JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars in thousands, except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
(in thousands, except share and per share data)
(Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(in thousands)
(Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The accompanying interim unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of Article 8 of Regulation S-X and the instructions to Form 10-Q of the Securities and
Exchange Commission. As a result, certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Janel Corporation
(the “Company” or “Janel”) believes that the disclosures made are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full fiscal year, or any other period. These consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Form 10-K as filed with the Securities and Exchange Commission.
Business description
Janel is a holding company with subsidiaries in three business segments: Global Logistics Services, Manufacturing and Life Sciences. A management group at the holding company level
(the “corporate group”) focuses on significant capital allocation decisions, corporate governance and supporting Janel’s subsidiaries where appropriate. Janel expects to grow through its subsidiaries’ organic growth and by completing
acquisitions. We plan to either acquire businesses within our existing segments or expand our portfolio into new strategic segments. Our acquisition strategy focuses on reasonably priced companies with strong and capable management teams,
attractive existing business economics and stable and predictable earnings power.
Global Logistics Services
The Company’s Global Logistics Services segment is comprised of several wholly-owned subsidiaries, collectively known as “Janel Group.” Janel Group is a non-asset based, full-service provider of cargo transportation
logistics management services, including freight forwarding via air-, ocean- and land-based carriers, customs brokerage services, warehousing and distribution services, and other value-added logistics services.
On November 20, 2018, we completed a business combination whereby we acquired the membership interest of Honor Worldwide Logistics, LLC (“Honor”), a global logistics services provider with two U.S. locations. See
note 2.
On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location. See note 2.
Manufacturing
The Company’s manufacturing segment is comprised of Indco, Inc. (“Indco”), a majority-owned subsidiary of the Company that manufactures and distributes mixing equipment and apparatus for specific applications within
various industries. Indco’s customer base is comprised of small- to mid-sized businesses as well as other larger customers for which Indco fulfills repetitive production orders.
Life Sciences
The Company’s Life Sciences segment is comprised of Aves Labs, Inc. (“Aves”), Antibodies Incorporated (“Antibodies”), IgG, LLC (“IgG”) and PhosphoSolutions, LLC, which are wholly-owned subsidiaries of the Company.
The Company’s Life Sciences segment manufactures and distributes high-quality monoclonal and polyclonal antibodies, diagnostic reagents and other immunoreagents for biomedical research and provides antibody
manufacturing for academic and industry research scientists. Our Life Sciences business also produces products for other life science companies on an original equipment manufacturer (“OEM”) basis.
Through Aves, the Company acquired the membership interests of a small life sciences company on July 1, 2019 and the equity interests of PhosphoSolutions, LLC. (“Phospho”) on September 6, 2019. Both acquisitions were
completed primarily to expand our product offerings in Life Sciences. See note 2.
Basis of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as Indco, of which Janel owns 91.65%, with a non-controlling interest held by existing
Indco management. The Indco non-controlling interest is mandatorily redeemable and is recorded as a liability. All intercompany transactions and balances have been eliminated in consolidation.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, as well as the reported amounts of revenues and expenses during the reporting period. The most critical estimates made by the
Company are those relating to accounts receivables valuation, the useful lives of long-term assets, accrual of cost related to ancillary services the Company provides and accrual of tax expense on an interim basis.
Cash
The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250. The Company’s accounts at these institutions
may, at times, exceed the federally insured limits. The Company has not experienced any losses in such accounts.
Accounts receivable and allowance for doubtful accounts receivable
Accounts receivable are recorded at the contractual amount. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical collection
experience, the age of the accounts receivable balances, credit quality of the Company’s customers, any specific customer collection issues that have been identified, current economic conditions, and other factors that may affect the customers’
ability to pay. The Company writes off accounts receivable balances that have aged significantly once all collection efforts have been exhausted and the receivables are no longer deemed collectible from the customer. The allowance for doubtful
accounts as of March 31, 2020 and September 30, 2019 was $654 and $503, respectively.
Inventory
Inventory is valued at the lower of cost (using the first-in, first-out method) or net realizable value. The Company maintains an inventory valuation reserve to provide for slow moving and obsolete inventory,
inventory not meeting quality control standards and inventory subject to expiration for its Antibodies business. The products of Antibodies require the initial manufacture of multiple batches to determine if quality standards can consistently be
met. In addition, the Company will produce larger batches of established products than current sales requirements due to economies of scale. The manufacturing process for these products, therefore, has and will continue to produce quantities in
excess of forecasted usage. The Company values acquired manufactured antibody inventory based on a three-year forecast. Inventory quantities in excess of the forecast are not valued due to uncertainty over salability. Amounts are charged to the
reserve when the Company scraps or disposes of inventory.
Property and equipment and depreciation policy
Property and equipment are recorded at cost. Property and equipment acquired in business combinations are initially recorded at fair value. Depreciation is provided for in amounts sufficient to amortize the costs of
the related assets over their estimated useful lives on the straight-line and accelerated methods for both financial reporting and income tax purposes.
Maintenance and repairs are recorded as expenses when incurred.
Goodwill
The Company records as goodwill the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired in a business combination. Under current authoritative guidance, goodwill
is not amortized but is tested for impairment annually (on September 30) as well as when an event or change in circumstance indicates impairment may have occurred. Goodwill is tested for impairment by comparing the fair value of the Company’s
individual reporting units to their carrying amount to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than the carrying value, an impairment loss is recorded to the extent that the implied fair
value of the goodwill of the reporting unit is less than its carrying value. If there is a material change in economic conditions, including as a result of continued disruption due to the coronavirus (COVID-19) pandemic, or other circumstances
influencing the estimate of future cash flows or significantly affect the fair value of our reporting units, the Company could be required to recognize impairment charges in the future. There were no indicators of impairment of goodwill as of March
21, 2020 and September 30, 2019.
The fair value of our reporting units was in excess of carrying value and goodwill was not deemed to be impaired as of March 31, 2020 and September 30, 2019.
Intangibles and long-lived assets
Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for
impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition.
If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of
future cash flows, as well as the estimated fair value of long-lived assets, involves significant estimates on the part of management. If there is a material change in economic conditions, including as a result of continued disruption due to the
coronavirus (COVID-19) pandemic, or other circumstances influencing the estimate of future cash flows or fair value, the Company could be required to recognize impairment charges in the future. There were no indicators of impairment of long-lived
assets as of March 31, 2020 and September 30, 2019.
Business segment information
The Company operates in three reportable segments: Global Logistics Services, Manufacturing and Life Sciences. The Company’s Chief Executive Officer regularly reviews financial information at the reporting segment
level in order to make decisions about resources to be allocated to the segments and to assess their performance.
Revenues and revenue recognition
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”), using the modified retrospective method. Results for reporting
periods beginning on or after October 1, 2018 are presented under ASC Topic 606; however, prior period amounts are not adjusted and continue to be reported in accordance with the accounting standards in effect for those periods.
The Company recorded an increase to the opening balance of retained earnings of $32, net of tax, as of October 1, 2018 due to the cumulative impact of adoption of ASC Topic
606. The impact to revenue and associated cost for the six months ended March 31, 2019 was an increase of $218 and $177, respectively, as a result of applying ASC Topic 606.
Global Logistics Services
Revenue Recognition
Revenue is recognized upon transfer of control of promised services to customers. With respect to its Global Logistics Services segment, the Company has determined that in general each shipment transaction or service
order constitutes a separate contract with the customer. When the Company provides multiple services to a customer, different contracts may be present for different services.
The Company typically satisfies its performance obligations as services are rendered at a point in time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight
services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed at a point in time during the life of a shipment,
including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to two-month period.
The Company evaluates whether amounts billed to customers should be reported as gross or net revenue. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the
promise to provide the services, when it has discretion in setting the prices for the services to the customers, and the Company has the ability to direct the use of the services provided by the third party. Revenue is recognized on a net basis
when we do not have latitude in carrier selection or to establish rates with the carrier.
In the Global Logistics Services segment, the Company disaggregates its revenues by its four primary service categories: ocean import and export, freight forwarding, customs brokerage and air import and export. A
summary of the Company’s revenues disaggregated by major service lines for the three and six months ended March 31, 2020 was as follows:
Manufacturing
Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment and accessories. Indco receives customer product orders via phone call, email, internet or fax. The pricing
of each standard product sold is listed in Indco’s print and web-based catalog. Customer specific products are priced by quote. A sales order acknowledgement is sent to every customer for every order to confirm pricing and the specifications of the
products ordered. The revenue is recognized at a point in time when the product is shipped to the customer.
Life Sciences
Revenues from the Life Sciences segment are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and
antibody manufacturing. Revenues are recognized when products are shipped and risk of loss is transferred to the carrier(s) used.
