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, 2024 and 2023 and for each of the two years
in the period ended September 30, 2024 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 high 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, 2024 Acquisitions
On June 5, 2024, the Company completed a business combination whereby it acquired a majority ownership position in Airschott , a
non-asset-based freight forwarder and customs broker. At closing, the Company purchased 80% of the outstanding stock of Airschott. The Company also agreed to purchase the remaining 20% of Airschott stock in three years subject to
certain closing conditions.
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On February 1, 2024, the Company completed a business combination whereby it acquired all of the outstanding stock of ViraQuest Inc., which we include in our Life Sciences segment.
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.
Investment in Marketable Securities - Rubicon
As of each of September 30, 2023 and September 30, 2024, the Company owned 1,108,000 shares, or approximately 46.6%, of the common stock of Rubicon Technology, Inc. (“Rubicon”). Rubicon
is an advanced materials provider specializing in monocrystalline sapphire for applications in optical and industrial systems. The purpose of our investment in Rubicon was 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 net operating loss carry-forward assets.
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, 2023 , filed on December 8, 2023, for a comparison of fiscal year 2023 results of operations to the fiscal year 2022 results of operations, which specific discussion is incorporated herein by
reference.
Our consolidated results of operations are as follows:
Financial Summary
Fiscal years ended September 30,
(in thousands)
2024
2023
Revenues
$
183,184
$
186,449
Forwarding expenses and cost of revenues
124,800
130,777
Gross profit
58,384
55,672
Operating expenses
54,626
53,073
Income from operations
$
3,758
$
2,599
Net income
$
551
$
723
Adjusted operating income (1)
$
6,720
$
5,353
Consolidated revenues for the year ended September 30, 2024 were $183,184, or 1.8% lower than fiscal 2023. 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 2024 was $3,758 compared to income from operations of $2,599 for fiscal 2023, an increase of $1,159, largely as a
result of increased profits across all of our operating segments. Adjusted operating income for fiscal 2024 increased to $6,720 versus $5,353 in the prior fiscal year primarily due to an overall increase in profits at our business
segments.
The Company’s net income for the year ended September 30, 2024 totaled $551 or $0.45 per diluted share, compared to net income of $723 or $0.60 per diluted share for the year ended
September 30, 2023. The decrease in net income was largely due to an increase in the fair value of mandatorily redeemable non-controlling interest and higher income tax expense, partially offset by higher profits in our business
segments.
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(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)
2024
2023
Income from operations
$
3,758
$
2,599
Amortization of intangible assets
2,299
2,098
Stock-based compensation
321
231
Cost recognized on sale of acquired inventory
342
425
Adjusted operating income
$
6,720
$
5,353
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 freight
forwarding via air, ocean and land-based carriers; customs brokerage services; warehousing and distribution services; trucking and other value-added logistics services. In addition to these revenue streams, the Company earns
accessorial revenues in connection with its core services. Accessorial revenues include, but are not limited to, fuel service charges, wait time fees, hazardous cargo fees, labor charges, handling, cartage, bonding and additional
labor charges.
Financial Summary
Fiscal years ended September 30,
(in thousands)
2024
2023
Revenues
$
159,958
$
166,052
Forwarding expense
117,501
123,938
Gross profit
$
42,457
$
42,114
Gross profit margin
26.5
%
25.4
%
Selling, general and administrative expenses
$
37,057
$
37,310
Income from operations
$
5,400
$
4,804
Fiscal 2024 compared with fiscal 2023
Revenues
Total revenues in fiscal 2024 were $159,958 as compared to $166,052 in fiscal 2023, a decrease of $6,094 or 3.7%. 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 revenues and forwarding expenses. Compared to fiscal 2023, our volume in
fiscal 2024, as measured in ocean freight by twenty-foot equivalent units, fell 4%, while air freight volume as measured by metric tons fell 5% and customs entries increased 5%. Organic growth, which represents revenues growth
excluding revenues from acquisitions within the preceding 12 months, decreased in fiscal 2024 by 7.3%.
