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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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As used throughout
this Report, “we,” “our,” “Janel”, “the Company” and similar words refers to Janel
Corporation and subsidiaries.
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 Corporation is
a holding company which operates in two industries. Its Janel Group operations provide logistics services for importers and exporters
worldwide through its wholly-owned subsidiaries. Following Janel Corporation’s March 2016 acquisition of INDCO Inc., Janel
Corporation also manufactures and sells light industrial mixers. Janel Corporation management focuses on significant capital allocation
decisions, corporate governance and supporting its business units where appropriate.
Janel Corporation
is domiciled in the state of Nevada and its corporate headquarters is located in Lynbrook, New York. The Company’s website
is located at
http://www.janelcorp.com
. The Company makes available through the website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC).
We expect to grow our
businesses organically and by completing acquisitions. We either will acquire businesses that fit within our existing freight forwarding
and logistics business portfolio, or we will expand our portfolio into new areas. Our acquisition strategy focuses on strong and
capable management teams, attractive existing business economics and businesses with stable and predictable earnings power that
can be purchased at a reasonable price.
Janel Corporation and
its controlled subsidiaries have 119 employees, including two employees in our corporate headquarters.
results
of operations
The following discussion
and analysis addresses the results of operations for the nine months ended June 30, 2016, as compared to the results of operations
for the nine months ended June 30, 2015. The discussion and analysis then addresses the liquidity and financial condition of the
Company, and other matters. On March 21, 2016 the Company completed the acquisition of INDCO, Inc. Refer to Note 3 to the Consolidated
Financial Statements.
Three months ended June 30, 2016
and 2015
Revenue.
Total revenue from continuing operations for the three months ended June 30, 2016 was $17,505,453, as compared to $16,650,954
for the three months ended June 30, 2015, an increase of $854,499 of 5.1%. This increase is mainly the result of the acquisitions
of INDCO and Liberty. Net revenue (revenues minus forwarding expenses and other direct manufacturing costs) from continuing operations
for the three months ended June 30, 2016 was $4,386,727, an increase of $1,597,514 or 57.3% as compared to net revenue of $2,789,213
for the three months ended June 30, 2015. This increase was primarily due to the associated increased gross margins of the recently
acquired INDCO business. The acquisition of the INDCO manufacturing operation provided for additional net revenue of $1,139,460
and is expected to continue to provide for higher consolidated revenue and margins as compared to prior periods.
Forwarding Expense
and Direct Manufacturing Costs.
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. Direct manufacturing costs
from continuing operations is primarily comprised of direct labor, materials and overhead costs applied to the INDCO operation.
For the three months
ended June 30, 2016, forwarding expense and direct costs from continuing operations decreased by $743,015, or 5.4%, to $13,118,726
as compared to $13,861,741 for the three months ended June 30, 2015, this is primarily the result of volume in the transportation
segment and direct costs related to the manufacturing segment. As a percentage of revenue, forwarding expenses were decreased to
74.9% for the three months ended June 30 2016, down from 83.2% for the three months ending June 30, 2015, an 8.3 percentage change.
This percentage decrease is principally the result of the loss of certain low margin transportation customers as well as INDCO’s
higher margins as compared to prior periods..
Selling, General
and Administrative Expense.
For the three months ended June 30, 2016, selling, general and administrative expenses from
continuing operations were $3,460,936 as compared to $2,247,701 in the same period prior year. This represents an increase of $1,213,236,
or 54.0% when compared to the prior period. As a percentage of revenue, selling, general and administrative expenses were 19.8%
and 13.5% of revenue for the three months ended June 30, 2016 and 2015, respectively. This 6.3 percentage increase is primarily
due to certain overhead expenditure additions including acquisition and consolidation expenses as well as a higher expenditures
as a percentage of revenue in the manufacturing segment.
Depreciation and
Amortization
. For the three months ended June 30, 2016 and 2015, depreciation and amortization expenses from continuing operations
were $229,573 and $80,434, respectively. This is an increase of $149,149 or 185.5% and is the result of increased amortization
expense associated with intangible assets in connection with the Liberty and INDCO acquisitions, as well as other fixed assets
obtained and depreciated from the Liberty and INDCO acquisitions (refer to Notes 3 and 4 to the Consolidated Financial Statements).
Interest Expense
.
For the three months ended June 30, 2016 and 2015, interest expense from continuing operations was $199,892 and $116,937, respectively.
