Our discussions below in this Item 7 should be read along with Janel's audited
financial statements and related notes thereto as of September 30, 2020 and 2019
and for each of the two years in the period ended September 30, 2020 included in
this Annual Report on Form 10-K.
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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 and corporate governance. 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.
COVID-19
The outbreak of COVID-19 has had a significant impact on global trade and on our
business during the fiscal year ended September 30, 2020. 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. As those
shutdowns and restrictions in China started to ease, export volumes from China
began to increase, in March 2020. 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 decline in global economic activity that
persisted during fiscal 2020 and resulted in a second steep decline in global
import and export trade volumes, which has materially impacted our Global
Logistics Services business. Specifically, in the fiscal year ended September
30, 2020, we experienced a year-over-year decrease of 7.6% in our Global
Logistics Services net revenues and a decrease of 19.1% in our Manufacturing
segment revenues as a result of the global trade slowdown arising from the
COVID- 19 pandemic.
We also experienced a significant slowdown in organic growth in our Life
Sciences segment due to a slowdown in orders and in academic research as a
result of 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 and Manufacturing segments, 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
longer-term financial challenges facing our customers. We are closely monitoring
our customers' payment performance and expect our customer credit risk will
remain heightened as long as economic and trade disruptions persist.
In our Global Logistics Services and Manufacturing segments, customer demand for
our services and products 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
business, financial position, results of operations or liquidity going forward
due to uncertainties regarding the severity and duration of the outbreak,
additional actions that may be taken by governmental authorities in response to
a potential resurgence of the virus, the pace of recovery once the pandemic
subsides and the overall long-term impact on the global economy. That said, our
results of operations and financial condition were significantly adversely
impacted in the fiscal year ended September 30, 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.
Year Ended September 30, 2020 Acquisitions
On July 23, 2020, the Company acquired Atlantic Customs Brokers, Inc. (ACB)
which we include in our Global Logistics Services segment.
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.
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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.
Results of Operations - Janel Corporation
Our results of operations and period-over-period change are discussed in the
following section. The tables and discussion should be read in conjunction with
the accompanying Consolidated Financial Statements and the notes thereto
appearing in Item 8.
Refer to Item 7. "Management Discussion and Analysis of Financial Condition
and Results of Operations" in our Annual Report on Form 10-K for the year
ended September 30, 2019, filed on January 28, 2020, for a comparison of fiscal
year 2019 results of operations to the fiscal year 2018 results of operations,
which specific discussion is incorporated herein by reference
Our condensed consolidated results of operations are as follows:
Financial Summary
in thousands
(Fiscal years ended September 30,)
2020 2019 2018
Revenues $ 82,429 $ 84,354 $ 67,521
Forwarding expenses and cost of revenues 58,908 59,248 47,209
Gross profit 23,521 25,106 20,312
Operating expenses 25,245 23,527 19,425
Operating (loss) income $ (1,724 ) $ 1,579 $ 887
Net (loss) income $ (1,725 ) $ 616 $ 248
Adjusted operating income $ 376 $ 3,040 $ 2,562Consolidated revenues for the year ended September 30, 2020 were $82,429, or
2.3% lower than fiscal 2019. Revenues for our Global Logistics Services and
Manufacturing segments decreased mostly due to slowdown related to the COVID-19
pandemic. Revenues for our Life Sciences segment increased largely due to
acquisitions.
The Company's net loss for the year ended September 30, 2020 totaled
approximately ($1,725) or ($2.75) per diluted share, compared to net income of
approximately $616 or $0.72 per diluted share for the year ended September 30,
2019. Net income 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, a reserve for the settlement of threatened litigation and severance
expenses, partially offset by contributions from acquisitions experienced during
the first quarter. These expenses impacted our overall operating results and our
adjusted operating profits for fiscal 2020 relative to prior years.
