JANEL CORP - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended March 31, 2017

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-60608

JANEL CORPORATION

Registrant’s telephone number, including area code: (516) 256-8143

(Former name, former address and former fiscal year if changed from last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

The number of shares of Common Stock outstanding as of May 12, 2017 was 553,951.

JANEL CORPORATION

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

JANEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

JANEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

JANEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

JANEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

JANEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The attached unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of Article 10 of regulation S-X and instructions to Form 10-Q of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full fiscal year, or any other period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on or about December 22, 2016.

INDCO, INC.

On March 21, 2016, the Company executed and closed a Stock Purchase Agreement (the “Purchase Agreement”) for the purchase by the Company of the outstanding common stock of INDCO (the “INDCO Shares”), representing approximately 91.65% of the beneficial ownership of INDCO. The remaining 8.35% ownership of INCDO was retained by existing INDCO management.

Under the terms of the Purchase Agreement, the purchase price for the INDCO shares was $11,000,000, subject to certain closing adjustments and customary indemnifications, representations and warranties which amount was paid at closing in cash.

INDCO comprises the Manufacturing segment of the Company.

Purchase price allocation

In accordance with the acquisition method of accounting, the Company allocated the consideration to the net tangible and identifiable intangible assets based on their estimated fair values which were determined by an independent valuation performed by a third party.

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.

The assets acquired and liabilities assumed as part of our acquisition were recognized at their fair values as of the effective acquisition date, March 1, 2016, based upon an appraisal from a third party. The following table summarizes the fair values assigned to the assets acquired and liabilities assumed.

A summary of intangible assets and the estimated useful lives used in the computation of amortization is as follows:

On March 27, 2014, Janel Corporation and several of its Janel Group subsidiaries (collectively, the “Janel Borrowers”), entered into a Loan and Security Agreement with Presidential Financial Corporation (“Presidential”) with respect to a revolving line of credit facility (the “Presidential Facility”). As currently amended, the Presidential Facility provides that the Janel Borrowers can borrow up to $10,000,000, limited to 85% of the Janel Borrowers’ aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Loan and Security Agreement. Interest will accrue at an annual rate equal to five percent above the greater of (a) the prime rate of interest quoted in The Wall Street Journal from time to time, or (b) 3.25%. The Janel Borrowers’ obligations under the Presidential Facility are secured by the assets of the Janel Borrowers. The agreement requires, among other things, that the Company, on a monthly basis, maintain a “minimum fixed charge covenant ratio” and “tangible net worth,” both as defined. The Presidential Facility will expire on March 27, 2018, subject to earlier termination as provided in the Loan and Security Agreement, unless renewed.

As of March 31, 2017, there were outstanding borrowings of $6,457,296 under the Presidential Facility, representing 64.57% of the $10,000,000 available thereunder.

On March 21, 2016, INDCO executed a Credit Agreement with First Merchants Bank (“First Merchants”) with respect to a $6,000,000 term loan and $1,500,000 (limited to the borrowing base and reserves) revolving loan. Interest will accrue on the term loan at an annual rate equal to the one month LIBOR plus either 3.75% (if INDCO’s cash flow leverage ratio is less than or equal to 2:1) or 4.75% (if INDCO’s cash flow leverage ratio is greater than 2:1). Interest accrues on the revolving loan at an annual rate equal to the one month LIBOR plus 2.75%. INDCO’s obligations under the First Merchants credit facilities are secured by all of INDCO’s assets, and are guaranteed by the Company. The First Merchants credit facilities will expire on the fifth anniversary of the loans, subject to earlier termination as provided in the Credit Agreement, unless renewed.

As of March 31, 2017, there were no borrowings under the revolving loan, and there were outstanding borrowings of $5,023,281 under the term loan.

Long-term debt - related party consists of the following:

As of March 31, 2017, the Company operates in two reportable segments, Global Logistics Services and Manufacturing, supported by a corporate group which conducts activities that are non-segment specific. The following table presents selected financial information about the Company’s reportable segments for the three and six months ended March 31, 2017:

Three months ended March 31, 2017

Six months ended March 31, 2017

The Company has evaluated events occurring after the date of these financial statements through the date that these financial statements were issued. Other than as discussed below, there were no material subsequent events as of that date which would require disclosure in or adjustments to the financial statements.

