Our discussions below in this Item 7 should be read in conjunction with our
consolidated financial statements, including the notes thereto, included in this
Annual Report on Form 10-K.
• Introduction
• Business Performance
• Liquidity and Capital Resources
• Current Outlook
• Critical Accounting Policies and Estimates
• New Accounting Standards
• Non - GAAP Financial Measures
This discussion and analysis should be read along with Janel's audited financial
statements and related notes thereto as of September 30, 2019 and 2018 and for
each of the two years in the period ended September 30, 2019 included in this
Annual Report. As discussed above, effective October 1, 2018, the Company
realigned its Manufacturing segment, which was separated into two segments named
Manufacturing and Life Sciences. Accordingly, the Company now operates in three
reportable segments: (1) Global Logistics Services, (2) Manufacturing and (3)
Life Sciences. Year-to-year comparisons between 2018 and 2017 have been omitted
from this Form 10-K, but may be found in " Management's Discussion and Analysis
of Financial Condition " in Part II, Item 7 of our Form 10-K for the fiscal
year ended September 30, 2018, which specific discussion is incorporated herein
by reference. The following discussion presents results of operations for the
Manufacturing segment on a realigned basis for the years ended September 30,
2018.
INTRODUCTION
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 higher 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.
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Year Ended September 30, 2019 Acquisitions
On September 6, 2019, the Company acquired Phospho, which we include in our Life
Sciences segment.
On July 1, 2019, we acquired the membership interests of a life sciences company
to expand our product offerings, which we include in our Life Sciences segment.
On November 20, 2018, the Company acquired Honor, which we include in our Global
Logistics Services segment.
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, which we include in our Global Logistics Services segment.
Year Ended September 30, 2018 Acquisitions
On June 22, 2018, the Company acquired Antibodies, which we include in our Life
Sciences segment.
On March 5, 2018, the Company acquired the common stock of Aves, which we
include in our Life Sciences segment.
On January 3, 2018, the Company acquired GTRI, which we include in our Global
Logistics Services segment.
Results of Operations - Janel Corporation
(In thousands except for per share data)
Financial Summary
in thousands
(Fiscal years ended September 30,)
2019 2018
Corporate expenses $ 2,367 $ 2,092Amortization of intangible assets 915 807
Stock-based compensation
203 506
Merger and acquistion expenses 166 465
Total corporate expenses
$ 3,651 $ 3,870
Corporate expenses decreased by $219 to $3,651, or 5.7%, in fiscal 2019 as
compared to fiscal 2018. The dollar decrease was due primarily to decreases in
stock-based compensation and merger and acquisition expenses, offset by
increases in amortization of intangible expenses and salaries related to
increased headcount at the corporate offices. We incur merger and acquisition
deal-related expenses and intangible amortization at the corporate level rather
than at the segment level.
Interest Expense
Interest expense for the consolidated company increased $195, or 39.1%, to $694
in fiscal 2019 from approximately $499 in fiscal 2018. The increase was
primarily due to higher average debt balances to support our acquisition
efforts.
Income Taxes
On a consolidated basis, the Company recorded an income tax provision of $330 in
fiscal 2019, as compared to $130 in fiscal 2018. The increase was primarily due
to increased pretax income, partially off-set by a related one-time income tax
benefit of $49 due to the new tax rate change during the year ended September
30, 2018. In 2016, a deferred tax asset was established to reflect a net
operating loss carryforward, which the Company has begun using, and expects to
continue to use, through ongoing profitability.
Preferred Stock Dividends
Preferred stock dividends include the Company's Series A Stock and dividends
accrued but not paid on the Company's Series C Stock. For the year ended
September 30, 2019 and 2018, preferred stock dividends were $571 and $438,
respectively. The increase of $133, or 30.4%, was the result of a higher number
of shares of Series C Stock outstanding to support acquisitions and an increase
in dividend rate as of January 1, 2019 to 6%.
Preferred stock dividends include $15 in annual dividends, paid quarterly, on
the Company's Series A Stock. On September 24, 2018, the 20,000 shares of Series
A Stock were repurchased by the Company for $400. On September 27, 2018, the
Series A Stock was retired.
