JANEL CORPORATION The following discussion and analysis should be read in conjunction with our
unaudited interim consolidated financial statements and related notes thereto as
of and for the six months ended
As used throughout this Report, "we," "us", "our," "Janel," "the Company,"
"Registrant" and similar words refer to
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Table of Contents 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
COVID-19
The outbreak of COVID-19 has had a significant impact on global trade and our
business. In late
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Table of Contents
In our Global Logistics Services segment, customer demand for our services in
many parts of our business has been materially and negatively impacted by the
mandated closure of our customers' operations or points of sale, while customer
demand for our services in other parts of our business has increased
significantly as consumers stockpile goods or switch to e-commerce platforms to
make purchases. We are unable to accurately predict the impact that COVID-19
will have on our operations going forward due to uncertainties regarding the
severity and duration of the outbreak and additional actions that may be taken
by governmental authorities. That said, we currently expect that our results of
operations and financial condition will be even more significantly adversely
impacted in the third quarter and fourth quarters of 2020 and subsequent periods
than in the quarter ended
The magnitude of the COVID-19 pandemic, including the extent of any impact on our business, financial position, results of operations or liquidity, which could be material, cannot be reasonably determined at this time due to the rapid development and fluidity of the situation. The effects of the pandemic on our business will depend on its duration and severity, whether business disruptions will continue, the pace of recovery once the pandemic subsides and the overall long-term impact on the global economy.
OVERVIEW
Janel is a holding company with subsidiaries in three business segments: Global Logistics Services, Manufacturing and Life Sciences. The company strives to create shareholder value primarily through three strategic priorities: supporting its businesses' efforts to make investments and to build long-term profits; allocating Janel's capital at high risk-adjusted rates of return; and attracting and retaining exceptional talent.
A management group at the holding company level (the "corporate group") focuses on significant capital allocation decisions, corporate governance and supporting Janel's subsidiaries where appropriate. Janel expects to grow through its subsidiaries' organic growth and by completing acquisitions. We plan to either acquire businesses within our existing segments or expand our portfolio into new strategic segments. Our acquisition strategy focuses on reasonably-priced companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings power.
Global Logistics Services
The Company's Global Logistics Services segment is comprised of several
wholly-owned subsidiaries (collectively "
On
On
Manufacturing
The Company's Manufacturing segment is comprised of
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Table of Contents Life Sciences
The Company's Life Sciences segment is comprised of
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
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
The Company's consolidated financial statements have been prepared in accordance
with
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.
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Table of Contents 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,
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.
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Table of Contents 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
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.
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Table of Contents 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
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
The following table sets forth a reconciliation of operating income to adjusted
operating income:
Three Months Ended Six Months Ended
March 31, March 31,
2020 2019 2020 2019
(in thousands) (in thousands)
Operating (loss) income $ (831 ) $ 442 $ (872 ) $ 1,332
Amortization of intangible assets(1) 243 236 486 444
Stock-based compensation(2) 75 107 149 236
Amortization of acquired inventory
valuation(3) 227 67 447 129
Adjusted operating income $ (286 ) $ 852 $ 210 $ 2,141 --------------------------------------------------------------------------------
(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.
