Part I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 

		June 30,			December 31,
		2017			2016
ASSETS
Current assets:
Cash		$	41,584		$	3,695
Accounts receivable, net of allowance of $346 and $321 at June 30, 2017 and December 31, 2016, respectively			88,224			54,177
Drivers’ advances and other receivables			2,707			2,632
Current portion of net investment in sales-type leases			4,790			3,516
Parts supplies			3,947			1,467
Income tax receivable			158			719
Prepaid and other current assets			16,192			13,504
Total current assets			157,602			79,710
Property and equipment, net			345,989			318,747
Intangible assets, net			68,768			71,653
Goodwill			108,413			89,035
Other long-term assets			14,223			11,090
Total assets			694,995			570,235
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Checks outstanding in excess of bank balances			925			1,166
Accounts payable			9,898			4,788
Accrued expenses and other liabilities			22,137			16,104
Accrued payroll, benefits and related taxes			12,191			7,835
Accrued insurance and claims			9,803			9,840
Current portion of long-term debt			21,520			52,665
Total current liabilities			76,474			92,398
Line of credit			—			6,858
Long-term debt, net of current portion			325,124			208,372
Deferred tax liabilities			106,515			92,815
Other long-term liabilities			227			286
Subordinated debt			—			66,443
Total liabilities			508,340			467,172
Commitments and contingencies (Note 15)
Stockholders’ equity:
Series A convertible preferred stock, $0.0001 par value; 10,000,000 shares authorized; 650,000 shares issued with liquidation preference of $65,000			65,000			—
Series B convertible preferred stock, $0.01 par value; 75,000 shares authorized; 0 and 64,500 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively			—			1
Common stock (par value $0.0001 per share); 250,000,000 shares authorized, 38,058,101 and 20,980,961 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively			4			1
Additional paid-in-capital			150,190			117,807
Accumulated deficit			(29,046)			(14,694)
Accumulated other comprehensive income (loss)			507			(52)
Total stockholders’ equity			186,655			103,063
Total liabilities and stockholders’ equity		$	694,995		$	570,235

 

The accompanying notes are an integral part of the consolidated financial statements.

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DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except share and per share data)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2017			2016			2017			2016
Revenues:
Freight		$	149,654		$	136,792		$	275,209		$	263,051
Brokerage			28,656			21,778			49,525			42,382
Logistics			2,700			—			2,700			—
Fuel surcharge			16,313			11,787			30,323			21,805
Total revenue			197,323			170,357			357,757			327,238
Operating expenses:
Salaries, wages and employee benefits			58,186			50,207			108,307			100,562
Fuel			20,466			17,283			39,689			31,780
Operations and maintenance			28,967			24,358			52,191			45,059
Communications			549			354			952			838
Purchased freight			49,760			41,185			87,346			77,960
Administrative expenses			8,022			5,096			15,400			12,490
Sales and marketing			555			483			937			846
Taxes and licenses			2,611			2,345			4,892			4,678
Insurance and claims			5,042			4,542			9,165			8,583
Acquisition-related transaction expenses			1,037			3			1,483			18
Depreciation and amortization			17,638			16,644			33,953			33,517
(Gain) loss on disposition of revenue property and equipment			26			571			(174)			652
Total operating expenses			192,859			163,071			354,141			316,983
Income from operations			4,464			7,286			3,616			10,255
Other (income) expense:
Interest income			(50)			(16)			(54)			(36)
Interest expense			6,544			5,446			12,440			10,797
Write-off of unamortized deferred financing fees			—			—			3,883			—
Other			(107)			(129)			(215)			(202)
Total other expense			6,387			5,301			16,054			10,559
Income (loss) before provision (benefit) for income taxes			(1,923)			1,985			(12,438)			(304)
Provision (benefit) for income taxes			2,184			974			(586)			(75)
Net income (loss)			(4,107)			1,011			(11,852)			(229)
Other comprehensive loss:
Unrealized income (loss) on interest rate swaps			—			(1)			52			(61)
Foreign currency translation adjustments			507			—			507			—
Comprehensive income (loss)			(3,600)			1,010			(11,293)			(290)
Net income (loss)			(4,107)			1,011			(11,852)			(229)
Less dividends to Series A convertible preferred stockholders			(1,693)			—			(1,694)			—
Less dividends to Series B convertible preferred stockholders			—			(1,243)			(806)			(2,486)
Net loss attributable to common stockholders		$	(5,800)		$	(232)		$	(14,352)		$	(2,715)
Net loss per common share:
Basic and Diluted		$	(0.15)		$	(0.01)		$	(0.44)		$	(0.13)
Weighted-average common shares outstanding:
Basic and Diluted			37,945,310			20,980,961			32,468,674			20,980,961
Dividends declared per Series A convertible preferred share		$	0.68		$	—		$	0.68		$	—
Dividends declared per Series B convertible preferred share		$	—		$	18.75		$	12.50		$	37.50

