JANEL CORP

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data)

The accompanying interim unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of Article 8 of Regulation S-X and the instructions to Form 10-Q of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Janel Corporation (the “Company” or “Janel”) believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full fiscal year, or any other period. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Form 10-K as filed with the Securities and Exchange Commission.

Business Description

Janel is a holding company with subsidiaries inthree business segments: Logistics, Life Sciences and Manufacturing. The Company strives to create shareholder value primarily through three strategic priorities: supporting its businesses’ efforts to make investments and to build long-term profits; allocating Janel’s capital at high risk-adjusted rates of return; and attracting and retaining exceptional talent.

Management at the holding company focuses on significant capital allocation decisions, corporate governance and supporting Janel’s subsidiaries where appropriate. Janel expects to grow through its subsidiaries’ organic growth and by completing acquisitions. We plan to either acquire businesses within our existing segments or expand our portfolio into new strategic segments. Our acquisition strategy focuses on reasonably-priced companies with strong and capable management teams, attractive existing business economics and stable and predictable earnings power.

Revenue and revenue recognition

Logistics

Revenues are recognized upon transfer of control of promised services to customers. With respect to its Logistics segment, the Company has determined that in general each shipment transaction or service order constitutes a separate contract with the customer. When the Company provides multiple services to a customer, different contracts may be present for different services.

The Company typically satisfies its performance obligations as services are rendered at a point in time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed at a point in time during the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one- to two-month period.

The Company evaluates whether amounts billed to customers should be reported as gross or net revenues. Generally, revenues are recorded on a gross basis when the Company is acting as principal and is primarily responsible for fulfilling the promise to provide the services, when it has discretion in setting the prices for the services to the customers, and the Company has the ability to direct the use of the services provided by the third party. Revenues are recognized on a net basis when the Company is acting as agent and we do not have latitude in carrier selection or to establish rates with the carrier.

In the Logistics segment, the Company disaggregates its revenue by itsfour primary service categories: trucking, air, ocean and customs brokerage and other. The Company has aggregated customs brokerage and other for the periods ended December 31, 2023 and 2022. A summary of the Company’s revenues disaggregated by major service lines for the three months ended December 31, 2023 and 2022 was as follows (in thousands):

Life Sciencesand Manufacturing

Revenues from the Company’s Life Sciences segment are derived from the sale of high-quality monoclonal and polyclonal antibodies, diagnostic reagents and diagnostic kits and other immunoreagents for biomedical research and antibody manufacturing. Revenues from the Company’s Manufacturing segment, which is comprised of Indco, a majority-owned subsidiary of the Company that manufactures and distributes mixing equipment and apparatus for specific applications within various industries, are derived from the engineering, manufacture and delivery of specialty mixing equipment and accessories. Revenues for Life Sciences and Manufacturing are recognized when products are shipped, and risk of loss is transferred to the carrier(s) used.

Fiscal 2023 Acquisitions

Life Sciences

On November 1, 2022, the Company completed a business combination whereby it acquired all of the outstanding stock of ImmunoBioScience Corporation (“IBS”), for an aggregate purchase price of $3,755, net of $153 cash received. At closing, $3,000 was paid in cash, $250 was due to the former stockholder of IBS as a deferred acquisition payment upon integration, $300 was recorded as a preliminary earnout consideration (not to exceed $750) and $205 was recorded as a preliminary working capital adjustment. The acquisition was funded with cash provided by normal operations, and the results of operations of IBS are included in Janel’s condensed consolidated results of operations since the date of the acquisition. In connection with the combination, the Company recorded an aggregate of $1,468 in goodwill and $1,680 in other identifiable intangibles. Supplemental pro forma information has not been provided as the acquisition did not have a significant impact on Janel’s condensed consolidated results of operations, individually or in aggregate. IBS is a developer and manufacturer of high-quality reagents used by research and diagnostic customers. IBS was founded in 2007 and is headquartered in Mukilteo, Washington. The acquisition of IBS was completed to expand our product offerings in our Life Sciences segment.