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Table of Contents
Results of Operations - Segment Financial Results - Three and Six Months Ended
The following table sets forth our segment financial results:
Three Months Ended Six Months Ended
March 31, March 31,
2020 2019 2020 2019
(in thousands)
Revenue:
Global Logistics Services $ 15,328 $ 16,865 $ 31,407 $ 35,670
Manufacturing 2,056 2,452 3,926 4,533
Life Sciences 1,737 1,652 3,609 3,093
Total Revenues 19,121 20,969 38,942 43,296
Gross Profit:
Global Logistics Services 3,713 3,908 7,705 8,295
Manufacturing 1,148 1,375 2,173 2,523
Life Sciences 1,135 1,087 2,405 2,039
Total Gross Profit 5,996 6,370 12,283 12,857
Income (loss) from Operations:
Global Logistics Services (239 ) 440 115 1,467
Manufacturing 447 616 790 1,056
Life Sciences 64 363 354 608
Total Income from Operations by Segment 272 1,419 1,259 3,131
Corporate administrative expense (860 ) (741 ) (1,645 ) (1,355 )
Amortization expense (243 ) (236 ) (486 ) (444 )
Interest expense, net (141 ) (198 ) (304 ) (360 )
Net (loss) income before taxes (972 ) 244 (1,176 ) 972
Income tax benefit (expense) 35 (69 ) 119 (253 )
Net (loss) income $ (937 ) $ 175 $ (1,057 ) $ 719
Preferred stock dividends (175 ) (148 ) (326 ) (270 )
Net (Loss) Income available to Common ) )
Stockholders $ (1,112 $ 27 $ (1,383 $ 449 Results of Operations -
The following table sets forth our corporate group expenses:
Three Months Ended Six Months Ended
March 31, March 31,
2020 2019 2020 2019
(in thousands)
Corporate expenses $ 785 $ 582 $ 1,470 $ 1,045
Amortization of intangible assets 243 236 486 444
Stock-based compensation 37 142 111 236
Merger and acquisition expenses 38 17 64 74
Total corporate expenses $ 1,103 $ 977 $ 2,131 $ 1,799
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Table of Contents Expenses
Corporate expenses, which include amortization of intangible assets, stock-based
compensation and merger and acquisition expenses, increased by
Amortization of Intangible Assets
For the three months ended
Interest Expense
For the three months ended
Income Taxes
On a consolidated basis, the Company recorded an income tax benefit of
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
Net (Loss) Income
Net loss was (
(Loss) Income Available to Common Stockholders
Loss available to holders of common shares was (
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Table of Contents 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 Six Months Ended
March 31, March 31,
2020 2019 2020 2019
(in thousands)
Revenue $ 15,328 $ 16,865 $ 31,407 $ 35,670
Forwarding expenses 11,615 12,957 23,702 27,375
Net revenue 3,713 3,908 7,705 8,295
Gross profit margin 24.2 % 23.2 % 24.5 % 23.3 %
Selling, general & administrative 3,952 3,468 7,590 6,828
(Loss) income from operations
Revenue
Total revenue decreased 9.1% to
Total revenue for the six months ended
Net Revenue
Net revenue for the three months ended
Net revenue for the six months ended
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Table of Contents Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
Selling, general and administrative expenses for the six months ended
(Loss) Income from Operations
For the three months ended
For the six months ended
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 Six Months Ended
March 31, March 31,
2020 2019 2020 2019
(in thousands)
Revenue $ 2,056 $ 2,452 $ 3,926 $ 4,533
Cost of sales 908 1,077 1,753 2,010
Gross profit 1,148 1,375 2,173 2,523
Gross profit margin $ 55.8 % $ 56.1 % 55.3 % 55.7 %Selling, general & administrative 701 759 1,383 1,467 Income from Operations
$ 447 $ 616 $ 790 $ 1,056 Revenue
Total revenue decreased 16.1% to
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Table of Contents Gross Profit
Gross profit decreased 16.5% to
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 7.6% to
Income from Operations
Income from operations was
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 Six Months Ended
March 31, March 31,
2020 2019 2020 2019
(in thousands)
Revenue $ 1,737 $ 1,652 $ 3,609 $ 3,093
Cost of sales 602 565 1,204 1,054
Gross profit 1,135 1,087 2,405 2,039
Gross profit margin 65.3 % 65.8 % 66.6 % 65.9 %Selling, general & administrative 1,071 724 2,051 1,431 Income from Operations
$ 64 $ 363 $ 354 $ 608 Revenue
Total revenue was
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Table of Contents Gross Profit and Gross Profit Margin
Gross profit was
Gross profit was
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
Income from Operations
Income from operations for the three months ended
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
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The COVID-19 pandemic has negatively impacted our liquidity and cash flows. As
discussed in greater detail in note 17 to the consolidated financial statements,
on
As of
Janel's cash flow performance for the three and six-months ended
Cash flows from operating activities
Net cash provided by operating activities for the six months ended
Cash flows from investing activities
Net cash used in investing activities totaled
Cash flows from financing activities
Net cash used in financing activities was (
Off-Balance Sheet Arrangements
As of
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