UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
Commission File No.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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(The Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of May 19, 2023, there were
JANONE INC.
INDEX TO FORM 10-Q
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Item 1. |
3 |
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Unaudited Condensed Consolidated Balance Sheets as of April 1, 2023 and December 31, 2022 |
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
30 |
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Item 3. |
30 |
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Item 4. |
30 |
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Item 5 |
30 |
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Item 6. |
31 |
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32 |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
JANONE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per-share amounts)
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April 1, |
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December 31, |
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(Unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Trade and other receivables, net |
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Prepaid expenses and other current assets |
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Current assets from discontinued operations |
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Total current assets |
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Intangible assets - Soin, net |
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Other intangible assets, net |
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Note receivable- SPYR, net |
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Note receivable - VM7, net |
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Marketable securities |
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Deposits and other assets |
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Other assets from discontinued operations |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity |
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Liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities - other |
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Short–term debt |
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Current liabilities from discontinued operations |
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Total current liabilities |
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Deferred income taxes, net |
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Other noncurrent liabilities |
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Noncurrent liabilities from discontinued operations |
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Total liabilities |
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Mezzanine equity |
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Convertible preferred stock, series S - par value $ |
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Stockholders' equity: |
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Preferred stock, series A - par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Accumulated other comprehensive loss |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
JANONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(Dollars in thousands, except per-share)
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For the Thirteen Weeks Ended |
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April 1, |
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April 2, |
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Revenues |
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$ |
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$ |
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Cost of revenues |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative expenses |
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Operating loss |
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( |
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Other income (expense): |
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Interest income (expense), net |
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( |
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Gain on litigation settlement, net |
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Unrealized loss on marketable securities |
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Gain on reversal of contingency loss |
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Other income, net |
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Total other income, net |
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Income (loss) from continuing operations before provision for income taxes |
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( |
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Income tax benefit |
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( | ) |
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Net income (loss) from continuing operations |
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( |
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Gain (loss) from discontinued operations (including a $ |
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( |
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Income tax provision for discontinued operations |
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Net income (loss) from discontinued operations |
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( |
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Net income |
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$ |
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$ |
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Net income (loss) per share: |
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Net income (loss) per share from continuing operations, basic |
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$ |
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$ |
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Net income (loss) per share from continuing operations, diluted |
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$ |
( |
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$ |
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Net income (loss) per share from discontinued operations, basic |
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$ |
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$ |
( |
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Net income (loss) per share from discontinued operations, diluted |
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$ |
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$ |
( |
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Net income per share, basic |
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$ |
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$ |
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Net income per share, basic |
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$ |
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$ |
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Weighted average common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
JANONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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For the Thirteen Weeks Ended |
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April 1, 2023 |
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April 2, 2022 |
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OPERATING ACTIVITIES: |
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Net income (loss) from continuing operations |
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$ |
( |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating |
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Depreciation and amortization |
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Stock based compensation expense |
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Accretion of note receivable discount |
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( |
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Loss on legal settlement |
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( |
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Unrealized loss on marketable securities |
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Gain on reversal of contingent liability |
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( |
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Changes in assets and liabilities: |
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Accounts receivable, net of acquisitions and dispositions |
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( |
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Prepaid expenses and other current assets, net of dispositions |
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Accounts payable and accrued expenses, net of dispositions |
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Other Assets |
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( |
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Operating cash flows provided by (used in) discontinued operations |
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( |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES: |
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Investing cash flows used in discontinued operations |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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FINANCING ACTIVITIES: |
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Proceeds from equity financing, net |
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Payments on short-term notes payable |
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( |
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( |
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Financing cash flows from discontinued operations |
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( |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of changes in exchange rate on cash and cash equivalents |
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( |
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INCREASE IN CASH AND CASH EQUIVALENTS |
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CASH AND CASH EQUIVALENTS, beginning of period |
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LESS CASH OF DISCONTINUED OPERATIONS, end of period |
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( |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
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$ |
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Supplemental cash flow disclosures: |
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Interest paid |
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$ |
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$ |
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Noncash recognition of new leases |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
JANONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(Dollars in thousands)
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Series A Preferred |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Deficit |
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Equity |
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Balance, December 31, 2022 |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Share based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for equity financing |
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— |
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— |
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— |
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— |
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Common stock issued for legal settlement |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance, April 1, 2023 |
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$ |
— |
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$ |
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$ |
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$ |
( | ) |
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$ |
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$ |
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Series A Preferred |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Deficit |
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Deficit |
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Balance, January 1, 2022 |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Share based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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( |
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Net Income |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance, April 2, 2022 |
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$ |
— |
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$ |
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$ |
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$ |
( | ) |
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$ |
( |
) |
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$ |
( |
) |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Note 1: Background
The accompanying consolidated financial statements include the accounts of JanOne Inc., a Nevada corporation, and its subsidiaries (collectively the “Company” or “JanOne”).
The Company had
Biotechnology
During September 2019, JanOne, through its biotechnology segment, broadened its business perspectives to become a pharmaceutical company focused on finding treatments for conditions that cause severe pain and bringing to market drugs with non-addictive pain-relieving properties. Effective December 28, 2022, the Company acquired Soin Therapeutics LLC, a Delaware limited liability company (“STLLC”), and its product, a patent-pending, novel formulation of low-dose naltrexone, (“JAN123”). The product is being developed for the treatment of Complex Regional Pain Syndrome (CRPS), an indication that causes severe, chronic pain generally affecting the arms or legs. At present, there are no truly effective treatments for CRPS. Because of the relatively small number of patients afflicted with CRPS, the FDA has granted Orphan Drug Designation for any product approved for treatment of CRPS. This designation will provide the Company with tax credits for its clinical trials, exemption of user fees, and the potential of seven years of market exclusivity following approval. In addition, development of orphan drugs currently also involves smaller trials and quicker times to approval, given the limited number of patients available to study. However, there can be no assurance that the product will receive FDA approval or that it will result in material sales.
Recycling
ARCA Recycling was the Company’s Recycling segment and provides turnkey recycling services for electric utility energy efficiency programs in the United States. ARCA Canada Inc. (“ARCA Canada”) provides turnkey recycling services for electric utility energy efficiency programs in Canada. Customer Connexx, LLC (“Connexx”) provides call center services for ARCA Recycling and ARCA Canada. On March 9, 2023, retroactive to March 1, 2023, the Company entered into a Stock Purchase Agreement with VM7 Corporation, a Delaware corporation, under which the Buyer agreed to acquire all of the outstanding equity interests of (a) ARCA Recycling, Inc., a California corporation, (b) Customer Connexx LLC, a Nevada limited liability company, and (c) ARCA Canada Inc., a corporation organized under the laws of Ontario, Canada (“ARCA Canada”; and, together with ARCA and Connexx, the “Subsidiaries”). The principal of the Buyer is Virland A. Johnson, our Chief Financial Officer. The sale of all of the outstanding equity interests of the Subsidiaries to the Buyer under the Purchase Agreement was consummated simultaneously with the execution of the Purchase Agreement (see Note 17). The Company's Board of Directors unanimously approved the Purchase Agreement and the Disposition Transaction. In connection with the disposition of ARCA Recycling, accounts for the Recycling segment have been presented as discontinued operations in the accompanying consolidated financial statements (see Note 3).
