Echo Global Logistics
Echo Global Logistics, Inc. (Form: 10-Q, Received: 07/31/2014 16:20:34)

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 June 30, 2014
 
 
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:  o
 
Accelerated filer:  x
 
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 July 30, 2014, the Registrant had 23,700,058 shares of Common Stock, par value $0.0001 per share, outstanding.



 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2014 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.    Consolidated Financial Statements


Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
REVENUE
$
305,119,867

 
$
224,050,929

 
$
552,790,084

 
$
428,028,307

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Transportation costs
251,782,397

 
184,390,955

 
457,242,488

 
349,917,054

Selling, general, and administrative expenses
42,999,630

 
30,280,576

 
78,271,950

 
61,287,720

Depreciation and amortization
3,410,246

 
2,612,468

 
6,366,350

 
5,207,779

INCOME FROM OPERATIONS
6,927,594

 
6,766,930

 
10,909,296

 
11,615,754

Interest expense
(26,729
)
 
(455
)
 
(26,729
)
 
(1,172
)
Other expense
(35,669
)
 
(106,275
)
 
(90,596
)
 
(199,774
)
OTHER EXPENSE, NET
(62,398
)
 
(106,730
)
 
(117,325
)
 
(200,946
)
INCOME BEFORE PROVISION FOR INCOME TAXES
6,865,196

 
6,660,200

 
10,791,971

 
11,414,808

INCOME TAX EXPENSE
(2,620,979
)
 
(2,537,583
)
 
(4,117,795
)
 
(4,315,559
)
NET INCOME
$
4,244,217

 
$
4,122,617

 
$
6,674,176

 
$
7,099,249

Basic net income per share
$
0.18

 
$
0.18

 
$
0.29

 
$
0.31

Diluted net income per share
$
0.18

 
$
0.18

 
$
0.28

 
$
0.30

See accompanying notes.


3

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Balance Sheets
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
27,365,274

 
$
52,506,560

Accounts receivable, net of allowance for doubtful accounts of $1,629,419 and $1,792,012 at June 30, 2014 and December 31, 2013, respectively
156,800,541

 
109,662,529

Income taxes receivable

 
1,337,180

Prepaid expenses
2,156,093

 
2,510,791

Deferred income taxes
946,480

 
943,740

Other current assets
763,301

 
121,403

Total current assets
188,031,689

 
167,082,203

Property and equipment, net
19,759,467

 
15,536,831

Intangible assets:
 
 

Goodwill
77,136,242

 
51,650,060

Intangible assets, net of accumulated amortization of $12,782,112 and $11,120,733 at June 30, 2014 and December 31, 2013, respectively
33,135,867

 
10,647,246

Other assets
340,078

 
230,253

Total assets
$
318,403,343

 
$
245,146,593

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
102,904,774

 
$
65,322,807

Due to seller-short term
5,929,256

 
5,763,779

Accrued expenses
15,728,063

 
8,322,117

Notes payable
17,507,500

 

Income tax payable
1,516,425

 

Total current liabilities
143,586,018

 
79,408,703

Due to seller-long term
1,881,691

 
1,386,653

Other noncurrent liabilities
1,527,289

 
1,573,780

Deferred income taxes
3,641,389

 
3,547,426

Total liabilities
150,636,387

 
85,916,562

Stockholders' equity:
 
 
 

Common stock, par value $0.0001 per share, 100,000,000 shares authorized, 23,024,024 and 22,900,471 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
2,304

 
2,291

Additional paid-in capital
108,694,538

 
106,831,802

Retained earnings
59,070,114

 
52,395,938

Total stockholders' equity
167,766,956

 
159,230,031

Total liabilities and stockholders' equity
$
318,403,343

 
$
245,146,593

See accompanying notes.

4

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
June 30,
 
2014
 
2013
Operating activities
 
 
 
Net income
$
6,674,176

 
$
7,099,249

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
90,248

 
446,947

Noncash stock compensation expense
2,413,348

 
1,866,590

Increase in contingent consideration due to seller
1,305,185

 
413,943

Depreciation and amortization
6,366,350

 
5,207,779

Change in assets, net of acquisitions:
 
 
 
Accounts receivable
(35,434,753
)
 
(13,630,758
)
Taxes receivable (payable)
2,853,605

 
(912,242
)
Prepaid expenses and other assets
(358,473
)
 
1,013,639

Change in liabilities, net of acquisitions:
 
 
 
Accounts payable
28,212,430

 
10,033,126

Accrued expenses and other
6,251,608

 
(609,406
)
Net cash provided by operating activities
18,373,724

 
10,928,867

Investing activities
 
 
 
Purchases of property and equipment
(8,392,641
)
 
(4,275,673
)
Payments for acquisitions, net of cash acquired
(33,048,075
)
 
(1,958,236
)
Net cash used in investing activities
(41,440,716
)
 
(6,233,909
)
Financing activities
 
 
 
Principal payments on capital lease obligations

 
(15,790
)
Tax benefit of stock options exercised
136,939

 
417,721

Payment of contingent consideration
(1,524,670
)
 
(280,000
)
Issuance of shares, net of issuance costs
167,360

 
1,029,889

Employee tax withholdings related to net share settlements of equity-based awards
(853,923
)
 
(734,535
)
Proceeds from borrowing
5,000,000

 

Repayments of amounts borrowed
(5,000,000
)
 

Net cash (used in) provided by financing activities
(2,074,294
)
 
417,285

(Decrease) increase in cash and cash equivalents
(25,141,286
)
 
5,112,243

Cash and cash equivalents, beginning of period
52,506,560

 
41,780,984

Cash and cash equivalents, end of period
$
27,365,274

 
$
46,893,227

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
26,729

 
$
1,172

Cash paid during the period for income taxes
1,037,884

 
4,348,944

Non-cash financing activity
 
 
 
Due to seller
880,000

 

Notes payable to former owner of One Stop
17,507,500

 

See accompanying notes.


5

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2014
(Unaudited)

 
Common Stock
 
Additional
Paid-In
Capital
 
 
 
 
 
Shares
 
Amount
 
 
Retained
Earnings
 
Total
Balance at December 31, 2013
22,900,471

 
$
2,291

 
$
106,831,802

 
$
52,395,938

 
$
159,230,031

Share compensation expense

 

 
2,413,348

 

 
2,413,348

Exercise of stock options
13,575

 
1

 
167,359

 

 
167,360

Common stock issued for vested restricted stock
153,762

 
16

 
(16
)
 

 

Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock
(43,784
)
 
(4
)
 
(853,919
)
 

 
(853,923
)
Tax benefit from exercise of stock options

 

 
135,964

 

 
135,964

Net income

 

 

 
6,674,176

 
6,674,176

Balance at June 30, 2014
23,024,024

 
$
2,304

 
$
108,694,538

 
$
59,070,114

 
$
167,766,956


See accompanying notes.

6

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013

1. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of Echo Global Logistics, Inc. and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in the consolidation. The consolidated statements of income 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 six month period ended June 30, 2014 are not necessarily indicative of the results expected for the full year of 2014 . 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, 2013.

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 investments, 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 due to seller is determined based on the likelihood of contingent earn-out payments.


2. New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 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, 2016. 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 Com pany will evaluate the effects, if any, that the adoption of this guidance will have on the Company’s consolidated financial statements.

In July 2013, the FASB issued authoritative guidance under ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. The provisions of this new guidance were effective as of the beginning of the Company's 2014 fiscal year and did not have a material impact on its financial statements.


7

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013

3. Acquisitions

2014 Acquisitions

Online Freight Services, Inc.

Effective January 1, 2014 , the Company acquired Online Freight Services, Inc. ("OFS"), a non-asset-based truckload transportation brokerage based in Mendota Heights, Minnesota, and the results of OFS have been included in the unaudited consolidated financial statements since that date. The Company agreed to purchase the assets and assume certain liabilities of OFS for $9,460,742 in cash payable at closing and an additional $1,500,000 in cash consideration that may become payable upon achievement of certain performance measures on or prior to December 31, 2017 . As a result of the preliminary purchase accounting for the acquisition, the Company recorded $4,286,440 of goodwill, of which $880,000 is related to contingent consideration, and $4,850,000 of intangible assets, primarily customer relationships and trade names. This allocation is subject to change as the Company finalizes purchase accounting. The amount of goodwill deductible for U.S. income tax purposes is approximately $3,406,440 , excluding future contingent consideration payments. For the three and six month periods ended June 30, 2014 , the Company recorded increases of $210,000 and $270,000 , respectively, to the contingent consideration obligation to reflect the change in fair value, which was primarily the result of adjustments to the forecasted financial performance of OFS resulting in a liability due to seller of $1,150,000 at June 30, 2014 .

The amounts of revenue and net income of OFS included in the Company's consolidated statement of income from the acquisition date for the period ended June 30, 2014 are $30.9 million and $0.5 million , respectively.

Comcar Logistics, LLC

Effective February 1, 2014 , the Company acquired Comcar Logistics, LLC ("Comcar"), a non-asset-based truckload brokerage with offices in Jacksonville, Florida and Denver, Colorado, and the results of Comcar have been included in the unaudited consolidated financial statements since that date. The Company agreed to purchase the assets and assume certain liabilities of Comcar for $4,900,930 in cash. There is no contingent consideration associated with the purchase of Comcar. As a result of the preliminary purchase accounting for the acquisition, the Company recorded $2,226,864 of goodwill, which is approximately the amount of goodwill deductible for U.S. income tax purposes, and $2,500,000 of intangible assets, primarily customer relationships. This allocation is subject to change as the Company finalizes purchase accounting.

The amounts of revenue and net income of Comcar included in the Company's consolidated statement of income from the acquisition date for the period ended June 30, 2014 are $7.9 million and $0.2 million , respectively.

One Stop Logistics, Inc.

Effective May 12, 2014 , the Company acquired One Stop Logistics, Inc. ("One Stop"), a non-asset based brokerage headquartered in Watsonville, California. One Stop provides both truckload and less-than-truckload solutions, and has offices throughout the country. The Company agreed to purchase the assets and assume certain liabilities of One Stop for total consideration of $36.8 million in cash. This $36.8 million will be paid in three separate payments, as follows:
Fair value of consideration transferred:

Cash Payment made at Closing
$
19,262,980

Cash Payment due in January 2015
13,782,500

Cash Payment due in May 2015
3,725,000

Total
$
36,770,480

The payments due in January 2015 and May 2015 were recorded as notes payable on the opening balance sheet. There is no contingent consideration associated with the purchase of One Stop. The acquisition provided the Company with strategic growth and added an assembled workforce with strong sales talent and an established network of shippers and carriers.



8

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013

The following table summarizes the allocation of the total consideration transferred for the acquisition of One Stop:
Cash
$

Accounts receivable
5,461,761

Property and equipment
17,137

Other Assets
32,605

Goodwill
18,972,878

Intangible Assets
16,800,000

Total Assets Acquired
$
41,284,381

Accounts Payable
$
4,376,067

Accrued Expenses
137,834

Total Liabilities Assumed
$
4,513,901

Total Consideration Transferred
$
36,770,480

Goodwill of $18,972,878 , 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 for several reasons, including expanding its presence in the truckload and less-than-truckload markets, especially in California, and adding an experienced sales force with established customer relationships. The intangible assets are primarily customer relationships, which have a useful life of twelve years. This allocation is subject to change as the Company finalizes purchase accounting.
The amounts of revenue and net income of One Stop included in the Company's consolidated statement of income from the acquisition date for the period ended June 30, 2014 are $8.4 million and $0.4 million , respectively.

Materiality of 2014 Acquisitions
    
The Company evaluated the 2014 acquisitions to determine if they are material on either an individual or aggregate basis, and concluded that the acquisitions of OFS, Comcar and One Stop are material on an aggregate basis. The following unaudited pro forma information presents a summary of the Company's consolidated statements of income for the three and six months ended June 30, 2014 and 2013 as if the Company had acquired OFS, Comcar and One Stop as of January 1, 2013:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
311,917,620

 
$
255,619,719

 
$
574,147,255

 
$
484,478,213

Income from operations
7,397,411

 
7,957,023

 
12,180,538

 
13,321,621

Net income
4,534,564

 
4,862,855

 
7,459,803

 
8,160,298

The above unaudited pro forma supplemental information includes the historical financial results of the Company and the three acquired businesses, adjusted to record intangible asset amortization as if the acquisitions had occurred on January 1, 2013, and adjusted to apply the Company's effective tax rate to the historical results of the acquired businesses. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and the acquired businesses. These pro forma results are not necessarily indicative either of what would have occurred if the acquisitions had been in effect for the period presented or future results.

