JANEL CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our unaudited interim consolidated financial statements and related notes thereto as of and for the nine months ended June 30, 2020, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Amounts presented in this section are in thousands, except share and per share data. As used throughout this Report, “we,” “us”, “our,” “Janel,” “the Company,” “Registrant” and similar words refer to Janel Corporation and its Subsidiaries. 25 Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (the “Report”) contains certain statements that are, or may deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that reflect management’s current expectations with respect to our operations, performance, financial condition, and other developments. These forward-looking statements may generally be identified by the use of the words “may,” “will,” “intends,” “plans,” projects,” “believes,” “should,” “expects,” “predicts,” “anticipates,” “estimates,” and similar expressions or the negative of these terms or other comparable terminology. These statements are necessarily estimates reflecting management’s best judgment based upon current information and involve a number of risks, uncertainties and assumptions. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors, including, but not limited to, those set forth elsewhere in this Report, could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, the impact of the coronavirus (“COVID-19”) pandemic and related economic effects; our strategy of expanding our business through acquisitions of other businesses; the risk that we may fail to realize the expected benefits or strategic objectives of any acquisition, or that we spend resources exploring acquisitions that are not consummated; litigation; indemnification claims and other unforeseen claims and liabilities that may arise from an acquisition; economic and other conditions in the markets in which we operate; the risk that we may not have sufficient working capital to continue operations; instability in the financial markets; the material weaknesses identified in our internal control over financial reporting; our dependence on key employees; competition from parties who sell their businesses to us and from professionals who cease working for us; terrorist attacks and other acts of violence or war; security breaches or cybersecurity attacks; competition faced by our global logistics services freight carriers with greater financial resources and from companies that operate in areas in which we plan to expand; our dependence on the availability of cargo space from third parties; recessions and other economic developments that reduce freight volumes; other events affecting the volume of international trade and international operations; risks arising from our global logistics services business’ ability to manage staffing needs; competition faced in the freight forwarding, freight brokerage, logistics and supply chain management industry; industry consolidation and our ability to gain sufficient market presence with respect to our global logistics services business; risks arising from our ability to comply with governmental permit and licensing requirements or statutory and regulatory requirements; seasonal trends; competition faced by our manufacturing (Indco) business from competitors with greater financial resources; Indco’s dependence on individual purchase orders to generate revenue; any decrease in the availability, or increase in the cost, of raw materials used by Indco; Indco’s ability to obtain and retain skilled technical personnel; risks associated with product liability claims due to alleged defects in Indco’s products; risks arising from the environmental, health and safety regulations applicable to Indco; the reliance of our Indco and life sciences businesses on a single location to manufacture their products; the ability of our life sciences business to compete effectively; the ability of our life sciences business to introduce new products in a timely manner; product or other liabilities associated with the manufacture and sale of new products and services; changes in governmental regulations applicable to our life sciences business; the ability of our life sciences business to continually produce products that meet high quality standards such as purity, reproducibility and/or absence of cross-reactivity; the controlling influence exerted by our officers and directors and one of our stockholders; our inability to issue dividends in the foreseeable future; and risks related to ownership of our common stock, including volatility and the lack of a guaranteed continued public trading market for our common stock. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected. You should not place undue reliance on any of our forward-looking statements which speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of these factors, see our periodic reports filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020. COVID-19 The outbreak of COVID-19 has had a significant impact on global trade and on our business during the first three quarters of 2020. In late January 2020, China implemented extensive business shutdowns and work restrictions to control the outbreak, which resulted in a steep drop in exports from China. Those shutdowns and restrictions in China started to ease, and export volumes from China began to increase, in March 2020. The spread of COVID-19 to other parts of the world, and the strong actions taken by many countries to reduce exposure to the virus, however, have led to a sharp decrease in global economic activity that has persisted during the third quarter of fiscal 2020 and a second steep drop in global import and export trade volumes, which has materially impacted our Global Logistics Services business. Specifically, in the nine months ended June 30, 2020, we experienced a decrease of 10.3% in our Global Logistics Services revenues and a decrease of 20.4% in our Manufacturing segment revenues as a result of the global trade slowdown arising from the COVID- 19 pandemic. 