Gross Profit
Gross profit in fiscal 2024 was $42,457, an increase of $343, or 0.8%, as compared to $42,114 in fiscal 2023. Gross profit as a percentage of revenue increased to 26.5% compared to 25.4%
for the prior fiscal year, primarily due to lower freight prices. The increase of $343 was the result of $1,562 in gross profit from an acquisition, partially offset by a decrease in gross profit from the remainder of the Logistics
segment.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2024 were $37,057 as compared to $37,310 in fiscal 2023. The decrease of $253, or 0.7%, was mainly due to lower personnel
expenses and insurance costs. As a percentage of gross revenue, selling, general and administrative expenses were 23.2% and 22.5% for fiscal 2024 and fiscal 2023, respectively. The increase in selling, general and administrative
expenses as a percentage of revenue largely reflected the decrease in transportation rates.
Income from Operations
Income from operations increased to $5,400 in fiscal 2024 compared to $4,804 in fiscal 2023. Income from operations increased as a result of normalization in the market, lower
personnel expense, insurance costs, and the additional profit from an acquisition. Operating margin as a percentage of gross profit was 12.7% in fiscal 2024 compared to 11.4% in fiscal 2023, largely due to higher gross profits.
Results of Operations - Life Sciences
The Company’s Life Sciences segment is comprised of several wholly-owned subsidiaries. The Company’s Life Sciences segment manufactures and distributes antibodies as well as research
and diagnostic reagents for, and provides custom services to academic, non-profit and commercial customers.
Financial Summary
Fiscal years ended September 30,
(in thousands)
2024
2023
Revenues
$
13,154
$
11,059
Cost of sales
2,296
1,951
Cost recognized upon sale of acquired inventory
342
425
Gross profit
$
10,516
$
8,683
Gross profit margin
79.9
%
78.5
%
Selling, general and administrative expenses
$
7,216
$
6,149
Income from operations
$
3,300
$
2,534
Fiscal 2024 compared with fiscal 2023
Revenues
Total revenues were $13,154 in fiscal 2024 compared with $11,059 in fiscal 2023. Revenues increased 18.9% or $2,095 primarily related to increased product demand and current year
acquisitions. Organic growth, which represents revenues growth excluding revenues from acquisitions within the preceding 12 months, increased in fiscal 2024 by 15.6%.
Gross Profit
Gross profit was $10,516 and $8,683 for fiscal years 2024 and 2023, respectively, representing a year-over-year increase of $1,833. In the fiscal years ended September 30, 2024 and
2023, the Life Sciences segment had a gross profit margin of 79.9% and 78.5%, 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 $7,216 and $6,149 for fiscal years 2024 and 2023, 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 54.9% and 55.6% for fiscal 2024 and fiscal 2023, respectively.
Income from Operations
The Life Sciences business earned $3,300 and $2,534 in income from operations for fiscal 2024 and 2023, respectively. The increase in operating income was primarily due to increased
product demand and incremental revenue from acquisitions. As a result of these factors, income from operations as a percentage of revenue increased from 22.9% in fiscal year 2023 to 25.1% in fiscal year 2024.
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Results of Operations - Manufacturing
The Company’s Manufacturing segment manufactures and distributes mixing equipment and apparatuses for specific applications within various industries. The customer base is comprised
of small- to mid-sized businesses as well as other larger customers for which they fulfill repetitive production orders.
Financial Summary
Fiscal years ended September 30,
(in thousands)
2024
2023
Revenues
$
10,072
$
9,338
Cost of sales
4,661
4,463
Gross profit
$
5,411
$
4,875
Gross profit margin
53.7
%
52.2
%
Selling, general and administrative expenses
$
3,129
$
2,978
Income from operations
$
2,282
$
1,897
Fiscal 2024 compared with fiscal 2023
Revenues
Total revenues were $10,072 in fiscal 2024 compared with $9,338 in fiscal 2023, an increase of 7.9%. The increase in revenues largely reflected an increase in manufacturing volume in
the business.
Gross Profit
Gross profit was $5,411 and $4,875 for fiscal years 2024 and 2023, respectively. The year-over-year increase in gross profit reflected an increase in sales volume. Gross profit
margin for the Manufacturing segment during fiscal 2024 was 53.7%, as compared to 52.2%, in fiscal 2023. The increase in gross profit margin was generally due to the increase in sales volume and economies of scale.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the Manufacturing segment were $3,129 and $2,978 for fiscal years 2024 and 2023, respectively, an increase of $151, or 5.1%. As a
percentage of gross revenues, selling, general and administrative expenses were 31.1% and 31.9% for fiscal 2024 and fiscal 2023, respectively. This decrease in selling, general and administrative expenses as a percentage of gross
revenues was the result of our leverage over overhead expenses due to higher volumes and revenues.
