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JLWT > SEC Filings for JLWT > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for JANEL WORLD TRADE LTD

Form 10-Q for JANEL WORLD TRADE LTD


11-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used throughout this Report, "we," "our," "Janel", "the Company" and similar words refers to Janel World Trade, Ltd.

forward-looking statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements reflecting our current expectations with respect to our operations, performance, financial condition, and other developments. These forward-looking statements may generally be identified by the use of the words "may", "will", "believes", "should", "expects", "anticipates", "estimates", and similar expressions. These statements are necessarily estimates reflecting management's best judgment based upon current information and involve a number of risks and uncertainties. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, those risks identified in our periodic reports filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K.

overview

Janel 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.

Our headquarters are in Jamaica, New York and we operate through a network which includes five company-owned offices in the United States and independent international agents in approximately 52 countries around the world.

As a non-asset based third party logistics provider, we do not own any transportation assets and fulfill our transportation needs by purchasing transportation services from direct (asset-based) carriers and from other transportation providers who generally provide us with favorable rates with priority handling of our shipments. By consolidating multiple shipments from our customers we are able to negotiate favorable pricing from these transportation providers and can offer lower rates to our customers than they could obtain on their own. This non-asset based approach provides us with a variable cost structure and allows for a high level of operating flexibility. Our investment in assets is limited to the purchase of office, warehouse and computer equipment and the leasing of office and warehouse space for our company owned offices.

Historically, Janel's quarterly operating results have been subject to seasonal trends. The fiscal first quarter has traditionally been the weakest and the fiscal third and fourth quarters have traditionally been the strongest. This pattern has been the result of, or influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and other similar and subtle forces. This historical seasonality has also been influenced by the growth and diversification of Janel's international network and service offerings.

A significant portion of Janel's revenues are derived from customers in industries with shipping patterns closely tied to consumer demand and from customers with shipping patterns dependent upon just-in-time production schedules. Many of Janel's customers may ship a significant portion of their goods at or near the end of a quarter. Therefore, the timing of Janel's revenues are, to a large degree, affected by factors beyond the Company's control, such as shifting consumer demand for retail goods and manufacturing production delays. The Company cannot accurately forecast many of these factors, nor can it estimate the relative impact of any particular factor and, as a result, there is no assurance that historical patterns will continue in the future.

results of operations

The following discussion and analysis addresses the results of operations for the three and nine months ended June 30, 2014, as compared to the results of operations for the three and nine months ended June 30, 2013. The discussion and analysis then addresses the liquidity and financial condition of the Company, and other matters. As noted above, during the June 2012 quarter, the Company divested itself of the food segment and therefore only has one reportable business segment.

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Effective with our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, the Company 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, with no change to previously reported net income (loss). In management's judgment, the revised methodology makes the presentation more useful and informative and better reflects industry practice. Refer to Note 2 to the Consolidated Financial Statements.

Three months ended June 30, 2014 and 2013

Revenue.Total revenue from continuing operations for the three months ended June 30, 2014 was $11,121,377, as compared to $10,783,481 for the same period of fiscal 2013, an increase of $337,896 or 3.1%. This increase is mainly the result of higher ocean import shipping activity when compared to the prior year. Net revenue (revenue minus forwarding expense) from continuing operations for the three months ended June 30, 2014 was $1,518,699, a decrease of $84,167 as compared to net revenue of $1,602,866 for the three months ended June 30, 2013.

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 the three months ended June 30, 2014, forwarding expense from continuing operations increased by $422,063, or 4.6%, to $9,602,678 as compared to $9,180,615 for the three months ended June 30, 2013 and as a percentage of revenue increased to 86.3% for fiscal 2014, from 85.1% for the three months ended June 30, 2013, a 1.2 percentage point increase. This percentage increase is principally the result of higher forwarding expense on ocean import shipping activity when compared to the prior year.

Selling, General and Administrative Expense. For the three months ended June 30, 2014 and 2013, selling, general and administrative expenses from continuing operations were $1,546,492 and $1,538,582, respectively, an increase of $7,910, or 0.5% when compared to the prior year. As a percentage of revenue, selling, general and administrative expenses decreased by 0.4 percentage points to 13.9% from 14.3% of revenue for the three months ended June 30, 2014 and 2013, respectively. This percentage point decrease is mainly a function of the increased revenue when compared to the prior year, while some of the expenses do not rise as revenues increase.

Depreciation and Amortization. For the three months ended June 30, 2014 and 2013, depreciation and amortization expenses from continuing operations were $4,239 and $4,798, respectively, a decrease of $559, or 11.6%, and is mainly the result of a minimal amount of capital expenditure.