26 Table of Contents We also experienced a significant slowdown in organic growth in our Life Sciences segment due to a slowdown in orders and in academic research as a result of the pandemic. Please see our results of operations discussion below for additional information. We expect demand for our products and services across all of our reporting segments, and in particular our Global Logistics Services and Manufacturing segments, to be adversely impacted for as long as global economic activity and trade volumes remain weak. A prolonged slowdown in trade volumes due to the pandemic could also significantly increase the longer term financial challenges facing our customers. We are closely monitoring our customers’ payment performance and expect our customer credit risk will remain heightened as long as economic and trade disruptions persist. In our Global Logistics Services and Manufacturing segments, customer demand for our services and products in many parts of our business has been materially and negatively impacted by the mandated closure of our customers’ operations or points of sale, while customer demand for our services in other parts of our business has increased significantly as consumers stockpile goods or switch to e-commerce platforms to make purchases. We are unable to accurately predict the impact that COVID-19 will have on our operations going forward due to uncertainties regarding the severity and duration of the outbreak and additional actions that may be taken by governmental authorities in response to a potential resurgence of the virus. That said, we currently expect that our results of operations and financial condition will continue to be adversely impacted in the fourth quarter of 2020 and subsequent periods, as levels of activity in the Company’s business have historically been positively correlated to broad measures of economic activity, such as gross domestic product, and to measures of industrial economic activity, which have been negatively impacted by the pandemic. The full magnitude of the COVID-19 pandemic, including the extent of any impact on our business, financial position, results of operations or liquidity, which could be material, cannot be reasonably determined at this time due to the rapid development and fluidity of the situation. The long term effects of the pandemic on our business will depend on its duration and severity, whether business disruptions will continue, the pace of recovery once the pandemic subsides and the overall long-term impact on the global economy. OVERVIEW Janel is a holding company with subsidiaries in three business segments: Global Logistics Services, Manufacturing and Life Sciences. The Company strives to create shareholder value primarily through three strategic priorities: supporting its businesses’ efforts to make investments and to build long-term profits; allocating Janel’s capital at high risk-adjusted rates of return; and attracting and retaining exceptional talent. A management group at the holding company level (the “corporate group”) focuses on significant capital allocation decisions, corporate governance and supporting Janel’s subsidiaries where appropriate. Janel expects to grow through its subsidiaries’ organic growth and by completing acquisitions. We plan to either acquire businesses within our existing segments or expand our portfolio into new strategic segments. Our acquisition strategy focuses on reasonably-priced companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings power. Global Logistics Services The Company’s Global Logistics Services segment is comprised of several wholly-owned subsidiaries (collectively “Janel Group”). Janel Group is a non-asset based, full-service provider of cargo transportation logistics management services, including freight forwarding via air-, ocean- and land-based carriers, customs brokerage services, warehousing and distribution services, and other value-added logistics services. On November 20, 2018, we completed a business combination whereby we acquired the membership interest of Honor Worldwide Logistics, LLC (“Honor”), a global logistics services provider with two U.S. locations. On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location. Manufacturing The Company’s Manufacturing segment is comprised of Indco, Inc. (“Indco”). Indco is a majority-owned subsidiary of the Company that manufactures and distributes mixing equipment and apparatus for specific applications within various industries. Indco’s customer base is comprised of small- to mid-sized businesses as well as other larger customers for which Indco fulfills repetitive production orders. 