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ITEM 2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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As used throughout this Report, “we,”
“our,” “Janel,” “the Company,” “Registrant” and similar words refer to Janel Corporation
and subsidiaries.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains
certain forward-looking statements reflecting our 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”, “believes”, “should”, “expects”, “anticipates”, “estimates”,
and similar expressions. 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.
OVERVIEW
Janel Corporation is a holding company with
subsidiaries in two business segments: Global Logistics Services and Manufacturing. The Company’s Global Logistics Services
segment comprises several wholly-owned subsidiaries, collectively known as “Janel Group.” The Company’s Manufacturing
segment comprises its majority-owned INDCO subsidiary, which manufactures and distributes industrial mixing equipment. Janel is
a successor to a business originally formed in 1975. Janel is domiciled in the state of Nevada. Its corporate headquarters is in
Lynbrook, New York. Its website is located at http://www.janelcorp.com.
Janel’s management focuses on significant
capital allocation decisions, corporate governance and supporting its subsidiaries where appropriate. The Company expects to grow
through its subsidiaries’ organic growth and by completing acquisitions. Janel either will acquire businesses within its
existing segments, or it will expand its portfolio into new segments. Janel’s acquisition strategy focuses on reasonably-priced
companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings
power.
In September 2014, the Company purchased the
equity of Alpha International / President Container Lines (“Alpha/PCL”), a global logistics services company. Approximately
one year later, it purchased the equity of Liberty International, Inc. (“Liberty”). These companies, along with the
legacy Janel Group, comprise Janel Corporation’s Global Logistics Services segment, which focuses on international transportation
and customs clearance. In March 2016, the Company purchased INDCO, Inc. (“INDCO”) in order to diversify cash flow streams.
INDCO comprises Janel Corporation’s Manufacturing segment.
Results
of Operations
The following discussion and analysis addresses
the results of operations for our business subsidiaries, Janel Group and INDCO, as well as for Janel Corporation consolidated,
for the three months ended December 31, 2016. Comparisons to results for the three months ended December 31, 2015 include data
from Janel Corporation and Janel Group only. Janel acquired a majority interest in INDCO in March 2016, and, therefore, no prior
year period comparison data is presented. The discussion and analysis then addresses liquidity and financial condition of Janel
Group and INDCO and the Company as a whole and other matters.
Global Logistics Services – Three
months ended December 31, 2016 and 2015
Revenue.
Total revenue
from continuing operations for the three months ended December 31, 2016 was $16,053,171, as compared to $22,573,626 for the three
months ended December 31, 2015. This is a decrease of ($6,520,455), or (28.9%). The decrease primarily is due to the loss of a
low-margin, high-revenue customer, previously reported.
Forwarding Expense.
Total forwarding expense from continuing operations for the three months ended December 31, 2016 was $12,939,103, as compared
to $19,179,493 for the three months ended December 31, 2015. This is a decrease of ($6,240,390), or (32.5%). The decrease
primarily is due to reduction in expenses associated with the loss of the customer referenced above.
For the current fiscal
year, certain items have been categorized as “corporate” expenses attributable to overall management of Janel and other
non-segment specific activities. These expenses are discussed below under the section heading for Janel Corporation’s “Corporate
General and Administrative Expenses.” The following discussion of selling, general and administrative expenses in the Global
Logistics Service segment excludes these “corporate” items from both the 2016 and 2015 figures so as to provide an
accurate comparison between the two periods.
Selling, General and
Administrative Expense.
Total selling, general and administrative expenses from continuing operations for the three
months ended December 31, 2016 was $2,647,083, as compared to $2,810,811 for the three months ended December 31, 2015. This is
a decrease of ($163,728), or (5.8%). The decrease is due to certain cost reduction initiatives enacted in prior periods.
As a percentage of revenue, selling, general and administrative expense for the three months ended December 31, 2016 was 16.6%,
as compared to 12.5% for the three months ended December 31, 2015. The increase of these costs as a percentage of revenue was primarily
due to fixed expenses that do not decrease directly with decreased sales.