Technology
GeoTraq Inc. (“GeoTraq”) was the Company’s Technology segment. On May 24, 2022, the Company entered into an Asset Purchase Agreement with SPYR Technologies Inc., pursuant to which the Company sold to SPYR substantially all the assets and none of the liabilities of its wholly-owned subsidiary GeoTraq Inc. The aggregate purchase price for the GeoTraq Assets was $
The Company reports on a 52- or 53-week fiscal year. The Company’s 2022 fiscal year (“2022”) ended on December 31, 2022, and the current fiscal year (“2023”) will end on December 30, 2023.
Going concern
The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business, however, the issues described below raise substantial doubt about the Company’s ability to do so.
7
The Company currently faces a challenging competitive environment and is focused on improving its overall profitability, which includes managing expenses. The Company reported a net loss from continuing operations of approximately $
The Company intends to fund operations by using cash on hand and monthly receipts in connection with the sale of its Subsidiaries and funds received from approved Employee Retention Credits (“ERC’s”) (see Note 18). The Company has approximately $
The ability of the Company to continue as a going concern is dependent upon the success of future capital raises or structured settlements to fund the required testing to obtain FDA approval of JAN 123 and JAN 101, as well as to fund its day-to-day operations. Such approval is contingent on several factors and no assurance can be provided that approval will be obtained. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. While the Company will actively pursue these additional sources of financing, management cannot make any assurances that such financing will be secured or FDA approvals will be obtained.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information and notes required for complete financial statements prepared in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. However, the Company’s results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 31, 2022.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified in these consolidated financial statements to conform to current period classifications. The prior year amounts have also been modified in these financial statements to properly report amounts under current operations and discontinued operations (see Note 3).
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumption that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates made in connection with the accompanying consolidated financial statements include the fair values in connection with the GeoTraq promissory note, Series S convertible preferred stock issued in the Soin merger, and the receivable in connection with the sale of ARCA, analysis of other intangibles and long-lived assets for impairment, valuation allowance against deferred tax assets, lease terminations, and estimated useful lives for intangible assets and property and equipment.
8
Financial Instruments
Financial instruments consist primarily of cash equivalents, trade and other receivables, notes receivable, and obligations under accounts payable, accrued expenses and notes payable. The carrying amounts of cash equivalents, trade receivables and other receivables, accounts payable, accrued expenses and short-term notes payable approximate fair value because of the short maturity of these instruments. The fair value of the long-term debt is calculated based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements, unless quoted market prices were available (Level 2 inputs). The carrying amounts of long-term debt at December 31, 2022 approximate fair value. The Company has no long-term debt as of April 1, 2023 due to the disposition of ARCA Recycling (see Note 18).
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new approach to estimate credit losses on certain types of financial instruments based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU No. 2016-13 is effective for smaller reporting companies for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company has adopted this new accounting standard, however, as of 13 weeks ended April 1, 2023, there is no material impact on our Consolidated Financial Statements and related disclosures.
Note 3: Discontinued Operations
As of April 1, 2023, the Company discontinued operations of its Recycling and Technology segments as follows:
On March 9, 2023, the Company executed a Stock Purchase Agreement with VM7 Corporation, a Delaware corporation, under which, as of March 1, 2023, the Buyer agreed to acquire all of the outstanding equity interests of (a) ARCA Recycling, Inc., a California corporation, (b) Customer Connexx LLC, a Nevada limited liability company, and (c) ARCA Canada Inc., a corporation organized under the laws of Ontario, Canada (“ARCA Canada”; and, together with ARCA and Connexx, the “Subsidiaries”). The principal of the Buyer is Virland A. Johnson, our Chief Financial Officer. The sale of all of the outstanding equity interests of the Subsidiaries to the Buyer under the Purchase Agreement was consummated simultaneously with the execution of the Purchase Agreement (see Note 18).
On May 24, 2022, the Company entered into an Asset Purchase Agreement with SPYR Technologies Inc., pursuant to which the Company sold to SPYR substantially all the assets and none of the liabilities of its wholly-owned subsidiary GeoTraq Inc. No GeoTraq assets or liabilities were included in discontinued operations at December 31, 2022.
In accordance with the provisions of ASC 205-20, the Company has separately reported the assets and liabilities of the discontinued operations in the consolidated balance sheets.
9
|
|
December 31, 2022 |
|
|
Assets from discontinued operations |
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
Trade and other receivables, net |
|
|
|
|
Inventories |
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
Total current assets from discontinued operations |
|
|
|
|
Property and equipment, net 1 |
|
|
|
|
Right of use asset - operating leases |
|
|
|
|
Intangible assets, net 2 |
|
|
|
|
Deposits and other assets |
|
|
|
|
Total other assets from discontinued operations |
|
|
|
|
Total assets from discontinued operations |
|
$ |
|
|
Liabilities from discontinued operations |
|
|
|
|
Accounts payable |
|
$ |
|
|
Accrued liabilities - other 3 |
|
|
|
|
Accrued liability - California sales taxes 4 |
|
|
|
|
Lease obligation short-term - operating leases |
|
|
|
|
Short term debt 5 |
|
|
|
|
Current portion of note payable |
|
|
|
|
Related party note |
|
|
|
|
Total current liabilities from discontinued operations |
|
|
|
|
Lease obligation long-term - operating leases |
|
|
|
|
Notes payable - long-term portion 6 |
|
|
|
|
Long-term portion related party note payable 7 |
|
|
|
|
Total noncurrent liabilities from discontinued operations |
|
|
|
|
Total liabilities from discontinued operations |
|
$ |
|
|
1 The Company's property and equipment consisted of the following:
|
|
Useful Life |
|
December 31, 2022 |
|
|
Buildings and improvements |
|
|
$ |
|
||
Equipment |
|
|
|
|
||
Projects under construction |
|
|
|
|
|
|
Property and equipment |
|
|
|
|
|
|
Less accumulated depreciation |
|
|
|
|
( |
) |
Total property and equipment, net, from discontinued operations |
|
|
|
$ |
|
|
Depreciation expense was $
2 The Company's intangible assets consisted of the following:
|
|
December 31, |
|
|
Patent and domains |
|
$ |
|
|
Computer software |
|
|
|
|
Intangible assets |
|
|
|
|
Less accumulated amortization |
|
|
( |
) |
Total intangible assets |
|
$ |
|
|
Amortization expense was $
3 The Company's accrued liabilities consisted of the following:
10
|
|
December 31, |
|
|
Compensation and benefits |
|
$ |
|
|
Contract liability |
|
|
|
|
Accrued incentive and rebate checks |
|
|
|
|
Accrued taxes |
|
|
|
|
Other |
|
|
|
|
Total accrued expenses |
|
$ |
|
|
The California Department of Tax and Fee Administration (formerly known as the California Board of Equalization) (“CDTFA”) conducted a sales and use tax examination covering ARCA Recycling’s California operations for years 2011, 2012, and 2013. The Company believed it was exempt from collecting sales taxes under service agreements with utility customers that included appliance replacement programs. During the fourth quarter of 2014, the Company received communication from the CDTFA indicating they were not in agreement with the Company’s interpretation of the law. As a result, the Company applied for and, as of February 9, 2015, received approval to participate in the CDTFA’s Managed Audit Program. The period covered under this program included the years 2011, 2012, and 2013 and extended through the nine-month period ended September 30, 2014.
