UNIQUE LOGISTICS INTERNATIONAL, INC. The following management's discussion and analysis of financial condition and results of operations describes the principal factors affecting the results of our operations, financial condition, and changes in financial condition for the year endedMay 31, 2021 and for the period fromMay 29, 2020 throughMay 31, 2020 as "Successor" and as "Predecessor" for period fromJune 1, 2019 throughMay 28, 2020 . This discussion should be read in conjunction with the accompanying Consolidated Financial Statements, and the notes thereto set forth in Part I, Item 8 of this Annual Report on Form 10-K.
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") that reflect management's current views with respect to future events and financial performance. These statements are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by the Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue" or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company's business, industry, and the Company's operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws ofthe United States , the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report. The forward-looking statements made in this report are based only on events or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. These risks include, by way of example and without limitation:
? The company provides services to customers engaged in international commerce.
Everything that affects international trade has the potential to expand or
contract our primary market and adversely impact our operating results.
? We depend on operators of aircrafts, ships, trucks, ports and airports.
? We derive a significant portion of our total revenues and net revenues from
our largest customers.
? Due to our dependence on a limited number of customers, we are subject to a
concentration of credit risk.
? Our earnings may be affected by seasonal changes in the transportation
industry.
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? Our business is affected by ever increasing regulations from a number of
sources in
? As a multinational corporation, we are subject to formal or informal
investigations from governmental authorities or others in the countries in
which we do business.
? The global economy and capital and credit markets continue to experience
uncertainty and volatility.
? Our business is subject to significant seasonal fluctuations driven by market
demands and each quarter is affected by seasonal trends.
? Our revenue and direct costs are subject to significant fluctuations depending
on supply and demand for freight capacity.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with theSecurities and Exchange Commission ("SEC"). We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. As used here and unless otherwise indicated, the terms "Company," "we," "us," and "our" refer toUnique Logistics International, Inc . and our wholly subsidiaries,Unique Logistics International (BOS) Inc , aMassachusetts corporation ("UL BOS") andUnique Logistics International (NYC) LLC , aDelaware limited liability company ("UL NYC")."). Unless otherwise specified, all dollar amounts are expressed inUnited States dollars. Business Overview We are a global logistics and freight forwarding company. We operated via our wholly owned subsidiaries,Unique Logistics Holdings, Inc. , aDelaware corporation ("UL HI"),Unique Logistics International (BOS) Inc , aMassachusetts corporation ("UL BOS") andUnique Logistics International (NYC) LLC , aDelaware limited liability company ("UL NYC"). The Company provides a range of international logistics services that enable its customers to outsource to the Company sections of their supply chain process. The services provided by the Company are seamlessly managed by its network of trained employees and integrated information systems. We enable our customers to share data regarding their international vendors and purchase orders with us, execute the flow of goods and information under their operating instructions, provide visibility to the flow of goods from factory to distribution center or store and when required, update their inventory records.