On March 2, 2023, the Company completed a business combination whereby it acquired all of the outstanding stock of Stephen Hall PhD, Ltd. (“SH”) for an aggregate purchase price of $600. At closing, $500 was paid in cash and $100 was due to the former stockholder of SH as a deferred acquisition payment upon integration. The acquisition was funded with cash provided by normal operations, and the results of operations of SH are included in Janel’s condensed consolidated results of operations since the date of the acquisition. In connection with the combination, the Company recorded an aggregate of $181 in goodwill and $202 in other identifiable intangibles. Supplemental pro forma information has not been provided as the acquisition did not have a significant impact on Janel’s condensed consolidated results of operations, individually or in aggregate. SH is a developer and manufacturer of antibodies and cell culture media for research and diagnostic uses. SH was founded in 2011 and is headquartered in Lafayette, Indiana. The acquisition of SH was completed to expand our product offerings in our Life Sciences segment.

On May 22, 2023, the Company acquired all the rights, title and interests to a royalty agreement for certain antibody products for a purchase price of $500. The Company recorded this acquisition as a royalty asset, which is included in intangible assets in the accompanying condensed consolidated balance sheet(reclassed from Security deposits and other long-term assets in the current period) and will be amortized over the estimated life of ten years.

Inventories consisted of the following (in thousands):

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

The composition of the intangible assets balance at December 31, 2023 and September 30, 2023 is as follows(in thousands):

Amortization expense for the three months ended December 31, 2023 and 2022 was $538 and $526, respectively.

The Company’s goodwill carrying amounts relate to acquisitions in the Logistics, Life Sciences and Manufacturing business segments.

The composition of the goodwill balance at December 31, 2023 and September 30, 2023 was as follows (in thousands):

The wholly-owned subsidiaries that comprise the Company’s Logistics segment (collectively, the “Janel Group Borrowers”), with the Company as a guarantor, have a Loan and Security Agreement (as amended, the “Santander Loan Agreement”) with Santander with respect to a revolving line of credit facility (the “Santander Facility”).

On January 30, 2023, the Santander Loan Agreement was further amended by the Third Amendment to the Amended and Restated Loan and Security Agreement (the “Third Santander Amendment”). As amended by the terms of the Third Santander Amendment, the percentage of the Borrowers’ eligible accounts receivable used to calculate the borrowing base under the Santander Loan Agreement was increased from 85% to 90% for Domestic Insured Accounts (as defined in the Third Santander Amendment), subject to adjustments set forth in the Santander Loan Agreement.

On April 25, 2023, in connection with an amendment to the Credit Agreement entered into with First Merchants Bank (“First Merchants”) as described further below, we entered into the Fourth Amendment to the Amended and Restated Loan and Security Agreement (the “Fourth Santander Amendment”). The Fourth Santander Amendment (i) included modifications to address the amendments made to the First Merchants Credit Facilities (as defined below) and the consolidation of the debt thereunder and (ii) terminated the subordination agreement relating to the Company’s guarantee of the First Merchants Credit Facilities (as defined below).

On August 22, 2023, we entered into the Fifth Amendment to the Santander Loan Agreement (the “Fifth Santander Amendment”). The Fifth Santander Amendment permitted the Company, in the ordinary course of business, to guaranty obligations of subsidiaries on an unsecured basis in an aggregate amount not to exceed $4,000 and related modifications to certain negative covenants.

On December 1, 2023, in connection with an amendment (the “Purchase Agreement Amendment”) to that certain Membership Interest Purchase Agreement dated as of September 21, 2021 (the “Purchase Agreement”) among Janel Group, Inc. (“Janel Group”), a wholly-owned subsidiary of the Company, Expedited Logistics and Freight Services, LLC (“ELFS”) and former shareholders of ELFS (the “ELFS Sellers”), (i) the Janel Group Borrowers and Santander entered into an Acknowledgment and Consent Agreement pursuant to which Santander consented to the Purchase Agreement Amendment and the effect of the modifications thereunder on the Santander Loan Agreement and (ii) the ELFS Sellers and Santander entered into an Acknowledgment and Consent Agreement pursuant to which Santander consented to the Purchase Agreement Amendment and the effect of the modifications thereunder on the Subordination Agreement (as defined in the Santander Loan Agreement) between Santander and the ELFS Sellers.