On April 13, 2017 the Company received the formal CDTFA assessment for sales tax for tax years 2011, 2012, and 2013 in the amount of approximately $
4 The Company's accrual relating to the California sales tax assessment consisted of the following:
|
|
December 31, |
|
|
Accrued liability - CA sales tax assessment |
|
$ |
|
|
Accrued liability - interest on CA sales tax assessment |
|
|
|
|
Total |
|
$ |
|
|
5 The Company's short-term debt consisted of the following:
|
|
December 31, |
|
|
Gulf Coast Bank and Trust Company |
|
$ |
|
|
Gulf Coast Bank and Trust Company loan origination fees |
|
|
( |
) |
Total |
|
$ |
|
|
6 The Company's long-term debt consisted of the following:
|
|
December 31, |
|
|
KLC Financial |
|
$ |
|
|
KLC Financial loan origination fees |
|
|
( |
) |
Total |
|
|
|
|
Less current portion |
|
|
( |
) |
Total |
|
$ |
|
|
Related Party ICG Note
On August 28, 2019, ARCA Recycling entered into and delivered to Isaac Capital Group LLC (“ICG”) a secured revolving line of credit promissory note, whereby ICG agreed to provide ARCA Recycling with a $
11
The obligations of ARCA Recycling under the ICG Note are guaranteed by the Company. The foregoing transaction did not include the issuance of any shares of the Company’s common stock, warrants, or other derivative securities. As of January 1, 2022, the balance due on ICG Note was $
7 The Company's related party debt consisted of the following:
|
|
December 31, |
|
|
Isaac Capital Group LLC |
|
$ |
|
|
Total |
|
|
|
|
Less current portion |
|
|
( |
) |
Total |
|
$ |
|
|
In accordance with the provisions of ASC 205-20, the Company has not included in the results of continuing operations the results of operations of the discontinued operations in the consolidated statements of operations and comprehensive income (loss).
|
|
13 weeks ended |
|
|||||
|
|
April 1, 2023 |
|
|
April 2, 2022 |
|
||
Revenues |
|
$ |
|
|
$ |
|
||
Cost of revenues |
|
|
|
|
|
|
||
Gross profit |
|
|
( |
) |
|
|
|
|
Operating expenses from discontinued operations: |
|
|
|
|
|
|
||
Selling, general and administrative expenses |
|
$ |
( |
) |
|
$ |
|
|
Total operating expenses from discontinued operations |
|
|
( |
) |
|
|
|
|
Operating loss from discontinued operations |
|
|
|
|
|
( |
) |
|
Other income (expense) from discontinued operations |
|
|
|
|
|
|
||
Interest expense, net |
|
|
( |
) |
|
|
( |
) |
Loss on litigation settlement |
|
|
|
|
|
( |
) |
|
Other expense, net |
|
|
( |
) |
|
|
( |
) |
Total other income (loss), net |
|
|
( |
) |
|
|
( |
) |
Income (loss) before provision for income taxes from discontinued operations |
|
|
|
|
|
( |
) |
|
Income tax provision |
|
|
|
|
|
|
||
Net income (loss) from discontinued operations |
|
$ |
|
|
$ |
( |
) |
|
In accordance with the provisions of ASC 205-20, the Company has separately reported the cash flow activity of the discontinued operations in the consolidated statements of cash flows.
12
|
|
13 weeks ended |
|
|||||
|
|
April 1, 2023 |
|
|
April 2, 2022 |
|
||
DISCONTINUED OPERATING ACTIVITIES: |
|
|
|
|
|
|
||
Net income (loss) from discontinued operations |
|
|
|
|
|
( |
) |
|
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization of debt issuance costs |
|
|
|
|
|
|
||
Amortization of right-of-use assets |
|
|
|
|
|
( |
) |
|
Change in deferred taxes |
|
|
|
|
|
— |
|
|
Gain on sale of ARCA, net of cash |
|
|
( |
) |
|
|
— |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
( |
) |
|
Inventories |
|
|
|
|
|
( |
) |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
|
|
|
|
|
||
Other assets |
|
|
( |
) |
|
|
|
|
Net cash provided by (used in) operating activities from discontinued operations |
|
$ |
|
|
$ |
( |
) |
|
DISCONTINUED INVESTING ACTIVITIES: |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Purchase of intangible assets |
|
|
( |
) |
|
|
|
|
Net cash used in investing activities from discontinued operations |
|
$ |
( |
) |
|
$ |
( |
) |
DISCONTINUED FINANCING ACTIVITIES: |
|
|
|
|
|
|
||
Proceeds from note payable |
|
|
|
|
|
|
||
Payment on related party note |
|
|
( |
) |
|
|
|
|
Proceeds from issuance of short term notes payable |
|
|
( |
) |
|
|
|
|
Payments on notes payable |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities from discontinued operations |
|
$ |
( |
) |
|
$ |
( |
) |
Effect of changes in exchange rate on cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
( |
) |
|
|
( |
) |
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
|
|
$ |
|
||
Note 4: Trade and other receivables
The Company’s trade and other receivables as of April 1, 2023 and December 31, 2022, respectively, were as follows (in $000’s):
|
|
April 1, |
|
|
December 31, |
|
||
Trade and other receivables, net, from discontinued operations |
|
$ |
|
|
$ |
|
||
Other receivables |
|
|
|
|
|
|
||
Trade and other receivables, net |
|
$ |
|
|
$ |
|
||
Note 5: Prepaids and other current assets
Prepaids and other current assets as of April 1, 2023 and December 31, 2022 consist of the following (in $000’s):
|
|
April 1, |
|
|
December 31, |
|
||
Prepaid insurance |
|
$ |
|
|
$ |
|
||
Prepaid other |
|
|
|
|
|
|
||
Prepaid expenses from discontinued operations |
|
|
|
|
|
|
||
Total prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
13
Note 6: Note receivable
SPYR Note
On May 24, 2022, the Company entered into an Asset Purchase Agreement with SPYR Technologies Inc. (“SPYR”), pursuant to which the Company sold to SPYR substantially all of the assets and none of the specified liabilities of GeoTraq. In connection with the Purchase Agreement, SPYR delivered to the Company a five-year Promissory Note in the initial principal amount of $
In connection with the asset sale, the Company engaged a third-party valuation firm to assess the fair value of the consideration received. Based on the valuation, the Promissory Note (“Note”) was initially valued at approximately $
The balance appearing on the Company's consolidated balance sheets represents the principal balance of the Promissory Note, net of the discount balance. During the 13 weeks ended April 1, 2023 and April 2, 2022, approximately $
VM7 Note
On March 9, 2023, the Company entered into a Stock Purchase Agreement with VM7 Corporation, a Delaware corporation, under which the Buyer agreed to acquire all of the outstanding equity interests of (a) ARCA Recycling, Inc., a California corporation, (b) Customer Connexx LLC, a Nevada limited liability company, and (c) ARCA Canada Inc., a corporation organized under the laws of Ontario, Canada (“ARCA Canada”; and, together with ARCA and Connexx, the “Subsidiaries”). The principal of the Buyer is Virland A. Johnson, our Chief Financial Officer. The sale of all of the outstanding equity interests of the Subsidiaries to the Buyer under the Purchase Agreement was consummated simultaneously with the execution of the Purchase Agreement. The Company's Board of Directors unanimously approved the Purchase Agreement and the Disposition Transaction. The Stock Purchase Agreement is retroactive to March 1, 2023 (see Note 18).