27 Table of Contents Life Sciences The Company’s Life Sciences segment is comprised of Aves Labs, Inc. (“Aves”), Antibodies Incorporated (“Antibodies”), IgG, LLC (“IgG”) and PhosphoSolutions, LLC, which are wholly-owned subsidiaries of the Company. The Company’s Life Sciences segment manufactures and distributes high-quality monoclonal and polyclonal antibodies, diagnostic reagents and other immunoreagents for biomedical research and provides antibody manufacturing for academic and industry research scientists. Our Life Sciences business also produces products for other life science companies on an original equipment manufacturer (“OEM”) basis. Through Aves, the Company acquired the membership interests of a small life sciences company on July 1, 2019 and the equity interests of PhosphoSolutions, LLC. (“Phospho”) on September 6, 2019. Both acquisitions were completed primarily to expand our product offerings in Life Sciences. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstance. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to revenue recognition, the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, accruals for transportation and other direct costs, accruals for cargo insurance, and deferred income taxes. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. We reevaluate these significant factors as facts and circumstances change. Note 1 of the notes to consolidated financial statements included herein includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of certain accounting policies and estimates. Management believes that the nature of the Company’s business is such that there are a few complex challenges in accounting for operations. Revenue recognition is considered the critical accounting policy due to the complexity of arranging and managing global logistics and supply-chain management transactions. Income taxes The Company uses the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. Estimates While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas that in the aggregate are not a major component of the Company’s consolidated statements of operations: • accounts receivable valuation; • the useful lives of long-term assets; • the accrual of costs related to ancillary services the Company provides; • accrual of tax expense on an interim basis; and • inventory valuation. 28 Table of Contents Management believes that the methods utilized in these areas are consistent in application. Management further believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company’s transactions. While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates would not produce materially different results than those reported. Critical Accounting Policies and Estimates Applicable to the Global Logistics Services Segment Revenue Recognition Revenues are derived from customs brokerage services and from freight forwarding services. Customs brokerage services include activities required for the clearance of shipments through government customs regimes, such as preparing required documentation, calculating and providing for payment of duties and other charges on behalf of customers, arranging required inspections and arranging final delivery. Freight forwarding may require multiple services, including long-distance shipment via air, ocean or ground assets, destination handling (“break bulk”), warehousing, distribution and other logistics management activities. As an asset-light business, Janel Group owns none of the assets by which it fulfills its customers’ logistics needs. Rather, it purchases the services its customers need from asset owners, such as airlines and steamship lines, and resells them. By consolidating shipments from multiple customers, Janel Group can negotiate terms of service with asset owners that are more favorable than those the customers could negotiate themselves. Revenue is recognized upon transfer of control of promised services to customers. With respect to its Global Logistics Services segment, the Company has determined that in general each shipment transaction or service order constitutes a separate contract with the customer. When the Company provides multiple services to a customer, different contracts may be present for different services. The Company typically satisfies its performance obligations as services are rendered at a point in time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed at a point in time during the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one-to two-month period. The Company evaluates whether amounts billed to customers should be reported as gross or net revenue. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the services, when it has discretion in setting the prices for the services to the customers, and the Company has the ability to direct the use of the services provided by the third party. Revenue is recognized on a net basis when we do not have latitude in carrier selection or establish rates with the carrier. In the Global Logistics Services segment, the Company disaggregates its revenues by its four primary service categories: ocean import and export, freight forwarding, customs brokerage and air import and export. Critical Accounting Policies and Estimates Applicable to the Manufacturing and Life Sciences Segments Revenue Recognition-Manufacturing Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment and accessories. Indco receives customer product orders via telephone, email, internet or fax. The pricing of each standard product sold is listed in Indco’s print and web-based catalog. Customer specific products are priced by quote. A sales order acknowledgement is sent to every customer for every order to confirm pricing and the specifications of the products ordered. The revenue is recognized at a point in time when the product is shipped to the customer. 