10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
FORM 10-Q
____________________________________________

x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the quarterly period ended March 31, 2016
 
 
o
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the transition period from _________ to _________
 
 
 
Commission File Number 001-34470
____________________________________________
 
ECHO GLOBAL LOGISTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
____________________________________________
Delaware
 
20-5001120
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
600 West Chicago Avenue
Suite 725
Chicago, Illinois 60654
Phone: (800) 354-7993
(Address (including zip code) and telephone number (including area code)
of registrant's principal executive offices)
____________________________________________

        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. Yes: x    No: o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: x    No: o

        Indicate by check mark whether the Registrant is an a large accelerated filer, an accelerated filer, or non-accelerated filer. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer: x
 
Accelerated filer: o
 
Non-accelerated filer: o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
        Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o     No: x

        As of April 28, 2016, the Registrant had 30,137,231 shares of Common Stock, par value $0.0001 per share, outstanding.


 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.    Consolidated Financial Statements


Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
Revenue
$
405,277,532

 
$
283,491,574

Costs and expenses:
 
 
 
Transportation costs
324,450,717

 
230,239,858

Selling, general, and administrative expenses
69,476,488

 
44,027,813

Depreciation and amortization
7,529,333

 
3,873,137

Income from operations
3,820,994

 
5,350,766

Interest expense
(3,503,395
)
 
(37,968
)
Other expense
—

 
(52,021
)
Interest and other expense
(3,503,395
)
 
(89,989
)
Income before provision for income taxes
317,599

 
5,260,777

Income tax expense
(54,988
)
 
(1,933,000
)
Net income
$
262,611

 
$
3,327,777

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.01

 
$
0.14

Diluted
$
0.01

 
$
0.14

See accompanying notes.


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Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Balance Sheets
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,518,677

 
$
56,522,194

Accounts receivable, net of allowance for doubtful accounts of $1,403,858 and $1,627,315 at March 31, 2016 and December 31, 2015, respectively
208,990,671

 
196,420,614

Income taxes receivable
1,528,262

 
1,038,327

Prepaid expenses
3,512,189

 
3,605,602

Other current assets
3,288,483

 
3,237,227

Total current assets
260,838,282

 
260,823,964

Noncurrent assets:
 
 
 
Property and equipment, net
28,085,153

 
27,304,474

Goodwill
307,314,171

 
308,490,588

Intangible assets, net of accumulated amortization of $30,784,159 and $26,785,810 at March 31, 2016 and December 31, 2015, respectively
143,533,820

 
147,532,169

Other noncurrent assets
2,986,788

 
2,358,587

Total noncurrent assets
481,919,932

 
485,685,818

Total assets
$
742,758,214

 
$
746,509,782

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
116,403,035

 
$
103,985,783

Due to seller, current
843,842

 
2,338,462

Accrued expenses
28,020,457

 
30,283,062

Other current liabilities
—

 
784,829

Total current liabilities
145,267,334

 
137,392,136

Noncurrent liabilities:
 
 
 
Convertible notes, net
198,344,843

 
196,659,354

Due to seller, noncurrent
1,004,230

 
1,748,235

Other noncurrent liabilities
5,316,566

 
2,940,435

Deferred income taxes
12,166,979

 
12,520,048

Total noncurrent liabilities
216,832,618

 
213,868,072

Total liabilities
362,099,952

 
351,260,208

Stockholders' equity:
 
 
 

Common stock, par value $0.0001 per share, 100,000,000 shares authorized, 29,941,529 shares issued and 28,992,684 shares outstanding at March 31, 2016; 29,765,525 shares issued and 29,727,588 shares outstanding at December 31, 2015
2,997

 
2,979

Treasury stock, 948,845 and 37,937 shares at March 31, 2016 and December 31, 2015, respectively
(19,390,803
)
 
(784,829
)
Additional paid-in capital
322,754,287

 
319,002,254

Retained earnings
77,291,781

 
77,029,170

Total stockholders' equity
380,658,262

 
395,249,574

Total liabilities and stockholders' equity
$
742,758,214

 
$
746,509,782

See accompanying notes.

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Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
262,611

 
$
3,327,777

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
(69,371
)
 
1,992,197

Noncash stock compensation expense
5,316,837

 
1,891,067

Noncash interest expense
1,862,661

 
—

Change in contingent consideration due to seller
(152,382
)
 
(95,934
)
Depreciation and amortization
7,529,333

 
3,873,137

Change in assets, net of acquisitions:
 
 
 
Accounts receivable
(12,570,057
)
 
(5,395,359
)
Taxes receivable
(497,228
)
 
(2,500,965
)
Prepaid expenses and other assets
413,201

 
648,217

Change in liabilities, net of acquisitions:
 
 
 
Accounts payable
12,417,253

 
12,365,149

Accrued expenses and other liabilities
(162,880
)
 
(6,676,417
)
Net cash provided by operating activities
14,349,978

 
9,428,869

Investing activities
 
 
 
Purchases of property and equipment
(4,311,663
)
 
(2,790,885
)
Payments for acquisitions, net of cash acquired
—

 
(5,869,303
)
Net cash used in investing activities
(4,311,663
)
 
(8,660,188
)
Financing activities
 
 
 
Tax benefit of stock options exercised
283,698

 
1,121,270

Payment of contingent consideration
(2,086,243
)
 
(2,665,833
)
Proceeds from exercise of stock options
34,188

 
773,168

Employee tax withholdings related to net share settlements of equity-based awards
(1,882,672
)
 
(1,576,316
)
Purchases of treasury stock
(19,390,803
)
 
—

Proceeds from borrowing on line of credit
—

 
29,782,500

Repayments of amounts borrowed on line of credit
—

 
(29,782,500
)
Proceeds from borrowing on ABL facility
6,000,000

 
—

Repayments of amounts borrowed on ABL facility
(6,000,000
)
 
—

Payment to former owners of One Stop Logistics
—

 
(13,782,500
)
Net cash used in financing activities
(23,041,832
)
 
(16,130,211
)
Decrease in cash and cash equivalents
(13,003,517
)
 
(15,361,530
)
Cash and cash equivalents, beginning of period
56,522,194

 
32,542,119

Cash and cash equivalents, end of period
$
43,518,677

 
$
17,180,589

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
—

 
$
37,968

Cash paid during the period for income taxes
436,900

 
1,324,828

Noncash financing activity
 
 
 
Due to seller
$
—

 
$
1,500,000

See accompanying notes.


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Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2016
(Unaudited)

 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Retained
Earnings
 
Total
Balance at December 31, 2015
29,765,525

 
$
2,979

 
$
319,002,254

 
(37,937
)
 
$
(784,829
)
 
$
77,029,170

 
$
395,249,574

Share compensation expense
—

 
—

 
5,316,837

 
—

 
—

 
—

 
5,316,837

Exercise of stock options
2,800

 
—

 
34,188

 
—

 
—

 
—

 
34,188

Common stock issued for vested restricted stock
214,886

 
22

 
(22
)
 
—

 
—

 
—

 
—

Common stock issued for vested performance shares
37,547

 
4

 
(4
)
 
—

 
—

 
—

 
—

Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of share-based awards
(79,229
)
 
(8
)
 
(1,882,664
)
 
—

 
—

 
—

 
(1,882,672
)
Tax benefit from exercise of stock options
—

 
—

 
283,698

 
—

 
—

 
—

 
283,698

Purchases of treasury stock
—

 
—

 
—

 
(910,908
)
 
(18,605,974
)
 
—

 
(18,605,974
)
Net income
—

 
—

 
—

 
—

 
—

 
262,611

 
262,611

Balance at March 31, 2016
29,941,529

 
$
2,997

 
$
322,754,287

 
(948,845
)
 
$
(19,390,803
)
 
$
77,291,781

 
$
380,658,262


See accompanying notes.