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 of $7,810,947 . The potential earnout payments and performance are defined in the individual purchase agreement 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.

9

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013


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. The probability of paying the contingent consideration ranges from 15% to 50% , with discount rates used in determining the fair value of the contingent consideration ranging between 2% and 15% . 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 liabilities measured at fair value on a recurring basis and the basis of measurement at June 30, 2014 and December 31, 2013 :

 
Fair Value Measurements as of June 30, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration obligation
$
(7,810,947
)
 
$

 
$

 
$
(7,810,947
)

 
Fair Value Measurements as of December 31, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration obligation
$
(7,150,432
)
 
$

 
$

 
$
(7,150,432
)


The following table provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3):
 
Due to Seller
Balance at December 31, 2013
$
(7,150,432
)
Increase related to acquisition of OFS
(880,000
)
Change in fair value
(1,305,185
)
Payment of contingent consideration
1,524,670

Balance at June 30, 2014
$
(7,810,947
)

For the six month period ended June 30, 2014 , the Company recorded an adjustment to each of the ten remaining contingent consideration obligations related to its acquisitions. The adjustments were the result of the time value of money and

10

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013

using revised forecasts and updated fair value measurements that adjusted the Company's estimated earn-out payments related to the purchases of these businesses.

For the six month periods ended June 30, 2014 and 2013 , the Company recognized charges of $1,305,185 and $413,943 , respectively, in selling, general, and administrative expenses in the consolidated statement of income due to the change in fair value measurements using a level three valuation technique.

For the six month period ended June 30, 2014 , the Company paid $1,524,670 in contingent earn-out payments. The Company paid the former owners of Nationwide Traffic Services LLC, Distribution Services Inc, Sharp Freight Systems, and Lubenow Logistics LLC ("Lubenow") $437,500 , $520,000 , $287,170 , and $280,000 , respectively, as the EBITDA targets set forth in the purchase agreements were met. For the six month period ended June 30, 2013 , the Company paid the former owners of Lubenow $280,000 , as the EBITDA targets set forth in the purchase agreement were met.

5. Intangibles and Other Assets

The following is a roll-forward of goodwill from December 31, 2013 to June 30, 2014 :
Balance as of December 31, 2013
$
51,650,060

  Goodwill acquired related to the purchase of OFS
4,286,440

  Goodwill acquired related to the purchase of Comcar
2,226,864

  Goodwill acquired related to the purchase of One Stop
18,972,878

Balance as of June 30, 2014
$
77,136,242


The following is a summary of amortizable intangible assets as of June 30, 2014 and December 31, 2013 :
 
June 30, 2014
 
December 31, 2013
 
Weighted-Average Life
Customer relationships
$
44,938,979

 
$
21,438,979

 
10.1 years
Noncompete agreements
339,000

 
139,000

 
4.2 years
Trade names
640,000

 
190,000

 
4.4 years
 
45,917,979

 
21,767,979

 
10.0 years
Less accumulated amortization
(12,782,112
)
 
(11,120,733
)
 
 
Intangible assets, net
$
33,135,867

 
$
10,647,246

 
 

Amortization expense related to intangible assets was $1,661,379 and $1,198,700 for the six months ended June 30, 2014 and 2013 , respectively.

The estimated amortization expense for the next five years and thereafter is as follows:
Remainder of 2014
$
2,239,501

2015
4,323,053

2016
4,009,699

2017
3,722,972

2018
3,350,826

Thereafter
15,489,816

 
$
33,135,867



11

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013

6. Accrued Expenses and Other Noncurrent Liabilities

The components of accrued expenses at June 30, 2014 and December 31, 2013 are as follows:
 
June 30, 2014
 
December 31, 2013
Accrued compensation
$
8,381,592

 
$
4,147,590

Accrued rebates
2,471,583

 
2,298,476

Deferred rent
280,592

 
263,893

Other
4,594,296

 
1,612,158

Total accrued expenses
$
15,728,063

 
$
8,322,117


The other noncurrent liability as of June 30, 2014 and December 31, 2013 is the portion of deferred rent in excess of twelve months.

7. Income Taxe s     

The following table shows the Company's effective income tax rate for the three and six months ended June 30, 2014 and 2013 :
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Income before provision for income taxes
$
6,865,196

 
$
6,660,200

 
$
10,791,971

 
$
11,414,808

Income tax expense
(2,620,979
)
 
(2,537,583
)
 
(4,117,795
)
 
(4,315,559
)
Effective tax rate
38.2
%
 
38.1
%
 
38.2
%
 
37.8
%

The increase in the Company's effective tax rate was primarily due to the timing and reenactment of the research and development tax credit which occurred in early 2013 for both the 2012 and 2013 tax years.

8. Earnings Per Share

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the number of weighted average common share equivalents outstanding. There were no employee stock options excluded from the calculation of diluted earnings per share for the three and six month periods ended June 30, 2014 and 2013 . The computation of basic and diluted earnings per common share for the three and six month periods ended June 30, 2014 and 2013 are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 

 
 

 
 
 
 
Net income
$
4,244,217

 
$
4,122,617

 
$
6,674,176

 
$
7,099,249

Denominator:
 

 
 

 
 
 
 
Denominator for basic earnings per share-weighted-average shares
23,017,056

 
22,857,339

 
22,992,087

 
22,826,908

Effect of dilutive securities:
 

 
 

 
 
 
 
Employee stock awards
489,412

 
498,714

 
485,936

 
471,205

Denominator for dilutive earnings per share
23,506,468

 
23,356,053

 
23,478,023

 
23,298,113

Basic net income per common share
$
0.18

 
$
0.18

 
$
0.29

 
$
0.31

Diluted net income per common share
$
0.18

 
$
0.18

 
$
0.28

 
$
0.30




12

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013

9. Stock-Based Compensation Plans

The Company recorded $1,105,035 and $2,413,348 in total stock-based compensation expense with corresponding tax benefits of $430,964 and $941,206 for the three and six month periods ended June 30, 2014 , respectively. For the three and six month periods ended June 30, 2013 , the Company recorded $794,652 and $1,866,590 in total stock-based compensation expense with corresponding tax benefits of $309,914 and $727,970 , respectively. During the six month period ended June 30, 2014 , the Company did not grant any stock options. During the six month period ended June 30, 2013 , the Company granted 3,000 stock options to one employee. The Company granted 181,157 and 119,363 shares of restricted stock to various employees during the six month periods ended June 30, 2014 and 2013 , 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 43,437 shares of performance and market-based stock during the six month period ended June 30, 2014 . In 2013, the Company initiated a performance stock incentive plan for certain executives that provides vesting based on specific financial performance measurements. The Company granted 38,701 shares of performance stock during the six month period ended June 30, 2013 .

There were no options granted during the six month period ended June 30, 2014 . The following assumptions were utilized in the valuation for options granted during the six months ended June 30, 2013 .

 
Six Months Ended June 30, 2013
Dividend Yield

Risk-free interest rate
1.7
%
Weighted-average expected life
5.5 years

Volatility
35.0
%


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.

Effective July 1, 2012, the Company acquired the assets of Shipper Direct Logistics, Inc. ("Shipper Direct"), a truckload transportation brokerage located near Nashville, Tennessee. In August 2012, the Company discovered that the revenue and profitability of the acquired business, both prior and subsequent to the acquisition, were not as expected based on representations contained in the Asset Purchase Agreement. The Company believes the representations made in the Asset Purchase Agreement were fraudulent. The founders of Shipper Direct, who had become employees of the Company, were terminated as a result, and the Company requested that the sellers return the entire purchase price and that the contingent consideration provision of the Asset Purchase Agreement be voided. However, the Company received only $1,779,554 . On September 25, 2012, the sellers asserted indemnification claims against the Company under the indemnification provisions of the Asset Purchase Agreement for $2,400,000 , including a claim for the repayment of the $1,779,554 return of purchase price. The Company believes the sellers' indemnification claims are without merit and intends to vigorously defend against any legal action taken by the sellers with respect to their indemnification claims.
In November 2012, the founders filed a complaint with the U.S. Department of Labor alleging that their employment was wrongfully terminated in violation of the whistleblower provisions of Sarbanes-Oxley. On August 27, 2013, this action was terminated in the Company's favor when the founders voluntarily withdrew their complaint.
In January 2013, the Company filed a lawsuit in the U.S. District Court for the Northern District of Illinois against Shipper Direct, the founders and others alleging, among other things, breach of contract and fraud. The lawsuit is seeking monetary damages of $2,500,000 . On May 28, 2013, the Company obtained a default judgment against the founders, which the founders subsequently attempted to vacate. On April 29, 2014, the court denied the founders’ attempt to vacate the default judgment.  The court ruled that one of the founders is liable for fraud, conspiracy, and breach of contract, and the other founder is liable for conspiracy.  The court held a hearing on May 21, 2014 to hear evidence as to the amount of the Company’s damages.  The court has not yet determined the amount of the Company’s damages.

13

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013


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. Revolving Credit Facility

On May 2, 2014, the Company entered into a revolving credit agreement with PNC Bank. The $50 million facility expires on May 2, 2017, and allows for the issuance of up to $20.0 million in letters of credit. The issuance of letters of credit under the credit facility reduces available borrowings. The Company's ability to access the revolving credit facility is subject to its compliance with the terms and conditions of the credit facility, including customary covenants that provide limitations and conditions on the Company's ability to enter into certain transactions. The credit agreement also contains financial covenants that require the Company to maintain a maximum leverage ratio and a minimum interest coverage ratio. At June 30, 2014 , the Company was in compliance with all such covenants.

The Company pays a commitment fee to PNC Bank to keep the revolving credit facility active. Borrowings bear interest at one of the following, plus an applicable margin: (1) the federal funds rate, (2) the prime rate, or (3) the LIBOR rate, based on the Company's election for each tranche of borrowing. Both the commitment fee and any interest expense are recorded to the income statement as interest expense in the period incurred.

During the second quarter of 2014 , the Company drew $5.0 million on the revolving credit facility, all of which was repaid as of June 30, 2014 . At June 30, 2014 , there were no amounts drawn against the revolving credit facility and there were letters of credit outstanding in the aggregate amount of $14.5 million . The amounts available under the revolving credit facility are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facility at  June 30, 2014 was  $35.5 million .


14


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, 2013 and elsewhere in this Quarterly Report. 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, consumer products and retail. Our clients fall into two categories, Enterprise and Transactional. We typically enter into multi-year contracts with our Enterprise 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. We provide transportation and logistics services to our Transactional clients on a shipment-by-shipment basis, typically with individual, or spot market, pricing.


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Table of Contents

Results of Operations

The following table represents certain statement of operations data:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
 (in thousands, except per share data)
Consolidated statements of income data:
 
 
 
 
 
 
 
Revenue
$
305,120

 
$
224,051

 
$
552,790

 
$
428,028

Transportation costs
251,782

 
184,391

 
457,242

 
349,917

Net revenue
53,338

 
39,660

 
95,548

 
78,111

Operating expenses:
 
 
 
 
 
 
 
Commissions
14,762

 
9,991

 
25,970

 
19,934

Selling, general and administrative expenses
27,157

 
20,634

 
50,998

 
40,940

Contingent consideration expense
1,081

 
(345
)
 
1,305

 
414

Depreciation and amortization
3,410

 
2,612

 
6,366

 
5,207

Total operating expenses
46,410

 
32,892

 
84,639

 
66,495

Income from operations
6,928

 
6,768

 
10,909

 
11,616

Other expense
(63
)
 
(107
)
 
(117
)
 
(201
)
Income before provision for income taxes
6,865

 
6,661

 
10,792

 
11,415

Income tax expense
(2,621
)
 
(2,538
)
 
(4,118
)
 
(4,316
)
Net income
$
4,244

 
$
4,123

 
$
6,674

 
$
7,099

Net income per share of common stock:
 
 
 
 
 
 
 
      Basic
$
0.18

 
$
0.18

 
$
0.29

 
$
0.31

      Diluted
$
0.18

 
$
0.18

 
$
0.28

 
$
0.30

Shares used in per share calculations:
 
 
 
 
 
 
 
      Basic
23,017

 
22,857

 
22,992

 
22,827

      Diluted
23,506

 
23,356

 
23,478

 
23,298




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 $552.8 million and $428.0 million  for the six month periods ended June 30, 2014 and 2013 , respectively, representing a period-over-period increase of 29.1% .