On December 21, 2023, we entered into the Sixth Amendment to the Amended and Restated Loan and Security Agreement, which modified the reporting due date of the monthly borrowing base calculation from the fifth day to the fifteenth day of each month.

The Santander Loan Agreement matures on September 21, 2026. Interest accrues on the Santander Facility at an annual rate equal to theone-month SOFR plus 2.75%. The Janel Group Borrowers’ obligations under the Santander Facility are secured by all of the assets of the Janel Group Borrowers, while the Santander Loan Agreement contains customary terms and covenants. As a result of its terms, the Santander Facility is classified as a current liability on the consolidated balance sheet.

At December 31, 2023, outstanding borrowings under the Santander Facility were $16,252, representing 46.4% of the $35,000 available subject to limitations thereunder, and interest was accruing at an effective interest rate of 7.68%.

At September 30, 2023, outstanding borrowings under the Santander Facility were $18,759, representing 53.6% of the $35,000 available thereunder, and interest was accruing at an effective interest rate of 7.60%.

The Company was in compliance with the financial covenants defined in the Santander Loan Agreement at both December 31, 2023 and September 30, 2023.

On February 29, 2016, Indco entered into a Credit Agreement (as amended, the “Prior First Merchants Credit Agreement”) with First Merchants.

On April 25, 2023, Indco and certain other Subsidiaries of the Company that are part of the Life Sciences and Manufacturing segments (together with Indco, the “Borrowers” and each, a “Borrower”), entered into a Credit Agreement (the “First Merchants Credit Agreement”) with First Merchants. The First Merchants Credit Agreement constitutes an amendment and restatement of the Prior First Merchants Credit Agreement. The credit facilities provided under the First Merchants Credit Agreement (the “First Merchants Credit Facilities”) consist of a $3,000 revolving loan (limited to the borrowing base and reserves), a $5,000 acquisition loan, a $6,905 Term A loan and a $620 Term B loan as a continuation of the mortgage loan under the Prior First Merchants Credit Agreement. Interest accrues on the outstanding revolving loan, Term A loan and acquisition loan at an annual rate equal toone-month adjusted term SOFR plus either (i)2.75% (if the Borrowers’ total funded debt to EBITDA ratio is less or equal to 1.75:1.00) or (ii)3.50% (if the Borrowers’ total funded debt to EBITDA ratio is greater than to 1.75:1.00). Interest accrues on the Term B loan at an annual rate of 4.19%. The Borrowers’ obligations under the First Merchants Credit Facilities are secured by all of the Borrowers’ real property and other assets, and are guaranteed by the Company, and the Company’s guarantee of the Borrowers’ obligations is secured by a pledge of the Company’s equity interests in certain of the Borrowers. The revolving loan portion will expire on August 1, 2027, the Term A loan portion will mature on April 25, 2033, and the Term B loan portion will mature on July 1, 2025. The acquisition loan will permit multiple draws until October 25, 2024, at which point the outstanding principal amount will amortize, with all remaining amounts of the acquisition loan due at maturity on April 25, 2029.

As of December 31, 2023, there were $500 of outstanding borrowings under the acquisition loan, $250 of outstanding borrowings under the revolving loan, $5,645 of outstanding borrowings under the Term A loan and $604 of outstanding borrowings under the Term B loan, with interest accruing on the acquisition loan and revolving loan at an effective interest rate of 8.22% and on the Term A loan and Term B loan at an effective interest rate of 8.22% and 4.19%, respectively.