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Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Echo Global Logistics, Inc. and its subsidiaries (the "Company" or "Echo"). All significant intercompany accounts and transactions have been eliminated in the consolidation. The consolidated statements of operations include the results of entities or assets acquired from the effective date of the acquisition for accounting purposes.

The preparation of the consolidated financial statements is in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") and accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules or regulations. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments considered necessary for a fair presentation of the results for the period and those adjustments are of a normal recurring nature. The operating results for the three month period ended March 31, 2016 are not necessarily indicative of the results expected for the full year 2016. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's audited financial statements for the year ended December 31, 2015.

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results can differ from those estimates.

Fair Value of Financial Instruments

The carrying values of the Company's financial instruments, which consist of cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values due to their short term nature. The fair value of the due to seller liabilities are determined based on the likelihood of the Company making contingent earn-out payments. The fair value of the contingent asset related to the Command Transportation, LLC ("Command") acquisition is determined based on the likelihood of the Company receiving contingent payments (see Footnote 3). The fair value of the liability component of the Notes (as defined in Footnote 11) was determined using the discounted cash flow analysis discussed in Footnote 11.


2. Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, Compensation – Stock Compensation:  Improvements to Employee Share-Based Payment Accounting.  The guidance requires the recognition of the income tax effects of share-based payment awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. This new accounting standard is effective as of January 1, 2017.  The Company is evaluating the effects that the adoption of this guidance will have on the Company’s financial statements.
 
In February 2016, the FASB issued ASU 2016-02, Leases.  This guidance requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months.  This new accounting standard is effective as of January 1, 2019.  The Company is evaluating the effects that the adoption of this guidance will have on the Company’s financial statements.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"). This guidance eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during

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Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015

the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. The Company early adopted ASU 2015-16, effective with the Form 10-Q filing for the period ended September 30, 2015. This change in accounting principle allowed the Company to record an immaterial measurement-period adjustment to amortization expense in the third quarter of 2015.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"), requiring debt issuance costs to be presented on the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred asset. ASU 2015-03 must be applied on a full retrospective basis, with all prior periods restated for the new presentation. The Company early adopted ASU 2015-03, effective with the Form 10-Q filing for the quarter ended June 30, 2015. Early adoption allowed the Company to record the significant debt issuance costs incurred in the second quarter of 2015 in accordance with ASU 2015-03, instead of waiting until 2016 to adopt ASU 2015-03 and then retrospectively restating the 2015 numbers. Effective with the Form 10-Q filing for the period ended June 30, 2015, the Company presents debt issuance costs related to the Notes (as defined in Footnote 11 (Long-Term Debt)) on the balance sheet as a contra-liability that reduces the carrying amount of the Note liability, rather than as a deferred asset. The Company's policy with regard to debt issuance costs incurred related to the Company's ABL Facility (as defined in Footnote 11 (Long-Term Debt)) is to present these costs as a contra-liability in periods when there is a related ABL Facility debt liability on the balance sheet. If there is no outstanding draw on the ABL Facility at period end, and thus no liability is recorded on the balance sheet, these debt issuance costs are presented as a deferred asset. After the Company had adopted this policy, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements in August 2015. This ASU was meant to clarify the guidance in ASC 2015-03, and stated that the SEC staff would not object to a company presenting debt issuance costs related to a line-of-credit arrangement on the balance sheet as a deferred asset, regardless of whether there were any outstanding borrowings at period-end. ASU 2015-15 does not require this presentation as a deferred asset, and thus the Company will continue to follow the accounting policy adopted in the second quarter of 2015.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the guidance regarding the consolidation analysis performed by reporting entities that are involved with VIEs, particularly those that have decision maker or service provider fee arrangements and related-party relationships. This new accounting standard is effective as of January 1, 2016, and the adoption did not have a material impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. The accounting standard is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
    
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. The guidance is effective for annual and interim periods beginning after December 15, 2017. Two methods of adoption are permitted - a full retrospective method that applies the new standard to each prior reporting period presented, or a modified retrospective approach that recognizes the cumulative effect of applying the new standard at the date of initial application. Early adoption is not permitted. The Company is evaluating the effects that the adoption of this guidance will have on the Company’s financial statements.

3. Acquisitions

Command Transportation, LLC

On June 1, 2015, the Company completed the acquisition of all of the outstanding membership units of Command, one of the largest privately held truckload brokers and non-asset based transportation providers in the United States. Command is headquartered in Skokie, Illinois, with satellite locations in Texas, Missouri and Kansas.

The Company financed the cash purchase price for the Command acquisition, in part, with the proceeds from the issuance of shares of its common stock and Notes. The Company financed the remainder of the cash purchase price for the Command acquisition with drawings under the ABL Facility. Additionally, a portion of the purchase price consisted of shares of Echo common stock issued to one of the sellers. The purchase price is reduced by a contingent consideration asset related to

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Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015

the retention of former Command employees. The acquisition date fair value of the total consideration transferred was $407.7 million, subject to post-closing adjustments for working capital and cash. The fair value of the total consideration transferred was as follows:
Cash
$
394,279,778

Echo common stock, fair value
14,746,000

Contingent consideration, fair value
(1,176,417
)
Working capital adjustment, December 2015
(142,969
)
Total consideration transferred
$
407,706,392


The equity portion of the purchase price consisted of 503,829 unregistered shares of Echo common stock issued to Paul Loeb, the former owner of Command, on June 1, 2015. The closing price of Echo common stock on June 1, 2015 was $32.52 per share. As these shares were unregistered, the Company applied a 10% marketability discount to determine the fair value of the consideration transferred.
The following table summarizes the preliminary allocation of the total consideration transferred for the acquisition of Command:
Cash
$
9,495,246

Accounts receivable, net
62,398,350

Property and equipment
3,667,615

Prepaid expenses
818,903

Goodwill
225,304,568

Intangible assets
125,400,000

Total assets acquired
$
427,084,682

Accounts payable
$
11,172,240

Accrued expenses
8,206,050

Total liabilities assumed
$
19,378,290

Total consideration transferred
$
407,706,392

Goodwill of $225,304,568, which is approximately the amount of goodwill deductible for U.S. income tax purposes, represents the premium the Company paid over the fair value of the net tangible and identifiable intangible assets it acquired. The Company paid this premium because the acquisition of Command will, among other things, significantly enhance the Company's national scale and density in the highly fragmented truckload market. In addition, Echo paid this premium to acquire an experienced sales force with established customer and carrier relationships and Command executives with significant experience in the transportation industry.
The allocation of the purchase price to the assets and liabilities above is subject to change as the Company finalizes purchase accounting. The Company is in the process of finalizing the valuation of certain acquired accounts receivable, accounts payable, property and equipment, and intangible assets. During the first quarter of 2016, the Company adjusted the purchase price to recognize a $1.2 million contingent asset that may be due from the seller related to the retention of former Command employees. The fair value of the contingent asset at the acquisition date was determined based on the probability of the Company meeting certain employee retention criteria set forth in the purchase agreement. The Company recorded the current and noncurrent portions of the contingent asset to other current assets and other noncurrent assets, respectively, on the balance sheet. The Company will determine the fair value of the contingent asset each quarter based on the likelihood of meeting the employee retention criteria, and will record any change in fair value to selling, general and administrative expense in the statement of operations. The fair value of the contingent asset at March 31, 2016 is $1.2 million. The maximum amount the company can receive under this agreement is $1.5 million.

