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, 2023 and 2022 and for each of the two years in
the period ended September 30, 2023 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.
Year Ended September 30, 2023 Acquisitions
On May 22, 2023, the Company acquired all the rights, title and interests to a royalty agreement for certain antibody products, which we include in our Life Sciences segment.
On March 2, 2023, the Company completed a business combination whereby it acquired all of the outstanding stock of Stephen Hall, PhD Ltd., which we include in our Life Sciences segment.
On November 1, 2022, the Company completed a business combination whereby it acquired all of the outstanding stock of ImmunoBioScience Corporation, which we include in our Life Sciences
segment.
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.
Investment in Marketable Securities - Rubicon
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
45.0% 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 Company owned
approximately 46.6% of Rubicon’s issued and outstanding shares of common stock as of September 30, 2023.
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 ou r Annual Report on Form 10-K for the year ended September 30, 2022 , filed on December 9, 2022,
for a comparison of fiscal year 2022 results of operation s to the fiscal year 2021 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)
2023
2022
Revenue
$
186,449
$
316,863
Forwarding expenses and cost of revenues
130,777
250,666
Gross profit
55,672
66,197
Operating expenses
53,073
56,699
Income from operations
$
2,599
$
9,498
Net income (loss)
$
723
$
(2,138
)
Adjusted operating income (1)
$
5,353
$
12,797
Consolidated revenues for the year ended September 30, 2023 were $186,449, or 41.2% lower than fiscal 2022. Revenues decreased primarily due to lower freight prices in our Logistics segment as
a result of lower freight demand relative to improved global transportation capacity. Income from operations for fiscal 2023 was $2,599 compared to income from operations of $9,498 for fiscal 2022, a decrease of $6,899, largely as a result of
lower profits across our business segments, especially at our Logistics segment, which benefited from unusually high demand in the prior fiscal year. Adjusted operating income for fiscal 2023 decreased to $5,353 versus $12,797 in the prior fiscal
year primarily due to an overall decrease in profits at our business segments.
The Company’s net income for the year ended September 30, 2023 totaled $723 or $0.36 per diluted share, compared to net loss of ($2,138) or ($2.07) per diluted share for the year ended
September 30, 2022. The increase in net income was largely due to a smaller non-cash mark-to-market write down of an equity investment, a change in fair value of an earnout and an income tax benefit, partially offset by lower profits in our
business segments and higher interest expense.
(1) 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)
2023
2022
Income from operations
$
2,599
$
9,498
Amortization of intangible assets
2,098
1,975
Stock-based compensation
231
832
Cost recognized on sale of acquired inventory
425
492
Adjusted operating income
$
5,353
$
12,797
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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)
2023
2022
Revenue
$
166,052
$
295,343
Forwarding expense
123,938
242,946
Gross profit
$
42,114
$
52,397
Gross profit margin
25.4
%
17.7
%
Selling, general and administrative expenses
$
37,310
$
40,075
Income from operations
$
4,804
$
12,322
Fiscal 2023 compared with fiscal 2022
Revenue
Total revenue in fiscal 2023 was $166,052 as compared to $295,343 in fiscal 2022, a decrease of $129,291 or 43.8%. Revenues decreased primarily due to lower freight prices as a result of lower
freight demand relative to improved global transportation capacity. Lower prices for ocean, air and trucking services led to a decrease in both gross revenue and forwarding expenses. Compared to fiscal 2022, during fiscal 2023, our volume, as
measured in ocean freight by twenty-foot equivalent units, fell 25%, air freight volume as measured by metric tons fell 25% and customs entries fell 16%.
Gross Profit
Gross profit in fiscal 2023 was $42,114, a decrease of $10,283, or 19.6%, as compared to $52,397 in fiscal 2022. Gross profit as a percentage of revenue increased to 25.4% compared to 17.7% for
the prior fiscal year, primarily because gross profit declined at a slower rate compared with gross revenue, which declined more significantly due to lower freight prices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2023 were $37,310 as compared to $40,075 in fiscal 2022. The decrease of $2,765, or 6.9%, was mainly due to lower personnel expenses and a
recovery of previously expensed bad debt. As a percentage of gross revenue, selling, general and administrative expenses were 22.5% and 13.6% for fiscal 2023 and fiscal 2022, respectively. The increase in selling, general and administrative
expenses as a percentage of revenue largely reflected the decrease in transportation rates and its impact on revenue.
