# RADIANT LOGISTICS, INC (RLGT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RADIANT LOGISTICS, INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1171155/000095017023004697/rlgt-20220630.htm
Accession: 0000950170-23-004697
Filing date: 2023-02-27
Report date: 2022-06-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/RLGT/
All MD&A years: /company/RLGT/mda/
Previous year: /company/RLGT/mda/fy2021/ (FY 2021)
Next year: /company/RLGT/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and result of operations should be read in conjunction with the consolidated financial statements and the related notes and other information included elsewhere in this report.

This discussion has been impacted by the restatement described in the Explanatory Note and in the Notes 2 and 20 of the consolidated financial statements of this Annual Report. Certain of the financial and other information provided in this Management’s Discussion and Analysis of Financial Condition and Results of Operations has been updated to reflect the restatement adjustments.

Overview

We operate as a third-party logistics company, providing technology-enabled global transportation and value-added logistics solutions primarily in the United States and Canada. We service a large and diversified account base consisting of consumer goods, food and beverage, manufacturing and retail customers, which we support from an extensive network of operating locations across North America as well as an integrated international service partner network located in other key markets around the globe. We provide these services through a multi-brand network, which includes over 100 operating locations. Included in these operating locations are a number of independent agents, who we also refer to as our “strategic operating partners”, that operated exclusively on our behalf, and approximately 25 Company-owned offices. As a third-party logistics company, we have a vast carrier network of asset-based transportation companies, including motor carriers, railroads, airlines and ocean lines in our carrier network. We believe shippers value our services because we are able to objectively arrange the most efficient and cost-effective means, type and provider of transportation service without undue influence caused by the ownership of transportation assets. In addition, our minimal investment in physical assets affords us the opportunity for a higher return on invested capital and net cash flows than our asset-based competitors.

Through our operating locations across North America, we offer domestic, international air and ocean freight forwarding services and freight brokerage services, including truckload services, LTL services, and intermodal services, which is the movement of freight in trailers or containers by combination of truck and rail. Our primary business operations involve arranging the shipment, on behalf of our customers, of materials, products, equipment and other goods that are generally larger than shipments handled by integrated carriers of primarily small parcels, such as FedEx, DHL and UPS. Our services include arranging and monitoring all aspects of material flow activity utilizing advanced information technology systems. We also provide other value-added logistics services, including MM&D, CHB and GTM solutions to complement our core transportation service offering.

The Company expects to grow its business organically and by completing acquisitions of other companies with complementary geographical and logistics service offerings. The Company’s organic growth strategy will continue to focus on strengthening existing and expanding new customer relationships leveraging the benefit of the Company’s technology platform, while continuing its efforts on the organic build-out of the Company’s network of strategic operating partner locations. In addition, as the Company continues to grow and scale its business, the Company believes that it is creating density in its trade lanes, which creates opportunities for the Company to more efficiently source and manage its transportation capacity.

In addition to its focus on organic growth, the Company will continue to search for acquisition candidates that bring critical mass from a geographic and purchasing power standpoint, along with providing complementary service offerings to the current platform. As the Company continues to grow and scale its business, it also remains focused on leveraging its back-office infrastructure and technology systems to drive productivity improvement across the organization.

Restatement of Previously Issued Consolidated Financial Statements

On September 28, 2022, the Company concluded that the Company’s previously issued financial statements for the Restatement Periods should be restated to correct historical errors related principally to the timing of recognition of the Company’s estimated accrual of in-transit revenues and related costs.

When preparing its fiscal year-end 2022 consolidated financial statements, in response to its December 2021 cyber event, the Company completed a detailed lookback analysis to compare its estimated accrued in-transit revenues and related costs, primarily, purchased transportation and applicable commission expenses, to its actual customer invoicing, related transportation costs and other costs subsequently recorded. In the course of its analysis of the actual information gathered through the lookback process, the Company detected differences between the estimated accrued amounts and the actual revenues and expenses recorded due primarily to errors in the underlying shipment information that was used to calculate the original estimates of the accrued amounts. In the ordinary course of closing its financial books and records, the Company previously inadvertently excluded certain in-transit revenues and associated costs from the appropriate periods as required under GAAP. Therefore, the Company misstated gross revenues and associated costs during the Restatement Periods. The Company principally attributes the errors to a material weakness in financial controls over the recording and processing of revenues, which was disclosed in Item II, Part 9A of the Annual Report on Form 10-K for the year-ended June 30, 2021, which the Company is working to remediate in fiscal year 2023. The discussion of financial results presented here is reflective of the restatement adjustments.

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Ransomware Incident

As previously disclosed during the quarter ended December 31, 2021, the Company filed an 8-K on December 13, 2021, disclosing some of the Company’s systems were affected by a ransomware incident that encrypted information on its systems and disrupted customer and employee access to its applications and services. The Company immediately took steps to isolate the impact and prevent additional systems from being affected, including taking its network offline as a precaution. Promptly upon our detection of this incident, we initiated response and containment protocols and our security teams, supplemented by leading cyber defense firms, worked to remediate this incident. We notified law enforcement, provided notice to customers apprising them of the situation and will provide any notices that may be required by applicable law related to potential PII data exposure.

