S-1/A 1 ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
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As filed with the Securities and Exchange Commission on July 1, 2011

Registration No. 333-172709

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

NEWGISTICS, INC.

(Exact name of Registrant as Specified in Its Charter)

 

Delaware   4731   74-2937236
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification No.)

2700 Via Fortuna, Suite 300

Austin, Texas 78746

(512) 225-6000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Michael J. Twomey

Chief Financial Officer

2700 Via Fortuna, Suite 300

Austin, Texas 78746

(512) 225-6000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Samer M. Zabaneh

Philip W. Russell

DLA Piper LLP (US)

401 Congress Avenue, Suite 2500

Austin, Texas 78701

 

Paul R. Tobias

Wilson Sonsini Goodrich & Rosati,

Professional Corporation

900 South Capital of Texas Highway

Las Cimas IV, Fifth Floor

Austin, Texas 78746

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one): ¨ Large accelerated filer, ¨ Accelerated filer, x Non-accelerated filer (do not check if a smaller reporting company) or ¨ Smaller reporting company.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 1, 2011

IPO PRELIMINARY PROSPECTUS

 

 

LOGO

            Shares

Common Stock

$0.001 per share

 

 

We are selling              shares of common stock and the selling stockholders are selling             shares of common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $             and $             per share. We have applied to list our common stock on the NASDAQ Global Select Market under the symbol “NEWG.”

The underwriters have an option to purchase a maximum of              additional shares to cover over-allotments of shares.

 

 

Investing in our common stock involves risks. See “Risk Factors” on page 12.

 

 

 

     Per Share        Total  

Public Offering Price

   $                      $                

Underwriting Discount

   $                      $                

Proceeds, before expenses, to us

   $                      $                

Proceeds, before expenses, to Selling Stockholders

   $                      $                

These securities are not deposits, savings accounts, or other obligations of any bank or savings association and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

Stifel Nicolaus Weisel    Piper Jaffray

 

 

 

BB&T Capital Markets    William Blair & Company

The date of this prospectus is                     , 2011.


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TABLE OF CONTENTS

 

     Page  

Glossary of Parcel, Freight, and Retail Industry Terms

     i   

Prospectus Summary

     1   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements and Industry Data

     26   

Use of Proceeds

     27   

Dividend Policy

     27   

Capitalization

     28   

Dilution

     30   

Selected Consolidated Financial And Other Data

     32   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35   

Business

     58   

Management

     76   

Executive Compensation

     82   

Certain Relationships and Related Party Transactions

     99   

Principal and Selling Stockholders

     103   

Description of Capital Stock

     106   

Shares Eligible for Future Sale

     111   

Certain Material U.S. Federal Tax Consequences for Non-U.S. Holders Of Common Stock

     113   

Underwriting

     117   

Legal Matters

     123   

Experts

     123   

Where You Can Find Additional Information

     123   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

In this prospectus “Company,” “we,” “us,” and “our” refer to Newgistics, Inc. and its subsidiaries. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option.

Dealer Prospectus Delivery Obligation

Until                     , 2011 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


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GLOSSARY OF PARCEL, FREIGHT, AND RETAIL INDUSTRY TERMS

Customer” means, for our parcel solutions business, a direct-to-consumer retailer, logistics service provider, or other business that utilizes our parcel delivery or return solutions. For our freight services business, customer means a manufacturer, distributor, or other business that utilizes our less-than-truckload, or LTL, and truckload transportation management solutions. We refer to an individual or organization that purchases merchandise from our parcel solutions customers as a consumer.

Direct-to-consumer” means the marketing, selling, and shipment of merchandise by retailers, manufacturers, and distributors directly to the end consumer, typically bypassing traditional brick-and-mortar retail locations. Direct-to-consumer sales channels may include websites, catalogues, television commercials, shopping networks, smartphones, and other mobile devices and media.

E-commerce” means, according to the U.S. Census Bureau, the sale of goods and services where an order is placed by the buyer, or price and terms of sale are negotiated over an internet, extranet, electronic data interchange network, electronic mail, or other online system. Payment may or may not be made online.

Electronic shopping and mail-order houses” means the industry group, as classified by the U.S. Census Bureau, that consists of establishments primarily engaged in retailing merchandise using non-store means, such as catalogues, toll-free telephone numbers, or electronic media, such as interactive televisions or computers.

First-mile” means the first stage of our parcel return service and represents the transportation of a parcel by a USPS carrier from the consumer’s home or workplace to a Post Office.

Gross LTL billings” means the dollar amount of customer freight purchases in our freight services business using our negotiated LTL carrier contracts.

Last-mile” means the final stage of our parcel delivery service and represents the transportation of a parcel by a USPS carrier from a Post Office to the consumer’s home or workplace.

Less-than-truckload” or “LTL” means a shipment that typically weighs less than 10,000 pounds and is consolidated with shipments from multiple shippers in a single trailer.

National Distribution Center” means a USPS facility that serves as a centralized mail processing and transfer point for designated geographic areas. As of June 30, 2011, there were 21 National Distribution Centers in the USPS network.

Newgistics SmartLabel” means our pre-paid, pre-addressed label that can be generated at the point-of-sale or shipment, after the sale by a customer service representative, or printed by a consumer returning merchandise. The Newgistics SmartLabel features intelligent barcodes that are scanned to provide shippers with detailed information related to each parcel return.

Parcel consolidators” means third-party service providers that pick up, sort, and transport a shipper’s parcels, and then deposit them into the USPS system for final delivery.

Parcel Return Service” or “PRS” means the USPS workshare discount program that permits approved providers to retrieve returned parcels from designated USPS locations.

Parcel Select” means the USPS workshare program that enables parcel consolidators to sort, consolidate, and ship parcels directly to USPS facilities or local Post Offices for last-mile delivery by the USPS to the final destination.

 

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Parcel yield” means the revenue per parcel that we receive for each parcel we ship.

SmartCenter” means one of our six parcel distribution and processing facilities located in the U.S., which are equipped with information management systems and automated sorting equipment with built-in redundancies designed to ensure delivery accuracy.

Sort” means to separate mail by a scheme or zipcode range.

Truckload” means a shipment from one customer that is dedicated an entire trailer from origin to destination.

Truckload brokerage” means the customer shipments for which our freight services business arranges the pickup and delivery of truckload freight using third-party carriers.

 

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PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information concerning our company, the common stock being sold in this offering, and our consolidated financial statements and related notes appearing in this prospectus and in the documents incorporated by reference in this prospectus. Because this is only a summary, you should read the rest of this prospectus, including the documents incorporated by reference in this prospectus, before you invest in our common stock. Read this entire prospectus carefully, especially the risks described under the section titled “Risk Factors.”

Our Business

Overview

We are a leading U.S. provider of technology-enabled parcel and freight transportation solutions to direct-to-consumer retailers, manufacturers, distributors, and logistics service providers. We operate in two business segments: parcel solutions and freight services.

In our parcel solutions business, we manage the delivery of large volumes of parcels from e-commerce, catalogue, and televised home shopping retailers primarily to consumers’ homes and returns from consumers back to retailers. By consolidating parcels from many customers and consumers and using the United States Postal Service, or the USPS, for last-mile delivery and first-mile pickup, we are able to provide cost-effective, reliable, and convenient shipping solutions. Utilizing our proprietary web-based technology platform, we believe our customers are able to improve their parcel shipping processes, reduce transportation and inventory costs, and improve consumer satisfaction. We provide parcel solutions to many leading U.S. online, catalogue, and other direct-to-consumer retailers, and leading third-party logistics providers, including Brother International, CDS Global, Inc., GENCO ATC, Lands’ End, Maritz Holdings, Mason, Neiman Marcus, QVC, Universal Screen Arts Group, and Victoria’s Secret, who collectively constituted 50.8% of our revenue and ten of our top twelve customers based on revenue during the first fiscal quarter of 2011.

We offer a national, integrated parcel delivery and return solution to our parcel solutions customers. For parcel deliveries, we consolidate many customers’ parcels having the same regional destination at one of our six SmartCenter parcel processing and distribution facilities and transport them to USPS distribution facilities in those regions to take advantage of lower cost USPS local delivery rates. For merchandise returns, the USPS picks up parcels from many consumers in the same region and consolidates them at USPS distribution facilities where we retrieve and transport them to one of our SmartCenters to be returned to our customers in aggregated shipments. We received, sorted, and transported an aggregate of approximately 41.3 million parcels and 11.5 million parcels at our SmartCenter distribution and processing facilities in fiscal 2010 and the first fiscal quarter of 2011, respectively.

Our proprietary, web-based technology platform, Intelligent Logistics Management, or ILM, can be integrated with our customers’ and third-party enterprise systems, thus enabling us to customize our parcel solutions to meet the requirements of each customer’s unique supply chain strategy. Through our technology platform, our customers are able to track individual parcels, receive in-transit parcel status and delivery confirmations, and transfer shipment-level data to their financial and customer management systems. Our customers have the ability to create customized reports using our software tools, enabling them to monitor service quality, confirm billing accuracy, and perform business analysis to identify potential operational improvements related to parcel deliveries and returns. We create and host customer-branded websites in which consumers can track parcels, initiate the return or exchange process, and arrange for pickup of returns. We believe these tools allow our customers to significantly reduce call center costs and improve the overall consumer shopping experience.

 

 

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We created an innovative parcel return solution that utilizes the extensive USPS local network and our proprietary software applications to improve the consumer return process. Our Newgistics SmartLabel technology and non-exclusive strategic alliance with the USPS simplifies the returns process by offering consumers pre-paid return via pickup from their home or workplace or drop off at any USPS collection box or Post Office. Specific product and consumer data embedded in the intelligent barcodes in our Newgistics SmartLabel provide our customers with the ability to sort and process returned merchandise based on predetermined business rules. This feature provides our customers visibility into their return process, which we believe allows them to manage inventory more efficiently and process credit to customers more quickly.

In our freight services business, we offer a range of less-than-truckload, or LTL, truckload, and expedited transportation management solutions that utilize capacity provided by third-party carriers. Our freight services offerings include rate negotiation, carrier selection, carrier and routing management, bill and audit administration, and consolidated freight payment services.

For both our parcel solutions and our freight services businesses, we utilize a non-asset based operating model. We do not own the transportation equipment used to transport our customers’ shipments. Instead, we rely on the USPS for local pickup and delivery of parcels, and capacity provided by third-party carriers for all of our other parcel and freight services transportation requirements.

We are led by an experienced management team with extensive industry knowledge. We believe that our focus on quality, innovation and customer service, extensive distribution network, and strong relationships with the USPS and third-party carriers have contributed to our leading market position.

We believe the significant growth we have experienced reflects both our ability to provide valuable services at a competitive price and the substantial growth in the direct-to-consumer retail industry. Our revenue for fiscal 2008, 2009, and 2010, was $129.3 million, $168.7 million, and $174.6 million, respectively, representing a 16.2% compound annual growth rate over the same period. Our operating income for fiscal 2008, 2009, and 2010 was $3.9 million, $8.4 million, and $13.4 million, respectively, representing a 86.1% compound annual growth rate for the same period. Our net income for fiscal 2008, 2009, and 2010 was $3.8 million, $13.1 million, and $21.4 million, respectively. Please see our Selected Consolidated Financial and Other Data, including the adjustments to net income related to our preferred stock warrant liability and net deferred tax asset valuation allowance.

Market Opportunity

Our parcel solutions segment operates within the rapidly growing direct-to-consumer parcel market while our freight services segment operates within the third-party logistics, or 3PL, market. Both markets are large and have favorable trends that we believe provide us significant growth opportunities.

Direct-to-Consumer Parcel Market

According to The Colography Group, or Colography, a leading research and consulting firm to the transportation industry, in a study commissioned by us, revenue generated in the less-than-70 pound U.S. parcel market, the primary market in which our parcel solutions business participates, was $54.8 billion in 2009. In the same study, Colography estimates that $37.7 billion of this market was related to delivery of parcels with transit times of two or more days, of which approximately 31%, measured by number of shipments, represented deliveries from businesses to residences, or direct-to-consumer deliveries.

We believe the growth of the U.S. parcel market is increasingly being driven by growth in direct-to-consumer retail sales, especially growth in e-commerce retail sales. Retailers, manufacturers, and distributors are increasingly using multiple direct-to-consumer channels to market and sell products, responding to changing consumer purchasing patterns. Direct-to-consumer sales channels include websites,

 

 

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catalogues, television commercials, shopping networks, smartphones, and other mobile devices and media. Utilizing direct-to-consumer channels in addition to, or in lieu of, brick-and-mortar store locations allows retailers to capture sales to consumers who prefer to shop utilizing alternative channels.

We believe a number of key trends are reshaping the retail industry, positively affecting the direct-to-consumer parcel market, including:

The growth of direct-to-consumer retail sales is significantly outpacing the growth of the broader retail market. According to the U.S. Census Bureau, sales from electronic shopping and mail-order houses increased at a 9.1% compound annual growth rate from $113.9 billion in 2000 to $270.8 billion in 2010. During this same period, total retail sales increased at only a 2.8% compound annual growth rate. In 2009, e-commerce sales represented the largest and one of the fastest growing components of sales from electronic shopping and mail-order houses. According to the U.S. Census Bureau, e-commerce sales increased at a 20.1% compound annual growth rate, from $27.5 billion in 2000 to $143.4 billion in 2009, the latest annual data available. We believe the following trends will drive continued growth in the direct-to-consumer retail market:

 

   

traditional brick-and-mortar retailers are increasingly using the internet as an alternative sales channel and distinct profit-generating business unit;

 

   

online purchases are increasing as consumers become more aware of the convenience of expanded product selection and availability of online shopping, and improvements in security and electronic payment technology;

 

   

adoption of mobile internet applications is accelerating and rapid introduction of new mobile technologies is improving internet accessibility and increasing the number of internet users; and

 

   

direct-to-consumer retailers are increasingly offering free shipping and adopting services that make the return process more convenient, in an effort to improve consumer satisfaction.

The increase in direct-to-consumer sales and marketing channels is creating challenges for retailers. Fulfilling direct-to-consumer orders creates customer service and supply chain management challenges for retailers. Consumers want both the convenience of shopping online and on-time, reliable parcel delivery. However, since consumers shopping online cannot inspect the merchandise at the time of purchase, they return or exchange merchandise at a higher rate than when shopping in a store. Both the consumer and retailer desire to track these deliveries and returns, with the consumer expecting a prompt credit for returned merchandise and the retailer wanting to quickly and efficiently return merchandise to stock.

A convenient, cost-effective parcel return and delivery capability is critical to direct-to-consumer retailers. We believe reliable, convenient, and cost-effective parcel return and delivery services are an essential component of successful direct-to-consumer retail sales strategies, and are increasingly a point of competitive differentiation among retailers. Direct-to-consumer retailers also desire return and delivery solutions that enable them to improve inventory management, streamline supply chain processes, and ensure consumer satisfaction. Critical elements of a parcel return and delivery service meeting these needs include:

 

   

reliable, convenient, and cost-effective parcel shipping;

 

   

shipment tracking during return and delivery;

 

   

technology integration into the customers’ enterprise systems to allow them to efficiently manage their supply chain processes;

 

   

pre-paid return via pickup at home, work, or other convenient locations;

 

   

flexible solutions tailored to the specific needs of the retailer and consumers; and

 

   

a high level of customer service supported by an understanding of the retailers’ business practices.

 

 

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Third-Party Logistics Services Market

Our freight services segment operates in the U.S. 3PL market. According to Armstrong & Associates, Inc., or Armstrong, a leader in supply chain market research and consulting, the outsourced U.S. 3PL market grew at a compound annual rate of 10.6% from 2000 to 2008, before declining 15.7% in 2009. In January 2011, Armstrong estimated that the U.S. 3PL market grew 13.5% to $121.6 billion in 2010 and that in 2010, $36.2 billion of this market would be related to the domestic transportation management market, the primary market in which our freight services business operates.

Today’s business environment requires companies to continually improve the efficiency and cost-effectiveness of their distribution services while maintaining focus on core competencies. Companies face competitive pressures to reduce transportation costs and improve customer service and are increasingly recognizing the efficiencies of outsourcing. This trend towards outsourcing certain supply chain functions is driving the use of 3PL providers such as freight brokers, freight forwarders, customs brokers, warehouse providers, transportation management providers, and distribution companies.

Our Competitive Strengths

We believe the following competitive strengths will continue to drive our success in the future:

Leading value-added parcel return solution. We collaborated with the USPS during the development of the Parcel Return Service, or PRS, a USPS program that permits approved providers to retrieve returned parcels from designated USPS facilities. We were the first USPS approved PRS provider, and, as of April 2, 2011, we, United Parcel Service, Inc., or UPS, and FedEx Corporation, or FedEx, were the only approved PRS providers. During the 12-month period ended September 30, 2010, we shipped approximately 22.9 million parcel returns, representing approximately 80.4% of the returns shipped through the PRS program during that period. Our parcel return solution simplifies the returns process by offering consumers pre-paid return via pickup by the USPS at the consumer’s home or workplace or via drop-off at any USPS collection box or Post Office. We create and host customer-branded websites in which consumers can initiate returns or exchanges, obtain return shipping labels, arrange for pickup at their residences, and track parcels. Intelligent barcodes embedded in our Newgistics SmartLabel provide our customers with order, product, and consumer data more quickly, enabling them to more efficiently manage their transportation and returns processing resources.

Reliable and cost-effective integrated parcel return and delivery network. Our transportation network is designed to meet the growing demand from direct-to-consumer retailers for a reliable, cost-effective, and convenient return and delivery service. We use our technology platform to integrate our SmartCenters and third-party carriers and rely on the USPS first-mile and last-mile network to provide a reliable residential transportation service with end-to-end shipment visibility. Over 97% of the measurable parcels we shipped in fiscal 2010 were delivered in less than seven business days, averaging less than 3.7 business days from receipt by us or the USPS to delivery. Because we process both deliveries and returns within a single network, we are able to procure transportation capacity at a lower cost by purchasing from third-party transportation providers on a round-trip basis, which reduces the transportation costs they incur repositioning equipment for subsequent loads. As our parcel volumes increase and density in our SmartCenters and third-party carrier network increases, we believe we will be able to lower our transportation and processing cost per parcel and reduce parcel transit time.

Flexible and customizable parcel solutions. Our parcel solutions allow our customers to customize their parcel delivery and return processes to support their own unique supply chain, customer service, and marketing strategies. We handle a wide range of mail and parcel classifications and, unlike the major integrated express and parcel carriers, we allow our customers to combine both mail and parcels into one

 

 

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shipment for pickup by us or delivery to our SmartCenters. Our SmartCenters and technology platform are designed to be flexible, allowing customers to optimize their own internal fulfillment and outbound tendering procedures without having to conform to our system. Our proprietary technology platform allows our customers to customize parcel sorting and routing based on shipment, product, and consumer information.

Scalable proprietary information technology platform. Our proprietary, web-based ILM technology platform provides parcel visibility, shipment level data transfer and reporting, and consumer-interfacing tools. We have invested significant resources in developing our industry leading ILM suite of solutions and enterprise tools. Our proprietary technology platform is capable of handling a significant increase in the number of customers we serve and shipments we process with minimal additional capital investment. Our applications can be integrated into our customers’ order, warehouse, billing, consumer relationship, and financial management systems, enabling real-time data transfer and customized data reporting based on the customer’s own preferences. We expect to continue to develop and offer new solutions to improve the efficiencies and performance of our customers’ supply chains, lower their operating costs, and enhance the satisfaction of their consumers.

High level of customer service. We have built our business on the principle of superior customer service, which is critical to our success. Each parcel solutions customer is assigned a dedicated account manager who is responsible for customer service. We train and empower our account managers and customer service representatives to resolve customer concerns as quickly as possible. Account managers are also responsible for identifying opportunities for improvement in our customers’ parcel processes and working with our sales, operations, and technology teams to design and implement enhancements to improve their performance. We operate a 24-hour customer call center where our team of customer service representatives are available via telephone, instant messaging, or e-mail to provide assistance regarding parcel tracking, handling instructions, shipment data transfer, or any other matter. We utilize a proactive customer service process to identify opportunities to do more for our customers and to increase customer retention.

Long-term relationships with our parcel solutions customers. Our parcel solutions customers include many leading U.S. direct-to-consumer retailers, consumer electronics manufacturers, and third-party logistics and fulfillment providers. We have established long-term relationships with many of our parcel solutions customers. Most of our parcel services contracts have initial terms of one to three years. We have experienced an 87.4% renewal rate of parcel solutions contracts expiring during the past three fiscal year period.

Non-asset based business model. Our non-asset based operating model enables us to scale our business up and down in response to changing business conditions. Furthermore, our operating model requires no investment in transportation equipment and minimal investment in facilities, which we believe enhances our returns on invested capital and assets. We obtain all of our network transportation capacity from third-party transportation providers and utilize the USPS for last-mile delivery and first-mile parcel pickup. All of our SmartCenter facilities are leased. Our net capital expenditures for fiscal 2008, 2009, and 2010, were $3.5 million, $2.9 million, and $2.2 million respectively, which represented 2.7%, 1.7%, and 1.3% of our total revenue, respectively. We believe our non-asset based business model enhances our ability to grow our revenue with relatively minimal capital investment.

Experienced senior management and postal operations team. We have attracted a knowledgeable and talented senior management team with extensive industry experience and a complementary mix of operational and technical capabilities, sales and marketing experience, and financial management skills. Our management team is led by our Chief Executive Officer, William J. Razzouk. Mr. Razzouk has substantial

 

 

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industry experience and previously has held various management positions with FedEx, ultimately serving as the Executive Vice President, Worldwide Customer Operations. We also have a postal operations team with extensive operational management experience with the USPS.

Our Strategy

Our objective is to strengthen our position as a leading provider of parcel transportation solutions and grow our parcel solutions and freight services businesses through the following strategies:

Expand our customer base. We intend to develop new long-term customer relationships by capitalizing on our leadership in parcel return solutions, our scalable technology, and our experience in the direct-to-consumer retail market. Historically, we have targeted high-volume, direct-to-consumer retailers that we believe value our solutions-based approach. Recently, we hired additional marketing and sales leadership and developed a targeted marketing strategy to expand our presence with middle market direct-to-consumer retailers. We also developed new technology solutions to facilitate the adoption of our solutions by these customers. We plan to continue to hire additional sales representatives, develop new technology solutions, and increase the use of demand-generation tools to identify and acquire new customers. We will continue to pursue high-volume, direct-to-consumer parcel customers as a significant component of our growth strategy.

Further penetrate our existing base of rapidly growing customers. We believe our existing customer base presents a significant opportunity for future growth. According to the U.S. Census Bureau, the electronic shopping and mail-order retail industry, the industry in which many of our parcel solutions customers participate, grew over three times faster than the overall retail industry from 2000 to 2010. We initiated our parcel return services in 2002 and established significant scale in return volumes before adding our delivery service offering in 2008. Many of our existing parcel returns customers would benefit from the operating efficiency and cost reduction we believe is achievable by also purchasing their parcel delivery solutions from us. In addition, we intend to expand our service offerings with our existing customers through the continued enhancement of our technology and processing capabilities.