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

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DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2017

(Unaudited)

(In thousands, except share data)

 

		Series A Convertible					Series B Convertible																Accumulated
		Preferred Stock					Preferred Stock					Common Stock											Other
									Par					Par			Additional			Accumulated			Comprehensive
		Shares		Amount			Shares		Value			Shares		Value			Paid- In Capital			Deficit			Loss			Total
Balance, January 1, 2017 as previously reported		—		$	—		64,500		$	1		145,495		$	1		$	117,807		$	(14,694)		$	(52)		$	103,063
Effect of reverse acquisition		—			—		—			—		20,835,466			1			—			—			—			1
Balance at January 1, 2017		—			—		64,500			1		20,980,961			2			117,807			(14,694)			(52)			103,064
Income on interest rate swaps		—			—		—			—		—			—			—			—			52			52
Series B convertible preferred stock dividend		—			—		—			—		—			—			—			(806)			—			(806)
Repurchase of common shares		—			—		—			—		(3,616,781)			—			(36,168)			—			—			(36,168)
Conversion of Series B convertible preferred stock to common shares		—			—		(64,500)			(1)		9,301,150			1			—			—			—			—
Shares assumed by legal acquirer		—			—		—			—		11,050,630			1			83,639			—			—			83,640
Settlement of legal acquirer transaction costs		—			—		—			—		—			—			(19,063)			—			—			(19,063)
Issuance of Series A convertible preferred stock		650,000			65,000		—			—		—			—			—			—			—			65,000
Issuance of common stock		—			—		—			—		342,133			—			3,437			—			—			3,437
Series A convertible preferred stock dividend		—			—		—			—		—			—			—			(1,694)			—			(1,694)
Stock-based compensation expense		—			—		—			—		—			—			538			—			—			538
Foreign currency translation adjustments		—			—		—			—		—			—			—			—			507			507
Net loss		—			—		—			—		—			—			—			(11,852)			—			(11,852)
Balance at June 30, 2017		650,000		$	65,000		—		$	—		38,058,093		$	4		$	150,190		$	(29,046)		$	507		$	186,655

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

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DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

		Six months ended
		June 30,
		2017			2016
Cash flows from operating activities
Net loss		$	(11,852)		$	(229)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation			31,069			30,470
Amortization of intangible assets			2,884			3,047
Amortization of deferred financing fees			793			563
Write-off of deferred financing fees			3,883			—
Stock-based compensation expense			538			—
Deferred taxes			(1,419)			(653)
Bad debt expense			221			—
Non-cash interest expense			92			534
(Gain) loss on disposition of property and equipment			(157)			653
Deferred gain recognized on sales-type leases			(339)			(342)
Changes in operating assets and liabilities
Accounts receivable			(20,311)			(2,357)
Drivers’ advances and other receivables			102			(540)
Payments received on sales-type leases			2,076			1,782
Other current assets			433			3,490
Accounts payable			1,344			2,080
Accrued expenses and other liabilities			4,714			(2,284)
Net cash provided by operating activities			14,071			36,214
Cash flows from investing activities
Purchase of property and equipment			(6,806)			(1,769)
Proceeds from sale of property and equipment			2,952			3,979
Cash paid in acquisitions, net of cash acquired			(40,571)			—
Net cash provided by (used in) investing activities			(44,425)			2,210
Cash flows from financing activities:
Checks outstanding in excess of bank balances			(241)			(881)
Advances on line of credit			343,083			346,479
Repayments on line of credit			(349,939)			(352,259)
Principal payments on and payoff of long-term debt			(224,587)			(43,175)
Proceeds from Term Loan Facility			289,500			14,188
Deferred financing fees			(14,266)			(488)
Pay off of subordinated debt			(66,715)			—
Issuance of common stock			64,577			—
Repurchase of common stock			(36,168)			—
Issuance of Series A convertible preferred stock			65,000			—
Series B convertible preferred stock dividends			(2,016)			(2,419)
Net cash provided by (used in) financing activities			68,228			(38,555)
Effect of exchange rates on cash			15			—
Net increase (decrease) in cash			37,889			(131)
Cash – beginning of period			3,695			4,886
Cash – end of period		$	41,584		$	4,755

