Annual Statements Open main menu

JANEL CORP - Quarter Report: 2019 December (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
 
Commission file number: 333-60608
 
JANEL CORPORATION
(Exact name of registrant as specified in its charter)
 
Nevada
 
86-1005291
(State or other jurisdiction of  incorporation or organization)
 
(I.R.S. Employer Identification No.)

80 Eighth Avenue
   
New York, New York
 
10011
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (516) 256-8143
Former name, former address and former fiscal year, if changed from last report: N/A
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading symbols(s)
 
Name of each exchange
on which registered
None
 
None
 
None

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.
Yes ☒         No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒           No ☐
 
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.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
Emerging growth company

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).
Yes   ☐         No ☒
 
The number of shares of Common Stock outstanding as of March 6, 2020 was 847,652.
 


JANEL CORPORATION
 
QUARTERLY REPORT ON FORM 10-Q
For Quarterly Period Ended December 31, 2019
 
TABLE OF CONTENTS
 
  Page
   
3
   
 
Item 1.
3
       
   
3
       
   
4
       
   
5
       
   
6
       
   
7
       
 
Item 2.
25
       
 
Item 4.
36
       
38
   
 
Item 1.
38
       
 
Item 1A.
38
       
 
Item 2.
39
       
 
Item 6.
39
       
   
40

PART I - FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
 
   
December 31,
2019
(Unaudited)
   
September 30,
2019
 
ASSETS
           
Current Assets:
           
Cash
 
$
1,607
   
$
2,163
 
Accounts receivable, net of allowance for doubtful accounts
   
18,433
     
21,351
 
Inventory, net
   
4,040
     
4,371
 
Prepaid expenses and other current assets
   
556
     
531
 
Note receivable
   
142
     
139
 
Total current assets
   
24,778
     
28,555
 
Property and Equipment, net
   
3,996
     
3,954
 
Other Assets:
               
Intangible assets, net
   
13,355
     
13,598
 
Goodwill
   
13,525
     
13,525
 
Right of use asset
   
863
     
 
Security deposits and other long term assets
   
260
     
87
 
Total other assets
   
28,003
     
27,210
 
Total assets
 
$
56,777
   
$
59,719
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Line of credit
 
$
8,766
   
$
8,391
 
Accounts payable – trade
   
17,709
     
22,061
 
Accrued expenses and other current liabilities
   
2,590
     
2,272
 
Dividends payable
   
1,192
     
1,041
 
Short-term lease liabilities
   
390
     
 
Current portion of long-term debt
   
989
     
980
 
Total current liabilities
   
31,636
     
34,745
 
Other Liabilities:
               
Long-term debt
   
6,557
     
6,602
 
Subordinated promissory notes
   
505
     
541
 
Mandatorily redeemable non-controlling interest
   
619
     
619
 
Deferred income taxes
   
1,989
     
2,000
 
Long-term lease liabilities
   
494
     
 
Other liabilities
   
284
     
334
 
Total other liabilities
   
10,448
     
10,096
 
Total liabilities
   
42,084
     
44,841
 
Stockholders’ Equity:
               
Preferred Stock, $0.001 par value; 100,000 shares authorized
               
Series B 5,700 shares authorized and 631shares issued and outstanding
   
     
 
Series C 20,000 shares authorized and 20,000 shares issued and outstanding at December 31, 2019 and September 30, 2019, liquidation value of $12,692 and $12,541 at December 31, 2019 and September 30, 2019, respectively
   
     
 
Common stock, $0.001 par value; 4,500,000 shares authorized, 867,652 issued and 847,652 outstanding as of December 31, 2019 and 863,812 issued and 843,812 outstanding as of September 30, 2019
   
1
     
1
 
Paid-in capital
   
15,010
     
15,075
 
Treasury stock, at cost, 20,000 shares
   
(240
)
   
(240
)
Accumulated (deficit) earnings
   
(78
)
   
42
 
Total stockholders’ equity
   
14,693
     
14,878
 
Total liabilities and stockholders’ equity
 
$
56,777
   
$
59,719
 

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

JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
 
   
Three Months Ended
December 31,
 
   
2019
   
2018
 
Revenue
 
$
19,821
   
$
22,327
 
Forwarding expenses and cost of revenues
   
13,534
     
15,840
 
Gross profit
   
6,287
     
6,487
 
Cost and Expenses:
               
Selling, general and administrative
   
6,085
     
5,389
 
Amortization of intangible assets
   
243
     
208
 
Total Costs and Expenses
   
6,328
     
5,597
 
(Loss) Income from Operations
   
(41
)
   
890
 
Other Items:
               
Interest expense net of interest income
   
(163
)
   
(162
)
(Loss) Income Before Income Taxes
   
(204
)
   
728
 
Income tax benefit (expense)
   
84
     
(184
)
Net (Loss) Income
   
(120
)
   
544
 
Preferred stock dividends
   
(151
)
   
(122
)
Net (Loss) Income Available to Common Stockholders
 
$
(271
)
 
$
422
 
                 
Net (loss) Income per share
               
Basic
 
$
(0.14
)
 
$
0.64
 
Diluted
 
$
(0.14
)
 
$
0.58
 
Net (loss) income per share attributable to common stockholders:
               
Basic
 
$
(0.31
)
 
$
0.50
 
Diluted
 
$
(0.31
)
 
$
0.45
 
Weighted average number of shares outstanding:
               
Basic
   
865,275
     
847,458
 
Diluted
   
865,275
     
936,314
 

The accompanying notes are an integral part of these consolidated financial statements.
 
JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share and per share data)
(Unaudited)
 
   
PREFERRED STOCK
   
COMMON STOCK
   
PAID-IN
CAPITAL
   
TREASURY STOCK
   
ACCUMULATED
EARNINGS
(DEFICIT)
   
TOTAL
EQUITY
 
   
SHARES
   

$
   
SHARES
   
$
   
$
   
SHARES
   
$



$



$
 
Balance - September 30, 2019
   
20,631
    $
     
863,812
   
$
1
   
$
15,075
     
20,000
   
$
(240
)
 
$
42
   
$
14,878
 
Net Loss
   
     
     
     
     
     
     
     
(120
)
   
(120
)
Dividends to preferred stockholders
   
     
     
     
     
(151
)
   
     
     
     
(151
)
Stock-based compensation
   
     
     
     
     
55
     
     
     
     
55
 
Stock option exercise
   
     
     
3,840
     
     
31
     
     
     
     
31
 
Balance - December 31, 2019
   
20,631
   
$
     
867,652
   
$
1
   
$
15,010
     
20,000
   
$
(240
)
 
$
(78
)
 
$
14,693
 

   
PREFERRED STOCK
   
COMMON STOCK
   
PAID-IN
CAPITAL
   
TREASURY STOCK
   
ACCUMULATED
EARNINGS
(DEFICIT)
   
TOTAL
EQUITY
 
   
SHARES
   
$
   
SHARES
   
$



$
   
SHARES
   
$



$



$
 
Balance - September 30, 2018
   
21,271
   
$
     
837,951
   
$
1
   
$
15,872
     
20,000
   
$
(240
)
 
$
(606
)
 
$
15,027
 
Net Income
   
     
     
     
     
     
     
     
544
     
544
 
Cumulative effect of change in accounting principle
   
     
     
     
     
     
     
     
32
     
32
 
Dividends to preferred stockholders
   
     
     
     
     
(122
)
   
     
     
     
(122
)
Vested restricted stock unissued
   
     
     
     
     
(236
)
   
     
     
     
(236
)
Stock option exercise
   
     
     
1,500
     
     
5
     
     
     
     
5
 
Stock-based compensation
   
     
     
     
     
94
     
     
     
     
94
 
Balance - December 31, 2018
   
21,271
   
$
     
839,451
   
$
1
   
$
15,613
     
20,000
   
$
(240
)
 
$
(30
)
 
$
15,344
 

The accompanying notes are an integral part of these consolidated financial statements.
 
JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
   
Three Months Ended
December 31,
 
   
2019
   
2018
 
Cash Flows From Operating Activities:
           
Net (loss) income
 
$
(120
)
 
$
544
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
Provision for uncollectible accounts
   
68
     
94
 
Depreciation
   
55
     
76
 
Deferred income tax
   
(11
)
   
220
 
Amortization of intangible assets
   
243
     
208
 
Amortization of acquired inventory valuation
   
220
     
62
 
Amortization of loan costs
   
5
     
3
 
Stock-based compensation
   
74
     
129
 
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
   
2,850
     
(4,790
)
Inventory
   
111
     
(137
)
Prepaid expenses and sundry current assets
   
(25
)
   
(61
)
Security deposits and other long term assets
   
(176
)
   
(3
)
Accounts payable and accrued expenses
   
(4,054
)
   
4,373
 
Other liabilities
   
(29
)
   
30
 
Net cash (used) in provided by operating activities
   
(789
)
   
748
 
Cash Flows From Investing Activities:
               
Acquisition of property and equipment, net of disposals
   
(97
)
   
(182
)
Acquisitions
   
     
(1,935
)
Net cash used in investing activities
   
(97
)
   
(2,117
)
Cash Flows From Financing Activities:
               
Repayments of term loan
   
(35
)
   
(106
)
Proceeds from stock option exercise
   
31
     
5
 
Line of credit, proceeds, net
   
370
     
1,606
 
Repayment of subordinated promissory notes
   
(36
)
   
 
Net cash provided by financing activities
   
330
     
1,505
 
Net (decrease) increase in cash
   
(556
)
   
136
 
Cash at beginning of the period
   
2,163
     
585
 
Cash at end of period
 
$
1,607
   
$
721
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
 
$
152
   
$
169
 
Income taxes
 
$
2
   
$
21
 
Non-cash investing activities:
               
Contingent earn-out acquisition
 
$
   
$
50
 
Subordinated Promissory notes of Honor
 
$
   
$
456
 
Non-cash financing activities:
               
Dividends declared to preferred stockholders
 
$
151
   
$
122
 
Vested restricted stock unissued
 
$
   
$
236
 

The accompanying notes are an integral part of these consolidated financial statements.
 
JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
 
1.
BASIS OF PRESENTATION, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 
The accompanying interim unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of Article 8 of Regulation S-X and the instructions to Form 10-Q of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Janel Corporation (the “Company” or “Janel”) 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.
 
Business description
 
Janel is a holding company with subsidiaries in three business segments: Global Logistics Services, Manufacturing and Life Sciences. A management group at the holding company level (the “corporate group”) 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.
 
Global Logistics Services
 
The Company’s Global Logistics Services segment is comprised of several wholly-owned subsidiaries, collectively known as “Janel Group.” Janel Group 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, and other value-added logistics services.
 