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Dividends accrued but not paid on the Company's Series C Stock were $1,041 and
$470, as of September 30, 2019 and 2018, respectively. By the filing of an
amendment to the certificate of designation for the Series C Stock on October
17, 2017, the annual dividend rate decreased to 5% from 7% per annum of the
original issuance price. The amendment on October 17, 2017 to the annual
dividend rate decrease was treated as an extinguishment for accounting purposes,
and the fair value prior to modification was $8,224 and $6,912 after
modification, for a change of $1,312. In accordance with Accounting Standards
Codification Topic 260, "Earnings Per Share," this incremental benefit was
treated as an adjustment to earnings per share for common stockholders for the
fiscal year ended September 30, 2018. On September 27, 2018, the Company paid
$1,093 to holders of Series C Stock.
Net Income (Loss) Available to Common Shareholders
Net income (loss) available to common shareholders was ($297), or ($0.35) per
diluted share, for fiscal 2019 and $1,072, or $1.28 per diluted share, for
fiscal 2018. The decrease was primarily due to the gain on extinguishment of
Series C Stock dividends of $1,312, partially offset by dividends to preferred
shares, an increase in professional fees and stock-based compensation and higher
expenses associated with acquisition activities.
Results of Operations - Segment Financial Results
The following table sets forth our segment financial results for the years ended
September 30, 2019 and 2018:
Years Ended September 30,
(In thousands) 2019 2018
Revenue:
Global Logistics Services $ 69,655 $ 57,200
Manufacturing 9,042 8,337
Life Sciences 5,657 1,984
Total revenues 84,354 67,521
Gross Profit:
Global Logistics Services 16,336 14,515
Manufacturing 5,022 4,540
Life Sciences 3,748 1,257
Total gross profit 25,106 20,312
Income from Operations:
Global Logistics Services 2,480 2,679
Manufacturing 1,909 1,710
Life Sciences 841 368
Total income from operations by segment 5,230 4,757
Corporate administrative expenses (2,736 ) (3,063 )
Amortization expense (915 ) (807 )
Interest expense (694 ) (499 )
Change in fair value of mandatorily redeemable
non-controlling interest 61 (10 )
Net income before taxes 946 378
Income taxes expense (330 ) (130 )
Net Income $ 616 $ 248
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BUSINESS PERFORMANCE
Consolidated revenues for the year ended September 30, 2019 were $84,354, or
24.9% higher than fiscal 2018. Revenues for our Global Logistics Services
segment increased mostly due to acquisitions and higher freight rates, while
revenues for our Manufacturing segment increased due to strong organic growth.
Revenues for our Life Sciences segment increased largely due to acquisitions.
The Company's net income from continuing operations for the year ended September
30, 2019 totaled approximately $616 or $0.65 per diluted share, compared to
approximately $248 or $0.30 per diluted share for the year ended September 30,
2018. Our profits in fiscal 2019 were positively impacted by lower corporate and
administrative expense, lower stock-based compensation, offset by additional
expenses related to interest expense and income tax expense. These expenses
impacted our overall operating results and our adjusted operating profits for
fiscal 2019 relative to prior years.
Results of Operations - Global Logistics Services
Financial Summary
in thousands
(Fiscal years ended September 30,)
2019 2018
Revenue $ 69,655 $ 57,200
Forwarding expense 53,319 42,685
Net revenue $ 16,336 $ 14,515
Net revenue yield 23 % 25 %
Income from operations $ 2,480 $ 2,679Fiscal 2019 compared with fiscal 2018
Revenue
Total revenue in fiscal 2019 was $69,655 as compared to $57,200 in fiscal 2018,
an increase of $12,455 or 21.8%. Revenue increased year over year due to higher
freight rates, partially offset by a slight organic decline in our base
business. The higher freight expenses drove higher purchased transportation
expenses. Our volume as measured by twenty-foot equivalent units ("TEUs"),
metric tons and custom entries grew 50%, 20% and 7%, respectively.