We undertook extensive efforts to identify, contain and recover from this incident quickly and securely. We systematically brought our information systems back online in a controlled, phased approach. Our teams worked to maintain our business operations and minimize the impact on our customers, operating partners, and employees.

The total ransomware incident related costs for fiscal year 2022 were $0.7 million. These costs were primarily comprised of various third-party consulting services including forensic experts, legal counsel, and other IT professional expenses including additional hardware and software.

We are making information technology investments in order to further strengthen our information security infrastructure. We engaged a leading cybersecurity defense firm that completed a forensics investigation of the ransomware incident, and we are taking appropriate actions in response to the findings. For example, in the short-term, we reset all credentials Company-wide and strengthened security tooling across our servers and workstations including whitelisting known Internet Protocol (IP) addresses and implementation of Multi-factor Authentication (MFA) to access our network from unknown IP addresses. In the long-term, we are continuing to advance the maturity and effectiveness of our information security resiliency strategy and capabilities. Our technology team has accelerated its roadmap to further strengthen the monitoring of network and servers to enable us to detect, respond and recover more quickly from security and technical incidents. As a proactive measure we have also implemented tools that pre-scan equipment requesting VPN access to our network servers to ensure they meet the standards of the Company. More specifically, we plan to continue to improve our security monitoring capabilities and enhance the information security within the Company and stations while also implementing a new Cyber Awareness training program.

COVID-19

The COVID-19 pandemic continues to impact our business operations and financial results. Although the effects have lessened over time, there is uncertainty in the nature and degree of its continued effects over time with new strains frequently being discovered and additional booster shots being recommended. As the world continues to respond to COVID-19, we continue to follow guidelines ensuring the safety of our employees, while striving to protect the health and well-being of the communities in which we operate.

Performance Metrics

Our principal source of income is derived from freight forwarding and freight brokerage services we provide to our customers. As a third-party logistics provider, we arrange for the shipment of our customers’ freight from point of origin to point of destination. Generally, we quote our customers a turnkey cost for the movement of their freight. Our price quote will often depend upon the customer’s time-definite needs (first day through fifth day delivery), special handling needs (heavy equipment, delicate items, environmentally sensitive goods, electronic components, etc.), and the means of transport (motor carrier, air, ocean or rail). In turn, we assume the responsibility for arranging and paying for the underlying means of transportation.

Our transportation revenue represents the total dollar value of services we sell to our customers. Our cost of transportation includes direct costs of transportation, including motor carrier, air, ocean, and rail services. Our adjusted transportation gross profit (gross transportation revenue less the direct cost of transportation) is the primary indicator of our ability to source, add value and resell services provided by third parties, and is considered by management to be a key performance measure. In addition, management believes measuring its operating costs as a function of adjusted transportation gross profit provides a useful metric, as our ability to control costs as a function of adjusted transportation gross profit directly impacts operating earnings.

Our operating results will be affected as acquisitions occur. Since all acquisitions are made using the acquisition method of accounting for business combinations, our financial statements will only include the results of operations and cash flows of acquired companies for periods subsequent to the date of acquisition.

Adjusted gross profit, a non-GAAP financial measure, is our total revenue minus our total cost of transportation and other services (excluding depreciation and amortization, which are reported separately) and adjusted gross profit percentage is adjusted gross profit as a percentage of our total revenue. We believe that these provide investors meaningful information to understand our results of operations and the ability to analyze financial and business trends on a period-to-period basis.

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Our GAAP-based net income will be affected by non-cash charges relating to the amortization of customer related intangible assets and other intangible assets attributable to completed acquisitions. Under applicable accounting standards, purchasers are required to allocate the total consideration in a business combination to the identified assets acquired and liabilities assumed based on their fair values at the time of acquisition. The excess of the consideration paid over the fair value of the identifiable net assets acquired is to be allocated to goodwill, which is tested at least annually for impairment. Applicable accounting standards require that we separately account for and value certain identifiable intangible assets based on the unique facts and circumstances of each acquisition. As a result of our acquisition strategy, our net income will include material non-cash charges relating to the amortization of customer related intangible assets and other intangible assets acquired in our acquisitions. Although these charges may increase as we complete more acquisitions, we believe we will be growing the value of our intangible assets (e.g., customer relationships). Thus, we believe that earnings before interest, taxes, depreciation and amortization, or EBITDA, is a useful financial measure for investors because it eliminates the effect of these non-cash costs and provides an important metric for our business.

EBITDA is a non-GAAP measure of income and does not include the effects of interest, taxes, and excludes the “non-cash” effects of depreciation and amortization on long-term assets. Companies have some discretion as to which elements of depreciation and amortization are excluded in the EBITDA calculation. We exclude all depreciation charges related to property, technology, and equipment and all amortization charges (including amortization of leasehold improvements). We then further adjust EBITDA to exclude changes in fair value of contingent consideration, expenses specifically attributable to acquisitions, transition and lease termination costs, foreign currency transaction gains and losses, share-based compensation expense, litigation expenses unrelated to our core operations, and other non-cash charges. While management considers EBITDA and adjusted EBITDA useful in analyzing our results, it is not intended to replace any presentation included in our consolidated financial statements. The Company’s financial covenants with its lenders define an adjusted EBITDA as a key component of its covenant calculations. The Company’s ability to grow adjusted EBITDA is closely monitored by management as it’s directly tied to financial borrowing capacity and also is a frequent point of discussion with its investors as well as the Company’s earnings calls.

