UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended June 30, 2018

 

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)

 

 

 

Registrant's telephone number, including area code: (516) 256-8143

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.

 

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 Exchange Act).

Yes           No

 

The number of shares of Common Stock outstanding as of August 14, 2018 was 567,951.

 

 

JANEL CORPORATION

 

QUARTERLY REPORT ON FORM 10-Q

For Quarterly Period Ended June 30, 2018

 

 

			Page
Part I - Financial Information
	Item 1.	Financial Statements:
		Consolidated Balance Sheets as of June 30, 2018 (unaudited) and September 30, 2017	3
		Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2018 and 2017 (unaudited)	4
		Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2018 (unaudited)	5
		Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2018 and 2017 (unaudited)	6
		Notes to Consolidated Financial Statements (unaudited)	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 4.	Controls and Procedures	33
Part II - Other Information
	Item 1.	Legal Proceedings	35
	Item 6.	Exhibit Index	35
		Signatures	36

 

 

 

 

JANEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

		June 30,				September 30,
		2018				2017
		(Unaudited)
ASSETS
Current Assets:
Cash		$	518,682			$	987,848
Accounts receivable, net of allowance for doubtful accounts			17,395,658				14,983,100
Inventory			2,046,875				349,813
Prepaid expenses and other current assets			514,253				324,745
Total current assets			20,475,468				16,645,506
Propert and Equipment, net			3,900,323				392,827
Other Assets:
Intangible assets, net			12,266,284				11,848,598
Goodwill			11,697,685				9,745,191
Security deposits and other long term assets			260,584				115,493
Total other assets			24,224,553				21,709,282
Total assets		$	48,600,344			$	38,747,615
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit		$	7,994,176			$	6,138,537
Note payable - related party			-				500,000
Accounts payable - trade			15,185,085				13,325,689
Accrued expenses and other current liabilities			2,737,567				1,572,124
Dividends payable			1,422,064				1,125,291
Current portion of long-term debt			896,860				857,148
Total current liabilities			28,235,752				23,518,789
Other Liabilities:
Long-term debt
Long-term debt			4,053,069				3,003,392
Subordinated promissory notes			343,807				-
Mandatorily redeemable non-controlling interest			671,110				671,110
Deferred income taxes			890,608				257,072
Other liabilities			224,663				78,568
Total other liabilities			6,183,257				4,010,142
Total liabilities		$	34,419,009			$	27,528,931
Stockholders' Equity:
Preferred Stock, $0.001 par value; 100,000 shares authorized
Series A 20,000 shares authorized and 20,000 shares issued and outstanding			20				20
Series B 5,700 shares authorized and 1,271 shares issued and outstanding			1				1
Series C 20,000 shares authorized and 20,000 shares issued and outstanding at June 30, 2018 and 14,205 shares issued and outstanding at September 30, 2017 liquidation value $12,918,477 and $8,224,204 as of June 30, 2018 and September 30, 2017, respectively			21				15
Common stock, $0.001 par value; 4,500,000 shares authorized, 587,951 issued and 567,951 outstanding as of June 30, 2018 and 573,951 issued and 553,951 outstanding as of September 30, 2017			588				574
Paid-in capital			15,328,371				12,312,054
Treasury stock, at cost, 20,000 shares			(240,000	)			(240,000	)
Accumulated deficit			(907,666	)			(853,980	)
Total stockholders' equity			14,181,335				11,218,684
Total liabilities and stockholders' equity		$	48,600,344			$	38,747,615

 

 

 

The accompanying notes are an integral part of these consolidated financial statements. 

JANEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		June 30,				June 30,				June 30,				June 30,
		2018				2017				2018				2017
Revenue:
Global logistic services		$	20,068,239			$	17,963,837			$	55,596,397			$	49,499,193
Manufacturing			2,431,019				2,283,041				6,531,403				6,444,205
Total Revenues			22,499,258				20,246,878				62,127,800				55,943,398
Cost and Expenses:
Forwarding expenses			16,310,873				14,455,926				44,920,963				39,810,183
Cost of revenues - manufacturing			940,327				989,313				2,528,047				2,888,458
Selling, general and administrative			5,031,499				3,986,752				13,911,039				11,140,897
Amortization of intangible assets			200,186				195,666				594,311				578,997
Total Costs and Expenses			22,482,885				19,627,657				61,954,360				54,418,535
Income from Operations			16,373				619,221				173,440				1,524,863
Other Items:
Interest expense net of interest income			(107,049	)			(184,280	)			(340,877	)			(566,807	)
(Loss) income  from Continuing Operations Before Income Taxes			(90,676	)			434,941				(167,437	)			958,056
Income tax benefit (expense)			73,633				(169,139	)			113,751				(348,802	)
(Loss) income from Continuing Operations			(17,043	)			265,802				(53,686	)			609,254
Loss from discontinued operations, net of tax			-				(9,331	)			-				(46,878	)
Net (loss) income			(17,043	)			256,471				(53,686	)			562,376
Preferred stock dividends			(110,990	)			(127,706	)			(308,024	)			(383,118	)
Gain on extinguishment of Preferred Stock Series C dividends			-				-				1,311,712				-
Net (Loss) Income  Available to Common Shareholders		$	(128,033	)		$	128,765			$	950,002			$	179,258
(Loss) income per share from continuing operations:
Basic		$	(0.03	)		$	0.48			$	(0.09	)		$	1.07
Diluted		$	(0.03	)		$	0.42			$	(0.09	)		$	0.88
Loss per share from discontinued operations:
Basic		$	-			$	(0.02	)		$	-			$	(0.08	)
Diluted		$	-			$	(0.02	)		$	-			$	(0.07	)
Net (loss) income per share attributable to common stockholders:
Basic		$	(0.22	)		$	0.23			$	1.67			$	0.32
Diluted		$	(0.22	)		$	0.21			$	1.67			$	0.26
Weighted average number of shares outstanding:
Basic			576,285				553,951				569,181				567,309
Diluted			576,285				625,997				569,181				693,332

 

 The accompanying notes are an integral part of these consolidated financial statements.

JANEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

Nine Months Ended June 30, 2018

(Unaudited)

		PREFERRED STOCK								COMMON STOCK								PAID-IN				TREASURY STOCK								RETAINED				TOTAL
		SHARES				$				SHARES				$				CAPITAL				SHARES				$				EARNINGS				EQUITY
Balance - September 30, 2017			35,476			$	36				573,951			$	574			$	12,312,054				20,000			$	(240,000	)		$	(853,980	)		$	11,218,684
Issuance of Series C preferred stock			5,795				6				-				-				2,897,494				-				-				-				2,897,500
Net loss			-				-				-				-				-				-				-				(53,686	)			(53,686	)
Dividends to preferred stockholders			-				-				-				-				(308,024	)			-				-				-				(308,024	)
Dividend to non-controlling interest			-				-				-				-				(50,364	)			-				-				-				(50,364	)
Stock based compensation			-				-				-				-				431,725				-				-				-				431,725
Stock option exercise			-				-				14,000				14				45,486				-				-				-				45,500
Balance - June 30, 2018			41,271			$	42				587,951			$	588			$	15,328,371				20,000			$	(240,000	)		$	(907,666	)		$	14,181,335

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

JANEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended June 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(53,686	)		$	562,376
Plus (loss) from discontinued operations			-				46,878
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for uncollectible accounts			(9,877	)			82,460
Depreciation			75,298				85,291
Deferred income tax			(86,558	)			259,896
Amortization of intangible assets			594,311				578,997
Amortization of imputed interest			-				21,526
Amortization of loan costs			7,500				-
Stock based compensation			577,820				173,143
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable			(1,573,405	)			(753,105	)
Inventory			70,087				24,510
Prepaid expenses and sundry current assets			(69,556	)			(87,655	)
Security deposits and other long term assets			(20,091	)			-
Accounts payable and accrued expenses			1,606,994				1,881,247
Net cash provided by continuing operations			1,118,837				2,875,564
Net cash used in discontinued operations			-				(46,878	)
Net cash provided by operating activities			1,118,837				2,828,686
Cash Flows From Investing Activities:
Acquisition of property and equipment			(96,700	)			(136,118	)
Cash acquired from acquisition			-				115,986
Acquisition of subsidiary			-				(100,000	)
Note receivable			(125,000	)			-
Acquisition of Aves, net of cash acquired			(1,902,910	)			-
Acquisition of GTRI, net of cash acquired			(418,149	)			-
Acquisition of Antibodies, net of cash acquired			(4,364,158	)			-
Net cash used in investing activities			(6,906,917	)			(120,132	)
Cash Flows From Financing Activities:
Dividends paid to preferred stockholder			(11,250	)			(11,250	)
Dividends paid to minority shareholder			(50,364	)			-
Repayments of term loan			(935,361	)			(1,032,951	)
Proceeds from senior secured term loan			2,024,750				-
Proceeds from sale of Series C Preferred Stock			2,897,500				-
Proceeds from stock option exercise			45,500				-
Line of credit, proceeds, net			1,848,139				-
Repayment of notes payable - related party			(500,000	)			(500,000	)
Treasury stock acquisition			-				(240,000	)
Net cash provided by (used in) in financing activities			5,318,914				(1,784,201	)
Net (decrease) increase in cash			(469,166	)			924,353
Cash at beginning of the period			987,848				965,115
Cash at end of period		$	518,682			$	1,889,468
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	326,565			$	545,281
Income taxes		$	61,650			$	145,470
Non-cash investing activities:
Subordinated promissory notes of Antibodies		$	343,807			$	-
Contingent earn-out acquisition of Aves		$	497,600			$	-
Non-cash financing activities:
Dividends declared to preferred stockholders		$	296,774			$	371,868

 

 

 The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

The accompanying interim unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of Article 10 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/A as filed with the Securities and Exchange Commission.