Income (loss) per common share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding, excluding unvested restricted stock, during the period. Diluted
net income (loss) per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or warrants or the vesting of restricted stock units. The treasury stock method
is used to calculate the potential dilutive effect of these common stock equivalents. Potentially dilutive shares are excluded from the computation of diluted net income (loss) per share when their effect is anti-dilutive.
Stock-based compensation to employees
Equity classified share-based awards
The Company recognizes compensation expense for stock-based payments granted based on the grant-date fair value estimated in accordance with ASC Topic 718, “Compensation-Stock Compensation.” For employee stock-based
awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for restricted shares; the expense is recognized over the service period for awards
expected to vest.
Stock-based compensation to non-employees
Liability classified share-based awards
The Company maintains other share unit compensation grants for shares of Indco, the Company’s majority-owned subsidiary, which vest over a period of up to three years following their grant. The shares contain certain
put features where the Company is either required or expects to settle vested awards on a cash basis.
These awards are classified as liability awards, measured at fair value at the date of grant and re-measured at fair value at each reporting date up to and including the settlement date. The determination of the fair
value of the share units under these plans is described in note 10. The fair value of the awards is expensed over the respective vesting period of the individual awards with recognition of a corresponding liability. Changes in fair value after
vesting are recognized through compensation expense. Compensation expense reflects estimates of the number of instruments expected to vest. The impact of forfeitures and fair value revisions, if any, are recognized in earnings such that the
cumulative expense reflects the revisions, with a corresponding adjustment to the settlement liability. Liability-classified share unit liabilities due within 12 months of the reporting date are presented in trade and other payables while
settlements due beyond 12 months of the reporting date are presented in non-current liabilities.
Non-employee share-based awards
In prior periods up to September 30, 2019, the Company accounted for stock-based compensation to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity-Based Payments to
Non-employees.” Measurement of share-based payment transactions with non-employees are based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of
share-based payment transactions is determined at the earlier of performance commitment date or performance completion date. The Company believes that the fair value of the stock-based award is more reliably measurable than the fair value of the
services received. The fair value of the granted stock-based awards is remeasured at each reporting date and expense is recognized over the vesting period of the award.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance was issued to simplify the accounting for
share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result,
nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions.
The Company adopted ASU 2018-07 on October 1, 2019. The adoption of the standard did not have a material impact on our financial statements for the six months ended March 31, 2020.
Mandatorily Redeemable Non-Controlling Interests
The non-controlling interests that are reflected as mandatorily redeemable non-controlling interests in the consolidated financial statements consist of non-controlling interests related to the Indco acquisition
whose owners have certain redemption rights that allow them to require the Company to purchase the non-controlling interests of those owners upon certain events outside the control of the Company, including
upon the death of the holder. The Company is required to purchase 20% of the 8.35% mandatorily redeemable non-controlling interest at the option of the holder beginning on the third anniversary of the date of the Indco acquisition, which was
March 21, 2019. As of March 31, 2020, the holder did not exercise the redemption rights.
On the date the Company acquires the controlling interest in a business combination, the fair value of the non-controlling interest is recorded in the long-term liabilities section of the consolidated balance sheet
under the caption “Mandatorily redeemable non-controlling interest.” The mandatorily redeemable non-controlling interest is adjusted each reporting period, if required, to its then current redemption value,
based on the predetermined formula defined in the respective agreement. The Company reflects any adjustment in the redemption value and any earnings attributable to the mandatorily redeemable non-controlling interest in its consolidated statements
of operations by recording the adjustments and earnings to other income and expense in the caption “change in fair value of mandatorily redeemable non-controlling interest.”
Note receivable
On March 2, 2018, the Company issued a convertible promissory note in the amount of $125 with a potential non- related party acquisition target. The note bears interest on the outstanding principal amount at a rate
of 8% per annum, and both principal and interest is payable on the maturity date of April 24, 2020. The convertible note, at the election of the Company, can be converted into common stock of the acquisition target. As of March 31, 2020, and
September 30, 2019, amounts outstanding including accrued interest were $142 and $139, respectively. As of March 31, 2020, the Company is no longer pursuing this potential acquisition target.
Income taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes
payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. 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 tax rates is recognized
in the results of operations in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to
be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.
Recent accounting pronouncements
Recently adopted accounting pronouncements
On October 1, 2019, the Company adopted ASU No. 2016-02, Leases (“ASC 842” or “ASU 2016-02”) issued by the FASB in February 2016 which was subsequently supplemented by
clarifying guidance intended to improve financial reporting of leasing transactions. The new lease accounting guidance requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for all leases with initial terms
longer than 12 months and provides enhanced disclosures on key information of leasing arrangements. The guidance allows companies to apply the requirements retrospectively, either to all prior periods presented or through a cumulative adjustment in
the year of adoption.
The Company adopted the new standards effective October 1, 2019 using the modified retrospective transition method. The Company elected to use the package of practical expedients which allowed the Company to (i) not
reassess whether an arrangement contains a lease, (ii) carry forward its lease classification as operating or capital leases and (iii) not reassess its previously-recorded initial direct costs. For all existing
operating leases as of October 1, 2019, the Company recorded operating lease right of use asset of $1,043 and corresponding lease liabilities of $1,060, with an offset to other liabilities of $17 to eliminate deferred rent on the consolidated
balance sheets.
Operating lease expense is recognized on a straight-line basis over the lease term. At each balance sheet date, operating lease liabilities represent the present value of the future minimum payments related to
non-cancelable periods.
Leases with an initial term of 12 months or less (short-term leases) are not recognized in the balance sheet, and the related lease payments are recognized as incurred over the lease term.
All significant lease arrangements after October 1, 2019 are recognized as right-of-use assets and lease liabilities at lease commencement. Right-of-use assets represent the Company’s right to use an underlying asset
for the lease term, and lease liabilities represent its obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the commencement date based on the present value of the future lease payments
using the Company’s incremental borrowing rate.
The adoption of the new lease accounting standard did not have a material impact on the Company’s results of operations or cash flows.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation, which expands the scope of Topic 718 to include all share-based payment transactions for
acquiring goods and services from nonemployees. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company’s
current share-based payment awards to non-employees consist only of grants made to its non-employee directors as compensation solely relates to each individual’s role as a non-employee director. As such, in accordance with ASC 718, the Company
accounts for these share-based payment awards to its non-employee directors in the same manner as share-based payment awards for its employees. The Company adopted this standard on October 1, 2019, and the amendments in this guidance had no
material effect on either the accounting for its share-based payment awards to its non-employee directors, or the Company’s consolidated financial statements.
Recently issued accounting pronouncements not yet adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value
Measurement. This new accounting standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. This new accounting standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated
financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss methodology previously employed to measure credit losses for most financial assets and
requires the use of a forward-looking expected loss model. Current accounting delays the recognition of credit losses until it is probable a loss has been incurred, while the update will require financial assets to be measured at amortized costs
less a reserve and equal to the net amount expected to be collected. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is
evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.
Reclassifications
Prior year financial statement amounts are reclassified as necessary to conform to the current year presentation. These prior period reclassifications did not affect the Company’s net income, earnings per share,
stockholders’ equity or working capital.
The Company completed four business acquisitions in the fiscal year ended September 30, 2019, with an aggregate purchase price of $6,768, net of cash acquired. The Company recorded an aggregate $2,067 in goodwill and
$2,165 in other identifiable intangibles. The results of operations of the acquired businesses are included in Janel’s consolidated results of operations since the date of each acquisition. Supplemental pro forma information has not been provided
as the acquisitions did not have a material impact on Janel’s consolidated results of operations, individually or in the aggregate.
Honor Worldwide Logistics, LLC
Through its wholly-owned subsidiary, Janel Group, the Company acquired the membership interests of Honor on November 20, 2018 in a transaction pursuant to which Honor became a direct wholly-owned subsidiary of Janel
Group and an indirect wholly-owned subsidiary of the Company. At closing, a subordinated promissory note in the aggregate amount of $456 was issued to a former member. The acquisition of Honor was funded with cash provided by normal operations
along with a subordinated promissory note. Honor provides global logistics services with two U.S. locations and expands the domestic network of the Company’s Global Logistics Services segment. The results of operations for Honor are reflected in
the Global Logistics Services reporting segment.