Income from Operations
Income from operations decreased to $4,804 in fiscal 2023 compared to $12,322 in fiscal 2022. Income from operations decreased as a result of lower transportation volume and prices partially
offset by lower personnel expense. Operating margin as a percentage of gross profit was 11.4% in fiscal 2023 compared to 23.5% in fiscal 2022, largely due to lower gross profits.
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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)
2023
2022
Revenue
$
11,059
$
11,625
Cost of sales
1,951
2,441
Cost recognized upon sale of acquired inventory
425
492
Gross profit
$
8,683
$
8,692
Gross profit margin
78.5
%
74.8
%
Selling, general and administrative expenses
$
6,149
$
5,421
Income from operations
$
2,534
$
3,271
Fiscal 2023 compared with fiscal 2022
Revenue
Total revenue was $11,059 in fiscal 2023 compared with $11,625 in fiscal 2022. Revenue decreased 4.9% or $566 primarily related to lower demand for diagnostic reagents, partially offset by
current year acquisitions. Organic growth excluding acquisition revenue declined $1,408, or 12.1% as COVID-19 pandemic-related revenue declined in fiscal 2023.
Gross Profit
Gross profit was $8,683 and $8,692 for fiscal years 2023 and 2022, respectively, relatively consistent with prior year. In the fiscal years ended September 30, 2023 and 2022, the Life Sciences
segment had a gross profit margin of 78.5% and 74.8%, respectively. The increase in gross profit margin resulted from an improvement in product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Life Sciences segment were $6,149 and $5,421 for fiscal years 2023 and 2022, respectively. The year-over-year increase was due to additional
expenses from acquired businesses. As a percentage of revenue, selling, general and administrative expenses were 55.6% and 46.6% for fiscal 2023 and fiscal 2022, respectively.
Income from Operations
The Life Sciences business earned $2,534 and $3,271 in income from operations for fiscal 2023 and 2022, respectively. The decrease in income from operations was primarily due to lower demand
for diagnostic reagents and additional expenses from acquired businesses. As a result of these factors, income from operations as a percentage of revenue declined from 28.1% in fiscal year 2022 to 22.9% in fiscal year 2023.
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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)
2023
2022
Revenue
$
9,338
$
9,895
Cost of sales
4,463
4,787
Gross profit
$
4,875
$
5,108
Gross profit margin
52.2
%
51.6
%
Selling, general and administrative expenses
$
2,978
$
3,095
Income from operations
$
1,897
$
2,013
Fiscal 2023 compared with fiscal 2022
Revenue
Total revenue was $9,338 in fiscal 2023 compared with $9,895 in fiscal 2022, a decrease of 5.6%. The revenue decline largely reflected a decrease in volume across the business, offset in part
by higher product pricing.
Gross Profit
Gross profit was $4,875 and $5,108 for fiscal years 2023 and 2022, respectively. The year-over-year decline in gross profit reflected a decrease in sales volume. Gross profit margin for the
Manufacturing segment during fiscal 2023 was 52.2%, as compared to 51.6%, in fiscal 2022. The increase in gross profit margin was generally due to a favorable product mix shift.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Manufacturing segment were $2,978 and $3,095 for fiscal years 2023 and 2022, respectively, a decrease of $117, or 3.8%. As a percentage of
gross revenue, selling, general and administrative expenses were 31.9% and 31.3% for fiscal 2023 and fiscal 2022, respectively, consistent with prior year.
Income from Operations
Income from operations for fiscal 2023 was $1,897 compared to $2,013 in fiscal 2022, representing a 5.8% decrease compared to the prior fiscal year and consistent with the decline in revenue.
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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,
2023
2022
(In thousands)
Total income from operating segments
$
9,235
$
17,606
Corporate expenses
(4,331
)
(5,342
)
Amortization expense
(2,098
)
(1,976
)
Stock-based compensation
(207
)
(790
)
Total Corporate expenses
(6,636
)
(8,108
)
Interest expense
(1,998
)
(1,276
)
Change in fair value of mandatorily redeemable non-controlling interest
(135
)
411
Fair value adjustments to Rubicon investment (net of dividends)
(798
)
(7,601
)
Change in fair value of earnout
857
(980
)
Net income before taxes
525
52
Income tax benefit (expense)
198
(2,190
)
Net Income (loss)
723
(2,138
)
Preferred stock dividends
(284
)
(586
)
Non-controlling interest dividends
—
(404
)
Net income (loss) Available to Common Stockholders
$
439
$
(3,128
)
Total Corporate Expenses
Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, decreased by $1,472 to $6,636, or 18.2%, in
fiscal 2023 as compared to fiscal 2022. The decrease was due primarily to lower stock-based compensation expense and lower accounting and merger and acquisition related professional expense, offset in part by current year 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 $722, or 56.6%, to $1,998 in fiscal 2023 from $1,276 in fiscal 2022. The increase was primarily due to higher interest rates, partially
offset by lower average debt outstanding.
