UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
Amendment No. 1
ý
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017October 1, 2022
or
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 0-19621
JANONE INC.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | 41-1454591 (I.R.S. Employer Identification No.) | |
Las Vegas, Nevada (Address of principal executive offices) |
(Zip Code) |
952-930-9000702-997-5968
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.001 par value per share | JAN | The Nasdaq Stock Market LLC (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. ý☒ Yeso No
Indicate by check mark whether the registrant has submitted electronically and posted on its Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). ý☒ Yeso No
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”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer | | Accelerated filer | | ||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||
Emerging growth company | |
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.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý☒ No
As of November 13, 2017,11, 2022, there were 3,150,230outstanding 6,875,365 shares of the registrant’s Common Stock, withoutcommon stock, with a par value.value of $0.001.
JANONE INC.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
EXPLANATORY NOTE
Restatement Background
On April 17, 2023, the Company’s management and the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) reached a determination that the Company’s previously issued unaudited consolidated financial statements and related disclosures for each of the quarterly periods ended July 2, 2022 and October 1, 2022, should no longer be relied upon because of a material misstatement contained in those two quarterly unaudited condensed consolidated financial statements. The Company’s management and the Audit Committee discussed the matters with Frazier & Deeter, LLC, the Company’s independent registered public accounting firm for the 2022 fiscal year, and with WSRP, LLC, the Company’s independent registered public accounting firm during the second and third quarters in the 2022 fiscal year and prior fiscal periods since 2019, and determined to restate the Company’s unaudited condensed consolidated financial statements for the second and third fiscal quarters ended July 2, 2022, and October 1, 2022.
In connection with the Company’s preparation of its unaudited condensed consolidated financial statements and related disclosures for its second quarter, the Company’s management and Audit Committee relied upon the report issued by a third-party valuation firm to determine the carrying value of the promissory note the Company had received from SPYR Technologies, Inc. (the “SPYR Note”), in connection with the Company’s sale of the assets of its GeoTraq, Inc. subsidiary to SPYR Technologies, Inc. in the second quarter of the Company’s 2022 fiscal year. The accounting treatment for the SPYR Note had financial statement implications to (i) two line items in the Company’s Condensed Consolidated Balance Sheets (specifically, Note receivable, net and Accumulated deficit), (ii) two line items in the Company’s Condensed Consolidated Statements of Operations And Comprehensive Income (Loss) (specifically, Gain on sale of GeoTraq, and Interest expense, net), resulting in a decrease in net income of approximately $1.8 million and a decrease in net loss of approximately $93,000 for the 13 weeks ended July 2, 2022 and October 1, 2022, respectively, and (iii) two line items in the Company’s Condensed Consolidated Statements of Cash Flows (specifically, Gain on sale of GeoTraq and Accretion of note receivable discount), resulting in decrease in net income of approximately $1.8 million for the 26 weeks ended July 2, 2022, and $1.7 million for the 39 weeks ended October 1, 2022. Further, in connection with the preparation of the Company’s Quarterly Report on Form 10-Q for this quarterly period, the Company also received guidance from an additional third-party source in connection with the review of those unaudited condensed consolidated financial statements and related disclosures. However, in connection with the Company’s 2022 fiscal year-end audit and the preparation of its consolidated financial statements and related disclosures for that fiscal year, the Company’s management and the Audit Committee concluded that the carrying value of the SPYR Note, as set forth in the aforementioned Quarterly Reports, should be restated. The initial carrying value of $11.2 million should be restated to be $9.4 million and reflect carrying value of $9.6 million as of October 1, 2022. This quarterly restatement has an impact on net income (loss), but not on operating cash flows for any period.
Restatement of Previously Issued Unaudited Condensed Consolidated Financial Statements
This amended Quarterly Report on Form 10-Q includes unaudited consolidated financial statements for the quarters ended October 1, 2022 and October 2, 2021, as well as relevant unaudited interim pro forma financial information for the quarterly periods ended October 1, 2022 and October 2, 2021.
See Note 3 Restatements and Reclassifications; Note 7 Notes Receivable; Note 19 Loss Per Share; Note 22 Segment Information; and Note 25 Sale of GeoTraq in Part I. Financial Information Item 1. Condensed Consolidated Financial Statements for such restated information on the quarterly unaudited condensed consolidated financial statements for this second quarter of the Company’s 2022 fiscal year. Further, the gain associated with the GeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods ending October 1, 2022. As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods ending October 2, 2021.
2
JANONE INC.
INDEX TO FORM 10-Q
Page | ||
Item 1. | 4 | |
4 | ||
5 | ||
6 | ||
7 | ||
Notes to Unaudited Condensed Consolidated Financial Statements (Restated) | 8 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated) | 33 |
Item 3. | 40 | |
Item 4. | 40 | |
Item 1. | 42 | |
Item 1A. | 42 | |
Item 2. | 42 | |
Item 3. | 42 | |
Item | 42 | |
Item 5 | 43 | |
Item 6. | 44 | |
45 |
3
ITEM 1. Condensed Consolidated Financial Statements
APPLIANCE RECYCLING CENTERS OF AMERICA,JANONE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)Dollars in thousands, except per-share amounts)
|
| October 1, |
|
| January 1, |
| ||
|
| (As restated) |
|
|
|
| ||
|
| (Unaudited) |
|
|
|
| ||
Assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 868 |
|
| $ | 705 |
|
Trade and other receivables, net |
|
| 6,834 |
|
|
| 4,220 |
|
Inventories |
|
| 415 |
|
|
| 1,104 |
|
Prepaid expenses and other current assets |
|
| 1,248 |
|
|
| 1,423 |
|
Current assets from discontinued operations |
|
| — |
|
|
| 105 |
|
Total current assets |
|
| 9,365 |
|
|
| 7,557 |
|
Property and equipment, net |
|
| 2,656 |
|
|
| 2,113 |
|
Right to use asset - operating leases |
|
| 5,733 |
|
|
| 3,671 |
|
Intangible assets, net |
|
| 328 |
|
|
| 268 |
|
Note receivable, net |
|
| 9,625 |
|
|
| — |
|
Marketable securities |
|
| 300 |
|
|
| — |
|
Deposits and other assets |
|
| 1,577 |
|
|
| 1,556 |
|
Total assets |
| $ | 29,584 |
|
| $ | 15,165 |
|
Liabilities and Stockholders' Equity (Deficit) |
|
| ||||||
Liabilities: |
|
|
|
|
|
| ||
Accounts payable |
| $ | 6,065 |
|
| $ | 5,071 |
|
Accrued liabilities - other |
|
| 5,575 |
|
|
| 5,232 |
|
Accrued liability - California Sales Taxes |
|
| 6,202 |
|
|
| 6,022 |
|
Lease obligation short–term - operating leases |
|
| 1,711 |
|
|
| 1,304 |
|
Short–term debt |
|
| 3,657 |
|
|
| 288 |
|
Current portion of notes payable |
|
| 406 |
|
|
| 261 |
|
Current portion of related party note payable |
|
| 228 |
|
|
| 1,000 |
|
Current liabilities from discontinued operations |
|
| — |
|
|
| 195 |
|
Total current liabilities |
|
| 23,844 |
|
|
| 19,373 |
|
Lease obligation long term - operating leases |
|
| 4,179 |
|
|
| 2,470 |
|
Notes payable - long term portion |
|
| 1,425 |
|
|
| 1,318 |
|
Long-term portion related party note payable |
|
| 665 |
|
|
| — |
|
Other noncurrent liabilities |
|
| 46 |
|
|
| 680 |
|
Total liabilities |
|
| 30,159 |
|
|
| 23,841 |
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
| ||
Stockholders' equity (deficit): |
|
|
|
|
|
| ||
Preferred stock, series A - par value $0.001 per share 2,000,000 authorized, |
|
| — |
|
|
| — |
|
Common stock, par value $0.001 per share, 200,000,000 shares authorized, |
|
| 3 |
|
|
| 2 |
|
Additional paid-in capital |
|
| 45,747 |
|
|
| 45,743 |
|
Accumulated deficit |
|
| (45,708 | ) |
|
| (53,804 | ) |
Accumulated other comprehensive loss |
|
| (617 | ) |
|
| (617 | ) |
Total stockholders' equity (deficit) |
|
| (575 | ) |
|
| (8,676 | ) |
Total liabilities and stockholders' equity (deficit) |
| $ | 29,584 |
|
| $ | 15,165 |
|
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 1,994 | $ | 968 | ||||
Trade and other receivables, net | 11,991 | 10,509 | ||||||
Inventories, net | 11,219 | 16,291 | ||||||
Income tax receivable | – | 16 | ||||||
Prepaid expenses and other current assets | 891 | 761 | ||||||
Total current assets | 26,095 | 28,545 | ||||||
Property and equipment, net | 994 | 10,116 | ||||||
Restricted cash | 1,298 | 500 | ||||||
Intangible assets, net | 15,748 | 57 | ||||||
Deposits and other assets | 751 | 557 | ||||||
Deferred taxes | 1,305 | 2,081 | ||||||
Total assets | $ | 46,191 | $ | 41,856 | ||||
Liabilities and Stockholders' Equity | ||||||||
Liabilities: | ||||||||
Accounts payable | $ | 2,592 | $ | 6,143 | ||||
Accrued liabilities | 6,227 | 8,888 | ||||||
Line of credit PNC bank | – | 10,333 | ||||||
Notes payable - short term | 800 | – | ||||||
Accrued income taxes | 1,581 | – | ||||||
Current portion of long term maturities | 3,846 | 2,093 | ||||||
Total current liabilities | 15,046 | 27,457 | ||||||
Long term obligations, less current maturities | – | 2,826 | ||||||
Other noncurrent liabilities | 307 | 364 | ||||||
Total liabilities | 15,353 | 30,647 | ||||||
Stockholders' equity: | ||||||||
Preferred stock, series A, 288,588 shares authorized, issued and outstanding at September 30, 2017 | 14,963 | – | ||||||
Common stock, no par value, 50,000 shares authorized, 6,655 shares issued and outstanding at September 30, 2017 and December 31, 2016 | 22,437 | 22,405 | ||||||
Accumulated deficit | (5,987 | ) | (11,028 | ) | ||||
Accumulated other comprehensive loss | (575 | ) | (574 | ) | ||||
Total stockholders' equity | 30,838 | 10,803 | ||||||
Non controlling interest | – | 406 | ||||||
Total liabilities and equity | $ | 46,191 | $ | 41,856 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
JANONE INC.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Dollars in Thousands)thousands, except per-share)
|
| For the Thirteen Weeks Ended |
|
| For the Thirty-Nine Weeks Ended |
| ||||||||||
|
| October 1, |
|
| October 2, |
|
| October 1, |
|
| October 2, |
| ||||
|
| (As restated) |
|
|
|
|
| (As restated) |
|
|
|
| ||||
Revenues |
| $ | 8,587 |
|
| $ | 12,113 |
|
| $ | 28,449 |
|
| $ | 29,391 |
|
Cost of revenues |
|
| 7,553 |
|
|
| 9,032 |
|
|
| 23,913 |
|
|
| 23,146 |
|
Gross profit |
|
| 1,034 |
|
|
| 3,081 |
|
|
| 4,536 |
|
|
| 6,245 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
|
| 2,858 |
|
|
| 2,989 |
|
|
| 8,705 |
|
|
| 9,230 |
|
Gain on sale of GeoTraq |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Operating income (loss) |
|
| (1,824 | ) |
|
| 92 |
|
|
| (4,169 | ) |
|
| (2,985 | ) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest income (expense), net |
|
| 130 |
|
|
| (125 | ) |
|
| (123 | ) |
|
| (323 | ) |
Gain on Payroll Protection Program loan forgiveness |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,872 |
|
Gain (loss) on litigation settlement, net |
|
| — |
|
|
| — |
|
|
| 1,835 |
|
|
| (1,950 | ) |
Gain on settlement of vendor advance payments |
|
| — |
|
|
| 11 |
|
|
| — |
|
|
| 952 |
|
Gain on reversal of contingency loss |
|
| — |
|
|
| — |
|
|
| 637 |
|
|
| — |
|
Unrealized loss on marketable securities |
|
| (270 | ) |
|
| — |
|
|
| (646 | ) |
|
| — |
|
Other income, net |
|
| — |
|
|
| 23 |
|
|
| 359 |
|
|
| 45 |
|
Total other income (expense), net |
|
| (140 | ) |
|
| (91 | ) |
|
| 2,062 |
|
|
| 596 |
|
Income (loss) from continuing operations before provision for income taxes |
|
| (1,964 | ) |
|
| 1 |
|
|
| (2,107 | ) |
|
| (2,389 | ) |
Provision for income taxes |
|
| 16 |
|
|
| 33 |
|
|
| 23 |
|
|
| 236 |
|
Net income (loss) from continuing operations |
|
| (1,980 | ) |
|
| (32 | ) |
|
| (2,130 | ) |
|
| (2,625 | ) |
Net income from discontinued operations, net of tax |
|
| (1 | ) |
|
| (936 | ) |
|
| 10,234 |
|
|
| (2,820 | ) |
Net income (loss) |
| $ | (1,981 | ) |
| $ | (968 | ) |
| $ | 8,104 |
|
| $ | (5,445 | ) |
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic and diluted loss per share from continuing operations |
| $ | (0.63 | ) |
| $ | (0.01 | ) |
| $ | (0.68 | ) |
| $ | (1.01 | ) |
Basic income (loss) per share from discontinued operations |
| $ | (0.00 | ) |
| $ | (0.33 | ) |
| $ | 3.25 |
|
| $ | (1.08 | ) |
Diluted income (loss) per share from discontinued operations |
| $ | (0.00 | ) |
| $ | (0.33 | ) |
| $ | 2.93 |
|
| $ | (1.08 | ) |
Basic income (loss) per share |
| $ | (0.63 | ) |
| $ | (0.34 | ) |
| $ | 2.57 |
|
| $ | (2.09 | ) |
Diluted income (loss) per share |
| $ | (0.63 | ) |
| $ | (0.34 | ) |
| $ | 2.32 |
|
| $ | (2.09 | ) |
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 3,150,230 |
|
|
| 2,827,410 |
|
|
| 3,150,230 |
|
|
| 2,601,827 |
|
Diluted |
|
| 3,150,230 |
|
|
| 2,827,410 |
|
|
| 3,496,003 |
|
|
| 2,601,827 |
|
Net income (loss) |
| $ | (1,981 | ) |
| $ | (968 | ) |
| $ | 8,104 |
|
| $ | (5,445 | ) |
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (42 | ) |
Total other comprehensive income loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (42 | ) |
Comprehensive income (loss) |
| $ | (1,981 | ) |
| $ | (968 | ) |
| $ | 8,104 |
|
| $ | (5,487 | ) |
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Revenues | $ | 25,484 | $ | 27,356 | $ | 74,505 | $ | 77,457 | ||||||||
Cost of revenues | 17,055 | 18,905 | 51,334 | 56,379 | ||||||||||||
Gross profit | 8,429 | 8,451 | 23,171 | 21,078 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative expenses | 7,301 | 7,036 | 21,167 | 21,543 | ||||||||||||
Operating income (loss) | 1,128 | 1,415 | 2,004 | (465 | ) | |||||||||||
Other income (expense): | ||||||||||||||||
Gain on the sale of Compton Facility | – | – | 5,163 | – | ||||||||||||
Gain on the sale of AAP equity interest | 81 | – | 81 | – | ||||||||||||
Interest expense, net | (207 | ) | (341 | ) | (636 | ) | (928 | ) | ||||||||
Other income (expense) | 248 | 61 | 315 | 155 | ||||||||||||
Total other income (expense), net | 122 | (280 | ) | 4,923 | (773 | ) | ||||||||||
Income (loss) before provision for income taxes | 1,250 | 1,135 | 6,927 | (1,238 | ) | |||||||||||
Total provision (benefit) for income taxes | 563 | – | 2,382 | 438 | ||||||||||||
Net income (loss) | 687 | 1,135 | 4,545 | (1,676 | ) | |||||||||||
Net loss attributed to noncontrolling interest | 83 | (12 | ) | 496 | 245 | |||||||||||
Net income (loss) attributed to shareholders' of the parent | $ | 770 | $ | 1,123 | $ | 5,041 | $ | (1,431 | ) | |||||||
Earnings (loss) per share: | ||||||||||||||||
Basic | $ | 0.12 | $ | 0.19 | $ | 0.76 | $ | (0.24 | ) | |||||||
Diluted | $ | 0.11 | $ | 0.19 | $ | 0.75 | $ | (0.24 | ) | |||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 6,655 | 5,991 | 6,655 | 5,940 | ||||||||||||
Diluted | 6,705 | 5,991 | 6,705 | 5,940 | ||||||||||||
Net income (loss) | $ | 687 | $ | 1,135 | $ | 4,545 | $ | (1,676 | ) | |||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Effect of foreign currency translation adjustments | (37 | ) | (29 | ) | (1 | ) | 14 | |||||||||
Total other comprehensive income (loss), net of tax | (37 | ) | (29 | ) | (1 | ) | 14 | |||||||||
Comprehensive income (loss) | 650 | 1,106 | 4,544 | (1,662 | ) | |||||||||||
Comprehensive loss attributable to noncontrolling interest | 83 | (12 | ) | 496 | 245 | |||||||||||
Comprehensive income (loss) attributable to shareholders' of the parent | $ | 733 | $ | 1,094 | $ | 5,040 | $ | (1,417 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
JANONE INC.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)thousands)
|
| For the Thirty-Nine Weeks Ended |
| |||||
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||
|
| As restated |
|
|
|
| ||
OPERATING ACTIVITIES: |
|
|
|
|
|
| ||
Net income (loss) |
| $ | 8,104 |
|
| $ | (5,445 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 347 |
|
|
| 3,136 |
|
Amortization of debt issuance costs |
|
| 10 |
|
|
| — |
|
Stock based compensation expense |
|
| 4 |
|
|
| 274 |
|
Accretion of note receivable discount |
|
| (225 | ) |
|
| — |
|
Gain on legal settlement |
|
| (115 | ) |
|
| — |
|
Gain on Payroll Protection Program loan forgiveness |
|
| — |
|
|
| (1,872 | ) |
Gain on settlement of vendor advance payments |
|
| — |
|
|
| (952 | ) |
Gain on reversal of contingent liability |
|
| (637 | ) |
|
| — |
|
Gain on sale of GeoTraq |
|
| (10,241 | ) |
|
| — |
|
Unrealized loss on marketable securities |
|
| 646 |
|
|
| — |
|
Changes in assets and liabilities: |
|
|
|
|
|
| ||
Accounts receivable |
|
| (2,614 | ) |
|
| (1,931 | ) |
Income taxes receivable |
|
| — |
|
|
| 196 |
|
Prepaid expenses and other current assets |
|
| 176 |
|
|
| (71 | ) |
Inventories |
|
| 689 |
|
|
| 478 |
|
Right of use assets |
|
| 54 |
|
|
| (995 | ) |
Lease liability |
|
| — |
|
|
| 971 |
|
Accounts payable and accrued expenses |
|
| 1,440 |
|
|
| 2,840 |
|
Deposits and other Assets |
|
| (29 | ) |
|
| (114 | ) |
Net cash used in operating activities |
|
| (2,391 | ) |
|
| (3,485 | ) |
INVESTING ACTIVITIES: |
|
|
|
|
|
| ||
Purchases of property and equipment |
|
| (736 | ) |
|
| (1,530 | ) |
Purchases of intangibles |
|
| (214 | ) |
|
| (65 | ) |
Net cash used in investing activities |
|
| (950 | ) |
|
| (1,595 | ) |
FINANCING ACTIVITIES: |
|
|
|
|
|
| ||
Proceeds from equity financing, net |
|
| — |
|
|
| 5,544 |
|
Proceeds from issuance of short-term notes payable |
|
| 648 |
|
|
| 538 |
|
Proceeds from stock option exercise |
|
| — |
|
|
| 27 |
|
Proceeds from notes payable |
|
| 4,052 |
|
|
| 1,835 |
|
Payments on related party notes payable |
|
| (107 | ) |
|
| — |
|
Payments on notes payable |
|
| — |
|
|
| (58 | ) |
Payments on short-term notes payable |
|
| (1,089 | ) |
|
| (323 | ) |
Net cash provided by financing activities |
|
| 3,504 |
|
|
| 7,563 |
|
Effect of changes in exchange rate on cash and cash equivalents |
|
| — |
|
|
| (42 | ) |
INCREASE IN CASH AND CASH EQUIVALENTS |
|
| 163 |
|
|
| 2,441 |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
| 705 |
|
|
| 379 |
|
CASH AND CASH EQUIVALENTS, end of period |
| $ | 868 |
|
| $ | 2,820 |
|
Supplemental cash flow disclosures: |
|
|
|
|
|
| ||
Interest paid |
| $ | 235 |
|
| $ | 146 |
|
Income taxes paid |
|
| 54 |
|
|
| 28 |
|
Right to use asset - operating leases capitalized |
|
| 1,902 |
|
|
| 1,815 |
|
39 Weeks Ended | ||||||||
September 30, 2017 | October 1, 2016 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 4,545 | $ | (1,676 | ) | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 1,054 | 936 | ||||||
Amortization of debt issuance costs | 262 | 136 | ||||||
Stock based compensation expense | 32 | 264 | ||||||
Gain on sale of property | (5,163 | ) | – | |||||
Gain on sale and deconsolidation of variable interest entity AAP | (81 | ) | – | |||||
Change in reserve for uncollectible accounts | 7 | – | ||||||
Change in reserve for inventory obsolescence | (124 | ) | – | |||||
Change in deferred income taxes | 776 | 439 | ||||||
Other | 679 | (37 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (1,531 | ) | 2,004 | |||||
Prepaid expenses and other current assets | (254 | ) | 108 | |||||
Inventories | 5,073 | 385 | ||||||
Accounts payable and accrued expenses | (4,509 | ) | 301 | |||||
Income tax payable | 1,597 | 859 | ||||||
Net cash provided by operating activities | 2,363 | 3,719 | ||||||
INVESTING ACTIVITIES: | ||||||||
Purchases of property and equipment | (107 | ) | (244 | ) | ||||
Proceeds from sale of property and equipment, net | 6,785 | – | ||||||
Purchase of intangible asset, GeoTraq Inc, net of debt and Series A preferred stock issued | (200 | ) | – | |||||
Proceeds from sale of equity in AAP less cash retained by AAP as a result of deconsolidation | 643 | – | ||||||
Increase in restricted cash | (798 | ) | – | |||||
Other | – | (22 | ) | |||||
Net cash provided by (used) in investing activities | 6,323 | (266 | ) | |||||
FINANCING ACTIVITIES: | ||||||||
Net payments under line of credit - PNC Bank | (10,333 | ) | (2,859 | ) | ||||
Net borrowing under the line of credit - MidCap Financial Trust | 3,616 | – | ||||||
Proceeds from issuance of debt obligations | 1,070 | 100 | ||||||
Payment of debt issuance costs | (484 | ) | (125 | ) | ||||
Payments on debt obligations | (1,544 | ) | (821 | ) | ||||
Net cash used in financing activities | (7,675 | ) | (3,705 | ) | ||||
Effect of changes in exchange rate on cash and cash equivalents | 15 | (8 | ) | |||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | 1,026 | (260 | ) | |||||
CASH AND CASH EQUIVALENTS, beginning of period | 968 | 1,969 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 1,994 | $ | 1,709 | ||||
Supplemental cash flow disclosures: | ||||||||
Interest paid | $ | 386 | $ | 1,033 | ||||
Income taxes refunded (paid) | $ | 48 | $ | 860 | ||||
Noncash financing and investing activities: | ||||||||
Notes payable issued to sellers of GeoTraq, Inc. (See Note 5) | $ | 800 | $ | – | ||||
Series A convertible preferred stock issued for the acquisition of GeoTraq, Inc. (See Note 5) | $ | 14,963 | $ | – | ||||
Debt issuance costs related to credit agreement renewal | $ | – | $ | 63 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
JANONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(Dollars in thousands)
|
| Series A Preferred |
|
| Common Stock |
|
| Additional |
|
| Accumulated |
|
| Accumulated |
|
| Total |
| ||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Deficit |
|
| Equity (Deficit) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (As restated) |
| ||||||||
Balance, January 1, 2022 |
|
| 238,729 |
|
| $ | — |
|
|
| 2,827,410 |
|
| $ | 2 |
|
| $ | 45,743 |
|
| $ | (53,804 | ) |
| $ | (617 | ) |
| $ | (8,676 | ) |
Share based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| 4 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8 | ) |
|
| (41 | ) |
|
| (49 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,211 |
|
|
| — |
|
|
| 1,211 |
|
Balance, April 2, 2022 |
|
| 238,729 |
|
|
| — |
|
|
| 2,827,410 |
|
|
| 2 |
|
|
| 45,747 |
|
|
| (52,601 | ) |
|
| (658 | ) |
|
| (7,510 | ) |
Series A-1 preferred converted |
|
| (16,141 | ) |
|
| — |
|
|
| 322,820 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 41 |
|
|
| 41 |
|
Net income, as restated |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,874 |
|
|
| — |
|
|
| 8,874 |
|
Balance, July 2, 2022 |
|
| 222,588 |
|
|
| — |
|
|
| 3,150,230 |
|
|
| 3 |
|
|
| 45,747 |
|
|
| (43,727 | ) |
|
| (617 | ) |
|
| 1,406 |
|
Net loss, as restated |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,981 | ) |
|
| — |
|
|
| (1,981 | ) |
Balance, October 1, 2022 |
|
| 222,588 |
|
| $ | — |
|
|
| 3,150,230 |
|
| $ | 3 |
|
| $ | 45,747 |
|
| $ | (45,708 | ) |
| $ | (617 | ) |
| $ | (575 | ) |
|
| Series A Preferred |
|
| Common Stock |
|
| Additional |
|
| Accumulated |
|
| Accumulated |
|
| Total |
| ||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Deficit |
|
| Equity |
| ||||||||
Balance, January 1, 2021 |
|
| 259,729 |
|
| $ | — |
|
|
| 1,829,982 |
|
| $ | 2 |
|
| $ | 39,869 |
|
| $ | (36,917 | ) |
| $ | (588 | ) |
| $ | 2,366 |
|
Shares issued |
|
| — |
|
|
| — |
|
|
| 571,428 |
|
|
| — |
|
|
| 5,544 |
|
|
| — |
|
|
| — |
|
|
| 5,544 |
|
Share based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 109 |
|
|
| — |
|
|
| — |
|
|
| 109 |
|
Stock option exercise |
|
| — |
|
|
| — |
|
|
| 2,000 |
|
|
| — |
|
|
| 11 |
|
|
| — |
|
|
| — |
|
|
| 11 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (42 | ) |
|
| (42 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 502 |
|
|
| — |
|
|
| 502 |
|
Balance, April 3, 2021 |
|
| 259,729 |
|
|
| — |
|
|
| 2,403,410 |
|
|
| 2 |
|
|
| 45,533 |
|
|
| (36,415 | ) |
|
| (630 | ) |
|
| 8,490 |
|
Share based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 71 |
|
|
| — |
|
|
| — |
|
|
| 71 |
|
Stock option exercise |
|
| — |
|
|
| — |
|
|
| 4,000 |
|
|
| — |
|
|
| 16 |
|
|
| — |
|
|
| — |
|
|
| 16 |
|
Series A-1 preferred converted |
|
| (21,000 | ) |
|
| — |
|
|
| 420,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,979 | ) |
|
| — |
|
|
| (4,979 | ) |
Balance, July 3, 2021 |
|
| 238,729 |
|
|
| — |
|
|
| 2,827,410 |
|
|
| 2 |
|
|
| 45,620 |
|
|
| (41,394 | ) |
|
| (630 | ) |
|
| 3,598 |
|
Share based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 94 |
|
|
| — |
|
|
| — |
|
|
| 94 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (968 | ) |
|
| — |
|
|
| (968 | ) |
Balance, October 2, 2021 |
|
| 238,729 |
|
| $ | — |
|
|
| 2,827,410 |
|
| $ | 2 |
|
| $ | 45,714 |
|
| $ | (42,362 | ) |
| $ | (630 | ) |
| $ | 2,724 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Note 1: Background
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. NatureThe accompanying consolidated financial statements include the accounts of BusinessJanOne Inc., a Nevada corporation, and Basis of Presentation
Appliance Recycling Centers of America, Inc. andits subsidiaries (“we,”(collectively the “Company” or “ARCA”“JanOne”) are.