    




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Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015


The fair values assigned to the intangible assets acquired were as follows:
Intangible Asset
Value
Useful Life
Customer relationships
$
97,200,000

17 years
Carrier relationships
18,300,000

17 years
Trade names
5,000,000

4 years
Noncompete agreements
4,900,000

5-8 years
 
$
125,400,000

 
The customer relationships are being amortized using an accelerated method, as an accelerated method best approximates the distribution of cash flows generated by the acquired customer relationships. The carrier relationships, trade names and noncompete agreements are being amortized using the straight-line method.

On June 1, 2015, the Company issued 335,882 shares of restricted common stock to 33 Command employees as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). This restricted common stock vests after 1 year and will be recognized as compensation expense over the vesting period. Additionally, at the closing, the Company issued 100,766 and 67,178 shares of restricted common stock and performance stock, respectively, to two of the sellers who entered into new employment agreements with the Company as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). This restricted common stock and performance stock vests over 3 years and will be recognized as compensation expense over the vesting period. The stock compensation expense related to these issuances for the three months ended March 31, 2016 is $3.1 million.

4. Fair Value Measurement

The Company applies ASC Topic 820, Fair Value Measurements and Disclosures, for its financial assets and financial liabilities. The guidance requires disclosures about assets and liabilities measured at fair value. The Company's financial liabilities primarily relate to contingent earn-out payments due to seller in connection with various acquisitions. The fair value of the due to seller liabilities at March 31, 2016 is $1,848,072. The potential earn-out payments and performance periods are defined in the individual purchase agreements for each acquisition. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is the performance target defined and measured to determine the earnout payment due, if any, after each defined measurement period.

The Company's financial assets relate to contingent payments that may be due from the seller of Command if certain employee retention criteria are met. The fair value of the due from seller contingent asset at March 31, 2016 is $1,176,417. The maximum amount the company can receive under this agreement is $1,500,000. The fair value of the due from seller contingent asset is determined based on the likelihood of the employee retention criteria being met.

ASC Topic 820 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:

•
Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.
•
Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.
•
Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The significant inputs used to derive the fair value of the amounts due to seller include financial forecasts of future operating results, the probability of reaching the forecast and an appropriate discount rate for each contingent liability. Probabilities are estimated by reviewing financial forecasts and assessing the likelihood of reaching the required performance measures based on factors specific to each acquisition as well as the Company’s historical experience with similar

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Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015

arrangements. If an acquisition reaches the required performance measure, the estimated probability would be increased to 100% and would still be classified as a contingent liability on the balance sheet. If the measure is not reached, the probability would be reduced to reflect the amount earned, if any, depending on the terms of the agreement. Discount rates used in determining the fair value of the contingent consideration ranged between 5% and 6%. Historical results of the respective acquisitions serve as the basis for the financial forecasts used in the valuation.

Quantitative factors are also considered in these forecasts, including acquisition synergies, growth and sales potential, and potential operational efficiencies gained. Changes to the significant inputs used in determining the fair value of the contingent consideration could result in a change in the fair value of the contingent consideration. However, the correlation and inverse relationship between higher projected financial results to the discount rate applied and probability of meeting the financial targets mitigates the effect of any changes to the unobservable inputs.

The following table sets forth the Company's financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at March 31, 2016 and December 31, 2015:
 
Fair Value Measurements as of March 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration due to seller
$
(1,848,072
)
 
—

 
—

 
$
(1,848,072
)
Assets:
 
 
 
 
 
 
 
Contingent consideration due from seller
$
1,176,417

 
—

 
—

 
$
1,176,417


 
Fair Value Measurements as of December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration due to seller
$
(4,086,697
)
 
—

 
—

 
$
(4,086,697
)

The following table provides a reconciliation of the beginning and ending balances for the assets and liabilities measured at fair value using significant unobservable inputs (Level 3):
 
Due from Seller Asset
Due to Seller Liability
Balance at December 31, 2015
$
—

$
(4,086,697
)
Change in fair value
—

152,382

Payment of contingent consideration
—

2,086,243

Command purchase price adjustment
1,176,417

—

Balance at March 31, 2016
$
1,176,417

$
(1,848,072
)

For the three months ended March 31, 2016 and 2015, the Company recognized benefits of $152,382 and $95,934, respectively, in selling, general and administrative expense due to the change in fair value determined by a level three valuation technique. These changes in fair value resulted from using revised forecasts that took into account the most recent performance at each acquired business, as well as from the effect of the time value of money.

For the three months ended March 31, 2016 and 2015, the Company made contingent earn-out payments of $2,086,243 and $2,665,833, respectively.

5. Intangibles and Goodwill

The following is a roll-forward of goodwill from December 31, 2015 to March 31, 2016:

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Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015

Balance as of December 31, 2015
$
308,490,588

  Command acquisition, purchase price adjustment
(1,176,417
)
Balance as of March 31, 2016
$
307,314,171


The following is a summary of amortizable intangible assets as of March 31, 2016 and December 31, 2015:
 
March 31, 2016
 
December 31, 2015
 
Weighted-Average Life
Customer relationships
$
145,138,979

 
$
145,138,979

 
14.8 years
Carrier relationships
18,300,000

 
18,300,000

 
17.0 years
Noncompete agreements
5,239,000

 
5,239,000

 
6.7 years
Trade names
5,640,000

 
5,640,000

 
4.0 years
 
174,317,979

 
174,317,979

 
14.4 years
Less accumulated amortization
(30,784,159
)
 
(26,785,810
)
 
 
Intangible assets, net
$
143,533,820

 
$
147,532,169

 
 

The customer relationships are being amortized using an accelerated method, as an accelerated method best approximates the distribution of cash flows generated by the acquired customer relationships. The carrier relationships, trade names and noncompete agreements are being amortized using the straight-line method. Amortization expense related to intangible assets was $3,998,349 and $1,132,092 for the three months ended March 31, 2016 and 2015, respectively.

The estimated amortization expense for the next five years and thereafter is as follows:
Remainder of 2016
$
11,806,079

2017
14,243,799

2018
12,861,305

2019
11,470,909

2020
10,638,587

Thereafter
82,513,141

Total
$
143,533,820


6. Accrued Expenses and Other Noncurrent Liabilities

The components of accrued expenses at March 31, 2016 and December 31, 2015 are as follows:
 
March 31, 2016
 
December 31, 2015
Accrued compensation
$
14,788,249

 
$
17,937,504

Accrued rebates
2,557,846

 
2,535,606

Accrued employee benefits
2,966,096

 
2,809,239

Accrued professional service fees
1,196,009

 
1,837,749

Accrued interest
3,104,615

 
1,463,880

Deferred rent
581,227

 
400,809

Other
2,826,415

 
3,298,275

Total accrued expenses
$
28,020,457

 
$
30,283,062


The other noncurrent liabilities of $5,316,566 and $2,940,435 as of March 31, 2016 and December 31, 2015, respectively, consist of the portion of deferred rent in excess of twelve months and the long-term uncertain tax liability.