This increase of $82,955 is primarily the result of higher interest costs resulting from borrowings under bank credit facilities
during the three months ended June 30, 2016. These additional borrowings were used as part of the consideration for the acquisition
of Liberty, and to pay the interest on the First Merchants’ loan associated with the INDCO acquisition. Included in interest
expense for the three months ended June 30, 2016 is imputed interest amortization in the amount of $14,168 which is in connection
with the Alpha acquisition (refer to Note 3 to the Consolidated Financial Statements).
Income From Continuing
Operations Before Income Taxes.
For the reasons stated above, the Company had income of $522,662 for the three months
ended June 30, 2016, compared to $349,908 for the three months ended June 30, 2015.
Income Taxes.
The company recorded a net income tax provision of $36,604 and $17,773 for the three months ended June 30, 2016 and 2015, respectively.
Both fiscal years 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, 2016 and 2015 reflect a loss from discontinued
operations of ($1,668) and ($45,778), respectively. Refer to Note 7 to the Consolidated Financial Statements.
Net Income.
For the three months ended June 30, 2016 the Company recorded net income of $484,390, and for the three months ended June 30,
2015, the Company recorded net income of $286,357. Following payment of dividends on the Company’s Preferred Stock and reduction
of non-controlling interest profits, net income available to common shareholders for the three months ended June 30, 2016 was $315,240
or $0.51 per diluted share and net income available to common shareholders for the three months ended June 30 2015 was $226,044
or $0.38 per diluted share.
Nine months ended June 30, 2016 and
2015
Revenue.
Total revenue from continuing operations for the nine months ended June 30, 2016 was $56,728,456, as compared to $47,182,227
for the nine months ended June 30, 2015, an increase of $9,546,229 or 20.2%. This increase is mainly the result of the acquisitions
of Liberty and INDCO. Net revenue (revenues minus forwarding expenses and other direct manufacturing costs) from continuing operations
for the nine months ended June 30, 2016 was $11,289,820, an increase of $3,311,426 or 41.5% as compared to net revenue of $7,978,394
for the nine months ended June 30, 2015. This increase was due to increased freight forwarding business through the Liberty acquisition.
The acquisition of the INDCO manufacturing operation provides four months’ of additional net revenues of $1,552,973 since
acquisition and is expected to continue to provide for higher consolidated revenue and margins as compared to prior periods.
Forwarding Expense
and Direct Manufacturing Costs.
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. Direct manufacturing costs
from continuing operations is primarily comprised of direct labor, materials and overhead costs applied to the INDCO operation.
For the nine months
ended June 30, 2016, forwarding expense and direct costs from continuing operations increased by $6,234,803, or 15.9%, to $45,438,636
as compared to $39,203,833 for the nine months ended June 30, 2015. This is primarily the result of higher revenues from the Liberty
and INDCO acquisitions. As a percentage of revenue, forwarding expenses decreased to 80.1% for the nine months ended June 30 2016,
from 83.1% for the nine months ending June 30, 2015, a 3.0 percentage change. This percentage decrease is principally the result
of the loss of certain low margin transportation customers who historically carried higher than average direct costs as a percentage
of revenue. The Company anticipates that INDCO’s higher margins will contribute to improve consolidated margins as compared
to prior periods.
Selling, General
and Administrative Expense.
For the nine months ended June 30, 2016 and 2015, selling, general and administrative expenses
from continuing operations were $9,798,308 and $7,034,517, respectively. This is an increase of $2,764,392, or 34.6% when compared
to the prior year. Included in the nine months ended June 30, 2016 is an expense in the amount of $91,492 for the issuance of stock
options (refer to Note 9c to the Consolidated Financial Statements). As a percentage of revenue, selling, general and administrative
expenses were 19.9% and 16.9% of revenue for the nine months ended June 30, 2016 and 2015, respectively. This 3.0 percentage increase
which is primarily the result of certain overhead expenditure additions including acquisition and consolidation expenses as well
as the manufacturing segment containing higher expenses as a percentage of revenue..
Depreciation and
Amortization
. For the nine months ended June 30, 2016 and 2015, depreciation and amortization expenses from continuing operations
were $465,507 and $238,135, respectively. This is an increase of $227,372 or 95.5% and is the result of increased amortization
expense associated with intangible assets in connection with the Liberty and INDCO acquisitions as well as other fixed assets obtained
and depreciated from the Liberty acquisition (refer to Notes 3 and 4 to the Consolidated Financial Statements).