 

The accompanying notes are an integral part of the consolidated financial statements.

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DASEKE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Unaudited)

(in thousands)

 

		Six months ended
		June 30,
		2017			2016
Supplemental disclosure of cash flow information
Cash paid for interest		$	17,728		$	10,001
Cash paid for income taxes		$	436		$	615
Noncash investing and financing activities
Property and equipment acquired with debt or capital lease obligations		$	5,139		$	22,897
Property and equipment sold for notes receivable		$	70		$	283
Property and equipment transferred to sales-type lease		$	4,842		$	5,213
Assets held for sale returned to property and equipment		$	—		$	351
Sales-type lease returns to property and equipment		$	645		$	69
Sales-type lease assets sold for notes receivable		$	12,700		$	13,099
Sales-type lease returns to sales-type lease assets		$	6,957		$	6,712
Common stock issued in acquisitions		$	3,438		$	—
Accrued Series A convertible preferred dividends		$	1,693		$	—
Accrued Series B convertible preferred dividends		$	—		$	1,344

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

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NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

The registrant was originally formed in April 2015 as a special purpose acquisition company, or SPAC, under the name Hennessy Capital Acquisition Corp. II (Hennessy). As a SPAC, Hennessy had no operations and its purpose was to go public with the intention of merging with or acquiring a company with the proceeds of the SPAC’s initial public offering (the IPO).

 

On February 27, 2017, Hennessy consummated the Business Combination (as defined and described in Note 2) with Daseke, Inc. Upon consummation of the Business Combination, Daseke, Inc. changed its name to Daseke Companies, Inc. and Hennessy changed its name to Daseke, Inc.

 

Daseke, Inc. was formed in 2008 and began operations on January 1, 2009. Daseke is engaged in full service open-deck trucking that specializes primarily in flatbed truckload and heavy haul transportation of specialized items throughout the United States and Canada and into Mexico with trailers. The Company also provides logistical planning and warehousing services to customers. The Company is subject to regulation by the Department of Transportation and various state regulatory authorities.

 

Unless expressly stated otherwise, references to the Company or Daseke refers to Daseke, Inc. and its wholly owned subsidiaries, Hennessy refers to the registrant prior to the closing of the Business Combination, and Private Daseke refers to Daseke, Inc. and its subsidiaries prior to the closing of the Business Combination.

 

Basis of Presentation

 

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.

 

The consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes for the year ended December 31, 2016 as set forth in the Company’s Current Report on Form 8-K/A, filed with the SEC on March 16, 2017.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Daseke, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Deferred Financing Fees

 

In conjunction with obtaining long-term debt, the Company incurred financing costs which are being amortized using the straight-line method, which approximates the effective interest rate method, over the terms of the obligations. As of June 30, 2017 and December 31, 2016, the balance of deferred financing fees was $13.7 million and $4.1 million, respectively, which is included as a reduction of long-term debt, net of current portion in the consolidated balance sheets. Amortization expense was $0.5 million and $0.3 million for the three months ended June 30, 2017 and 2016, respectively, and $0.8 million and $0.6 million for the six months ended June 30, 2017 and 2016, respectively, which is included in interest expense. In February 2017, in conjunction with new term loan financing discussed in Note 9, the Company incurred deferred financing costs of $14.2 million and expensed unamortized deferred financing fees totaling $3.9 million.