Business description

 

The Company operates its business as two distinct segments: Global Logistics Services and Manufacturing.

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 April 1, 2017, the Company acquired W.J. Byrnes & Co. ("Byrnes"), a global logistics services provider with five U.S. locations.

Manufacturing

On January 3, 2018, the Company acquired Global Trading Resources, Inc. ("GTRI"), a full-service cargo transportation logistics management services provider, which provides freight forwarding via air-, ocean- and land-based carriers, customs brokerage services, warehousing and distribution services, and other value-added logistics services. See note 3.

The Company's manufacturing segment is comprised of Indco, Inc. ("Indco"), Aves Labs, Inc. ("Aves") and Antibodies Incorporated ("Antibodies").  Indco, which is a majority-owned subsidiary of the Company, manufactures and distributes mixing equipment and apparatus for specific applications within various industries. The customer base is comprised of small- to mid-sized businesses as well as repetitive production orders for other larger customers. Aves is a wholly-owned subsidiary of the Company and is a manufacturer and distributor of high-quality antibodies and other immunoreagents for biomedical research and antibody manufacturing.  Antibodies is a wholly-owned subsidiary of the Company and is a manufacturer and distributor of monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and a developer and practitioner of ImmunoAssays for academic and industry research scientists.

On March 5, 2018, the Company acquired all of the outstanding common stock of Aves. See note 3.

On June 22, 2018, the Company acquired Antibodies via merger. See note 3.

Basis of consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as Indco, which Janel owns 91.65% of, with a non-controlling interest held by existing Indco management. The Indco non-controlling interest is mandatorily redeemable and is recorded as a liability. See note 1. 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 the potential impairment of goodwill and intangible assets with indefinite lives, the impairment of other long-lived assets, the valuation of acquisitions, the valuation of mandatorily redeemable non-controlling interests, gain on extinguishment of dividends on our Series C Cumulative Preferred Stock and the realization of deferred tax assets. Actual results could differ from those estimates.

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

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, 2018 and September 30, 2017 was $157,000 and $169,000, 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. 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, repairs and minor renewals are recorded as expenses when incurred. Replacements and major renewals are capitalized.

 

Business segment information

 

The Company operates in two reportable segments: Global Logistics Services and Manufacturing. 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 

 

Global Logistics Services

 

Revenues are derived from customs brokerage services and from freight forwarding services. Total revenues consist of the total dollar value of goods and services purchased from us by customers. Our gross margin is our total revenues less purchased transportation and related services, including contracted motor carrier, rail, ocean, air, and other costs, and the purchase price and services related to the products we source. We act principally as the service provider for these transactions and recognize revenue as these services are rendered or goods are delivered. At that time, our obligations to the transactions are completed and collection of receivables is reasonably assured. Most transactions in our transportation and sourcing businesses are recorded at the gross amount we charge our customers for the service we provide and the goods we sell. In these transactions, we are the primary obligor, we have credit risk, we have discretion to select the supplier, and we have latitude in pricing decisions. Certain transactions in customs brokerage, managed services, freight forwarding, and sourcing are recorded at the net amount we charge our customers for the service we provide because many of the factors stated above are not present.

Manufacturing

 

Revenues from Indco are derived from the engineering, manufacture, and delivery of specialty mixing equipment. Revenues from Aves are derived from the sale of high-quality antibodies and other immunoreagents for biomedical research and antibody manufacturing.  Revenues from Antibodies are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and antibody manufacturing.  Payments are received by either credit card or invoice by Indco, Aves and Antibodies. A significant portion of Indco sales come from print- and web-based catalog and specification features. Such online sales are generally credit card purchases. Revenues from Indco, Aves and Antibodies are recognized when products are shipped and risk of loss transfers to the carrier(s) used.

 

 

 

Income 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 ("Accounting Standards Codification") Topic 718, "Compensation-Stock Compensation." For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for restricted shares; the expense is recognized over the service period for awards expected to vest.

 

Stock-based compensation to non-employees

Liability classified share-based awards

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

These awards are classified as liability awards, measured at fair value at the date of grant and re-measured at fair value at each reporting date up to and including the settlement date. The determination of the fair value of the share units under these plans is described in note 10. The fair value of the awards is expensed over the respective vesting period of the individual awards with recognition of a corresponding liability. Changes in fair value after vesting are recognized through compensation expense. Compensation expense reflects estimates of the number of instruments expected to vest. The impact of forfeitures and fair value revisions, if any, are recognized in earnings such that the cumulative expense reflects the revisions, with a corresponding adjustment to the settlement liability. Liability-classified share unit liabilities due within 12 months of the reporting date are presented in trade and other payables while settlements due beyond 12 months of the reporting date are presented in non-current liabilities.

Non-employee share-based awards

The Company accounts 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 are 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.

 

Mandatorily Redeemable Non-Controlling Interests

 

 

 

 

 

 

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.

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (the "Tax Reform Act"), which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 34% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. As a result of the enactment of the Tax Reform Act, the Company recorded an additional one-time income tax benefit of $49,284 during the first quarter of fiscal 2018 related to the re-measurement of certain deferred tax assets, primarily net operating losses.

Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the entities expect to receive in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The FASB subsequently issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to address issues arising from implementation of the new revenue recognition standard. ASU 2014-09 and ASU 2016-10 are effective for interim and annual periods beginning after December 15, 2017, and may be adopted earlier, but not before December 15, 2017. The revenue standards are required to be adopted by taking either a full retrospective or a modified retrospective approach. The Company anticipates the adoption of this standard may change the timing of revenue recognition for our transportation business from at delivery to over the transit period as our performance obligation is completed. Due to the short transit period of many of our performance obligations, we do not expect this change to have a material impact on our results of operations, financial position, or cash flows once implemented.

The Company's approach to implementing the new standard includes performing a detailed review of key contracts representative of its different businesses and comparing historical accounting policies and practices to the new standard. The guidance permits two methods of adoption, retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company is continuing to assess the impact on our consolidated financial statements by finalizing our location surveys, reviewing unique customer contract terms, and developing processes to manage the changes in the revenue recognition guidance and gather information for the required disclosures. The company expects this process will be completed during the fourth quarter of fiscal year 2018.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements and related disclosures.

Reclassifications

Prior period 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.

 

 

 

 

 

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

 

			June 30,		September 30,
			2018		2017		Life
	Building and improvements		$    2,330,000		$                      -		15-30 years
	Land and improvements		825,021		-		Indefinite
	Furniture and Fixture		230,905		167,097		3-7 years
	Computer Equipment		302,558		234,396		3-5 years
	Machinery & Equipment		1,015,883		721,125		3-15 years
	Leasehold Improvements		86,291		86,291		3-5 years
			4,790,658		1,208,909
	Less Accumulated Depreciation		(890,335)		(816,082)
			$    3,900,323		$       392,827

Depreciation expense for the three months ended June 30, 2018 and 2017 was $24,741 and $28,332, respectively. Depreciation expense for the nine months ended June 30, 2018 and 2017 was $75,298 and $85,291, respectively.

 

(A)

Global Trading Resources, Inc.

The Company acquired all of the outstanding common stock of GTRI effective as of January 3, 2018 for $527,511. A 338(h)(10) election was made in connection with the GTRI acquisition, and the acquisition will be treated as an asset purchase for income tax purposes, which will allow for the deduction of GTRI's goodwill. The acquisition of GTRI was funded with cash provided by normal operations. The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. GTRI provides full-service 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. GTRI was established in 1994 and is headquartered in Portland, Oregon. The results of operations for GTRI will be in the Global Logistics Service reporting segment.  Acquisition expenses associated with GTRI acquisition amounted to $23,916 for the nine months ended June 30, 2018 and is included in selling general and administrative expenses. For the three and nine months ended June 30, 2018, the gross margin, selling general and administrative expense and loss from operations of GTRI amounted to and $224,063 and $511,387, $309,523 and $651,198 and $85,460 and $139,811, respectively.

Purchase price allocation

In accordance with the acquisition method of accounting, the Company allocated the consideration paid for GTRI to the net tangible and identifiable intangible assets based on their estimated fair values. The Company is still finalizing the valuation of assets acquired and liabilities assumed, and, as such, the fair value amounts noted in the table below are preliminary and subject to change. Primary amounts subject to adjustment include, but are not limited to, intangible assets, fair value of accounts receivable and the potential for the recognition of a gain on bargain purchase or a change in the goodwill balance. Such changes in the fair values from those listed below could be significant.  Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.

 

 

 

 

 

The Company acquired all of the outstanding common stock of Aves effective March 5, 2018 for $2,497,000. At closing, $1,975,000 was paid in cash and $497,000 was recorded in accrued expenses as a preliminary earnout consideration.  If Aves manufactures certain products set forth in the purchase agreement, the earnout consideration is payable no later than thirty days following the determination that the applicable earnout condition has been satisfied. For the earnout consideration to be payable, the earnout condition must be satisfied no later than one hundred eighty days following the closing, or September 1, 2018. A 338(h)(10) election was made in connection with the Aves acquisition, and this acquisition will be treated as an asset purchase for income tax purposes, which will allow for the deduction of Aves goodwill. The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. Aves provides high-quality antibodies and other immunoreagents for biomedical research and antibody manufacturing. Aves was established in 1997 and is headquartered in Tigard, Oregon. The results of operations for Aves will be reported in our Manufacturing segment. Acquisition expenses associated with Aves acquisition amounted to $72,852 for the nine months ended June 30, 2018 and is included in selling general and administrative expenses. Aves results for the period from acquisition through June 30, 2018 are included in the results of operations for the three-month and nine-month periods ended June 30, 2018. Aves results for the period from acquisition through June 30, 2018 are included in the results of operations for the three-month and nine-month periods ended June 30, 2018. This includes revenues, cost of goods sold, selling, general and administrative expense and net income from operations of Aves amounted to $283,583 and $364,635, and $113,964 and $154,226, and $116,883 and $147,978 and $52,857 and $62,552, respectively.