Interest Expense
.
For the nine months ended June 30, 2016 and 2015, interest expense from continuing operations was $476,665 and $373,612, respectively,
an increase of $103,053. This increase is primarily the result of higher interest costs resulting from increased borrowings under
bank credit facilities during the nine months ended June 30, 2016 versus 2015. These additional borrowings which were used as part
of the consideration for the acquisition of Liberty. Also included in interest expense for the nine months ended June 30, 2016
is imputed interest amortization in the amount of $41,954 in connection with the Alpha acquisition (refer to Note 6 to the Consolidated
Financial Statements).
Income From Continuing
Operations Before Income Taxes.
For the reasons stated above, the Company recognized income of $611,332 for the nine
months ended June 30, 2016, compared to income of $346,285 for the nine months ended June 30, 2015.
Income Taxes.
The company recorded a net income tax provision of $75,181 and $25,773 for the nine months ended June 30, 2016 and 2015, respectively.
Both fiscal years 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, 2016 and 2015 reflect a loss from discontinued
operations of $184,845 and $128,129, respectively. Refer to Note 7 to the Consolidated Financial Statements.
Net Income.
For the nine months ended June 30, 2016 the Company recorded a net income of $351,306, and for the nine months ended June 30,
2015, the Company recorded a net income of $192,363. Following payment of dividends on the Company’s Preferred Stock and
reduction of non-controlling interest profits, net income available to common shareholders for the nine months ended June 30, 2016
was $39,505 or $0.06 per diluted share and net income available to common shareholders for the nine months ended June 30 2015 was
$11,423 or $0.02 per diluted share.
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 ending June 30, 2016 is not necessarily indicative of future cash flow performance.
As of June 30, 2016,
and compared with the prior fiscal year, the Company’s cash and cash equivalents decreased by $366,846 or 38.9%, to $575,901
from $942,748. During the nine months ended June 30, 2016, Janel’s net working capital (current assets minus current liabilities)
decreased by ($501,906) to a negative ($5,514,197) at June 30, 2016, from a negative ($5,012,291) at September 30, 2015. This
decrease is primarily due to the decrease in Accounts Receivable relative to Accounts Payable.
Cash flows from
continuing operating activities.
Net cash provided by continuing operating activities for the nine months ended June 30, 2016
was $854,725 and net cash provided by continuing operating activities for the nine months ended June 30 2015 was $773,411. The
change was principally driven by an increase in the collection of outstanding accounts receivable, and deferment of Accounts Payable
as well as improved net income for the current period compared to the prior year.
Cash flows from
discontinued operating activities.
Net cash used in discontinued operating activities was $184,845 for the nine months ended
June 30, 2016 and $128,129 for the nine months ending June 30, 2015.
Cash flows from
investing activities
. Net cash used in investing activities for the nine months ended June 30, 2016, primarily due to the acquisition
of INDCO was ($11,042,213) as compared to ($50,122) for the nine months ending June 30, 2015.
Cash flows from
financing activities
. Net cash provided by financing activities was $9,820,642 for the nine months ended June 30, 2016 and
net cash used in financing activities was ($1,064,329) for the nine months ended June 30 2015. The cash provided by financing activities
for the nine months ending June 30, 2016 was primarily the result of the debt instruments and newly subscribed Preferred Series
C shares used to finance the purchase of INDCO as well as increased borrowings on the bank line of credit, offset by the first
of three annual earn out payments due on the 2014 Alpha acquisition. The cash provided by financing activities for the nine months
ending June 30, 2015 was primarily due to decreased borrowings under the bank line of credit.
Presidential Financial
Borrowing Facility.
On March 27, 2014, the Company and its wholly-owned subsidiaries entered into a Loan and Security Agreement
with Presidential Financial Corporation (“Presidential”), which, following several amendments, now provides for an
up to $10.0 million revolving line of credit, limited to 85% of the aggregate outstanding eligible accounts receivable, subject
to adjustment as set forth in the Loan and Security Agreement (the “Presidential Facility”). Interest accrues at an
annual rate equal to 3.25 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 obligations under the Presidential facility are secured by all of the assets of the Company, AILP, PCL
and Liberty. The Presidential Facility will expire on March 27, 2018 (subject to earlier termination as provided in the Loan and
Security Agreement) unless renewed. As of June 30, 2016, there were outstanding borrowings of $6,462,346 under the Presidential
Facility (which represented 64.6% of the amount available thereunder) out of a total amount available for borrowing under the Presidential
Facility of $10,000,000. The agreement requires, among other things, that the Company, on a monthly basis, maintain a “minimum
fixed charge covenant ratio” and “tangible net worth,” both as defined.