As of September 30, 2023, there were $500 of outstanding borrowings under the acquisition loan, $450 of outstanding borrowings under the revolving loan, $6,235 of outstanding borrowings under the Term A loan and $610 of outstanding borrowings under the Term B loan, with interest accruing on the acquisition loan and revolving loan at an effective interest rate of 8.18% and on the Term A loan and Term B loan at an effective interest rate of 8.18% and 4.19%, respectively.

The Company was in compliance with the financial covenants defined in the First Merchants Credit Agreement at December 31, 2023 and September 30, 2023.

The table below sets forth the total long-term debt, net of capitalized loan fees of $349 for the First Merchants Credit Agreement (in thousands):

(A) ICT Subordinated Promissory Note

Aves Labs, Inc., a wholly-owned subsidiary of the Company, is the obligor on a fixed 0.5% subordinated promissory note in the amount of $1,850 (the “ICT Subordinated Promissory Note”) issued to the former owner of ImmunoChemistry Technologies, LLC (“ICT”), in connection with a business combination whereby the Company acquired all of the membership interests of ICT. The ICT Subordinated Promissory Note is payable insixteen scheduled quarterly installments of principal and interest beginning March 4, 2021, matures on December 4, 2024, and may be prepaid, in whole or in part, without premium or penalty.

The ICT Subordinated Promissory Note is subordinate to and junior in right of payment for principal interest premiums and other amounts payable to Santander and First Merchants.

As of December 31, 2023, the amount outstanding under the ICT Subordinated Promissory Note was $221, net of a $28 discount, which is included in the current portion of subordinated promissory notes.

As of September 30, 2023, the amount outstanding under the ICT Subordinated Promissory Note was $312, of which $288 is included in the current portion of subordinated promissory notes and $24 is included in the long-term portion of subordinated promissory notes.

(B) ELFS Subordinated Promissory Notes

Janel Group is the obligor onfour fixed 4% subordinated promissory notes totaling $6,000 in the aggregate (together, the “ELFS Subordinated Promissory Notes”), payable to certain former shareholders of ELFS, in connection with the Company’s business combination whereby it acquired all the membership interest of ELFS and its related subsidiaries. All of the ELFS Subordinated Promissory Notes are guaranteed by the Company and are subordinate to and junior in right of payment for principal, interest, premiums and other amounts payable to the Santander Facility and the First Merchants Credit Facilities. The ELFS Subordinated Promissory Notes are payable intwelve equal consecutive quarterly installments of principal together with accrued interest. Beginning October 15, 2021 and on the same day of the next eight consecutive calendar quarters, payment of accrued interest and unpaid interest is due to the former shareholders. Beginning October 15, 2023 and on the same day of the next twelve consecutive calendar quarters, payment of principal together with accrued interest and unpaid interest is due to the former shareholders. In June 2022, the principal amount of the ELFS Subordinated Promissory Notes was adjusted to $5,100 due to a revised working capital adjustment of $900.

On December 1, 2023, in connection with the Purchase Agreement Amendment described above, the Company extended the ELFS Subordinated Promissory Notes maturity bytwo years and restored the working capital adjustment (as defined in the Purchase Agreement) by $900, which increased the principal amount of the ELFS Subordinated Promissory Notes to $6,000. The Company evaluated the accounting treatment related to the amendment and determined the agreements are substantially different; accordingly, the Company extinguished the original subordinated promissory notes and recorded the amended ELFS Subordinated Promissory Notes at a fair value of $4,654. As a result, the Company recorded a debt discount of approximately $921 and a $21 gain on extinguishment, which is included in other income expense.

As of December 31, 2023, the gross principal amount outstanding under the ELFS Subordinated Promissory Notes was $5,575 ($4,654 net of a $921 unamortized discount), of which $1,174 was included in the current portion of subordinated promissory notes and $3,480 was included in the long-term portion of subordinated promissory notes.

As of September 30, 2023, the principal amount outstanding under the ELFS Subordinated Promissory Notes was $5,100, of which $1,700 was included in the current portion of subordinated promissory notes and $3,400 was included in the long-term portion of subordinated promissory notes.