Purchase price allocation

 

In accordance with the acquisition method of accounting, the Company allocated the consideration paid for Aves to the net tangible and identifiable intangible assets based on their estimated fair values. The Company is still finalizing the valuation of assets acquired and liabilities assumed and, as such, the fair value amounts noted in the table below are preliminary and subject to change. Primary amounts subject to adjustment include, but are not limited to, inventory, intangible assets, fair value of accounts receivable and the potential for the recognition of a gain on bargain purchase or a change in the goodwill balance. Such changes in the fair values from those listed below could be significant.

 

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.

 

The Company acquired Antibodies via a merger that closed effective June 22, 2018 for $4,707,965, net of $226,767 cash received. At closing, the former stockholders of Antibodies were paid $4,364,158 in cash and certain former stockholders were issued an aggregate amount of $343,807 in subordinated promissory notes.  The acquisition of Antibodies was funded with cash provided by normal operations in the amount of $1,168,675, the sale of Series C Preferred Stock in the amount of $1,397,500, a senior secured term loan in the amount of $2,024,750, and $343,807 in subordinated promissory notes to certain former shareholders of Antibodies. The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. Antibodies is a manufacturer and distributor of monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and a developer and practitioner of ImmunoAssays for academic and industry research scientists. Antibodies was founded in 1960 and is headquartered in Davis, California. The results of operations for Antibodies will be reported in our Manufacturing segment.  Acquisition expenses associated with Antibodies acquisition amounted to $244,625 for the three months ended June 30, 2018 and are included in selling general and administrative expenses.  Antibodies' results for the period from acquisition through June 30, 2018 have not been included in the results of operations for the three-month period ended June 30, 2018, due to the timing of the acquisition on June 22, 2018.

 

 

 

 

Purchase price allocation

 

In accordance with the acquisition method of accounting, the Company allocated the consideration paid for Antibodies to the net tangible and identifiable intangible assets based on their estimated fair values. The Company is still finalizing the valuation of assets acquired and liabilities assumed and, as such, the fair value amounts noted in the table below are preliminary and subject to change. Primary amounts subject to adjustment include, but are not limited to, inventory, intangible assets, fair value of accounts receivable, property and equipment, deferred taxes and goodwill. Such changes in the fair values from those listed below could be significant. The Company made preliminary estimates as of June 30, 2018 since there was insufficient time between the acquisition date and the end of the period to finalize the analysis.

 

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.

Accounts receivable		$	410,615
Inventory			475,287
Prepaids			111,688
Property & equipment, net			3,454,516
Intangibles - trademark			229,000
Intangibles - other			305,000
Goodwill			1,033,574
Accounts payable			(301,510	)
Accrued expenses			(290,111	)
Deferred Income Taxes			(720,094	)
Purchase price, net of cash received		$	4,707,965

 

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

		June 30,		September 30,
		2018		2017		Life
Customer relationships		$   11,902,000		$   11,690,000		15-20 years
Trademarks / names		2,046,000		1,770,000		20 years
Other		584,000		60,000		2-5 years
		14,532,000		13,520,000
Less: Accumulated Amortization		(2,265,716)		(1,671,402)
		$  12,266,284		$   11,848,598

 

 

Amortization expense for the three months ended June 30, 2018 and 2017 was $200,186 and $195,666, respectively. Amortization expense for the nine months ended June 30, 2018 and 2017 was $594,311 and $578,997, respectively.

 

 

On March 27, 2014, Janel Corporation and several of its Janel Group subsidiaries (collectively, the "Janel Borrowers") entered into a Loan and Security Agreement (the "Presidential Loan Agreement") with Presidential Financial Corporation with respect to a revolving line of credit facility (the "Presidential Facility"). At September 30, 2017, the Presidential Facility provided that the Janel Borrowers could borrow up to $10.0 million, limited to 85% of the Janel Borrowers' aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Presidential Loan Agreement. Interest accrued at an annual rate equal to 5% above the greater of (a) the prime rate of interest quoted in The Wall Street Journal from time to time, or (b) 3.25%. The Janel Borrowers' obligations under the Presidential Facility were secured by all of the assets of the Janel Borrowers. The Presidential Facility was terminated on October 17, 2017, and the Company replaced the Presidential Facility with the Santander Bank Facility (see below).

At September 30, 2017, outstanding borrowings under the Presidential Facility were $6,138,537, representing 80.3% of the $7,643,380 available thereunder, and interest was accruing at an effective interest rate of 7.5%. The Janel Borrowers were in compliance with the covenants defined in the Presidential Loan Agreement as of September 30, 2017.

 

 

 

On October 17, 2017, the Janel Group subsidiaries (collectively the "Janel Group Borrowers"), with Janel Corporation as a guarantor, entered into a Loan and Security Agreement (the "Santander Loan Agreement") with Santander Bank, N.A. ("Santander") with respect to a revolving line of credit facility (the "Santander Facility"). The Santander Facility provides that the Janel Group Borrowers can borrow up to $10.0 million, limited to 85% of the Janel Group Borrowers' aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Santander Loan Agreement. Interest accrues on the Santander Facility at an annual rate equal to, at the Janel Group Borrowers' option, Prime plus 0.50%, or LIBOR (30, 60 or 90 day) plus 2.50% subject to a LIBOR floor of 75 basis points. The Janel Group Borrowers' obligations under the Santander Facility are secured by all of the assets of the Janel Group Borrowers. The Santander Loan Agreement requires, among other things, that the Janel Group Borrowers, on a quarterly basis, maintain a Minimum Debt Service Coverage ratio, as defined in the Santander Loan Agreement. The loan is subject to earlier termination as provided in the Santander Loan Agreement and matures on October 17, 2020, unless renewed. The Santander Loan Agreement requires the Company to maintain a lock box with Santander in addition to containing certain subjective acceleration clauses. As a result of these terms, the loan is classified as a current liability on the consolidated balance sheet.

 

On March 21, 2018, the Janel Group Borrowers, the Company, and Aves entered into an amendment with Santander (the "Santander Amendment") with respect to the Santander Loan Agreement. Pursuant to the Santander Amendment, and among other changes effected by such Santander Amendment, Aves was added as a Loan Party Obligor (but not a Janel Group Borrower) under the Santander Loan Agreement, the maximum amount available under the Santander Loan Agreement was increased from $10.0 million to $11.0 million (subject to 85% of eligible receivables), the foreign account sublimit was increased from $1.5 million to $2.0 million, a one-time waiver was granted until May 31, 2018 for the stated event of default related to the delivery of the quarterly financial statements for the fiscal quarter ended December 31, 2017, and a one-time waiver, retroactive to March 5, 2018, of the provision that prohibits the Company from using proceeds of the revolving loan to finance acquisitions was granted for the purpose of partially funding the acquisition of Aves.

 

At June 30, 2018, outstanding borrowings under the Santander Facility were $7,994,176, representing 72.67% of the $11,000,000 available thereunder, and interest was accruing at an effective interest rate of 5.25%. As of March 31, 2018, Santander had granted the Janel Group Borrowers a one-time waiver until May 31, 2018 for an event of default related to the delivery of the quarterly financial statements for the fiscal quarter ended December 31, 2017.  Such event of default was subsequently remedied.  Other than as specifically referenced above, the Janel Group Borrowers were in compliance with the covenants defined in the Santander Loan Agreement as of June 30, 2018.

 

 

On March 21, 2016, Indco executed a Credit Agreement (the "First Merchants Credit Agreement") with First Merchants Bank with respect to a $6,000,000 term loan and $1,500,000 (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 3.75% (if Indco's cash flow leverage ratio is less than or equal to 2:1) or 4.75% (if Indco's cash flow leverage ratio is greater than 2:1). Interest accrues on the revolving loan at an annual rate equal to the one-month LIBOR plus 2.75%. Indco's obligations under the First Merchants Facility are secured by all of Indco's assets and are guaranteed by the Company. The First Merchants Credit Agreement requires, among other things, that Indco, on a monthly basis, not exceed a "maximum total funded debt to EBITDA ratio" and maintain a "minimum fixed charge covenant ratio," both as defined in the First Merchants Credit Agreement. The First Merchants Facility requires monthly payments until the expiration date on the fifth anniversary of the loan. The loan is subject to earlier termination as provided in the First Merchants Credit Agreement.

As of September 30, 2017, there were no outstanding borrowings under the revolving loan and $3,860,540 of borrowings under the term loan, and interest was accruing on the term loan at an effective interest rate of 4.98%.

  

 

 

 

As of June 30, 2018, there was $25,797 of outstanding borrowings under the revolving loan and $2,925,179 of borrowings under the term loan, with interest accruing on the term loan at an effective interest rate of 5.63%. Indco was in compliance with the covenants defined in the First Merchants Credit Agreement at both September 30, 2017 and June 30, 2018.