First Merchants Bank
Credit Facility. On March 21, 2016, INDCO executed a Credit Agreement with First Merchants Bank (“First Merchants”)
with respect to a $6 million Term Loan and $1.5 million (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 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 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 the Company. The First Merchants credit facilities
will expire on the fifth anniversary of the loans (subject to earlier termination as provided in the Credit Agreement) unless renewed.
Working Capital
Requirements.
Our Janel Group business’s cash needs are currently met by commercial bank credit facilities and cash on
hand. Actual working capital needs for the short and long terms will depend upon numerous factors, including operating results,
the availability of a revolving line of credit, competition, and the cost associated with growing Janel Group, either internally
or through acquisition, none of which can be predicted with certainty. If results of operations and availability under our bank
line of credit are insufficient to meet cash needs, Janel Group will be required to obtain additional investment capital or debt
funding to continue operations. Janel Group’s cash needs are currently met by the Presidential Facility and cash on hand.
INDCO’s cash needs are currently met by the First Merchants credit facilities and cash on hand. As of June 30, 2016, the
Company had $1,215,142 available under its $10.0 million Presidential Facility, $500,000 under its First Merchant’s Revolver
loan and $575,901 in cash from operations and cash on hand. On October 30 2013, the Company 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 $4.00 per share. 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
Full Service Cargo Transportation
Logistics Management
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.
Industrial Mixer Manufacturing
INDCO was purchased
as of March 1 2016 and consequently four month’s results of operations are contained herein. Results of operations are also
largely affected by the general economic cycle, as INDCO has a large and diverse customer base dependent on consumer retail markets
in many industries including paint, food, pharmaceutical, chemical and others. 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
holidays, consumer demand, economic conditions, the growth and diversification of its larger industrial customers 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.
Janel is progressing
with the implementation of its business plan and strategy to grow its revenue and profitability for fiscal 2016 and beyond through
several avenues. Janel Corporation expects to continue to grow its businesses in part by completing acquisitions. Either we will
acquire businesses that fit within our existing freight forwarding and logistics business portfolio, or we will expand our portfolio
into new areas. In either case, there can be no assurance:
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that Janel’s financial condition
will be sufficient to support the funding needs of an expansion program;
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that acquisitions will be successfully
consummated or will enhance profitability; or
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that any expansion opportunities will
be available upon reasonable terms.
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We expect future acquisitions
to encounter risks similar to the risks that past acquisitions have had such as:
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difficulty in assimilating the operations
and personnel of the acquired businesses;
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potential disruption of ongoing business;
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the inability of management to realize
the projected operational and financial benefits from the acquisition or to maximize financial and strategic benefits through the
successful incorporation of acquired personnel and clients;
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the maintenance of uniform standards,
controls, procedures and policies; and
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the impairment of relationships with employees
and clients as a result of any integration of new management personnel.
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We expect that any
future acquisitions could provide for consideration to be paid in cash, stock or a combination of cash and stock. There can be
no assurance that any of these acquisitions will be accomplished. If an entity we acquire is not efficiently or completely integrated
with us, then our business, financial condition and operating results could be materially adversely affected.
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. 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.
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’s transportation business, Janel Group Inc. (“JGI”).,
is a non-asset-based carrier and accordingly does not own transportation assets. JGI 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, JGI
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 JGI acts as a freight consolidator. Ocean freight revenues include the charges
for carrying the shipments when JGI acts as a Non-Vessel Operating Common Carrier (NVOCC). In each case, JGI is acting as an indirect
carrier. When acting as an indirect carrier, JGI 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, JGI 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 JGI 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 JGI 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.
The movement of freight
may require multiple services. In most instances JGI 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.”
A. Industrial Mixer Manufacturing
Revenues are derived
from the manufacture and shipment of industrial mixers to commercial customers. Revenue is recognized upon transfer of title to
the customer and is recorded net of estimated provisions for discounts and returns.
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:
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a.
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accounts receivable valuation;
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c.
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the useful lives of long-term assets;
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d.
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the accrual of costs related to ancillary services the Company provides;
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e.
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accrual of tax expense on an interim basis; and
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f.
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deferred tax valuation allowance.
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Management believes
that the methods utilized in all of these areas are reasonable 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.