The Company has three operating segments – Biotechnology, Recycling, and Technology. In connection with the sale of GeoTraq (see Note 25), the accounts for the Technology segment have been presented as discontinued operations in the accompanying consolidated financial statements.
During September 2019, JanOne, through its biotechnology segment, broadened its business of providingperspectives 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.
ARCA Recycling, Inc. (“ARCA Recycling”) is the Company’s Recycling segment and provides turnkey appliance recycling and replacement services for electric utilities and other sponsors ofutility energy efficiency programs. Weprograms 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 February 19, 2021, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with (i) ARCA Affiliated Holdings Corporation, a Delaware corporation, (ii) ARCA Services Inc., a Delaware corporation, and (iii) Connexx Services Inc, a Delaware corporation (collectively, the “Buyers”), pursuant to which the Buyers agreed to acquire substantially all of the assets, and assume certain liabilities, of ARCA Recycling and Connexx (the “Disposition Transaction”). The principal of the Buyers is Virland A. Johnson, our Chief Financial Officer. On November 14, 2021, the parties entered into an amendment to the Purchase Agreement, which provided for the immediate termination of the transactions proposed by the Purchase Agreement and for an amendment for the Buyers to pay to us a “break fee.” The break fee was amended to an aggregate of $100,000, payable in two $50,000 installments: (i) the first of which is due to be paid on or around August 12, 2022 (the one-year anniversary of the Recycling Sale Agreement and which at the time of filing has not yet been paid) and (ii) the second of which is due to be paid not later than the last day of our next fiscal year, which is December 31, 2022. However, if, prior to the date on which either installment of the amended break fee is payable, we sell ARCA Recycling, ARCA Canada, and Connexx to an otherwise unaffiliated third party for an aggregate amount less than $25 million, then the Buyers will be relieved of their obligation to pay to us any not-yet-then-due installment of the break fee. Additionally, if, prior to the date on which the second installment of the amended break fee is payable, we have not sold ARCA Recycling, ARCA Canada, and Connexx to any third party, then the Buyers will be relieved of their obligation to pay to us the second installment of the break fee. Finally, if, prior to a date on which either installment of the amended break fee is due, we sell ARCA Recycling, ARCA Canada, and Connexx to the Buyers, then, the purchase price therefore will be reduced by an amount equivalent to any break fee that had been previously paid to us by the Buyers and the Buyers shall also sell new major household appliances through a chainbe relieved of Company-owned stores undertheir obligation to pay to us any not-yet-due installment of the name ApplianceSmart®. Through our break fee.
GeoTraq Inc. (“GeoTraq”) subsidiary,was the Company’s Technology segment. The Company suspended all operations for GeoTraq during the year ended January 1, 2022. On May 24, 2022, the Company sold substantially all of the GeoTraq assets (see Note 25).
The Company reports on a development stage company, we are engaged52- or 53-week fiscal year. The Company’s 2021 fiscal year (“2021”) ended on January 1, 2022, and the current fiscal year (“2022”) will end on December 31, 2022.
Going concern (Restated)
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 of approximately $2.0 million and a net loss of approximately $968,000 for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and net income of approximately $8.1 million and a net loss of approximately $5.4 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively. In addition, as of October 1, 2022, the Company has total current assets of approximately $9.4 million and total current liabilities of approximately $23.8 million resulting in a net negative working capital of approximately $14.5 million.
The Company has available cash balances and funds available under its credit facility with Gulf Coast Bank and Trust (“Gulf Coast”) to provide sufficient liquidity to fund the entity’s operations and remodeling activities for at least the next twelve months. However, the Company cannot be certain its efforts will suffice. The agreement with Gulf Coast allows the Company to obtain lending in the development, design and, ultimately, we expectamount of the salelesser of cellular transceiver modules, also known as Cell-ID modules. GeoTraq is part of a new reporting segment for our$7.0 million or its calculated borrowing base (see Note 16 below). The Company – Technology. On August 15, 2017, we sold our 50% interest in a joint venture operatingexpects that it will be able to utilize the available funds under the name ARCA Advanced Processing, LLC (AAP”), which recycles appliances from twelve states incredit facility to provide liquidity and to pursue acquisitions and other strategic transactions to expand and grow the Northeastbusiness to enhance shareholder value. Management also regularly monitors capital market conditions to ensure no other conditions or events exist that may materially affect the Company’s financial conditions and Mid-Atlantic regionsliquidity and the Company may raise additional funds through borrowings or public or private sales of debt or equity securities, if necessary.
8
As of January 1, 2022, the Company had recorded a full impairment of the United States.GeoTraq intangible asset. On May 24, 2022, the Company sold substantially all of the GeoTraq assets, as discussed in Note 25 below.
Based on the above, management has concluded that, as of October 1, 2022, the Company is not aware of, and did not identify, any other conditions or events that would cause the Company to not be able to continue business as a going concern for the next twelve months.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying balance sheet as of December 31, 2016 which has been derived from the audited consolidated financial statements and the unaudited condensed consolidated financial statements have been prepared by the Company in accordanceconformity with accounting principles generally accepted accounting principles (“GAAP”) in the United StatesU.S. (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of AmericaRegulation S-X for interim financial information and Article 8 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”).information. Accordingly, theythese financial statements do not include all of the information and notes required by GAAP for complete financial statements.statements prepared in conformity with U.S. GAAP. In theour opinion, all adjustments, consisting of management, normal and recurring adjustments, and accruals considered necessary for a fair presentation for the periods indicated have been included. Operating results forHowever, the 13 Week and 39 Week periods ended September 30, 2017 and October 1, 2016, are presented in lieu of three month and nine month periods, respectively. The Company reports results on a 52-week fiscal basis. TheCompany’s results of operations for anythe interim periodperiods presented are not necessarily indicative of the results that may be expected for the full year.
In preparation of the Company’s condensed consolidated financial statements, management is required For further information, refer to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2016, includedJanuary 1, 2022.
Reclassifications
Certain amounts in the Company’s Annual Report on Form 10-K, as amended, initially filed withprior period have been reclassified to conform to the SEC on March 31, 2017.current period presentation.
Principles of consolidation:Consolidation
The accompanying consolidated financial statements include the accounts of Appliance Recycling Centers of America, Inc.the Company and ourits wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
ApplianceSmart, Inc., a Minnesota corporation, is a wholly owned subsidiary that was formed through a corporate reorganization in July 2011 to hold our business of selling new major household appliances through a chain of Company-owned retail stores. ARCA Canada Inc., a Canadian corporation, is a wholly owned subsidiary that was formed in September 2006 to provide turnkey recycling services for electric utility energy efficiency programs. ARCA Recycling, Inc., a California corporation, is a wholly owned subsidiary that was formed in November 1991 to provide turnkey recycling services for electric utility energy efficiency programs. The operating results of our wholly owned subsidiaries are consolidated in our financial statements.
AAP is a joint venture that was formed in October 2009 between ARCA and 4301 Operations, LLC (“4301”). ARCA and 4301 owned a 50% interest in AAP through August 15, 2017, on which date ARCA sold its 50% interest in AAP. AAP established a regional processing center in Philadelphia, Pennsylvania at which recyclable appliances are processed. The financial position and results of operations of AAP are consolidated in our financial statements through August 15, 2017, based on our conclusion that AAP is a variable interest entity due to our contribution in excess of 50%preparation of the total equity, subordinated debt and other forms of financial support. We had a controlling financial interest in AAP and we have provided substantial financial support to fund the operations of AAP since its inception. On August 15, 2017, ARCA sold it’s 50% interest in AAP and is no longer consolidating the results of AAP in its consolidated financial statements asin conformity with U.S. GAAP requires management to make estimates and assumption that affect the reported amounts of that date. Note 6 – Saleassets and deconsolidationliabilities and disclosure of variable interest entity AAP to these condensedcontingent assets and liabilities at the date of the consolidated financial statements.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 estimated reserve for doubtful current and long-term trade and other receivables, the estimated reserve for excess and obsolete inventory, estimated fair value and forfeiture rates for stock-based compensation, fair values in connection with the analysis of other intangibles and long-lived assets for impairment, valuation allowance against deferred tax assets and estimated useful lives for intangible assets and property and equipment.
Financial Instruments
On August 18, 2017, we acquired GeoTraq. GeoTraqFinancial 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 a development stage company that is engaged in the development, design,calculated based on interest rates available for debt with terms and ultimately, we expect, sale of cellular transceiver modules, also known as Cell-ID modules. GeoTraq has created a dedicated Cell-ID transceiver module that we believe can enable the design of extremely small, inexpensive products that can operate for years on a single charge, powered by standardly available batteries of diminutive size without the need of recharge. Accordingly, and utilizing Cell-ID technology exclusively, we believe that GeoTraq will provide an exclusive, low-cost solution and service life that will enable new global markets for location-based services (LBS) that could utilize technologymaturities similar to the technology that emergency 911 location systems currently utilize.Company’s existing debt arrangements, unless quoted market prices were available (Level 2 inputs). The carrying amounts of short-term debt at October 1, 2022 and January 1, 2022 approximate fair value.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Fair value of cash equivalents approximates carrying value.
Trade Receivables and Allowance for Doubtful Accounts
AsThe Company carries unsecured trade receivables at the original invoice amount less an estimate made for doubtful accounts based on a resultmonthly review of this transaction, GeoTraq becameall outstanding amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a wholly-owned subsidiarycustomer’s financial condition, credit history and therefore,current economic conditions. The
9
Company writes off trade receivables when deemed uncollectible. The Company records recoveries of trade receivables previously written off when payment is received. The Company considers a trade receivable to be past due if any portion of the results of GeoTraq are included in our consolidated resultsreceivable balance is outstanding for more than ninety days. The Company does not charge interest on past due receivables. The Company has no allowance for doubtful accounts as of August 18, 2017.October 1, 2022 or January 1, 2022.
Inventories
2. Inventories
Inventories, consisting principallyprimarily of appliances, are stated at the lower of cost, determined on a specific identification basis, or net realizable value and consist of:
September 30, 2017 | December 31, 2016 | |||||||
Appliances held for resale | $ | 11,219 | $ | 16,146 | ||||
Processed metals from recycled appliances held for resale | – | 139 | ||||||
Other | – | 6 | ||||||
$ | 11,219 | $ | 16,291 |
We providevalue. The Company provides estimated provisions for the obsolescence of appliance inventories, including adjustment to market, based on various factors, including the age of such inventory and management’s assessment of the need for such provisions. We look at historical inventory aging reports and margin analyses in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded. The Company has no reserve for excess or obsolete inventory as of October 1, 2022 or January 1, 2022.
Property and Equipment
Property and Equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful life of building and improvements is 3 to 30 years, transportation equipment is 3 to 15 years, machinery and equipment is 5 to 10 years, furnishings and fixtures is 3 to 5 years and office and computer equipment is 3 to 5 years.
The Company periodically reviews property and equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. We assess recoverability based on several factors, including our intention with respect to maintaining our facilities and projected discounted cash flows from operations. An impairment loss would be recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted cash flows.
Intangible Assets
The Company accounts for intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. Under ASC 350, intangible assets subject to amortization, shall be reviewed for impairment in accordance with the Impairment or Disposal of Long-Lived Assets in ASC 360, Property, Plant, and Equipment.
Under ASC 360, long-lived assets are tested for recoverability whenever events or changes in circumstances (‘triggering event’) indicate that the carrying amount may not be recoverable. In making this determination, triggering events that were considered included:
If a triggering event has occurred, for purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If after identifying a triggering event it is determined that the asset group’s carrying value may not be recoverable, a recoverability test is performed by forecasting the expected cash flows to be derived from the asset group for the remaining useful life of the asset group’s primary asset compared to its carrying value. The recoverability test relies upon the undiscounted cash flows (excluding interest and taxes) which are derived from the Company’s specific use of those assets (not how a market participant
10
would use those assets); and are based upon the existing service potential of the current assets (excluding any improvements that would materially enhance the assets). If the expected undiscounted cash flows exceed the carrying value, the assets are considered recoverable.
The Company’s intangible assets consist of customer relationship intangibles, trade names, licenses for the use of internet domain names, Universal Resource Locators, or URL’s, software, patent USPTO reference No. 10,182,402, and historical know-how, designs and related manufacturing procedures. Upon acquisition, critical estimates are made in valuing acquired intangible assets, which include but are not limited to: future expected cash flows from customer contracts, customer lists, and estimating cash flows from projects when completed; tradename and market position, as well as assumptions about the period of time that customer relationships will continue; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from the assumptions used in determining the fair values. All intangible assets are capitalized at their original cost and amortized over their estimated useful lives as follows: domain name and marketing – 3 to 20 years; software – 3 to 5 years, technology intangibles – 7 years, customer relationships – 7 to 15 years.
Based on a qualitative evaluation, for the year ended January 1, 2022, the Company recorded an impairment charge for the full unamortized balance of its GeoTraq intangible, in the amount of $9.8 million. The Company has recorded no impairment charges during the 13 weeks and 39 weeks ended October 1, 2022.
Revenue Recognition
Biotechnology Revenue
The Company is currently generating no revenue from its Biotechnology segment.
Recycling Revenue
The Company provides replacement appliances and provides appliance pickup and recycling services for consumers (“end users”) of public utilities, our customers. As part of the Company’s de-manufacturing and recycling process, it receives revenue from scrap dealers for refrigerant, steel, plastic, glass, copper and other residual items.
The Company accounts for revenue in accordance with Accounting Standards Codification 606 Revenue from Contracts with Customers.
Under the revenue standard, the Company determines revenue recognition through the following steps:
As part of our assessment of each contract, the Company evaluates certain factors including the customer’s ability to pay, or credit risk. For each contract, the Company considers the promise to transfer products or services, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the price stated on the contract is typically fixed and represents the net consideration to which the Company expects to be entitled per order, and therefore there is no variable consideration. As the Company’s standard payment terms are less than 90 days, the Company has elected, as a practical expedient, to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product or service based on its relative standalone selling price. The product or service price, as specified on the contract, is considered the standalone selling price as it is an observable source that depicts the price as if sold to a similar customer in similar circumstances.
Replacement Product Revenue
The Company generates revenue by providing replacement appliances. Revenue is recognized at the point in time when control of the replacement product is transferred to the end user and when performance obligations are satisfied, which typically occurs upon delivery from the Company’s center facility and installation at the end user’s home.
Recycling Services Revenue
The Company generates revenue by providing pickup and recycling services. Revenue is recognized at the point in time when a to-be recycled appliance has been picked up and transfer of ownership has occurred, thereby satisfying the performance obligation.
11
Byproduct Revenue
The Company generates other recycling byproduct revenue (the sale of copper, steel, plastic, and other recoverable non-refrigerant byproducts) as part of a de-manufacturing process. The Company recognizes byproduct revenue upon delivery and transfer of control of the byproduct to a third-party recycling customer having mutually agreed upon a price per pound, and that collection is reasonably assured. Transfer of control occurs at the time the customer assumes possession of the byproduct material. Revenue recognized is a function of byproduct weight, type and, in some cases, volume of the byproduct delivered multiplied by the market rate as quoted.
Contract Liability
Receivables are recognized in the period the Company ships the product or provides the service. Payment terms on invoiced amounts are based on contractual terms with each customer. When the Company receives consideration, or such consideration is unconditionally due, prior to transferring goods or services to the customer under the terms of a sales contract, they are recorded as deferred revenue, which represents a contract liability. The Company recognizes a contract liability as net sales once control of goods and/or services have been transferred to the customer and all revenue recognition criteria have been met, and any constraints have been resolved. The Company defers product costs until recognition of the related revenue occurs.
Assets Recognized from Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has concluded that no material costs have been incurred to obtain and fulfill our FASB Accounting Standards Codification, or ASC 606 contracts, meet the capitalization criteria, and as such, there are no material costs deferred and recognized as assets on the consolidated balance sheet at October 1, 2022 or January 1, 2022.
Other:
The majority of the Company’s revenue recognized is derived from contracts with customers.
Technology Revenue
The Company is currently generating no revenue from its Technology segment.
Shipping and Handling
The Company classifies shipping and handling charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.
Advertising Expense
Advertising expense is charged to operations as incurred. The Company had $0 and $6,000 in advertising expenses for the 13 weeks and 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows: Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. Level 2 – to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
12
Income Taxes
The Company accounts for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company’s assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided on deferred taxes if it is determined that it is more likely than not that the asset will not be realized. The Company recognizes penalties and interest accrued related to income tax liabilities in the provision for income taxes in its Condensed Consolidated Statements of Operations and Other Comprehensive Income (loss).