 

 

On June 21, 2018, AB Merger Sub, Inc., a wholly-owned, indirect subsidiary of the Company entered into a Business Loan Agreement (the "First Northern Loan Agreement") and Promissory Note with First Northern Bank of Dixon ("First Northern"), with respect to a $2,024,750 senior secured term loan (the "Senior Secured Term Loan"). The First Northern Loan Agreement and Promissory Note are dated and effective as of June 14, 2018. The proceeds of the Senior Secured Term Loan were used to fund a portion of the merger consideration to acquire Antibodies.  Interest will accrue on the Senior Secured Term Loan at an annual rate based on the five-year Treasury constant maturity (index) plus 2.50% (margin) for years one through five then adjusted and fixed for years six through ten using the same index and margin. The borrower's and the Company's obligations to First Northern under the First Northern Loan Agreement are secured by certain real property owned by Antibodies as of the closing of the Antibodies merger. The Senior Secured Term Loan will mature on June 14, 2028 (subject to earlier termination as provided in the First Northern Loan Agreement). The First Northern Loan Agreement requires, among other things, that the Borrowers, maintain certain Minimum Debt Service Coverage, Debt to Tangible Net Worth and Tangible Net Worth ratios as defined in the First Northern Loan Agreement.

As of June 30, 2018, the total amount outstanding under the Senior Secured Term Loan was $2,024,750, of which $1,985,038 is included in long term debt and $39,712 is included in current portion of long term debt, with interest accruing at an effective interest rate of 5.28%.  The financial covenants set forth in the First Northern Loan Agreement will commence for the period ending September 30, 2018.

On June 22, 2018, in connection with the Antibodies acquisition AB HoldCo, Inc. ("AB HoldCo"), a wholly-owned subsidiary of the Company, entered into subordinated promissory notes ("Subordinated Promissory Notes") with certain former shareholders of Antibodies. Both the Subordinated Promissory Notes are guaranteed by the Company.  The Subordinated Promissory Notes are subordinate to the terms of any credit agreement, loan agreement, indenture, promissory note, guaranty or other debt instrument pursuant to which AB HoldCo or any affiliate of AB HoldCo 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 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 has a maturity date of June 22, 2021. The outstanding principal amount of these notes are payable in a single payment on the three-year anniversary June 22, 2021. Both notes are subject to prepayment in whole or in part, without premium or penalty, the outstanding principal amount of the notes, together with all accrued but unpaid 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.

Amounts outstanding as of June 30, 2018 under the two Subordinated Promissory Notes were $45,916 and $296,891, respectively.

 

 

 

Debt - related party consists of the following:

 

During the nine months ended June 30, 2018 the Company made aggregate note repayments of $500,000. As a result, the related party debt was paid in full.

 

In 2012, the Company elected to discontinue the operations of its New Jersey warehousing business and the operations of its food sales segment. The Company earned no revenues from discontinued operations in three and nine months ended June 30, 2018 and 2017. Selling, general and administrative expenses associated with discontinued operations were $0 and ($46,878) for the nine months ended June 30, 2018 and 2017, respectively. Liabilities related to the discontinued operations as of September 30, 2017 were $74,350 and were included in accrued expenses and other current liabilities.

The cash flows from the discontinued business for the three and nine months ended June 30, 2017 were as follows:

 

 

The Company 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.

 

For the nine months ended June 30, 2018 and 2017, the Company declared preferred stock dividends of $308,024 and $383,118, respectively.

Series A Convertible Preferred Stock (the "Series A Stock") shares are convertible into shares of the Company's $0.001 par value common stock at any time on a one-share for one-share basis. The Series A Stock pays a cumulative cash dividend at a rate of $15,000 per year, payable quarterly.

 

Series B Convertible Preferred Stock (the "Series B Stock") shares 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.

 

 

 

 

Series C Cumulative Preferred Stock, (the "Series C Stock") shares were initially entitled to receive annual dividends at a rate of 7% per annum of the Original Issuance Price of $10, when and if declared by the Company's board of directors, such rate to increase by 2% annually beginning on the third anniversary of issuance of such Series C Stock to a maximum rate of 13%. By the filing of the Certificate of Amendment on October 17, 2017, the annual dividend rate decreased to 5% per annum of the Original issuance Price, when and if declared by the Company's board of directors, such rate to increase by 1% annually beginning on January 1, 2019 and 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, 2018 and 2017 was 5% and 7%, respectively. In the event of liquidation, holders of Series C Stock shall be paid an amount equal to the Original Issuance Price, plus any accrued but unpaid dividends thereon. Shares of 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 Series C Stock was $12,918,477 and $8,224,204 as of June 30, 2018 and September 30, 2017, respectively. The amendment on October 17, 2017 to the annual dividend rate decrease was treated as an extinguishment for accounting purposes and the fair value prior to modification was $7,705,120 and $6,172,898 after modification, for a change of $1,311,712. In accordance with ASC 260, "Earnings Per Share," this incremental benefit is treated as an adjustment to EPS for common stockholders.

On March 21, 2018, the Company sold 3,000 shares of the Series C Stock to an accredited investor at a purchase price of $500 per share, or an aggregate of $1,500,000.

On June 22, 2018, the Company sold 2,795 shares of the Series C Stock to an accredited investor at a purchase price of $500 per share, or an aggregate of $1,397,500.

Such shares issued on March 21, 2018 and June 22, 2018 were sold to an accredited investor in a private placement in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 and Regulation D promulgated thereunder.

 

 

On March 31, 2017, the Company acquired 20,000 shares of its common stock for an aggregate of $240,000. This amount was paid in April 2017.

 

 

On May 12, 2017, the Company adopted the 2017 Equity Incentive Plan (the "2017 Plan") pursuant to which (i) incentive stock options, (ii) non-statutory stock options, (iii) restricted stock awards, and (iv) 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 board of directors in its role as the Compensation Committee.  The 2017 Plan was amended and restated on May 8, 2018, as discussed in more detail in note 10.

 

In connection with the October 6, 2013 Securities Purchase Agreement with Oaxaca Group, LLC, the Company issued warrants, all of which are currently outstanding, to purchase an aggregate of 250,000 shares of common stock at $4.00 per share. The warrants expire on October 5, 2018. The Company has no other stock warrants outstanding.

 

On October 30, 2013, the board of directors adopted Janel's 2013 Non-Qualified Stock Option Plan (the "2013 Option Plan") providing for options to purchase up to 100,000 shares of common stock for issuance to directors, officers, and employees of and consultants to the Company and its subsidiaries. At June 30, 2018 and September 30, 2017, a total of 73,121 equity options, were outstanding under the 2013 Option Plan and 12,879 options were still available for issuance.

On May 12, 2017, the board of directors adopted the 2017 Plan pursuant to which (i) incentive stock options, (ii) non-statutory stock options, (iii) restricted stock awards, and (iv) stock appreciation rights with respect to up to 100,000 shares of the Company's common stock may be granted to directors, officers, and employees of and consultants to the Company. At June 30, 2018 and September 30, 2017, a total of 84,693 and 66,524 equity options and restricted stock awards, respectively, were outstanding under the 2017 Plan, and 15,307 and 33,476 shares, respectively, were still available for issuance.

On May 8, 2018, the board of directors of Janel amended and restated the 2017 Plan (as amended and restated, the "Amended 2017 Plan"). The provisions and terms of the Amended 2017 Plan are the same as those in the 2017 Plan, except that the Amended 2017 Plan removes the ability of Janel to award incentive stock options and removes the requirement for stockholder approval of the 2017 Plan.

 

 

 

Total stock-based compensation for the three months ended June 30, 2018 and 2017 amounted to $135,912 and $113,220, respectively, and was included in selling, general and administrative expense in the Company's statements of operations.  Total stock-based compensation for the nine months ended June 30, 2018 and 2017 amounted to $431,725 and $173,143, respectively, and was included in selling, general and administrative expense in the Company's statements of operations.

During the nine months ended June 30, 2018, 7,153 options were granted. The Company uses the Black-Scholes option pricing model to estimate the fair value of our share-based awards. In applying this model, the Company used the following assumptions:

 

 

 

The aggregate intrinsic value in the above table is calculated as the difference between the closing price of the Company's common stock at June 30, 2018 of $9.00 per share and the exercise price of the stock options that had strike prices below such closing price.

As of June 30, 2018, there was approximately $46,000 of total unrecognized compensation expense related to the unvested employee stock options. This expense is expected to be recognized over a weighted average period of less than one year.

There were no non-employee grants for the nine-month period ended June 30, 2018.

The aggregate intrinsic value in the above table is calculated as the difference between the closing price of the Company's common stock at June 30, 2018 of $9.00 per share and the exercise price of the stock options that had strike prices below such closing price.

As of June 30, 2018, there was approximately $182,000 of total unrecognized compensation expense related to the unvested stock options. This expense is expected to be recognized over a weighted average period of approximately 1.1 years.

 

 

 

Liability classified share-based awards

Additionally, during the nine months ended June 30, 2018, 25,321 options were granted on Indco's common stock. The Company uses the Black-Scholes option pricing model to estimate the fair value of Indco's share-based awards. In applying this model, the Company used the following assumptions:

  

The aggregate intrinsic value in the above table is calculated as the difference between the valuation price of Indco's common stock at June 30, 2018 of $12.07 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 compensation cost related to these options was $146,097 for the nine-month period ended June 30, 2018 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 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 a mandatorily redeemable security. 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, 2018, there was approximately $96,000 of total unrecognized compensation expense related to the unvested employee stock options. This expense is expected to be recognized over a weighted average period of approximately 1.2 years.

During the nine months ended June 30, 2018 there were no shares of restricted stock granted. Under the Amended 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 Amended 2017 Plan for the nine months ended June 30, 2018:

As of June 30, 2018, there was approximately $28,000 of total unrecognized compensation cost related to unvested employee restricted stock. The cost is expected to be recognized over a weighted-average period of less than one year. 

