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Janel Corp. – ‘10-Q’ for 6/30/20

On:  Friday, 8/7/20, at 7:49pm ET   ·   For:  6/30/20   ·   Accession #:  1140361-20-17861   ·   File #:  333-60608

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 8/07/20  Janel Corp.                       10-Q        6/30/20   77:7.1M                                   Edgarfilings Ltd.

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    538K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     23K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     23K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     21K 
 5: EX-32.1     Exhibit 32.2                                        HTML     20K 
12: R1          Document and Entity Information                     HTML     50K 
13: R2          Consolidated Balance Sheets (Unaudited)             HTML    137K 
14: R3          Consolidated Balance Sheets (Unaudited)             HTML     47K 
                (Parenthetical)                                                  
15: R4          Consolidated Statements of Operations (Unaudited)   HTML    108K 
16: R5          Consolidated Statement of Changes in Stockholders'  HTML     78K 
                Equity (Unaudited)                                               
17: R6          Consolidated Statements of Cash Flows (Unaudited)   HTML    117K 
18: R7          Basis of Presentation, Summary of Business and      HTML     69K 
                Significant Accounting Policies                                  
19: R8          Acquisitions                                        HTML     26K 
20: R9          Inventory                                           HTML     29K 
21: R10         Property and Equipment                              HTML     37K 
22: R11         Intangible Assets                                   HTML     32K 
23: R12         Goodwill                                            HTML     28K 
24: R13         Notes Payable - Banks                               HTML     41K 
25: R14         Subordinated Promissory Notes                       HTML     30K 
26: R15         Sba Paycheck Protection Program Loan                HTML     24K 
27: R16         Stockholders' Equity                                HTML     27K 
28: R17         Stock-Based Compensation                            HTML     89K 
29: R18         Income Per Common Share                             HTML     81K 
30: R19         Income Taxes                                        HTML     32K 
31: R20         Business Segment Information                        HTML    125K 
32: R21         Risks and Uncertainties                             HTML     28K 
33: R22         Commitments and Contingencies                       HTML     23K 
34: R23         Leases                                              HTML     33K 
35: R24         Subsequent Events                                   HTML     26K 
36: R25         Basis of Presentation, Summary of Business and      HTML    108K 
                Significant Accounting Policies (Policies)                       
37: R26         Basis of Presentation, Summary of Business and      HTML     30K 
                Significant Accounting Policies (Tables)                         
38: R27         Inventory (Tables)                                  HTML     30K 
39: R28         Property and Equipment (Tables)                     HTML     36K 
40: R29         Intangible Assets (Tables)                          HTML     32K 
41: R30         Goodwill (Tables)                                   HTML     27K 
42: R31         Notes Payable - Banks (Tables)                      HTML     37K 
43: R32         Subordinated Promissory Notes (Tables)              HTML     26K 
44: R33         Stock-Based Compensation (Tables)                   HTML     91K 
45: R34         Income Per Common Share (Tables)                    HTML     82K 
46: R35         Income Taxes (Tables)                               HTML     30K 
47: R36         Business Segment Information (Tables)               HTML    121K 
48: R37         Leases (Tables)                                     HTML     33K 
49: R38         Basis of Presentation, Summary of Business and      HTML    120K 
                Significant Accounting Policies (Details)                        
50: R39         Acquisitions (Details)                              HTML     66K 
51: R40         Inventory (Details)                                 HTML     31K 
52: R41         Property and Equipment (Details)                    HTML     58K 
53: R42         Intangible Assets (Details)                         HTML     47K 
54: R43         Goodwill (Details)                                  HTML     37K 
55: R44         NOTES PAYABLE - BANKS, Santander Bank Facility      HTML     44K 
                (Details)                                                        
56: R45         NOTES PAYABLE - BANKS, First Merchants Bank Credit  HTML     72K 
                Facility (Details)                                               
57: R46         NOTES PAYABLE - BANKS, First Northern Bank of       HTML     71K 
                Dixon (Details)                                                  
58: R47         Subordinated Promissory Notes (Details)             HTML     40K 
59: R48         SUBORDINATED PROMISSORY NOTES, Amounts Outstanding  HTML     30K 
                (Details)                                                        
60: R49         Sba Paycheck Protection Program Loan (Details)      HTML     35K 
61: R50         STOCKHOLDERS' EQUITY, Shares Authorized and Par     HTML     28K 
                Value (Details)                                                  
62: R51         STOCKHOLDERS' EQUITY, Preferred Stock (Details)     HTML     54K 
63: R52         STOCK-BASED COMPENSATION, Expense and Authorized    HTML     29K 
                (Details)                                                        
64: R53         STOCK-BASED COMPENSATION, Assumptions (Details)     HTML     44K 
65: R54         STOCK-BASED COMPENSATION, Summary of Stock Options  HTML    102K 
                (Details)                                                        
66: R55         STOCK-BASED COMPENSATION, Restricted Stock          HTML     64K 
                (Details)                                                        
67: R56         INCOME PER COMMON SHARE, Reconciliation of Basic    HTML     77K 
                and Diluted EPS (Details)                                        
68: R57         INCOME PER COMMON SHARE, Potentially Diluted        HTML     32K 
                Securities (Details)                                             
69: R58         Income Taxes (Details)                              HTML     38K 
70: R59         Business Segment Information (Details)              HTML     79K 
71: R60         Risks and Uncertainties (Details)                   HTML     26K 
72: R61         Commitments and Contingencies (Details)             HTML     29K 
73: R62         Leases (Details)                                    HTML     70K 
74: R63         Subsequent Events (Details)                         HTML     91K 
76: XML         IDEA XML File -- Filing Summary                      XML    136K 
75: EXCEL       IDEA Workbook of Financial Reports                  XLSX    102K 
 6: EX-101.INS  XBRL Instance -- janl-20200630                       XML   2.00M 
 8: EX-101.CAL  XBRL Calculations -- janl-20200630_cal               XML    182K 
 9: EX-101.DEF  XBRL Definitions -- janl-20200630_def                XML    907K 
10: EX-101.LAB  XBRL Labels -- janl-20200630_lab                     XML   1.80M 
11: EX-101.PRE  XBRL Presentations -- janl-20200630_pre              XML   1.20M 
 7: EX-101.SCH  XBRL Schema -- janl-20200630                         XSD    180K 
77: ZIP         XBRL Zipped Folder -- 0001140361-20-017861-xbrl      Zip    223K 


‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Part I -- Financial Information
"Financial Statements
"Consolidated Balance Sheets as of June 30, 2020 (unaudited) and September 30, 2019
"The accompanying notes are an integral part of these consolidated financial statements
"Consolidated Statements of Operations for the Three and Nine Months ended June 30, 2020, and 2019 (unaudited)
"Consolidated Statement of Changes in Stockholders' Equity for the Nine Months ended June 30, 2020 and 2019 (unaudited)
"Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2020 and 2019 (unaudited)
"Notes to Consolidated Financial Statements (unaudited)
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures About Market Risk
"Controls and Procedures
"Part II -- Other Information
"Legal Proceedings
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults Upon Senior Securities
"Mine Safety Disclosures
"Exhibit Index
"Signatures

This is an HTML Document rendered as filed.  [ Alternative Formats ]



 C: 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number: 333-60608

JANEL CORPORATION
(Exact name of registrant as specified in its charter)

Nevada
 
86-1005291
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

80 Eighth Avenue
   
 
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (516) 256-8143
Former name, former address and former fiscal year, if changed from last report: N/A
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Trading symbols(s)
 
Name of each exchange
on which registered
None
 
None
 
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer
Non-accelerated filer   ☐
Smaller reporting company
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐  No ☒

The number of shares of Common Stock outstanding as of August 7, 2020 was 865,652.



JANEL CORPORATION

QUARTERLY REPORT ON FORM 10-Q
For Quarterly Period Ended June 30, 2020


 
Page
   
3
   
 
Item 1.
3
       
   
3
       
   
4
       
   
5
       
   
6
       
   
7
       
 
Item 2.
25
       
 
Item 3.
37
       
 
Item 4.
37
       
39
     
 
Item 1.
39
       
 
Item 1A.
39
       
 
Item 2.
39
       
 
Item 3.
39
       
 
Item 4.
39
       
 
Item 5.
39
       
 
Item 6.
40
       
   
41

PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
   
(Unaudited)
     
ASSETS
           
Current Assets:
           
Cash
 
$
2,679
   
$
2,163
 
Accounts receivable, net of allowance for doubtful accounts
   
12,476
     
21,351
 
Inventory, net
   
3,956
     
4,371
 
Prepaid expenses and other current assets
   
354
     
531
 
Note receivable
   
71
     
139
 
Total current assets
   
19,536
     
28,555
 
Property and Equipment, net
   
4,044
     
3,954
 
Other Assets:
               
Intangible assets, net
   
12,869
     
13,598
 
Goodwill
   
13,641
     
13,525
 
Operating lease right of use asset
   
1,498
     
 
Security deposits and other long-term assets
   
206
     
87
 
Total other assets
   
28,214
     
27,210
 
Total assets
 
$
51,794
   
$
59,719
 
LIABILITIES
               
Current Liabilities:
               
Line of credit
 
$
5,923
   
$
8,391
 
Accounts payable – trade
   
14,539
     
22,061
 
Accrued expenses and other current liabilities
   
2,562
     
2,272
 
Dividends payable
   
1,541
     
1,041
 
Current portion of subordinated promissory note
   
157
     
152
 
Short-term lease liabilities
   
438
     
 
Current portion of Paycheck Protection Program (PPP) loan
   
1,351
     
 
Current portion of long-term debt
   
919
     
828
 
Total current liabilities
   
27,430
     
34,745
 
Other Liabilities:
               
Long-term debt
   
5,991
     
6,602
 
Paycheck Protection Program (PPP) loan
   
1,380
     
 
Subordinated promissory notes
   
424
     
541
 
Mandatorily redeemable non-controlling interest
   
619
     
619
 
Deferred income taxes
   
2,360
     
2,000
 
Long-term operating lease liabilities
   
1,082
     
 
Other liabilities
   
320
     
334
 
Total other liabilities
   
12,176
     
10,096
 
Total liabilities
   
39,606
     
44,841
 
STOCKHOLDERS’ EQUITY
               
Preferred Stock, $0.001 par value; 100,000 shares authorized
               
Series B 5,700 shares authorized and 331 and 631 shares issued and outstanding as of June 30, 2020 and September 30, 2019, respectively.
   
     
 
Series C 20,000 shares authorized and 20,000 shares issued and outstanding at June 30, 2020 and September 30, 2019, liquidation value of $13,041 and $12,541 at June 30, 2020 and September 30, 2019, respectively
   
     
 
Common stock, $0.001 par value; 4,500,000 shares authorized, 875,652 issued and 855,652 outstanding as of June 30, 2020 and 863,812 issued and 843,812 outstanding as of September 30, 2019
   
1
     
1
 
Paid-in capital
   
14,739
     
15,075
 
Treasury stock, at cost, 20,000 shares
   
(240
)
   
(240
)
Accumulated (deficit) earnings
   
(2,312
)
   
42
 
Total stockholders’ equity
   
12,188
     
14,878
 
Total liabilities and stockholders’ equity
 
$
51,794
   
$
59,719
 


JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)

   
Three Months Ended
June 30,
   
Nine Months Ended
 
       
2019
   
2020
   
2019
 
Revenue
 
$
18,498
   
$
20,311
   
$
57,440
     
63,607
 
Forwarding expenses and cost of revenues
   
13,405
     
14,225
     
40,064
     
44,664
 
Gross profit
   
5,093
     
6,086
     
17,376
     
18,943
 
Costs and Expenses:
                               
Selling, general and administrative
   
5,482
     
5,600
     
18,151
     
16,681
 
Amortization of intangible assets
   
243
     
230
     
729
     
674
 
Total Costs and Expenses
   
5,725
     
5,830
     
18,880
     
17,355
 
(Loss) Income from Operations
   
(632
)
   
256
     
(1,504
)
   
1,588
 
Other Items:
                               
Interest expense net of interest income
   
(108
)
   
(183
)
   
(412
)
   
(543
)
(Loss) Income Before Income Taxes
   
(740
)
   
73
     
(1,916
)
   
1,045
 
Income tax expense
   
(557
)
   
(103
)
   
(438
)
   
(356
)
Net (Loss) Income
   
(1,297
)
   
(30
)
   
(2,354
)
   
689
 
Preferred stock dividends
   
(174
)
   
(150
)
   
(500
)
   
(420
)
Net (Loss) Income Available to Common Stockholders
 
$
(1,471
)
 
$
(180
)
 
$
(2,854
)
 
$
269
 
                                 
Net (loss) Income per share
                               
Basic
 
$
(1.49
)
 
$
(0.04
)
 
$
(2.71
)
 
$
0.81
 
Diluted
 
$
(1.49
)
 
$
(0.04
)
 
$
(2.71
)
 
$
0.73
 
Net (loss) income per share attributable to common stockholders:
                               
Basic
 
$
(1.69
)
 
$
(0.22
)
 
$
(3.29
)
 
$
0.32
 
Diluted
 
$
(1.69
)
 
$
(0.22
)
 
$
(3.29
)
 
$
0.28
 
Weighted average number of shares outstanding:
                               
Basic
   
872,838
     
852,071
     
868,033
     
849,104
 
Diluted
   
872,838
     
852,071
     
868,033
     
938,830
 


JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share and per share data)
(Unaudited)
 
   
PREFERRED STOCK
   
COMMON STOCK
   
PAID-IN
CAPITAL
   
TREASURY STOCK
   
ACCUMULATED
EARNINGS
(DEFICIT)
   