Our operating results are also subject to seasonal trends when measured on a quarterly basis. The impact of seasonality on our business will depend on numerous factors, including the markets in which we operate, holiday seasons, consumer demand, and economic conditions. Since our revenue is largely derived from customers whose shipments are dependent upon consumer demand and just-in-time production schedules, the timing of our revenue is often beyond our control. Factors such as shifting demand for retail goods and/or manufacturing production delays could unexpectedly affect the timing of our revenue. As we increase the scale of our operations, seasonal trends in one area of our business may be offset to an extent by opposite trends in another area. We cannot accurately predict the timing of these factors, nor can we accurately estimate the impact of any particular factor, and thus we can give no assurance any historical seasonal patterns will continue in future periods.

Critical Accounting Estimates

Accounting policies, methods and estimates are an integral part of the 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 financial statements, the areas that are particularly significant include revenue recognition; the fair value of acquired assets and liabilities and the assessment of the recoverability of long-lived assets, goodwill and intangible assets; and fair value of contingent consideration.

As a non-asset-based carrier, we do not generally own transportation assets. We do, however, own certain trailers and refrigerated trailers that we use in our business. We generate the majority of our air and ocean freight forwarding and freight brokerage revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to our customers. Freight forwarding revenues related to shipments where we issue a House Airway Bill or a House Ocean Bill of Lading and corresponding related costs are recognized over the transit period as customers’ goods move from point of origin to point of destination. We estimate revenues at the end of each of our fiscal accounting periods for partially completed shipments and their related costs based on several factors including calculating recent average transit times by mode and, calculating the percentage of completion of shipments in transit. Furthermore, any known posted shipment information available after month end, but prior to our accrual is utilized to estimate revenues and costs for those shipments that were open as of month end. Macroeconomic conditions impacting the supply chain such as port delays, COVID-19 impacting the labor force, as well as inflationary pressures can impact the actual results compared to our estimates. All other revenue, including revenue from other value-added services including freight brokerage services, customs brokerage services and warehousing and fulfillment services, is recognized upon completion of the service.

We perform an annual impairment test for goodwill as of April 1 of 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.

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Intangible assets consist of customer related intangible assets, trade names and trademarks, and non-compete agreements arising from our acquisitions. Customer related intangible assets are amortized using the straight-line method over periods of up to 15 years, trademarks and trade names are amortized using the straight-line method over periods of up to 15 years, and non-compete agreements are amortized using the straight-line method over periods of up to five years, and developed technology is amortize using the straight-line method over five years.

We review long-lived assets to be held-and-used 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.

The Company has contingent obligations to transfer cash payments and/or equity shares to the former shareholder of acquired operations in conjunction with certain acquisitions if specified operating results and financial objectives are met over the next four fiscal years. The Company uses projected future financial results based on recent and historical data to value the anticipated future earn-out payments. To calculate fair value, the future earn-out payments were then discounted using Level 3 inputs.

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Results of Operations

The results of operations for the fiscal year ended June 30, 2021 have been restated. Refer to Note 2, Restatement of Previously Issued Consolidated Financial Statements, of this Annual Report on Form 10-K for details.

Fiscal year ended June 30, 2022, compared to fiscal year ended June 30, 2021 (as restated)

The following table summarizes revenues, cost of transportation and other services, and adjusted gross profit by reportable operating segments for the fiscal years ended June 30, 2022 and 2021 (as restated):

[[GREPCENT_TABLE]]
[["","Year Ended June 30, 2022","","","Year Ended June 30, 2021"],["(In thousands)","United States","","","Canada","","","Corporate/ Eliminations","","","Total","","","United States","","","Canada","","","Corporate/ Eliminations","","","Total"],["","","","","","","","","","","","","","(as restated)","","","","","","","","","(as restated)"],["Revenues"],["Transportation","$","1,266,704","","","$","149,230","","","$","(1,428",")","","$","1,414,506","","","$","772,586","","","$","97,418","","","$","(489",")","","$","869,515"],["Value-added services","","16,329","","","","28,584","","","","\u2014","","","","44,913","","","","8,887","","","","21,410","","","","\u2014","","","","30,297"],["","","1,283,033","","","","177,814","","","","(1,428",")","","","1,459,419","","","","781,473","","","","118,828","","","","(489",")","","","899,812"],["Cost of transportation and other services"],["Transportation","","1,015,199","","","","119,944","","","","(1,428",")","","","1,133,715","","","","587,837","","","","80,715","","","","(489",")","","","668,063"],["Value-added services","","6,816","","","","12,603","","","","\u2014","","","","19,419","","","","6,004","","","","4,339","","","","\u2014","","","","10,343"],["","","1,022,015","","","","132,547","","","","(1,428",")","","","1,153,134","","","","593,841","","","","85,054","","","","(489",")","","","678,406"],["Adjusted gross profit (1)"],["Transportation","","251,505","","","","29,286","","","","\u2014","","","","280,791","","","","184,749","","","","16,703","","","","\u2014","","","","201,452"],["Value-added services","","9,513","","","","15,981","","","","\u2014","","","","25,494","","","","2,883","","","","17,071","","","","\u2014","","","","19,954"],["","$","261,018","","","$","45,267","","","$","\u2014","","","$","306,285","","","$","187,632","","","$","33,774","","","$","\u2014","","","$","221,406"],["Adjusted gross profit percentage"],["Transportation","","19.9","%","","","19.6","%","","N/A","","","","19.9","%","","","23.9","%","","","17.1","%","","N/A","","","","23.2","%"],["Value-added services","","58.3","%","","","55.9","%","","N/A","","","","56.8","%","","","32.4","%","","","79.7","%","","N/A","","","","65.9","%"]]
[[/GREPCENT_TABLE]]