 

 

 

The following table summarizes the status of our non-employee unvested restricted stock under the Amended 2017 Plan for the nine months ended June 30, 2018:

 

As of June 30, 2018, there was approximately $175,000 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 1.1 years.

  

 

On December 22, 2017, the Tax Reform Act was signed into law. The Tax Reform Act included significant changes to existing law, including, among other items, a reduction to the U.S. federal statutory corporate tax rate from 34% to 21% effective January 1, 2018. ASC 740, "Income Taxes (Topic 740)," ("ASC 740") requires that the effects of changes in tax laws or rates be recognized in the period in which the law is enacted. Those effects, both current and deferred, are reported as part of the tax provision, regardless of income in which the underlying pretax income (expense) or asset (liability) was or will be reported.

 

The Company's estimated fiscal 2018 blended U.S. federal statutory corporate income tax rate of 24.2% was applied in the computation of the income tax provision for the three and nine months ended June 30, 2018. The blended U.S. federal statutory corporate tax rate of 24.2% represents the weighted average of the pre-enactment U.S. federal statutory corporate tax rate of 34% prior to the January 1, 2018 effective date and the post-enactment U.S. federal statutory corporate tax rate of 21% thereafter.

 

 

The following table provides a reconciliation of the basic and diluted (loss) income per share ("EPS") computations for the three and nine months ended June 30, 2018 and 2017:

 

		Three Months Ended								Nine Months Ended
		June 30,				June 30,				June 30,				June 30,
		2018				2017				2018				2017
Income:
Income from continuing operations		$	(17,043	)		$	265,802			$	(53,686	)		$	609,254
Loss from discontinued operations			-				(9,331	)			-				(46,878	)
Net income			(17,043	)			256,471				(53,686	)			562,376
Preferred stock dividends			(110,990	)			(127,706	)			(308,024	)			(383,118	)
Gain on extinguishment of Preferred stock dividends Series C			-				-				1,311,712				-
Net income (loss) income attributable to common stockholders		$	(128,033	)		$	128,765			$	950,002			$	179,258
Common Shares:
Basic - weighted average common shares			576,285				553,951				569,181				567,309
Effect of dilutive securities:
Stock options			-				50,775				-				104,752
Restricted stock			-				-				-				-
Warrants			-				-				-				-
Convertible preferred stock			-				21,271				-				21,271
Diluted - weighted average common stock			576,285				625,997				569,181				693,332

 

 

		Three Months Ended								Nine Months Ended
		June 30,				June 30,				June 30,				June 30,
		2018				2017				2018				2017
Income per Common Share:
Basic -
Income from continuing operations		$	(0.03	)		$	0.48			$	(0.09	)		$	1.07
Loss from discontinued operations			-				(0.02	)			-				(0.08	)
Net income			(0.03	)			0.46				(0.09	)			0.99
Preferred stock dividends			(0.19	)			(0.23	)			(0.54	)			(0.67	)
Gain on extinguishment of Preferred stock dividends Series C			-				-				2.30				-
Net income (loss) attributable to common stockholders		$	(0.22	)		$	0.23			$	1.67			$	0.32
Diluted -
Income from continuing operations		$	(0.03	)		$	0.42			$	(0.09	)		$	0.88
Loss from discontinued operations			-				(0.02	)			-				(0.07	)
Net income			(0.03	)			0.41				(0.09	)			0.81
Preferred stock dividends			(0.19	)			(0.20	)			(0.54	)			(0.55	)
Gain on extinguishment of Preferred stock dividends Series C			-				-				2.30				-
Net income (loss) attributable to common stockholders		$	(0.22	)		$	0.21			$	1.67			$	0.26

The computation for the diluted number of shares excludes unvested restricted stock, unexercised stock options and unexercised warrants that are anti-dilutive.

 

Potentially diluted securities as of June 30, 2018 and 2017 are as follows:

As of June 30, 2018, the Company operates in two reportable segments, Global Logistics Services and Manufacturing, supported by a corporate group which conducts activities that are non-segment specific. The following table presents selected financial information about the Company's reportable segments for the three and nine months ended June 30, 2018 and 2017:

 

 

 

   

 

 

 

The nature of Janel's operations requires it to deal with currencies other than the U.S. Dollar. This results in the Company being 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 tries to compensate for these exposures by accelerating international currency settlements among those agents.

 

 

The Company's assets that are exposed to concentrations of credit risk consist primarily of cash and receivables from customers. The Company places its cash with financial institutions that have high credit ratings. The receivables from clients are spread over many customers. The Company maintains an allowance for uncollectible accounts receivable based on expected collectability and performs ongoing credit evaluations of its customers' financial condition.

 

 

   

 

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 predicated 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 financial position or results of operations.

 

 

Sales to one major customer were approximately 10% and 12% for the three months ended June 30, 2018 and 2017, respectively. Sales to one major customer were approximately12% and 12% for the nine months ended June 30, 2018 and 2017, respectively.

  

  

The following discussion and analysis should be read in conjunction with our unaudited interim consolidated financial statements as at and for the three months ended June 30, 2018 and the related notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). This discussion and analysis contains forward-looking statements and forward-looking information that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements and information as a result of many factors, including, but not limited to, those set forth elsewhere in this Quarterly Report on Form 10-Q (the "Report"). See section heading "Note Regarding Forward-Looking Statements" below.

As used throughout this Report, "we," "our," "Janel," "the Company," "Registrant" and similar words refer to Janel Corporation.

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements 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 and uncertainties. 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 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, those risks identified in our periodic reports filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K/A.

OVERVIEW

The Company operates its business as two distinct segments: Global Logistics Services and Manufacturing.

 

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 April 1, 2017, the Company acquired W.J. Byrnes & Co. ("Byrnes"), a global logistics services provider with five U.S. locations.

On January 3, 2018, the Company acquired Global Trading Resources, Inc. ("GTRI"), a full-service cargo transportation logistics management services provider, which provides freight forwarding via air-, ocean- and land-based carriers, customs brokerage services, warehousing and distribution services, and other value-added logistics services. See note 3 to the consolidated financial statements.

 

 

 

 

The Company's manufacturing segment is comprised of Indco, Inc. ("Indco"), Aves Labs, Inc. ("Aves") and Antibodies Incorporated ("Antibodies").  Indco, which is a majority-owned subsidiary of the Company, manufactures and distributes mixing equipment and apparatus for specific applications within various industries. The customer base is comprised of small- to mid-sized businesses as well as repetitive production orders for other larger customers. Aves is a wholly-owned subsidiary of the Company and is a manufacturer and distributor of high-quality antibodies and other immunoreagents for biomedical research and antibody manufacturing.  Antibodies is a wholly-owned subsidiary of the Company and is a manufacturer and distributor of monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and a developer and practitioner of ImmunoAssays for academic and industry research scientists.

On March 5, 2018, the Company acquired all of the outstanding common stock of Aves. See note 3 to the consolidated financial statements.

On June 22, 2018, the Company acquired Antibodies via merger. See note 3 to the consolidated financial statements.

See note 3 to the consolidated financial statements.

As of June 30, 2018, the Company employed 129 full-time and five part-time employees in the United States. None of these employees are covered by a collective bargaining agreement. We have experienced no work stoppages and consider relations with our employees to be good.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The Company's consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to revenue recognition, the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, accruals for transportation and other direct costs, accruals for cargo insurance, and deferred income taxes. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. We reevaluate these significant factors as facts and circumstances change. Historically, actual results have not differed significantly from our estimates. Note 1 of the notes to consolidated financial statements in our Annual Report on Form 10-K/A for the year ended September 30, 2017 includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of certain accounting policies and estimates.

 

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

 

Income taxes

 

The Company uses the asset and liability method of accounting for income taxes in accordance with 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.

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (the "Tax Reform Act"), which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 34% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. As a result of the enactment of the Tax Reform Act, the Company has made a reasonable estimate and recorded an additional one-time income tax benefit of $49,284 during the first quarter of fiscal 2018, related to the estimated re-measurement of certain deferred tax assets, primarily net operating losses and deferred tax liabilities attributable to intangible assets. The Company continues to evaluate the impact the new legislation will have on the Consolidated Financial Statements.

 

Estimates

 

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

 

 

 

Management believes that the methods utilized in these areas are consistent in application. Management further believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company's transactions. While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates would not produce materially different results than those reported.

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

Revenue Recognition

  

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

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

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

In the case of ocean and air freight movements, Janel Group may negotiate a contract of carriage, the terms of which determine when revenue is recognized. For movements by ground, revenue generally is recognized at the time of cargo tender to the vendor. For other activities, such as warehousing and distribution services, revenue is recognized upon completion of the service.

  

Gross Margin

Our total revenues represent the total dollar value of services and goods we sell to our customers. Our gross margin is our total revenues less forwarding expenses, which are purchased transportation and related services, including contracted air, ocean, rail, motor carrier and other costs. Total revenues can be influenced greatly by changes in transportation rates or other items, such as fuel prices, which we do not control. Our gross margin, however, is the primary indicator of our ability to source, add value, and sell services and products that are provided by third parties; therefore, we consider gross margin to be our primary performance measurement. Accordingly, the discussion of our results of operations below focuses on the changes in our gross margin.