The minimum consideration to be received by the Company from the Disposition Transaction, as discussed above, is $
Note 7: Intangible Assets
Intangible assets as of April 1, 2023 and December 31, 2022 consist of the following (in $000’s):
|
|
April 1, |
|
|
December 31, |
|
||
Patent and domains |
|
$ |
|
|
$ |
|
||
Soin intangibles * |
|
$ |
|
|
$ |
|
||
Computer software |
|
|
|
|
|
|
||
Intangible assets from discontinued operations |
|
|
|
|
|
|
||
Intangible assets |
|
|
|
|
|
|
||
Less accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Total intangible assets |
|
$ |
|
|
$ |
|
||
*
14
Intangible amortization expense from continuing operations was $
Note 8: Deposits and other assets
Deposits and other assets as of April 1, 2023 and December 31, 2022 consist of the following (in $000’s):
|
|
April 1, |
|
|
December 31, |
|
||
Deposits and other assets from discontinued operations |
|
$ |
|
|
$ |
|
||
Other |
|
|
|
|
|
|
||
Total deposits and other assets |
|
$ |
|
|
$ |
|
||
Note 9: Accrued Liabilities
Accrued liabilities as of April 1, 2023 and December 31, 2022 consist of the following (in $000’s):
|
|
April 1, |
|
|
December 31, |
|
||
Compensation and benefits |
|
$ |
|
|
$ |
|
||
Accrued guarantees |
|
|
|
|
|
|
||
Accrued taxes |
|
|
|
|
|
|
||
Accrued litigation settlement |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Accrued expenses from discontinued operations |
|
|
|
|
|
|
||
Total accrued expenses |
|
$ |
|
|
$ |
|
||
Note 10: Income Taxes
The Company recorded an income tax benefit from continuing operations of approximately $
Note 11: Short Term Debt
Short term debt and other financing obligations as of April 1, 2023 and December 31, 2022, consist of the following (in $000’s):
|
|
April 1, |
|
|
December 31, |
|
||
AFCO Finance |
|
$ |
|
|
$ |
|
||
Total short-term debt |
|
$ |
|
|
$ |
|
||
AFCO Finance
The Company has entered into a financing agreement with AFCO Credit Corporation (“AFCO”) purchased through Marsh Insurance on an annual basis to fund the annual premiums on insurance policies due July 1 of each year. These policies relate to workers’ compensation and various liability policies including, but not limited to, General, Auto, Umbrella, Property, and Directors’ and Officers’ insurance. The total amount of the premiums financed in July 2022 was approximately $
15
Note 12: Commitments and Contingencies
Litigation
SEC Complaint
On August 2, 2021, the U.S. Securities and Exchange Commission (“SEC”) filed a civil complaint (the “SEC Complaint”) in the United States District Court for the District of Nevada naming the Company and one of its executive officers, Virland Johnson, the Company's Chief Financial Officer, as defendants (collectively, the “Defendants”).
The SEC Complaint alleges financial, disclosure and reporting violations against the Company and the executive officer under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. The SEC Complaint also alleges various claims against the executive officer under Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, and 13b2-2. The SEC seeks permanent injunctions and civil penalties against the Defendants, and an officer-and-director bar against the executive officer. The foregoing is only a general summary of the SEC Complaint, which may be accessed on the SEC’s website at https://www.sec.gov/litigation/litreleases/2021/lr25155.htm.
The Company continues to assert that the SEC’s pursuit of this matter will not result in any benefit to investors and instead will only serve as a distraction from its core business. On October 1, 2021, the Company, filed a motion with the court to dismiss the complaint. The SEC filed its response opposing the motions on November 1, 2021.On September 7, 2022, the motions to dismiss were denied by the court. Pursuant to the automatic stay of proceedings under the Private Securities Litigation Reform Act, all discovery was stayed pending the motions to dismiss and continues to be stayed pending the June 23, 2023 mediation to which all of the parties have agreed.
The Defendants strongly dispute and deny the allegations and are vigorously defending themselves against the claims.
16
Skybridge
On December 29, 2016, the Company served a Minnesota state court complaint for breach of contract on Skybridge Americas, Inc. (“SA”), the Company’s primary call center vendor throughout 2015 and most of 2016. The Company sought damages in the millions of dollars as a result of alleged overcharging by SA and lost client contracts. On January 25, 2017, SA served a counterclaim for unpaid invoices in the amount of approximately $
GeoTraq
On or about April 9, 2021, GeoTraq, Gregg Sullivan, Tony Isaac, and we, among others, resolved all of their claims that related to, among other items, the Company's acquisition of GeoTraq in August 2017, all post-acquisition activities, and Mr. Sullivan’s post-acquisition employment relationship with GeoTraq (all of such claims, the “GeoTraq Matters”). The resolution was effectuated through the parties’ execution and delivery of a Settlement Agreement and Mutual Agreement of Claims (the “GeoTraq Settlement Agreement”).
Under the terms of the Settlement Agreement, the Company, on its own behalf and on behalf of GeoTraq and Mr. Isaac, agreed to tender to Mr. Sullivan an aggregate of $
Pursuant to the terms of the Settlement Agreement, Mr. Sullivan provided the Company with his proxy to vote his remaining shares of its Series A-1 Convertible Preferred Stock that the Company had issued to him in connection with its acquisition of GeoTraq in 2017, as well as his proxy for the shares of the Company's common stock into which those shares of preferred stock may be converted. The Company may utilize the proxy in the context of an annual meeting of its stockholders, a special meeting of its stockholders, and a written consent of its stockholders. Subject to the above-described contingent GeoTraq Prepayment tender
The parties to the Settlement Agreement released and forever discharged one another from any and all known and unknown claims that were asserted or could have been asserted arising out of the GeoTraq Litigation Matters. The accrued liability for payments due to Mr. Sullivan is $
Sieggreen
On March 6, 2023, Sieggreen, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. Live Ventures Incorporated, Jon Isaac, and Virland A. Johnson, Defendants, the Company was added as a defendant on March 6, 2023, and was served on March 23, 2023. Plaintiff has alleged causes of action against the Company for (i) violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and (ii) violation of Section 10(b) of the Securities Exchange Act of 1934 and Rules
17
10b-5(a) and 10b-5(c) promulgated thereunder. The Company has not filed a responsive pleading as of the date of these financial statements and strongly disputes and denies all of the allegations contained therein and will vigorously defend itself against the claims.