(1) Adjusted gross profit is revenues net of cost of transportation and other services.

Transportation revenue was $1,414.5 million and $869.5 million for the years ended June 30, 2022 and 2021 (as restated), respectively. The increase of $545.0 million, or 62.7%, is primarily attributable to the mark-ups associated with higher transportation costs, driven by substantial surcharges on ocean, some rail and trucking lanes due to tight capacity, coupled with significant fuel surcharges, and meaningful charter business included in the current year, overall increased shipment volumes and seven months of results related to our acquisition of Navegate. Adjusted transportation gross profit was $280.8 million and $201.5 million for the years ended June 30, 2022 and 2021 (as restated), respectively. Adjusted transportation gross profit percentage decreased from 23.2% to 19.9%, primarily due to the significant surcharges associated with the extremely tight capacity experienced in certain modes of transportation, most notably ocean, fuel surcharges, and significant lower margin business associated with charter business and inclusion of seven months of Navegate, which has lower margin characteristics.

Value-added services revenue was $44.9 million and $30.3 million for the years ended June 30, 2022 and 2021 (as restated), respectively. The increase of $14.6 million, or 48.2%, is primarily attributable to the increase in warehouse revenues and other value-added services from our Canada segment. Adjusted value-added services gross profit was $25.5 million for the year ended June 30, 2022, compared to $20.0 million for the comparable prior year period. Adjusted value-added services gross profit percentage decreased from 65.9% to 56.8%, primarily due to additional startup costs associated with moving to a new warehouse at our Coleraine facility in Canada.

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The following table provides a reconciliation for the fiscal years ended June 30, 2022 and 2021 (as restated) of adjusted gross profit to gross profit, the most directly comparable GAAP measure.

[[GREPCENT_TABLE]]
[["(In thousands)","Year Ended June 30,"],["Reconciliation of adjusted gross profit to GAAP gross profit","2022","","","2021"],["","","","","(as restated)"],["Revenues","$","1,459,419","","","$","899,812"],["Cost of transportation and other services (exclusive of depreciation and amortization, shown separately below)","","(1,153,134",")","","","(678,406",")"],["Depreciation and amortization","","(12,775",")","","","(11,986",")"],["GAAP gross profit","$","293,510","","","$","209,420"],["Depreciation and amortization","","12,775","","","","11,986"],["Adjusted gross profit","$","306,285","","","$","221,406"],["GAAP gross margin (GAAP gross profit as a percentage of revenues)","","20.1","%","","","23.3","%"],["Adjusted gross profit percentage (adjusted gross profit as a percentage of revenues)","","21.0","%","","","24.6","%"]]
[[/GREPCENT_TABLE]]

The following table compares consolidated statements of comprehensive income data by reportable operating segments for the fiscal years ended June 30, 2022 and 2021 (as restated):