PhosphoSolutions
Through Aves, the Company completed a business combination whereby we acquired Phospho on September 6, 2019. The aggregate purchase price for Phospho was $4,043, net of $13 of cash received. At closing, $4,000 was
paid in cash and $56 was recorded in accrued expenses as preliminary tax gross up due to former owners. Phospho is a manufacturer and distributor of monoclonal and polyclonal antibodies, principally used in neuroscience research. Phospho was
founded in 2001 and is headquartered in Aurora, Colorado. The results of operations for Phospho are reflected in the Life Sciences reporting segment. As of March 31, 2020, the Company paid $172 in tax gross up consideration to former owners and
recorded an additional $116 of goodwill related to the Phospho acquistion.
Other Acquisitions
On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location. On July 1, 2019, we
acquired the membership interests of a life sciences company to expand our product offerings in Life Sciences. These acquisitions were funded with cash provided by normal operations. The results of operations for these acquisitions are reported in our Global Logistics Services and Life Sciences segments. The aggregate purchase price for these acquisitions was $430. At
closing, $50 was recorded in accrued expenses as a preliminary earnout consideration.
Inventories consisted of the following:
A summary of property and equipment and the estimated lives used in the computation of depreciation and amortization is as follows:
Depreciation expense for the six months ended March 31, 2020 and 2019 was $92 and $152, respectively.
A summary of intangible assets and the estimated useful lives used in the computation of amortization is as follows:
Amortization expense for the six months ended March 31, 2020 and 2019 was $486 and $444, respectively.
The Company’s goodwill carrying amounts relate to the acquisitions in the Global Logistics Services, Manufacturing and Life Sciences businesses. As of March 31, 2020, the Company paid $172 in tax gross up
consideration to former owners and recorded an additional $116 of goodwill related to the Phospho acquistion.
The composition of the goodwill balance at March 31, 2020 and September 30, 2019 was as follows:
On October 17, 2017, the Janel Group subsidiaries (collectively the “Janel Group Borrowers”), with the Company as a guarantor, entered into a Loan and Security Agreement (the “Santander Loan Agreement”) with
Santander Bank, N.A. (“Santander”) with respect to a revolving line of credit facility (the “Santander Facility”). As amended in March 2018, November 2018 and March 2020, the Santander Facility currently provides that the Janel Group Borrowers can
borrow up to $17,000 limited to 85% of the Janel Group Borrowers’ aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Santander Loan Agreement. Interest accrues on the Santander Facility at an annual rate
equal to, at the Janel Group Borrowers’ option, prime plus 0.50%, or LIBOR (30, 60 or 90 day) plus 2.25% subject to a LIBOR floor of 75 basis points. The Janel Group Borrowers’ obligations under the Santander Facility are secured by all of the
assets of the Janel Group Borrowers, while the Santander Loan Agreement contains customary terms and covenants. The Santander Facility matures on October 17, 2022, unless earlier terminated or renewed. As a result of its terms, the Santander
Facility is classified as a current liability on the consolidated balance sheet.
At March 31, 2020, outstanding borrowings under the Santander Facility were $7,533, representing 82.33% of the available amount thereunder, and interest was accruing at an effective interest rate of 3.26%. The Janel
Group Borrowers were in compliance with the covenants defined in the Santander Loan Agreement at March 31, 2020 and September 30, 2019.
On March 21, 2016, as amended in August 2019, Indco entered into a Credit Agreement (the “First Merchants Credit Agreement”) with First Merchants Bank with respect to a $5,500 term loan and $1,000 (limited to the
borrowing base and reserves) revolving loan (together, the “First Merchants Facility”). Interest accrues on the term loan at an annual rate equal to the one-month LIBOR plus either 2.75% (if Indco’s total funded debt to EBITDA ratio is less than
2:1), or 3.5% (if Indco’s total funded debt to EBITDA ratio is greater than or equal to 2:1). Interest accrues on the revolving loan at an annual rate equal to the one-month LIBOR plus 2.75%. Indco’s obligations under the First Merchants Facility
are secured by all of Indco’s assets and are guaranteed by the Company, and the Company’s guarantee of Indco’s obligations is secured by a pledge of the Company’s Indco shares. The First Merchants Credit Agreement contains customary terms and
covenants. The First Merchants Facility will expire on August 30, 2024 (subject to earlier termination as provided in the Credit Agreement) unless renewed.
As of March 31, 2020, there were no outstanding borrowings under the revolving loan and $4,931 of borrowings under the term loan, with interest accruing on the term loan at an effective interest rate of 5.08%.
The Company was in compliance with the covenants defined in the First Merchants Credit Agreement at March 31, 2020 and September 30, 2019.
On June 21, 2018, AB Merger Sub, Inc., a wholly-owned, indirect subsidiary of the Company, entered into a Business Loan Agreement (the “First Northern Loan Agreement”) with First Northern Bank of Dixon (“First
Northern”), with respect to a $2,025 First Northern Term Loan (the “First Northern Term Loan”). The proceeds of the First Northern Term Loan were used to fund a portion of the merger consideration to acquire Antibodies. Interest was to accrue on
the First Northern Term Loan at an annual rate based on the five-year Treasury constant maturity (index) plus 2.50% (margin) for years one through five then adjusted and fixed for years six through ten using the same index and margin. The
borrower’s and the Company’s obligations to First Northern under the First Northern Loan Agreement are secured by certain real property owned by Antibodies as of the closing of the Antibodies merger. The First Northern Loan Agreement contains
customary terms and covenants and matures on June 14, 2028 (subject to earlier termination).
On November 18, 2019, Antibodies modified and refinanced its existing credit facilities with First Northern Bank. The existing First Northern Term Loan was increased to $2,235, the initial interest rate decreased to
4.18%, and the maturity date was extended to November 14, 2029, with all other terms, covenants and conditions substantially unchanged. The existing revolving credit facility was expanded to $500, the interest rate decreased to 6.0%, and the
maturity date was extended to October 1, 2020, with all other terms, covenants and conditions substantially unchanged. Additionally, Antibodies entered into a new business loan agreement (“Solar Loan”) which provided for a $125 term loan in
connection with a potential expansion of solar generation capacity on the Antibodies property. The initial interest rate on the facility is 4.43%, subject to adjustment in five years.
As of March 31, 2020, there were no outstanding borrowings under the revolving credit facility and $2,217 of borrowings under the term loan.
The Company was in compliance with the covenants defined in the First Northern Loan Agreement at March 31, 2020 and September 30, 2019.
On June 22, 2018, in connection with the Antibodies acquisition, AB HoldCo, Inc. (“AB HoldCo”), a wholly-owned subsidiary of the Company, entered into two subordinated promissory notes
(“AB HoldCo Subordinated Promissory Notes”) with certain former shareholders of Antibodies. As the result of the merger of AB HoldCo into Antibodies, Antibodies became the obligor under the AB HoldCo Subordinated Promissory Notes. Both of the
AB HoldCo Subordinated Promissory Notes are guaranteed by the Company and are subordinate to the terms of any credit agreement, loan agreement, indenture, promissory note, guaranty or other debt instrument pursuant to which the obligor or any
affiliate of the obligor incurs, borrows, extends, guarantees, renews or refinances any indebtedness for borrowed money or other extensions of credit with any federal or state bank or other institutional lender and are unsecured. Each of the
AB HoldCo Subordinated Promissory Notes has a 4% annual interest rate payable in arrears on the last business day of each calendar quarter, commencing on September 30, 2018, and the full outstanding principal balance and accrued, unpaid
interest is due on June 22, 2021. Both notes are subject to prepayment in whole or in part, without premium or penalty, of the outstanding principal amount of the notes, together with all accrued interest on such principal amount up to the date
of prepayment. Any prepayment shall be applied first to accrued but unpaid interest, and then to outstanding principal. As of March 31, 2020, and September 30, 2019, amounts outstanding under the two AB HoldCo Subordinated Promissory Notes was
$344 and is included in the long term portion of subordinated promissory notes.
On November 20, 2018, in connection with the Honor acquisition, Janel Group, a wholly-owned subsidiary of the Company, entered into a subordinated promissory note (“Janel Group Subordinated Promissory Note”) with a
former owner of Honor. The Janel Group Subordinated Promissory Note is guaranteed by the Company. The Janel Group Subordinated Promissory Note is subordinate to and junior in right of payment for principal interest premiums and other amounts
payable to the Santander Bank Facility and the First Merchants Bank Credit Facility. The Janel Group Subordinated Promissory Note, has a 6.75% annual interest rate, payable in twelve equal consecutive quarterly installments of principal and
interest, on the last day of January, April, July and October beginning in January 2019, and shall be due and payable each in the amount of $42. The outstanding principal and accrued and unpaid interest are payable in a single payment on the
three-year anniversary date of November 20, 2021. The note is subject to prepayment in whole or in part, without premium or penalty, of the outstanding principal amount of the notes, together with all accrued but unpaid interest on such principal
amount up to the date of prepayment. As of March 31, 2020, and September 30, 2019, the amounts outstanding under the Janel Group Subordinated Promissory Note was $276 and $349, respectively.
