Proficient Auto Logistics Inc

Note 1 — Nature of operations

Proficient Auto Transport, Inc. and its consolidated subsidiary (collectively, “Proficient Transport”) primarily transports new automobiles for automobile manufacturers and/or their respective agents. Proficient Transport operates an asset-based truckload service on behalf of the manufacturers as well as various third-party logistics management companies or brokers. In addition, the Proficient Transport provides third party logistics to other transportation companies under an asset-light freight model.

On December 21, 2023, Proficient Transport entered into a stock purchase agreement with Proficient Auto Logistics, Inc., a Delaware corporation (“PAL” or the “parent”), and PAL Stock Acquiror, Inc., a Delaware corporation and wholly owned subsidiary of PAL (the “purchaser”). Pursuant to the terms of the stock purchase agreement, the purchaser agreed to acquire 75% of Proficient Transport’s outstanding shares in exchange for cash consideration. The shareholders of Proficient Transport agreed to contribute the remaining 25% of the outstanding shares of Proficient Transport to the purchaser in exchange for shares of PAL upon consummation of the stock purchase agreement.

Note 2 — Summary of significant accounting policies

*Basis of Presentation –*The condensed consolidated financial statements and footnotes included in this Quarterly Report include the accounts of Proficient Transport and should be read in conjunction with the consolidated financial statements and footnotes related to Proficient Transport included in PAL’s Registration Statement on Form S-1 (333-279346). In management's opinion, these condensed consolidated financial statements were prepared in accordance with GAAP and include all adjustments necessary (consisting of normal recurring adjustments) for the fair statement of the periods presented.

With respect to transactional/durational data, references to years pertain to calendar years. Similarly, references to quarters pertain to calendar quarters.

*Seasonality –*In the transportation industry, results of operations generally follow a seasonal pattern. Freight volumes in the first quarter are typically lower due to less consumer demand, customers reducing shipments following the holiday season, and inclement weather. At the same time, operating expenses generally increase, and tractor productivity of Proficient Transport’s Truckload fleet, independent contractors and third-party carriers decreases during the winter months due to decreased fuel efficiency, increased cold weather-related equipment maintenance and repairs, and increased insurance claims and costs attributed to higher accident frequency from harsh weather. These factors typically lead to lower operating profitability, as compared to other parts of the year. Additionally, beginning in the latter half of the third quarter and continuing into the fourth quarter, Proficient Transport typically experiences surges pertaining to customer’s demand to delivery automobiles before year-end. Additionally, macroeconomic trends and cyclical changes in the trucking industry, including imbalances in supply and demand, can override the seasonality faced in the industry.

Principles of Consolidation— The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany transactions and accounts have been eliminated.

Accounts Receivable— Accounts receivable represents customer obligations due under normal trade terms. Proficient Transport reviews accounts receivable on a continuing basis to determine if any receivables are potentially uncollectible. Proficient Transport writes off uncollectible receivables based on specifically identified amounts determined to be uncollectible. Based on the information available, Proficient Transport recorded an allowance for credit losses of approximately $589,317 and $634,913 at March 31, 2024 and December 31, 2023, respectively. Actual write-offs could differ from management’s estimate.

Note 2 — Summary of significant accounting policies(cont.)

Impairment of Long-Lived Assets — Proficient Transport reviews its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of the expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. Proficient Transport measures the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised value of the assets, as appropriate. There was no indication of impairment for the quarters ended March 31, 2024 and 2023.

Claims and Insurance Accruals— Claims and insurance accruals consist of cargo loss, physical damage, group health, liability (personal injury and property damage) and workers’ compensation claims and associated legal and other expenses within Proficient Transport’s established retention levels. Claims in excess of retention levels are generally covered by insurance in amounts the Company considers adequate. Claims accruals represent the uninsured portion of the loss and if we are the primary obligor, the insured portion of pending claims at March 31, 2024 and December 31, 2023, plus an estimated liability for incurred but not reported claims and the associated expense.