Increase volumes to leverage existing parcel solutions infrastructure. In order to achieve our service delivery time commitments, we operate a scheduled transportation network that requires our transportation providers to depart our SmartCenters at a designated time regardless of shipment volumes. Although we do not own or lease transportation assets, our scheduled network design results in inherent operating leverage in our business model. As parcel volumes increase and excess purchased transportation capacity is absorbed, we achieve higher levels of capacity utilization resulting in a decrease in our transportation and processing cost per parcel. Our SmartCenter network and technology platform are capable of handling large increases in parcel volume with minimal additional capital investment or corresponding increases in operating costs. For example, the number of parcels shipped through our network increased from 26.8 million in fiscal 2008 to 41.3 million in fiscal 2010, or 54.1%, while our parcel solutions segment operating expenses increased from $18.9 million to $21.8 million, or 15.3%, during the same period.

Selectively pursue strategic acquisitions. We intend to actively pursue acquisitions of non-asset or asset-light logistics providers that complement our existing services and capabilities, diversify and further penetrate our customer base, and accelerate our earnings growth.

 

 

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Risks Affecting Us

Our business is subject to a number of risks that you should understand before making an investment decision. These risks are discussed more fully in the section titled “Risk Factors” following this prospectus summary. Some of these risks are:

 

   

current and future competition could impair our business operations and financial condition;

 

   

we rely on the USPS to provide our parcel solutions;

 

   

a significant portion of our revenue is derived from a limited number of customers, and any loss of, or significant decrease in parcel volume from, these customers could harm our results of operations. QVC and GENCO ATC accounted for 28.0% and 11.5% of our revenue in fiscal 2010, respectively, and our top ten customers collectively accounted for 57.4% of our revenue in fiscal 2010;

 

   

if our third-party carriers do not meet our needs or expectations, or those of our customers, our business could suffer;

 

   

any disruption in operations at our SmartCenter facilities could lead to significant costs and could reduce our revenue, harm our business reputation, and have a material adverse effect on our financial results; and

 

   

our business is particularly sensitive to changes in the economy, and the current U.S. and global economic climate may pose additional risks and exacerbate existing risks to our business.

Corporate Information

We were incorporated in December 1999 and are headquartered in Austin, Texas. Our principal executive offices are located at 2700 Via Fortuna, Suite 300, Austin, Texas 78746. Our telephone number is (512) 225-6000. Our website address for our operations is www.newgistics.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

Newgistics®, SmartLabel®, Intelligent Returns Management®, Returns Marketing®, ReturnCart®, ReturnValet®, Advance Return Notification®, and “Returns Aren’t Just Boxes. They’re Customers®” are registered trademarks in the United States and are the property of Newgistics, Inc. Our unregistered trademarks include: Carrier Pickup, Intelligent Logistics Management™, Flexship™, OneShip, SmartCenter™, and “Shipping Has A New Home™.” This prospectus contains additional trade names, trademarks, and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

 

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THE OFFERING

 

Common stock offered by us

            shares

 

Common stock offered by selling stockholders

            shares

 

Common stock to be outstanding after this offering

            shares

 

Over-allotment option

            shares

 

Use of proceeds

We intend to use our net proceeds from this offering primarily to redeem all of the outstanding shares of our series F preferred stock and accrued dividends thereon for approximately $12.2 million and general corporate purposes, including working capital. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See the section titled “Use of Proceeds.”

 

Proposed NASDAQ Global Select Market symbol

NEWG

The number of shares of common stock to be outstanding after this offering is based on 624,292,507 shares of our common stock outstanding as of April 2, 2011. Such number excludes:

 

   

115,146,802 shares issuable upon the exercise of options outstanding as of April 2, 2011, having a weighted-average exercise price of $0.07 per share;

 

   

5,446,906 shares issuable upon the exercise of warrants outstanding as of April 2, 2011, having a weighted-average exercise price of $0.12 per share; and

 

   

37,527,554 additional shares available after April 2, 2011 for future grant under our 2011 Equity Incentive Plan, or 2011 Equity Plan.

Except as otherwise indicated, all information in this prospectus reflects and assumes (i) the reverse split of each outstanding share of our common stock into             of a share of common stock prior to the effectiveness of the registration statement of which this prospectus is a part, (ii) the conversion of our preferred stock, other than series F preferred stock, into shares of common stock, (iii) no exercise by the underwriters of their over-allotment option, and (iv) no exercise of options or warrants outstanding as of April 2, 2011.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following summary historical consolidated financial and other data for fiscal years 2008, 2009, and 2010 are derived from our audited consolidated financial statements. The following summary historical financial and other data for the three months ended April 3, 2010 and April 2, 2011 are derived from our unaudited consolidated financial statements and related notes included elsewhere in this prospectus. Our fiscal year ends on the Saturday closest to December 31 and consists of either 52 weeks or, as was the case for fiscal 2008, 53 weeks. Our 2008, 2009, and 2010 fiscal years ended on January 3, 2009, January 2, 2010, and January 1, 2011, respectively. You should read this data together with our audited consolidated financial statements and related notes included elsewhere in this prospectus and the information under the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” See note 2 to our audited consolidated financial statements for a description of the calculation of basic and diluted net income (loss) per share. Additionally, our historical results are not necessarily indicative of the results expected for any future period.

 

 

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    Fiscal Year     First Fiscal Quarter  
    2008     2009     2010         2010             2011      
          (unaudited)  
    (in thousands, except per share and average
parcel yield amounts)
 

Revenue

  $ 129,316      $ 168,714      $ 174,562      $ 42,672      $ 50,927   

Cost of revenue

    98,582        132,044        132,831        32,632        38,810   
                                       

Gross profit

    30,734        36,670        41,731        10,040        12,117   

Operating expenses:

         

Selling, general and administrative

    25,126        26,060        26,113        6,458        7,816   

Research and development

    1,742        2,205        2,231        591        309   
                                       

Total operating expenses

    26,868        28,265        28,344        7,049        8,125   

Income from operations

    3,866        8,405        13,387        2,991        3,992   

Other income (expense):

         

Interest and other income (expense), net

    104        62        10        9        1   

Change in fair value of interest rate swap

    (341     174        145        34        21   

Change in fair value of preferred stock warrant liability

    -          1,907        7,262        1,432        126   

Interest expense, including amortization of debt discount

    (1,425     (1,454     (939     (330     (25
                                       

Other income (expense), net

    (1,662     689        6,478        1,145        123   
                                       

Income (loss) before income taxes

    2,204        9,094        19,865        4,136        4,115   

Income tax benefit (expense)

    1,617        4,054        1,565        523        (2,051
                                       

Net income

  $ 3,821      $ 13,148      $ 21,430      $ 4,659      $ 2,064   
                                       

Net income (loss) attributable to common stockholders:

         

Basic

  $ (2,243   $ 792      $ 3,004      $ 687      $ 232   

Diluted

  $ (2,243   $ 1,333      $ 14,168      $ 3,227      $ 1,938   

Net income (loss) per share attributable to common stockholders:

         

Basic

  $ (0.03   $ 0.01      $ 0.04      $ 0.01      $ 0.00   

Diluted

  $ (0.03   $ 0.01      $ 0.02      $ 0.00      $ 0.00   

Weighted-average shares used in computing net income (loss) per share attributable to common stockholders:

         

Basic

    74,321        74,357        76,156        74,351        76,803   

Diluted

    74,321        133,832        870,361        892,414        759,937   

Pro forma net income attributable to common stockholders (unaudited):

         

Net income

      $ 21,430      $ 4,659      $ 2,064   

Change in fair value of preferred stock warrant liability

        (7,262     (1,432     (126
                           

Pro forma net income attributable to common stockholders (unaudited)

      $ 14,168      $ 3,227      $ 1,938   

Pro forma net income per share attributable to common stockholders (unaudited):

         

Basic

      $ 0.02      $ 0.01      $ 0.00   

Diluted

      $ 0.02      $ 0.00      $ 0.00   

Pro forma weighted-average shares used in computing pro forma and pro forma as adjusted net income per share attributable to common stockholders (unaudited) (1):

         

Basic

        628,277        626,472        628,924   

Diluted

        697,859        695,953        701,669   

Pro forma as adjusted net income attributable to common stockholders (unaudited) (2):

         

Pro forma net income attributable to common stockholders (unaudited)

      $ 14,168      $ 3,227      $ 1,938   

Decrease in net deferred tax asset valuation allowance (2)

        (6,572     (1,069     -     
                           

Pro forma as adjusted net income attributable to common stockholders (unaudited) (2)

      $ 7,596      $ 2,158      $ 1,938   

Pro forma as adjusted net income per share attributable to common stockholders (unaudited) (2):

         

Basic

      $ 0.01      $ 0.00      $ 0.00   

Diluted

      $ 0.01      $ 0.00      $ 0.00   

Consolidated statement of cash flows data:

         

Net cash provided by (used in):

         

Operating activities

  $ 6,194      $ 7,066      $ 18,479      $ 4,153      $ 3,023   

Investing activities

  $ (10,559   $ (2,879   $ (2,229   $ (161   $ (692

Financing activities

  $ 1,891      $ (2,115   $ (17,311   $ (6,912   $ 82   

Other data:

         

Total capital expenditures

  $ 3,470      $ 2,883      $ 2,231      $ 163      $ 369   

Adjusted EBITDA (unaudited) (3)

  $ 7,567      $ 12,781      $ 18,166      $ 4,221      $ 5,230   

Parcel volume (number of parcels)

    26,752        37,930        41,282        10,035        11,469   

Average parcel yield

  $ 4.47      $ 4.23      $ 3.99      $ 4.03      $ 4.22   

Gross LTL carrier billings

  $ 121,096      $ 94,674      $ 104,537      $ 23,929      $ 28,874   

 

 

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(1)

Pro forma and pro forma as adjusted basic weighted-average shares outstanding reflect the (i) effect of the reverse split of each outstanding share of our common stock into              of a share of common stock prior to the effectiveness of the registration statement of which this prospectus is a part and (ii) conversion of our convertible preferred stock (using the if-converted method) into common stock, except for series F preferred stock, as though the conversion had occurred. Pro forma and pro forma as adjusted diluted weighted-average shares outstanding also reflects the effect of any dilutive stock options and warrants.

(2)

In fiscal 2010 and the first fiscal quarter of 2011, we decreased our valuation allowance for net deferred tax assets by $6.6 million and $1.1 million, respectively. As of April 2, 2011, no such valuation allowance remains. We have presented pro forma as adjusted net income attributable to common stockholders to remove the effect of the release of valuation allowance in fiscal 2010 as we do not expect a similar release in future years.

(3)

For further discussion regarding Adjusted EBITDA, see footnote (3) to the table in section titled “Selected Consolidated Financial and Other Data.”

 

     As of April 2, 2011  
     Actual     Pro
Forma (1)
     Pro Forma As
Adjusted (2)
 
     (in thousands)  
     (unaudited)  

Consolidated balance sheet data:

       

Cash

   $ 4,545      $ 4,545       $      

Working capital

     8,101        8,101      

Total assets

     50,954        50,954      

Long-term debt, including current portion

     -          -        

Convertible preferred stock warrant liability

     457        -        

Total liabilities

     12,351        11,894      

Redeemable convertible preferred stock

     123,837        12,237      

Stockholders’ equity (deficit)

   $ (85,234   $ 26,823       $      

 

(1)

The pro forma column in the balance sheet data table above reflects the (i) effect of the reverse split of each outstanding share of our common stock into             of a share of common stock prior to the effectiveness of the registration statement of which this prospectus is a part, (ii) automatic conversion of all of our outstanding convertible preferred stock, except for series F, into 546,674,400 shares of common stock upon the completion of this offering, and (iii) reclassification of the preferred stock warrant liability to common stock and additional paid-in capital immediately prior to the closing of this offering.

(2)

The pro forma as adjusted column in the balance sheet data table above reflects (i) the effect of the reverse split of each outstanding share of our common stock into             of a share of common stock, (ii) the automatic conversion of all of our outstanding convertible preferred stock, except for series F, into 546,674,400 shares of common stock upon the completion of this offering, (iii) the reclassification of the preferred stock warrant liability to common stock and additional paid-in capital immediately prior to the closing of this offering, (iv) our sale of            shares of common stock in this offering at the initial public offering price of $            per share, which is the mid-point of the price range on the cover of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us and the application of our net proceeds from this offering, and (v) our redemption of 85,017 remaining outstanding shares of series F preferred stock and payment of accrued dividends thereon for an aggregate amount of $12.2 million.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before deciding whether to purchase shares of our common stock. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained or incorporated by reference in this prospectus, including our consolidated financial statements and related notes.

Risks Related to Our Business

Current and future competition could impair our business operations and financial condition.

Competition in the direct-to-consumer parcel and third-party logistics, or 3PL, market is intense and highly sensitive to price and service level, especially in periods of little or no economic growth, such as the recent recession. We compete against asset-based and non-asset based transportation and logistics companies, some of which have greater financial and marketing resources than we do and more recognizable brands, including:

 

   

global asset-based integrated parcel carriers, such as FedEx Corporation, or FedEx, and United Parcel Service, Inc., or UPS;

 

   

parcel consolidators that utilize the first-mile and last-mile delivery capabilities of the USPS;

 

   

regional parcel service providers that offer services in a specific market segment or service area;

 

   

3PL providers that offer comprehensive transportation management solutions;

 

   

truckload carriers and less-than-truckload, or LTL, carriers; and

 

   

internal shipping departments of businesses with substantial transportation requirements.

Historically, we have lost customers due to price competition and at times have elected to reduce prices or delay price increases in response to competitive pressure. Further rate pressure may adversely affect our revenue and income from operations.

There are many competitive factors that could impair our operating results, including the following:

 

   

price competition by our competitors to gain or retain business, especially during times of declining growth rates in the economy, which competition may limit our ability to maintain or increase our rates, maintain our operating margins, or retain or grow our business;

 

   

the solicitation by shippers of bids from multiple carriers for their shipping needs and the resulting reduction in rates or loss of business to competitors;

 

   

additional competition if new competitors are attracted to the direct-to-consumer parcel market due to the market’s growth;

 

   

the development of competitive technology solutions by competitors with significant financial resources and experience in the direct-to-consumer parcel market; and

 

   

the offering by our competitors of comparable or a wider range of services.

Increased competition may lead to reduced revenue and profit margins, or a loss of market share, any of which could harm our business.

If the USPS ceases to provide services to us, or materially and adversely modifies the terms of such services, our financial results would be substantially and adversely affected.

We rely on the USPS network to provide our parcel solutions. Our shipping services contract with the USPS may be terminated by us or the USPS with 30 days’ notice for any reason, and by the Postal Regulatory Commission at any time, and the USPS may terminate our PRS contract upon 30 days’ notice if the USPS determines that we have not complied with certain material provisions of the PRS contract. Without the USPS,

 

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we would be forced to cease offering our parcel solutions, which represent a substantial majority of our revenue.

The USPS has the ability to modify postal rates and to change the terms of programs in which we participate on a periodic basis. Many of our parcel solutions customer contracts have limits on the size of any USPS price increase that can be passed on to our customers, and any significant price increases could make us less competitive.

Further, from time to time, the future of the USPS and its current network are evaluated by lawmakers seeking to reduce federal budgets by closing USPS locations or reducing USPS services. To the extent that any actions related to the USPS are implemented and have an adverse effect on the services or pricing provided by the USPS to us, our business and financial results could be adversely affected.

Additionally, any disruption or significant change within the USPS network could impact our current or future postage costs and the level of service we can provide to our customers.

A significant portion of our revenue is derived from a limited number of customers, and any loss of, or significant decrease in parcel volume from, these customers could harm our results of operations.

Historically, we have experienced significant customer concentration. Revenue from our two largest customers, QVC and GENCO ATC, accounted for 20.8% and 16.3% of our total revenue in fiscal 2009, respectively, and 28.0% and 11.5% of our total revenue in fiscal 2010, respectively. Revenue from our ten largest customers in each of fiscal 2009 and 2010 together accounted for 57.8% and 57.4% of our total revenue, respectively. We are likely to continue to experience ongoing customer concentration. The loss or significant reduction of business from one or more of our major customers would adversely affect our results of operations. In addition to the loss of revenue, our network efficiency and margins on our remaining business would be adversely affected at reduced volumes.

If our third-party carriers do not meet our needs or expectations, or those of our customers, our business could suffer.

The success of our business depends on our ability to meet our customers’ service expectations. We do not own or control the transportation assets or operations of the carriers that transport our customers’ parcels or freight, and we do not employ the people directly involved in delivering the parcels or freight. In addition to the USPS, we rely on other independent third-parties, including our competitors, to provide truckload, LTL, and courier services. If we are unable to secure sufficient and quality transportation services to meet our commitments to our customers, our customers might switch to our competitors temporarily or permanently and our operating results could be adversely affected. Many of these risks are beyond our control and difficult to anticipate, including:

 

   

quality issues with respect to services provided by the carriers that transport our customers’ parcel or freight;

 

   

changes in rates charged by transportation providers;

 

   

supply shortages in the transportation industry;

 

   

interruptions in service or stoppages in transportation as a result of labor disputes;

 

   

negligence, theft, or other damage to assets being shipped; and

 

   

changes in regulations impacting the transportation industry.

If any of the third parties we rely on do not meet our needs or expectations, or those of our customers, our professional reputation may be damaged and our business could be harmed.

 

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Any disruption in operations at our SmartCenter facilities could lead to significant costs and could reduce our revenue, harm our business reputation, and have a material adverse effect on our financial results.

We process each parcel we transport in one of our six SmartCenter facilities. Please see the section titled “Business—Facilities.” Any destruction, failure, impairment, or downtime in one of our SmartCenter facilities could affect a significant percentage of our parcel solutions customers. The destruction, failure, or impairment of any of our SmartCenter facilities would require us to redistribute parcels to our remaining SmartCenter facilities and could result in a significant increase in the time it takes us to process and transport parcels. Since our ability to attract and retain customers depends on our ability to provide customers with reliable and timely service, interruptions in our service could harm our reputation. The services we provide are subject to failure resulting from numerous factors, including:

 

   

human error or accidents;

 

   

power loss;

 

   

equipment failure;

 

   

improper building maintenance in the buildings in which our facilities are located;

 

   

security breaches;

 

   

fires, earthquakes, hurricanes, tornadoes, floods, and other natural disasters;

 

   

epidemics;

 

   

water damage;

 

   

terrorism;

 

   

theft, sabotage, and vandalism; and

 

   

failure by us or our vendors to provide adequate service to our equipment.

Any interruptions could cause our customers to seek damages for losses incurred, require us to replace existing equipment, damage our reputation, cause existing customers to cancel or elect to not renew their contracts with us, and make it more difficult for us to attract new customers. Any of these events could materially increase our expenses or reduce our revenue, which would have a material adverse effect on our operating results.

Our business is particularly sensitive to changes in the economy. The current U.S. and global economic climate may pose additional risks and exacerbate existing risks to our business.

The transportation industry is especially susceptible to trends in economic activity, such as the recent recession. Our primary business is to transport goods, so our business levels are directly tied to the purchase and production of goods—key macro-economic measurements. When individuals and businesses purchase and produce fewer goods, fewer goods are transported. Additionally, economic conditions may adversely affect our customers’ business levels, the amount of services they need, and their ability to pay for our services. Continued or increased economic weakness could have a material adverse effect on our business or financial condition.

If our senior management team and our postal operations team do not remain with us in the future, our business, operating results, and financial condition could be adversely affected.

We have been successful in attracting a knowledgeable and talented senior management team and postal operations team. Our future success will depend to a significant extent on the continued services of the members of our senior management team and our postal operations team. The loss of services provided by any

 

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one of these individuals could adversely affect our business, operating results and financial condition, and could divert senior management time in searching for one or more replacements.

If we are unable to attract additional sales representatives, or if a significant number of our sales representatives leave us, our ability to increase our revenue could be negatively impacted.

Our ability to expand our business will depend, in part, on our ability to attract additional sales representatives. Competition for qualified sales representatives can be intense, and we may be unable to hire them when we need them or at all. Any difficulties we experience in attracting additional sales representatives could have a negative impact on our ability to expand our customer base, increase revenue, and continue our growth.

In addition, we must retain our current sales representatives and properly incentivize them to obtain new customers. If a significant number of our sales representatives were to leave us or join our competitors, our revenue could be negatively impacted. In certain circumstances, we have entered into agreements with our sales representatives that contain non-compete provisions to mitigate this risk, but we may need to litigate to enforce our rights under these agreements, which could be time-consuming, expensive, and ineffective. A significant increase in the turnover rate among our current sales representatives could also increase our recruiting costs and decrease our operating efficiency, which could lead to a decline in the demand for our services.

If we are unable to maintain the level of service we currently provide to our customers, our reputation may be damaged, resulting in a loss of business.

We compete with other transportation providers based on reliability, delivery time, security, visibility, and personalized service. If we are unable to deliver our services in a timely, reliable, secure, and personalized manner while providing visibility into delivery or return status of our parcels, our reputation and business may suffer.

We may not be able to continue to add new customers, and retain and increase sales to our existing customers, which could adversely affect our operating results.

Our revenue growth is dependent on our ability to continually attract new customers and retain existing customers, while expanding our service offerings. Growth in the demand for our solutions may be inhibited, and we may be unable to sustain growth in our customer base for a number of reasons, including, but not limited to:

 

   

challenges in marketing our solutions in a cost-effective manner to new customers or in new markets;

 

   

difficulty in expanding sales to existing customers;

 

   

our inability to build and promote our brand; and

 

   

real or perceived problems with our delivery time, reliability, security, visibility, or service.

Our obligation to pay the USPS and other carriers is not contingent upon receipt of payment from our customers, and we extend credit to certain customers as part of our business model.

In our parcel solutions business, we take full risk of credit loss for the transportation services we procure from the USPS and other carriers. Our obligation to pay our carriers is not contingent upon receipt of payment from our customers. If any significant customer fails to pay for our services, our operating results would be negatively impacted.

We extend credit to certain customers in the ordinary course of business as part of our business model. By extending credit, we increase our exposure to uncollected receivables. The current economic conditions have resulted in an increasing trend of business failures, downsizing, and delinquencies, which may cause an

 

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increase in our credit risk. If we fail to monitor and manage effectively any increased credit risk, our immediate and long-term liquidity may be adversely affected.

If we are unable to maintain our proprietary, web-based technology platform, our business would be adversely affected.

The provision and application of information technology is an important competitive factor in the direct-to-consumer parcel market. Among other things, our information systems must frequently interact with those of our customers and transportation providers. Our future success will depend on our ability to deploy technology that meets industry standards and customer demands. Although there are redundancy systems and procedures in place, the failure of the hardware or software that supports our information technology systems could significantly disrupt customer workflows and cause economic losses for which we could be held liable and which would damage our reputation.

We rely heavily on our proprietary, web-based technology platform to track and store externally and internally generated market data, analyze the capabilities of our carrier network, and select cost-effective carriers in the appropriate transportation mode. To keep pace with changing technologies and customer demands, we must correctly interpret and address market trends and enhance the features and functionality of our proprietary technology platform in response to these trends, which may lead to significant ongoing research and development costs. We may be unable to accurately determine the needs of our customers and the trends in the direct-to-consumer parcel market or to design and implement the appropriate features and functionality of our technology platform in a timely and cost-effective manner, which could result in decreased demand for our services and a corresponding decrease in our revenue. Despite testing, we may be unable to detect defects in existing or new versions of our proprietary software, or errors may arise in our software. Any failure to identify and address such defects or errors could result in loss of revenue or market share, liability to customers or others, diversion of resources, injury to our reputation, and increased service and maintenance costs. Correction of such errors could prove to be impossible or very costly, and responding to resulting claims or liability could similarly involve substantial cost.