[[GREPCENT_TABLE]]
[["","Year Ended June 30, 2022","","","Year Ended June 30, 2021"],["(In thousands)","United States","","","Canada","","","Corporate/ Eliminations","","","Total","","","United States","","","Canada","","","Corporate/ Eliminations","","","Total"],["","","","","","","","","","","","","","(as restated)","","","","","","(as restated)","","","(as restated)"],["Adjusted gross profit (1)","$","261,018","","","$","45,267","","","$","\u2014","","","$","306,285","","","$","187,632","","","$","33,774","","","$","\u2014","","","$","221,406"],["Operating expenses:"],["Operating partner commissions","","121,937","","","","\u2014","","","","\u2014","","","","121,937","","","","95,141","","","","\u2014","","","","\u2014","","","","95,141"],["Personnel costs","","54,524","","","","16,287","","","","1,431","","","","72,242","","","","38,109","","","","13,441","","","","3,802","","","","55,352"],["Selling, general and administrative expenses","","22,500","","","","6,902","","","","4,598","","","","34,000","","","","14,974","","","","5,765","","","","2,979","","","","23,718"],["Depreciation and amortization","","5,651","","","","3,509","","","","9,556","","","","18,716","","","","3,929","","","","2,586","","","","10,127","","","","16,642"],["Change in fair value of contingent consideration","","\u2014","","","","\u2014","","","","767","","","","767","","","","\u2014","","","","\u2014","","","","4,350","","","","4,350"],["Total operating expenses","","204,612","","","","26,698","","","","16,352","","","","247,662","","","","152,153","","","","21,792","","","","21,258","","","","195,203"],["Income from operations","","56,406","","","","18,569","","","","(16,352",")","","","58,623","","","","35,479","","","","11,982","","","","(21,258",")","","","26,203"],["Other (expense) income","","678","","","","233","","","","(1,351",")","","","(440",")","","","676","","","","(162",")","","","2,863","","","","3,377"],["Income before income taxes","","57,084","","","","18,802","","","","(17,703",")","","","58,183","","","","36,155","","","","11,820","","","","(18,395",")","","","29,580"],["Income tax expense","","\u2014","","","","\u2014","","","","(12,692",")","","","(12,692",")","","","\u2014","","","","\u2014","","","","(5,951",")","","","(5,951",")"],["Net income","","57,084","","","","18,802","","","","(30,395",")","","","45,491","","","","36,155","","","","11,820","","","","(24,346",")","","","23,629"],["Less: net income attributable to non- controlling interest","","(1,027",")","","","\u2014","","","","\u2014","","","","(1,027",")","","","(519",")","","","\u2014","","","","\u2014","","","","(519",")"],["Net income attributable to Radiant Logistics, Inc.","$","56,057","","","$","18,802","","","$","(30,395",")","","$","44,464","","","$","35,636","","","$","11,820","","","$","(24,346",")","","$","23,110"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended June 30, 2022","","","Year Ended June 30, 2021"],["Operating expenses as a percent of adjusted gross profit (1):","United States","","","Canada","","","Corporate/ Eliminations","","Total","","","United States","","","Canada","","","Corporate/ Eliminations","","Total"],["","","","","","","","","","","","","(as restated)","","","","","","","","(as restated)"],["Operating partner commissions","","46.7","%","","","0.0","%","","N/A","","","39.8","%","","","50.7","%","","","0.0","%","","N/A","","","43.0","%"],["Personnel costs","","20.9","%","","","36.0","%","","N/A","","","23.6","%","","","20.3","%","","","39.8","%","","N/A","","","25.0","%"],["Selling, general and administrative expenses","","8.6","%","","","15.2","%","","N/A","","","11.1","%","","","8.0","%","","","17.1","%","","N/A","","","10.7","%"],["Depreciation and amortization","","2.2","%","","","7.8","%","","N/A","","","6.1","%","","","2.1","%","","","7.7","%","","N/A","","","7.5","%"]]
[[/GREPCENT_TABLE]]

(1) Adjusted gross profit is revenues net of cost of transportation and other services.

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Operating partner commissions increased $26.8 million, or 28.2%, to $121.9 million for the year ended June 30, 2022. The increase is primarily due to increased adjusted gross profit from operating partners. As a percentage of adjusted gross profit, operating partner commissions decreased 316 basis points to 39.8% from 43.0% for the years ended June 30, 2022 and 2021, respectively as a result of a greater percentage of business is coming from company owned locations which are not subject to commissions.

Personnel costs increased $16.9 million, or 30.5%, to $72.2 million for the year ended June 30, 2022. The increase is primarily due to increased workforce supporting the expansion of business volumes in both U.S. and Canada, the restoration of COVID related payroll reductions associated with the pandemic, and the inclusion of payroll associated with our acquisition of Navegate. As a percentage of adjusted gross profit, personnel costs decreased 141 basis points to 23.6% from 25.0% for the years ended June 30, 2022 and 2021, respectively.

Selling, general and administrative (“SG&A”) expenses increased $10.3 million, or 43.4%, to $34.0 million for the year ended June 30, 2022. The increase is primarily due to increased professional services primarily attributed to IT related initiatives, increased bad debt costs, increased banking fees, increased professional services fees, and overall increase in SG&A spent with Navegate being included in the consolidated results of the organization. As a percentage of adjusted gross profit, SG&A increased 39 basis points to 11.1% from 10.7% for the years ended June 30, 2022 and 2021, respectively.

Depreciation and amortization costs increased $2.1 million, or 12.5%, to $18.7 million for the year ended June 30, 2022. The increase is primarily attributed to the acquisition of Navegate. As a percentage of adjusted gross profit, depreciation and amortization decreased 141 basis points to 6.1% from 7.5% for the years ended June 30, 2022 and 2021, respectively.

Change in fair value of contingent consideration was an expense of $0.8 million for the year ended June 30, 2022, compared to an expense of $4.4 million for the year ended June 30, 2021. The change in each year is attributable to a change in management’s estimates of future earn-out payments through the remainder of the respective earn-out periods.

Net other (expense) income decreased $3.8 million, or 113.0%, from an income of $3.4 million for the year ended June 30, 2021 to an expense of $0.4 million for the year ended June 30, 2022. The decrease is primarily due to the gain on the forgiveness of the PPP loans offered under the CARES Act recorded during the year ended June 30, 2021, partially offset by increases in the fair value of interest rate swap contracts during the year ended June 30, 2022.

Our change in net income is driven principally by increased adjusted gross profit, partially offset by increased operating expenses and increased income taxes compared to the prior year.

