JANEL CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes thereto as of and for the three months ended December 31, 2024, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Amounts presented in this section are in thousands, except share and per share data. As used throughout this Report, “we,” “us”, “our,” “Janel,” “the Company,” “Registrant” and similar words refer to Janel Corporation and its subsidiaries. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (the “Report”) contains certain statements that are, or may deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that reflect management’s current expectations with respect to our operations, performance, financial condition, and other developments. These forward – looking statements may generally be identified using the words “may,” “will,” “intends,” “plans,” projects,” “believes,” “should,” “expects,” “predicts,” “anticipates,” “estimates,” and similar expressions or the negative of these terms or other comparable terminology. These statements are necessarily estimates reflecting management’s best judgment based upon current information and involve several risks, uncertainties and assumptions. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors, including, but not limited to, those set forth elsewhere in this Report, could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, our strategy of expanding our business through acquisitions of other businesses; we may be required to record a significant charge to earnings related to the impairment of acquired assets; we may fail to realize the expected benefits or strategic objectives of any acquisition, or that we spend resources exploring acquisitions that are not consummated; risks associated with litigation, including contingent auto liability and insurance coverage, and indemnification claims and other unforeseen claims and liabilities that may arise from an acquisition; changes in tax rates, laws or regulations and our acquired companies and subsidiaries’ ability to utilize anticipated tax benefits; the impact of rising interest rates on our investments, business and operations; conflicts of interest with the minority shareholders of our business; we may not have sufficient working capital to continue operations; we may lose customers who are not obligated to long-term contracts to transact with us; instability in the financial markets; changes or developments in U.S. laws or policies; competition from companies with greater financial resources and from companies that operate in areas in which we plan to expand; our dependence on technically skilled employees; impacts from climate change, including the increased focus by third-parties on sustainability issues and our ability to comply therewith; competition from parties who sell their businesses to us and from professionals who cease working for us; the level of our insurance coverage, including related to product and other liability risks; our compliance with applicable privacy, security and data laws; risks related to the diverse platforms and geographies which host our management information and financial reporting systems; our dependence on the availability of cargo space from third parties; the impact of claims arising from transportation of freight by the carriers with which we contract, including an increase in premium costs; higher carrier prices may result in decreased adjusted gross profit; risks related to the classification of owner-operators in the transportation industry; recessions and other economic developments that reduce freight volumes; other events affecting the volume of international trade and international operations; risks arising from our ability to comply with governmental permit and licensing requirements or statutory and regulatory requirements; the impact of seasonal trends and other factors beyond our control on our Logistics business; changes in governmental regulations applicable to our Life Sciences business; the ability of our Life Sciences business to continually produce products that meet high-quality standards such as purity, reproducibility and/or absence of cross-reactivity; the ability of our Life Sciences business to maintain, determine the scope of and defend its and its competitors’ intellectual property rights; the impact of pressures in the life sciences industry to increase the predictability of or reduce healthcare costs; any decrease in the availability, or increase in the cost or supply shortages, of raw materials used by Indco; risks arising from the environmental, health and safety regulations applicable to Indco; the reliance of our Indco business on a single location to manufacture their products; the controlling influence exerted by our officers and directors and one of our stockholders; the unlikelihood that we will issue dividends in the foreseeable future; and risks related to ownership of our common stock, including share price volatility, our ability to issue shares of preferred stock with greater rights than our common stock, the lack of a guaranteed continued public trading market for our common stock, and costs related to maintaining our status as a public company; terrorist attacks and other acts of violence or war and such other factors that may be identified from time to time in our Securities and Exchange Commission (“SEC”) filings. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected. You should not place undue reliance on any of our forward-looking statements which speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of these factors, see our periodic reports filed with the SEC, including our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2024. 19 Table of Contents OVERVIEW Janel Corporation ("Janel," the "Company," or the "Registrant") 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 Janel holding company focuses on significant capital allocation decisions, corporate governance and supporting Janel’s subsidiaries where appropriate. Janel expects to grow through its subsidiaries’ organic growth and by completing acquisitions. We plan to either acquire businesses within our existing segments or expand our portfolio into new strategic segments. Our acquisition strategy focuses on reasonably priced companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings power. Our Business Segments Logistics The Company’s Logistics segment is comprised of several subsidiaries. The Logistics segment is a non-asset based, full-service provider of cargo transportation logistics management services, including freight forwarding via air, ocean and land-based carriers; customs brokerage services; warehousing and distribution services; 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. 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. Life Sciences The Company’s Life Sciences segment is comprised of several wholly-owned subsidiaries. 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 segment also produces products for other life sciences companies on an original equipment manufacturer (OEM) basis. 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 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 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. Manufacturing The Company’s Manufacturing segment is comprised of Indco, Inc. (“Indco”). Indco is a majority-owned subsidiary of the Company that manufactures and distributes mixing equipment and apparatus for specific applications within various industries. Indco’s customer base is comprised of small- to mid-sized businesses as well as other larger customers for which Indco fulfills repetitive production orders. Investment in Marketable Securities at fair value 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 total issued and outstanding shares of common stock as of December 31, 2024 and September 30, 2024. 20 Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses during the reporting period. Our senior management has reviewed the critical accounting policies and estimates with the Audit Committee of our board of directors. For a description of the Company’s critical accounting policies and estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K filed with the SEC on December 6, 2024. Critical accounting policies are those that are most important to the portrayal of our financial condition, results of operations and cash flows and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. There were no significant changes to our critical accounting policies during the three months ended December 31, 2024. 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 and gross profit excluding those from acquisitions within the preceding 12 months. The organic growth presentation provides useful period-to-period comparison of revenues 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. 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 industries 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. 21 Table of Contents Results of Operations – Janel Corporation – Three Months Ended December 31, 2024 and 2023 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 Condensed Consolidated Financial Statements and the notes thereto. Our consolidated results of operations are as follows: Three Months Ended December 31, (in thousands) 2024 2023 Revenues $ 51,354 $ 41,035 Forwarding expenses and cost of revenues 36,212 26,890 Gross profit 15,142 14,145 Total operating expenses 13,933 13,143 Income from operations 1,209 1,002 Net income 659 276 Adjusted operating income $ 2,041 $ 1,694 Consolidated revenues for the three months ended December 31, 2024 were $51,354, which was $10,319 or 25.1% higher than the prior year period. Revenues over this period increased primarily due to the inclusion of revenues from Airschott, which was acquired in June 2024. Income from operations for the three months ended December 31, 2024 was $1,209 compared with $1,002 in the prior year period. The increase for the three months ended December 31, 2024 resulted from the inclusion of Airschott gross profit. Net income for the three months ended December 31, 2024 totaled $659, or $0.55 per diluted share, compared to net income of $276, or $0.23 per diluted share, for the three months ended December 31, 2023. The increase in net income was largely due to greater income from operations in our Logistics segment and a non-cash mark-to-market increase of our equity investment. Adjusted operating income for the three months ended December 31, 2024 was $2,041, an increase of $347, compared to $1,694 in the prior year period. The increase for the three months ended December 31, 2024 resulted primarily from an increase in income from operations in our Logistics segment, partially offset by decreases in income from operations in our Life Sciences and Manufacturing segments. The following table sets forth a reconciliation of operating income to adjusted operating income: Three Months Ended December 31, (in thousands) 2024 2023 Income from operations $ 1,209 $ 1,002 Amortization of intangible assets 641 538 Stock-based compensation 122 71 Cost recognized on sale of acquired inventory 69 83 Adjusted operating income $ 2,041 $ 1,694 22 Table of Contents Results of Operations – Logistics – Three Months Ended December 31, 2024 and 2023 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. Three Months Ended December 31, 2024 2023 (in thousands) Revenues $ 46,086 $ 35,215 Forwarding expenses 34,708 25,214 Gross profit 11,378 10,001 Gross profit margin 24.7 % 28.4 % Selling, general and administrative expenses 9,368 8,865 Income from operations $ 2,010 $ 1,136 Revenues Total revenues for the three months ended December 31, 2024 was $46,086 as compared to $35,215 for the three months ended December 31, 2023, an increase of $10,871 or 30.9%. Revenues increased primarily due to the inclusion of Airschott revenues, as well as increased freight rates. Gross Profit Gross profit for the three months ended December 31, 2024 was $11,378, an increase of $1,377, or 13.8%, as compared to $10,001 for the three months ended December 31, 2023. The inclusion of Airschott, added $1,160 in gross profit. The gross profit organic growth percentage was 2.2% for the three months ended December 31, 2024. Gross profit margin decreased to 24.7% for the three months ended December 31, 2024, compared to 28.4% for the prior year period. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended December 31, 2024 were $9,368, as compared to $8,865 for the three months ended December 31, 2023. This increase of $503, or 5.7%, was mainly due to the inclusion of Airschott personnel expenses. Income from Operations Income from operations increased by $874 to $2,010 for the three months ended December 31, 2024, as compared to income from operations of $1,136 for the three months ended December 31, 2023. Income from operations increased as a result of improved margins at Airschott. Income from operations as a percentage of gross profit for the three months ended December 31, 2024 was 17.7% compared to 11.4% in the prior year period, largely due to higher revenues. 23 Table of Contents Results of Operations – Life Sciences – Three Months Ended December 31, 2024 and 2023 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. Three Months Ended December 31, 2024 2023 (in thousands) Revenues $ 2,983 $ 3,481 Cost of sales 381 523 Cost recognized upon sale of acquired inventory 69 83 Gross profit 2,533 2,875 Gross profit margin 84.9 % 82.6 % Selling, general and administrative expenses 1,999 1,750 Income from operations $ 534 $ 1,125 Revenues Total revenues was $2,983 and $3,481 for the three months ended December 31, 2024 and 2023, respectively, reflecting a decrease of $498 or 14.3% compared to the prior year period primarily due to the timing of orders. Organic growth decreased 15.5% excluding acquired revenues of $40, due to the timing of orders. Gross Profit Gross profit was $2,533 and $2,875 for the three months ended December 31, 2024 and 2023, respectively, a decrease of $342, or 11.9%. During the three months ended December 31, 2024 and 2023, gross profit margin was 84.9% and 82.6%, respectively, as cost recognized upon sale of acquired inventory declined slightly and product mix improved due to contributions from past acquisitions. Selling, General and Administrative Expenses Selling, general and administrative expenses for the Life Sciences segment were $1,999 and $1,750 for the three months ended December 31, 2024 and 2023, respectively. The period-over-period increase was largely due to investments to support growth. Income from Operations Income from operations for the three months ended December 31, 2024 and 2023 was $534 and $1,125, respectively, a decrease of $591 or 52.5%, primarily due to the timing of orders. Results of Operations - Manufacturing – Three Months Ended December 31, 2024 and 2023 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. Three Months Ended December 31, 2024 2023 (in thousands) Revenues $ 2,285 $ 2,339 Cost of sales 1,054 1,070 Gross profit 1,231 1,269 Gross profit margin 53.9 % 54.3 % Selling, general and administrative expenses 941 784 Income from operations $ 290 $ 485 Revenues Total revenues was $2,285 and $2,339 for the three months ended December 31, 2024 and 2023, respectively, a decrease of $54 or 2.3%. The decrease in revenues for the three months ended December 31, 2024 primarily reflected an increase in discounts on manufactured products based on customers' volume purchases. 24 Table of Contents Gross Profit Gross profit was $1,231 and $1,269 for the three months ended December 31, 2024 and 2023, respectively, a decrease of $38. Gross profit margin for the three months ended December 31, 2024 and 2023 was 53.9% and 54.3%, respectively. The period-over-period decrease in gross profit margin was primarily due to a decrease in sales volume combined with a product mix variance. Selling, General and Administrative Expenses Selling, general and administrative expenses were $941 and $784 for the three months ended December 31, 2024 and 2023, respectively, an increase of $157, or 20.0%. The increase was primarily due to bonuses expensed during the quarter relating to the refinancing of the First Merchants Credit Facilities. Income from Operations Income from operations was $290 for the three months ended December 31, 2024 compared