Net Revenue
Net revenue in fiscal 2019 was $16,336, an increase of $1,821, or 12.5%, as
compared to $14,515 in fiscal 2018. This increase was mainly the result of
additional net revenue from an acquisition, which was partially offset by a
slight organic decline in our base business. Our net revenue yield (net revenue
divided by gross revenues) declined to 23.5% in fiscal 2019 compared to 25.4% in
fiscal 2018 largely due to an increase in transportation rates and changes in
our mix of business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations in
fiscal 2019 were $13,856, as compared to $11,836 in fiscal 2018. The increase of
$2,020, or 17.1%, was mainly due to additional expenses from the acquisition of
Honor, Sea Cargo and GTRI and higher expenses related to our investments in a
marketing program, which were partially offset by cost efficiencies experienced
across the rest of Janel Group. As a percentage of gross revenue, selling,
general and administrative expenses were 20.1% and 20.7% for fiscal 2019 and
fiscal 2018, respectively.
Income from Operations
Operating income decreased to $2,480 in fiscal 2019 compared to $2,679 in fiscal
2018, a decrease of 7.4%. The benefit from acquisitions and integration
efficiencies from prior year acquisition investments more than offset an
investment in the integration of recent acquisitions and a marketing program in
fiscal 2019. Our operating margin as a percentage of net revenue was 15.2% in
fiscal 2019 compared to 18.5% in fiscal 2018.
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Results of Operations - Manufacturing
Financial Summary
in thousands
(Fiscal years ended September 30,)
2019 2018
Revenue $ 9,042 $ 8,337
Gross profit $ 5,022 $ 4,540
Gross profit margin 55.5 % 54.5 %
Income from operations $ 1,909 $ 1,710Fiscal 2019 compared with fiscal 2018
Note Regarding Comparison Between Periods
We are presenting the below discussion of the results of operations for our
Manufacturing segment for the fiscal year ended September 30, 2019 as compared
to the fiscal year ended September 30, 2018 which reflects the realignment of
our segments effective October 1, 2018, as discussed above, and the resulting
realignment of our Manufacturing segment's results of operations for prior
periods.
Revenue
Total revenue was $9,042 in fiscal 2019 compared with $8,337 in fiscal 2018, an
increase of 8.5%. The revenue growth reflected strong growth across the
business.
Gross Profit
Gross profit was $5,022 and $4,540 for fiscal years 2019 and 2018, respectively.
Gross profit margin at Indco in the full-year period of fiscal 2019 was 55.5%,
as compared to 54.5% in fiscal 2018. Gross profit margin overall for the
Manufacturing segment increased slightly due to strong business demand and
leverage of fixed expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Manufacturing segment was
$3,113 and $2,830 for fiscal years 2019 and 2018, respectively. Our expenses
within the mixing business increased year-over-year due to stock-based
compensation expense. As a percentage of gross revenue, selling, general and
administrative expenses were 34.4% and 33.9% for fiscal 2019 and fiscal 2018,
respectively.
Income from Operations
Operating income for fiscal 2019 was $1,909 compared to $1,710 in fiscal 2018.
Indco's operating income increased 11.6% versus the prior year due to strong
business growth which more than offset stock-based compensation expenses and
items related to our debt refinancing and related dividend actions.
Results of Operations - Life Sciences
Financial Summary
in thousands
(Fiscal years ended September 30,)
2019 2018
Revenue $ 5,657 $ 1,984
Gross profit $ 3,748 $ 1,257
Gross profit margin 66.3 % 63.4 %
Income from operations $ 841 $ 368
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Note Regarding Comparison Between Periods
Janel acquired its first Life Sciences business on March 5, 2018. Therefore,
fiscal 2018 figures represent the results of only seven months of Janel
ownership. Janel acquired Aves on March 5, 2018, Antibodies on June 22, 2018,
IgG on July 1, 2019 and Phospho on September 6, 2019.