On November 20, 2018, we completed a business combination whereby we acquired the membership interest of Honor Worldwide Logistics, LLC (“Honor”), a global logistics services provider with two U.S. locations. See note 2.
 
On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location. See note 2.
 
Manufacturing
 
The Company’s manufacturing segment is comprised of Indco, Inc. (“Indco”), 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.
 
Life Sciences
 
The Company’s Life Sciences segment is comprised of Aves Labs, Inc. (“Aves”), Antibodies Incorporated (“Antibodies”), IgG, LLC (“IgG”) and Phospho Solutions, LLC, which are wholley-owned subsidiaries of the Company.
 
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 original equipment manufacturer (“OEM”) basis.
 
Through Aves, the Company acquired the membership interests of a small life sciences company on July 1, 2019 and the equity interests of PhosphoSolutions, Inc. (“Phospho”) on September 6, 2019. Both acquisitions were completed primarily to expand our product offering in Life Sciences. See note 2.
 
Basis of consolidation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as Indco, of which Janel owns 91.65%, with a non-controlling interest held by existing Indco management. The Indco non-controlling interest is mandatorily redeemable and is recorded as a liability. All intercompany transactions and balances have been eliminated in consolidation.
 
Uses of estimates in the preparation of financial statements
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, as well as the reported amounts of revenues and expenses during the reporting period. The most critical estimates made by the Company are those relating to accounts receivables valuation, the useful lives of long-term assets, accrual of cost related to ancillary services the Company provides and accrual of tax expense on an interim basis.
 
Cash
 
The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250. The Company’s accounts at these institutions may, at times, exceed the federally insured limits. The Company has not experienced any losses in such accounts.
 
Accounts receivable and allowance for doubtful accounts receivable
 
Accounts receivable are recorded at the contractual amount. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical collection experience, the age of the accounts receivable balances, credit quality of the Company’s customers, any specific customer collection issues that have been identified, current economic conditions, and other factors that may affect the customers’ ability to pay. The Company writes off accounts receivable balances that have aged significantly once all collection efforts have been exhausted and the receivables are no longer deemed collectible from the customer. The allowance for doubtful accounts as of December 31, 2019 and December 31, 2018 was $554 and $124, respectively.
 
Inventory
 
Inventory is valued at the lower of cost (using the first-in, first-out method) or net realizable value. The Company maintains an inventory valuation reserve to provide for slow moving and obsolete inventory, inventory not meeting quality control standards and inventory subject to expiration for its Antibodies business. The products of Antibodies require the initial manufacture of multiple batches to determine if quality standards can consistently be met. In addition, the Company will produce larger batches of established products than current sales requirements due to economies of scale. The manufacturing process for these products, therefore, has and will continue to produce quantities in excess of forecasted usage. The Company values acquired manufactured antibody inventory based on a three-year forecast. Inventory quantities in excess of the forecast are not valued due to uncertainty over salability. Amounts are charged to the reserve when the Company scraps or disposes of inventory.
 
Property and equipment and depreciation policy
 
Property and equipment are recorded at cost. Property and equipment acquired in business combinations are initially recorded at fair value. Depreciation is provided for in amounts sufficient to amortize the costs of the related assets over their estimated useful lives on the straight-line and accelerated methods for both financial reporting and income tax purposes.
 
Maintenance and repairs are recorded as expenses when incurred.
 
Goodwill
 
The Company records as goodwill the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired in a business combination. Under current authoritative guidance, goodwill is not amortized but is tested for impairment annually (on September 30) as well as when an event or change in circumstance indicates impairment may have occurred. Goodwill is tested for impairment by comparing the fair value of the Company’s individual reporting units to their carrying amount to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than the carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value.
 
The fair value of our reporting units was in excess of carrying value and goodwill was not deemed to be impaired as of December 31, 2019 and September 30, 2019.
 
Intangibles and long-lived assets
 
Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition.
 
If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows, as well as the estimated fair value of long-lived assets, involves significant estimates on the part of management. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, the Company could be required to recognize impairment charges in the future. There were no indicators of impairment of long-lived assets as of December 31, 2019 and September 30, 2019.
 
Business segment information
 
The Company operates in three reportable segments: Global Logistics Services, Manufacturing and Life Sciences. The Company’s Chief Executive Officer regularly reviews financial information at the reporting segment level in order to make decisions about resources to be allocated to the segments and to assess their performance.
 
Revenues and revenue recognition
 
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
 
On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”), using the modified retrospective method. Results for reporting periods beginning on or after October 1, 2018 are presented under ASC Topic 606; however, prior period amounts are not adjusted and continue to be reported in accordance with the accounting standards in effect for those periods.
 
The Company recorded an increase to the opening balance of retained earnings of $32, net of tax, as of October 1, 2018 due to the cumulative impact of adoption of ASC Topic 606. The impact to revenue and associated cost for the three months ended December 31, 2018 was a decrease of $451 and $273, respectively, as a result of applying ASC Topic 606.
 
Global Logistics Services
 
Revenue Recognition
 
Revenue is recognized upon transfer of control of promised services to customers. With respect to its Global Logistics Services segment, the Company has determined that in general each shipment transaction or service order constitutes a separate contract with the customer. When the Company provides multiple services to a customer, different contracts may be present for different services.
 
The Company typically satisfies its performance obligations as services are rendered at a point in time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed at a point in time during the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to two-month period.
 
The Company evaluates whether amounts billed to customers should be reported as gross or net revenue. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the services, when it has discretion in setting the prices for the services to the customers, and the Company has the ability to direct the use of the services provided by the third party. Revenue is recognized on a net basis when we do not have latitude in carrier selection or to establish rates with the carrier.
 
In the Global Logistics Services segment, the Company disaggregates its revenues by its four primary service categories: ocean import and export, freight forwarding, customs brokerage and air import and export. A summary of the Company’s revenues disaggregated by major service lines for the three months ended December 31, 2019 and 2018 was as follows:
 
   
Three Months
Ended
December 31,
   
Three Months
Ended
December 31,
 
Service Type
 
2019
   
2018
 
Ocean import and export
 
$
5,857
   
$
7,761
 
Freight forwarding
   
3,810
     
4,593
 
Customs brokerage
   
2,194
     
2,289
 
Air import and export
   
4,218
     
4,162
 
Total
 
$
16,079
   
$
18,805
 

Manufacturing
 
Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment and accessories. Indco receives customer product orders via phone call, email, internet or fax. The pricing of each standard product sold is listed in Indco’s print and web-based catalog. Customer specific products are priced by quote. A sales order acknowledgement is sent to every customer for every order to confirm pricing and the specifications of the products ordered. The revenue is recognized at a point in time when the product is shipped to the customer.
 
Life Sciences
 
Revenues from the Life Sciences segment are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and antibody manufacturing. Revenues are recognized when products are shipped and risk of loss is transferred to the carrier(s) used.
 
Income (loss) per common share
 
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding, excluding unvested restricted stock, during the period. Diluted net income (loss) per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or warrants or the vesting of restricted stock units. The treasury stock method is used to calculate the potential dilutive effect of these common stock equivalents. Potentially dilutive shares are excluded from the computation of diluted net income (loss) per share when their effect is anti-dilutive.
 
Stock-based compensation to employees
 
Equity classified share-based awards
 
The Company recognizes compensation expense for stock-based payments granted based on the grant-date fair value estimated in accordance with ASC Topic 718, “Compensation-Stock Compensation.” For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for restricted shares; the expense is recognized over the service period for awards expected to vest.
 
Stock-based compensation to non-employees
 
Liability classified share-based awards
 
The Company maintains other share unit compensation grants for shares of Indco, the Company’s majority-owned subsidiary, which vest over a period of up to three years following their grant. The shares contain certain put features where the Company is either required or expects to settle vested awards on a cash basis.
 
These awards are classified as liability awards, measured at fair value at the date of grant and re-measured at fair value at each reporting date up to and including the settlement date. The determination of the fair value of the share units under these plans is described in note 9. The fair value of the awards is expensed over the respective vesting period of the individual awards with recognition of a corresponding liability. Changes in fair value after vesting are recognized through compensation expense. Compensation expense reflects estimates of the number of instruments expected to vest. The impact of forfeitures and fair value revisions, if any, are recognized in earnings such that the cumulative expense reflects the revisions, with a corresponding adjustment to the settlement liability. Liability-classified share unit liabilities due within 12 months of the reporting date are presented in trade and other payables while settlements due beyond 12 months of the reporting date are presented in non-current liabilities.
 
Non-employee share-based awards
 
In prior periods up to September 30, 2019, the Company accounted for stock-based compensation to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity-Based Payments to Non-employees.” Measurement of share-based payment transactions with non-employees are based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of share-based payment transactions is determined at the earlier of performance commitment date or performance completion date. The Company believes that the fair value of the stock-based award is more reliably measurable than the fair value of the services received. The fair value of the granted stock-based awards is remeasured at each reporting date and expense is recognized over the vesting period of the award.
 
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions.

The Company adopted ASU 2018-07 on October 1, 2019. The adoption of the standard did not have a material impact on our financial statements for the three months ended December 31, 2019.
 
Mandatorily Redeemable Non-Controlling Interests
 
The non-controlling interests that are reflected as mandatorily redeemable non-controlling interests in the consolidated financial statements consist of non-controlling interests related to the Indco acquisition whose owners have certain redemption rights that allow them to require the Company to purchase the non-controlling interests of those owners upon certain events outside the control of the Company, including upon the death of the holder. The Company is required to purchase 20% of the 8.35% mandatorily redeemable non-controlling interest at the option of the holder beginning on the third anniversary of the date of the Indco acquisition, which was March 21, 2019. On the date the Company acquires the controlling interest in a business combination, the fair value of the non-controlling interest is recorded in the long-term liabilities section of the consolidated balance sheet under the caption “Mandatorily redeemable non-controlling interest.” As of December 31, 2019, the holder did not exercise the redemption rights. The mandatorily redeemable non-controlling interest is adjusted each reporting period, if required, to its then current redemption value, based on the predetermined formula defined in the respective agreement. The Company reflects any adjustment in the redemption value and any earnings attributable to the mandatorily redeemable non-controlling interest in its consolidated statements of operations by recording the adjustments and earnings to other income and expense in the caption “change in fair value of mandatorily redeemable non-controlling interest.”
 
Note receivable
 
On March 2, 2018, the Company issued a convertible promissory note in the amount of $125 with a potential non- related party acquisition target. The note bears interest on the outstanding principal amount at a rate of 8% per annum, and both principal and interest is payable on the maturity date of April 24, 2020. The convertible note, at the election of the Company, can be converted into common stock of the acquisition target. As of December 31, 2019, and September 30, 2019, amounts outstanding including accrued interest were $142 and $139, respectively. As of December 31, 2019, the Company is no longer pursuing this potential acquisition target.
 
Income taxes
 
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.
 
Recent accounting pronouncements
 
Recently adopted accounting pronouncements
 
On October 1, 2019, the Company adopted ASU No. 2016-02, Leases (“ASC 842” or “ASU 2016-02”) issued by the FASB in February 2016 which was subsequently supplemented by clarifying guidance intended to improve financial reporting of leasing transactions. The new lease accounting guidance requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for all leases with initial terms longer than 12 months and provides enhanced disclosures on key information of leasing arrangements. The guidance allows companies to apply the requirements retrospectively, either to all prior periods presented or through a cumulative adjustment in the year of adoption.
 
The Company adopted the new standards effective October 1, 2019 using the modified retrospective transition method. The Company elected to use the package of practical expedients which allowed the Company to (i) not reassess whether an arrangement contains a lease, (ii) carry forward its lease classification as operating or capital leases and (iii) not reassess its previously-recorded initial direct costs. For all existing operating leases as of October 1, 2019, the Company recorded right-of-use assets of $1,043 and corresponding lease liabilities of $1,060, with an offset to other liabilities of $17 to eliminate deferred rent on the consolidated balance sheets.

Operating lease expense is recognized on a straight-line basis over the lease term. At each balance sheet date, operating lease liabilities represent the present value of the future minimum payments related to non-cancelable periods.
 
Leases with an initial term of 12 months or less (short-term leases) are not recognized in the balance sheet, and the related lease payments are recognized as incurred over the lease term.
 
All significant lease arrangements after October 1, 2019 are recognized as right-of-use assets and lease liabilities at lease commencement. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent its obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the commencement date based on the present value of the future lease payments using the Company’s incremental borrowing rate.
 
The adoption of the new lease accounting standard did not have a material impact on the Company’s results of operations or cash flows.
 
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company’s current share-based payment awards to      non-employees consist only of grants made to its non-employee directors as compensation solely relates to each individual’s role as a non-employee director. As such, in accordance with ASC 718, the Company accounts for these share-based payment awards to its non-employee directors in the same manner as share-based payment awards for its employees. The Company adopted this standard on October 1, 2019, and the amendments in this guidance had no material effect on either the accounting for its share-based payment awards to its non-employee directors, or the Company’s consolidated financial statements.
 
Recently issued accounting pronouncements not yet adopted
 
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This new accounting standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its disclosures.
 
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This new accounting standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss methodology previously employed to measure credit losses for most financial assets and requires the use of a forward-looking expected loss model. Current accounting delays the recognition of credit losses until it is probable a loss has been incurred, while the update will require financial assets to be measured at amortized costs less a reserve and equal to the net amount expected to be collected. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.
 
Reclassifications
 
Prior year financial statement amounts are reclassified as necessary to conform to the current year presentation. These prior period reclassifications did not affect the Company’s net income, earnings per share, stockholders’ equity or working capital.
 
2.
ACQUISITIONS
 
The Company completed four business acquisitions in the fiscal year ended September 30, 2019, with an aggregate purchase price of $6,768, net of cash acquired. The Company recorded an aggregate $2,067 in goodwill and $2,165 in other identifiable intangibles.  The results of operations of the acquired businesses are included in Janel’s consolidated results of operations since the date of each acquisition. Supplemental pro forma information has not been provided as the acquisitions did not have a material impact on Janel’s consolidated results of operations, individually or in the aggregate.
 
Honor Worldwide Logistics, LLC
 
Through its wholly-owned subsidiary, Janel Group, the Company acquired the membership interests of Honor on November 20, 2018 in a transaction pursuant to which Honor became a direct wholly-owned subsidiary of Janel Group and an indirect wholly-owned subsidiary of the Company. At closing, a subordinated promissory note in the aggregate amount of $456 was issued to a former member. The acquisition of Honor was funded with cash provided by normal operations along with a subordinated promissory note. Honor provides global logistics services with two U.S. locations and expands the domestic network of the Company’s Global Logistics Services segment. The results of operations for Honor are reflected in the Global Logistics Services reporting segment.
 
PhosphoSolutions
 
Through Aves, the Company completed a business combination whereby we acquired Phospho on September 6, 2019.  The aggregate purchase price for Phospho was $4,043, net of $13 of cash received.  At closing, $4,000 was paid in cash and $56 was recorded in accrued expenses as preliminary tax gross up due to former owners.  Phospho is a manufacturer and distributor of monoclonal and polyclonal antibodies, principally used in neuroscience research. Phospho was founded in 2001 and is headquartered in Aurora, Colorado. The results of operations for Phospho are reflected in the Life Sciences reporting segment.
 
Other Acquisitions
 
On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location. On July 1, 2019, we acquired the membership interests of a life sciences company to expand our product offerings in Life Sciences. These acquisitions were funded with cash provided by normal operations. The results of operations for these acquisitions are reported in our Global Logistics Services and Life Sciences segments. The aggregate purchase price for these acquisitions were $430. At closing, $50 was recorded in accrued expenses as a preliminary earnout consideration.
 
3.
INVENTORY
 
Inventories consisted of the following:
 
   
December 31,
2019
   
September 30,
2019
 
Finished Goods
 
$
2,813
   
$
2,988
 
Work-in-Process
   
540
     
461
 
Raw Materials
   
714
     
946
 
Less - Reserve for Inventory Valuation
   
(27
)
   
(24
)
Inventory Net
 
$
$ 4,040
   
$
4,371
 

4.
PROPERTY AND EQUIPMENT
 
A summary of property and equipment and the estimated lives used in the computation of depreciation and amortization is as follows:
 
   
December 31,
2019
   
September 30,
2019
 
Life
Building and Improvements
 
$
2,559
   
$
2,577
 
15-30 Years
Land and Improvements
   
855
     
835
 
Indefinite
Furniture & Fixtures
   
251
     
218
 
3-7 Years
Computer Equipment
   
291
     
465
 
3-5 Years
Machinery & Equipment
   
1,139
     
973
 
3-15 Years
Leasehold Improvements
   
181
     
181
 
Shorter of Lease Term or Asset Life
     
5,276
     
5,249
   
Less: Accumulated Depreciation
   
(1,280
)
   
(1,295
)
 
   
$
3,996
   
$
3,954
   

Depreciation expense for the three months ended December 31, 2019 and 2018 was $55 and $76, respectively.
 
5.
INTANGIBLE ASSETS
 
A summary of intangible assets and the estimated useful lives used in the computation of amortization is as follows:
 
   
December 31,
2019
   
September 30,
2019
 
Life
Customer Relationships
 
$
13,762
   
$
13,762
 
15-20 Years
Trademarks / Names
   
2,251
     
2,251
 
20 Years
Other
   
978
     
978
 
2-5 Years
     
16,991
     
16,991
   
Less: Accumulated Amortization
   
(3,636
)
   
(3,393
)
 
   
$
13,355
   
$
13,598
   

Amortization expense for the three months ended December 31, 2019 and 2018 was $243 and $208, respectively.
 
6.
GOODWILL
 
The Company’s goodwill carrying amounts relate to the acquisitions in the Global Logistics Services, Manufacturing and Life Sciences businesses.

The composition of the goodwill balance at December 31, 2019 and September 30, 2019 was as follows:

   
December 31,
2019
   
September 30,
2019
 
Global Logistics Services
 
$
5,655
   
$
5,655
 
Manufacturing
   
5,046
     
5,046
 
Life Sciences
   
2,824
     
2,824
 
   
$
13,525
   
$
13,525
 

7.
NOTES PAYABLE - BANKS
 
(A)
Santander Bank Facility
 
On October 17, 2017, the Janel Group subsidiaries (collectively the “Janel Group Borrowers”), 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 in March and November of 2018, the Santander Facility currently provides that the Janel Group Borrowers can borrow up to $17,000, limited to 85% of the Janel Group Borrowers’ aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Santander Loan Agreement. Interest accrues on the Santander Facility at an annual rate equal to, at the Janel Group Borrowers’ option, Prime plus 0.50%, or LIBOR (30, 60 or 90 day) plus 2.50% subject to a LIBOR floor of 75 basis points. The Janel Group Borrowers’ obligations under the Santander Facility are secured by all of the assets of the Janel Group Borrowers, and the Santander Loan Agreement contains customary terms and covenants. The Santander Facility matures on October 17, 2020, unless earlier terminated or renewed.  As a result of its terms, the Santander Facility is classified as a current liability on the consolidated balance sheet.
 
At December 31, 2019, outstanding borrowings under the Santander Facility were $8,766, representing 51.6% of the $17,000 available thereunder, and interest was accruing at an effective interest rate of 5.50%. The Janel Group Borrowers were in compliance with the covenants defined in the Santander Loan Agreement at December 31, 2019 and September 30, 2019.
 
(B)
First Merchants Bank Credit Facility
 
On March 21, 2016, as amended in August 2019, Indco entered into a Credit Agreement (the “First Merchants Credit Agreement”) with First Merchants Bank with respect to a $5,500 term loan and $1,000 (limited to the borrowing base and reserves) revolving loan (together, the “First Merchants Facility”). Interest accrues on the term loan at an annual rate equal to the one-month LIBOR 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 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 Facility are secured by all of Indco’s assets and are guaranteed by the Company, and the Company’s guarantee of Indco’s obligations is secured by a pledge of the Company’s Indco shares. The First Merchants Credit Agreement contains customary terms and covenants. The First Merchants Facility will expire on August 30, 2024 (subject to earlier termination as provided in the Credit Agreement) unless renewed.
 
As of December 31, 2019, there were no outstanding borrowings under the revolving loan and $5,164 of borrowings under the term loan, with interest accruing on the term loan at an effective interest rate of 5.28%.
 
   
December 31,
2019
   
September 30,
2019
 
Long Term Debt*
 
$
5,164
   
$
5,455
 
Less Current Portion
   
(786
)
   
(786
)
   
$
4,378
   
$
4,669
 


*
Note: Long Term Debt is due in monthly installments of $71 plus monthly interest, at LIBOR plus 3.75% to 4.75% per annum. The note is collateralized by all of Indco’s assets and guaranteed by Janel.

(C)
First Northern Bank of Dixon
 
On June 21, 2018, AB Merger Sub, Inc., a wholly-owned, indirect subsidiary of the Company, entered into a Business Loan Agreement (the “First Northern Loan Agreement”) with First Northern Bank of Dixon (“First Northern”), with respect to a $2,025 First Northern Term Loan (the “First Northern Term Loan”). The proceeds of the First Northern Term Loan were used to fund a portion of the merger consideration to acquire Antibodies.  Interest will accrue on the First Northern Term Loan at an annual rate based on the five-year Treasury constant maturity (index) plus 2.50% (margin) for years one through five then adjusted and fixed for years six through ten using the same index and margin. The borrower’s and the Company’s obligations to First Northern under the First Northern Loan Agreement are secured by certain real property owned by Antibodies as of the closing of the Antibodies merger. The First Northern Loan Agreement contains customary terms and covenants, and matures on June 14, 2028 (subject to earlier termination).
 
On November 18, 2019, Antibodies modified and refinanced its existing credit facilities with First Northern Bank. The existing Senior Secured Term loan was increased to $2,235, the initial interest rate decreased to 4.18%, and the maturity date was extended to November 14, 2029, with all other terms, covenants and conditions substantially unchanged. The existing revolving credit facility was expanded to $500, the interest rate decreased to 6.0%, and the maturity date was extended to October 1, 2020, with all other terms, covenants and conditions substantially unchanged. Additionally, Antibodies entered into a new business loan agreement (“Solar Loan”) which provided for a $125 term loan in connection with a potential expansion of solar generation capacity on the Antibodies property. The initial interest rate on the facility is 4.43%, subject to adjustment in five years.

As of December 31, 2019, there were no outstanding borrowings under the revolving credit facility.
 
   
December 31,
2019
   
September 30,
2019
 
Long Term Debt*
 
$
2,230
   
$
1,975
 
Less Current Portion
   
(51
)
   
(42
)
   
$
$2,179
   
$
1,933
 


*
Note: Long Term Debt is due in monthly installments of $12 plus monthly interest, at an effective interest rate of 4.18% as of December 31, 2019 and 5.28% as of December 31, 2019, per annum. The note is collateralized by real property owned by Antibodies and guaranteed by Janel.
 
The Company was in compliance with the covenants defined in the First Northern Loan Agreement at December 31, 2019 and September 30, 2019.
 
8.
SUBORDINATED PROMISSORY NOTES
 
On June 22, 2018, in connection with the Antibodies acquisition, AB HoldCo, Inc. (“AB HoldCo”), a wholly-owned subsidiary of the Company, entered into two subordinated promissory notes (“AB HoldCo Subordinated Promissory Notes”) with certain former shareholders of Antibodies. Both of the AB HoldCo Subordinated Promissory Notes are guaranteed by the Company and are subordinate to the terms of any credit agreement, loan agreement, indenture, promissory note, guaranty or other debt instrument pursuant to which AB HoldCo or any affiliate of AB HoldCo incurs, borrows, extends, guarantees, renews or refinances any indebtedness for borrowed money or other extensions of credit with any federal or state bank or other institutional lender and are unsecured. Each of the AB HoldCo Subordinated Promissory Notes has a 4% annual interest rate payable in arrears on the last business day of each calendar quarter, commencing on September 30, 2018, and has a maturity date of June 22, 2021. The outstanding principal amount of these notes is payable in a single payment on the three-year anniversary date of June 22, 2021. Both notes are subject to prepayment in whole or in part, without premium or penalty, of the outstanding principal amount of the notes, together with all accrued but unpaid interest on such principal amount up to the date of prepayment.  Any prepayment shall be applied first to accrued but unpaid interest, and then to outstanding principal. As of December 31, 2019, amounts outstanding under the two AB HoldCo Subordinated Promissory Notes were $47 and $297, respectively.
 
On November 20, 2018, in connection with the Honor acquisition, Janel Group, a wholly-owned subsidiary of the Company, entered into a subordinated promissory note (“Janel Group Subordinated Promissory Note”) with a former owner of Honor. The Janel Group Subordinated Promissory Note is guaranteed by the Company. The Janel Group Subordinated Promissory Note is subordinate to and junior in right of payment for principal interest premiums and other amounts payable to the Santander Bank Facility and the First Merchants Bank Credit Facility. The Janel Group Subordinated Promissory Note, has a 6.75% annual interest rate, payable in twelve equal consecutive quarterly installments of principal and interest, on the last day of January, April, July and October beginning in January 2019, and shall be due and payable each in the amount of $42. The outstanding principal and accrued and unpaid interest are payable in a single payment on the three-year anniversary date of November 20, 2021. The note is subject to prepayment in whole or in part, without premium or penalty, of the outstanding principal amount of the notes, together with all accrued but unpaid interest on such principal amount up to the date of prepayment.  As of December 31, 2019, the amount outstanding under the Janel Group Subordinated Promissory Note was $313.
 
9.
STOCKHOLDERS’ EQUITY
 
Janel is authorized to issue 4,500,000 shares of common stock, par value $0.001. In addition, the Company is authorized to issue 100,000 shares of preferred stock, par value $0.001. The preferred stock is issuable in series with such voting rights, if any, designations, powers, preferences and other rights and such qualifications, limitations and restrictions as may be determined by the Company’s board of directors or a duly authorized committee thereof, without stockholder approval. The board of directors may fix the number of shares constituting each series and increase or decrease the number of shares of any series.
 
(A)
Preferred Stock
 
Series B Convertible Preferred Stock
 
Shares of the Company’s Series B Convertible Preferred Stock (the “Series B Stock”) are convertible into shares of the Company’s $0.001 par value common stock at any time on a one-share (of Series B Stock) for ten-shares (of common stock) basis. On September 6, 2019, a holder of the Series B Stock converted 640 shares of Series B Stock into 6,400 shares of the Company’s Common Stock.
 
Series C Cumulative Preferred Stock
 
Shares of the Company’s Series C Cumulative Preferred Stock the “Series C Stock” are entitled to receive annual dividends at a rate of 5% per annum of the original issuance price of $10, when and if declared by the Company’s board of directors, with such rate increased by 1% annually beginning on January 1, 2019.  Such rate is to increase on each January 1 thereafter for four years to a maximum rate of 9%. The dividend rate of the Series C Stock as of December 31, 2019 was 6%. In the event of liquidation, holders of Series C Stock shall be paid an amount equal to the original issuance price, plus any accrued but unpaid dividends thereon. Shares of Series C Stock may be redeemed by the Company at any time upon notice and payment of the original issuance price, plus any accrued but unpaid dividends thereon. The liquidation value of Series C Stock was $12,692 as of December 31, 2019.
 
For the three months ended December 31, 2019, the Company declared dividends on Series C Stock of $151.  As of December 31, 2019, the Company had accrued dividends of $1,192.
 
(B)
Equity Incentive Plan
 
On May 12, 2017, the Company adopted the 2017 Equity Incentive Plan (the “2017 Plan”) which was amended on May 8, 2018.  Under the 2017 Plan as amended, non-statutory stock options, restricted stock awards and 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. Participants and all terms of any awards under the Plan are at the discretion of the Company’s Compensation Committee of the board of directors.
 
10.
STOCK-BASED COMPENSATION
 
On October 30, 2013, the board of directors of the Company adopted the Company’s 2013 Non-Qualified Stock Option Plan (the “2013 Option Plan”) providing for options to purchase up to 100,000 shares of common stock for issuance to directors, officers, employees of and consultants to the Company and its subsidiaries.
 
Total stock-based compensation for the three months ended December 31, 2019 and 2018 amounted to $74 and $129, respectively, and was included in selling, general and administrative expense in the Company’s statements of operations.
 
(A)
Stock Options
 
The Company uses the Black-Scholes option pricing model to estimate the fair value of our share-based awards. In applying this model, we use the following assumptions:
 

Risk-free interest rate - We determine the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate.
 

Expected term - We estimate the expected term of our options on the average of the vesting date and term of the option.
 

Expected volatility - We estimate expected volatility using daily historical trading data of a peer group.
 

Dividend yield - We have never paid dividends on our common stock and currently have no plans to do so; therefore, no dividend yield is applied.
 
The fair values of our employee option awards were estimated using the assumptions below, which yielded the following weighted average grant date fair values for the periods presented:
 
 
Three Months Ended
December 31,
2019
Risk-free Interest Rate
1.59%
Expected Option Term in Years
5.5-6.5
Expected Volatility
101.2% - 101.7%
Dividend Yield
0%
Weighted Average Grant Date Fair Value
$6.97 - $7.33

Options for Employees
 
   
Number of
Options
   
Weighted
Average Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term (in years)
   
Aggregate
Intrinsic Value
(in thousands)
 
Outstanding Balance at September 30, 2019
   
110,837
   
$
5.05
   
5.98
   
$
438.06
 
Granted
   
7,500
    $
9.00
     
9.75
    $
 
Exercised
   
(3,841
)
  $
8.17
     
    $
 
Outstanding Balance at December 31, 2019
   
114,496
    $
5.21
     
5.92
    $
424.44
 
Exercisable on December 31, 2019
   
96,792
    $
4.62
     
5.40
    $
414.80
 

The aggregate intrinsic value in the above table was calculated as the difference between the closing price of the Company’s common stock at December 31, 2019 of $8.90 per share and the exercise price of the stock options that had strike prices below such closing price.
 
As of December 31, 2019, there was approximately $65 of total unrecognized compensation expense related to the unvested employee stock options which is expected to be recognized over a weighted average period of less than one year.
 
There were no non-employee options awarded during the three month period ended December 31, 2019.  During the three-month period ended December 31, 2019, 15,000 non-employee options were forfeited.
 
   
Number of
Options
   
Weighted
Average Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term (in years)
   
Aggregate
Intrinsic Value
(in thousands)
 
Outstanding Balance at September 30, 2019
   
51,053
   
$
7.58
   
7.80
   
$
72.68
 
Forfeited
   
(15,000
)
  $
8.04
     
    $
 
Outstanding Balance at December 31, 2019
   
36,053
    $
7.38
     
7.5
    $
54.67
 
Exercisable on December 31, 2019
   
6,053
    $
4.13
     
6.8
    $
28.87
 

The aggregate intrinsic value in the above table was calculated as the difference between the closing price of our common stock at December 31, 2019, of $8.90 per share and the exercise price of the stock options that had strike prices below such closing price.
 
As of December 31, 2019, there was approximately $51 of total unrecognized compensation expense related to the unvested stock options, which is expected to be recognized over a weighted average period of less than one year.
 
Liability classified share-based awards
 
Additionally, during the three months ended December 31, 2019, 6,880 options were granted with respect to Indco’s common stock. The Company uses the Black-Scholes option pricing model to estimate the fair value of Indco’s share-based awards. In applying this model, the Company used the following assumptions:
 
 
Three Months Ended
December 31,
2019
Risk-free Interest Rate
1.59%
Expected Option Term in Years
5.5 - 6.5
Expected Volatility
101.2% - 101.7%
Dividend Yield
0%
Weighted Average Grant Date Fair Value
$8.59 - $9.03

   
Number of
Options
   
Weighted
Average
Exercise Price
   
Weighted
Average
Remaining
Contractual
Term (in years)
   
Aggregate
Intrinsic Value
(in thousands)
 
Outstanding Balance at September 30, 2019
   
32,133
   
$
8.85
   
7.34
   
$
85.45
 
Granted
   
6,880
    $
11.08
     
9.75
    $
 
Outstanding Balance at December 31, 2019
   
39,013
    $
9.24
     
7.56
    $
85.45
 
Exercisable on December 31, 2019
   
23,095
    $
7.58
     
6.64
    $
85.45
 

The aggregate intrinsic value in the above table was calculated as the difference between the valuation price of Indco’s common stock at December 31, 2019 of $11.08 per share and the exercise price of the stock options that had strike prices below such closing price.
 
The liability classified awards were measured at fair value at each reporting date until the final measurement date, which was the date of completion of services required to earn the option. The accrued compensation cost related to these options was approximately $284 and $172 as of December 31, 2019 and September 30, 2019, respectively, and is included in other liabilities in the consolidated financial statement.  The cost associated with the options issued on each grant date is being recognized ratably over the period of service required to earn each tranche of options.
 
Upon vesting, the options continue to be accounted for as a liability in accordance with ASC 480-10-25-8 and are measured in accordance with ASC 480-10-35 at every reporting period until the options are settled. Changes in the fair value of the vested options are recognized in earnings in the consolidated financial statements.
 
The options are classified as liabilities, and the underlying shares of Indco’s common stock also contain put options which result in their classification as a mandatorily redeemable security. While their redemption does not occur on a fixed date, there is an unconditional obligation for the Company to repurchase the shares upon death, which is certain to occur at some point in time.
 
As of December 31, 2019, there was approximately $84 of total unrecognized compensation expense related to the unvested Indco stock options. This expense is expected to be recognized over a weighted average period of less than one year.
 
(B)
Restricted Stock
 
During the three months ended December 31, 2019, there were no shares of restricted stock granted. Under the 2017 Plan, each grant of restricted stock vests over a three-year period, and the cost to the recipient is zero. Restricted stock compensation expense, which is a non-cash item, is being recognized in the Company’s financial statements over the vesting period of each restricted stock grant.
 
The following table summarizes the status of our employee unvested restricted stock under the 2017 Plan for the three months ended December 31, 2019:
 
   
Restricted Stock
(in thousands)
   
Weighted Average
Grant Date Fair Value
   
Weighted Average
Remaining
Contractual Term
(in years)
 
Unvested at September 30, 2019
   
5,000
   
$
8.01
   
0.61
 
Vested
   
    $
     
 
Unvested at December 31, 2019
   
5,000
    $
8.01
     
0.36
 

As of December 31, 2019, there was approximately $5 of total unrecognized compensation cost related to unvested employee restricted stock. The cost is expected to be recognized over a weighted-average period of approximately 0.36 years.
 
The following table summarizes the status of our non-employee unvested restricted stock under the 2017 Plan for the three months ended December 31, 2019:
 
   
Restricted Stock
(in thousands)
   
Weighted Average
Grant Date Fair Value
   
Weighted Average
Remaining
Contractual Term
(in years)
 
Unvested at September 30, 2019
   
26,667
   
$
8.04
   
0.88
 
Vested
   
    $
     
 
Unvested at December 31, 2019
   
26,667
    $
8.04
     
0.62
 

As of December 31, 2019, there was approximately $50 of unrecognized compensation cost related to non-employee unvested restricted stock. The cost is expected to be recognized over a weighted-average period of approximately 0.62 years.
 
As of December 31, 2019, included in accrued expenses and other current liabilities was $159 which represents 18,333 shares of restricted stock that vested but were not issued.
 
11.
INCOME PER COMMON SHARE
 
The following table provides a reconciliation of the basic and diluted income (loss) per share (“EPS”) computations for the three months ended December 31, 2019 and 2018 (in thousands, except share and per share data):

   
For the Three Months Ended
December 31,
 
   
2019
   
2018
 
Income:
           
Net income (loss)
 
$
(120
)
 
$
544
 
Preferred stock dividends
   
(151
)
   
(122
)
Net Income (loss) available to common stockholders
 
$
(271
)
 
$
422
 
                 
Common Shares:
               
Basic - weighted average common shares
   
865,275
     
847,458
 
Effect of dilutive securities:
               
Stock options
   
     
58,191
 
Restricted stock
   
     
17,955
 
Convertible preferred stock
   
     
12,710
 
Diluted - weighted average common stock
 
$
865,275
   
$
936,314
 
                 
Income per Common Share:
               
Basic -
               
Net income (loss)
 
$
(0.14
)
 
$
0.64
 
Preferred stock dividends
   
(0.17
)
   
(0.14
)
Net Income (loss) available to common stockholders
 
$
(0.31
)
 
$
0.50
 
                 
Diluted -
               
Net income (loss)
 
$
(0.14
)
 
$
0.58
 
Preferred stock dividends
   
(0.17
)
   
(0.13
)
Net income (loss) available to common stockholders
 
$
(0.31
)
 
$
0.45
 

The computation for the diluted number of shares excludes unvested restricted stock, unexercised stock options and unexercised warrants that are anti-dilutive. There were no anti-dilutive shares for the three-month periods ended December 31, 2019.
 
Potentially dilutive securities as of December 31, 2019 and 2018 were as follows:
 
   
December 31,
 
   
2019
   
2018
 
Employee Stock Options
   
114,496
     
118,798
 
Non-employee Stock Options
   
36,053
     
51,053
 
Employee Restricted Stock
   
5,000
     
5,000
 
Non-employee Restricted Stock
   
26,667
     
26,667
 
Convertible Preferred Stock
   
6,310
     
12,710
 
     
188,526
     
214,228
 

12.
INCOME TAXES
 
The Company’s estimated fiscal 2020 and 2019 blended U.S. federal statutory corporate income tax rate of 41% and 25.2% was applied in the computation of the income tax provision for the three months ended December 31, 2019 and 2018.

The reconciliation of income tax computed at the Federal statutory rate to the (benefit) provision for income taxes is as follows:

   
December 31,
2019
   
December 31,
2018
 
Federal taxes at statutory rates
 
$
(43
)
 
$
153
 
Permanent differences
   
(15
)
   
6
 
State and local taxes
   
(26
)
   
25
 
   
$
(84
)
 
$
184
 

13.
BUSINESS SEGMENT INFORMATION
 
As discussed above in note 1, the Company operates in three reportable segments: 1) Global Logistics Services, 2) Manufacturing and 3) Life Sciences, 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 months ended December 31, 2019:
 
For the three months ended
December 31, 2019
 
Consolidated
   
Global Logistics
Services
   
Manufacturing
   
Life Sciences
   
Corporate
 
Revenue
 
$
19,821
   
$
16,079
   
$
1,870
   
$
1,872
    $
 
Forwarding expenses and cost of revenues
   
13,534
     
12,087
     
845
     
602
     
 
Gross profit
   
6,287
     
3,992
     
1,025
     
1,270
     
 
Selling, general and administrative
   
6,085
     
3,638
     
682
     
980
     
785
 
Amortization of intangible assets
   
243
     
     
     
     
243
 
Operating (loss) income
   
(41
)
   
354
     
343
     
290
     
(1,028
)
Interest expense
   
163
     
66
     
72
     
27
     
(2
)
Identifiable assets
   
56,777
     
17,926
     
2,148
     
9,766
     
26,937
 
Capital expenditures
   
97
     
47
     
23
     
27
     
 

 
The following table presents selected financial information about the Company’s reportable segments for the three months ended December 31, 2018:
 
For the three months ended
December 31, 2018
 
Consolidated
   
Global Logistics
Services
   
Manufacturing
   
Life Sciences
   
Corporate
 
Revenue
 
$
22,327
   
$
18,805
   
$
2,081
   
$
1,441
   
$
 
Forwarding expenses and cost of revenues
   
15,840
     
14,418
     
933
     
489
     
 
Gross profit
   
6,487
     
4,387
     
1,148
     
952
     
 
Selling, general and administrative
   
5,389
     
3,360
     
708
     
707
     
614
 
Amortization of intangible assets
   
208
     
     
     
     
208
 
Operating income (loss)
   
890
     
1,027
     
440
     
245
     
(822
)
Interest expense
   
162
     
98
     
40
     
27
     
(3
)
Identifiable assets
   
58,950
     
25,047
     
1,989
     
6,484
     
25,430
 
Capital expenditures
   
182
     
14
     
41
     
127
     
 

14.
RISKS AND UNCERTAINTIES
 
(A)
Currency Risks
 
The nature of Janel’s operations requires it to deal with currencies other than the U.S. Dollar. As a result, the Company is exposed to the inherent risks of international currency markets and governmental interference. A number of countries where Janel maintains offices or agent relationships have currency control regulations. The Company attempts to compensate for these exposures by accelerating international currency settlements among those agents.
 
(B)
Concentration of Credit Risk
 
The Company’s assets that are exposed to concentrations of credit risk consist primarily of cash and receivables from customers. The Company places its cash with financial institutions that have high credit ratings. The receivables from clients are spread over many customers. The Company maintains an allowance for uncollectible accounts receivable based on expected collectability and performs ongoing credit evaluations of its customers’ financial condition.
 
(C)
Legal Proceedings
 
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 predicted 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 business, results of operations, financial condition or cash flows.
 
In December 2017, Janel Group received a Notice of Copyright Infringement letter from counsel for Warren Communications News, Inc. (“Warren”), the publisher of the International Trade Today (“ITT”) newsletter.  The letter alleges that Janel Group infringed upon Warren’s registered copyrights in its ITT newsletter.  The Company believes it has meritorious defenses to the allegations.  The Company is not presently able to reasonably estimate potential losses, if any, related to the allegations.
 
15.
LEASES
 
The Company has operating leases for office and warehouse space in all districts where it conducts business. As of December 31, 2019, the remaining terms of the Company’s operating leases are between one and 44 months and certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include the minimum lease payments that the Company is obligated to make under the non-cancelable initial terms of the leases as the renewal terms are at the Company’s option.
 
The components of lease cost for the three-month period ended December 31, 2019 are as follows:
 
   
Three Months Ended
December 31,
2019
 
Operating lease cost
 
$
200
 
Short-term lease cost
   
14
 
Total lease cost
 
$
214
 

Right-of-use assets, short-term lease liabilities and long-term lease liabilities reported in the consolidated balance sheets for operating leases as of December 31, 2019 were $863, $390 and $494, respectively. The weighted-average remaining lease term and the weighted-average discount rate related to the Company’s operating leases were 2.8 years and 6.58%, respectively. Cash paid for amounts included in the measurement of operating lease obligations were $224 for the three months ended December 31, 2019.
 
Future minimum lease payments under non-cancelable operating leases as of December 31, 2019 are as follows:
 
2020
 
$
507
 
2021
   
263
 
2022
   
246
 
2023
   
53
 
Total undiscounted lease payments
   
1,069
 
Less: Imputed interest
   
(185
)
Total lease obligations
 
$
884
 

16.
SUBSEQUENT EVENTS
 
On March 4, 2020, the Company and its wholly-owned subsidiaries, entered into the Third Amendment to Loan and Security Agreement (“Amendment No. 3”) to the Loan and Security Agreement, dated October 17, 2017 by and between the Company, certain of its subsidiaries, and Santander Bank, N.A. (as amended by the Limited Waiver, Joinder and First Amendment dated as of March 21, 2018, and the Limited Waiver, Joinder and Second Amendment dated November 20, 2018 (collectively, the “Loan Agreement”). Pursuant to, and among other changes effected by, Amendment No. 3: (1) the Maturity date of the Loan evidenced by the Loan Agreement was extended to October 17, 2022; (2) the LIBOR rate margin was reduced from 2.50% to 2.25%; (3) the monthly Collateral Monitor Fee was reduced from $1 to $0.5; (4) the definition of EBITDA was revised to allow addback of up to $500 annually for merger and acquisition costs; and (5) the Company’s subsidiaries were permitted to pay up to $500 in aggregate dividends to the Company for fiscal 2020 if certain conditions were met.

On February 4, 2020, Indco, Inc., a majority-owned subsidiary of the Company, entered into a Purchase and Sale Agreement with 4040 Earnings Way, LLC (“Seller”) to acquire from Seller the land and building which serves as the Indco office and manufacturing facility in New Albany, Indiana, for a purchase price of $845.  Indco anticipates that the purchase price will be financed with cash from operations and a loan of up to $700 from First Merchants Bank secured by the subject property.  Closing is expected to occur in April 2020.

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 consolidated financial statements and related notes thereto as of and for the three months ended December 31, 2019, 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 by the use of 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 a number of 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; the risk that 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; litigation, indemnification claims and other unforeseen claims and liabilities that may arise from an acquisition; economic and other conditions in the markets in which we operate; the risk that we may not have sufficient working capital to continue operations; instability in the financial markets; the material weaknesses identified in our internal control over financial reporting; our dependence on key employees; competition from parties who sell their businesses to us and from professionals who cease working for us; terrorist attacks and other acts of violence or war; security breaches or cybersecurity attacks; competition faced by our global logistics services freight carriers with greater financial resources and from companies that operate in areas in which we plan to expand; our dependence on the availability of cargo space from third parties; recessions and other economic developments that reduce freight volumes; other events affecting the volume of international trade and international operations; risks arising from our global logistics services business’ ability to manage staffing needs; competition faced in the freight forwarding, freight brokerage, logistics and supply chain management industry; industry consolidation and our ability to gain sufficient market presence with respect to our global logistics services business; risks arising from our ability to comply with governmental permit and licensing requirements or statutory and regulatory requirements; seasonal trends; competition faced by our manufacturing (Indco) business from competitors with greater financial resources; Indco’s dependence on individual purchase orders to generate revenue; any decrease in the availability, or increase in the cost, of raw materials used by Indco; Indco’s ability to obtain and retain skilled technical personnel; risks associated with product liability claims due to alleged defects in Indco’s products; risks arising from the environmental, health and safety regulations applicable to Indco; the reliance of our Indco and life sciences businesses on a single location to manufacture their products; the ability of our life sciences business to compete effectively; the ability of our life sciences business to introduce new products in a timely manner; product or other liabilities associated with the manufacture and sale of new products and services; 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 controlling influence exerted by our officers and directors and one of our stockholders; our inability to issue dividends in the foreseeable future; and risks related to ownership of our common stock, including volatility and the lack of a guaranteed continued public trading market for our common stock. 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 Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
 
OVERVIEW
 
Janel is a holding company with subsidiaries in three business segments: Global Logistics Services, Manufacturing and Life Sciences. 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.
 
A management group at the holding company level (the “corporate group”) 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.
 
Global Logistics Services
 
The Company’s Global Logistics Services segment is comprised of several wholly-owned subsidiaries (collectively “Janel Group”). Janel Group 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, and other value-added logistics services.
 
On November 20, 2018, we completed a business combination whereby we acquired the membership interest of Honor Worldwide Logistics, LLC (“Honor”), a global logistics services provider with two U.S. locations.
 
On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of a global logistics services provider with one U.S. location.
 
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.
 
Life Sciences
 
The Company’s Life Sciences segment is comprised of Aves Labs, Inc. (“Aves”), Antibodies Incorporated (“Antibodies”), IgG, LLC (“IgG”) and PhosphoSolutions, LLC, which are wholly-owned subsidiaries of the Company.
 
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 original equipment manufacturer (“OEM”) basis.
 
Through Aves, the Company acquired the membership interests of a small life sciences company on July 1, 2019 and the equity interests of PhosphoSolutions, Inc. (“Phospho”) on September 6, 2019. Both acquisitions were completed primarily to expand our product offering in Life Sciences.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstance. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
 
The Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP. 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 differences 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. Note 1 of the notes to consolidated financial statements included herein includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of certain accounting policies and estimates.
 
Management believes that the nature of the Company’s business is such that there are a few complex challenges in accounting for operations. Revenue recognition is considered the critical accounting policy due to the complexity of arranging and managing global logistics and supply-chain management transactions.
 
Income taxes
 
The Company uses the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.
 
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:
 

accounts receivable valuation;
 

the useful lives of long-term assets;
 

the accrual of costs related to ancillary services the Company provides;
 

accrual of tax expense on an interim basis; and
 

inventory valuation.
 
Management believes that the methods utilized in these areas are consistent in application. Management further 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.
 
Critical Accounting Policies and Estimates Applicable to the Global Logistics Services Segment
 
Revenue Recognition
 
Revenues are derived from customs brokerage services and from freight forwarding services.
 
Customs brokerage services include activities required for the clearance of shipments through government customs regimes, such as preparing required documentation, calculating and providing for payment of duties and other charges on behalf of customers, arranging required inspections and arranging final delivery.
 
Freight forwarding may require multiple services, including long-distance shipment via air, ocean or ground assets, destination handling (“break bulk”), warehousing, distribution and other logistics management activities. As an asset-light business, Janel Group owns none of the assets by which it fulfills its customers’ logistics needs. Rather, it purchases the services its customers need from asset owners, such as airlines and steamship lines, and resells them. By consolidating shipments from multiple customers, Janel Group can negotiate terms of service with asset owners that are more favorable than those the customers could negotiate themselves.
 
Revenue is recognized upon transfer of control of promised services to customers. With respect to its Global Logistics Services segment, the Company has determined that in general each shipment transaction or service order constitutes a separate contract with the customer. When the Company provides multiple services to a customer, different contracts may be present for different services.
 
The Company typically satisfies its performance obligations as services are rendered at a point in time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed at a point in time during the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to-two-month period.
 
The Company evaluates whether amounts billed to customers should be reported as gross or net revenue. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the services, when it has discretion in setting the prices for the services to the customers, and the Company has the ability to direct the use of the services provided by the third party. Revenue is recognized on a net basis when we do not have latitude in carrier selection or establish rates with the carrier.
 
In the Global Logistics Services segment, the Company disaggregates its revenues by its four primary service categories: ocean import and export, freight forwarding, customs brokerage and air import and export.

Critical Accounting Policies and Estimates Applicable to the Manufacturing and Life Sciences Segments
 
Revenue Recognition-Manufacturing

Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment and accessories. Indco receives customer product orders via phone call, email, internet or fax. The pricing of each standard product sold is listed in Indco’s print and web-based catalog. Customer specific products are priced by quote. A sales order acknowledgement is sent to every customer for every order to confirm pricing and the specifications of the products ordered. The revenue is recognized at a point in time when the product is shipped to the customer.

Revenue Recognition-Life Sciences

Revenues from the Life Sciences segment are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and antibody manufacturing. Revenues are recognized when products are shipped and risk of loss is transferred to the carrier(s) used.
 
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”).
 
Net Revenue
 
Net revenue is a non-GAAP measure calculated as total revenue less forwarding expenses attributable to the Company’s Global Logistics Services segment. Our total revenue represents the total dollar value of services and goods we sell to our customers. Forwarding expenses attributable to the Company’s Global Logistics Services segment refer to purchased transportation and related services including contracted air, ocean, rail, motor carrier and other costs. Total revenue can be influenced greatly by changes in transportation rates or other items, such as fuel prices, which we do not control. Management believes that providing net revenue is useful to investors as net revenue is the primary indicator of our ability to source, add value and sell services and products that are provided by third parties, and we consider net revenue to be our primary performance measurement. The difference between the rate billed to our customers (the sell rate) and the rate we pay to the carrier (the buy rate) is termed “net revenue”, “yield” or “margin.” As presented, net revenue matches gross margin.
 
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 amortization 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 net revenue and adjusted operating income provide useful information in understanding and evaluating our operating results in the same manner as management. However, net revenue 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 net revenue, 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 net revenue 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.

The following table sets forth a reconciliation of operating income to adjusted operating income:
 
   
Three Months Ended
December 31,
 
   
2019
   
2018
 
   
(in thousands)
 
Operating (loss) income
 
$
(41
)
 
$
890
 
Amortization of intangible assets(1)
   
243
     
208
 
Stock-based compensation(2)
   
74
     
129
 
Amortization of acquired inventory valuation(3)
   
220
     
62
 
Adjusted operating income
 
$
496
   
$
1,289
 


(1)
Amortization of intangible assets represents non-cash amortization expense or impairment expense, if any, attributable to acquisition-related intangible assets, including any portion that is allocated to noncontrolling interests. Management believes that making this adjustment aids in comparing the Company’s operating results with other companies in our industry that have not engaged in acquisitions.
(2)
The Company eliminates the impact of stock-based compensation because it does not consider such non-cash expenses to be indicative of the Company’s core operating performance. The exclusion of stock-based compensation expenses also facilitates comparisons of the Company’s underlying operating performance on a period-to-period basis.
(3)
The Company has excluded the impact of amortization of acquired inventory valuation in connection with acquisitions as such adjustments represent non-cash items, are not consistent in amount and frequency and are significantly impacted by the timing and size of the Company’s acquisitions.
 
Results of Operations – Janel Corporation – Three Months Ended December 31, 2019 and 2018
 
The following table sets forth our corporate group expenses:
 
   
Three Months Ended
December 31,
 
   
2019
   
2018
 
   
(in thousands)
 
Corporate expenses
 
$
685
   
$
452
 
Amortization of intangible assets
   
243
     
208
 
Stock-based compensation
   
74
     
94
 
Merger and acquisition expenses
   
26
     
68
 
Total corporate expenses
 
$
1,028
   
$
822
 

Expenses
 
Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, increased by $206 to $1,028, or 25.1% in the three months ended December 31, 2019 as compared to $822 for the three months ended December 31, 2018. The increase was due primarily to higher accounting-related professional expenses partially offset by lower stock-based compensation expense and lower merger and acquisition related expenses for the quarter.
 
Amortization of Intangible Assets
 
For the three months ended December 31, 2019 and 2018, corporate amortization expenses were $243 and $208, respectively, an increase of $35, or 16.8%. The increase was primarily related to acquisitions.
 
Interest Expense
 
Interest expense for the consolidated company increased $1, or 0.6%, to $163 for the three months ended December 31, 2019 from $162 for the three months ended December 31, 2018.
 
Income Taxes
 
On a consolidated basis, the Company recorded an income tax benefit of $84 for the three months ended December 31, 2019, as compared to an income tax expense of $184 for the three months ended December 31, 2018. The decrease was primarily due to the increase in pretax loss. In 2016, a deferred tax asset was established to reflect a net operating loss carryforward, which the Company has begun using, and is expected to continue to use, through ongoing profitability.
 
Preferred Stock Dividends
 
Preferred stock dividends include any dividends accrued but not paid on the Company’s Series C Cumulative Preferred Stock (the “Series C Stock”). For the three months ended December 31, 2019 and 2018, preferred stock dividends were $151 and $122, respectively. The increase of $29, or 23.8%, was the result of a higher number of shares of Series C Stock outstanding to support acquisitions and the increase in dividend rate as of January 1, 2019 to 6%. See note 9 to the consolidated financial statements for additional information.
 
Net Income (Loss)
 
Net loss was ($120), or ($0.14) per diluted share, for the three months ended December 31, 2019 compared to income of $544, or $0.58 per diluted share, for the three months ended December 31, 2018. The decrease was primarily due to lower revenues and gross profit and higher selling, general and administrative expenses across the Global Logistics Services and Manufacturing Segments partially offset by stronger performance in the Life Sciences Segment.
 
Income (Loss) Available to Common Stockholders
 
Loss available to holders of common shares was ($271), or ($0.31) per diluted share, for the three months ended December 31, 2019 compared to income of $422, or $0.45 per diluted share, for the three months ended December 31, 2018. The decrease primarily was due to lower revenues and gross profit and higher selling, general and administrative expenses across the Global Logistics Services and Manufacturing Segments partially offset by stronger performance in the Life Sciences Segment and higher number of shares of Series C Stock outstanding to support acquisitions and the increase in dividend rate as of January 1, 2019 to 6%.
 
Results of Operations – Segment Financial Results – Three Months Ended December 31, 2019 and 2018
 
The following table sets forth our segment financial results:
 
   
Three Months Ended
December 31,
 
   
2019
   
2018
 
   
(in thousands)
 
Revenue:
           
Global Logistics Services
 
$
16,079
   
$
18,805
 
Manufacturing
   
1,870
     
2,081
 
Life Sciences
   
1,872
     
1,441
 
Total Revenues
   
19,821
     
22,327
 
                 
Gross Profit:
               
Global Logistics Services
   
3,992
     
4,387
 
Manufacturing
   
1,025
     
1,148
 
Life Sciences
   
1,270
     
952
 
Total Gross Profit
   
6,287
     
6,487
 
                 
Income from Operations:
               
Global Logistics Services
   
354
     
1,027
 
Manufacturing
   
343
     
440
 
Life Sciences
   
290
     
245
 
Total Income from Operations by Segment
   
987
     
1,712
 
                 
Corporate administrative expense
   
(785
)
   
(614
)
Amortization expense
   
(243
)
   
(208
)
Interest expense, net
   
(163
)
   
(162
)
Net (loss) income before taxes
   
(204
)
   
728
 
Income tax expense
 
$
(35
)
 
$
(184
)
Net (loss) income
 
$
(239
)
 
$
544
 

Results of Operations - Global Logistics Services – Three Months Ended December 31, 2019 and 2018
 
Our Global Logistics Services business helps its clients move and manage freight efficiently to reduce inventories and to increase supply chain speed and reliability. Key services include customs entry filing, arrangement of freight forwarding by air, ocean and ground, warehousing, cargo insurance procurement, logistics planning, product repackaging and online shipment tracking.
 
Global Logistics Services – Selected Financial Information:
 
   
Three Months Ended
December 31,
 
   
2019
   
2018
 
   
(in thousands)
 
Revenue
 
$
16,079
   
$
18,805
 
Forwarding expenses
   
12,087
     
14,418
 
Net Revenue
   
3,992
     
4,387
 
Gross profit margin
   
24.8
%
   
23.3
%
Income from operations
 
$
354
   
$
1,027
 

Revenue
 
Total revenue for the three months ended December 31, 2019 was $16,079, as compared to $18,805 for the three months ended December 31, 2018, a decrease of $2,726 or 14.5%. The decrease in revenue was largely due to customers in the prior year period moving freight ahead of new proposed governmental trade policies. Acquired revenue from two acquisitions completed during fiscal 2019 slightly offset some of the revenue decline.
 
Forwarding Expenses
 
Forwarding expenses for the three months ended December 31, 2019 decreased by $2,331, or 16.2%, to $12,087 as compared to $14,418 for the three months ended December 31, 2018. Forwarding expenses as a percentage of revenue were 75.2% and 76.7% for the three months ended December 31, 2019 and December 31, 2018, respectively. Similar to the revenue decrease, the decline in forwarding expenses reflected lower shipment volume slightly offset by increased expenses related to two acquisitions.
 
Net Revenue
 
Net revenue for the three months ended December 31, 2019 was $3,992, a decrease of $395, or 9.0%, as compared to $4,387 for the three months ended December 31, 2018. This decrease was mainly the result of a low double-digit organic decline for the quarter in our base business due to volume shift as customers moved freight prior to new proposed governmental trade policies. Net revenue as a percentage of gross revenue increased to 24.8% versus 23.3% for the prior year period due to the mix of business and lower freight rates.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses for the three months ended December 31, 2019 were $3,638, as compared to $3,360 for the three months ended December 31, 2018. This increase of $278, or 8.3%, was largely attributed to the additional expenses from businesses acquired versus the prior year period. As a percentage of revenue, selling, general and administrative expenses were 22.6% and 17.9% of revenue for the three months ended December 31, 2019 and 2018, respectively.
 
Income from Operations
 
Income from operations before income taxes decreased to $354 for the three months ended December 31, 2019, as compared to $1,027 for the three months ended December 31, 2018, a decrease of $673, or 65.5%. Income from operations declined as a result of the shift in volume experienced during the first quarter of fiscal 2018 that did not recur and which more than offset acquisition contributions experienced during the three months ended December 31, 2019. Our operating margin as a percentage of net revenue for the three months ended December 31, 2019 was 8.9%, versus 23.4% in the prior year period.
 
Results of Operations - Manufacturing – Three Months Ended December 31, 2019 and 2018
 
The Company’s Manufacturing segment includes its majority-owned Indco subsidiary, which manufactures and distributes industrial mixing equipment.
 
Manufacturing – Selected Financial Information:
 
   
Three Months Ended
December 31,
 
   
2019
   
2018
 
   
(in thousands)
 
Revenue
 
$
1,870
   
$
2,081
 
Cost of sales
   
845
     
933
 
Gross profit
   
1,025
     
1,148
 
Gross profit margin
   
54.8
%
 
$
55.2
%
Income from Operations
 
$
343
   
$
440
 

Revenue
 
Total revenue was $1,870 and $2,081 for the three months ended December 31, 2019 and 2018, respectively, a decrease of 10.1%. The revenue decline reflected decline in volume across the business relative to the prior year period.

Cost of Sales
 
Cost of sales was $845 and $933 for the three months ended December 31, 2019 and 2018, respectively, a decrease of $88, or 9.4%, due to decreased sales.
 
Gross Profit and Gross Profit Margin
 
Gross profit was $1,025 and $1,148 for the three months ended December 31, 2019 and 2018, respectively. Gross profit margin for each of the three months ended December 31, 2019 and 2018 was 54.8% and 55.2%, as the mix of business remained consistent.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses were $682 and $708 for the three months ended December 31, 2019 and 2018, respectively, a decrease of $26 or 3.7%, due to continued investments to grow the business.
 
Income from Operations
 
Income from operations was $343 for the three months ended December 31, 2019 compared to $440 for the three months ended December 31, 2018, representing a 22% decrease from the prior year period. Operating profit decreased due to lower revenue growth and continued investment to grow the business.
 
Results of Operations – Life Sciences – Three Months Ended December 31, 2019 and 2018
 
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.
 
Life Sciences – Selected Financial Information:
 
   
Three Months Ended
December 31,
 
   
2019
   
2018
 
   
(in thousands)
 
Revenue
 
$
1,872
   
$
1,441
 
Cost of sales
   
602
     
489
 
Gross profit
   
1,270
     
952
 
Gross profit margin
   
67.8
%
   
66.1
%
Income from Operations
 
$
290
   
$
245
 

Revenue
 
Total revenue was $1,872 and $1,441 for the three months ended December 31, 2019 and 2018, respectively, an increase of $431 or 29.9%. Acquisitions accounted for most of the increase, as organic growth also increased modestly due to new products and services.
 
Cost of Sales
 
Cost of sales was $602 and $489 for the three months ended December 31, 2019 and 2018, respectively, an increase of $113 or 23.1%, largely due to acquired businesses offset by mix improvements.
 
Gross Profit and Gross Profit Margin
 
Gross profit was $1,270 and $952 for the three months ended December 31, 2019 and 2018, respectively, an increase of $318 or 33.4%. In the three months ended December 31, 2019 and 2018, the Life Sciences segment had gross profit margins of 67.8% and 66.1%, respectively. Gross profit margin increased due to acquisitions and favorable product mix.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses were $980 and $707 for the three months ended December 31, 2019 and 2018, respectively, an increase of $273 or 38.6%, largely due to acquired businesses.
 
Income from Operations
 
Income from operations for the three months ended December 31, 2019 and 2018 was $290 and $245, or 15.0% and 17.0%, respectively, of segment revenue for the relevant period.  This increase was largely due to acquired businesses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
General
 
Our ability to satisfy liquidity requirements, including satisfying debt obligations and fund 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 Global Logistcs Services 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. Generally, Janel does not make significant capital expenditures.
 
As a customs broker, our Global Logistics Services 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 U.S. 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 and 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.
 
As of December 31, 2019, the Company’s cash and working capital deficiency (current assets minus current liabilities) were $1,607 and $6,858, respectively, as compared to $2,163 and $6,190 as of September 30, 2019. The increase in working capital deficiency is considered nominal, representing relatively stable collections from customers and payments of vendors.
 
Janel’s cash flow performance for the three-months ended December 31, 2019 is not necessarily indicative of future cash flow performance.
 
Cash flows from operating activities
 
Net cash (used) in and provided by operating activities for the three months ended December 31, 2019 and 2018 was ($789) and $748, respectively. The decrease in cash provided by operations for the three months ended December 31, 2019 was driven principally by timing of cash collections for accounts receivables and cash payments on accounts payables and the net loss for the three-month period ended December 31, 2019.
 
Cash flows from investing activities
 
Net cash used in investing activities totaled $97 for the three months ended December 31, 2019, versus $2,117 for the prior year period. During the three months ended December 31, 2018, the Company used $1,935 for two acquisitions, net of cash acquired. The Company also used $97 for the acquisition of property and equipment for the three months ended December 31, 2019 versus $182 for the three months ended December 31, 2018.
 
Cash flows from financing activities
 
Net cash provided by financing activities was $330 for the three months ended December 31, 2019, versus $1,505 provided by financing activities for the three months ended December 31, 2018. Net cash provided by financing activities for the three months ended December 31, 2019 primarily included funds from our line of credit. Net cash provided by financing activities for the three months ended December 31, 2018 period primarily funded our acquisition efforts.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2019, we had no off-balance sheet arrangements or obligations.
 
ITEM 4.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2019, the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, because a material weaknesses in the Company’s internal control over financial reporting existed at September 30, 2018 and had not been remediated by the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q.  These material weaknesses in the Company’s internal control over financial reporting and the Company’s remediation efforts are described below.
 
Material Weaknesses in Internal Control Over Financial Reporting
 
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, have identified material weaknesses in the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
 
In connection with the preparation of the Company’s Annual Report on Form 10-K, management identified the following material weaknesses as of September 30, 2019 related to our Life Sciences segment:
 

The Company had inadequate controls over the following:
 
(1) recording of sales orders and timeliness of revenue recognition in accordance with ASC Topic 606, Revenue from Contracts with Customers – Principal Agent Consideration (“ASC Topic 606”),
 
(2) recording of journal entries and approvals,
 
(3) payroll recording and processing of payroll changes,
 
(4) vendor setup and creation,
 
(5) documentation of inventory cycle count results, and
 
(6) recording of inventory and updating of standard costing worksheets used in the valuation of inventory.
 

A number of deficiencies were identified related to the design, implementation and effectiveness of certain information technology general controls, including segregation of duties, user access, change management, data back-ups and review of SOC 1 and 2 reports from critical vendors, some of which could have a direct impact on the Company’s financial reporting.
 
In addition, as of September 30, 2019, management identified the following additional deficiency related to the Company’s Global Logistics Services segment:
 

Management did not have an effective process or control in place to perform an assessment of gross versus net revenue recognition criteria in accordance with ASC Topic 606.
 
Based on this assessment and the material weaknesses described above, management concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2019 and had not been remediated by the end of the period covered by this Quarterly Report on Form 10-Q.
 
Our management performed analyses, substantive procedures and other post-closing activities with the assistance of consultants and other professional advisors in order to ensure the validity, completeness and accuracy of our income tax provision and accounting for complex and/or non-routine transactions and the related disclosures. Accordingly, our management believes that the financial statements included in this Form 10-Q as of December 31, 2019 are fairly presented, in all material respects, and in conformity with U.S. GAAP.
 
Remediation Plan
 
We are engaging an external consultant to assist in the development and execution of a plan to remediate our material weaknesses related to our Life Sciences segment noted above. This process will commence during the second quarter of fiscal 2020.
 
We have developed and are executing on our plan to remediate our material weaknesses in connection with the information technology controls by expanding our in-house expertise on information technology general controls, as well as continuing to consult with external third parties. This process commenced during the fourth quarter of fiscal 2018 and is ongoing.
 
We have also implemented new system triggered revenue recognition process for Global Logistics Services segement based on target dates (e.g. delivery date, file transfer date, etc.) for specific file types. This process has been implemented as the second quarter of fiscal year 2020.
 
Our management believes that the foregoing efforts will effectively remediate the material weaknesses. That said, the new and enhanced controls have not operated for a sufficient amount of time to conclude that the material weaknesses have been remediated.  As we continue to evaluate and work to improve our internal control over financial reporting, our management may decide to take additional measures to address the material weaknesses or modify the remediation plan described above.
 
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those controls determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our executive management team, together with our board of directors, is committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity.
 
Changes in Internal Control over Financial Reporting
 
As disclosed above under “Remediation Plan,” there were changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In addition, as discussed above, during the quarter ended December 31, 2019, the Company implemented changes to its accounting policies, practices and internal controls over financial reporting in connection with its adoption of ASC Topic 606.
 
PART II - OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
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 predicted 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 business, results of operations, financial condition or cash flows.
 
In December 2017, Janel Group received a Notice of Copyright Infringement letter from counsel for Warren Communications News, Inc. (“Warren”), the publisher of the International Trade Today (“ITT”) newsletter.  The letter alleges that Janel Group infringed upon Warren’s registered copyrights in its ITT newsletter.  The Company believes it has meritorious defenses to the allegations.  The Company is not presently able to reasonably estimate potential losses, if any, related to the allegations.
 
ITEM 1A.
RISK FACTORS
 
For a discussion of the Company’s potential risks or uncertainties, please see “Part I—Item 1A—Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 filed with the SEC. The risk factors set forth below include any material changes to, and supersede the description of, the risk factors disclosed in Part I—Item 1A—Risk Factors of the Annual Report on Form 10-K for the fiscal year ended September 30, 2019 filed with the SEC.
 
Other events affecting the volume of international trade and international operations could adversely affect Janel Group’s international operations.

In addition to economic conditions, Janel Group’s international supply chain services are directly related to, and dependent on, the volume of international trade, particularly trade between the United States and foreign nations. This trade, as well as Janel Group’s international supply chain services, is influenced by many factors, including:

• economic and political conditions in the United States and abroad;

• major work stoppages;

• exchange controls, currency conversion and fluctuations;

• war, other armed conflicts and terrorism;

• disease, pandemics or other severe public health events: and

• U.S. and foreign laws relating to tariffs, trade restrictions, foreign investment and taxation.

The foregoing and other events beyond Janel Group’s control, such as a failure of various nations to reach or adopt international trade agreements or an increase in bilateral or multilateral trade restrictions, could have a material adverse effect on Janel Group’s business.

In particular, changes to major international trade arrangements (e.g., the United States-Mexico-Canada Agreement), and the imposition of tariffs by certain foreign governments, including China, in response to the imposition of tariffs or modification of trade relationships by the United States, could negatively impact our results of operations.  Recently, the Trump Administration imposed tariffs on a broad range of products imported into the United States. In response to the tariffs imposed by the United States, the European Union, Canada, Mexico and China have announced tariffs on U.S. goods and services. The new tariffs, along with any additional tariffs or trade restrictions that may be implemented by the United States or retaliatory trade measures or tariffs implemented by other countries, could result in reduced economic activity, increased costs in operating our business, reduced demand and changes in purchasing behaviors, limits on trade with the United States or other potentially adverse economic outcomes. While tariffs and other retaliatory trade measures imposed by other countries on U.S. goods have not yet had a significant impact on our business or results of operations, we cannot predict further developments, and such existing or future tariffs could have a material adverse effect on our financial condition, results of operations and liquidity. Additionally, our global operations may also be adversely affected by political events, domestic or international public health or terrorist events and hostilities or complications due to natural, nuclear or other disasters.  For example, the recent global coronavirus outbreak could harm our business and results of operations. In December 2019, a coronavirus (COVID-19) was reported in China, and, in January 2020, the World Health Organization declared it a Public Health Emergency of International Concern. This contagious disease outbreak, which has continued to spread to additional countries, and any related adverse public health developments, could adversely affect the Company’s customers and suppliers as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. More broadly, the outbreak could affect workforces, customers, economies and financial markets globally, potentially leading to an economic downturn. This could decrease spending, adversely affect demand for our products and services and harm our business and results of operations.
 
These or any further political or governmental developments or health concerns in China or other countries in which we operate could result in social, economic and labor instability.  These uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
There were no unregistered sales of equity securities during the three months ended December 31, 2019. In addition, there were no shares of common stock purchased by us during the three months ended December 31, 2019.
 
ITEM 6.
EXHIBIT INDEX
 
Exhibit No.
 
   
Purchase and Sale Agreement dated February 4, 2020 by and between 4040 Earnings Way, LLC, and Indco, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 4, 2020, as amended by the Company’s Current Report on Form 8-K/A filed March 6, 2020)
   
Third Amendment to Loan and Security Agreement dated March 4, 2020 by and between Santander Bank, N.A., Janel Group, Inc., Honor Worldwide Logistics LLC and Janel Corporation (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 4, 2020, as amended by the Company’s Current Report on Form 8-K/A filed March 6, 2020)
   
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer (filed herewith)
   
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer (filed herewith)
   
Section 1350 Certification of Principal Executive Officer (filed herewith)
   
Section 1350 Certification of Principal Financial Officer (filed herewith)
   
101
Interactive data files providing financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 for the three months ended December 31, 2019 and 2018 in XBRL (Extensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2019 and September 30, 2018, (ii) Consolidated Statements of Operations for the three months ended December 31, 2019 and 2018, (iii) Consolidated Statement of Changes in Stockholders’ Equity for the three months ended December 31, 2019 and 2018, (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2019 and 2018, and (v) Notes to Consolidated Financial Statements.

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.
 
Dated: March 6, 2020
JANEL CORPORATION
 
Registrant
   
 
/s/ Dominique Schulte
 
Dominique Schulte
 
Chairman, President and Chief Executive Officer
 
(Principal Executive Officer)

Dated: March 6, 2020
JANEL CORPORATION
 
Registrant
   
 
/s/ Vincent A. Verde
 
Vincent A. Verde
 
Principal Financial Officer, Treasurer and Secretary
 

40