Our range of services can be categorized as follows:
? Air Freight services ?Ocean Freight services ? Customs Brokerage and Compliance services ? Warehousing and Distribution services ? Order Management 22
OnMay 29, 2020 ,Unique Logistics Holdings, Inc. , a privately heldDelaware corporation incorporated onOctober 28, 2019 (date of inception) headquartered inNew York ("ULHI"), entered into a Securities Purchase Agreement withUnique Logistics Holdings Ltd , ("UL HK"), pursuant to which the Company purchased from UL HK (i) sixty percent (60%) of the membership interests of ("UL ATL Membership Interests") ofUnique Logistics International (ATL) LLC , aGeorgia limited liability company ("UL ATL"); (ii) eighty percent (80%) of the common stock ofUnique Logistics International (BOS) Inc. , aMassachusetts corporation ("UL BOS"); and (iii) sixty-five percent (65%) of theUnique Logistics International (USA) Inc. , aNew York corporation ("UL NYC").UL ATL ,UL BOS , andUL NYC are collectively referred to as "UL US Entities".aHong Kong company, (the "UL
HK Transaction"). OnOctober 8, 2020 ,Unique Logistics Holdings, Inc. ,Innocap, Inc. , andInno Acquisition Corp. , aDelaware corporation and wholly owned subsidiary ofInnocap Inc. ("Merger Sub"), entered into an Acquisition Agreement and Plan of Merger pursuant to which the Merger Sub was merged with and into ULHI, with ULHI surviving as a wholly owned subsidiary ofInnocap, Inc. (the "Merger"). EffectiveJanuary 11, 2021 , the Company amended and restated its articles of incorporation with the office of the Secretary ofState of Nevada to, among other things, change the Company's name toUnique Logistics International, Inc. and increase the number of shares of common stock that the Company is authorized to issue from 500,000,000 shares to 800,000,000 shares. OnJanuary 13, 2021 , the Company received notice from theFinancial Industry Regulation Authority ("FINRA") that the above name change had been approved and took effect at the opening of trading onJanuary 14, 2021 . In connection with the name change, the Company changed its ticker symbol from "INNO" to "UNQL". COVID-19
InJanuary 2020 , theWorld Health Organization has declared the outbreak of a novel coronavirus (COVID-19) as a "Public Health Emergency of International Concern," which continues to have an impact throughout the world and has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The coronavirus outbreak and government responses are creating disruption in global supply chains and adversely impacting many industries. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The extent of the impact of COVID-19 on our operational and financial performance will depend on the effect on our shippers and carriers, all of which are uncertain and cannot be predicted. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the coronavirus outbreak. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results. The Company has experienced increased air and ocean freight rates due to overall cargo restraints imposed by shippers and carriers and is in a position to pass these cost increases directly to the customers without significantly effecting its margins. Basis of Presentation The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with the accounting principles generally accepted inthe United States of America ("GAAP"). From inception,October 28, 2019 toMay 29, 2020 , ULHI was inactive. The activity of ULHI and UL US Entities presented in the consolidated financial statements for the periodMay 29, 2020 throughMay 31, 2020 as "Successor. The activity of combined UL US Entities prior to the UL HK Transaction date is presented as "Predecessor" for periods fromJune 1, 2019 toMay 28, 2020 .
Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared on a going concern basis. As a consequence of acquisition financing at inception, the Company experienced negative working capital and adverse cash flows from operations. As ofMay 31, 2021 , the Company had cash of approximately$0.25 million and negative working capital of approximately$3.5 million . This was a significant improvement in working capital compared withMay 31, 2020 , when the Company's negative working capital was approximately$10.7 million . The Company has financed its first year of operations primarily through the sale of convertible notes, PPP loans, promissory notes, and cash advances received from factoring arrangements. The negative working capital resulted primarily from increases to short term liabilities, such as trade accounts payable, PPP loans received, operating lease liability and current portion of a long-term debt incurred by the company during the acquisition. 23 During its first full fiscal year, the Company paid down most of the acquisition related debt, received forgiveness of PPP loans and reached an agreement to exchange most of its convertible debt into common stocks. In addition, onAugust 4, 2021 the parties to the TBK Agreement entered into an agreement to increase the Company's credit facility from$30.0 million to$40.0 million during the periodAugust 4, 2021 , through and includingDecember 2, 2021 , further reducing liquidity concerns.
The following table summarizes total current assets, liabilities and working
capital on
May 31, 2021 May 31, 2020 Change
Current Assets $ 52,400,799 $ 15,181,076 $ 37,219,723
Current Liabilities 55,929,942 25,834,209 30,095,733
Working Capital Deficit $ (3,529,143 ) $ (10,653,133 ) $ 7,123,990
The change in working capital deficit is primarily attributable to an increase
in trade accounts receivable of $12.4 million , an increase of contract asset of
$18.6 million , an increase in factoring reserve of $6.6 million , an increase in
prepaid expenses of $0.7 million , a decrease in accrued expenses and other
current liabilities of $1.2 million and a decrease of $6.0 in the current
portion of long-term debt due to related parties. These amounts were offset by
decrease in cash of $1.1 million , an increase in trade accounts payable of $29.4
million , an increase in accrued freight of $6.9 million , an increase in current
portion of operating lease liabilities of $0.2 million and an increase in the
current portion of notes payable of $0.8 million .
