Celadon's financing plan scrapped by DOJ investigation, but its operating numbers are on the way up

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The financial problems of its past have become legal ones, and have combined to force Celadon (CGIP: OTC) to change a plan to raise more capital even as its operations improve.

In a July 3 statement, Celadon—which describes itself as “a premier cross-border NAFTA carrier”--said an earlier plan to raise capital from an unidentified source was being abandoned. The reason? The still-unidentified entity can not invest in a company that is under investigation by the Department of Justice, as Celadon is, according to the company statement.

Thom Albrecht, the company’s executive vice president and chief financial officer, said in an email to FreightWaves that “the deal was terminated because the potential lender’s bylaws prohibit them from lending to companies with open DOJ investigations. That is not necessarily true of all institutions, but this entity is public and as such their bylaws are what they are.”

That investment, first laid out in April, would have supplied Celadon with $200 million in term financing in exchange for approximately 20% of the company and two seats on the board.

Albrecht said of the possible replacement funding sources: “It is too early to tell what form(s) our new financing will take and it may or may not involve equity. Between the favorable industry environment and our own improved performance, we are optimistic about the possibility of more advantageous terms, although that will ultimately be subject to market conditions.”  

Celadon is undergoing a massive restatement of its financial statements following an accounting scandal that led to former management being pushed out of the company and a statement earlier this year that its earlier financial reports could not be relied on. (A more detailed summary of the scandal, though a year old, can be found in this report from the Indiana Business Journal).

In the July 3 statement, Celadon said it is “aware of investigations by the U.S. Securities and Exchange Commission and the Criminal Division of the United States Department of Justice into events and circumstances related to the previously announced restatement. The Company is cooperating with these ongoing investigations, including responding to subpoenas and meeting with investigators through counsel.” But it is the DOJ investigation, according to Albrecht’s email, that led to the withdrawal of the funding plan.

“We are immediately re-engaging with alternative sources of capital as well as the lenders and lessors in our existing capital structure, and we have engaged a globally recognized investment bank to support us in this process," CEO Paul Svindland said in the statement.

Svindland, in the release, gave an update on Celadon’s activities for May relative to May 2017. (There are no public reports to be relied on for comparison beyond the numbers disclosed by Celadon.) Svindland said revenues were flat at $83.5 million, excluding a discontinued business. But average revenue per seated tractor per week was $3,619 for May of this year, compared to $3,107 for the prior year. The total seat count was down, “as we focused a right-sized fleet on more profitable opportunities in more tightly defined regions and continued to experience a competitive market for professional truck drivers,” Svindland said. Revenue per total mile excluding fuel surcharges was up about 20%.

But with the company’s books still being cleaned up, Svindland offered the following caution about the operating numbers: “(T)hey are not necessarily indicative of net income or operating cash flow in accordance with generally accepted accounting principles due to certain fixed costs, as well as substantial fees, expenses, and interest payments associated with the investigations and financial statement restatement, the refinancing process, and other activities outside trucking operations.”

The company did have other positive news on the financial front, with a more favorable revolving credit line and letter of credit capability. It did have $180 million in the revolver, and $30 million in LC capacity. That will go up to $195 million on the revolver and $35 million in LC capacity, beginning July 13 and running through December 12. Albrecht noted that previous bank line amendments lasted only one to three months, so the latest change is extended from that.

The interest rate on the loan is prime plus 8%.

Albrecht spoke of the sheer scope of the financial restatement in defending the timeline. “I think it is important that people understand the scope of the work,” he said in the email to FreightWaves. “Fiscal years 2014-2016 are being restated; fiscal 2017, which only had two quarters released previously, is being completed and then we will have 2018 audited and ultimately Q1 of fiscal year 2019 will be released.  So the work involves 5.25 years of financial statements and will be completed in about a year, which is a substantial accomplishment.  Our auditors only re-engaged in mid-January and the restatement was announced April 2, 2018. We are proud of the work that our finance, accounting and auditing teams are doing.”

Celadon’s stock was delisted from the New York Stock Exchange as a result of its financial problems. It is traded on the OTC “pink sheets” market, where it has made a strong recovery. On April 6, it closed at $1.15. It shares Thursday at 2 p.m. were trading at $3.44, up 28 cts for a gain of 8.86% on the day, the first since the announcement of its operating conditions.