Significant management judgment is required to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Company uses a two-step process to evaluate tax positions. The first step requires an entity to determine whether it is more likely than not (greater than 50% chance) that the tax position will be sustained. The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion. The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements of the Company in future periods.
Lease Accounting
The Company accounts for leases in accordance with ASC 842 – Leases. This accounting standard requires all lessees to record the impact of leasing contracts on the balance sheet as a right to use asset and corresponding liability. This is measured by taking the present value of the remaining lease payments over the lease term and recording a right to use asset (“ROU”) and corresponding lease obligation for lease payments. Rent expense is realized on a straight-line basis and the lease obligation is amortized based on the effective interest method. The amounts recognized reflect the present value of remaining lease payments for all leases that have a lease term greater than 12 months. The discount rate used is an estimate of the Company’s incremental borrowing rate based on information available at lease commencement.
In considering the lease asset value, the Company considers fixed or variable payment terms, prepayments and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company uses an estimate of its incremental borrowing rate based on information available at lease commencement in determining present value of lease payments.
The Company leases warehouse facilities and office space. These assets and properties are generally leased under noncancelable agreements that expire at various dates through 2025 with various renewal options for additional periods. The agreements, which have and continue to be classified as operating leases, generally provide for base rent and require us to pay all insurance, taxes and other maintenance costs. The Company’s operating leases are exclusively for building space in the different cities we have operations. The lease terms typically last from 2-3 years with some being longer or shorter depending on needs of the business and the lease partners. The Company has also engages in month-to-month leases for parking spaces that the Company has elected to expense as incurred. Our lease agreements do not include variable lease payments. The Company’s lessors offer options to extend lease terms as leases expire, and management evaluates current rental markets and other strategic factors in making the decision whether to renew. When leases are within six months of renewal, management will estimate probabilities of renewing for an additional term based on market and strategic factors, and if the probability is more likely than not that the lease will be renewed, the financials will assume the lease is renewed under the lease renewal option.
The Company's operating leases contain no residual value guarantees or contain restrictive covenants.
Lease amounts accounted for under ASC 842 were determined based on analysis of the lease contracts using lease payments and timing as documented in the contract. Non-lease contracts were also evaluated to determine if the contract terms provided an asset that was controlled by the Company, and provided it with substantially all relevant economic benefits. The Company is not a party to any contracts containing embedded leases. All lease contracts were reviewed, and distinctions made between lease and non-lease payments. Only payments related to the lease of the asset were included in lease payment calculations. Management uses an estimation of its incremental borrowing rate at lease commencement over similar terms as the lease contracts in determining the present value of its lease obligations.
Stock-Based Compensation
The Company from time to time grants stock awards, restricted stock awards, and options to employees (including executives), non-employees, and members of the Board of Directors. Such awards are valued based on the grant date fair-value of the instruments, net of estimated forfeitures. The value of each award is recognized over the vesting period.
13
Foreign Currency
The financial statements of the Company’s non-U.S. subsidiary are translated into U.S. dollars in accordance with ASC 830, Foreign Currency Matters. Under ASC 830, if the assets and liabilities of the Company are recorded in certain non-U.S. functional currencies other than the U.S. dollar, they are translated at rates of exchange at year end. Revenue and expense items are translated at the average monthly exchange rates. The resulting translation adjustments are recorded directly into accumulated other comprehensive income.
Earnings Per Share
Earnings per share is calculated in accordance with ASC 260, “Earnings Per Share”. Under ASC 260 basic earnings per share is computed using the weighted average number of common shares outstanding during the period except that it does not include unvested restricted stock subject to cancellation. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants, options, restricted shares and convertible preferred stock. The dilutive effect of outstanding restricted shares, options and warrants is reflected in diluted earnings per share by application of the treasury stock method. Convertible preferred stock is reflected on an if-converted basis.
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company has determined it has three reportable segments.
Concentration of Credit Risk
The Company maintains cash balances at several banks in several states including, California, Minnesota, and Nevada. Accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 per institution as of October 1, 2022. At times, balances may exceed federally insured limits.
Note 3: Restatements and Reclassifications
On April 17, 2023, the Company’s management and the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) reached a determination that the Company’s previously issued unaudited consolidated financial statements and related disclosures for each of the quarterly periods ended July 2, 2022 and October 1, 2022, should no longer be relied upon because of a material misstatement contained in those two quarterly unaudited condensed consolidated financial statements. In connection with the Company’s preparation of its unaudited condensed consolidated financial statements and related disclosures for each of the two referenced periods, the Company’s management and Audit Committee relied upon the report issued by a third-party valuation firm to determine the carrying value of the promissory note the Company had received from SPYR Technologies, Inc. (the “SPYR Note”), in connection with the Company’s sale of the assets of its GeoTraq, Inc. subsidiary to SPYR Technologies, Inc. in the second quarter of the Company’s 2022 fiscal year. At December 31, 2022, the Company reviewed the original valuation of the Promissory Note to determine if the original 10.5% used to discount the Note was appropriate. In connection with this review, the Company determined that the discount rate should be revised to 14.5%.
The Company’s management and the Audit Committee discussed the matters with Frazier & Deeter, LLC, the Company’s independent registered public accounting firm for the 2022 fiscal year, and with WSRP, LLC, the Company’s independent registered public accounting firm during the second and third quarters in the 2022 fiscal year and prior fiscal periods since 2019, and determined to restate the Company’s unaudited condensed consolidated financial statements for the second and third fiscal quarters ended July 2, 2022, and October 1, 2022. Further, the gain associated with the GeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods ending October 1, 2022. As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods ending October 2, 2021.
14
|
| October 1, |
| |||||||
|
| (Unaudited) |
|
|
| (As restated) |
| |||
|
| Previously Reported |
| Effect of Restatement |
| (Unaudited) |
| |||
Consolidated balance sheets as of October 1, 2022 |
|
|
|
|
|
|
| |||
Note receivable, net |
|
| 11,345 |
|
| (1,720 | ) |
| 9,625 |
|
Total assets |
| $ | 31,304 |
| $ | (1,720 | ) | $ | 29,584 |
|
Total liabilities |
|
| 30,159 |
|
| — |
|
| 30,159 |
|
Additional paid-in capital |
|
| 45,747 |
|
| — |
|
| 45,747 |
|
Accumulated deficit |
|
| (43,988 | ) |
| (1,720 | ) |
| (45,708 | ) |
Total stockholders' equity (deficit) |
|
| 1,145 |
|
| (1,720 | ) |
| (575 | ) |
Total liabilities and stockholders' equity (deficit) |
| $ | 31,304 |
| $ | (1,720 | ) | $ | 29,584 |
|
|
| For the Thirteen Weeks Ended |
|
| For the Thirty-Nine Weeks Ended |
| ||||||||||||||
|
| October 1, |
|
| October 1, |
| ||||||||||||||
|
| Previously Reported |
| Effect of Restatement |
| (As restated) |
|
| Previously Reported |
| Effect of Restatement |
| (As restated) |
| ||||||
Selling, general and administrative expenses |
|
| 2,858 |
|
| — |
|
| 2,858 |
|
|
| 8,711 |
|
| (6 | ) |
| 8,705 |
|
Gain on sale of GeoTraq |
|
| — |
|
| — |
|
| — |
|
|
| (12,091 | ) |
| 12,091 |
|
| — |
|
Operating income (loss) |
|
| (1,824 | ) |
| — |
|
| (1,824 | ) |
|
| 7,916 |
|
| (12,085 | ) |
| (4,169 | ) |
Interest income (expense), net |
|
| 36 |
|
| 94 |
|
| 130 |
|
|
| (254 | ) |
| 131 |
|
| (123 | ) |
Total other income (expense), net |
|
| (234 | ) |
| 94 |
|
| (140 | ) |
|
| 1,931 |
|
| 131 |
|
| 2,062 |
|
Income (loss) from continuing operations before provision for income taxes |
|
| (2,058 | ) |
| 94 |
|
| (1,964 | ) |
|
| 9,847 |
|
| (11,954 | ) |
| (2,107 | ) |
Net income (loss) from continuing operations |
|
| (2,074 | ) |
| 94 |
|
| (1,980 | ) |
|
| 9,824 |
|
| (11,954 | ) |
| (2,130 | ) |
Net income from discontinued operations, net of tax |
|
| — |
|
| (1 | ) |
| (1 | ) |
|
| — |
|
| 10,234 |
|
| 10,234 |
|
Net income (loss) |
| $ | (2,074 | ) | $ | 93 |
| $ | (1,981 | ) |
| $ | 9,824 |
| $ | (1,720 | ) | $ | 8,104 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic and diluted income (loss) per share from continuing operations |
| $ | (0.66 | ) | $ | 0.03 |
| $ | (0.63 | ) |
| $ | 3.12 |
| $ | (3.80 | ) | $ | (0.68 | ) |
Basic income per share from discontinued operations |
| $ | — |
| $ | (0.00 | ) | $ | (0.00 | ) |
| $ | — |
| $ | 3.25 |
| $ | 3.25 |
|
Diluted income per share from discontinued operations |
| $ | — |
| $ | (0.00 | ) | $ | (0.00 | ) |
| $ | — |
| $ | 2.93 |
| $ | 2.93 |
|
Basic income (loss) per share |
| $ | (0.66 | ) | $ | 0.03 |
| $ | (0.63 | ) |
| $ | 3.12 |
| $ | (0.55 | ) | $ | 2.57 |
|
Diluted income (loss) per share |
| $ | (0.66 | ) | $ | 0.03 |
| $ | (0.63 | ) |
| $ | 2.81 |
| $ | (0.49 | ) | $ | 2.32 |
|
|
| For the Thirty-Nine Weeks Ended |
| |||||||
|
| October 1, 2022 |
| |||||||
|
| Previously Reported |
| Effect of Restatement |
| As restated |
| |||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 9,824 |
|
| (1,720 | ) | $ | 8,104 |
|
Accretion of note receivable discount |
|
| (95 | ) |
| (130 | ) |
| (225 | ) |
Gain on sale of GeoTraq |
|
| (12,091 | ) |
| 1,850 |
|
| (10,241 | ) |
Net cash used in operating activities |
|
| (2,391 | ) |
| — |
|
| (2,391 | ) |
Note 4: Trade and Other Receivables
The Company’s trade and other receivables as of October 1, 2022 and January 1, 2022, respectively, were as follows (in $000’s):
|
| October 1, |
|
| January 1, |
| ||
Trade receivables, net |
| $ | 6,315 |
|
| $ | 6,105 |
|
Factored accounts receivable |
|
| — |
|
|
| (2,194 | ) |
Prestige Capital reserve receivable |
|
| — |
|
|
| 172 |
|
Other receivables |
|
| 519 |
|
|
| 137 |
|
Trade and other receivables, net |
| $ | 6,834 |
|
| $ | 4,220 |
|
|
|
|
|
|
| |||
Trade accounts receivable |
| $ | 4,313 |
|
| $ | 4,449 |
|
Un–billed trade receivables |
|
| 2,002 |
|
|
| 1,656 |
|
Total trade receivables, net |
| $ | 6,315 |
|
| $ | 6,105 |
|
15
Note 5: Inventory
Appliances held for sale are stated at the lower of cost, determined on a specific identification basis, or net realizable value. Inventory raw material – chips, are stated at the lower of average cost or net realizable value. Total inventory consists of the following as of October 1, 2022 and January 1, 2022 (in $000’s):
|
| October 1, |
|
| January 1, |
| ||
Appliances held for resale |
| $ | 415 |
|
| $ | 1,104 |
|
Discontinued operations |
|
| — |
|
|
| 105 |
|
Total inventory |
| $ | 415 |
|
| $ | 1,209 |
|
The Company provides estimated provisions for the obsolescence of inventories, including adjustments to net realizable value, based on various factors, including the age of such inventory and our management’s assessment of the need for such provisions. We look atThe Company reviews historical inventory aging’saging reports and margin analysisanalyses in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded. As of October 1, 2022 and January 1, 2022, the Company has recorded no inventory reserve.
Note 6: Prepaids and other current assets
Prepaids and other current assets as of October 1, 2022 and January 1, 2022 consist of the following (in $000’s):
|
| October 1, |
|
| January 1, |
| ||
Prepaid insurance |
| $ | 567 |
|
| $ | 493 |
|
Prepaid rent |
|
| — |
|
|
| 180 |
|
Prepaid other |
|
| 681 |
|
|
| 750 |
|
Total prepaid expenses and other current assets |
| $ | 1,248 |
|
| $ | 1,423 |
|
Note 7: Notes receivable
3. EarningsApplianceSmart
On December 30, 2017, the Company sold its retail appliance segment, ApplianceSmart, Inc. (“ApplianceSmart”) to ApplianceSmart Holdings LLC (the “Purchaser”), a wholly owned subsidiary of Live Ventures Incorporated, pursuant to a Stock Purchase Agreement (the “Agreement”). Pursuant to the Agreement, the Purchaser purchased from the Company all of the issued and outstanding shares of capital stock of ApplianceSmart in exchange for $6.5 million. On April 25, 2018, the Purchaser delivered to the Company a promissory note (the “ApplianceSmart Note”) in the original principal amount of approximately $3.9 million.
On December 9, 2019, ApplianceSmart filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code. Consequently, the Company recorded an impairment charge of approximately $3.0 million for the amount owed by ApplianceSmart to the Company as of December 28, 2019.
On October 13, 2021, a hearing was held to consider approval of a disclosure statement filed by ApplianceSmart in conjunction with its bankruptcy proceedings. On December 14, 2021, a hearing was held to confirm ApplianceSmart’s plan for reorganization (the “Plan”). On January 10, 2022, ApplianceSmart paid $25,000 to JanOne in settlement of its debt, as provided for in the confirmed Plan, and the ApplianceSmart Note was reversed. A final decree was issued by the court on February 28, 2022, upon the full satisfaction of the Plan, at which time ApplianceSmart emerged from Chapter 11. The outstanding balance of the ApplianceSmart Note at October 1, 2022 and January 1, 2022 was zero and approximately $3.0 million, respectively, exclusive of the impairment charge.
GeoTraq (Restated)
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, as discussed in Note 25 below. In connection with the Purchase Agreement, SPYR delivered to the Company a five-year Promissory Note in the initial principal amount of $12.6 million. The Promissory Note bears simple interest at the rate of 8% per share
Basic income per common share is computed basedannum, provides quarterly interest payments due on the weighted average numberfirst day of common shares outstanding. Diluted income per common share is computed based on the weighted average number ofeach calendar quarter, and may be prepaid at any time without penalty. Interest payments may be remitted in either restricted shares of common stock outstanding adjustedof SPYR, or in cash. The Promissory Note matures on May 24, 2027.
16
As of October 1, 2022, no interest payments had been received in connection with the Asset Purchase Agreement. SPYR is reviewing options to issue shares permitting it to remain in compliance with the Asset Purchase Agreement and not violate rules as set forth by the number of additional shares that would have been outstanding had the potentially dilutiveSEC. Any future shares of commonSPYR stock been issued. Potentially dilutive shares of common stock include unexercised stock options and warrants. Basic per share amounts are computed, generally, by dividing net income attributableissued to shareholders’the Company will be restricted.
In connection with the asset sale, the Company engaged a third-party valuation firm to assess the fair value of the parent byconsideration received. Based on the weighted average numbervaluation, the Promissory Note was valued at approximately $11.3 million. The amount of sharesthe discount, or approximately $1.3 million, has been recorded as an offset to the principal amount of common stock outstanding. Diluted per share amounts assume the conversion, exercise or issuancePromissory Note, and will be accreted ratably to interest income over the term of all potential common stock instruments unless their effect is anti-dilutive, thereby reducing the loss or increasingNote. At December 31, 2022, the income per common share.Company reviewed the original valuation of the Promissory Note to determine if the original 10.5% used to discount the Note was appropriate. In calculating diluted weighted average shares and per share amounts, we included stock options and warrantsconnection with exercise prices below average market prices, forthis review, the respective reporting periods in which they were dilutive, using the treasury stock method. We calculated the number of additional shares by assuming the outstanding stock options were exercised andCompany determined that the proceeds from such exercises were useddiscount rate should be revised to acquire shares14.5%. Consequently, the Company took a $1.85 million charge against income in its restatement of common stock at the average market price during13 and 26 weeks ended July 2, 2022, as discussed previously. The balance appearing on the quarter. ForCompany's unaudited Condensed Consolidated Balance Sheets represents the principal balance of the Promissory Note, net of the discount balance. During the 13 weeks and 39 weeks ended September 30, 2017 and October 1, 2016, we excluded options2022, approximately $65,000 and warrants to purchase 651$226,000, respectively, of the discount was recorded as interest income. As of October 1, 2022, the net principal balance on the Note was approximately $9.6 million.
Note 8: Property and 651 sharesEquipment
Property and equipment as of common stock fromOctober 1, 2022 and January 1, 2022 consist of the diluted weighted average shares outstanding calculation as the effect of these options were anti-dilutive.following (in $000’s):
|
| Useful Life |
| October 1, |
|
| January 1, |
| ||
Buildings and improvements |
| 3-30 |
| $ | 85 |
|
| $ | 80 |
|
Equipment |
| 3-15 |
|
| 3,664 |
|
|
| 3,638 |
|
Projects under construction |
|
|
|
| 1,556 |
|
|
| 851 |
|
Property and equipment |
|
|
|
| 5,305 |
|
|
| 4,569 |
|
Less accumulated depreciation and amortization |
|
|
|
| (2,649 | ) |
|
| (2,456 | ) |
Total property and equipment, net |
|
|
| $ | 2,656 |
|
| $ | 2,113 |
|
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Basic | ||||||||||||||||
Net income (loss) attributed to shareholders’ of parent | $ | 770 | $ | 1,123 | $ | 5,041 | $ | (1,431 | ) | |||||||
Weighted average common shares outstanding | 6,655 | 5,991 | 6,655 | 5,940 | ||||||||||||
Basic earnings (loss) per share | $ | 0.12 | $ | 0.19 | $ | 0.76 | $ | (0.24 | ) | |||||||
Diluted | ||||||||||||||||
Net income (loss) applicable to diluted earnings (loss) per share | $ | 770 | $ | 1,123 | $ | 5,041 | $ | (1,431 | ) | |||||||
Weighted average common shares outstanding | 6,655 | 5,991 | 6,655 | 5,940 | ||||||||||||
Add: options | – | – | – | – | ||||||||||||
Add: common stock warrants | 50 | – | 50 | – | ||||||||||||
Assumed diluted weighted average common shares outstanding | 6,705 | 5,991 | 6,705 | 5,940 | ||||||||||||
Diluted earnings (loss) per share | $ | 0.11 | $ | 0.19 | $ | 0.75 | $ | (0.24 | ) |
4. Share-based compensation
We recognized share-based compensationDepreciation expense of $0was approximately $35,000 and $123$53,000 for the 13 weeks ended September 30, 2017,October 1, 2022 and October 1, 2016 respectively. We recognized share-based compensation expense of $322, 2021, respectively, and $264$193,000 and $128,000 for the 39 weeks ended September 30, 2017October 1, 2022 and October 1, 2016,2, 2021, respectively. There is no estimated future share-based compensation expense
Note 9: Intangible Assets
Intangible assets as of September 30, 2017.October 1, 2022 and January 1, 2022 consist of the following (in $000’s):
|
| October 1, |
|
| January 1, |
| ||
Patent and domains |
| $ | 23 |
|
| $ | 23 |
|
Computer software |
|
| 4,773 |
|
|
| 4,559 |
|
Intangible assets |
|
| 4,796 |
|
|
| 4,582 |
|
Less accumulated amortization |
|
| (4,468 | ) |
|
| (4,314 | ) |
Total intangible assets |
| $ | 328 |
|
| $ | 268 |
|
5.AcquisitionIntangible amortization expense was approximately $42,000 and $998,000 for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and approximately $154,000 and $3.0 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
Note 10: Marketable Securities
Marketable securities as of GeoTraq, Inc.October 1, 2022 and January 1, 2022 consist of the following (in $000’s, except shares):
|
| Shares |
| Amount |
| ||
Beginning balance, January 1, 2022 |
|
| — |
| $ | — |
|
Securities received |
|
| 30,000,000 |
|
| 946 |
|
Mark-to-market |
|
| — |
|
| (646 | ) |
Ending balance, October 1, 2022 |
|
| 30,000,000 |
| $ | 300 |
|
On August 18, 2017,17
Marketable securities reflect shares of SPYR stock received by the Company entered into a series of transactions, acquiring all of the assets and capital stock of GeoTraq by way of merger. GeoTraq is a development stage company that is engaged in the development, design, and, ultimately,connection with the sale of cellular transceiver modules, also knownGeoTraq (see Note 25). Shares held are marked to fair market value as Cell-ID modules. As of August 18, 2017, GeoTraq became a wholly-owned subsidiary of the Company.
The final fair value of the single identifiable intangible asset acquired in the GeoTraq acquisition is a U.S. patent application USPTO reference No. 14724039 titled “Locator Device with Low Power Consumption” togethereach balance sheet date, with the assignment of intellectual property that included historical know-how, designs and related manufacturing procedures is $15,963. Total consideration paid for GeoTraq included cash $200, unsecured promissory notes bearing interest at the annual rate of 1.29%, and maturing on August 18, 2017 in the aggregate principal of $800, and 288,588 shares of newly created convertible series A preferred stock with a final fair value of $14,963. See Note 16 – Series A Preferred Stock to these condensed consolidated financial statements. There were no other assets acquiredresulting change recorded as an unrealized gain or liabilities assumed.
At the time of the acquisition of GeoTraq, GeoTraq was a shell company with no business operations, one intangible asset and historical know-how andesigns. GeoTraq is in the development stage and has yet to begin operations. The Company has elected to early adopt ASU 2017-01, which clarifies the definition of a business for purposes of applying ASC 805. The Company has determined that GeoTraq is a single or group of related assets, not a business as clarified by ASU 2017-01 at the time of acquisition.
6. Sale and deconsolidation of variable interest entity - AAP
The financial position and results of operations of AAP have been consolidated in our financial statements since AAP’s inception based on our conclusion that AAP is a variable interest entity that we controlled due to our contribution in excess of 50% of the total equity, subordinated debt and other forms of financial support. Since inception we provided substantial financial support to fund the operations of AAP. The financial position and results of operations for AAP are reported in our recycling segment. On August 15, 2017, we sold our 50% interest in AAP, and therefore, as of August 15, 2017, no longer consolidate the results of AAP in our financial statements.