 

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NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

 

Fair Value Measurements

 

The Company follows the accounting guidance for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures about fair value measurements. The three levels of the fair value framework are as follows:

 

Level 1 - Quoted market prices in active markets for identical assets or liabilities.

Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 - Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.

 

A financial asset or liability’s classification within the framework is determined based on the lowest level of input that is significant to the fair value measurement.

 

The fair value of the Company’s interest rate swaps is determined using cash flow computer models with unobservable inputs, therefore the liability for interest rate swaps is classified within Level 3 of the fair value framework. In conjunction with the Business Combination discussed in Note 2, the Company’s lone interest rate swap was terminated. At December 31, 2016, the fair value of this liability was $51,871   and is classified in accrued expenses and other liabilities on the consolidated balance sheets.  The tables below are a summary of the changes in the fair value of this liability for the three and six months ended June 30, 2017 and 2016 (in thousands):

 

		2016
Balance at January 1, 2016		$	(124)
Change in fair value			(62)
Balance at March 31, 2016			(186)
Change in fair value			(1)
Balance at June 30, 2016		$	(187)

 

		2017
Balance at January 1, 2017		$	(52)
Change in fair value			52
Balance at June 30, 2017		$	—

 

Stock-Based Compensation

 

Awards of equity instruments issued to employees and directors are accounted for under the fair value method of accounting and recognized in the consolidated statements of operations. Compensation cost is measured for all stock-based awards at fair value on the date of grant and recognized using the straight-line method over the service period over which the awards are expected to vest.

 

Fair value of all time-vested options as of the date of grant is estimated using the Black-Scholes option valuation model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Since the Company does not have a sufficient history of exercise behavior, expected term is calculated using the assumption that the options will be exercised ratably from the date of vesting to the end of the contractual term for each vesting tranche of awards. The risk-free interest rate is based on the U.S. Treasury yield curve for the period of the expected term of the stock option. Expected volatility is calculated using an index of publicly traded peer companies.

 

Fair values of nonvested stock awards (restricted stock units) are equal to the market value of the common stock on the date of the award with compensation costs amortized over the vesting period of the award.

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NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

 

Segment Reporting

 

The Company determines its operating segments based on the information utilized by the chief operating decision maker to allocate resources and assess performance. Based on this information, the Company has determined it has ten operating segments as of June 30, 2017 and eight operating segments as of June 20, 2016 that are aggregated into two reportable segments: Flatbed Solutions, which delivers its services using primarily flatbed transportation equipment to meet the needs of high-volume, time-sensitive shippers, and Specialized Solutions, which delivers transportation and logistics solutions for super heavy haul, high-value customized and over-dimensional loads, many of which require engineering and customized equipment.

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per common share is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings (loss).

 

For the three and six months ended June 30, 2017, shares of the Company’s 7.625% Series A Convertible Cumulative Preferred Stock (Series A Preferred Stock) were not included in the computation of diluted loss per share as their effects were anti-dilutive. For the three and six months ended June 30, 2017 and 2016, shares of Private Daseke’s Series B Convertible Preferred Stock (Series B Preferred Stock)   were not included in the computation of diluted earnings per share as their effects were anti-dilutive. For the three and six months ended June 30, 2017, there was no dilutive effect from the Merger Agreement earn-out provision (see Note 2) or the outstanding warrants to purchase shares of the Company’s common stock (the common stock purchase warrants).

 

Common Stock Purchase Warrants

 

The Company accounts for the issuance of common stock purchase warrants in connection with equity offerings in accordance with the provisions of the Accounting Standards Codification (ASC) 815, Derivatives and Hedging (ASC 815). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). See Note 11 for additional details on the common stock purchase warrants.

 

The Company assessed the classification of its common stock purchase warrants and determined that such instruments meet the criteria for equity classification at the time of issuance.

