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| JLWT.OB > SEC Filings for JLWT.OB > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
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. Such forward-looking statements include, but are not limited to, those relating to the following: the effect and benefits of the Company's reverse merger transaction; Janel's plans to reduce costs (including the scope, timing, impact and effects thereof); potential annualized cost savings; plans for direct entry into the trucking and warehouse distribution business (including the scope, timing, impact and effects thereof); the Company's ability to improve its cost structure; plans for opening additional domestic and foreign branch offices (including the scope, timing, impact and effects thereof); the sensitivity of demand for the Company's services to domestic and global economic and political conditions; expected growth; future operating expenses; future margins; fluctuations in currency valuations; fluctuations in interest rates; future acquisitions and any effects, benefits, results, terms or other aspects of such acquisitions; ability to continue growth and implement growth and business strategy; the ability of expected sources of liquidity to support working capital and capital expenditure requirements; future expectations and outlook and any other statements regarding future growth, cash needs, operations, business plans and financial results and any other statements that are not historical facts.
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 Janel's Annual Report on Form 10-K filed with the SEC on January 15, 2008. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected.
Overview
The following discussion and analysis addresses the results of operations for the three and nine months ended June 30, 2008, as compared to the results of operations for the three and nine months ended June 30, 2007. The discussion and analysis then addresses the liquidity and financial condition of the Company, and other matters.
Results of Operations
Janel operates its business as two reportable segments comprised of: 1) full-service cargo transportation logistics management, including freight forwarding - via air, ocean and land-based carriers - customs brokerage services, warehousing and distribution services, and other value-added logistics services, and 2) computer software sales, support and maintenance.
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Revenue. Revenue for the third quarter of fiscal 2008 was $19,962,837, as compared to $18,851,199 for the same period of fiscal 2007, a year-over-year increase of $1,111,638, or 5.9%. For the three months of fiscal 2008, transportation logistics accounted for revenue of $19,897,384, while computer software revenue was $65,453, generated during the quarter from the Company's October 18, 2007 acquisition of certain assets of Order Logistics Inc. There was no comparable computer software-related revenue in the fiscal 2007 period. The increased level of transportation logistics revenue reflected relatively greater overall shipping activity by existing customers between the two periods. The Company's transfer of Order Logistics' operations from South Carolina to Janel's Chicago facilities began in the second fiscal quarter of 2008, and was completed during the third quarter. As a result, computer software-related revenue was negatively affected during both periods, but is expected to recover during the fourth quarter of fiscal 2008, and thereafter.
Forwarding Expense. Forwarding expense 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. Forwarding expense also includes any duties and/or trucking charges related to the shipments. As a general rule, revenue received by the Company for shipments via ocean freight are marked up at a lower percentage versus their related forwarding expense than are shipments via airfreight, i.e., forwarding expense as a percentage of revenue is generally higher (and the Company earns less) for ocean freight than for airfreight.
For the third quarter of fiscal 2008, forwarding expense increased by $893,666, or 5.3%, to $17,613,732, as compared to $16,720,066 for the third quarter of fiscal 2007. The percentage increase in forwarding expense was less than the percentage increase in transportation logistics revenue, up 5.5%, year-over-year, yielding a favorable decrease of 17 basis points in the measure of forwarding expense as a percentage of transportation logistics revenue to 88.52% in the third quarter of fiscal 2008, from 88.69% for the third fiscal quarter of 2007. This is principally the result of increased average margins earned by the Company on ocean freight shipments in the fiscal 2008 quarter, which also accounted for a higher proportion of the quarter's shipping activity.
Selling, General and Administrative Expense. Selling, general and administrative expense in third quarter of fiscal 2008 increased by $476,239, or 25.0%, to $2,379,938, as compared to $1,903,699 in the third quarter of fiscal 2007. The year-over-year dollar increase in SG&A primarily resulted from the incremental expenses related to additional employees added to the Company's payroll during the fiscal 2008 first quarter as a result of its asset acquisition during that period. SG&A as a percentage of revenue increased by 182 basis points from 10.10% in the third quarter of fiscal 2007, to 11.92% in the third quarter of fiscal 2008.
