, 2021 | For the Three Months Ended August 31, 2020 | |||||||
| Net income (loss) | $ | 2,023,416 | $ | (601,171 | ) | |||
| Add Back: | ||||||||
| Income tax expense | 634,459 | 16,694 | ||||||
| Depreciation and amortization | 193,797 | 190,819 | ||||||
| Stock-based compensation | - | - | ||||||
| Gain on forgiveness of promissory notes | (358,236 | ) | - | |||||
| Gain on extinguishment of convertible notes | (780,050 | ) | - | |||||
| Factoring fees | 27,000 | 474,060 | ||||||
| Interest expense (including accretion of debt discount) | 1,675,759 | 32,439 | ||||||
| Adjusted EBITDA | $ | 3,416,145 | $ | 112,841 | ||||
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared on a going concern basis. Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.
From the inception, the Company experienced negative working capital and adverse cash flows from operations, primarily due to significant business growth during the first twelve months in operations, entering new markets and products and repayment of an acquisition related debt. As of August 31, 2021, the Company had negative working capital of approximately $1.7 million compared with $3.5 million negative working capital as of May 31, 2021. These factors raise the risk of there being substantial doubt about the Company’s ability to continue as a going concern.
In response to such factors, the Company’s plans to alleviate the risk of substantial doubt are
| ● | Repaid significant portion of its acquisition related debt during the year ended May 31, 2021 | |
| ● | Entered into a Second Amendment to the TBK Agreement to increase the credit facility from $40.0 million to $47.5 million for the period through January 31, 2022 | |
| ● | Entered into a Purchase Money Financing Agreement on September 8, 2021, with Corefund Capital, LLC to enable the Company to finance additional cargo charter flights for the peak shipping season. | |
| ● | Entered into an Exchange Agreement on August 4, 2021 to exchange all of its Convertible debt into shares of common stocks upon Financing Event (Note 5). |
While we continue to execute our strategic plan, the Company is also in a process of evaluating several other liquidity-oriented options such as raising additional capital, increasing credit limits of the revolving credit facilities, reducing cost of debt, controlling expenditures, and improving its cash collection processes. While many of the aspects of the Company’s plan involve management’s judgments and estimates that include factors that could be beyond our control and actual results could differ from our estimates. These and other factors could cause the strategic plan to be unsuccessful which could have a material adverse effect on our operating results, financial condition, and liquidity.
| 6 |
As of August 31, 2021, we expect to meet our liquidity needs for the next twelve months with cash and cash equivalents and cash flows from operations. We expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements.
The following table summarizes total current assets, liabilities and working capital at August 31, 2021 compared to May 31, 2021:
August 31, 2021 | May 31, 2021 | Change | ||||||||||
| Current Assets | $ | 119,575,786 | $ | 52,400,799 | $ | 67,174,987 | ||||||
| Current Liabilities | $ | 121,288,046 | $ | 55,929,942 | $ | 65,358,104 | ||||||
| Working Capital Deficit | $ | (1,712,260 | ) | $ | (3,529,143 | ) | $ | (1,816,883 | ) | |||
Increase in current assets is primarily due to an increase in trade accounts receivable, approximately $49.8 million as a result of increase in sales as well as a repurchase of approximately $31.5 million of own accounts receivable from the Factor previously accounted off balance sheet. An increase in contract assets of approximately $25.0 million related to company’s revenue recognition policy “over time” for shipments in transit. A decrease in factoring reserve $7.6 million is a result of replacing factoring arrangements with a revolving line of credit on June 1, 2021.
Increase in current liabilities is primarily due to increase in trade accounts payables and addition of a revolving line of credit. Significant increase in customer orders led to increase in accounts payable of approximately $6.0 million, increase in accrued expenses and other current liabilities of approximately $4.4 million, an increase in accrued contact liabilities of $14.7 million for the freight in transit, an increase in the outstanding balance on the line of credit of $39.5 million and an increase in the current portion of notes payable by $0.7 million related to cash received from an investor in contemplation of issuance of a $1.0 million short term note.
