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JLWT > SEC Filings for JLWT > Form 10-K on 14-Jan-2014All Recent SEC Filings

Show all filings for JANEL WORLD TRADE LTD

Form 10-K for JANEL WORLD TRADE LTD


14-Jan-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The statements contained in all parts of this document that are not historical facts are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this document, the words "anticipate," "estimate," "expect," "may," "plans," "project," and similar expressions are intended to be among the statements that identify forward-looking statements. Janel's results may differ significantly from the results discussed in the forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, those relating to costs, delays and difficulties related to the Company's dependence on its ability to attract and retain skilled managers and other personnel; the intense competition within the freight industry; the uncertainty of the Company's ability to manage and continue its growth and implement its business strategy; the Company's dependence on the availability of cargo space to serve its customers; effects of regulation; its vulnerability to general economic conditions and dependence on its principal customers; accuracy of accounting and other estimates; risk of international operations; risks relating to acquisitions; the Company's future financial and operating results, cash needs and demand for its services; and the Company's ability to maintain and comply with permits and licenses; as well as other risk factors described in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected.

Introduction

The following discussion and analysis addresses the results of operations for the fiscal year ended September 30, 2013, as compared to the results of operations for the fiscal year ended September 30, 2012. The discussion and analysis then addresses the liquidity and financial condition of the Company, and other matters.

Results of Operations

Janel is a non-asset based third party logistics services company, engaged in full-service cargo transportation logistics management, including freight forwarding - via air, ocean and land-based carriers, customs brokerage services, and warehousing and distribution services. From April 2011 until June 2012, we operated a vertical sales and supply chain food industry business segment including supplier selection, manufacturing, transportation, import, distribution, marketing and sales within the food industry. During the June 2012 quarter the Company divested itself of and discontinued the food industry segment and now operates as one reportable business segment.

Effective with this Annual Report on Form 10-K, the Company has changed its accounting principle with regard to customs duty and no longer includes customs duty as a component of revenue or forwarding expense. The net effect of this change is a reduction to revenue with a corresponding equal reduction to forwarding expense. Refer to Note 2 to the Consolidated Financial Statements.

Years ended September 30, 2013 and 2012

Revenue. Total revenue from continuing operations for fiscal 2013 was $44,744,518, as compared to $49,837,461 for the same period of fiscal 2012, a decrease of $5,092,946 or 10.2%. This decrease is mainly the result of lower ocean import shipping activity when compared to the prior year. Net revenue (revenue minus forwarding expense) from continuing operations in fiscal 2013 was $6,264,544, a decrease of $554,851 or 8.1% as compared to net revenue of $6,819,395 for fiscal 2012.

Forwarding Expense. Forwarding expense from continuing operations is primarily comprised of the fees paid by Janel directly to cargo carriers to handle and transport its actual freight shipments on behalf of its customers between initial and final terminal points, and includes any trucking and warehousing charges related to the shipments.

For fiscal 2013, forwarding expense from continuing operations decreased by $4,538,092, or 10.6%, to $38,479,974 as compared to $43,018,066 for fiscal 2012 and as a percentage of revenue decreased to 86.0% for fiscal 2013, from 86.3% for fiscal 2012, a 0.3 percentage point decrease. This percentage decrease is principally the result of higher forwarding expense on ocean import shipping activity when compared to the prior year.

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Selling, General and Administrative Expense. For fiscal 2013 and 2012, selling, general and administrative expenses from continuing operations were $6,433,722 and $6,757,816, respectively, a decrease of $324,094, or 4.8% when compared to the prior year mainly due to staff and payroll cost reductions. As a percentage of revenue, selling, general and administrative expenses were 14.4% and 13.6% of revenue for fiscal 2013 and 2012, respectively, an 0.8 percentage point increase which is mainly the result of the decrease in revenue for fiscal 2013 when compared to the prior year and expenses which do not decrease in proportion to lower revenue.

Depreciation and Amortization . For fiscal 2013 and 2012, depreciation and amortization expenses from continuing operations were $19,191 and $31,154, respectively. This represents a year over year decrease of $11,963, or 38.4%, and is mainly the result of a minimal amount of capital expenditure during fiscal 2013 and 2012.

Interest Expense . For fiscal 2013 and 2012, interest expense from continuing operations was $121,021 and $94,454, respectively, an increase of $25,567. This increase is primarily the result of higher interest costs due to increased borrowings under our revolving line of credit with Community National Bank during fiscal 2013 versus 2012.

Loss From Continuing Operations. For the reasons stated above, the Company incurred a loss before taxes from continuing operations of ($314,106) and ($65,029) for the fiscal years ended 2013 and 2012, respectively.

Income Taxes. The company recorded a net income tax provision of $17,000 and $1,221,304 for fiscal 2013 and 2012, respectively. Fiscal 2013 only reflects applicable state income taxes and fiscal 2012 reflects applicable state income taxes and an expense in the amount of $1,184,003 to provide for a valuation allowance against the deferred tax asset.