Our future financial results may be impacted by amortization of intangible assets resulting from acquisitions as well as gains or losses from changes in fair value of contingent consideration that are difficult to predict.

The following table provides a reconciliation for the fiscal years ended June 30, 2022 and 2021 (as restated) of adjusted EBITDA to net income (loss), the most directly comparable GAAP measure.

[[GREPCENT_TABLE]]
[["","Year Ended June 30, 2022","","","Year Ended June 30, 2021"],["(In thousands)","United States","","","Canada","","","Corporate/ Eliminations","","","Total","","","United States","","","Canada","","","Corporate/ Eliminations","","","Total"],["","","","","","","","","","","","","","(as restated)","","","","","","(as restated)","","","(as restated)"],["Net income attributable to Radiant Logistics, Inc.","$","56,057","","","$","18,802","","","$","(30,395",")","","$","44,464","","","$","35,636","","","$","11,820","","","$","(24,346",")","","$","23,110"],["Income tax expense","","\u2014","","","","\u2014","","","","12,692","","","","12,692","","","","\u2014","","","","\u2014","","","","5,951","","","","5,951"],["Depreciation and amortization","","5,651","","","","3,509","","","","9,556","","","","18,716","","","","3,929","","","","2,586","","","","10,127","","","","16,642"],["Net interest expense","","\u2014","","","","\u2014","","","","3,191","","","","3,191","","","","\u2014","","","","\u2014","","","","2,531","","","","2,531"],["EBITDA","","61,708","","","","22,311","","","","(4,956",")","","","79,063","","","","39,565","","","","14,406","","","","(5,737",")","","","48,234"],["Share-based compensation","","1,016","","","","248","","","","534","","","","1,798","","","","378","","","","218","","","","475","","","","1,071"],["Change in fair value of contingent consideration","","\u2014","","","","\u2014","","","","767","","","","767","","","","\u2014","","","","\u2014","","","","4,350","","","","4,350"],["Acquisition related costs","","\u2014","","","","\u2014","","","","596","","","","596","","","","\u2014","","","","\u2014","","","","42","","","","42"],["Ransomware incident related costs, net","","\u2014","","","","\u2014","","","","684","","","","684","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Litigation costs","","\u2014","","","","\u2014","","","","568","","","","568","","","","\u2014","","","","\u2014","","","","535","","","","535"],["Gain on litigation settlement, net","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","(25",")","","","(25",")"],["Change in fair value of interest rate swap contracts","","\u2014","","","","\u2014","","","","(1,840",")","","","(1,840",")","","","\u2014","","","","\u2014","","","","594","","","","594"],["Gain on forgiveness of debt","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","(5,987",")","","","(5,987",")"],["Foreign currency transaction (gain) loss","","(573",")","","","(145",")","","","\u2014","","","","(718",")","","","(179",")","","","368","","","","\u2014","","","","189"],["Adjusted EBITDA","$","62,151","","","$","22,414","","","$","(3,647",")","","$","80,918","","","$","39,764","","","$","14,992","","","$","(5,753",")","","$","49,003"],["Adjusted EBITDA as a % of adjusted gross profit (1)","","23.8","%","","","49.5","%","","N/A","","","","26.4","%","","","21.2","%","","","44.4","%","","N/A","","","","22.1","%"]]
[[/GREPCENT_TABLE]]

(1) Adjusted gross profit is revenues net of cost of transportation and other services.

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Adjusted EBITDA increased $31.9 million, or 65.1% to $80.9 million for the year ended June 30, 2022.

Liquidity and Capital Resources

Generally, our primary sources of liquidity are cash generated from operating activities and borrowings under our Revolving Credit Facility, as described below. These sources also fund a portion of our capital expenditures and contractual contingent consideration obligations. Our level of cash and financing capabilities along with cash flows from operations have historically been sufficient to meet our operating and capital needs. As of June 30, 2022, we have $24.4 million in cash on hand to serve as adequate working capital.

Fiscal year ended June 30, 2022 compared to fiscal year ended June 30, 2021

Net cash provided by operating activities were $24.9 million and $14.1 million for the fiscal years ended June 30, 2022 and 2021, respectively. The cash provided primarily consisted of net income adjusted for depreciation and amortization and changes in accounts payable and accounts receivable. Compared to the prior fiscal year, cash provided by operating activities increased mainly due to increased net income and increased payables to vendors offset by increased accounts receivable and contract assets balances.

Net cash used for investing activities were $45.7 million and $11.1 million for the years ended June 30, 2022 and 2021, respectively. The primary uses of cash were for acquisition and purchases of technology and equipment. During the fiscal year ended June 30, 2022, cash paid for the acquisition of Navegate, Inc., net of the acquiree company's cash balance on the acquisition date, was $38.4 million. Cash paid for purchases of technology and equipment were $7.5 million and $11.4 million for the years ended June 30, 2022 and 2021, respectively. Proceeds from sale of property, technology, and equipment were $0.2 million and $0.4 million for the years ended June 30, 2022 and 2021, respectively.