29 Table of Contents Revenue Recognition-Life Sciences Revenues from the Life Sciences segment are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and antibody manufacturing. Revenues are recognized when products are shipped and risk of loss is transferred to the carrier(s) used. NON-GAAP FINANCIAL MEASURES While we prepare our financial statements in accordance with U.S. GAAP, we also utilize and present certain financial measures, in particular adjusted operating income, which is not based on or included in U.S. GAAP (we refer to these as “non-GAAP financial measures”). Net Revenue Net revenue is a non-GAAP measure calculated as total revenue less forwarding expenses attributable to the Company’s Global Logistics Services segment. Our total revenue represents the total dollar value of services and goods we sell to our customers. Forwarding expenses attributable to the Company’s Global Logistics Services segment refer to purchased transportation and related services including contracted air, ocean, rail, motor carrier and other costs. Total revenue can be influenced greatly by changes in transportation rates or other items, such as fuel prices, which we do not control. Management believes that providing net revenue is useful to investors as net revenue is the primary indicator of our ability to source, add value and sell services and products that are provided by third parties, and we consider net revenue to be our primary performance measurement. The difference between the rate billed to our customers (the sell rate) and the rate we pay to the carrier (the buy rate) is termed “net revenue”, “yield” or “margin.” As presented, net revenue matches gross margin. Adjusted Operating Income As a result of our acquisition strategy, our net income includes material non-cash charges relating to the amortization of customer-related intangible assets in the ordinary course of business as well as other intangible assets acquired in our acquisitions. Although these charges may increase as we complete more acquisitions, we believe we will be growing the value of our intangible assets such as customer relationships. Because these charges are not indicative of our operations, we believe that adjusted operating income is a useful financial measure for investors because it eliminates the effect of these non-cash costs and provides an important metric for our business that is more representative of the actual results of our operations. Adjusted operating income (which excludes the non-cash impact of amortization of intangible assets, stock-based compensation and amortization of acquired inventory valuation) is used by management as a supplemental performance measure to assess our business’s ability to generate cash and economic returns. Adjusted operating income is a non-GAAP measure of income and does not include the effects of preferred stock dividends, interest and taxes. We believe that net revenue and adjusted operating income provide useful information in understanding and evaluating our operating results in the same manner as management. However, net revenue and adjusted operating income are not financial measures calculated in accordance with U.S. GAAP and should not be considered as a substitute for total revenue, operating income or any other operating performance measures calculated in accordance with U.S. GAAP. Using these non-GAAP financial measures to analyze our business has material limitations because the calculations are based on the subjective determination of management regarding the nature and classification of events and circumstances that users of the financial statements may find significant. In addition, although other companies in our industry may report measures titled net revenue, adjusted operating income or similar measures, such non-GAAP financial measures may be calculated differently from how we calculate our non-GAAP financial measures, which reduces their overall usefulness as comparative measures. Because of these limitations, you should consider net revenue and adjusted operating income alongside other financial performance measures, including total revenue, operating income and our other financial results presented in accordance with U.S. GAAP. 30 Table of Contents The following table sets forth a reconciliation of operating income to adjusted operating income: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in thousands) (in thousands) Operating (loss) income $ (632 ) $ 256 $ (1,504 ) $ 1,588 Amortization of intangible assets (1) 243 230 729 674 Stock-based compensation (2) 68 93 217 329 Amortization of acquired inventory valuation (3) 150 66 597 195 Adjusted operating (loss) income $ (171 ) $ 645 $ 39 $ 2,786 (1) Amortization of intangible assets represents non-cash amortization expense or impairment expense, if any, attributable to acquisition-related intangible assets, including any portion that is allocated to noncontrolling interests. Management believes that making this adjustment aids in comparing the Company’s operating results with other companies in our