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The following table sets forth a reconciliation of operating income to adjusted
operating income:
Adjusted Operating Income
in thousands
(Fiscal years ended September 30,)
2020 2019 2018
(Loss) income from operations $ (1,724 ) $ 1,579 $ 887
Amortization of intangible assets 955 915 807
Stock-based compensation 269 296 678
Cost recognized on sale of acquired inventory 876 250 190
Adjusted operating income
$ 376 $ 3,040 $ 2,562
BUSINESS PERFORMANCE
Results of Operations - Global Logistics Services
Financial Summary in thousands
(Fiscal years ended September
30,)
2020 2019
Revenue $ 68,492 $ 69,655
Forwarding expense 53,397 53,319
Net revenue $ 15,095 $ 16,336
Net revenue yield 22.0 % 23.5 %
Selling, general and administrative expenses $ 14,992 $ 13,856
Income from operations $ 103 $ 2,480
Fiscal 2020 compared with fiscal 2019
Revenue
Total revenue in fiscal 2020 was $68,492 as compared to $69,655 in fiscal 2019,
a decrease of $1,163 or 1.7%. The decrease in revenue was largely due to the
impact of the continued global trade slowdown, in particular the steep reduction
in global import and export trade volumes due to the COVID-19 pandemic partially
offset by an increase in transportation rates due to COVID related
transportation capacity reductions. Acquired revenue from two acquisitions
completed during fiscal 2019 and one in fiscal 2020 also slightly offset a
portion of the revenue decline in the twelve-month period. Our volume as
measured by twenty-foot equivalent units ("TEUs") grew 30%, metric tons and
custom entries decreased 24% and 10%, respectively.
Net Revenue
Net revenue in fiscal 2020 was $15,095, a decrease of $1,241, or 7.6%, as
compared to $16,336 in fiscal 2019. The decrease reflected a low-double digit
organic decline for the year due to volume pressures from the COVID-19 pandemic
and customers in the prior year period moving freight in advance of certain
governmental trade policies, partially offset by acquisition contributions. Our
net revenue yield (net revenue divided by gross revenues) declined to 22.0% in
fiscal 2020 compared to 23.5% in fiscal 2019 largely due to an increase in
transportation rates.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations in
fiscal 2020 were $14,992, as compared to $13,856 in fiscal 2019. The increase of
$1,136, or 8.2%, was mainly due to additional expenses from acquired businesses,
severance expenses related to leadership changes, and settlement of threatened
litigation. As a percentage of gross revenue, selling, general and
administrative expenses were 21.8% and 19.9% for fiscal 2020 and fiscal 2019,
respectively.
Income from Operations
Operating income decreased to $103 in fiscal 2020 compared to $2,480 in fiscal
2019, a decrease of 95.8%. Income from operations declined as a result of the
impact of the COVID-19 pandemic and management's decision to maintain staffing
and operational capabilities, a shift in volume experienced during the first
quarter of fiscal 2019 that did not recur and the settlement of threatened
litigation, partially offset by contributions from acquisitions. Our operating
margin as a percentage of net revenue was 0.7% in fiscal 2020 compared to 15.2%
in fiscal 2019.
Results of Operations - Manufacturing
Financial Summary
in thousands
(Fiscal years ended September 30,)
2020 2019
Revenue $ 7,319 $ 9,042
Cost of revenues $ 3,329 $ 4,020
Gross profit $ 3,990 $ 5,022
Gross profit margin 54.5 % 55.5 %
Selling, general and administrative expenses $ 2,505 $ 3,113
Income from operations
$ 1,485 $ 1,909
Fiscal 2020 compared with fiscal 2019
Revenue
Total revenue was $7,319 in fiscal 2020 compared with $9,042 in fiscal 2019, a
decrease of 19%. The revenue decline reflected a decline in volumes across the
business relative to the prior year period due to the slowdown related to the
COVID-19 pandemic.
Gross Profit
Gross profit was $3,990 and $5,022 for fiscal years 2020 and 2019, respectively.
Gross profit margin for the Manufacturing segment in the full-year period of
fiscal 2020 was 54.5%, as compared to 55.5%, in fiscal 2019. Gross profit margin
overall for the Manufacturing segment decreased slightly due to mix of business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Manufacturing segment were
$2,505 and $3,113 for fiscal years 2020 and 2019, respectively. As a percentage
of gross revenue, selling, general and administrative expenses were 34.2% and
34.4% for fiscal 2020 and fiscal 2019, respectively. The decrease in expenses
related to the decline in revenue, lower stock-based compensation items related
to our debt refinancing and related dividend actions, partially offset by
management's decision to maintain staffing and operational capabilities.
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Income from Operations
Operating income for fiscal 2020 was $1,485 compared to $1,909 in fiscal 2019.
Indco's operating income decreased 22.2% versus the prior year due to lower
revenue without corresponding expense reductions.