| For the Three Months Ended, August 31, 2021 | For the Three Months Ended, August 31, 2020 | Change | ||||||||||
| Net cash used in by operating activities | $ | (40,400,646 | ) | $ | (945,839 | ) | $ | (39,454,807 | ) | |||
| Net cash used in investing activities | $ | (24,199 | ) | $ | - | $ | (24,199 | ) | ||||
| Net cash used in financing activities | $ | 40,468,637 | $ | 80,000 | $ | 40,388,637 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 43,792 | $ | (865,839 | ) | $ | 909,631 | |||||
Operating activities used cash of $40.4 million for the three months ended August 31, 2021 compared to net cash used by operations of $0.9 million for the three months ended August 31, 2020. Primary reason for cash used for the three months ended August 31, 2021, was a significant increase in accounts receivables, reflecting repurchase of trade receivables from a factor taking advantage of a better interest rate on Company’s new revolving credit facility. This cash outlays were balanced by a corresponding increase in accounts payable, reflecting company’s ability to finance operations through extended credit with diverse network of suppliers, partners and shipping companies.
Investing activities used cash of $24,199 for the three months ended August 31, 2021 compared to $0 for the three months ended August 31, 2020. During the three months ended August 31, 2021, investing activities consisted of purchasing office equipment.
Financing activities provided cash of $40.5 million for the three months ended August 31, 2021 and were the result of receiving aggregate gross proceeds of $1.0 million from an investor in exchange for a contemplated note payable and net proceeds of $39.5 million from the line of credit facility in effect from June 1, 2021 used to repurchase factored trade receivables per above. These proceeds were offset by payments on notes payable and related party debt of $41,666 and $32,780, respectively.
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Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of the condensed consolidated financial statements prepared by management and are based upon management’s current judgments. These judgments are normally based on knowledge and experience regarding past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management’s current judgments. While there are a number of accounting policies, methods and estimates that affect our condensed consolidated financial statements, the areas that are particularly significant include revenue recognition; the fair value of acquired assets and liabilities; fair value of contingent consideration; the assessment of the recoverability of long-lived assets, goodwill and intangible assets; and leases.
We perform an impairment test of goodwill for each year unless events or circumstances indicate impairment may have occurred before that time. We assess qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount. After assessing qualitative factors, if further testing is necessary, we would determine the fair value of each reporting unit and compare the fair value to the reporting unit’s carrying amount.
Intangible assets consist of customer relationships, trade names and trademarks and non-compete agreements arising from our acquisitions. Customer relationships are amortized on a straight-line basis over 12 to 15 years. Tradenames, trademarks and non-compete agreements, are amortized on a straight-line basis over 3 to 10 years.
We review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, we estimate fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Our significant accounting policies are summarized in Note 1 of our condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact there are resource constraints and management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated, as of the end of the period covered by this Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, which took into consideration the recent acquisition and integration of three private companies, our Principal Executive Officer and Principal Financial Officer concluded as of August 31, 2021 that our disclosure controls and procedures were not effective and require remediation in order to be effective at the reasonable assurance level. Prior to the business combination, we have been a private company with limited accounting personnel and other resources with which we address our internal control over financial reporting. In connection with the audit of our financial statements as of and for the year ended May 31, 2021, our management identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified relate to the fact that we did not design and maintain an effective control environment commensurate with our financial reporting requirements, including (a) lack of a sufficient number of trained professionals with an appropriate level of accounting knowledge, training and experience. Management’s general assessment of the above processes in light of the company’s size, maturity and complexity, as to the design and effectiveness of the internal controls over financial reporting is that the key controls and procedures in each of these processes provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) has occurred during the three months ended August 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management is currently assessing a remediation plan and intends to implement such controls and procedures. Management intends to have the controls and procedures implemented and in place by May 31, 2022.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations, except as set forth below. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
ITEM 1A. RISK FACTORS
Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our most recent Annual Report on Form 10-K and in our other filings with the SEC, the occurrence of any one of which could have a material adverse effect on our actual results. There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K and our other filings with the SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Index
* Filed Herewith
** In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
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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.
| UNIQUE LOGISTICS INTERNATIONAL, INC. | ||
| By: | /s/ Sunandan Ray | |
| Sunandan Ray | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| By: | /s/ Eli Kay | |
| Eli Kay | ||
Chief Financial Officer (Principal Financial Officer) |
||
| October 18, 2021 | ||
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