Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussions below in this Item 7 should be read along with Janel’s audited financial statements and related notes thereto as of September 30, 2022 and 2021 and for each of the two years in the
period ended September 30, 2022 included in this Annual Report on Form 10-K.
INTRODUCTION
Janel is a holding company with subsidiaries in three business segments: Logistics, Life Sciences and Manufacturing. 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 higher risk-adjusted rates of return and attracting and retaining exceptional talent. Management at the holding
company level focuses on significant capital allocation decisions and corporate governance. 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.
Recent Investment
On August 19, 2022, the Company acquired 1,108,000 shares of the common stock, par value $0.001 per share, of Rubicon Technology, Inc. ("Rubicon"), at a price per share of $20.00, in a cash tender
offer made pursuant to the Stock Purchase and Sale Agreement, dated July 1, 2022, between the Company and Rubicon (the "Rubicon Purchase Agreement"). Pursuant to the terms of the Rubicon Purchase Agreement, the acquired shares represented 44.99%
of Rubicon's issued and outstanding shares of common stock as of August 3, 2022, as reported in Rubicon's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022, filed with the SEC on August 12, 2022. The purpose of our
investment in Rubicon is for Janel to acquire a significant ownership interest in Rubicon, together with representation on Rubicon's Board, in an attempt to (i) restructure the Rubicon business to achieve profitability and (ii) assist Rubicon in
utilizing its NOL carry-forward assets.
Year Ended September 30, 2022 Acquisitions
On August 15, 2022, the Company completed a business combination whereby it acquired all of the membership interests of ECM Biosciences LLC, which we include in our Life Sciences segment.
Year Ended September 30, 2021 Acquisitions
On September 21, 2021, the Company completed a business combination whereby it acquired all of the membership interests of Expedited Logistics and Freight Services, LLC ("ELFS") and related
subsidiaries, which we include in our Logistics segment.
On December 31, 2020, the Company completed a business combination whereby it acquired substantially all of the assets and certain liabilities of W.R. Zanes & Co. of LA., Inc. (“W.R. Zanes”),
which we include in our Logistics segment.
On December 4, 2020, the Company completed a business combination whereby it acquired all of the membership interests of ImmunoChemistry Technologies, LLC (“ICT”), which we include in our Life
Sciences segment.
Results of Operations – Janel Corporation
Our results of operations and period-over-period changes are discussed in the following section. The tables and discussion should be read in conjunction with the accompanying Consolidated Financial
Statements and the notes thereto appearing in Item 8.
Refer to Item 7. “Management Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended September 30, 2021, filed on December 23,
2021, for a comparison of fiscal year 2021 results of operations to the fiscal year 2020 results of operations, which specific discussion is incorporated herein by reference.
Our condensed consolidated results of operations are as follows:
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Financial Summary
Fiscal years ended September 30,
(in thousands)
2022
2021
Revenue
$
316,863
$
146,419
Forwarding expenses and cost of revenue
250,666
113,986
Gross profit
66,197
32,433
Operating expenses
56,699
28,482
Income from operations
$
9,498
$
3,951
Net (loss) income
$
(2,138
)
$
5,203
Adjusted operating income
$
12,797
$
5,894
Revenue for the year ended September 30, 2022 was $316,863, or 116.4% higher than fiscal 2021. Revenue increased largely due to our Logistics segment which benefited from acquisitions and higher
freight prices due to tight global shipping capacity relative to the prior fiscal year. Income from operations for fiscal 2022 was $9,498 compared to an income from operations of $3,951 for fiscal 2021, an increase of $5,547, largely as a result
of our Logistics segment which benefited from acquisitions and strong demand due to tight global shipping capacity, partially offset by higher spending in the corporate segment for stock based compensation and legal fees related to the Rubicon
investment. Adjusted operating income for fiscal 2022 increased to $12,797 versus $5,894 in the prior fiscal year primarily due to the increase in Logistics profits partially offset by higher acquisition expenses at Corporate.