industry that have not engaged in acquisitions. (2) The Company eliminates the impact of stock-based compensation because it does not consider such non-cash expenses to be indicative of the Company’s core operating performance. The exclusion of stock-based compensation expenses also facilitates comparisons of the Company’s underlying operating performance on a period-to-period basis. (3) The Company has excluded the impact of amortization of acquired inventory valuation in connection with acquisitions as such adjustments represent non-cash items, are not consistent in amount and frequency and are significantly impacted by the timing and size of the Company’s acquisitions. Results of Operations – Segment Financial Results – Three and Nine Months Ended June 30, 2020 and 2019 The following table sets forth our segment financial results: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in thousands) (in thousands) Revenue: Global Logistics Services $ 15,565 $ 16,708 $ 46,972 $ 52,378 Manufacturing 1,605 2,419 5,531 6,952 Life Sciences 1,328 1,184 4,937 4,277 Total Revenues 18,498 20,311 57,440 63,607 Gross Profit: Global Logistics Services 3,371 3,836 11,076 12,131 Manufacturing 853 1,353 3,026 3,876 Life Sciences 869 897 3,274 2,936 Total Gross Profit 5,093 6,086 17,376 18,943 Income (loss) from Operations: Global Logistics Services (58 ) 236 57 1,911 Manufacturing 371 861 1,161 1,709 Life Sciences (82 ) 102 272 710 Total Income from Operations by Segment 231 1,199 1,490 4,330 Corporate administrative expense (620 ) (713 ) (2,265 ) (2,068 ) Amortization expense (243 ) (230 ) (729 ) (674 ) Interest expense, net (108 ) (183 ) (412 ) (543 ) Net (loss) income before taxes (740 ) 73 (1,916 ) 1,045 Income tax expense (557 ) (103 ) (438 ) (356 ) Net (loss) income $ (1,297 ) $ (30 ) $ (2,354 ) $ 689 Preferred stock dividends (174 ) (150 ) (500 ) (420 ) Net (Loss) Income available to Common Stockholders $ (1,471 ) $ (180 ) $ (2,854 ) $ 269 31 Table of Contents Results of Operations – Janel Corporation The following table sets forth our corporate group expenses: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in thousands) (in thousands) Corporate expenses $ 458 $ 557 $ 1,928 $ 1,602 Amortization of intangible assets 243 230 729 674 Stock-based compensation 106 93 217 329 Merger and acquisition expenses 56 63 120 137 Total corporate expenses $ 863 $ 943 $ 2,994 $ 2,742 Expenses Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, decreased by $80 to $863, or 8.5% for the three months ended June 30, 2020 as compared to $943 for the three months ended June 30, 2019. The decrease was due primarily to lower accounting-related professional expenses. Corporate expenses increased to $2,994 for the nine months ended June 30, 2020 as compared to $2,742 for the nine months ended June 30, 2019, a $252 or 9.2% increase. The increase was due primarily to higher accounting-related professional expenses, partially offset by lower stock-based compensation expense and merger and acquisition related expenses for the quarter. Amortization of Intangible Assets For the three months ended June 30, 2020 and 2019, corporate amortization expenses were $243 and $230, respectively, an increase of $13, or 5.7%. For the nine months ended June 30, 2020 and 2019, corporate amortization expenses were $729 and $674, respectively, an increase of $55, or 8.2%. The increases in both periods were related to acquisitions. Interest Expense For the three months ended June 30, 2020, interest expense for the consolidated company decreased $75, or 41%, to $108 from $183 for the three months ended June 30, 2019. For the nine months ended June 30, 2020 and 2019, interest expense was $412 and $543, respectively, a decrease of $131, or 24.1%. The decrease in both periods was primarily due to lower prevailing interest rates and lower rates on the amended revolving line of credit facility, partially offset by average higher debt levels on the senior secured term loan facility. Income Taxes On a consolidated basis, the Company recorded an income tax expense of $557 for the three months ended June 30, 2020, as compared to an income tax expense of $103 for the three months ended June 30, 2019. For the nine months ended June 30, 2020, the Company recorded an income tax expense of $438 compared to an expense of $356 in the prior year period. The increase in income tax expense in the current period was primarily due to the estimated non-deductible expense related to the expected loan forgiveness amount under the Paycheck Protection Program (“PPP”) loan received in the third quarter. In 2016, a deferred tax asset was established to reflect a net operating loss carryforward, which the Company has begun using, and is expected to continue to use, through ongoing profitability. Preferred Stock Dividends Preferred stock dividends include any dividends accrued but not paid on the Company’s Series C Cumulative Preferred Stock (the “Series C Stock”). For the three months ended June 30, 2020 and 2019, preferred stock dividends were $174 and $150, respectively. For the nine months ended June 30, 2020 and 2019, the preferred stock dividends were $500 compared to $420, respectively. The increases of $24 for the three-month period and $80 for the nine-month period were the result of an increase in the dividend rate as of January 1, 2020 to 7% and a higher outstanding amount of accrued and unpaid dividends. See note 10 to the consolidated financial statements for additional information. 