Interest Expense
.
Total interest expense from continuing operations for the three months ended December 31, 2016 was $117,932, as compared to $137,071
for the three months ended December 31, 2015. This is a decrease of ($19,139), or (14.0%). The decrease is due to a reduction
in the average balance of our revolving loan as compared to the prior year period, the result of positive cash flow and repayment
of the principal balance.
Income from Continuing
Operations before Income Taxes.
As a result of the above, income from continuing operations for the three months ended December
31, 2016 was $466,985, as compared to $446,251 for the three months ended December 31, 2015. This is an increase of $20,734,
or 4.6%.
Manufacturing – Three months ended
December 31, 2016
INDCO, which comprises
the Company’s Manufacturing segment, was purchased as of March 1, 2016. Since Janel did not own INDCO during the prior year
period, no prior year period comparison data is presented.
Revenue.
Total
revenue from continuing operations for the three months ended December 31, 2016 was $1,802,326.
Cost of Sales.
Total cost of sales from continuing operations for the three months ended December 31, 2016 was $812,927.
Gross Margin
. Total
gross margin from continuing operations for the three months ended December 31, 2016 was $989,399.
Selling, General and
Administrative Expense.
Total selling, general and administrative expense from continuing operations for the three months ended
December 31, 2016 was $613,134 consisting mainly of payroll expenses of $239,926 and marketing expenses of $113,981.
Interest Expense
.
Total interest expense from continuing operations for the three months ended December 31, 2016 was $72,374.
Income from Continuing
Operations before Income Taxes.
Income from continuing operations before income taxes for the three months ended December 31,
2016 was $373,766.
Janel Corporation – Three months
ended December 31, 2016 and 2015
Corporate Selling, General
and Administrative Expense
. Total corporate selling, general and administrative expense from continuing operations for the
three months ended December 31, 2016 was $348,073, as compared to $206,579 for the three months ended December 31, 2015. This is
an increase of $141,494, or 68.5%. The increase is due to the recategorization of certain costs, previously included in the
Global Logistics Services segment, as “corporate” costs. These include primarily the salaries of executives whose responsibilities
have shifted from the Global Logistics Service segment to Janel Corporation corporate development.
Amortization of Intangibles.
Total amortization of intangibles for the three months ended December 31, 2016 was $191,666, as compared to $88,417 for the
three months ended December 31, 2015. This is an increase of $103,249, or 116.8%. The increase is due to the addition of goodwill
amortization associated with the March 2016 purchase of INDCO. These amounts do not include amortization associated with the INDCO
term loan origination fee.
Net Income
. Net
income for Janel, including both business segments, for the three months ended December 31, 2016 was $38,773, as compared to $112,130
for the three months ended December 31, 2015. This is a decrease of ($73,357), or (65.4%). The decrease primarily is due to
the income tax effect of the Manufacturing segment not owned in the prior period, certain customer losses referenced above and
corporate cost increases associated with Janel Corporation corporate development discussed above, offset by the addition to net
income of INDCO profits and savings from certain cost initiatives in our Global Logistics Services segment.
Liquidity
and Capital Resources
General.
Our ability
to satisfy our liquidity requirements, which derive from debt obligations, working capital needs, day-to-day operating expenses
and capital expenditures, depends upon our future performance, which is subject to general economic conditions, competition and
other factors, some of which are beyond our control. We depend on our commercial credit facilities to fund our day-to-day operations
as there is a timing difference between our collection cycles and the timing of our payments to vendors.
Janel’s cash flow
performance for the three months ending December 31, 2016 is not necessarily indicative of future cash flow performance.
Cash and cash equivalents
for the three months ended December 31, 2016 decreased from $965,115 at the beginning of the period to $793,483 at the end of the
period. This is a decrease of $171,632, or 17.8%. Net working capital (current assets minus current liabilities) for the three
months ended December 31, 2016 decreased from negative ($5,122,295) at the beginning of the period to negative ($5,811,071) at
the end of the period. This is a decrease of ($688,778). This decrease is primarily due to an
increase in certain trade accruals.