Net cash provided by financing activities was $28.9 million and net cash used for financing activities was $23.7 million for the fiscal years ended June 30, 2022 and 2021, respectively. Gross proceeds from the credit facility was $116.1 million and gross repayments from the credit facility was $68.6 million during the fiscal year ended June 30, 2022. Gross proceeds from the credit facility was $6.4 million and gross repayments to the credit facility was $21.4 million for the fiscal year ended June 30, 2021. Repayments of notes payable and finance lease liability were $5.1 million and $4.7 million for the fiscal years ended June 30, 2022 and 2021, respectively. During the fiscal year ended June 30, 2022, $0.2 million was received in exchange for issuance of common stock to former shareholders of Navegate, Inc. Payments for repurchases of common stock were $11.3 million and $1.9 million for the fiscal years ended June 30, 2022 and 2021, respectively. Payments of contingent consideration were $1.1 million and $2.0 million for the fiscal years ended June 30, 2022 and 2021, respectively. Distributions to non-controlling interest were $1.1 million and $1.0 million for the fiscal years ended June 30, 2022 and 2021, respectively. Proceeds from employees’ exercise of stock options were $0.4 million and $1.4 million for the fiscal years ended June 30, 2022 and 2021, respectively. Payments of employee tax withholdings related to vesting of restricted stock awards were $0.4 million and $0.3 million for each of the fiscal years ended June 30, 2022 and 2021, respectively. Payments of employee tax withholdings related to the cashless exercise of stock option were $0.1 million and $0.2 million for the fiscal years ended June 30, 2022 and 2021, respectively.

Working Capital

We believe that our current working capital, anticipated cash flow from operations, and access to financing through the Revolving Credit Facility are adequate for funding existing operations for the next twelve months.

Acquisitions

Below are descriptions of recent acquisitions in the last two fiscal years.

On December 3, 2021, and effective as of November 30, 2021, the Company entered into a Stock Purchase Agreement, pursuant to which it acquired all of the issued and outstanding common shares of Navegate, Inc. (“Navegate”), a Minnesota based, privately held company and subsidiaries from Saltspring Capital, LLC. Navegate is a technology-enabled supply chain management and third-party logistics services company that combines a robust digital platform and decades of expertise to manage international, cross-border, and domestic freight from purchase order to final delivery. Navegate’s combination of tech-enabled services, customs brokerage expertise, and a full complement of international and domestic services significantly reduces costs and leads to better compliance and risk mitigation for its customers. Navegate has come to operate as a wholly owned subsidiary of Radiant Logistics, Inc. As consideration for the acquisition, the Company paid $38.4 million in cash upon closing.

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On October 1, 2022, the Company acquired the assets and operations of Cascade Enterprises of Minnesota, Inc. (“Cascade”) a Minneapolis, Minnesota based, privately held company that has operated under the Company's Airgroup brand since 2007. Cascade will continue to operate under the Airgroup brand through the remainder of 2022 and is expected to transition to the Radiant brand in early 2023 as Cascade is combined with existing Company owned operations in the Minneapolis and will be able to leverage the Company’s global trade management platform to strengthen our purchase order and vendor management service offering. As consideration for the acquisition, the Company paid $3,250 in cash upon closing, and the seller is entitled to additional contingent consideration payable in subsequent periods based on future performance of the acquired operation.

Technology

A primary component of our business strategy is to provide robust and advanced technology offerings to our customers, while providing advanced technology to our operations, strategic operating partners and management. To accomplish this, we will continuously develop and enhance our technology platform to align with current and future business requirements. During the year ended June 30, 2022, we capitalized approximately $2.4 million on technology enhancements and software systems in order to increase our operating efficiency and improve technology offerings. We expect to spend between $4 million and $5 million during the fiscal year ended June 30, 2023 in order to continue enhancing our technology platform, which we expect will include elements focused on customer facing, vendor facing, and user facing tools and systems that will be integrated into our existing platform and support our continued growth.

Revolving Credit Facility

The Company currently operates under a $200 million syndicated, Credit Facility pursuant to a Credit Agreement dated as of August 5, 2022 (the “Credit Facility”). The Credit Facility was entered into with Bank of America, N.A. and BMO Capital Markets Corp. as joint book runners and joint lead arrangers, Bank of America, N.A. as Administrative Agent, Swingline Lender and Letter of Credit Issuer, Bank of Montreal as syndication agent, KeyBank National Association and MUFG Union Bank, N.A. as co-documentation agents and Bank of America, N. A., Bank of Montreal, KeyBank National Association, MFUG Union Bank, N.A. and Washington Federal Bank, National Association as lenders (such named lenders are collectively referred to herein as “Lenders”).

The Credit Facility has a term of five years and is collateralized by a first-priority security interest in the accounts receivable and other assets of the Company and the guarantors named below on a parity basis with the security interest held by Fiera Private Debt Fund IV LP and Fiera Private Debt Fund V LP described below. Borrowings under the Credit Facility accrue interest (at the Company’s option), at a) the Lenders’ base rate plus 0.75% and can be subsequently adjusted based on the Company’s consolidated net leverage ratio under the facility at the Lenders’ base rate plus 0.5% to 1.50%: b) Term SOFR plus 1.65% and can be subsequently adjusted based on the Company’s consolidated net leverage ratio under the facility at Term SOFR plus 1.40% to 2.40%; and c) Term SOFR Daily Floating Rate plus 1.65% and can be subsequently adjusted based on the Company’s consolidated net leverage ratio under the facility at Term SOFR Daily Floating Rate plus 1.40% to 2.40%.