In addition, our competitors may have or may develop information technology systems that permit them to be more cost-effective and otherwise better situated to meet customer demands than we are able to develop. Larger competitors may be able to develop or license information technology systems more cost-effectively than we can by spreading the cost across a larger customer base, and competitors with greater financial resources may be able to develop or purchase information technology systems that we cannot afford. If we fail to meet the demands of our customers or protect against disruptions of both our and our customers’ operations, we may lose customers, which could seriously harm our business and adversely affect our operating results and operating cash flow.

Further, we license from third parties a variety of software that is used in our technology platform. As a result, the success and functionality of our technology platform is dependent upon our ability to continue to license the software components upon which it is built. There can be no assurances that we will be able to maintain these licenses or replace the functionality provided by this software on commercially reasonable terms or at all. Additionally, while we are not aware of any infringement, we could be subject to claims of infringement in the future. The failure to maintain these licenses or any significant delay in the replacement of, or interference in, our use of this software or any claims of infringement, even those without merit, could have a material adverse effect on our business, financial condition, and results of operations.

Our ability to provide our proprietary, web-based services relies heavily on our telecommunication service providers, our electronic delivery systems, and the internet, which exposes us the risk of increased prices and disruptions of essential services.

Our ability to deliver our proprietary, web-based services depends upon the capacity, reliability, and security of services provided to us by our telecommunication service providers, our electronic delivery systems, and the

 

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internet. We have little or no control over the operation, quality, or maintenance of these services or whether the vendors will improve their services or continue to provide services that are essential to our business. In addition, our telecommunication service providers may increase the prices at which they provide services, which would increase our costs. If our telecommunication service providers were to cease to provide essential services or to significantly increase their prices, we could experience significant delays in obtaining new or replacement services, which could significantly harm our reputation and could cause us to lose customers and revenue. Moreover, our ability to deliver information using the internet may be impaired because of infrastructure failures, service outages at third-party internet providers, or increased government regulation. If disruptions, failures, or impairments of our electronic delivery systems or the internet occur, our ability to effectively provide technology-enabled transportation and supply chain management services and to serve our customers could be impaired.

A significant privacy breach could adversely affect our business, and we may be required to increase our spending on data security.

The provision of service to our customers and the operation of our network involve the storage and transmission of proprietary information and sensitive or confidential data, including personal information of customers, employees, and others. Breaches in security could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information, resulting in litigation and potential liability for the company, as well as the loss of existing or potential customers, damage to our brand and reputation, or disruptions in our operations. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

We may not be able to identify suitable acquisition candidates, effectively integrate newly acquired businesses, or achieve expected operating results from acquisitions.

Part of our growth strategy is to increase our revenue and improve our operating results through the acquisition of complementary businesses. There can be no assurance that suitable candidates for acquisitions will be identified or, if suitable candidates are identified, that acquisitions can be completed on acceptable terms, if at all.

In 2007, we added parcel delivery solutions and freight transportation management services through our acquisitions of Cornerstone Shipping Solutions, Inc. and Newgistics Freight Services, Inc., formerly known as Logistics Management, Inc. We may continue to make acquisitions in the future. The success of our acquisitions will depend on our ability to identify, negotiate, complete, and integrate businesses and, if necessary, to obtain satisfactory debt or equity financing to fund those acquisitions. If we finance an acquisition with debt financing, we will incur interest expense and may have to comply with financing covenants or secure that debt obligation with our assets. Further, mergers and acquisitions are inherently risky, and any mergers and acquisitions we complete may not be successful. Any mergers and acquisitions we do would involve numerous risks, any of which could have a material adverse effect on our business and the market price of our common stock, including the following:

 

   

failure of the acquired company to achieve anticipated revenue, earnings, or cash flows;

 

   

assumption of liabilities that were not disclosed to us or that exceed our estimates;

 

   

difficulties in integrating and managing the combined operations, technologies, and service offerings;

 

   

diversion of our management’s attention or other resources from our existing business;

 

   

our inability to maintain the key business relationships and the reputations of the businesses we acquire;

 

   

uncertainty of entry into markets in which we have limited or no prior experience or in which competitors have stronger market positions;

 

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our dependence on unfamiliar affiliates and partners of the companies we acquire;

 

   

insufficient revenue to offset our increased expenses associated with acquisitions;

 

   

our responsibility for the liabilities of the businesses we acquire;

 

   

our inability to maintain internal standards, controls, procedures, and policies;

 

   

potential accounting charges;

 

   

potential loss of key employees of the companies we acquire; and

 

   

dilution of our stockholders’ ownership interests if we finance all or any portion of the purchase price of any acquisition by issuing equity.

If we fail to protect our intellectual property rights, our competitive position could be harmed or we could incur significant expense to enforce our rights.

We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws, and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain. We have two issued patents, which may be contested, circumvented, or invalidated. Further, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented, or invalidated. Moreover, the rights granted under any issued patents may not provide us with a competitive advantage, and, as with any technology, competitors may be able to develop similar or superior technologies to our own, now or in the future. For example, our Intelligent Returns Management, or IRM, solution incorporates our patented technology. As a substantial portion of our total revenue is generated from customers that use IRM, any loss of our patent rights or circumvention of our patents by competitors may result in a loss of competitive advantage and could adversely affect our operating results.

In addition to patented technology, we rely upon unpatented proprietary technology, processes, and know-how. We generally seek to protect this information in part by entering into confidentiality agreements with our employees, consultants, and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected, which could in turn adversely affect our business, financial condition, and results of operations.

Protecting against the unauthorized use of our trademarks and other proprietary rights is expensive, difficult, time consuming, and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets, or to determine the validity or scope of the proprietary rights of others. Such litigation could result in substantial cost and diversion of management resources, either of which could harm our business, financial condition, and operating results. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Significant fluctuations in LTL prices and capacity could have an adverse impact on our freight services business.

We negotiate contract rate schedules with LTL carriers on behalf of our freight services customers. These rate schedules are established in contracts between us and the LTL carriers and are generally fixed for one year,

 

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providing our customers with the assurance of fixed transportation rates and fuel surcharge schedules for one year. However, our customers are not obligated to use us exclusively for their freight services needs. Significant fluctuations in LTL prices or capacity could result in a lower “spot” rate, or the rate charged for a single shipping transaction, which could make our prices less competitive and cause customer attrition, which could result in an adverse impact on our revenue and operating results.

We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute your ownership of our common stock.

After this offering, we will have an aggregate of             shares of common stock authorized but unissued and not reserved for issuance under our stock option plans or otherwise. We may issue all of these shares without any action or approval by our stockholders, subject to certain limitations of the NASDAQ Global Select Market. We may require additional capital from equity or debt financing in the future in order to take advantage of strategic opportunities, including more rapid expansion of our business or the acquisition of complementary service offerings, technologies, or businesses, or simply to provide capital to support our existing business. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds or finance acquisitions through further issuances of equity, convertible debt securities, or other securities convertible into equity, you and our other stockholders could suffer significant dilution in your percentage ownership of our company, and any new securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

We are subject to claims arising from services provided by third-party carriers we engage for transportation services.

We use the services of various third-party transportation carriers. From time to time, the drivers employed and engaged by the carriers with whom we contract are involved in accidents which may result in damage to parcels or serious personal injuries. In addition, from time to time, parcels may be lost, stolen, or otherwise damaged during transport. The resulting types and amounts of damages may be excluded by or exceed the amount of insurance coverage maintained by the contracted carrier. Although these drivers are not our employees and all of these drivers are employees, owner-operators, or independent contractors working for carriers, claims have been and, in the future may be, asserted against us for their actions, or for our actions in retaining them. Claims against us may exceed the amount of our insurance coverage, or may not be covered by insurance at all. A material increase in the frequency or severity of accidents, liability claims, or workers’ compensation claims, or unfavorable resolutions of claims could materially and adversely affect our customer relationships and operating results. In addition, significant increases in insurance costs or the inability to purchase insurance as a result of these claims could reduce our profitability.

If our employees were to unionize, our operating costs would likely increase.

Our employees are not currently represented by a collective bargaining agreement. However, we have no assurance that our employees will not unionize in the future, which could increase our operating costs, force us to alter our operating methods, and have a material adverse effect on our operating results.

We are subject to business risks and increasing costs associated with the direct-to-consumer parcel and 3PL markets, including seasonality, that are largely out of our control, any of which could have a material adverse effect on our business, financial condition, and results of operations.

We are subject to business risks and increasing costs associated with the direct-to-consumer parcel and 3PL markets that are largely out of our control, any of which could adversely affect our business, financial condition, and results of operations. The factors contributing to these risks and costs include weather, excess

 

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capacity in the transportation industry, terrorist attacks, rising insurance premiums, the risk of outbreak of epidemics, and the risk of widespread disruption of our technology systems. Our results of operations may also be affected by seasonal factors.

We may be sued by third parties for infringement of their intellectual or proprietary rights.

Our use of our proprietary, web-based technology to provide our services could be challenged by claims that such use infringes, misappropriates or otherwise violates the intellectual property rights of a third party. Any intellectual property claims, with or without merit, could be time-consuming and costly to resolve, could divert management’s attention from our business, and could require us to pay substantial monetary damages. Any settlement or adverse judgment resulting from such a claim could require us to enter into a licensing agreement to continue using the technology that is the subject of the claim, or could otherwise restrict or prohibit our use of such technology. There can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all, from the party asserting an infringement claim, or that we would be able to develop or license a suitable alternative technology to permit us to continue offering the affected services to our customers. A claim, with or without merit, could result in substantial costs and divert management’s attention.

Inflation could materially increase our operating expenses, which could have a material adverse affect on our results of operations.

Inflation can have an impact on our operating costs. Inflation could cause interest rates, fuel, wages, and other costs to increase, which would adversely affect our results of operations unless freight rates correspondingly increase, in the case of our freight services business, and unless we are able to increase prices, in the case of our parcel solutions business.

High fuel prices may increase third-party carrier prices, and to the extent we are unable to pass such increased costs on to our customers, our financial results would be adversely affected.

Fuel prices have increased in 2011 and continue to be volatile and difficult to predict. In the event fuel prices continue to rise, third-party carriers can be expected to charge higher prices to cover their higher operating expenses. Our gross profits and income from operations will be adversely affected if we are unable to pass these increased expenses to our customers through fuel surcharges or otherwise.

 

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Risks Related to this Offering and Ownership of Our Common Stock

The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the initial public offering price.

The trading price of our common stock following this offering may be highly volatile and could be subject to wide fluctuations in response to various factors, including but not limited to, those described in this “Risk Factors” section, some of which are beyond our control. Furthermore, our common stock has no prior trading history. Factors affecting the trading price of our common stock will include:

 

   

variations in our operating results or the operating results of similar companies;

 

   

announcements of technological innovations, new services or service enhancements, and strategic alliances or agreements by us or by our competitors;

 

   

marketing and advertising initiatives by us or our competitors;

 

   

the gain or loss of customers;

 

   

threatened or actual litigation;

 

   

recruitment or departure of senior management or postal operations personnel;

 

   

changes in the estimates of our operating results or changes in recommendations by any securities analysts that follow our common stock;

 

   

market conditions in our industry, the industries of our customers, and the economy as a whole;

 

   

the overall performance of the equity markets;

 

   

sales of shares of our common stock by existing stockholders;

 

   

volatility in our stock price, which may lead to higher stock-based compensation expense under applicable accounting standards; and

 

   

adoption or modification of regulations, policies, procedures, or programs applicable to our business.

In addition, the stock market in general, and the markets for technology or parcel and freight transportation services companies, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may harm the market price of our common stock regardless of our actual operating performance. These fluctuations may even be more pronounced in the trading market for our stock shortly following this offering. Each of these factors, among others, could adversly affect your investment in our common stock. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert management’s attention.

Our securities have no prior market and our stock price may decline after the offering.

Prior to this offering, there has been no public market for shares of our common stock. Although we have applied to have our common stock quoted on the NASDAQ Global Select Market, an active public trading market for our common stock may not develop or, if it develops, may not be maintained after this offering. We and the representatives of the underwriters will negotiate to determine the initial public offering price. The initial public offering price may be higher than the trading price of our common stock following this offering. As a result, you could lose all or part of your investment.

 

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Insiders will continue to have substantial control over us after this offering, which may limit our stockholders’ ability to influence corporate matters and delay or prevent a third party from acquiring control over us.

Upon completion of this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately     % of our outstanding common stock compared to     % represented by the shares sold in this offering. Further, we anticipate that Kenneth P. DeAngelis and Philip S. Siegel, members of our board of directors and general partners of Austin Ventures, and entities affiliated with Austin Ventures, will hold an aggregate of approximately         % of our common stock following this offering. This significant concentration of ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. In addition, these stockholders will be able to exercise influence over all matters requiring stockholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other stockholders. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, please see the section titled “Principal and Selling Stockholders.”

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Upon completion of this offering, we will have             shares of common stock outstanding. The shares sold in this offering will be immediately tradable without restriction. Of the remaining shares,             shares will be eligible for sale upon the expiration of lock-up agreements subject in some cases to volume and other restrictions under Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act, and various vesting agreements. In addition,             shares that are subject to outstanding options will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

The lock-up agreements expire 180 days after the date of this prospectus, except that the 180-day period may be extended in certain cases for up to 34 additional days under certain circumstances where we announce or pre-announce earnings or a material event occurs within approximately 17 days prior to, or approximately 16 days after, the termination of the 180-day period. The representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements.

Following this offering, holders of             % of our common stock not sold in this offering will be entitled to rights with respect to the registration of these shares under the Securities Act. Please see the section titled “Description of Capital Stock—Registration Rights.” If we register their shares of common stock following the expiration of the lock-up agreements, these stockholders could sell those shares in the public market without being subject to the volume and other restrictions of Rule 144 and Rule 701.

 

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After this offering, we intend to register approximately             shares of our common stock that we have issued or may issue under our equity plans. Of these shares,             shares will be eligible for sale upon the exercise of vested options after the expiration of the lock-up agreements.

Our management team has limited experience managing a public company, and compliance efforts may divert its attention from the day-to-day management of our business.

The individuals who now constitute our management team have limited experience managing a publicly traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition into a public company that will be subject to significant oversight and reporting obligations under federal securities laws. In particular, these new obligations will require substantial attention from our senior management and divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.

We will incur significant increased expenses and administrative burdens as a public company, which could have a material adverse effect on our operations and financial results.

We will face increased legal, accounting, administrative, and other costs and expenses as a public company that we do not incur as a private company. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the Securities and Exchange Commission, or SEC, the Public Company Accounting Oversight Board, and the NASDAQ Global Select Market, impose additional reporting and other obligations on public companies. We expect that compliance with public company requirements will increase our costs and make some activities more time-consuming. A number of those requirements will require us to carry out activities we have not done previously. For example, we will create new board committees and adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our SEC reporting requirements. For example, under Section 404 of the Sarbanes-Oxley Act, for our annual report on Form 10-K for our fiscal year ending December 30, 2012, we will need to document and test our internal control procedures, our management will need to assess and report on the effectiveness of our internal control over financial reporting, and our independent accountants will need to issue an opinion on the effectiveness of those controls. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our auditors identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation, or investor perceptions of us. We also expect that it will be more expensive to obtain director and officer liability insurance. Risks associated with our status as a public company may make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We expect that the additional reporting and other obligations imposed on us by these rules and regulations will increase our legal and financial compliance costs and the costs of our related legal, accounting, and administrative activities by approximately $1.0 million per year. These increased costs will require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives. Advocacy efforts by stockholders and third-parties may also prompt even more changes in governance and reporting requirements, which could further increase our costs.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business, and investors’ views of us.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. We are in the process of documenting,

 

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reviewing and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act, which requires annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent auditors. Both we and our independent auditors will be testing our internal controls in connection with the audit of our financial statements for the fiscal year ending December 30, 2012. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, harm our ability to operate our business, and reduce the trading price of our stock.

If securities or industry analysts do not publish research or publish unfavorable or misleading research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes unfavorable or misleading research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the market for our stock and demand for our stock could decrease, which could cause our stock price or trading volume to decline.

Because our initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock, new investors will experience immediate and substantial dilution as a result of this offering and future equity issuances.

We expect the initial public offering price per share of our common stock to be substantially higher than the pro forma as adjusted net tangible book value per share of our common stock based on the total value of our tangible assets less our total liabilities immediately following this offering. As a result, investors purchasing common stock in this offering will experience immediate and substantial dilution of approximately $            per share, the difference between the price you pay for our common stock and its pro forma as adjusted net tangible book value after the completion of this offering. Any issuance of shares in connection with the exercise of stock options or otherwise would dilute the percentage ownership held by the investors who purchase our shares in this offering.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay, or prevent a change in control of our company and may affect the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the stockholder becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. For more information, see the section titled “Description of Capital Stock—Anti-Takeover Effects of Our Charter and Bylaws and Delaware Law.” In addition, our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws, which will be in effect as of the closing of this offering:

 

   

authorize the issuance of “blank check” convertible preferred stock that could be issued by our board of directors to defend against a takeover attempt;

 

   

establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

 

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require that directors only be removed from office for cause and only upon a supermajority stockholder vote;

 

   

provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;

 

   

prevent stockholders from calling special meetings; and

 

   

prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. Any payment of future dividends will be at the discretion of our board of directors, subject to compliance with certain covenants contained in our credit facility, which limit our ability to pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. For more information, see the section titled “Dividend Policy.” Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay.

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply those proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. We expect to use approximately $12.2 million of the net proceeds from this offering to redeem our outstanding series F preferred stock and pay accrued dividends thereon, and the balance for general corporate purposes, including working capital and capital expenditures, which may in the future include investments in, or acquisitions of, complementary businesses, services or technologies. We have not allocated the net proceeds for general corporate purposes to any specific purpose. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how the net proceeds from this offering are used. For more information, please see the section titled “Use of Proceeds.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus, including the sections titled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this prospectus, other than statements of historical fact, are forward-looking. You can identify forward-looking statements by terminology such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” “will,” or “would” or the negative of these terms or similar expressions.

There are a number of important factors that could cause our actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this prospectus in the section titled “Risk Factors.” You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act which does not extend to initial public offerings. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity, and market share, is based on information from various sources (including the U.S. Census Bureau, Armstrong & Associates, The Colography Group in a report commissioned by us, other industry publications, surveys and forecasts, and our internal research) and on assumptions that we have made, which we believe are reasonable, based on those data and other similar sources and on our knowledge of the markets for our services. In addition, projections, assumptions, and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates included in this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $            , based upon an assumed initial public offering price of $            per share, the mid-point of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, the net proceeds to us will be approximately $            . A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the net proceeds to us from this offering (excluding any exercise of the over-allotment option) by approximately $            million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriter discounts and estimated offering expenses payable by us.

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. The selling stockholders include certain of our executive officers and members of our board of directors or entities affiliated with or controlled by them.

We intend to use approximately $12.2 million of the net proceeds from this offering to redeem all of the outstanding shares of our series F preferred stock, including approximately $3.7 million of accumulated and unpaid dividends on our outstanding shares of series F preferred stock, which accrued at a rate of 18% per annum on the original issue price of each such share of series F preferred stock from its original issuance date until March 9, 2007. All of the outstanding shares of our series F preferred stock are held by certain of our affiliates and, as a result, our affiliates will receive all of the $12.2 million of net proceeds from this offering used to redeem shares of our series F preferred stock.

Other than as described above, we do not have current specific plans for the use of a significant portion of the net proceeds from this offering. Our management will have broad discretion in the application of the net proceeds and investors will be relying upon the judgment of our management regarding their application. We generally intend to use the balance of the net proceeds of this offering for working capital and other general corporate purposes, including to finance our growth, develop new solutions, fund capital expenditures, or expand our existing business through investments in or acquisitions of other businesses, solutions, or technologies. However, we do not have agreements or commitments for any acquisitions at this time. Pending the uses mentioned above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. Neither Delaware law nor our amended and restated certificate of incorporation requires our board of directors to declare dividends on our common stock. Any future determination to declare cash dividends on our common stock will be made at the discretion of our board of directors, subject to compliance with certain covenants contained in our credit facility, which limit our ability to pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. We do not anticipate paying cash dividends on our common stock for the foreseeable future.

 

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CAPITALIZATION

The following table sets forth our capitalization as of April 2, 2011:

 

   

On an actual basis;

 

   

On a pro forma basis to give effect to the (i) reverse split of each outstanding share of common stock into             of a share of common stock prior to the effectiveness of the registration statement of which this prospectus is a part, and (ii) automatic conversion of all of our outstanding convertible preferred stock, except for series F preferred stock, into 546,674,400 shares of common stock upon the completion of this offering; and

 

   

On a pro forma as adjusted basis to give effect to the (i) reverse split of each outstanding share of common stock into             of a share of common stock prior to the effectiveness of the registration statement of which this prospectus is a part, (ii) automatic conversion of all of our outstanding convertible preferred stock, except for series F preferred stock, into 546,674,400 shares of common stock upon the completion of this offering, (iii) sale of             shares of common stock by us in this offering at an assumed initial public offering price of $            per share, the mid-point of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (iv) redemption of the 85,017 remaining outstanding shares of series F preferred stock and payment of accrued dividends thereon for approximately $12.2 million.

The pro forma as adjusted information set forth in the table below is for illustrative purposes only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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Index to Financial Statements

You should read the information in this table together with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

     As of April 2, 2011  
         Actual             Pro Forma         Pro Forma As
        Adjusted (1)         
 
     (in thousands, except share and per share amounts)  
     (unaudited)  

Cash and cash equivalents

   $ 4,545      $ 4,545      $                  
                        

Long-term debt, including current portion

   $ -        $ -        $      

Convertible preferred stock warrant liability

     457        -       

Redeemable convertible preferred stock $0.001 par value, 528,130,523 shares authorized and issuable in series, 499,491,871 shares issued and outstanding, actual; 528,130,523 shares authorized and issuable in series, 85,017 shares issued and outstanding, pro forma; no shares authorized, issued, or outstanding, pro forma as adjusted

     123,837        12,237     

Stockholders’ equity (deficit):

      

Undesignated preferred stock, $0.001 par value, no shares authorized, actual; no shares authorized, issued, and outstanding, pro forma; 5,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

     -          -       

Common Stock; $0.001 par value; 900,000,000 shares authorized, 77,618,107 shares issued and outstanding, actual; 900,000,000 shares authorized,             shares issued and outstanding, pro forma; 70,000,000 shares authorized,             shares issued and outstanding, pro forma as adjusted

     78        623     

Additional paid-in capital

     9,555        121,067     

Accumulated deficit

     (94,867     (94,867  
                        

Total stockholders’ equity (deficit)

     (85,234     26,823     
                        

Total capitalization

   $ 39,060      $ 39,060      $      
                        

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $            million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriter discounts and estimated offering expenses payable by us.