The following table shows Company's cash flows:
Successor Predecessor
Period from Period from
Year Ended May 29, 2020 to June 1, 2019 to
May 31, 2021 May 31, 2020 May 28, 2020
Net cash provided by (used in)
operating activities $ (161,906 ) $ 1,562,052 $ 1,431,254
Net cash used in investing
activities (51,489 ) (212,689 ) (101,828 )
Net cash provided by (used in)
financing activities $ (883,353 ) $ - $ 604,481
Operating activities used cash of approximately $0.2 million for the year ended
May 31, 2021 compared to net cash provided by operations of $1.6 million and
cash used in operations of $1.2 million during the Successor period from May 29,
2020 through May 31, 2020 , and the Predecessor period from June 1, 2019 to May
29, 2020 , respectively. Primary reason for cash used for the year ended May 31,
2021 , was a significant increase in accounts receivables, reflecting extended
credit terms, specifically as it relates to increase in charter operations,
where prepayments have to be made in advance of the upcoming flights. This cash
outlays were balanced by a corresponding increase in accounts payable,
reflecting company's ability to finance operations through extended credit with
diverse network of suppliers, partners and shipping companies.
Investing activities used cash of $0.1 million for the year ended May 31, 2021
compared to $0.2 million and $0.1 million during the Successor period from May
29, 2020 through May 31, 2020 , and the Predecessor period from June 1, 2019 to
May 29, 2020 , respectively. All these cash outlays primarily related to
purchases of computer and office related equipment as the company grew its
office and warehouse space and employed more staff in operations and customer
service.
Financing activities used cash of $0.8 million for the year ended May 31, 2021
and were the result of receiving aggregate gross proceeds of $5,174,902 from
promissory notes and convertible notes offset by payments on notes payable and
related party debt of $858,330 and $5,149,925 , respectively. During the
Predecessor period ended on May 29, 2020 , the financing activities provided cash
of approximately $0.6 million from net borrowing on the operating line of
credit.
24
The Company does not anticipate having any significant capital expenditures in the next fiscal year (June 1, 2020 toMay 31, 2022 ). The Company expects to turn its operating capital positive early in the upcoming fiscal year as we continue to invest in our network, products, customer development, sales and marketing activities. Management is fully aware that the Company's business plan is dependent upon the generation of sufficient revenues from its products to offset expenses, increased cash flow from ongoing operations the collection of outstanding receivables and the restructuring of the current debt burden. Although the Company believes in the viability of management's strategy to generate sufficient revenue, control costs and the ability to raise additional funds, if necessary, there can be no assurances to that effect. In the event that the Company does not generate sufficient cash flows from operations and is unable to obtain funding, the Company will be forced to delay, reduce, or eliminate some or all of its discretionary spending, which could adversely affect the Company's business prospects, ability to meet long-term liquidity needs or ability to continue operations. Based on the above analysis and business performance of the Company subsequent to the balance sheet date, management has concluded that the Company's cash and operating capital as ofMay 31, 2021 , would be sufficient to continue as a going concern for at least one year from the date these consolidated financial statements are available for issuance. Results of Operations for the Year EndedMay 31, 2021 compared with the periodMay 29, 2020 throughMay 31, 2020 (Successor) and period fromJune 1, 2019
toMay 28, 2020 (Predecessor) Successor Predecessor Period from Period from Year Ended May 29, 2020 to June 1, 2019 to May 31, 2021 May 31, 2020 May 28, 2020 Revenue$ 371,887,272 $ 1,070,324 $ 114,619,829 Cost of Sales 345,358,428 948,062 101,494,747 Gross Margin 26,528,844 122,262 13,125,082 Operating Expenses Salaries and related costs 9,184,390 60,776 9,202,566 Professional fees 1,350,369 180,000 409,961 Rent and occupancy 1,815,194 21,086 1,823,189 Selling and promotion 4,535,373 5,720 832,107