Accruals for cargo loss, physical damage, group health, liability and workers’ compensation claims are estimated based on Proficient Transport’s evaluation of the type and severity of individual claims and future development based on historical trends. The Company is self-insured for its group health insurance plan. The amount recorded for Proficient Transport’s group health accrual as of March 31, 2024 and December 31, 2023, was based in part upon actuarial studies performed by a third-party actuary. As of March 31, 2024 and December 31, 2023, Proficient Transport recorded total claims and insurance accruals of $1,561,833 and $2,209,173, respectively, within accrued liabilities on the condensed consolidated balance sheet.

Concentration of Credit Risks— For the quarter ended March 31, 2024, three of Proficient Transport’s largest customers accounted for approximately 76.7% of operating revenue. As of March 31, 2024, Proficient Transport’s largest three customers had accounted for approximately 73.2% of gross accounts receivable.

For the quarter ended March 31, 2023, two of Proficient Transport’s largest customers accounted for approximately 64.8% of operating revenue. As of December 31, 2023 Proficient Transport’s largest two customers had accounted for approximately 73.0% of gross accounts receivable. Proficient Transport performs ongoing credit evaluations and generally does not require collateral.

Segment Reporting— In accordance with ASC 280,Segment Reporting, operating segments are defined as components of an enterprise for which separate financial information is available and are regularly reviewed by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The CODM primarily evaluates performance based on operational results from the services provided by the Company’s Truckload and Brokerage segments, which represent the Company’s operating segments for the quarters ended March 31, 2024 and 2023.

Recently Adopted Accounting Pronouncements — In June 2016, the FASB released ASU 2016-13*— Financial Instruments — Credit Losses (Topic 326):* Measurement of Credit Losses on Financial Instruments. The amendments in the ASU require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected, and credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, and interim periods within fiscal years beginning after December 15, 2023, with early adoption of all amendments in the same period permitted. Proficient Transport adopted ASU 2016-13 on January 1, 2023 and it did not have a material impact on its condensed consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which would require enhanced disclosures about significant segment expenses and information used to assess segment performance. This standard is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Proficient Transport is currently assessing the impact this standard will have on its disclosures.

In December 2023, the FASB issued ASU 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which would require additional transparency for income tax disclosures, including the income tax rate reconciliation table and cash taxes paid both in the United States and foreign jurisdictions. This standard is effective for annual periods beginning after December 15, 2024. Proficient Transport is currently assessing the impact this standard will have on its disclosures.

Note 3 — Property and equipment

Property and equipment, at cost, consist of the following as of :

Proficient Transport recorded depreciation expense of $636,055 and $589,822 in the condensed consolidated statements of comprehensive income for the quarters ended March 31, 2024, and 2023, respectively. Proficient Transport recorded a gain on the disposal of equipment for $235,081 and $16,218 for the quarters ended March 31, 2024, and 2023, respectively.

Note 4 — Accrued liabilities

Accrued liabilities consist of the following as of:

Note 5 — Income taxes

The income tax provision differs from the amount determined by applying the U.S. federal tax rate as follows:

Proficient Transport’s tax years 2019 and forward remain subject to examination by federal and state jurisdictions. Proficient Transport is not currently under an IRS examination as of the date these financials were available to be issued.

Note 6 — Line of credit

As of March 31, 2024 and December 31, 2023, Proficient Transport had an outstanding balance on a revolving line of credit of $0 and $3,450,129, respectively. Proficient Transport’s revolving line of credit is with a financial institution which provides for borrowings up to 18,000,000 subject to a borrowing base calculation of Qualified Accounts Receivable plus Qualified Rolling Stock (trucks, tractors, and trailers that transport goods in interstate commerce purchased on the line). Interest is payable monthly at the Prime Rate plus 0.75% per annum, but no less than 4% per annum (9.25% as of March 31, 2024). Borrowings against the line of credit are secured by all Proficient Transport’s assets and matures in December 2024, when all accrued interest and unpaid principal is due. Subsequent to year end, Proficient Transport entered into an amendment with the financial institution that extended the maturity date to March 30, 2025. The line of credit requires Proficient Transport to comply with certain restrictive covenants, including but not limited to a debt service coverage ratio, tangible net worth plus subordinated debt, and liabilities to tangible net worth plus subordinated debt ratio. Proficient Transport was in compliance with all other covenants for the as of March 31, 2024 and December 31, 2023.