Income Tax Expense
On a consolidated basis, the Company recorded an income tax benefit of $198 in fiscal 2023, as compared to an income tax expense of ($2,190) in fiscal 2022. The decrease in income tax expense
was primarily due to a decrease in pretax income.
Preferred Stock Dividends
Preferred stock dividends include the Company’s Series C Stock and dividends accrued but not paid. For the fiscal years ended September 30, 2023 and 2022, preferred stock dividends were $284
and $586, respectively. Preferred stock dividends for fiscal 2023 decreased $302, or 51.5%, compared to fiscal 2022 as a result of the Company retiring $6,000 of Series C Preferred Stock on March 31, 2022 and due to a decrease in the annual
dividend rate from 9% to 5%. Dividends accrued but not paid on the Company’s Series C Stock were $2,029 and $1,745 as of September 30, 2023 and 2022, respectively.
Net Income (loss)
Net income (loss) was $723, or $0.60 per diluted share, for fiscal 2023 and ($2,138), or ($2.07) per diluted share, for fiscal year 2022. The increase in net income was primarily due to a
smaller non-cash mark-to-market write-down of an equity investment, a change in fair value of an earnout, lower stock-based compensation and an income tax benefit offset by lower profits in our business segments and higher interest expense.
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Table of Contents
Net income (loss) Available to Common Stockholders
Net income (loss) available to common stockholders was $439 or $0.36 per diluted share for fiscal 2023 and ($3,128) or ($3.03) per diluted share for fiscal 2022. The increase in net income
available to common stockholders was largely due to a smaller non-cash mark-to-market write-down of an equity investment, a change in fair value of an earnout, lower stock-based compensation and an income tax benefit offset by lower profits in
our business segments and higher interest expense as well as lower preferred stock dividends and the absence of dividends to non-controlling shareholders.
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 2023 fiscal year may not necessarily be indicative of future cash flow performance.
As of September 30, 2023, and compared with the prior fiscal year, the Company’s cash and cash equivalents decreased by $4,130, or 62.7%, to $2,461 from $6,591 as of September 30, 2022. During
the fiscal year ended September 30, 2023, Janel’s net working capital deficiency (current assets less current liabilities) decreased by $6,407, from ($13,143) at September 30, 2022 to ($19,550) at September 30, 2023.
Cash flows from operating activities
Net cash provided by operating activities for fiscal years 2023 and 2022 was $11,388 and $12,107, respectively. The decrease in cash provided by operations for the year ended September 30, 2023 was driven principally by lower net income, deferred income tax provision, change in fair value of an earnout and an increase in prepaid expenses,
partially offset by the timing of cash collections for accounts receivables and cash payments on accounts payable primarily in our Logistics segment for the year ended September 30, 2023.
Cash flows from investing activities
Net cash used in investing activities, mainly for the acquisition of subsidiaries, was $6,500 for fiscal 2023 and $11,469 for fiscal 2022. Net cash used in investing activities for fiscal 2023
related to the two acquisitions in our Life Sciences segment and earnout payments the former owners of ELFS. The fiscal 2022 amount was associated with the Rubicon investment (net of dividend) and one Life Sciences acquisition. The Company also
used $360 for the acquisition of property and equipment for the year ended September 30, 2023 compared to $551 for the year ended September 30, 2022.
Cash flows from financing activities
Net cash (used in) financing activities was ($9,018) for fiscal 2023 and ($281) for fiscal 2022. Net cash used in financing activities in fiscal 2023 primarily included repayment of our term
loan and line of credit. Net cash provided by financing activities in fiscal year 2022 primarily included proceeds from an increase in our amended term loan and proceeds from our private placement offering, offset in part by repayments on our
line of credit and repurchase of Series C Preferred Stock.
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Credit Facilities
Logistics
Santander Bank Facility
The wholly-owned subsidiaries that comprise the Company’s Logistics segment (collectively, the “Janel Group Borrowers”), with the Company as a guarantor, have a Loan and Security Agreement
(as amended, the “Santander Loan Agreement”) with Santander with respect to a revolving line of credit facility (the “Santander Facility”). The Santander Loan Agreement was amended on March 31, 2022 to provide for, among other changes, the
following: (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 Santander
Loan Agreement); (ii) the LIBOR basis on which interest under the Santander Loan Agreement was calculated under certain circumstances 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 $1,000 to $3,000 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 that 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 a 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 Janel Group Borrowers’ eligible accounts receivable borrowing base and reserves, subject to adjustments set forth in the Santander Loan Agreement) and (ii) provide 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 (the “Rubicon Transaction”)by the Company of up to 45% of the outstanding shares of Rubicon Technology, Inc.