Main/270
The Company is a defendant in an action filed on April 11, 2022, in the U.S. District Court Southern District of Ohio, Eastern Division, styled, Trustees Main/270, LLC, Plaintiff, vs ApplianceSmart, Inc. and JANONE, Inc., Defendant, Case no.: 2:22-cv-01938-ALM-EPD. The Company was a guarantor of the lease between the Plaintiff and ApplianceSmart, Inc. Plaintiff alleged a cause of action against the Company in respect of the guaranty and seeks approximately $
Westerville Square
In an attempt to recover payments due under a lease, in 2019, Westerville Square, Inc., as the landlord, initiated a civil action against the Company, styled Westerville Square, Inc. v. Appliance Recycling Centers Of America, Inc., et al., in the Court of Common Pleas of Franklin County, Ohio, Case No. 19 CV 8627. The case was stayed during the bankruptcy proceedings of ApplianceSmart, Inc., and was reinstated on June 7, 2021. The landlord is currently seeking $
Other Commitments
On December 30, 2017, the Company disposed of its retail appliance segment and sold ApplianceSmart to Live Ventures Incorporated, a related party. In connection with that sale, as of December 28, 2019, the Company accrued an aggregate amount of future real property lease payments of approximately $
The Company is party from time to time to other ordinary course disputes that we do not believe to be material to our financial condition as of April 1, 2023.
Note 13: Stockholders’ Equity
Common Stock: Our Articles of Incorporation authorize
On March 22, 2023, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company in a registered direct offering of
As of April 1, 2023, and December 31, 2022, there were
Stock Options: The 2016 Plan, which replaces the 2011 Plan, authorizes the granting of awards in any of the following forms: (i) incentive stock options, (ii) nonqualified stock options, (iii) restricted stock awards, and (iv) restricted stock units, and expires on the earlier of
The Company's 2011 Plan, which has expired, authorizes the granting of awards in any of the following forms: (i) stock options, (ii) stock appreciation rights, and (iii) other share-based awards, including but not limited to, restricted stock, restricted stock units or performance shares. As of April 1, 2023, and December 31, 2022,
18
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. There were
Additional information relating to all outstanding options is as follows:
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
Weighted |
|
||||
|
|
Options |
|
|
Exercise |
|
|
Intrinsic |
|
|
Contractual |
|
||||
Outstanding at January 1, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
||||
Cancelled/expired |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding at December 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at April 1, 2023 |
|
|
|
|
$ |
|
|
$ |
— |
|
|
|
|
|||
Exercisable at April 1, 2023 |
|
|
|
|
$ |
|
|
$ |
— |
|
|
|
|
|||
The Company recognized approximately $
As of April 1, 2023, the Company has approximately $
Series A-1 Preferred Stock
Shares of Series A-1 Preferred Stock are convertible into the Company’s common shares at a ratio of .
Note 14: Mezzanine Equity
Series S Preferred Stock
On December 28, 2022 the Company acquired Soin Therapeutics by way of merger. In connection with this transaction, with a potential value of up to $
Note 15: Earnings Per Share
Net income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the applicable period. Basic weighted average common shares outstanding do not include shares of restricted stock that have not yet vested, although such shares are included as outstanding shares in the Company’s Consolidated Balance Sheet. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and if dilutive, potential common shares outstanding during the period. Potential common shares consist of the additional common shares issuable in respect of restricted share awards, stock options and convertible preferred stock.
19
The following table presents the computation of basic and diluted net income (loss) per share (in $000’s, except share and per–share data):
|
|
For the Thirteen Weeks Ended |
|
|||||
|
|
April 1, 2023 |
|
|
April 2, 2022 |
|
||
Continuing Operations |
|
|
|
|
|
|
||
Basic |
|
|
|
|
|
|
||
Net income (loss) from continuing operations |
|
$ |
( |
) |
|
$ |
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
||
Basic income (loss) per share from continuing operations |
|
$ |
( | ) |
|
$ |
|
|
Diluted |
|
|
|
|
|
|
||
Net income (loss) from continuing operations |
|
$ |
( |
) |
|
$ |
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
||
Diluted income (loss) per share from continuing operations |
|
$ |
( | ) |
|
$ |
|
|
Discontinued Operations |
|
|
|
|
|
|
||
Basic |
|
|
|
|
|
|
||
Net income (loss) from discontinued operations |
|
$ |
|
|
$ |
( |
) |
|
Weighted average common shares outstanding |
|
|
|
|
|
|
||
Basic income (loss) per share from discontinued operations |
|
$ |
|
|
$ |
( |
) |
|
Diluted |
|
|
|
|
|
|
||
Net income (loss) from discontinued operations |
|
$ |
|
|
$ |
( |
) |
|
Weighted average common shares outstanding |
|
|
|
|
|
|
||
Diluted income (loss) per share from discontinued operations |
|
$ |
|
|
$ |
( |
) |
|
Total |
|
|
|
|
|
|
||
Basic |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Weighted average common shares outstanding |
|
|
|
|
|
|
||
Basic income per share |
|
$ |
|
|
$ |
|
||
Diluted |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Weighted average common shares outstanding |
|
|
|
|
|
|
||
Diluted income per share |
|
$ |
|
|
$ |
|
||
Potentially dilutive securities totaling
20
Note 16: Segment Information
The Company operates through its biotechnology segment for continuing operations. The biotechnology segment commenced operations in September 2019 and is focused on development of new and innovative solutions for ending the opioid epidemic ranging from digital technologies to educational advocacy. The recycling segment included all fees charged and costs incurred for collecting, recycling and installing appliances for utilities and other customers. The recycling segment also included byproduct revenue, which was primarily generated through the recycling of appliances. The technology segment designed wireless modules to connect devices to the Mobile Internet of Things (“IoT”) which contained location-based service (“LBS”) capabilities and can interface to external sensors to allow them to communicate both sensor status and position information. The nature of products, services and customers for each segment varies significantly. As such, the segments are managed separately. Our Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”). The CODM evaluates performance and allocates resources based on sales and income from operations of each segment. Operating loss represents revenues less cost of revenues and operating expenses, including certain allocated selling, general and administrative costs. There are no intersegment sales or transfers. As discussed above (see Note 3), the recycling and technology are being presented as discontinued operations for the 13 weeks ended April 1, 2023 and April 2, 2022.