 

Foreign Currency Gains and Losses

 

The local currency is the functional currency for the Company’s operations in Canada. For these operations, assets and liabilities are translated at the rates of exchange on the consolidated balance sheet date, while income and expense items are translated at average rates of exchange during the period. The resulting gains or losses arising from the translation of accounts from the functional currency into U.S. dollars are included as a separate component of stockholders’ equity in accumulated other comprehensive income (loss) until a partial or complete liquidation of the Company’s net investment in the foreign operation.

 

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NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

 

From time to time, the Company’s foreign operations may enter into transactions that are denominated in a currency other than their functional currency. These transactions are initially recorded in the functional currency of the operating company based on the applicable exchange rate in effect on the date of the transaction. Monthly, these transactions are remeasured to an equivalent amount of the functional currency based on the applicable exchange rate in effect on the remeasurement date. Any adjustment required to remeasure a transaction to the equivalent amount of functional currency is recorded in the consolidated statements of operations of the foreign operating company as a component of foreign exchange gain or loss.

 

New Accounting Pronouncements

 

In July 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). ASU 2017-11 provides guidance on accounting for financial instruments with down round features and clarify the deferral of certain provisions in Topic 480. ASU 2017-11 will become effective for annual periods beginning after December 15, 2018 and interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718).  ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award requires the application of modification accounting. Modification accounting will apply unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. ASU 2017-09 will become effective for annual periods beginning after December 15, 2017 and interim periods within those periods. Early adoption is permitted. The Company does not expect ASU 2017-09 to have a material impact on its consolidated results of operations, financial condition, cash flows, or financial statement disclosures.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years beginning December 15, 2019, with early adoption permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017, and applied prospectively. The Company does not expect ASU 2017-04 to have a material impact on its consolidated results of operations, financial condition, cash flows, or financial statement disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230).  ASU 2016-15 provides new guidance intended to reduce diversity in practice in how certain cash receipts and payments are classified in the statement of cash flows, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investees. ASU 2016-05 will become effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 31, 2019. Early adoption is permitted. ASU 2016-15 requires application using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.

 

In June 2016, the FASB issued ASU No. 2016-13, Accounting for Credit Losses (Topic 326). ASU 2016-13 requires the use of an “expected loss” model on certain types of financial instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.

 

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718). ASU 2016-09 requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. ASU 2016-09 also allows for the Company to repurchase more of the Company’s shares for tax withholding purposes without triggering liability accounting. In addition, ASU 2016-09 allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. Adoption of this pronouncement and election to account for forfeitures as they occur did not have a material impact on its consolidated results of operations, financial condition, cash flows or financial statement disclosures.

 

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NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  ASU 2016-02 amends various aspects of existing guidance for leases.  ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The main difference between previous GAAP and the amended standard is the recognition of lease assets and lease liabilities of lessees on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial position and results of operations.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued updated guidance with ASU 2015-14 and deferred the effective date of ASU 2014-09 by one year. The guidance in ASU 2014-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.

 

In March 2016, the FASB issued an ASU that further clarifies guidance under ASU 2014-09 with respect to principal versus agent considerations in revenue from contracts with customers. In the second quarter of 2016, the FASB issued two ASUs that provide additional guidance when identifying performance obligations and licenses as well as allowing for certain narrow scope improvements and practical expedients. In May 2017, the FASB issued an ASU that provides guidance on the identification of the customer in a service concession arrangement. The Company is in the process of evaluating ASU 2014-09, including the expected impact on business processes, systems and controls, and potential differences in the timing and/or method of revenue recognition for contracts. The Company has not determined if adoption of ASU 2014-09 will have a material impact on results of operations in the periods after adoption and expects to complete its assessment of the cumulative effect of adopting ASU 2014-09 during the third quarter of 2017.

