Note 1 - Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Significant Accounting Policies [Text Block]

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Express-1 Expedited Solutions, Inc. (“we”, “us”, “our” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with the instructions to Form 10-Q. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. However, we believe that the disclosures contained herein are adequate to make the information presented not misleading.

The Company provides premium transportation and logistics services to thousands of customers primarily through its three wholly owned subsidiaries: (1) Express-1, Inc. (“Express-1”) which provides time critical expedited transportation to its customers; (2) Concert Group Logistics, Inc.  (“CGL”) which provides freight forwarding services through a chain of independently owned stations located throughout the United States; and (3) Bounce Logistics, Inc. (“Bounce”) which provides premium truckload brokerage transportation services to customers throughout the United States. For specific financial information relating to these subsidiaries refer to Note 6 – Operating Segments.

These unaudited condensed consolidated financial statements reflect, in our opinion, all material adjustments (which include only normal recurring adjustments) necessary to fairly present our financial position as of June 30, 2011 and December 31, 2010 and results of operations for the three- and six- month periods ended June 30, 2011 and 2010. The preparation of the condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ materially from those estimates.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 2010 included in Exhibit 99.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission (the“SEC”) on August 15, 2011 and available on the SEC’s website (www.sec.gov). Results of operations for interim periods are not necessarily indicative of results to be expected for a full year.

Revenue Recognition

The Company recognizes revenue at the point in time delivery is completed on the freight shipments it handles; with related costs of delivery being accrued as incurred and expensed within the same period in which the associated revenue is recognized. The Company uses the following supporting criteria to determine that revenue has been earned and should be recognized:

· Persuasive evidence of an arrangement exists;

· Services have been rendered;

· The sales price is fixed and determinable; and

· Collectability is reasonably assured.

The Company reports revenue on a gross basis in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 605, “Reporting Revenue Gross as Principal Versus Net as an Agent,” and, as such, presentation on a gross basis is required as:

· The Company is the primary obligor and is responsible for providing the service desired by the customer;

· The customer holds the Company responsible for fulfillment including the acceptability of the service. (Requirements may include, for example, on-time delivery, handling freight loss and damage claims, establishing pick-up and delivery times, and tracing shipments in transit.);

· For Express-1 and Bounce, the Company has complete discretion to select its drivers, contractors or other transportation providers (collectively, “service providers”). For CGL, the Company enters into agreements with significant service providers that specify the cost of services, among other things and has ultimate authority in providing approval for all service providers that can be used by CGL independently owned stations. Independently owned stations may further negotiate the cost of services with CGL approved service providers for individual customer shipments;

· Express-1 and Bounce have complete discretion to establish sales prices. Independently owned stations within CGL have the discretion to establish sales prices; and

· The Company bears credit risk for all receivables.  In the case of CGL, the independently owned stations reimburse CGL for a portion (typically 70-80%) of credit losses. CGL retains the risk that the independent station owners will not meet this obligation.

Stock-Based Compensation

The Company has in place a stock option plan approved by the stockholders of the Company for up to 5,600,000 shares of its common stock. Through the plan, the Company offers stock options to employees and directors.

Options generally become fully vested three to five years from the date of grant and expire five to ten years from the grant date. During the six-month period ended June 30, 2011, the Company granted 200,000 options to purchase shares of its common stock while cancelling or retiring 11,000 options in the same period. During the six-month period ended June 30, 2010, the Company granted 450,000 options to purchase shares of its common stock while cancelling or retiring 152,000 options in the same period.   As of June 30, 2011 and June 30, 2010, the Company had 2,693,000 and 3,114,000 options outstanding, respectively.   As of June 30, 2011,  the Company had an additional 1,933,000 options available for future grants under the existing plan. During the life of the plan 974,000 stock options have been exercised.

The weighted-average fair value of each stock option recorded in expense for the six-month period ended June 30, 2011 was estimated on the date of grant using the Black-Scholes option pricing model and amortized over the requisite service period of the underlying options. The Company has used one grouping for the assumptions, as its option grants have similar characteristics. The expected term of options granted has been derived based upon the Company’s history of actual exercise behavior and represents the period of time that options granted are expected to be outstanding. Historical data was also used to estimate option exercises and employee terminations. Estimated volatility is based upon the Company’s historical market price at consistent points in a period equal to the expected life of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and the dividend yield is zero.

The following table summarizes the option activity for the six-month periods ended June 30, 2011 and 2010:

			Weighted Average	Weighted Average
	Options		Exercise Price	Remaining Life
Outstanding at December 31, 2010	3,005,000		$1.18	6.2
Granted	200,000		2.56
Expired	(11,000	)	1.52
Exercised	(501,000	)	1.45
Outstanding at June 30, 2011	2,693,000		1.23	6.4
Outstanding Exercisable at June 30, 2011	2,013,000		$1.08	5.7
Outstanding at December 31, 2009	3,143,000		$1.14	5.0
Granted	450,000		1.47
Expired	(152,000	)	1.25
Exercised	(327,000	)	1.25
Outstanding at June 30, 2010	3,114,000		1.17	6.0
Outstanding Exercisable at June 30, 2010	2,381,000		$1.14	5.2

For the six months ended June 30, 2011 and 2010, the Company recognized $84,000 and $93,000, respectively, in stock- based compensation.

As of June 30, 2011, the Company had approximately $270,000 of unrecognized compensation cost related to non-vested stock-based compensation that is anticipated to be recognized over a weighted average period of approximately 1.0 years. Estimated remaining compensation expense related to existing stock-based plans is $82,000, $129,000 and $59,000 for the years ended December 31, 2011, 2012 and 2013, respectively.