The following table summarizes the assets and liabilities of AAP consolidated in our financial position as of December 31, 2016:
Assets | December 31, 2016 | ||||
Current assets | $ | 438 | |||
Property and equipment, net | 7,322 | ||||
Other assets | 83 | ||||
Total assets | $ | 7,843 | |||
Liabilities | |||||
Accounts payable | $ | 1,388 | |||
Accrued expenses | 523 | ||||
Current maturities of long-term debt obligations | 3,558 | ||||
Long-term debt obligations, net of current maturities | 435 | ||||
Other liabilities (a) | 1,126 | ||||
Total liabilities | $ | 7,030 |
(a) Other liabilities represent loans and advances between ARCA and AAP that are eliminated in consolidation.
The following table summarizes the operating results of AAP consolidated in our financial resultsloss. Unrealized loss recorded for the 13 weeks and 39 weeks ended September 30, 2017, and October 1, 2016, respectively:
13 Weeks Ended | ||||||||
September 30, 2017 (b) | October 1, 2016 | |||||||
Revenues | $ | 306 | $ | 2,076 | ||||
Gross profit | 38 | 492 | ||||||
Operating income (loss) | (140 | ) | 79 | |||||
Net income (loss) | (165 | ) | 24 |
39 Weeks Ended | ||||||||
September 30, 2017 (b) | October 1, 2016 | |||||||
Revenues | $ | 1,433 | $ | 5,557 | ||||
Gross profit | 24 | 967 | ||||||
Operating loss | (848 | ) | (285 | ) | ||||
Net loss | (991 | ) | (490 | ) |
(b) Operating results for AAP were consolidated in the Company’s operating results from inception of AAP through August 15, 2017, the date of our 50% equity sale in AAP. We recorded a gain of $81 on the sale2022 was approximately $270,000 and deconsolidation of our 50% equity interest in AAP. Net Cash outflow arising from deconsolidation of AAP was $157. The Company received $800 in cash consideration for its 50% equity interest in AAP.$646,000, respectively.
7. Property and equipment
Property and equipment as of September 30, 2017, and December 31, 2016, consist of the following:
Useful Life (Years) | September 30, 2017 | December 31, 2016 | ||||||||
Land | $ | – | $ | 1,140 | ||||||
Buildings and improvements | 18-30 | 2,122 | 3,780 | |||||||
Equipment (including computer software) | 3-15 | 7,897 | 19,260 | |||||||
Projects under construction | 73 | 204 | ||||||||
Property and equipment | 10,092 | 24,384 | ||||||||
Less accumulated depreciation and amortization | (9,098 | ) | (14,268 | ) | ||||||
Property and equipment, net | $ | 994 | $ | 10,116 |
Depreciation and amortization expense was $173 and $302 for the 13 weeks ended September 30, 2017 and October 1, 2016, respectively. Depreciation and amortization expense was $782 and $936 for the 39 weeks ended September 30, 2017 and October 1, 2016, respectively.
On January 25, 2017, as disclosed by the Company in Item 2.01 of its Current Report on Form 8-K filed with the SEC on January 31, 2017, the Company sold its’ Compton, California facility (the “Compton Facility”) for $7,103 to Terreno Acacia, LLC. The proceeds from the sale paid off the PNC term loan in the aggregate principal amount of $1,020 that was secured by the property and costs of sale of $325, with the remaining proceeds of $5,758 paid towards the PNC Revolver (as defined below). The Company recorded a gain on the sale of property of $5,163. The Company rented the Compton Facility back from Terreno Acacia, LLC after the completion of the sale from January 26, 2017 through April 10, 2017.
8. Intangible assets
Intangible assets as of September 30, 2017, and December 31, 2016, consist of the following:
September 30, 2017 | December 31, 2016 | |||||||
Intangible assets GeoTraq, net (See Note 5) | $ | 15,691 | $ | – | ||||
Recycling contract, net | 19 | 19 | ||||||
Goodwill | 38 | 38 | ||||||
$ | 15,748 | $ | 57 |
For the 13 Week and 39 Week periods ended September 30, 2017, we recorded amortization expense of $272, related to our finite intangible assets. The useful life and amortization period of the GeoTraq intangible acquired is seven years.
9.Note 11: Deposits and other assets
Deposits and other assets as of September 30, 2017,October 1, 2022 and December 31, 2016,January 1, 2022 consist of the following:following (in $000’s):
|
| October 1, |
|
| January 1, |
| ||
Deposits |
| $ | 1,547 |
|
| $ | 1,513 |
|
Other |
|
| 30 |
|
|
| 43 |
|
Total deposits and other assets |
| $ | 1,577 |
|
| $ | 1,556 |
|
September 30, 2017 | December 31, 2016 | |||||||||
Deposits | $ | 600 | $ | 453 | ||||||
Other | 151 | 104 | ||||||||
$ | 751 | $ | 557 |
Deposits are primarilyfor a refundable “deposit in lieu of bond”, in the amount of $1.3 million, relating the Skybridge matter (see Note 17) and for refundable security deposits with landlords from which the Company leases property from.property.
Note 12: Leases
The Company accounts for leases in accordance with ASC 842. The amount recorded is the present value of all remaining lease payments for leases with terms greater than 12 months. The right of use asset is offset by a corresponding liability. The discount rate is based on an estimate of our incremental borrowing rate for terms similar to our lease terms at the time of lease commencement. The asset will be amortized over remaining lease terms. See Lease Accounting in Note 2.
Total present value of future lease payments as of October 1, 2022 (in $000’s):
Twelve months ended, |
|
|
| |
2023 |
| $ | 594 |
|
2024 |
|
| 1,975 |
|
2025 |
|
| 1,681 |
|
2026 |
|
| 1,158 |
|
2027 |
|
| 981 |
|
Thereafter |
|
| 445 |
|
Total |
|
| 6,834 |
|
Less Interest |
|
| (944 | ) |
Present Value of Payments |
| $ | 5,890 |
|
During the 39 weeks ended October 1, 2022 and October 2, 2021, approximately $1.3 million and approximately $1.1 million, respectively, were included in operating cash flow for amounts paid for operating leases.
Additionally, the Company obtained right-of-use assets in exchange for lease liabilities of approximately $1.9 million upon commencement of new and renewed operating leases during the 39 weeks ended October 1, 2022. The weighted average lease term for operating leases is 3.75 years and the weighted average discount rate is 8.09%.
10.18
Note 13: Accrued liabilitiesLiabilities
Accrued liabilities as of September 30, 2017,October 1, 2022 and December 31, 2016,January 1, 2022 consist of the following:following (in $000’s):
|
| October 1, |
|
| January 1, |
| ||
Compensation and benefits |
| $ | 948 |
|
| $ | 731 |
|
Contract liability |
|
| 678 |
|
|
| 17 |
|
Accrued incentive and rebate checks |
|
| 1,986 |
|
|
| 1,427 |
|
Accrued transportation costs* |
|
| — |
|
|
| 904 |
|
Accrued guarantees |
|
| 130 |
|
|
| 767 |
|
Accrued purchase orders |
|
| — |
|
|
| 23 |
|
Accrued taxes |
|
| 507 |
|
|
| 543 |
|
Accrued litigation settlement |
|
| 680 |
|
|
| 680 |
|
Other |
|
| 646 |
|
|
| 140 |
|
Total accrued expenses |
| $ | 5,575 |
|
| $ | 5,232 |
|
September 30, 2017 | December 31, 2016 | |||||||
Sales tax estimates, including interest | $ | 4,610 | $ | 4,203 | ||||
Compensation and benefits | 741 | 2,431 | ||||||
Accrued incentive and rebate checks | 192 | 358 | ||||||
Accrued rent | 238 | 263 | ||||||
Warranty | 14 | 26 | ||||||
Accrued payables | – | 570 | ||||||
Deferred revenue | 322 | 227 | ||||||
Other | 110 | 810 | ||||||
$ | 6,227 | $ | 8,888 |
During the 39 weeks ended October 1, 2022, the Company reversed approximately $637,000 in contingent liabilities relating to guarantees of ApplianceSmart leases that no longer exist as a result of ApplianceSmart’s emergence from bankruptcy (see Note 7). No such transactions occurred during the 39 weeks ended October 2, 2021.
*Accrued transportation costs are related to delayed billing from certain vendors.
Contract liabilities rollforward
The following table summarizes the contract liability activity for the 39 weeks ended October 1, 2022 (in $000’s):
Beginning balance, January 1, 2022 |
| $ | 17 |
|
Accrued |
|
| 1,906 |
|
Settled |
|
| (1,245 | ) |
Ending balance, October 1, 2022 |
| $ | 678 |
|
Note 14: Accrued Liability – California Sales and Use Tax Assessment
We operateThe Company operates in twenty-threefourteen states in the U.S. and in various provinces in Canada. From time to time, we arethe Company is subject to sales and use tax audits that could result in additional taxes, penalties and interest owed to various taxing authorities.
As previously disclosed,The California Department of Tax and Fee Administration (formerly known as the California Board of EqualizationEqualization) (“BOE”CDTFA”) conducted a sales and use tax examination covering the Company’sARCA 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 BOECDTFA 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 California Board of Equalization’sCDTFA’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 BOECDTFA assessment for sales tax for tax years 2011, 2012, and 2013 in the amount of $4.1approximately $4.1 million plus applicable interest of $0.5 million$500,000 related to the appliance replacement programs that wethe Company administered on behalf of ourits customers on which weit did not assess, collect or remit sales tax. The Company intends to appealhas appealed this assessment and continue to engage the services of our existing retained sales tax experts throughout theCDTFA Appeals Bureau. The appeal remains in process. The BOE tax assessment is subjectInterest continues to protest and appeal, and would not need to be fundedaccrue until the matter has been fully resolved through the appeal process. The Company anticipates that resolutionis settled.
As of the BOE assessment could take up to two years.
11. Line of credit - PNC Bank
We had a Revolving Credit, Term LoanOctober 1, 2022, and Security Agreement, as amended, (“PNC Revolver”) with PNC Bank, National Association (“PNC”) that provided us with a $15,000 revolving line of credit. The PNC Revolver loan agreement included a lockbox agreement and a subjective acceleration clause and as a result we have classified the revolving line of credit as a current liability. The PNC Revolver was collateralized by a security interest in substantially all of our assets and PNC was also secured by an inventory repurchase agreement with Whirlpool Corporation solely with respect to Whirlpool purchases only. In addition, we issued a $750 letter of credit in favor of Whirlpool Corporation. The PNC Revolver required, starting with the fiscal quarter ending April 2, 2016, that we meet a specified minimum earnings before interest, taxes, depreciation and amortization, and continuing at the end of each quarter thereafter, that we meet a minimum fixed charge coverage ratio of 1.1 to 1.0. The PNC Revolver loan agreement limited investments that we could purchase, the amount of other debt and leases that we could incur, the amount of loans that we could issue to our affiliates and the amount we could spend on fixed assets, along with prohibiting the payment of dividends.
The interest rate on the PNC Revolver, as stated in our renewal agreement on January 22, 2016, was PNC Base Rate (as defined below) plus 1.75% to 3.25%, or 1-, 2- or 3-month PNC LIBOR Rate plus 2.75% to 4.25%, with the rate being dependent on our level of fixed charge coverage. The PNC Base Rate meant, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the interest rate per annum announced from time to time by PNC as its prime rate, (ii) the Federal Funds Open Rate plus 0.5%, and (iii) the one-month LIBOR rate plus 100 basis points (1%).
The amount of available revolving borrowings under the PNC Revolver was based on a formula using accounts receivable and inventories. We did not have access to the full $15,000 revolving line of credit due to such formula, the amount of the letter of credit issued in favor of Whirlpool Corporation and the amount of outstanding loans owed to PNC by out AAP joint venture.
As discussed above, the Company sold its the Compton Facility building and land for $7,103. The net proceeds from the sale, after costs of sale and payoff of the Term Loan (as defined below), were used to reduce the outstanding balance under our PNC Revolver.
On May 1, 2017, the PNC Revolver loan agreement was amended and the term was extended through June 2, 2017. The amendment, effective May 2, 2017, also reduced the maximum amount of borrowing under the PNC Revolver to $6 million. On May 10, 2017 we repaid in full and terminated our existing Revolving Credit, Term Loan and Security Agreement, as amended, with PNC Bank, National Association on the same date.
The PNC Revolver loan agreement terminated and the PNC Revolver was paid in full on May 10, 2017 with funds from MidCap Financial Trust. A letter of credit to Whirlpool Corporation remains outstanding with PNC backed by restricted cash collateral of $750 as of September 30, 2017. See Note 13, long term obligations, for additional information.
12. Notes payable – short term
On August 18, 2017, the Company, as part of its’ acquisition of GeoTraq, issued unsecured promissory notes to the sellers of GeoTraq with interest at the annual rate of interest of 1.29% maturing on August 18, 2018. The outstanding balance of the notes payable – short term as of September 30, 2017 is $800. Interest accrued is included in accrued expenses.
13. Long term obligations
Long term debt, capital lease and other financing obligations as of September 30, 2017, and December 31, 2016, consist of the following:
September 30, 2017 | December 31, 2016 | |||||||
PNC term loan | $ | – | $ | 1,020 | ||||
MidCap financial trust asset based revolving loan | 3,616 | – | ||||||
AFCO Finance | 639 | – | ||||||
Susquehanna term loans | – | 3,242 | ||||||
GE 8% loan agreement | 482 | 482 | ||||||
EEI note | 103 | 103 | ||||||
PIDC 2.75% note, due in month installments of $3, including interest, due October 2024 | – | 287 | ||||||
Capital leases and other financing obligations | 36 | 564 | ||||||
Debt issuance costs, net | (1,030 | ) | (779 | ) | ||||
Total debt obligations | 3,846 | 4,919 | ||||||
Less current maturities | (3,846 | ) | (2,093 | ) | ||||
Long-term debt obligations, net of current maturities | $ | – | $ | 2,826 |
PNC Term Loan
On January 24, 2011, we entered into a $2,550 Term Loan (“Term Loan”) with the PNC Bank to refinance the mortgage on our Compton Facility. The Term Loan was payable in 119 consecutive monthly principal payments of $21 plus interest commencing on February 1, 2011 and followed by a 120th payment of all unpaid principal, interest and fees on February 1, 2021. The PNC Revolver loan agreement required a balloon payment of $1,020 in principal plus interest and additional fees due on January 31, 2017. The Term Loan was collateralized by the Compton Facility. As disclosed by the Company in Item 2.01 of2022, the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2017, the Term Loanaccrued liability for California sales tax was paid off in full on January 25, 2017 when the Compton Facility was sold.approximately $6.2 million and $6.0 million respectively.
MidCap Financial Trust
On May 10, 2017, we entered into a Credit and Security Agreement (“Credit Agreement”) with MidCap Financial Trust (“MidCap Financial Trust”), as a lender and as agent for itself and other lenders under the Credit Agreement. The Credit Agreement provides us with a $12,000 revolving line of credit, which may be increased to $16,000 under certain terms and conditions (the “MidCap Revolver”). The MidCap Revolver has a stated maturity date of May 10, 2020, if not renewed. The MidCap Revolver is collateralized by a security interest in substantially all of our assets. The lender is also secured by an inventory repurchase agreement with Whirlpool Corporation for Whirlpool purchases only. The Credit Agreement requires that we meet a minimum fixed charge coverage ratio of 1.00:1.00 for the applicable measuring period as of the end of each calendar month. The applicable measuring period is (i) the period commencing May 1, 2017 and ending on the last day of each calendar month from May 31, 2017 through April 30, 2018, and (ii) the twelve-month period ending on the last day of such calendar month thereafter. The Credit Agreement limits the amount of other debt we can incur, the amount we can spend on fixed assets, and the amount of investments we can make, along with prohibiting the payment of dividends.
The amount of revolving borrowings available under the Credit Agreement is based on a formula using receivables and inventories. We may not have access to the full $12,000 revolving line of credit due to the formula using our receivables and inventories and the amount of any outstanding letters of credit issued by the Lender. The interest rate on the revolving line of credit is the one-month LIBOR rate plus four and one-half percent (4.50%).
On September 30, 2017 and December 31, 2016, our available borrowing capacity under the Credit Agreement is $2,416 and $0, respectively. The weighted average interest rate for the period of May 10, 2017 through September 30, 2017 was 5.66%. We borrowed $45,099 and repaid $41,483 on the Credit Agreement during the period of May 10, 2017 through September 30, 2017, leaving an outstanding balance on the Credit Agreement of $3,616 and $0 at September 30, 2017 and December 31, 2016, respectively.
On September 20, 2017, we received a written notice of default, dated September 20, 2017 (the “Notice of Default”), from MidCap Funding X Trust (the “Agent”), asserting that events of default had occurred with respect to the Credit Agreement. The Agent alleges in the Notice of Default that, as a result of the Company’s recent acquisition of GeoTraq, and the issuance of promissory notes to the stockholders of GeoTraq in connection with such acquisition, the Borrowers have failed to comply with certain terms of the Loan Agreement, and that such failure constitutes one or more Events of Default under the Loan Agreement. Specifically, the Notice of Default states that as a result of the acquisition and related issuance of promissory notes, the Borrowers have failed to comply with (i) a covenant not to incur additional indebtedness other than Permitted Debt (as defined in the Loan Agreement), without the Agent’s prior written consent, and a covenant not to make acquisitions or investments other than Permitted Acquisitions or Permitted Investments (as defined in the Credit Agreement). The Notice of Default also states that the Borrowers’ failure to pledge the stock in GeoTraq as collateral under the Credit Agreement and to make GeoTraq a “Borrower “under the Credit Agreement will become an Event of Default if not cured within the applicable cure period. The Agent has reserved the right to avail itself of any other rights and remedies available to it at law or by contract, including the right to (a) withhold funding, increase reserves and suspend making further advances under the Credit Agreement, (b) declare all principal, interest and other sums owing in connection with the Credit Agreement immediately due and payable in full, (c) charge the Default Rate on amounts outstanding under the Credit Agreement, and/or (d) exercise one or more rights and remedies with respect to any and all collateral securing the Credit Agreement. The Agent has not declared the amounts outstanding under the Credit Agreement to be immediately due and payable but has imposed the default rate of interest, which is 5% in excess of the rates otherwise payable under the Loan Agreement), effective as of August 18, 2017 and continuing until the Agent notifies the Borrowers that the specified Events of Default have been waived and no other Events of Default exist.
The Company strongly disagrees with the Lenders that any Event of Default has occurred and is reserving all of its options with respect to the Credit Agreement. The Company and the Agent are in active discussions for forbearance and resolution of the default, however there can be no assurance the Company and the Agent will be able to agree on terms of the forbearance. The Company is classifying the Mid-Cap Revolver as a current liability until forbearance and resolution of the default is cured.
GE
On August 14, 2017 as a part of the sale of the Company’s equity interest in AAP, Recleim LLC, a Delaware limited liability company (“Recleim”), agreed to undertake, pay or assume the Company’s GE obligations consisting of a promissory note (GE 8% loan agreement) and other payables which were incurred after the issuance of such promissory note. Recleim has agreed to indemnify, and hold ARCA harmless from any action to be taken by GE relating to such obligations. The Company has an offsetting receivable due from Recleim.
AFCO Finance
On June 16, 2017, we entered into a financing agreement with AFCO Credit Corporation (“AFCO”) to fund the annual premiums on insurance policies purchased through Marsh Insurance. These policies relate to workers’ compensation and various liability policies including, but not limited to, General, Auto, Umbrella, Property, and Directors’ and Officers’. The total amount of the premiums financed is $1,070 with an interest rate of 3.567%. An initial down payment of $160 was paid on June 16, 2017 and an additional 10 monthly payments of $92 will be made beginning July 1, 2017 and ending April 1, 2018. The outstanding principal at the end of September 30, 2017 and December 31, 2016 was $639 and $0, respectively.
Susquehanna Term Loans
On March 10, 2011, AAP entered into three separate commercial term loans (“BB&T Term Loans”) with Branch Banking Trust Company, as successor to Susquehanna Bank, (“BB&T”) pursuant to the guidelines of the U.S. Small Business Administration 7(a) Loan Program. The aggregate principal amount of the BB&T Term Loans was $4,750, divided into three separate loans with principal amounts of $2,100; $1,400; and $1,250, respectively. The BB&T Term Loans matured in ten years and bore an interest rate of prime plus 2.75%. Borrowings under the BB&T Term Loans were secured by substantially all of the assets of AAP along with liens on the business assets and certain personal assets of the owners of 4301 Operations, LLC. We were a guarantor of the BB&T Term Loans along with 4301 Operations, LLC and its members. In connection with the BB&T Term Loans, BB&T had a security interest in the recycling equipment assets of the Company. The BB&T Term Loans entered into by AAP were paid in full on August 15, 2017 and BB&T’s security interest in the recycling equipment assets of the Company was terminated and released.
Energy Efficiency Investments LLC
On November 8, 2016, the Company entered into a securities purchase agreement with Energy Efficiency Investments, LLC, pursuant to which the Company agreed to issue up to $7,732 principal amount of 3% Original Issue Discount Senior Convertible Promissory Notes of the Company and related common stock purchase warrants. These notes will be issued from time to time, up to such aggregate principal amount, at the request of the Company, subject to certain conditions, or at the option of Energy Efficiency Investments, LLC. Interest accrues at the rate of eight percent per annum on the principal amount of the notes outstanding from time to time, and is payable at maturity or, if earlier, upon conversion of these notes. The principal amount of these notes outstanding at September 30, 2017 and December 31, 2016, was $103.
14. Commitments and Contingencies
Contracts: We have entered into material contracts with three appliance manufacturers. Under the agreements there are no minimum purchase commitments; however, we have agreed to indemnify the manufacturers for certain claims, allegations or losses with respect to appliances we sell.
Litigation:
In February 2012, various individuals commenced a class action lawsuit against Whirlpool Corporation (“Whirlpool”) and various distributors of Whirlpool products, including Sears, The Home Depot, Lowe’s and us, alleging certain appliances Whirlpool sold through its distribution chain, which includes us, were improperly designated with the ENERGY STAR® qualification rating established by the U.S. Department of Energy and the Environmental Protection Agency. The claims against us include breach of warranty claims, as well as various state consumer protection claims. The amount of the claim is, as yet, undetermined. Whirlpool has offered to fully indemnify and defend its distributors in this lawsuit, including us, and has engaged legal counsel to defend itself and the distributors. We are monitoring Whirlpool’s defense of the claims and believe the possibility of a material loss is remote.