Income from Operations
Income from operations for fiscal 2024 was $2,282 compared to $1,897 in fiscal 2023, representing a 20.3% increase compared to the prior fiscal year and consistent with the increase
in revenues and gross margin, combined with a proportionally lower increase in selling, general and administrative expenses.
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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,
2024
2023
(In thousands)
Total income from operating segments
$
10,982
$
9,235
Corporate expenses
(4,620
)
(4,331
)
Amortization expense
(2,299
)
(2,098
)
Stock-based compensation - Corporate
(305
)
(207
)
Total Corporate expenses
(7,224
)
(6,636
)
Interest expense
(2,318
)
(1,998
)
Other expense
(346
)
(76
)
Net income before taxes
1,094
525
Income tax benefit (expense)
(543
)
198
Net Income
551
723
Preferred stock dividends
(328
)
(284
)
Net Income Available to Common Stockholders
$
223
$
439
Total Corporate Expenses
Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, increased by $588 to $7,224, or 8.9%, in fiscal
2024 as compared to fiscal 2023. The increase was primarily due to higher stock-based compensation expense and amortization expense. 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 $320, or 16.0%, to $2,318 in fiscal 2024 from $1,998 in fiscal 2023. The increase was primarily due to a higher average debt
outstanding and higher interest rates.
Income Tax Benefit (Expense)
On a consolidated basis, the Company recorded an income tax expense of $543 in fiscal 2024, as compared to an income tax benefit of $198 in fiscal 2023. The increase in income tax
expense was primarily due to an increase in pretax income.
Preferred Stock Dividends
Preferred stock dividends include the Company’s Series C Stock dividends accrued or paid. For the fiscal years ended September 30, 2024 and 2023, preferred stock dividends were
$328 and $284, respectively. Preferred stock dividends for fiscal 2024 increased by $44, or 15.5%, compared to fiscal 2023. The increase in preferred stock dividends was the result of the increase in the dividend rate of the
Series C Stock by 1% on January 1, 2024. Such rate is set to increase on each January 1 thereafter for three years to a maximum rate of 9%. The dividend rate of the Series C Stock as of each of September 30, 2024 and September
30, 2023 was 6% and 5%, respectively. Dividends accrued on the Company’s Series C Stock were $2,271 and $2,029 as of September 30, 2024 and 2023, respectively.
Net Income
Net income was $551, or $0.45 per diluted share, for fiscal 2024 and $723, or $0.60 per diluted share, for fiscal year 2023. The decrease in net income was primarily due to a
change in fair value of an earnout, higher stock-based compensation and higher income tax expense, partially offset by higher profits in our operating segments.
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Net income Available to Common Stockholders
Net income available to common stockholders was $223 or $0.18 per diluted share for fiscal 2024 and $439 or $0.36 per diluted share for fiscal 2023. The decrease in net income
available to common stockholders was due to the change in net income discussed above and higher preferred stock dividends.
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 revenues 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 2024 fiscal year may not necessarily be indicative of future cash flow performance.
As of September 30, 2024, and compared with the prior fiscal year, the Company’s cash and cash equivalents increased by $371, or 15.1%, to $2,832 from $2,461 as of September 30,
2023. During the fiscal year ended September 30, 2024, Janel’s net working capital deficiency (current assets less current liabilities) increased by $5,855, from ($19,549) at September 30, 2023 to ($25,404) at September 30,
2024.
Cash flows from operating activities
Net cash provided by operating activities for fiscal years 2024 and 2023 was $6,832 and $11,388, respectively. The decrease in cash provided by operations for the year ended September 30, 2024 was driven principally by reduced net income, unrealized loss on marketable securities, and the timing of cash collections for
accounts receivables primarily in our Logistics segment for the year ended September 30, 2024.
Cash flows used in investing activities
Net cash used in investing activities, mainly for the acquisition of subsidiaries, was $5,636 for fiscal 2024 and $6,500 for fiscal 2023. Net cash used in investing activities for
fiscal 2024 related to two acquisitions; one in our Life Sciences segment and one in our Logistics segment. The fiscal 2023 net cash used in investing activities related to the two acquisitions in our Life Sciences segment and
earnout payments to the former owners of ELFS. The Company also used $1,003 for the acquisition of property and equipment for the year ended September 30, 2024 compared to $360 for the year ended September 30, 2023.