TOTAL
EQUITY
 
   
SHARES
   

$    
SHARES
   

$    

$    
SHARES
   

$    

$    

$  
   
20,631
   
$
     
863,812
   
$
1
   
$
15,075
     
20,000
   
$
(240
)
 
$
42
   
$
14,878
 
Net Loss
   
     
     
     
     
     
     
     
(2,354
)
   
(2,354
)
Dividends to preferred stockholders
   
     
     
     
     
(500
)
   
     
     
     
(500
)
Conversion of Preferred B shares to Common Shares
   
(300
)
   
     
3,000
     
     
     
     
     
     
 
Issuance of Restricted Stock
   
     
     
5,000
     
     
     
     
     
     
 
Restricted stock vested but not issued
   
     
     
     
     
(30
)
   
     
     
     
(30
)
Stock-based compensation
   
     
     
     
     
163
     
     
     
     
163
 
Stock option exercise
   
     
     
3,840
     
     
31
     
     
     
     
31
 
Balance – June 30, 2020
   
20,331
   
$
     
875,652
   
$
1
   
$
14,739
     
20,000
   
$
(240
)
 
$
(2,312
)
 
$
12,188
 

   
PREFERRED STOCK
   
COMMON STOCK
   
PAID-IN
CAPITAL
   
TREASURY STOCK
   
ACCUMULATED
EARNINGS
(DEFICIT)
   
TOTAL
EQUITY
 
   
SHARES
   

$
   
SHARES
   

$    

$    
SHARES
   

$    

$    

$  
   
21,271
   
$
     
837,951
   
$
1
   
$
15,872
     
20,000
   
$
(240
)
 
$
(606
)
 
$
15,027
 
Net Income
   
     
     
     
     
     
     
     
689
     
689
 
Cumulative effect of change in accounting principle
   
     
     
     
     
     
     
     
32
     
32
 
Dividends to preferred stockholders
   
     
     
     
     
(420
)
   
     
     
     
(420
)
Restricted stock vested but not issued
   
     
     
     
     
(235
)
   
     
     
     
(235
)
Stock option exercise
   
     
     
9,461
     
     
72
     
     
     
     
72
 
Stock-based compensation
   
     
     
     
     
251
     
     
     
     
251
 
Balance – June 30, 2019
   
21,271
   
$
     
847,412
   
$
1
   
$
15,540
     
20,000
   
$
(240
)
 
$
115
   
$
15,416
 


JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
   
Nine Months Ended
 
       
2019
 
Cash Flows From Operating Activities:
           
Net (loss) income
 
$
(2,354
)
 
$
689
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
Provision for uncollectible accounts
   
137
     
353
 
Depreciation and amortization
   
198
     
229
 
Deferred income tax
   
360
     
318
 
Amortization of intangible assets
   
729
     
674
 
Amortization of acquired inventory valuation
   
597
     
195
 
Amortization of loan costs
   
7
     
7
 
Stock-based compensation
   
217
     
329
 
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
   
8,738
     
(1,108
)
Inventory
   
(182
)
   
(161
)
Prepaid expenses and other current assets
   
177
     
(276
)
Security deposits and other long term assets
   
(51
)
   
(8
)
Accounts payable and accrued expenses
   
(7,317
)
   
1,910
 
Other liabilities
   
7
     
68
 
Net cash provided by operating activities
   
1,263
     
3,219
 
Cash Flows From Investing Activities:
               
Acquisition of property and equipment, net of disposals
   
(288
)
   
(303
)
Acquisitions
   
(115
)
   
(1,935
)
Net cash used in investing activities
   
(403
)
   
(2,238
)
Cash Flows From Financing Activities:
               
Repayments of term loan
   
(519
)
   
(916
)
Proceeds from stock option exercise
   
31
     
72
 
Line of credit, net
   
(2,472
)
   
712
 
Proceeds from PPP loan
   
2,727
     
-
 
Repayment of subordinated promissory notes
   
(111
)
   
(72
)
Net cash used in financing activities
   
(344
)
   
(204
)
Net increase in cash
   
516
     
777
 
Cash at beginning of the period
   
2,163
     
585
 
Cash at end of period
 
$
2,679
   
$
1,362
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
 
$
420
   
$
542
 
Income taxes
 
$
7
   
$
132
 
Non-cash operating activities:
               
Operating lease right of use asset
 
$
1,900
   
$
-
 
Operating lease liabilities
               
Non-cash investing activities:
 
$
1,917
   
$
-
 
Contingent earn-out acquisition
 
$
-
   
$
50
 
Subordinated Promissory notes of Honor
 
$
-
   
$
456
 
Non-cash financing activities:
               
Dividends declared to preferred stockholders
 
$
500
   
$
420
 
Vested restricted stock unissued
 
$
30
   
$
235
 

 
JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

1.
BASIS OF PRESENTATION, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying interim unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of Article 8 of Regulation S-X and the instructions to Form 10-Q of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Janel Corporation (the “Company” or “Janel”) believes that the disclosures made are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full fiscal year, or any other period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Form 10-K as filed with the Securities and Exchange Commission.

Business description

Janel is a holding company with subsidiaries in three business segments: Global Logistics Services, Manufacturing and Life Sciences. A management group at the holding company level (the “corporate group”) focuses on significant capital allocation decisions, corporate governance and supporting Janel’s subsidiaries where appropriate. Janel expects to grow through its subsidiaries’ organic growth and by completing acquisitions. We plan to either acquire businesses within our existing segments or expand our portfolio into new strategic segments. Our acquisition strategy focuses on reasonably priced companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings power.

Global Logistics Services

The Company’s Global Logistics Services segment is comprised of several wholly-owned subsidiaries, collectively known as “Janel Group.” Janel Group is a non-asset based, full-service provider of cargo transportation logistics management services, including freight forwarding via air-, ocean- and land-based carriers, customs brokerage services, warehousing and distribution services, and other value-added logistics services.

On November 20, 2018, we completed a business combination whereby we acquired the membership interest of Honor Worldwide Logistics, LLC (“Honor”), a global logistics services provider with two U.S. locations. See note 2.

On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location. See note 2.

Manufacturing

The Company’s Manufacturing segment is comprised of Indco, Inc. (“Indco”), a majority-owned subsidiary of the Company that manufactures and distributes mixing equipment and apparatus for specific applications within various industries. Indco’s customer base is comprised of small- to mid-sized businesses as well as other larger customers for which Indco fulfills repetitive production orders.

Life Sciences

The Company’s Life Sciences segment is comprised of Aves Labs, Inc. (“Aves”), Antibodies Incorporated (“Antibodies”), IgG, LLC (“IgG”) and PhosphoSolutions, LLC, which are wholly-owned subsidiaries of the Company.

The Company’s Life Sciences segment manufactures and distributes high-quality monoclonal and polyclonal antibodies, diagnostic reagents and other immunoreagents for biomedical research and provides antibody manufacturing for academic and industry research scientists. Our Life Sciences business also produces products for other life science companies on an original equipment manufacturer (“OEM”) basis.

Through Aves, the Company acquired the membership interests of a small life sciences company on July 1, 2019 and the equity interests of PhosphoSolutions, LLC. (“Phospho”) on September 6, 2019. Both acquisitions were completed primarily to expand our product offerings in Life Sciences. See note 2.

Basis of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as Indco, of which Janel owns 91.65%, with a non-controlling interest held by existing Indco management. The Indco non-controlling interest is mandatorily redeemable and is recorded as a liability. All intercompany transactions and balances have been eliminated in consolidation.

Uses of estimates in the preparation of financial statements

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, as well as the reported amounts of revenues and expenses during the reporting period. The most critical estimates made by the Company are those relating to accounts receivables valuation, the useful lives of long-term assets, accrual of cost related to ancillary services the Company provides and accrual of tax expense on an interim basis.

Cash

The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250. The Company’s accounts at these institutions may, at times, exceed the federally insured limits. The Company has not experienced any losses in such accounts.

Accounts receivable and allowance for doubtful accounts receivable

Accounts receivable are recorded at the contractual amount. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical collection experience, the age of the accounts receivable balances, credit quality of the Company’s customers, any specific customer collection issues that have been identified, current economic conditions, and other factors that may affect the customers’ ability to pay. The Company writes off accounts receivable balances that have aged significantly once all collection efforts have been exhausted and the receivables are no longer deemed collectible from the customer. The allowance for doubtful accounts as of June 30, 2020 and September 30, 2019 was $554 and $503, respectively.

Inventory

Inventory is valued at the lower of cost (using the first-in, first-out method) or net realizable value. The Company maintains an inventory valuation reserve to provide for slow moving and obsolete inventory, inventory not meeting quality control standards and inventory subject to expiration for its Antibodies business. The products of Antibodies require the initial manufacture of multiple batches to determine if quality standards can consistently be met. In addition, the Company will produce larger batches of established products than current sales requirements due to economies of scale. The manufacturing process for these products, therefore, has and will continue to produce quantities in excess of forecasted usage. The Company values acquired manufactured antibody inventory based on a three-year forecast. Inventory quantities in excess of the forecast are not valued due to uncertainty over salability. Amounts are charged to the reserve when the Company scraps or disposes of inventory.

Property and equipment and depreciation policy

Property and equipment are recorded at cost. Property and equipment acquired in business combinations are initially recorded at fair value. Depreciation is provided for in amounts sufficient to amortize the costs of the related assets over their estimated useful lives on the straight-line and accelerated methods for both financial reporting and income tax purposes.

Maintenance and repairs are recorded as expenses when incurred.

Goodwill

The Company records as goodwill the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired in a business combination. Under current authoritative guidance, goodwill is not amortized but is tested for impairment annually (on September 30) as well as when an event or change in circumstance indicates impairment may have occurred. Goodwill is tested for impairment by comparing the fair value of the Company’s individual reporting units to their carrying amount to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than the carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value.

If there is a material change in economic conditions, including as a result of continued disruption due to the coronavirus (COVID-19) pandemic, or other circumstances influencing the estimate of future cash flows or significantly affect the fair value of our reporting units, the Company could be required to recognize impairment charges in the future. There were no indicators of impairment of goodwill as of June 30, 2020 and September 30, 2019.

The fair value of our reporting units was in excess of carrying value and goodwill was not deemed to be impaired as of June 30, 2020 and September 30, 2019.

Intangibles and long-lived assets

Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition.

If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows, as well as the estimated fair value of long-lived assets, involves significant estimates on the part of management. If there is a material change in economic conditions, including as a result of continued disruption due to the COVID-19 pandemic, or other circumstances influencing the estimate of future cash flows or fair value, the Company could be required to recognize impairment charges in the future. There were no indicators of impairment of long-lived assets as of June 30, 2020 and September 30, 2019.

Business segment information

The Company operates in three reportable segments: Global Logistics Services, Manufacturing and Life Sciences. The Company’s Chief Executive Officer regularly reviews financial information at the reporting segment level in order to make decisions about resources to be allocated to the segments and to assess their performance.

Revenues and revenue recognition

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”), using the modified retrospective method. Results for reporting periods beginning on or after October 1, 2018 are presented under ASC Topic 606; however, prior period amounts are not adjusted and continue to be reported in accordance with the accounting standards in effect for those periods.

The Company recorded an increase to the opening balance of retained earnings of $32, net of tax, as of October 1, 2018 due to the cumulative impact of adoption of ASC Topic 606. The impact to revenue and associated cost for the nine months ended June 30, 2019 was a decrease of $135 and $109, respectively, as a result of applying ASC Topic 606.

Global Logistics Services

Revenue Recognition

Revenue is recognized upon transfer of control of promised services to customers. With respect to its Global Logistics Services segment, the Company has determined that in general each shipment transaction or service order constitutes a separate contract with the customer. When the Company provides multiple services to a customer, different contracts may be present for different services.

The Company typically satisfies its performance obligations as services are rendered at a point in time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed at a point in time during the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to two-month period.

The Company evaluates whether amounts billed to customers should be reported as gross or net revenue. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the services, when it has discretion in setting the prices for the services to the customers, and the Company has the ability to direct the use of the services provided by the third party. Revenue is recognized on a net basis when we do not have latitude in carrier selection or to establish rates with the carrier.

In the Global Logistics Services segment, the Company disaggregates its revenues by its four primary service categories: ocean import and export, freight forwarding, customs brokerage and air import and export. A summary of the Company’s revenues disaggregated by major service lines for the three and nine months ended June 30, 2020 was as follows:

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
Service Type
 
2020
   
2020
 
Ocean import and export
 
$
6,376
   
$
18,113
 
Freight forwarding
   
2,873
     
9,335
 
Customs brokerage
   
2,411
     
7,716
 
Air import and export
   
3,905
     
11,808
 
Total
 
$
15,565
   
$
46,972
 

Manufacturing

Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment and accessories. Indco receives customer product orders via phone call, email, internet or fax. The pricing of each standard product sold is listed in Indco’s print and web-based catalog. Customer specific products are priced by quote. A sales order acknowledgement is sent to every customer for every order to confirm pricing and the specifications of the products ordered. The revenue is recognized at a point in time when the product is shipped to the customer.

Life Sciences

Revenues from the Life Sciences segment are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and antibody manufacturing. Revenues are recognized when products are shipped and risk of loss is transferred to the carrier(s) used.

Income (loss) per common share

Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding, excluding unvested restricted stock, during the period. Diluted net income (loss) per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or warrants or the vesting of restricted stock units. The treasury stock method is used to calculate the potential dilutive effect of these common stock equivalents. Potentially dilutive shares are excluded from the computation of diluted net income (loss) per share when their effect is anti-dilutive.

Stock-based compensation to employees

Equity classified share-based awards

The Company recognizes compensation expense for stock-based payments granted based on the grant-date fair value estimated in accordance with ASC Topic 718, “Compensation-Stock Compensation.” For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for restricted shares; the expense is recognized over the service period for awards expected to vest.