The Company’s net loss for the year ended September 30, 2022 totaled $2,138 or $2.07 per diluted share, compared to net income of approximately $5,203 or $5.26 per diluted share for the year ended
September 30, 2021. The decline in net income was largely due to a non-cash mark-to-market write-down of our equity investment in Rubicon, higher interest expenses and higher earn-out accruals as profit related to an acquisition were higher than
expected.
The following table sets forth a reconciliation of income from operations to adjusted operating income:
Adjusted Operating Income
Fiscal years ended September 30,
(in thousands)
2022
2021
Income from operations
$
9,498
$
3,951
Amortization of intangible assets
1,975
1,120
Stock-based compensation
832
115
Cost recognized on sale of acquired inventory
492
708
Adjusted operating income
$
12,797
$
5,894
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BUSINESS PERFORMANCE
Results of Operations – Logistics
Our Logistics business helps its clients move and manage freight efficiently to reduce inventories and to increase supply chain speed and reliability. Key services include arrangement of freight forwarding by air, ocean
and ground, customs entry filing, warehousing, cargo insurance procurement, logistics planning, product repacking and online shipment tracking.
Financial Summary
Fiscal years ended September 30,
(in thousands)
2022
2021
Revenue
$
295,343
$
125,863
Forwarding expense
242,946
106,139
Gross profit
$
52,397
$
19,724
Gross profit margin
17.7
%
15.7
%
Selling, general and administrative expenses
$
40,075
$
16,656
Income from operations
$
12,322
$
3,068
Fiscal 2022 compared with fiscal 2021
Revenue
Total revenue in fiscal 2022 was $295,343 as compared to $125,863 in fiscal 2021, an increase of $169,480 or 134.7%. Of the increase in revenue, two acquisitions accounted for $102,412 of additional
revenue compared to the prior year and $67,068 represented organic growth. A rise in transportation rates drove organic growth due to a shortage of transportation capacity globally. Higher prices for ocean, air and trucking services led to
significant growth in both gross revenue and forwarding expenses. Our volume, as measured in ocean freight by twenty-foot equivalent units, grew 3%, air freight volume as measured by metric tons increased 17% and customs entries grew 4%. In
fiscal 2023, we anticipate both gross revenue and forwarding expenses decreasing as demand is expected to decrease to match the industry's available capacity.
Gross Profit
Gross profit in fiscal 2022 was $52,397, an increase of $32,673, or 165.7%, as compared to $19,724 in fiscal 2021. Two acquisitions accounted for $26,170 of additional gross profit, while a 33%
increase in organic gross profit was attributed to volume growth and higher pricing across most of our services—especially air and ocean—resulting in higher adjusted gross profits per transaction. Gross profit as a percentage of revenue increased
to 17.7% compared to 15.7% for the prior year, due to the higher gross profit margins at an acquired business partially offset by lower gross profit margins due to the increase in transportation rates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations in fiscal 2022 were $40,075 as compared to $16,656 in fiscal 2021. The increase of $23,419, or 140.6%, was mainly due to
additional expenses from acquired businesses and costs to support business growth. As a percentage of gross revenue, selling, general and administrative expenses were 13.6% and 13.2% for fiscal 2022 and fiscal 2021, respectively.
Income from Operations
Income from operations increased to $12,322 in fiscal 2022 compared to $3,068 in fiscal 2021. Income from operations increased as a result of the contribution from acquisitions, favorable industry
pricing and operating leverage from revenue growth. Our operating margin as a percentage of gross profit was 23.5% in fiscal 2022 compared to 15.6% in fiscal 2021, largely due to operating leverage from significantly higher gross profit due to
elevated industry demand and pricing.
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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.
Financial Summary
Fiscal years ended September 30,
(in thousands)
2022
2021
Revenue
$
11,625
$
11,992
Cost of sales
2,441
3,156
Cost recognized upon sale of acquired inventory
492
708
Gross profit
$
8,692
$
8,128
Gross profit margin
74.8
%
67.8
%
Selling, general and administrative expenses
$
5,421
$
4,469
Income from operations
$
3,271
$
3,659
Fiscal 2022 compared with fiscal 2021
Revenue
Total revenue was $11,625 in fiscal 2022 compared with $11,992 in fiscal 2021. Revenue decreased 3.0% or $367 primarily related to the timing of orders, in particular for diagnostic reagents.