Cash flows used in financing activities
Net cash used in financing activities was $574 for fiscal 2024 and $9,018 for fiscal 2023. Net cash used in financing activities in fiscal 2024 primarily came from repayments on
our term loan as well as repayment on our subordinated promissory note, partially offset by borrowings from our line of credit. Net cash used in financing activities in fiscal year 2023 primarily included repayment of our term
loan and line of credit.
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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 Bank, N.A. (“Santander”) with respect to a revolving line of credit facility (the “Santander Facility”). The Santander Loan Agreement provides for the
following: (i) the maximum revolving facility amount available of $35,000 (limited to 90% of the Janel Group 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.
The Santander Loan Agreement matures on September 21, 2026. 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.
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 Merchants”) 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.
On December 1, 2023, in connection with an amendment (the “Purchase Agreement Amendment”) to that certain Membership Interest Purchase Agreement dated as of September 21, 2021
(the “Purchase Agreement”) among Janel Group, Inc. (“Janel Group”), a wholly-owned subsidiary of the Company, Expedited Logistics and Freight Services, LLC (“ELFS”) and former shareholders of ELFS (the “ELFS Sellers”), (i) the
Janel Group Borrowers and Santander entered into an Acknowledgment and Consent Agreement pursuant to which Santander consented to the Purchase Agreement Amendment and the effect of the modifications thereunder on the Santander
Loan Agreement and (ii) the ELFS Sellers and Santander entered into an Acknowledgment and Consent Agreement pursuant to which Santander consented to the Purchase Agreement Amendment and the effect of the modifications
thereunder on the Subordination Agreement (as defined in the Santander Loan Agreement) between Santander and the ELFS Sellers.
On December 21, 2023, we entered into the Sixth Amendment to the Santander Loan Agreement (the “Sixth Santander Amendment”). The Sixth Santander Amendment modified the reporting
due date of the monthly borrowing base calculation from the fifth day to the fifteenth day of each month.
On June 5, 2024, we entered into the Seventh Amendment to the Santander Loan Agreement (the “Seventh Santander Amendment”). The Seventh Santander Amendment added Airschott as a
loan party obligor and borrower.
At September 30, 2024, outstanding borrowings under the Santander Facility were $19,313, representing 55.2% of the $35,000 available thereunder, and interest was accruing at an
effective interest rate of 7.65%.
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%.
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The Company was in compliance with the financial covenants defined in the Santander Loan Agreement at both September 30, 2024 and September 30, 2023.
Working Capital Requirements
Through September 30, 2024, the Logistics segment’s cash needs were met by the Santander Facility and cash on hand. As of September 30, 2024, the Logistics segment had, subject to
collateral availability, $5,852 available for future borrowings under its $35,000 Santander Facility and $748 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 Bank (“First Merchants”).
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 1.75:1.00) or (ii) 3.50% (if the Borrowers’ total funded debt to EBITDA ratio is greater than to 1.75:1.00). 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.
On January 10, 2024, the First Merchants Credit Facilities was amended to provide for, among other changes, permitted affiliate loans provided availability on its revolving loan
both before and after giving effect to any such loan, is not less than $1,000 and maturity of such permitted affiliate loans are not to exceed fourteen days from disbursement.
As of September 30, 2024, there were $3,700 of outstanding borrowings under the acquisition loan, $4,028 of outstanding borrowings under the Term A loan and $585 of outstanding
borrowings under the Term B loan, with interest accruing on the acquisition loan and revolving loan at an effective interest rate of 7.82% each, and on the Term A loan and Term B loan at an effective interest rate of 7.82% and
4.19%, respectively.
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.
The Company was in compliance with the financial covenants defined in the First Merchants Credit Agreement at September 30, 2024 and September 30, 2023.
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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, 2024, Life Sciences and Manufacturing had $3,000 available under its $3,000 revolving loan and had $1,300 available under its $5,000 acquisition loan subject to collateral availability and $800
and $1,075 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.
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 revenues and profitability for fiscal 2025 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.
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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, 2024.
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 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, 2024.
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 revenues growth excluding revenues from acquisitions within the preceding 12 months. The organic growth presentation
provides useful period-to-period comparison of revenues results as it excludes revenues 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.
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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 revenues, 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 revenues, 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.