Income (Loss) Before Taxes. Janel's results fell from an income before taxes of $246,490 in the third quarter of fiscal 2007 to a loss before taxes of $(207,813) in the third quarter of fiscal 2008. Third quarter 2008 charges of $161,814 related to amortization of intangible assets pertaining essentially to the Company's asset acquisition in October 2007, and incremental interest expense during the fiscal 2008 third quarter of $24,317, pertaining principally to acquisition financing (see Note 2 to financial statements) essentially accounted for the reported quarterly pretax loss.
Income Taxes. The effective income tax rate in both the 2008 and 2007 fiscal periods reflects the U.S. federal statutory rate and applicable state income taxes.
Net Income. Net loss available to common shareholders for the third quarter of fiscal 2008 was $(157,579), or $(0.009) per fully diluted share, as compared to net income available to common shareholders of $136,740, or $0.008 per fully diluted share, in the third quarter of fiscal 2007. The same principal factors as described above for the third fiscal quarter 2008 loss before taxes contributed to the period's net loss.
Nine Months Ended June 30, 2008 Compared to Nine Months Ended June 30, 2007
Revenue. Revenue for the nine months ended June 30, 2008 was $58,312,144, as compared to $53,882,658 for the same period of fiscal 2007, a year-over-year increase of $4,429,486, or 8.2%. The higher level of revenue primarily reflected a net year-over-year rise in shipping activity by existing customers as the generally weaker dollar has hampered the level of imports to a greater extent than it has benefited exports. In addition, total nine months' revenue in 2008 benefitted from the Company's computer software segment acquired in October 2007. For the nine months of 2008, transportation logistics accounted for revenue of $57,928,492, while computer software revenue was $383,652.
Forwarding Expense. For the nine months ended June 30, 2008, forwarding expense was $51,097,175, as compared to $47,864,647 for the same period of fiscal 2007, a year-over-year increase of $3,232,528, or 6.8%. The percentage increase was somewhat less than the increase in transportation logistics revenue, up 7.5%, for the nine months ended June 30, 2008 as compared to fiscal 2007, resulting in forwarding expense as a percentage of transportation logistics revenue declining 62 basis points to 88.21% as compared to the year-earlier 88.83%. This is principally the result of increased average margins earned by the Company on ocean freight shipments in the fiscal 2008 nine months, which also accounted for a higher proportion of the nine month's shipping activity.
Selling, General and Administrative Expense. For the nine-month periods ended June 30, 2008 and 2007, selling, general and administrative expenses were $7,046,743 (12.08% of total revenue) and $5,658,942 (10.50%), respectively. This represents a year-over-year increase of $1,387,801, or 24.5%. The year-over-year dollar increase in SG&A resulted from incremental expenses related to additional employees added to the Company's payroll during the fiscal 2008 first nine months as a result of its asset acquisition in October 2007.
Income (Loss) Before Taxes. Janel reported a loss before taxes of $(366,584) for the nine months ended June 30, 2008 as compared to income before taxes of $402,706 for the nine months ended June 30, 2007. Charges in the first nine months of 2008 were $485,439 related to amortization of intangible assets pertaining essentially to the Company's asset acquisition in October 2007, and incremental interest expense during the 2008 first half of $87,437, pertaining principally to acquisition financing, (see Note 2 to financial statements), accounted for significantly more than the reported nine-months pretax loss.
Income Taxes. The effective income tax rate in both the 2008 and 2007 fiscal periods reflects the U.S. federal statutory rate and applicable state income taxes.
Net Income. Janel reported net loss available to common shareholders for the nine months ended June 30, 2008 of $(305,850), or $(0.018) per diluted share, down $528,473 as compared to a net income available to common shareholders of $222,623 or $0.013 per diluted share, for the nine months ended June 30, 2007. The same principal factors as described above for the first nine months of 2008 loss before taxes contributed to the period's net loss.
Liquidity and Capital Resources
Janel's ability to meet its liquidity requirements, which include satisfying its debt obligations and funding working capital, day-to-day operating expenses and capital expenditures depends upon its future performance, and is subject to general economic conditions and other factors, some of which are beyond its control.
During the nine months ended June 30, 2008, Janel's net working capital (current
assets minus current liabilities) decreased by approximately $(566,000), or
(13.2)%, reflecting an decrease in cash and cash equivalents of approximately
$881,000, plus increases in notes payable and the current portion of long-term
debt totaling $481,000, partially offset by increased accounts receivable of
approximately $715,000. Janel's cash flow performance for the nine months is not
necessarily indicative of future cash flow performance.