 

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DILUTION

As of April 2, 2011, we had pro forma net tangible book value of $13.7 million, or $            per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities plus the reclassification of the preferred stock warrant liability to additional paid-in capital and divided by the total number of shares of common stock outstanding, after giving effect to the reverse split of our common stock prior to the effectiveness of the registration statement of which this prospectus is a part and the conversion of our convertible preferred stock (other than our series F preferred stock) into shares of common stock upon the completion of this offering. Dilution per share to new investors in this offering represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the foregoing, the sale of             shares of common stock offered by us in this offering at an assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover page of this prospectus, our redemption of the 85,017 remaining outstanding shares of series F preferred stock and payment of accrued dividends thereon for approximately $12.2 million, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of April 2, 2011 would have been $             million, or $             per share of common stock. This represents an immediate increase in net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors in our common stock. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $                
           

Pro forma net tangible book value per share as of April 2, 2011, before giving effect to this offering

   $                   
           

Increase in net tangible book value per share attributable to new investors

     
           

Pro forma as adjusted net tangible book value per share as of April 2, 2011, after giving effect to this offering

     
           

Dilution per share to new investors in this offering

      $                
           

If the underwriters exercise their option to purchase additional shares of our common stock in full, the pro forma as adjusted net tangible book value per share after this offering would be $            per share, and the dilution per share to new investors in this offering would be $             per share.

The following table summarizes, on a pro forma basis as discussed above as of April 2, 2011 and after giving effect to the offering, based on an assumed initial public offering price of $             per share, the differences between existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us for such common stock and the average price per share paid.

 

     Shares Purchased     Total Consideration     Average
Price

Per  Share
 
      Number      Percent     Amount      Percent    

Existing stockholders

               $                             $                

New investors

            
                                    

Total

        100.0   $                      100.0  
                                    

If the underwriters exercise their over-allotment option in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering.

 

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If all our outstanding options and warrants had been exercised, as of April 2, 2011, we would have had a pro forma net tangible book value of $            million, or $            per share, and the pro forma as adjusted net tangible book value after this offering (excluding any exercise of the over-allotment option) would have been $             million, or $             per share, causing dilution to new investors of $             per share.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this prospectus. The selected consolidated financial data in this section is not intended to replace the financial statements and is qualified in its entirety by the consolidated financial statements and related notes thereto included elsewhere in this prospectus. We have derived the following consolidated statement of operations data for fiscal 2008, 2009, and 2010 and consolidated balance sheet data as of the end of fiscal 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the following consolidated statement of operations data for fiscal 2006 and 2007 and consolidated balance sheet data as of the end of fiscal 2006, 2007, and 2008 from our audited consolidated financial statements not included in this prospectus. The selected consolidated statements of operations data for the three months ended April 3, 2010 and April 2, 2011, and the selected consolidated balance sheet data as of April 2, 2011 are derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. See note 2 to our audited consolidated financial statements for a description of the calculation of basic and diluted net loss per share. Historical results are not necessarily indicative of future results.

 

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    Fiscal Year     First Fiscal Quarter  
    2006     2007     2008     2009     2010           2010             2011      
          (unaudited)  
    (in thousands, except per share and average parcel yield amounts)  

Revenue

  $ 82,236      $ 85,736      $ 129,316      $ 168,714      $ 174,562      $  42,672      $ 50,927   

Cost of revenue

    65,890        61,163        98,582        132,044        132,831        32,632        38,810   
                                                       

Gross profit

    16,346        24,573        30,734        36,670        41,731        10,040        12,117   

Operating expenses:

             

Selling, general and administrative

    12,676        17,094        25,126        26,060        26,113        6,458        7,816   

Research and development

    2,432        1,797        1,742        2,205        2,231        591        309   
                                                       

Total operating expenses

    15,108        18,891        26,868        28,265        28,344        7,049        8,125   

Income from operations

    1,238        5,682        3,866        8,405        13,387        2,991        3,992   

Other income (expense):

             

Interest and other income (expense), net

    5        32        104        62        10        9        1   

Change in fair value of interest rate swap

    -          -          (341     174        145        34        21   

Change in fair value of preferred stock warrant liability

    -          (13,591     -          1,907        7,262        1,432        126   

Interest expense, including amortization of debt discount

    (463     (1,427     (1,425     (1,454     (939     (330     (25
                                                       

Other income (expense), net

    (458     (14,986     (1,662     689        6,478        1,145        123   

Income (loss) before income taxes

    780        (9,304     2,204        9,094        19,865        4,136        4,115   

Income tax benefit (expense)

    -          (492     1,617        4,054        1,565        523        (2,051
                                                       

Net income (loss)

  $ 780      $ (9,796   $ 3,821      $ 13,148      $ 21,430      $ 4,659      $ 2,064   
                                                       

Net income (loss) attributable to common stockholders:

             

Basic

  $ (4,440   $ (29,696   $ (2,243   $ 792      $ 3,004      $ 687      $ 232   

Diluted

  $ (4,440   $ (29,696   $ (2,243   $ 1,333      $ 14,168      $ 3,227      $ 1,938   

Net income (loss) per share attributable to common stockholders:

             

Basic

  $ (0.06   $ (0.41   $ (0.03   $ 0.01      $ 0.04      $ 0.01      $ 0.00   

Diluted

  $ (0.06   $ (0.41   $ (0.03   $ 0.01      $ 0.02      $ 0.00      $ 0.00   

Weighted-average shares used in computing net income (loss) per share attributable to common stockholders:

             

Basic

    71,568        73,213        74,321        74,357        76,156        74,351        76,803   

Diluted

    71,568        73,213        74,321        133,832        870,361        892,414        759,937   

Pro forma net income attributable to common stockholders (unaudited):

             

Net income

          $ 21,430      $ 4,659      $ 2,064   

Change in fair value of preferred stock warrant liability

            (7,262     (1,432     (126
                               

Pro forma net income attributable to common stockholders (unaudited)

          $ 14,168      $ 3,227      $ 1,938   

Pro forma net income per share attributable to common stockholders (unaudited):

             

Basic

          $ 0.02      $ 0.01      $ 0.00   

Diluted

          $ 0.02      $ 0.00      $ 0.00   

Pro forma weighted-average shares used in computing pro forma and pro forma as adjusted net income per share attributable to common stockholders (unaudited) (1):

             

Basic

            628,277        626,472        628,924   

Diluted

            697,859        695,853        701,669   

Pro forma as adjusted net income attributable to common stockholders (unaudited) (2):

             

Pro forma net income attributable to common stockholders (unaudited)

          $ 14,168      $ 3,227      $ 1,938   

Decrease in net deferred tax asset valuation allowance (2)

            (6,572     (1.069     -     
                               

Pro forma as adjusted net income attributable to common stockholders (unaudited) (2)

          $ 7,596      $ 2,158      $ 1,938   

Pro forma as adjusted net income per share attributable to common stockholders (unaudited) (2):

             

Basic

          $ 0.01      $ 0.00      $ 0.00   

Diluted

          $ 0.01      $ 0.00      $ 0.00   

Other data:

             

Adjusted EBITDA (unaudited) (3)

  $ 1,724      $ 7,892      $ 7,567      $ 12,781      $ 18,166      $ 4,221      $ 5,230   

Parcel volume (number of parcels)

    17,605        15,947        26,752        37,930        41,282        10,035        11,469   

Average parcel yield

  $ 4.67      $ 4.96      $ 4.47      $ 4.23      $ 3.99      $ 4.03      $ 4.22   

Gross LTL carrier billings

  $ -        $ 94,244      $ 121,096      $ 94,674      $ 104,537      $ 23,929      $ 28,874   

 

(1)

Pro forma and pro forma as adjusted weighted-average shares outstanding reflect the (i) effect of the reverse split of each outstanding share of our common stock into             of a share of common stock prior to the effectiveness of the registration statement of which this prospectus is a part and (ii) conversion of our convertible preferred stock (using the if-converted method) into common stock, except for series F preferred stock, as though the conversion had occurred. Pro forma and pro forma as adjusted diluted weighted-average shares outstanding also reflects the effect of any dilutive stock options and warrants.

 

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(2)

Pro forma as adjusted net income per share attributable to common stockholders represents net income as adjusted to (i) exclude the income resulting from the change in fair value of our preferred stock warrant liability of $7.3 million and $0.1 million for fiscal year 2010 and the first fiscal quarter of 2011, respectively, and (ii) exclude the income tax benefit of $6.6 million and $1.1 million resulting from the release of our valuation allowance for our net deferred tax assets during fiscal 2010 and the first fiscal quarter of 2011, respectively. The preferred stock warrant liability will be reclassified to additional paid-in capital before or in connection with this offering and, accordingly, no change in fair value of such liability will occur after this offering. In fiscal 2010, we recorded an income tax benefit due to the release of our remaining valuation allowance for our net deferred tax assets. In periods subsequent to fiscal 2010, we expect to record income tax expense at an effective income tax rate of approximately 40%.

(3)

Adjusted EBITDA is calculated as net income (loss), plus net interest expense, including amortization of debt discount, provision for income taxes, depreciation and amortization expense, stock-based compensation expense, and the change in fair value of our interest rate swap and preferred stock warrant liability. Management uses Adjusted EBITDA as a supplemental measure in evaluating its operating performance and when determining executive incentive compensation. Management believes that Adjusted EBITDA is useful to investors in evaluating our operating performance compared to other companies in our industry because it assists in analyzing and benchmarking the performance and value of our business. The calculation of Adjusted EBITDA eliminates the effects of financing, income taxes, and the non-cash accounting effects of our preferred stock warrant liability. These items may vary for different companies for reasons unrelated to the overall operating performance of a company’s business. Adjusted EBITDA is not a financial measure presented in accordance with U.S. generally accepted accounting principles, or GAAP. Although management uses Adjusted EBITDA as a financial measure to assess the performance of our business compared to that of others in our industry, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures, future requirements for capital expenditures, or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debts;

 

   

although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a supplemental measure. See the consolidated statements of cash flows included in our consolidated financial statements included elsewhere in this prospectus. The following is a reconciliation of Adjusted EBITDA to net income:

 

     Fiscal Year     First Fiscal Quarter  
     2006      2007     2008     2009     2010         2010             2011      
           (unaudited)  
     (in thousands)  

Net income (loss)

   $ 780       $ (9,796   $ 3,821      $ 13,148      $ 21,430      $ 4,659      $ 2,064   

Plus: Total net interest expense, including amortization of debt discount

     462         1,395        1,372        1,380        931        323        25   

Plus/less: Increase (decrease) in fair value of interest rate swap

     -           -          341        (174     (145     (34     (21

Plus/less: Provision (benefit) for income taxes

     -           492        (1,617     (4,054     (1,565     (523     2,051   

Plus: Depreciation and amortization

     463         2,030        3,209        4,157        4,500        1,141        1,148   

Plus: Stock-based compensation

     19         180        441        231        277        87        89   

Plus/less: Change in fair value of preferred stock warrant liability

     -           13,591        -          (1,907     (7,262     (1,432     (126
                                                         

Adjusted EBITDA

   $ 1,724       $ 7,892      $ 7,567      $ 12,781      $ 18,166      $ 4,221      $ 5,230   

 

     Fiscal Year     First Fiscal Quarter  
     2006     2007     2008     2009     2010     2010     2011  
           (unaudited)  
     (in thousands)  

Consolidated balance sheet data:

              

Cash

   $ 7      $ 3,595      $ 1,121      $ 3,193      $ 2,132      $ 273      $ 4,545   

Total assets

     8,375        30,711        41,818        50,065        48,254        42,635        50,954   

Working capital

     1,498        1,117        172        3,393        5,586        2,040        8,101   

Current and long-term debt

     4,566        17,436        19,318        17,259        -          10,377        -     

Convertible preferred stock warrant liability

     13,275        27,148        27,148        25,241        17,230        23,809        457   

Total liabilities

     23,362        51,234        58,020        52,888        28,533        40,712        12,351   

Redeemable convertible preferred stock

     83,282        107,121        113,241        117,346        107,930        114,404        123,837   

Total stockholders’ deficit

     (98,269     (127,643     (129,443     (120,169     (88,209     (112,481     (85,234

Other financial data:

              

Net cash provided by (used in) operations

   $ (781   $ 6,142      $ 6,194      $ 7,066      $ 18,479      $ 4,153      $ 3,023   

Capital expenditures

     749        537        3,470        2,883        2,231        163        369   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial and Other Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. Furthermore, the statements included herein that are not based solely on historical facts are “forward looking statements.” Such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Our actual results could differ materially from those anticipated by us in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the section titled “Risk Factors.”

Overview

We are a leading provider of parcel and freight transportation solutions to direct-to-consumer retailers, manufacturers, distributors, and third-party logistics and fulfillment providers. Through our strategic alliance with the United States Postal Service, or the USPS, and our network of processing and distribution SmartCenter facilities, we provide nationwide parcel return and delivery services. We also offer a range of less-than-truckload, or LTL, truckload, and expedited transportation management solutions that utilize capacity provided by third-party asset-based carriers.

We were founded in 1999 and have grown to become a leading provider of parcel return management solutions to the direct-to-consumer retail industry. Between 1999 and 2002, we focused on building our core technology infrastructure. In 2002, we launched a dedicated distribution network that utilizes our Newgistics SmartLabel technology to process consumer parcel returns and provide return parcel tracking visibility. In 2004, we collaborated with the USPS to develop the Parcel Return Service, or PRS, a program that permits approved providers to retrieve returned parcels from designated Post Offices or other designated USPS locations. As of April 2, 2011, we, United Parcel Service, Inc., or UPS, and FedEx Corporation, or FedEx, were the only PRS approved providers currently utilizing the program. In 2007, we acquired two businesses, enabling us to offer more comprehensive parcel solutions and to begin providing freight transportation solutions. From fiscal 2008 to fiscal 2010, our annual revenue and gross profit increased 35.0% and 35.8%, respectively, while operating expenses increased 5.5% over the same period. This modest increase in operating expenses relative to the increase in revenue and gross profit was in large part attributable to our nationally integrated return and delivery network and the buying power we have achieved with carriers.

We provide our services through two operating segments: parcel solutions and freight services.

Parcel Solutions Segment

Our parcel solutions segment, which comprised 94.5% of our total revenue and 81.4% of our total gross profit in fiscal 2010, manages and arranges the delivery of parcels from e-commerce, catalogue, and televised home shopping retailers primarily to consumers’ homes and, in the case of merchandise returns, from consumers back to retailers. In the first fiscal quarter of 2011, our parcel solutions segment comprised 94.9% of our total revenue and 83.0% of our total gross profit. By consolidating shipments from many customers and using the USPS for last-mile delivery and first-mile pickup, we are able to provide customers delivering parcels and consumers returning parcels with cost-effective, reliable, and convenient shipping solutions. We believe our proprietary technology platform enables us to provide cost-effective and convenient return and delivery solutions to our customers, allowing them to more efficiently manage their supply chains while providing a more positive experience for their customers. We have a diversified customer base that includes leading direct-to-consumer retailers of apparel, consumer electronics, and other general consumer products. We believe our integrated national network, which enables pickup and delivery directly from and to USPS entry points, provides a compelling value proposition to our customers.

 

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Parcel solutions revenue is the product of the number of parcels we process and ship during a period multiplied by the average price we charge per parcel processed. The price per parcel shipped varies depending primarily on parcel weight and distance traveled as set forth in contractual pricing arrangements with each customer. Cost of revenue includes postage paid to the USPS for inbound and outbound freight, transportation fees paid to third-party transportation providers, and salary and facility expenses, such as depreciation and amortization, associated with our processing and distribution SmartCenters.

Freight Services Segment

Our freight services segment, which comprised 5.5% of our total revenue and 18.6% of our total gross profit in fiscal 2010, offers LTL and truckload brokerage services in all 50 states through a network of carrier relationships. In the first fiscal quarter of 2011, our freight services segment comprised 5.1% of our total revenue and 17.0% of our total gross profit. We negotiate transportation rates and other arrangements with carriers on behalf of our customers. This approach is designed to provide our customers with committed capacity, responsive service, and rate transparency. We believe our aggregate buying power generally allows us to reduce our customers’ total annual transportation and logistics costs. We also utilize our buying power with third-party carriers to lower the rates we pay to carriers in our own parcel distribution network, thereby reducing transportation costs within our parcel solutions segment.

Freight services revenue consists of LTL commissions, truckload brokerage revenue, and service fees. We earn LTL commissions as a percentage of gross LTL carrier billings. We generate truckload brokerage revenue by procuring truckload transportation capacity on behalf of our customers on a per load basis through our carrier network. Service fees are related to other services we provide, including auditing of freight bills, processing of non-commissionable carrier invoices, and handling of freight payments to the carriers. We recognize LTL revenue, which comprised 77.4% and 78.2% of freight services revenue in fiscal 2010 and the first fiscal quarter of 2011, respectively, on a net basis because we act as an agent, do not establish prices or manage the shipping process, and do not take the risk of loss for collection, delivery, or return. As a result, typically, both operating expenses and operating income are higher as a percentage of revenue in our freight services segment compared to our parcel solutions segment. Cost of revenue within our freight services segment primarily consists of transportation costs paid to third-party carriers related to our truckload brokerage services.

Key Non-Financial Terms and Metrics

We use a number of indicators to monitor our revenue and operating efficiency. Our primary measures of business performance for our parcel solutions segment are parcel volume and parcel yield. Our primary measure of business performance for our freight services segment is gross LTL carrier billings.

Parcel Volume

Parcel volume is the number of parcels shipped in a period. It is a key indicator of the growth and productivity of our business. Generally, an increase in parcel volume in a period would cause an increase in the productivity of our processing centers and transportation network, resulting in lower costs per parcel. Conversely, a decrease in parcel volume in a period generally would result in a decrease in productivity.

Parcel Yield

Parcel yield is a measurement of the revenue per parcel we receive. Parcel yield will vary depending on the applicable USPS defined mail class, distance traveled, fuel prices, and parcel characteristics, such as weight, dimension, and shape.

Gross LTL Carrier Billings

Gross LTL carrier billings is a key measure of our financial performance and productivity within our freight services segment. Gross LTL carrier billings is the dollar amount of customer freight purchases using our negotiated carrier contracts. Since our freight services segment earns a commission equal to a percentage of gross LTL carrier billings, our revenue is a function of total gross LTL carrier billings.

 

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Set forth below is revenue, gross profit, gross profit margin, operating income, parcel volume, parcel yield, and gross LTL carrier billings information for our reporting segments for fiscal 2008, 2009, and 2010, and the first fiscal quarter of 2010 and 2011:

 

     Fiscal Year     First Fiscal Quarter  
     2008     2009     2010     2010     2011  
           (unaudited)  
     (in thousands, except percentages and average parcel yield amounts)  

Parcel solutions segment:

          

Revenue

   $ 119,592      $ 160,375      $ 164,892      $ 40,436      $ 48,397   

Gross profit

   $ 21,939      $ 29,555      $ 33,963      $ 8,217      $ 10,053   

Gross profit margin

     18.3     18.4     20.6     20.3     20.8

Operating income

   $ 3,008      $ 8,011      $ 12,195      $ 2,810      $ 3,774   

Parcel volume (number of parcels)

     26,752        37,930        41,282        10,035        11,469   

Average parcel yield

   $ 4.47      $ 4.23      $ 3.99      $ 4.03      $ 4.22   

Freight services segment:

          

Revenue

   $ 9,724      $ 8,339      $ 9,670      $ 2,236      $ 2,624   

Gross profit

   $ 8,795      $ 7,115      $ 7,768      $ 1,823      $ 2,064   

Gross profit margin

     90.4     85.3     80.3     81.5     78.7

Operating income

   $ 859      $ 394      $ 1,192      $ 181      $ 218   

Gross LTL carrier billings

   $ 121,096      $ 94,674      $ 104,537      $ 23,929      $ 28,874   

Opportunities and Trends

Our parcel solutions segment customers are primarily direct-to-consumer retailers, which represent a fast growing segment of the retail market. According to the U.S. Census Bureau, sales from electronic shopping and mail-order houses increased at a 9.1% compound annual growth rate from $113.9 billion in 2000 to $270.8 billion in 2010. During this same period, total retail sales increased at only a 2.8% compound annual growth rate. Many of our direct-to-consumer customers are engaged in e-commerce, or the sale of retail merchandise via electronic means, primarily over the internet through online retail channels. In 2009, e-commerce sales represented the largest and one of the fastest growing components of sales from electronic shopping and mail-order houses. According to the U.S. Census Bureau, e-commerce sales increased at a 20.1% compound annual growth rate, from $27.5 billion in 2000 to $143.3 billion in 2009, the latest annual data available. E-commerce retail sales experienced modest growth in 2008 and 2009, despite a severe U.S. recession that caused overall retail sales to decline. We believe growth in direct-to-consumer purchases will continue to outpace growth in overall retail sales, regardless of economic conditions. We expect our revenue to grow as we capitalize on this market opportunity.

Since 2007, our operating income has grown at a faster rate than our revenue primarily as a result of three major initiatives. First, in 2008, we established our own SmartCenter facilities to replace services previously provided by third parties, which helped reduce our processing cost per parcel in fiscal 2008, 2009, and 2010, and the first fiscal quarter of 2011. Second, we invested in technology that enabled us to process increased parcel volumes more efficiently and effectively, without significantly adding headcount. Third, we expanded our transportation carrier network to pickup and deliver parcels to locations within the USPS network closer to the consumer, which reduced our per parcel postage costs and improved operational efficiency. We intend to pursue initiatives to further improve the efficiency and effectiveness of our operations in future periods. We anticipate that as our volumes continue to increase, our efficiency will likely improve without the need for a significant increase in capital expenditures.

From 2007 through 2010, average parcel yield declined 10.7%. This decline in parcel yield was primarily the result of our entry into the delivery market, in which, on average, our parcel weights are lighter than those in the returns market. Our average parcel yield increased in the first fiscal quarter of 2011 as compared to the first fiscal quarter of 2010 as a result of an increase in our pricing and a shift in mail class mix. Future parcel yield is

 

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difficult to predict as it is influenced by the applicable USPS defined mail class, distance traveled, fuel price, and parcel characteristics, such as weight, dimension, and shape, which vary by customer and are dependent on many factors, including but not limited to the popularity and mix of consumer product purchases, customer advertising and marketing campaigns, technological advances, and the general state of the economy.

We recently have begun a new growth initiative in our parcel solutions business targeted at increasing sales from middle market direct-to-consumer retailers. This initiative includes the hiring of a new Vice President of Marketing, who joined us in January 2011, the expansion of our sales force, and the development of targeted marketing programs to secure customers from this segment. In connection with the initial phases of this growth initiative, we will incur an increase in operating expenses in excess of gross profit generated from this initiative and, as a result, we expect that our operating profit will decrease both in absolute dollars and as a percentage of revenue in fiscal 2011. We anticipate that, following the startup phase, the increase in gross profit both from this expansion initiative and from our other business efforts will have more than offset the increase in operating expenses from this program.