12

7. Income Taxes     

The following table shows the Company's effective income tax rate for the three months ended March 31, 2016 and 2015:
 
Three Months Ended
March 31,
 
2016
 
2015
Income before provision for income taxes
$
317,599

 
$
5,260,777

Income tax expense
$
(54,988
)
 
$
(1,933,000
)
Effective tax rate
17.3
%
 
36.7
%

The decrease in the Company's effective tax rate for the three months ended March 31, 2016 was primarily due to the impact of certain tax credits on the lower income before taxes in the quarter.

8. Earnings Per Share

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average shares outstanding plus share equivalents that would arise from the exercise of share options and the vesting of restricted stock. The computation of basic and diluted earnings per common shares for the three months ended March 31, 2016 and 2015 is as follows:

 
Three Months Ended
March 31,
 
2016
 
2015
Numerator
 
 
 
Net income
$
262,611

 
$
3,327,777

Denominator:
 

 
 
Denominator for basic earnings per common share - weighted-average shares
29,072,061

 
23,306,989

Effect of dilutive securities:
 

 
 
Employee stock awards
746,259

 
628,903

Denominator for dilutive earnings per common share
29,818,320

 
23,935,892

Basic earnings per common share
$
0.01

 
$
0.14

Diluted earnings per common share
$
0.01

 
$
0.14


There were no employee stock options and no unvested restricted stock excluded from the calculation of diluted earnings per common share for the three months ended March 31, 2016 and 2015.

As of March 31, 2016, none of the conditions allowing holders of the Notes to convert have been met and no conversion spread exists. As such, the Notes did not have a dilutive impact on diluted earnings per common share for the three months ended March 31, 2016.


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Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015

9. Stock-Based Compensation Plans

The Company recorded $5,316,837 in total stock-based compensation expense with a corresponding tax benefit of $1,948,089 for the three months ended March 31, 2016. For the three months ended March 31, 2015, the Company recorded $1,891,067 in total stock-based compensation expense with a corresponding tax benefit of $694,022.

During the three months ended March 31, 2016 and 2015, the Company did not grant any stock options.

The Company granted 222,408 and 214,832 shares of restricted stock to various employees during the three months ended March 31, 2016 and 2015, respectively.

In 2014, the Company initiated a performance and market-based stock incentive plan for certain executives that provides vesting based on specific financial and market-based performance measurements. The Company granted 91,612 and 69,213 shares of performance and market-based stock during the three months ended March 31, 2016 and 2015, respectively.

10. Legal Matters

In the normal course of business, the Company is subject to potential claims and disputes related to its business, including claims for freight lost or damaged in transit. Some of these matters may be covered by the Company's insurance and risk management programs or may result in claims or adjustments with the Company's carriers.

In August 2012, the Company discovered that the revenue and profitability of Shipper Direct Logistics, Inc. ("Shipper Direct"), a truckload transportation brokerage acquired by the Company in July 2012, were not as expected based on representations contained in the Asset Purchase Agreement.  In January 2013, the Company filed a lawsuit against Shipper Direct and its founders in Illinois federal court alleging, among other things, breach of contract and fraud. In November 2014, the Company obtained a judgment against Shipper Direct and its founders for $3,013,831 in compensatory damages and $2,044,420 in punitive damages. The Company has not received the awarded damages and has not recorded a gain related to this ruling as of March 31, 2016.

Management does not believe that the outcome of any of the legal proceedings to which the Company is a party will have a material adverse effect on its financial position or results of operations.

11. Long-Term Debt

ABL Facility

On June 1, 2015, the Company and Command, as co-borrowers, entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank. The Credit Agreement provides for a senior secured revolving credit facility in an initial aggregate principal amount of up to $200 million (the “ABL Facility”). The initial aggregate principal amount under the ABL Facility may be increased from time to time by an additional $100 million to a maximum aggregate principal amount of $300 million; provided, however, that only four increases are permitted during the life of the loan and, for each increase, certain requirements are satisfied. The Company’s obligations under the ABL Facility are secured, on a first lien priority basis, by certain working capital assets.

Interest is payable at a rate per annum equal to, at the option of the Company, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate, plus 0.50%, (2) the base commercial lending rate of PNC Bank, National Association and (3) a daily LIBOR rate, plus 1.00%; or (b) a LIBOR rate determined by reference to the costs of funds for deposits in the relevant currency for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margin will be 0.25% to 0.75% for borrowings at the base rate and 1.25% to 1.75% for borrowings at the LIBOR rate, in each case, based on the excess availability under the ABL Facility.

The Company will also be required to pay a commitment fee in respect to the unutilized commitments under the ABL Facility of between 0.25% and 0.375% based on the excess availability for the prior calendar quarter under the ABL Facility. At March 31, 2016, the Company's commitment fee was calculated at a rate of 0.375%.


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Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015

The terms of the ABL Facility include various covenants, including a covenant that requires the Company to maintain a consolidated fixed charge coverage ratio at any time (a) a specified default occurs or (b) if excess availability falls below certain specified levels. As of March 31, 2016, neither of the events that would require the Company to maintain the fixed charge coverage ratio occurred, and the Company is in compliance with all covenants related to the ABL.

The Company drew $6.0 million on the ABL Facility during the first quarter of 2016, all of which was repaid as of March 31, 2016. No amounts were outstanding on the ABL Facility as of March 31, 2016.

The issuance of letters of credit under the ABL Facility reduces available borrowings. At March 31, 2016, there were $0.7 million of letters of credit outstanding. The total draw allowed on the ABL Facility at March 31, 2016, as determined by the working capital assets pledged as collateral, was $169.1 million. After adjusting for the letters of credit, the Company's remaining availability under the ABL Facility at March 31, 2016 was $168.4 million.

The Company incurred issuance costs of $3.1 million in 2015 related to the ABL Facility. These issuance costs are being amortized to interest expense using straight-line amortization over the 5 year life of the ABL Facility. During the first quarter of 2016, the Company recorded $0.2 million of interest expense related to ABL Facility issuance costs. As there is no outstanding draw on the ABL Facility at March 31, 2016, the unamortized issuance costs are presented as a deferred asset on the balance sheet.

Convertible Senior Notes

On May 5, 2015, the Company issued $230 million aggregate principal amount of 2.50% convertible senior notes due 2020 (the “Notes”) in a registered public offering. The proceeds from the Company's sale of the Notes, net of underwriting discounts and commissions, were $223.1 million. The Company used all of the net proceeds from the Notes offering (together with proceeds from the sale of common stock and borrowings under the ABL Facility) to finance the acquisition of Command.

The Notes bear interest at a rate of 2.50% per year payable semiannually in arrears in cash on May 1 and November 1 of each year, beginning on November 1, 2015. The Notes will mature on May 1, 2020, unless earlier converted or repurchased in accordance with the terms discussed below. The Notes are the Company's senior unsecured obligations and rank senior in right of payment to any of the Company's indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company's unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company's subsidiaries.