Our revenue is generated from two different types of clients: Enterprise and Transactional. Our Enterprise accounts typically generate higher dollar amounts and volume than our Transactional relationships. We categorize a client as an Enterprise client if we have a contract with the client for the provision of services on a recurring basis. Our contracts with Enterprise 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 six month periods ended June 30, 2014 and 2013 , Enterprise clients accounted for 27% and 30% , respectively, of our revenue and Transactional clients accounted for 73% and 70% , respectively, of our revenue. We expect to continue to grow both our Enterprise 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, intermodal and small parcel. Other transportation modes include domestic air, expedited services and international. Typically, our revenue is lower for an LTL shipment than for a TL shipment, and revenue per shipment is higher for shipments in modes other than TL, LTL and small parcel. Material shifts in the percentage of our revenue by transportation mode could have a significant impact on our

16

Table of Contents

revenue growth. For the six month period ended June 30, 2014 , TL accounted for 52% of our revenue, LTL accounted for 37% of our revenue, intermodal accounted for 6% of our revenue, small parcel accounted for 4% of our revenue and other transportation modes accounted for 1% of our revenue. For the six month period ended June 30, 2013 , TL accounted for 44% of our revenue, LTL accounted for 42% of our revenue, intermodal accounted for 8% of our revenue, small parcel accounted for 4% of our revenue and other transportation modes accounted for 2% 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 the primary indicator of our ability to add value to our clients and 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, however, is typically higher for an LTL shipment than for a TL shipment. Material shifts in the percentage of our revenue by transportation mode, including small parcel, could have a significant impact on our net revenue. The discussion of results of operations below focuses on changes in our net revenue and expenses as a percentage of net revenue margin. For the six month periods ended June 30, 2014 and 2013 , our net revenue was $95.5 million and $78.1 million , respectively, reflecting an increase of 22.3% .

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 related to contingent consideration, 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 six month periods ended June 30, 2014 and 2013 , commission expense was 27.2% and 25.5% , respectively, of our net revenue. The increase is due to the fluctuation of the composition of our net revenue originating from sales employees and agents. 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 percentage of net revenue, could increase or decrease in the future depending on the composition of our revenue growth and the relative impact of changes in sales teams and service offerings.

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 and other general and administrative expenses. For the six month periods ended June 30, 2014 and 2013 , our selling, general and administrative expenses were $51.0 million and $40.9 million , respectively. For the six month periods ended June 30, 2014 and 2013 , selling, general and administrative expenses as a percentage of net revenue were 53.4% and 52.4% , respectively. The increase is due to additional operating support, additional operating expenses related to our 2014 acquisitions of Online Freight Services, Inc. ("OFS"), Comcar Logistics, LLC ("Comcar") and One Stop Logistics, Inc. ("One Stop"), and acquisition-related transaction costs associated with our 2014 acquisitions.

Our contingent consideration expenses consist of the change in the fair value of the contingent liabilities payable to the sellers of our acquired businesses. The contingent liabilities relate to expected earn-out payments that will be paid upon the

17

Table of Contents

achievement of certain performance measures by our acquired businesses. These liabilities are evaluated on a quarterly basis and the change in the contingent consideration is included in the selling, general and administrative expenses in our consolidated statement of income. For the six month periods ended June 30, 2014 and 2013 , we recorded charges of $1.3 million and $0.4 million , respectively, related to fair value adjustments to the contingent consideration obligation.

Our depreciation expense is primarily attributable to our depreciation of computer hardware and software, equipment, furniture and fixtures and internally developed software. For the six month periods ended June 30, 2014 and 2013 , depreciation expense was $4.7 million and $4.0 million , respectively. The increase is primarily due to the depreciation of property and equipment related to the expansion of our Chicago headquarters.

Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including customer relationships, trade names and non-compete agreements. For the six month periods ended June 30, 2014 and 2013 , amortization expense was $1.7 million and $1.2 million , respectively. The increase is due to the amortization of intangible assets associated with the acquisitions of OFS, Comcar and One Stop.

Comparison of the six months ended June 30, 2014 and 2013

Revenue

Our revenue increased by $124.8 million , or 29.1% , to $552.8 million for the six month period ended June 30, 2014 , from $428.0 million for the six month period ended June 30, 2013 . The increase was attributable to the increase in the number of our clients and the total number of shipments executed on behalf of, and services provided to, these clients. Included in this increase was $47.2 million of additional revenue generated in 2014 from the acquisitions of OFS, Comcar, and One Stop.

Our revenue from Enterprise clients increased by $21.3 million , or 16.8% , to $148.3 million for the six month period ended June 30, 2014 , from $127.0 million for the six month period ended June 30, 2013 , resulting from increases in the number of Enterprise clients, shipments executed on behalf of these clients and transportation rates. Our percentage of revenue from Enterprise clients decreased to 26.8% of our revenue for the period ended June 30, 2014 from 29.7% for the period ended June 30, 2013 due to an increase in the number of Transactional shipments.

Our revenue from Transactional clients increased by $103.5 million , or 34.4% , to $404.5 million  for the six month period ended June 30, 2014 , from $301.0 million  for the six month period ended June 30, 2013 . Our percentage of revenue from Transactional clients increased to 73.2% of our revenue for the six month period ended June 30, 2014 , from 70.3% of our revenue for the six month period ended June 30, 2013 . The increase in Transactional revenue was driven by increases in both the number and productivity of sales employees as well as by the acquisitions of OFS, Comcar, and One Stop. Our revenue per Transactional client increased by approximately 12.2% for the six month period ended June 30, 2014 compared to the same period in 2013 .
 
Transportation costs

Our transportation costs increased by $107.3 million , or 30.7% , to $457.2 million for the six month period ended June 30, 2014 , from $349.9 million for the six month period ended June 30, 2013 . The growth in the total number of shipments accounted for most of the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 82.7% for the six month period ended June 30, 2014 from 81.8% for the six month period ended June 30, 2013 due to an increased percentage of TL shipments in the composition of our sales volume. Also included in this increase is the transportation costs associated with the revenue generated from our 2014 acquisitions.

Net revenue

Net revenue increased by $17.4 million , or 22.3% , to $95.5 million for the six month period ended June 30, 2014 , from $78.1 million for the six month period ended June 30, 2013 . The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our net revenue during this period. Net revenue margins decreased to 17.3% for the six month period ended June 30, 2014 , from 18.2% for the six month period ended June 30, 2013 . The decrease in net revenue margins was primarily the result of a higher percentage of TL revenue as a percentage of total revenue in the six month period ended June 30, 2014 when compared to the same period in 2013 .





18

Table of Contents

Operating expenses

Commission expense increased by $6.1 million , or 30.3% , to $26.0 million for the six month period ended June 30, 2014 , from $19.9 million for the six month period ended June 30, 2013 . This increase is primarily attributable to the increase in net revenue. For the six month periods ended June 30, 2014 and 2013 , commission expense was 27.2% and 25.5% , respectively, of our net revenue. This increase is due to the fluctuation of the composition of our net revenue originating from sales employees and agents.

Selling, general and administrative expenses increased by $10.1 million , or 24.6% , to $51.0 million for the six month period ended June 30, 2014 , from $40.9 million for the six month period ended June 30, 2013 . The increase is primarily the result of hiring sales personnel to drive continued growth of our business, hiring operational personnel to support our growth in customers and shipment volume, and acquisition-related transaction costs for our 2014 acquisitions. As a percentage of net revenue, selling, general and administrative expenses increased to 53.4% for the six month period ended June 30, 2014 , from 52.4% for the six month period ended June 30, 2013 . The increase, as a percentage of net revenue, is primarily attributable to increased compensation and facilities expenses associated with the growth of our business.

Contingent consideration

The change in contingent consideration resulted in a net increase to our contingent consideration obligation for the six month periods ended June 30, 2014 and 2013 . The resulting expense recognized in our consolidated statement of income from the change in the contingent consideration obligation was $1.3 million for the six month period ended June 30, 2014 compared to $0.4 million for the six month period ended June 30, 2013 . For the six month periods ended June 30, 2014 and 2013 , the increases in the contingent liability were due to greater probability of acquisitions achieving EBITDA earn-out targets and changes to the time value of money. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of June 30, 2014 .

Depreciation and amortization

Depreciation expense increased by $0.7 million , or 17.4% , to $4.7 million for the six month period ended June 30, 2014 , from $4.0 million for the six month period ended June 30, 2013 . The increase in depreciation expense is primarily attributable to the depreciation of property and equipment related to the expansion of our Chicago headquarters. Amortization expense increased by $0.5 million , or 38.6% , to $1.7 million for the six month period ended June 30, 2014 , from $1.2 million for the six month period ended June 30, 2013 . The increase in amortization expense is attributable to the amortization of intangible assets related to our 2014 acquisitions.

Income from operations

Income from operations decreased by $0.7 million , or 6.1% , to $10.9 million for the six month period ended June 30, 2014 , from $11.6 million for the six month period ended June 30, 2013 . The decrease in income from operations is attributable to the increase in operating expenses in excess of the increase in net revenue.

Other expense and income tax expense

Other expense decreased to $0.1 million for the six month period ended June 30, 2014 from $0.2 million for the six month period ended June 30, 2013 .

Income tax expense decreased to $4.1 million for the six month period ended June 30, 2014 , from $4.3 million for the six month period ended June 30, 2013 . This decrease was due to the decrease in income from operations discussed above. Our effective tax rate for the six month period ended June 30, 2014 increased to 38.2% , from 37.8% for the six month period ended June 30, 2013 . The increase in our effective tax rate was primarily due to the timing and reenactment of the research and development tax credit which occurred in early 2013 for both the 2012 and 2013 tax years.
    
Net Income

Net income decreased by $0.4 million , or 22.3% , to $6.7 million for the six month period ended June 30, 2014 , from $7.1 million for the six month period ended June 30, 2013 , due to the items previously discussed.




19

Table of Contents


Comparison of the three months ended June 30, 2014 and 2013

Revenue

Our revenue increased by $81.0 million , or 36.2% , to $305.1 million for the three month period ended June 30, 2014 , from $224.1 million for the three month period ended June 30, 2013 . The increase was attributable to the increase in the number of our clients and the total number of shipments executed on behalf of, and services provided to, these clients. Included in this increase was $31.5 million of additional revenue generated in 2014 from the acquisitions of OFS, Comcar, and One Stop.

Our revenue from Enterprise clients increased by $12.1 million , or 18.3% , to $78.2 million for the three month period ended June 30, 2014 , from $66.1 million for the three month period ended June 30, 2013 , resulting from increases in the number of Enterprise clients, shipments executed on behalf of these clients and transportation rates. Our percentage of revenue from Enterprise clients decreased to 25.6% of our revenue for the period ended June 30, 2014 from 29.5% for the period ended June 30, 2013 due to an increase in the number of Transactional shipments.

Our revenue from Transactional clients increased by $68.9 million , or 43.6% , to $226.9 million  for the three month period ended June 30, 2014 , from $158.0 million  for the three month period ended June 30, 2013 . Our percentage of revenue from Transactional clients increased to 74.4% of our revenue for the three month period ended June 30, 2014 , from 70.5% of our revenue for the three month period ended June 30, 2013 . The increase in Transactional revenue was driven by increases in both the number and productivity of sales employees as well as by the acquisitions of OFS, Comcar, and One Stop. Our revenue per Transactional client increased by approximately 19.9% for the three month period ended June 30, 2014 compared to the same period in 2013 .
 
Transportation costs

Our transportation costs increased by $67.4 million , or 36.5% , to $251.8 million for the three month period ended June 30, 2014 , from $184.4 million for the three month period ended June 30, 2013 . The growth in the total number of shipments accounted for most of the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 82.5% for the three month period ended June 30, 2014 from 82.3% for the three month period ended June 30, 2013 due to an increased percentage of TL shipments in the composition of our sales volume. Also included in this increase is the transportation costs associated with the revenue generated from our 2014 acquisitions.