Depreciation and amortization 765,532 - 172,295 Fees on factoring arrangements 4,471,540 -
-
Other 877,458 259,032 1,479,526
22,999,856 526,614 13,919,645
Other Expenses (Income)
Interest 1,781,828 4,158 (333,608 )
Gain on forgiveness of promissory
notes (1,646,062 ) -
Loss on extinguishment of
convertible debt 1,147,856 - -
1,283,622 4,258 (333,608 )
-Income (Loss) before Income tax 2,245,366 (408,510
) (1,128,171 ) -Income tax 519,869 - - Net Income (Loss)$ 1,725,497 $ (408,510 ) $ (1,128,171 ) 25
The table below shows our profit margins earned by transportation mode:
Successor Predecessor
Period from Period from
For the Year Ended May 29, 2020 to June 1, 2019 to
May 31, 2021 May 31, 2020 May 28, 2020
Air $ 6,491,325 $ 11,701 $ 3,413,304
Ocean 16,282,069 102,402 6,677,538
Contract Logistics 1,826,266 14,629 1,515,408
Customs brokage 1,929,184 (6,470 ) 1,518,831
Total: $ 26,528,844 $ 122,262 $ 13,125,082
Gross Profit Margin % 7.1 % 11.4 % 11.5 %
Revenue
Revenue from operations was$371.9 million for the year endedMay 31, 2021 , compared to$1.1 million and$114,6 million for the periods fromMay 29, 2020 throughMay 31, 2020 , and the Predecessor period fromJune 1, 2019 toMay 28, 2020 , respectively. The increase in revenue was primarily attributable to management's success in combining the acquired entities, achievement of synergies, as well as significant increase in a number of customers, shipping volumes and the market prices, for both air and ocean freight services, during the year. The Company is in a strong position to deliver on its strategy, ensuring growth both organically and through acquisitions in strategic geographic areas of our business. Costs of Sales Cost of sales was were$345.4 million for the year endedMay 31, 2021 , compared with$0.9million and$101.5 million for the period fromMay 29, 2020 throughMay 31, 2020 , and the Predecessor period fromJune 1, 2019 toMay 28, 2020 , respectively. This increase in cost was attributable to a significant increase in shipping volume as well as increase in market prices. For the year endedMay 31, 2021 , the Company maintained 7.1% gross margins for products and services which are close to historical average. Operating Expenses
Operating expenses were approximately$23.0 million for the year endedMay 31, 2021 , compared with$0.5 million and$13.9 million for the period fromMay 29, 2020 throughMay 31, 2020 , and the Predecessor period fromJune 1, 2019 toMay 29, 2020 , respectively. Comparing the year endedMay 31, 2021 and the Predecessor period endedMay 28, 2020 , increase in operating expenses mostly due to professional fees increased by$0.9 million due to acquisition related transactions in May of 2020 and the reverse merger transactions in October of 2020, selling and promotion expense increased by approximately$3.7 million due to increase in sales team and more effective incentives, resulting in higher sales. In order to support higher sales, the Company engaged in a factoring arrangement startingMay 29, 2020 , to provide short term liquidity while working with a number of banks on establishing an operating line of credit. The Company was successful in securing a line by the end of year endedMay 31, 2021 . As a result, the Company incurred$4.5 million in Factoring fees during the year
endedMay 31, 2021 . 26 Other Income (Expense)
Interest expense was approximately$1.8 million for the year endedMay 31, 2021 , compared with$4,158 and$0.3 million for the period fromMay 29, 2020 throughMay 31, 2020 , and the Predecessor period fromJune 1, 2019 toMay 28, 2020 , respectively. During the year endedMay 31, 2021 (Predecessor) interest expense totaled approximately$1.8 million and was comprised of$121,000 for bank interest charges,$310,000 for loan interest and approximately$1.4 million for accretion of debt discount related to the Company's convertible notes. During Predecessor period, interest expense was charged on the two small lines of credit used by the ULI HK Entities for operating capital. During the year endedMay 31, 2021 , the Company recorded loss on extinguishment of convertible note payable of approximately$1.1 million . The Company was also granted forgiveness of the Paycheck Protection Program loans under the CARES Act, (the "PPP Loan") and