Janel is authorized to issue 4,500,000 shares of common stock, par value $0.001. In addition, the Company is authorized to issue 100,000 shares of preferred stock, par value $0.001. The preferred stock is issuable in
series with such voting rights, if any, designations, powers, preferences and other rights and such qualifications, limitations and restrictions as may be determined by the Company’s board of directors or a duly authorized committee thereof,
without stockholder approval. The board of directors may fix the number of shares constituting each series and increase or decrease the number of shares of any series.
Series B Convertible Preferred Stock
Shares of the Company’s Series B Convertible Preferred Stock (the “Series B Stock”) are convertible into shares of the Company’s $0.001 par value common stock at any time on a one-share (of Series B Stock) for
ten-shares (of common stock) basis. On September 6, 2019, a holder of the Series B Stock converted 640 shares of Series B Stock into 6,400 shares of the Company’s Common Stock.
Series C Cumulative Preferred Stock
Shares of the Company’s Series C Cumulative Preferred Stock (the “Series C Stock”) are entitled to receive annual dividends at a rate of 5% per annum of the original issuance price of $10, when and if declared by the
Company’s board of directors, with such rate increased by 1% annually beginning on January 1, 2019. Such rate is to increase on each January 1 thereafter for four years to a maximum rate of 9%. The dividend rate of the Series C Stock as of March
31, 2020 was 7%. In the event of liquidation, holders of the Series C Stock shall be paid an amount equal to the original issuance price, plus any accrued but unpaid dividends thereon. Shares of the Series C Stock may be redeemed by the Company at
any time upon notice and payment of the original issuance price, plus any accrued but unpaid dividends thereon. The liquidation value of the Series C Stock was $12,867 as of March 31, 2020.
For the six months ended March 31, 2020, the Company declared dividends on the Series C Stock of $326. As of March 31, 2020, the Company had accrued dividends of $1,366.
On May 12, 2017, the Company adopted the 2017 Equity Incentive Plan which was amended on May 8, 2018 (as amended, the “2017 Plan”). Under the 2017 Plan, non-statutory stock options, restricted stock awards and stock
appreciation rights with respect to shares of the Company’s common stock may be granted to directors, officers, employees of and consultants to the Company. Participants and all terms of any awards under the Plan are at the discretion of the
Company’s Compensation Committee of the board of directors.
On October 30, 2013, the board of directors of the Company adopted the Company’s 2013 Non-Qualified Stock Option Plan (the “2013 Option Plan”) providing for options to purchase up to 100,000 shares of the Company’s
common stock for issuance to directors, officers, employees of and consultants to the Company and its subsidiaries.
Total stock-based compensation for the six months ended March 31, 2020 and 2019 amounted to $149 and $236, respectively, and was included in selling, general and administrative expense in the Company’s statements of
operations.
The Company uses the Black-Scholes option pricing model to estimate the fair value of our share-based awards. In applying this model, we use the following assumptions:
The fair values of our employee option awards were estimated using the assumptions below, which yielded the following weighted average grant date fair values for the periods presented:
Options for Employees
The aggregate intrinsic value in the above table was calculated as the difference between the closing price of the Company’s common stock at March 31, 2020 of $7.50 per share and the exercise price of the stock
options that had strike prices below such closing price.
As of March 31, 2020, there was approximately $51 of total unrecognized compensation expense related to the unvested employee stock options which is expected to be recognized over a weighted average period of less
than one year.
Options for Non-Employees
There were no non-employee options awarded during the six-month period ended March 31, 2020. During the six-month period ended March 31, 2020, 15,000 non-employee options were forfeited.
The aggregate intrinsic value in the above table was calculated as the difference between the closing price of our common stock at March 31, 2020, of $7.50 per share and the exercise price of the stock options that
had strike prices below such closing price.
As of March 31, 2020, there was approximately $32 of total unrecognized compensation expense related to the unvested stock options, which is expected to be recognized over a weighted average period of less than one
year.
Liability classified share-based awards
Additionally, during the six months ended March 31, 2020, 6,880 options were granted with respect to Indco’s common stock. The Company uses the Black-Scholes option pricing model to estimate the fair value of Indco’s
share-based awards. In applying this model, the Company used the following assumptions:
The aggregate intrinsic value in the above table was calculated as the difference between the valuation price of Indco’s common stock at March 31, 2020 of $11.08 per share and the exercise price of the stock options
that had strike prices below such closing price.
The liability classified awards were measured at fair value at each reporting date until the final measurement date, which was the date of completion of services required to earn the option. The accrued compensation
cost related to these options was approximately $302 and $172 as of March 31, 2020 and September 30, 2019, respectively, and is included in other liabilities in the consolidated financial statement. The cost associated with the options issued on
each grant date is being recognized ratably over the period of service required to earn each tranche of options.
Upon vesting, the options continue to be accounted for as a liability in accordance with ASC 480-10-25-8 and are measured in accordance with ASC 480-10-35 at every reporting period until the options are settled.
Changes in the fair value of the vested options are recognized in earnings in the consolidated financial statements.
The options are classified as liabilities, and the underlying shares of Indco’s common stock also contain put options which result in their classification as mandatorily redeemable securities. While their redemption
does not occur on a fixed date, there is an unconditional obligation for the Company to repurchase the shares upon death, which is certain to occur at some point in time.
As of March 31, 2020, there was approximately $66 of total unrecognized compensation expense related to the unvested Indco stock options. This expense is expected to be recognized over a weighted average period of
less than one year.
During the six months ended March 31, 2020, there were no shares of restricted stock granted. Under the 2017 Plan, each grant of restricted stock vests over a three-year period, and the cost to the recipient is zero.
Restricted stock compensation expense, which is a non-cash item, is being recognized in the Company’s financial statements over the vesting period of each restricted stock grant.
The following table summarizes the status of our employee unvested restricted stock under the 2017 Plan for the six months ended March 31, 2020:
As of March 31, 2020, there was approximately $2 of total unrecognized compensation cost related to unvested employee restricted stock. The cost is expected to be recognized over a weighted-average period of
approximately 0.11 years.
The following table summarizes the status of our non-employee unvested restricted stock under the 2017 Plan for the six months ended March 31, 2020:
As of March 31, 2020, there was approximately $30 of unrecognized compensation cost related to non-employee unvested restricted stock. The cost is expected to be recognized over a weighted-average period of
approximately 0.38 years.
As of March 31, 2020, included in accrued expenses and other current liabilities was $159 which represents 18,333 shares of restricted stock that vested but were not issued.
The following table provides a reconciliation of the basic and diluted income (loss) per share (“EPS”) computations for the three and six months ended March 31, 2020 and 2019 (in thousands, except share and per share
data):
The computation for the diluted number of shares excludes unvested restricted stock, unexercised stock options and unexercised warrants that are anti-dilutive. There were no anti-dilutive shares for the six-month
periods ended March 31, 2020.
Potentially dilutive securities as of March 31, 2020 and 2019 were as follows:
The Company’s estimated fiscal 2020 and 2019 blended U.S. federal statutory corporate income tax rate of 10.1% and 25.2%, respectively, were applied in the computation of the Company’s
income tax provision for the six months ended March 31, 2020 and 2019.
The reconciliation of income tax computed at the Federal statutory rate to the benefit (provision) for income taxes for the six months ended March 31, 2020 is as follows:
As discussed above in note 1, the Company operates in three reportable segments: 1) Global Logistics Services, 2) Manufacturing and 3) Life Sciences, supported by a corporate group which conducts activities that are
non-segment specific. The following tables present selected financial information about the Company’s reportable segments for the three and six months ended March 31, 2020:
The following tables present selected financial information about the Company’s reportable segments for the three and six months ended March 31, 2019:
The nature of Janel’s operations requires it to deal with currencies other than the U.S. Dollar. As a result, the Company is exposed to the inherent risks of international currency markets and governmental
interference. A number of countries where Janel maintains offices or agent relationships have currency control regulations. The Company attempts to compensate for these exposures by accelerating international currency settlements among those
agents.
The Company’s assets that are exposed to concentrations of credit risk consist primarily of cash and receivables from customers. The Company places its cash with financial institutions that have high credit ratings.
The receivables from clients are spread over many customers. The Company maintains an allowance for uncollectible accounts receivable based on expected collectability and performs ongoing credit evaluations of its customers’ financial condition. We
have experienced heightened customer credit risk as a result of the negative impact to customers’ financial condition, employment levels and consumer confidence arising from economic disruptions related to the COVID-19 pandemic, and expect that our
risk in this area will remain high as long as the disruptions persist.