The transportation industry has been very competitive, especially during the recent economic downturn, which adversely affected consumer confidence and spending. Freight pricing is particularly susceptible to changes in the economy, as a reduction in demand from both businesses and consumers result in unused capacity, leading to significant price competition. However, we believe excess capacity in the industry is beginning to lessen as the economy recovers and freight and parcel volumes increase, resulting in increased gross LTL carrier billings and revenue for our freight services segment. Reduced transportation capacity may also increase transportation costs for our parcel solutions segment. However, we anticipate these changes will benefit our overall future business performance, as increased volumes generally result in increased revenue and network efficiencies that offset increases in our transportation costs. Additionally, we have begun implementing initiatives within our parcel solutions segment to minimize any short-term increase in transportation costs, such as incorporating more inter-facility parcel moves to improve utilization of our purchased transportation capacity.

Key Components of Our Results of Operations

Revenue

We primarily generate revenue from each parcel shipped and each freight shipment or load transacted by us on behalf of our customers. Generally, we enter into agreements with our parcel solutions customers for terms ranging from one to three years. In our freight services business, our commission rates are negotiated annually with our carrier partners.

Within our parcel solutions segment, we generate revenue through service fees charged for the processing and shipment of individual parcels. Revenue is recognized at an individual parcel level and varies depending on the applicable USPS defined mail class, distance traveled, fuel prices, and parcel characteristics such as weight, dimension, and shape. Revenue for delivery of parcels is recognized upon delivery to a USPS location, which concludes our contractual obligation. Revenue for parcel returns is recognized when parcels are delivered to our customers’ distribution centers, which concludes our contractual obligation.

Within our freight services segment, for LTL services we negotiate transportation rates and fuel surcharge schedules with carriers on behalf of our customers and earn commissions from the carriers based on a percentage of our customers’ gross LTL carrier billings. We recognize LTL revenue on a per shipment basis at the time we receive carrier invoices. For truckload brokerage services, we generate revenue by procuring transportation services on behalf of our customers. We recognize truckload brokerage revenue on a per truckload basis upon receiving shipment delivery confirmation from our carriers. Truckload brokerage revenue is recognized on a gross basis and therefore represents the total dollar value of truckload services we sell to our customers.

 

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Cost of Revenue

Cost of revenue within our parcel solutions segment includes postage paid to the USPS for inbound and outbound transportation, fees paid to third-party transportation providers, and salary and facility expenses associated with processing parcels in our SmartCenters. Because we do not own or lease any of our own transportation equipment, the majority of our transportation costs are variable.

Cost of revenue within our parcel solutions segment varies depending on the USPS defined mail class, the USPS entry or retrieval point, distance traveled, and characteristics of the parcel. Our USPS postage cost consists of published and contracted rates on a per parcel basis. Other transportation costs are primarily direct costs paid to our network of third-party carriers and couriers for the transportation of parcels between the USPS and customers’ facilities. We also incur costs associated with the sorting of parcels at our SmartCenter facilities, including salaries of SmartCenter personnel, rent, utilities, communications, and depreciation and amortization. Cost of revenue also includes fees we pay to third-party transportation providers for sortation services at their facilities.

Cost of revenue within our freight services segment primarily consists of transportation costs related to our truckload brokerage services paid to third-party carriers for dedicated truck capacity to transport freight on behalf of our customers. There is no cost of revenue associated with our LTL freight services as we recognize only the commissions we receive from our carriers.

Operating Expenses

Selling, general and administrative expenses consist of salaries and related benefits, bonuses, commissions and stock-based compensation of our sales and marketing, finance and accounting, human resources, information technology, and certain operations personnel. These expenses also include depreciation and amortization, marketing programs, legal, audit, and tax fees, as well as other general corporate expenses. We expect selling, general and administrative expenses to increase in absolute dollars as we continue to add personnel and incur additional expenses as we grow our business and comply with the requirements of operating as a public company.

Research and development costs consist of personnel related costs, including salaries, bonuses, and stock-based compensation, as well as costs of third-party service providers, incurred for the development and enhancement of our technology solutions. We expense all research and development costs as they are incurred.

Interest and Other Income

Interest and other income consists primarily of gains and losses from the sale and or disposition of fixed assets.

Change in Fair Value of Interest Rate Swap

Loans outstanding under our Prior Credit Facility, described below, bore interest per annum at a variable rate based on LIBOR. On August 29, 2008, we entered into an interest rate swap agreement for a notional amount of $10.2 million at a fixed LIBOR rate of 5.94%. Change in fair value of interest rate swap represents the change in fair value of our interest rate swap based on changes in interest rates in the public market. The term of this interest rate swap expired on February 9, 2011.

Change in Fair Value of Preferred Stock Warrant Liability

During the fiscal periods herein discussed, we had warrants outstanding that were exercisable for our redeemable convertible preferred stock. We recorded either income or expense as the liability with respect to the warrants fluctuated from period to period. A decrease in the warrant liability resulted in the recognition of income and an increase in the warrant liability resulted in the recognition of expense. During the second quarter of fiscal 2011, the remaining warrants were exercised, and the liability was reclassified to additional paid-in capital.

 

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Interest Expense, Including Amortization of Debt Discount

Interest expense, including amortization of debt discount, consists of interest expense incurred on borrowings under our Credit Facilities and amortization of debt issuance costs. Loans outstanding under our Prior Credit Facility bore interest per year based on LIBOR and was adjusted on a quarterly basis based on our funded debt to EBITDA ratio.

Provision for Income Taxes

Our provision for income taxes includes income tax expense or benefit recorded pursuant to the liability method of accounting for income taxes. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the respective carrying amounts and tax bases of our assets and liabilities. Our provision for income taxes also includes the effect of a change in our valuation allowance for net deferred tax assets. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. We evaluate the need for, and the adequacy of, valuation allowances based on the expected realization of our deferred tax assets. The factors we use to assess the likelihood of realization include our latest forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. In fiscal 2008, 2009, and 2010, our provision for income taxes included a benefit from the result of decreases in our valuation allowance in the amount of $3.9 million, $6.9 million, and $6.6 million, respectively. Such decreases in our valuation allowance were due to our increased expectation of realization of our deferred tax assets, which consist primarily of net operating loss carryforwards, as a result of the improved outlook of our taxable income. As of April 2, 2011, no valuation allowance for net deferred tax assets remains. Therefore, we have assumed our provision for income taxes for fiscal 2011 and future periods to be approximately 40% of our income before income taxes.

Fiscal Periods

Our fiscal year ends on the Saturday closest to December 31 and consists of either 52 weeks or, as was the case of fiscal 2008, 53 weeks. Each quarter of each fiscal year generally consists of 13 weeks, although the fourth quarter of fiscal 2008 had 14 weeks. Our quarter end for the first fiscal quarter of fiscal 2010 and 2011 was April 3, 2010 and April 2, 2011, respectively. Our year end for fiscal 2008, 2009, and 2010 was January 3, 2009, January 2, 2010, and January 1, 2011, respectively. The differing number of days in fiscal years 2008, 2009, and 2010 did not have a material effect on the Company’s results of operations.

 

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Results of Operations

The following table sets forth our audited consolidated statements of operations for fiscal 2008, 2009, and 2010, and our unaudited condensed consolidated statements of operations for the first fiscal quarters of 2010 and 2011, and the related percentage of total revenue. The period-to-period comparison of financial results is not necessarily indicative of future periods:

Consolidated Statements of Operations Data

 

    Fiscal Year     First Fiscal Quarter  
    2008     2009     2010     2010     2011  
          (unaudited)  
    (dollars in thousands)  

Revenue

  $ 129,316        100.0   $ 168,714        100.0   $ 174,562        100.0   $ 42,672        100.0   $ 50,927        100.0

Cost of revenue

    98,582        76.2        132,044        78.3        132,831        76.1        32,632        76.5     38,810        76.2
                                                                               

Gross profit

    30,734        23.8        36,670        21.7        41,731        23.9        10,040        23.5     12,117        23.8

Operating expenses:

                   

Selling, general and administrative

    25,126        19.4        26,060        15.4        26,113        15.0        6,458        15.1     7,816        15.3

Research and development

    1,742        1.3        2,205        1.3        2,231        1.3        591        1.4     309        0.6
                                                                               

Total operating expenses

    28,868        20.8        28,265        16.8        28,344        16.2        7,049        16.5     8,125        16.0

Operating income

    3,866        3.0        8,405        5.0        13,387        7.7        2,991        7.0     3,992        7.8

Interest and other income

    104        0.1        62        0.0        10        0.0        9        0.0     1        0.0

Change in fair value of interest rate swap

    (341)        (0.3)        174        0.1        145        0.1        34        0.1     21        0.0

Change in fair value of preferred stock warrant liability

    -          0.0        1,907        1.1        7,262        4.2        1,432        3.4     126        0.2

Interest expense, including amortization of debt discount

    (1,425)        (1.1)        (1,454)        (0.9)        (939)        (0.5)        (330)        (0.8 %)      (25)        (0.0 %) 

Income before income taxes

    2,204        1.7        9,094        5.4        19,864        11.4        4,136        9.7     4,115        8.1

Income tax benefit (expense)

    1,617        1.3        4,054        2.4        1,565        0.9        523        1.2     (2,051     (4.0 %) 
                                                                               

Net income

  $ 3,821        3.0   $ 13,148        7.8   $ 21,430        12.3   $ 4,659        10.9   $ 2,064        4.1
                                                                               

First Fiscal Quarter 2011 Compared to First Fiscal Quarter 2010, Fiscal 2010 Compared to Fiscal 2009 and Fiscal 2009 Compared to Fiscal 2008

The following discussion of our results of operations is based on actual results of operations for fiscal 2008, 2009, and 2010, and the first fiscal quarter of 2010 and 2011. Dollar information provided in the tables below is in thousands.

Revenue

 

     Fiscal Year      First Fiscal Quarter  
     2008      2009      2010      2010      2011  
                          (unaudited)  

Revenue

   $ 129,316       $ 168,714       $ 174,562       $ 42,672       $ 50,927   

 

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First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. Revenue increased by $8.3 million, or 19.3%, to $50.9 million in the first fiscal quarter of 2011 from $42.7 million in the first fiscal quarter of 2010. The increase in revenue in the first fiscal quarter of 2011 as compared to the first fiscal quarter of 2010 was primarily due to an increase in parcel volume from new and existing customers of 2.1 million parcels, or $8.5 million in revenue, a $1.1 million increase in revenue due to higher parcel yield, and $0.3 million increase in freight services revenue due to an increase in business from new and existing customers. This increase in revenue was partially offset by a $1.7 million decrease due to parcel customer attrition.

2010 Comparison to 2009. Revenue increased by $5.8 million, or 3.5%, to $174.6 million in fiscal 2010 from $168.7 million in fiscal 2009. The increase in revenue in fiscal 2010 as compared to fiscal 2009 was primarily due to an increase in parcel volume from new and existing customers of 9.2 million parcels, or $33.7 million in revenue, and an increase in freight services revenue of $1.3 million. Revenue was partially offset by a $24.3 million decrease in revenue due to customer attrition, of which $9.5 million was due to the loss of a single customer, and a $4.7 million decrease in revenue due to lower parcel yield.

2009 Comparison to 2008. Revenue increased by $39.4 million, or 30.5%, to $168.7 million in fiscal 2009 from $129.3 million in fiscal 2008. The increase in revenue in fiscal 2009 as compared to fiscal 2008 was primarily due to an increase in parcel volume from new and existing customers of 13.8 million, or $65.3 million. Revenue was partially offset by a $14.1 million decrease in revenue due to lower parcel yield, a $10.8 million decrease in revenue due to customer attrition, and a $1.4 million decrease in freight services revenue.

Cost of Revenue

 

     Fiscal Year     First Fiscal Quarter  
     2008     2009     2010     2010     2011  

Transportation costs

   $ 85,611        86.8   $ 116,563        88.3   $ 115,741        87.1   $ 28,533        87.4   $ 34,302        88.4

Warehouse costs

     11,512        11.7        15,610        11.8        16,563        12.5        3,947        12.1        4,306        11.1   

Other direct costs

     1,460        1.5        (129     -0.1        526        0.4        152        0.5        203        0.5   
                                                                                

Total cost of revenue

   $ 98,582        100.0   $ 132,044        100.0   $ 132,831        100.0   $ 32,632        100.0   $ 38,810        100.0

First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. Cost of revenue increased by $6.2 million, or 18.9%, to $38.8 million in the first fiscal quarter of 2011 from $32.6 million in the first fiscal quarter of 2010. The increase in cost of revenue in the first fiscal quarter of 2011 as compared to the first fiscal quarter of 2010 was primarily due to higher parcel volume from new and existing customers. On a consolidated basis, our cost of revenue as a percent of revenue decreased to 76.2% in the first fiscal quarter of 2011 as compared to 76.5% in the first fiscal quarter of 2010 due to improved optimization of our transportation network and increased productivity at our SmartCenter facilities.

2010 Comparison to 2009. Cost of revenue increased by $0.8 million, or 0.6%, to $132.8 million in fiscal 2010 from $132.0 million in fiscal 2009. The increase in cost of revenue in fiscal 2010 as compared to the prior year was primarily due to higher parcel volume from new and existing customers. On a consolidated basis, our cost of revenue as a percent of revenue decreased to 76.1% in fiscal 2010 as compared to 78.3% in fiscal 2009 due to improved optimization of our transportation network and increased productivity at our SmartCenter facilities.

2009 Comparison to 2008. Cost of revenue increased by $33.5 million, or 33.9%, to $132.0 million in fiscal 2009 from $98.6 million in fiscal 2008. The increase in cost of revenue in fiscal 2009 as compared to the prior year was primarily due to higher parcel volume from new and existing customers. On a consolidated basis, our cost of revenue as a percent of revenue increased to 78.3% in fiscal 2009 as compared to 76.2% in fiscal 2008 due to investments in our transportation network and SmartCenter facilities to accomodate future growth.

 

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Gross Profit

 

000,000 000,000 000,000 000,000 000,000
     Fiscal Year     First Fiscal Quarter  
     2008     2009     2010     2010     2011  
                       (unaudited)  

Gross profit

   $ 30,734      $ 36,670      $ 41,731      $ 10,040      $ 12,117   

Gross profit margin

     23.8     21.7     23.9     23.5     23.8

First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. Gross profit increased by $2.1 million, or 20.7%, to $12.1 million in the first fiscal quarter of 2011 from $10.0 million in the first fiscal quarter of 2010. The increase in gross profit and gross profit margin from 23.5% to 23.8% in the first fiscal quarter of 2011 as compared to the first fiscal quarter of 2010 was primarily due to growth in parcel volume. Gross profit within our brokerage services increased by 4.4% year over year due to an increase in shipments.

2010 Comparison to 2009. Gross profit increased by $5.1 million, or 13.8%, to $41.7 million in fiscal 2010 from $36.7 million in fiscal 2009. The increase in gross profit and gross profit margin to 23.9% in fiscal 2010 from 21.7% in fiscal 2009 was primarily due to growth in parcel volume and improved optimization of our transportation network. As our volume increases, we are able to achieve lower per unit costs due to higher densities and increased volume over fixed costs. In addition, during fiscal 2010, we increased the percentage of parcels that were delivered to local Post Offices, thereby achieving price discounts from the USPS. The increase in gross profit year over year was partially offset by a decrease in gross profit margin in our freight services segment from 85.3% in fiscal 2009 to 80.3% in fiscal 2010. This decrease in gross profit margin was primarily due to an increase in revenue attributable to our truckload brokerage services, which have lower gross profit margins than our LTL services, in which commissions are recorded on a net basis.

2009 Comparison to 2008. Gross profit increased by $5.9 million, or 19.3%, to $36.7 million in fiscal 2009 from $30.7 million in fiscal 2008. The increase in gross profit in absolute dollars was primarily due to growth in parcel volume and improved optimization of our transportation network. As our volume increases, we are able to achieve lower per unit costs due to higher densities and increased volume over fixed costs. In addition, during fiscal 2009, we increased the percentage of parcels that were delivered to local Post Offices, thereby achieving price discounts from the USPS. As a percentage of revenue, gross profit decreased to 21.7% in fiscal 2009 from 23.8% in fiscal 2008 primarily due to lower pricing from new customers in an effort to grow our volumes in future periods and thereby improve the efficiency of our transportation network. Additionally, gross profit margin in our freight services segment decreased from 90.4% in fiscal 2008 to 85.3% in fiscal 2009 due to an increase in revenue attributable to our truckload brokerage services, which have lower gross margins than our LTL services, in which commissions are recorded on a net basis.

Selling, General and Administrative

 

0000000 0000000 0000000 0000000 0000000
     Fiscal Year      First Fiscal Quarter  
     2008      2009      2010          2010              2011      
                          (unaudited)  

Selling, general and administrative

   $ 25,126       $ 26,060       $ 26,113       $ 6,458       $ 7,816   

First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. Selling, general and administrative expenses increased by $1.4 million, or 21.0%, to $7.8 million in the first fiscal quarter of 2011 from $6.5 million in the first fiscal quarter of 2010. As a percentage of revenue, selling, general and administrative expenses remained relatively unchanged at 15.3% in the first fiscal quarter of 2011 as compared to 15.1% in the first fiscal quarter of 2010. The increase in selling, general and administrative expense in absolute dollars primarily relates to an increase in salaries and related benefits due to increased headcount as part of our sales initiative with middle market, direct-to-consumer retailers.

2010 Comparison to 2009. Selling, general and administrative expenses remained relatively unchanged at $26.1 million in fiscal 2010 as compared to fiscal 2009. As a percentage of revenue, selling, general and

 

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administrative expenses decreased to 15.0% in fiscal 2010 from 15.4% in fiscal 2009. The decrease in selling, general and administrative expense as a percentage of revenue primarily relates to revenue increasing at a faster rate than salaries and related benefits and other expenses.

2009 Comparison to 2008. Selling, general and administrative expenses increased by $0.9 million, or 3.7%, to $26.1 million in fiscal 2009 from $25.1 million in fiscal 2008. The increase in absolute dollars was primarily due to $0.9 million in increased sales commissions. As a percentage of revenue, selling, general and administrative expenses decreased to 15.4% in fiscal 2009 compared to 19.4% in fiscal 2008, due to revenue increasing at a faster rate than salaries and related benefits and other expenses.

Research and Development

 

0000000 0000000 0000000 0000000 0000000
     Fiscal Year      First Fiscal Quarter  
     2008      2009      2010      2010      2011  
                          (unaudited)  

Research and development

   $ 1,742       $ 2,205       $ 2,231       $ 591       $ 309   

First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. Research and development expense decreased $0.3 million, or 47.7%, to $0.3 million in the first fiscal quarter of 2011 from $0.6 million in the first fiscal quarter of 2010. The decrease in research and development expense is primarily as a result of reduced activity as certain projects near completion.

2010 Comparison to 2009. Research and development expense remained relatively unchanged at $2.2 million in fiscal 2010 as compared to fiscal 2009, as we did not substantially alter our research and development efforts.

2009 Comparison to 2008. In fiscal 2009, research and development expense increased by $0.5 million, or 26.6%, to $2.2 million from $1.7 million in fiscal 2008. In fiscal 2009, we increased our investment in technology enhancements to further improve the efficiency with which we deliver services to our customers.

Interest and Other Income

 

0000000 0000000 0000000 0000000 0000000
     Fiscal Year      First Fiscal Quarter  
     2008      2009      2010      2010      2011  
                          (unaudited)  

Interest and other income

   $ 104       $ 62       $ 10       $ 9       $ 1   

Interest and other income was minimal in fiscal years 2008, 2009 and 2010, and the first fiscal quarter of 2010 and 2011.

Change in Fair Value of Interest Rate Swap

 

0000000 0000000 0000000 0000000 0000000
     Fiscal Year      First Fiscal Quarter  
     2008     2009      2010      2010      2011  
                         (unaudited)  

Change in fair value of interest rate swap

   $ (341   $ 174       $ 145       $ 34       $ 21   

First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. The change in fair value of our interest rate swap was minimal in the first fiscal quarter of 2010 and 2011.

2010 Comparison to 2009. The change in fair value of our interest rate swap resulted in income of $0.1 million in fiscal 2010 compared to income of $0.2 million in fiscal 2009, representing the change in fair value of our interest rate swap based on changes in interest rates in the public market in each of the respective periods.

 

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2009 Comparison to 2008. The change in fair value of our interest rate swap resulted in income of $0.2 million in fiscal 2009 compared to expense of $0.3 million in fiscal 2008, representing the change in fair value of our interest rate swap based on changes in interest rates in the public market in each of the respective periods.

Change in Fair Value of Preferred Stock Warrant Liability

 

0000000 0000000 0000000 0000000 0000000
     Fiscal Year      First Fiscal Quarter  
     2008      2009      2010      2010      2011  
                          (unaudited)  

Change in fair value of preferred stock warrant liability

   $ -       $ 1,907       $ 7,262       $ 1,432       $ 126   

First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. We had warrants outstanding that were exercisable for our redeemable convertible preferred stock. In the first fiscal quarter of 2010, we recorded income of $1.4 million as a result of a corresponding decrease in the fair value of the warrants. In the first fiscal quarter of 2011, we recorded income of $0.1 million as a result of a corresponding decrease in the fair value of the warrants. During the first fiscal quarter of 2011, warrants to purchase 185,873,115 shares of our series E preferred stock were exercised and the liability with respect to these warrants was reclassified to redeemable preferred stock and additional paid-in capital.

2010 Comparison to 2009. We had warrants outstanding that were exercisable for our redeemable convertible preferred stock. In fiscal 2009, we recorded income of $1.9 million as a result of a corresponding decrease in the fair value of the warrants. In fiscal 2010, we recorded income of $7.3 million as a result of a corresponding decrease in the fair value of the warrants.

2009 Comparison to 2008. In fiscal 2008, we recorded no income or expense, as the fair value of the warrants did not change. In fiscal 2009, we recorded income of $1.9 million as a result of a corresponding decrease in fair value of the warrants.

During the second fiscal quarter of 2011, all preferred stock warrants remaining outstanding were exercised and the liability was reclassified to additional paid-in capital.

Interest Expense, Including Amortization of Debt Discount

 

     Fiscal Year     First Fiscal Quarter  
     2008     2009     2010     2010     2011  
                       (unaudited)  

Interest expense, including amortization of debt discount

   $ (1,425   $ (1,454   $ (939   $ (330   $ (25

First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. In the first fiscal quarter of 2011, interest expense, including amortization of debt discount, decreased $0.3 million, or 92.4%, to $25,000 compared to $0.3 million in the first fiscal quarter of 2010. The decrease in interest expense was primarily due to a decrease in average outstanding borrowings.

2010 Comparison to 2009. In fiscal 2010, interest expense, including amortization of debt discount, decreased $0.5 million, or 35.4%, to $0.9 million compared to $1.5 million in fiscal 2009. The decrease in interest expense, including amortization of debt discount, was primarily due to a decrease in average outstanding borrowings.

 

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2009 Comparison to 2008. In fiscal 2009, interest expense, including amortization of debt discount, remained relatively unchanged as compared to fiscal 2008.

Income Tax Benefit

 

     Fiscal Year      First Fiscal Quarter  
     2008      2009      2010      2010      2011  
                          (unaudited)  

Income tax (expense) benefit

   $ 1,617       $ 4,054       $ 1,565       $ 523       $ (2,051

First Fiscal Quarter 2011 Comparison to First Fiscal Quarter 2010. In the first fiscal quarter of 2010 we recorded an income tax benefit of $0.5 million as a result of the release of the valuation allowance for our net operating loss carryforwards and other deferred tax assets based upon our analyses of whether it was more likely than not that such deferred tax assets were realizable. We recorded income tax expense of $2.1 million in the first fiscal quarter of 2011, which represents our expected overall effective income tax rate of 40% for fiscal 2011 plus additional immaterial expense for certain discrete items related to prior years. As of January 1, 2011 and April 2, 2011, no valuation allowance for net deferred tax assets remains.