Net revenue

Net revenue increased by $13.6 million , or 34.5% , to $53.3 million for the three month period ended June 30, 2014 , from $39.7 million for the three month period ended June 30, 2013 . The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our net revenue during this period. Net revenue margins decreased to 17.5% for the three month period ended June 30, 2014 , from 17.7% for the three month period ended June 30, 2013 . The decrease in net revenue margins was primarily the result of a higher percentage of TL revenue as a percentage of total revenue in the three month period ended June 30, 2014 when compared to the same period in 2013 .

Operating expenses

Commission expense increased by $4.8 million , or 47.8% , to $14.8 million for the three month period ended June 30, 2014 , from $10.0 million for the three month period ended June 30, 2013 . This increase is primarily attributable to the increase in net revenue. For the three month periods ended June 30, 2014 and 2013 , commission expense was 27.7% and 25.2% , respectively, of our net revenue. This increase is due to the fluctuation of the composition of our net revenue originating from sales employees and agents.

Selling, general and administrative expenses increased by $6.6 million , or 31.6% , to $27.2 million for the three month period ended June 30, 2014 , from $20.6 million for the three month period ended June 30, 2013 . The increase is primarily the result of hiring sales personnel to drive continued growth of our business, hiring operational personnel to support our growth in customers and shipment volume, and acquisition-related transaction costs for the One Stop acquisition that occurred during the quarter. As a percentage of net revenue, selling, general and administrative expenses decreased to 50.9% for the three month period ended June 30, 2014 , from 52.0% for the three month period ended June 30, 2013 . The percentage growth in net revenue has outpaced the percentage growth in selling, general and administrative expenses due to increases in productivity from sales personnel.

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Table of Contents


Contingent consideration

The change in contingent consideration resulted in a net increase and a net decrease to our contingent consideration obligation for the three month periods ended June 30, 2014 and 2013 , respectively. The resulting expense recognized in our consolidated statement of income from the change in the contingent consideration obligation was $1.1 million for the three month period ended June 30, 2014 compared to a benefit of $0.3 million for the three month period ended June 30, 2013 . For the three month period ended June 30, 2014 , the increase in the contingent liability was due to greater probability of acquisitions achieving EBITDA earn-out targets and changes to the time value of money. For the three month period ended June 30, 2013 , the decrease in the contingent liability was due to a reduced probability of acquisitions achieving EBITDA earn-out targets. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of June 30, 2014 .

Depreciation and amortization

Depreciation expense increased by $0.4 million , or 21.7% , to $2.4 million for the three month period ended June 30, 2014 , from $2.0 million for the three month period ended June 30, 2013 . The increase in depreciation expense is primarily attributable to the depreciation of property and equipment related to the expansion of our Chicago headquarters. Amortization expense increased by $0.4 million , or 60.1% , to $1.0 million for the three month period ended June 30, 2014 , from $0.6 million for the three month period ended June 30, 2013 . The increase in amortization expense is attributable to the amortization of intangible assets related to our 2014 acquisitions.

Income from operations

Income from operations increased by $0.1 million , or 2.4% , to $6.9 million for the three month period ended June 30, 2014 , from $6.8 million for the three month period ended June 30, 2013 . The increase in income from operations is attributable to the increase in net revenue in excess of the increase in operating expenses.

Other expense and income tax expense

Other expense remained relatively consistent at $0.1 million for both the three month periods ended June 30, 2014 and June 30, 2013 .

Income tax expense increased to $2.6 million for the three month period ended June 30, 2014 , from $2.5 million for the three month period ended June 30, 2013 . This increase was due to the increase in income from operations discussed above. Our effective tax rate for the three month period ended June 30, 2014 increased to 38.2% , from 38.1% for the three month period ended June 30, 2013 .
    
Net Income

Net income increased by $0.1 million , or 2.9% , to $4.2 million for the three month period ended June 30, 2014 , from $4.1 million for the three month period ended June 30, 2013 , due to the items previously discussed.

Liquidity and Capital Resources

As of June 30, 2014 , we had $27.4 million in cash and cash equivalents, $44.4 million in working capital and $35.5 million available under our credit facility, which matures on May 2, 2017.

Cash provided by operating activities

For the six month period ended June 30, 2014 , $18.4 million of cash was provided by operating activities, representing an increase of $7.5 million compared to the six month period ended June 30, 2013 . For the six month period ended June 30, 2014 , we generated $16.8 million in cash from net income, adjusted for non-cash operating items, compared to $15.0 million for the six month period ended June 30, 2013 . For the six month periods ended June 30, 2014 and 2013 , cash flow generation increased by $1.5 million and was offset by $4.1 million , respectively, in changes to net working capital. This change is primarily due to the growth of our business.




21

Table of Contents

Cash used in investing activities

Cash used in investing activities was $41.4 million and $6.2 million during the six month periods ended June 30, 2014 and 2013 , respectively. For the six month period ended June 30, 2014 , the primary investing activities were the acquisition related payments to OFS, Comcar and One Stop, the procurement of computer hardware and software, and the internal development of computer software. For the six month period ended June 30, 2013 , the primary investing activities were related to the procurement of computer hardware and software, the internal development of computer software and the acquisition of Open Mile, Inc.

Cash (used in) provided by financing activities

During the six month period ended June 30, 2014 , net cash used in financing activities was $2.1 million compared to net cash provided by financing activities of $0.4 million for the six month period ended June 30, 2013 . For the six month period ended June 30, 2014 , the use of cash in financing activities was primarily attributable to contingent consideration payments of $1.5 million and the use of cash to satisfy employee tax withholdings upon the vesting of restricted stock. For the six month period ended June 30, 2013 , the net cash provided by financing activities was primarily related to the exercise of employee stock options offset by the use of cash to satisfy employee tax withholdings upon the vesting of restricted stock.

Revolving credit facility

On May 2, 2014, we entered into a revolving credit agreement with PNC Bank. The $50 million facility expires on May 2, 2017, and allows for the issuance of up to $20 million in letters of credit. The issuance of letters of credit under the credit facility reduces available borrowings. Our ability to access the revolving credit facility is subject to our compliance with the terms and conditions of the credit facility, including customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The credit agreement also contains financial covenants that require us to maintain a maximum leverage ratio and a minimum interest coverage ratio. At June 30, 2014 , we were in compliance with all such covenants.

We pay a commitment fee to PNC Bank to keep the revolving credit facility active. Borrowings bear interest at one of the following, plus an applicable margin: (1) the federal funds rate, (2) the prime rate, or (3) the LIBOR rate, based on our election for each tranche of borrowing. Both the commitment fee and any interest expense are recorded to the income statement as interest expense in the period incurred.

During the second quarter of 2014 , we drew $5 million on the revolving credit facility, all of which was repaid as of June 30, 2014 . At June 30, 2014 , there were no amounts drawn against the revolving credit facility and there were letters of credit outstanding in the aggregate amount of $14.5M. The amounts available under the revolving credit facility are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facility at  June 30, 2014 was $35.5 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 a material use 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, and for working capital and other general corporate purposes. We also expect to use available cash to make approximately $4.3 million of potential earn-out payments for the remainder of 2014 in connection with our acquisitions. We currently expect to use up to $7.0 million for capital expenditures for the remainder of 2014 . 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 lifecycle 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.



22

Table of Contents


Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 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, 2016. 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. We will evaluate the effects, if any, that the adoption of this guidance will have on our consolidated financial statements.

In July 2013, the FASB issued authoritative guidance under ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. The provisions of this new guidance were effective as of the beginning of our 2014 fiscal year and did not have a material impact on our financial statements.


Item 3.     Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk

We pass through increases 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 line of credit. Borrowings bear interest at one of the following, plus an applicable margin: (1) the federal funds rate, (2) the prime rate, 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 three rates described above. Assuming the $50.0 million line of credit was fully drawn, a 1.0% increase in the interest rate selected would increase our annual interest expense by $500,000.

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 six months ended June 30, 2014 and 2013 .


23

Table of Contents

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 June 30, 2014 . 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 June 30, 2014 , 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 June 30, 2014 .

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 June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


24

Table of Contents

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

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

Effective July 1, 2012, the Company acquired the assets of Shipper Direct Logistics, Inc. ("Shipper Direct'"), a truckload transportation brokerage located near Nashville, Tennessee. In August 2012, the Company discovered that the revenue and profitability of the acquired business, both prior and subsequent to the acquisition, were not as expected based on representations contained in the Asset Purchase Agreement. The Company believes the representations made in the Asset Purchase Agreement were fraudulent. The founders of Shipper Direct, who had become employees of the Company, were terminated as a result, and the Company requested that the sellers return the entire purchase price and that the contingent consideration provision of the Asset Purchase Agreement be voided. However, the Company received only $1,779,554 . On September 25, 2012, the sellers asserted indemnification claims against the Company under the indemnification provisions of the Asset Purchase Agreement for $2,400,000 , including a claim for the repayment of the $1,779,554 return of purchase price. The Company believes the sellers' indemnification claims are without merit and intends to vigorously defend against any legal action taken by the sellers with respect to their indemnification claims.
In November 2012, the founders filed a complaint with the U.S. Department of Labor alleging that their employment was wrongfully terminated in violation of the whistleblower provisions of Sarbanes-Oxley. On August 27, 2013, this action was terminated in the Company's favor when the founders voluntarily withdrew their complaint.
In January 2013, the Company filed a lawsuit in the U.S. District Court for the Northern District of Illinois against Shipper Direct, the founders and others alleging, among other things, breach of contract and fraud. The lawsuit is seeking monetary damages of $2,500,000 . On May 28, 2013, the Company obtained a default judgment against the founders, which the founders subsequently attempted to vacate. On April 29, 2014, the court denied the founders’ attempt to vacate the default judgment.  The court ruled that one of the founders is liable for fraud, conspiracy, and breach of contract, and the other founder is liable for conspiracy.  The court held a hearing on May 21, 2014 to hear evidence as to the amount of the Company’s damages.  The court has not yet determined the amount of the Company’s damages.

Management does not believe that the outcome of any of the legal proceedings to which we are a party will have a material adverse effect on our 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, 2013 .


25

Table of Contents

Item 6.    Exhibits
Exhibit No
 
Description of Exhibit
10.1

 
Credit Agreement, dated as of May 2, 2014, by and among Echo Global Logistics, Inc., the lenders party thereto and PNC Bank, National Association, as administrative agent
 
 
 
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


26

Table of Contents

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:
July 31, 2014
 
 
 
/s/ DOUGLAS R. WAGGONER
 
 
 
By:
 
Douglas R. Waggoner
Chief Executive Officer
 
 
 
 
 
 
Date:
July 31, 2014
 
 
 
/s/ KYLE L. SAUERS
 
 
 
By:
 
Kyle L. Sauers
Chief Financial Officer


27

Table of Contents

EXHIBIT INDEX
Number
 
Description
 
 
 
10.1

 
Credit Agreement, dated as of May 2, 2014, by and among Echo Global Logistics, Inc., the lenders party thereto and PNC Bank, National Association, as administrative agent
 
 
 
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


28
EXECUTION VERSION






$50,000,000 REVOLVING CREDIT FACILITY
CREDIT AGREEMENT
by and among
ECHO GLOBAL LOGISTICS, INC.
and
THE LENDERS PARTY HERETO
and
PNC BANK, NATIONAL ASSOCIATION, as Administrative Agent
Dated as of May 2, 2014