In April 2017, after the close of the period covered by this Report, the Company acquired 100% of the outstanding equity of W.J. Byrnes & Co., a California corporation engaged in global logistics services with several stations in the United States. This acquisition will expand the domestic network of the Company’s Global Logistics Services segment.

On May 12, 2017, Janel adopted the Company’s 2017 Equity Incentive Plan (the “Plan”) pursuant to which (i) incentive stock Options, (ii) non-statutory stock options, (iii) restricted stock awards, and (iv) stock appreciation rights with respect to shares of the Company’s common stock may be granted to directors, officers, employees of and consultants to the Company and its subsidiaries. Participants and all terms of any awards under the Plan are in the discretion of the Company’s Compensation Committee (or the full Board if no Compensation Committee is appointed).

On May 12, 2017, the following named executive officers were granted options under the Company’s 2013 Non-Qualified Stock Option Plan exercisable for a period of ten years to purchase the following number of shares of the Company’s common stock at $8.01 per share:

As used throughout this Report, “we,” “our,” “Janel,” “the Company,” “Registrant” and similar words refer to Janel Corporation and subsidiaries.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements reflecting our current expectations with respect to our operations, performance, financial condition, and other developments. These forward-looking statements may generally be identified by the use of the words “may”, “will”, “believes”, “should”, “expects”, “anticipates”, “estimates”, and similar expressions. These statements are necessarily estimates reflecting management’s best judgment based upon current information and involve a number of risks and uncertainties. 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 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, those risks identified in our periodic reports filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K.

OVERVIEW

Janel Corporation is a holding company with subsidiaries in two business segments: Global Logistics Services and Manufacturing. The Company’s Global Logistics Services segment comprises several wholly-owned subsidiaries, collectively known as “Janel Group.” The Company’s Manufacturing segment comprises its majority-owned INDCO subsidiary, which manufactures and distributes industrial mixing equipment. Janel is a successor to a business originally formed in 1975. Janel is domiciled in the state of Nevada. Its corporate headquarters is in Lynbrook, New York. Its website is located at http://www.janelcorp.com.

Janel’s management focuses on significant capital allocation decisions, corporate governance and supporting its subsidiaries where appropriate. The Company expects to grow through its subsidiaries’ organic growth and by completing acquisitions. Janel either will acquire businesses within its existing segments, or it will expand its portfolio into new segments. Janel’s acquisition strategy focuses on reasonably-priced companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings power.

In September 2014, the Company purchased the equity of Alpha International/President Container Lines (“Alpha/PCL”), a global logistics services company. Approximately one year later, it purchased the equity of Liberty International, Inc. (“Liberty”). These companies, along with the legacy Janel Group, comprise Janel Corporation’s Global Logistics Services segment, which focuses on international transportation and customs clearance. In March 2016, the Company purchased INDCO, Inc. (“INDCO”) in order to diversify cash flow streams. INDCO comprises Janel Corporation’s Manufacturing segment.

In April 2017, after the close of the period covered by this Report, the Company acquired 100% of the outstanding equity of W.J. Byrnes & Co., a California corporation engaged in global logistics services with several stations in the United States. This acquisition will expand the domestic network of the Company’s Global Logistics Services segment.

Janel and its consolidated subsidiaries employ 108 full-time and five part-time people in the United States. None of these employees is covered by a collective bargaining agreement. Janel and its subsidiaries have experienced no work stoppages and consider relations with their employees to be good.

Results of Operations

The following discussion and analysis addresses the results of operations for our business segments, Global Logistics Services and Manufacturing, as well as for the Company's corporate group and the consolidated Company, for the three and six months ended March 31, 2017. Comparisons to results for the three and six months ended March 31, 2016 include data from the Global Logistics Services segment and the corporate group for the full period, and only one month of results for the Manufacturing segment, which was purchased on March 1, 2016. The discussion and analysis then addresses liquidity and the financial condition of the segments and consolidated Company as well as other matters.