Gross Profit
Gross profit was $8,692 and $8,128 for fiscal years 2022 and 2021, respectively, representing a year-over-year increase of $564 or 6.9%. In the fiscal years ended September 30, 2022 and 2021, the
Life Sciences segment had a gross profit margin of 74.8% and 67.8%, respectively. The increase in gross profit and the related margin reflected lower cost recognized upon the sale of acquired inventory and improved product mix. The gross profit
margin was impacted by the amortization of non-cash acquired inventory expenses of $492 and $708 for fiscal 2022 and 2021, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Life Sciences segment were $5,421 and $4,469 for fiscal years 2022 and 2021, respectively. The year-over-year increase was largely due to
inflation, additional cost in the business to support future growth and expenses from acquired businesses. As a percentage of revenue, selling, general and administrative expenses were 46.6% and 37.3% for fiscal 2022 and fiscal 2021,
respectively.
Income from Operations
The Life Sciences business earned $3,271 and $3,659 in income from operations for fiscal 2022 and 2021, respectively. The decrease in operating income reflected a decline in revenue and higher
expenses partially offset by favorable mix in the business. As a result of these factors, the income from operations as a percentage of revenue declined from 30.5% in fiscal year 2021 to 28.1% in fiscal year 2022.
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Results of Operations - Manufacturing
The Company's Manufacturing segment reflects its majority-owned Indco subsidiary, which manufactures and distributes industrial mixing equipment.
Financial Summary
Fiscal years ended September 30,
(in thousands)
2022
2021
Revenue
$
9,895
$
8,564
Cost of sales
$
4,787
$
3,983
Gross profit
$
5,108
$
4,581
Gross profit margin
51.6
%
53.5
%
Selling, general and administrative expenses
$
3,095
$
2,696
Income from operations
$
2,013
$
1,885
Fiscal 2022 compared with fiscal 2021
Revenue
Total revenue was $9,895 in fiscal 2022 compared with $8,564 in fiscal 2021, an increase of 15.5%. The revenue increase largely reflected higher product pricing implemented to address an increase in
the cost of sales and an increase in volume as demand remained steady.
Gross Profit
Gross profit was $5,108 and $4,581 for fiscal years 2022 and 2021, respectively. Gross profit margin for the Manufacturing segment during fiscal 2022 was 51.6%, as compared to 53.5%, in fiscal 2021.
The year-over-year decrease in gross profit margin was generally due to mix of business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Manufacturing segment were $3,095 and $2,696 for fiscal years 2022 and 2021, respectively. As a percentage of gross revenue, selling, general and
administrative expenses were 31.3% and 31.5% for fiscal 2022 and fiscal 2021, respectively, as expenses remained consistent with the growth of the business.
Income from Operations
Income from operations for fiscal 2022 was $2,013 compared to $1,885 in fiscal 2021, representing a 6.8% increase compared to the prior year and consistent with the growth in the business.
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Results of Operations – Corporate and Other
Below is a reconciliation of income from operating segments to net (loss) available to common stockholders:
Years Ended
September 30,
2022
2021
(In thousands)
Total income from operating segments
$
17,606
$
8,612
Corporate expenses
(5,342
)
(3,493
)
Amortization expense
(1,976
)
(1,120
)
Stock-based compensation
(790
)
(48
)
Total Corporate expenses
(8,108
)
(4,661
)
Interest expense
(1,276
)
(589
)
Change in fair value of mandatorily redeemable non-controlling interest
411
(93
)
Fair value adjustments to Rubicon investment (net of dividends)
(7,601
)
—
Change in fair value of earnout
(980
)
—
Gain on Paycheck Protection Program loan forgiveness
—
2,895
Net income before taxes
52
6,164
Income tax expense
(2,190
)
(961
)
Net (loss) Income
(2,138
)
5,203
Preferred stock dividends
(586
)
(766
)
Non-controlling interest dividends
(404
)
—
Net (loss) Income Available to Common Stockholders
$
(3,128
)
$
4,437
Total Corporate Expenses
Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, increased by $3,447 to $8,108, or 74.0%, in fiscal 2022 as compared
to fiscal 2021. The increase was due primarily to legal and consulting costs related to the Rubicon investment, stock-based compensation related to restricted stock issuance with immediate vesting, higher accounting-related professional expense,
increased merger and acquisition expenses and increases in amortization of intangible expenses. We incur merger and acquisition deal-related expenses and intangible amortization at the Corporate level rather than at the segment level.