US_ACTIVE-117264347.3-200453-00020



TABLE OF CONTENTS
 
 
Page
1.
CERTAIN DEFINITIONS
1
1.1
Certain Definitions
1
1.2
Construction
26
1.3
Accounting Principles; Changes in GAAP
26
2.
REVOLVING CREDIT FACILITY
27
2.1
Revolving Credit Commitments
27
2.1.1
Revolving Credit Loans
27
2.2
Nature of Lenders’ Obligations with Respect to Revolving Credit Loans
27
2.3
Commitment Fees
27
2.4
Reserved
28
2.5
Revolving Credit Loan Requests
28
2.6
Making Revolving Credit Loans; Presumptions by the Administrative Agent; Repayment of Revolving Credit Loans
28
2.6.1
Making Revolving Credit Loans
28
2.6.2
Presumptions by the Administrative Agent
28
2.6.3
Repayment of Revolving Credit Loans
29
2.7
Notes
29
2.8
Use of Proceeds
29
2.9
Letter of Credit Subfacility
29
2.9.1
Issuance of Letters of Credit
29
2.9.2
Letter of Credit Fees
30
2.9.3
Disbursements, Reimbursement
30
2.9.4
Repayment of Participation Advances
31
2.9.5
Documentation
32
2.9.6
Determinations to Honor Drawing Requests
32
2.9.7
Nature of Participation and Reimbursement Obligations
32
2.9.8
Indemnity
34
2.9.9
Liability for Acts and Omissions
34
2.9.10
Issuing Lender Reporting Requirements
35
2.10
Defaulting Lenders
36
3.
RESERVED
37
4.
INTEREST RATES
37
4.1
Interest Rate Options
37
4.1.1
Revolving Credit Interest Rate Options
38
4.1.2
Rate Quotations
38
4.2
Interest Periods
38
4.2.1
Amount of Borrowing Tranche
38
4.2.2
Renewals
38
4.3
Interest After Default
38
4.3.1
Letter of Credit Fees, Interest Rate
38

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4.3.2
Other Obligations
38
4.3.3
Acknowledgment
39
4.4
LIBOR Rate Unascertainable; Illegality; Increased Costs; Deposits Not Available
39
4.4.1
Unascertainable
39
4.4.2
Illegality; Increased Costs; Deposits Not Available
39
4.4.3
Administrative Agent’s and Lender’s Rights
39
4.5
Selection of Interest Rate Options
40
5.
PAYMENTS
40
5.1
Payments
40
5.2
Pro Rata Treatment of Lenders
41
5.3
Sharing of Payments by Lenders
41
5.4
Presumptions by Administrative Agent
42
5.5
Interest Payment Dates
42
5.6
Voluntary Prepayments
42
5.6.1
Right to Prepay
42
5.6.2
Replacement of a Lender
43
5.6.3
Designation of a Different Lending Office
44
5.7
Reserved
44
5.8
Increased Costs
44
5.8.1
Increased Costs Generally
44
5.8.2
Capital Requirements
44
5.8.3
Certificates for Reimbursement; Repayment of Outstanding Loans; Borrowing of New Loans
45
5.8.4
Delay in Requests
45
5.9
Taxes
45
5.9.1
Issuing Lender
45
5.9.2
Payments Free of Taxes
45
5.9.3
Payment of Other Taxes by the Loan Parties
46
5.9.4
Indemnification by the Loan Parties
46
5.9.5
Indemnification by the Lenders
46
5.9.6
Evidence of Payments
46
5.9.7
Status of Lenders
46
5.9.8
Treatment of Certain Refunds
48
5.9.9
Survival
49
5.10
Indemnity
49
6.
REPRESENTATIONS AND WARRANTIES
49
6.1
Representations and Warranties
50
6.1.1
Organization and Qualification; Power and Authority; Compliance With Laws; Title to Properties; Event of Default
50
6.1.2
Subsidiaries; Investment Companies
50
6.1.3
Validity and Binding Effect
50
6.1.4
No Conflict; Material Agreements; Consents
50
6.1.5
Litigation
51

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6.1.6
Financial Statements
51
6.1.7
Margin Stock
51
6.1.8
Full Disclosure
52
6.1.9
Taxes
52
6.1.10
Patents, Trademarks, Copyrights, Licenses, Etc.
52
6.1.11
Liens in the Collateral
52
6.1.12
Insurance
52
6.1.13
ERISA Compliance
52
6.1.14
Environmental Matters
53
6.1.15
Solvency
53
6.1.16
Anti-Money Laundering/International Trade Law Compliance
53
6.1.17
Specified Subsidiaries
53
6.2
Updates to Schedules
53
7.
CONDITIONS OF LENDING AND ISSUANCE OF LETTERS OF CREDIT
54
7.1
Conditions Precedent to the Execution of the Credit Agreement
54
7.1.1
Deliveries
54
7.1.2
Payment of Fees
55
7.2
Conditions Precedent to Initial Extensions of Credit
55
7.3
Conditions Precedent to All Extensions of Credit
55
8.
COVENANTS
55
8.1
Affirmative Covenants
55
8.1.1
Preservation of Existence, Etc.
55
8.1.2
Payment of Liabilities, Including Taxes, Etc.
56
8.1.3
Maintenance of Insurance
56
8.1.4
Maintenance of Properties and Leases
56
8.1.5
Visitation Rights
56
8.1.6
Keeping of Records and Books of Account
56
8.1.7
Compliance with Laws; Use of Proceeds
57
8.1.8
Further Assurances
57
8.1.9
Anti-Terrorism Laws
57
8.2
Negative Covenants
57
8.2.1
Indebtedness
57
8.2.2
Liens; Lien Covenants
58
8.2.3
Guaranties
58
8.2.4
Loans and Investments
58
8.2.5
Dividends and Related Distributions
59
8.2.6
Liquidations, Mergers and Consolidations
59
8.2.7
Dispositions of Assets or Subsidiaries
59
8.2.8
Affiliate Transactions
60
8.2.9
Subsidiaries, Partnerships and Joint Ventures
61
8.2.10
Continuation of or Change in Business
61
8.2.11
Fiscal Year
61

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8.2.12
Changes in Organizational Documents
61
8.2.13
Minimum Consolidated Interest Coverage Ratio
61
8.2.14
Maximum Consolidated Total Leverage Ratio
61
8.2.15
Limitation on Negative Pledges
61
8.2.16
Specified Subsidiaries
62
8.3
Reporting Requirements
62
8.3.1
Quarterly Financial Statements
62
8.3.2
Annual Financial Statements
62
8.3.3
Certificate of the Borrower
62
8.3.4
Notices
63
9.
DEFAULT
64
9.1
Events of Default
64
9.1.1
Payments Under Loan Documents
64
9.1.2
Breach of Warranty
64
9.1.3
Breach of Negative Covenants or Visitation Rights
64
9.1.4
Breach of Other Covenants
64
9.1.5
Defaults in Other Agreements or Indebtedness
64
9.1.6
Final Judgments or Orders
64
9.1.7
Loan Document Unenforceable
65
9.1.8
[Reserved]
65
9.1.9
Events Relating to Plans and Benefit Arrangements
65
9.1.10
Change of Control
65
9.1.11
Relief Proceedings
65
9.2
Consequences of Event of Default
65
9.2.1
Events of Default Other Than Bankruptcy, Insolvency or Reorganization Proceedings
65
9.2.2
Bankruptcy, Insolvency or Reorganization Proceedings
66
9.2.3
Set-off
66
9.2.4
Application of Proceeds
66
10.
THE ADMINISTRATIVE AGENT
67
10.1
Appointment and Authority
67
10.2
Rights as a Lender
67
10.3
Exculpatory Provisions
67
10.4
Reliance by Administrative Agent
68
10.5
Delegation of Duties
69
10.6
Resignation of Administrative Agent
69
10.7
Non-Reliance on Administrative Agent and Other Lenders
70
10.8
Administrative Agent Fee
70
10.9
Reserved
70
10.10
Authorization to Release Collateral and Guarantors
70
10.11
No Reliance on Administrative Agent’s Customer Identification Program
70
11.
MISCELLANEOUS
71
11.1
Modifications, Amendments or Waivers
71

- iv -    



11.1.1
Increase of Commitment
71
11.1.2
Extension of Payment; Reduction of Principal, Interest or Fees; Modification of Terms of Payment
71
11.1.3
Release of Collateral or Guarantor
71
11.1.4
Miscellaneous
71
11.2
No Implied Waivers; Cumulative Remedies
72
11.3
Expenses; Indemnity; Damage Waiver
72
11.3.1
Costs and Expenses
72
11.3.2
Indemnification by the Borrower
72
11.3.3
Reimbursement by Lenders
73
11.3.4
Waiver of Consequential Damages, Etc.
73
11.3.5
Payments
74
11.4
Holidays
74
11.5
Notices; Effectiveness; Electronic Communication
74
11.5.1
Notices Generally
74
11.5.2
Electronic Communications
74
11.5.3
Change of Address, Etc.
75
11.6
Severability
75
11.7
Duration; Survival
75
11.8
Successors and Assigns
75
11.8.1
Successors and Assigns Generally
75
11.8.2
Assignments by Lenders
75
11.8.3
Register
77
11.8.4
Participations
77
11.8.5
Certain Pledges; Successors and Assigns Generally
78
11.9
Confidentiality
78
11.9.1
General
78
11.9.2
Sharing Information With Affiliates of the Lenders
79
11.10
Counterparts; Integration; Effectiveness
79
11.10.1
Counterparts; Integration; Effectiveness
79
11.11
CHOICE OF LAW; SUBMISSION TO JURISDICTION; WAIVER OF VENUE; SERVICE OF PROCESS; WAIVER OF JURY TRIAL
80
11.11.1
Governing Law
80
11.11.2
SUBMISSION TO JURISDICTION
80
11.11.3
WAIVER OF VENUE
80
11.11.4
SERVICE OF PROCESS
81
11.11.5
WAIVER OF JURY TRIAL
81
11.12
USA Patriot Act Notice
81


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LIST OF SCHEDULES AND EXHIBITS
SCHEDULES
SCHEDULE 1.1(A)
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PRICING GRID
SCHEDULE 1.1(B)
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COMMITMENTS OF LENDERS AND ADDRESSES FOR NOTICES
SCHEDULE 1.1(C)
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EXISTING LETTERS OF CREDIT
SCHEDULE 1.1(D)
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SPECIFIED SUBSIDIARIES
SCHEDULE 1.1(P)
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PERMITTED LIENS
SCHEDULE 6.1.2
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SUBSIDIARIES
SCHEDULE 8.2.1
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PERMITTED INDEBTEDNESS

EXHIBITS
EXHIBIT 1.1(A)
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ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT 1.1(G)(1)
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GUARANTOR JOINDER
EXHIBIT 1.1(G)(2)
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GUARANTY AGREEMENT
EXHIBIT 1.1(N)(1)
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REVOLVING CREDIT NOTE
EXHIBIT 1.1(S)
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SECURITY AGREEMENT
EXHIBIT 2.5.1
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LOAN REQUEST
EXHIBIT 5.9.7(A)
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U.S. TAX COMPLIANCE CERTIFICATE (For Foreign Lenders That Are Not Partnerships For U.S. Federal Income Tax Purposes)
EXHIBIT 5.9.7(B)
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U.S. TAX COMPLIANCE CERTIFICATE (For Foreign Participants That Are Not Partnerships For U.S. Federal Income Tax Purposes)
EXHIBIT 5.9.7(C)
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U.S. TAX COMPLIANCE CERTIFICATE (For Foreign Participants That Are Partnerships For U.S. Federal Income Tax Purposes)
EXHIBIT 5.9.7(D)
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U.S. TAX COMPLIANCE CERTIFICATE (For Foreign Lenders That Are Partnerships For U.S. Federal Income Tax Purposes)
EXHIBIT 8.3.3
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QUARTERLY COMPLIANCE CERTIFICATE