The Notes will be convertible, under certain circumstances and during certain periods, into cash, shares of the Company's common stock, or a combination of cash and shares of common stock at the Company's election, at an initial conversion rate of 25.5428 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $39.15 per share of common stock.

Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding January 1, 2020 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the ‘‘measurement period’’) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; (3) if the Company calls the Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.

If the Company undergoes a fundamental change, subject to certain conditions, holders of the Notes may require the Company to purchase for cash all or a part of their Notes at a repurchase price equal to 100% of the principal amount of Notes to be repurchased, plus accrued and unpaid interest. In addition, following certain corporate events that occur prior to maturity, the Company may increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate

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Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015

event in certain circumstances. In such event, the conversion rate could increase to a maximum of 34.4827 shares of common stock per $1,000 principal amount of Notes.

On or after January 1, 2020 until the close of business on the business day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of the Company's common stock, or a combination of cash and shares of the Company's common stock, at the Company's election.

The Company's intent and policy will be to settle the $230 million principal amount of Notes in cash, and any excess conversion premium in shares of common stock. As such, the principal amount of the Notes will not be included in the calculation of diluted earnings per common share, but any conversion premium that exists will be included in the calculation of diluted earnings per common share using the treasury stock method. As of March 31, 2016, none of the conditions allowing holders of the Notes to convert have been met and no conversion spread exists. As such, the notes did not have a dilutive impact on diluted earnings per common share for the three months ended March 31, 2016.

The accounting guidance in ASC 470-20, Debt with Conversion and Other Options, requires that the principal amount of the Notes be separated into liability and equity components at issuance. The value assigned to the liability component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature. The difference between the principal amount of the Notes and the estimated fair value of the liability component, representing the value of the conversion premium assigned to the equity component, is recorded as a debt discount on the issuance date. The fair value of the liability component of the Notes was determined using a discounted cash flow analysis, in which the projected interest and principal payments were discounted back to the issuance date of the Notes at an estimated market yield for a similar debt instrument without the conversion feature. The Company estimated the straight debt yield using a combination of inputs observable in the marketplace, including the credit spread indicated by the terms of the Company's ABL Facility, LIBOR rates, and U.S. Treasury bonds. This represents a Level 2 valuation technique. The Company estimated the straight debt borrowing rates at issuance to be 5.75% for similar debt to the Notes without the conversion feature, which resulted in a fair value of the liability component of $198.5 million and a fair value of the equity component of $31.5 million. The fair value of the equity component was recorded as a debt discount, with the offset recorded as a credit to additional paid-in capital within stockholders' equity. The $31.5 million debt discount and Note issuance costs discussed below are being amortized to interest expense under the effective interest method over the 5 year life of the Notes, using an effective interest rate of 6.33%.

The Company allocated the total issuance costs related to the Notes to the liability and equity components based on their relative fair values. Issuance costs attributable to the liability component were recorded on the consolidated balance sheets as a contra-liability that reduces the carrying amount of the convertible note liability. This amount is being amortized to interest expense over the term of the Notes using the effective interest method and an effective interest rate of 6.33%. Issuance costs attributable to the equity component were recorded as a charge to additional paid-in capital within stockholders' equity.

As of March 31, 2016, the carrying amount of the Notes on the balance sheet is $198.3 million, calculated as follows:

 
March 31, 2016
Convertible senior notes, principal amount
$
230,000,000

Unamortized debt discount
(26,428,209
)
Unamortized debt issuance costs
(5,226,948
)
Convertible senior notes, net
$
198,344,843


The Notes are carried on the balance sheet at their principal amount, net of the unamortized debt discount and unamortized debt issuance costs, and are not marked to market each period. The approximate fair value of the Notes as of March 31, 2016 was $232.6 million. The fair value of the Notes was estimated based on the trading price of the Notes at March 31, 2016. As trading volume is low, these are quoted prices for identical instruments in markets that are not active, and thus are Level 2 in the fair value hierarchy.

The Company has recognized interest expense related to the Notes of $3.1 million for the three months ended March 31, 2016, consisting of $1.4 million of contractual coupon interest, $1.4 million of debt discount amortization and $0.3 million of debt issuance cost amortization.

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Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015


The undiscounted interest and principal payments due in relation to the Notes from March 31, 2016 to the maturity of the Notes on May 1, 2020 are as follows:

 
Total
2016
2017
2018
2019
2020
Senior convertible notes, including interest
$
255,875,000

5,750,000

5,750,000

5,750,000

5,750,000

$
232,875,000



12. Related Parties

As of the closing of the Command acquisition on June 1, 2015, the Company leases the Command office building headquarters in Skokie, Illinois from a company owned by Paul Loeb, the former owner of Command who joined the Echo Board of Directors in June 2015. The lease requires monthly rental payments of $54,638 for the duration of the lease, which ends on December 31, 2018. The Company is obligated to pay real estate taxes, insurance, and all building maintenance costs in addition to the minimum rental payments for the facility related to this lease. The total rental expense related to this lease included in the Company's consolidated statements of operations for the three months ended March 31, 2016 was $163,914. All amounts due under the lease were paid as of March 31, 2016, and thus there was no liability due to the related party at March 31, 2016.




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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this Quarterly Report on Form 10-Q are "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"). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors which could materially affect such forward-looking statements can be found in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and elsewhere in this Form 10-Q. Investors are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Overview

We are a leading provider of technology-enabled transportation and supply chain management solutions. We utilize a proprietary technology platform to compile and analyze data from our multi-modal network of transportation providers to satisfy the transportation and logistics needs of our clients. This model enables us to quickly adapt to and offer efficient and cost-effective solutions for our clients' shipping needs. We focus primarily on arranging transportation by truckload ("TL") and less-than-truckload ("LTL") carriers. We also offer intermodal (which involves moving a shipment by rail and truck), small parcel, domestic air, expedited and international transportation services. Our core logistics services include rate negotiation, shipment execution and tracking, carrier management, routing compliance and performance management reporting.

We procure transportation and provide logistics services for clients across a wide range of industries, such as manufacturing, construction, food and beverage, consumer products and retail. Our clients fall into two categories: Transactional and Managed Transportation. We provide transportation and logistics services to our Transactional clients on a shipment-by-shipment basis, typically with individual, or spot market, pricing. We typically enter into multi-year contracts with our Managed Transportation clients, which are often on an exclusive basis for a specific transportation mode or point of origin. As part of our value proposition, we also provide core logistics services to these clients.