Interest Expense
Interest expense for the consolidated company increased $687, or 116.6%, to $1,276 in fiscal 2022 from $589 in fiscal 2021. The increase was primarily due to higher average debt balances to support
our acquisition efforts and higher interest rates.
Income Tax Expense
On a consolidated basis, the Company recorded an income tax expense of $2,190 in fiscal 2022, as compared to an income tax expense of $961 in fiscal 2021. The increase in expense was primarily due
to an increase in pretax income and the non-deductible legal consulting expense related to the Rubicon investment and utilization of prior NOL carry forwards. In 2016, a deferred tax asset was established to reflect a net operating loss
carryforward. The Company fully utilized its Federal loss carryforwards in fiscal 2022 and still has a small number of state loss carryforwards that could be used in the future with ongoing profitability.
Preferred Stock Dividends
Preferred stock dividends include the Company’s Series C Stock and dividends accrued but not paid. For the year ended September 30, 2022 and 2021, preferred stock dividends were $586 and $766,
respectively. The decrease in dividends of $180, or 23.5%, was the result of the Company retiring $6,000 of Series C Preferred Stock on March 31, 2022 and the annual dividend rate change from 9% to 5%. Dividends accrued but not paid on the
Company’s Series C Stock were $1,745 and $2,427 as of September 30, 2022 and 2021, respectively.
Net (loss) Income
Net (loss) income was ($2,138), or $2.07 per diluted share, for fiscal 2022 and $5,203, or $5.26 per diluted share, for fiscal year 2021. The decrease in net income was primarily due to an unrealized loss on the Rubicon investment, higher interest expense and the change in
fair value of an earnout, partially offset by higher operating income.
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Net (loss) income Available to Common Stockholders
Net (loss) income available to common stockholders was ($3,128) or ($3.03) per diluted share for fiscal 2022 and $4,437 or $4.48 per diluted share for fiscal 2021. The decrease in net income was
primarily due to unrealized loss on the Rubicon investment, higher interest expense and the change in fair value of an earnout, partially offset by higher operating income and non-controlling interest dividend.
LIQUIDITY AND CAPITAL RESOURCES
General
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. Our Logistics 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.
As a customs broker, our Logistics 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 United States. 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 or 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.
Janel’s cash flow performance for the 2022 fiscal year may not necessarily be indicative of future cash flow performance.
As of September 30, 2022, and compared with the prior fiscal year, the Company’s cash and cash equivalents increased by $357, or 6%, to $6,591 from $6,234 as of September 30, 2021. During the fiscal
year ended September 30, 2022, Janel’s net working capital deficiency (current assets less current liabilities) decreased by $1,641, from ($14,784) at September 30, 2021 to ($13,143) at September 30, 2022.
Cash flows from continuing operating activities
Net cash provided by (used in) continuing operating activities for fiscal years 2022 and 2021 was $12,107 and ($201), respectively. The increase in cash provided by operations for the year ended
September, 2022 was driven principally by higher profits, timing of cash collections for accounts receivables and cash payments on accounts payables primarily in our Logistics segment for the year ended September 30, 2022.
Cash flows from investing activities
Net cash used in investing activities, mainly for the acquisition of subsidiaries, was $11,469 for fiscal 2022 and $16,108 for fiscal 2021. Net cash used in investing activities for fiscal 2022
related to the Rubicon investment (net of dividend) and one Life Sciences acquisition. The fiscal 2021 amount was associated with two Logistics acquisitions and one Life Sciences acquisition. The Company also used $551 for the acquisition of
property and equipment for the year ended September 30, 2022 compared to $234 for the year ended September 30, 2021.