Note 7 — Long-term debt

Long-term debt consists of the following as of:

Note 7 — Long-term debt(cont.)

Future maturities of long-term debt are as follows:

Proficient Transport had no capitalized debt issuance costs during the periods ended March 31, 2024 and December 31, 2023, respectively. Amortization expense related to the debt issuance costs totaled $3,279 and $3,279 for the quarters ended March 31, 2024 and 2023, respectively, and was recorded within interest expense on the condensed consolidated statements of comprehensive income. As of March 31, 2024 and December 31, 2023, the assets that are pledged as collateral related to our debt obligations are $6,884,343 and $7,467,232, respectively and were recorded within property and equipment, net on the condensed consolidated balance sheet.

Note 8 — Leases

Lessee— Proficient Transport leases real estate and equipment under operating and finance leases. The real estate operating leases, which generally have fixed payments with expiration dates ranging from one to three years and primarily include office buildings and trailers. The operating leases and finance leases for equipment generally have fixed payments with expiration dates ranging from four to six years and include transportation equipment, such as trucks and trailers. Proficient Transport’s leases can include an option to extend the lease, or to terminate the lease early, which may include a termination penalty. Proficient Transport includes these options to extend or terminate the lease in the lease term when Proficient Transport is reasonably certain to exercise these options.

Proficient Transport has certain leases which have initial terms of twelve months or less (“short-term leases”). Proficient Transport elected to exclude these leases from recognition, and these leases have not been included in Proficient Transport’s recognized ROU assets and operating lease liabilities. Proficient Transport records rent expense related to the short-term leases within general, selling, and other operating expense on the condensed consolidated statements of comprehensive income.

Note 8 — Leases (cont.)

The following table presents certain information related to lease costs for finance and operating leases as of:

As of March 31, 2024 and December 31, 2023, the weighted-average discount rate for operating leases was 6.71% and 0.86%, respectively. The weighted-average remaining lease term as of March 31, 2024 and December 31, 2023, was 4.67 and less than a year, respectively. As of March 31, 2024 and December 31, 2023, the weighted-average discount rate for finance leases was 9.22% and 9.26%, respectively and the weighted-average remaining lease term was 1.03 years and 1.07 years, respectively.

As of December 31, 2023, future maturities of the lease liabilities were as follows:

As of March 31, 2024 and December 31, 2023, the right-of-use assets net book value related to Proficient Transport’s finance lease obligations totaled $3,414,921 and $3,535,854, respectively and were recorded within property and equipment, net on the condensed consolidated balance sheet.

Lessor — Proficient Transport finances various types of transportation-related equipment to independent third parties under lease contracts which are generally for a term of one to three years and contain an option for the lessee to return or purchase the equipment at a bargain purchase price. Proficient Transport classifies these leases as a sales-type lease. Proficient Transport assesses a third party’s ability to pay based on the financial capacity and intention to pay, considering all relevant facts and circumstances, including past experiences with that third party or similar third parties. For those leases classified as sales-type leases where collectability is not probable at lease commencement, Proficient Transport does not derecognize the underlying asset, and the payments received for these leases are recorded as deposit liabilities. Deposit liabilities of $544,708 and $348,134 were reported in accrued liabilities on the condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.

Lease receivables are carried at the aggregate of lease payments receivable plus the estimated residual value of the leased assets and any initial direct costs incurred to originate these leases, less unearned income, which is accreted to interest income over the lease term using the interest method. Lease receivables of $26,631 and $35,055 are reported as net investment in leases on the condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.

Note 8 — Leases (cont.)

For the years ended March 31, 2024 and December 31, 2023, Proficient Transport recorded sales-type lease revenue of $0 and $25,000, respectively, within operating revenue on the condensed consolidated statement of comprehensive income. For the periods ended March 31, 2024 and 2023, Proficient Transport recorded interest income of $213 and $587, respectively, within interest expense, net on the condensed consolidated statements of comprehensive income.