32 Table of Contents Net (Loss) Income Net loss was ($1,297) or ($1.49) per diluted share, for the three months ended June 30, 2020 compared to net loss of ($30), or ($0.04) per diluted share, for the three months ended June 30, 2019. For the nine months ended June 30, 2020, net loss totaled ($2,354) or ($2.71) per diluted share compared to net income of $689 or $0.73 per diluted share for the nine months ended June 30, 2019. The period-over-period losses were primarily due to lower revenues and gross profit and higher selling, general and administrative expenses across our businesses in both periods. Net (Loss) Income Available to Common Stockholders Net loss available to holders of common shares was ($1,471), or ($1.69) per diluted share, for the three months ended June 30, 2020 compared to loss of ($180), or ($0.22) per diluted share, for the three months ended June 30, 2019. In the nine months ended June 30, 2020, net loss available to holders of common shares totaled ($2,854) or ($3.29) per diluted share compared to $269 or $0.28 per diluted share for the nine months ended June 30, 2019. The decrease primarily was due to lower revenues and gross profit and higher selling, general and administrative expenses across our businesses in both periods and an increase in the dividend rate with respect to the Series C Stock as of January 1, 2020 to 7%. Results of Operations - Global Logistics Services Our Global Logistics Services business helps its clients move and manage freight efficiently to reduce inventories and to increase supply chain speed and reliability. Key services include customs entry filing, arrangement of freight forwarding by air, ocean and ground, warehousing, cargo insurance procurement, logistics planning, product repackaging and online shipment tracking. Global Logistics Services – Selected Financial Information: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in thousands) (in thousands) Revenue $ 15,565 $ 16,708 $ 46,972 $ 52,378 Forwarding expenses 12,194 12,872 35,896 40,247 Net revenue 3,371 3,836 11,076 12,131 Gross profit margin 22 % 23 % 24 % 23 % Selling, general & administrative 3,429 3,600 11,019 10,220 (Loss) income from operations $ (58 ) $ 236 $ 57 $ 1,911 Revenue Total revenue decreased 6.8% to $15,565 for the three months June 30, 2020, compared to $16,708 in the three months ended June 30, 2019. The decrease in revenue was driven by the continued global trade slowdown, in particular the steep reduction in global import and export trade volumes, due to the COVID-19 pandemic. Total revenue for the nine months ended June 30, 2020 and 2019 was $46,972 and $52,378, respectively, a decrease of $5,406 or 10.32%. The decrease in revenue was largely due to the impact of the continued global trade slowdown due to the COVID-19 pandemic and customers in the prior year period moving freight ahead of certain governmental trade policies. Acquired revenue from two acquisitions completed during fiscal 2019 slightly offset a portion of the revenue decline in the nine-month period. Net Revenue Net revenue for the three months ended June 30, 2020 and 2019 was $3,371 and $3,836, respectively, a decrease of $465, or 12.1%. The decrease reflected an organic decline for the quarter in our base business due to volume pressures from the COVID-19 pandemic. Net revenue as a percentage of gross revenue decreased to 21.7% versus 23% for the prior year period due to COVID-19 related impact on transportation prices. Net revenue for the nine months ended June 30, 2020 and 2019 was $11,076 and $12,131, respectively, a decrease of $1,055, or 8.7%, as a result of organic declines due to the COVID-19 pandemic and customers in the prior year period moving freight in advance of certain governmental trade policies. 33 Table of Contents This decline was partially offset by contributions from two acquisitions and improved freight purchase rates in the current year period. Net revenue as a percentage of gross revenue in the nine-month period approximated 23.6% versus 23.2% in the prior year. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended June 30, 2020 were $3,429, as compared to $3,600 for the three months ended June 30, 2019. This decrease of $171, or 4.7%, was largely attributable to lower travel related expenses due to the COVID-19 pandemic. As a percentage of revenue, selling, general and administrative expenses were 22% and 21.5% of revenue for the three months ended June 30, 2020 and 2019, respectively. Selling, general and administrative expenses for the nine months ended June 30, 2020 and 2019 were $11,019 and $10,220, respectively. The increase of $799, or 7.8%, reflected the reserve for the settlement of threatened litigation and higher expenses from prior year acquisitions. As a percentage of revenue, selling, general and administrative expenses were 23.5% and 19.5% of revenue for the nine months ended June 30, 2020 and 2019, respectively. (Loss) Income from Operations For the three months ended June 30, 2020, loss from operations before income taxes was $(58) as compared to income from operations of $236 for the three months ended June 30, 2019, a decrease of $294 or 124.6%. Operating income in the three-month period declined due to the impact of the global trade slowdown associated with the COVID-19 pandemic. For the nine months ended June 30, 