Critical Accounting Policies and Estimates Applicable to the Manufacturing Segment

Revenue Recognition

Revenues from Indco are derived from the engineering, manufacture, and delivery of specialty mixing equipment. Revenues from Aves are derived from the sale of high-quality antibodies and other immunoreagents for biomedical research and antibody manufacturing.  Revenues from Antibodies are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and antibody manufacturing.  Payments are received by either credit card or invoice by the Company. A significant portion of Indco sales come from print- and web-based catalogs and specification features. Such online sales are generally credit card purchases. Revenues from Indco, Aves and Antibodies are recognized when products are shipped and risk of loss transfers 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 EBITA, which is not based on or included in U.S. GAAP (we refer to these as "non-GAAP financial measures").

EBITA

Our net income will include material non-cash charges relating to the amortization of customer related intangible assets and 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 earnings before interest, taxes, and amortization, or EBITA, 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.

 

 

 

EBITA is a non-GAAP measure of income and does not include the effects of preferred stock dividends, interest and taxes. EBITA is used by management as a supplemental performance and liquidity measure, primarily to exclude the impact of acquisition-related intangible assets in order to compare current financial performance to historical performance, assess the ability of our assets to generate cash and assist in the evaluation of potential acquisitions.

 

Companies have some discretion as to which elements of amortization are excluded in the EBITA calculation. We include all amortization charges related to intangible assets. We will not adjust EBITA to exclude expenses specifically attributable to acquisitions, severance and lease termination costs, foreign exchange gains and losses, litigation expenses or stock based-compensation. We do not adjust for depreciation as we view depreciation as an on-going expense. While management considers EBITA useful in analyzing our results, it is not intended to replace any presentation included in our consolidated financial statements.

The following table sets forth a reconciliation of income (loss) from operations to EBITA:

Three and Nine Months Ended June 30,

(in thousands)

  

Janel Group 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.

  

Revenue

Total revenue from continuing operations for the three months ended June 30, 2018 was $20,068,239, as compared to $17,963,837 for the three months ended June 30, 2017, an increase of $2,104,402 or 11.7%. This increase mainly is the result of additional revenue from the acquisition of GTRI.

 

Gross Margin

Gross margin from continuing operations for the three months ended June 30, 2018 was $3,757,366, an increase of $249,455, or 7.1%, as compared to $3,507,911 for the three months ended June 30, 2017. The increase is mainly the result of additional gross margin from the GTRI acquisition, which added gross margin of $219,430, a slight organic increase in our base business offset by a slight decline in gross margin as a percentage of revenue due to mix of business.

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses from continuing operations for the three months ended June 30, 2018 were $2,985,325, as compared to $2,870,235 for the three months ended June 30, 2017. This is an increase of $115,090, or 4.1%. The increase mainly was due to additional expenses from an acquisition, acquisition integration expenses and investment in a marketing program, and cost efficiencies across the rest of Janel Group. As a percentage of revenue, selling, general and administrative expenses were 14.9% and 15.9% of revenue for the three months ended June 30, 2018 and 2017, respectively.

 

 

JANEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income from Operations

Janel Group earned income from operations of $772,041 for the three months ended June 30, 2018 as compared to $637,676 for the three months ended June 30, 2017, an increase of $134,365, or 21.1%. Income from operations increased due to acquisition of Byrnes and GTRI, and cost efficiencies across the rest of Janel Group.

The Company's manufacturing segment is comprised of its majority-owned Indco subsidiary, and Aves and Antibodies, which are wholly-owned subsidiaries of the Company. Indco manufactures and distributes industrial mixing equipment and provides solutions for the mixing needs of customers operating in diverse industries, including chemicals, inks, paints, construction, plastics, adhesives, cosmetics, food and pharmaceuticals. Solutions include over 2,500 standard product configurations, both manufactured and distributed, available for order from Indco's website and its print catalog, mailed quarterly. In addition, Indco manufactures custom-designed mixing solutions that Indco helps specify, design, machine, assemble and distribute. Aves is a manufacturer and distributor of high-quality antibodies and other immunoreagents for biomedical research and antibody manufacturing.  Antibodies is a manufacturer and distributor of monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and a developer and practitioner of ImmunoAssays for academic and industry research scientists.  Due to the timing of the closing of the Antibodies acquisition on June 22, 2018, the results of operations of Antibodies from June 23 to June 30, 2018 are not included in the statement of operations.

Revenue

Total revenue from continuing operations for the three months ended June 30, 2018 was $2,431,019, as compared to $2,283,041 for the three months ended June 30, 2017 an increase of $147,978 or 6.5%. The revenue increase occurred primarily due to the acquisition of Aves, partly offset by a decline in other manufacturing lines.

Gross Margin

Gross margin for the three months ended June 30, 2018 was $1,490,692, an increase of $196,964, or 15.2%, as compared to $1,293,728 for the three months ended June 30, 2017. The acquisition of Aves accounted for nearly all of the gross margin increase. The gross margin for the three months ended June 30, 2018 was 61.3%, as compared to 56.7% for the three months ended June 30, 2017, with the increase due to a mix shift to some higher margin products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the Manufacturing segment were $981,783 and $620,121 for the three months ended June 30, 2018 and 2017, respectively. Selling, general and administrative expenses increased as a percentage of revenue due to a product mix shift and new expenses from the acquisition of Aves.

Income from Operations

The Manufacturing segment earned $508,909 and $671,107 in income from operations for the three months ended June 30, 2018 and 2017, respectively, a decrease of $162,198, or 24.2%. The decrease primarily is due to a decline in revenue to existing customers, partially offset by contributions from the acquisition of Aves.

 

Revenue

On a consolidated basis, the Company earned revenue of $22,499,258 for the three months ended June 30, 2018, as compared to $20,246,878 for the three months ended June 30, 2017. The increase of $2,252,380, or 11.1%, was the result of higher revenues in the Global Logistics Services segment and the acquisition of Aves, partly offset by a decline in other manufacturing lines.

EBITA

On a consolidated basis, the Company had EBITA of $216,559 for the three months ended June 30, 2018, as compared to $814,887 for the three months ended June 30, 2017, a decrease of $598,328 or 73.4%. Just over half of the decline in EBITA is due to stock-based compensation expense and a decline in profits at our business segments. The balance of the decline relates to higher professional fees and higher expenses associated with acquisition activities. See "Non-GAAP Financial Measures" for more detail.

 

 

 

Amortization

For the three months ended June 30, 2018 and 2017, amortization expenses were $200,186 and $195,666, respectively. These amounts do not include the amortization associated with the Indco term loan origination fee. This increase is the result of the full-year impact of amortizing intangible assets associated with the Byrnes acquisition and additional intangible asset amortization associated with the GTRI and Aves acquisitions.

Interest Expense

Interest expense for the consolidated Company decreased $77,231, or 41.9%, to $107,049 for the three months ended June 30, 2018 from $184,280 for the three months ended June 30, 2017. The decrease is due primarily to a new credit facility with a lower interest rate and a lower debt level in the Manufacturing segment, partially offset by acquisition related borrowings.

Income Taxes

On a consolidated basis, the Company recorded an income tax benefit of $73,633 for the three months ended June 30, 2018, as compared to a $169,139 income tax expense for the three months ended June 30, 2017. The decrease is primarily due to the new tax rate provided for in the Tax Reform Act and a corresponding one-time income tax benefit of $49,284.  On December 22, 2017, the United States enacted tax reform legislation through the Tax Reform Act, which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 34% to 21%. As a result of enactment of the Tax Reform Act, the Company has made a reasonable estimate and recorded an additional one-time income tax benefit of $49,284 during the first quarter of fiscal 2018, related to the estimated re-measurement of certain deferred tax assets, primarily net operating losses and deferred tax liabilities attributable to intangible assets. In 2016, a deferred tax asset was established to reflect a net operating loss carryforward, which the Company has begun using, and expects to continue to use through ongoing profitability.

Loss from Discontinued Operations

On August 28, 2013, the Company sold its New Jersey freight forwarding and logistics operations, and in June 2012 discontinued its food segment business. As a result, the New Jersey operations and expenses associated with the food segment are included in discontinued operations. The three months ended June 30, 2017 reflect a loss from discontinued operations of ($9,331).

Preferred Stock Dividends

Preferred stock dividends include $15,000 in annual dividends, paid quarterly, on the Company's Series A Convertible Preferred Stock and 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, 2018 and 2017, preferred stock dividends were $110,990 and $127,706, respectively. The decrease of $16,716, or 13.1%, is the result of the reduction of the interest rate on the Series C Stock. See note 9 to the consolidated financial statements for additional information.

Net (Loss) Income

Net loss was $17,043, or $0.03 per diluted share, for the three months ended June 30, 2018. Net income was $256,471, or $0.42 per diluted share, for the three months ended June 30, 2017. The decrease from 2017 to 2018 is primarily due to higher professional fees and stock based compensation, partially offset by the one-time income tax benefit of $49,284 during the first quarter of fiscal 2018 related to the estimated re-measurement of certain deferred tax assets as a result of a reduction in the corporate tax rate from 34% to 21%, lower interest expense and lower discontinued operations expenses in fiscal 2017.

Net (Loss) Income Available to Common Stockholders

Net (loss) income available to holders of common shares ("Common Stockholders") was ($128,033), or ($0.22) per diluted share, for the three months ended June 30, 2018 and $128,765, or $0.19 per diluted share, for the three months ended June 30, 2017. The decrease primarily is due to higher professional fees, stock-based compensation, dividends to non-controlling interest and higher expenses associated with acquisition activities, partially offset by the decrease to the annual dividend rate of the Series C Stock.

 

Revenues

Total revenues from continuing operations for the nine months ended June 30, 2018 were $55,596,397, as compared to $49,499,193 for the nine months ended June 30, 2017. The increase primarily is due to the acquisitions of Byrnes and GTRI.