Global Logistics Services – Three months ended March 31, 2017 and 2016

Revenues. Total revenues from continuing operations for the three months ended March 31, 2017 were $15,482,185 as compared to $15,937,072 for the three months ended March 31, 2016. This is a decrease of ($454,887), or (2.9%). The decrease primarily is due to the loss of a low-margin, high-revenue customer, previously reported.

Forwarding Expenses. Total forwarding expenses from continuing operations for the three months ended March 31, 2017 were $12,415,154 as compared to $12,835,126 for the three months ended March 31, 2016. This is a decrease of ($419,972), or (3.3%). The decrease primarily is due to reduction in expenses associated with the loss of the low-margin, high-revenue customer referenced above.

Certain items have been categorized as “corporate” expenses attributable to overall management of the Company and other non-segment specific activities. These expenses are discussed below under Corporate Selling, General and Administrative Expenses. The following discussion of selling, general and administrative expenses in the Global Logistics Service segment excludes these “corporate” items.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses from continuing operations for the three months ended March 31, 2017 were $2,486,391 as compared to $2,668,508 for the three months ended March 31, 2016. This is a decrease of ($182,117), or (6.8%). The decrease is due to certain cost reduction initiatives enacted in prior periods. As a percentage of revenue, selling, general and administrative expenses for the three months ended March 31, 2017 were 16.1%, as compared to 16.7% for the three months ended March 31, 2016. The decrease primarily was due to the loss of the low-margin, high-revenue customer referenced above.

Interest Expense. Total interest expense for the three months ended March 31, 2017 was $121,757, as compared to $124,745 for the three months ended March 31, 2016. This is a decrease of ($2,988), or (2.4%).

Income from Continuing Operations before Income Taxes. As a result of the above, income from continuing operations for the three months ended March 31, 2017 was $458,883, as compared to $308,694 for the three months ended March 31, 2016. This is an increase of $150,189, or 48.7%.

Manufacturing – Three months ended March 31, 2017 and 2016

INDCO, which comprises the Company’s Manufacturing segment, was purchased as of March 1, 2016. Therefore, prior year period data includes only the results of the one month in that period that the Company owned INDCO.

Revenues. Total revenues for the three months ended March 31, 2017 were $2,358,838 and $712,306, for the one month ended March 31, 2016.

Cost of Revenues. Total cost of revenues for the three months ended March 31, 2017 was $1,086,218 and $305,291 for the one month ended March 31, 2016.

Gross Margin. Total gross margin for the three months ended March 31, 2017 was $1,272,620 and $407,015 for the one month ended March 31, 2016.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses for the three months ended March 31, 2017 were $663,034 and $211,797 for the one month ended March 31, 2016.

Interest Expense. Total interest expense for the three months ended March 31, 2017 was $70,464, and $14,957 for the one month ended March 31, 2016.

Income from Continuing Operations before Income Taxes. Income before income taxes for the three months ended March 31, 2017 was $536,621 and $179,427 for the one month ended March 31, 2016.

Corporate – Three months ended March 31, 2017 and 2016

Corporate Selling, General and Administrative Expenses. Total corporate selling, general and administrative expenses from continuing operations for the three months ended March 31, 2017 were $434,449, as compared to $422,735 for the three months ended March 31, 2016.

Amortization of Intangible Assets. Total amortization of intangible assets for the three months ended March 31, 2017 was $189,164, as compared to $127,969 for the three months ended March 31, 2016. This is an increase of $61,195, or 47.8%. The increase is due to the additional amortization associated with the March 2016 purchase of INDCO. These amounts do not include amortization associated with the INDCO term loan origination fee.

Net Loss. Net loss for the three months ended March 31, 2017 was ($623,613), as compared to ($550,704) for the three months ended March 31, 2016. This is a decrease of ($72,909) or (13.2%). The decrease primarily is due to the significant increase in amortization of intangible assets.

Consolidated income taxes – Three months ended March 31, 2017 and 2016

The company recorded a net income tax provision for the three months ended March 31, 2017 of $164,389, as compared to $23,390 for the three months ended March 31, 2016.