Cash flows from financing activities
Net cash (used in) provided by financing activities was ($281) for fiscal 2022 and $19,194 for fiscal 2021. Net cash used in financing activities in fiscal 2022 primarily included proceeds from an
increase in our amended term loan, proceeds from our private placement offering, offset by repayments on our line of credit and repurchase of Series C Preferred Stock. Net cash provided by financing activities in fiscal year 2021 primarily
included proceeds from an increase in our line of credit–which financed our acquisition of ELFS–and proceeds from the sale of Series C Preferred Stock, partially offset by repayments on our term loan and notes payables to related party.
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Credit Facilities
Logistics
Santander Bank Facility
On October 17, 2017, the Janel Group ("Janel Group"), a wholly-owned subsidiary of the Company, and its subsidiaries, with the Company as a guarantor, entered into a Loan and Security Agreement (the
“Santander Loan Agreement”) with Santander Bank, N.A. (“Santander”) with respect to a revolving line of credit facility (the “Santander Facility”), as amended. The borrowers' obligations under the Santander Facility are secured by all of the
assets of the borrowers, and the Santander Loan Agreement contains customary terms and covenants. On September 21, 2021, the Santander Loan Agreement was amended and restated by the Amended and Restated Loan and Security Agreement by and among
Janel Group and Janel Group's wholly-owned subsidiaries, ELFS and ELFS Brokerage, LLC, as borrowers (the "Borrowers"), the Company and Expedited Logistics and Freight services, LLC, an Oklahoma limited liability company and wholly-owned
subsidiary of Janel Group, as loan party obligors, and Santander.
As amended and restated, the Santander Loan Agreement provided that the maximum revolving facility amount available increased from $17,000 to $30,000 (limited to 85% of the borrowers' eligible
accounts receivable borrowing base and reserves, subject to adjustments set forth in the Loan Agreement), interest accrued at an annual rate equal to LIBOR (30, 60 or 90 day) plus 2.25% subject to a LIBOR floor of 75 basis points at close, with a
potential LIBOR floor reduction to 25 basis points upon certain conditions; the Company was provided the option of making distributions of up to $1 million annually on its outstanding shares of Series C Cumulative Preferred Stock (the "Series C
Preferred Stock") if specified conditions are met, and the maturity date of the Santander Facility was extended to September 21, 2026.
On March 31, 2022, the Santander Loan Agreement was amended to provide for, among other changes: (i) the maximum revolving facility amount available was increased from $30,000 to $31,500 (limited to
85% of the Borrowers' eligible accounts receivable borrowing base and reserves, subject to adjustments set forth in the Loan Agreement); (ii) the LIBOR basis on which interest under the Santander Loan Agreement was calculated was changed to the
Secured Overnight Financing Rate ("SOFR") and interest on the Santander Facility accrues at an annual rate equal to the one-month SOFR plus 2.75%; (iii) a one-time increase from $1 million to $3 million in the amount the Company was permitted to
distribute to holders of the Company's Series C Preferred Stock if specified conditions are met; and (iv) the amount of indebtedness of the Company's Antibodies Incorporated subsidiary which the Company was permitted to guaranty was increased
from $2,920 to $5,000.
On July 13, 2022, the Santander Loan Agreement was further amended by the Consent, Waiver and Second Amendment (the "Second Santander Amendment") to (i) increase the maximum revolving facility
amount available to $35,000 (limited to 85% of the Borrowers' eligible accounts receivable borrowing base and reserves, subject to adjustments set forth in the Santander Loan Agreement), and (ii) provided for a new bridge term loan to the Company
in the principal amount of up to $12,000 (the "Bridge Facility") to be funded in connection with the acquisition by the Company of up to 45% of the outstanding shares of Rubicon Technology, Inc., a Delaware corporation (the "Rubicon
Transaction"), subject to the satisfaction of certain customary limited conditions. The Bridge Facility was drawn on August 18, 2022 and matured on the earlier to occur of (i) twenty (20) business days following the funding of the Bridge Facility
and (ii) the date of funding of the dividend to be paid by Rubicon in connection with the Rubicon Transaction. The Company repaid the Bridge Facility in full on August 30, 2022. The Second Santander Amendment also contained a one-time waiver and
consent to (a) the consummation of the Rubicon Transaction, and (b) a dividend of $2,500 to be paid by Janel Group to the Company.