Gross margin

Gross margin from continuing operations for the nine months ended June 30, 2018 was $10,675,434, an increase of $986,424, or 10.2%, as compared to $9,689,010 for the nine months ended June 30, 2017. The increase is mainly the result of additional net revenue from the Byrnes and GTRI acquisitions, offset by a slight organic decline in our base business.

 

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses from continuing operations for the nine months ended June 30, 2018 were $8,769,182 as compared to $8,001,437 for the nine months ended June 30, 2017. This is an increase of $767,745, or 9.6%. The increase is due to additional expenses from two acquisitions, acquisition integration expenses and investments in a marketing program, partially offset by a reallocation of administrative expenses from Janel Group to the corporate group and cost efficiencies across the rest of Janel Group.

 

Income from Operations

 

Janel Group earned income from operations of $1,906,252 for the nine months ended June 30, 2018, as compared to $1,687,573 for the nine months ended June 30, 2017, an increase of $218,679, or 12.9%. Income from operations increased due to two acquisitions partially offset by integration expenses and investments in a marketing program.

 

Revenue

Total revenue from continuing operations for the nine months ended June 30, 2018 was $6,531,403, as compared to $6,444,205 for the nine months ended June 30, 2017 an increase of $87,198, or 1.4%. The revenue increase occurred from the acquisition of Aves, partially offset by our manufacturing product lines.

Gross Margin

Gross margin for the nine months ended June 30, 2018 was $4,003,356, an increase of $447,609, or 12.6%, as compared to $3,555,747 for the nine months ended June 30, 2017. The gross margin for the nine months ended June 30, 2018 was 61.3%, as compared to 55.2% for the nine months ended June 30, 2017 due to a mix shift to some higher margin products offset by non-cash inventory charges from Aves.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the Manufacturing segment were $2,680,657 and $1,846,286 for the nine months ended June 30, 2018 and 2017, respectively. Selling, general and administrative expenses increased as a percentage of revenue due to a stock-based compensation expense of $146,095, product mix shift, and new expenses from the acquisition of Aves.

Income from Operations

The Manufacturing segment earned $1,322,699 and $1,701,961 in income from operations for the nine months ended June 30, 2018 and 2017, respectively, a decrease of $379,262, or 22.3%. The decrease primarily is due to a stock option expense in the quarter and a decline in revenue to existing customers, partially offset by a contribution from the acquisition of Aves.

 

Revenue

On a consolidated basis, the Company earned revenue of $62,127,800 for the nine months ended June 30, 2018, as compared to $55,943,398 for the nine months ended June 30, 2017. The increase of $6,184,402, or 11.1%, was the result of higher revenues due to acquisitions, offset by lower revenues due to slight organic declines in our base business at both segments.

Income from Operations

On a consolidated basis, the Company earned income from operations of $173,440 for the nine months ended June 30, 2018, as compared to $1,524,863 for the nine months ended June 30, 2017, a decrease of $1,351,423, or 88.8%. The majority of the decline is due to stock-based compensation expense, a decline in profits at the Company's business segments, higher professional fees and higher expenses associated with acquisition activities.

EBITA

EBITA declined to $767,751 for the nine months ended June 30, 2018, as compared to $2,103,860 for the nine months ended June 30, 2017, a decrease of $1,336,109, or 63.5%, due to stock-based compensation expense, a decline in profits at the Company's business segments, higher professional fees and higher expenses associated with acquisition activities. See "Non-GAAP Financial Measures" for more detail.

 

 

Amortization

For the nine months ended June 30, 2018 and 2017, amortization expenses were $594,311 and $578,997, respectively. These amounts do not include the amortization associated with the Indco term loan origination fee. This increase is the result of the full-year impact of amortizing intangible assets associated with the Byrnes acquisition and additional intangible asset amortization associated with the acquisitions of GTRI and Aves.

Interest Expense

Interest expense for the consolidated Company decreased $225,930, or 39.9%, to $340,877 for the nine months ended June 30, 2018 from $566,807 for the nine months ended June 30, 2017. The decrease is due primarily to a new credit facility with a lower interest rate and a lower debt level at the Manufacturing segment, partially offset by acquisition-related borrowings.

Income Taxes

On a consolidated basis, the Company recorded an income tax benefit of $113,751 for the nine months ended June 30, 2018, as compared to a $348,802 income tax expense for the nine months ended June 30, 2017. The decrease is due to the new tax rate provided for in the Tax Reform Act and the corresponding one-time income tax benefit of $49,284. On December 22, 2017, the United States enacted tax reform legislation through the Tax Reform Act, which significantly changes the existing U.S. tax laws, including by reducing the corporate tax rate from 34% to 21%. As a result of enactment of the legislation, the Company has made a reasonable estimate and recorded an additional one-time income tax benefit of $49,284 during the first quarter of fiscal 2018, related to the estimated re-measurement of certain deferred tax assets, primarily net operating losses and deferred tax liabilities attributable to intangible assets. In 2016, a deferred tax asset was established to reflect a net operating loss carryforward, which the Company has begun using, and expects to continue to use through ongoing profitability.

Loss from Discontinued Operations

On August 28, 2013, the Company sold its New Jersey freight forwarding and logistics operations, and in June 2012 discontinued its food segment business. As a result, the New Jersey operations and expenses associated with the food segment are included in discontinued operations. The nine months ended June 30, 2017 reflect a loss from discontinued operations of ($46,878). Refer to note 8 to the consolidated financial statements for more information.

Preferred Stock Dividends

Preferred stock dividends include $15,000 in annual dividends, paid quarterly, on the Company's Series A Convertible Preferred Stock and dividends accrued but not paid on the Company's Series C Stock. For the nine months ended June 30, 2018 and 2017, preferred stock dividends were $308,024 and $383,118, respectively. The decrease of $75,094, or 19.6%, is the result of the reduction of interest rate on Series C Stock. See note 9 to the consolidated financial statements for additional information.

Net (Loss) Income

The Company had a net loss of $53,686, or $0.09 per diluted share, for the nine months ended June 30, 2018 and net income of $562,376, or $0.88 per diluted share, for the nine months ended June 30, 2017. The decrease is primarily due to higher professional fees and stock based compensation of $146,095, partially offset by the one-time income tax benefit of $49,284 during the first quarter of fiscal 2018 related to the estimated re-measurement of certain deferred tax assets as a result of a reduction in the corporate tax rate from 34% to 21%, partially offset by lower interest expense and lower discontinued operations expenses in fiscal 2017.

Income Available to Common Stockholders

Income available to Common Stockholders was $950,002, or $1.67 per diluted share, for the nine months ended June 30, 2018 and $179,258, or $0.26 per diluted share, for the nine months ended June 30, 2017. The increase primarily is due to the gain on extinguishment of Series C Stock dividends of $1,311,712, offset by dividends to preferred shares an increase in professional fees and stock-based compensation and higher expenses associated with acquisition activities.

LIQUIDITY AND CAPITAL RESOURCES

 

Our ability to satisfy liquidity requirements, including satisfying debt obligations and funding 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. Janel's subsidiaries depend on commercial credit facilities to fund day-to-day operations as there is a difference between the timing of collection cycles and the timing of payments to vendors. Generally, Janel does not make significant capital expenditures.

 

 

 

Janel's cash flow performance for the nine months ended June 30, 2018 is not necessarily indicative of future cash flow performance.

 

As of June 30, 2018, the Company's cash and working capital deficiency (current assets minus current liabilities) was $518,682 and $7,760,284 as compared to $987,848 and $6,873,283 as of September 30, 2017. The decreases in cash are considered nominal, representing relatively stable collections from customers and payments of vendors, increases in working capital are primarily related to increases in accounts receivable and inventory acquired from the acquisitions of Aves and Antibodies.

 

Cash flows from continuing operating activities

Net cash provided by continuing operating activities for the nine months ended June 30, 2018 and 2017 was $1,118,837 and $2,875,564, respectively. The decrease in cash provided by continuing operations for the nine months ended June 30, 2018 was driven principally by increase in accounts receivable balance and the $53,686 loss for the period.

 

Cash flows from discontinued operating activities

Net cash used in discontinued operating activities was $46,878 for the nine months ended June 30, 2017. The net cash used is related to legal fees and settlements. There was no net cash used in discontinued operating activities for the nine months ended June 30, 2018.

 

Cash flows from investing activities

Net cash used in investing activities was $6,906,917 and $120,132 for the nine months ended June 30, 2018 and 2017.  In the nine months ended June 30, 2018, the activity consisted mainly of the acquisitions of Antibodies, Aves and GTRI. In the nine months ended June 30, 2017, the activity related to the purchase of fixed assets.

 

Cash flows from financing activities

Net cash provided by (used in) financing activities was $5,318,914 for the nine months ended June 30, 2018 and $(1,784,201) for the nine months ended June 30, 2017. Net cash provided by financing activities for the nine months ended June 30, 2018 primarily includes the proceeds from the sale of additional shares of Series C Stock, proceeds from debt used to acquire Antibodies and the issuance of notes payable. Net cash used in financing activities for the nine months ended June 30 2017 primarily related to payments on bank loans, notes payable, and treasury stock acquisitions. 