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Results of Operations

The following table represents certain results of operations data:
 
Three Months Ended
March 31,
 
2016

2015

(Unaudited)

 (in thousands, except per share data)
Consolidated statements of operations data:



Revenue
$
405,278


$
283,492

Transportation costs
324,451


230,240

Net revenue (1)
80,827


53,252

Operating expenses:
 
 
 
Commissions
24,838

 
14,932

Selling, general and administrative expenses
44,791

 
29,192

Contingent consideration benefit
(152
)
 
(96
)
Depreciation and amortization
7,529

 
3,873

Total operating expenses
77,006

 
47,901

Income from operations
3,821

 
5,351

Interest expense
(3,503
)
 
(38
)
Other expense
—

 
(52
)
Income before provision for income taxes
318

 
5,261

Income tax expense
(55
)
 
(1,933
)
Net income
$
263

 
$
3,328

Earnings per common share:
 
 
 
      Basic
$
0.01

 
$
0.14

      Diluted
$
0.01

 
$
0.14

Shares used in per share calculations (in thousands):
 
 
 
      Basic
29,072

 
23,307

      Diluted
29,818

 
23,936


(1) Net revenue is a non-GAAP measure calculated as revenue less transportation costs. Net revenue is one of the primary operational and financial measures used by management to evaluate the business. The following table presents a reconciliation of net revenue to revenue, the most comparable GAAP measure:


 
Three Months Ended
March 31,
 
2016
 
2015
 
(Unaudited)
 
 (in thousands)
Revenue
$
405,278

 
$
283,492

Transportation costs
324,451

 
230,240

Net revenue
$
80,827

 
$
53,252



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Revenue

We generate revenue through the sale of transportation and logistics services to our clients. Revenue is recognized when the client's product is delivered by a third-party carrier. Our revenue was $405.3 million and $283.5 million for the three months ended March 31, 2016 and 2015, respectively, representing a period-over-period increase of 43.0%.

Our revenue is generated from two different types of clients: Transactional and Managed Transportation. We categorize a client as a Managed Transportation client if we have a contract with the client for the provision of services on a recurring basis. Our contracts with Managed Transportation clients typically have a multi-year term and are often on an exclusive basis for a specific transportation mode or point of origin. In several cases, we provide substantially all of a client's transportation and logistics requirements. We categorize all other clients as Transactional clients. We provide services to our Transactional clients on a shipment-by-shipment basis. For the three months ended March 31, 2016 and 2015, Transactional clients accounted for 82% and 77% of our revenue, respectively, and Managed Transportation clients accounted for 18% and 23% of our revenue, respectively. We expect to continue to grow both our Managed Transportation and Transactional client base in the future, although the rate of growth for each type of client will vary depending on opportunities in the marketplace.

Revenue recognized per shipment will vary depending on the transportation mode, fuel prices, shipment weight, density and mileage of the product shipped. The primary modes of shipment that we transact in are TL, LTL and intermodal. Other transportation modes include small parcel, domestic air, expedited and international. Material shifts in the percentage of our revenue by transportation mode could have a significant impact on our revenue growth. For the three month period ended March 31, 2016, TL accounted for 68% of our revenue, LTL accounted for 26% of our revenue, intermodal accounted for 4% of our revenue and other transportation modes accounted for 2% of our revenue. For the three month period ended March 31, 2015, TL accounted for 56% of our revenue, LTL accounted for 37% of our revenue, intermodal accounted for 6% of our revenue and other transportation modes accounted for 1% of our revenue.

The transportation industry has historically been subject to seasonal sales fluctuations as shipments generally are lower during and after the winter holiday season because many companies ship goods and stock inventories prior to the winter holiday season. While we experience some seasonality, differences in our revenue between periods have been driven primarily by growth in our client base.

Transportation costs and net revenue

We act primarily as a service provider to add value and expertise in the procurement and execution of transportation and logistics services for our clients. Our pricing structure is primarily variable, although we have entered into a limited number of fixed fee arrangements that represent an insignificant portion of our revenue. Net revenue equals revenue minus transportation costs. Our transportation costs consist primarily of the direct cost of transportation paid to the carrier.

Net revenue is considered by management to be an important measurement of our success in the marketplace. Our transportation costs are typically lower for an LTL shipment than for a TL shipment. Our net revenue margin is typically higher for an LTL shipment than for a TL shipment. Material shifts in the percentage of our revenue by transportation mode could have a significant impact on our net revenue. The discussion of our results of operations below focuses on changes in our net revenue and expenses as a percentage of net revenue. Net revenue for the three months ended March 31, 2016 was $80.8 million, an increase of 51.8% from $53.3 million in the comparable period of 2015.

Operating expenses

Our costs and expenses, excluding transportation costs, consist of commissions paid to our sales personnel, general and administrative expenses to run our business, changes in our contingent consideration obligations, acquisition-related transaction costs, and depreciation and amortization.

Commissions paid to our sales personnel, including employees and agents, are a significant component of our operating expenses. These commissions are based on the net revenue we collect from the clients for which such sales personnel have primary responsibility. For the three months ended March 31, 2016 and 2015, our commission expense was $24.8 million and $14.9 million, respectively. Commission expense was 30.7% and 28.0% of our net revenue in the current and prior year, respectively. The increase is due to the fluctuation of the composition of our net revenue by mode, as TL shipments typically have higher commission percentages than other modes. The percentage of net revenue paid as commissions will vary depending on the type of client, composition of the sales team and mode of transportation. Commission expense, stated as a

20
Table of Contents

percentage of net revenue, could increase or decrease in the future depending on the composition and sources of our revenue growth.

We accrue for commission expense when we recognize the related revenue. Some of our sales personnel receive a monthly advance to provide them with a more consistent income stream. Cash paid to our sales personnel in advance of commissions earned is recorded as a prepaid expense. As our sales personnel earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Prepaid commissions and accrued commissions are presented on a net basis on our balance sheet.

Our selling, general and administrative expenses, which exclude commission expense and changes to contingent consideration, consist of compensation costs for our sales, operations, information systems, finance and administrative support employees as well as occupancy costs, professional fees, acquisition-related transactions costs and other general and administrative expenses. For the three months ended March 31, 2016 and 2015, our selling, general and administrative expenses were $44.8 million and $29.2 million, respectively. For the three months ended March 31, 2016 and 2015, selling, general and administrative expenses as a percentage of net revenue were 55.4% and 54.8%, respectively. These increases are due primarily to integration costs related to the acquisition of Command Transportation, LLC ("Command"), as well as the Command selling, general and administrative expenses included in our consolidated statements of operations in 2016.

Our contingent consideration expense is the change in the fair value of our contingent consideration. The contingent consideration consists of the fair value of expected earn-out payments that may be paid or received from the sellers of certain acquired businesses upon the achievement of certain performance measures. The fair value of the contingent consideration is evaluated on a quarterly basis, and the change in fair value is included in selling, general and administrative expenses in our consolidated statements of operations. For the three months ended March 31, 2016 and 2015, we recorded benefits of $0.2 million and $0.1 million, respectively, due to fair value adjustments to our contingent consideration.

Our depreciation expense is primarily attributable to our depreciation of computer hardware and software, equipment, leasehold improvements, furniture and fixtures and internally developed software. For the three months ended March 31, 2016 and 2015, depreciation expense was $3.5 million and $2.7 million, respectively. The increase is primarily due to the depreciation of property and equipment acquired during the prior twelve months, including property and equipment at Command.

Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including customer and carrier relationships, trade names and non-compete agreements. For the three months ended March 31, 2016 and 2015, amortization expense was $4.0 million and $1.1 million, respectively. The increase is due to the amortization of intangible assets associated with the acquisition of Command.