The following tables present our segment information for the 13 weeks ended April 1, 2023 and April 2, 2022 (in $000's):
|
Thirteen Weeks Ended |
|
|||||
|
April 1, 2023 |
|
|
April 2, 2022 |
|
||
Revenues |
|
|
|
|
|
||
Biotechnology |
$ |
|
|
$ |
|
||
Discontinued operations |
|
|
|
|
|
||
Total Revenues |
$ |
|
|
$ |
|
||
Gross profit |
|
|
|
|
|
||
Biotechnology |
$ |
|
|
$ |
|
||
Discontinued operations |
|
( |
) |
|
|
|
|
Total Gross profit |
$ |
( |
) |
|
$ |
|
|
Operating loss |
|
|
|
|
|
||
Biotechnology |
$ |
( |
) |
|
$ |
( |
) |
Discontinued operations |
|
|
|
|
( |
) |
|
Total Operating loss |
$ |
|
|
$ |
( |
) |
|
Depreciation and amortization |
|
|
|
|
|
||
Biotechnology |
$ |
|
|
$ |
|
||
Discontinued operations |
|
|
|
|
|
||
Total Depreciation and amortization |
$ |
|
|
$ |
|
||
Interest (income) expense, net |
|
|
|
|
|
||
Biotechnology |
$ |
( |
) |
|
$ |
|
|
Discontinued operations |
|
|
|
|
|
||
Total Interest expense, net |
$ |
( |
) |
|
$ |
|
|
Net income (loss) before income taxes |
|
|
|
|
|
||
Biotechnology |
$ |
( |
) |
|
$ |
|
|
Discontinued operations |
|
|
|
|
( |
) |
|
Total Net income before income taxes |
$ |
|
|
$ |
|
||
Note 17: Related Parties
Shared Services
Tony Isaac, the Company’s Chief Executive Officer, is the father of Jon Isaac, President and Chief Executive Officer of Live Ventures Incorporated (“Live Ventures”) and managing member of Isaac Capital Group LLC (“ICG”), a greater than
21
Sale of ARCA and Connexx
On March 9, 2023, the Company entered into a Stock Purchase Agreement with VM7 Corporation, a Delaware corporation, under which the Buyer agreed to acquire all of the outstanding equity interests of (a) ARCA Recycling, Inc., a California corporation, (b) Customer Connexx LLC, a Nevada limited liability company, and (c) ARCA Canada Inc., a corporation organized under the laws of Ontario, Canada (“ARCA Canada”; and, together with ARCA and Connexx, the “Subsidiaries”). The principal of the Buyer is Virland A. Johnson, our Chief Financial Officer. The sale of all of the outstanding equity interests of the Subsidiaries to the Buyer under the Purchase Agreement was consummated simultaneously with the execution of the Purchase Agreement. The Company's Board of Directors unanimously approved the Purchase Agreement and the Disposition Transaction. The Stock Purchase Agreement is retroactive to March 1, 2023 (see Note 18).
Note 18. Sale of ARCA and Subsidiaries
On March 9, 2023, the Company entered into a Stock Purchase Agreement with VM7 Corporation, a Delaware corporation, under which the Buyer agreed to acquire all of the outstanding equity interests of (a) ARCA Recycling, Inc., a California corporation, (b) Customer Connexx LLC, a Nevada limited liability company, and (c) ARCA Canada Inc., a corporation organized under the laws of Ontario, Canada (“ARCA Canada”; and, together with ARCA and Connexx, the “Subsidiaries”). The principal of the Buyer is Virland A. Johnson, our Chief Financial Officer. The sale of all of the outstanding equity interests of the Subsidiaries to the Buyer under the Purchase Agreement was consummated simultaneously with the execution of the Purchase Agreement. The Company's Board of Directors unanimously approved the Purchase Agreement and the Disposition Transaction. The Stock Purchase Agreement is retroactively effective as of March 1, 2023.
The economic aspects of the Disposition Transaction are: (i) the Company reduced the liabilities on its consolidated balance sheets by approximately $
The following table details the calculation of the gain on sale of ARCA and subsidiaries, as shown on the income statement (in $000's):
22
Total minimum consideration |
|
$ |
|
|
Payment from buyer |
|
|
|
|
Net consideration |
|
$ |
|
|
Accounts payable |
|
|
|
|
Accrued liabilities |
|
|
|
|
Accrued liabilities - California state sales tax |
|
|
|
|
Lease liabilities |
|
|
|
|
Debt |
|
|
|
|
Accumulated other comprehensive loss |
|
|
( |
) |
Total disposal of liabilities |
|
|
|
|
Total consideration |
|
|
|
|
Cash |
|
|
|
|
Accounts receivable |
|
|
|
|
Inventory |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Right-of-use assets |
|
|
|
|
Other assets |
|
|
|
|
Total disposal of assets |
|
|
|
|
Total gain on sale |
|
$ |
|
23
Note 19. Subsequent event
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have been no events that have occurred that would require adjustments to disclosures in its condensed consolidated financial statements.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Dollars stated in thousands, except per–share amounts.
Forward-Looking and Cautionary Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as ‘‘believes,’’ ‘‘expects,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘seeks,’’ ‘‘approximately,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘estimates’’ or ‘‘anticipates’’ or similar expressions that concern our strategy, plans or intentions. Any statements we make relating to our future operations, performance and results, and anticipated liquidity are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, including, without limitation, in conjunction with the forward-looking statements included in this Form 10-Q, are disclosed in “Item 1-Business, Item 1A – Risk Factors” of our Form 10-K and Part II, Item 1A of this Form 10-Q.
We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Our MD&A should be read in conjunction with our Form 10-K (including the information presented therein under the caption Risk Factors), together with our Quarterly Reports on Forms 10-Q and other publicly available information. All amounts herein are unaudited.
Overview
We are focused on finding treatments for conditions that cause severe pain and bringing to market drugs with non-addictive pain-relieving properties. In addition, through our now-sold subsidiaries ARCA Recycling, Connexx, and ARCA Canada, we were engaged in the business of recycling major household appliances in North America by providing turnkey appliance recycling and replacement services for utilities and other sponsors of energy efficiency programs. Also, through our now-sold GeoTraq Inc. subsidiary, we were engaged in the development, design of wireless transceiver modules with technology that provides LBS directly from global Mobile IoT networks.