 

 

Global Logistics Services

Presidential Financial Corporation Facility

On March 27, 2014, Janel Corporation and several of its Janel Group subsidiaries (collectively, the "Janel Borrowers") entered into a Loan and Security Agreement (the "Presidential Loan Agreement") with Presidential Financial Corporation with respect to a revolving line of credit facility (the "Presidential Facility"). At September 30, 2017, the Presidential Facility provided that the Janel Borrowers could borrow up to $10.0 million limited to 85% of the Janel Borrowers' aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Presidential Loan Agreement. Interest accrued at an annual rate equal to 5% above the greater of (a) the prime rate of interest quoted in The Wall Street Journal from time to time, or (b) 3.25%. The Janel Borrowers' obligations under the Presidential Facility were secured by all of the assets of the Janel Borrowers. The Presidential Facility was terminated on October 17, 2017 and the Company replaced the Presidential Facility with the Santander Bank Facility.

At September 30, 2017, outstanding borrowings under the Presidential Facility were $6,138,537, representing 80.3% of the $7,643,380 available thereunder, and interest was accruing at an effective interest rate of 7.5%. The Janel Borrowers were in compliance with the covenants defined in the Presidential Loan Agreement as of September 30, 2017.

 

 

 

Santander Bank Facility

On October 17, 2017, the Janel Group subsidiaries (collectively the "Janel Group Borrowers"), with Janel Corporation as a guarantor, entered into a Loan and Security Agreement (the "Santander Loan Agreement") with Santander Bank, N.A. ("Santander") with respect to a revolving line of credit facility (the "Santander Facility"). The Santander Facility provides that the Janel Group Borrowers can borrow up to $10.0 million, limited to 85% of the Janel Group Borrowers' aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Santander Loan Agreement. Interest accrues on the Santander Facility at an annual rate equal to, at the Janel Group Borrowers' option, Prime plus 0.50%, or LIBOR (30, 60 or 90 day) plus 2.50% subject to a LIBOR floor of 75 basis points. The Janel Group Borrowers' obligations under the Santander Facility are secured by all of the assets of the Janel Group Borrowers. The Santander Loan Agreement requires, among other things, that the Janel Group Borrowers, on a quarterly basis, maintain a Minimum Debt Service Coverage ratio, as defined in the Santander Loan Agreement. The loan is subject to earlier termination as provided in the Santander Loan Agreement and matures on October 17, 2020, unless renewed. The Santander Loan Agreement requires the Company to maintain a lock box with Santander in addition to containing certain subjective acceleration clauses. As a result of these terms the loan is classified as a current liability on the consolidated balance sheet.

On March 21, 2018, the Janel Group Borrowers, the Company, and Aves entered into an amendment with Santander (the "Santander Amendment") with respect to the Santander Loan Agreement. Pursuant to the Santander Amendment, and among other changes effected by such Santander Amendment, Aves was added as a Loan Party Obligor (but not a Janel Group Borrower) under the Santander Loan Agreement, the maximum amount available under the Santander Loan Agreement was increased from $10.0 million to $11.0 million (subject to 85% of eligible receivables), the foreign account sublimit was increased from $1.5 million to $2.0 million, a one-time waiver was granted until May 31, 2018 for the stated event of default related to the delivery of the quarterly financial statements for the fiscal quarter ended December 31, 2017, and a one-time waiver, retroactive to March 5, 2018, of the provision that prohibits the Company from using proceeds of the revolving loan to finance acquisitions was granted for the purpose of partially funding the acquisition of Aves.

At June 30, 2018, outstanding borrowings under the Santander Facility were $7,994,176, representing 72.67% of the $11,000,000 available thereunder, and interest was accruing at an effective interest rate of 5.25%. As of March 31, 2018, Santander had granted the Janel Group Borrowers a one-time waiver until May 31, 2018 for an event of default related to the delivery of the quarterly financial statements for the fiscal quarter ended December 31, 2017.  Such event of default was subsequently remedied.  Other than as specifically referenced above, the Janel Group Borrowers are in compliance with the covenants defined in the Santander Loan Agreement as of June 30, 2018. 

Working Capital Requirements

The Company believes that its current financial resources will be sufficient to finance Janel Group's operations and obligations (current and long-term liabilities) for the long and short terms. However, Janel Group's actual working capital needs for the long and short terms will depend upon numerous factors, including operating results, the cost associated with growing Janel Group, either internally or through acquisition, competition, and the availability under the Santander Facility, none of which can be predicted with certainty. If cash flow and available credit are not sufficient to fund working capital, Janel Group's operations will be materially negatively impacted.

 

Manufacturing

 

First Merchants Bank Facility

On March 21, 2016, Indco executed a Credit Agreement (the "First Merchants Credit Agreement") with First Merchants Bank with respect to a $6,000,000 term loan and $1,500,000 (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 3.75% (if Indco's cash flow leverage ratio is less than or equal to 2:1) or 4.75% (if Indco's cash flow leverage ratio is greater than 2:1). Interest accrues on the revolving loan at an annual rate equal to the one-month LIBOR plus 2.75%. Indco's obligations under the First Merchants Facility are secured by all of Indco's assets and are guaranteed by the Company. The First Merchants Credit Agreement requires, among other things, that Indco, on a monthly basis, not exceed a "maximum total funded debt to EBITDA ratio" and maintain a "minimum fixed charge covenant ratio," both as defined in the First Merchants Credit Agreement. The First Merchants Facility requires monthly payments until the expiration date on the fifth anniversary of the loan. The loan is subject to earlier termination as provided in the First Merchants Credit Agreement.

As of September 30, 2017, there were no outstanding borrowings under the revolving loan and $3,860,540 of borrowings under the term loan, and interest was accruing on the term loan at an effective interest rate of 4.98%.

  

As of June 30, 2018, there were $25,797 of outstanding borrowings under the revolving loan and $2,925,179 of borrowings under the term loan, with interest accruing on the term loan at an effective interest rate of 5.63%. Indco was in compliance with the covenants defined in the First Merchants Credit Agreement at both September 30, 2017 and June 30, 2018.

On June 21, 2018, AB Merger Sub, Inc., a wholly-owned, indirect subsidiary of the Company entered into a Business Loan Agreement (the "First Northern Loan Agreement") and Promissory Note with First Northern Bank of Dixon ("First Northern"), with respect to a $2,024,750 senior secured term loan (the "Senior Secured Term Loan"). The First Northern Loan Agreement and Promissory Note are dated and effective as of June 14, 2018. The proceeds of the Senior Secured Term Loan were used to fund a portion of the merger consideration to acquire Antibodies.  Interest will accrue on the Senior Secured Term Loan at an annual rate based on the five-year Treasury constant maturity (index) plus 2.50% (margin) for years one through five then adjusted and fixed for years six through ten using the same index and margin. 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 the Antibodies as of the closing of the Antibodies merger. The Senior Secured Term Loan will mature on June 14, 2028 (subject to earlier termination as provided in the First Northern Loan Agreement). The First Northern Loan Agreement requires, among other things, that the borrowers, maintain certain Minimum Debt Service Coverage, Debt to Tangible Net Worth and Tangible Net Worth ratios as defined in the First Northern Loan Agreement.

 

 

As of June 30, 2018, outstanding borrowings under the Senior Secured Term Loan were $2,024,750, with interest accruing at an effective interest rate of 5.28%.  The financial covenants set forth in the First Northern Loan Agreement will commence for the period ending September 30, 2018.

 

Working Capital Requirements

Indco's cash needs are currently met by the term loan and revolving credit facility under the First Merchants Credit Agreement and cash on hand. As of June 30, 2018, Indco had $1.47 million available under its $1.5 million revolving facility subject to collateral availability and $320,366 in cash. The Company believes that the current financial resources will be sufficient to finance Indco's operations and obligations (current and long-term liabilities) for the long and short terms. However, actual working capital needs for the long and short terms will depend upon numerous factors, including operating results, the cost associated with growing Indco either internally or through acquisition, competition, and the availability under the revolving credit facility, none of which can be predicted with certainty. If cash flow and available credit are not sufficient to fund working capital, Indco's operations will be materially negatively impacted.

CURRENT OUTLOOK

 

The results of operations in both the Global Logistics Services and Manufacturing segments are affected by the general economic cycle, particularly as it influences global trade levels and specifically the import and export activities of Janel Group's various current and prospective customers. Historically, the Company's quarterly results of operations have been subject to seasonal trends which have been the result of, or influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions, the growth and diversification of Janel Group's international network and service offerings, and other similar and subtle forces. The Company cannot accurately forecast many of these factors, nor can it estimate accurately the relative influence of any particular factor. As a result, there can be no assurance that historical patterns will continue in future periods.

 

The Company's subsidiaries are implementing business strategies to grow revenue and profitability for fiscal 2018 and beyond. Janel Group's strategy calls for additional branch offices, the introduction of new revenue streams for existing locations, sales force expansion, additional acquisitions, and a continued focus on implementing lean methodologies to contain operating expenses. Indco's strategy calls for introduction of new product lines and wider distribution and promotion of its print and web-based catalog.

 

In addition to supporting its subsidiaries' growth plans, the Company may seek to grow by entering new business segments through acquisition.

 

Certain elements of the Company's profitability and growth strategy, principally proposals for acquisition and accelerating revenue growth, are contingent upon the availability of adequate financing on terms acceptable to the Company. Without adequate equity and/or debt financing, the implementation of significant aspects of the Company's strategic growth plan may be deferred beyond the originally anticipated timing, and the Company's operations will be materially negatively impacted.

   

 

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) that are designed to provide reasonable assurance that information that is required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner.

   

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2018. This assessment was based on criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control-Integrated Framework (2013).

In connection with the preparation of the Company's Quarterly Report on Form 10-Q, management identified the following material weaknesses as of June 30, 2018:

 

 

 

As a result of these material weaknesses, our management has concluded that our internal control over financial reporting was not effective as of June 30, 2018.

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, 2018 are fairly presented, in all material respects, and in conformity with U.S. GAAP.