Cash Flows from Continuing
Operating Activities.
Net cash provided by continuing operating activities for the three months ended December 31, 2016 was
$911,033, as compared to 187,271 for the three months ended December 31, 2015. The change was principally driven by deferments
of outstanding accounts payable when compared to the prior year.
Cash Flows from Discontinued
Operating Activities.
Net cash used in discontinued operating activities for the three months ended December 31, 2016 was $11,984,
as compared to $23,938 for the three months ending December 31, 2015.
Cash Flows from Investing
Activities
. Net cash used in investing activities for the three months ended December 31, 2016 was $118,533, as compared to
$2,905 for the three months ended December 31, 2015. The increase was due to capital expenditures for property and equipment by
INDCO, which the Company did not own in the prior year period.
Cash Flows from Financing
Activities
. Net cash used in financing activities for the three months ended December 31, 2016 was $952,148, as compared to
$493,567 for the three months ended December 31, 2015. The cash used in financing activities for the three months ending December
31, 2016 primarily went toward the second of three annual earnout payments associated with the 2014 acquisition of Alpha/PCL, offset
by increased borrowings for the first annual earnout payment under the bank line of credit. The cash used in financing activities
for the three months ending December 31, 2015 was primarily due to increased borrowings under the bank line of credit.
Global Logistics Services
Presidential Financial
Corporation Borrowing 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 with Presidential Financial Corporation (“Presidential”)
with respect to a revolving line of credit facility (the “Presidential Facility”). As currently amended, the Presidential
Facility now provides that the Janel Borrowers can borrow up to $10,000,000, limited to 85% of the Janel Borrowers’ aggregate
outstanding eligible accounts receivable, subject to adjustment as set forth in the Loan and Security Agreement. Interest will
accrue at an annual rate equal to five percent 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 are secured by the assets
of the Janel Borrowers. The agreement requires, among other things, that the Company, on a monthly basis, maintain a “minimum
fixed charge covenant ratio” and “tangible net worth,” both as defined. The Presidential Facility will expire
on March 27, 2018, subject to earlier termination as provided in the Loan and Security Agreement, unless renewed.
Working Capital Requirements.
Janel Group’s cash needs are currently met by the Presidential Facility and cash on hand. As of December 31, 2016, the
Company had $3,669,709 available under its $10,000,000 Presidential Facility and $458,563 in cash from operations and cash on hand.
The Company believes that current financial resources will be sufficient to finance Janel Group 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 Presidential Facility. None of these factors 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
Borrowing Facility.
On March 21, 2016, INDCO executed a 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. Interest will accrue 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 will accrue on the revolving loan at
an annual rate equal to the one month LIBOR plus 2.75%. INDCO’s obligations under the First Merchants credit facilities are
secured by all of INDCO’s assets, and are guaranteed by the Company. The First Merchants credit facilities will expire on
the fifth anniversary of the loans, subject to earlier termination as provided in the Credit Agreement, unless renewed.
Working Capital Requirements.
INDCO’s cash needs are currently met by the First Merchant’s Bank term loan and revolving credit facility and cash
on hand. As of December 31, 2016, INDCO had $1,500,000 available under its $1,500,000 revolving facility, subject to collateral
availability, and $334,920 in cash. The Company believes that the current financial resources will be sufficient to finance INDCO
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 available credit under the revolving credit facility. None of
these factors 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 our Janel Group business’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 and, as a result, there can be no assurance that historical patterns, if any, will
continue in future periods.
The Company’s subsidiaries
are implementing business strategies to grow revenue and profitability for the current fiscal year and beyond. Janel Group’s
strategy calls for additional branch offices, introduction of new revenue streams for existing locations, sales force expansion,
additional acquisitions, and a continued focus on implementing lean methodologies to contain operating expenses. INDCO’s
strategy calls for introductions 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 Janel by entering new business segments through acquisition.