AMTIM Capital Inc. (“AMTIM”) provided management and sales services in respect of our recycling services in Canada, and was paid pursuant to agreements between AMTIM and us. A dispute arose between AMTIM and us with respect to the calculation of amounts due to AMTIM pursuant to the agreements. In a lawsuit filed in the province of Ontario on March 29, 2011, AMTIM claimed a discrepancy in the calculation of fees due to AMTIM by us in excess of $1.6 million. On December 9, 2011 the United States District Court for the District of Minnesota issued a declaratory default judgment to the effect that our method of calculating of the amounts due to AMTIM is correct. Although the Ontario action continues, and its outcome is uncertain, we believe that no further amounts are due under the terms of these agreements and we will continue to defend our position relative to this lawsuit.
We are party from time to time to ordinary course disputes that we do not believe to be material or have merit. We intend to vigorously defend ourselves against these ordinary course disputes.
15.Note 15: Income Taxes
OurThe Company’s overall effective tax rate was 34.4% for the 39 weeks ended September 30, 2017 and a positive tax provision of $438 against a pre-provision loss of $1,2380.23% for the 39 weeks ended October 1, 2016, respectively.2022, and a tax provision expense of approximately $23,000 was recorded against pre-provision income of approximately $9.8 million. The Company's overall effective tax rate was 4.5% for the 39 weeks ended October 2, 2021, and it had a tax provision expense of approximately $236,000 against a
19
pre-provision loss of approximately $5.2 million. The effective tax rates and related provisional tax amounts vary from the U.S. federal statutory rate due to state taxes, foreign taxes, share-based compensation, non-controlling interest, valuation allowance, and certain non-deductible expenses.
WeThe Company regularly evaluateevaluates both positive and negative evidence related to retaining a valuation allowance against certain deferred tax assets. The realization of deferred tax assets is dependent upon sufficient future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income. We haveThe Company has concluded, based on the weight of evidence, that a valuation allowance should be maintained against certain deferred tax assets that we doare not expectexpected to utilizebe utilized in the near future. The Company continues to haverecognize a full valuation allowance against its Canadian operations.
Note 16: Long-Term Debt
Long-term debt and other financing obligations as of October 1, 2022 and January 1, 2022, consist of the following (in $000’s):
|
| October 1, |
|
| January 1, |
| ||
AFCO Finance |
| $ | 406 |
|
| $ | 288 |
|
KLC Financial |
|
| 1,826 |
|
|
| 1,654 |
|
Gulf Coast Bank and Trust Company |
|
| 3,372 |
|
|
| — |
|
Total debt |
|
| 5,604 |
|
|
| 1,942 |
|
Less unamortized debt issuance costs |
|
| (116 | ) |
|
| (74 | ) |
Net amount |
|
| 5,488 |
|
|
| 1,868 |
|
Less current portion |
|
| (4,063 | ) |
|
| (550 | ) |
Total long-term debt |
| $ | 1,425 |
|
| $ | 1,318 |
|
16. Series A Preferred StockAFCO 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 $579,000 with an interest rate of ranging from approximately 6.0%-7.0% over the period. An initial down payment of approximately $129,000 was made on July 21, 2022 with additional monthly payments of approximately $59,000, escalating to approximately $69,000 over the term, being made beginning August 1, 2022 and ending on April 1, 2023. The outstanding principal due AFCO at October 1, 2022 and January 1, 2022 was approximately $406,000 and $288,000, respectively.
KLC Financial
On March 25, 2021, ARCA Recycling entered into a Master Equipment Finance Agreement (collectively, the “Equipment Finance Agreement”) with KLC Financial, Inc. (“KLC”). Under the terms of the Equipment Finance Agreement, KLC has agreed to make loans to ARCA Recycling secured by certain equipment purchased or to be purchased by ARCA Recycling on terms set forth or to be set forth in schedules to the Equipment Finance Agreement. Under the terms of Schedule No. 01 (the “Initial Loan”), KLC has agreed to loan ARCA Recycling approximately $1.8 million secured by existing equipment and new equipment to be purchased by ARCA Recycling. ARCA Recycling will make monthly payments of $31,000, inclusive of principal and interest, over a period of five years, at which time it is intended that the Initial Loan will be repaid in full. The Initial Loan bears interest at 7.59% per annum. KLC will have a first priority security interest over, among other things, all equipment identified in the schedules. The Initial Loan is personally guaranteed by Virland Johnson, the Chief Financial Officer of JanOne and Chief Financial Officer and Secretary of ARCA Recycling. The Equipment Finance Agreement contains customary affirmative and negative covenants, representations and warranties, and events of default for transactions of this nature. As of October 1, 2022 and January 1, 2022, the outstanding balance due under this agreement was approximately $1.8 million and $1.7 million, respectively.
Gulf Coast Bank and Trust Company
On September 26, 2022, ARCA Recycling, Inc. entered into a series of agreements with Gulf Coast to refinance its existing credit facility with Prestige Capital. The principal limit of the refinanced facility is $7.0 million, and the borrowing base is the lesser of the principal limit or the sum of the following:
20
Advances under the new credit facility will bear interest at the prime rate, as published daily in the Wall Street Journal, plus 3.25%, but at no time will be less than 8.75%. The refinancing of the Borrower’s existing credit facility improves the availability and liquidity of funds and provides flexibility to borrow against expanded asset categories.
The facility matures on September 25, 2024; and, the facility is automatically extended by succeeding periods of the same duration, unless terminated earlier in accordance with its terms. If the agreement is terminated and the obligation is repaid before the current maturity date, for any reason, the Borrower shall be assessed an early termination fee. The early termination fee is determined by multiplying the minimum amount in effect at the time of termination by the number of calendar months between the termination date and the then-current maturity date. However, no early termination fee shall be assessed if the Borrower repays all obligations after the first anniversary of the agreement and before the then-current maturity date; and repays all obligations with funds borrowed from the Lender. Advances under the new credit facility are secured by a pledge of substantially all of the assets of the Borrower. The Company is a guarantor of the facility. As of October 1, 2022 and January 1, 2022, the outstanding balance due under this agreement was approximately $3.4 million and $0, respectively.
Note 17: Commitments and Contingencies
Litigation
SEC Complaint
On August 18,2, 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 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.
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 seeks 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 $460,000 plus interest and attorneys’ fees. On March 29, 2017, the Company acquired GeoTraq by wayHennepin County district court (the “District Court”) dismissed the Company’s breach of merger. GeoTraq iscontract claim based on SA’s overuse of its Canadian call center but permitted the Company’s remaining claims to proceed. Following motion practice, on January 8, 2018 the District Court entered judgment in SA’s favor, which was amended as of February 28, 2018, for a development stage company total amount of approximately $614,000 including interest and attorneys’ fees. On March 4, 2019, the Minnesota Court of Appeals (the “Court of Appeals”) ruled and (i) reversed the District Court’s judgment in favor of Skybridge on the call center location claim and remanded the issue back to the District Court for further proceedings, (ii) reversed the District Court’s judgment in favor of Skybridge on the net payment issue and remanded the issue to the District Court for further proceedings, and (iii) affirmed the District Court’s judgment in Skybridge’s favor against the Company’s claim
21
that is engaged inSkybridge breached the development, manufacture, and, ultimately, we expect, sale of cellular transceiver modules, also known as Cell-ID modules.contract when it failed to meet the service level agreements. As a result of thisthe decision by the Court of Appeals, the District Court’s award of interest and attorneys’ fees, etc. was reversed. The Company and SA held a mediation session in July 2020. Trial was held in August 2020 and on February 1, 2021, the District Court assessed damages against the Company in the amount of approximately $715,000 plus interest, fees, and costs and attorneys’ fees of $475,000. In subsequent proceedings, the Appeals Court affirmed the District Court judgment. Of the total amount awarded to SA, less the funds that the Company had previously deposited with the District Court, SA remains entitled to approximately $382,000 of statutory interest, which obligation has been assumed by the Buyer in connection with the ARCA and Subsidiaries Disposition transaction (see Note 26).
AMTIM Capital
AMTIM Capital, Inc. (“AMTIM”) acts as the Company’s representative to market our recycling services in Canada under an arrangement that pays AMTIM for revenues generated by recycling services in Canada as set forth in the agreement between the parties. A dispute has arisen between AMTIM and the Company with respect to the calculation of amounts due to AMTIM pursuant to the agreement. In a lawsuit filed by AMTIM in the province of Ontario, AMTIM claims a discrepancy in the calculation of fees due to AMTIM by the Company of approximately $2.0 million. Trial commenced in February 2022, and, on December 12, 2022, a decree was issued by the court dismissing the case.
GeoTraq
On or about April 9, 2021, GeoTraq, becameGregg 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 wholly-owned subsidiarySettlement 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 $1.95 million (the “GeoTraq Settlement Consideration”) in the following manner: (i) $250,000, which was tendered in cash on or about the date of the Settlement Agreement and (ii) up to 10 quarterly installments of not less than $170,000 that commenced on June 1, 2021, and shall continue not less frequently than every three months thereafter (the “GeoTraq Installments”). The Company may tender the GeoTraq Installments in cash or in the equivalent value of shares of its common stock (the value of the shares to be determined by a formula set forth in the Settlement Agreement), in either case at the Company's discretion. The Company may also prepay one or more GeoTraq Installments in full or in part at any time or from time to time either in cash or in shares of its common stock (a “GeoTraq Prepayment”). If the Company elects to prepay one or more GeoTraq Installments with shares of its common stock, Mr. Sullivan reserves the right not to consent to a tender thereof in excess of 50% of the value of that specific GeoTraq Prepayment; however, Mr. Sullivan is restricted in the reasons for which he can refuse to provide his written consent. The number of shares of the Company's common stock to be issued upon any GeoTraq Prepayment is determined by a different formula than the one to be utilized for a GeoTraq Installment.
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 50% restriction, Mr. Sullivan provided the Company with the sole ability to determine the time and amount of each conversion of those shares of preferred stock.
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 $680,000 and $1.2 million as of October 1, 2022 and January 1, 2022, respectively.
Alixpartners, LLC
On October 19, 2022, Alixpartners, LLC filed a complaint in the Supreme Court of the State of New York, County of New York, styled Alixpartners, LLC, plaintiff/petitioner, against JanOne Inc., Index No. 653877/2022. Plaintiff alleged the breach of an agreement and sought damages in the amount of approximately $345,000. The Company denied that obligation. After extensive negotiations, the parties reached a settlement, pursuant to which the Company agreed to pay to Alixpartners the sum of $125,000 in two tranches and to provide a confession of judgment in its favor in the amount of approximately $450,000, which represented the amount sought in the complaint plus interest thereon. The confession of judgment will be null and void and the complaint will be dismissed with prejudice upon the Company tendering both tranches timely.
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,
22
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 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 $90,000 therefor. Plaintiff also seeks approximately $1,420,000 against ApplianceSmart and the Company on a joint and several basis. The Company does not believe that it is obligated to Plaintiff in that amount and the parties continue to negotiate a potential settlement.
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 $120,000, which amount is disputed by the Company. The parties are in the process of attempting to settle the matter.
Other Commitments
As previously disclosed and as discussed, on December 30, 2017, the Company disposed of its retail appliance segment and sold ApplianceSmart to the Purchaser (see Note 25). In connection with this transaction,that sale, as of December 28, 2019, the Company tendered to the owners of GeoTraq $200,000, issued to themaccrued an aggregate amount of 288,588future real property lease payments of approximately $767,000 which represented amounts guaranteed or which may have been owed under certain lease agreements to three third party landlords in which the Company either remained the counterparty, was a guarantor, or had agreed to remain contractually liable under the lease (“ApplianceSmart Leases”). A final decree was issued by the court on February 28, 2022, upon the full satisfaction of the Plan, at which time ApplianceSmart emerged from Chapter 11. During the year ended December 31, 2022, the Company reversed approximately $637,000 of the accrual, as the Company is no longer liable for two of these guarantees upon ApplianceSmart's emergence from bankruptcy (see Note 23). As of October 1, 2022, a balance of approximately $130,000 remains as an accrued liability due to an ongoing dispute concerning one of the leases.
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 October 1, 2022.
Note 18: Stockholders’ Equity
Common Stock: Our Articles of Incorporation authorize 200,000,000 shares of common stock that may be issued from time to time having such rights, powers, preferences and designations as the Board of Directors may determine. During the 39 weeks ended October 1, 2022 and October 2, 2021, no shares of common stock were issued in lieu of professional services.
As of October 1, 2022, and January 1, 2022, there were 3,150,230, and 2,827,410 shares, respectively, of common stock issued and outstanding.
Equity Offering
On January 29, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Purchasers”) for the sale by the Company in a registered direct offering (the “Offering”) of 571,428 shares of the Company’s Series A Convertible Preferredcommon stock, par value $0.001 per share (the “Common Stock”), at a purchase price per share of Common Stock of $10.50. The Offering closed on February 2, 2021 with gross proceeds to the Company of approximately $6.0 million before deducting placement agent fees and other offering expenses. The Company is utilizing the net proceeds for general working capital.
The Purchase Agreement contains customary representations, warranties and agreements by the Company and the Purchasers and customary indemnification rights and obligations of the parties.
A.G.P./Alliance Global Partners acted as the sole placement agent (the “Placement Agent”) for the Company on a “reasonable best efforts” basis in connection with the Offering. The Company entered into one-year unsecured promissory notesa Placement Agency Agreement, dated as of January 29, 2021, by and between the Company and the Placement Agent (the “Placement Agency Agreement”). Pursuant to the Placement Agency
23
Agreement, the Placement Agent was paid a cash fee of 7% of the gross proceeds paid to the Company for the securities or $420,000, and reimbursement for accountable legal expenses incurred by it in connection with the Offering of $35,000.
The shares of Common Stock sold in the aggregate principal amount of $800,000.Offering were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3 (File No. 333-251645) (the “Registration Statement”), which was initially filed with the Securities and Exchange Commission on December 23, 2020 and was declared effective on December 29, 2020.
To accomplishThe representations, warranties and covenants contained in the designation and issuancePurchase Agreement were made solely for the benefit of the Series A Preferred Stock, we filedparties to the Purchase Agreement. In addition, such representations, warranties, and covenants (i) are intended as a Certificateway of Designationallocating the risk between the parties to the Purchase Agreement and not as statements of fact, and (ii) may apply standards of materiality in a way that is different from what may be viewed as material by stockholders of, or other investors in, the Company. Accordingly, the Purchase Agreement incorporated by reference in this filing only to provide investors with information regarding the Secretary of Stateterms of the State of Minnesota. On November 9, 2017, we filed a Certificate of Correctiontransaction, and not to provide investors with any other factual information regarding the Minnesota Secretary of State. The following summaryCompany. Stockholders should not rely on the representations, warranties, and covenants or any descriptions thereof as characterizations of the Series A Preferred Stockactual state of facts or condition of the Company or any of its subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and Certificatewarranties may change after the date of Designation doesthe Purchase Agreement, which subsequent information may or may not purport to be fully reflected in public disclosures.
The foregoing descriptions of the Purchase Agreement and the Placement Agency Agreement are not complete and isare qualified in its entiretytheir entireties by reference to the provisionsfull text of applicable lawthe Purchase Agreement and to the CertificatePlacement Agency Agreement, a copy of Designation and Certificateeach of Correction, which is filed as Exhibit 3.110.1 and Exhibit 1.1, respectively, to the Company’s QuarterlyCurrent Report on Form 10-Q,8-K as amended,filed on January 29, 2021 and each is incorporated by reference herein.
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 October 28, 2026, or the date that all shares reserved under the 2016 Plan are issued or no longer available. The 2016 Plan provides for the quarterly period ended July 1, 2017, and Certificateissuance of Correction, which is filed as Exhibit 3.2. hereto.
Dividends
We cannot declare, pay or set aside any dividends onup to 800,000 shares of any other class or series of our capitalcommon stock unless (in additionpursuant to awards granted under the obtaining of any consents required by our Articles of Incorporation) the holders of the Series A Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend in the aggregate amount of $1.00, regardless of the number of then-issued and outstanding shares of Series A Preferred Stock. Any remaining dividends allocated2016 Plan. The vesting period is determined by the Board of Directors shallat the time of the stock option grant. As of October 1, 2022, and January 1, 2022, 90,000 options were outstanding under the 2016 Plan.
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 October 1, 2022, and January 1, 2022, 27,500 options were outstanding under the 2011 Plan. No additional awards will be distributed in an equal amount per sharegranted under the 2011 Plan.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. No options were granted during the 13 weeks and 39 weeks ended October 1, 2022.
Additional information relating to all outstanding options is as follows:
|
|
|
|
| Weighted |
|
| Aggregate |
|
| Weighted |
| ||||
|
| Options |
|
| Exercise |
|
| Intrinsic |
|
| Contractual |
| ||||
Outstanding at January 2, 2021 |
|
| 113,900 |
|
| $ | 11.97 |
|
| $ | 78 |
|
|
| 7.0 |
|
Granted |
|
| 38,000 |
|
|
| 8.16 |
|
|
|
|
|
|
| ||
Cancelled/expired |
|
| (28,400 | ) |
|
| 9.71 |
|
|
|
|
|
|
| ||
Exercised |
|
| (6,000 | ) |
|
| 4.32 |
|
|
|
|
|
|
| ||
Outstanding at January 1, 2022 |
|
| 117,500 |
|
| $ | 7.16 |
|
| $ | 21 |
|
|
| 7.0 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Cancelled/expired/forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Balance at October 1, 2022 |
|
| 117,500 |
|
| $ | 7.16 |
|
| $ | — |
|
|
| 6.3 |
|
Exercisable at October 1, 2022 |
|
| 117,500 |
|
| $ | 7.16 |
|
| $ | — |
|
|
| 6.3 |
|
The Company recognized approximately $0 and $94,000 of share-based compensation expense for the holders13 weeks ended October 1, 2022 and October 2, 2021, respectively, and approximately $4,000 and $274,000 of outstanding commonshare-based compensation expense for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
As ofOctober 1, 2022, the Company has no unrecognized share-based compensation expense associated with stock and option awards.
24
Series AA-1 Preferred Stock
Shares of Series A-1 Preferred Stock (on an as-if-converted toare convertible into the Company’s common stock basis pursuant toshares at a ratio of 1:20. During the Conversion Ratio as defined below).
Liquidation Rights
Immediately prior to the occurrence of any liquidation, dissolution or winding up of the Company, whether voluntary of involuntary, all39 weeks ended October 1, 2022, 16,141 shares of Series A ConvertibleA-1 Preferred Stock automatically convertwere converted into322,820 shares of ourthe Company's common stock based upon the then-applicable “conversion ratio” (as defined below)stock. As of October 1, 2022 and shall participate in the liquidation proceeds in the same manner as otherJanuary 1, 2022, there were 222,588 and 238,729 shares, respectively, of our common stock.
Conversion
The Series A ConvertibleA-1 Preferred Stock is not convertible into shares of our common stock except as described below.
outstanding.
Note 19: Loss Per Share (Restated)
Subject to the third sentence of this paragraph, each holder of a share of Series A Preferred Stock has the right, exercisable at any time and from time to time (unless otherwise prohibited by law, rule or regulation, or as restricted below), to convert any or all of such holder’s shares of Series A Preferred Stock into shares of our common stock at the conversion ratio. The “conversation ratio”Net loss per share ofis calculated using the Series A Preferred Stock is a ratio of 1:100, meaning every one share of Series A Preferred Stock, if and when converted into shares of our common stock, converts into 100 shares of our common stock. Notwithstanding anything to the contrary in the Certificate of Designation, a holder of Series A Preferred Stock may not convert any of such holder’s shares and we may not issue any shares of our common stock in connection with a conversation that would trigger any Nasdaq requirement to obtain shareholder approval prior to such conversion or issuance in connection with such conversion that would be in excess of thatweighted average number of shares of common stock equivalent to 19.9%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 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 numberadditional common shares issuable in respect of shares of commonrestricted share awards, stock as of Augustoptions and convertible preferred stock. As discussed in Note 18 2017 ; provided, however, that holders of the Series A Preferred Stock may effectuate any conversion and we are obligated to issue shares of common stock in connection with a conversion that would not trigger such a requirement. The foregoing restriction is of no further force or effect upon the approval of our stockholders in compliance with Nasdaq’s shareholder voting requirements. Notwithstanding anything to the contrary contained in the Certificate of Designation, the holders of the Series A Preferred Stock may not effectuate any conversion and we may not issue any shares of common stock in connection with a conversion until the later of (x) February 28, 2018, or (y) sixty-one days following the date on which our stockholders have approved the voting, conversion, and other potential rights of the holders of Series A Preferred Stock described in the Certificate of Designation in accordance with the relevant Nasdaq requirements.
Redemption
Theabove, 16,141 shares of Series AA-1 Preferred Stock have no redemption rights.were converted into 322,820 shares of the Company's common stock. For purposes of determining the weighted average common shares outstanding for the 13 weeks and 39 weeks ended October 1, 2022, respectively, these shares are considered to be outstanding for the entire period.