Interest Expense. For the three months ended June 30, 2014 and 2013, interest expense from continuing operations was $38,630 and $30,510, respectively, an increase of $8,120. This increase is primarily the result of higher interest costs on our new credit facility which began on March 31, 2014 with Presidential Financial Corporation versus the prior year's interest cost under our previous credit facility with Community National Bank.

Loss From Continuing Operations. For the reasons stated above, the Company incurred a loss before taxes from continuing operations of ($70,662) for the three months ended June 30, 2014 compared to income before taxes of $28,976 for the three months ended June 30, 2013.

Income Taxes.For the three months ended June 30, 2014 and 2013 the Company recorded a net income tax provision of $4,000 and $4,000, respectively. Both periods reflect applicable state income taxes only as we have fully provided 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. The three months ended June 30, 2014 and 2013 reflect a loss from discontinued operations of ($25,322) and ($245,608), respectively. Refer to Note 6 to these Consolidated Financial Statements.

Net Loss. For the three months ended June 30, 2014 and 2013, the Company incurred a net loss of ($99,984) and ($220,632), respectively. Net loss available to common shareholders for fiscal 2014 and 2013 was ($103,734) or ($0.00) per diluted share and ($224,382) or ($0.01) per diluted share, respectively.

Nine months ended June 30, 2014 and 2013

Revenue.Total revenue from continuing operations for the nine months ended June 30, 2014 was $32,847,671, as compared to $31,907,348 for the same period of fiscal 2013, an increase of $940,323 or 2.9%. This increase is mainly the result of higher ocean import shipping activity when compared to the prior year. Net revenue (revenue minus forwarding expense) from continuing operations for the nine months ended June 30, 2014 was $4,596,060, a decrease of $55,154 as compared to net revenue of $4,651,214 for the nine months ended June 30, 2013.

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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 the nine months ended June 30, 2014, forwarding expense from continuing operations increased by $995,477, or 3.7%, to $28,251,611 as compared to $27,256,134 for the nine months ended June 30, 2013 and as a percentage of revenue increased to 86.0% for fiscal 2014, from 85.4% for the nine months ended June 30, 2013, an 0.6 percentage point increase. This percentage increase is principally the result of higher forwarding expense on ocean import shipping activity when compared to the prior year.

Selling, General and Administrative Expense. For the nine months ended June 30, 2014 and 2013, selling, general and administrative expenses from continuing operations were $4,842,334 and $4,883,798, respectively, a decrease of $41,464, or 0.8% when compared to the prior year. The nine months ended June 30, 2014 includes an expense in the amount of $237,492 for the issuance of stock options on October 30, 2013 (refer to Note 8 to the Consolidated Financial Statements) which was offset by reductions in selling, general and administrative expenses, mainly staff and payroll cost reductions. As a percentage of revenue, selling, general and administrative expenses decreased by 0.6 percentage points to 14.7% from 15.3% of revenue for the nine months ended June 30, 2014 and 2013, respectively. This percentage point decrease is mainly a function of the increased revenue when compared to the prior year, while some of the expenses do not rise as revenues increase.

Depreciation and Amortization. For the nine months ended June 30, 2014 and 2013, depreciation and amortization expenses from continuing operations were $11,828 and $14,336, respectively, a decrease of $2,508, or 17.5%, and is mainly the result of a minimal amount of capital expenditure.

Interest Expense. For the nine months ended June 30, 2014 and 2013, interest expense from continuing operations was $85,662 and $91,082, respectively, a decrease of $5,420. This decrease is primarily the result of lower borrowings under bank credit facilities during the nine months ended June 30, 2014 versus the same period of 2013.

Loss From Continuing Operations. For the reasons stated above, the Company incurred a loss before taxes from continuing operations of ($352,764) and ($353,718) for the nine months ended June 30, 2014 and 2013, respectively.

Income Taxes. For the six months ended March 31, 2014 and 2013 the Company recorded a net income tax provision of $5,000 and $7,000, respectively. Both periods reflect applicable state income taxes only as we have fully provided 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. The nine months ended June 30, 2014 and 2013 reflect a loss from discontinued operations of ($50,252) and ($357,260), respectively. Refer to Note 6 to these Consolidated Financial Statements.

Net Loss. For the nine months ended June 30, 2014 and 2013, the Company incurred a net loss of ($403,016) and ($710,978), respectively. Net loss available to common shareholders for fiscal 2014 and 2013 was ($414,266) or ($0.01) per diluted share and ($722,228) or ($0.03) 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 nine months ended June 30, 2014 is not necessarily indicative of future cash flow performance.