Preferred Stock

Series C Cumulative Preferred Stock

Shares of the Company’s Series C Cumulative Preferred Stock (the “Series C Stock”) were initially entitled to receive annual dividends at a rate of 7% per annum of the original issuance price of $500, when and if declared by the Company’s board of directors, with such rate to increase by 2% annually beginning on the third anniversary of issuance of such Series C Stock to a maximum rate of 13%. By the filing of the Certificate of Amendment to the Company’s Certificate of Incorporation on March 31, 2022, the annual dividend rate decreased to 5% per annum of the original issuance price, when and if declared by the Company’s board of directors, and will increase by 1% beginning on January 1, 2024. Such rate is to increase on each January 1 thereafter forfour years to a maximum rate of 9%. The dividend rate of the Series C Stock as of each December 31, 2023 and September 30, 2023 was 5%.

On October 30, 2013, the board of directors of the Company adopted the Company’s 2013 Non-Qualified Stock Option Plan (the “2013 Option Plan”) providing for options to purchase up to 100,000 shares of common stock for issuance to directors, officers, employees of and consultants to the Company and its subsidiaries.

On September 21, 2021, the board of directors of the Company adopted the Amended and Restated 2017 Janel Corporation Equity Incentive Plan (the “Amended Plan”) pursuant to which non-statutory stock options, restricted stock awards and stock appreciation rights of the Company’s Common Stock may be granted to employees, directors and consultants to the Company and its subsidiaries. The Amended Plan increased the number of shares of Common Stock that may be issued pursuant to the Amended Plan from 100,000 to 200,000 shares of Common Stock of the Company and was updated to reflect certain other non-substantive amendments.

Total stock-based compensation for the three months ended December 31, 2023 and 2022 amounted to $68 and $51, respectively, and is included in selling, general and administrative expense in the Company’s statementsof operations.

Options

The aggregate intrinsic value in the above table was calculated as the difference between the closing price of the Company’s common stock at December 31, 2023 of $25.00 per share and the exercise price of the stock options that had strike prices below such closing price.

As of December 31, 2023, there was approximately $479 of total unrecognized compensation expense related to the unvested employee stock options which is expected to be recognized over a weighted average period of 1.73 years.

Liability classified share-based awards

Duringthe three months ended December 31, 2023 and fiscal year ended September 30, 2023, there wereno options granted andno options were exercised with respect to Indco’s common stock.

The following table provides a reconciliation of the basic and diluted earnings per share (“EPS”) computations for the three months ended December 31, 2023 and 2022:

Thecomputation for the diluted number of shares excludes unexercised stock options that are anti-dilutive. There were 22.5 and 10 anti-dilutive shares for the three-month periods ended December 31, 2023 and 2022, respectively.

The reconciliation of income tax computed at the Federal statutory rate to the provision for income taxes from continuing operations for the three month periods ended December 31, 2023 and 2022 was as follows (in thousands):

As referenced above in Note 1, the Company operates inthree reportable segments: Logistics, Life Sciences and Manufacturing.

The Company’s Chief Executive Officer regularly reviews financial information at the reporting segment level in order to make decisions about resources to be allocated to the segments and to assess their performance.

The following tables present selected financial information about the Company’s reportable segments and Corporate for the purpose of reconciling to the consolidated totals for the three months ended December 31, 2023:

The following tables present selected financial information about the Company’s reportable segments and Corporate for the purpose of reconciling to the consolidated totals for the three months ended December 31, 2022:

Recurring Fair Value Measurements

The following table presents the Company’s assets that are measured at fair value on a recurring basis based on the three-level valuation hierarchy (in thousands):

On August 19, 2022, the Company acquired 1,108,000 shares of the common stock, par value $0.001 per share, of Rubicon Technology, Inc. (“Rubicon”), at a price per share of $20.00, in a cash tender offer. As of each of December 31, 2023 and September 30, 2023, the Company held 46.6% of the total issued and outstanding shares of Rubicon and reported its investment under the fair value method pursuant to ASC 320. Management determined that it was appropriate to carry its investment in Rubicon at fair value because the investment was traded on the NASDAQ stock exchange through January 2, 2023, began trading on the OTCQB Capital Market on January 3, 2023 and had daily trading activity, the combination of which provide a better indicator of value. The investment in Rubicon is re-measured at the end of each quarter based on the trading price and any change in the value is reported on the income statement as an unrealized gain or loss on marketable securities in other income (expense).