Janel is occasionally subject to claims and lawsuits which typically arise in the normal course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal
matters will have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows.
In December 2017, Janel Group received a Notice of Copyright Infringement letter from counsel for Warren Communications News, Inc. (“Warren”), the publisher of the International Trade Today (“ITT”) newsletter. The letter alleges that Janel Group
infringed upon Warren’s registered copyrights in its ITT newsletter (the “Warren Matter”). As of March 31, 2020, the Company had a liability for settlement costs related to the Warren Matter, which is included in accrued expenses and other current
liabilities. On May 11, 2020, the parties reached a settlement agreement and release to resolve any and all concerns between the parties, voluntarily and without admission of copyright infringement.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic. As a result, public health measures have been taken by federal, state and local governments to
minimize exposure to and contain the virus. Measures intended to reduce the spread of COVID-19, such as quarantines, travel restrictions and other governmental restrictions such as social distancing protocols, have has, and are likely to continue
to have, an adverse impact on economic activity, including with respect to business closures, increasing unemployment levels and financial market instability. The extent or duration of the disruption on global, national, and local economies cannot
be reasonably estimated at this time. However, should the pandemic and its economic impact continue for an extended period, the Company’s future business operations, including its results of operations, cash flows and financial position could be
significantly affected.
On February 4, 2020, Indco, Inc., a majority-owned subsidiary of the Company, entered into a Purchase and Sale Agreement with 4040 Earnings Way, LLC (“Seller”) to acquire from Seller the land and building which
serves as the Indco office and manufacturing facility in New Albany, Indiana, for a purchase price of $845. Indco anticipates that the purchase price will be financed with cash from operations and a loan of up to $700 from First Merchants Bank
secured by the subject property. Closing is expected to occur during the third quarter of fiscal 2020, ending June 30, 2020.
The Company has operating leases for office and warehouse space in all districts where it conducts business. As of March 31, 2020, the remaining terms of the Company’s operating leases were between one and 58 months
and certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include the minimum lease payments that the Company is obligated to make under the non-cancelable initial terms of the leases as the
renewal terms are at the Company’s option and the Company is not reasonably certain to exercise those renewal options at lease commencement..
The components of lease cost for the six-month period ended March 31, 2020 are as follows:
Rent expense for the six-month period March 31, 2019 was $372
Operating lease right of use asset, current portion of operating lease liabilities and long-term operating lease liabilities reported in the consolidated balance sheets for operating leases as of March 31, 2020 were $1,599, $479 and $1,142,
respectively.
During the three months ended March 31, 2020, the Company entered into a new operating lease and recorded an addition $857 in operating lease right of use asset of and corresponding lease liabilities.
As of March 31, 2020, the weighted-average remaining lease term and the weighted-average discount rate related to the Company’s operating leases were 3.9 years and 6.58%, respectively. Cash paid for amounts included
in the measurement of operating lease obligations were $410 for the six months ended March 31, 2020.
Future minimum lease payments under non-cancelable operating leases as of March 31, 2020 are as follows:
CARES Act Loan
The Coronavirus Aid, Relief and Economic Security Act, Section 7(a)(36) of the Small Business Act (the “CARES Act”), which was signed into law in March 2020, established the Paycheck Protection Program (the “PPP”).
The PPP authorizes up to $349 billion in forgivable loans to small businesses. Loan amounts are forgiven to the extent proceeds are used to cover documented payroll, mortgage interest, rent and utility costs over an eight-week measurement period
following loan funding. Loans have a maturity of two years and bear interest at a rate of 1.00% per annum. Prepayments may be made at any time prior to maturity without penalty.
On April 19, 2020, the Company entered into a Loan Agreement (the “Loan Agreement”) with Santander and executed a U.S. Small Business Administration Note (the “Note”) pursuant to
which the Company borrowed $2,726 (the “Loan”) from Santander pursuant to the PPP under the CARES Act.
The Loan matures on April 19, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on November 19, 2020. The Note may be prepaid by Janel at any time prior to
maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent and utilities (collectively, “Qualifying Expenses”). Under the terms of the
PPP, certain amounts of the Loan may be forgiven if they are used for Qualifying Expenses as described in the CARES Act. The Company's participation in the PPP subsequent to quarter end should allow the Company to avoid significant staff
reductions in the near term.
As discussed in note 14 (C) above, the Company received a letter in December 2017 from legal counsel representing Warren in which Warren made certain allegations against the Company of copyright infringement
concerning an electronic newsletter by Warren. On May 11, 2020, the parties reached a settlement agreement and release to resolve any and all concerns between the parties, voluntarily and without admission of copyright infringement. As of March
31, 2020, the Company had a liability for settlement costs related to the Warren Matter, which is included in accrued expenses and other current liabilities.
The following discussion and analysis should be read in conjunction with our unaudited interim consolidated financial statements and related notes thereto as of and for the six months ended March
31, 2020, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Amounts presented in this section are in thousands, except share and per share data.
As used throughout this Report, “we,” “us”, “our,” “Janel,” “the Company,” “Registrant” and similar words refer to Janel Corporation and its Subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Report”) contains certain statements that are, or may deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 and that reflect management’s current expectations with respect to our operations, performance, financial condition, and other developments. These forward-looking statements may generally be identified by
the use of the words “may,” “will,” “intends,” “plans,” projects,” “believes,” “should,” “expects,” “predicts,” “anticipates,” “estimates,” and similar expressions or the negative of these terms or other comparable terminology. These statements are
necessarily estimates reflecting management’s best judgment based upon current information and involve a number of risks, uncertainties and assumptions. We caution readers not to place undue reliance on any such forward-looking statements, which
speak only as of the date made, and readers are advised that various factors, including, but not limited to, those set forth elsewhere in this Report, could affect our financial performance and could cause our actual results for future periods to
differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, the impact of the coronavirus (“COVID-19”) pandemic and related economic effects; our strategy
of expanding our business through acquisitions of other businesses; the risk that we may fail to realize the expected benefits or strategic objectives of any acquisition, or that we spend resources exploring acquisitions that are not consummated;
litigation; indemnification claims and other unforeseen claims and liabilities that may arise from an acquisition; economic and other conditions in the markets in which we operate; the risk that we may not have sufficient working capital to
continue operations; instability in the financial markets; the material weaknesses identified in our internal control over financial reporting; our dependence on key employees; competition from parties who sell their businesses to us and from
professionals who cease working for us; terrorist attacks and other acts of violence or war; security breaches or cybersecurity attacks; competition faced by our global logistics services freight carriers with greater financial resources and from
companies that operate in areas in which we plan to expand; our dependence on the availability of cargo space from third parties; recessions and other economic developments that reduce freight volumes; other events affecting the volume of
international trade and international operations; risks arising from our global logistics services business’ ability to manage staffing needs; competition faced in the freight forwarding, freight brokerage, logistics and supply chain management
industry; industry consolidation and our ability to gain sufficient market presence with respect to our global logistics services business; risks arising from our ability to comply with governmental permit and licensing requirements or statutory
and regulatory requirements; seasonal trends; competition faced by our manufacturing (Indco) business from competitors with greater financial resources; Indco’s dependence on individual purchase orders to generate revenue; any decrease in the
availability, or increase in the cost, of raw materials used by Indco; Indco’s ability to obtain and retain skilled technical personnel; risks associated with product liability claims due to alleged defects in Indco’s products; risks arising from
the environmental, health and safety regulations applicable to Indco; the reliance of our Indco and life sciences businesses on a single location to manufacture their products; the ability of our life sciences business to compete effectively; the
ability of our life sciences business to introduce new products in a timely manner; product or other liabilities associated with the manufacture and sale of new products and services; changes in governmental regulations applicable to our life
sciences business; the ability of our life sciences business to continually produce products that meet high quality standards such as purity, reproducibility and/or absence of cross-reactivity; the controlling influence exerted by our officers and
directors and one of our stockholders; our inability to issue dividends in the foreseeable future; and risks related to ownership of our common stock, including volatility and the lack of a guaranteed continued public trading market for our common
stock. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected. You should not place undue reliance on any of our forward-looking
statements which speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of
these factors, see our periodic reports filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
COVID-19
The outbreak of COVID-19 has had a significant impact on global trade and our business. In late January 2020, China implemented extensive business shutdowns and work restrictions to control the outbreak, which
resulted in a steep drop in exports from China. Those shutdowns and restrictions in China started to ease in March 2020, and export volumes from China increased throughout the month. The spread of COVID-19 to other parts of the world, and the
strong actions taken by many countries to reduce exposure to the virus, however, have led to a sharp decrease in global economic activity during the second quarter of fiscal 2020 and a second steep drop in global import and export trade volumes,
which has materially impacted our Global Logistics Services business. Specifically, in the three months ended March 31, 2020, we experienced a decrease of 9.1% in our Global Logistics Services segment revenues as a result of the global trade
slowdown due to the COVID- 19 pandemic. We also experienced a significant slowdown in organic growth in both our Manufacturing and Life Sciences segments due to a slowdown in orders and in academic research due to the pandemic. Please see our
results of operations discussion below for additional information. We expect demand for our products and services across all of our reporting segments, and in particular our Global Logistics Services segment to be adversely impacted for as long as
global economic activity and trade volumes remain weak. A prolonged slowdown in trade volumes due to the pandemic could also significantly increase the financial challenges facing our customers. We are closely monitoring our customers’ payment
performance and expect our customer credit risk will remain high as long as economic and trade disruptions persist.