During the periods disclosed in this Quarterly Report, we operated three reportable segments:
For the Thirteen Weeks Ended April 1, 2023 and April 2, 2022
Results of Operations
The following table sets forth certain statement of operations items and as a percentage of revenue, for the periods indicated (in $000's):
25
|
|
13 Weeks Ended |
|
13 Weeks Ended |
||||||
|
|
April 1, 2023 |
|
April 2, 2022 |
||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
||
Revenues |
|
$ |
— |
|
|
|
$ |
— |
|
|
Cost of revenues |
|
|
— |
|
|
|
|
— |
|
|
Gross profit |
|
|
— |
|
|
|
|
— |
|
|
Selling, general and administrative expenses |
|
|
1,099 |
|
|
|
|
681 |
|
|
Operating loss |
|
|
(1,099 |
) |
|
|
|
(681 |
) |
|
Interest income (expense), net |
|
|
475 |
|
|
|
|
(2 |
) |
|
Gain on litigation settlement |
|
|
— |
|
|
|
|
1,950 |
|
|
Unrealized loss on marketable securities |
|
|
(247 |
) |
|
|
|
— |
|
|
Gain on reversal of contingency loss |
|
|
— |
|
|
|
|
637 |
|
|
Other income, net |
|
|
(18 |
) |
|
|
|
715 |
|
|
Net income (loss) before provision for income taxes |
|
|
(889 |
) |
|
|
|
2,619 |
|
|
Income tax benefit |
|
|
(227 |
) |
|
|
|
— |
|
|
Net income (loss) from continuing operations |
|
|
(662 |
) |
|
|
|
2,619 |
|
|
Income (loss) from discontinued operations |
|
|
13,976 |
|
|
|
|
(1,405 |
) |
|
Income tax provision for discontinued operations |
|
|
3,229 |
|
|
|
|
3 |
|
|
Net income (loss) from discontinued operations |
|
|
10,747 |
|
|
|
|
(1,408 |
) |
|
Net income |
|
$ |
10,085 |
|
|
|
$ |
1,211 |
|
|
The following tables set forth revenues for key product and service categories, percentages of total revenue and gross profits earned by key product and service categories and gross profit percent as compared to revenues for each key product category indicated (in $000's):
|
|
13 Weeks Ended |
|
|
13 Weeks Ended |
|
||||||||||
|
|
April 1, 2023 |
|
|
April 2, 2022 |
|
||||||||||
|
|
Net |
|
|
Percent |
|
|
Net |
|
|
Percent |
|
||||
|
|
Revenue |
|
|
of Total |
|
|
Revenue |
|
|
of Total |
|
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue from discontinued operations |
|
$ |
3,795 |
|
|
|
100.0 |
% |
|
$ |
9,324 |
|
|
|
100.0 |
% |
Biotechnology |
|
|
— |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
0.0 |
% |
Total Revenue |
|
$ |
3,795 |
|
|
|
100.0 |
% |
|
$ |
9,324 |
|
|
|
100.0 |
% |
|
|
13 Weeks Ended |
|
|
13 Weeks Ended |
|
||||||||||
|
|
April 1, 2023 |
|
|
April 2, 2022 |
|
||||||||||
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
||||
|
|
Profit |
|
|
Profit % |
|
|
Profit |
|
|
Profit % |
|
||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit from discontinued operations |
|
$ |
(197 |
) |
|
|
-5.2 |
% |
|
$ |
1,853 |
|
|
|
19.9 |
% |
Biotechnology |
|
|
— |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
0.0 |
% |
Total Gross Profit |
|
$ |
(197 |
) |
|
|
-5.2 |
% |
|
$ |
1,853 |
|
|
|
19.9 |
% |
Revenue
Revenue decreased by approximately $5.5 million, or 59.3%, for the 13 weeks ended April 1, 2023, as compared to the 13 weeks ended April 2, 2022. The decrease is primarily due to reduced demand and inventory availability during the 13 weeks ended April 1, 2023, as well as the disposition of our recycling segment as of March 1, 2023.
Cost of Revenue
Cost of revenue decreased by approximately $3.5 million for the 13 weeks ended April 1, 2023, as compared to the 13 weeks ended April 2, 2022. The decrease is primarily due the disposition of our recycling segment as of March 1, 2023.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased by approximately $418,000, or 61.5%, for the 13 weeks ended April 1, 2023, as compared to the 13 weeks ended April 2, 2022, primarily due to increased amortization costs relating to the Soin intangibles. This increase relates only to continuing operations.
26
Interest Income, net
Interest income, net increased by approximately $477,000 for the 13 weeks ended April 1, 2023, as compared to the 13 weeks ended April 2, 2022 primarily due to the accretion of discount in connection with the promissory note with SPYR and receivable from VM7 (see Note 18), as well as interest recorded on the note with SPYR.
Unrealized Loss on Marketable Securities
For the 13 weeks ended April 1, 2023, an unrealized loss on marketable securities of approximately $247,000 was recorded to mark to fair value securities received in connection to the sale of GeoTraq. There were no similar transactions for the 13 weeks ended April 2, 2022.
Segment Performance
We report our business in the following segments: Biotechnology and discontinued operations. We expect revenues and profits for our biotechnology segment to be driven by the development of pharmaceuticals that treat the root cause of pain but are non-opioid painkillers. We include Corporate expenses within the Biotechnology segment. As discussed above, we sold our Technology segment, GeoTraq, during the fiscal year ended December 31, 2022, and our Recycling segment in March 2023, and detail those results as discontinued operations below.
Operating loss by operating segment, is defined as loss before net interest expense, other income and expense, provision for income taxes ($000’s).
|
|
13 Weeks Ended April 1, 2023 |
|
|
13 Weeks Ended April 2, 2022 |
|
||||||||||||||||||
|
|
Biotechnology |
|
|
Discontinued Operations |
|
|
Total |
|
|
Biotechnology |
|
|
Discontinued Operations |
|
|
Total |
|
||||||
Revenue |
|
$ |
— |
|
|
$ |
3,795 |
|
|
$ |
3,795 |
|
|
$ |
— |
|
|
$ |
9,324 |
|
|
$ |
9,324 |
|
Cost of revenue |
|
|
— |
|
|
|
3,992 |
|
|
|
3,992 |
|
|
|
— |
|
|
|
7,471 |
|
|
|
7,471 |
|
Gross profit |
|
|
— |
|
|
|
(197 |
) |
|
|
(197 |
) |
|
|
— |
|
|
|
1,853 |
|
|
|
1,853 |
|
Selling, general and administrative expense |
|
|
1,099 |
|
|
|
(14,355 |
) |
|
|
(13,256 |
) |
|
|
681 |
|
|
|
2,263 |
|
|
|
2,944 |
|
Operating loss (income) |
|
$ |
(1,099 |
) |
|
$ |
14,158 |
|
|
$ |
13,059 |
|
|
$ |
(681 |
) |
|
$ |
(410 |
) |
|
$ |
(1,091 |
) |
Biotechnology Segment
Our biotechnology segment incurred expenses of approximately $1.1 million and $681,000 related to employee costs and professional services related to research, and corporate services, as well as amortization of the Soin intangibles for the 13 weeks ended April 1, 2023 and the 13 weeks ended April 2, 2022, respectively.
Discontinued Operations
Discontinued operations consists of our Recycling segment, which was disposed of effective March 1, 2023, and our Technology segment, which was disposed of during May 2022. Revenue for the 13 weeks ended April 1, 2023, decreased by approximately $5.5 million, or 59.3%, as compared to the prior year period, which was primarily due to the disposition of our Recycling segment as of March 1, 2023.
Operating loss for the 13 weeks ended April 1, 2023, increased by approximately $1.3 million as compared to the prior year period. The increase is primarily due to the disposition of our Recycling segment as of March 1, 2023.
Liquidity and Capital Resources
Overview
As of April 1, 2023, our cash on hand was $353,000. We intend to fund operations by using cash on hand, monthly revenues from the sale of our Subsidiaries, and funds received from approved ERC’s. We intend to raise funds to support future development of JAN 123 and JAN 101 either through capital raises or structured arrangements.
Our ability to continue as a going concern is dependent upon the success of future capital raises or structured settlements to fund the required testing to obtain FDA approval of JAN 123 and JAN 101, as well as to fund our day-to-day operations. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. While we will actively pursue these additional sources of financing, management cannot make any assurances that such financing will be secured.
27
Cash Flows
During the 13 weeks ended April 1, 2023, cash provided by operations was approximately $2.4 million, compared to cash provided by operations of approximately $2.1 million during the 13 weeks ended April 2, 2022. Cash provided by discontinued operations during the 13 weeks ended April 1, 2023 was approximately $2.3 million, while cash provided by continuing operations was approximately $106,000. The increase in cash was primarily due to results of operations as discussed above.