At September 30, 2022, outstanding borrowings under the Santander Facility were $26,396, representing 75.4% of the $35,000 available thereunder, and interest was accruing at an effective interest
rate of 5.79%.
At September 30, 2021, outstanding borrowings under the Santander Facility were $29,637, representing 98.8% of the $30,000 available thereunder, and interest was accruing at an effective interest
rate of 3.00%.
The Company was in compliance with the financial covenants defined in the Santander Loan Agreement at both September 30, 2022 and September 30, 2021.
Working Capital Requirements
Through September 30, 2022, the Logistics segment’s cash needs were met by the Santander Facility and cash on hand. As of September 30, 2022, the Logistics segment had, subject to collateral
availability, $7,400 available for future borrowings under its $35,000 Santander Facility and $1,882 in cash.
The Company believes that its current financial resources will be sufficient to finance the operations and obligations (current and long-term liabilities) of the Logistics segment for the short- and
long-term. However, the actual working capital needs of the Logistics segment will depend upon numerous factors, including operating results; the costs associated with growing the Logistics segment, either organically or through acquisitions;
competition and 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, the operations of the Logistics segment will be materially
negatively impacted.
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Life Sciences
First Northern Bank of Dixon
On June 21, 2018, Antibodies Incorporated (“Antibodies”), a wholly-owned subsidiary of the Company, entered into a Business Loan Agreement (the “First Northern Loan Agreement”) with First Northern
Bank of Dixon (“First Northern”). As amended, the First Northern Loan Agreement provides for a $2,235 term loan (the “First Northern Term Loan”), which bears interest at an annual rate of 4.00% and matures on November 14, 2029. In addition,
Antibodies has a $750 revolving credit facility with First Northern, which currently bears interest at a variable index rate, currently 7.75% and matures on November 10, 2023 (the “First Northern Revolving Loan”). Antibodies also entered into two
separate business loan agreements with First Northern: a $125 term loan in connection with a potential expansion of solar generation capacity on the Antibodies property (“First Northern Solar Loan”), bearing interest at the annual rate of 4.43%
(subject to adjustment in five years) and maturing on November 14, 2029; and a $60 term loan in connection with a potential expansion of generator capacity on the Antibodies property (“Generator Loan”), bearing interest at the annual rate of
4.25% and maturing on November 5, 2025. There were no outstanding borrowings under the Generator Loan at September 30, 2022 and 2021. Antibodies' obligations to First Northern are secured by Antibodies' real property and are guaranteed by Janel.
As of September 30, 2022, the total amount outstanding under the First Northern Term Loan was $2,084, of which $2,027 is included in long-term debt and $57 is included in the current portion of
long-term debt, with interest accruing at an effective interest rate of 4.18%.
As of September 30, 2022, the total amount outstanding under the First Northern Solar Loan was $23, of which $15 is included in long-term debt and $8 is included in the current portion of long-term
debt, with interest accruing at an effective interest rate of 4.43%.
As of September 30, 2021, the total amount outstanding under the First Northern Term Loan was $2,139, of which $2,084 is included in long-term debt and $55 is included in the current portion of
long-term debt, with interest accruing at an effective interest rate of 4.18%.
As of September 30, 2021, the total amount outstanding under the First Northern Solar Loan was $105, of which $101 is included in long-term debt and $4 is included in the current portion of
long-term debt, with interest accruing at an effective interest rate of 4.43%.
The Company was in compliance with the financial covenants defined in the First Northern Loan Agreement at September 30, 2022 and September 30, 2021.