(“Rubicon”). 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, Inc., (the “Janel Group”) to the Company.
On January 30, 2023, the Santander Loan Agreement was further amended by the Third Amendment to the Amended and Restated Loan and Security Agreement (the “Third Santander Amendment”). As
amended by the terms of the Third Santander Amendment, the percentage of the Borrowers’ eligible accounts receivable used to calculate the borrowing base under the Loan Agreement was increased from 85% to 90% for Domestic Insured Accounts (as
defined in the Amendment), subject to adjustments set forth in the Loan Agreement.
On April 25, 2023, in connection with an amendment to the Credit Agreement entered into with First Merchants Bank (“First Merchant”) as described further below, we entered into the Fourth
Amendment to the Amended and Restated Loan and Security Agreement (the “Fourth Santander Amendment”). The Fourth Santander Amendment (i) included modifications to address the amendments made to the First Merchants Credit Facilities (as defined
below) and the consolidation of the debt thereunder and (ii) terminated the subordination agreement relating to the Company’s guarantee of the First Merchant’s Credit Facilities.
On August 22, 2023, we entered into the Fifth Amendment to the Amended and Restated Loan and Security Agreement (the “Fifth Santander Amendment”). The Fifth Santander Amendment permitted
certain unsecured guaranties by the Company in the ordinary course of business guarantying obligations of subsidiaries in an aggregate amount not to exceed $4,000 and related modifications to certain negative covenants.
The Santander Loan Agreement matures on September 21, 2026. Interest accrues on the Santander Facility at an annual rate equal to the one-month SOFR plus 2.75%. The Janel Group Borrowers’
obligations under the Santander Facility are secured by all of the assets of the Janel Group Borrowers, while the Santander Loan Agreement contains customary terms and covenants. As a result of its terms, the Santander Facility is classified as
a current liability on the consolidated balance sheet.
At September 30, 2023, outstanding borrowings under the Santander Facility were $18,759, representing 53.6% of the $35,000 available thereunder, and interest was accruing at an effective
interest rate of 7.60%.
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%.
The Company was in compliance with the financial covenants defined in the Santander Loan Agreement at both September 30, 2023 and September 30, 2022.
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Working Capital Requirements
Through September 30, 2023, the Logistics segment’s cash needs were met by the Santander Facility and cash on hand. As of September 30, 2023, the Logistics segment had, subject to collateral
availability, $1,622 available for future borrowings under its $35,000 Santander Facility and $906 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.
Life Sciences and Manufacturing
First Merchants Bank Credit Facility
On February 29, 2016, Indco entered into a Credit Agreement (as amended, the “Prior First Merchants Credit Agreement”) with First Merchants.
On August 1, 2022, Indco and First Merchants entered into Amendment No. 3 to the Prior First Merchants Credit Agreement, modifying the terms of Indco’s credit facilities. Under the revised
terms, the credit facilities consisted 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 “Prior First
Merchants Facility”). Interest accrued 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 was less than 2:1), or 3.5% (if Indco’s total funded debt to EBITDA
ratio was greater than or equal to 2:1). Interest accrued on the revolving loan at an annual rate equal to one-month adjusted term SOFR plus 2.75%. Interest accrued on the mortgage loan at an annual rate of 4.19%. Indco’s obligations under the
Prior First Merchants Credit Facility were secured by all of Indco’s real property and other assets, and are guaranteed by Janel, and Janel’s guarantee of Indco’s obligations was secured by a pledge of Janel’s Indco shares.