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CREDIT AGREEMENT
THIS CREDIT AGREEMENT (as hereafter amended, the “ Agreement ”) is dated as of May 2, 2014 and is made by and among ECHO GLOBAL LOGISTICS, INC., a Delaware corporation (the “ Borrower ”), the LENDERS (as hereinafter defined), and PNC BANK, NATIONAL ASSOCIATION, in its capacity as administrative agent for the Lenders under this Agreement (hereinafter referred to in such capacity as the “ Administrative Agent ”).
The Borrower has requested the Lenders to provide a revolving credit facility to the Borrower in an aggregate principal amount not to exceed $50,000,000. In consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, the parties hereto covenant and agree as follows:
1. CERTAIN DEFINITIONS
1.1      Certain Definitions . In addition to words and terms defined elsewhere in this Agreement, the following words and terms shall have the following meanings, respectively, unless the context hereof clearly requires otherwise:
Administrative Agent shall mean PNC Bank, National Association, and its successors and assigns, in its capacity as administrative agent hereunder.
Affiliate as to any Person shall mean any other Person (i) which directly or indirectly controls, is controlled by, or is under common control with such Person, (ii) which beneficially owns or holds 5% or more of any class of the voting or other equity interests of such Person, or (iii) 5% or more of any class of voting interests or other equity interests of which is beneficially owned or held, directly or indirectly, by such Person. For purposes of this definition, “control” of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.
Anti-Terrorism Laws shall mean any Laws relating to terrorism or money laundering, including Executive Order No. 13224, the USA Patriot Act, the Laws comprising or implementing the Bank Secrecy Act, and the Laws administered by the United States Treasury Department’s Office of Foreign Asset Control (as any of the foregoing Laws may from time to time be amended, renewed, extended, or replaced).
Applicable Commitment Fee Rate shall mean the percentage rate per annum based on the Consolidated Total Leverage Ratio then in effect according to the pricing grid on Schedule 1.1(A) below the heading “Commitment Fee.”
Applicable Letter of Credit Fee Rate shall mean the percentage rate per annum based on the Consolidated Total Leverage Ratio then in effect according to the pricing grid on Schedule 1.1(A) below the heading “Letter of Credit Fee.”
Applicable Margin shall mean, as applicable:





(i)      the percentage spread to be added to the Base Rate applicable to Revolving Credit Loans under the Base Rate Option based on the Consolidated Total Leverage Ratio then in effect according to the pricing grid on Schedule 1.1(A) below the heading “Revolving Credit Base Rate Spread”, or
(ii)      the percentage spread to be added to the LIBOR Rate applicable to Revolving Credit Loans under the Daily LIBOR Rate Option or the LIBOR Rate Option based on the Consolidated Total Leverage Ratio then in effect according to the pricing grid on Schedule 1.1(A) below the heading “Revolving Credit LIBOR Rate Spread”.
Approved Fund shall mean any fund that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of business and that is administered or managed by (i) a Lender, (ii) an Affiliate of a Lender or (iii) an entity or an Affiliate of an entity that administers or manages a Lender.
Assignment and Assumption Agreement shall mean an assignment and assumption agreement entered into by a Lender and an assignee permitted under Section 11.8 [Successors and Assigns], in substantially the form of Exhibit 1.1(A) .
Authorized Officer shall mean, with respect to any Loan Party, the Chief Executive Officer, President, Chief Financial Officer, Treasurer or Assistant Treasurer of such Loan Party, any manager or the members (as applicable) in the case of any Loan Party which is a limited liability company, or such other individuals, designated by written notice to the Administrative Agent from the Borrower, authorized to execute notices, reports and other documents on behalf of such Loan Party required hereunder. The Borrower may amend such list of individuals from time to time by giving written notice of such amendment to the Administrative Agent.
Base Rate shall mean, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the Federal Funds Open Rate, plus 0.5%, (ii) the Prime Rate, and (iii) the Daily LIBOR Rate, plus 100 basis points (1.0%). Any change in the Base Rate (or any component thereof) shall take effect at the opening of business on the day such change occurs.
Base Rate Option shall mean the option of the Borrower to have Loans bear interest at the rate and under the terms set forth in either Section 4.1.1(i) [Revolving Credit Interest Rate Options].
Borrower shall have the meaning specified in the introductory paragraph.
Borrowing Date shall mean, with respect to any Loan, the date for the making thereof or the renewal or conversion thereof at or to the same or a different Interest Rate Option, which shall be a Business Day.
Borrowing Tranche shall mean specified portions of Loans outstanding as follows: (i) any Loans to which a LIBOR Rate Option applies which become subject to the same Interest Rate Option under the same Loan Request by the Borrower and which have the same

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Interest Period shall constitute one Borrowing Tranche, (ii) all Loans to which a Base Rate Option applies shall constitute one Borrowing Tranche and (iii) all Loans to which a Daily LIBOR Rate Option applies shall constitute one Borrowing Tranche.
Business Day shall mean any day other than a Saturday or Sunday or a legal holiday on which commercial banks are authorized or required to be closed for business in Pittsburgh, Pennsylvania and if the applicable Business Day relates to any Loan to which the LIBOR Rate Option applies, such day must also be a day on which dealings are carried on in the London interbank market.
Capital Stock shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing.
Change in Law shall mean the occurrence, after the date of this Agreement, of any of the following: (i) the adoption or taking effect of any Law, (ii) any change in any Law or in the administration, interpretation, implementation or application thereof by any Official Body or (iii) the making or issuance of any request, rule, guideline or directive (whether or not having the force of Law) by any Official Body; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, regulations, guidelines, interpretations or directives thereunder or issued in connection therewith (whether or not having the force of Law) and (y) all requests, rules, regulations, guidelines, interpretations or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities (whether or not having the force of Law), in each case pursuant to Basel III, shall in each case be deemed to be a Change in Law regardless of the date enacted, adopted, issued, promulgated or implemented.
Change of Control shall mean any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), shall become, or obtain rights (whether by means or warrants, options or otherwise) to become, the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of more than thirty-five percent (35%) of the Capital Stock of the Borrower.
CIP Regulations shall have the meaning specified in Section 10.11 [No Reliance on Administrative Agent’s Customer Identification Program].
Closing Date shall mean the Business Day on which this Agreement is executed, which shall be May 2, 2014.
Code shall mean the Internal Revenue Code of 1986, as the same may be amended or supplemented from time to time, and the rules and regulations thereunder, as from time to time in effect.

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Collateral shall mean the collateral under the Security Agreement.
Commitment shall mean as to any Lender its Revolving Credit Commitment and Commitments shall mean the Revolving Credit Commitments of all of the Lenders.
Commitment Fee shall have the meaning specified in Section 2.3 [Commitment Fees].
Compliance Authority means each and all of the (a) U.S. Treasury Department/Office of Foreign Assets Control, (b) U.S. Treasury Department/Financial Crimes Enforcement Network, (c) U.S. State Department/Directorate of Defense Trade Controls, (d) U.S. Commerce Department/Bureau of Industry and Security, (e) U.S. Internal Revenue Service, (f) U.S. Justice Department, and (g) U.S. Securities and Exchange Commission.
Compliance Certificate shall have the meaning specified in Section 8.3.3 [Certificate of the Borrower].
Connection Income Taxes shall mean Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
Consolidated EBITDA shall mean, for a specified period, an amount determined for the Borrower and its Subsidiaries on a consolidated basis equal to:
(a)    Consolidated Net Income,
plus
(b)    to the extent deducted in calculating Consolidated Net Income for such period, the sum of, without duplication, amounts for:
(i)    all amounts deducted in calculating net income (or loss) for depreciation and amortization for such period,
(ii)    interest expense (less interest income) and amortization of debt discount and commissions and other fees and charges associated with Indebtedness deducted in calculating net income (or loss) for such period,
(iii)    all taxes on or measured by income, profits or capital to the extent deducted in calculating net income (or loss) for such period,
(iv)    extraordinary losses or charges to the extent deducted in calculating net income (or loss) for such period,
(vi)     all non-cash charges, losses, or expenses (or minus non-cash income or gain) included or deducted in calculating net income (or loss) for such period, including, without limitation, any non-cash loss or expense (or income or gain) due to the

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application of FASB ASC 815-10 regarding hedging activity, FASB ASC 350 regarding impairment of goodwill, FASB ASC 480-10 regarding accounting for such financial instruments with debt and equity characteristics, non-cash foreign currency exchange losses (or minus gains), non-cash expenses deducted as a result of any grant of Capital Stock to employees, officers or directors and expenses (or gains) on account of changes to contingent asset purchase consideration, but excluding any non-cash loss or expense (a) that is an accrual of a reserve for a cash expenditure or payment to be made, or anticipated to be made, in a future period or (b) relating to a write-down, write-off or reserve with respect to accounts receivable and inventory,
(vii)     non-cash compensation related expense resulting from the grant of, issuance of or re-pricing of Capital Stock to any prospective, current or former employee, officer, director or consultant, of any Loan Party, including, without limitation, FAS123R expenses, in each case to the extent deducted in calculating net income (or loss) for such period,
(viii) any expenses for directors fees,
(ix)     to the extent deducted in calculating net income (or loss) for such period, costs, fees, expenses and charges in connection (a) Permitted Acquisitions (b) any permitted Investments, (c) the issuance of any Capital Stock, (d) any permitted recapitalization or disposition of property and (e) any payments in respect of or adjustments to Permitted Acquisitions or permitted investments, in each case as may be permitted pursuant to the terms of the Loan Documents and in each case, whether or not ultimately consummated,
(x)     (a) reasonable and documented out-of-pocket fees and expenses incurred in connection with the negotiation, execution and delivery of the Loan Documents and the One Stop Acquisition Documents, to the extent deducted in calculating net income (or loss) for such period, and (b) any expenses related to purchase accounting deducted in calculating net income (or loss),
(xi)     any documented expenses for which a seller party in connection with a Permitted Acquisition has indemnified any Loan Party pursuant to the terms of the acquisition documents,
(xii)     any amounts deducted from net income in respect of purchase accounting required or permitted by GAAP in connection with transactions contemplated by the Loan Documents and any Permitted Acquisitions, and
(xiii)     other unusual and non-recurring cash losses or expenses acceptable to the Administrative Agent not to exceed $2,000,000 in the aggregate in any fiscal year.
; provided, however, with respect to the calculation of Consolidated EBITDA for all purposes under this Agreement, (a) pro forma full-year effect will be given to Permitted Acquisitions, Investments and dispositions, and (b) full-year effect pro forma adjustments (certified by the chief financial officer or other equivalent officer of the Borrower) will be included for verifiable and factually supportable (in the good faith determination of the Borrower) cost savings in an aggregate amount not to exceed 10% of Consolidated EBITDA (calculated before giving effect

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to all such adjustments described in this clause (b)) in any four quarter period or such greater amount as may reasonably be approved by the Administrative Agent.
Consolidated Interest Coverage Ratio shall mean the ratio of (a) Consolidated EBITDA to (b) Consolidated Interest Expense.
Consolidated Interest Expense shall mean for any period of determination the sum of interest expense on Indebtedness of the Borrower and its Subsidiaries for any such period determined and consolidated in accordance with GAAP.
Consolidated Net Income shall mean, for any specified period, the consolidated net income (or loss) of the Borrower and its Subsidiaries, after deduction of all expenses, taxes, and other proper charges, determined in accordance with GAAP; provided that there shall be excluded (i) the income (or loss) of any Person (other than consolidated Subsidiaries of the Borrower) in which any Person (other than Borrower or any of its consolidated Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of its consolidated Subsidiaries by such Person during such specified period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a consolidated Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its consolidated Subsidiaries or such Person’s assets are acquired by the Borrower or any of its consolidated Subsidiaries, and (iii) the income of any consolidated Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by that consolidated Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that consolidated Subsidiary.
Consolidated Total Leverage Ratio shall mean the ratio of (a) the result of (i) Funded Indebtedness less (ii) the amount of cash and cash equivalents of the Loan parties subject to a deposit account control agreement in favor of the Administrative Agent (other than amounts held as cash collateral for Letter of Credit Obligations) in an amount not to exceed $10,000,000 to (b) Consolidated EBITDA.
Covered Entity means the Borrower, its Subsidiaries, and to the knowledge of the Borrower, its Affiliates.
Daily LIBOR Rate shall mean, for any day, the rate per annum determined by the Administrative Agent by dividing (x) the Published Rate by (y) a number equal to 1.00 minus the LIBOR Reserve Percentage on such day.
Daily LIBOR Rate Option shall mean the option of the Borrower to have Loans bear interest at the rate and under the terms set forth in Section 4.1.1(iii) [Revolving Credit Daily LIBOR Rate Option].
Defaulting Lender shall mean any Lender that (a) has failed, within two Business Days of the date required to be funded or paid, to (i) fund any portion of its Loans, (ii) fund any portion of its participations in Letters of Credit or (iii) pay over to the Administrative Agent, the