2010 Comparison to 2009. In fiscal 2009 and 2010, we recorded an income tax benefit of $4.1 million and $1.6 million, respectively. In both fiscal 2009 and fiscal 2010, the income tax benefit was primarily the result of the release of valuation allowance for our net operating loss carryforwards and other deferred tax assets based upon our analyses of whether it was more likely than not that such deferred tax assets were realizable. As of January 1, 2011, no valuation allowance for net deferred tax assets remains. We expect our provision for income taxes for annual and interim periods subsequent to January 1, 2011 to be an expense that approximates 40% of our income before income taxes.

2009 Comparison to 2008. In fiscal 2008, we recorded an income tax benefit of $1.6 million. In fiscal 2009, we recorded an income tax benefit of $4.1 million. In both fiscal 2008 and fiscal 2009, the income tax benefit was primarily the result of the release of valuation allowance for our net operating loss carryforwards and other deferred tax assets based upon our analyses of whether it was more likely than not that such deferred tax assets were realizable.

Quarterly Results of Operations and Seasonality

The results of operations of our parcel solutions segment generally reflect a seasonal pattern. As our customers increase sales during the holiday season at year-end, the fourth quarter historically has been our strongest volume quarter for deliveries. Return volumes are typically strongest in the first and fourth quarters, as consumers return items purchased during the holiday season. Parcel yield is typically strongest in the first and fourth quarters as parcel weights during these quarters tend to be heavier. While we have experienced seasonality, differences in our revenue and parcel yield between periods have also been impacted by additions or losses of parcel solutions customers. We experienced lower revenue during the first quarter of fiscal 2009 as compared to the second and third quarter of fiscal 2009 due to the fact that a new customer that contributed a significant amount to our total revenue in fiscal 2009 was less active during the first quarter of fiscal 2009. Cost of revenue increased over the course of the quarters presented below primarily due to an increase in operating costs related to the increased sales of our solutions. Historically, our quarterly results of operations have also been significantly impacted by changes in the fair value of our preferred stock warrant liability and releases of valuation allowances for our deferred tax assets. Due to these and other factors, results for any particular quarter may not be indicative of results to be expected for any future quarter or fiscal year.

 

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The following table sets forth our unaudited quarterly condensed consolidated financial data for the periods presented. You should read the following table in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

    Fiscal 2009     Fiscal 2010     Fiscal 2011  
    Q1     Q2     Q3     Q4     Q1     Q2     Q3     Q4     Q1  
          (in thousands, except per share and parcel yield amounts)  

Revenue

  $ 38,801      $ 41,635      $ 42,532      $ 45,746      $ 42,672      $ 40,101      $ 41,151      $ 50,638      $ 50,927   

Cost of revenue

    30,670        33,531        32,887        34,956        32,632        30,461        31,053        38,685        38,810   

Gross profit

    8,131        8,104        9,645        10,790        10,040        9,640        10,098        11,953        12,117   

Operating income

    1,053        1,125        2,808        3,419        2,991        2,788        3,113        4,495        3,992   

Change in fair value of preferred stock warrant liability

    152        4,649        445        (3,339     1,432        3,730        3,332        (1,232     126   

Income tax (expense) benefit

    (271     (299     (913     5,537        523        (1,221     (1,896     4,159        (2,051

Net income

  $ 601      $ 5,166      $ 2,000      $ 5,381      $ 4,659      $ 5,106      $ 4,391      $ 7,274      $ 2,064   

Net income (loss) attributable to common stockholders:

                 

Basic

  $ 49      $ 929      $ 169      $ (420   $ 687      $ 992      $ 780      $ 417      $ 232   

Diluted

  $ 78      $ 5,166      $ 289      $ (748   $ 3,227      $ 1,376      $ 1,059      $ 755      $ 1,938   

Net income (loss) per share attributable to common stockholders:

                 

Basic

  $ 0.00      $ 0.01      $ 0.00      $ (0.01   $ 0.01      $ 0.01      $ 0.01      $ 0.01      $ 0.00   

Diluted

  $ 0.00      $ 0.01      $ 0.00      $ (0.01   $ 0.00      $ 0.00      $ 0.00      $ 0.01      $ 0.00   

Average parcel yield

  $ 4.60      $ 4.18      $ 4.10      $ 4.11      $ 4.03      $ 3.94      $ 3.88      $ 4.10      $ 4.22   

Parcel volume

    7,974        9,469        9,846        10,641        10,035        9,575        9,939        11,734        11,469   

Liquidity and Capital Resources

Historically, we have financed our operations and business acquisitions and met our capital expenditure requirements primarily through the private sale of equity securities and debt financings. However, in the past three years, we have met our financing needs through cash generated from operations and our Prior Credit Facility. As of April 2, 2011, our primary source of liquidity consisted of cash totaling $4.5 million and $7.98 million of available credit under our Current Credit Facility. Working capital at April 2, 2011 was $8.1 million.

Our future capital requirements may vary materially from those now planned and will depend on many factors, including the costs to develop and implement new solutions and applications and the sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications we develop. Historically, we have experienced increases in our expenditures consistent with the growth of our operations and personnel, and we anticipate that our expenditures will continue to increase at the same historical rate as we grow our business, although not at the same historical rate. We believe that the net proceeds from this offering, our existing cash, expected cash generated from operations, and borrowing availability under our Current Credit Facility, will be sufficient to meet our operating needs for the next 12 months, including working capital requirements and capital expenditures. We anticipate that our capital expenditures during fiscal 2011 will not exceed $3.0 million. Of these expenditures, approximately $1.5 million relates to planned updates and maintenance of our SmartCenters and $1.2 million relates to new projects and maintenance on our corporate operations.

 

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Inflation

Inflation can have an impact on our results of operations. A prolonged period of inflation could cause interest rates, fuel, wages, and other costs to increase, which would adversely affect our results of operations unless freight rates correspondingly increase, in the case of our freight services business, and unless we are able to increase prices, in the case of our parcel solutions business. However, the effect of inflation has been minor over the past three years as, to the extent our costs have increased, we have been able to pass these cost increases onto our customers in the form of freight rate increases or price increases. For example, historically, we have passed increases in fuel costs on to our customers through a corresponding increase in fuel surcharge, minimizing the impact of the increased fuel costs on our operating results. If fuel costs escalate and we are unable to recover these costs with effective fuel surcharges, it would have an adverse effect on our results of operations and profitability.

Cash Flows

A summary of our changes in cash for fiscal years 2008, 2009, and 2010, and the first fiscal quarters of 2010 and 2011 is as follows:

 

     Fiscal Year     First Fiscal Quarter  
     2008     2009     2010     2010     2011  
           (unaudited)  
     (in thousands)  

Cash provided by operating activities

   $ 6,194      $ 7,066      $ 18,479      $ 4,153      $ 3,023   

Cash used in investing activities

     (10,559     (2,879     (2,229     (161     (692

Cash provided by (used in) financing activities

     1,891        (2,115     (17,311     (6,912     82   

Cash at end of period

     1,121        3,193        2,132        273        4,545   

Cash Provided by Operating Activities

We generated $4.2 million and $3.0 million in cash from operations in the first fiscal quarter of 2010 and 2011, respectively. The decrease in cash provided by operating activities in the first fiscal quarter of 2011 compared to the first fiscal quarter of 2010 is primarily due to an increase in accounts receivable of $2.8 million as a result of the timing of customer payments and an increase in prepaid expenses of $1.6 million, of which $1.2 million relates to IPO expenses incurred in the current fiscal quarter, partially offset by improvements in the timing of vendor payments of $1.6 million in the current fiscal quarter. We generated $6.2 million, $7.1 million, and $18.5 million in cash from operations in fiscal 2008, 2009, and 2010, respectively. The increase in cash provided by operating activities in fiscal 2010 as compared to fiscal 2009 was primarily due to an increase in net income after adjustments for non-cash charges. The increase in cash provided by operating activities in fiscal 2009 as compared to fiscal 2008 was primarily due to an increase in net income after adjustments for non-cash charges, partially offset by an increase in working capital related to business growth.

Cash Used in Investing Activities

Cash used in investing activities was $10.6 million, $2.9 million, and $2.2 million in fiscal 2008, 2009, and 2010, respectively. Cash used in investing activities was $0.2 million and $0.7 million in the first fiscal quarter of 2010 and 2011, respectively. Investing activities in the first fiscal quarter of 2011, fiscal 2010, and fiscal 2009 related to investments in our information technology infrastructure. Cash used in investing activities in fiscal 2008 consisted primarily of $7.1 million related to our acquisition of Cornerstone Shipping Solutions, Inc.

Cash Provided by (Used in) Financing Activities

Cash provided by financing activities was $1.9 million in fiscal 2008 and cash used in financing activities was $2.1 million and $17.3 million in fiscal 2009 and 2010, respectively. Cash used and provided by financing

 

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activities in fiscal 2008, 2009, and 2010, including the first fiscal quarter of 2010, primarily relates to net principal payments and borrowings on our Prior Credit Facility. As of April 2, 2011 and January 1, 2011, we had no debt outstanding under our Current or Prior Credit Facility as all prior borrowings were repaid using cash generated from operations during fiscal 2010. Cash used in financing activities was $6.9 million in the first fiscal quarter of 2010 and cash provided by financing activities was $82,000 in the first fiscal quarter of 2011.

Indebtedness

Prior to March 2011, we utilized a senior secured credit facility, our Prior Credit Facility, provided by Comerica Bank. The Prior Credit Facility was secured by substantially all of our assets and provided senior secured financing of $24.9 million, consisting of a $22.6 million term loan facility and a $2.3 million revolving credit facility, which amounts were subsequently amended and decreased/increased to $17.1 million and $7.8 million, respectively. Available amounts under the revolving portion of our Prior Credit Facility were calculated against a borrowing base, which was limited to 80% of the net amount of eligible accounts receivable, as determined in accordance with the Prior Credit Facility agreement. Loans under the term loan facility bore interest at a floating rate based on our funded debt to EBITDA ratio (see Note 6 to our audited consolidated financial statements).

Historically, we used interest rate swap agreements in an effort to hedge our exposure to fluctuating interest rates related to our Prior Credit Facility. On August 29, 2008, we entered into an interest rate swap agreement for a notional amount of $10.2 million at a fixed LIBOR rate of 5.9%, which settled and expired on February 9, 2011. During fiscal 2008, 2009, and 2010, the weighted-average interest rate on our outstanding borrowings was 6.0%, 5.6%, and 5.5%, respectively.

Our Prior Credit Facility contained customary affirmative covenants regarding, among other things, the delivery of financial and other information to Comerica Bank, maintenance of records, compliance with law, maintenance of property and insurance, and conduct of our existing business, subject in each case to customary exceptions and qualifications. Our Prior Credit Facility also contained certain financial ratio covenants. We were required to maintain a funded debt to EBITDA ratio of less than 2.00:1.00 and a fixed charge coverage ratio of at least 1.25:1.00. Our Prior Credit Facility also contained customary negative covenants that limited our ability to, among other things, dispose of assets, make changes to our governing documents and certain of our agreements, have a change of control, enter into mergers or consolidations, incur additional indebtedness or guarantee indebtedness of others, create liens on our assets, prepay indebtedness, pay dividends and make other distributions on our capital stock, redeem and repurchase our capital stock, make investments, including acquisitions, and enter into transactions with affiliates.

Our Prior Credit Facility included events of default that were customary for a facility of its type, including non-payment default, covenant default (including breaches of the covenants described above), cross-default to other indebtedness, a default if a material adverse change in our business occurs, attachment and levy of material assets default, material inaccuracy of representations and warranties, bankruptcy, and insolvency default, and judgment default. Certain defaults were subject to materiality thresholds and grace periods customary for a facility of its type. The occurrence of an event of default under our Prior Credit Facility could have resulted in the triggering of default interest rates, the acceleration of outstanding term loans and revolving credit line loans, and the exercise of remedies by Comerica Bank. As of April 2, 2011 and January 2, 2010, we were in compliance with all applicable provisions of our Prior Credit Facility.

Our obligations to Comerica Bank under the Prior Credit Facility were also guaranteed by our wholly-owned subsidiary, Newgistics Freight Services, Inc., or NFS.

In March 2011, we terminated our Prior Credit Facility and established a new senior secured credit facility, our Current Credit Facility, with Comerica Bank. Our Current Credit Facility is secured by substantially all of our assets (other than intellectual property, except in certain circumstances) and consists of an $8.0 million revolving credit facility. Available amounts under the Current Credit Facility are calculated against a borrowing

 

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base, which is limited to 80% of the net amount of eligible accounts receivable, as determined in accordance with the Current Credit Facility agreement. As of April 2, 2011, our borrowing availability was $7.98 million under our Current Credit Facility. As of the date of this registration statement, we have no outstanding borrowings under our Current Credit Facility.

Loans outstanding under our Current Credit Facility bear interest per annum at a rate equal to the greater of (i) the prime rate of Comerica Bank plus 1%, or (ii) LIBOR plus 2.5%. Interest on the Current Credit Facility is payable monthly. The fee in respect to non-use of available funds is 0.125% and is payable quarterly. All loans under the Current Credit Facility may be repaid and reborrowed at any time without penalty or premium, with the balance of all loans due on March 1, 2013.

Our Current Credit Facility contains customary affirmative covenants regarding, among other things, the delivery of financial and other information to Comerica Bank, maintenance of records, compliance with law, maintenance of property and insurance and conduct of our existing business, subject in each case to customary exceptions and qualifications. Our Current Credit Facility also contains customary negative covenants that limit our ability to, among other things, dispose of assets, make changes to our governing documents and certain of our agreements, have a change of control, enter into mergers or consolidations, incur additional indebtedness or guarantee indebtedness of others, create liens on our assets, prepay indebtedness, pay dividends and make other distributions on our capital stock, redeem and repurchase our capital stock, make investments, including acquisitions, and enter into transactions with affiliates.

Our Current Credit Facility contains events of default that are customary for a facility of this type, including non-payment default, covenant default (including breaches of the covenants described above), cross-default to other indebtedness, a default if a material adverse change in our business occurs, attachment and levy of material assets default, material inaccuracy of representations and warranties, bankruptcy, and insolvency default and judgment default. Certain of the defaults are subject to materiality thresholds and grace periods usual for a facility of this type. The occurrence of an event of default under our Current Credit Facility could result in the triggering of default interest rates, the acceleration of the outstanding revolving loans and the exercise of remedies by Comerica Bank.

Our obligations to Comerica Bank under the Current Credit Facility are also guaranteed by NFS.

As of April 2, 2011 and January 1, 2011, we had no outstanding borrowings under our Current or Prior Credit Facility and $7.98 million and $7.8 million in available credit, respectively, under our revolving credit facility, after giving effect to all reserves. As of January 2, 2010, we had $12.8 million and $4.5 million of outstanding borrowings under the term loan and revolving credit line, respectively, and $2.8 million of borrowing availability after giving effect to all reserves.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations associated with lease and purchase obligations as of January 1, 2011:

 

     Payments Due by Period  
      Total      Less than 1 year      1-3 Years      3-5 Years      After 5 Years  
    

(in thousands)

 

Operating leases (1)

   $ 3,962       $ 2,090       $ 1,652       $ 220       $ -   

Purchase obligations (2)

     209         201         8         -         -   
                                            
   $ 4,171       $ 2,291       $ 1,660       $ 220       $     -   
                                            

 

(1) Includes future minimum lease payments.
(2) Consists of minimum services and goods we are committed to purchase in the ordinary course of business. Purchase obligations do not include contracts we can terminate without cause with little or no penalty to us.

 

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Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent that actual events differ from our estimates and assumptions, there could be a material impact on our financial statements.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that our significant accounting policies, which are described in note 2 to our audited consolidated financial statements, and the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee and our independent registered public accounting firm.

Revenue Recognition

We primarily generate revenue from each parcel shipped and each freight load transacted on behalf of our customers. Revenue is recognized in accordance with ASC Topic 605 “Revenue Recognition” when persuasive evidence of an agreement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.

Within our parcel solutions segment, we generate revenue through service fees charged for the shipment and processing of individual parcels. Revenue is recognized at an individual parcel level and varies depending on USPS defined mail class, distance traveled, fuel prices, and parcel characteristics, such as weight, dimension, and shape. Revenue for delivery of parcels is recognized upon delivery to a USPS location, which concludes our contractual service obligation. Revenue for parcel returns is recognized when parcels are delivered to customers’ distribution centers, which concludes our contractual service obligation.

Within our freight services segment, for LTL services, we negotiate transportation rates with carriers on behalf of our customers and generate commissions based on our customers’ gross LTL carrier billings. Because we are acting as an agent in the arrangement, commission revenue paid by carriers is recognized on a net basis at the time carrier invoices are received, in accordance with the provisions of ASC 605-45 “Principal Agent Considerations.” For truckload brokerage services, we generate revenue by procuring transportation services on behalf of our customers. Truckload brokerage revenue is recognized upon receiving parcel delivery confirmation from carriers. Retainer revenue for aggregation services is recognized monthly as the services are performed.

Amounts received for services in advance of completion of such services are recorded as deferred revenue.

Allowance for Doubtful Accounts

Based on a review of the current status of our existing accounts receivable and historical collection experience, we have established an estimate of our allowance for doubtful accounts. We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Provisions are made based on a consideration of the aging of the accounts

 

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receivable balances, historical write-off experience, current economic conditions and customer-specific information. For those invoices not specifically reviewed, provisions are made based on our collection history and current economic trends. If our actual collections are lower than expected, additional allowances for doubtful accounts may be needed and our future results of operations and cash flows could be negatively affected. Write-offs of accounts receivable and recoveries were insignificant during each of fiscal 2008, 2009, and 2010, and the first fiscal quarter of 2011. A one percent change in our allowance for doubtful accounts would not have a material effect on our consolidated financial statements.

Long-lived Assets, Including Goodwill and Identifiable Intangible Assets

We apply ASC Topic 350 “Intangibles—Goodwill and Other” in accounting for the valuation of goodwill and identifiable intangible assets. In accordance with this guidance, we assess our goodwill on the first day of the fourth fiscal quarter of each year, or more frequently if we believe events or changes in circumstances indicate that goodwill might be impaired. The events and circumstances that we consider include deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. Because we operate in two segments, we perform the impairment test for each segment or reporting unit by comparing the estimated fair value of each segment to the carrying value of the goodwill in each of the respective segments. Our goodwill impairment test requires the use of fair-value techniques which are inherently subjective.

We determine fair value using a combination of the income approach, which utilizes a discounted cash flow model, and the market value approach. Both of these approaches are developed from the perspective of a market participant. Under the income approach, we calculate the fair value of the segment or reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market multiples of revenue and earnings for comparable publicly traded companies or comparable sales transactions of similar companies. The estimates and assumptions used in our calculations include revenue growth rates, expense growth rates, expected capital expenditures to determine projected cash flows, expected tax rates, and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity and our weighted-average cost of capital.

Both of these approaches include inherent uncertainties. With the income approach there are uncertainties around our estimates of the future cash flows of our segments; the most significant of which include our estimates of future revenue growth, operating expense growth, and projected cash flows from operations. In making these estimates, we have considered factors important to our business, including gross bookings, pricing, market penetration, competition, seasonality, and customer churn. With the market approach, uncertainties exist around future market valuations of comparable publicly traded companies. Significant changes in these estimates or their related assumptions in the future for the income and market approaches could result in an impairment charge related to our goodwill. As of January 1, 2011 and April 2, 2011, our goodwill balance was $6.5 million.

In addition, we periodically review the estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life, using a two-step approach. The first step screens for impairment and, if impairment is indicated, we will employ a second step to measure the impairment. If we determine that impairment has occurred, we will record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. Although we believe goodwill and intangible assets are appropriately stated in our consolidated financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance. There was no impairment of goodwill or intangible assets with indefinite lives in fiscal years 2008, 2009, or 2010, or the first fiscal quarter of 2011.

In accordance with ASC Topic 360-10 “Property, Plant and Equipment,” we test long-lived assets for impairment when events or changes in circumstances may indicate that the carrying amount of an asset may not

 

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be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as an amount by which the carrying amount of the assets exceed the discounted future net cash flows.

Preferred Stock Warrants

Freestanding warrants related to shares that are redeemable are accounted for in accordance with the applicable guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Under the provisions of this guidance, we classify the freestanding warrants that are related to our convertible preferred stock as a liability on our consolidated balance sheets. The warrants are subject to re-measurement at each balance sheet date, and we recognize any change in fair value as a component of other income (expense). During the second fiscal quarter of 2011, all preferred stock warrants remaining outstanding were exercised and the liability was reclassified to additional paid-in capital.

We estimated the fair value of the preferred stock warrant liability using the Black-Scholes valuation model which required us to make a number of estimates and assumptions. For the valuation inputs to the Black-Scholes valuation model, we utilized the following assumptions: (1) estimated fair value of preferred stock—the fair value of our common stock; (2) exercise price—the exercise price of the warrant units; (3) expected life—the remaining term of the warrant units; (4) risk-free interest rate—the U.S. Treasury yield curve in place at each quarterly measurement date; (5) dividend yield—zero; (6) forfeiture rate—zero; and (7) volatility—the same as used for the common stock option grants made during the quarter of each measurement.

 

     Fiscal Year     First Fiscal
Quarter
 
     2008     2009     2010     2011  
                       (unaudited)  

Weighted-average fair value of warrants outstanding

   $ 0.14      $ 0.13      $ 0.09      $ 0.08   

Risk-free interest rate

     1.25     0.68     0.26     0.26

Expected volatility

     53.9     45.0     29.2     28.9

Weighted-average expected life in years

     4.25        3.26        2.20        7.88   

Dividend yield

     0     0     0     0

In estimating the fair value of the convertible preferred stock, we consider the following factors, among others: market transactions with preferred stockholders; quarterly valuation results for the common stock as determined by the board of directors; the rights and privileges of the convertible preferred stockholders in comparison to the common stockholders and expectations of the convertible preferred stockholders regarding our future possible liquidity events. There have been limited market transactions with preferred stockholders, and therefore we have placed a higher consideration on the other noted factors. In considering the above factors, we concluded that the estimated fair value of our common stock was the best indicator of the fair value of the redeemable convertible preferred stock and thus utilized the fair value of the common stock as a reasonable estimate of the fair value of the convertible preferred stock. Significant judgment is required in determining the expected volatility of our common stock. The expected volatility of the stock is determined based on our peer group in the industry in which we do business because we do not have historical volatility data for our own stock. In the future, as we gain historical data for volatility in our own stock, expected volatility may change which could substantially change the measurement date fair value and ultimately the other income (expense) we record.

Stock-Based Compensation

Prior to January 1, 2006, we accounted for employee stock options using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” or

 

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APB No. 25, and Financial Accounting Standards Board, or FASB, Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25.” The intrinsic value represents the difference between the per share market price of the stock on the date of grant and the per share exercise price of the respective stock option. We generally grant stock options to employees for a fixed number of shares with an exercise price equal to the fair value of the shares on the date of grant. Under APB No. 25, no compensation expense was recorded for employee stock options granted at an exercise price equal to the market price of the underlying stock on the date of grant.