As of December 31, 2023, future minimum lease payments expected to be collected were as follows:

Note 9 — Series A preferred stock

Proficient Transport is authorized to issue 10,000,000 shares of Series A preferred stock, which has a par value of $0.01 per share. The holders of Series A preferred stock are entitled to vote as common shareholders and have certain liquidation preferences to every other class or series of stock. The Series A preferred stock is redeemable at the option of the Series A preferred stockholders at the greater of the fair market value of the Series A preferred stock at the date of redemption or a value determined using a discounted cash flow model, as defined. The Series A preferred stock is convertible into common stock at the option of the holder and converts at a rate of one common share per share of Series A preferred stock. The Series A preferred stock will be mandatorily convertible upon the occurrence of a public offering, as defined in the stock agreement.

The Series A preferred stock earns a cumulative preferred return equal to 8% per annum on the sum of $1.00 per share invested plus accrued and unpaid Series A returns. The Series A returns accrue on a quarterly basis and will be fully cumulative, whether or not declared by Proficient Transport’s Board of Directors.

Since the holder of the Series A preferred stock has the option to redeem their shares at any time, the Series A preferred stock is considered contingently redeemable, and accordingly, is classified as mezzanine equity on the condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023.

The Series A preferred stock is recorded at its redemption of $9,058,424 and $8,880,672 as of March 31, 2024 and December 31, 2023, respectively. The accumulated but undistributed preferred returns were approximately $5,991,501 and $5,813,749 as of March 31, 2024 and December 31, 2023, respectively.

Activity related to the Series A preferred stock for the period ended March 31, 2024 and December 31, 2023 is as follows:

Note 10 — Equity-based compensation

Phantom Stock Plan— In June 2018, Proficient Transport granted a phantom stock award of 565,463 units (the “Units”), of which 188,488 Units vested immediately, to a member of the Board of Directors of Proficient Transport. The remaining 376,975 Units will vest upon the occurrence of a change of control, as defined, and the Units are payable only in the event of a change of control. Based on their contingent nature, no accrual has been recognized in the condensed consolidated financial statements.

Note 11 — Segment reporting

Proficient Transport’s business is organized into two operating segments, which represent Proficient Transport’s reportable segments. The Truckload segment offers automobile transport and contract services under an asset-based model. Proficient Transport’s contract service offering devotes the use of equipment to specific customers and provides transportation services through long-term contracts. Proficient Transport’s Brokerage segments offers transportation services utilizing an asset-light model focusing on outsourcing transportation of loads to third-party carriers.

The following table summarizes information about our reportable segments for the quarters ended March 31:

Note 12 — Retirement plan

Proficient Transport has a 401(k) Profit Sharing Plan (the “Plan”) which covers substantially all employees. Participating employees may elect to contribute, on a tax-deferred basis, a portion of their compensation, in accordance with Section 401(k) of the Internal Revenue Code. Proficient Transport is not required to match any employee contributions. Company contributions may be made to the Plan at the discretion of the Board of Directors and are payable after the close of Proficient Transport’s year-end. During the quarters ended March 31, 2022 and 2023, no discretionary contributions were made.

Note 13 — Commitments and contingencies

None.

Note 14 — Subsequent events

On May 13, 2024, concurrently with the closing of PAL’s initial public offering, Proficient Transport was acquired along with four other companies in separate acquisitions (the “Combinations”) of operating businesses and their respective affiliated entities, as applicable: (i) Delta Automotive Services, Inc. (which converted to Delta Automotive Services, LLC in an F-reorganization on April 29, 2024), doing business as Delta Auto Transport, Inc., (ii) Deluxe Auto Carriers, Inc., (iii) Sierra Mountain Group, Inc., and (iv) Tribeca Automotive Inc. (together, the “Founding Companies” and each a “Founding Company”).

Proficient acquired the stock of the Founding Companies for a combination of cash and shares of its common stock. The aggregate cash consideration paid in the Combinations was approximately $180.4 million, subject to post-closing adjustments. The aggregate stock consideration Proficient paid in the Combinations consisted of approximately 6,978,191 shares of its common stock. The consideration for the Combinations was determined by arms-length negotiations between Proficient and representatives of each Founding Company.