Stock-based compensation to non-employees

Liability classified share-based awards

The Company maintains other share unit compensation grants for shares of Indco, which vest over a period of up to three years following their grant. The shares contain certain put features where the Company is either required or expects to settle vested awards on a cash basis.

These awards are classified as liability awards, measured at fair value at the date of grant and re-measured at fair value at each reporting date up to and including the settlement date. The determination of the fair value of the share units under these plans is described in note 11. The fair value of the awards is expensed over the respective vesting period of the individual awards with recognition of a corresponding liability. Changes in fair value after vesting are recognized through compensation expense. Compensation expense reflects estimates of the number of instruments expected to vest.

The impact of forfeitures and fair value revisions, if any, are recognized in earnings such that the cumulative expense reflects the revisions, with a corresponding adjustment to the settlement liability. Liability-classified share unit liabilities due within 12 months of the reporting date are presented in trade and other payables while settlements due beyond 12 months of the reporting date are presented in non-current liabilities.

Non-employee share-based awards

In prior periods up to September 30, 2019, the Company accounted for stock-based compensation to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity-Based Payments to Non-employees.” Measurement of share-based payment transactions with non-employees are based on the fair value of whichever is more reliably measurable: (a) the goods or services received or (b) the equity instruments issued. The fair value of share-based payment transactions is determined at the earlier of performance commitment date or performance completion date. The Company believes that the fair value of the stock-based award is more reliably measurable than the fair value of the services received. The fair value of the granted stock-based awards is remeasured at each reporting date, and expense is recognized over the vesting period of the award.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions.

The Company adopted ASU 2018-07 on October 1, 2019. The adoption of the standard did not have a material impact on our financial statements for the nine months ended June 30, 2020.

Mandatorily Redeemable Non-Controlling Interests

The non-controlling interests that are reflected as mandatorily redeemable non-controlling interests in the consolidated financial statements consist of non-controlling interests related to the Indco acquisition whose owners have certain redemption rights that allow them to require the Company to purchase the non-controlling interests of those owners upon certain events outside the control of the Company, including upon the death of the holder. The Company is required to purchase 20% of the 8.35% mandatorily redeemable non-controlling interest at the option of the holder beginning on the third anniversary of the date of the Indco acquisition, which was March 21, 2019. As of June 30, 2020, the holder did not exercise the redemption rights.

On the date the Company acquires the controlling interest in a business combination, the fair value of the non-controlling interest is recorded in the long-term liabilities section of the consolidated balance sheet under the caption Mandatorily redeemable non-controlling interest.” The mandatorily redeemable non-controlling interest is adjusted each reporting period, if required, to its then current redemption value, based on the predetermined formula defined in the respective agreement. The Company reflects any adjustment in the redemption value and any earnings attributable to the mandatorily redeemable non-controlling interest in its consolidated statements of operations by recording the adjustments and earnings to other income and expense in the caption change in fair value of mandatorily redeemable non-controlling interest.”

Note receivable

On March 2, 2018, the Company issued a convertible promissory note in the amount of $125 with a potential non-related party acquisition target. The note bears interest on the outstanding principal amount at a rate of 8% per annum, and both principal and interest was payable on the maturity date of April 24, 2020. The convertible note, at the election of the Company, can be converted into common stock of the acquisition target. On April 9, 2020, the Company agreed to a revised payment schedule, with $75 due upon signing of the revised payment schedule and $72, representing the remaining principal and accrued interest, due on September 24, 2020.  As of June 30, 2020, and September 30, 2019, amounts outstanding including accrued interest were $71 and $139, respectively. As of June 30, 2020, the Company is no longer pursuing this potential acquisition target.

Income taxes

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.

Recent accounting pronouncements

Recently adopted accounting pronouncements

On October 1, 2019, the Company adopted ASU No. 2016-02, Leases (“ASC 842” or “ASU 2016-02”), issued by the FASB in February 2016 which was subsequently supplemented by clarifying guidance intended to improve financial reporting of leasing transactions. The new lease accounting guidance requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for all leases with initial terms longer than 12 months and provides enhanced disclosures on key information of leasing arrangements. The guidance allows companies to apply the requirements retrospectively, either to all prior periods presented or through a cumulative adjustment in the year of adoption.

The Company adopted the new standards effective October 1, 2019 using the modified retrospective transition method. The Company elected to use the package of practical expedients which allowed the Company to (i) not reassess whether an arrangement contains a lease, (ii) carry forward its lease classification as operating or capital leases and (iii) not reassess its previously-recorded initial direct costs. For all existing operating leases as of October 1, 2019, the Company recorded operating lease right of use 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.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company’s current share-based payment awards to non-employees consist only of grants made to its non-employee directors as compensation solely relates to each individual’s role as a non-employee director. As such, in accordance with ASC 718, the Company accounts for these share-based payment awards to its non-employee directors in the same manner as share-based payment awards for its employees. The Company adopted this standard on October 1, 2019, and the amendments in this guidance had no material effect on either the accounting for its share-based payment awards to its non-employee directors, or the Company’s consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This new accounting standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

This new accounting standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss methodology previously employed to measure credit losses for most financial assets and requires the use of a forward-looking expected loss model. Current accounting delays the recognition of credit losses until it is probable a loss has been incurred, while the update will require financial assets to be measured at amortized costs less a reserve and equal to the net amount expected to be collected. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

Reclassifications

Prior year financial statement amounts are reclassified as necessary to conform to the current year presentation. These prior period reclassifications did not affect the Company’s net income, earnings per share, stockholders’ equity or working capital.

2.
ACQUISITIONS

The Company completed four business acquisitions in the fiscal year ended September 30, 2019, with an aggregate purchase price of $6,768, net of cash acquired. The Company recorded an aggregate $2,067 in goodwill and $2,165 in other identifiable intangibles. The results of operations of the acquired businesses are included in Janel’s consolidated results of operations since the date of each acquisition. Supplemental pro forma information has not been provided as the acquisitions did not have a significant impact on Janel’s consolidated results of operations, individually or in the aggregate.

Honor Worldwide Logistics, LLC

Through its wholly-owned subsidiary, Janel Group, the Company acquired the membership interests of Honor on November 20, 2018 in a transaction pursuant to which Honor became a direct wholly-owned subsidiary of Janel Group and an indirect wholly-owned subsidiary of the Company. At closing, a subordinated promissory note in the aggregate amount of $456 was issued to a former member. The acquisition of Honor was funded with cash provided by normal operations along with a subordinated promissory note. Honor provides global logistics services with two U.S. locations and expands the domestic network of the Company’s Global Logistics Services segment. The results of operations for Honor are reflected in the Global Logistics Services reporting segment.

PhosphoSolutions

Through Aves, the Company completed a business combination whereby we acquired Phospho on September 6, 2019.  The aggregate purchase price for Phospho was $4,043, net of $13 of cash received.  At closing, $4,000 was paid in cash and $56 was recorded in accrued expenses as preliminary tax gross up due to the former owners.  Phospho is a manufacturer and distributor of monoclonal and polyclonal antibodies, principally used in neuroscience research. Phospho was founded in 2001 and is headquartered in Aurora, Colorado. The results of operations for Phospho are reflected in the Life Sciences reporting segment.  As of June 30, 2020, the Company paid $172 in tax gross up consideration to the former owners and recorded an additional $116 of goodwill related to the Phospho acquisition.

Other Acquisitions

On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location. On July 1, 2019, we acquired the membership interests of a life sciences company to expand our product offerings in Life Sciences. These acquisitions were funded with cash provided by normal operations. The results of operations for these acquisitions are reported in our Global Logistics Services and Life Sciences segments. The aggregate purchase price for these acquisitions was $430. At closing, $50 was recorded in accrued expenses as a preliminary earnout consideration.

3.
INVENTORY

Inventories consisted of the following:
         
Finished Goods
 
$
2,484
   
$
2,988
 
Work-in-Process
   
298
     
461
 
Raw Materials
   
1,201
     
946
 
Less - Reserve for Inventory Valuation
   
(27
)
   
(24
)
Inventory Net
 
$
3,956
   
$
4,371
 

4.
PROPERTY AND EQUIPMENT

A summary of property and equipment and the estimated lives used in the computation of depreciation and amortization is as follows:

         
Life
Building and Improvements
 
$
2,672
   
$
2,577
 
15-30 Years
Land and Improvements
   
869
     
835
 
Indefinite
Furniture & Fixtures
   
282
     
218
 
3-7 Years
Computer Equipment
   
302
     
465
 
3-5 Years
Machinery & Equipment
   
1,151
     
973
 
3-15 Years
Leasehold Improvements
   
183
     
181
 
Shorter of Lease Term or Asset Life
     
5,459
     
5,249
   
Less: Accumulated Depreciation and Amortization
   
(1,415
)
   
(1,295
)
 
Property and Equipment Net
 
$
4,044
   
$
3,954
   

Depreciation and amortization expense for the nine months ended June 30, 2020 and 2019 was $198 and $229, respectively.

5.
INTANGIBLE ASSETS

A summary of intangible assets and the estimated useful lives used in the computation of amortization is as follows:

         
Life
Customer Relationships
 
$
13,762
   
$
13,762
 
15-20 Years
Trademarks / Names
   
2,251
     
2,251
 
20 Years
Other
   
978
     
978
 
2-5 Years
     
16,991
     
16,991
   
Less: Accumulated Amortization
   
(4,122
)
   
(3,393
)
 
Intangible Assets Net
 
$
12,869
   
$
13,598
   

Amortization expense of intangible assets for the nine months ended June 30, 2020 and 2019 was $729 and $674, respectively.

6.
GOODWILL

The Company’s goodwill carrying amounts relate to the acquisitions in the Global Logistics Services, Manufacturing and Life Sciences businesses.  In the nine month period ended June 30, 2020, with respect to the Phospho acquisition, the Company paid $172 in tax gross up consideration to the former owners and recorded an additional $116 of goodwill.

The composition of the goodwill balance at June 30, 2020 and September 30, 2019 was as follows:

         
Global Logistics Services
 
$
5,655
   
$
5,655
 
Manufacturing
   
5,046
     
5,046
 
Life Sciences
   
2,940
     
2,824
 
Total Goodwill
 
$
13,641
   
$
13,525
 

7.
NOTES PAYABLE – BANKS

(A)
Santander Bank Facility

On October 17, 2017, the Janel Group subsidiaries (collectively the “Janel Group Borrowers”), with the Company as a guarantor, entered into a Loan and Security Agreement (the “Santander Loan Agreement”) with Santander Bank, N.A. (“Santander”) with respect to a revolving line of credit facility (the “Santander Facility”).  As amended in March 2018, November 2018 and March 2020, the Santander Facility currently provides that the Janel Group Borrowers can borrow up to $17,000 limited to 85% of the Janel Group Borrowers’ aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Santander Loan Agreement. Interest accrues on the Santander Facility at an annual rate equal to, at the Janel Group Borrowers’ option, prime plus 0.50%, or LIBOR (30, 60 or 90 day) plus 2.25% subject to a LIBOR floor of 75 basis points. The Janel Group Borrowers’ obligations under the Santander Facility are secured by all of the assets of the Janel Group Borrowers, while the Santander Loan Agreement contains customary terms and covenants. The Santander Facility matures on October 17, 2022, unless earlier terminated or renewed.  As a result of its terms, the Santander Facility is classified as a current liability on the consolidated balance sheet.

At June 30, 2020, outstanding borrowings under the Santander Facility were $5,923, representing 34.84% of the available amount thereunder, and interest was accruing at an effective interest rate of 2.61%. The Janel Group Borrowers were in compliance with the covenants defined in the Santander Loan Agreement at June 30, 2020 and September 30, 2019.

(B)
First Merchants Bank Credit Facility

On March 21, 2016, as amended in August 2019, Indco entered into a Credit Agreement (the “First Merchants Credit Agreement”) with First Merchants Bank with respect to a $5,500 term loan and $1,000 (limited to the borrowing base and reserves) revolving loan (together, the “First Merchants Facility”). Interest accrues on the term loan at an annual rate equal to the one-month LIBOR plus either 2.75% (if Indco’s total funded debt to EBITDA ratio is less than 2:1), or 3.5% (if Indco’s total funded debt to EBITDA ratio is greater than or equal to 2:1). Interest accrues on the revolving loan at an annual rate equal to the one-month LIBOR plus 2.75%. Indco’s obligations under the First Merchants Facility are secured by all of Indco’s assets and are guaranteed by the Company, and the Company’s guarantee of Indco’s obligations is secured by a pledge of the Company’s Indco shares. The First Merchants Credit Agreement contains customary terms and covenants. The First Merchants Facility will expire on August 30, 2024 (subject to earlier termination as provided in the Credit Agreement) unless renewed.

As of June 30, 2020, there were no outstanding borrowings under the revolving loan and $4,625 of borrowings, net of capitalized loan cost of $38, under the term loan, with interest accruing on the term loan at an effective interest rate of 3.68%.

The Company was in compliance with the covenants defined in the First Merchants Credit Agreement at June 30, 2020 and September 30, 2019.

         
Long Term Debt*
 
$
4,625
   
$
5,455
 
Less Current Portion
   
(786
)
   
(786
)
   
$
3,839
   
$
4,669
 

*
Note: Long Term Debt is due in monthly installments of $65 plus monthly interest, at LIBOR plus 3.75% to 4.75% per annum. The note is collateralized by all of Indco’s assets and guaranteed by Janel.