Working Capital Requirements
Life Sciences cash needs are currently met by the First Northern Loan Agreement and cash on hand of $1,147. The Company believes that the current financial resources will be sufficient to finance
Life Sciences operations and obligations (current and long-term liabilities) for the long- and short- term. However, actual working capital needs will depend upon numerous factors, including operating results; the cost associated with growing
Life Sciences, either organically or through acquisitions; competition and 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, Life Sciences operations will be materially negatively impacted.
Manufacturing
First Merchants Bank Credit Facility
On March 21, 2016, Indco entered into a Credit Agreement (the "First Merchants Credit Agreement") with First Merchants Bank ("First Merchant"), which has been as amended.
On August 1, 2022, Indco and First Merchants entered into Amendment No. 3 to the First Merchants Credit Agreement, modifying the terms of Indco's credit facilities.
Under the revised terms, the credit facilities consist of a $5,500 term loan, a $1,000 (limited to the borrowing base and reserves) revolving loan and the continuation of a mortgage loan in the
original principal amount of $680 (collectively, the "First Merchants Facility"). Interest will accrue on the term loan at an annual rate equal to one-month adjusted term SOFR plus either 2.75% (if Indco's total funded debt to EBITDA ratio is
less than 2:1), or 3.5% (if Indco's total funded debt to EBITDA ratio is greater than or equal to 2:1). Interest will accrue on the revolving loan at an annual rate equal to one-month adjusted term SOFR plus 2.75%. Interest will accrue on the
mortgage loan at a fixed annual rate of 4.19% until July 1, 2023. Indco's obligations under the First Merchants Credit Facility are secured by all of Indco's real property and other assets, and are guaranteed by Janel, and Janel's guarantee of
Indco's obligations is secured by a pledge of Janel's Indco shares. The term loan and revolving loan portions of the First Merchants Credit Facility will expire on August 1, 2027, and the mortgage loan will mature on July 1, 2025 (subject to
earlier termination as provided in the First Merchant Credit Agreement), unless renewed or extended.
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As of September 30, 2022, there were no outstanding borrowings under the revolving loan, $5,420 of borrowings under the term loan, and $631 of borrowing under the mortgage loan, with interest
accruing on the term loan and mortgage loan at an effective interest rate of 6.63% and 4.19%, respectively.
As of September 30, 2021, there were no outstanding borrowings under the revolving loan, $2,713 of borrowings under the term loan, and $655 of borrowing under the mortgage loan, with interest
accruing on the term loan and mortgage loan at an effective interest rate of 2.83% and 4.19%, respectively.
Indco was in compliance with the financial covenants defined in the First Merchants Credit Agreement at both September 30, 2022 and September 30, 2021.
Working Capital Requirements
Manufacturing’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 September 30, 2022, Manufacturing had
$1,000 available under its $1,000 revolving facility subject to collateral availability and $1,221 in cash. The Company believes that the current financial resources will be sufficient to finance the Manufacturing segment's operations and
obligations (current and long-term liabilities) for the long- and short- term. However, actual working capital needs will depend upon numerous factors, including operating results; the cost associated with growing the Manufacturing segment,
either organically or through acquisitions; competition; and 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,
Manufacturing’s operations will be materially negatively impacted.
CURRENT OUTLOOK
The results of operations in the Logistics, Life Sciences 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 Logistics segment’s various current and prospective customers. Historically, the Company’s annual 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 the segment’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 fiscal 2023 and beyond. Our Logistics 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. In fiscal 2023, we anticipate both gross revenue and profit
declines relative to the prior fiscal year as transportation demand moderates to match the industry's available capacity.
Our Life Sciences and Manufacturing segments expect to introduce new product lines and wider distribution and promotion of their products with internet sales efforts. 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, including 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 may be materially negatively impacted.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1 – Summary of Significant Accounting Policies, included herein, which contains a summary of the significant accounting policies and methods used in the
preparation of our consolidated financial statements. Our financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), which require us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those
estimates. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition
and cash flows.