In our Global Logistics Services segment, customer demand for our services in many parts of our business has been materially and negatively impacted by the mandated closure of our customers’ operations or points of
sale, while customer demand for our services in other parts of our business has increased significantly as consumers stockpile goods or switch to e-commerce platforms to make purchases. We are unable to accurately predict the impact that COVID-19
will have on our operations going forward due to uncertainties regarding the severity and duration of the outbreak and additional actions that may be taken by governmental authorities. That said, we currently expect that our results of operations
and financial condition will be even more significantly adversely impacted in the third quarter and fourth quarters of 2020 and subsequent periods than in the quarter ended March 31, 2020, as levels of activity in the Company’s business have
historically been positively correlated to broad measures of economic activity, such as gross domestic product, and to measures of industrial economic activity, which have been negatively impacted by the pandemic.
The magnitude of the COVID-19 pandemic, including the extent of any impact on our business, financial position, results of operations or liquidity, which could be material, cannot be reasonably
determined at this time due to the rapid development and fluidity of the situation. The effects of the pandemic on our business will depend on its duration and severity, whether business disruptions will continue, the pace of recovery once the
pandemic subsides and the overall long-term impact on the global economy.
OVERVIEW
Janel is a holding company with subsidiaries in three business segments: Global Logistics Services, Manufacturing and Life Sciences. The company strives to create shareholder value primarily through three strategic
priorities: supporting its businesses’ efforts to make investments and to build long-term profits; allocating Janel’s capital at high risk-adjusted rates of return; and attracting and retaining exceptional talent.
A management group at the holding company level (the “corporate group”) focuses on significant capital allocation decisions, corporate governance and supporting Janel’s
subsidiaries where appropriate. Janel expects to grow through its subsidiaries’ organic growth and by completing acquisitions. We plan to either acquire businesses within our existing segments or expand our portfolio into new strategic segments.
Our acquisition strategy focuses on reasonably-priced companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings power.
Global Logistics Services
The Company’s Global Logistics Services segment is comprised of several wholly-owned subsidiaries (collectively “Janel Group”). Janel Group is a non-asset based, full-service provider of cargo transportation
logistics management services, including freight forwarding via air-, ocean- and land-based carriers, customs brokerage services, warehousing and distribution services, and other value-added logistics services.
On November 20, 2018, we completed a business combination whereby we acquired the membership interest of Honor Worldwide Logistics, LLC (“Honor”), a global logistics services provider with two U.S. locations.
On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location.
Manufacturing
The Company’s Manufacturing segment is comprised of Indco, Inc. (“Indco”). Indco is a majority-owned subsidiary of the Company that manufactures and distributes mixing equipment and apparatus for specific
applications within various industries. Indco’s customer base is comprised of small- to mid-sized businesses as well as other larger customers for which Indco fulfills repetitive production orders.
Life Sciences
The Company’s Life Sciences segment is comprised of Aves Labs, Inc. (“Aves”), Antibodies Incorporated (“Antibodies”), IgG, LLC (“IgG”) and PhosphoSolutions, LLC, which are wholly-owned subsidiaries of the Company.
The Company’s Life Sciences segment manufactures and distributes high-quality monoclonal and polyclonal antibodies, diagnostic reagents and other immunoreagents for biomedical research and provides antibody
manufacturing for academic and industry research scientists. Our Life Sciences business also produces products for other life science companies on an original equipment manufacturer (“OEM”) basis.
Through Aves, the Company acquired the membership interests of a small life sciences company on July 1, 2019 and the equity interests of PhosphoSolutions, LLC. (“Phospho”) on September 6, 2019. Both acquisitions were
completed primarily to expand our product offerings in Life Sciences.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain
matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstance. Actual amounts and results could differ from these estimates made by management. Certain accounting
policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
The Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Actual
results could differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to revenue
recognition, the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, accruals for transportation and other direct costs, accruals for cargo
insurance, and deferred income taxes. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. We reevaluate these significant factors as facts and circumstances
change. Note 1 of the notes to consolidated financial statements included herein includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief
discussion of certain accounting policies and estimates.
Management believes that the nature of the Company’s business is such that there are a few complex challenges in accounting for operations. Revenue recognition is considered the critical accounting policy due to the
complexity of arranging and managing global logistics and supply-chain management transactions.
Income taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for
the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. 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 tax
rates is recognized in the results of operations in the period that includes the enactment date.
Estimates
While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas that in the aggregate are not a major component of the
Company’s consolidated statements of operations:
Management believes that the methods utilized in these areas are consistent in application. Management further believes that there are limited, if any, alternative accounting principles or methods which could be
applied to the Company’s transactions. While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such
estimates would not produce materially different results than those reported.
Critical Accounting Policies and Estimates Applicable to the Global Logistics Services Segment
Revenue Recognition
Revenues are derived from customs brokerage services and from freight forwarding services.
Customs brokerage services include activities required for the clearance of shipments through government customs regimes, such as preparing required documentation, calculating and providing for payment of duties and
other charges on behalf of customers, arranging required inspections and arranging final delivery.
Freight forwarding may require multiple services, including long-distance shipment via air, ocean or ground assets, destination handling (“break bulk”), warehousing, distribution and other logistics management
activities. As an asset-light business, Janel Group owns none of the assets by which it fulfills its customers’ logistics needs. Rather, it purchases the services its customers need from asset owners, such as airlines and steamship lines, and
resells them. By consolidating shipments from multiple customers, Janel Group can negotiate terms of service with asset owners that are more favorable than those the customers could negotiate themselves.
Revenue is recognized upon transfer of control of promised services to customers. With respect to its Global Logistics Services segment, the Company has determined that in
general each shipment transaction or service order constitutes a separate contract with the customer. When the Company provides multiple services to a customer, different contracts may be present for different services.
The Company typically satisfies its performance obligations as services are rendered at a point in time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight
services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed at a point in time during the life of a shipment,
including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one-to two-month period.
The Company evaluates whether amounts billed to customers should be reported as gross or net revenue. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the
promise to provide the services, when it has discretion in setting the prices for the services to the customers, and the Company has the ability to direct the use of the services provided by the third party. Revenue is recognized on a net basis
when we do not have latitude in carrier selection or establish rates with the carrier.
In the Global Logistics Services segment, the Company disaggregates its revenues by its four primary service categories: ocean import and export, freight forwarding, customs brokerage and air import and export.
Critical Accounting Policies and Estimates Applicable to the Manufacturing and Life Sciences Segments
Revenue Recognition-Manufacturing
Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment and accessories. Indco receives customer product orders via telephone, email, internet or fax. The pricing
of each standard product sold is listed in Indco’s print and web-based catalog. Customer specific products are priced by quote. A sales order acknowledgement is sent to every customer for every order to confirm pricing and the specifications of the
products ordered. The revenue is recognized at a point in time when the product is shipped to the customer.
Revenue Recognition-Life Sciences
Revenues from the Life Sciences segment are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and
antibody manufacturing. Revenues are recognized when products are shipped and risk of loss is transferred to the carrier(s) used.
NON-GAAP FINANCIAL MEASURES
While we prepare our financial statements in accordance with U.S. GAAP, we also utilize and present certain financial measures, in particular adjusted operating income, which is not based on or included in U.S. GAAP
(we refer to these as “non-GAAP financial measures”).
Net Revenue
Net revenue is a non-GAAP measure calculated as total revenue less forwarding expenses attributable to the Company’s Global Logistics Services segment. Our total revenue represents
the total dollar value of services and goods we sell to our customers. Forwarding expenses attributable to the Company’s Global Logistics Services segment refer to purchased transportation and related services including contracted air, ocean,
rail, motor carrier and other costs. Total revenue can be influenced greatly by changes in transportation rates or other items, such as fuel prices, which we do not control. Management believes that providing net revenue is useful to
investors as net revenue is the primary indicator of our ability to source, add value and sell services and products that are provided by third parties, and we consider net revenue to be our primary performance measurement. The difference between
the rate billed to our customers (the sell rate) and the rate we pay to the carrier (the buy rate) is termed “net revenue”, “yield” or “margin.” As presented, net revenue matches gross margin.