Global Logistics Services – Six months ended March 31, 2017 and 2016

Revenues. Total revenues from continuing operations for the six months ended March 31, 2017 were $31,535,356, as compared to $38,510,697 for the six months ended March 31, 2016. This is a decrease of ($6,975,341), or (18.1%). The decrease primarily is due to the loss of a low-margin, high-revenue customer, previously reported.

Forwarding Expenses. Total forwarding expenses from continuing operations for the six months ended March 31, 2017 were $25,354,257 as compared to $32,014,619 for the six months ended March 31, 2016. This is a decrease of ($6,660,362), or (20.8%). The decrease primarily is due to reduction in expenses associated with the loss of the low-margin, high-revenue customer referenced above.

For the current fiscal year, certain items have been categorized as “corporate” expenses attributable to overall management of Janel and other non-segment specific activities. These expenses are discussed below under “Corporate Selling, General and Administrative Expenses.” The following discussion of selling, general and administrative expenses in the Global Logistics Service segment excludes these “corporate” items.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses from continuing operations for the six months ended March 31, 2017 were $5,145,458 as compared to $5,442,278 for the six months ended March 31, 2016. This is a decrease of ($296,820), or (5.5%). The decrease is due to certain cost reduction initiatives enacted in prior periods. As a percentage of revenue, selling, general and administrative expenses for the six months ended March 31, 2017 were 16.3%, as compared to 14.1% for the six months ended March 31, 2016. The increase primarily was due to the loss of the low-margin, high-revenue customer referenced above.

Interest Expense. Total interest expense for the six months ended March 31, 2017 was $239,689, as compared to $261,816 for the six months ended March 31, 2016. This is a decrease of ($22,127), or (8.5%). The decrease is due to a reduction in the average balance of our revolving loan as compared to the prior year period, the result of positive cash flow and repayment of the principal balance.

Income from Continuing Operations before Income Taxes. As a result of the above, income from continuing operations for the six months ended March 31, 2017 was $795,952, as compared to $791,984 for the six months ended March 31, 2016. This is an increase of $3,968, or 0.5%.

Manufacturing – Six months ended March 31, 2016

INDCO, which comprises the Company’s Manufacturing segment, was purchased as of March 1, 2016. Therefore, prior year period data includes only the results of the one month in that period that the Company owned INDCO.

Revenues. Total revenues for the six months ended March 31, 2017 were $4,161,164 and $712,306 for the one month ended March 31, 2016.

Cost of Revenues. Total cost of revenues for the six months ended March 31, 2017 was $1,899,145 and $305,291 for the one month ended March 31, 2016.

Gross Margin. Total gross margin for the six months ended March 31, 2017 was $2,262,019 and $407,015 for the one month ended March 31, 2016.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses for the six months ended March 31, 2017 were $1,276,168 and $199,297 for the one month ended March 31, 2016.

Interest Expense. Total interest expense for the six months ended March 31, 2017 was $142,837 and $14,957 for the one month ended March 31, 2016.

Income from Continuing Operations before Income Taxes. Income from continuing operations before income taxes for the six months ended March 31, 2017 was $838,014 and $179,427 for the one month ended March 31, 2016.

Corporate – Six months ended March 31, 2017 and 2016

Corporate Selling, General and Administrative Expenses. Total corporate selling, general and administrative expenses from continuing operations for the six months ended March 31, 2017 were $782,522, as compared to $656,230 for the six months ended March 31, 2016. This is an increase of $126,292, or 19.2%. The increase is due to the recategorization of certain costs, previously included in the Global Logistics Services segment, as “corporate” costs. These include primarily the salaries of executives whose responsibilities have shifted from the Global Logistics Service segment to Janel Corporation corporate development.

Amortization of Intangible Assets. Total amortization of intangibles for the six months ended March 31, 2017 was $378,331, as compared to $226,511 for the six months ended March 31, 2016. This is an increase of $151,820, or 67%. The increase is due to the addition of goodwill amortization associated with the March 2016 purchase of INDCO. These amounts do not include amortization associated with the INDCO term loan origination fee.