 

NOTE 2 – BUSINESS COMBINATION

 

On February 27, 2017, Hennessy consummated the merger of Hennessy’s wholly-owned subsidiary with and into Daseke, Inc., with Daseke, Inc. surviving as a direct wholly-owned subsidiary of Hennessy (the Business Combination) pursuant to the Agreement and Plan of Merger, dated December 22, 2016 (the Merger Agreement). The aggregate consideration received by Private Daseke stockholders upon closing was $266.7 million, consisting of newly issued shares of common stock at a value of $10.00 per share. The Merger Agreement contains an earn-out provision through which Private Daseke stockholders could receive up to 15 million additional shares of common stock (with up to 5 million shares payable annually with respect to 2017, 2018 and 2019 performance). The full 15 million shares are only payable if (i) the annualized Adjusted EBITDA (giving effect to acquisitions and as defined in the Merger Agreement) for 2017, 2018 and 2019 is at least $140.0 million, $170.0 million and $200.0 million, respectively, and (ii) the closing share price of the Company’s common stock is at least $12.00, $14.00 and $16.00 for any 20 trading days in a consecutive 30 trading day period in 2017, 2018 and 2019, respectively. For each year, the 5 million earn-out shares will be prorated to the extent the annualized Adjusted EBITDA (giving effect to acquisitions and as defined in the Merger Agreement) exceeds 90% but represents less than 100%, of the applicable earn-out target.

 

Following the consummation of the Business Combination on February 27, 2017 (the Closing), there were 37,715,960 shares of common stock issued and outstanding, consisting of (i) 26,665,330 shares issued to Private Daseke stockholders pursuant to the Merger Agreement, (ii) 419,669 shares issued in a private placement that closed in conjunction with the Business Combination, (iii) 2,288,043 shares originally issued to Hennessy Capital Partners II LLC (the Sponsor) in a private placement that closed simultaneously with the consummation of the IPO, and (iv) 8,342,918 shares, following redemptions, which shares were originally issued in the IPO. In connection with the Business Combination, $65.0 million of Series A Preferred Stock (650,000 shares) were issued in a private placement.

 

In conjunction with the Closing, the Company entered into (i) a $350.0 million term loan credit facility (the Term Loan Facility), which consists of a $250.0 million term loan funded on the closing date of the Term Loan Facility and up to $100.0 million of term loans to be funded from time to time under a delayed draw term loan facility, and (ii) an asset-based revolving credit facility (the ABL Facility), in an aggregate maximum credit amount equal to $70.0 million (subject to availability under a borrowing base). See Note 9 for more information regarding the Term Loan Facility and the ABL Facility. Prior to the Closing, the Company had a credit facility consisting of a term loan (Senior Term Loan) and a revolving line of credit (Line of Credit).

 

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NOTE 2 – BUSINESS COMBINATION – (Continued)

 

The following table is a summary of cash proceeds and utilization of proceeds in the Business Combination (in thousands):

 

Proceeds
Public share proceeds (1)		$	83,429
Issuance of Series A Preferred Stock			65,000
Term Loan Facility			250,000
Cash (2)			3,209
Total proceeds			401,638
Use of Proceeds
Repayment of Line of Credit (3)			16,717
Repayment of Senior Term Loan (4)			122,724
Repayment of equipment loans (5)			89,488
Repayment of subordinated debt (6)			67,460
Payment of deferred financing fees (7)			14,148
Repurchase Main Street and Prudential shares (8)			36,168
Hennessy transaction costs			19,063
Daseke transaction costs (9)			1,204
Total use of proceeds			366,972
Net cash received		$	34,666

 

 

The Business Combination was accounted for as a reverse merger in accordance with GAAP. Under this method of accounting, Hennessy is treated as the “acquired” company. This determination was primarily based on Private Daseke comprising the ongoing operations of the combined company, Private Daseke’s senior management comprising the senior management of the combined company, and Private Daseke stockholders having a majority of the voting power of the combined company. For accounting purposes, Private Daseke is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of Private Daseke (i.e., a capital transaction involving the issuance of stock by Hennessy for the stock of Private Daseke). Accordingly, the consolidated assets, liabilities and results of operations of Private Daseke are the historical financial statements of the combined company, and Hennessy’s assets, liabilities and results of operations are consolidated with Private Daseke beginning on the acquisition date.

 

In connection with the Closing, Daseke, Inc. changed its name to Daseke Companies, Inc. and Hennessy Capital Acquisition Corp. II changed its name to Daseke, Inc.  Daseke, Inc.’s common stock and warrants began trading under the ticker symbols DSKE and DSKEW, respectively, on February 28, 2017.