Adjusted Operating Income
As a result of our acquisition strategy, our net income includes material non-cash charges relating to the amortization of customer-related intangible assets in the ordinary course of business as well as other
intangible assets acquired in our acquisitions. Although these charges may increase as we complete more acquisitions, we believe we will be growing the value of our intangible assets such as customer relationships. Because these charges are not
indicative of our operations, we believe that adjusted operating income is a useful financial measure for investors because it eliminates the effect of these non-cash costs and provides an important metric for our business that is more
representative of the actual results of our operations.
Adjusted operating income (which excludes the non-cash impact of amortization of intangible assets, stock-based compensation and amortization of acquired inventory valuation) is used by management as a supplemental
performance measure to assess our business’s ability to generate cash and economic returns.
Adjusted operating income is a non-GAAP measure of income and does not include the effects of preferred stock dividends, interest and taxes.
We believe that net revenue and adjusted operating income provide useful information in understanding and evaluating our operating results in the same manner as management. However, net revenue and adjusted operating
income are not financial measures calculated in accordance with U.S. GAAP and should not be considered as a substitute for total revenue, operating income or any other operating performance measures calculated in accordance with U.S. GAAP. Using
these non-GAAP financial measures to analyze our business has material limitations because the calculations are based on the subjective determination of management regarding the nature and classification of events and circumstances that users of
the financial statements may find significant.
In addition, although other companies in our industry may report measures titled net revenue, adjusted operating income or similar measures, such non-GAAP financial measures may be calculated differently from how we
calculate our non-GAAP financial measures, which reduces their overall usefulness as comparative measures. Because of these limitations, you should consider net revenue and adjusted operating income alongside other financial performance measures,
including total revenue, operating income and our other financial results presented in accordance with U.S. GAAP.
The following table sets forth a reconciliation of operating income to adjusted operating income:
Results of Operations – Segment Financial Results – Three and Six Months Ended March 31, 2020 and 2019
The following table sets forth our segment financial results:
Results of Operations – Janel Corporation
The following table sets forth our corporate group expenses:
Expenses
Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, increased by $126 to $1,103, or 12.9% in the three months ended March 31, 2020 as
compared to $977 for the three months ended March 31, 2019. Expenses increased to $2,131 in the six months ended March 31, 2020 as compared to $1,799 in the six months ended March 31, 2019, a $332 or 18.5% increase. The increases in both periods
were due primarily to higher accounting-related professional expenses and higher merger and acquisition related expenses partially offset by lower stock-based compensation expense for the quarter.
Amortization of Intangible Assets
For the three months ended March 31, 2020 and 2019, corporate amortization expenses were $243 and $236, respectively, an increase of $7, or 3.0%. For the six months ended March 31, 2020 and 2019, corporate
amortization expenses were $486 and $444, respectively, an increase of $42, or 9.5%. The increases in both periods were primarily related to acquisitions.
Interest Expense
For the three months ended March 31, 2020, interest expense for the consolidated company decreased $57, or 28.9%, to $141 from $198 for the three months ended March 31, 2019. For the six months ended March 31, 2020
and 2019, interest expense was $304 and $360, respectively, a decrease of $56, or 15.5%. The decrease in both periods was primarily due to lower prevailing interest rates and lower rates on the amended revolving line of credit facility, partially
offset by average higher debt levels on the senior secured term loan facility.
Income Taxes
On a consolidated basis, the Company recorded an income tax benefit of $35 for the three months ended March 31, 2020, as compared to an income tax expense of $69 for the three months ended March 31, 2019. For the six
months ended March 31, 2020, the Company recorded an income tax benefit of $119 versus an expense of $253 in the prior year period. The income tax benefit in both periods was primarily due to the increase in pretax loss. In 2016, a deferred tax
asset was established to reflect a net operating loss carryforward, which the Company has begun using, and is expected to continue to use, through ongoing profitability.
Preferred Stock Dividends
Preferred stock dividends include any dividends accrued but not paid on the Company’s Series C Cumulative Preferred Stock (the “Series C Stock”). For the three months ended March 31, 2020 and 2019, preferred stock
dividends were $175 and $148, respectively. For the six months ended March 31, 2020 and 2019, the preferred stock dividends we $326 versus $270, respectively. The increase of $27 for the three-month period and $56 for the six-month period were the
result of an increase in the dividend rate as of January 1, 2020 to 7% and a higher outstanding amount of accrued and unpaid dividends. See note 9 to the consolidated financial statements for additional information.
Net (Loss) Income
Net loss was ($937) or ($1.08) per diluted share, for the three months ended March 31, 2020 compared to net income of $175, or $0.18 per diluted share, for the three months ended March 31, 2019. For the six months
ended March 31, 2020, net (loss) income totaled ($1,057) or ($1.22) per share compared to $719 or $0.77 per share for the six months ended March 31, 2019. The loss was primarily due to lower revenues and gross profit and higher selling, general and
administrative expenses across our businesses in both periods.
(Loss) Income Available to Common Stockholders
Loss available to holders of common shares was ($1,112), or ($1.29) per diluted share, for the three months ended March 31, 2020 compared to income of $27, or $0.03 per diluted share, for the three months ended March
31, 2019. In the six months ended March 31, 2020 loss available to holders of common shares totaled ($1,383) or ($1.60) per share compared to $449 or $0.48 per share for the six months ended March 31, 2019. The decrease primarily was due to lower
revenues and gross profit and higher selling, general and administrative expenses across our businesses in both periods and an increase in the dividend rate with respect to the Series C Stock as of January 1, 2020 to 7%.
Results of Operations - Global Logistics Services
Our Global Logistics Services business helps its clients move and manage freight efficiently to reduce inventories and to increase supply chain speed and reliability. Key services include customs entry filing,
arrangement of freight forwarding by air, ocean and ground, warehousing, cargo insurance procurement, logistics planning, product repackaging and online shipment tracking.
Global Logistics Services – Selected Financial Information:
Revenue
Total revenue decreased 9.1% to $15,328 for the three months ended March 31, 2020, compared to $16,865 in the three months ended March 31, 2019. The decrease in revenue was driven by the global trade slowdown, in
particular the steep reductions in global import and export trade volumes, due to the COVID-19 pandemic.
Total revenue for the six months ended March 31, 2020 and 2019 was $31,407 and $35,670 respectively, a decrease of $4,263 or 11.9%. The decrease in revenue was largely due to the
impact of the global trade slowdown due to the COVID-19 pandemic and customers in the prior year period moving freight ahead of certain governmental trade policies. Acquired revenue from two acquisitions
completed during fiscal 2019 slightly offset some of the revenue decline in the six-month period.
Net Revenue
Net revenue for the three months ended March 31, 2020 and 2019 was $3,713 and $3,908 respectively, a decrease of $195, or 5.0%. The decrease reflected an organic decline for the quarter in our base business due to
volume pressures from the COVID-19 pandemic partially offset by improved freight purchase rates. Net revenue as a percentage of gross revenue increased to 24.2% versus 23.2% for the prior year period due to lower freight rates.
Net revenue for the six months ended March 31, 2020 and 2019 was $7,705 and $8,295 respectively, a decrease of $590, or 7.1%, as a result of organic declines due to the COVID-19 pandemic partially offset by
contributions from two acquisitions and improved freight purchase rates in the current year period, whereas we benefited in the prior year period from customers moving freight in advance of certain governmental trade policies. Net revenue as a
percentage of gross revenue increased in the six-month period to 24.5% versus 23.3% in the prior year period due to lower freight rates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2020 were $3,952, as compared to $3,468 for the three months ended March 31, 2019. This increase of $484, or 14.0%, was largely
attributable to the reserve for the settlement of threatened litigation and additional expenses from maintaining current staff levels. As a percentage of revenue, selling, general and administrative expenses were 25.8% and 20.6% of revenue for the
three months ended March 31, 2020 and 2019, respectively.
Selling, general and administrative expenses for the six months ended March 31, 2020 and 2019 were $7,590 and $6,828 respectively. The increase of $762, or 11.16% reflected the reserve for the settlement of
threatened litigation and higher expenses from prior year acquisitions. As a percentage of revenue, selling, general and administrative expenses were 24.2% and 19.1% of revenue for the six months ended March 31, 2019 and 2018, respectively.