recorded a gain on forgiveness of approximately$1.6 million . Net Income (Loss) Interest income was approximately$1.7 million for the year endedMay 31, 2021 , compared with a net loss of$0.5 million and a net loss of$1.1 million for the period fromMay 29, 2020 throughMay 31, 2020 , and the Predecessor period fromJune 1, 2019 toMay 28, 2020 , respectively. The increase was primarily due to the Company's management successfully combining the acquired entities, achieved synergies, and growing profitable new business. Adjusted EBITDA We define adjusted EBITDA to be earnings before interest, taxes, depreciation and amortization, factoring fees, other income, net, stock-based compensation and expenses, merger and acquisition costs, restructuring, transition and acquisitions expense, net, goodwill impairment and certain other items. Adjusted EBITDA is not a measurement of financial performance under GAAP and may not be comparable to other similarly titled measures of other companies. We present adjusted EBITDA because we believe that adjusted EBITDA is a useful supplement to net income from operations as an indicator of operating performance. We use adjusted EBITDA as a financial metric to measure the financial performance of the business because management believes it provides additional information with respect to the performance of its fundamental business activities. For this reason, we believe adjusted EBITDA will also be useful to others, including our stockholders, as a valuable financial metric. We believe that adjusted EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net income from continuing operations and adjusted EBITDA has been provided in the financial results. Adjusted EBITDA should not be considered as an alternative to income from operations or net income from operations as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
The following are reconciliations of Adjusted EBITDA to net income (loss), the most comparable GAAP measure:
Successor Predecessor
Period from Period from
Year Ended May 29, 200 to June 1, 2019 to
December 31, 2021 May 31, 2020 May 28, 2020
Net income (loss) $ 1,725,497 $ (408,510 ) $ (1,128,171 )
Adjustments:
Income tax expense 519,869 -
Depreciation and amortization 765,532 172,295
Stock based compensation 91,666 -
Gain on forgiveness of promissory
notes 1,147,856 -
Loss on extinguishment of
convertible notes (1,646,062 ) -
Factoring fees 4,471,540 -
Interest expense (including
accretion of debt discount) 1,781,828 333,608
Adjusted EBITDA $ 8,857,726 $ (408,510 )$ (622,268 ) 27
Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of the condensed consolidated financial statements prepared by management and are based upon management's current judgments. These judgments are normally based on knowledge and experience regarding past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management's current judgments. While there are a number of accounting policies, methods and estimates that affect our condensed consolidated financial statements, the areas that are particularly significant include revenue recognition; the fair value of acquired assets and liabilities; fair value of contingent consideration; the assessment of the recoverability of long-lived assets, goodwill and intangible assets; and leases. We perform an impairment test of goodwill for each year unless events or circumstances indicate impairment may have occurred before that time. We assess qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount. After assessing qualitative factors, if further testing is necessary, we would determine the fair value of each reporting unit and compare the fair value to the reporting unit's carrying amount. Intangible assets consist of customer relationships, trade names and trademarks and non-compete agreements arising from our acquisitions. Customer relationships are amortized on a straight-line basis over 12 to 15 years. Tradenames, trademarks and non-compete agreements, are amortized on a straight-line basis over 3 to 10 years. We review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, we estimate fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Our significant accounting policies are summarized in Note 1 of our condensed consolidated financial statements.
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