As of June 30, 2011, the aggregate intrinsic value of options outstanding was $5.1 million and the aggregate intrinsic value of options exercisable was $4.1 million.  As of June 30, 2010, the aggregate intrinsic value of options outstanding was $525,000 and the aggregate intrinsic value of options exercisable was $441,000.

501,000 options were exercised during the six-month period ended June 30, 2011 and 327,000 options were exercised during the six-month period ended June 30, 2010.  Cash proceeds received from the exercise of options for the six months ended June 30, 2011 and 2010 were $727,000 and $409,000, respectively.

Use of Estimates

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to:  accrued revenue, purchased transportation, recoverability of long-lived assets, accrual of acquisition earn-outs, estimated legal accruals, valuation allowances for deferred taxes, reserve for uncertain tax positions, and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made as information is available. Management believes that these estimates are reasonable and have been discussed with the audit committee; however, actual results could differ from these estimates.

Income Taxes

Taxes on income are provided in accordance with ASC Topic 740, “Income Taxes”. Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the condensed consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax basis of particular assets and liabilities, and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date. A valuation allowance is provided to offset the net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has evaluated its tax position and concluded no valuation allowance on its deferred tax assets is required, as of June 30, 2011. For state tax purposes, as of June 30, 2011, the net operating loss carry forward was approximately $1,500,000.

Accounting for uncertainty in income taxes is determined based on ASC Topic 740, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. As of June 30, 2011, the Company has accrued $200,000 for certain potential state income taxes.

Goodwill and Intangible Assets with Indefinite Lives

Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. Intangible assets with indefinite lives consist principally of the Express-1 and CGL trade names.  The Company follows the provisions of ASC Topic 350, “Intangibles – Goodwill and Other”, which requires an annual impairment test for goodwill and intangible assets with indefinite lives. If the carrying value of intangibles with indefinite lives exceeds their fair value, an impairment loss is recognized in an amount equal to that excess.  Goodwill is evaluated using a two-step impairment test at the reporting unit level.  The first step compares the book value of a reporting unit, including goodwill, with its fair value.  If the book value of a reporting unit exceeds its fair value, we complete the second step in order to determine the amount of goodwill impairment loss that we should record.  In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill.  The amount of impairment is equal to the excess of the book value of goodwill over the implied fair value of that goodwill.  The Company performs the annual impairment testing during the third quarter unless events or circumstances indicate impairment of the goodwill may have occurred before that time. For the periods presented, we did not recognize any goodwill impairment as the estimated fair value of our reporting units with goodwill significantly exceeded the book value of these reporting units.

The Company’s trade name intangible assets with indefinite lives totaled $6.4 million as of June 30, 2011 and December 31, 2010 and represented 11.5% of total assets as of June 30, 2011 and 11.3% of total assets as of December 31, 2010.

Identified Intangible Assets

The Company follows the provisions of ASC Topic 360, “Property, Plant and Equipment”, which establishes accounting standards for the impairment of long-lived assets such as property, plant and equipment and intangible assets subject to amortization. The Company reviews long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset.  During the six-month periods ended June 30, 2011 and 2010, there was no impairment of the identified intangible assets.

The Company’s intangible assets subject to amortization consist of trade names, employee contracts, non-compete agreements, customer relationships and other intangibles that are amortized on a straight-line basis over the estimated useful lives of the related intangible asset.  The estimated useful lives of the respective intangible assets range from four to 12 years.

Other Long-Term Assets

Other long-term assets consist primarily of balances representing various deposits, the long term portion of the Company’s non-qualified deferred compensation plan and notes receivable from various CGL independent station owners. Also included within this account classification are incentive payments to independent station owners within the CGL network. These payments are made by CGL to certain station owners as an incentive to join the network. These amounts are amortized over the life of each independent station contract and the unamortized portion is recoverable in the event of default under the terms of the agreements.

Fair Value Measurements

     FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and classifies the inputs used to measure fair value into the following hierarchy:

· Level 1 – Quoted prices for identical instruments in active markets;

· Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and

· Level 3 – Valuations based on inputs that are unobservable, generally utilizing pricing models or other valuation techniques that reflect management’s judgment and estimates.

Estimated Fair Value of Financial Instruments

The aggregate net fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, notes receivable, accounts payable, accrued expenses and short-term borrowings. Fair values approximate carrying values for these financial instruments since they are short-term in nature and they are receivable or payable on demand. The fair value of the Company’s long-term debt and CGL notes receivable approximated their respective carrying values based on the interest rates associated with these instruments.

Earnings per Share

Earnings per common share are computed in accordance with ASC Topic 260, “Earnings per Share”, which requires companies to present basic earnings per share and diluted earnings per share.

Basic earnings per common shareare computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.

Diluted earnings per commonshareare computed by dividing net income by the combined weighted average number of shares of common stock outstanding and dilutive options outstanding during the period.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Basic weighted average common shares outstanding		33,010,881		32,044,116		32,857,654		32,039,706
Effect of dilutive securities:  Assumed exercise of stock options		1,322,775		601,283		1,353,863		562,661
Diluted weighted average common shares outstanding		34,333,656		32,645,399		34,211,517		32,602,367

Please also refer to Note 1 of the “Notes to Consolidated Financial Statements” in the consolidated financial statements included in Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on August 15, 2011 for a more complete discussion of our significant accounting policies.