Net Loss. Net loss for the six months ended March 31, 2017 was ($1,160,853) as compared to ($882,741) for the six months ended March 31, 2016. This is a decrease of ($278,112) or (31.5%). The decrease primarily is due to the significant increase in professional fees related to acquisition activity.

Consolidated income taxes – Six months ended March 31, 2017 and 2016

The company recorded a net income tax provision for the six months ended March 31, 2017 of $226,838, as compared to $38,577 for the six months ended March 31, 2016.

Liquidity and Capital Resources

General. Our ability to satisfy our liquidity requirements, which derive from debt obligations, working capital needs, day-to-day operating expenses and capital expenditures, depends upon our future performance, which is subject to general economic conditions, competition and other factors, some of which are beyond our control. We depend on our commercial credit facilities to fund our day-to-day operations as there is a timing difference between our collection cycles and the timing of our payments to vendors.

Janel’s cash flow performance for the six months ending March 31, 2017 is not necessarily indicative of future cash flow performance.

Cash and cash equivalents for the six months ended March 31, 2017 decreased from $965,115 at the beginning of the period to $764,559 at the end of the period. This is a decrease of $200,556, or 20.8%. Net working capital (current assets minus current liabilities) for the six months ended March 31, 2017 decreased from ($5,122,295) at the beginning of the period to ($5,815,727) at the end of the period. This is a decrease of ($453,430). This decrease is primarily due to the reduction of revenues for the period.

Cash Flows from Continuing Operating Activities. Net cash provided by continuing operating activities for the six months ended March 31, 2017 was $973,232, as compared to $1,602,121 for the six months ended March 31, 2016. The change was driven by a decrease in accounts receivable, partially offset by a decrease in accounts payable and accrued expenses.

Cash Flows from Discontinued Operating Activities. Net cash used in discontinued operating activities for the six months ended March 31, 2017 was $37,547 reported within continuing operations in 2017, as compared to $183,177 for the six months ending March 31, 2016. The 2016 figure includes the settlement of a lawsuit involving the Company's discontinued food business.

Cash Flows from Investing Activities. Net cash used in investing activities for the six months ended March 31, 2017 was $130,608, as compared to $11,006,191 for the six months ended March 31, 2016. The decrease is due to the presence of the INDCO acquisition in the prior period.

Cash Flows from Financing Activities. Net cash (used in) provided by financing activities for the six months ended March 31, 2017 was ($1,043,180) as compared to $9,761,894 for the six months ended March 31, 2016. The cash used in financing activities for the six months ending March 31, 2017 primarily went toward the second of three annual earnout payments associated with the 2014 acquisition of Alpha/PCL and toward repayment of the First Merchants credit facility associated with the INDCO acquisition. The cash provided by financing activities for the six months ended March 31, 2016 primarily came from the First Merchants credit facility and the sale of additional Preferred Series C shares, both associated with the INDCO acquisition.

Global Logistics Services

Presidential Financial Corporation Borrowing Facility. On March 27, 2014, Janel Corporation and several of its Janel Group subsidiaries (collectively, the “Janel Borrowers”), entered into a Loan and Security Agreement with Presidential Financial Corporation (“Presidential”) with respect to a revolving line of credit facility (the “Presidential Facility”). As currently amended, the Presidential Facility now provides that the Janel Borrowers can borrow up to $10,000,000, limited to 85% of the Janel Borrowers’ aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Loan and Security Agreement. Interest will accrue at an annual rate equal to five percent above the greater of (a) the prime rate of interest quoted in The Wall Street Journal from time to time, or (b) 3.25%. The Janel Borrowers’ obligations under the Presidential Facility are secured by the assets of the Janel Borrowers. The agreement requires, among other things, that the Company, on a monthly basis, maintain a “minimum fixed charge covenant ratio” and “tangible net worth,” both as defined. The Presidential Facility will expire on March 27, 2018, subject to earlier termination as provided in the Loan and Security Agreement, unless renewed.