Loss From Discontinued Operations. On August 28, 2013 the Company sold its New Jersey freight forwarding and logistics operations and in June 2012 discontinued its food segment business. As a result, the New Jersey operations and some ongoing expenses associated with the food segment are included in discontinued operations. Fiscal 2013 and 2012 reflect a loss from discontinued operations of ($1,827,128) and ($1,392,383), respectively. Refer to Note 8 to the Consolidated Financial Statements.

Net Loss. For fiscal 2013 and 2012, the Company incurred a net loss of ($2,158,234) and ($2,678,716), respectively. Net loss available to common shareholders for fiscal 2013 and 2012 was ($2,173,234) or ($0.09) per diluted share and ($2,693,716) or ($0.12) per diluted share, respectively.

Liquidity and Capital Resources

General. Our ability to satisfy our liquidity requirements, which include satisfying our debt obligations and funding working capital, day-to-day operating expenses and capital expenditures depends upon our future performance, which is subject to general economic conditions, competition and other factors, some of which are beyond our control. We depend on our commercial credit facilities to fund our day-to-day operations as there is a timing difference between our collection cycles and the timing of our payments to vendors. Generally we do not have a need for significant capital expenditure as we are a non-asset based freight forwarder.

Janel's cash flow performance for the 2013 fiscal year is not necessarily indicative of future cash flow performance.

As of September 30, 2013, and compared with the prior fiscal year, the Company's cash and cash equivalents decreased by ($148,284), or (19.2%), to $625,584 from $773,868, respectively. During the fiscal year ended September 30, 2013, Janel's net working capital (current assets minus current liabilities) decreased by ($2,159,572) from $1,976,234 at September 30, 2012, to a negative ($183,338) at September 30, 2013. This decrease is primarily due to the net loss of ($2,158,234) for the fiscal year ended September 30, 2013.

Cash flows from continuing operating activities. Net cash used in continuing operating activities for fiscal 2013 was ($283,267) and net cash provided by continuing operations for fiscal 2012 was $394,743. The change was principally driven by a decrease in the collection of outstanding accounts receivable, an increase in payments of outstanding accounts payable, the receipt in fiscal 2012 of a federal tax refund and a change in the deferred tax asset; which were partially offset by a reduction in the net loss from continuing operations when compared to the prior year and a decrease in payments for prepaid expenses and other sundry assets.

Cash flows from discontinued operating activities. Net cash provided by discontinued operating activities was $97,818 for fiscal 2013 and net cash used in discontinued operating activities was ($786,609) for fiscal 2012.

Cash flows from investing activities . Net cash provided by investing activities, primarily the sale of the assets of our New Jersey operations and marketable securities, was $528,065 for fiscal 2013. Net cash used for investing activities, primarily capital expenditures for property and equipment, was ($7,754) for fiscal 2012.

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Cash flows from financing activities . Net cash used in financing activities was ($490,900) for fiscal 2013 and net cash provided by financing activities was 698,733 for fiscal 2012. The cash used in financing activities for fiscal 2013 consisted primarily of the repayment of long-term debt of ($305,900) and a net decrease of ($170,000) under our bank line of credit. The cash provided by financing activities for fiscal 2012 consisted primarily of an increase of $650,000 in borrowings under our bank line of credit, the sale on October 14, 2011 of 750,000 shares of the Company's common stock for $150,000 and the repayment of a loan receivable in the amount of $92,817; which were partially offset by the repayment of a note payable in the amount of $100,000.

Community National Bank Borrowing Facility. On August 3, 2010, the Company's Janel Group of New York, Inc. ("Janel New York") subsidiary entered into a one year $3.5 million revolving line of credit agreement with Community National Bank ("CNB"). The CNB Facility has been periodically renewed. Currently, the interest rate of the CNB Facility is the prime rate plus 1%, with a minimum rate of 7%. On September 30, 2013, the CNB Facility was extended from September 30, 2013 to January 31, 2014. As part of the extension, CNB (i) reduced the Credit Facility to $1,731,336 (the amount of borrowings outstanding at that time), (ii) requires that 80% of the collections on eligible (under the borrowing base) accounts receivable from the Company's former Hillside, New Jersey freight forwarding and logistics operations which was sold on August 30, 2013 (the "NJ Collections"), be used to pay down borrowings under the Credit Facility within 10 days of collection, and (iii) will not allow any additional borrowings during the extension period. Obligations under the CNB Facility are secured by all of the assets of the Company, are guaranteed by the Company, and are guaranteed by James N. Jannello, the Company's retired founder and Chief Executive Officer. As of September 30, 2013, after the required repayment of $300,000 of NJ Collections, there were outstanding borrowings of $1,431,336 under the CNB Facility. On December 9, 2013, subsequent to the period covered by this report, the company repaid $156,000 to CNB, reducing the amount of borrowings outstanding under the Credit Facility to $1,275,336. This repayment was a result of NJ Collections for the period October 1, 2013 through November 30, 2013 and after this repayment there are no further repayments required from the NJ Collections. On August 30, 2013, the Company used a portion of the cash proceeds from the sale of its New Jersey operations to repay the $229,241outstanding balance on its 2011 term loan from CNB.