Results of Operations - Life Sciences
Financial Summary
in thousands
(Fiscal years ended September 30,)
2020 2019
Revenue $ 6,618 $ 5,657
Cost of revenues 1,306 1,659
Cost recognized upon sale of acquired inventory 876 250
Gross profit
$ 4,436 $ 3,748
Gross profit margin 67.0 % 66.3 %
Selling, general and administrative expenses $ 3,870 $ 2,907
Income from operations
$ 566 $ 841
Fiscal 2020 compared with fiscal 2019
Revenue
Total revenue was $6,618 in fiscal 2020 compared with $5,657 in fiscal 2019. The
increase in sales was entirely due to acquisitions. Revenue declined at a
mid-single digit rate on an organic basis due to the slowdown in academic
research related to the COVID-19 pandemic.
Gross Profit
Gross profit was $4,436 and $3,748 for fiscal years 2020 and 2019, respectively.
The gross profit margin of 67.0% in fiscal 2020 remained comparable to 66.3% in
the prior fiscal year. Gross profit was negatively impacted as a result of
purchase accounting related to inventory in fiscal 2020 and 2019. Under purchase
accounting, inventory is valued at fair value less expected selling and
marketing costs, resulting in reduced margins in future periods as the inventory
is sold. The gross profit margin was impacted by the amortization of non-cash
acquired inventory expenses of $876 and $250 for fiscal 2020 and 2019,
respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Life Sciences segment were
$3,870 and $2,907 for fiscal years 2020 and 2019, respectively. The increase in
both periods was largely due to acquired businesses. As a percentage of gross
revenue, selling, general and administrative expenses were 58.5% and 51.4% for
fiscal 2020 and fiscal 2019, respectively. Expenses rose faster than revenue due
to mix of business from acquisitions.
Income from Operations
The Life Sciences business earned $566 and $841 in income from operations for
fiscal 2020 and 2019, respectively. The decline in operating income reflected
higher cost recognized on sale of acquired inventory due to acquisitions
partially offset by the profit contribution from acquisitions. The difference in
operating margin of 8.6% in fiscal 2020 compared with 14.9% in fiscal 2019 was
largely due to higher amortization of acquired inventory from our acquisitions.
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Results of Operations - Corporate and Other
Below is a reconciliation of income from operations segments to net (loss)
available to common stockholders
Years Ended September 30,
2020 2019
(In thousands)
Total income from operating segments $ 2,154 $ 5,230
Administrative expenses (2,724 ) (2,533 )
Amortization expense (955 ) (915 )
Stock-based compensation (199 ) (203 )
Total Corporate expenses (3,878 ) (3,651 )
Interest expense (521 ) (694 )
Change in fair value of mandatorily redeemable
non-controlling interest 15 61
Net (loss) income before taxes (2,230 ) 946
Income tax (benefit) expense 505 (330 )
Net (loss) income (1,725 ) 616
Preferred stock dividends (675 ) (571 )
Non-controlling interest dividends - (342 )
Net (Loss) Available to Common Stockholders $ (2,400 ) $ (297 )Total Corporate Expenses
Corporate expenses increased by $227 to $3,878, or 6.2%, in fiscal 2020 as
compared to fiscal 2019. The dollar increase was due primarily to higher
accounting related professional expense and increases in amortization of
intangible expenses partially offset by lower stock-based compensation and
merger and acquisition expenses. 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 decreased $173, or 24.9%, to $521
in fiscal 2020 from approximately $694 in fiscal 2019. The decrease was
primarily due to more favorable debt refinancing terms and lower interest rates
partially offset by higher average debt balances to support our acquisition
efforts.
Income Tax Expense
On a consolidated basis, the Company recorded an income tax benefit of $505 in
fiscal 2020, as compared to an income tax expense of $330 in fiscal 2019. The
decrease was primarily due to a decrease in pretax income and by the estimated
deductible expense related to the expected loan forgiveness amount under the
Paycheck Protection Program ("PPP") loan received in the third quarter. 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 C Stock and dividends
accrued but not paid. For the year ended September 30, 2020 and 2019, preferred
stock dividends were $675 and $571, respectively. The increase of $104, or
18.2%, was the result of a higher number of shares of Series C Stock outstanding
and an increase in dividend rate as of January 1, 2020 to 7%.
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Dividends accrued but not paid on the Company's Series C Stock were $1,661 and
$1,041 as of September 30, 2020 and 2019, respectively.