Fiscal 2019 compared with fiscal 2018
Revenue
Total revenue was $5,657 in fiscal 2019 compared with $1,984 in fiscal 2018. The
increase in sales was almost entirely due to acquisitions.
Gross Profit
Gross profit was $3,748 and $1,257 for fiscal years 2019 and 2018, respectively.
The gross profit margin of 66.3% in fiscal 2019 increased compared to 63.4% in
the prior fiscal year due to the mix of acquisitions. The gross profit margin
was also impacted by the amortization of non-cash acquired inventory expenses of
$250 and $190 for fiscal 2019 and 2018, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Life Sciences segment were
$2,907 and $889 for fiscal years 2019 and 2018, respectively. Our expenses
within the business increased year-over-year due to stock-based compensation
expense
As a percentage of gross revenue, selling, general and administrative expenses
were 51.4% and 44.8% for fiscal 2019 and fiscal 2018, respectively. The expenses
rose faster than revenue due to mix of business from acquisitions and
investments in growth initiatives.
Income from Operations
The Life Sciences business earned $841 and $368 in operating income for fiscal
2019 and 2018, respectively. The difference in operating margin of 14.9% in
fiscal 2019 compared with 18.5% in fiscal 2018 largely due to changes in mix of
business from acquisitions and investments in growth initiatives.
LIQUIDITY AND CAPITAL RESOURCES
General
Our ability to satisfy liquidity requirements, including 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 our control.
Subsidiaries depend 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, we do not make significant capital
expenditures.
Janel's cash flow performance for the 2019 fiscal year is not necessarily
indicative of future cash flow performance. As of September 30, 2019, and
compared with the prior fiscal year, the Company's cash and cash equivalents
increased by $1,578, or 270%, to $2,163 from $585. During the fiscal year ended
September 30, 2019, Janel's net working capital deficiency (current assets less
current liabilities) decreased by $397, from ($6,587) at September 30, 2018 to
($6,190) at September 30, 2019. This decrease is considered nominal,
representing relatively stable collections from customers and payments of
vendors in 2019 and 2018.
Cash flows from continuing operating activities
Net cash provided by continuing operating activities for fiscal years 2019 and
2018 was $7,203 and $848, respectively. The increase in cash provided by
continuing operations in fiscal 2019 was driven principally by higher net
income, an increase in accounts payable and accrued expenses, partially offset
by a modest increase in accounts receivable.
Cash flows from investing activities
Net cash used for investing activities, mainly for the acquisition of
subsidiaries, was $6,600 for fiscal 2019 and $7,600 for fiscal 2018. The fiscal
2019 amount was associated with the Honor, Sea Cargo, IgG and Phospho
acquisitions, and the fiscal 2018 amount was associated with the GTRI, Aves and
Antibodies acquisitions.
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Cash flows from financing activities
Net cash provided by financing activities was $975 for fiscal 2019 and $6,349
for fiscal 2018. Net cash provided by financing activities in fiscal 2019
primarily included proceeds from our term loan offset by repayments on line of
credit, and in fiscal 2018 primarily included proceeds from the sales of Series
C Stock, proceeds from a line of credit and proceeds from a senior secured term
loan.
Credit Facilities
Global Logistics Services
Santander Bank Facility
On October 17, 2017, the Janel Group subsidiaries (collectively the "Janel Group
Borrowers"), with Janel Corporation 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"). The Santander Facility provides that the Janel Group
Borrowers can borrow up to $10,000, 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 2.50% 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. The
Santander Loan Agreement requires, among other things, that the Janel Group
Borrowers, on a quarterly basis, maintain a Minimum Debt Service Coverage ratio,
as defined in the Santander Loan Agreement. The loan is subject to earlier
termination as provided in the Santander Loan Agreement and matures on October
17, 2020, unless renewed. The Santander Loan Agreement requires the Company to
maintain a lock box with Santander in addition to containing certain subjective
acceleration clauses. As a result of these terms, the loan is classified as a
current liability on the consolidated balance sheet.