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Issuing Lender or any Lender any other amount required to be paid by it hereunder, unless, in the case of clause (i) above, such Lender notifies the Administrative Agent in writing that such failure is the result of such Lender’s good faith determination that a condition precedent to funding (specifically identified and including the particular default, if any) has not been satisfied, (b) has notified the Borrower or the Administrative Agent in writing, or has made a public statement to the effect, that it does not intend or expect to comply with any of its funding obligations under this Agreement (unless such writing or public statement indicates that such position is based on such Lender’s good faith determination that a condition precedent (specifically identified and including the particular default, if any) to funding a loan under this Agreement cannot be satisfied) or generally under other agreements in which it commits to extend credit, (c) has failed, within two Business Days after request by the Administrative Agent or the Borrower, acting in good faith, to provide a certification in writing from an authorized officer of such Lender that it will comply with its obligations (and is financially able to meet such obligations) to fund prospective Loans and participations in then outstanding Letters of Credit under this Agreement, provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon the Administrative Agent’s or the Borrower’s receipt of such certification in form and substance satisfactory to the Administrative Agent or the Borrower, as the case may be, (d) has become the subject of a Bankruptcy Event or (e) has failed at any time to comply with the provisions of Section 5.3 [Sharing of Payments by Lenders] with respect to purchasing participations from the other Lenders, whereby such Lender’s share of any payment received, whether by setoff or otherwise, is in excess of its Ratable Share of such payments due and payable to all of the Lenders.
As used in this definition and in Section 2.10 [Defaulting Lenders], the term “Bankruptcy Event” means, with respect to any Person, such Person or such Person’s direct or indirect parent company becoming the subject of a bankruptcy or insolvency proceeding, or having had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the reorganization or liquidation of its business appointed for it, or, in the good faith determination of the Administrative Agent, has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment, provided that a Bankruptcy Event shall not result solely by virtue of any ownership interest, or the acquisition of any ownership interest, in such Person or such Person’s direct or indirect parent company by an Official Body or instrumentality thereof if, and only if, such ownership interest does not result in or provide such Person with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Person (or such Official Body or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made by such Person.
Dollar, Dollars, U.S. Dollars and the symbol $ shall mean lawful money of the United States of America.
Drawing Date shall have the meaning specified in Section 2.9.3 [Disbursements, Reimbursement].

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Environmental Laws shall mean all applicable Laws pertaining or relating to: (i) pollution or pollution control; (ii) protection of human health from exposure to regulated substances; (iii) protection of the environment and/or natural resources; (iv) employee safety in the workplace; (v) the presence, use, management, generation, manufacture, processing, extraction, treatment, recycling, refining, reclamation, labeling, packaging, sale, transport, storage, collection, distribution, disposal or release or threat of release of regulated substances; (vi) the presence of contamination; (vii) the protection of endangered or threatened species; and (viii) the protection of environmentally sensitive areas.
Equity Interests shall have the meaning specified in Section 6.1.2 [Subsidiaries; Investment Companies].
ERISA shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect.
ERISA Affiliate shall mean, at any time, any member of the ERISA Group (other than the Borrower).
ERISA Event shall mean (a) a reportable event (under Section 4043 of ERISA and regulations thereunder) with respect to a Plan (other than an event for which the 30-day notice period is waived by regulation); (b) withdrawal by Borrower or any ERISA Affiliate from a Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan, or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Plan; (e) an event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; or (f) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate.
ERISA Group shall mean, at any time, the Borrower and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control and all other entities which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code.
Event of Default shall mean any of the events described in Section 9.1 [Events of Default] and referred to therein as an “Event of Default.”
Excluded Taxes shall mean any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient, (i) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (a) imposed as a result of such Recipient being organized under the

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laws of, or having its principal office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (b) that are Other Connection Taxes, (ii) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the date on which (a) such Lender acquires such interest in such Loan or Commitment (other than pursuant to an assignment request by the Borrower under Section 5.6.2 [Replacement of a Lender]) or (b) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 5.9.7 [Taxes], amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its lending office, (iii) Taxes attributable to such Recipient’s failure to comply with 5.9.7 [Status of Lenders], and (iv) any U.S. federal withholding Taxes imposed under FATCA.
Executive Order No. 13224 shall mean the Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, as the same has been, or shall hereafter be, renewed, extended, amended or replaced.
Existing Letters of Credit shall mean the letters of credit issued by JPMorgan Chase Bank, N.A. for the account of the Borrower or any Subsidiary listed on Schedule 1.1(C) .
Expiration Date shall mean, with respect to the Revolving Credit Commitments, May 2, 2017.
FATCA shall mean Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code and any Law or official agreement implementing an official governmental agreement with respect thereto.
Federal Funds Effective Rate for any day shall mean the rate per annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the “Federal Funds Effective Rate” as of the date of this Agreement; provided , if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the “Federal Funds Effective Rate” for such day shall be the Federal Funds Effective Rate for the last day on which such rate was announced.
Federal Funds Open Rate for any day shall mean the rate per annum (based on a year of 360 days and actual days elapsed) which is the daily federal funds open rate as quoted by ICAP North America, Inc. (or any successor) as set forth on the Bloomberg Screen BTMM for that day opposite the caption “OPEN” (or on such other substitute Bloomberg Screen that displays such rate), or as set forth on such other recognized electronic source used for the

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purpose of displaying such rate as selected by the Administrative Agent (for purposes of this definition, an “ Alternate Source ”) (or if such rate for such day does not appear on the Bloomberg Screen BTMM (or any substitute screen) or on any Alternate Source, or if there shall at any time, for any reason, no longer exist a Bloomberg Screen BTMM (or any substitute screen) or any Alternate Source, a comparable replacement rate determined by the Administrative Agent at such time (which determination shall be conclusive absent manifest error); provided however, that if such day is not a Business Day, the Federal Funds Open Rate for such day shall be the “open” rate on the immediately preceding Business Day. If and when the Federal Funds Open Rate changes, the rate of interest with respect to any advance to which the Federal Funds Open Rate applies will change automatically without notice to the Borrower, effective on the date of any such change.
Foreign Lender shall mean (i) if the Borrower is a U.S. Person, a Lender that is not a U.S. Person, and (ii) if the Borrower is not a U.S. Person, a Lender that is resident or organized under the Laws of a jurisdiction other than that in which the Borrower is resident for tax purposes. For purposes of this definition, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
Foreign Subsidiary shall mean any Subsidiary organized outside of the United States (for the avoidance of doubt, any Subsidiary organized in a U.S. possession or territory shall be a “Foreign Subsidiary”).
Funded Indebtedness shall mean, as of any date of determination, all then outstanding Indebtedness of the Borrower and its Subsidiaries, on a consolidated basis, of the type described in clauses (i), (ii) and (iv) of the defined term “Indebtedness”; provided, that payment obligations in respect of Permitted Earn-Outs constituting Indebtedness shall only be included as Funded Indebtedness to the extent such Permitted Earn-Outs shall have been earned and are scheduled to be paid during the relevant financial covenant test period.
GAAP shall mean generally accepted accounting principles as are in effect from time to time, subject to the provisions of Section 1.3 [Accounting Principles], and applied on a consistent basis both as to classification of items and amounts.
Guarantor shall mean each Person which executes or joins the Guaranty Agreement after the date hereof pursuant to Section 8.2.9.
Guarantor Joinder shall mean a joinder by a Person as a Guarantor under the Loan Documents in the form of Exhibit 1.1(G)(1) .
Guaranty of any Person shall mean any obligation of such Person guaranteeing or in effect guaranteeing any liability or obligation of any other Person in any manner, whether directly or indirectly, including any agreement to indemnify or hold harmless any other Person, any performance bond or other suretyship arrangement and any other form of assurance against loss, except endorsement of negotiable or other instruments for deposit or collection in the ordinary course of business.

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Guaranty Agreement shall mean the Continuing Agreement of Guaranty and Suretyship in substantially the form of Exhibit 1.1(G)(2) executed and delivered by each of the Guarantors to the Administrative Agent for the benefit of the Lenders.
ICC shall have the meaning specified in Section 11.11.1 [Governing Law].
Indebtedness shall mean, as to any Person at any time, any and all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such Person for or in respect of: (i) borrowed money, (ii) reimbursement obligations (contingent or otherwise) under any letter of credit agreement, (iii) obligations under any currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management device, (iv) any other transaction (including forward sale or purchase agreements, capitalized leases and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such Person to finance its operations or capital requirements (but not including (a) trade payables and accrued expenses incurred in the ordinary course of business, (b) purchase price holdbacks arising in the ordinary course of business in respect of a portion of the purchase price of an asset to satisfy warranties or other unperformed obligations of the seller of such asset or (c) deferred payment obligations in the amount of 13,782,500 pursuant to the One Stop Acquisition Agreement), (v) obligations arising under Permitted Securitization Transactions or (vi) any Guaranty of Indebtedness for borrowed money.
Indemnified Taxes shall mean (i) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document, and (ii) to the extent not otherwise described in the preceding clause (i), Other Taxes.
Indemnitee shall have the meaning specified in Section 11.3.2 [Indemnification by the Borrower].
Information shall mean all information received from the Loan Parties or any of their Subsidiaries relating to the Loan Parties or any of such Subsidiaries or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the Issuing Lender on a non confidential basis prior to disclosure by the Loan Parties or any of their Subsidiaries, provided that, in the case of information received from the Loan Parties or any of their Subsidiaries after the date of this Agreement, such information is clearly identified at the time of delivery as confidential.
Insolvency Proceeding shall mean, with respect to any Person, (a) a case, action or proceeding with respect to such Person (i) before any court or any other Official Body under any bankruptcy, insolvency, reorganization or other similar Law now or hereafter in effect, or (ii) for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of any Loan Party or otherwise relating to the liquidation, dissolution, winding-up or relief of such Person, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect

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of such Person’s creditors generally or any substantial portion of its creditors; undertaken under any Law.
Interest Period shall mean the period of time selected by the Borrower in connection with (and to apply to) any election permitted hereunder by the Borrower to have Revolving Credit Loans bear interest under the LIBOR Rate Option. Subject to the last sentence of this definition, such period shall be one, two, three or six Months. Such Interest Period shall commence on the effective date of such Interest Rate Option, which shall be (i) the Borrowing Date if the Borrower is requesting new Loans, or (ii) the date of renewal of or conversion to the LIBOR Rate Option if the Borrower is renewing or converting to the LIBOR Rate Option applicable to outstanding Loans Notwithstanding the second sentence hereof: (A) any Interest Period which would otherwise end on a date which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (B) the Borrower shall not select, convert to or renew an Interest Period for any portion of the Loans that would end after the Expiration Date.
Interest Rate Hedge shall mean an interest rate exchange, collar, cap, swap, adjustable strike cap, adjustable strike corridor or similar agreements entered into by the Loan Parties or their Subsidiaries in order to provide protection to, or minimize the impact upon, the Borrower, the Guarantor and/or their Subsidiaries of increasing floating rates of interest applicable to Indebtedness.
Interest Rate Option shall mean any LIBOR Rate Option, Base Rate Option or a Daily LIBOR Rate Option.
IRS shall mean the United States Internal Revenue Service.
ISP98 shall have the meaning specified in Section 11.11.1 [Governing Law].
Issuing Lender shall mean PNC, in its individual capacity as issuer of Letters of Credit hereunder, and any other Lender that Borrower, Administrative Agent and such other Lender may agree may from time to time issue Letters of Credit hereunder.
Joint Venture shall mean a corporation, partnership, limited liability company or other entity in which any Person other than the Loan Parties and their Subsidiaries holds, directly or indirectly, an equity interest.
Law shall mean any law (including common law), constitution, statute, treaty, regulation, ordinance, and any final and non-appealable and applicable order, injunction, writ, decree, judgment, or settlement agreement with any Official Body.
Lender Provided Interest Rate Hedge shall mean an Interest Rate Hedge which is provided by any Lender or its Affiliate which: (i) is documented in a standard International Swaps and Derivatives Association Agreement, and (ii) provides for the method of calculating