Net (Loss) Available to Common Shareholders
Net (loss) available to common shareholders was ($2,400), or ($2.75) per diluted
share, for fiscal 2020 and ($297), or ($0.35) per diluted share, for fiscal
2019. The increase in net loss was primarily 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%.
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.
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 United States. 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 9 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 PPP 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.
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 2020 fiscal year is not
necessarily indicative of future cash flow performance. As of September 30,
2020, and compared with the prior fiscal year, the Company's cash and cash
equivalents increased by $1,186, or 55%, to $3,349 from $2,163 as of September
30, 2020. During the fiscal year ended September 30, 2020, Janel's net working
capital deficiency (current assets less current liabilities) increased by
$4,182, from ($6,190) at September 30, 2019 to ($10,372) at September 30, 2020.
Cash flows from continuing operating activities
Net cash (used in) provided by continuing operating activities for fiscal years
2020 and 2019 was ($554) and $7,203, respectively. The decrease in cash provided
by operations for the year ended September, 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 year ended September
30, 2020.
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Cash flows from investing activities
Net cash used for investing activities, mainly for the acquisition of
subsidiaries, was $1,544 for fiscal 2020 and $6,600 for fiscal 2019. The fiscal
2020 amount was associated with a logistics acquisition, and the fiscal 2019
amount was associated with the two logistics and two Life Sciences acquisitions.
The Company also used $1,297 for the acquisition of property and equipment for
the year ended September 30, 2020 compared to $421 for the year ended September
30, 2019.
Cash flows from financing activities
Net cash provided by financing activities was $3,284 for fiscal 2020 and $975
for fiscal 2019. Net cash provided by financing activities in fiscal 2020
primarily included proceeds from our PPP loan, deferred payments for the ACB
acquisition and proceeds from stock option exercises, proceeds from sale of
Series C Preferred, offset by repurchase of Series C Preferred, and in fiscal
2019 primarily included repayments 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 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, March 2020 and
July 22, 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.
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.
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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.
On March 4, 2020, the Company and its wholly-owned subsidiaries, entered into
the Third Amendment to Loan and Security Agreement ("Amendment No. 3") to the
Loan and Security Agreement, dated October 17, 2017 by and between the Company,
certain of its subsidiaries, and Santander Bank, N.A. (as amended by the Limited
Waiver, Joinder and First Amendment dated as of March 21, 2018, and the Limited
Waiver, Joinder and Second Amendment dated November 20, 2018 (collectively, the
"Loan Agreement"). Pursuant to, and among other changes effected by, Amendment
No. 3: (1) the Maturity date of the Loan evidenced by the Loan Agreement was
extended to October 17, 2022; (2) the LIBOR rate margin was reduced from 2.50%
to 2.25%; (3) the monthly Collateral Monitor Fee was reduced from $1 to $0.5;
(4) the definition of EBITDA was revised to allow addback of up to $500 annually
for merger and acquisition costs; and (5) the Company's subsidiaries were
permitted to pay up to $500 in aggregate dividends to the Company for fiscal
2020 if certain conditions were met.
On July 22, 2020, Janel Group and Atlantic Customs Brokers, Inc. ("Atlantic") as
borrowers, and the Company as loan party obligor, entered into the Consent,
Joinder and Fourth Amendment (the "Fourth Amendment") to the Loan and Security
Agreement, dated October 17, 2017 (as heretofore amended, the "Loan Agreement"),
with Santander Bank, N.A., in its capacity as Lender. Pursuant to, and among
other changes effected by, the Fourth Amendment, (i) Atlantic was added as a new
borrower under the Loan Agreement, (ii) acquisition seller financing of up to
$1,500 outstanding at any time was added as permitted indebtedness, and (iii)
the Company was permitted to guaranty certain indebtedness of its Antibodies
subsidiary up to $2,920 outstanding at any time.
At September 30, 2020, outstanding borrowings under the Santander Facility were
$8,447, representing 49.7% of the $17,000 available thereunder, and interest was
accruing at an effective interest rate of 2.40%.
The Company was in compliance with the covenants defined in the Santander Loan
Agreement at September 30, 2020 and September 30, 2019.
Working Capital Requirements
Through September 30, 2020, Janel Group's cash needs were met by the Santander
Facility and cash on hand. As of September 30, 2020, the Janel Group had,
subject to collateral availability, $5,421 available for future borrowings under
its $17,000 Santander Facility and $56 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.