On March 21, 2018, the Janel Group Borrowers, the Company and Aves entered into
an amendment with Santander (the "Santander Amendment") with respect to the
Santander Loan Agreement. Pursuant to the Santander Amendment, among other
changes Aves was added as a loan party obligor (but not a Janel Group Borrower)
under the Santander Loan Agreement, the maximum amount available under the
Santander Loan Agreement was increased from $10,000 to $11,000 (subject to 85%
of eligible receivables), the foreign account sublimit was increased from $1,500
to $2,000, a one-time waiver was granted until May 31, 2018 for the stated event
of default related to the delivery of the quarterly financial statements for the
fiscal quarter ended December 31, 2017, and a one-time waiver, retroactive to
March 5, 2018, of the provision that prohibits the Company from using proceeds
of the revolving loan to finance acquisitions was granted for the purpose of
partially funding the acquisition of Aves.
On November 20, 2018, the Company and its wholly-owned subsidiaries entered into
the Limited Waiver, Joinder and Second Amendment ("Amendment No. 2") to the
Santander Loan Agreement (as amended by the Santander Amendment), with Santander
Bank, N.A. Pursuant to, and among other changes affected by, Amendment No. 2:
(1) Honor Worldwide Logistics LLC, HWL Brokerage LLC and Global Trading
Resources Inc. were added as new borrowers under the Santander Loan Agreement;
(2) Aves was released as a loan party obligor under the Santander Loan
Agreement; (3) the maximum revolving facility amount available was increased
from $11,000 to $17,000 (limited to 85% of the borrowers' eligible accounts
receivable borrowing base and reserves); (4) the foreign account sublimit was
increased from $2,000 to $2,500; (5) the letter of credit limit was increased
from $500 to $1,000; (6) the definitions of "Debt Service Coverage Ratio," "Debt
Service Coverage Ratio (Borrower Group)" and "Loan Party" were restated; (7) the
permitted acquisition debt basket was increased from $2,500 to $4,000; and (8)
the permitted indebtedness basket was increased from $500 to $1,000.
At September 30, 2019, outstanding borrowings under the Santander Facility were
$8,391, representing 49.4% of the $17,000 available thereunder, and interest was
accruing at an effective interest rate of 5.50%. As of May 1, 2019, Santander
had granted the Janel Group Borrowers a one-time waiver until July 31, 2019 for
an event of default related to the delivery of the audited financial statements
for the fiscal year ended September 30, 2018. Other than as specifically
referenced above, the Janel Group Borrowers were in compliance with the
covenants defined in the Santander Loan Agreement as of September 30, 2019.
At September 30, 2018, outstanding borrowings under the Santander Facility were
$9,730, representing 88.5% of the $11,000 available thereunder, and interest was
accruing at an effective interest rate of 5.75%.
Working Capital Requirements
Through September 30, 2019, Janel Group's cash needs were met by the Santander
Facility and cash on hand. As of September 30, 2019, the Janel Group had,
subject to collateral availability, $8,609 available under its $17,000 Santander
Facility and $1,116 in cash.
The Company believes that its current financial resources will be sufficient to
finance Janel Group's operations and obligations (current and long-term
liabilities) for the long and short term. However, Janel Group's actual working
capital needs will depend upon numerous factors, including operating results,
the costs associated with growing Janel Group, either organically or through
acquisitions, competition and availability under the Santander Facility, none of
which can be predicted with certainty. If cash flow and available credit are not
sufficient to fund working capital, Janel Group's operations will be materially
negatively impacted.
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Manufacturing
First Merchants Bank Credit Facility
On March 21, 2016, Indco executed a Credit Agreement (the "First Merchants
Credit Agreement") with First Merchants Bank with respect to a $6,000 term loan
and $1,500 (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 3.75% (if Indco's cash
flow leverage ratio is less than or equal to 2:1) or 4.75% (if Indco's cash flow
leverage ratio is greater than 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. The First Merchants Credit Agreement requires, among
other things, that Indco, on a monthly basis, not exceed a "maximum total funded
debt to EBITDA ratio" and maintain a "minimum fixed charge covenant ratio," both
as defined in the First Merchants Credit Agreement. The First Merchants Facility
requires monthly payments until the expiration date on the fifth anniversary of
the loan. The loan is subject to earlier termination as provided in the First
Merchants Credit Agreement.