The following table presents the computation of basic and diluted net loss per share (in $000’s, except share and per–share data):
|
| Thirteen Weeks Ended |
|
| Thirty-Nine Weeks Ended |
| ||||||||||
|
| October 1, 2022 |
|
| October 2, 2021 |
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||||
|
| (as restated) |
|
|
|
|
| (as restated) |
|
|
|
| ||||
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (1,980 | ) |
| $ | (32 | ) |
| $ | (2,130 | ) |
| $ | (2,625 | ) |
Basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic and diluted loss per share |
| $ | (0.63 | ) |
| $ | (0.01 | ) |
| $ | (0.68 | ) |
| $ | (1.01 | ) |
Weighted average common shares outstanding |
|
| 3,150,230 |
|
|
| 2,827,410 |
|
|
| 3,150,230 |
|
|
| 2,601,827 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
|
| (1 | ) |
|
| (936 | ) |
|
| 10,234 |
|
|
| (2,820 | ) |
Basic |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic income (loss) per share |
| $ | (0.00 | ) |
| $ | (0.33 | ) |
| $ | 3.25 |
|
| $ | (1.08 | ) |
Weighted average common shares outstanding |
|
| 3,150,230 |
|
|
| 2,827,410 |
|
|
| 3,150,230 |
|
|
| 2,601,827 |
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted income (loss) per share |
| $ | (0.00 | ) |
| $ | (0.33 | ) |
| $ | 2.93 |
|
| $ | (1.08 | ) |
Weighted average common shares outstanding |
|
| 3,150,230 |
|
|
| 2,827,410 |
|
|
| 3,496,003 |
|
|
| 2,601,827 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
|
| (1,981 | ) |
|
| (968 | ) |
|
| 8,104 |
|
|
| (5,445 | ) |
Basic |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic income (loss) per share |
| $ | (0.63 | ) |
| $ | (0.34 | ) |
| $ | 2.57 |
|
| $ | (2.09 | ) |
Weighted average common shares outstanding |
|
| 3,150,230 |
|
|
| 2,827,410 |
|
|
| 3,150,230 |
|
|
| 2,601,827 |
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted income (loss) per share |
| $ | (0.63 | ) |
| $ | (0.34 | ) |
| $ | 2.32 |
|
| $ | (2.09 | ) |
Weighted average common shares outstanding |
|
| 3,150,230 |
|
|
| 2,827,410 |
|
|
| 3,496,003 |
|
|
| 2,601,827 |
|
Preemptive Rights
HoldersPotentially dilutive securities totaling 117,500 and 66,000 were excluded from the calculation of diluted earnings per share for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively, because the effects were anti-dilutive based on the application of the treasury stock method. Additionally, 205,299 shares of Series AA-1 Preferred Stock, are not entitled to any preemptive rights in respect to any securitiesconvertible into 4,105,979 of the Company’s common shares, were excluded from the calculation of diluted earnings per share as, by agreement, these shares could not be converted as of October 1, 2022.
25
Note 20: Major Customers and Suppliers
For the 13 weeks ended October 1, 2022, one customer represented approximately 14% of the Company’s total revenue. For the 13 weeks and 39 weeks ended October 2, 2021, one customer represented approximately 13% of the Company's total revenue. For the 39 weeks ended October 1, 2022, four customers represented approximately 33% of the Company’s total revenue. For the 39 weeks ended October 2, 2021, two customers represented approximately 32% of the Company's total revenue
As of October 1, 2022, six customers represented five percent or more than of the Company's total trade receivables, and represented a combined 78% of the Company’s total trade receivables. As of January 1, 2022, five customers represented five percent or more than of the Company's total trade receivables, and represented 38% of the Company's trade receivables in aggregate.
During the 39 weeks ended October 1, 2022 and October 2, 2021, the Company except as set forth inpurchased appliances for resale from five and four suppliers, respectively. The Company has secured, and is continuing to secure, other vendors from which to purchase appliances. However, the Certificatecurtailment or loss of Designationone of these suppliers or any other document agreed to by us.
Voting Rights
Each holder of a share of Series A Preferred Stock has a number of votes as is determined by multiplying (i) the number of shares of Series A Preferred Stock held by such holder, and (ii) 100. The holders of Series A Preferred Stock vote together with all other classes and series of common and preferred stock of the Company as a single class on all actions to be taken by the common stockholders of the Company, except to the extent that voting as a separate class or series is required by law. Notwithstanding anything to the contrary herein, the holders of the Series A Preferred Stock may not engage in any vote where the voting power would trigger any Nasdaq requirement to obtain shareholder approval; provided, however, the holders do have the right to vote that portion of their voting power that would not trigger such a requirement. The foregoing voting restriction lapses upon the requisite approval of the shareholders in compliance with Nasdaq’s shareholder voting requirements in effect at the time of such approval.
Protective Provisions
Without first obtaining the affirmative approval of a majority of the holders of the shares of Series A Preferred Stock, we may not directly or indirectly (i) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock; (ii) effect an exchange, reclassification, or cancellation of all or a part of the Series A Preferred Stock, but excluding a stock split or reverse stock split or combination of the common stock or preferred stock; (iii) effect an exchange, or create a right of exchange, of all or part of the shares of another class of shares into shares of Series A Preferred Stock; or (iii) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely the shares of such series, including the rights set forth in this Designation; provided, however, that we may, without any vote of the holders of shares of the Series A Preferred Stock, make technical, corrective, administrative or similar changes to the Certificate of Designation that do not, individually or in the aggregate, materiallyappliance supplier could adversely affect the rights or preferencesCompany’s operations.
Note 21: Defined Contribution Plan
The Company has a defined contribution salary deferral plan covering substantially all employees under Section 401(k) of the holdersInternal Revenue Code. The Company contributes an amount equal to 10 cents for each dollar contributed by each employee up to a maximum of shares5% of each employee’s compensation. The Company recognized expense for contributions to the Series A Preferred Stock.
plans of approximately $9,000 and $16,000 for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and approximately $25,000 and $22,000 for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
26
17.Note 22: Segment Information (Restated)
We operateThe Company operates within targeted markets through three reportable segments: retail,segments for continuing operations: biotechnology, recycling, and technology. The retailbiotechnology segment commenced operations in September 2019 and is composedfocused on development of income generated through our ApplianceSmart stores, which includes appliance salesnew and byproduct revenuesinnovative solutions for ending the opioid epidemic ranging from collected appliances.digital technologies to educational advocacy. The recycling segment is composed of income generated byincludes all fees charged and costs incurred for collecting, recycling and installing appliances for utilities and other customers andcustomers. The recycling segment also includes byproduct revenue, which areis primarily generated through the recycling of appliances. We have included the results from consolidating AAP in our recycling segment through August 15, 2017. The technology segment is composeddesigned wireless modules to connect devices to the Mobile Internet of all revenueThings (“IoT”) which contain location-based service (“LBS”) capabilities and costs incurred orcan interface to external sensors to allow them to communicate both sensor status and position information. Further, the gain associated with GeoTraq. At this time, GeoTraq. is in the development stageGeoTraq disposition (Technology segment) has been restated and expects to go to market with productspresented as discontinued operations for the periods ending October 1, 2022. As such, the results of the Technology segment have been reclassified and services inpresented as discontinued operations for the location based services market.periods ending October 2, 2021. 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 revenuessales and income from operations of each segment. Income from operationsOperating loss represents revenues less cost of revenues and operating expenses, including certain allocated selling, general and administrative costs. There are no inter-segmentintersegment sales or transfers.
The following tables present our segment information for periods indicated:the 13 weeks and 39 weeks ended October 1, 2022 and October 2, 2021 (in $000's):
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Revenues | ||||||||||||||||
Retail | $ | 13,678 | $ | 15,102 | $ | 44,334 | $ | 47,769 | ||||||||
Recycling | 11,806 | 12,254 | 30,171 | 29,688 | ||||||||||||
Technology | – | – | – | – | ||||||||||||
Total revenues | $ | 25,484 | $ | 27,356 | $ | 74,505 | $ | 77,457 | ||||||||
Gross profit | ||||||||||||||||
Retail | $ | 3,996 | $ | 4,089 | $ | 12,933 | $ | 13,149 | ||||||||
Recycling | 4,433 | 4,362 | 10,238 | 7,929 | ||||||||||||
Technology | – | – | – | – | ||||||||||||
Total gross profit | $ | 8,429 | $ | 8,451 | $ | 23,171 | $ | 21,078 | ||||||||
Operating income (loss) | ||||||||||||||||
Retail | $ | 308 | $ | (112 | ) | $ | 2,110 | $ | (549 | ) | ||||||
Recycling | 1,092 | 1,527 | 166 | 84 | ||||||||||||
Technology | (272 | ) | – | (272 | ) | – | ||||||||||
Total operating income (loss) | $ | 1,128 | $ | 1,415 | $ | 2,004 | $ | (465 | ) | |||||||
Depreciation and amortization | ||||||||||||||||
Retail | $ | 42 | $ | 46 | $ | 131 | $ | 151 | ||||||||
Recycling | 131 | 256 | 651 | 785 | ||||||||||||
Technology | 272 | – | 272 | – | ||||||||||||
Total depreciation and amortization | $ | 445 | $ | 302 | $ | 1,054 | $ | 936 |
|
| Thirteen Weeks Ended |
|
| Thirty-Nine Weeks Ended |
| ||||||||||
|
| October 1, 2022 |
|
| October 2, 2021 |
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||||
|
| (As restated) |
|
|
|
|
| (As restated) |
|
|
|
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Biotechnology |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Recycling |
|
| 8,587 |
|
|
| 12,113 |
|
|
| 28,449 |
|
|
| 29,391 |
|
Discontinued operations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Revenues |
| $ | 8,587 |
|
| $ | 12,113 |
|
| $ | 28,449 |
|
| $ | 29,391 |
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Biotechnology |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Recycling |
|
| 1,034 |
|
|
| 3,081 |
|
|
| 4,536 |
|
|
| 6,245 |
|
Discontinued operations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Gross profit |
| $ | 1,034 |
|
| $ | 3,081 |
|
| $ | 4,536 |
|
| $ | 6,245 |
|
Operating Income (loss) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Biotechnology |
| $ | 21 |
|
| $ | (182 | ) |
| $ | (331 | ) |
| $ | (1,232 | ) |
Recycling |
|
| (1,845 | ) |
|
| 274 |
|
|
| (3,838 | ) |
|
| (1,753 | ) |
Operating loss from continuing operations |
|
| (1,824 | ) |
|
| 92 |
|
|
| (4,169 | ) |
|
| (2,985 | ) |
Discontinued operations |
|
| (1 | ) |
|
| (936 | ) |
|
| 10,234 |
|
|
| (2,820 | ) |
Total Operating income (loss) |
| $ | (1,825 | ) |
| $ | (844 | ) |
| $ | 6,065 |
|
| $ | (5,805 | ) |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Biotechnology |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Recycling |
|
| 77 |
|
|
| 109 |
|
|
| 345 |
|
|
| 327 |
|
Discontinued operations |
|
| — |
|
|
| 937 |
|
|
| 2 |
|
|
| 2,809 |
|
Total Depreciation and amortization |
| $ | 77 |
|
| $ | 1,046 |
|
| $ | 347 |
|
| $ | 3,136 |
|
Interest (income) expense, net |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Biotechnology |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Recycling |
|
| (130 | ) |
|
| 125 |
|
|
| 123 |
|
|
| 323 |
|
Discontinued operations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Interest (income) expense, net |
| $ | (130 | ) |
| $ | 125 |
|
| $ | 123 |
|
| $ | 323 |
|
Net income (loss) before benefit from income taxes |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Biotechnology |
| $ | 21 |
|
| $ | (182 | ) |
| $ | (331 | ) |
| $ | (1,232 | ) |
Recycling |
|
| (1,985 | ) |
|
| 208 |
|
|
| (1,776 | ) |
|
| (1,145 | ) |
Net loss before benefit from income taxes |
|
| (1,964 | ) |
|
| 26 |
|
|
| (2,107 | ) |
|
| (2,377 | ) |
Discontinued operations |
|
| (1 | ) |
|
| (961 | ) |
|
| 10,234 |
|
|
| (2,832 | ) |
Total Net income (loss) before benefit from income taxes |
| $ | (1,965 | ) |
| $ | (935 | ) |
| $ | 8,127 |
|
| $ | (5,209 | ) |
27
|
| As of |
|
| As of |
| ||
Assets |
|
|
|
|
|
| ||
Biotechnology |
| $ | — |
|
| $ | — |
|
Recycling |
|
| 29,584 |
|
|
| 15,058 |
|
Discontinued operations |
|
| — |
|
|
| 107 |
|
Total Assets |
| $ | 29,584 |
|
| $ | 15,165 |
|
|
|
|
|
|
|
| ||
Intangible assets |
|
|
|
|
|
| ||
Biotechnology |
| $ | — |
|
| $ | — |
|
Recycling |
|
| 328 |
|
|
| 268 |
|
Discontinued operations |
|
| — |
|
|
| — |
|
Total Intangible assets |
| $ | 328 |
|
| $ | 268 |
|
Note 23: 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 5% stockholder of the Company. Tony Isaac, Chief Executive Officer, and Richard Butler, Board of Directors member of the Company, are members of the Board of Directors of Live Ventures. The Company also shares certain executive, accounting and legal services with Live Ventures. The total services shared were approximately $74,000 and $86,000 for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and approximately $221,000and $220,000 for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively. Customer Connexx rents approximately 9,900 square feet of office space from Live Ventures in Las Vegas, Nevada. The total rent and common area expense was approximately $53,000 and $62,000 for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and approximately $161,000 and $168,000 for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
ApplianceSmart Note
As stated in Note 7, on December 30, 2017, the Company sold its retail appliance segment, ApplianceSmart, Inc. (“ApplianceSmart”) to ApplianceSmart Holdings LLC (the “Purchaser”), a wholly owned subsidiary of Live Ventures Incorporated, pursuant to a Stock Purchase Agreement (the “Agreement”). Pursuant to the Agreement, the Purchaser purchased from the Company all of the issued and outstanding shares of capital stock of ApplianceSmart in exchange for $6.5 million. On April 25, 2018, the Purchaser delivered to the Company a promissory note (the “ApplianceSmart Note”) in the original principal amount of approximately $3.9 million.
On December 9, 2019, ApplianceSmart filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code. Consequently, the Company recorded an impairment charge of approximately $3.0 million for the amount owed by ApplianceSmart to the Company as of December 28, 2019.
On October 13, 2021, a hearing was held to consider approval of a disclosure statement filed by ApplianceSmart in conjunction with its bankruptcy proceedings. On December 14, 2021, a hearing was held to confirm ApplianceSmart’s plan for reorganization (the “Plan”). On January 10, 2022, ApplianceSmart paid $25,000 to JanOne in settlement of its debt, as provided for in the confirmed Plan, and the ApplianceSmart Note was reversed. A final decree was issued by the court on February 28, 2022, upon the full satisfaction of the Plan, at which time ApplianceSmart emerged from Chapter 11. The outstanding balance of the ApplianceSmart Note at October 1, 2022 and January 1, 2022 was zero and approximately $3.0 million, respectively, exclusive of the impairment charge.
For discussion related to potential obligations and or guarantees under ApplianceSmart Leases, see Note 17.
28
Related Party ICG Group Note
On August 28, 2019, ARCA Recycling entered into and delivered to ICG a secured revolving line of credit promissory note, whereby ICG agreed to provide ARCA Recycling with a $2.5 million revolving credit facility (the “ICG Note”). The ICG Note originally matured on August 28, 2020. On August 25, 2020, the ICG Note was amended to extend the maturity date to December 31, 2020. On March 30, 2021, ARCA Recycling entered into a Second Amendment and Waiver (the “Second Amendment”) to the ICG Note to further extend the maturity date to August 18, 2021 and waive certain defaults under the ICG Note. The ICG Note bears interest at 8.75% per annum and provides for the payment of interest, monthly in arrears. ARCA Recycling will pay a loan fee of 2.0% on each borrowing made under the ICG Note. In connection with entering into the ICG Note, the Borrower also entered into a security agreement in favor of the Lender, pursuant to which ARCA Recycling granted a security interest in all of its assets to the Lender. 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 $1.0 million. Beginning in April 2022, the revolving credit facility was converted to a term note that amortizes ratably through its maturity date of March 2026. The principal amount of the note is $1.0 million, and bears interest at 8.75% per annum. Monthly payments on this note will be approximately $24,767. ICG is a record and beneficial owner of 13.9% of the outstanding common stock of the Company. Jon Isaac is the manager and sole member of ICG, and the son of Tony Isaac, the Chief Executive Officer of JanOne and ARCA Recycling. As of October 1, 2022, the principal balance of the note is approximately $893,000.
ARCA Purchasing Agreement
On April 5, 2022, ARCA entered into a Purchasing Agreement with Live Ventures. Pursuant to the agreement, Live agrees to purchase inventory from time to time for ARCA, as set forth in submitted purchase orders. The inventory is owned by Live until which time payment by ARCA is received. All purchases made by the ARCA shall be paid back to Live in full plus an additional five percent surcharge or broker-type fee. The term of the Agreement is one year, and automatically renews if not terminated by either party, as provided for in the Agreement.
Note 24: Sale of ARCA and Connexx
On February 19, 2021, the Company, together with its subsidiaries (a) ARCA Recycling, Inc., a California corporation (“ARCA”), and (b) Customer Connexx LLC, a Nevada limited liability company (“Connexx”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with (i) ARCA Affiliated Holdings Corporation, a Delaware corporation, (ii) ARCA Services Inc., a Delaware corporation, and (iii) Connexx Services Inc, a Delaware corporation (collectively, the “Buyers”), pursuant to which the Buyers agreed to acquire substantially all of the assets, and assume certain liabilities, of ARCA and Connexx (the “Disposition Transaction”). The principal of the Buyers is Virland A. Johnson, our Chief Financial Officer. The Disposition Transaction was previously expected to be consummated on or before August 18, 2021 (the "Outside Date"). On August 12, 2021, the parties entered into Amendment No. One to AssetPurchaseAgreement (the “Recycling Sale Amendment”) to extend the Outside Date to September 30, 2021. In the event the Disposition Transaction is not closed by such date, the Purchase Agreement may be terminated and, in accordance with its terms, the Buyers may be required to pay to us a “break fee” of $250,000. On November 14, 2021, the parties entered into Amendment No. Two to the Asset Purchase Agreement, which provided for the immediate termination of the transactions proposed by the Purchase Agreement, as amended by the Recycling Sale Amendment, and for an amendment for the Buyers to pay to us a “break fee.” The break fee was amended to an aggregate of $100,000, payable in two $50,000 installments: (i) the first of which is due on or around August 12, 2022 (the one-year anniversary of the Recycling Sale Agreement and which at the time of filing has not yet been paid) and (ii) the second of which is due to be paid not later than the last day of our next fiscal year. However, if, prior to the date on which either installment of the amended break fee is payable, we sell ARCA and Connexx to an otherwise unaffiliated third party for an aggregate amount less than $25 million, then the Buyers will be relieved of their obligation to pay to us any not-yet-then-due installment of the break fee. Additionally, if, prior to the date on which the second installment of the amended break fee is payable, we have not sold ARCA and Connexx to any third party, then the Buyers will be relieved of their obligation to pay to us the second installment of the break fee. Finally, if, prior to a date on which either installment of the amended break fee is due, we sell ARCA and Connexx to the Buyers, then, the purchase price therefore will be reduced by an amount equivalent to any break fee that had been previously paid to us by the Buyers and the Buyers shall also be relieved of their obligation to pay to us any not-yet-due installment of the break fee.
29
September 30, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Retail | $ | 15,285 | $ | 17,559 | ||||
Recycling | 15,721 | 24,297 | ||||||
Technology | 15,185 | – | ||||||
Total assets | $ | 46,191 | $ | 41,856 | ||||
Intangible assets | ||||||||
Retail | $ | 2 | $ | – | ||||
Recycling | 55 | 57 | ||||||
Technology | 15,691 | – | ||||||
Total intangible assets | $ | 15,748 | $ | 57 |
Note 25: Sale of GeoTraq (Restated)
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. The aggregate purchase price for the GeoTraq Assets was $13.5 million, payable in cash and shares of SPYR’s common stock. As of the closing of the transaction on May 24, 2022, SPYR issued to the Company 30,000,000 shares of its common stock at $0.03 per share, and delivered a five-year Promissory Note in the principal amount of $12.6 million. The Promissory Note bears simple interest at the rate of 8% per annum, provides quarterly interest payments due the first day of each calendar quarter, and may be prepaid at any time without penalty. Quarterly interest payments may be made in cash or in SPYR's restricted common stock. The Promissory Note matures on May 24, 2027.
In connection with the Asset Purchase Agreement, the Company employed an independent third-party firm to assess the fair value of the 30,000,000 shares of SPYR stock and the Promissory Note. The assessment determined that the fair market value of the SPYR common stock was approximately $946,000, or approximately $0.032 per share, which was approximately $46,000 greater than the amount of the shares received at close. The Promissory Note was valued at approximately $11.3 million, which was approximately $1.4 million less than the Note issued. Consequently, the Company recorded the shares of SPYR stock at fair market value of $946,000, and recorded a discount offsetting the Promissory Note in the amount of $1.35 million. The discount will be accreted ratably over the term of the Promissory Note, and recorded as interest income. Additionally, approximately $105,000 in GeoTraq inventory was transferred as part of the sale, and was, thus, derecognized.
On April 17, 2023, the Company’s management and the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) reached a determination that the Company’s previously issued unaudited consolidated financial statements and related disclosures for each of the quarterly periods ended July 2, 2022 and October 1, 2022, should no longer be relied upon because of a material misstatement contained in those two quarterly unaudited condensed consolidated financial statements. In connection with the Company’s preparation of its unaudited condensed consolidated financial statements and related disclosures for each of the two referenced periods, the Company’s management and Audit Committee relied upon the report issued by a third-party valuation firm to determine the carrying value of the promissory note the Company had received from SPYR Technologies, Inc. (the “SPYR Note”), in connection with the Company’s sale of the assets of its GeoTraq, Inc. subsidiary to SPYR Technologies, Inc. in the second quarter of the Company’s 2022 fiscal year. At December 31, 2022, the Company reviewed the original valuation of the Promissory Note to determine if the original 10.5% used to discount the Note was appropriate. In connection with this review, the Company determined that the discount rate should be revised to 14.5%. Further, the gain associated with the GeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods ending October 1, 2022. As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods ending October 2, 2021.
The following table illustrates the calculation of the gain on sale of GeoTraq, as shown on the income statement (in $000's):
Purchase price |
| $ | 13,500 |
|
Discount on note receivable |
|
| (3,200 | ) |
Premium on shares received |
|
| 46 |
|
Derecognition of GeoTraq inventory |
|
| (105 | ) |
Gain on sale |
| $ | 10,241 |
|
30
Note 26: Subsequent Eventsevent
None.The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q/A and determined that there have been no events that have occurred that would require adjustments to disclosures in its condensed consolidated financial statements other than as described below:
Securities Purchase Agreement
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 361,000 shares of the Company’s common stock, par value $0.001 per share, at a purchase price per share of Common Stock of $1.17. The offering closed on March 24, 2023. The aggregate gross proceeds for the sale of the shares of Common Stock were approximately $422,000, before deducting the placement agent fees and related expenses. The Company intends to use the net proceeds for working capital and general corporate purposes.