Business Combinations and Related Acquired Intangible Assets and Goodwill . We record all tangible and intangible assets acquired and liabilities assumed in a
business combination at fair value as of the acquisition date in accordance with Accounting Standards Codification (“ASC”) 805 Business Combinations. Acquisition date fair value represents the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants as measured on the acquisition date. The valuations are based on information that existed as of the acquisition date. During the measurement period, which shall not
exceed one year from the acquisition date, we may adjust provisional amounts recorded for assets acquired and liabilities assumed to reflect new information that we have subsequently obtained regarding facts and circumstances that existed as of
the acquisition date. Such fair value assessments require judgments and estimates, which may cause final amounts to differ materially from original estimates.
As part of acquisitions of businesses, we acquired certain identifiable intangible assets, which are valued as of the acquisition date using a discounted cash flow (“DCF”) model. Key assumptions in
the DCF model include (i) future revenues, (ii) earnings before interest, taxes depreciation and amortization (“EBITDA”) and (iii) the weighted average cost of capital discount rate. Estimated future revenues include assumptions about our ability
to renew contracts in a competitive bidding process. A decrease in revenues or gross and EBITDA margins may adversely affect the value of identifiable intangible assets. The discount rate focuses on rates of return for equity and debt and is
calculated using public information from selected guideline companies. The magnitude of the discount rate reflects the perceived risk of an investment. A change in the estimated risk of the acquired company cash flows would change the discount
rate, which in turn could significantly affect the valuation of acquired identifiable intangible assets.
The excess amount of the aggregated purchase consideration paid over the fair value of the net of assets acquired and liabilities assumed is recorded as goodwill. Goodwill is evaluated for
impairment annually or more frequently if an event occurs or circumstances change, such as material deterioration in performance that would indicate an impairment may exist. When evaluating goodwill for impairment, we may first perform a
qualitative assessment (“step zero” of the impairment test) to determine whether it is more likely than not that a reporting unit is impaired. If we decide not to perform a qualitative assessment, or if we determine that it is more likely than
not the carrying amount of a reporting unit exceeds its the fair value, then we perform a quantitative assessment (“step one” of the impairment test) and calculate the estimated fair value of the reporting unit. If the carrying amount of the
reporting unit exceeds the estimated fair value, an impairment charge would be recorded to reduce the carrying amount to its estimated fair value. The decision to perform a qualitative impairment assessment in a given year is influenced by a
number of factors, including the significance of the excess of the reporting units’ estimated fair value over carrying amount at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date
of our acquisitions.
No indicators of impairment were identified from the date of our annual impairment test through September 30, 2022.
A qualitative assessment is performed for intangibles and long-lived assets to determine if there are any indicators that the carrying amount might not be recovered. A quantitative analysis may be
performed in order to test the intangibles and long-lived assets for impairment. If a quantitative analysis is necessary, an income approach, specifically a relief from royalty method, is used to estimate the fair value of the intangibles and
long-lived assets. Principal factors used in the relief from royalty method that require judgment are projected net sales, discount rates, royalty rates and terminal growth assumptions.
The estimated fair value of each intangible and long-lived assets is compared to its carrying amount to determine if impairment exists. If the carrying amount of a intangibles and long-lived assets
exceeds the estimated fair value, an impairment charge would be recorded to reduce the carrying amount of the intangibles and long-lived assets. No indicators of impairment of our intangibles and long-lived assets were identified from the date of
our annual impairment test through September 30, 2022.
RECENT ACCOUNTING STANDARDS
The recent accounting standards is discussed in Note 1 to the consolidated financial statements contained in this report.
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”).
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Organic Growth
Our non-GAAP financial measure of organic growth represents revenue growth excluding revenue from acquisitions within the preceding 12 months. The organic growth presentation provides useful
period-to-period comparison of revenue results as it excludes revenue from acquisitions that would not be included in the comparable prior period.
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 cost recognized on the sale 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 organic growth and adjusted operating income provide useful information in understanding and evaluating our operating results in the same manner as management. However, organic
growth 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 organic growth, 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 organic growth 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.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Consistent with the rules applicable to “smaller reporting companies”, we have omitted the information required by Item 7A.