On October 4, 2023, Rubicon announced that it had authorized a cash dividend of $1.10 per share of common stock of Rubicon and set October 16, 2023 as the record date for the distribution. On October 23, 2023, the Company received $1,219 in dividends and recorded a fair value adjustment to its investment in Rubicon of $709, which is included in other income and expense.

The following table sets forth a summary of the changes in the fair value of the Company’s investment in Rubicon, which is measured at fair value on a recurring basis utilizing Level 1 assumptions in its valuation (in thousands):

The following table presents the Company’s liabilities that are measured at fair value on a recurring basis based on the three-level valuation hierarchy (in thousands):

These liabilities relate to the estimated fair value of earnout payments to former IBS and ELFS Sellers for the periods ending December 31, 2023 and September 30, 2023.

On December 1, 2023, in connection with the Purchase Agreement Amendment among Janel Group and the ELFS Sellers described above, the parties agreed to certain modifications fixing the amount of theremaining earnout payments to ELFS in earnout years three and four to $1,078 each year. As a result the measurement of the earnout liability became a Level 1 fair value measurement based on the present value of the negotiated payments.

The current and non-current portions of the fair value of the contingent earnout liabilities at December 31, 2023 were $740 and $1,996, respectively. The current and non-current portions of the fair value of the contingent earnout liabilities at September 30, 2023 were $592 and $1,738, respectively.

The following table sets forth a summary of the changes in the fair value of the Company’s contingent earnout liabilities, which are measured at fair value on a recurring basis utilizing Level 3 assumptions in their valuation (in thousands):

The Company determined the fair value of the Level 3 contingent earnout liability using forecasted results through the expected earnout periods. The principal inputs to the approach include expectations of the specific business’s revenues in fiscal years 2024 through 2025 using an appropriate discount rate. Given the use of significant inputs that are not observable in the market, the contingent earnout liability is classified within Level 3 of the fair value hierarchy.

The Company has operating leases for office and warehouse space in all locations where it conducts business. As of December 31, 2023, the remaining terms of the Company’s operating leases were betweenone and 123 months and certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include the minimum lease payments that the Company is obligated to make under the non-cancelable initial terms of the leases as the renewal terms are at the Company’s option and the Company is not reasonably certain to exercise those renewal options at lease commencement.

The components of lease cost for the three-month periods ended December 31, 2023 and 2022 were as follows (in thousands):

Rent expense for the three months ended December 31, 2023 and 2022 was $699 and $571, respectively.

Operating lease right of use assets, current portion of operating lease liabilities and long-term operating lease liabilities reported in the condensed consolidated balance sheets for operating leases as of December 31, 2023 were $6,853, $1,935 and $5,221, respectively.

Operating lease right of use assets, current portion of operating lease liabilities and long-term operating lease liabilities reported in the condensed consolidated balance sheets for operating leases as of September 30, 2023 were$7,460, $2,020 and $5,689, respectively.

As of December 31, 2023 and September 30, 2023, the weighted-average remaining lease term and the weighted-average discount rate related to the Company’s operating leases were 5.8 years and 4.53% and 5.9 years and 4.01%, respectively.

Future minimum lease payments under non-cancelable operating leases as of December 31, 2023 were as follows (in thousands):

On January 10, 2024, the agreement governing the First Merchants Credit Facilities was amended to provide for, among other changes, permitted affiliate loans, provided that availability on its revolving loan both before and after giving effect to any such loan is not less than $1,000 and the maturity of such permitted affiliate loans are not to exceed fourteen days from disbursement.