On August 30, 2019, Indco and First Merchants entered into Amendment No. 1 to
Credit Agreement modifying the terms of Indco's credit facilities with First
Merchants and extending the maturity date of the credit facilities. Under the
revised terms, the credit facilities will consist of a $5,500 Term Loan and
$1,000 (limited to the borrowing base and reserves) Revolving Loan. Interest
will accrue 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 will accrue on the Revolving Loan at an annual rate equal to the
one-month LIBOR plus 2.75%. Indco's obligations under the First Merchants credit
facilities are secured by all of Indco's assets and are guaranteed by Janel, and
Janel's guarantee of Indco's obligations is secured by a pledge of Janel's Indco
shares. The First Merchants credit facilities will expire on August 30, 2024
(subject to earlier termination as provided in the Credit Agreement) unless
renewed.
As of September 30, 2019, there were no outstanding borrowings under the
revolving loan and $5,455 of borrowings under the term loan, with interest
accruing on the term loan at an effective interest rate of 6.01%. Indco was in
compliance with the covenants defined in the First Merchants Credit Agreement at
both September 30, 2019 and September 30, 2018.
As of September 30, 2018, there were no outstanding borrowings under the
revolving loan and $2,713 of borrowings under the term loan, with interest
accruing on the term loan at an effective interest rate of 5.85%.
Working Capital Requirements
Manufacturing's cash needs are currently met by the term loan and revolving
credit facility under the First Merchants Credit Agreement and cash on hand. As
of September 30, 2019, Manufacturing had $1,000 available under its $1,000
revolving facility subject to collateral availability and $501 in cash. The
Company believes that the current financial resources will be sufficient to
finance Manufacturing operations and obligations (current and long-term
liabilities) for the long and short term. However, actual working capital needs
will depend upon numerous factors, including operating results, the cost
associated with growing Manufacturing either organically or through
acquisitions, competition and availability under the revolving credit facility,
none of which can be predicted with certainty. If cash flow and available credit
are not sufficient to fund working capital, Manufacturing's operations will be
materially negatively impacted.
Life Sciences
First Northern Bank of Dixon
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") and Promissory Note with First Northern Bank of Dixon ("First
Northern"), with respect to a $2,025 senior secured term loan (the "Senior
Secured Term Loan"). The First Northern Loan Agreement and Promissory Note are
dated and effective as of June 14, 2018. The proceeds of the Senior Secured Term
Loan were used to fund a portion of the merger consideration to acquire
Antibodies.
Interest will accrue on the Senior Secured 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.
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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 Senior Secured Term Loan will
mature on June 14, 2028 (subject to earlier termination as provided in the First
Northern Loan Agreement). The First Northern Loan Agreement requires, among
other things, that the borrowers maintain certain Minimum Debt Service Coverage,
Debt to Tangible Net Worth and Tangible Net Worth ratios as defined in the First
Northern Loan Agreement.
As of September 30, 2019, the total amount outstanding under the Senior Secured
Term Loan was $1,975, of which $1,933 is included in long-term debt and $42 is
included in current portion of long-term debt, with interest accruing at an
effective interest rate of 5.28%.
As of September 30, 2018, the total amount outstanding under the Senior Secured
Term Loan was $2,015, of which $1,975 is included in long-term debt and $40 is
included in current portion of long-term debt, with interest accruing at an
effective interest rate of 5.28%.
Working Capital Requirements
Life Sciences cash needs are currently met by the First Northern Loan Agreement
and cash on hand of $373. The Company believes that the current financial
resources will be sufficient to finance Life Sciences operations and obligations
(current and long-term liabilities) for the long and short term. However, actual
working capital needs will depend upon numerous factors, including operating
results, the cost associated with growing Life Sciences either organically or
through acquisitions, competition and availability under the revolving credit
facility, none of which can be predicted with certainty. If cash flow and
available credit are not sufficient to fund working capital, Life Sciences
operations will be materially negatively impacted.
