A Critical Forensic Look At Radiant Logistics Strategy, Management, And Financial Accounting Strain Suggests 30-50% Downside Risk by Spruce Point

Summary

Radiant IPO’d through a reverse merger, using a similar logistics roll-up strategy; we’ll illustrate it’s non-economic and worse performing than Echo Global’s, a previous short call we made down 30%.

Radiant’s CEO and co-founder were involved with Stonepath Group, a public company that failed spectacularly 10 years ago when it admitted accounting irregularities tied to revenue overstatement and expense understatement.

Radiant’s share price is up 85% in the past year, yet investors are overlooking signs of financial strain such as diverging GAAP/Non-GAAP results, plunging cash flow, and guidance suspension.

Radiant’s financial policies, capital management, and accounting are irregular. When investors focus on debt maturities due in 2018, we wouldn’t be surprised to see substantial dilution as cash flows sag.

Radiant’s valuation is irrational. It currently trades at a premium to peers, despite having no top-line growth, an inferior model, and financials divorced from reality. We see 30-50% downside.

Spruce Point Capital Management is pleased to announce it has released the contents of a unique short idea involving Radiant Logistics, Inc. (RLGT or “the Company”), a poorly constructed roll-up in the third party logistics (3PL) and transportation industry. With its share price up approximately 85% in the past year, we have conducted an extensive fundamental and forensic accounting review and believe investors are overlooking significant downside risks. As a result, we have a “Strong Sell” opinion and a price target of approximately $3.00-4.50 per share, or approximately 30-50% downside. Please review our disclaimer at the bottom of this email. We also encourage all of our readers to follow us on Twitter @sprucepointcap and register on our website.

Executive Summary And Tenants Of Short Thesis

We previously laid out our Seeking Alpha short case on Echo Global Logistics (NASDAQ:ECHO) in September 2016, a highly promoted but poor performing roll-up in the 3rd party logistics (3PL) sector. Echo’s share price recently touched $17.90 and has fallen by up to 30%.

Spruce Point believes that Radiant Logistics, another promotional 3PL roll-up story, is an even worse investment and much weaker company.

Questionable Management History Tarnished By Previous Accounting Scandal

  • Radiant’s CEO Bohn Crain and first General Counsel Cohen were executives at Stonepath Group (formerly AMEX: SRG ; now OTC:SGRZ), which crumbled when it admitted financial and accounting irregularities tied to revenue overstatement and expense understatement. An SEC inquiry commenced, allegations of fraud were made, and Stonepath was eventually delisted and faded to the pink sheets and insolvency
  • Later, with a “reverse merger” from the shell of “Golf Two, Inc”, the duo launched Radiant Logistics on the bulletin board in 2005
  • The SEC has already questioned Radiant’s accounting, and it has made the scary disclosure that its margin method “Generally results in recognition of revenues and purchased transportation costs earlier than the preferred methods under GAAP which does not recognize revenue until a proof of delivery is received or which recognizes revenue as progress on the transit is made.”
  • Don’t expect Radiant’s minor league auditor named Peterson Sullivan to spot problems. Radiant pays it miniscule audit fees, and three of its employees (including two partners) have recently been sanctioned by the SEC and PCAOB in less than two years

Similar To Echo, Radiant Is A Non-Accretive Roll-Up Strategy In The 3rd Party Logistics Space Showing Strains

  • Radiant has completed 16 acquisitions since 2006 and has not demonstrated any cumulative net cash flow, a key measure of success
  • Its largest acquisition of Wheels in 2015 has failed to hit expectations and exposed Radiant to the transportation brokerage market, an area coming under extreme margin pressure from new technology entrants. Radiant levered up and diluted shareholders meaningfully. It’s noteworthy that Wheels Group was itself a reverse merger on the Toronto Venture exchange and also promoted as a 3PL roll-up
  • Radiant’s GAAP/Non-GAAP financials are diverging at an alarming rate, and it recently announced “organizational changes” (Warning: it had to hire a “Chief Commercial Officer” and its COO resigned) while suspending Sales and EPS guidance to investors for FY 2017

Unattractive Capital Structure And Unfavorable Shareholder Policies

  • Radiant’s expensive 9.75% perpetual preferred stock sucks cash flow from common shareholders; the Company will likely have to use its existing shelf registration to dilute shareholders again when the preferred first becomes callable at the end of 2018
  • Radiant has a history of irrational dilution; eg. in July 2015 to pay down its credit facility costing just 3.5%; clearly, its equity is cheaper!
  • Radiant announced a 5m share buyback in January 2016, yet has repurchased just 91k shares. It could have bought back all the stock it wanted at $3/share or less but it didn’t – shareholders should be asking why?
  • Key insiders have been selling. Notably, Radiant’s second largest shareholder/original executive Cohen sold all his shares in 2015 and now hides his association from Radiant on his biography. The Company’s new COO also sold his entire shares one year after joining

Unattractive Valuation And Limited Reason To Own The Stock

  • With shares up nearly 85% in the past year, investors seem blinded to the fact that recent cash flow is declining 20% YoY
  • The market is expecting virtually no revenue growth from Radiant and has failed to take a close forensic look at the Company to identify issues that suggest further strain lies ahead. However, Radiant trades at an irrational premium to logistics peers
  • We suggest valuing it on free cash flow multiple, which, at an 18-24x, would be worth approx. $3.00-4.30/sh, implying 30-50% downside

Capital Structure Overview And Valuation

We will demonstrate in this report that RLGT’s financial condition is fragile and its valuation is nonsensical. Investors may start focusing on FY 2018 very soon as a critical year for capital needs. Radiant has $48m remaining on its shelf registration, and we would expect further dilution to manage debt obligations.

Radiant Logistics

(1) Less $7m paid for Lomas acquisition post 3/31/17 and $511k for preferred dividend.

Debt Maturity Profile

Details on Management’s Questionable History

Prior to starting Radiant Logistics in 2006, Bohn Crain was the EVP and CFO of Stonepath Group from 2001 to 2004, a publicly traded logistics roll-up that failed spectacularly during his leadership. Stephen M. Cohen was Stonepath’s general counsel and joined Crain to start Radiant.

9/20/04: Stonepath Group Announces Intention To Restate 2003 And Q1-Q2 2004 Financial Statements

  • Stonepath determined that it had understated its accrued purchased transportation liability and related costs of purchased transportation; it relied on trend analysis to estimate its costs of purchased transportation
  • The Company concluded that the process did not accurately account for the differences between the estimates and the actual freight costs incurred. This allowed for the accumulation of previously unidentified costs of purchased transportation and an under-reported liability for the accrued costs of purchased transportation.
  • Stonepath’s CEO Mr. Pelino seemed to back Crain: “The Company has also restructured its financial organization to have the senior financial staff of its Domestic Services and International Services operations report directly to
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