2020 and 2019, income from operations before income taxes was $57 and $1,911 respectively, a decrease of $1,854 or 97%. Income from operations declined as a result of the impact of the COVID-19 pandemic, a shift in volume experienced during the first quarter of fiscal 2019 that did not recur and the reserve for the settlement of threatened litigation, partially offset by contributions from acquisitions experienced during the first quarter. Our operating margin as a percentage of net revenue for the nine months ended June 30, 2020 was 0.5%, versus 15.8% in the prior year period. Results of Operations - Manufacturing The Company’s Manufacturing segment includes its majority-owned Indco subsidiary, which manufactures and distributes industrial mixing equipment. Manufacturing – Selected Financial Information: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in thousands) (in thousands) Revenue $ 1,605 $ 2,419 $ 5,531 $ 6,952 Cost of sales 752 1,066 2,505 3,076 Gross profit 853 1,353 3,026 3,876 Gross profit margin 53 % 56 % 55 % 56 % Selling, general & administrative 482 492 1,865 2,167 Income from Operations $ 371 $ 861 $ 1,161 $ 1,709 Revenue Total revenue decreased 33.6% to $1,605 in the three months ended June 30, 2020, compared to $2,419 for the three months ended June 30, 2019. Total revenue decreased 20.4% to $5,531 in the nine months ended June 30, 2020, compared to $6,952 in the nine months ended June 30, 2019. The revenue decline in both periods reflected a decline in volumes across the business relative to the prior year periods, due to the slowdown related to the COVID-19 pandemic. Gross Profit Gross profit decreased 36.9% to $853 in the three months ended June 30, 2020, compared to $1,353 for the three months ended June 30, 2019. Gross profit margin for the three-month periods ended June 30, 2020 and 2019 was 53.1% and 56%, respectively. 34 Table of Contents Gross profit decreased 21.9% to $3,026 in the nine months ended June 30, 2020, compared to $3,876 for the nine months ended June 30, 2019. Gross profit margin for the nine months ended June 30, 2020 decreased to 54.7%, compared to 56% for the nine months ended June 30, 2019. In both the three- and nine-month periods, gross profit margin decreased due to the mix of business. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 2% to $482 for the three months ended June 30, 2020, compared to $492 for the three months ended June 30, 2019. Selling, general and administrative expenses decreased 13.9% to $1,865 for the nine months ended June 30, 2020, compared to $2,167 for the nine months ended June 30, 2020. The decrease in both periods was related to the decline in revenue, partially offset by management’s decision to maintain staffing and operational capabilities. Income from Operations Income from operations was $371 for the three months ended June 30, 2020 compared to $861 for the three months ended June 30, 2019, representing a 56.9% decrease from the prior year period. Income from operations of $1,161 for the nine months ended June 30, 2020 decreased 32.1% compared to $1,709 for the nine months ended June 30, 2019. Operating profit decreased in both periods due to lower revenue growth without corresponding expense reductions. Results of Operations – Life Sciences The Company’s Life Sciences segment manufactures and distributes high-quality monoclonal and polyclonal antibodies, diagnostic reagents and other immunoreagents for biomedical research and provides antibody manufacturing for academic and industry research scientists. Our Life Sciences business also produces products for other life science companies on an OEM basis. Life Sciences – Selected Financial Information: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in thousands) (in thousands) Revenue $ 1,328 $ 1,184 $ 4,937 $ 4,277 Cost of sales 459 287 1,663 1,341 Gross profit 869 897 3,274 2,936 Gross profit margin 65 % 76 % 66 % 69 % Selling, general & administrative 951 795 3,002 2,226 Income (loss) from Operations $ (82 ) $ 102 $ 272 $ 710 Revenue Total revenue was $1,328 and $1,184 for the three months ended June 30, 2020 and 2019, respectively, an increase of $144 or 12.2%. Total revenue was $4,937 and $4,277 for the nine months ended June 30, 2020 and 2019, respectively, an increase of $660 or 15.4%. Acquisitions accounted for all of the increase in both periods, as organic growth declined at a double-digit rate for the quarter and at a mid-single digit rate in the nine-month period, each as compared to the prior year period, due to the slowdown in academic research related to the COVID-19 pandemic. Gross Profit and Gross Profit Margin Gross profit was $869 and $897 for the three months ended June 30, 2020 and 2019, respectively, a decrease of $28 or 3.1%. Amortization of acquired inventory in the quarter totaled $150 compared to $66 in the prior year period due to our two prior year acquisitions. For the three months ended June 30, 2020 and 2019, the Life Sciences segment had gross profit margins of 65.4% and 76%, respectively. Gross profit margin decreased in the quarter compared to the prior year period due to an acquisition-related inventory charge. Gross profit was $3,274 and $2,936 for the nine months ended June 30, 2020 and 2019, respectively. In the nine months ended June 30, 2020, amortization of acquired inventory totaled $597 compared to $195 in the prior year period. For the nine months ended June 30, 2020, the Life Sciences segment had a gross profit margin of 66.3% compared to 69% for the prior year period. 