(C)
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 to 6.0%, and the maturity date was extended to October 1, 2020, with all other terms, covenants and conditions substantially unchanged. Additionally, Antibodies entered into a new business loan agreement (“Solar Loan”) which provided for a $125 term loan in connection with a potential expansion of solar generation capacity on the Antibodies property. The initial interest rate on the facility is 4.43%, subject to adjustment in five years. 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 June 30, 2020, there were no outstanding borrowings under the revolving credit facility, $2,204 of borrowings under the First Northern Term Loan and $81 under the Solar Loan.

         
Long Term Debt*
 
$
2,285
   
$
1,975
 
Less Current Portion
   
(133
)
   
(42
)
   
$
2,152
   
$
1,933
 

*
Note: Long Term Debt is due in monthly principal and interest installments of $12 plus monthly interest, at an effective interest rate of 4.18% as of June 30, 2020 and 5.28% as of September 2019, per annum. The note is collateralized by real property owned by Antibodies and guaranteed by Janel.

The Company was in compliance with the covenants defined in the First Northern Loan Agreement at June 30, 2020 and September 30, 2019.

8.
SUBORDINATED PROMISSORY NOTES

On June 22, 2018, in connection with the Antibodies acquisition, AB HoldCo, Inc. (“AB HoldCo”), a wholly-owned subsidiary of the Company, entered into two subordinated promissory notes (“AB HoldCo Subordinated Promissory Notes”) with certain former shareholders of Antibodies. As the result of the merger of AB HoldCo into Antibodies, Antibodies became the obligor under the AB HoldCo Subordinated Promissory Notes.  Both of the AB HoldCo Subordinated Promissory Notes are guaranteed by the Company and are subordinate to the terms of any credit agreement, loan agreement, indenture, promissory note, guaranty or other debt instrument pursuant to which the obligor  or any affiliate of the obligor  incurs, borrows, extends, guarantees, renews or refinances any indebtedness for borrowed money or other extensions of credit with any federal or state bank or other institutional lender and are unsecured.

Each of the AB HoldCo Subordinated Promissory Notes has a 4% annual interest rate payable in arrears on the last business day of each calendar quarter, commencing on September 30, 2018, and the full outstanding principal balance and accrued, unpaid interest is due on June 22, 2021. Both notes are subject to prepayment in whole or in part, without premium or penalty, of the outstanding principal amount of the notes, together with all accrued interest on such principal amount up to the date of prepayment.  Any prepayment shall be applied first to accrued but unpaid interest, and then to outstanding principal. As of each of June 30, 2020, and September 30, 2019, the amount outstanding under the two AB HoldCo Subordinated Promissory Notes was $344, which is included in the long-term portion of subordinated promissory notes.

On November 20, 2018, in connection with the Honor acquisition, Janel Group, a wholly-owned subsidiary of the Company, entered into a subordinated promissory note (“Janel Group Subordinated Promissory Note”) with a former owner of Honor. The Janel Group Subordinated Promissory Note is guaranteed by the Company. The Janel Group Subordinated Promissory Note is subordinate to and junior in right of payment for principal interest premiums and other amounts payable to the Santander Bank Facility and the First Merchants Bank Credit Facility. The Janel Group Subordinated Promissory Note, has a 6.75% annual interest rate, payable in twelve equal consecutive quarterly installments of principal and interest, on the last day of January, April, July and October beginning in January 2019, and shall be due and payable each in the amount of $42. The outstanding principal and accrued and unpaid interest are payable in a single payment on the three-year anniversary date of November 20, 2021. The note is subject to prepayment in whole or in part, without premium or penalty, of the outstanding principal amount of the notes, together with all accrued but unpaid interest on such principal amount up to the date of prepayment.  As of June 30, 2020, and September 30, 2019, the amounts outstanding under the Janel Group Subordinated Promissory Note were $237 and $349, respectively.

         
Long term subordinated promissory notes
 
$
581
   
$
693
 
Less current portion of subordinated promissory note
   
(157
)
   
(152
)
   
$
424
   
$
541
 

9.
SBA PAYCHECK PROTECTION PROGRAM LOAN

On April 19, 2020, the Company received a loan (the “PPP Loan”) in the aggregate amount of $2,726 from Santander, pursuant to the Paycheck Protection Program (the “PPP”) offered by the Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), Section 7(a)(36) of the Small Business Act, which was enacted March 27, 2020. The PPP Loan, which was in the form of a note dated April 19, 2020 issued by the Company, matures on April 19, 2022 and bears interest at a rate of 1.00% per annum. All principal and interest payments are deferred for six months from the date of the note.  To the extent the PPP Loan is not forgiven, principal and interest payments in the amount of $153 are due monthly commencing on November 1, 2020. The Company may prepay the note at any time prior to maturity with no prepayment penalties. The Company may only use funds from the PPP Loan for purposes specified in the CARES Act and related PPP rules, which include payroll costs, costs used to continue group health care benefits, rent, utilities and certain mortgage payments (“qualifying expenses”). As of June 30, 2020, the amount outstanding, including accrued interest, under the PPP Loan was $2,731.

The Company intends to use the entire PPP Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts granted as part of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, which was recently extended for a 24-week period commencing on the date of disbursement of the PPP Loan.  The Company expects that this loan will be forgiven.

10.
STOCKHOLDERS’ EQUITY

Janel is authorized to issue 4,500,000 shares of common stock, par value $0.001. In addition, the Company is authorized to issue 100,000 shares of preferred stock, par value $0.001.

The preferred stock is issuable in series with such voting rights, if any, designations, powers, preferences and other rights and such qualifications, limitations and restrictions as may be determined by the Company’s board of directors or a duly authorized committee thereof, without stockholder approval. The board of directors may fix the number of shares constituting each series and increase or decrease the number of shares of any series.

(A)
Preferred Stock

Series B Convertible Preferred Stock

Shares of the Company’s Series B Convertible Preferred Stock (the “Series B Stock”) are convertible into shares of the Company’s $0.001 par value common stock at any time on a one-share (of Series B Stock) for ten-shares (of common stock) basis. On September 6, 2019, a holder of the Series B Stock converted 640 shares of Series B Stock into 6,400 shares of the Company’s Common Stock. On April 23, 2020, a holder of the Series B Stock converted 300 shares of Series B Stock into 3,000 shares of the Company’s Common Stock.

Series C Cumulative Preferred Stock

Shares of the Company’s Series C Cumulative Preferred Stock (the “Series C Stock”) are entitled to receive annual dividends at a rate of 5% per annum of the original issuance price of $10, when and if declared by the Company’s board of directors, with such rate increased by 1% annually beginning on January 1, 2019.  Such rate is to increase on each January 1 thereafter for four years to a maximum rate of 9%. The dividend rate of the Series C Stock as of June 30, 2020 was 7%. In the event of liquidation, holders of the Series C Stock shall be paid an amount equal to the original issuance price, plus any accrued but unpaid dividends thereon. Shares of the Series C Stock may be redeemed by the Company at any time upon notice and payment of the original issuance price, plus any accrued but unpaid dividends thereon. The liquidation value of the Series C Stock was $13,041 as of June 30, 2020.

For the nine months ended June 30, 2020, the Company accrued dividends on the Series C Stock of $500. As of June 30, 2020, the Company had accrued dividends of $1,541.

(B)
Equity Incentive Plan

On May 12, 2017, the Company adopted the 2017 Equity Incentive Plan which was amended on May 8, 2018 (as amended, the “2017 Plan”).  Under the 2017 Plan, non-statutory stock options, restricted stock awards and stock appreciation rights with respect to shares of the Company’s common stock may be granted to directors, officers, employees of and consultants to the Company. Participants and all terms of any awards under the Plan are at the discretion of the Company’s Compensation Committee of the board of directors.

11.
STOCK-BASED COMPENSATION

On October 30, 2013, the board of directors of the Company adopted the Company’s 2013 Non-Qualified Stock Option Plan (the “2013 Option Plan”) providing for options to purchase up to 100,000 shares of the Company’s common stock for issuance to directors, officers, employees of and consultants to the Company and its subsidiaries.

Total stock-based compensation for the nine months ended June 30, 2020 and 2019 amounted to $217 and $251, respectively, and was included in selling, general and administrative expense in the Company’s statements of operations.

(A)
Stock Options

The Company uses the Black-Scholes option pricing model to estimate the fair value of our share-based awards. In applying this model, we use the following assumptions:

Risk-free interest rate - We determine the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate.

Expected term - We estimate the expected term of our options on the average of the vesting date and term of the option.

Expected volatility - We estimate expected volatility using daily historical trading data of a peer group.

Dividend yield - We have never paid dividends on our common stock and currently have no plans to do so; therefore, no dividend yield is applied.

The fair values of our employee option awards were estimated using the assumptions below, which yielded the following weighted average grant date fair values for the periods presented:

   
Nine Months Ended
 
Risk-free Interest Rate
 
1.59%
 
Expected Option Term in Years
 
5.5-6.5
 
Expected Volatility
 
101.2% - 101.7%
 
Dividend Yield
 
0%
 
Weighted Average Grant Date Fair Value
 
$6.97 - $7.33
 

Options for Employees

   
Number of
Options
   
Weighted
Average Exercise
Price
   
Weighted Average
Remaining Contractual
Term (in years)
   
Aggregate
Intrinsic Value
(in thousands)
 
Outstanding Balance at September 30, 2019
   
110,837
   
$
5.05
     
5.98
   
$
438.06
 
Granted
   
7,500
   
$
9.00
     
9.25
   
$
 
Exercised
   
(3,841
)
 
$
8.17
     
   
$
 
Outstanding Balance at June 30, 2020
   
114,496
   
$
5.21
     
5.42
   
$
310.00
 
Exercisable on June 30, 2020
   
101,164
   
$
4.77
     
4.98
   
$
310.00
 

The aggregate intrinsic value in the above table was calculated as the difference between the closing price of the Company’s common stock at June 30, 2020 of $7.50 per share and the exercise price of the stock options that had strike prices below such closing price.

As of June 30, 2020, there was approximately $38 of total unrecognized compensation expense related to the unvested employee stock options which is expected to be recognized over a weighted average period of less than one year.

Options for Non-Employees

There were no non-employee options awarded during the nine-month period ended June 30, 2020. During the nine-month period ended June 30, 2020, 15,000 non-employee options were forfeited.

   
Number of
Options
   
Weighted
Average Exercise
Price
   
Weighted Average
Remaining Contractual
Term (in years)
   
Aggregate
Intrinsic Value
(in thousands)
 
Outstanding Balance at September 30, 2019
   
51,053
   
$
7.58
     
7.80
   
$
72.68
 
Forfeited
   
(15,000
)
 
$
8.04
     
   
$
 
Outstanding Balance at June 30, 2020
   
36,053
   
$
7.38
     
7.01
   
$
21.91
 
Exercisable on June 30, 2020
   
6,053
   
$
4.13
     
6.25
   
$
21.91
 

The aggregate intrinsic value in the above table was calculated as the difference between the closing price of our common stock at June 30, 2020, of $7.50 per share and the exercise price of the stock options that had strike prices below such closing price.

As of June 30, 2020, there was approximately $13 of total unrecognized compensation expense related to the unvested stock options, which is expected to be recognized over a weighted average period of less than one year.

Liability classified share-based awards

Additionally, during the nine months ended June 30, 2020, 6,880 options were granted with respect to Indco’s common stock. The Company uses the Black-Scholes option pricing model to estimate the fair value of Indco’s share-based awards. In applying this model, the Company used the following assumptions:

   
Nine Months Ended
 
Risk-free Interest Rate
 
1.59%

Expected Option Term in Years
 
5.5 - 6.5
 
Expected Volatility
 
101.2% - 101.7%
 
Dividend Yield
 
0%
 
Weighted Average Grant Date Fair Value
 
$8.59 - $9.03
 

   
Number of
Options
   
Weighted
Average Exercise
Price
   
Weighted Average
Remaining Contractual
Term (in years)
   
Aggregate
Intrinsic Value
(in thousands)
 
Outstanding Balance at September 30, 2019
   
32,133
   
$
8.85
     
7.34
   
$
85.45
 
Granted
   
6,880
   
$
11.08
     
9.25
   
$
 
Outstanding Balance at June 30, 2020
   
39,013
   
$
9.24
     
7.06
   
$
85.45
 
Exercisable on June 30, 2020
   
25,343
   
$
7.98
     
6.24
   
$
85.45
 

The aggregate intrinsic value in the above table was calculated as the difference between the valuation price of Indco’s common stock at June 30, 2020 of $11.08 per share and the exercise price of the stock options that had strike prices below such closing price.

The liability classified awards were measured at fair value at each reporting date until the final measurement date, which was the date of completion of services required to earn the option. The accrued compensation cost related to these options was approximately $319 and $172 as of June 30, 2020 and September 30, 2019, respectively, and is included in other liabilities in the consolidated financial statement.  The cost associated with the options issued on each grant date is being recognized ratably over the period of service required to earn each tranche of options.

Upon vesting, the options continue to be accounted for as a liability in accordance with ASC 480-10-25-8 and are measured in accordance with ASC 480-10-35 at every reporting period until the options are settled. Changes in the fair value of the vested options are recognized in earnings in the consolidated financial statements.

The options are classified as liabilities, and the underlying shares of Indco’s common stock also contain put options which result in their classification as mandatorily redeemable securities. While their redemption does not occur on a fixed date, there is an unconditional obligation for the Company to repurchase the shares upon death, which is certain to occur at some point in time.

As of June 30, 2020, there was approximately $51 of total unrecognized compensation expense related to the unvested Indco stock options. This expense is expected to be recognized over a weighted average period of less than one year.

(B)
Restricted Stock

During the nine months ended June 30, 2020, there were no shares of restricted stock granted. Under the 2017 Plan, each grant of restricted stock vests over a three-year period, and the cost to the recipient is zero. Restricted stock compensation expense, which is a non-cash item, is being recognized in the Company’s financial statements over the vesting period of each restricted stock grant.