Working Capital Requirements. Janel Group’s cash needs are currently met by the Presidential Facility and cash on hand. As of March 31, 2017, the Company had $3,542,704 available under its $10,000,000 Presidential Facility and $317,300 in cash. The Company believes that current financial resources will be sufficient to finance Janel Group operations and obligations (current and long-term liabilities) for the long- and short-terms. However, Janel Group’s actual working capital needs for the long- and short-terms will depend upon numerous factors, including operating results, the cost associated with growing Janel Group either internally or through acquisition, competition, and the availability under the Presidential Facility. None of these factors can be predicted with certainty. If cash flow and available credit are not sufficient to fund working capital, Janel Group’s operations will be materially negatively impacted.

Manufacturing

First Merchants Bank Borrowing Facility. On March 21, 2016, INDCO executed a Credit Agreement with First Merchants Bank with respect to a $6,000,000 term loan and $1,500,000 (limited to the borrowing base and reserves) revolving loan. Interest will accrue on the term loan at an annual rate equal to the one month LIBOR plus either 3.75% (if INDCO’s cash flow leverage ratio is less than or equal to 2:1) or 4.75% (if INDCO’s cash flow leverage ratio is greater than 2:1). Interest will accrue on the revolving loan at an annual rate equal to the one month LIBOR plus 2.75%. INDCO’s obligations under the First Merchants credit facilities are secured by all of INDCO’s assets, and are guaranteed by the Company. The First Merchants credit facilities will expire on the fifth anniversary of the loans, subject to earlier termination as provided in the Credit Agreement, unless renewed.

Working Capital Requirements. INDCO’s cash needs are currently met by the First Merchant’s Bank term loan and revolving credit facility and cash on hand. As of March 31, 2017, INDCO had $1,500,000 available under its $1,500,000 revolving facility, subject to collateral availability, and $447,259 in cash. The Company believes that the current financial resources will be sufficient to finance INDCO operations and obligations (current and long-term liabilities) for the long- and short-terms. However, actual working capital needs for the long- and short-terms will depend upon numerous factors, including operating results, the cost associated with growing INDCO either internally or through acquisition, competition, and available credit under the revolving credit facility. None of these factors can be predicted with certainty. If cash flow and available credit are not sufficient to fund working capital, INDCO’s operations will be materially negatively impacted. 

Current Outlook

The results of operations in both the Global Logistics Services 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 Janel Group business’s various current and prospective customers. Historically, the Company’s quarterly 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 Janel Group’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 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 the current fiscal year and beyond. Janel Group’s 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. INDCO’s strategy calls for introductions of new product lines and wider distribution and promotion of its print- and web-based catalog.

In addition to supporting its subsidiaries’ growth plans, the Company may seek to grow by entering new business segments through acquisition.

Certain elements of our profitability and growth strategy, principally proposals for acquisition and accelerating our 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 will be materially negatively impacted.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such difference may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to revenue recognition, the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, accruals for transportation and other direct costs, accruals for cargo insurance, and deferred income taxes. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. We reevaluate these significant factors as facts and circumstances change. Historically, actual results have not differed significantly from our estimates.

Management believes that the nature of the Company’s business is such that there are few, if any, complex challenges in accounting for operations. Revenue recognition is considered the critical accounting policy.

Revenue Recognition

Global Logistics Services

Revenues are derived from airfreight, ocean freight and custom brokerage services. The Company’s Janel Group business is a non-asset-based carrier and accordingly does not own transportation assets. Janel Group generates the major portion of its air and ocean freight revenues by purchasing transportation services from direct carriers (airlines, steam ship lines, etc.) and reselling those services to its customers. By consolidating shipments from multiple customers and availing itself of its buying power, Janel Group is able to negotiate favorable rates from the direct carriers, while offering to its customer’s lower rates than the customers could obtain themselves.

Airfreight revenues include the charges for carrying the shipments when Janel Group acts as a freight consolidator. Ocean freight revenues include the charges for carrying the shipments when Janel Group acts as a Non-Vessel Operating Common Carrier (NVOCC). In each case, Janel Group is acting as an indirect carrier. When acting as an indirect carrier, Janel Group will issue a House Airway Bill (HAWB) or a House Ocean Bill of Lading (HOBL) to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, Janel Group receives a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments. At this point the risk of loss passes to the carrier, however, in order to claim for any such loss, the customer is first obligated to pay the freight charges.