35 Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses were $951 and $795 for the three months ended June 30, 2020 and 2019, respectively, an increase of $156 or 19.6%. Selling, general and administrative expenses were $3,002 and $2,226 for the nine months ended June 30, 2020 and 2019, respectively, an increase of $776 or 34.9%. The increase in both periods was largely due to acquired businesses. Income (loss) from Operations Loss from operations for the three months ended June 30, 2020 ($82) compared to income from operations of $102 in the prior year period. The decline in operating income reflected higher amortization of acquired inventory due to acquisitions and a slowdown in academic research in the quarter related to the COVID-19 pandemic. Income from operations for the nine months ended June 30, 2020 and 2019 was $272 and $710, respectively. The decline reflected higher amortization of acquired inventory due to acquisitions. As a percentage of revenue, income from operations in the nine months ended June 30, 2020 declined to 5.5% versus 16.6% due to lower amortization of acquired inventory. Absent these non-cash expenses, adjusted operating income for the nine months ended June 30, 2020 was $869 compared to $905 in the prior year. LIQUIDITY AND CAPITAL RESOURCES General Our ability to satisfy liquidity requirements, including satisfying debt obligations and fund working capital, day-to-day operating expenses and capital expenditures, depends upon future performance, which is subject to general economic conditions, competition and other factors, some of which are beyond Janel’s control. Our Global Logistics Services segment depends on commercial credit facilities to fund day-to-day operations as there is a difference between the timing of collection cycles and the timing of payments to vendors. Generally, Janel does not make significant capital expenditures. As a customs broker, our Global Logistics Services segment makes significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities primarily in the U.S. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. These “pass through” billings can influence our traditional credit collection metrics. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Management believes that it has established effective credit control procedures and has historically experienced relatively insignificant collection problems. The COVID-19 pandemic has negatively impacted our liquidity and cash flows. As discussed in greater detail in note 9 to the consolidated financial statements, on April 19, 2020, we entered into a loan agreement with Santander and executed a U.S. Small Business Administration (SBA) note pursuant to which we borrowed $2,726 from Santander pursuant to the PPP under The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), Section 7(a)(36) of the Small Business Act in order to be able to continue to cover our payroll costs, group health care benefits, mortgage payments, rent and utilities. The duration and magnitude of the pandemic is not reasonably estimable at this point, and if the pandemic persists, our liquidity and capital resources could be further negatively impacted. As of June 30, 2020, the Company’s cash and working capital deficiency (current assets minus current liabilities) were $2,679 and $7,894, respectively, as compared to $2,163 and $6,190 as of September 30, 2019. The increase in working capital deficiency is considered nominal, representing relatively stable collections from customers and payments of vendors. Janel’s cash flow performance for the three and nine-months ended June 30, 2020 is not necessarily indicative of future cash flow performance. Cash flows from operating activities Net cash provided by operating activities for the nine months ended June 30, 2020 and 2019 was $1,263 and $3,219, respectively. The decrease in cash provided by operations for the nine months ended June 30, 2020 was driven principally by the higher net loss, partially offset by timing of cash collections for accounts receivables and cash payments on accounts payables for the nine-month period ended June 30, 2020. 36 Table of Contents Cash flows from investing activities Net cash used in investing activities totaled $403 for the nine months ended June 30, 2020, versus $2,238 for the prior year period. During the nine months ended June 30, 2020, the Company used $116 for final purchase price adjustments related to an acquisition in the prior year compared to $1,935 for the nine months ended June 30, 2019. The Company also used $288 for the acquisition of property and equipment for the nine months ended June 30, 2020 compared to $303 for the nine months ended June 30, 2019. Cash flows from financing activities Net cash used in financing activities was $344 for the nine months ended June 30, 2020, compared to $204 for the nine months ended June 30, 2019. Net cash used in financing activities for the nine months ended June 30, 2020 was primarily a result of reduced outstanding balances on our line of credit. Net cash used in financing activities for the nine months ended June 30, 2019 was primarily a result of repayment of the First Merchants Bank term loan. Off-Balance Sheet Arrangements As of June 30, 2020, we had no off-balance sheet arrangements or obligations.