The following table summarizes the status of our employee unvested restricted stock under the 2017 Plan for the nine months ended June 30, 2020:

   
Restricted Stock
   
Weighted Average
Grant Date Fair Value
   
Weighted Average
Remaining
Contractual Term
(in years)
 
Unvested at September 30, 2019
   
5,000
   
$
8.01
     
0.61
 
Vested
   
(5,000
)
 
$
8.01
     
 
Unvested at June 30, 2020
   
   
$
     
 

As of June 30, 2020, there was no unrecognized compensation cost related to unvested employee restricted stock.

The following table summarizes the status of our non-employee unvested restricted stock under the 2017 Plan for the nine months ended June 30, 2020:

   
Restricted Stock
(in thousands)
   
Weighted Average
Grant Date Fair Value
   
Weighted Average
Remaining
Contractual Term
(in years)
 
Unvested at September 30, 2019
   
26,667
   
$
8.04
     
0.88
 
Vested
   
(3,333
)
 
$
     
 
Unvested at June 30, 2020
   
23,334
   
$
8.04
     
0.16
 

As of June 30, 2020, there was approximately $12 of unrecognized compensation cost related to non-employee unvested restricted stock. The cost is expected to be recognized over a weighted-average period of approximately 0.16 years.

As of June 30, 2020, included in accrued expenses and other current liabilities was $189 which represents 21,666 shares of restricted stock that vested but were not issued.
 
12.
INCOME PER COMMON SHARE
 

The following table provides a reconciliation of the basic and diluted income (loss) per share (“EPS”) computations for the three and nine months ended June 30, 2020 and 2019 (in thousands, except share and per share data):

   
For the Three Months Ended
June 30,
   
For the Nine Months Ended
 
       
2019
   
2020
   
2019
 
Income:
                       
Net income (loss)
 
$
(1,297
)
 
$
(30
)
 
$
(2,354
)
 
$
689
 
Preferred stock dividends
   
(174
)
   
(150
)
   
(500
)
   
(420
)
Net Income (loss) available to common stockholders
 
$
(1,471
)
 
$
(180
)
 
$
(2,854
)
 
$
269
 
                                 
Common Shares:
                               
Basic - weighted average common shares
   
872,838
     
852,071
     
868,033
     
849,104
 
Effect of dilutive securities:
                               
Stock options
   
     
     
     
56,697
 
Restricted stock
   
     
     
     
20,319
 
Convertible preferred stock
   
     
     
     
12,710
 
Diluted - weighted average common stock
 
$
872,838
   
$
852,071
   
$
868,033
   
$
938,830
 
                                 
Income per Common Share:
                               
Basic -
                               
Net income (loss)
 
$
(1.49
)
 
$
(0.04
)
 
$
(2.71
)
 
$
0.81
 
Preferred stock dividends
   
(0.20
)
   
(0.18
)
   
(0.58
)
   
(0.49
)
Net Income (loss) available to common stockholders
 
$
(1.69
)
 
$
(0.22
)
 
$
(3.29
)
 
$
0.32
 
                                 
Diluted -
                               
Net income (loss)
 
$
(1.49
)
 
$
(0.04
)
 
$
(2.71
)
 
$
0.73
 
Preferred stock dividends
   
(0.20
)
   
(0.18
)
   
(0.58
)
   
(0.45
)
Net income (loss) available to common stockholders
 
$
(1.69
)
 
$
(0.22
)
 
$
(3.29
)
 
$
0.28
 

The computation for the diluted number of shares excludes unvested restricted stock, unexercised stock options and unexercised warrants that are anti-dilutive. There were no anti-dilutive shares for the three- and nine-month periods ended June 30, 2020.

Potentially dilutive securities as of June 30, 2020 and 2019 were as follows:

     
       
2019
 
Employee Stock Options
   
114,496
     
110,837
 
Non-employee Stock Options
   
36,053
     
51,053
 
Employee Restricted Stock
   
5,000
     
5,000
 
Non-employee Restricted Stock
   
26,667
     
26,667
 
Convertible Preferred Stock
   
3,310
     
12,710
 
     
185,526
     
206,267
 

13.
INCOME TAXES

The Company’s estimated fiscal 2020 and 2019 blended U.S. federal statutory corporate income tax rate of 22.9% and 34.1%, respectively, were applied in the computation of the Company’s income tax provision for the nine months ended June 30, 2020 and 2019, respectively.

The reconciliation of income tax computed at the Federal statutory rate to the benefit (provision) for income taxes for the nine months ended June 30, 2020 was as follows:

   
Nine Months Ended
 
         
Federal taxes at statutory rates
 
$
402
     
(219
)
Permanent differences
   
(332
)
   
(35
)
Other
   
(451
)
   
-
 
State and local taxes
   
(57
)
   
(102
)
Income tax expense
 
$
(438
)
   
(356
)

14.
BUSINESS SEGMENT INFORMATION

As discussed above in note 1, the Company operates in three reportable segments: 1) Global Logistics Services, 2) Manufacturing and 3) Life Sciences, supported by a corporate group which conducts activities that are non-segment specific. The following tables present selected financial information about the Company’s reportable segments for the three and nine months ended June 30, 2020:

For the three months ended
 
Consolidated
   
Global Logistics
Services
   
Manufacturing
   
Life Sciences
   
Corporate
 
Revenue
 
$
18,498
   
$
15,565
   
$
1,605
   
$
1,328
   
$
-
 
Forwarding expenses and cost of revenues
   
13,405
     
12,194
     
752
     
459
     
-
 
Gross profit
   
5,093
     
3,371
     
853
     
869
     
-
 
Selling, general and administrative
   
5,482
     
3,429
     
482
     
951
     
620
 
Amortization of intangible assets
   
243
     
-
     
-
     
-
     
243
 
Operating (loss) income
   
(632
)
   
(58
)
   
371
     
(82
)
   
(863
)
Interest expense (income) net
   
108
     
30
     
49
     
25
     
4
 
Identifiable assets as of June 30, 2020
   
51,794
     
13,173
     
2,472
     
9,776
     
26,373
 
Capital expenditures
 
$
157
   
$
28
   
$
11
   
$
118
   
$
-
 

For the nine months ended
 
Consolidated
   
Global Logistics
Services
   
Manufacturing
   
Life Sciences
   
Corporate
 
Revenue
 
$
57,440
   
$
46,972
   
$
5,531
   
$
4,937
   
$
-
 
Forwarding expenses and cost of revenues
   
40,064
     
35,896
     
2,505
     
1,663
     
-
 
Gross profit
   
17,376
     
11,076
     
3,026
     
3,274
     
-
 
Selling, general and administrative
   
18,151
     
11,019
     
1,865
     
3,002
     
2,265
 
Amortization of intangible assets
   
729
     
-
     
-
     
-
     
729
 
Operating (loss) income
   
(1,504
)
   
57
     
1,161
     
272
     
(2,994
)
Interest expense (income) net
   
412
     
150
     
187
     
76
     
(1
)
Identifiable assets as of June 30, 2020
   
51,794
     
13,173
     
2,472
     
9,776
     
26,373
 
Capital expenditures
 
$
288
   
$
92
   
$
34
   
$
162
   
$
-
 

The following tables present selected financial information about the Company’s reportable segments for the three and nine months ended June 30, 2019:

For the three months ended
 
Consolidated
   
Global Logistics
Services
   
Manufacturing
   
Life Sciences
   
Corporate
 
Revenue
 
$
20,311
   
$
16,708
   
$
2,419
   
$
1,184
   
$
 
Forwarding expenses and cost of revenues
   
14,225
     
12,872
     
1,066
     
287
     
 
Gross profit
   
6,086
     
3,836
     
1,353
     
897
     
 
Selling, general and administrative
   
5,600
     
3,600
     
492
     
795
     
713
 
Amortization of intangible assets
   
230
     
     
     
     
230
 
Operating income (loss)
   
256
     
236
     
861
     
102
     
(943
)
Interest expense (income) net
   
183
     
127
     
31
     
27
     
(2
)
Identifiable assets as of June 30, 2019
   
55,266
     
20,672
     
2,753
     
6,566
     
25,275
 
Capital expenditures
 
$
50
   
$
   
$
26
   
$
24
   
$
 

For the nine months ended
 
Consolidated
   
Global Logistics
Services
   
Manufacturing
   
Life Sciences
   
Corporate
 
Revenue
 
$
63,607
   
$
52,378
   
$
6,952
   
$
4,277
   
$
 
Forwarding expenses and cost of revenues
   
44,664
     
40,247
     
3,076
     
1,341
     
 
Gross profit
   
18,943
     
12,131
     
3,876
     
2,936
     
 
Selling, general and administrative
   
16,681
     
10,220
     
2,167
     
2,226
     
2,068
 
Amortization of intangible assets
   
674
     
     
     
     
674
 
Operating income (loss)
   
1,588
     
1,911
     
1,709
     
710
     
(2,742
)
Interest expense (income) net
   
543
     
352
     
107
     
91
     
(7
)
Identifiable assets as of June 30, 2019
   
55,266
     
20,672
     
2,753
     
6,566
     
25,275
 
Capital expenditures
 
$
303
   
$
16
   
$
67
   
$
220
   
$
 

15.
RISKS AND UNCERTAINTIES

(A)
Currency Risks

The nature of Janel’s operations requires it to deal with currencies other than the U.S. Dollar. As a result, the Company is exposed to the inherent risks of international currency markets and governmental interference. A number of countries where Janel maintains offices or agent relationships have currency control regulations. The Company attempts to compensate for these exposures by accelerating international currency settlements among those agents.

(B)
Concentration of Credit Risk

The Company’s assets that are exposed to concentrations of credit risk consist primarily of cash and receivables from customers. The Company places its cash with financial institutions that have high credit ratings. The receivables from clients are spread over many customers. The Company maintains an allowance for uncollectible accounts receivable based on expected collectability and performs ongoing credit evaluations of its customers’ financial condition. We have continued to experience heightened customer credit risk as a result of the negative impact to customers’ financial condition, employment levels and consumer confidence arising from economic disruptions related to the COVID-19 pandemic, and expect that our risk in this area will remain high as long as the disruptions persist.

(C)
Legal Proceedings

Janel is occasionally subject to claims and lawsuits which typically arise in the normal course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows.

In December 2017, Janel Group received a Notice of Copyright Infringement letter from counsel for Warren Communications News, Inc. (“Warren”), the publisher of the International Trade Today (“ITT”) newsletter. The letter alleges that Janel Group infringed upon Warren’s registered copyrights in its ITT newsletter (the “Warren Matter”). On May 11, 2020, the parties reached a settlement agreement and release to resolve any and all concerns between the parties, voluntarily and without admission of copyright infringement.

(D)
COVID-19

The worldwide outbreak of COVID-19 (coronavirus), which was declared a pandemic by the World Health Organization on March 11, 2020, has impacted and may continue to impact our business operations, including employees, customers, financial condition, liquidity and cash flow for an extended period of time. In particular, we have experienced significant changes in demand among our various customers depending on their industry. Federal and state governments have implemented measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes, and closure of nonessential businesses, which measures have adversely impacted our business operations in the first three quarters of 2020. Specifically, in the nine months ended June 30, 2020, we experienced a decrease of 10.3% in our Global Logistics Services revenues and a decrease of 20.4% 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. Although some of the states and foreign markets in which we operate have begun to reopen on a phased basis, the United States and other countries continue to struggle with rolling outbreaks of the virus.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this filing. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, industry, and workforce.

16.
COMMITMENTS AND CONTINGENCIES

On February 4, 2020, Indco entered into a Purchase and Sale Agreement with 4040 Earnings Way, LLC (“Seller”) to acquire from the Seller the land and building that serves as the Indco office and manufacturing facility in New Albany, Indiana, for a purchase price of $845, financed with cash from operations and a loan of up to $700 from First Merchants Bank secured by the subject property. Closing on this property occurred July 1, 2020, see note 18.

17.
LEASES

The Company has operating leases for office and warehouse space in all districts where it conducts business. As of June 30, 2020, the remaining terms of the Company’s operating leases were between one and 57 months and certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include the minimum lease payments that the Company is obligated to make under the non-cancelable initial terms of the leases as the renewal terms are at the Company’s option and the Company is not reasonably certain to exercise those renewal options at lease commencement.

The components of lease cost for the nine-month period ended June 30, 2020 are as follows:

   
Nine Months Ended
 
Operating lease cost
 
$
559
 
Short-term lease cost
   
103
 
Total lease cost
 
$
662
 

Rent expense for the nine-month period June 30, 2019 was $567.

Operating lease right of use assets, current portion of operating lease liabilities and long-term operating lease liabilities reported in the consolidated balance sheets for operating leases as of June 30, 2020 were $1,498, $438 and $1,082, respectively.

During the nine months ended June 30, 2020, the Company entered into a new operating lease and recorded an additional $857 in operating lease right of use assets and corresponding lease liabilities.

As of June 30, 2020, the weighted-average remaining lease term and the weighted-average discount rate related to the Company’s operating leases were 3.8 years and 6.58%, respectively. Cash paid for amounts included in the measurement of operating lease obligations were $657 for the nine months ended June 30, 2020.

Future minimum lease payments under non-cancelable operating leases as of June 30, 2020 are as follows:

2020
 
$
485
 
2021
   
467
 
2022
   
372
 
2023
   
223
 
2024
   
166
 
Total undiscounted lease payments
   
1,713
 
Less: Imputed interest
   
(193
)
Total lease obligations
 
$
1,520
 

18.
SUBSEQUENT EVENTS

As previously reported, 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.

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.