The Credit Facility includes a $75,000 accordion feature to support future acquisition opportunities. For general borrowings under the Credit Facility, the Company is subject to the maximum consolidated net leverage ratio of 3.00 and minimum consolidated interest coverage ratio of 3.00. Additional minimum availability requirements and financial covenants apply in the event the Company seeks to use advances under the Credit Facility to pursue acquisitions or repurchase its common stock. Restatement described in Note 2 and Note 20 has no impact on the Company’s compliance with debt covenant ratios. Although the restatement delayed the process of providing audited financial statements to the Lenders, a waiver was received to extend the period within which the audited financial statements may be submitted to the Lenders.

The Company’s current Credit Facility replaces a $150 million Revolving Credit Facility that was put in place and used by the Company from March 13, 2020, until August 5, 2022 (the “Revolving Credit Facility”). On June 30, 2022, the borrowings outstanding on the Revolving Credit Facility was $62.5 million. The Revolving Credit Facility was entered into with Bank of America Securities, Inc. as sole book runner and sole lead arranger, Bank of Montreal Chicago Branch, as lender and syndication agent, MUFG Union Bank, N.A as lender and documentation agent and Bank of America, N. A., KeyBank National Association and Washington Federal Bank, National Association as lenders (such named lenders are collectively referred to herein as “Lenders”).

The Revolving Credit Facility had a term of five years and was collateralized by a first-priority security interest in the accounts receivable and other assets of the Company. Borrowings under the Revolving Credit Facility accrued interest (at the Company’s option), at the Lenders’ base rate plus 1.00% or LIBOR plus 2.00% and could be subsequently adjusted based on the Company’s consolidated leverage ratio under the facility at the Lenders’ base rate plus 1.00% to 1.75% or LIBOR plus 2.00% to 2.75%.

The Revolving Credit Facility included a $50 million accordion feature to support future acquisition opportunities. For general borrowings under the Revolving Credit Facility, the Company was subject to the maximum consolidated leverage ratio of 3.00 and minimum consolidated fixed charge coverage ratio of 1.25. Additional minimum availability requirements and financial covenants applied in the event the Company sought to use advances under the Revolving Credit Facility to pursue acquisitions or repurchase its common stock.

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In conjunction with the Revolving Credit Facility, Radiant entered into two interest rate swap contracts. On March 20, 2020, and effective April 17, 2020, Radiant entered into an interest rate swap contract with Bank of America to trade variable interest cash inflows at one-month LIBOR for a $20 million notional amount, for fixed interest cash outflows at 0.635%. On April 1, 2020, and effective April 2, 2020, Radiant entered into an interest rate swap contract with Bank of America to trade the variable interest cash inflows at one-month LIBOR for a $10 million notional amount, for fixed interest cash outflows at 0.5865%. Both interest rate swap contracts mature and terminate on March 13, 2025.

Senior Secured Loan

On April 2, 2015, Radiant Canada obtained a CAD$29 million senior secured Canadian term loan from Fiera Private Debt Fund IV LP (“FPD IV” formerly, Integrated Private Debt Fund IV LP) pursuant to a CAD$29,000,000 Credit Facilities Loan Agreement (the “FPD IV Loan Agreement”). The Company and its U.S. and Canadian subsidiaries are guarantors of the Radiant Canada obligations thereunder. The loan matures on April 1, 2024 and accrues interest at a rate of 6.65% per annum. We made interest-only payments for the first twelve months and blended principal and interest payments through maturity. In connection with the loan, we paid an amount equal to five months of interest payments into a debt service reserve account controlled by FPD IV.

In connection with our acquisition of Lomas, Radiant Canada obtained a CAD$10 million senior secured Canadian term loan from Fiera Private Debt Fund V LP (“FPD V” formerly, Integrated Private Debt Fund V LP) pursuant to a CAD$10,000,000 Credit Facilities Loan Agreement (the “FPD V Loan Agreement,” and together with the FPD IV Loan Agreement, the “FPD Loan Agreements”). The Company and its U.S. and Canadian subsidiaries are guarantors of the Radiant Canada obligations thereunder. The loan matures on June 1, 2024 and accrues interest at a rate of 6.65% per annum. The loan repayment consists of monthly blended principal and interest payments.

The loans may be prepaid in whole at any time upon providing at least 30 days prior written notice and paying the difference between (i) the present value of the loan interest and the principal payments foregone discounted at the Government of Canada Bond Yield for the term from the date of prepayment to the maturity date and (ii) the face value of the principal amount being prepaid.

For additional information regarding our indebtedness, see Note 9 to the consolidated financial statements.

Off Balance Sheet Arrangements

As of June 30, 2022, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which had been established for the purpose of facilitating off‑balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Guidance

The recent accounting guidance is discussed in Note 3 to the consolidated financial statements contained in this report.