(Loss) Income from Operations
For the three months ended March 31, 2020, loss from operations before income taxes was $(239) as compared to income from operations of $440 for the three months ended March 31, 2019, a decrease of $679 or 154.3%.
Operating income in the three-month period declined due to the impact of the global trade slowdown associated with the COVID-19 pandemic and the reserve for the settlement of threatened litigation.
For the six months ended March 31, 2020 and 2019, income from operations before income taxes was $115 and $1,467 respectively, a decrease of $1,352 or 92.2%. Income from operations declined as a result of the impact
of the COVID-19 pandemic, a shift in volume experienced during the first quarter of fiscal 2019 that did not recur and the reserve for the settlement of threatened litigation, partially offset by contributions from acquisitions experienced during
the first quarter. Our operating margin as a percentage of net revenue for the three months ended March 31, 2020 was 6.4%, versus 11.3% in the prior year period.
Results of Operations - Manufacturing
The Company’s Manufacturing segment includes its majority-owned Indco subsidiary, which manufactures and distributes industrial mixing equipment.
Manufacturing – Selected Financial Information:
Revenue
Total revenue decreased 16.1% to $2,056 in the three months ended March 31, 2020, compared to $2,452 for the three months ended March 31, 2019. Total revenue decreased 13.4% to $3,926 in the six months ended March
31, 2019, compared to $4,533 in the six months ended March 31, 2018. The revenue decline in both periods reflected a decline in volume across the business relative to the prior year periods, due to the slowdown late in the quarter related to the
COVID-19 pandemic.
Gross Profit
Gross profit decreased 16.5% to $1,148 in the three months ended March 31, 2020, compared to $1,375 for the three months ended March 31, 2019. Gross profit margin for the three-month periods ended March 31, 2020 and
2019 was 55.8% and 56.1%, respectively. Gross profit margin for the six months ended March 31, 2020 decreased to 55.3%, compared to 55.7% for the six months ended March 31, 2019. In both the three- and six-month periods, gross profit margin was
relatively flat as the mix of business remained consistent.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 7.6% to $701 in the three months ended March 31, 2020, compared to $759 in the three months ended March 31, 2019. Selling, general and administrative expenses
decreased 5.7% to $1,383 in the six months ended March 31, 2020, compared to $1,467 in the six months ended March 31, 2020. The decrease in both periods was related to the decline in revenue, partially offset by management’s decision to maintain
operational capabilities.
Income from Operations
Income from operations was $447 for the three months ended March 31, 2020 compared to $616 for the three months ended March 31, 2019, representing a 27.4% decrease from the prior year period. Income from operations
of $790 for the six months ended March 31, 2020 decreased 25.2% compared to $1,056 for the six months ended March 31, 2019. Operating profit decreased in both periods due to lower revenue growth without corresponding expense reductions.
Results of Operations – Life Sciences
The Company’s Life Sciences segment manufactures and distributes high-quality monoclonal and polyclonal antibodies, diagnostic reagents and other immunoreagents for biomedical research and provides antibody
manufacturing for academic and industry research scientists. Our Life Sciences business also produces products for other life science companies on an OEM basis.
Life Sciences – Selected Financial Information:
Revenue
Total revenue was $1,737 and $1,652 for the three months ended March 31, 2020 and 2019, respectively, an increase of $85 or 5.1%. Total revenue was $3,609 and $3,093 for the six months ended March 31, 2020 and 2019,
respectively. Acquisitions accounted all of the increase in both periods, as organic growth declined at a double-digit rate for the quarter and at a mid-single digit rate in the six-month period, each as compared to the prior year period, due to
the slowdown in academic research late in the quarter related to the COVID-19 pandemic.
Gross Profit and Gross Profit Margin
Gross profit was $1,135 and $1,087 for the three months ended March 31, 2020 and 2019, respectively, an increase of $48 or 4.4%. Amortization of acquired inventory in the
quarter totaled $227 versus $67 in the prior year period due to our two prior year acquisitions. In the three months ended March 31, 2020 and 2019, the Life Sciences
segment had gross profit margins of 65.3% and 65.8%, respectively. Gross profit margin decreased in the quarter compared to prior year period due to acquisitions and favorable product mix.
Gross profit was $2,405 and $2,039 for the six months ended March 31, 2020 and 2019, respectively. In the six months ended March 31, 2020 the amortization of acquired inventory totaled $447 versus $129 in the prior
year. In the six months ended March 31, 2020, the Life Sciences segment had a gross profit margin of 66.6% compared to 65.9% for the prior year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,071 and $724 for the three months ended March 31, 2020 and 2019, respectively, an increase of $347 or 47.9%, largely due to acquired businesses. Selling, general
and administrative expenses were $2,051 and $1,431 for the six months ended March 31, 2020 and 2019, respectively. The increase was largely due to acquired businesses.
Income from Operations
Income from operations for the three months ended March 31, 2020 and 2019 was $64 compared to $363, in the prior year. The decline in operating income reflected higher amortization of acquired inventory due to
acquisitions and a slowdown in academic research late in the quarter related to the COVID-19 pandemic. Income from operations for the six months ended March 31, 2020 and 2019 was $354 and $608, respectively. The decline reflected higher
amortization of acquired inventory due to acquisitions. As a percentage of revenue income from operations in the six months ended March 31, 2020 declined to 9.8% versus 19.7% due to higher amortization of acquired inventory. Absent these non-cash
expenses, adjusted operating income increased to $801 versus $736 in the prior year period due to acquisitions, offset by lower organic revenue.
LIQUIDITY AND CAPITAL RESOURCES
General
Our ability to satisfy liquidity requirements, including satisfying debt obligations and fund working capital, day-to-day operating expenses and capital expenditures, depends upon future performance, which is subject
to general economic conditions, competition and other factors, some of which are beyond Janel’s control. Our Global Logistics Services segment depends on commercial credit facilities to fund day-to-day operations as there is a difference between
the timing of collection cycles and the timing of payments to vendors. Generally, Janel does not make significant capital expenditures.
As a customs broker, our Global Logistics Services segment makes significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of
duties and taxes to customs authorities primarily in the U.S. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a “pass through” and are not recorded as a component of revenue
and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. These “pass through”
billings can influence our traditional credit collection metrics. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Management believes that it has established effective credit control
procedures and has historically experienced relatively insignificant collection problems.
The COVID-19 pandemic has negatively impacted our liquidity and cash flows. As discussed in greater detail in note 17 to the consolidated financial statements, on April 19, 2020, we entered into a loan agreement with
Santander and executed a U.S. Small Business Administration Note pursuant to which we borrowed $2,726 from Santander pursuant to the Paycheck Protection Program under The Coronavirus Aid, Relief and Economic Security Act, Section 7(a)(36) of the
Small Business Act in order to be able to continue to cover our payroll costs, group health care benefits, mortgage payments, rent and utilities. The duration and magnitude of the pandemic is not reasonably estimable at this point, and if the
pandemic persists, our liquidity and capital resources could be further negatively impacted.
As of March 31, 2020, the Company’s cash and working capital deficiency (current assets minus current liabilities) were $1,928 and $8,302, respectively, as compared to $2,163 and $6,190 as of September 30, 2019. The
increase in working capital deficiency is considered nominal, representing relatively stable collections from customers and payments of vendors.
Janel’s cash flow performance for the three and six-months ended March 31, 2020 is not necessarily indicative of future cash flow performance.
Cash flows from operating activities
Net cash provided by operating activities for the six months ended March 31, 2020 and 2019 was $1,209 and $1,272, respectively. The decrease in cash provided by operations for the six months ended March 31, 2020 was
driven principally by the higher net loss, partially offset by timing of cash collections for accounts receivables and cash payments on accounts payables for the six-month period ended March 31, 2020.
Cash flows from investing activities
Net cash used in investing activities totaled $247 for the six months ended March 31, 2020, versus $2,188 for the prior year period. During the six months ended March 31, 2020, the Company used $116 for final
purchase price adjustments related to an acquisition in the prior year compared to $1,935 for the six months ended March 31, 2019. The Company also used $131 for the acquisition of property and equipment for the six months ended March 31, 2020
compared to $253 for the six months ended March 31, 2019.
Cash flows from financing activities
Net cash used in financing activities was ($1,197) for the six months ended March 31, 2020, versus $1,712 provided by financing activities for the six months ended March 31, 2019. Net cash used in financing
activities for the six months ended March 31, 2020 was primarily a result of reduced outstanding balances on our line of credit. Net cash provided by financing activities for the six months ended March 31, 2019 primarily funded our acquisition
efforts.
Off-Balance Sheet Arrangements
As of March 31, 2020, we had no off-balance sheet arrangements or obligations.