On July 22, 2020, Janel Group, Inc., a wholly-owned subsidiary of Janel Corporation, and, Atlantic Customs Brokers, Inc. (“Atlantic”) as borrowers, and the Company as loan party obligor, entered into the Consent, Joinder and Fourth Amendment (the “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 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 Incorporated subsidiary up to $2,920 outstanding at any time.

On July 23, 2020, Janel Group, Inc., a wholly-owned subsidiary of Janel Corporation, acquired all of the outstanding common stock of a global logistics services provider with two U.S. locations effective July 23, 2020 for $880. At closing the former stockholder was paid $300 in cash and $194, $193 and $193 is due to the stockholder on the first, second and third anniversary of the closing date. The fair value of the purchase price and the allocation thereof has not yet been determined. The results of operations for this acquisition will be reported in our Global Logistics Services segment.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited interim consolidated financial statements and related notes thereto as of and for the nine months ended June 30, 2020, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Amounts presented in this section are in thousands, except share and per share data.

As used throughout this Report, “we,” “us”, “our,” “Janel,” the Company,” “Registrant” and similar words refer to Janel Corporation and its Subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Report”) contains certain statements that are, or may deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that reflect management’s current expectations with respect to our operations, performance, financial condition, and other developments. These forward-looking statements may generally be identified by the use of the words “may,” “will,” “intends,” “plans,” projects,” “believes,” “should,” “expects,” “predicts,” “anticipates,” “estimates,” and similar expressions or the negative of these terms or other comparable terminology. These statements are necessarily estimates reflecting management’s best judgment based upon current information and involve a number of risks, uncertainties and assumptions.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors, including, but not limited to, those set forth elsewhere in this Report, could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, the impact of the coronavirus (“COVID-19”) pandemic and related economic effects; our strategy of expanding our business through acquisitions of other businesses; the risk that we may fail to realize the expected benefits or strategic objectives of any acquisition, or that we spend resources exploring acquisitions that are not consummated; litigation; indemnification claims and other unforeseen claims and liabilities that may arise from an acquisition; economic and other conditions in the markets in which we operate; the risk that we may not have sufficient working capital to continue operations; instability in the financial markets; the material weaknesses identified in our internal control over financial reporting; our dependence on key employees; competition from parties who sell their businesses to us and from professionals who cease working for us;

terrorist attacks and other acts of violence or war; security breaches or cybersecurity attacks; competition faced by our global logistics services freight carriers with greater financial resources and from companies that operate in areas in which we plan to expand; our dependence on the availability of cargo space from third parties; recessions and other economic developments that reduce freight volumes; other events affecting the volume of international trade and international operations; risks arising from our global logistics services business’ ability to manage staffing needs; competition faced in the freight forwarding, freight brokerage, logistics and supply chain management industry; industry consolidation and our ability to gain sufficient market presence with respect to our global logistics services business; risks arising from our ability to comply with governmental permit and licensing requirements or statutory and regulatory requirements; seasonal trends; competition faced by our manufacturing (Indco) business from competitors with greater financial resources; Indco’s dependence on individual purchase orders to generate revenue; any decrease in the availability, or increase in the cost, of raw materials used by Indco; Indco’s ability to obtain and retain skilled technical personnel; risks associated with product liability claims due to alleged defects in Indco’s products; risks arising from the environmental, health and safety regulations applicable to Indco; the reliance of our Indco and life sciences businesses on a single location to manufacture their products; the ability of our life sciences business to compete effectively; the ability of our life sciences business to introduce new products in a timely manner; product or other liabilities associated with the manufacture and sale of new products and services; changes in governmental regulations applicable to our life sciences business; the ability of our life sciences business to continually produce products that meet high quality standards such as purity, reproducibility and/or absence of cross-reactivity; the controlling influence exerted by our officers and directors and one of our stockholders; our inability to issue dividends in the foreseeable future; and risks related to ownership of our common stock, including volatility and the lack of a guaranteed continued public trading market for our common stock.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected.  You should not place undue reliance on any of our forward-looking statements which speak only as of the date they are made.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of these factors, see our periodic reports filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

COVID-19

The outbreak of COVID-19 has had a significant impact on global trade and on our business during the first three quarters of 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. Those shutdowns and restrictions in China started to ease, and 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 decrease in global economic activity that has persisted during the third quarter of fiscal 2020 and a second steep drop in global import and export trade volumes, which has materially impacted our Global Logistics Services business. Specifically, in the nine months ended June 30, 2020, we experienced a decrease of 10.3% in our Global Logistics Services revenues and a decrease of 20.4% 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 operations going forward due to uncertainties regarding the severity and duration of the outbreak and additional actions that may be taken by governmental authorities in response to a potential resurgence of the virus. That said, we currently expect that our results of operations and financial condition will continue to be adversely impacted in the fourth quarter of 2020 and subsequent periods, as levels of activity in the Company’s business have historically been positively correlated to broad measures of economic activity, such as gross domestic product, and to measures of industrial economic activity, which have been negatively impacted by the pandemic.

The full magnitude of the COVID-19 pandemic, including the extent of any impact on our business, financial position, results of operations or liquidity, which could be material, cannot be reasonably determined at this time due to the rapid development and fluidity of the situation. The long term effects of the pandemic on our business will depend on its duration and severity, whether business disruptions will continue, the pace of recovery once the pandemic subsides and the overall long-term impact on the global economy.

OVERVIEW

Janel is a holding company with subsidiaries in three business segments: Global Logistics Services, Manufacturing and Life Sciences. The Company strives to create shareholder value primarily through three strategic priorities: supporting its businesses’ efforts to make investments and to build long-term profits; allocating Janel’s capital at high risk-adjusted rates of return; and attracting and retaining exceptional talent.

A management group at the holding company level (the “corporate group”) focuses on significant capital allocation decisions, corporate governance and supporting Janel’s subsidiaries where appropriate. Janel expects to grow through its subsidiaries’ organic growth and by completing acquisitions.

We plan to either acquire businesses within our existing segments or expand our portfolio into new strategic segments. Our acquisition strategy focuses on reasonably-priced companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings power.

Global Logistics Services

The Company’s Global Logistics Services segment is comprised of several wholly-owned subsidiaries (collectively “Janel Group”). Janel Group is a non-asset based, full-service provider of cargo transportation logistics management services, including freight forwarding via air-, ocean- and land-based carriers, customs brokerage services, warehousing and distribution services, and other value-added logistics services.

On November 20, 2018, we completed a business combination whereby we acquired the membership interest of Honor Worldwide Logistics, LLC (“Honor”), a global logistics services provider with two U.S. locations.

On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location.

Manufacturing

The Company’s Manufacturing segment is comprised of Indco, Inc. (“Indco”). Indco is a majority-owned subsidiary of the Company that manufactures and distributes mixing equipment and apparatus for specific applications within various industries. Indco’s customer base is comprised of small- to mid-sized businesses as well as other larger customers for which Indco fulfills repetitive production orders.

Life Sciences

The Company’s Life Sciences segment is comprised of Aves Labs, Inc. (“Aves”), Antibodies Incorporated (“Antibodies”), IgG, LLC (“IgG”) and PhosphoSolutions, LLC, which are wholly-owned subsidiaries of the Company.

The Company’s Life Sciences segment manufactures and distributes high-quality monoclonal and polyclonal antibodies, diagnostic reagents and other immunoreagents for biomedical research and provides antibody manufacturing for academic and industry research scientists. Our Life Sciences business also produces products for other life science companies on an original equipment manufacturer (“OEM”) basis.

Through Aves, the Company acquired the membership interests of a small life sciences company on July 1, 2019 and the equity interests of PhosphoSolutions, LLC. (“Phospho”) on September 6, 2019. Both acquisitions were completed primarily to expand our product offerings in Life Sciences.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstance. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

The Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment.

Actual results could differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to revenue recognition, the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, accruals for transportation and other direct costs, accruals for cargo insurance, and deferred income taxes. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. We reevaluate these significant factors as facts and circumstances change. Note 1 of the notes to consolidated financial statements included herein includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of certain accounting policies and estimates.

Management believes that the nature of the Company’s business is such that there are a few complex challenges in accounting for operations. Revenue recognition is considered the critical accounting policy due to the complexity of arranging and managing global logistics and supply-chain management transactions.

Income taxes

The Company uses the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

Estimates

While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas that in the aggregate are not a major component of the Company’s consolidated statements of operations:

accounts receivable valuation;

the useful lives of long-term assets;

the accrual of costs related to ancillary services the Company provides;

accrual of tax expense on an interim basis; and

inventory valuation.

Management believes that the methods utilized in these areas are consistent in application. Management further believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company’s transactions.

While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates would not produce materially different results than those reported.

Critical Accounting Policies and Estimates Applicable to the Global Logistics Services Segment

Revenue Recognition

Revenues are derived from customs brokerage services and from freight forwarding services.

Customs brokerage services include activities required for the clearance of shipments through government customs regimes, such as preparing required documentation, calculating and providing for payment of duties and other charges on behalf of customers, arranging required inspections and arranging final delivery.

Freight forwarding may require multiple services, including long-distance shipment via air, ocean or ground assets, destination handling (“break bulk”), warehousing, distribution and other logistics management activities. As an asset-light business, Janel Group owns none of the assets by which it fulfills its customers’ logistics needs. Rather, it purchases the services its customers need from asset owners, such as airlines and steamship lines, and resells them. By consolidating shipments from multiple customers, Janel Group can negotiate terms of service with asset owners that are more favorable than those the customers could negotiate themselves.

Revenue is recognized upon transfer of control of promised services to customers. With respect to its Global Logistics Services segment, the Company has determined that in general each shipment transaction or service order constitutes a separate contract with the customer. When the Company provides multiple services to a customer, different contracts may be present for different services.

The Company typically satisfies its performance obligations as services are rendered at a point in time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed at a point in time during the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one-to two-month period.

The Company evaluates whether amounts billed to customers should be reported as gross or net revenue. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the services, when it has discretion in setting the prices for the services to the customers, and the Company has the ability to direct the use of the services provided by the third party. Revenue is recognized on a net basis when we do not have latitude in carrier selection or establish rates with the carrier.

In the Global Logistics Services segment, the Company disaggregates its revenues by its four primary service categories: ocean import and export, freight forwarding, customs brokerage and air import and export.

Critical Accounting Policies and Estimates Applicable to the Manufacturing and Life Sciences Segments

Revenue Recognition-Manufacturing

Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment and accessories. Indco receives customer product orders via telephone, email, internet or fax. The pricing of each standard product sold is listed in Indco’s print and web-based catalog. Customer specific products are priced by quote. A sales order acknowledgement is sent to every customer for every order to confirm pricing and the specifications of the products ordered. The revenue is recognized at a point in time when the product is shipped to the customer.

Revenue Recognition-Life Sciences

Revenues from the Life Sciences segment are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and antibody manufacturing. Revenues are recognized when products are shipped and risk of loss is transferred to the carrier(s) used.

NON-GAAP FINANCIAL MEASURES

While we prepare our financial statements in accordance with U.S. GAAP, we also utilize and present certain financial measures, in particular adjusted operating income, which is not based on or included in U.S. GAAP (we refer to these as “non-GAAP financial measures”).

Net Revenue

Net revenue is a non-GAAP measure calculated as total revenue less forwarding expenses attributable to the Company’s Global Logistics Services segment.

Our total revenue represents the total dollar value of services and goods we sell to our customers. Forwarding expenses attributable to the Company’s Global Logistics Services segment refer to purchased transportation and related services including contracted air, ocean, rail, motor carrier and other costs. Total revenue can be influenced greatly by changes in transportation rates or other items, such as fuel prices, which we do not control. Management believes that providing net revenue is useful to investors as net revenue is the primary indicator of our ability to source, add value and sell services and products that are provided by third parties, and we consider net revenue to be our primary performance measurement. The difference between the rate billed to our customers (the sell rate) and the rate we pay to the carrier (the buy rate) is termed “net revenue”, “yield” or “margin.” As presented, net revenue matches gross margin.

Adjusted Operating Income

As a result of our acquisition strategy, our net income includes material non-cash charges relating to the amortization of customer-related intangible assets in the ordinary course of business as well as other intangible assets acquired in our acquisitions. Although these charges may increase as we complete more acquisitions, we believe we will be growing the value of our intangible assets such as customer relationships. Because these charges are not indicative of our operations, we believe that adjusted operating income is a useful financial measure for investors because it eliminates the effect of these non-cash costs and provides an important metric for our business that is more representative of the actual results of our operations.

Adjusted operating income (which excludes the non-cash impact of amortization of intangible assets, stock-based compensation and amortization of acquired inventory valuation) is used by management as a supplemental performance measure to assess our business’s ability to generate cash and economic returns.

Adjusted operating income is a non-GAAP measure of income and does not include the effects of preferred stock dividends, interest and taxes.

We believe that net revenue and adjusted operating income provide useful information in understanding and evaluating our operating results in the same manner as management. However, net revenue and adjusted operating income are not financial measures calculated in accordance with U.S. GAAP and should not be considered as a substitute for total revenue, operating income or any other operating performance measures calculated in accordance with U.S. GAAP. Using these non-GAAP financial measures to analyze our business has material limitations because the calculations are based on the subjective determination of management regarding the nature and classification of events and circumstances that users of the financial statements may find significant.

In addition, although other companies in our industry may report measures titled net revenue, adjusted operating income or similar measures, such non-GAAP financial measures may be calculated differently from how we calculate our non-GAAP financial measures, which reduces their overall usefulness as comparative measures. Because of these limitations, you should consider net revenue and adjusted operating income alongside other financial performance measures, including total revenue, operating income and our other financial results presented in accordance with U.S. GAAP.