During the first quarter of 2008, to help finance the Company's acquisition of certain assets of Order Logistics, Inc., the Company borrowed $1,700,000 (including a temporary increase of $200,000) under this existing line of credit, while also issuing a note payable in the amount of $125,000. In addition, Janel entered into a term loan agreement with a different bank in the amount of $500,000 (see Note 2 to financial statements). The outstanding balance of notes payable of $1,825,000 bears interest at prime plus three-quarters of one percent (0.75%) per annum and is collateralized by substantially all the assets of Janel and personal guarantees by certain shareholders of the Company. As of December 31, 2008, the Company had taken down the full $500,000 of available borrowing under its three-year term loan agreement, bearing interest at prime plus one-half of one percent (0.50%) per annum, collateralized by substantially all the assets of Order Logistics, Inc. In April 2008, the outstanding bank note payable of $1,700,000 was converted into a term loan payable in monthly installments of $20,238 plus interest at the bank's prime rate plus 0.75% per annum, or LIBOR plus 2% per annum. In addition, the bank gave the Company a new credit line of $1,500,000, which expires on March 31, 2009.
Management believes that anticipated cash flow is sufficient to meet its current working capital and operating needs. However, the Company is also proceeding with its comprehensive growth strategy for fiscal 2008 and beyond, which encompasses a number of potential elements, as discussed below under "Current Outlook." To successfully execute several of these growth strategy elements in the coming months, the Company may need to secure additional financing estimated at up to $10,000,000. There is no assurance that such additional capital as necessary to execute the Company's business plan and intended growth strategy will be available or, if available, will be extended to the Company at mutually acceptable terms.
Current Outlook
Janel is primarily engaged in the business of providing full-service cargo transportation logistics management, including freight forwarding via air, ocean and land-based carriers, customs brokerage services, warehousing and distribution services, and other value-added logistics services and in the business of computer software sales, support and maintenance. Its 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.
Management has been engaged in reviewing the profitability of various customer accounts with a view toward eliminating accounts which are only marginally profitable, and focusing on accounts that are more profitable, with a view to increasing its overall profit margin. Based upon the results for the nine months ended June 30, 2008, and its current expectations for the final quarter of fiscal 2008, Janel projects that gross revenue from its currently existing accounts and businesses for its fiscal year ending September 30, 2008, will grow by approximately 5-10% to approximately $78-$82 million.
Janel is continuing to implement its business plan and strategy to increase revenue and profitability through its fiscal year ending September 30, 2008 and beyond. The Company's strategy, some of which has been implemented, includes plans to: open additional branch offices both domestically and in Southeast Asia; increase profit margins by avoiding low-margin business; introduce additional revenue streams for its existing headquarters and branch locations; proceed with negotiations and due diligence with privately held transportation-related firms which may ultimately lead to their acquisition by the Company; 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; and continue its efforts to reduce current and prospective overhead and operating expenses, particularly with regard to the efficient integration of any additional offices or acquisitions.
Certain elements of the Company's growth strategy, principally proposals for acquisition, are contingent upon the availability of adequate financing at terms acceptable to the Company. The Company is continuing in its efforts to secure long-term financing, but has to date been unable to complete any such financing transactions at terms it deems acceptable, and cannot presently anticipate when or if financing on acceptable terms will become available. Therefore, the implementation of significant aspects of the Company's strategic growth plan may be deferred beyond the originally anticipated timing.
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, and accruals for cargo insurance. 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 described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007.
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.
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 involve providing multiple services at destination including clearing shipments through customs by preparing required documentation, calculating and providing for payment of duties and other charges on behalf of the customers, arranging for any required inspections, and arranging for final delivery. These revenues are recognized upon completion of the services.
The movement of freight may require multiple services. In most instances 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."
B. Computer Software Sales, Support and Maintenance
The Company recognizes revenue, including multiple element arrangements, in accordance with the provisions of the SEC's Staff Accounting bulletin ("SAB") No. 104, Revenue Recognition, and the Financial Accounting Standards Board's ("FASB"), and EITF 00-21, Revenue Agreements with Multiple Deliverables. Revenue from the sale of the Company's products and services are recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. Amounts billed in excess of revenue recognized are recorded as deferred revenue in the balance sheet.
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 income:
a. accounts receivable valuation;
b. the useful lives of long-term assets;
c. the accrual of costs related to ancillary services the Company provides; and
d. accrual of tax expense on an interim basis.
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.
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