Interest expense

The interest expense included in our consolidated statements of operations consists of interest expense related to our $230 million aggregate principal amount of 2.50% convertible senior notes due 2020 issued in May 2015 (the "Notes") and our senior secured revolving credit facility in an initial aggregate principal amount of up to $200 million entered into in June 2015 (the "ABL Facility"). We amortize the debt discount and issuance costs related to the Notes over the 5 year life of the Notes using the effective interest method. We amortize the issuance costs related to our ABL Facility over the 5 year life of the facility using straight-line amortization, as the amount drawn on the line (and thus the interest rate and commitment fee paid by Echo) will fluctuate from period to period. Interest expense was $3.5 million and $0.04 million for the three months ended March 31, 2016 and 2015, respectively.

    

Comparison of the three months ended March 31, 2016 and 2015

Revenue

Revenue for the three months ended March 31, 2016 was $405.3 million, an increase of 43.0% from $283.5 million in the comparable period of 2015. The increase in revenue was primarily attributable to revenue from Command, which we acquired in June 2015. Command contributed $117.2 million of revenue for the three months ended March 31, 2016.

Revenue from Transactional clients for the three months ended March 31, 2016 was $332.0 million, an increase of 52.7% from $217.4 million in the comparable period of 2015. Revenue from Transactional clients was 82% of our total

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revenue for the three months ended March 31, 2016, an increase from 77% of our total revenue in the comparable period of 2015. The increase in Transactional revenue was driven by transactional revenue from Command.

Revenue from Managed Transportation clients for the three months ended March 31, 2016 was $73.3 million, an increase of 10.9% from $66.1 million in the comparable period of 2015. This increase was driven by an increase in the number of Managed Transportation clients and an increase in revenue per Managed Transportation client. Revenue from Managed Transportation clients was 18% of our total revenue for the three months ended March 31, 2016, a decrease from 23% of total revenue in the comparable period of 2015. This decrease was driven by an increase in the number of Transactional shipments due to the acquisition of Command.

Transportation costs

Transportation costs for the three months ended March 31, 2016 were $324.5 million, an increase of 40.9% from $230.2 million in the comparable period of 2015. The growth in the total number of shipments, including the shipments attributable to Command, drove the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue decreased to 80.1% for the three months ended March 31, 2016 from 81.2% in the comparable period of 2015, due to an increase in TL margins and a decrease in fuel prices across all modes.

Net revenue

Net revenue for the three months ended March 31, 2016 was $80.8 million, an increase of 51.8% from $53.3 million in the comparable period of 2015. The growth in the total number of shipments, including the shipments attributable to Command, accounted for most of the increase in our net revenue during this period. Net revenue margins increased to 19.9% for the three months ended March 31, 2016, from 18.8% in the comparable period of 2015, as a result of an increase in TL margins and a drop in fuel prices across all modes.

Operating expenses

Commission expense for the three months ended March 31, 2016 was $24.8 million, an increase of 66.3% from $14.9 million in the comparable period of 2015. This increase was primarily attributable to the increase in net revenue, including the net revenue attributable to Command. For the three months ended March 31, 2016 and 2015, commission expense was 30.7% and 28.0%, respectively, of our net revenue. This increase was due to the fluctuation in the composition of our net revenue by mode, as TL shipments typically have higher commission percentages than other modes.

Selling, general and administrative expenses for the three months ended March 31, 2016 were $44.8 million, an increase of 53.4% from $29.2 million in the comparable period of 2015. As a percentage of net revenue, selling, general and administrative expenses increased to 55.4% for the three months ended March 31, 2016, from 54.8% in the comparable period of 2015. These increases are due primarily to integration costs related to the Command acquisition, as well as the Command selling, general and administrative expenses included in our consolidated statements of operations in 2016.

The contingent consideration fair-value adjustment resulted in benefits of $0.2 million and $0.1 million for the three months ended March 31, 2016 and 2015, respectively. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of March 31, 2016.

Depreciation expense for the three months ended March 31, 2016 was $3.5 million, an increase of 28.8% from $2.7 million in the comparable period of 2015. The increase in depreciation expense was primarily attributable to depreciation on purchases of computer hardware and software, equipment, leasehold improvements, furniture and fixtures, and internally developed software, including the property and equipment at Command. Amortization expense for the three months ended March 31, 2016 was $4.0 million, an increase of 253.2% from $1.1 million in the comparable period of 2015. The increase in amortization expense was attributable to the amortization of intangible assets associated with the acquisition of Command.

Income from operations

Income from operations for the three months ended March 31, 2016 was $3.8 million, a decrease of 28.6% from $5.4 million in the comparable period of 2015. The decrease in income from operations was attributable to the increase in operating expenses in excess of the increase in net revenue, primarily due to integration costs related to the Command acquisition.




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Interest expense

Interest expense was $3.5 million for the three months ended March 31, 2016, an increase from $0.04 million of interest expense in the comparable period of 2015. The substantial increase in interest expense was related to our Notes issued in May 2015 and the ABL Facility we entered into in June 2015.

Income tax expense

We recognized income tax expense of $0.1 million and $1.9 million for the three months ended March 31, 2016 and 2015, respectively. Our effective tax rate for the three months ended March 31, 2016 was 17.3%, compared to an effective tax rate of 36.7% in the comparable period of 2015. The decrease in the effective tax rate in the current quarter was due to the impact of certain tax credits on the lower income before taxes in the quarter.
    
Net Income

Net income for the three months ended March 31, 2016 was $0.3 million, compared to $3.3 million of net income in the comparable period of 2015, due to the items previously discussed.


Liquidity and Capital Resources

As of March 31, 2016, we had $43.5 million in cash and cash equivalents, $115.6 million in working capital and $168.4 million available under our ABL Facility.

Cash provided by operating activities

During the three months ended March 31, 2016 and 2015, net cash provided by operating activities was $14.3 million and $9.4 million, respectively. We generated $14.7 million and $11.0 million in cash from net income (adjusted for noncash operating items) for the three months ended March 31, 2016 and 2015, respectively. During the three months ended March 31, 2016 and 2015, the cash generated from net income was offset by $0.4 million and $1.6 million, respectively, due to changes in working capital. These fluctuations in working capital were primarily driven by the timing of payments made each year.

Cash used in investing activities

During the three months ended March 31, 2016 and 2015, net cash used in investing activities was $4.3 million and $8.7 million, respectively. During the three months ended March 31, 2016, the primary investing activities were the purchase of property and equipment and the internal development of computer software. During the three months ended March 31, 2015, the primary investing activities were the acquisition of Xpress Solutions, Inc., the purchase of property and equipment and the internal development of computer software.

Cash used in financing activities

During the three months ended March 31, 2016 and 2015, net cash used in financing activities was $23.0 million and $16.1 million, respectively. During the three months ended March 31, 2016, the primary financing activities were the purchase of treasury stock and the payment of contingent consideration. During the three months ended March 31, 2015, the primary financing activities were the payment of contingent consideration.

ABL Facility

On June 1, 2015, we entered into a Revolving Credit and Security Agreement with PNC Bank (the "Credit Agreement"). The Credit Agreement provides for a senior secured revolving credit facility in an initial aggregate principal amount of up to $200 million. Our obligations under the ABL Facility are secured, on a first lien priority basis, by certain working capital assets.