On April 25, 2023, Indco and certain other Subsidiaries of the Company that are part of the Life Science and Manufacturing segments (together with Indco, the “Borrowers” and each, a
“Borrower”), entered into a Credit Agreement (the “Credit Agreement”) with First Merchants. The Credit Agreement constitutes an amendment and restatement of the Prior First Merchants Credit Agreement. The credit facilities provided under the
Credit Agreement (the “First Merchants Credit Facilities”) consist of a $3,000 revolving loan (limited to the borrowing base and reserves), a $5,000 acquisition loan, a $6,905 Term A loan and a $620 Term B loan as a continuation of the mortgage
loan under the Prior First Merchants Credit Agreement. Interest accrues on the outstanding revolving loan, Term A loan and acquisition loan at an annual rate equal to one-month adjusted term SOFR plus either (i) 2.75% (if the Borrowers’ total
funded debt to EBITDA ratio is less or equal to 1.75:1) or (ii) 3.50% (if the Borrowers’ total funded debt to EBITDA ratio is greater than to 1.75:1). Interest accrues on the Term B loan at an annual rate of 4.19%. The Borrowers’ obligations
under the First Merchants Credit Facilities are secured by all of the Borrowers’ real property and other assets, and are guaranteed by the Company, and the Company’s guarantee of the Borrowers’ obligations is secured by a pledge of the Company’s
equity interests in certain of the Borrowers. The revolving loan portion will expire on August 1, 2027, the Term A loan portion will mature on April 25, 2033, the Term B loan portion will mature on July 1, 2025 and the acquisition loan will
permit multiple draws until October 25, 2024, at which point the outstanding principal amount will amortize, with all remaining amounts due at maturity of the acquisition loan on April 25, 2029; each of the foregoing maturities, subject to
earlier termination as provided in the Credit Agreement and unless renewed or extended.
As of September 30, 2023, there were $500 of outstanding borrowings under the acquisition loan, $450 of outstanding borrowings under the revolving loan, $6,235 of outstanding borrowings under
the Term A loan and $610 of outstanding borrowings under the Term B loan, with interest accruing on the acquisition loan and revolving loan at an effective interest rate of 8.18% and on the Term A loan and Term B loan at an effective interest
rate of 8.18% and 4.19%, respectively.
As of September 30, 2022, there were no outstanding borrowings under the revolving loan under the Prior First Merchants Credit Agreement, $5,420 of borrowings under the term loan under the
Prior First Merchants Credit Agreement, and $631 of borrowings under the mortgage loan under the Prior First Merchants Credit Agreement with interest accruing on such term loan and mortgage loan at an effective interest rate of 6.63% and 4.19%,
respectively.
The Company was in compliance with the financial covenants defined in the First Merchants Credit Agreement at September 30, 2023 and the Prior First Merchants Credit Agreement at September 30,
2022.
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Working Capital Requirements
Life Sciences and Manufacturing’s cash needs are currently met by the Term A loan, Term B loan, revolving loan and acquisition loan under the First Merchants Credit Facilities and cash on hand.
As of September 30, 2023, Life Sciences and Manufacturing had $2,550 available under its $3,000 revolving loan and had $4,500 available under its $5,000 acquisition loan subject to collateral availability and $1,101 and $266 in cash,
respectively. The Company believes that the current financial resources will be sufficient to finance the Life Sciences and 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 Life Sciences and Manufacturing segments, 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 and Manufacturing’s operations will be materially
negatively impacted.
Life Sciences
First Northern Bank of Dixon
Antibodies Incorporated (“Antibodies”), a wholly-owned subsidiary of the Company, entered into a Business Loan Agreement (as amended, the “First Northern Loan Agreement”) with First Northern
Bank of Dixon (“First Northern”) on June 21, 2018. The First Northern Loan Agreement provided for a $2,235 term loan (the “First Northern Term Loan”) and a $750 revolving credit facility (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 (the “First Northern Solar Loan”) on November 18, 2019 and a $60 term loan in connection with a potential expansion of generator capacity on the Antibodies property (the “First Northern Generator Loan”) on June 19, 2020.
On April 25, 2023, each of the First Northern Term Loan, the First Northern Revolving Loan, the First Northern Solar Loan and the First Northern Generator Loan was paid in full with the
proceeds provided by the First Merchants Credit Facilities and the First Merchants Loan Agreement. In connection with the repayment, each business loan agreement governing such First Northern loans was terminated and all liens granted to First
Northern in connection with the First Northern Loan Agreement and such business loan agreements on any property of Antibodies were released. Antibodies has no further obligations owing to First Northern in connection with the First Northern Loan
Agreement and such business loan agreements.
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 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 current portion of long-term
debt, with interest accruing at an effective interest rate of 4.43%.
As of September 30, 2022, there were no outstanding borrowings under the First Northern Revolving Loan.
The Company was in compliance with the financial covenants defined in the First Northern Loan Agreement at April 25, 2023.
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.
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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 2024 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.
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.
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. During the fourth quarter of 2021, we changed
the date of our annual impairment test of goodwill and indefinite-lived intangible assets from September 30 to July 1. 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.
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No indicators of impairment were identified from the date of our annual impairment test through September 30, 2023.
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, 2023.
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”).
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.
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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.