Certain elements of our
profitability and growth strategy, principally proposals for acquisition and accelerating our revenue growth, are contingent upon
the availability of adequate financing on terms acceptable to the Company. Without adequate equity and/or debt financing, the implementation
of significant aspects of the Company’s strategic growth plan may be deferred beyond the originally anticipated timing, and
the Company’s operations will be materially negatively impacted.
Critical
Accounting Policies and Estimates
Management’s Discussion
and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 difference 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. These accounting
policies are more fully described in Note 1 of the Notes to the Consolidated Financial Statements, filed with the Company’s
Form 10-K for the year ended September 30, 2016.
Management believes that
the nature of the Company’s business is such that there are few, if any, 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.
Revenue Recognition
Global Logistics Services
Revenues are derived from
airfreight, ocean freight and custom brokerage services. The Company’s Janel Group business is a non-asset-based carrier
and accordingly does not own transportation assets. Janel Group generates the major portion of its air and ocean freight revenues
by purchasing transportation services from direct carriers (airlines, steam ship lines, etc.) and reselling those services to its
customers. By consolidating shipments from multiple customers and availing itself of its buying power, Janel Group is able to negotiate
favorable rates from the direct carriers, while offering to its customers lower rates than the customers could obtain themselves.
Airfreight revenues include
the charges for carrying the shipments when Janel Group acts as a freight consolidator. Ocean freight revenues include the charges
for carrying the shipments when Janel Group acts as a Non-Vessel Operating Common Carrier (NVOCC). In each case, Janel Group is
acting as an indirect carrier. When acting as an indirect carrier, Janel Group will issue a House Airway Bill (HAWB) or a House
Ocean Bill of Lading (HOBL) to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct
carrier, Janel Group receives a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean
Bill of Lading for ocean shipments. At this point the risk of loss passes to the carrier, however, in order to claim for any such
loss, the customer is first obligated to pay the freight charges.
Based upon the terms in
the contract of carriage, revenues related to shipments where Janel Group issues a HAWB or a HOBL are recognized at the time the
freight is tendered to the direct carrier. Costs related to the shipments are recognized at the same time.
Revenues realized when
Janel Group acts as an agent for the shipper and does not issue a HAWB or a HOBL include only the commission and fees earned for
the services performed. These revenues are recognized upon completion of the services.
Customs brokerage and other
services involves provide multiple services at destination including clearing shipments through customs by preparing required documentation,
calculating and providing for payment of duties and other charges on behalf of the customers, arranging for any required inspections,
and arranging for final delivery. These revenues are recognized upon completion of the services.
The movement of freight
may require multiple services. In most instances Janel Group may perform multiple services including destination break bulk and
value added services such as local transportation, distribution services and logistics management. Each of these services has separate
fee that is recognized as revenue upon completion of the service.
Customers will frequently
request an all-inclusive rate for a set of services that is known in the industry as “door-to-door services.” In these
cases, the customer is billed a single rate for all services from pickup at origin to delivery. The allocation of revenue and expense
among the components of services when provided under an all-inclusive rate are done in an objective manner on a fair value basis
in accordance with Emerging Issues Task Force (EITF) 00-21, “Revenue Arrangements with Multiple Deliverables.”
Manufacturing
Revenues are derived from
the engineering, manufacture, and delivery of specialty mixing equipment. Payments are made by either credit card acceptance or
invoice billing by INDCO. A significant portion of sales comes from its web-based catalog. Such online sales are generally credit
card purchases. Revenue is recognized when products are delivered and risk of loss transfers to the carrier(s) used.
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:
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a.
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accounts receivable valuation;
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b.
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the useful lives of intangible assets and long-term
assets;
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c.
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the accrual of costs related to ancillary services the Company provides;
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d.
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accrual of tax expense on an interim basis;
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e.
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deferred tax valuation allowance; and
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f.
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impairment of intangible assets.
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Management believes that
the methods utilized in these areas are non-aggressive in approach and consistent in application. Management 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.
Recent
Accounting Pronouncements
From time to time, new
accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have
an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements
and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting
or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented.