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JANEL CORP - Quarter Report: 2019 June (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 June 30, 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.)

303 Merrick Road - Suite 400
   
Lynbrook, New York
 
11563
(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 and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 December 16, 2019 was 863,812.



JANEL CORPORATION

QUARTERLY REPORT ON FORM 10-Q
For Quarterly Period Ended June 30, 2019

TABLE OF CONTENTS

 
Page
   
Part I - Financial Information
 
       
 
Item 1.
Financial Statements:
 
       
   
3
       
   
4
       
   
5
       
   
6
       
   
7
       
 
Item 2.
25
       
 
Item 4.
38
       
Part II - Other Information
 
   
 
Item 1.
40
       
 
Item 1A.
40
       
 
Item 2.
40
       

Item 6.
40
       
   
41

PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

   
June 30,
2019
   
September 30,
2018
 
   
(Unaudited)
       
ASSETS
 
Current Assets:
           
Cash
 
$
1,362
   
$
585
 
Accounts receivable, net of allowance for doubtful accounts
   
21,964
     
19,726
 
Inventory, net
   
2,357
     
2,391
 
Prepaid expenses and other current assets
   
644
     
354
 
Total current assets
   
26,327
     
23,056
 
Property and Equipment, net
   
3,876
     
3,787
 
Other Assets:
               
Intangible assets, net
   
12,729
     
12,347
 
Goodwill
   
12,061
     
11,458
 
Security deposits and other long term assets
   
273
     
263
 
Total other assets
   
25,063
     
24,068
 
Total assets
 
$
55,266
   
$
50,911
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
               
Line of credit
 
$
10,449
   
$
9,730
 
Accounts payable - trade
   
18,654
     
16,798
 
Accrued expenses and other current liabilities
   
2,895
     
1,748
 
Dividends payable
   
890
     
470
 
Current portion of long-term debt
   
899
     
897
 
Total current liabilities
   
33,787
     
29,643
 
Other Liabilities:
               
Long-term debt
   
2,914
     
3,831
 
Subordinated promissory notes
   
729
     
344
 
Mandatorily redeemable non-controlling interest
   
681
     
681
 
Deferred income taxes
   
1,417
     
1,131
 
Other liabilities
   
322
     
254
 
Total other liabilities
   
6,063
     
6,241
 
Total liabilities
   
39,850
     
35,884
 
Stockholders' Equity:
               
Preferred Stock, $0.001 par value; 100,000 shares authorized
               
Series B 5,700 shares authorized and 1,271 shares issued and outstanding
   
-
     
-
 
Series C 20,000 shares authorized and 20,000 shares issued and outstanding at June 30, 2019 and September 30, 2018, liquidation value of $12,399 and $11,966 at June 30, 2019 and September 30, 2018, respectively
   
-
     
-
 
Common stock, $0.001 par value; 4,500,000 shares authorized, 847,412 issued and 827,412 outstanding as of June 30, 2019 and 837,951 issued and 817,951 outstanding as of September 30, 2018
   
1
     
1
 
Paid-in capital
   
15,540
     
15,872
 
Treasury stock, at cost, 20,000 shares
   
(240
)
   
(240
)
Accumulated earnings (deficit)
   
115
     
(606
)
Total stockholders' equity
   
15,416
     
15,027
 
Total liabilities and stockholders' equity
 
$
55,266
   
$
50,911
 

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
June 30,
   
Nine Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Revenue
 
$
20,311
   
$
17,669
   
$
63,607
   
$
48,318
 
Forwarding expenses and cost of revenues
   
14,225
     
12,422
     
44,664
     
33,640
 
Gross profit
   
6,086
     
5,247
     
18,943
     
14,678
 
Cost and Expenses:
                               
Selling, general and administrative
   
5,600
     
5,031
     
16,681
     
13,911
 
Amortization of intangible assets
   
230
     
200
     
674
     
594
 
Total Costs and Expenses
   
5,830
     
5,231
     
17,355
     
14,505
 
Income from Operations
   
256
     
16
     
1,588
     
173
 
Other Items:
                               
Interest expense net of interest income
   
(183
)
   
(107
)
   
(543
)
   
(341
)
Income (Loss) Before Income Taxes
   
73
     
(91
)
   
1,045
     
(168
)
Income tax (expense) benefit
   
(103
)
   
74
     
(356
)
   
114
 
Net Income (loss)
   
(30
)
   
(17
)
   
689
     
(54
)
Preferred stock dividends
   
(150
)
   
(111
)
   
(420
)
   
(308
)
Gain on extinguishment of Preferred Stock Series C dividends
   
-
     
-
     
-
     
1,312
 
Net Income (Loss) Available to Common Stockholders
 
$
(180
)
 
$
(128
)
 
$
269
   
$
950
 
                                 
Net Income (loss) per share
                               
Basic
 
$
(0.04
)
 
$
(0.03
)
 
$
0.81
   
$
(0.09
)
Diluted
 
$
(0.04
)
 
$
(0.03
)
 
$
0.73
   
$
(0.09
)
Net income (loss) per share attributable to common stockholders:
                               
Basic
 
$
(0.22
)
 
$
(0.22
)
 
$
0.32
   
$
1.67
 
Diluted
 
$
(0.22
)
 
$
(0.22
)
 
$
0.28
   
$
1.67
 
Weighted average number of shares outstanding:
                               
Basic
   
852,071
     
576,285
     
849,104
     
569,181
 
Diluted
   
852,071
     
576,285
     
938,830
     
569,181
 

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
   
RETAINED EARNINGS
   
TOTAL EQUITY
 
                                                       
   
SHARES
   
$
   
SHARES
   

 $
   

$
   
SHARES
   
$
   
$
   
$
 
Balance - September 30, 2018
   
21,271
     
-
     
837,951
   
$
1
   
$
15,872
     
20,000
   
$
(240
)
 
$
(606
)
 
$
15,027
 
Net Income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
689
     
689
 
Cumulative effect of change in accounting principle
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
32
     
32
 
Dividends to preferred stockholders
   
-
     
-
     
-
     
-
     
(420
)
   
-
     
-
     
-
     
(420
)
Vested restricted stock unissued
   
-
     
-
     
-
     
-
     
(235
)
   
-
     
-
     
-
     
(235
)
Stock based compensation
   
-
     
-
     
-
     
-
     
251
     
-
     
-
     
-
     
251
 
Stock option exercise
   
-
     
-
     
9,461
     
-
     
72
     
-
     
-
     
-
     
72
 
Balance - June 30, 2019
   
21,271
   
$
-
     
847,412
   
$
1
   
$
15,540
     
20,000
   
$
(240
)
 
$
115
   
$
15,416
 

   
PREFERRED STOCK
   
COMMON STOCK
   
PAID-IN CAPITAL
   
TREASURY STOCK
   
RETAINED EARNINGS
   
TOTAL EQUITY
 
                                                       
   
SHARES
   
$
   
SHARES
   
$    
$    
SHARES
   
$    
 $    
$  
Balance - September 30, 2017
   
35,476
   
$
-
     
573,951
   
$
1
   
$
12,312
     
20,000
   
$
(240
)
 
$
(854
)
 
$
11,219
 
Net Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(54
)
   
(54
)
Issuance of Series C Preferred Stock
   
5,795
     
-
     
-
     
-
     
2,897
     
-
     
-
     
-
     
2,897
 
Dividends to preferred stockholders
   
-
     
-
     
-
     
-
     
(308
)
   
-
     
-
     
-
     
(308
)
Dividend to non-controlling interest
   
-
     
-
     
-
     
-
     
(50
)
   
-
     
-
     
-
      (50
)
Stock option exercise
   
-
     
-
     
14,000
     
-
     
45
     
-
     
-
     
-
     
45
 
Stock based compensation
   
-
     
-
     
-
     
-
     
432
     
-
     
-
     
-
     
432
 
Balance - June 30, 2018
   
41,271
   
$
-
     
587,951
   
$
1
   
$
15,328
     
20,000
   
$
(240
)
 
$
(908
)
 
$
14,181
 

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

JANEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

   
Nine Months Ended
June 30,
 
   
2019
   
2018
 
Cash Flows From Operating Activities:
           
Net income (loss)
 
$
689
   
$
(54
)
Adjustments to reconcile net income to net  cash provided by operating activities:
               
Provision for uncollectible accounts
   
353
     
(10
)
Depreciation
   
229
     
75
 
Deferred income tax
   
318
     
(87
)
Amortization of intangible assets
   
674
     
594
 
Amortization of acquired inventory valuation
   
195
     
-
 
Amortization of loan costs
   
7
     
7
 
Stock based compensation
   
329
     
578
 
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
   
(1,108
)
   
(1,573
)
Inventory
   
(161
)
   
70
 
Prepaid expenses and sundry current assets
   
(276
)
   
(69
)
Security deposits and other long term assets
   
(8
)
   
(20
)
Accounts payable and accrued expenses
   
1,910
     
1,607
 
Other liabilities
   
68
     
-
 
Net cash provided by operating activities
   
3,219
     
1,118
 
Cash Flows From Investing Activities:
               
Acquisition of property and equipment, net of $47 in disposals
   
(303
)
   
(97
)
Note Receivable
   
-
     
(125
)
Acquisitions
   
(1,935
)
   
(6,685
)
Net cash used in investing activities
   
(2,238
)
   
(6,907
)
Cash Flows From Financing Activities:
               
Dividends Paid
   
-
     
(62
)
Repayments of term loan
   
(916
)
   
(935
)
Proceeds from senior securied term loan
   
-
     
2,025
 
Proceeds from sale of  Series C Preferred Stock
   
-
     
2,897
 
Proceeds from stock option exercise
   
72
     
46
 
Line of credit, proceeds, net
   
712
     
1,848
 
Repayment of notes payable - related party
   
(72
)
   
(500
)
Net cash provided by (used in) in financing activities
   
(204
)
   
5,319
 
Net increase (decrease) in cash
   
777
     
(470
)
Cash at beginning of the period
   
585
     
988
 
Cash at end of period
 
$
1,362
   
$
518
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
 
$
544
   
$
327
 
Income taxes
 
$
132
   
$
62
 
Non-cash investing activities:
               
Contingent earn-out acquisition
 
$
50
   
$
498
 
Subordinated Promissory notes of Honor
 
$
456
   
$
-
 
Subordinated promissory notes of Antibodies
 
$
-
   
$
344
 
Non-cash financing activities:
               
Dividends declared to preferred stockholders
 
$
420
   
$
297
 
Vested restricted stock unissued
 
$
235
   
$
-
 

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 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 that had the following two reportable segments at September 30, 2018: Global Logistics Services and Manufacturing. Effective October 1, 2018, the Company realigned its Manufacturing segment, which was separated into two segments named Manufacturing and Life Sciences. Accordingly, the Company’s current structure consists of the following three reportable segments: (1) Global Logistics Services, (2) Manufacturing and (3) Life Sciences. The Company has reported its segment results for all periods presented under the realigned business segments for the prior year to be consistent with the current presentation, as reflected in note 12.
 
A management group at the holding company level (the “corporate group”) focuses on significant capital allocation decisions and 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 Sea Cargo, Inc. (“Sea Cargo”), 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") and Antibodies Incorporated ("Antibodies"), 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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

On March 5, 2018, the Company acquired all the outstanding common stock of Aves.

On June 22, 2018, the Company acquired all the outstanding common stock of Antibodies.

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 the potential impairment of goodwill and intangible assets with indefinite lives, the impairment of other long-lived assets, the valuation of acquisitions, the valuation of mandatorily redeemable non-controlling interests, gain on extinguishment of dividends on our Series C Cumulative Preferred Stock and the realization of deferred tax assets. Actual results could differ from those estimates.

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 June 30, 2019 and September 30, 2018 was $457 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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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 were in excess of carrying value and goodwill was not deemed to be impaired as of September 30, 2018.

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 during the year ended September 30, 2018.

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 nine months ended June 30, 2019 was a decrease of $135 and $109, 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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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.
 

A summary of the Company’s revenues disaggregated by major service lines for the three and nine months ended June 30, 2019 was as follows:
 
   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
Service Type
 
2019
   
2019
 
Ocean import and export
 
$
7,055
   
$
21,355
 
Freight forwarding
   
4,650
     
14,340
 
Customs brokerage
   
2,066
     
6,493
 
Air import and export
   
2,937
     
10,190
 
Total
 
$
16,708
   
$
52,378
 

Manufacturing and Life Sciences

Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment. Revenues from Aves are derived from the sale of high-quality antibodies and other immunoreagents for biomedical research and antibody manufacturing.  Revenues from Antibodies 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. Payments are received either by credit card or invoice by Indco, Aves and Antibodies. A significant portion of Indco sales comes from print- and web-based catalog and specification features. Such online sales are generally credit card purchases. Revenues from Indco, Aves and Antibodies 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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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

The Company accounts 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.

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 June 30, 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."

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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (the "Tax Reform Act"), which significantly changed the existing U.S. tax laws, including a reduction in the corporate tax rate from 34% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. As a result of the enactment of the Tax Reform Act, the Company recorded an income tax benefit of $28 in fiscal 2018 related to the re-measurement of certain deferred tax assets, primarily net operating losses and intangibles.

Recent accounting pronouncements

Recently adopted accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”), to clarify the principles used to recognize revenue for all entities. This new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. In addition, the new standard requires enhanced qualitative and quantitative disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
 
The Company adopted this standard on October 1, 2018 using the modified retrospective approach. As a result of using this approach, the Company recognized the cumulative effect adjustment to the opening balance of retained earnings. Comparative prior year information has not been adjusted and continues to be reported under the Company's historical revenue recognition policies described in note 1 to the Company's Form 10-K as filed on July 26, 2019.
 
The adoption of this new standard adjusted the revenue recognition timing of the Company's brokerage and transportation management services performance obligation from point in time to over time on a proportionate transit time basis within the Company’s Global Logistics Services, which resulted in a cumulative transition adjustment to the opening balance of retained earnings on October 1, 2018, of $32, net of tax, and a decrease of $135 and $109 to revenue and cost for the nine months ended June 30, 2019, respectively. While adoption of this standard also affected the corresponding direct costs of revenue, this change did not have a material impact on the Company's consolidated financial statements due to the short-term nature of its performance obligations.

As part of the adoption of this standard, the Company implemented changes to its accounting policies, practices and internal controls over financial reporting.
 
Recently issued accounting pronouncements not yet adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The new lease standard will be adopted using a modified retrospective transition and will be effective for the Company beginning on October 1, 2019.

The Company is currently evaluating its existing lease portfolio, including accumulating all of the necessary information required to properly evaluate and account for the leases under this new standard. The Company anticipates that the adoption of this standard will materially affect the consolidated balance sheets.

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 will be 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 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 will be effective for fiscal years beginning after December 15, 2018, 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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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

Honor Worldwide Logistics, LLC

Through its wholly-owned subsidiary, Janel Group, Inc. (“Janel Group”), the Company acquired the membership interests of Honor Worldwide Logistics LLC (“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. 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.
 
Sea Cargo, Inc.

On October 17, 2018, we completed a business combination whereby we acquired substantially all of the assets and certain liabilities of Sea Cargo, Inc. (“Sea Cargo”), a global logistics services provider with one U.S. location. The acquisition of Sea Cargo was funded with cash provided by normal operations. This acquisition was completed primarily to expand our services and offerings and was related to our Global Logistics Services business.
 
Purchase price allocation

The aggregate purchase price for the Honor and Sea Cargo acquisitions was $2,392, net of $70 of cash received. At closing, $2,006 was paid in cash, a subordinated promissory note in the aggregate amount of $456 was issued to a former member and $50 was recorded in accrued expenses as a preliminary earnout consideration.  In accordance with the acquisition method of accounting, the Company allocated the consideration paid for Honor and Sea Cargo to the net tangible and identifiable intangible assets based on their estimated fair values. Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.

3.
INVENTORY

Inventories consisted of the following:

   
June 30,
2019
   
September 30,
2018
 
Finished Goods
 
$
1,095
   
$
1,241
 
Work-in-Process
   
300
     
286
 
Raw Materials
   
988
     
888
 
Less - Reserve for Inventory Valuation
   
(26
)
   
(24
)
Inventory, Net
 
$
2,357
   
$
2,391
 

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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:

   
June 30,
2019
   
September 30,
2018
 
Life
Building and Improvements
 
$
2,551
   
$
2,366
 
15-30 Years
Land and Improvements
   
835
     
823
 
Indefinite
Furniture & Fixtures
   
225
     
211
 
3-7 Years
Computer Equipment
   
367
     
323
 
3-5 Years
Machinery & Equipment
    959       942  
3-15 Years
Leasehold Improvements
   
181
     
181
 
Shorter of Lease Term or Asset Life
     
5,118
     
4,846
   
Less: Accumulated Depreciation
   
(1,242
)
   
(1,059
)
 
     
3,876
   
$
3,787
   

Depreciation expense for the nine months ended June 30, 2019 and 2018 was $229 and $75, respectively.

5.
INTANGIBLE ASSETS

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

   
June 30,
2019
   
September 30,
2018
 
Life
Customer Relationships
 
$
13,032
   
$
12,052
 
15-20 Years
Trademarks / Names
   
2,141
     
2,118
 
20 Years
Other
   
708
     
656
 
2-5 Years
     
15,881
     
14,826
   
Less: Accumulated Amortization
   
(3,152
)
   
(2,479
)
 
   
$
12,729
   
$
12,347
   

Amortization expense for the nine months ended June 30, 2019 and 2018 was $674 and $594, respectively.

6.
NOTES PAYABLE - BANKS

(A)
Presidential Financial Corporation Facility

On March 27, 2014, Janel Corporation and several of its Janel Group subsidiaries (collectively, the "Janel Borrowers") entered into a Loan and Security Agreement (the "Presidential Loan Agreement") with Presidential Financial Corporation with respect to a revolving line of credit facility (the "Presidential Facility"). At September 30, 2017, the Presidential Facility provided that the Janel Borrowers could borrow up to $10.0 million, limited to 85% of the Janel Borrowers' aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Presidential Loan Agreement. Interest accrued at an annual rate equal to 5% above the greater of (a) the prime rate of interest quoted in The Wall Street Journal from time to time, or (b) 3.25%. The Janel Borrowers' obligations under the Presidential Facility were secured by all of the assets of the Janel Borrowers. The Presidential Facility was terminated on October 17, 2017, and the Company replaced the Presidential Facility with the Santander Bank Facility (see below).

At September 30, 2017, outstanding borrowings under the Presidential Facility were $6,139, representing 80.3% of the $7,643 available thereunder, and interest was accruing at an effective interest rate of 7.5%. The Janel Borrowers were in compliance with the covenants defined in the Presidential Loan Agreement as of September 30, 2017.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

(B)
Santander Bank Facility

On October 17, 2017, the Janel Group subsidiaries (collectively the "Janel Group Borrowers"), with Janel Corporation 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"). The Santander Facility provides that the Janel Group Borrowers can borrow up to $10,000, 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. The Santander Loan Agreement requires, among other things, that the Janel Group Borrowers, on a quarterly basis, maintain a Minimum Debt Service Coverage ratio, as defined in the Santander Loan Agreement. The loan is subject to earlier termination as provided in the Santander Loan Agreement and matures on October 17, 2020, unless renewed. The Santander Loan Agreement requires the Company to maintain a lock box with Santander in addition to containing certain subjective acceleration clauses. As a result of these terms, the loan is classified as a current liability on the consolidated balance sheet.

On March 21, 2018, the Janel Group Borrowers, the Company and Aves entered into an amendment with Santander (the "Santander Amendment") with respect to the Santander Loan Agreement. Pursuant to the Santander Amendment, among other changes Aves was added as a loan party obligor (but not a Janel Group Borrower) under the Santander Loan Agreement, the maximum amount available under the Santander Loan Agreement was increased from $10,000 to $11,000 (subject to 85% of eligible receivables), the foreign account sublimit was increased from $1,500 to $2,000, a one-time waiver was granted until May 31, 2018 for the stated event of default related to the delivery of the quarterly financial statements for the fiscal quarter ended December 31, 2017, and a one-time waiver, retroactive to March 5, 2018, of the provision that prohibits the Company from using proceeds of the revolving loan to finance acquisitions was granted for the purpose of partially funding the acquisition of Aves.

On November 20, 2018, the Company and its wholly-owned subsidiaries entered into the Limited Waiver, Joinder and Second Amendment (“Amendment No. 2”) to the Santander Loan Agreement (as amended by the Santander Amendment), with Santander Bank, N.A. Pursuant to, and among other changes affected by, Amendment No. 2: (1) Honor Worldwide Logistics LLC, HWL Brokerage LLC and Global Trading Resources Inc. were added as new borrowers under the Santander Loan Agreement; (2) Aves was released as a loan party obligor under the Santander Loan Agreement; (3) the maximum revolving facility amount available was increased from $11,000 to $17,000 (limited to 85% of the borrowers’ eligible accounts receivable borrowing base and reserves); (4) the foreign account sublimit was increased from $2,000 to $2,500; (5) the letter of credit limit was increased from $500 to $1,000; (6) the definitions of “Debt Service Coverage Ratio,” “Debt Service Coverage Ratio (Borrower Group)” and “Loan Party” were restated; (7) the permitted acquisition debt basket was increased from $2,500 to $4,000; and (8) the permitted indebtedness basket was increased from $500 to $1,000.

At June 30, 2019, outstanding borrowings under the Santander Facility were $10,449, representing 61.5% of the $17,000 available thereunder, and interest was accruing at an effective interest rate of 5.75%. As of May 1, 2019, Santander had granted the Janel Group Borrowers a one-time waiver until July 31, 2019 for an event of default related to the delivery of the audited financial statements for the fiscal year ended September 30, 2018.  Other than as specifically referenced above, the Janel Group Borrowers were in compliance with the covenants defined in the Santander Loan Agreement as of June 30, 2019.

At September 30, 2018, outstanding borrowings under the Santander Facility were $9,730, representing 88.5% of the $11,000 available thereunder, and interest was accruing at an effective interest rate of 5.75%.

(C)
First Merchants Bank Credit Facility

On March 21, 2016, Indco executed a Credit Agreement (the "First Merchants Credit Agreement") with First Merchants Bank with respect to a $6,000 term loan and $1,500 (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 3.75% (if Indco's cash flow leverage ratio is less than or equal to 2:1) or 4.75% (if Indco's cash flow leverage ratio is greater than 2:1). Interest accrues on the revolving loan at an annual rate equal to the one-month LIBOR plus 2.75%. Indco's obligations under the First Merchants Facility are secured by all of Indco's assets and are guaranteed by the Company. The First Merchants Credit Agreement requires, among other things, that Indco, on a monthly basis, not exceed a "maximum total funded debt to EBITDA ratio" and maintain a "minimum fixed charge covenant ratio," both as defined in the First Merchants Credit Agreement. The First Merchants Facility requires monthly payments until the expiration date on the fifth anniversary of the loan. The loan is subject to earlier termination as provided in the First Merchants Credit Agreement.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

As of September 30, 2018, there were no outstanding borrowings under the revolving loan and $2,713 of borrowings under the term loan, with interest accruing on the term loan at an effective interest rate of 5.85%.

As of June 30, 2019, there were no outstanding borrowings under the revolving loan and $1,828 of borrowings under the term loan, with interest accruing on the term loan at an effective interest rate of 6.01%. Indco was in compliance with the covenants defined in the First Merchants Credit Agreement at both June 30, 2019 and September 30, 2018.

   
June 30,
2019
   
September 30,
2018
 
Long Term Debt *
 
$
1,828
   
$
2,713
 
Less Current Portion
   
(857
)
   
(857
)
   
$
971
   
$
1,856
 
*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.
               

(D)
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") and Promissory Note with First Northern Bank of Dixon ("First Northern"), with respect to a $2,025 senior secured term loan (the "Senior Secured Term Loan"). The First Northern Loan Agreement and Promissory Note are dated and effective as of June 14, 2018. The proceeds of the Senior Secured Term Loan were used to fund a portion of the merger consideration to acquire Antibodies.  Interest will accrue on the Senior Secured 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 Senior Secured Term Loan will mature on June 14, 2028 (subject to earlier termination as provided in the First Northern Loan Agreement). The First Northern Loan Agreement requires, among other things, that the borrowers maintain certain Minimum Debt Service Coverage, Debt to Tangible Net Worth and Tangible Net Worth ratios as defined in the First Northern Loan Agreement.

As of September 30, 2018, the total amount outstanding under the Senior Secured Term Loan was $2,015, of which $1,975 is included in long-term debt and $40 is included in current portion of long-term debt, with interest accruing at an effective interest rate of 5.28%.

As of June 30, 2019, the total amount outstanding under the Senior Secured Term Loan was $1,985, of which $1,943 is included in long-term debt and $42 is included in current portion of long-term debt, with interest accruing at an effective interest rate of 5.28%.

   
June 30,
2019
   
September 30,
2018
 
Long Term Debt *
 
$
1,985
   
$
2,015
 
Less Current Portion
   
(42
)
   
(40
)
   
$
1,943
   
$
1,975
 
*Note: Long Term Debt is due in monthly installments of $12 plus monthly interest, at 5.28% 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 June 30, 2019 and September 30, 2018.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

7.
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 June 30, 2019 and September 30, 2018, amounts outstanding under the two AB HoldCo Subordinated Promissory Notes were $47 and $297.

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, and shall be due and payable on the last day of January, April, July and October beginning in January 2019 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. Any prepayment shall be applied first to accrued but unpaid interest, and then to outstanding principal.

8.
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 A Convertible Preferred Stock

Shares of the Company’s Series A Convertible Preferred Stock (the “Series A Stock”) are convertible into shares of the Company’s $0.001 par value common stock at any time on a one-share for one-share basis. The Series A Stock pays a cumulative cash dividend at a rate of $15 per year, payable quarterly. On September 24, 2018, the 20,000 shares of Series A Stock then outstanding were repurchased by the Company for $400. On September 27, 2018, all outstanding shares of the Series A Stock were retired.

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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

Series C Cumulative Preferred Stock

Shares of the Company’s Series C Cumulative Preferred Stock were initially entitled to receive annual dividends at a rate of 7% per annum of the original issuance price of $10, when and if declared by the Company’s board of directors, with such rate to increase by 2% annually beginning on the third anniversary of issuance of such Series C Stock to a maximum rate of 13%. By the filing of the Certificate of Amendment on October 17, 2017, the annual dividend rate decreased to 5% per annum of the original issuance price, when and if declared by the Company’s board of directors, and increased by 1% 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 September 30, 2018 and 2017 was 5% and 7%, respectively. 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 $12,399 and $11,966 as of June 30, 2019 and September 30, 2018, respectively. The change in terms were deemed to be substantial from a quantitative perspective (greater than 10% change in the present value of future cash flows) as well as qualitatively when considering the change in the form of the security from original issuance through October 17, 2017. The fair value prior to modification was $8,224 and $6,912 after modification, for a change of $1,312. In accordance with FASB’s Topic ASC 260, “Earnings Per Share,” this incremental benefit is treated as an adjustment to EPS for common stockholders. The amendment on October 17, 2017 to the annual dividend rate decrease was treated as an extinguishment for accounting purposes in a manner similar to a dividend.

On March 21, 2018, the Company sold 3,000 shares of the Series C Stock to an accredited investor at a purchase price of $500 per share, or an aggregate of $1,500. On June 22, 2018, the Company sold 2,795 shares of the Series C Stock to an accredited investor at a purchase price of $500 per share, or an aggregate of $1,398. Such shares issued on March 21, 2018 and June 22, 2018 were sold in private placements in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 and Regulation D promulgated thereunder.

For the nine months ended June 30, 2019 and 2018, the Company declared dividends on Series C Stock of $420 and $308, respectively.

(B)
Equity Incentive Plan

On May 12, 2017, the Company adopted the 2017 Equity Incentive Plan (the "2017 Plan") pursuant to which (i) incentive stock options, (ii) non-statutory stock options, (iii) restricted stock awards and (iv) stock appreciation rights with respect to shares of the Company's common stock may be granted to directors, officers, employees of and consultants to the Company. 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. The 2017 Plan was amended and restated on May 8, 2018, as discussed in more detail in note 9.

9.
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.

On May 12, 2017, the board of directors adopted the Company's 2017 Equity Incentive Plan (the "2017 Plan") pursuant to which (i) incentive stock options, (ii) non-statutory stock options, (iii) restricted stock awards and (iv) stock appreciation rights with respect to up to 100,000 shares of the Company's common stock may be granted to directors, officers, employees of and consultants to the Company.

On May 8, 2018, the board of directors of Janel amended and restated the 2017 Plan (as amended and restated, the "Amended 2017 Plan"). The provisions and terms of the Amended 2017 Plan are the same as those in the 2017 Plan, except that the Amended 2017 Plan removes the ability of Janel to award incentive stock options and removes the requirement for stockholder approval of the 2017 Plan.

Total stock-based compensation for the nine months ended June 30, 2019 and 2018 amounted to $251 and $432, respectively, and was included in selling, general and administrative expense in the Company's statements of operations.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

(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:

   
Nine Months Ended
June 30,
2019
 
Risk-free Interest Rate
   
3.04%

Expected Option Term in Years
   
5.5-6.5
 
Expected Volatility
   
95.4% - 98.8%

Dividend Yield
   
0%

Weighted Average Grant Date Fair Value
 

$5.87 - $6.29
 


   
Number of
Options
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining Contractual
Term (in years)
   
Aggregate Intrinsic
Value (in thousands)
 
Outstanding Balance at September 30, 2018
   
112,798
   
$
5.09
     
6.9
   
$
357.10
 
Granted
   
7,500
   
$
7.75
     
9.3
   
$
15.38
 
Exercised
   
(9,461
)
 
$
7.63
     
-
   
$
-
 
Outstanding Balance at June 30, 2019
   
110,837
   
$
5.05
     
6.2
   
$
526.24
 
Exercisable on June 30, 2019
   
95,124
   
$
4.57
     
5.8
   
$
497.82
 


The aggregate intrinsic value in the above table was calculated as the difference between the closing price of the Company's common stock at June 30, 2019 of $9.80 per share and the exercise price of the stock options that had strike prices below such closing price.

As of June 30, 2019, there was approximately $36 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 nine month period ended June 30, 2019.

   
Number of
Options
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining Contractual
Term (in years)
   
Aggregate Intrinsic
Value (in thousands)
 
Outstanding Balance at September 30, 2018
   
51,053
   
$
7.58
     
8.8
   
$
31.84
 
Granted
   
-
   
$
-
     
-
   
$
-
 
Outstanding Balance at June 30, 2019
   
51,053
   
$
7.58
     
8.1
   
$
113.52
 
Exercisable on June 30, 2019
   
19,036
   
$
7.21
     
8.0
   
$
49.28
 

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

The aggregate intrinsic value in the above table was calculated as the difference between the closing price of our common stock at June 30, 2019, of $9.80 per share and the exercise price of the stock options that had strike prices below such closing price.

As of June 30, 2019, there was approximately $62 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 nine months ended June 30, 2019, 6,812 options were granted with respects 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:

   
Nine Months Ended
June 30,
2019
 
Risk-free Interest Rate
   
3.04%

Expected Option Term in Years
   
5.5 - 6.5
 
Expected Volatility
   
95.4% - 98.8%

Dividend Yield
   
0%

Weighted Average Grant Date Fair Value
 

$9.19 - $9.85
 

   
Number of
Options
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining Contractual
Term (in years)
   
Aggregate Intrinsic
Value (in thousands)
 
Outstanding Balance at September 30, 2018
   
25,321
   
$
7.97
     
7.90
   
$
105.36
 
Granted
   
6,812
   
$
12.13
     
9.30
   
$
-
 
Outstanding Balance at June 30, 2019
   
32,133
   
$
8.85
     
7.60
   
$
105.36
 
Exercisable on June 30, 2019
   
20,825
   
$
7.08
     
6.90
   
$
105.09
 

The aggregate intrinsic value in the above table was calculated as the difference between the valuation price of Indco's common stock at June 30, 2019 of $12.13 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 compensation cost related to these options was approximately $78 and $172 for the nine months ended June 30, 2019 and fiscal year ended September 30, 2018, 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 June 30, 2019, there was approximately $56 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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

(B)
Restricted Stock

During the nine months ended June 30, 2019, there were no shares of restricted stock granted. Under the Amended 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 Amended 2017 Plan for the nine months ended June 30, 2019:

   
Restricted Stock
(in thousands)
   
Weighted Average
Grant Date Fair Value
 
Unvested at September 30, 2018
   
10,000
   
$
8.01
 
Vested
   
(5,000
)
 
$
8.01
 
Unvested at June 30, 2019
   
5,000
   
$
8.01
 

As of June 30, 2019, there was approximately $12 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 1.1 years.

The following table summarizes the status of our non-employee unvested restricted stock under the Amended 2017 Plan for the nine months ended June 30, 2019:

   
Restricted Stock
(in thousands)
   
Weighted Average
Grant Date Fair Value
 
Unvested at September 30, 2018
   
30,000
   
$
8.03
 
Vested
   
(3,333
)
 
$
8.01
 
Unvested at June 30, 2019
   
26,667
   
$
8.04
 

As of June 30, 2019, there was approximately $63 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 1.3 years.

As of June 30, 2019, included in accrued expenses and other current liabilities was $235 which represents 28,333 shares of restricted stock that vested but were not issued.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

10.
INCOME PER COMMON SHARE

The following table provides a reconciliation of the basic and diluted income (loss) per share ("EPS") computations for the three and nine months ended June 30, 2019 and 2018 (in thousands, except share and per share data):

   
For the Three Months Ended
June 30,
   
For the Nine Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Income:
                       
Net income (loss)
 
$
(30
)
 
$
(17
)
 
$
689
   
$
(54
)
Gain on extinguishment of Preferred Stock Series C Dividends
   
-
     
-
     
-
     
1,312
 
Preferred stock dividends
   
(150
)
   
(111
)
   
(420
)
   
(308
)
Net Income (loss) availible to common stockholders
 
$
(180
)
 
$
(128
)
 
$
269
   
$
950
 
                                 
Common Shares:
                               
Basic - weighted average common shares
   
852,071
     
576,285
     
849,104
     
569,181
 
Effect of dilutive securities:
                               
Stock options
   
-
     
-
     
56,697
     
-
 
Restricted stock
   
-
     
-
     
20,319
     
-
 
Convertible preferred stock
   
-
     
-
     
12,710
     
-
 
Diluted - weighted average common stock
 
$
852,071
   
$
576,285
   
$
938,830
   
$
569,181
 
                                 
Income per Common Share:
                               
Basic -
                               
Net income (loss)
 
$
(0.04
)
 
$
(0.03
)
 
$
0.81
   
$
(0.09
)
Gain on extinguishment of Preferred Stock Series C Dividends
   
-
     
-
     
-
     
2.31
 
Preferred stock dividends
   
(0.18
)
   
(0.19
)
   
(0.49
)
   
(0.54
)
Net Income (loss) availible to common stockholders
 
$
(0.22
)
 
$
(0.22
)
 
$
0.32
   
$
1.67
 
                                 
Diluted -
                               
Net income (loss)
 
$
(0.04
)
 
$
(0.03
)
 
$
0.73
   
$
(0.09
)
Gain on extinguishment of Preferred Stock Series C Dividends
   
-
     
-
     
-
     
2.31
 
Preferred stock dividends
   
(0.18
)
   
(0.19
)
   
(0.45
)
   
(0.54
)
Net income (loss) availible to common stockholders
 
$
(0.22
)
 
$
(0.22
)
 
$
0.28
   
$
1.67
 

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 nine month periods ended June 30, 2019 and 2018.

Potentially dilutive securities as of June 30, 2019 and 2018 are as follows:

   
June 30,
 
   
2019
   
2018
 
Employee Stock Options
   
110,837
     
112,798
 
Non-employee Stock Options
   
51,053
     
51,053
 
Employee Restricted Stock
   
5,000
     
10,000
 
Non-employee Restricted Stock
   
26,667
     
41,666
 
Warrants
   
-
     
250,000
 
Convertible Preferred Stock
   
12,710
     
12,710
 
     
206,267
     
478,227
 

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

11.
INCOME TAXES

On December 22, 2017, the Tax Cut and Jobs Act ("Tax Reform Act") was signed into law. The Tax Reform Act included significant changes to existing law, including among other items, a reduction to the U.S. federal statutory corporate tax rate from 34% to 21% effective January 1, 2018. ASC 740, "Income Taxes ("ASC 740"), requires that the effects of changes in tax laws or rates be recognized in the period in which the law is enacted. Those effects, both current and deferred, are reported as part of the tax provision, regardless of income in which the underlying pretax income (expense) or asset (liability) was or will be reported.

The Company's estimated fiscal 2019 blended U.S. federal statutory corporate income tax rate of 26.1% was applied in the computation of the income tax provision for the three months ended June 30, 2019. The Company applied an effective income tax rate of 141.1% and 34.1% in computing the income tax provision for the three and nine months ended June 30, 2019.

12.
BUSINESS SEGMENT INFORMATION

As discussed above in note 1, the Company had the following two reportable segments at September 30, 2018: Global Logistics Services and Manufacturing. Effective October 1, 2018, the Company realigned its Manufacturing segment, which was separated into two segments named Manufacturing and Life Sciences.  Accordingly, the Company now 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 tables presents selected financial information about the Company's reportable segments for the three and nine months ended June 30, 2019:

For the three months ended June 30, 2019
 
Consolidated
   
Global
Logistics
Services
   
Manufacturing
   
Life Sciences
   
Corporate
 
Revenue
 
$
20,311
   
$
16,708
   
$
2,419
   
$
1,184
   
$
-
 
Forwarding expenses and cost of revenues
   
14,225
     
12,872
     
1,066
     
287
     
-
 
Gross profit
   
6,086
     
3,836
     
1,353
     
897
     
-
 
Selling, general and administrative
   
5,600
     
3,600
     
492
     
795
     
713
 
Amortization of intangible assets
   
230
     
-
     
-
     
-
     
230
 
Income (loss) from Operations
   
256
     
236
     
861
     
102
     
(943
)
Interest expense (income)
   
183
     
127
     
31
     
27
     
(2
)
Identifiable assets
   
55,266
     
20,672
     
2,753
     
6,566
     
25,275
 
 Capital expenditures
   
50
     
-
     
26
     
24
     
-
 

For the nine months ended June 30, 2019
 
Consolidated
   
Global
Logistics
Services
   
Manufacturing
   
Life Sciences
   
Corporate
 
Revenue
 
$
63,607
   
$
52,378
   
$
6,952
   
$
4,277
   
$
-
 
Forwarding expenses and cost of revenues
   
44,664
     
40,247
     
3,076
     
1,341
     
-
 
Gross profit
   
18,943
     
12,131
     
3,876
     
2,936
     
-
 
Selling, general and administrative
   
16,681
     
10,220
     
2,167
     
2,226
     
2,068
 
Amortization of intangible assets
   
674
     
-
     
-
     
-
     
674
 
Income (loss) from Operations
   
1,588
     
1,911
     
1,709
     
710
     
(2,742
)
Interest expense (income)
   
543
     
352
     
107
     
91
     
(7
)
Identifiable assets
   
55,266
     
20,672
     
2,753
     
6,566
     
25,275
 
Capital expenditures
   
303
     
16
     
67
     
220
     
-
 

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

As of June 30, 2018, the Company operated in two reportable segments, Global Logistics Services and Manufacturing, supported by a corporate group which conducts activities that are non-segment specific. The following table presents selected financial information about the Company's reportable segments for the three and nine months ended June 30, 2018:

For the three months ended June 30, 2018
 
Consolidated
   
Global
Logistics
Services
   
Manufacturing
   
Life
Sciences
   
Corporate
 
Revenue
 
$
17,669
   
$
15,238
   
$
2,148
   
$
283
   
$
-
 
Forwarding expenses and cost of revenues
   
12,422
     
11,482
     
826
     
114
     
-
 
Gross profit
   
5,247
     
3,756
     
1,322
     
169
     
-
 
Selling, general and administrative
   
5,031
     
2,985
     
865
     
117
     
1,064
 
Amortization of intangible assets
   
200
     
-
     
-
     
-
     
200
 
Income (loss) from Operations
   
16
     
771
     
457
     
52
     
(1,264
)
Interest expense (income)
   
107
     
70
     
39
     
-
     
(2
)
Identifiable assets
   
48,600
     
16,572
     
1,805
      6,067      
24,156
 
Capital expenditures
   
59
     
46
     
13
     
-
     
-
 

For the nine months ended June 30, 2018
 
Consolidated
   
Global
Logistics
Services
   
Manufacturing
   
Life
Sciences
   
Corporate
 
Revenue
 
$
48,318
   
$
41,787
   
$
6,167
   
$
364
   
$
-
 
Forwarding expenses and cost of revenues
   
33,640
     
31,112
     
2,374
     
154
     
-
 
Gross profit
   
14,678
     
10,675
     
3,793
     
210
     
-
 
Selling, general and administrative
   
13,911
     
8,769
     
2,533
     
148
     
2,461
 
Amortization of intangible assets
   
594
     
-
     
-
     
-
     
594
 
Income (loss) from Operations
   
173
     
1,906
     
1,260
     
62
     
(3,055
)
Interest expense (income)
   
341
     
205
     
138
     
-
     
(2
)
Identifiable assets
   
48,600
     
16,572
     
1,805
     
6,067
     
24,156
 
Capital expenditures
   
97
     
46
     
51
     
-
     
-
 

13.
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.

JANEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

14.
SUBSEQUENT EVENTS

On August 30, 2019, Indco and First Merchants entered into Amendment No. 1 to Credit Agreement modifying the terms of Indco’s credit facilities with First Merchants and extending the maturity date of the credit facilities. Under the revised terms, the credit facilities will consist of a $5,500 Term Loan and $1,000 (limited to the borrowing base and reserves) Revolving Loan. Interest will accrue on the Term Loan at an annual rate equal to the one-month LIBOR plus either 2.75% (if Indco’s total funded debt to EBITDA ratio is less than 2:1), or 3.5% (if Indco’s total funded debt to EBITDA ratio is greater than or equal to 2:1). Interest will accrue on the Revolving Loan at an annual rate equal to the one-month LIBOR plus 2.75%. Indco’s obligations under the First Merchants credit facilities are secured by all of Indco’s assets and are guaranteed by Janel, and Janel’s guarantee of Indco’s obligations is secured by a pledge of Janel’s Indco shares. The First Merchants credit facilities will expire on August 30, 2024 (subject to earlier termination as provided in the Credit Agreement) unless renewed.

Through Aves, the Company acquired the membership interests of IgG, LLC (“IgG”) on July 1, 2019 in a transaction pursuant to which IgG became a direct wholly-owned subsidiary of Aves and an indirect wholly-owned subsidiary of the Company.

Through Aves, the Company completed a business combination whereby we acquired all of the equity interests of PhosphoSolutions, LLC and all of the stock of PhosphoSolutions, Inc, (collectively “Phospho”) on September 6, 2019. The acquisition of Phospho was funded with cash provided by normal operations.

The aggregate purchase price for the IgG and Phospho acquisitions was $4,243, net of $13 of cash received.
 
Both the IgG and Phospho acquisitions were completed primarily to expand our product offerings in Life Sciences.

Effective 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”) 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.
 
The terms, covenants and conditions for the Solar Loan are substantially similar to that of the Senior Secured Term Loan and Revolving Credit Facility.
 
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 and nine months ended June 30, 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.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Report”) contains certain forward-looking statements 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 acquisitions; 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. 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, 2018.

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 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 Sea Cargo, Inc. (“Sea Cargo”), 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") and Antibodies Incorporated ("Antibodies"), 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.

On March 5, 2018, the Company acquired all of the outstanding common stock of Aves.

On June 22, 2018, the Company acquired all the outstanding common stock of Antibodies.

Through Aves, the Company acquired the membership interests of IgG, LLC (“IgG”) on July 1, 2019 and the equity interests of PhosphoSolutions, Inc. (“Phospho”) on September 6, 2019. Both IgG and Phospho 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 our Annual Report on Form 10-K for the year ended September 30, 2018 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, 2018.

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.

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (the “Tax Reform Act”), which significantly changed the existing U.S. tax laws, including by reducing the corporate tax rate from 34% to 21%, moving from a worldwide tax system to a territorial system as well as other changes. As a result of the enactment of the Tax Reform Act, the Company made a reasonable estimate and recorded an additional one-time income tax benefit of $49 during the first quarter of fiscal 2018, related to the estimated re-measurement of certain deferred tax assets, primarily net operating losses and deferred tax liabilities attributable to intangible assets. The Company continues to evaluate the impact the legislation will have on the consolidated financial statements.

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.
 
Critical Accounting Policies and Estimates Applicable to the Manufacturing and Life Sciences Segments

Revenue Recognition

Revenues from Indco are derived from the engineering, manufacture and delivery of specialty mixing equipment. Revenues from Aves are derived from the sale of high-quality antibodies and other immunoreagents for biomedical research and antibody manufacturing.  Revenues from Antibodies 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.  Payments are received by either credit card or invoice by Indco, Aves and Antibodies. A significant portion of Indco sales come from print- and web-based catalogs and specification features.

Such online sales are generally credit card purchases. Revenues from Indco, Aves and Antibodies are recognized at a point in time when the performance obligation for goods or services is satisfied and products are shipped with control transferring to the customer generally upon the transfer of title and risk of loss transfers 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
June 30,
   
Nine Months Ended
June 30,
 
(in thousands)
 
2019
   
2018
   
2019
   
2018
 
Operating income
 
$
256
   
$
16
   
$
1,588
   
$
173
 
Amortization of intangible assets (1)
   
230
     
200
     
674
     
594
 
Stock-based compensation (2)
   
93
     
162
     
329
     
578
 
Amortization of acquired inventory valuation (3)
   
66
     
-
     
195
     
-
 
Adjusted operating income
 
$
645
   
$
378
   
$
2,786
   
$
1,345
 


(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 June 30, 2019 and 2018

The following table sets forth our corporate group expenses:

   
Three Months Ended
June 30,
 
(in thousands)
 
2019
   
2018
 
Corporate expenses
 
$
557
   
$
575
 
Amortization of intangible assets
   
230
     
200
 
Stock-based compensation
   
93
     
162
 
Merger and acquisition expenses
   
63
     
327
 
Total corporate expenses
 
$
943
   
$
1,264
 

Expenses

Corporate expenses, which include amortization of intangible assets, stock-based compensation and merger and acquisition expenses, decreased by $321 to $943, or 25.4% in the three months ended June 30, 2019 as compared to $1,264 for the three months ended June 30, 2018. The decrease was due primarily to higher accounting related professional expenses in the prior year and lower stock-based compensation expense and lower merger related expenses for the quarter.

Amortization of Intangible Assets

For the three months ended June 30, 2019 and 2018, corporate amortization expenses were $230 and $200, respectively, an increase of $30, or 15.0%. The increase was primarily related to the acquisitions of Aves, Antibodies, Honor and Sea Cargo.

Interest Expense

Interest expense for the consolidated Company increased $76, or 71.1%, to $183 for the three months ended June 30, 2019 from $107 for the three months ended June 30, 2018. The increase was due primarily to our new senior secured term loan facility and subordinated promissory notes in connection with the Antibodies and Honor acquisitions, partially off-set by a lower debt level at the manufacturing segment.

Income Taxes

On a consolidated basis, the Company recorded an income tax expense of $103 for the three months ended June 30, 2019, as compared to an income tax benefit of $74 for the three months ended June 30, 2018. The increase was primarily due to increase in pretax income. 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 the Company's Series A Convertible Preferred Stock (the “Series A Stock”) and dividends accrued but not paid on the Company's Series C Cumulative Preferred Stock (the "Series C Stock"). For the three months ended June 30, 2019 and 2018, preferred stock dividends were $150 and $111, respectively. The increase of $39, or 35.1%, 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%. All outstanding shares of Series A Stock were repurchased by the Company on September 24, 2018 and retired on September 27, 2018. See note 8 to the consolidated financial statements for additional information.

Net Income (Loss)

Net loss was ($30), or ($0.04) per diluted share, for the three months ended June 30, 2019 compared to a loss of ($17), or ($0.03) per diluted share, for the three months ended June 30, 2018. The increase was primarily due higher income tax expense.

Income (Loss) Available to Common Stockholders

Loss available to holders of common shares ("Common Stockholders") was ($180), or ($0.22) per diluted share, for the three months ended June 30, 2019 compared to a loss of ($128), or ($0.22) per diluted share, for the three months ended June 30, 2018. The decrease primarily was due to the amendment on October 17, 2017 to the annual dividend rate, as discussed in note 8 to the consolidated financial statements, which was treated as a gain on extinguishment for accounting purposes. The fair value prior to and after modification was $8,224 and $6,912, respectively, for a change of $1,312. In accordance with ASC 260 Earnings Per Share, this incremental benefit was treated as an adjustment to earnings per share for Common Stockholders.

Results of Operations – Segment Financial Results – Three and Nine Months Ended June 30, 2019 and 2018

The following table sets forth our segment financial results:

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
(in thousands)
 
2019
   
2018
   
2019
   
2018
 
Revenue:
                       
Global Logistics Services
 
$
16,708
   
$
15,238
   
$
52,378
   
$
41,787
 
Manufacturing
   
2,419
     
2,148
     
6,952
     
6,167
 
Life Sciences
   
1,184
     
283
     
4,277
     
364
 
Total Revenues
   
20,311
     
17,669
     
63,607
     
48,318
 
                                 
Gross Profit:
                               
Global Logistics Services
   
3,836
     
3,756
     
12,131
     
10,675
 
Manufacturing
   
1,353
     
1,322
     
3,876
     
3,793
 
Life Sciences
   
897
     
169
     
2,936
     
210
 
Total gross profit
   
6,086
     
5,247
     
18,943
     
14,678
 
                                 
Income from Operations:
                               
Global Logistics Services
   
236
     
771
     
1,911
     
1,906
 
Manufacturing
   
861
     
457
     
1,709
     
1,260
 
Life Sciences
   
102
     
52
     
710
     
62
 
Total income from operations by segment
   
1,199
     
1,280
     
4,330
     
3,228
 
                                 
Corporate administrative expense
   
(713
)
   
(1,064
)
   
(2,068
)
   
(2,461
)
Amortization expense
   
(230
)
   
(200
)
   
(674
)
   
(594
)
Interest expense
   
(183
)
   
(107
)
   
(543
)
   
(341
)
Net income (loss) before taxes
   
73
     
(91
)
   
1,045
     
(168
)
Income taxes (benefit)
   
(103
)
   
74
     
(356
)
   
114
 
Net income (loss)
 
$
(30
)
 
$
(17
)
 
$
689
   
$
(54
)

Results of Operations - Global Logistics Services – Three Months Ended June 30, 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
June 30,
 
(in thousands)
 
2019
   
2018
 
Revenue
 
$
16,708
   
$
15,238
 
Forwarding expense
   
12,872
     
11,482
 
Gross profit
 
$
3,836
   
$
3,756
 
Gross profit margin
   
23
%
   
25
%
Income from Operations
 
$
236
   
$
771
 

Revenue

Total revenue for the three months ended June 30, 2019 was $16,708, as compared to $15,238 for the three months ended June 30, 2018, an increase of $1,470 or 9.7%. The increase in revenue was largely due to the inclusion of the acquisitions of Honor and Sea Cargo as compared to the prior year period, offset by lower transportation prices and an approximate high single-digit organic decline for the quarter in our base of business as customers moved freight prior to new proposed governmental trade policies.

Forwarding Expenses

Forwarding expenses for the three months ended June 30, 2019 increased by $1,390, or 12.1%, to $12,872 as compared to $11,482 for the three months ended June 30, 2018. Forwarding expenses as a percentage of revenue were 77.0% and 75.4% for the three months ended June 30, 2019 and June 30, 2018, respectively. Similar to the revenue increase, the increase in forwarding expenses primarily was due to acquisitions and higher purchased transportation expenses.

Net Revenue

Net revenue for the three months ended June 30, 2019 was $3,836, an increase of $80, or 2.1%, as compared to $3,756 for the three months ended June 30, 2018. This increase was mainly the result of additional net revenue from the acquisitions discussed above, which were not included in the prior year, offset by an approximate high single digit organic decline for the quarter in our base of business as customers moved freight prior to new proposed governmental trade policies. Net revenue as a percentage of gross revenue declined to 23.0% versus 24.7% the prior year 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 June 30, 2019 were $3,600, as compared to $2,985 for the three months ended June 30, 2018. This increase of $615, or 20.6%, 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 21.6% and 19.6% of revenue for the three months ended June 30, 2019 and 2018, respectively.

Income from Operations

Income from operations before income taxes decreased to $236 for the three months ended June 30, 2019, as compared to $771 for the three months ended June 30, 2018, a decrease of $535, or 69.4%. Income from operations declined as a result of the shift in volume due to tariff-driven volume shifts more than offset acquisition contributions. Our operating margin as a percentage of net revenue for the three months ended June 30, 2019 was 6.2%, versus 20.5% in the prior year period.

Results of Operations - Manufacturing – Three Months Ended June 30, 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
June 30,
 
(in thousands)
 
2019
   
2018
 
Revenue
 
$
2,419
   
$
2,148
 
Gross profit
 
$
1,353
   
$
1,322
 
Gross profit margin
   
56
%
   
62
%
Income from Operations
 
$
861
   
$
457
 

Revenue

Total revenue was $2,419 and $2,148 for the three months ended June 30, 2019 and 2018, respectively, an increase of 12.6%. The revenue growth reflected strong growth across the business.

Cost of Sales

Cost of sales was $1,066 and $826 for the three months ended June 30, 2019 and 2018, respectively, an increase of $240, or 29.1%, due to increased sales and mix of business.

Gross Profit and Margin

Gross profit was $1,353 and $1,322 for the three months ended June 30, 2019 and 2018, respectively. Gross profit margin for the three months ended June 30, 2019 declined to 55.9%, compared to 61.5% for the three months ended June 30, 2018, due to product mix shifting to some lower margin products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $492 and $865 for the three months ended June 30, 2019 and 2018, respectively, a decrease of $373 or 43.1%. Selling, general and administrative expenses at Indco decreased as a percentage of revenue due to strong revenue growth and expense control and unusual items experienced during the prior year period related to subsidiary level stock-based compensation expenses and items related to a special dividend that did not recur.

Income from Operations

Income from operations of $861 for the three months ended June 30, 2019 increased 88.4% compared to $457 for the three months ended June 30, 2018. Operating profit increased due to strong business growth, lower subsidiary level stock-based compensation expense and items related to a special dividend in the prior year that did not recur.

Results of Operations – Life Sciences – Three Months Ended June 30, 2019 and 2018

The Company's Life Sciences segment comprises two life science businesses we acquired through the acquisitions of Aves and Antibodies, both of which manufacture high-quality antibodies and other immunoreagents for biomedical research.

Life Sciences – Selected Financial Information:

   
Three Months Ended
June 30,
 
(in thousands)
 
2019
   
2018
 
Revenue
 
$
1,184
   
$
283
 
Gross profit
 
$
897
   
$
169
 
Gross profit margin
   
76
%
   
60
%
Income from Operations
 
$
102
   
$
52
 

The Life Sciences segment began to be reported as a segment beginning with the three-month period ended December 31, 2018. Aves was acquired on March 5, 2018, and Antibodies was acquired on June 22, 2018.

Revenue

Total revenue was $1,184 and $283 for the three months ended June 30, 2019 and 2018, respectively, an increase $901 or 318.4%.

Cost of Sales

Cost of sales was $287 and $114 for the three months ended June 30, 2019 and 2018, respectively, an increase of $173 or 151.6%

Gross Profit and Margin

Gross profit was $897 and $169 for the three months ended June 30, 2019 and 2018, respectively, an increase of $728 or 430.8%. Gross profit and margins increased due to acquisitions. In the three months ended June 30, 2019 and 2018, the Life Sciences segment had gross profit margins of 75.8% and 59.7%, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $795 and $117 for the three months ended June 30, 2019 and 2018, respectively.

Income from Operations

Income from operations for the three months ended June 30, 2019 and 2018 was $102 and $50, or 39.8% and 18.4%, respectively, of segment revenue.

Results of Operations – Janel Corporation – Nine Months Ended June 30, 2019 and 2018

The following table sets forth our corporate group expenses:

   
Nine Months Ended
June 30,
 
(in thousands)
 
2019
   
2018
 
Corporate expenses
 
$
1,602
   
$
1,431
 
Amortization of intangible assets
   
674
     
594
 
Stock-based compensation
   
329
     
578
 
Merger and acquisition expenses
   
137
     
452
 
Total corporate expenses
 
$
2,742
   
$
3,055
 

Expenses

Corporate expenses increased to $1,602 versus $1,431 in the prior year period due to an increase in professional expenses related to our audit. Total corporate expenses decreased by $313 to $2,742, or 10.3%, in the nine months ended June 30, 2019 as compared to $3,055 for the nine months ended June 30, 2018 primarily due to lower stock-based compensation and merger and acquisition expenses.

Amortization of Intangible Assets

For the nine months ended June 30, 2019 and 2018, corporate amortization expenses were $674 and $594, respectively, an increase of $80, or 13.5%. The increase was primarily related to the acquisitions of Aves, Antibodies, Honor and Sea Cargo.

Interest Expense

Interest expense for the consolidated Company increased by $202, or 59.4%, to $543 for the nine months ended June 30, 2019 from $341 for the nine months ended June 30, 2018. The increase was due primarily to our new senior secured term loan facility and subordinated promissory notes in connection with the Antibodies and Honor acquisitions, partially off-set by a lower debt level at the manufacturing segment.

Income Taxes

On a consolidated basis, the Company recorded an income tax expense of $356 for the nine months ended June 30, 2019, as compared to an income tax benefit of $114 for the nine months ended June 30, 2018.

The increase was primarily due to increased pretax income, partially off-set by a related one-time income tax benefit of $49 due to the new tax rate change during the nine-month period ended June 30, 2018. 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 the Company's Series A Stock and dividends accrued but not paid on the Company's Series C Stock.  For the nine months ended June 30, 2019 and 2018, preferred stock dividends were $420 and $308, respectively. The increase of $112, or 36.4%, was the result of a higher number of shares of Series C Stock outstanding to support acquisitions and increase in dividend rate as of January 1, 2019 to 6%. All outstanding shares of Series A Stock were repurchased by the Company on September 24, 2018 and retired on September 27, 2018. See note 8 to the consolidated financial statements for additional information.

Net Income (Loss)

Net income was $689, or $0.73 per diluted share, for the nine months ended June 30, 2019 compared to a loss of ($54), or ($0.09) per diluted share, for the nine months ended June 30, 2018. The increase was primarily due to the increase in operating profits from each of our segments and the inclusion of our new Life Sciences segment, off-set by higher income tax expense.

Income Available to Common Stockholders

Income available to Common Stockholders was $269, or $0.28 per diluted share, for the nine months ended June 30, 2019 compared to $950, or $1.67 per diluted share, for the nine months ended June 30, 2018. The decrease primarily was due to the amendment on October 17, 2017 to the annual dividend rate, as discussed in note 8 to the consolidated financial statements, which was treated as a gain on extinguishment for accounting purposes. The fair value prior to and after modification was $8,224 and $6,912, respectively, for a change of $1,312. In accordance with ASC 260 Earnings Per Share, this incremental benefit was treated as an adjustment to earnings per share for Common Stockholders.

Results of Operations - Global Logistics Services – Nine Months Ended June 30, 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:

   
Nine Months Ended
June 30,
 
(in thousands)
 
2019
   
2018
 
Revenue
 
$
52,378
   
$
41,787
 
Forwarding expense
   
40,247
     
31,112
 
Gross profit
 
$
12,131
   
$
10,675
 
Gross profit margin
   
23
%
   
26
%
Income from Operations
 
$
1,911
   
$
1,906
 

Revenue

Total revenue for the nine months ended June 30, 2019 was $52,378, as compared to $41,787 for the nine months ended June 30, 2018, an increase of $10,591 or 25.4%. The increase in revenue was largely due to the inclusion of the acquisitions of Honor and Sea Cargo as compared to the prior year period and higher transportation prices. The business also experienced strong organic growth early in the fiscal year as customers moved freight prior to new proposed governmental trade policies.

Forwarding Expenses

Forwarding expenses for the nine months ended June 30, 2019 increased by $9,135, or 29.4%, to $40,247 as compared to $31,112 for the nine months ended June 30, 2018. Forwarding expenses as a percentage of revenue were 76.8% and 74.5% for the nine months ended June 30, 2019 and June 30, 2018, respectively. Similar to the revenue increase, the increase in forwarding expenses primarily was due to acquisitions, higher purchased transportation expenses and an increase in our base of business.

Net Revenue

Net revenue for the nine months ended June 30, 2019 was $12,131, an increase of $1,456 or 13.6%, as compared to $10,675 for the nine months ended June 30, 2018. This increase was mainly the result of additional net revenue from the acquisitions discussed above, which were not included in the prior year, and low single-digit organic growth in our base business. Net revenue as a percentage of gross revenue declined to 23.2% versus 25.5% the prior year due to the mix of business and higher freight rates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended June 30, 2019 were $10,220, as compared to $8,769 for the nine months ended June 30, 2018. This increase of $1,451, or 16.5%, 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 19.5% and 21.0% of revenue for the nine months ended June 30, 2019 and 2018, respectively.

Income from Operations

Income from operations before income taxes increased to $1,911 for the nine months ended June 30, 2019, as compared to $1,906 for the nine months ended June 30, 2018, an increase of $5, or 0.3%. Income from operations grew slower than net revenue as acquisition benefits were more than offset by an increased investment in growth initiatives. Our operating margin as a percentage of net revenue for the nine months ended June 30, 2019 was 15.8%, versus 21.0% in the prior year period.

Results of Operations - Manufacturing – Nine Months Ended June 30, 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:

   
Nine Months Ended
June 30,
 
(in thousands)
 
2019
   
2018
 
Revenue
 
$
6,952
   
$
6,167
 
Gross profit
 
$
3,876
   
$
3,793
 
Gross profit margin
   
56
%
   
62
%
Income from Operations
 
$
1,709
   
$
1,260
 

Revenue

Total revenue was $6,952 and $6,167 for the nine months ended June 30, 2019 and 2018, respectively, an increase of 12.7%. The revenue growth reflected strong growth across the business.

Cost of Sales

Cost of sales for the nine months ended June 30, 2019 and 2018 was $3,076 and $2,374, respectively, an increase of $702 or 29.6% due to increased sales and mix of business.

Gross Profit and Margin

Gross profit was $3,876 and $3,793 for the nine months ended June 30, 2019 and 2018, respectively. Gross profit margin for the nine months ended June 30, 2019 decreased to 55.8% compared to 61.5% for the nine months ended June 30, 2018 due to product mix shifting to some lower margin products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,167 and $2,533 for the nine months ended June 30, 2019 and 2018, respectively, a decrease of $366 or 14.5%. Selling, general and administrative expenses at Indco decreased as a percentage of revenue due to strong revenue growth and expense control and unusual items experienced during the prior year period related to subsidiary level stock-based compensation expense and items related to a special dividend that did not recur.

Income from Operations

Income from operations of $1,709 for the nine months ended June 30, 2019 increased 35.6% compared to $1,260 for the nine months ended June 30, 2018. Operating profit increased due to strong business growth, lower subsidiary level stock-based compensation expense and items related to a special dividend in the prior year that did not recur.

Results of Operations – Life Sciences – Nine Months Ended June 30, 2019 and 2018

The Company's Life Sciences segment comprises two life science businesses that we acquired through the acquisitions of Aves and Antibodies, both of which manufacture high-quality antibodies and other immunoreagents for biomedical research.

Life Sciences – Selected Financial Information:

   
Nine Months Ended
June 30,
 
(in thousands)
 
2019
   
2018
 
Revenue
 
$
4,277
   
$
364
 
Gross profit
 
$
2,936
   
$
210
 
Gross profit margin
   
69
%
   
58
%
Income from Operations
 
$
710
   
$
62
 

The Life Sciences segment began to be reported as a segment beginning with the three-month period ended December 31, 2018. Aves was acquired on March 5, 2018, and Antibodies was acquired on June 22, 2018.

Revenue

Total revenue was $4,277 and $364 for the nine months ended June 30, 2019 and 2018, respectively.

Cost of Sales

Cost of sales was $1,341 and $154 for the nine months ended June 30, 2019 and 2018, respectively.

Gross Profit and Margin

Gross profit was $2,936 and $210 for the nine months ended June 30, 2019 and 2018, respectively. In the nine months ended June 30, 2019, the Life Sciences segment had gross profit margins of 68.7% versus 57.7% the prior year. Gross profit and margins increased due to acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,226 and $148 for the nine months ended June 30, 2019 and 2018, respectively.

Income from Operations

Income from operations for the nine months ended June 30, 2019 and 2018 was $710 and $62, respectively, or 16.6% and 17.0% of segment revenue.

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. Subsidiaries depend on commercial credit facilities to fund day-to-day operations as there is a difference between the timing of collection cycles and the timing of payments to vendors. Generally, Janel does not make significant capital expenditures.

As a customs broker, we make 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 June 30, 2019, the Company's cash and working capital deficiency (current assets minus current liabilities) were $1,362 and $7,460, respectively, as compared to $585 and $6,587 as of September 30, 2018. The increase is considered nominal, representing relatively stable collections from customers and payments of vendors.

Janel's cash flow performance for the three months ended June 30, 2019 is not necessarily indicative of future cash flow performance.

Cash flows from operating activities

Net cash provided by operating activities for the nine months ended June 30, 2019 and 2018 was $3,219 and $1,118, respectively. The increase in cash provided by operations for the nine months ended June 30, 2019 was driven principally by higher net income and improved working capital.

Cash flows from investing activities

Net cash used in investing activities totaled $2,238 for the nine months ended June 30, 2019, versus $6,907 for the prior year period. During the nine months ended June 30, 2019, the Company used $1,935 for two acquisitions, net of cash acquired. The Company also used $303 for the acquisition of property and equipment for the nine months ended June 30, 2019 versus $97 for the nine months ended June 30, 2018.

Cash flows from financing activities

Net cash used in financing activities was $204 for the nine months ended June 30, 2019, versus $5,319 provided by financing activities for the nine months ended June 30, 2018. Net cash used in financing activities for the nine months ended June 30, 2019 primarily included funds used to repay debt. Net cash provided by financing activities for the nine months ended June 30, 2018 period primarily funded our acquisition efforts.

Off-Balance Sheet Arrangements

As of June 30, 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 June 30, 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, 2018:


We did not maintain adequate controls over journal entry approval;


Management identified a number of deficiencies related over the design, implementation and effectiveness of certain information technology general controls, including segregation of duties, user access, change management, data back-ups and hardware security, some of which have a direct impact on our financial reporting; and


We did not maintain adequate controls over inventory valuation as it relates to overhead costs.

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, 2018 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 June 30, 2019 are fairly presented, in all material respects, and in conformity with U.S. GAAP.

Remediation Plan

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.

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, 2018, 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, 2018 filed with the SEC. There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2018.

Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the three months ended June 30, 2019. In addition, there were no shares of common stock purchased by us during the three months ended June 30, 2019.

ITEM 6.
EXHIBIT INDEX

Exhibit No.
 
   
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 June 30, 2019 for the three and nine months ended June 30, 2019 and 2018 in XBRL (Extensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2019 and September 30, 2018, (ii) Consolidated Statements of Operations for the three months ended June 30, 2019 and 2018, (iii) Consolidated Statement of Changes in Stockholders' Equity for the nine months ended June 30, 2019 and 2018, (iv) Consolidated Statements of Cash Flows for the nine months ended June 30, 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: December 16, 2019
JANEL CORPORATION
 
Registrant
   
 
/s/ Dominique Schulte
 
Dominique Schulte
 
Chairman, President and Chief Executive Officer
 
(Principal Executive Officer)

Dated: December 16, 2019
JANEL CORPORATION
 
Registrant
   
 
/s/ Vincent A. Verde
 
Vincent A. Verde
 
Principal Financial Officer, Treasurer and Secretary


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