The following table sets forth a reconciliation of operating income to adjusted operating income:

   
Three Months Ended
June 30,
   
Nine Months Ended
 
       
2019
   
2020
   
2019
 
   
(in thousands)
   
(in thousands)
 
Operating (loss) income
 
$
(632
)
 
$
256
   
$
(1,504
)
 
$
1,588
 
Amortization of intangible assets(1)
   
243
     
230
     
729
     
674
 
Stock-based compensation(2)
   
68
     
93
     
217
     
329
 
Amortization of acquired inventory valuation(3)
   
150
     
66
     
597
     
195
 
Adjusted operating (loss) income
 
$
(171
)
 
$
645
   
$
39
   
$
2,786
 

(1)
Amortization of intangible assets represents non-cash amortization expense or impairment expense, if any, attributable to acquisition-related intangible assets, including any portion that is allocated to noncontrolling interests. Management believes that making this adjustment aids in comparing the Company’s operating results with other companies in our industry that have not engaged in acquisitions.

(2)
The Company eliminates the impact of stock-based compensation because it does not consider such non-cash expenses to be indicative of the Company’s core operating performance. The exclusion of stock-based compensation expenses also facilitates comparisons of the Company’s underlying operating performance on a period-to-period basis.
(3)
The Company has excluded the impact of amortization of acquired inventory valuation in connection with acquisitions as such adjustments represent non-cash items, are not consistent in amount and frequency and are significantly impacted by the timing and size of the Company’s acquisitions.

Results of Operations – Segment Financial Results – Three and Nine Months Ended June 30, 2020 and 2019

The following table sets forth our segment financial results:

   
Three Months Ended
June 30,
   
Nine Months Ended
 
       
2019
   
2020
   
2019
 
   
(in thousands)
   
(in thousands)
 
Revenue:
                       
Global Logistics Services
 
$
15,565
   
$
16,708
   
$
46,972
   
$
52,378
 
Manufacturing
   
1,605
     
2,419
     
5,531
     
6,952
 
Life Sciences
   
1,328
     
1,184
     
4,937
     
4,277
 
Total Revenues
   
18,498
     
20,311
     
57,440
     
63,607
 
                                 
Gross Profit:
                               
Global Logistics Services
   
3,371
     
3,836
     
11,076
     
12,131
 
Manufacturing
   
853
     
1,353
     
3,026
     
3,876
 
Life Sciences
   
869
     
897
     
3,274
     
2,936
 
Total Gross Profit
   
5,093
     
6,086
     
17,376
     
18,943
 
                                 
Income (loss) from Operations:
                               
Global Logistics Services
   
(58
)
   
236
     
57
     
1,911
 
Manufacturing
   
371
     
861
     
1,161
     
1,709
 
Life Sciences
   
(82
)
   
102
     
272
     
710
 
Total Income from Operations by Segment
   
231
     
1,199
     
1,490
     
4,330
 
                                 
Corporate administrative expense
   
(620
)
   
(713
)
   
(2,265
)
   
(2,068
)
Amortization expense
   
(243
)
   
(230
)
   
(729
)
   
(674
)
Interest expense, net
   
(108
)
   
(183
)
   
(412
)
   
(543
)
Net (loss) income before taxes
   
(740
)
   
73
     
(1,916
)
   
1,045
 
Income tax expense
   
(557
)
   
(103
)
   
(438
)
   
(356
)
Net (loss) income
 
$
(1,297
)
 
$
(30
)
 
$
(2,354
)
 
$
689
 
Preferred stock dividends
   
(174
)
   
(150
)
   
(500
)
   
(420
)
Net (Loss) Income available to Common Stockholders
 
$
(1,471
)
 
$
(180
)
 
$
(2,854
)
 
$
269
 

Results of Operations – Janel Corporation

The following table sets forth our corporate group expenses:

   
Three Months Ended
June 30,
   
Nine Months Ended
 
       
2019
   
2020
   
2019
 
   
(in thousands)
   
(in thousands)
 
Corporate expenses
 
$
458
   
$
557
   
$
1,928
   
$
1,602
 
Amortization of intangible assets
   
243
     
230
     
729
     
674
 
Stock-based compensation
   
106
     
93
     
217
     
329
 
Merger and acquisition expenses
   
56
     
63
     
120
     
137
 
Total corporate expenses
 
$
863
   
$
943
   
$
2,994
   
$
2,742
 

Expenses

Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, decreased by $80 to $863, or 8.5% for the three months ended June 30, 2020 as compared to $943 for the three months ended June 30, 2019. The decrease was due primarily to lower accounting-related professional expenses.  Corporate expenses increased to $2,994 for the nine months ended June 30, 2020 as compared to $2,742 for the nine months ended June 30, 2019, a $252 or 9.2% increase. The increase was due primarily to higher accounting-related professional expenses, partially offset by lower stock-based compensation expense and merger and acquisition related expenses for the quarter.

Amortization of Intangible Assets

For the three months ended June 30, 2020 and 2019, corporate amortization expenses were $243 and $230, respectively, an increase of $13, or 5.7%. For the nine months ended June 30, 2020 and 2019, corporate amortization expenses were $729 and $674, respectively, an increase of $55, or 8.2%. The increases in both periods were related to acquisitions.

Interest Expense

For the three months ended June 30, 2020, interest expense for the consolidated company decreased $75, or 41%, to $108 from $183 for the three months ended June 30, 2019. For the nine months ended June 30, 2020 and 2019, interest expense was $412 and $543, respectively, a decrease of $131, or 24.1%. The decrease in both periods was primarily due to lower prevailing interest rates and lower rates on the amended revolving line of credit facility, partially offset by average higher debt levels on the senior secured term loan facility.

Income Taxes

On a consolidated basis, the Company recorded an income tax expense of $557 for the three months ended June 30, 2020, as compared to an income tax expense of $103 for the three months ended June 30, 2019. For the nine months ended June 30, 2020, the Company recorded an income tax expense of $438 compared to an expense of $356 in the prior year period. The increase in income tax expense in the current period was primarily due to the estimated non-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 is expected to continue to use, through ongoing profitability.

Preferred Stock Dividends

Preferred stock dividends include any dividends accrued but not paid on the Company’s Series C Cumulative Preferred Stock (the “Series C Stock”). For the three months ended June 30, 2020 and 2019, preferred stock dividends were $174 and $150, respectively. For the nine months ended June 30, 2020 and 2019, the preferred stock dividends were $500 compared to $420, respectively. The increases of $24 for the three-month period and $80 for the nine-month period were the result of an increase in the dividend rate as of January 1, 2020 to 7% and a higher outstanding amount of accrued and unpaid dividends. See note 10 to the consolidated financial statements for additional information.

Net (Loss) Income

Net loss was ($1,297) or ($1.49) per diluted share, for the three months ended June 30, 2020 compared to net loss of ($30), or ($0.04) per diluted share, for the three months ended June 30, 2019. For the nine months ended June 30, 2020, net loss totaled ($2,354) or ($2.71) per diluted share compared to net income of $689 or $0.73 per diluted share for the nine months ended June 30, 2019. The period-over-period losses were primarily due to lower revenues and gross profit and higher selling, general and administrative expenses across our businesses in both periods.

Net (Loss) Income Available to Common Stockholders

Net loss available to holders of common shares was ($1,471), or ($1.69) per diluted share, for the three months ended June 30, 2020 compared to loss of ($180), or ($0.22) per diluted share, for the three months ended June 30, 2019. In the nine months ended June 30, 2020, net loss available to holders of common shares totaled ($2,854) or ($3.29) per diluted share compared to $269 or $0.28 per diluted share for the nine months ended June 30, 2019. The decrease primarily was due to lower revenues and gross profit and higher selling, general and administrative expenses across our businesses in both periods and an increase in the dividend rate with respect to the Series C Stock as of January 1, 2020 to 7%.

Results of Operations - Global Logistics Services

Our Global Logistics Services business helps its clients move and manage freight efficiently to reduce inventories and to increase supply chain speed and reliability. Key services include customs entry filing, arrangement of freight forwarding by air, ocean and ground, warehousing, cargo insurance procurement, logistics planning, product repackaging and online shipment tracking.

Global Logistics Services – Selected Financial Information:

   
Three Months Ended
June 30,
   
Nine Months Ended
 
       
2019
   
2020
   
2019
 
   
(in thousands)
   
(in thousands)
 
Revenue
 
$
15,565
   
$
16,708
   
$
46,972
   
$
52,378
 
Forwarding expenses
   
12,194
     
12,872
     
35,896
     
40,247
 
Net revenue
   
3,371
     
3,836
     
11,076
     
12,131
 
Gross profit margin
   
22
%
   
23
%
   
24
%
   
23
%
Selling, general & administrative
   
3,429
     
3,600
     
11,019
     
10,220
 
(Loss) income from operations
 
$
(58
)
 
$
236
   
$
57
   
$
1,911
 

Revenue

Total revenue decreased 6.8% to $15,565 for the three months June 30, 2020, compared to $16,708 in the three months ended June 30, 2019. The decrease in revenue was driven by the continued global trade slowdown, in particular the steep reduction in global import and export trade volumes, due to the COVID-19 pandemic.

Total revenue for the nine months ended June 30, 2020 and 2019 was $46,972 and $52,378, respectively, a decrease of $5,406 or 10.32%. The decrease in revenue was largely due to the impact of the continued global trade slowdown due to the COVID-19 pandemic and customers in the prior year period moving freight ahead of certain governmental trade policies. Acquired revenue from two acquisitions completed during fiscal 2019 slightly offset a portion of the revenue decline in the nine-month period.

Net Revenue

Net revenue for the three months ended June 30, 2020 and 2019 was $3,371 and $3,836, respectively, a decrease of $465, or 12.1%. The decrease reflected an organic decline for the quarter in our base business due to volume pressures from the COVID-19 pandemic.  Net revenue as a percentage of gross revenue decreased to 21.7% versus 23% for the prior year period due to COVID-19 related impact on transportation prices.

Net revenue for the nine months ended June 30, 2020 and 2019 was $11,076 and $12,131, respectively, a decrease of $1,055, or 8.7%, as a result of organic declines due to the COVID-19 pandemic and customers in the prior year period moving freight in advance of certain governmental trade policies.

This decline was partially offset by contributions from two acquisitions and improved freight purchase rates in the current year period. Net revenue as a percentage of gross revenue in the nine-month period approximated 23.6% versus 23.2% in the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2020 were $3,429, as compared to $3,600 for the three months ended June 30, 2019. This decrease of $171, or 4.7%, was largely attributable to lower travel related expenses due to the COVID-19 pandemic. As a percentage of revenue, selling, general and administrative expenses were 22% and 21.5% of revenue for the three months ended June 30, 2020 and 2019, respectively.

Selling, general and administrative expenses for the nine months ended June 30, 2020 and 2019 were $11,019 and $10,220, respectively. The increase of $799, or 7.8%, reflected the reserve for the settlement of threatened litigation and higher expenses from prior year acquisitions. As a percentage of revenue, selling, general and administrative expenses were 23.5% and 19.5% of revenue for the nine months ended June 30, 2020 and 2019, respectively.

(Loss) Income from Operations

For the three months ended June 30, 2020, loss from operations before income taxes was $(58) as compared to income from operations of $236 for the three months ended June 30, 2019, a decrease of $294 or 124.6%. Operating income in the three-month period declined due to the impact of the global trade slowdown associated with the COVID-19 pandemic.

For the nine months ended June 30, 2020 and 2019, income from operations before income taxes was $57 and $1,911 respectively, a decrease of $1,854 or 97%.

Income from operations declined as a result of the impact of the COVID-19 pandemic, a shift in volume experienced during the first quarter of fiscal 2019 that did not recur and the reserve for the settlement of threatened litigation, partially offset by contributions from acquisitions experienced during the first quarter. Our operating margin as a percentage of net revenue for the nine months ended June 30, 2020 was 0.5%, versus 15.8% in the prior year period.

Results of Operations - Manufacturing

The Company’s Manufacturing segment includes its majority-owned Indco subsidiary, which manufactures and distributes industrial mixing equipment.

Manufacturing – Selected Financial Information:

   
Three Months Ended
June 30,
   
Nine Months Ended
 
       
2019
   
2020
   
2019
 
   
(in thousands)
   
(in thousands)
 
Revenue
 
$
1,605
   
$
2,419
   
$
5,531
   
$
6,952
 
Cost of sales
   
752
     
1,066
     
2,505
     
3,076
 
Gross profit
   
853
     
1,353
     
3,026
     
3,876
 
Gross profit margin
   
53
%
   
56
%
   
55
%
   
56
%
Selling, general & administrative
   
482
     
492
     
1,865
     
2,167
 
Income from Operations
 
$
371
   
$
861
   
$
1,161
   
$
1,709
 

Revenue

Total revenue decreased 33.6% to $1,605 in the three months ended June 30, 2020, compared to $2,419 for the three months ended June 30, 2019. Total revenue decreased 20.4% to $5,531 in the nine months ended June 30, 2020, compared to $6,952 in the nine months ended June 30, 2019. The revenue decline in both periods reflected a decline in volumes across the business relative to the prior year periods, due to the slowdown related to the COVID-19 pandemic.

Gross Profit

Gross profit decreased 36.9% to $853 in the three months ended June 30, 2020, compared to $1,353 for the three months ended June 30, 2019. Gross profit margin for the three-month periods ended June 30, 2020 and 2019 was 53.1% and 56%, respectively.

Gross profit decreased 21.9% to $3,026 in the nine months ended June 30, 2020, compared to $3,876 for the nine months ended June 30, 2019. Gross profit margin for the nine months ended June 30, 2020 decreased to 54.7%, compared to 56% for the nine months ended June 30, 2019. In both the three- and nine-month periods, gross profit margin decreased due to the mix of business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 2% to $482 for the three months ended June 30, 2020, compared to $492 for the three months ended June 30, 2019. Selling, general and administrative expenses decreased 13.9% to $1,865 for the nine months ended June 30, 2020, compared to $2,167 for the nine months ended June 30, 2020. The decrease in both periods was related to the decline in revenue, partially offset by management’s decision to maintain staffing and operational capabilities.