As of June 30, 2014, and compared with the prior fiscal year, the Company's cash and cash equivalents decreased by ($372,271), or (59.5%), to $235,313 from $625,584, respectively. During the nine months ended June 30, 2014, Janel's net working capital (current assets minus current liabilities) increased by $322,747 to $139,409 at June 30, 2014, from a negative ($183,338) at September 30, 2013. This increase is primarily the result of the sale on October 30, 2013 of 7,692,308 shares of the Company's common stock for $500,000.

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Cash flows from continuing operating activities. Net cash used in continuing operating activities for the nine months ended June 30, 2014 and 2013 was ($632,075) and ($237,622), respectively. The change was principally driven by a decrease in the collection of outstanding accounts receivable, a decrease in payments of outstanding accounts payable, and an increase in payments for prepaid expenses and other sundry assets, which were offset by a reduction in the net loss and changes in non cash related items mainly the issuance of stock options and changes in the allowance for doubtful accounts when compared to the prior year.

Cash flows from discontinued operating activities. Net cash provided by discontinued operating activities for the nine months ended June 30, 2014 was $182,216 and net cash used in discontinuing operating activities for the nine months ended June 30, 2013 was ($174,274).

Cash flows from investing activities. Net cash used in investing activities for the nine months ended June 30, 2014, primarily capital expenditures for property and equipment, was $8,758. Net cash provided by investing activities for the nine months ended June 30, 2013, primarily the sale of marketable securities, was $58,998.

Cash flows from financing activities. Net cash provided by financing activities, primarily the sale on October 30, 2013 of 7,692,308 shares of the Company's common stock for $500,000 (Refer to Note 7 to the Consolidated Financial Statements) which was partially offset by the repayment of ($420,404) under our bank line of credit, was $68,346 for the nine months ended June 30, 2014. Net cash provided by financing activities, primarily borrowing under our bank line of credit, was $118,750 for the nine months ended June 30, 2013.

Presidential Financial Borrowing Facility. On March 27, 2014, the Company and its wholly-owned subsidiaries, The Janel Group Of New York, Inc., The Janel Group of Illinois, Inc., The Janel Group of Georgia, Inc., The Janel Group of Los Angeles, Inc., and Janel Ferrara Logistics, LLC (collectively, the "Janel Borrowers"), entered into a Loan and Security Agreement with Presidential Financial Corporation ("Presidential") with respect to a three year $3.5 million (limited to the borrowing base and reserves) revolving line of credit facility (the "Presidential Facility"). The Presidential Facility replaces The Janel Group of New York's previous line of credit agreement with Community National Bank ("CNB"). Under the new Presidential Facility, the Janel Borrowers may borrow up to $3.5 million limited to 70% of the Janel Borrowers' aggregate outstanding eligible accounts receivable, subject to adjustment as set forth in the Loan and Security Agreement. Interest will accrue at an annual rate equal to five percent above the greater of (a) the prime rate of interest quoted in The Wall Street Journal from time to time, or (b) 3.25%. The Janel Borrowers' obligations under the Presidential facility are secured by all of the assets of the Janel Borrowers. The new credit facility will expire on March 26, 2017
(subject to earlier termination as provided in the Loan and Security Agreement)
unless renewed. On March 31, 2014, $1,282,673 of the Presidential Facility was used to pay off the outstanding balances under the line of credit facility with CNB. As of June 30, 2014, there were outstanding borrowings of $1,010,932 under the Presidential Facility (which represented 52.4% of the amount available thereunder) out of a total amount available for borrowing under the Presidential Facility of approximately $1,929,202.

Working Capital Requirements. The Company's cash needs are currently met by the Presidential Facility and cash on hand. As of June 30, 2014, the Company had $918,270 available under its $3.5 million Presidential Facility and $235,313 in cash from operations and cash on hand. On October 30, 2013, the Company raised $500,000 (Refer to Note 7 to the Consolidated Financial Statements) 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 believe that our current financial resources will be sufficient to finance our operations and obligations (current and long-term liabilities) for the long and short terms. However, our actual working capital needs for the long and short terms will depend upon numerous factors, including our operating results, the cost associated with growing the Company either internally or through acquisition, competition, and the availability under our revolving credit facility, none of which can be predicted with certainty. If our cash flow and available credit are not sufficient to fund our working capital, the Company's operations will be materially negatively impacted.

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.

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Janel is progressing with the implementation of its business plan and strategy to grow its revenue and profitability for fiscal 2014 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, the Company raised $500,000 (Refer to Note 7 to the Consolidated Financial Statements) 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. Without adequate equity and/or debt financing, the implementation of significant aspects of the Company's strategic growth plan may be deferred beyond the originally anticipated timing, and the Company's operations will be materially negatively impacted.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such difference may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to 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.

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.

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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 . . .

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