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the reimbursable amount of the provider’s credit exposure in a reasonable and customary manner.
Lenders shall mean the financial institutions named on Schedule 1.1(B) and their respective successors and assigns as permitted hereunder, each of which is referred to herein as a Lender. For the purpose of any Loan Document which provides for the granting of a security interest or other Lien to the Lenders or to the Administrative Agent for the benefit of the Lenders as security for the Obligations, “Lenders” shall include any Affiliate of a Lender to which such Obligation is owed.
Letter of Credit shall have the meaning specified in Section 2.9.1 [Issuance of Letters of Credit].
Letter of Credit Borrowing shall have the meaning specified in Section 2.9.3 [Disbursements, Reimbursement].
Letter of Credit Fee shall have the meaning specified in Section 2.9.2 [Letter of Credit Fees].
Letter of Credit Obligation shall mean, as of any date of determination, the aggregate amount available to be drawn under all outstanding Letters of Credit on such date (if any Letter of Credit shall increase in amount automatically in the future, such aggregate amount available to be drawn shall currently give effect to any such future increase) plus the aggregate Reimbursement Obligations and Letter of Credit Borrowings on such date.
Letter of Credit Sublimit shall have the meaning specified in Section 2.9.1 [Issuance of Letters of Credit].
LIBOR Rate shall mean, with respect to the Loans comprising any Borrowing Tranche to which the LIBOR Rate Option applies for any Interest Period, the interest rate per annum determined by the Administrative Agent by dividing (the resulting quotient rounded upwards, if necessary, to the nearest 1/100th of 1% per annum) (i) the rate which appears on the Bloomberg Page BBAM1 (or on such other substitute Bloomberg page that displays rates at which US dollar deposits are offered by leading banks in the London interbank deposit market), or the rate which is quoted by another source selected by the Administrative Agent as an authorized information vendor for the purpose of displaying rates at which US dollar deposits are offered by leading banks in the London interbank deposit market (for purposes of this definition, an “ Alternate Source ”), at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period as the London interbank offered rate for U.S. Dollars for an amount comparable to such Borrowing Tranche and having a borrowing date and a maturity comparable to such Interest Period (or if there shall at any time, for any reason, no longer exist a Bloomberg Page BBAM1 (or any substitute page) or any Alternate Source, a comparable replacement rate determined by the Administrative Agent at such time (which determination shall be conclusive absent manifest error)), by (ii) a number equal to 1.00 minus the LIBOR Reserve Percentage. The LIBOR Rate shall be adjusted with respect to any Loan to which the LIBOR Rate Option applies that is outstanding on the effective date of any change in

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the LIBOR Reserve Percentage as of such effective date. The Administrative Agent shall give prompt notice to the Borrower of the LIBOR Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.
LIBOR Rate Option shall mean the option of the Borrower to have Loans bear interest at the rate and under the terms set forth in Section 4.1.1(ii) [Revolving Credit LIBOR Rate Option].
LIBOR Reserve Percentage shall mean as of any day the maximum percentage in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as “ Eurocurrency Liabilities ”).
Lien shall mean any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, whether voluntarily or involuntarily given, including any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security and any filed financing statement or other notice of any of the foregoing (whether or not a lien or other encumbrance is created or exists at the time of the filing).
Loan Documents shall mean this Agreement, the Notes, the Post-Closing Letter, the Security Agreement and any other instruments, certificates or documents delivered in connection herewith or therewith and any Guaranty Agreement delivered pursuant to Section 8.2.9.
Loan Parties shall mean the Borrower and the Guarantors.
Loan Request shall have the meaning specified in Section 2.5 [Revolving Credit Loan Requests].
Loans shall mean collectively and Loan shall mean separately all Revolving Credit Loans or any Revolving Credit Loan.
Material Adverse Change shall mean any set of circumstances or events which (a) has or could reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of this Agreement or any other Loan Document, (b) is or could reasonably be expected to be material and adverse to the business, properties, assets, financial condition or results of operations of the Loan Parties taken as a whole, (c) impairs materially or could reasonably be expected to impair materially the ability of the Loan Parties taken as a whole to duly and punctually pay or perform any of the Obligations, or (d) impairs materially or could reasonably be expected to impair materially the ability of the Administrative Agent or any of the Lenders, to the extent permitted, to enforce their legal remedies pursuant to this Agreement or any other Loan Document.

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Month , with respect to an Interest Period under the LIBOR Rate Option, shall mean the interval between the days in consecutive calendar months numerically corresponding to the first day of such Interest Period. If any LIBOR Rate Interest Period begins on a day of a calendar month for which there is no numerically corresponding day in the month in which such Interest Period is to end, the final month of such Interest Period shall be deemed to end on the last Business Day of such final month.
Multiemployer Plan shall mean any employee benefit plan which is a “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA and to which the Borrower or any member of the ERISA Group is then making or accruing an obligation to make contributions or, within the preceding five Plan years, has made or had an obligation to make such contributions.
Non-Consenting Lender shall have the meaning specified in Section 11.1 [Modifications, Amendments or Waivers].
Non-Lender Provided Financial Services Product shall mean agreements or other arrangements under which any Person other than a Lender or Affiliate of a Lender provides any of the following products or services to any of the Loan Parties or their Subsidiaries: (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) foreign currency exchange.
Notes shall mean collectively, and Note shall mean separately, the promissory notes in the form of Exhibit 1.1(N)(1) evidencing the Revolving Credit Loans.
Obligation shall mean any obligation, Indebtedness or liability of any of the Loan Parties, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, under or in connection with (i) this Agreement, the Notes, the Letters of Credit or any other Loan Document whether to the Administrative Agent, any of the Lenders or their Affiliates or other persons provided for under such Loan Documents, (ii) any Lender Provided Interest Rate Hedge and (iii) any Other Lender Provided Financial Service Product.
Official Body shall mean the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank) and any group or body charged with setting financial accounting or regulatory capital rules or standards (including the Financial Accounting Standards Board, the Bank for International Settlements or the Basel Committee on Banking Supervision or any successor or similar authority to any of the foregoing).
One Stop Acquisition shall mean Borrower’s acquisition of the assets of One Stop Logistics Inc.

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One Stop Acquisition Agreement shall mean that certain [Asset Purchase Agreement] expected to be dated on or about May 7, 2014 between Borrower and One Stop Logistics Inc.
One Stop Acquisition Documents shall mean the One Stop Acquisition Agreement and all material documents and agreements made in connection therewith, including, without limitation any escrow agreement.
One Stop Earn-Out shall mean a contingent payment in the amount of $3,725,000 pursuant to the One Stop Acquisition Agreement.
Order shall have the meaning specified in Section 2.9.9 [Liability for Acts and Omissions].
Other Connection Taxes shall mean, with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient (or an agent or affiliate thereof) and the jurisdiction imposing such Tax (other than connections arising solely from such Recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).
Other Lender Provided Financial Service Product shall mean agreements or other arrangements under which any Lender or Affiliate of a Lender provides any of the following products or services to any of the Loan Parties or their Subsidiaries: (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) foreign currency exchange.
Other Taxes shall mean all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 5.6.2 [Replacement of a Lender]).
Participant has the meaning specified in Section 11.8.4 [Participations].
Participant Register shall have the meaning specified in Section 11.8.4 [Participations].
Participation Advance shall have the meaning specified in Section 2.9.3 [Disbursements, Reimbursement].
Payment Date shall mean the first day of each calendar quarter after the date hereof and on the Expiration Date or upon acceleration of the Notes.

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Payment In Full and Paid in Full shall mean the payment in full in cash of the Loans and other Obligations hereunder, termination of the Commitments and expiration or termination of all Letters of Credit.
PBGC shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor.
Permitted Acquisition shall mean any acquisition by the Borrower or any Subsidiary of all or substantially all of the assets, business or a line of business, or at least a majority of the outstanding Equity Interests which have the ordinary voting power for the election of directors of the board of directors (or equivalent governing body) (whether through purchase, merger or otherwise), of any other Person if each such acquisition meets all of the following requirements:

(i)      no less than fifteen (15) days (or less if acceptable to the Administrative Agent) prior to the proposed closing date of such acquisition, the Borrower shall have delivered (x) written notice of such acquisition to the Administrative Agent and the Lenders and (y) copies of all business and financial information (including historical financial statements) reasonably requested by the Administrative Agent (to the extent available to Borrower) related to the target of the acquisition;
(ii)      the Person or business to be acquired shall be in a line of business that is the same or substantially similar to the business of the Borrower or a line of business reasonably related, ancillary or complementary thereto;
(iii)      if such transaction is a merger or consolidation, the Borrower or a Subsidiary shall be the surviving Person and no Change in Control shall have been effected thereby;
(iv)      no Potential Default or Event of Default shall have occurred and be continuing both before and after giving effect to such acquisition; and
(v)      if the Permitted Acquisition Consideration for such transaction exceeds $10,000,000, the Borrower shall, unless otherwise waived by the Administrative Agent, demonstrate, in form and substance reasonably satisfactory to the Administrative Agent, that the entity to be acquired had no less than zero Consolidated EBITDA for the four (4) fiscal quarter period ended immediately prior to the proposed closing date of such acquisition.
Permitted Acquisition Consideration shall mean the aggregate amount of the purchase price for any Permitted Acquisition, including, but not limited to, any assumed Indebtedness, Equity Interests of the Borrower or deferred payment obligations, excluding Permitted Earn-Outs.
Permitted Earn-Outs shall mean, with respect to any Person, obligations of such Person arising in connection with a Permitted Acquisition which are payable based on the achievement of specified financial results over time, and which are structured such that, if not

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paid due to a Potential Default or Event of Default under this Agreement, no default thereunder or breach thereof shall be deemed to have occurred or exist (and no penalty or interest shall accrue or be charged) and the Loan Parties shall not be deemed in violation of the terms thereof.
Permitted Investments shall mean:
(i)      direct obligations of the United States of America or any agency or instrumentality thereof or obligations backed by the full faith and credit of the United States of America maturing in twelve (12) months or less from the date of acquisition;
(ii)      commercial paper maturing in 180 days or less rated not lower than A-1, by Standard & Poor’s or P-1 by Moody’s Investors Service, Inc. on the date of acquisition;
(iii)      demand deposits, time deposits or certificates of deposit maturing within one year in commercial banks whose obligations are rated A-1, A or the equivalent or better by Standard & Poor’s on the date of acquisition;
(iv)      money market or mutual funds whose investments are limited to those types of investments described in clauses (i) - (iii) above; and
(v)      investments made under the Cash Management Agreements or under cash management agreements with any other Lenders.
Permitted Liens shall mean:
(i)      Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business and that are not yet due and payable;
(ii)      Pledges or deposits made in the ordinary course of business to secure payment of workmen’s compensation, or to participate in any fund in connection with workmen’s compensation, unemployment insurance, old-age pensions or other social security programs;
(iii)      Liens of mechanics, materialmen, warehousemen, carriers, or other like Liens, securing obligations incurred in the ordinary course of business that are not yet due and payable and Liens of landlords securing obligations to pay lease payments that are not yet due and payable or in default;
(iv)      Good-faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, not in excess of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business;
(v)      Encumbrances consisting of zoning restrictions, easements or other restrictions on the use of real property, none of which materially impairs the use of such property

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or the value thereof, and none of which is violated in any material respect by existing or proposed structures or land use;
(vi)      Liens, security interests and mortgages in favor of the Administrative Agent for the benefit of the Lenders and their Affiliates securing the Obligations (including Lender Provided Interest Rate Hedges and Other Lender Provided Financial Services Obligations);
(vii)      Any Lien existing on the date of this Agreement and described on Schedule 1.1(P) ;
(viii)      Purchase Money Security Interests and capitalized leases permitted in Section 8.2.1 [Indebtedness];
(ix)      Liens securing judgments for the payment of money not constituting an Event of Default under Section 9.1.6 ;
(x)      Liens on property of a Person existing at the time of the acquisition of such property or when such Person is merged into or consolidated with any Subsidiary of Borrower or becomes a Subsidiary of the Borrower and any modifications, replacements, renewals or extensions thereof; provided that such Liens were not created in contemplation of such merger, consolidation or Investment and do not extend to any assets other than the property acquired or those of the Person merged into or consolidated with such Subsidiary or acquired by the Borrower or such Subsidiary (other than the proceeds and products thereof), and the applicable Indebtedness secured by such Lien (or, as applicable, any modifications, replacements, renewals or extension thereof) is permitted under Section 8.2.1;
(xi)      pledges and deposits in the ordinary course of business securing insurance premiums or reimbursement obligations under insurance policies, in each case payable to insurance carriers that provide insurance to the Borrower or any of its Subsidiaries;
(xii)      (i) leases, licenses, subleases or sublicenses granted to other Persons in the ordinary course of business which do n