Interest is payable at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate, plus 0.50%, (2) the base commercial lending rate of PNC Bank, National Association and (3) a daily LIBOR rate, plus 1.00%; or (b) a LIBOR rate determined by reference to the costs of funds for deposits in the relevant currency for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margin will be 0.25% to 0.75% for borrowings at the base rate

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and 1.25% to 1.75% for borrowings at the LIBOR rate, in each case, based on the excess availability under the ABL Facility. We will also be required to pay a commitment fee in respect of the unutilized commitments under the revolving credit facility of between 0.25% and 0.375% based on the excess availability for the prior calendar quarter under the ABL Facility.

At March 31, 2016, there was no outstanding balance on the ABL Facility. The issuance of letters of credit under the ABL Facility also reduces available borrowings. At March 31, 2016, there were $0.7 million of letters of credit outstanding. The total draw allowed under the ABL Facility at March 31, 2016, as determined by the working capital assets pledged as collateral, was $169.1 million. After adjusting for the letters of credit, our remaining availability under the ABL Facility at March 31, 2016 was $168.4 million.

Anticipated uses of cash

Our priority is to continue to grow our revenue and net revenue. We anticipate that our operating expenses and planned expenditures will constitute material uses of cash, and we expect to use available cash to expand our sales force, to enhance our technology, to acquire or make strategic investments in complementary businesses, to integrate our technology and business with the technology and business of Command, and for working capital and other general corporate purposes. We also expect to use available cash to make contingent earn-out payments and to make the $2.9 million semi-annual Note coupon payments due May 1, 2016 and November 1, 2016. We also currently expect to use approximately $22 million for capital expenditures for the remainder of 2016. We expect our use of cash for working capital purposes and other purposes to be offset by the cash flow generated from operating activities during the same period.

Historically, our average accounts receivable life-cycle has been longer than our average accounts payable lifecycle, meaning that we have used cash to pay carriers in advance of collecting from our clients. We elect to provide this benefit to foster strong relationships with our clients and carriers. As our business grows, we expect this use of cash to continue. The amount of cash we use will depend on the growth of our business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

On February 17, 2016, we signed a lease for an additional 132,000 square feet at our Chicago, Illinois headquarters, bringing our total leased square footage at our headquarters to 224,678 square feet. As of March 31, 2016, we continue to also lease over 30 branch sales offices. Our future minimum annual rent payments for these operating leases are as follows:
 
Operating
Leases
2016
$
4,902,099

2017
6,896,824

2018
7,599,071

2019
6,846,569

2020
6,538,344

Thereafter
36,733,730

 
$
69,516,637


Other than this Chicago headquarters lease and the payment of $2,086,243 of contingent consideration due to seller discussed in Footnote 4, there have been no material changes in the outstanding contractual obligations disclosed in our Form 10-K for the year ended December 31, 2015.

Recent Accounting Pronouncements

The discussion of recent accounting pronouncements in Footnote 2, Recent Accounting Pronouncements, to the Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q is incorporated herein by reference.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk

We pass through fluctuations in fuel prices to our clients. As a result, we believe that there is no material risk exposure to fluctuations in fuel prices.

Interest Rate Risk

We have exposure to changes in interest rates on our ABL Facility. Borrowings bear interest at one of the following, plus an applicable margin: (1) the federal funds rate, (2) the base commercial lending rate of PNC Bank, or (3) the LIBOR rate, based on the Company's election for each tranche of borrowing. The interest rate on our line of credit fluctuates based on the rates described above. Assuming the $200.0 million ABL Facility was fully drawn, a 1.0% increase in the interest rate selected would increase our annual interest expense by $2.0 million.

Our interest income is sensitive to changes in the general level of U.S. interest rates, in particular because all of our investments are in cash equivalents. Due to the short-term nature of our investments, we believe that there is no material risk exposure.

We do not use derivative financial instruments for speculative trading purposes.

Impact of Inflation

We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations for the three months ended March 31, 2016 and 2015.


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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2016. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), means controls and other procedures of a company 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. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company's disclosure controls and procedures were effective at the reasonable assurance level.

Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Based on its evaluation, management concluded that our internal control over financial reporting was effective as of March 31, 2016.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarterly period ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

In the normal course of business, the Company is subject to potential claims and disputes related to its business, including claims for freight lost or damaged in transit. Some of these matters may be covered by the Company's insurance and risk management programs or may result in claims or adjustments with the Company's carriers.

In August 2012, the Company discovered that the revenue and profitability of Shipper Direct Logistics, Inc. ("Shipper Direct"), a truckload transportation brokerage acquired by the Company in July 2012, were not as expected based on representations contained in the Asset Purchase Agreement.  In January 2013, the Company filed a lawsuit against Shipper Direct and its founders in Illinois federal court alleging, among other things, breach of contract and fraud. In November 2014, the Company obtained a judgment against Shipper Direct and its founders for $3,013,831 in compensatory damages and $2,044,420 in punitive damages. The Company has not received the awarded damages and has not recorded a gain related to this ruling as of March 31, 2016.

Management does not believe that the outcome of any of the legal proceedings to which the Company is a party will have a material adverse effect on its financial position or results of operations.

Item 1A.    Risk Factors

There have been no material changes from the risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

During the three months ended March 31, 2016, we did not issue any unregistered securities.

Issuer Purchases of Equity Securities

The table below gives information on a monthly basis regarding purchases made by us of our common stock and the number of shares delivered to us by employees to satisfy the mandatory tax withholding requirement upon vesting of restricted stock during the first quarter of 2016.
Date
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program (1)
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under Program (1)
1/1/16-1/31/16
 
865,971

 
$
20.25

 
837,707

 
$
32,220,133

2/1/16-2/29/16
 
89,524

 
$
22.45

 
73,201

 
$
30,609,197

3/1/16-3/31/16
 
34,642

 
$
26.66

 
—

 
$
30,609,197

Total
 
990,137

 
$
20.67

 
910,908

 
 

(1) On December 29, 2015, the Board of Directors authorized a repurchase program for up to an aggregate of $50 million of the Company's outstanding common stock and Notes prior to its expiration on December 31, 2017. The timing and amount of any repurchases will be determined based on market conditions and other factors, and the program may be discontinued or suspended at any time.

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Item 6.    Exhibits
Exhibit No
 
Description of Exhibit
 
 
 
31.1

 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2

 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1

 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2

 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS**

 
XBRL Instance Document
 
 
 
101.SCH**

 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL**

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF**

 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB**

 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE**

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
** Submitted electronically with this Quarterly Report on Form 10-Q

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SIGNATURES

Pursuant to the requirements 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.

 
 
 
ECHO GLOBAL LOGISTICS, INC.
 
 
 
 
 
 
Date:
April 29, 2016
 
 
 
/s/ DOUGLAS R. WAGGONER
 
 
 
By:
 
Douglas R. Waggoner
Chairman and Chief Executive Officer
 
 
 
 
 
 
Date:
April 29, 2016
 
 
 
/s/ KYLE L. SAUERS
 
 
 
By:
 
Kyle L. Sauers
Chief Financial Officer


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EXHIBIT INDEX
Number
 
Description
 
 
 
31.1

 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2

 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1

 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2

 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS**

 
XBRL Instance Document
 
 
 
101.SCH**

 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL**

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF**

 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB**

 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE**

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
** Submitted electronically with this Quarterly Report on Form 10-Q

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