Income from Operations

Income from operations was $371 for the three months ended June 30, 2020 compared to $861 for the three months ended June 30, 2019, representing a 56.9% decrease from the prior year period. Income from operations of $1,161 for the nine months ended June 30, 2020 decreased 32.1% compared to $1,709 for the nine months ended June 30, 2019. Operating profit decreased in both periods due to lower revenue growth without corresponding expense reductions.

Results of Operations – Life Sciences

The Company’s Life Sciences segment manufactures and distributes high-quality monoclonal and polyclonal antibodies, diagnostic reagents and other immunoreagents for biomedical research and provides antibody manufacturing for academic and industry research scientists. Our Life Sciences business also produces products for other life science companies on an OEM basis.

Life Sciences – Selected Financial Information:

   
Three Months Ended
June 30,
   
Nine Months Ended
 
       
2019
   
2020
   
2019
 
   
(in thousands)
   
(in thousands)
 
Revenue
 
$
1,328
   
$
1,184
   
$
4,937
   
$
4,277
 
Cost of sales
   
459
     
287
     
1,663
     
1,341
 
Gross profit
   
869
     
897
     
3,274
     
2,936
 
Gross profit margin
   
65
%
   
76
%
   
66
%
   
69
%
Selling, general & administrative
   
951
     
795
     
3,002
     
2,226
 
Income (loss) from Operations
 
$
(82
)
 
$
102
   
$
272
   
$
710
 

Revenue

Total revenue was $1,328 and $1,184 for the three months ended June 30, 2020 and 2019, respectively, an increase of $144 or 12.2%. Total revenue was $4,937 and $4,277 for the nine months ended June 30, 2020 and 2019, respectively, an increase of $660 or 15.4%. Acquisitions accounted for all of the increase in both periods, as organic growth declined at a double-digit rate for the quarter and at a mid-single digit rate in the nine-month period, each as compared to the prior year period, due to the slowdown in academic research related to the COVID-19 pandemic.

Gross Profit and Gross Profit Margin

Gross profit was $869 and $897 for the three months ended June 30, 2020 and 2019, respectively, a decrease of $28 or 3.1%. Amortization of acquired inventory in the quarter totaled $150 compared to $66 in the prior year period due to our two prior year acquisitions. For the three months ended June 30, 2020 and 2019, the Life Sciences segment had gross profit margins of 65.4% and 76%, respectively. Gross profit margin decreased in the quarter compared to the prior year period due to an acquisition-related inventory charge.

Gross profit was $3,274 and $2,936 for the nine months ended June 30, 2020 and 2019, respectively. In the nine months ended June 30, 2020, amortization of acquired inventory totaled $597 compared to $195 in the prior year period. For the nine months ended June 30, 2020, the Life Sciences segment had a gross profit margin of 66.3% compared to 69% for the prior year period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $951 and $795 for the three months ended June 30, 2020 and 2019, respectively, an increase of $156 or 19.6%. Selling, general and administrative expenses were $3,002 and $2,226 for the nine months ended June 30, 2020 and 2019, respectively, an increase of $776 or 34.9%. The increase in both periods was largely due to acquired businesses.

Income (loss) from Operations

Loss from operations for the three months ended June 30, 2020 ($82) compared to income from operations of $102 in the prior year period. The decline in operating income reflected higher amortization of acquired inventory due to acquisitions and a slowdown in academic research in the quarter related to the COVID-19 pandemic. Income from operations for the nine months ended June 30, 2020 and 2019 was $272 and $710, respectively.

The decline reflected higher amortization of acquired inventory due to acquisitions. As a percentage of revenue, income from operations in the nine months ended June 30, 2020 declined to 5.5% versus 16.6% due to lower amortization of acquired inventory. Absent these non-cash expenses, adjusted operating income for the nine months ended June 30, 2020 was $869 compared to $905 in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

General

Our ability to satisfy liquidity requirements, including satisfying debt obligations and fund working capital, day-to-day operating expenses and capital expenditures, depends upon future performance, which is subject to general economic conditions, competition and other factors, some of which are beyond Janel’s control. Our Global Logistics Services segment depends on commercial credit facilities to fund day-to-day operations as there is a difference between the timing of collection cycles and the timing of payments to vendors. Generally, Janel does not make significant capital expenditures.

As a customs broker, our Global Logistics Services segment makes significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities primarily in the U.S. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. These “pass through” billings can influence our traditional credit collection metrics. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Management believes that it has established effective credit control procedures and has historically experienced relatively insignificant collection problems.

The COVID-19 pandemic has negatively impacted our liquidity and cash flows. As discussed in greater detail in note 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 (SBA) note pursuant to which we borrowed $2,726 from Santander pursuant to the PPP under The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), Section 7(a)(36) of the Small Business Act in order to be able to continue to cover our payroll costs, group health care benefits, mortgage payments, rent and utilities. The duration and magnitude of the pandemic is not reasonably estimable at this point, and if the pandemic persists, our liquidity and capital resources could be further negatively impacted.

As of June 30, 2020, the Company’s cash and working capital deficiency (current assets minus current liabilities) were $2,679 and $7,894, respectively, as compared to $2,163 and $6,190 as of September 30, 2019. The increase in working capital deficiency is considered nominal, representing relatively stable collections from customers and payments of vendors.

Janel’s cash flow performance for the three and nine-months ended June 30, 2020 is not necessarily indicative of future cash flow performance.

Cash flows from operating activities

Net cash provided by operating activities for the nine months ended June 30, 2020 and 2019 was $1,263 and $3,219, respectively. The decrease in cash provided by operations for the nine months ended June 30, 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 nine-month period ended June 30, 2020.

Cash flows from investing activities

Net cash used in investing activities totaled $403 for the nine months ended June 30, 2020, versus $2,238 for the prior year period. During the nine months ended June 30, 2020, the Company used $116 for final purchase price adjustments related to an acquisition in the prior year compared to $1,935 for the nine months ended June 30, 2019. The Company also used $288 for the acquisition of property and equipment for the nine months ended June 30, 2020 compared to $303 for the nine months ended June 30, 2019.

Cash flows from financing activities

Net cash used in financing activities was $344 for the nine months ended June 30, 2020, compared to $204 for the nine months ended June 30, 2019. Net cash used in financing activities for the nine months ended June 30, 2020 was primarily a result of reduced outstanding balances on our line of credit. Net cash used in financing activities for the nine months ended June 30, 2019 was primarily a result of repayment of the First Merchants Bank term loan.

Off-Balance Sheet Arrangements

As of June 30, 2020, we had no off-balance sheet arrangements or obligations.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. For a discussion of quantitative and qualitative disclosures about market risk, please refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, from which our exposure to market risk has not materially changed.

ITEM 4.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2020, the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q because, in part, material weaknesses in the Company’s internal control over financial reporting existed at September 30, 2018 and had not been remediated by the end of the period covered by this Quarterly Report on Form 10-Q.  The material weaknesses in the Company’s internal control over financial reporting and the Company’s remediation efforts are described below.

Material Weaknesses in Internal Control Over Financial Reporting

The Company’s management, including our Chief Executive Officer and Chief Financial Officer, have identified material weaknesses in the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Life Sciences
 
In connection with the preparation of the Company’s Annual Report on Form 10-K, management identified certain material weaknesses as of September 30, 2019 related to our Life Sciences segment.  In particular, the Company had inadequate controls over the following:

(1) recording of sales orders and timeliness of revenue recognition in accordance with ASC Topic 606, Revenue from Contracts with Customers – Principal Agent Consideration (“ASC Topic 606”),

(2) recording of journal entries and approvals,

(3) payroll recording and processing of payroll changes,

(4) vendor setup and creation,

(5) documentation of inventory cycle count results, and

(6) recording of inventory and updating of standard costing worksheets used in the valuation of inventory.

In addition, a number of deficiencies were identified related to the design, implementation and effectiveness of certain information technology general controls, including segregation of duties, user access, change management, data back-ups and review of SOC 1 and 2 reports from critical vendors, some of which could have a direct impact on the Company’s financial reporting.

Global Logistics Services

As of September 30, 2019, management determined that, with respect to the Company’s Global Logistics Services segment, management did not have an effective process or control in place to perform an assessment of gross versus net revenue recognition criteria in accordance with ASC Topic 606.  In addition, during the three months ended June 30, 2020, management identified a material weakness related to the prevention and timely detection of funds transfers to an unauthorized account, for which remediation actions have been undertaken as more fully described below.  The new controls have not operated for a sufficient time to conclude the material weakness has been remediated by the end of the period covered by this Quarterly Report on Form 10-Q.

Based on its assessment and the material weaknesses described above, management concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2019 and that the material weaknesses identified as of that date and thereafter had not been remediated by the end of the period covered by this Quarterly Report on Form 10-Q.

Our management performed analyses, substantive procedures and other post-closing activities with the assistance of consultants and other professional advisors in order to ensure the validity, completeness and accuracy of our income tax provision and accounting for complex and/or non-routine transactions and the related disclosures. Accordingly, our management believes that the financial statements included in this Form 10-Q as of June 30, 2020 are fairly presented, in all material respects, and in conformity with U.S. GAAP.

Remediation Plan

We have engaged an external consultant to assist in the development and execution of a plan to remediate the material weaknesses related to our Life Sciences segment noted above. This process commenced during the second quarter of fiscal 2020 and is ongoing.

We have developed and are executing on our plan to remediate our material weaknesses in connection with the information technology controls and have expanded our in-house expertise on information technology general controls, as well as continuing to consult with external third parties. We have implemented improved information technology general controls, including segregation of duties, user access, change management, data back-ups and review of SOC 1 and 2 reports from critical vendors on a consistent basis. This process commenced during the fourth quarter of fiscal 2018 and is ongoing.

With respect to our Global Logistics Services segment, we have implemented a new system triggered revenue recognition process based on target dates (e.g., delivery date, file transfer date, etc.) for specific file types. Through this technology and reporting improvement, we have enhanced our ability to timely monitor revenue recognition in accordance with GAAP. Moreover, in response to the material weakness related to the prevention and timely detection of funds transfers to unauthorized accounts, we have updated company policies and controls to provide for multifactor authentication, implemented a new payment processing validation procedure, updated internal firewall protocols related to e-mails and conducted updated training on finance-related internal controls policies.

Our management believes that the foregoing efforts will effectively remediate the material weaknesses. That said, the new and enhanced controls have not operated for a sufficient amount of time to conclude that the material weaknesses have been remediated.  As we continue to evaluate and work to improve our internal control over financial reporting, our management may decide to take additional measures to address the material weaknesses or modify the remediation plan described above.

Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those controls determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our executive management team, together with our board of directors, is committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity.

Changes in Internal Control over Financial Reporting

As disclosed above under “Remediation Plan,” there were changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

Janel is occasionally subject to claims and lawsuits which typically arise in the normal course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows.

In December 2017, Janel Group received a Notice of Copyright Infringement letter from counsel for Warren Communications News, Inc. (“Warren”), the publisher of the International Trade Today (“ITT”) newsletter. On May 11, 2020, the parties reached a settlement agreement and release to resolve any and all concerns between the parties, voluntarily and without admission of copyright infringement.

ITEM 1A.
  RISK FACTORS

For a discussion of the Company’s potential risks or uncertainties, please see “Part I—Item 1A—Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Other than as discussed in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020, there have been no material changes to the risk factors disclosed in Part I—Item 1A of the Company’s 2019 Annual Report.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the nine months ended June 30, 2020. In addition, there were no shares of common stock purchased by us during the nine months ended June 30, 2020.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.
OTHER INFORMATION

None.

ITEM 6.

Exhibit No.
 
   
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer (filed herewith)
   
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer (filed herewith)
   
Section 1350 Certification of Principal Executive Officer (filed herewith)
   
Section 1350 Certification of Principal Financial Officer (filed herewith)
   
101
Interactive data files providing financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 for the nine months ended June 30, 2020 and 2019 in XBRL (Extensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2020 and September 30, 2019, (ii) Consolidated Statements of Operations for the nine months ended June 30, 2020 and 2019, (iii) Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended June 30, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the nine months ended June 30, 2020 and 2019, and (v) Notes to Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

JANEL CORPORATION
 
Registrant
   
 
 
 
Chairman, President and Chief Executive Officer
 
(Principal Executive Officer)

JANEL CORPORATION
 
Registrant
   
 
 
 
Principal Financial Officer, Treasurer and Secretary


41


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
11/14/29
6/14/28
11/5/25
7/1/25
8/30/24
10/17/22
4/19/22
11/20/21
6/22/21
11/5/20
11/1/20
10/1/204,  4/A
9/24/20
8/14/204
Filed on:8/7/20
7/23/20
7/22/208-K
7/1/208-K
For Period end:6/30/20
6/19/20
5/14/20
5/11/2010-Q
4/24/20
4/23/208-K
4/19/208-K
4/9/20
3/31/2010-Q
3/27/20
3/11/20
2/4/208-K,  8-K/A
1/1/20
12/15/19
11/18/19
10/1/194
9/30/1910-K,  NT 10-K,  NT 10-K/A
9/6/198-K
7/1/19
6/30/1910-Q,  NT 10-Q
3/21/19
1/1/19
12/15/18
11/20/188-K
10/17/18
10/1/184
9/30/1810-K,  NT 10-K
6/22/18
6/21/188-K
5/8/183,  8-K
3/2/18
10/17/178-K,  8-K/A
5/12/1710-Q,  4
3/21/168-K,  8-K/A
10/30/133,  4,  8-K
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