Working Capital Requirements. The Company's cash needs are currently met by the CNB Facility and cash on hand. As of September 30, 2013 the Company had $625,584 in cash on hand and under the current extension with CNB the Company is not allowed any additional borrowings under the CNB Facility. Our actual working capital needs for the short and long terms will depend upon numerous factors, including our operating results, the availability of a revolving line of credit, competition, and the cost associated with growing the Company either internally or through acquisition, none of which can be predicted with certainty. If our results of operations and our availability under our bank line of credit are insufficient to meet our cash needs, we will be required to obtain additional investment capital or debt funding to continue operations. On October 30, 2013, subsequent to the period covered by this report, the Company raised $500,000 from the sale of newly issued shares of the Company's Common Stock at a price of $0.065 per share. The Company also issued five-year warrants to the investor for up to an additional $1,000,000 investment upon exercise for additional newly issued shares of the Company's common stock at a price of $0.08. We intend to use the proceeds from these sales for general working capital purposes. We are also currently seeking a credit facility to replace our current bank financing. If the investor does not exercise the warrants, and/or the Company is not able to renew the CNB Facility upon acceptable terms to us or obtain replacement financing for the CNB Facility, the Company's operations will be materially negatively impacted.

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Current Outlook

Our results of operations are affected by the general economic cycle, particularly as it influences global trade levels and specifically the import and export activities of Janel's various current and prospective customers. Historically, the Company's quarterly results of operations have been subject to seasonal trends which have been the result of, or influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions, the growth and diversification of its international network and service offerings, and other similar and subtle forces. We cannot accurately forecast many of these factors nor can we estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods.

Our food segment incurred losses and the Company's Board of Directors determined that it was in the Company's best interests to divest the food segment and refocus our growth strategy on our transportation logistics business. During June 2012, the company divested itself of the food segment and as a result, the losses from the food segment have been eliminated.

Janel is progressing with the implementation of its business plan and strategy to grow its revenue and profitability for fiscal 2013 and beyond through several avenues. The Company's strategy for further growth includes plans to: open, as warranted, additional branch offices domestically and/or outside the continental United States; introduce additional revenue streams for its existing headquarters and branch locations; expand its existing sales force by hiring additional commission-only sales representatives with established customer bases; increase its focus on growing revenue related to export activities; evaluate direct entry into the trucking and warehouse distribution business as a complement to the services already provided to existing customers; seek out and pursue privately held transportation-related firms which may ultimately lead to their acquisition by the Company; and continue its focus on containing current and prospective overhead and operating expenses, particularly with regard to the efficient integration of any additional offices or acquisitions.

Certain elements of our profitability and growth strategy, principally proposals for acquisition and accelerating our revenue growth are contingent upon the availability of adequate financing on terms acceptable to the Company. On October 30, 2013, subsequent to the period covered by this report, the Company raised $500,000 from the sale of newly issued shares of the Company's Common Stock at a price of $0.065 per share. The Company also issued five-year warrants to the investor for up to an additional $1,000,000 investment upon exercise for additional newly issued shares of the company's common stock at a price of $0.08. We are currently seeking a credit facility to replace our current bank financing. If the investor does not exercise the warrants, and/or the Company is not able to renew the CNB Facility upon acceptable terms to us or obtain replacement financing for the CNB Facility, the Company's operations will be materially negatively impacted. Therefore, the implementation of significant aspects of our strategic growth plan may be delayed.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such difference may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, accruals for transportation and other direct costs, accruals for cargo insurance, and deferred income taxes. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. We reevaluate these significant factors as facts and circumstances change. Historically, actual results have not differed significantly from our estimates. These accounting policies are more fully described in Note 1 of the Notes to the Consolidated Financial Statements.

Management believes that the nature of the Company's business is such that there are few, if any, complex challenges in accounting for operations. Revenue recognition is considered the critical accounting policy due to the complexity of arranging and managing global logistics and supply-chain management transactions.

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Revenue Recognition

A. Full-Service Cargo Transportation Logistics Management

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

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

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

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

Customs brokerage and other services involves provide multiple services at destination including clearing shipments through customs by preparing required documentation, calculating and providing for payment of duties and other charges on behalf of the customers, arranging for any required inspections, and arranging for final delivery. These revenues are recognized upon completion of the services. Effective with the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2013, the Company has changed its accounting principle and no longer includes customs duty as a component of revenue. Refer to Note 2 to the Consolidated Financial Statements.

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

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

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 Comprehensive loss:

a. accounts receivable valuation;
b. the useful lives of long-term assets;
c. the accrual of costs related to ancillary services the Company provides;
d. accrual of tax expense on an interim basis; and
e. deferred tax valuation allowance.

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

Recent Accounting Pronouncements

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

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