Based upon the terms in the contract of carriage, revenues related to shipments where Janel Group issues a HAWB or a HOBL are recognized at the time the freight is tendered to the direct carrier. Costs related to the shipments are recognized at the same time.

Revenues realized when Janel Group acts as an agent for the shipper and does not issue a HAWB or a HOBL include only the commission and fees earned for the services performed. These revenues are recognized upon completion of the services.

Customs brokerage and other services involves provide multiple services at destination including clearing shipments through customs by preparing required documentation, calculating and providing for payment of duties and other charges on behalf of the customers, arranging for any required inspections, and arranging for final delivery. These revenues are recognized upon completion of the services.

The movement of freight may require multiple services. In most instances, Janel Group may perform multiple services including destination break bulk and value added services such as local transportation, distribution services and logistics management. Each of these services has separate fee that is recognized as revenue upon completion of the service.

Customers will frequently request an all-inclusive rate for a set of services that is known in the industry as “door-to-door services.” In these cases, the customer is billed a single rate for all services from pickup at origin to delivery. The allocation of revenue and expense among the components of services when provided under an all-inclusive rate are done in an objective manner on a fair value basis in accordance with Emerging Issues Task Force (EITF) 00-21, “Revenue Arrangements with Multiple Deliverables.”

Manufacturing

Revenues are derived from the engineering, manufacture, and delivery of specialty mixing equipment. Payments are made by either credit card acceptance or invoice billing by INDCO. A significant portion of sales comes from its web-based catalog. Such online sales are generally credit card purchases. Revenue is recognized when products are delivered and risk of loss transfers to the carrier(s) used.

Estimates

While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas that in the aggregate are not a major component of the Company’s consolidated statements of operations:

Management believes that the methods utilized in these areas are non-aggressive in approach and consistent in application. Management believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company’s transactions. While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates would not produce materially different results than those reported.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented.

Janel maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and have concluded that the system is effective. There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Janel is occasionally subject to claims and lawsuits which typically arise in the normal course of business. While the outcome of these claims cannot be predicated with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s financial position or results of operations.

The following table sets forth information with respect to purchases of common stock by the Company or any affiliated purchasers during the three months ended March 31, 2017:

On March 31, 2017, the Company entered into an Agreement and Release with James N. Jannello, the founder and former president of the Company, pursuant to which Mr. Jannello released the Company from all future obligations in connection with Mr. Jannello’s retirement from the Company in 2013, the Company and Mr. Jannello released each other from all claims, and the Company and affiliated purchasers purchased 20,000 and 80,000 shares, respectively, of Mr. Jannello’s 110,000 shares of the Company’s Common Stock. The aggregate payment to Mr. Jannello by all purchasers was $1,200,000.

On May 12, 2017, the Company submitted for filing to the Nevada Secretary of State an Amendment to Certificate of Designation After Issuance of Class or Series eliminating redemption rights of holders of the Company’s Series C Cumulative Preferred Stock, par value $0.001 per share.

On May 12, 2017, Janel adopted the Company’s 2017 Equity Incentive Plan (the “Plan”) pursuant to which (i) incentive stock options, (ii) non-statutory stock options, (iii) restricted stock awards, and (iv) stock appreciation rights with respect to shares of the Company’s common stock may be granted to directors, officers, employees of and consultants to the Company and its subsidiaries. Participants and all terms of any awards under the Plan are in the discretion of the Company’s Compensation Committee (or the full Board if no Compensation Committee is appointed). The full text of the Plan is filed as Exhibit 10.2 hereto and incorporated herein by this reference. 

On May 12, 2017, the following named executive officers were granted options under the Company’s 2013 Non-Qualified Stock Option Plan exercisable for a period of ten years to purchase the following number of shares of the Company’s common stock at $8.01 per share:

The options granted to Mr. Killackey are immediately exercisable, and the options granted to Mr. Pla are exercisable in three equal installments on the first, second and third anniversaries of the grant date and were in satisfaction of the grant previously reported as having been made as part of his employment by the Company.

Exhibit No.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.