to $485 for the three months ended December 31, 2023, representing a 40.2% decrease from the prior year period, primarily due to an increase in selling, general and administrative expenses. Results of Operations – Corporate and Other – Three Months Ended December 31, 2024 and 2023 Below is a reconciliation of income from operating segments to net income available to common stockholders. Three Months Ended December 31, (in thousands) 2024 2023 Total income from operating segments $ 2,834 $ 2,746 Corporate expenses (862 ) (1,135 ) Amortization of intangible assets (641 ) (538 ) Stock-based compensation - Corporate (122 ) (71 ) Total corporate expenses (1,625 ) (1,744 ) Interest expense (666 ) (524 ) Other expense 314 (10 ) Net income before taxes 857 468 Income tax expense (198 ) (192 ) Net income 659 276 Preferred stock dividends (86 ) (72 ) Non-controlling interest dividends (243 ) — Net income Available to Common Stockholders $ 330 $ 204 Total Corporate Expenses Total Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, decreased by $119, or 6.8%, to $1,625 in the three months ended December 31, 2024 as compared to $1,744 for the three months ended December 31, 2023. 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 $142, or 27.1%, to $666 for the three months ended December 31, 2024 from $524 for the three months ended December 31, 2023. The increase was primarily due to higher interest rates partially offset by lower average debt balances. Income Tax Expense On a consolidated basis, the Company recorded an income tax expense of $198 for the three months ended December 31, 2024, as compared to an income tax expense of $192 for the three months ended December 31, 2023. The increase in expense was primarily due to an increase in income from operations. 25 Table of Contents Preferred Stock Dividends Preferred stock dividends include any dividends accrued on the Company’s Series C Cumulative Preferred Stock (the “Series C Preferred Stock”). For the three months ended December 31, 2024 and 2023, preferred stock dividends were $86 and $72, respectively. Non-Controlling Interest Dividends Non-controlling interest dividends include the dividends accrued and paid to the non-controlling interest of Indco (the “Non-controlling interest dividends”). For the three months ended December 31, 2024, non-controlling interest dividends were $243. Net Income Net income was $659, or $0.55 per diluted share, for the three months ended December 31, 2024 compared to net income of $276, or $0.23 per diluted share, for the three months ended December 31, 2023. The increase in net income was largely due to higher profits in our Logistics segment and a non-cash mark-to-market increase of an equity investment. Income Available to Common Stockholders Income available to holders of Common Stock was $330, or $0.28 per diluted share, for the three months ended December 31, 2024 compared to income available to holders of Common Stock of $204, or $0.17 per diluted share, for the three months ended December 31, 2023. The increase in net income available to common stockholders is due to an increase net income, partially offset by an increase in preferred stock dividends. LIQUIDITY AND CAPITAL RESOURCES General Our ability to satisfy liquidity requirements—including meeting 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 our 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 and expenses. 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. Our subsidiaries depend on commercial credit facilities to fund day-to-day operations as there is a difference between the timing of collection cycles and the timing of payments to vendors. Generally, we do not make significant capital expenditures. Our cash flow performance for the 2025 fiscal year may not necessarily be indicative of future cash flow performance. Cash flows from operating activities Net cash provided by operating activities was $1,754 for the three months ended December 31, 2024, versus $3,006 provided by operating activities for the three months ended December 31, 2023. The decrease in cash provided by operations for the three months ended December 31, 2024 compared to the prior year period was primarily due to a decrease in net income adjusted by non-cash items of $676 and a decrease in net working capital of $576. Cash flows from investing activities Net cash used in investing activities totaled $324 for the three months ended December 31, 2024, versus $53 used in investing activities for the three months ended December 31, 2023. The change in net cash used in investing activities was primarily due to purchase price adjustments relating to payments made on liabilities existing prior to the date of acquisition. Cash flows from financing activities Net cash provided by financing activities was $252 for the three months ended December 31, 2024, versus net cash used in financing activities of $3,835 for the three months ended December 31, 2023. Net cash provided by financing activities for the three months ended December 31, 2024 included the conversion and extinguishment of the acquisition loan into the term loan and proceeds from the line of credit, partially offset by repayment of subordinate promissory notes, dividends paid to preferred stockholders, and dividends paid to non-controlling interest. 26 Table of Contents Off-Balance Sheet Arrangements As of December 31, 2024, we had no off-balance sheet arrangements or obligations.