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