Cash used in investing activities was approximately $156,000 and $127,000, respectively, for the 13 weeks ended April 1, 2023 and the 13 weeks ended April 2, 2022. Cash used in investing activities for the 13 weeks ended April 1, 2023 was all associated with discontinued operations and was related to purchases of property and equipment. Cash used in investing activities for the 13 weeks ended April 2, 2022 was all associated with discontinued operations and related to purchases of property and equipment and intangibles.
Cash used in financing activities was approximately $2.0 million for the 13 weeks ended April 1, 2023. Cash used in financing activities from discontinued operations for the 13 weeks ended April 1, 2023 was approximately $2.2 million and was primarily due to the repayment of debt obligations. Cash provided financing activities from continued operations for the 13 weeks ended April 1, 2023 was approximately $163,000 and was related to $368,000 in proceeds from equity financing, partially offset by $205,000 in debt repayments. Cash used in financing activities was approximately $279,000 for the 13 weeks ended April 2, 2022. Cash used in financing activities for the 13 weeks ended April 2, 2022 was approximately $63,000 and $216,000 from discontinued and continuing operations, respectively, and was primarily due to the repayment of debt obligations.
Sources of Liquidity
We continue to face a challenging competitive environment as we continue to focus on raising capital and managing expenses. We reported a net loss of approximately $662,000 from continuing operations in for the 13 weeks ended April 1, 2023, and net income from continuing operations of approximately $2.6 million for the 13 weeks ended April 2, 2022 primarily due to a gain on litigation settlement of approximately $2.0 million, gain on reversal of a contingency loss of $637,000, and other income, net of $715,0000, partially offset by an operating loss of $681,000. Additionally, the Company has total current assets of approximately $637,000 and total current liabilities of approximately $3.5 million resulting in a net negative working capital of approximately $2.8 million. Cash provided by continuing operations was approximately $106,000.
Future Sources of Cash; Phase 2b Trials, New Acquisitions, Products, and Services
We may require additional debt financing and/or capital to finance new acquisitions, conduct our Phase IIb clinical trials, or consummate other strategic investments in our business. No assurance can be given any financing obtained may not further dilute or otherwise impair the ownership interest of our existing stockholders.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk and Impact of Inflation
Interest Rate Risk. We do not believe there is any significant risk related to interest rate fluctuations on our short and long-term fixed rate debt.
We do not hold any derivative financial instruments, nor do we hold any securities for trading or speculative purposes.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Evaluation of Disclosure control and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of April 1, 2023, the period covered in this report, our disclosure controls and procedures were not effective because of the material weaknesses discussed below.
28
In light of the conclusion that our internal disclosure controls are ineffective as of April 1, 2023, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regard to this annual report. Accordingly, the Company believes, based on its knowledge, that: (i) this annual report does not contain any untrue statement of a material fact or omit a material fact; and (ii) the financial statements, and other financial information included in this annual report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this annual report.
Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of April 1, 2023. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013 regarding Internal Control – Integrated Framework. Based on our assessment using those criteria, our management concluded that our internal control over financial reporting was not effective as of April 1, 2023.
Management noted material weaknesses in internal control when conducting their evaluation of internal control as of April 1, 2023. (1) Insufficient information technology general controls and segregation of duties. (2) inadequate control design or lack of sufficient controls over significant accounting processes; (3) insufficient assessment of the impact of potentially significant transactions; and (4) insufficient processes and procedures related to proper recordkeeping of agreements and contracts.
These material weaknesses remained outstanding as of the filing date of this Form 10-K and management is currently working to remedy these outstanding material weaknesses.
The Company’s management, including the Company’s CEO and CFO, do not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent or detect all error and all fraud. A control system, regardless of how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. These inherent limitations include the following: judgements in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes, controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting during the fiscal year ended April 1, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
29
PART II. Other Information
Item 1. Legal Proceedings
The information in response to this item is included in Note 15, Commitments and Contingencies, to the Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q.
Item 1A. Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. However, in light of the SEC Complaint, the Company provides the following additional risk factors, which supplements the risk factors previously disclosed by the Company in Part I, Item 1A, Risk Factors, of the 2020 10-K.
We are the subject of an SEC Complaint, which could divert management's focus, result in substantial litigation expenses and have an adverse impact on our business, reputation, financial condition, results of operations or stock price.
We are currently subject to an SEC Complaint. Refer to Note 15 to our Consolidated Financial Statements and Part II, Item 1 of this Quarterly Report for additional information regarding this specific matter. We may be subject to additional investigations, arbitration proceedings, audits, regulatory inquiries and similar actions, including matters related to intellectual property, employment, securities laws, disclosures, tax, accounting, class action and product liability, as well as regulatory and other claims related to our business and our industry, which we refer to collectively as legal proceedings. We cannot predict the outcome of any particular proceeding, or whether ongoing investigations, will be resolved favorably or ultimately result in charges or material damages, fines or other penalties, enforcement actions, bars against serving as an officer or director, or practicing before the SEC, or civil or criminal proceedings against us or members of our senior management.
Legal proceedings in general, and securities and class action litigation and regulatory investigations in particular, can be expensive and disruptive. Our insurance may not cover all claims that may be asserted against us, and we are unable to predict how long the legal proceedings to which we are currently subject will continue. An unfavorable outcome of any legal proceeding may have an adverse impact on our business, financial condition and results of operations or our stock price. Any proceeding could negatively impact our reputation among our stakeholders. Furthermore, publicity surrounding ongoing legal proceedings, even if resolved favorably for us, could result in additional legal proceedings against us, as well as damage our image.
We may not be able to maintain compliance with the continued listing requirements of The Nasdaq Capital Market.
Our common stock is listed on The Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other requirements including, without limitation, a requirement that our closing bid price be at least $1.00 per share. If we fail to continue to meet all applicable continued listing requirements for The Nasdaq Global Market in the future and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, our ability to obtain financing to repay debt, and fund our operations.
Item 2. Unregistered Sales of Equity Securities and Use of funds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.
Index to Exhibits
Exhibit Number |
|
Exhibit Description |
|
Form |
|
File Number |
|
Exhibit Number |
|
Filing Date |
10.96 |
|
|
8-K |
|
0-19621 |
|
10.95 |
|
3/20/2023 |
|
|
|
|
|
|
|
|
|
|
|
|
10.97 |
|
|
8-K |
|
0-19621 |
|
10.96 |
|
3/20/2023 |
|
|
|
|
|
|
|
|
|
|
|
|
10.98 |
|
|
8-K |
|
0-19621 |
|
10.98 |
|
3/22/2023 |
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.INS |
* |
Inline XBRL Instance Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.SCH |
* |
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.CAL |
* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.DEF |
* |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.LAB |
* |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.PRE |
* |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
|
|
|
|
|
|
|
|
* Filed herewith.
31
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized.
|
|
JanOne Inc. |
|
|
|
(Registrant) |
|
|
|
|
|
Date: |
May 22, 2023 |
By: |
/s/ Tony Isaac |
|
|
|
Tony Isaac |
|
|
|
Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
Date: |
May 22, 2023 |
By: |
/s/ Virland A. Johnson |
|
|
|
Virland A. Johnson |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial and Accounting Officer) |
32