ARCA and Subsidiaries Disposition
On March 19, 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 economic aspects of the Disposition Transaction are: (i) the Company reduced the liabilities on its consolidated balance sheets by approximately $17.6 million, excluding those related to the California Business Fee and Tax Division; (ii) the Company will receive not less than $24.0 million in aggregate monthly payments from the Buyer, which payments are subject to potential increase due to the Subsidiaries’ future performance; and (iii) during the next five years, the Company may request that the Buyer prepay aggregate monthly payments in the aggregate amount of $1 million. The Company also received one thousand dollars for the equity of each of the Subsidiaries at the closing. Each monthly payment is to be the greater of (a) $140,000 (or $100,000 for each January and February during the 15-year payment period) or (b) a monthly percentage-based payment, which is an amount calculated as follows: (i) 5% of the Subsidiaries’ aggregate gross revenues up to $2,000,000 for the relevant month, plus (ii) 4% of the Subsidiaries’ aggregate gross revenues between $2,000,000 and $3,000,000 for the relevant month, plus (iii) 3% of the Subsidiaries aggregate gross revenues over $3,000,000 for the relevant month. The Buyer will receive credit toward the payment of the first monthly payment (March of 2023) for any payments, distributions, or cash dividends paid by any of the Subsidiaries to the Seller on or after March 19, 2023.
Soin Merger
Effective as of 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. 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.
In anticipation of the closing of the merger, the Company formed a merger subsidiary known as STI Merger Sub, Inc., a Delaware corporation (our “Merger Sub”), and designated a series of 200,000 shares of its preferred stock, stated value of $300.00 per share (the “Series S Convertible Preferred Stock” or the “Series S Stock”) (see Note 19). The acquisition was memorialized by an Agreement and Plan of Merger, dated as of December 28, 2022 (the “Merger Agreement”), by and among STLLC, Amol Soin, M.D., the sole stockholder of STLLC (“Dr. Soin”), the Company's Merger Sub, and us.
For not less than six months after the closing and potentially up to approximately one year from the closing, Dr. Soin will remain the Company's Chief Medical Officer.
31
At the closing of the merger, (i) our Merger Sub merged with and into STLLC with STLLC as the surviving entity and (ii) the Company issued 100,000 shares of its Series S Stock to Dr. Soin. This all-stock transaction has an initial value of $13,000,000, potentially increasing by an additional $17,000,000 to up to a total value of $30,000,000, depending on revenues generated by the STLLC product. Dr. Soin agreed to certain restrictions on the maximum number of shares of Series S Stock that he may ultimately keep or that he may convert into shares of our common stock or sell into the public markets at any given time: (i) Dr. Soin may not convert shares of Series S Stock into shares of the Company's common stock in an amount such that, upon any such conversion, he beneficially own shares of the Company's common stock in excess of 4.99% of the Company's then-outstanding common stock and (ii) during the five-year period that commences on the date that Dr. Soin is first eligible to convert any shares of Series S Stock into shares of the Company's common stock, he will not dispose of any of such shares into the public markets in an amount that exceeds five percent of the daily trading volume of the Company's common stock during any trading day.
Dr. Soin may convert up to three million dollars of value of the Series S Stock into shares of the Company's common stock commencing one year from the closing and may convert up to an additional $10 million of value of the Series S Stock into shares of the Company's common stock from and after the sooner of (y) the issuance by the FDA of New Drug Approval for low-dose naltrexone for treating pain or (z) 10 years from the closing. Further, during the 10-year period following the closing, Dr. Soin may convert up to an additional $17 million of value at a rate of five percent of the gross revenues that the Company receives in connection with sales or license revenue from the product.
In connection with the merger, the Company employed an independent third-party firm to assess the fair value of the 100,000 shares of Series S Stock issued. The assessment determined that the fair market value of the Series S Stock was approximately $14.5 million, which was allocated to the intellectual property acquired.
32
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 Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Part II, Item 1A of this Quarterly Report on Form 10-Q. Some of the factors that we believe could affect our results include:
We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not in fact occur. 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (including the information presented therein under the caption Risk Factors), as amended, as well astogether with our Quarterly Reports on Forms 10-Q and other publicly available information. All amounts herein are unaudited.
33
Overview
Overview
ApplianceWe 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 subsidiaries ARCA Recycling, Centers of America, Inc.Connexx, and Subsidiaries (“ARCA Canada, we” the “Company” or “ARCA”) are engaged in the business of being the bridge between utilities or manufacturers to their customers by recycling replacing, and selling major household appliances in North America. We are committed toAmerica by providing turnkey appliance recycling and replacement services for utilities and other sponsors of energy efficiency andprograms. Also, through our GeoTraq Inc. subsidiary, we have been engaged in the development, design of wireless transceiver modules with technology that provides LBS directly from global Mobile IoT networks. However, Our GeoTraq subsidiary has not generated any revenue to date, including in the fiscal year ended January 1, 2022. Consequently, during the year ended January 1, 2022, the Company took a pioneer in appliance recycling programs. We expect that our recent acquisitionfull write-down of GeoTraq, a development stage company, will ultimately allow us to market and sell products and services that capitalize on the large under-servedunamortized portion of the location based services market that is not addressed by existing solutions. RFIDGeoTraq intangible asset of approximately $9.8 million. Further, the gain associated with the GeoTraq disposition (Technology segment) has been restated and Wi-Fi require close proximitypresented as discontinued operations for asset tracking, while GPS is too bulkythe periods ending October 1, 2022. As such, the results of the Technology segment have been reclassified and power hungrypresented as discontinued operations for many needs. GeoTraq addresses the white space in-between by exclusively using Cell-ID technology. GeoTraq’s patented technology allows for a substantially lower cost solution, extended service life, a small form factor and even disposable devices, which we believe can significantly reduce return logistics costs.periods ending October 2, 2021.
We operate three reportable segments:
| ||
For the Thirteen Weeks Ended September 30, 201713 weeks ended October 1, 2022 and October 1, 20162, 2021
Results of Operations (Restated)
The following table sets forth certain statement of operations items and as a percentage of revenue, as restated, for the periods indicated:indicated (in $000's):
|
| 13 Weeks Ended |
|
| 13 Weeks Ended |
| ||||||||||
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||||||||||
|
| (As restated) |
|
|
|
| ||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 8,587 |
|
|
| 100.0 | % |
| $ | 12,113 |
|
|
| 100.0 | % |
Cost of revenue |
|
| 7,553 |
|
|
| 88.0 | % |
|
| 9,032 |
|
|
| 74.6 | % |
Gross profit |
|
| 1,034 |
|
|
| 12.0 | % |
|
| 3,081 |
|
|
| 25.4 | % |
Selling, general and administrative expense |
|
| 2,858 |
|
|
| 33.3 | % |
|
| 2,989 |
|
|
| 24.7 | % |
Gain on sale of GeoTraq |
|
| — |
|
|
| 0.0 | % |
|
| — |
|
|
| 0.0 | % |
Operating loss |
|
| (1,824 | ) |
|
| -21.2 | % |
|
| 92 |
|
|
| 0.8 | % |
Interest income (expense), net |
|
| 130 |
|
|
| 1.5 | % |
|
| (125 | ) |
|
| -1.0 | % |
Gain on settlement of vendor advance payments |
|
| — |
|
|
| 0.0 | % |
|
| 11 |
|
|
| 0.1 | % |
Unrealized loss on marketable securities |
|
| (270 | ) |
|
| -3.1 | % |
|
| — |
|
|
| 0.0 | % |
Other income |
|
| — |
|
|
| 0.0 | % |
|
| 23 |
|
|
| 0.2 | % |
Net loss from continuing operations before provision for income taxes |
|
| (1,964 | ) |
|
| -22.9 | % |
|
| 1 |
|
|
| 0.0 | % |
Provision for income taxes |
|
| 16 |
|
|
| 0.2 | % |
|
| 33 |
|
|
| 0.3 | % |
Net loss from continuing operations |
|
| (1,980 | ) |
|
| -23.1 | % |
|
| (32 | ) |
|
| -0.3 | % |
Income (loss) from discontinued operations, net of tax |
|
| (1 | ) |
|
| 0.0 | % |
|
| (936 | ) |
|
| -7.7 | % |
Net loss |
| $ | (1,981 | ) |
|
| -23.1 | % |
| $ | (968 | ) |
|
| -8.0 | % |
34
13 Weeks Ended | 13 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||
Statement of Income Data (in Thousands): | ||||||||||||||||
Revenue | $ | 25,484 | 100.0% | $ | 27,356 | 100.0% | ||||||||||
Cost of revenue | 17,055 | 66.9% | 18,905 | 69.1% | ||||||||||||
Gross profit | 8,429 | 33.1% | 8,451 | 30.9% | ||||||||||||
Selling, general and administrative expense | 7,301 | 28.6% | 7,036 | 25.7% | ||||||||||||
Operating income | 1,128 | 4.4% | 1,415 | 5.2% | ||||||||||||
Interest (expense), net | (207 | ) | -0.8% | (341 | ) | -1.2% | ||||||||||
Other income (expense) | 329 | 1.3% | 61 | 0.2% | ||||||||||||
Net income before income taxes | 1,250 | 4.9% | 1,135 | 4.1% | ||||||||||||
Provision (benefit) for income taxes | 563 | 2.2% | – | 0.0% | ||||||||||||
Net income before noncontrolling interest | 687 | 2.7% | 1,135 | 4.1% | ||||||||||||
Net income (loss) attributed to noncontrolling interest | 83 | 0.3% | (12 | ) | 0.0% | |||||||||||
Net income attributed to shareholders' of parent | $ | 770 | 3.0% | $ | 1,123 | 4.1% |
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:indicated (in $000's):
|
| 13 Weeks Ended |
|
| 13 Weeks Ended |
| ||||||||||
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||||||||||
|
| Net |
|
| Percent |
|
| Net |
|
| Percent |
| ||||
|
| Revenue |
|
| of Total |
|
| Revenue |
|
| of Total |
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recycling and Byproducts |
| $ | 6,334 |
|
|
| 73.8 | % |
| $ | 6,714 |
|
|
| 55.4 | % |
Replacement Appliances |
|
| 2,253 |
|
|
| 26.2 | % |
|
| 5,399 |
|
|
| 44.6 | % |
Total Revenue |
| $ | 8,587 |
|
|
| 100.0 | % |
| $ | 12,113 |
|
|
| 100.0 | % |
|
| 13 Weeks Ended |
|
| 13 Weeks Ended |
| ||||||||||
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||||||||||
|
| Gross |
|
| Gross |
|
| Gross |
|
| Gross |
| ||||
|
| Profit |
|
| Profit % |
|
| Profit |
|
| Profit % |
| ||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recycling and Byproducts |
| $ | 200 |
|
|
| 3.2 | % |
| $ | 1,277 |
|
|
| 19.0 | % |
Replacement Appliances |
|
| 834 |
|
|
| 37.0 | % |
|
| 1,804 |
|
|
| 33.4 | % |
Total Gross Profit |
| $ | 1,034 |
|
|
| 12.0 | % |
| $ | 3,081 |
|
|
| 25.4 | % |
13 Weeks Ended | 13 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||
Net | Percent | Net | Percent | |||||||||||||
(in the Thousands) | Revenue | of Total | Revenue | of Total | ||||||||||||
Revenue | ||||||||||||||||
Retail Boxed | $ | 8,718 | 34.2% | $ | 10,236 | 37.4% | ||||||||||
Retail UnBoxed | 4,288 | 16.8% | 4,102 | 15.0% | ||||||||||||
Retail Delivery | 259 | 1.0% | 21 | 0.1% | ||||||||||||
Retail Service, Parts & Accessories | 195 | 0.8% | 560 | 2.0% | ||||||||||||
Extended Warranties, net | 218 | 0.9% | 183 | 0.7% | ||||||||||||
Recycling, Byproducts, Carbon Offset | 8,608 | 33.8% | 8,501 | 31.1% | ||||||||||||
Replacement Appliances | 3,198 | 12.5% | 3,753 | 13.7% | ||||||||||||
Total Revenue | $ | 25,484 | 100.0% | $ | 27,356 | 100.0% |
Revenue
13 Weeks Ended | 13 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||
Profit | Profit % | Profit | Profit % | |||||||||||||
Gross Profit | ||||||||||||||||
Retail Boxed | $ | 1,657 | 19.0% | $ | 3,226 | 31.5% | ||||||||||
Retail UnBoxed | 2,395 | 55.9% | 1,308 | 31.9% | ||||||||||||
Retail Delivery | (283 | ) | -109.3% | (1,651 | ) | -7861.9% | ||||||||||
Retail Service, Parts & Accessories | (161 | ) | -82.6% | 528 | 94.3% | |||||||||||
Extended Warranties, net | 218 | 100.0% | 183 | 100.0% | ||||||||||||
Recycling, Byproducts, Carbon Offset | 3,476 | 40.4% | 2,914 | 34.3% | ||||||||||||
Replacement Appliances | 1,127 | 35.2% | 1,943 | 51.8% | ||||||||||||
Total Gross Profit | $ | 8,429 | 33.1% | $ | 8,451 | 30.9% |
Revenue
Revenue decreased $1,872by approximately $3.5 million, or 6.8%29.1%, for the 13 weeks ended September 30, 2017October 1, 2022, as compared to the 13 weeks ended October 1, 2016. On July 18, 2017 the Company had a fire at its’ Reynoldsburg store in Columbus, OH.2, 2021. The damage caused total loss of inventory of $764. The inventory loss has been received by the Company from our insurance carrier. The Reynoldsburg storedecrease is expectedprimarily due to re-open in November 2017. The inventory loss and resulting business interruption and loss of profit is insured subjectreduced replacement volume due to a $10 deductible. Sales were adversely affected during the 13 weeks ended September 30, 2017 due to lack of operations at the Reynoldsburg store. Inappliance availability, and weakening commodity markets, partially offset by increased recycling volume.
Cost of Revenue
Cost of revenue decreased by approximately $1.5 million, or 16.4%, for the 13 weeks ended October 1, 2016, the Company recorded a one-time carbon offset sale of $1,048.
Revenue decreased in the following categories as compared to the prior year period:
Retail Boxed $1,518 or 14.8%, Retail Service, Parts and Accessories $365 or 65.2%, and Replacement Appliances $555 or 14.8%.
The revenue decreases were partially offset by the following increases in revenue as compared to the prior year period:
Revenue increased in Recycling, Byproducts, Carbon Offset $107 or 1.3%, Extended Warranties,net $35 or 19.1%, Retail Delivery $238, and Retail Unboxed $186 or 4.5%.
Cost of Revenue
Cost of revenue decreased $1,850, or 9.8% for the 13 weeks ended September 30, 20172022, as compared to the 13 weeks ended October 1, 2016, primarily as a result of the change in revenue discussed above as well as the changes in gross profit discussed below. The Company has made several vendor changes in the area of delivery and transportation to improve scalability, cost and customer service. Retail UnBoxed Revenue cost of revenue has decreased and the resulting gross profit percentage has increased2, 2021, due to re-negotiated purchase discounts with the Company’s UnBoxed vendors.factors described above.
Selling, General and Administrative Expense (Restated)
Gross Profit
Gross profitSelling, general and administrative expense decreased $22by approximately $131,000, or 0.3%4.4%, for the 13 weeks ended September 30, 2017October 1, 2022, as compared to the 13 weeks ended October 1, 2016.2, 2021, primarily due to decreases in stock-based compensation, professional fees, amortization expense, and legal fees.
Interest Expense, net
Gross profitInterest expense, net, decreased in the following categories as compared to the prior year period:
Retail Boxed $1,569 or 48.6%, Retail Service, Parts and Accessories $689 or 130.5% and Replacement Appliances $816 or 42.0%.
Gross profit decreases were partially offset by the following increases in gross profit as compared to the prior year period.
Retail UnBoxed $1,087 or 83.1% and Retail Deliver $1,368, Extended Warranties, net $35 or 19.1% and Recycling, Byproducts, Carbon Offset $562 or 19.3%.
Gross profit margin as a percentage of sales were improved for Retail UnBoxed 55.9% vs. 31.9%, while Retail Delivery had less of loss, Recycling, Byproducts, Carbon Offset 40.4% vs. 34.3%.
Gross profit margin as a percentage of sales declined for Retail Boxed 19.0% vs. 31.5%, Retail Service, Parts and Accessories (82.6%) vs. 94.3%.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $265 or 3.8%,approximately $255,000 for the 13 weeks ended September 30, 2017October 1, 2022, as compared to the 13 weeks ended October 1, 2016.2, 2021 primarily due to interest income recorded in connection with the sale of GeoTraq.
Unrealized Loss on Marketable Securities
Operating Income
As a result of the factors described above, operating income of $1,128 for the 13 weeks ended September 30, 2017, represented a decrease of $287 over the comparable prior year 13 weeks ended October 1, 2016 of $1,415. We expect to receive the business interruption proceeds from the Reynoldsburg store fire in the last quarter of the Company’s fiscal year.
Interest Expense, net
Interest expense net decreased $134 or 39.3%, for the 13 weeks ended September 30, 2017 as compared toFor the 13 weeks ended October 1, 2016 primarily due2022, an unrealized loss on marketable securities of approximately $270,000 was recorded to decreased rates and amountsmark to fair value securities received in connection to the sale of interest paid as a resultGeoTraq. See Note 25 of decreased borrowing.
Other Income and Expense
Other income and expense increased $268the unaudited Consolidated Financial Statements. There were no similar transactions for the 13 weeks ended September 30, 2017 as compared toOctober 2, 2021.
Gain on Settlement of Vendor Advance Payments
For the 13 weeks ended October 2, 2021, a portion of the vendor advance payments were settled, which resulted in a gain of approximately $11,000. There were no similar transactions for the 13 weeks ended October 1, 2016.2022.
35
Segment Performance (Restated)
We report our business in the following segments: Biotechnology, Recycling, and Technology. We identified these segments based on a combination of business type, customers serviced and how we divide management responsibility. Our revenues and profits are driven through our recycling centers, e-commerce, individual sales reps and our internet services for our recycling and technology segment. 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 Recycling segment.
Provision for (benefit from) Income Taxes
We recorded aOperating 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 October 1, 2022 (As restated) |
|
| 13 Weeks Ended October 2, 2021 |
| ||||||||||||||||||||||||||||||||||
|
| Biotechnology |
|
| Recycling |
|
| Continuing Operations |
|
| Discontinued Operations |
|
| Total |
|
| Biotechnology |
|
| Recycling |
|
| Continuing Operations |
|
| Discontinued Operations |
|
| Total |
| ||||||||||
Revenue |
| $ | — |
|
| $ | 8,587 |
|
| $ | 8,587 |
|
| $ | — |
|
| $ | 8,587 |
|
| $ | — |
|
| $ | 12,113 |
|
| $ | 12,113 |
|
| $ | — |
|
| $ | 12,113 |
|
Cost of revenue |
|
| — |
|
|
| 7,553 |
|
|
| 7,553 |
|
|
| — |
|
|
| 7,553 |
|
|
| — |
|
|
| 9,032 |
|
|
| 9,032 |
|
|
| — |
|
|
| 9,032 |
|
Gross profit |
|
| — |
|
|
| 1,034 |
|
|
| 1,034 |
|
|
| — |
|
|
| 1,034 |
|
|
| — |
|
|
| 3,081 |
|
|
| 3,081 |
|
|
| — |
|
|
| 3,081 |
|
Selling, general and administrative expense |
|
| (21 | ) |
|
| 2,879 |
|
|
| 2,858 |
|
|
| 1 |
|
|
| 2,859 |
|
|
| 182 |
|
|
| 2,807 |
|
|
| 2,989 |
|
|
| 936 |
|
|
| 3,925 |
|
Operating income (loss) |
| $ | 21 |
|
| $ | (1,845 | ) |
| $ | (1,824 | ) |
| $ | (1 | ) |
| $ | (1,825 | ) |
| $ | (182 | ) |
| $ | 274 |
|
| $ | 92 |
|
| $ | (936 | ) |
| $ | (844 | ) |
Biotechnology Segment
Our biotechnology segment incurred expenses of $563approximately $124,000, offset by a gain of approximately $145,000 due to an overstatement of segment expenses in Q2 2022 for the 13 weeks ended September 30, 2017, compared with a provision of $0 in the same period of 2016. The provision for income taxesOctober 1, 2022, and $182,000 related to employee costs and professional services related to research for the 13 weeks ended September 30, 2017, increased over the same periodOctober 2, 2021.
Recycling Segment
The recycling segment consists of 2016 by $563.
Net Income
The factors described above led to a net income of $770ARCA Recycling, Customer Connexx, and ARCA Canada. Revenue for the 13 weeks ended September 30, 2017,October 1, 2022, decreased by approximately $3.5 million, or 29.1%, as compared to the prior year period. Replacement services revenue decreased by approximately $3.1 million, period over period, primarily due to reduced replacement volume due to a decreaselack of $353 from a net incomeappliance availability. Recycling and Byproducts revenue decreased by approximately $380,000 primarily due to weakening commodity markets.
Cost of $1,123revenue for the 13 weeks ended October 1, 2022, decreased by approximately $1.5 million, or 16.4%, as compared to the prior year period, for those reasons described above.
Operating loss for the 13 weeks ended October 1, 2022, increased by approximately $2.1 million, as compared to the prior year period. The increase is due to an decrease in gross profit of approximately $2.0 million, partially offset by an increase in selling, general and administrative expenses of approximately $72,000.
Discontinued Operations (Restated)
Discontinued operations consists of GeoTraq. There was no activity from discontinued operations for the 13 weeks ended October 1, 2022 due to the sale of GeoTraq during the period ended July 2, 2016.2022. See Note 25 of the unaudited Consolidated Financial Statements. Further, the gain associated with the GeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods ending October 1, 2022. As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods ending October 2, 2021.