On January 1, 2006, we adopted the provisions of the applicable guidance under ASC Topic 718 “Compensation—Stock Compensation” for share-based payment transactions. Under the provision of this guidance, stock-based compensation costs for employees are measured on the grant date, based on the estimated fair value of the award on that date, and are recognized as expense over the employee’s requisite service period, which is generally over the vesting period, on a straight-line basis. We adopted this guidance using the prospective transition method. Under this transition method, non-vested option awards outstanding on January 1, 2006, continue to be accounted for under the minimum value method, and all awards granted, modified or settled after the date of adoption are accounted for using the measurement, recognition and attribution provisions of this guidance.

Under the provisions of this guidance, we make a number of estimates and assumptions. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as an adjustment in the period estimates are revised. Actual results may differ substantially from these estimates. In valuing share-based awards under this guidance, significant judgment is required in determining the expected volatility of our common stock and the expected term individuals will hold their share-based awards prior to exercising. Expected volatility of the stock is based on our peer group in the industry in which we do business because we do not have historical volatility data for our own stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding and is calculated based on historical information. In the future, as we gain historical data for volatility in our own stock and more data on the actual term employees hold our options, expected volatility and expected term may change, which could substantially change the grant-date fair value of future awards of stock options and ultimately the expense we record.

During 2010 and the first fiscal quarter of 2011, we granted options to purchase our common stock as follows, utilizing the following assumptions in accordance with ASC Topic 718:

 

    Grant
Date
    No.
Shares
    Per
Share
Exercise
Price
    Black-
Scholes

Per
Share
Fair
Value
    Aggregate
Fair
Value
    Estimated
Fair
Market

Value of
Common
Stock
    Dividend
Yield
    Volatility     Expected
Life

(Years)
    Forfeitures     Risk-Free
Interest
Rate
 

2010:

                     

First Quarter

    2/23/2010        3,500,000      $ 0.14      $ 0.06      $ 210,000      $ 0.14        0     49.2     6.0        20.0     2.48

Second Quarter

    -          -          -          -          -          -          -          -          -          -          -     

Third Quarter

    -          -          -          -          -          -          -          -          -          -          -     

Fourth Quarter

    10/20/2010        1,250,000      $ 0.18      $ 0.06      $ 72,625      $ 0.18        0     38.9     6.0        2.0     1.41

2011:

                     

First Quarter

    2/9/2011        4,500,000      $ 0.21      $ 0.12      $ 531,600      $ 0.21        0     58.1     6.0        14.9     2.7

 

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As of April 2, 2011, we had approximately $0.7 million of unrecognized stock-based compensation expense that will be expensed over a weighted-average period of approximately 3.09 years. The table below shows the intrinsic value of our outstanding vested and unvested options as of April 2, 2011 at the initial public offering price of $                     per share, the mid-point of the price range on the cover of this prospectus.

 

No. Options Outstanding

   Number of Shares
Underlying
Options
     Aggregate Intrinsic
Value
 

Vested

     105,254,009      

Unvested

     9,892,793      
           

Total

     115,146,802      

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

In valuing our common stock, our board of directors utilized valuation methodologies such as an income approach, a market approach and a probability weighted expected return method to estimate the value of our common stock based upon an analysis of expected future cash flows considering possible future liquidity events, as well as the rights and preferences of each share class.

In determining the value of our common stock from the first quarter of 2010 through the third quarter of 2010, our board of directors analyzed fair value using an income approach and a market approach. The income approach seeks to derive the present value of an enterprise based on a discount of future economic benefits. In performing the income approach, our board of directors used the discounted cash flow method. In performing the market approach, our board used the Guideline Public Company Method. The Guideline Public Company Method attempts to determine enterprise value based on comparisons to public companies in similar lines of business.

In determining the value of our common stock starting in the fourth quarter of 2010, our board of directors utilized the probability weighted expected return method and considered four possible scenarios: (i) an acquisition by another company, or an acquisition scenario, (ii) the completion of an initial public offering, or an IPO scenario, (iii) a delayed IPO scenario, and (iv) remaining private, or a private scenario.

In valuing our common stock in the acquisition scenario, we determine a business enterprise value of our company using an income approach which estimates the present value of future estimated debt-free cash flows, based upon forecasted revenue and costs. Our board of directors adds these discounted cash flows to the present value of our estimated enterprise terminal value, the multiple of which is derived from comparable company market data. Our board of directors discounts these future cash flows to their present values using a rate corresponding to our estimated weighted average cost of capital.

In valuing our common stock in the IPO and delayed IPO scenarios, we utilize a market approach which estimates the fair value of a company by applying to that company the market multiples of publicly traded companies operating within the same industry. Based on the range of these observed multiples, we exercise judgment in determining an appropriate multiple to apply to our metrics in order to derive an indication of value.

In valuing our common stock in the private scenario, we apply the income approach utilizing a terminal period value calculated using the Gordon growth model and a residual revenue growth rate in the terminal year based on our expectation of long-term growth.

First Quarter 2010

In the first quarter of 2010, our board of directors considered our performance as well as a valuation report to determine a fair value of our common stock equal to $0.14 per share. The determination was based on the present value of estimated future net cash flows under the income approach and an increase in EBITDA growth for comparable public companies within our industry under the Guideline Public Company Method.

 

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Second Quarter 2010

In the second quarter of 2010, we did not issue any stock options and therefore our board of directors did not analyze the fair value of our common stock.

Third Quarter 2010

In the third quarter of 2010, we did not issue any stock options and therefore our board of directors did not analyze the fair value of our common stock.

Fourth Quarter 2010

In the fourth quarter of 2010, the U.S. economy continued to stabilize, U.S. stock markets continued to improve, access to capital and debt markets increased, our sales performance showed considerable improvement, and the enterprise value of comparable publicly-traded peers improved. We also commenced due diligence on our IPO process and representatives of our underwriters provided us with estimated valuation ranges for our initial public offering assuming an offering in the second quarter of 2011. Our board of directors considered the above factors, a valuation report dated October 2, 2010, and the probability weighted expected return method to arrive at a fair value of our common stock of $0.18 per share.

First Quarter 2011

In the first quarter of 2011, we continued our IPO process and our sales performance continued to improve. Our board of directors considered the above factors, a valuation report dated January 1, 2011, and the probability weighted expected return method to arrive at a fair value of our common stock of $0.21 per share.

Deferred Tax Asset Valuation Allowance

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amount and the tax basis of assets, liabilities, and net operating loss carryforwards. We establish valuation allowances when the recovery of a deferred tax asset is not likely based on historical income, projected future income, the expected timing of the reversals of temporary differences, and the implementation of tax-planning strategies. Significant management judgment is required to determine our provision for income taxes and whether deferred tax assets will be realized in full or in part.

Our net deferred tax asset balance was approximately $12.1 million at April 2, 2011 and primarily related to prepaid and accrued expenses and net operating loss carryforwards. As of April 2, 2011, we did not maintain a valuation allowance related to our ability to realize net operating loss carryforwards in future periods.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements and we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We had cash of $1.1 million, $3.2 million, $2.1 million, and $4.5 million as of January 3, 2009, January 2, 2010, January 1, 2011, and April 2, 2011, respectively. Any declines in interest rates will reduce future interest income. If overall interest rates had fallen by 10% in fiscal 2010, our interest income would not have been materially affected.

 

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During fiscal 2010, outstanding borrowings under our Prior Credit Facility bore interest at Comerica Bank’s prime rate plus 0.75% or 6%. As of January 1, 2011 and April 2, 2011 we had no outstanding borrowings under our Prior Credit Facility. In March 2011, we terminated our Prior Credit Facility and established our Current Credit Facility, and we currently have no outstanding borrowings under our Current Credit Facility. If overall interest rates had increased by 10% in fiscal 2010, our interest expense would have increased by $0.7 million. If overall interest rates had increased by 10% during the first fiscal quarter of 2011, our interest expense would not have changed as we had no outstanding borrowings under our Current Credit Facility.

Foreign Currency Risk

Our results of operations and cash flows are not subject to fluctuations due to changes in foreign currency exchange rates. We bill our customers in U.S. dollars and receive payment in U.S. dollars, and all of our operating expenses are denominated in U.S. dollars.

Internal Control Over Financial Reporting

The SEC, pursuant to Section 404 of the Sarbanes-Oxley Act, adopted rules requiring that a reporting company’s management report on and its independent registered public accounting firm attest to the company’s internal control over financial reporting in the company’s annual report. Our first Annual Report on Form 10-K to be filed following the completion of the offering will not include a report of management’s assessment regarding internal control over financial reporting or an attestation report from our independent registered public accounting firm due to a transition period established by SEC rules applicable to newly public companies. Management will be required to provide an assessment of the effectiveness of our internal control over financial reporting as of December 30, 2012.

Recent Accounting Pronouncements

In October 2009, the FASB updated FASB ASC 605, “Revenue Recognition” that amended the criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third–party evidence if vendor-specific objective evidence is not available, or the estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments will change the application of the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We believe the impact of adoption of this update will not have a material effect on our financial position or results of operations.

In January 2010, the FASB updated FASB ASC 820, “Fair Value Measurements and Disclosures,” requires additional disclosures and clarifies existing disclosures regarding fair value measurements. The additional disclosures include (i) transfers in and out of Levels 1 and 2 and (ii) activity in Level 3 fair value measurements. The update provides amendments that clarify existing disclosures on (i) level of disaggregation and (ii) disclosures about inputs and valuation techniques. This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the update on January 3, 2010 as required and concluded it did not have a material impact on our consolidated financial position or results of operations.

 

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BUSINESS

Our Company

We are a leading U.S. provider of technology-enabled parcel and freight transportation solutions to direct-to-consumer retailers, manufacturers, distributors, and third-party logistics and fulfillment providers. We operate in two business segments: parcel solutions and freight services.

In our parcel solutions business, we manage and arrange the delivery of large volumes of parcels from e-commerce, catalogue, and televised home shopping retailers primarily to consumers’ homes and, in the case of merchandise returns, from consumers back to retailers. By consolidating parcels from many customers and consumers and using the United States Postal Service, or the USPS, for last-mile delivery and first-mile pickup, we are able to provide cost-effective, reliable, and convenient shipping solutions. Utilizing our proprietary, web-based technology platform, we believe our customers are able to improve their parcel shipping processes, reduce transportation and inventory costs, and improve consumer satisfaction. We provide parcel solutions to many leading U.S. online, catalogue, and other direct-to-consumer retailers, and leading third-party logistics providers, including Brother International, CDS Global, Inc., GENCO ATC, Lands’ End, Maritz Holdings, Mason, Neiman Marcus, QVC, Universal Screen Arts Group, and Victoria’s Secret, who collectively constituted 50.8% of our revenue and ten of our top twelve customers based on revenue during the first fiscal quarter of 2011.

We offer a national, integrated parcel delivery and return solution to our parcel customers. For parcel deliveries, we consolidate many customers’ parcels having the same regional destination at one of our six SmartCenter parcel processing and distribution facilities and transport them to USPS distribution facilities in those regions to take advantage of lower cost USPS local delivery rates. For merchandise returns, the USPS picks up parcels from many consumers in the same region and consolidates them at USPS distribution facilities where we retrieve and transport them to one of our SmartCenters to be returned to our customers in aggregated shipments. We received, sorted, and transported an aggregate of approximately 41.3 million parcels and 11.5 million parcels at our SmartCenter distribution and processing facilities in fiscal 2010 and the first fiscal quarter of 2011, respectively.

Our proprietary, web-based technology platform, Intelligent Logistics Management, or ILM, can be integrated with our customers’ and third-party enterprise systems, thus enabling us to customize our parcel solutions to meet the requirements of each customer’s unique supply chain strategy. Through our technology platform, our customers are able to track individual parcels, receive in-transit parcel status and delivery confirmations, and transfer shipment-level data to their financial and customer management systems. Our customers have the ability to create customized reports using our software tools, enabling them to monitor service quality, confirm billing accuracy, and perform business analysis to identify potential operational improvements related to parcel deliveries and returns. We create and host customer-branded websites in which consumers can track parcels, initiate the return or exchange process, and arrange for pickup of returns. We believe these tools allow our customers to significantly reduce call center costs and improve the overall consumer shopping experience.

We created an innovative parcel return solution that utilizes the extensive USPS local network and our proprietary software applications to improve the consumer return process, a key factor in maintaining consumer satisfaction with direct-to-consumer shopping. Our Newgistics SmartLabel technology and strategic alliance with the USPS simplifies the returns process by offering consumers pre-paid return via pickup from their home or workplace or drop off at any USPS collection box or Post Office. Specific product and consumer data embedded in the intelligent barcodes in our Newgistics SmartLabel provide our customers with the ability to sort and process returned merchandise based on predetermined business rules. This feature provides our customers visibility into their return process, which we believe allows them to manage inventory more efficiently and process credit to consumers more quickly.

 

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In our freight services business, we offer a range of less-than-truckload, or LTL, truckload, and expedited transportation management solutions that utilize capacity provided by third-party carriers. Our freight services offerings include rate negotiation, carrier selection, carrier and routing management, bill and audit administration, and consolidated freight payment services. For LTL services, after an in-depth consultation and analysis with our customer to identify cost savings opportunities, we negotiate transportation rates and terms with carriers on behalf of our customers, providing our customers with committed capacity, responsive service, and rate transparency. Our customers benefit from our aggregate buying power, and as a result, we believe we are able to reduce our customers’ total annual transportation and logistics costs by approximately 10% to 20%, while providing high quality service.

For both our parcel solutions and our freight services businesses, we utilize a non-asset based operating model. We do not own the transportation equipment used to transport our customers’ shipments. Instead, we rely on the USPS for local pickup and delivery of parcels, and capacity provided by third-party carriers for all of our other parcel and freight services transportation requirements. Our SmartCenter processing and distribution facilities are leased with terms of three to four years. As a result, our business model requires minimal capital investment or fixed expenses, resulting in enhanced free cash flow and return on our invested capital.

We are led by an experienced management team with extensive industry knowledge. We believe that our focus on quality, innovation and customer service, extensive distribution network, and strong relationships with the USPS and third-party carriers have contributed to our leading market position.

We believe the significant growth we have experienced reflects both our ability to provide valuable services at a competitive price and the substantial growth in the direct-to-consumer retail industry. In 2007, we complemented our organic growth with the successful acquisition of two businesses that enabled us to expand our distribution network and service offerings. Our revenue for fiscal 2008, 2009, and 2010 was $129.3 million, $168.7 million, and $174.6 million, respectively, representing a 16.2% compound annual growth rate over the same period. Our operating income for fiscal 2008, 2009, and 2010 was $3.9 million, $8.4 million, and $13.4 million, respectively, representing a 86.1% compound annual growth rate for the same period. Our net income for fiscal 2008, 2009, and 2010 was $3.8 million, $13.1 million, and $21.4 million, respectively. Please see our Selected Consolidated Financial and Other Data, including the adjustments to net income related to our preferred stock warrant liability and net deferred tax asset valuation allowance. See note 13 to our consolidated financial statements for financial information for each our reportable segments.

Market Opportunity

Our parcel solutions segment operates within the rapidly growing direct-to-consumer parcel market while our freight services segment operates within the third-party logistics, or 3PL, market. Both markets are large and have favorable trends that we believe provide us significant growth opportunities.

Direct-to-Consumer Parcel Market

According to The Colography Group, or Colography, a leading research and consulting firm to the transportation industry, in a study commissioned by us, revenue generated in the less-than-70 pound domestic U.S. parcel market, the primary market in which our parcel solutions business participates, was $54.8 billion in 2009. In the same study, Colography estimates that $37.7 billion of this market was related to delivery of parcels with transit times of two or more days, of which approximately 31%, measured by number of shipments, represented deliveries from businesses to residences, or direct-to-consumer deliveries.

We believe the growth of the domestic parcel market is increasingly being driven by growth in direct-to-consumer retail sales, especially growth in e-commerce retail sales. Retailers, manufacturers, and distributors are increasingly responding to changing consumer purchasing patterns by using multiple direct-to-consumer channels such as websites, catalogues, television commercials, shopping networks, smartphones, and other mobile devices and media to market and sell products. Utilizing direct-to-consumer channels in addition to, or in lieu of, brick-and-mortar store locations allows retailers to capture sales to consumers who prefer to shop through alternative channels.

 

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We believe a number of key trends are reshaping the retail industry, positively affecting the direct-to-consumer parcel market, including:

The growth of direct-to-consumer retail sales is significantly outpacing the growth of the broader retail market. According to the U.S. Census Bureau, sales from electronic shopping and mail-order houses increased at a 9.1% compound annual growth rate from $113.9 billion in 2000 to $270.8 billion in 2010. During this same period, total retail sales increased at only a 2.8% compound annual growth rate. In 2010, sales from electronic shopping and mail-order houses increased 15.7%, while total retail sales increased 7.0%. In 2009, e-commerce sales represented the largest and one of the fastest growing components of sales from electronic shopping and mail-order houses. According to the U.S. Census Bureau, e-commerce sales increased at a 20.1% compound annual growth rate, from $27.5 billion in 2000 to $143.4 billion in 2009, the latest annual data available. We believe the following trends will drive continued growth in the direct-to-consumer retail market:

 

   

traditional brick-and-mortar retailers are increasingly using the internet as an alternative sales channel and distinct profit-generating business unit;

 

   

online purchases are increasing as consumers take advantage of the convenience of increased product selection and availability of online shopping, and improvements in security and electronic payment technology;

 

   

adoption of mobile internet applications is accelerating and rapid introduction of new mobile technologies is improving internet accessibility and expanding the number of internet users; and

 

   

direct-to-consumer retailers are increasingly offering free shipping and adopting services that make the return process more convenient, in an effort to improve consumer satisfaction.

The increase in direct-to-consumer sales and marketing channels is creating challenges for retailers. Fulfilling direct-to-consumer orders creates customer service and supply chain management challenges for retailers. Consumers want both the convenience of shopping online and reliable, on-time parcel delivery. However, since consumers shopping online cannot inspect the merchandise at the time of purchase, they return or exchange merchandise at a higher rate than when shopping in a store. Both the consumer and retailer desire to track these deliveries and returns, with the consumer expecting a prompt credit for returned merchandise and the retailer wanting to quickly and efficiently return merchandise to stock.

A convenient, cost-effective parcel return and delivery capability is critical to direct-to-consumer retailers. We believe reliable, convenient, and cost-effective parcel return and delivery services are an essential component of successful direct-to-consumer retail sales strategies, and are increasingly a point of competitive differentiation among retailers. Direct-to-consumer retailers also desire return and delivery solutions that enable them to improve inventory management, streamline supply chain processes, and ensure consumer satisfaction. Critical elements of a parcel return and delivery service meeting these needs include:

 

   

reliable, convenient, and cost-effective parcel shipping;

 

   

shipment tracking during return and delivery;

 

   

technology integration into the customers’ enterprise systems to allow them to efficiently manage their supply chain processes;

 

   

pre-paid return via pickup at home, work, or other convenient location;

 

   

flexible solutions tailored to the specific needs of the retailer and their customer; and

 

   

a high level of customer service supported by an understanding of the retailers’ business practices.

Third-Party Logistics Services Market

Our freight services segment operates in the U.S. 3PL services market. According to Armstrong & Associates, Inc., or Armstrong, a leader in supply chain market research and consulting, the outsourced U.S. 3PL market grew at a compound annual rate of 10.1%, from 2000 to 2008 before declining 15.7% in 2009. In

 

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January 2011, Armstrong estimated that the U.S. 3PL market grew 13.5% to $121.6 billion in 2010 and that in 2010, $36.2 billion of this market would be related to the domestic transportation management market, the primary market in which our freight services business operates.

Today’s business environment requires companies to continually improve the efficiency and cost-effectiveness of their distribution services while maintaining focus on core competencies. Companies face competitive pressures to reduce transportation costs and improve customer service and are increasingly recognizing the efficiencies of outsourcing. This trend towards outsourcing certain supply chain functions is driving the use of 3PL providers such as freight brokers, freight forwarders, customs brokers, warehouse providers, transportation management providers, and distribution companies.

Our Competitive Strengths

We believe the following competitive strengths will continue to drive our success in the future:

Leading value-added parcel return solution. We collaborated with the USPS during the development of the Parcel Return Service, or PRS, a USPS program that permits approved providers to retrieve returned parcels from designated USPS facilities. We were the first USPS-approved PRS provider, and, as of April 2, 2011, we, United Parcel Service, Inc., or UPS, and FedEx Corporation, or FedEx, were the only approved PRS providers. During the 12-month period ended September 30, 2010, we shipped approximately 22.9 million parcel returns, representing approximately 80.4% of the returns shipped through the PRS program during that period. Our parcel return solution simplifies the returns process by offering consumers pre-paid return via pickup by the USPS at the consumer’s home or workplace or via drop-off at any USPS collection box or Post Office. We create and host customer-branded websites where consumers can initiate returns or exchanges, obtain return shipping labels, arrange for pickup at their residences, and track parcels. Intelligent barcodes embedded in our Newgistics SmartLabel provide our customers with order, product, and consumer data more quickly, enabling them to more efficiently manage their transportation and returns processing resources.

Reliable and cost-effective integrated parcel return and delivery network. Our transportation network is designed to meet the growing demand from direct-to-consumer retailers for a reliable, cost-effective, and convenient return and delivery service. We use our technology platform to integrate our SmartCenters and third-party carriers and rely on the USPS first-mile and last-mile network to provide a reliable residential transportation service with end-to-end shipment visibility. Over 97% of the measurable parcels we shipped in fiscal 2010 were delivered in less than seven business days, averaging less than 3.7 business days from receipt by us or the USPS to delivery. Because we process both deliveries and returns within a single network, we are able to procure transportation capacity at a lower cost by purchasing from third-party transportation providers on a round-trip basis, which reduces the transportation costs they incur repositioning equipment for subsequent loads. As our parcel volumes increase and density in our SmartCenters and third-party carrier network increases, we believe we will be able to lower our transportation and processing cost per parcel and reduce parcel transit time.

Flexible and customizable parcel solutions. Our parcel solutions allow our customers to customize their parcel delivery and return processes to support their own unique supply chain, customer service, and marketing strategies. We handle a wide range of mail and parcel classifications and, unlike the major integrated express and parcel carriers, we allow our customers to combine both mail and parcels into one shipment for pickup by us or delivery to our SmartCenters. Our SmartCenters and technology platform are designed to be flexible, allowing customers to optimize their own internal fulfillment and outbound tendering procedures without having to conform to our system. Our proprietary technology platform allows our customers to customize parcel sorting and routing based on shipment, product, and consumer information.

 

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Scalable proprietary information technology platform. Our proprietary, web-based ILM technology platform provides parcel visibility, shipment level data transfer and reporting, and consumer interfacing tools. We have invested significant resources in developing our industry leading ILM suite of solutions and enterprise tools. Our proprietary technology platform is capable of handling a significant increase in the number of customers we serve and shipments we process with minimal additional capital investment. Our applications can be integrated into our customers’ order, warehouse, billing, consumer relationship, and financial management systems, enabling real-time data transfer and customized data reporting based on the customer’s own preferences. We expect to continue to develop and offer new solutions to improve the efficiencies and performance of our customers’ supply chains, lower their operating costs, and enhance the satisfaction of their consumers.