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 term loan,
revolving loan and mortgage loan (together, the "First Merchant Facility"), as
amended in August 2019 and July 2020. On February 4, 2020, Indco entered into a
Purchase and Sale Agreement to acquire the land and building which serves as the
Indco office and manufacturing facility in New Albany, Indiana. This transaction
closed on July 1, 2020.
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On July 1, 2020, Indco and First Merchants Bank entered into Amendment No. 2 to
the First Merchants Credit Agreement, modifying the terms of Indco's credit
facilities. Under the revised terms, the credit facilities consist of a $5,500
term loan, a $1,000 (limited to the borrowing base and reserves) revolving loan
and a $680 mortgage 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%.
Interest will accrue on the Mortgage Loan at an annual rate of 4.19%. Indco's
obligations under the First Merchants Bank credit facilities are secured by all
of Indco's real property and other assets, and are guaranteed by Janel.
Additionally, Janel's guarantee of Indco's obligations is secured by a pledge of
Janel's Indco shares. The term loan and revolving loan portions of the First
Merchants credit facilities will expire on August 30, 2024, and the mortgage
loan will mature on July 1, 2025 (subject to earlier termination as provided in
the First Merchants Credit Agreement), unless renewed or extended.
As of September 30, 2020, there were no outstanding borrowings under the
revolving loan, $4,349 of borrowings under the term loan, and $676 of borrowing
under the mortgage loan with interest accruing on the term loan and mortgage
loan at an effective interest rate of 3.66% and 4.19%, respectively.
The Company was in compliance with the covenants defined in the First Merchants
Credit Agreement at September 30, 2020 and September 30, 2019.
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, 2020, Manufacturing had $1,000 available under its $1,000
revolving facility subject to collateral availability and $582 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") 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 from 6.0% to 4.0%, 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.
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On June 19, 2020, First Northern extended the draw period on the Solar Loan from
May 14, 2020 to August 14, 2020, with all other terms, covenants and conditions
substantially unchanged. Additionally, on June 19, 2020, we entered into a new
business loan agreement ("Generator Loan") which provided for a $60 term loan in
connection with a potential expansion of generator capacity on the Antibodies
property. The draw period for the Generator Loan expires in November 5, 2020.
The interest rate for the Generator Loan is 4.25%, and the loan matures on
November 5, 2025. There were no outstanding borrowings under the Generator Loan.
As of September 30, 2020, the total amount outstanding under the First Northern
Term Loan was $2,192, of which $2,139 is included in long-term debt and $53 is
included in current portion of long-term debt, with interest accruing at an
effective interest rate of 4.18%.
As of September 30, 2020, the total amount outstanding under the First Northern
Solar Loan was $81, of which $76 is included in long-term debt and $5 is
included in current portion of long-term debt, with interest accruing at an
effective interest rate of 4.43%.
The Company was in compliance with the covenants defined in the First Northern
Loan Agreement at September 30, 2020 and September 30, 2019.
Working Capital Requirements
Life Sciences cash needs are currently met by the First Northern Loan Agreement
and cash on hand of $2,582. 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. The effects of the COVID-19 pandemic may remain prevalent for a
significant period of time and may continue to adversely affect our business,
results of operations and financial condition even after the COVID-19 outbreak
has subsided. 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 2021 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.
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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, deferred income taxes and potential impairment of goodwill
and intangible assets with indefinite lives, long-lived assets impairment.
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.
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.
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.
• inventory valuation
• potential impairment of goodwill and intangible assets with indefinite lives,
long-lived assets impairment
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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.
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 freight, air freight, custom
brokerage and trucking and other.
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."
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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.
NEW ACCOUNTING STANDARDS
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 standard 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 assets 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.
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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.
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.
Organic Growth
Our non-GAAP financial measure of organic growth represents revenue growth
excluding revenue from acquisitions within the preceding 12 months. The organic
growth presentation provides useful period-to-period comparison of revenue
results as it excludes revenue from acquisitions that would not be included in
the comparable prior period.
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 cost recognized on the sale 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.
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We believe that net revenue, organic growth and adjusted operating income
provide useful information in understanding and evaluating our operating results
in the same manner as management. However, net revenue, organic growth 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, organic growth, 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, organic growth 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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