CURRENT OUTLOOK
The results of operations in the Global Logistics Services, Manufacturing and
Life Sciences segments are affected by the general economic cycle, particularly
as it influences global trade levels and specifically the import and export
activities of our Janel Group business's various current and prospective
customers. Historically, the Company's annual results of operations have been
subject to seasonal trends which have been the result of, or influenced by,
numerous factors including climate, national holidays, consumer demand, economic
conditions, the growth and diversification of Janel Group's international
network and service offerings, and other similar and subtle forces. The Company
cannot accurately forecast many of these factors, nor can it estimate accurately
the relative influence of any particular factor and, as a result, there can be
no assurance that historical patterns, if any, will continue in future periods.
The Company's subsidiaries are implementing business strategies to grow revenue
and profitability for fiscal 2020 and beyond. Janel Group's strategy calls for
additional branch offices, introduction of new revenue streams for existing
locations, sales force expansion, additional acquisitions, and a continued focus
on implementing lean methodologies to contain operating expenses.
Our Manufacturing and Life Sciences segments expect to introduce new product
lines and wider distribution and promotion of its products with internet sales
efforts. In addition to supporting its subsidiaries' growth plans, the Company
may seek to grow Janel by entering new business segments through acquisition.
Certain elements of the Company's profitability and growth strategy, including
proposals for acquisition and accelerating revenue growth, are contingent upon
the availability of adequate financing on terms acceptable to the Company.
Without adequate equity and/or debt financing, the implementation of significant
aspects of the Company's strategic growth plan may be deferred beyond the
originally anticipated timing, and the Company's operations will be materially
negatively impacted.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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. Historically, actual results have not differed
significantly from our estimates. 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.
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Management believes that the nature of the Company's business is such that there
are 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.
On December 22, 2017, the United States enacted tax reform legislation through
the Tax Cuts and Jobs Act (the "Tax Reform Act"), which significantly changed
the existing U.S. tax laws, including by reducing the corporate tax rate from
34% to 21%, moving from a worldwide tax system to a territorial system as well
as other changes. As a result of the enactment of the Tax Reform Act, the
Company made a reasonable estimate and recorded an additional one-time income
tax benefit of $49 during the first quarter of fiscal 2018, related to the
estimated re-measurement of certain deferred tax assets, primarily net operating
losses and deferred tax liabilities attributable to intangible assets.
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:
• accounts receivable valuation;
• the useful lives of long-term assets;
• the accrual of costs related to ancillary services the Company provides; and
• accrual of tax expense on an interim basis.
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 mean 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. Revenues are recognized upon completion of the services.
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. In the case of ocean and air freight
movements, Janel Group may negotiate a contract of carriage.
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.
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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.
Net Revenue
Our total revenues represent the total dollar value of services and goods we
sell to our customers. Our net revenue is calculated as Revenue - Global
Logistics Services less Cost and Expenses - Forwarding Expenses, as presented on
our consolidated statement of operations, which are purchased transportation and
related services, including contracted air, ocean, rail, motor carrier and other
costs. Total revenues can be influenced greatly by changes in transportation
rates or other items, such as fuel prices, which we do not control. Our net
revenue, however, is the primary indicator of our ability to source, add value,
and sell services and products that are provided by third parties; therefore, we
consider net revenue to be our primary performance measurement. Accordingly, the
discussion of our results of operations focuses on the changes in our net
revenue. 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."
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 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.
Revenue Recognition Life Sciences
Revenues from Aves, Antibodies, IgG and Phospho 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. Payments are received either by credit card or invoice by Aves,
Antibodies, IgG and Phospho. Revenues from Aves, Antibodies, IgG and Phospho are
recognized when products are shipped and risk of loss is transferred to the
carrier(s) used.
NEW ACCOUNTING STANDARDS
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 fiscal year
ended September 30, 2019 was a decrease of $443 and $403, respectively, as a
result of applying ASC Topic 606.
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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.
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