High level of customer service. We have built our business on the principle of superior customer service, which is critical to our success. Each parcel solutions customer is assigned a dedicated account manager who is responsible for customer service. We train and empower our account managers and customer service representatives to resolve customer concerns as quickly as possible. Account managers are also responsible for identifying opportunities for improvement in our customers’ parcel processes, and working with our sales, operations, and technology teams to design and implement enhancements to improve their performance. We operate a 24-hour customer call center where our team of customer service representatives are available via telephone, instant messaging, or e-mail to provide assistance regarding parcel tracking, handling instructions, shipment data transfer, or any other matter. We utilize a proactive customer service process to identify opportunities to do more for our customers and to increase customer retention.

Long-term relationships with our parcel solutions customers. Our parcel solutions customers include many leading U.S. direct-to-consumer retailers, consumer electronics manufacturers, and third-party logistics and fulfillment providers. We have established long-term relationships with many of our parcel solutions customers. Most of our parcel services contracts have initial terms of one to three years. We have experienced an 87.4% renewal rate of parcel solutions contracts expiring during the past three fiscal year period.

Non-asset based business model. Our non-asset based operating model enables us to scale our business up and down in response to changing business conditions. Furthermore, our operating model requires no investment in transportation equipment and minimal investment in facilities, which we believe enhances our returns on invested capital and assets. We obtain all of our network transportation capacity from third-party transportation providers and utilize the USPS for last-mile delivery and first-mile parcel pickup. All of our SmartCenter facilities are leased. Our net capital expenditures for fiscal 2008, 2009, and 2010, were $3.5 million, $2.9 million, and $2.2 million, respectively, which represented 2.7%, 1.7%, and 1.3% of our total revenue, respectively. We believe our non-asset based business model enhances our ability to grow our revenue with relatively minimal capital investment.

Experienced senior management and postal operations team. We have attracted a knowledgeable and talented senior management team with extensive industry experience and a complementary mix of operational and technical capabilities, sales and marketing experience, and financial management skills. Our management team is led by our Chief Executive Officer, William J. Razzouk. Mr. Razzouk has substantial industry experience and previously has held various management positions with FedEx, ultimately serving as the Executive Vice President, Worldwide Customer Operations. We also have a postal operations team with extensive operational management experience with the USPS.

 

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Our Strategy

Our objective is to strengthen our position as a leading provider of parcel transportation solutions and grow our parcel solutions and freight services businesses through the following strategies:

Expand our customer base. We intend to develop new long-term customer relationships by capitalizing on our leadership in parcel return solutions, our scalable technology, and our experience in the direct-to-consumer retail market. Historically, we have targeted high-volume, direct-to-consumer retailers that we believe value our solutions-based approach. Recently, we hired additional marketing and sales leadership and developed a targeted marketing strategy to expand our presence with middle market direct-to-consumer retailers. We also developed new technology solutions to facilitate the adoption of our solutions by these customers. We plan to continue to hire additional sales representatives, develop new technology solutions, and increase the use of demand-generation tools to identify and acquire new customers. We will continue to pursue high-volume, direct-to-consumer parcel customers as a significant component of our growth strategy.

Further penetrate our existing base of rapidly growing customers. We believe our existing customer base presents a significant opportunity for future growth. According to the U.S. Census Bureau, the electronic shopping and mail-order retail industry, the industry in which many of our parcel solutions customers participate, grew over three times faster than the overall retail industry from 2000 to 2010. We initiated our parcel return services in 2002 and established significant scale in return volumes before adding our delivery service offering in 2008. Many of our existing parcel returns customers would benefit from the operating efficiency and cost reduction we believe is achievable by also purchasing their parcel delivery solutions from us. In addition, we intend to expand our service offerings with our existing customers through the continued enhancement of our technology and processing capabilities.

Increase volumes to leverage existing parcel solutions infrastructure. In order to achieve our service delivery time commitments, we operate a scheduled transportation network that requires our transportation providers to depart our SmartCenters at a designated time regardless of shipment volumes. Although we do not own or lease transportation assets, our scheduled network design results in inherent operating leverage in our business model. As parcel volumes increase and excess purchased transportation capacity is absorbed, we achieve higher levels of capacity utilization resulting in a decrease in our transportation and processing cost per parcel. Our SmartCenter network and technology platform are capable of handling large increases in parcel volume with minimal additional capital investment or corresponding increases in operating costs. For example, the number of parcels shipped through our network increased from 26.8 million in fiscal 2008 to 41.3 million in fiscal 2010, or 54.1%, while our parcel solutions segment operating expenses increased from $18.9 million to $21.8 million, or 15.3%, during the same period.

Selectively pursue strategic acquisitions. We intend to actively pursue acquisitions of non-asset or asset-light logistics providers that complement our existing services and capabilities, diversify and further penetrate our customer base, and accelerate our earnings growth.

Our History

We were incorporated in 1999 and have grown to become a leading provider of parcel return management solutions to the e-commerce retail industry. Between 1999 and 2002, we focused on building our core technology infrastructure. In 2002, we launched a dedicated distribution network utilizing our Newgistics SmartLabel technology to process consumer parcel returns and provide return parcel tracking visibility. In 2004, we collaborated with the USPS to introduce PRS, a program that permits approved providers to retrieve returned parcels from designated Post Office locations or from designated USPS locations.

 

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During 2007, we acquired two businesses, enabling us to offer more comprehensive and cost-effective parcel and freight transportation solutions. In March 2007, we acquired Newgistics Freight Services, Inc., or NFS, formerly known as Logistics Management, Inc., a provider of transportation management solutions, including carrier and routing management, management information tools, freight bill administration, and consolidated freight payment services. The acquisition of NFS enabled us to leverage NFS’s aggregate purchasing power capability to achieve better rates for our purchased transportation and establish a national platform to grow our logistics services portfolio through both organic and strategic initiatives. In 2010, NFS serviced more than 1,600 small to medium-sized shippers that benefitted from our contractual freight rates with quality national and regional LTL and truckload carriers. In December 2010, we changed the name of NFS to Newgistics Freight Services, Inc.

In December 2007, we acquired Cornerstone Shipping Solutions, Inc., or Cornerstone, a provider of parcel delivery and consolidation solutions that leveraged the USPS network to provide competitive pricing and service. The acquisition of Cornerstone enabled us to supplement our parcel return solutions with parcel delivery solutions, allowing us to offer a highly customized forward and reverse parcel transportation offering in a single integrated network. In January 2009, we merged Cornerstone into Newgistics, Inc.

Our Service Solutions

We offer a broad range of solutions and services through two principal operating segments: parcel solutions and freight services.

Parcel Solutions

In our parcel solutions business, we manage and arrange the delivery of parcels from e-commerce, catalogue, and televised home shopping retailers primarily to consumers’ homes and, in the case of merchandise returns, from consumers back to retailers. Our customer base includes many of the leading online, catalogue, and other direct-to-consumer retailers, consumer electronics manufacturers, and 3PL and fulfillment providers in the United States. Our parcel transportation network leverages the frequency and comprehensive residential coverage of the USPS’ last-mile delivery and first-mile pickup network offering consumers a convenient return and delivery service that is price competitive with comparable services of the major integrated parcel carriers. We process and transport parcels that meet the weight and dimension requirements of the USPS, or parcels that weigh up to 70 pounds and have a maximum combined length and girth of 130 inches. Throughout the transportation process, we provide our customers with continuous access to a secure, web-based portal with analytical capabilities that include end-to-end parcel tracking and parcel characteristics. We shipped approximately 41.3 million parcels and 11.5 million parcels in fiscal 2010 and the first fiscal quarter of 2011, respectively.

Parcel Return Service

Our Intelligent Returns Management, or IRM, solution is designed to simplify the parcel return process for consumers in order to improve the consumer’s purchasing experience, increase consumer loyalty, and generate repeat purchases. We believe that a more convenient return process also reduces “trunk time,” or the amount of time merchandise is held by consumers before being returned. By reducing trunk time, the risk of the returned item becoming obsolete is reduced and the likelihood of a substitute purchase is increased. Using our solutions to process returns and interface with consumers allows our customers to reduce parcel return-related call center activity, reduce associated freight costs, and improve inventory management.

Our technology platform is integrated with most of our return customers’ distribution systems, enabling them to print our pre-paid, pre-addressed Newgistics SmartLabel at the time the order is fulfilled and include it in the parcel with the merchandise shipped to the consumer. To initiate the return process, the consumer either retrieves the Newgistics SmartLabel from the originally delivered parcel or goes online to our customer’s website to print or request a Newgistics SmartLabel. The consumer then attaches the Newgistics SmartLabel to

 

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the returning parcel and tenders it to the USPS. The return parcels can be picked up from the consumer’s home or be dropped off at any one of approximately 175,000 USPS collection boxes or any Post Office or other USPS location. Alternatively, consumers may go online to arrange for a scheduled pickup by the USPS at their residence. Return parcels are scanned by USPS personnel upon receipt, and relevant shipment data is electronically transferred from barcodes embedded in our Newgistics SmartLabel through our technology platform to our customer’s enterprise systems. This shipment data includes parcel characteristics, order number, and the consumer identity, or other data fields incorporated into the label based on our customer’s label specifications. Using this data, our customers can track return parcels, transmit electronic receipt confirmation to consumers and customer service representatives, and can more quickly provide return sales credit to the consumer.

Based on information contained in the Newgistics SmartLabel, the USPS stages a return parcel at a designated USPS facility where the parcels are consolidated for pickup by one of our third-party transportation providers and transported to one of our SmartCenters. Once a parcel is in our SmartCenter network, we scan and sort for destination according to customer-established rules. We consolidate return parcels into a single shipment or load for delivery to a customer designated facility, minimizing handling by our customers and reducing their transportation costs. We also offer our customers the ability to customize delivery times based on their preferences. Throughout the return process, we provide our customers with continuous access to a secure, web-based portal with analytical capabilities that include end-to-end parcel tracking and parcel characteristics. The following illustration demonstrates our end-to-end parcel return process:

LOGO

Parcel Delivery Service

We added our parcel delivery offering in December 2007, which has enabled us to offer a national integrated return and delivery solution. We process a wide range of mail and parcel classifications and, unlike the major integrated express and parcel carriers, allow our customers to combine both mail and parcels into one shipment for pickup or delivery to our SmartCenters. We manifest and sort our customers’ parcels into proper USPS shipment classifications based on weight and dimension after they have entered our network, removing this complex and cumbersome process from our customers’ fulfillment and distribution centers and ensuring each parcel is shipped using the lowest cost classification.

Consumer orders placed with direct-to-consumer retailers are fulfilled by our customers or their third-party fulfillment vendors. Our customers consolidate parcels of various sizes and weights and either deliver them to one of our six SmartCenter facilities, or we arrange for pickup by one of our third-party transportation providers. Upon arrival at a SmartCenter, parcels are scanned to verify receipt and transfer shipment manifest data to our customers, which enable them to begin both the revenue recognition process and the accurate allocation of costs earlier in the shipping cycle. Delivery parcels are then sorted into proper USPS mail and

 

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shipment classifications and properly labeled for accurate delivery through the USPS local delivery network. Parcels are consolidated by destination region and transported by one of our third-party transportation providers for tendering to the USPS at a facility closer to their final destination, thereby bypassing several postal distribution centers along the way. By delivering parcels to a USPS facility close to the consumer’s home, we are able to reduce transit time, minimize handling, and provide discounted prices to our customers.

The following illustration demonstrates our end-to-end parcel delivery process:

LOGO

Freight Services

Our freight services segment offers a full-range of non-asset based LTL, truckload, and expedited transportation management services in all 50 states by utilizing an extensive network of asset-based carriers. In fiscal 2010, we utilized 18 asset-based LTL carriers. We have longstanding contractual relationships with the asset-based LTL carriers with which we conduct a majority of our LTL transportation management services. Our freight services are not dependent on any particular carrier and carrier turnover is not significant to our operations. We provide the necessary operational expertise, information technology capabilities, and relationships with asset-based transportation providers to meet the unique needs of our freight services customers.

LTL Services

As part of our LTL services, we negotiate transportation rates with carriers on behalf of our customers, providing our customers with committed capacity, responsive service, and rate transparency. We are able to provide competitive rates to our customers by negotiating favorable rates with our carriers, including capped fuel surcharges that are fixed for one year, allowing our customers to budget their annual transportation costs with little risk of significant price fluctuations. Our customers benefit from our aggregate transportation capacity buying power, and as a result, we believe we are able to reduce our customers’ total annual transportation and logistics costs by approximately 10% to 20%, while providing high quality service. We have established long-term relationships with many of our customers, and provide our asset-based carriers with committed routings, revenue, and customer longevity. In connection with LTL shipments booked by us on behalf of our customers, carriers pay us a commission. The primary components of our freight services capability include the following:

 

   

Transportation Network Assessment and Carrier Contracting. We conduct a comprehensive base-line study of each of our customer’s transportation networks by analyzing their current LTL rates and freight patterns

 

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in order to identify cost savings opportunities. Based on our assessment, we recommend a carrier for each lane determined by a combination of service and price. We provide our customers with a summary of projected savings and manage the contract negotiation and execution process with each of the designated carriers.

 

   

Shipment Planning. We analyze freight patterns and consolidation opportunities to maximize cost savings. We also provide rating and routing services to ensure least-cost carrier selection.

 

   

Shipment Management. We provide our customers with real-time rate quotes and shipment tracking via web services, allowing them to provide up to date shipment costs and status to their consumers.

 

   

Freight Bill Administration and Audit Services. We collect electronic freight invoices from third-party carriers and provide payment processing services for our customers. As part of this service, we provide freight bill audit services to ensure that our customers’ invoices conform to contract terms and specific customer pricing arrangements. We also mediate carrier billing disputes on behalf of our customers.

 

   

Management Information Tools. Using our web-based software applications, our customers are able to track individual shipments, access freight rate calculators and rating engines, manage invoice imaging and storage, transfer shipment-level data to their financial management systems, and create customized dashboards and reports detailing carrier activity on an enterprise-wide basis. We identify ongoing savings opportunities for our customers by analyzing all of their transportation purchases and benchmarking these opportunities with our freight services contractual rates. We are then able to quantify cost savings through increased routing compliance with our network of carriers. We select carriers based upon a combination of service and price.

Truckload Brokerage Services

For our truckload brokerage services, we provide full-service management of every transaction, including rate quoting, load tendering, shipment tracking, delivery confirmation, and invoice payment. We arrange the pickup and delivery of truckload freight using third-party carriers.

Our Proprietary Technology Platform

Through a combination of software licensing and development, we have architected a proprietary technology platform from which our parcel solutions services and applications are derived. The core of our proprietary technology platform is our Intelligent Logistics Management suite, or ILM, which is an enterprise-level platform that is integrated with customer applications, carriers, service providers, and the USPS to provide end-to-end solutions. The platform is deployed on a scalable, reliable, and proven multi-tenant architecture and allows our clients to integrate at the level they desire, whether that is via web service application program interfaces or linking to complete web applications. The platform leverages technology from third-party technology providers, such as Microsoft Corporation, Oracle Corporation, and Informatica Corporation. In addition, our technology has been integrated into leading e-commerce technology platforms, such as Kewill, Inc., Manhattan Associates, Inc., and RedPrairie Corporation.

Our ILM suite of information technology solutions can be integrated into our customers’ information management systems, allowing us to offer solutions tailored to our customers’ specific sales, marketing, and customer service strategies. Using our ILM suite, customers can manage communication with their consumers by utilizing customer-branded websites, manage parcel flow and handling instructions based on parcel contents or brand, and automate the returns authorization and timing of consumer sales credit based on pre-established client-specific business rules. Our ILM suite incorporates the following key features:

 

   

real-time order-to-delivery parcel shipment tracking via a flexible integration framework that supports standards based interchange (i.e., XML or EDI) or custom data exchange;

 

   

in-transit parcel status and electronic subscription based delivery notification to consumer and customer service representatives;

 

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customer-branded websites for online tracking by a reference meaningful to consumers;

 

   

extensive, secure and customized data reporting to improve efficiency of handling processes and pre-sort accuracy;

 

   

merchant-configurable business rules to tailor services based on consumer type, product category, or brand identity; and

 

   

electronic return authorization based on product-specific criteria.

As part of our proprietary ILM platform, we have invested significant resources to develop a suite of solutions and enterprise tools that we believe our customers can leverage to gain efficiency in and improve the performance of their supply chain, lower their operating costs, and enhance consumer satisfaction. The key elements of our ILM suite of solutions include the following:

Intelligent Returns Management, or IRM, is a patented enterprise-level solution that provides shippers with control of the returns process by managing both the parcel and the information flow from the point-of-order, or shipment, to the final product destination. We believe the data captured by our IRM solution during the return process improves our customers’ visibility into their reverse supply chain.

Newgistics SmartLabel is a pre-paid, pre-addressed label that can be generated at the point-of-sale, or shipment, after the sale by a customer service representative, or printed by a consumer returning merchandise. Our Newgistics SmartLabel is typically included in the delivery package. The Newgistics SmartLabel features intelligent barcodes that are scanned to provide information, such as product serial numbers, order numbers, return merchandise authorization numbers, the reason for the return, as well as detail about the consumer returning the merchandise. The ILM suite supports the production of labels via the web and can be emailed or printed as a postcard and mailed to consumers.

OneShip is our proprietary, distributed warehouse control system utilized in our SmartCenter facilities. OneShip is a flexible, business rules driven system that allows for automation of workflow and processes for a variety of different warehouse configurations. It is a single system that supports initial scan, sortation, containerization, and manifesting of both return and delivery parcels. Using OneShip, we are able to efficiently manage multiple USPS mail classifications and parcel shipping products at each SmartCenter. This allows our customers to combine mail and parcels into one convenient load for pickup, eliminating costly and labor intensive pre-sorting activities.

Shipment Manager is a web-based portal that is used to access our logistics applications for managing the parcel return and delivery life cycle. This system includes applications for label creation, tracking, returns merchandise authorization, notifications, parcel pickup, advanced exchange, business intelligence, and other management tools. Customers can pick and choose the set of applications by user role and customize the data, content, workflow, and look and feel of each application.

Flexship is a label creation and data collection software program that supports all of our parcel solutions and allows our small and midsized customers to manage their shipments by importing and exporting order data for label creation and exporting label data to their systems.

Our information technology infrastructure provides a high level of security for our proprietary software and systems. The storage mechanism for our systems and database is designed to ensure that power and hardware failures do not result in the loss of critical data. Data is protected from unauthorized access through a combination of security measures, including firewalls, encryption, antivirus software, anti-spy software, passwords, and physical security, with access limited to authorized information technology personnel. In addition to our security infrastructure, our system is backed up daily to prevent the loss of our data due to catastrophic failures and natural disasters.

 

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In fiscal 2008, 2009, and 2010 and the first fiscal quarter of 2011, we incurred approximately $1.7 million, $2.2 million, $2.2 million, and $0.3 million respectively, related to research and development to further improve our technologies.

Our Strategic Relationship with the USPS

Our non-exclusive relationship with the USPS is an integral part of our operations and is critical to our success. We use the USPS for the last-mile delivery to and the first-mile pickup from consumers for virtually all of our parcel volume.

Since the early 1990’s, the USPS has been offering discounted prices to medium and large shippers and parcel consolidators for delivering parcels into the postal network closer to the final destination. Parcels are sorted, consolidated, and shipped to USPS facilities or local Post Offices for final delivery to consumer residences. The closer a parcel is delivered to the final destination, the higher the USPS discount received, resulting in lower postage costs. Parcels delivered to the Post Office closest to the consumer’s residence incur the lowest postage. When a shipper tenders a parcel for delivery to an end consumer, the USPS requires the parcel to be sorted to either a three digit or five digit zip code, as well as rated based on weight, delivery distance, and the entry facility type. As a result, many shippers prefer to use a third-party consolidator, such as ourselves, to perform this service. This service encompasses multiple USPS mail classifications, including Parcel Select. Parcel Select is a unique service offering that requires carriers to capture certain key attributes that determine USPS pricing and requires volume minimums to qualify for discounted pricing. During the 12-month period ended September 30, 2010, over 268 million parcels were shipped in the United States under the USPS Parcel Select offering, representing a 20% increase over 2009.

In 2004, we collaborated with the USPS to introduce PRS, a program that permits approved providers to retrieve returned parcels from designated Post Offices or from other designated USPS locations. PRS was initially developed as an experimental rate service provided by the USPS only through us and utilized the same concepts as were offered in Parcel Select only in reverse. These concepts involve picking up parcels at postal facilities closer to the consumer’s residence, shipping through a private network of carriers, and consolidating at SmartCenters for bulk shipment back to our customer.

Initially, we provided parcel pickup services at national distribution centers for consolidation and shipment back to our customers. By 2005, we had transitioned to providing parcel pickup services at local Post Offices, as the customer acceptance of this offering made it economical to do so. In 2006, the USPS granted permanent rate status to PRS, signaling its value to shippers and consumers. In 2009, UPS and FedEx joined the PRS program, further validating the capabilities of this service. During the twelve-month period ended September 30, 2010, we shipped approximately 22.9 million parcel returns, representing approximately 80.4% of the returns shipped through the PRS program during that period.

Since the inception of the PRS program, we have worked with the USPS to enhance and improve the program in order to meet or exceed customer expectations. For example, since 2007, our average time from initial pickup to final delivery has improved by over 50%. Working with the USPS, we are scanning parcels multiple times in the return process to provide comprehensive and real-time parcel tracking. The USPS has added scheduled pickup from the home, at no additional charge, allowing consumers to go online and schedule a parcel pickup from their front door. In 2009, the USPS added electronic manifesting to improve processing time and reduce their manual audit efforts, and we were the first program participant to implement this service. We expect to continue to work with the USPS to adopt practices that will improve the efficiency and effectiveness of our offerings.

Our Customers

We provide parcel and freight transportation solutions to customers across a wide range of industries. In fiscal 2010, we provided solutions to over 180 and 1,600 customers in our parcel solutions and freight services

 

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segments, respectively. In the first fiscal quarter of 2011, we provided solutions to over 130 and 1,100 customers in our parcel solutions and freight services segments, respectively. In fiscal 2010, QVC and GENCO ATC each accounted for more than 10% of our revenue. The loss of either of these customers would have a material adverse effect on our business.

We provide parcel solutions primarily to direct-to-consumer retailers, manufacturers, distributors, and third-party logistics and fulfillment providers. We enter into written contracts with our parcel solutions customers. Although we do not generally require volume commitments or exclusivity with our parcel solutions customers, many of our parcel solutions customers utilize our solutions for all, or a substantial portion, of their parcel return transportation requirements to streamline their transportation and inventory processes in a cost-effective manner. Most of our parcel services contracts have initial terms of one to three years. Our parcel solutions customers pay us per parcel according to contracted pricing. Our customer contracts generally provide us with flexibility to increase prices in the event of price increases by the USPS, although many of our customer contracts have limits on the size of any USPS price increase that can be passed on to the customer. We have experienced an 87.4% renewal rate of parcel solutions contracts expiring during the past three year period.