For the Thirty-Nine Weeks Ended September 30, 201739 weeks ended October 1, 2022 and October 1, 20162, 2021
Results of Operations (Restated)
The following table sets forth certain statement of operations items and as a percentage of revenue, for the periods indicated:indicated (in $000's):
36
39 Weeks Ended | 39 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||
Statement of Income Data (in Thousands): | ||||||||||||||||
Revenue | $ | 74,505 | 100.0% | $ | 77,457 | 100.0% | ||||||||||
Cost of revenue | 51,334 | 68.9% | 56,379 | 72.8% | ||||||||||||
Gross profit | 23,171 | 31.1% | 21,078 | 27.2% | ||||||||||||
Selling, general and administrative expense | 21,167 | 28.4% | 21,543 | 27.8% | ||||||||||||
Operating income (loss) | 2,004 | 2.7% | (465 | ) | -0.6% | |||||||||||
Interest (expense), net | (636 | ) | -0.9% | (928 | ) | -1.2% | ||||||||||
Other income (expense) | 5,559 | 7.5% | 155 | 0.2% | ||||||||||||
Net income (loss) before income taxes | 6,927 | 9.3% | (1,238 | ) | -1.6% | |||||||||||
Provision (benefit) for income taxes | 2,382 | 3.2% | 438 | -0.6% | ||||||||||||
Net income (loss) before noncontrolling interest | 4,545 | 6.1% | (1,676 | ) | -2.2% | |||||||||||
Net income (loss) attributed to noncontrolling interest | 496 | 0.7% | 245 | 0.3% | ||||||||||||
Net income (loss) attributed to shareholders' of parent | $ | 5,041 | 6.8% | $ | (1,431 | ) | -1.8% |
|
| 39 Weeks Ended |
|
| 39 Weeks Ended |
| ||||||||||
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||||||||||
|
| (As restated) |
|
|
|
| ||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 28,449 |
|
|
| 100.0 | % |
| $ | 29,391 |
|
|
| 100.0 | % |
Cost of revenue |
|
| 23,913 |
|
|
| 84.1 | % |
|
| 23,146 |
|
|
| 78.8 | % |
Gross profit |
|
| 4,536 |
|
|
| 15.9 | % |
|
| 6,245 |
|
|
| 21.2 | % |
Selling, general and administrative expense |
|
| 8,705 |
|
|
| 30.6 | % |
|
| 9,230 |
|
|
| 31.4 | % |
Gain on sale of GeoTraq |
|
| — |
|
|
| 0.0 | % |
|
| — |
|
|
| 0.0 | % |
Operating income (loss) |
|
| (4,169 | ) |
|
| -14.7 | % |
|
| (2,985 | ) |
|
| -10.2 | % |
Interest expense, net |
|
| (123 | ) |
|
| -0.4 | % |
|
| (323 | ) |
|
| -1.1 | % |
Gain on Payroll Protection Program loan forgiveness |
|
| — |
|
|
| 0.0 | % |
|
| 1,872 |
|
|
| 6.4 | % |
Gain on settlement of vendor advance payments |
|
| — |
|
|
| 0.0 | % |
|
| 952 |
|
|
| 3.2 | % |
Gain (loss) on litigation settlement, net |
|
| 1,835 |
|
|
| 6.5 | % |
|
| (1,950 | ) |
|
| -6.6 | % |
Gain on reversal of contingency loss |
|
| 637 |
|
|
| 2.2 | % |
|
| — |
|
|
| 0.0 | % |
Unrealized loss on marketable securities |
|
| (646 | ) |
|
| -2.3 | % |
|
| — |
|
|
| 0.0 | % |
Other income, net |
|
| 359 |
|
|
| 1.3 | % |
|
| 45 |
|
|
| 0.2 | % |
Net loss from continuing operations before provision for income taxes |
|
| (2,107 | ) |
|
| -7.4 | % |
|
| (2,389 | ) |
|
| -8.1 | % |
Provision for income taxes |
|
| 23 |
|
|
| 0.1 | % |
|
| 236 |
|
|
| 0.8 | % |
Net loss from continuing operations |
|
| (2,130 | ) |
|
| -7.5 | % |
|
| (2,625 | ) |
|
| -8.9 | % |
Income (loss) from discontinued operations, net of tax |
|
| 10,234 |
|
|
| 36.0 | % |
|
| (2,820 | ) |
|
| -9.6 | % |
Net income (loss) |
| $ | 8,104 |
|
|
| 28.5 | % |
| $ | (5,445 | ) |
|
| -18.5 | % |
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:indicated (in $000's):
|
| 39 Weeks Ended |
|
| 39 Weeks Ended |
| ||||||||||
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||||||||||
|
| Net |
|
| Percent |
|
| Net |
|
| Percent |
| ||||
|
| Revenue |
|
| of Total |
|
| Revenue |
|
| of Total |
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recycling and Byproducts |
| $ | 15,850 |
|
|
| 55.7 | % |
| $ | 15,580 |
|
|
| 53.0 | % |
Replacement Appliances |
|
| 12,599 |
|
|
| 44.3 | % |
|
| 13,811 |
|
|
| 47.0 | % |
Total Revenue |
| $ | 28,449 |
|
|
| 100.0 | % |
| $ | 29,391 |
|
|
| 100.0 | % |
|
| 39 Weeks Ended |
|
| 39 Weeks Ended |
| ||||||||||
|
| October 1, 2022 |
|
| October 2, 2021 |
| ||||||||||
|
| Gross |
|
| Gross |
|
| Gross |
|
| Gross |
| ||||
|
| Profit |
|
| Profit % |
|
| Profit |
|
| Profit % |
| ||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recycling and Byproducts |
| $ | 68 |
|
|
| 0.4 | % |
| $ | 1,739 |
|
|
| 11.2 | % |
Replacement Appliances |
|
| 4,468 |
|
|
| 35.5 | % |
|
| 4,506 |
|
|
| 32.6 | % |
Total Gross Profit |
| $ | 4,536 |
|
|
| 15.9 | % |
| $ | 6,245 |
|
|
| 21.2 | % |
39 Weeks Ended | 39 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||
Net | Percent | Net | Percent | |||||||||||||
(in the Thousands) | Revenue | of Total | Revenue | of Total | ||||||||||||
Revenue | ||||||||||||||||
Retail Boxed | $ | 28,405 | 38.1% | $ | 31,168 | 40.2% | ||||||||||
Retail UnBoxed | 13,206 | 17.7% | 14,042 | 18.1% | ||||||||||||
Retail Delivery | 959 | 1.3% | 786 | 1.0% | ||||||||||||
Retail Service, Parts & Accessories | 684 | 0.9% | 1,121 | 1.4% | ||||||||||||
Extended Warranties, net | 1,080 | 1.4% | 652 | 0.8% | ||||||||||||
Recycling, Byproducts, Carbon Offset | 20,952 | 28.1% | 19,703 | 25.4% | ||||||||||||
Replacement Appliances | 9,219 | 12.4% | 9,985 | 12.9% | ||||||||||||
Total Revenue | $ | 74,505 | 100.0% | $ | 77,457 | 100.0% |
Revenue
39 Weeks Ended | 39 Weeks Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||
Profit | Profit % | Profit | Profit % | |||||||||||||
Gross Profit | ||||||||||||||||
Retail Boxed | $ | 5,940 | 20.9% | $ | 8,693 | 27.9% | ||||||||||
Retail UnBoxed | 5,746 | 43.5% | 4,445 | 31.7% | ||||||||||||
Retail Delivery | (63 | ) | -6.6% | (1,643 | ) | -209.0% | ||||||||||
Retail Service, Parts & Accessories | (266 | ) | -38.9% | 1,000 | 89.2% | |||||||||||
Extended Warranties, net | 1,080 | 100.0% | 652 | 100.0% | ||||||||||||
Recycling, Byproducts, Carbon Offset | 7,535 | 36.0% | 4,495 | 22.8% | ||||||||||||
Replacement Appliances | 3,199 | 34.7% | 3,436 | 34.4% | ||||||||||||
Total Gross Profit | $ | 23,171 | 31.1% | $ | 21,078 | 27.2% |
Revenue
Revenue decreased $2,952by approximately $940,000, or 3.8%3.2%, for the 39 weeks ended September 30, 2017October 1, 2022, as compared to the 39 weeks ended October 1, 2016.
Revenue decreased in the following categories as compared2, 2021. The decrease is primarily due to the prior year period:
Retail Boxed $2,763 or 8.9%, Retail Unboxed $836 or 6.0%, Retail Service, Partsreduced replacement volume due to a lack of appliance availability, and Accessories $437 or 39.0% and Replacement Appliances $766 or 7.7%.
The revenue decreases wereweakening commodity markets, partially offset by the following increases in revenue as compared to the prior year period:increased recycling volume.
Retail Delivery $173 or 22.0%, Extended Warranties, net $428 or 65.6% and Recycling, Byproducts, Carbon Offset $1,249 or 6.3%.
Cost of Revenue
Cost of revenue decreased $5,045,increased by approximately $765,000, or 8.9%3.3%, for the 39 weeks ended September 30, 2017October 1, 2022, as compared to the 39 weeks ended October 1, 2016, primarily as a result of2, 2021, due to the change in revenue discussed above as well as the changes in gross profit discussed below.factors described above.
37
Gross ProfitSelling, General and Administrative Expense (Restated)
Gross profit increased $2,093Selling, general and administrative expense decreased by approximately $525,000, or 9.9%5.7%, for the 39 weeks ended September 30, 2017October 1, 2022, as compared to the 39 weeks ended October 1, 2016.
Gross profit increased in the following categories as compared2, 2021, primarily due to the prior year period:
Retail UnBoxed $1,301 or 29.3%, Retail Delivery $1,580, Extended Warranties, net $428 or 65.6% and Recycling, Byproducts, Carbon Offset $3,040 or 67.6%.
Gross profit increases were partially offset by the following decreases in gross profit as compared to the prior year period.stock-based compensation, professional fees, amortization expense, and legal fees.
Interest Expense, net (Restated)
Retail Boxed $2,753 or 31.7%, Retail Service, Parts and Accessories $1,266 or (126.6%), and Replacement Appliances $237 or 6.9%.
Gross profit margin as a percentage of sales were improved for Retail UnBoxed 43.5% vs. 31.7%, Retail Delivery (6.6%) vs. -209.0%, Retail Service, Parts and Accessories (38.9%) vs. 89.2%, Recycling, Byproducts and Carbon Offset 36.0% vs. 22.8% and Replacement Appliances 34.7% vs. 34.4%.
Gross profit margin as a percentage of sales declined for Retail Boxed 20.9% vs. 27.9% and Retail Service, Parts and Accessories (38.9%) vs. 89.2%.
Selling, General and Administrative Expense
Selling, general and administrativeInterest expense, net, decreased $376 or 1.7%,by approximately $200,000 for the 39 weeks ended September 30, 2017October 1, 2022, as compared to the 39 weeks ended October 1, 2016.2, 2021 primarily due to interest income recorded in connection with the sale of GeoTraq, partially offset by increased interest on notes payable.
Gain on Sale of GeoTraq (Restated)
Operating Income
As a result of the factors described above, operating income of $2,004 for the 39 weeks ended September 30, 2017, represented an increase of $2,469 over the comparable prior year 39 week period of $(465).
Interest Expense, net
Interest expense net decreased $292 or 31.5%, for the 39 weeks ended September 30, 2017 as compared toDuring the 39 weeks ended October 1, 2016 primarily due to decreased rates2022, we recorded a gain on the sale of interest paidGeoTraq of approximately $10.2 million. See Note 25 of unaudited Condensed Consolidated Financial Statements. Further, the gain associated with the GeoTraq disposition (Technology segment) has been restated and amounts borrowed.
Other Income and Expense
Other income and expense increased $5,404presented as discontinued operations for the 39 weeks ended September 30, 2017periods ending October 1, 2022. As such, the results of the Technology segment have been reclassified and presented as compared todiscontinued operations for the periods ending October 2, 2021.
Unrealized Loss on Marketable Securities
For the 39 weeks ended October 1, 2016, primarily due2022, an unrealized loss on marketable securities of approximately $646,000 was recorded to mark to fair value securities received in connection to the gain on sale of propertyGeoTraq. See Note 25 of $5,163.
Provision for (benefit from) Income Taxes
We recorded a provision for income taxes of $2,382unaudited Consolidated Financial Statements. There were no similar transactions for the 39 weeks ended September 30, 2017, compared withOctober 2, 2021.
Gain on Litigation Settlement, net
Gain on litigation settlement includes the receipt of a provision$1.95 million payment from Sompo International Companies (“Sompo”) in exchange for a full release in favor of $438Sampo from liability for both the GeoTraq and SEC-related matters, partially offset by an accrual of approximately $115,000 to finalize the Blackhawk settlement.
Gain on Reversal of Contingency Loss
Gain on reversal of continency loss reverses approximately $637,000 in contingent liabilities relating to guarantees of ApplianceSmart leases that no longer exist as a result of ApplianceSmart's emergence from bankruptcy (see Notes 7 to the same periodunaudited financial statements).
Gain on Settlement of 2016. The provision for income taxes forVendor Advance Payments
For the 39 weeks ended September 30, 2017, increased overOctober 2, 2021, a portion of the same periodvendor advance payments were settled, which resulted in a gain of 2016 by $1,944, primarily due to an increase in earnings from the disposition of our Compton California land and building.
Net Income
The factors described above and the gain from the sale of our Compton California land and building of $5,163 led to a net income of $5,041 for the 39 weeks ended September 30, 2017, an increase of $6,472 from a net loss of $1,431approximately $952,000. There were no similar transactions for the 39 weeks ended October 1, 2016.2022.
Segment Performance (Restated)
We report our business in the following segments: Retail,Biotechnology, Recycling, and Technology. We identified these segments based on a combination of business type, customers serviced and how we divide management responsibility. Our revenues and profits are driven through our physical stores, our recycling centers, e-commerce, individual sales reps and our internet services.services for our recycling and technology segment.
38
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 Recycling segment.
Operating income (loss)loss by operating segment, is defined as income (loss)loss before net interest expense, other income and expense, provision for income taxes ($000’s):
|
| 39 Weeks Ended October 1, 2022 (As restated) |
|
| 39 Weeks Ended October 2, 2021 |
| ||||||||||||||||||||||||||||||||||
|
| Biotechnology |
|
| Recycling |
|
| Continuing Operations |
|
| Discontinued Operations |
|
| Total |
|
| Biotechnology |
|
| Recycling |
|
| Continuing Operations |
|
| Discontinued Operations |
|
| Total |
| ||||||||||
Revenue |
| $ | — |
|
| $ | 28,449 |
|
| $ | 28,449 |
|
| $ | — |
|
| $ | 28,449 |
|
| $ | — |
|
| $ | 29,391 |
|
| $ | 29,391 |
|
| $ | — |
|
| $ | 29,391 |
|
Cost of revenue |
|
| — |
|
|
| 23,913 |
|
|
| 23,913 |
|
|
| — |
|
|
| 23,913 |
|
|
| — |
|
|
| 23,146 |
|
|
| 23,146 |
|
|
| — |
|
|
| 23,146 |
|
Gross profit |
|
| — |
|
|
| 4,536 |
|
|
| 4,536 |
|
|
| — |
|
|
| 4,536 |
|
|
| — |
|
|
| 6,245 |
|
|
| 6,245 |
|
|
| — |
|
|
| 6,245 |
|
Selling, general and administrative expense |
|
| 331 |
|
|
| 8,374 |
|
|
| 8,705 |
|
|
| (10,234 | ) |
|
| (1,529 | ) |
|
| 1,232 |
|
|
| 7,998 |
|
|
| 9,230 |
|
|
| 2,820 |
|
|
| 12,050 |
|
Operating income (loss) |
| $ | (331 | ) |
| $ | (3,838 | ) |
| $ | (4,169 | ) |
| $ | 10,234 |
|
| $ | 6,065 |
|
| $ | (1,232 | ) |
| $ | (1,753 | ) |
| $ | (2,985 | ) |
| $ | (2,820 | ) |
| $ | (5,805 | ) |
Biotechnology Segment
Our biotechnology segment incurred expenses of approximately $331,000 and income (loss) attributable$1.2 million related to non-controlling interest.employee costs and professional services related to research for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
Recycling Segment
13 Weeks Ended September 30, 2017 | 13 Weeks Ended October 1, 2016 | |||||||||||||||||||||||||||||||
Segments in $ | Segments in $ | |||||||||||||||||||||||||||||||
(in the thousands) | Retail | Recycling | Technology | Total | Retail | Recycling | Technology | Total | ||||||||||||||||||||||||
Revenue | $ | 13,678 | $ | 11,806 | $ | – | $ | 25,484 | $ | 15,102 | $ | 12,254 | $ | – | $ | 27,356 | ||||||||||||||||
Cost of revenue | 9,852 | 7,203 | – | 17,055 | 11,508 | 7,397 | – | 18,905 | ||||||||||||||||||||||||
Gross profit | 3,826 | 4,603 | – | 8,429 | 3,594 | 4,857 | – | 8,451 | ||||||||||||||||||||||||
Selling, general and administrative expense | 3,518 | 3,511 | 272 | 7,301 | 3,706 | 3,330 | – | 7,036 | ||||||||||||||||||||||||
Operating income (loss) | $ | 308 | $ | 1,092 | $ | (272 | ) | $ | 1,128 | $ | (112 | ) | $ | 1,527 | $ | – | $ | 1,415 |
13 Weeks Ended September 30, 2017 | 13 Weeks Ended October 1, 2016 | |||||||||||||||||||||||||||||||
Segments in % | Segments in % | |||||||||||||||||||||||||||||||
Retail | Recycling | Technology | Total | Retail | Recycling | Technology | Total | |||||||||||||||||||||||||
Revenue | 100.0% | 100.0% | 0.0% | 100.0% | 100.0% | 100.0% | 0.0% | 100.0% | ||||||||||||||||||||||||
Cost of revenue | 72.0% | 61.0% | 0.0% | 66.9% | 76.2% | 60.4% | 0.0% | 69.1% | ||||||||||||||||||||||||
Gross profit | 28.0% | 39.0% | 0.0% | 33.1% | 23.8% | 39.6% | 0.0% | 30.9% | ||||||||||||||||||||||||
Selling, general and administrative expense | 25.7% | 29.7% | 100.0% | 28.6% | 24.5% | 27.2% | 0.0% | 25.7% | ||||||||||||||||||||||||
Operating income (loss) | 2.3% | 9.2% | -100.0% | 4.4% | -0.7% | 12.5% | 0.0% | 5.2% |
Retail Segment
Segment results for Retail include Appliancesmart.The recycling segment consists of ARCA Recycling, Customer Connexx, and ARCA Canada. Revenue for the 1339 weeks ended September 30, 2017October 1, 2022, decreased $1,424,by approximately $940,000, or 9.4%3.2%, as compared to the prior year period. Replacement services revenue decreased by approximately $1.2 million, period over period, primarily due to reduced replacement volume due to a lack of appliance availability. Recycling and Byproducts revenue increased by approximately $270,000 primarily due to strong consumer demand, partially offset by weakening commodity markets.
Cost of revenue for the 39 weeks ended October 1, 2022, increased by approximately $765,000, or 3.3%, as compared to the prior year period, as a result of decreases in Retail Boxed $1,518 or 14.8%, Retail Service, Parts and Accessories $365 or 65.2%; partially offset by Extended Warranties, net $35 or 19.1%, Retail UnBoxed $186 or 4.5%, and Retail Delivery $238.for those reasons described above.
Cost of revenueOperating loss for the 1339 weeks ended September 30, 2017 decreased $1,656 or 14.4%,October 1, 2022, increased by approximately $2.1 million as compared to the prior year period, as a result of cost of revenue a decrease in Retail UnBoxed $901 or 32.2% and Retail Delivery $1,130; partially offset byperiod. The increase is due to an increase in Retail Service, Parts and Accessories $324, and Retail Boxed $51.
Operating income for the 13 weeks ended September 30, 2017 increased $420, as compared to the prior year period, as a result of increased gross profit of $232 and decreased selling, general and administrative expense of $188.
Recycling Segment
Segment results for ARCA Recycling, Customer Connexx, ARCA Canada and AAP (through August 15, 2017). Revenue for the 13 weeks ended September 30, 2017 decreased by $448, or 3.7%, as compared to the prior year period, as a result of decreases in Replacement Appliances $555 or 14.8%; partially offset by Recycling, Byproducts, Carbon Offset Revenue of $107 or 1.3%.
Cost of revenue for the 13 weeks ended September 30, 2017 decreased $194 or 2.6%, as compared to the prior year period; as a result of an increase in Replacement Appliances $261 or 14.4%; partially offset by a decrease in cost of revenue of Recycling, Byproducts, Carbon Offset $455 or 8.1%.
Operating income for the 13 weeks ended September 30, 2017 decreased $435, as compared to the prior year period; as a result of decreased gross profit of $254; offset by increased selling, general and administrative expense of $181.
Technology Segment
Segment results for Technology include GeoTraq. Results for the 13 weeks ended September 30, 2017 include intangible asset amortization expense for $272. No prior year period results as this acquisition was completed August 18, 2017.
39 Weeks Ended September 30, 2017 | 39 Weeks Ended October 1, 2016 | |||||||||||||||||||||||||||||||
Segments in $ | Segments in $ | |||||||||||||||||||||||||||||||
(in the thousands) | Retail | Recycling | Technology | Total | Retail | Recycling | Technology | Total | ||||||||||||||||||||||||
Revenue | $ | 44,334 | $ | 30,171 | $ | – | $ | 74,505 | $ | 47,769 | $ | 29,688 | $ | – | $ | 77,457 | ||||||||||||||||
Cost of revenue | 31,897 | 19,437 | – | 51,334 | 34,622 | 21,757 | – | 56,379 | ||||||||||||||||||||||||
Gross profit | 12,437 | 10,734 | – | 23,171 | 13,149 | 7,929 | – | 21,078 | ||||||||||||||||||||||||
Selling, general and administrative expense | 10,327 | 10,568 | 272 | 21,167 | 13,698 | 7,845 | – | 21,543 | ||||||||||||||||||||||||
Operating income (loss) | $ | 2,110 | $ | 166 | $ | (272 | ) | $ | 2,004 | $ | (549 | ) | $ | 84 | $ | – | $ | (465 | ) | |||||||||||||
39 Weeks Ended September 30, 2017 | 39 Weeks Ended October 1, 2016 | |||||||||||||||||||||||||||||||
Segments in % | Segments in % | |||||||||||||||||||||||||||||||
Retail | Recycling | Technology | Total | Retail | Recycling | Technology | Total | |||||||||||||||||||||||||
Revenue | 100.0% | 100.0% | 0.0% | 100.0% | 100.0% | 100.0% | 0.0% | 100.0% | ||||||||||||||||||||||||
Cost of revenue | 71.9% | 64.4% | 0.0% | 68.9% | 72.5% | 73.3% | 0.0% | 72.8% | ||||||||||||||||||||||||
Gross profit | 28.1% | 35.6% | 0.0% | 31.1% | 27.5% | 26.7% | 0.0% | 27.2% | ||||||||||||||||||||||||
Selling, general and administrative expense | 23.3% | 35.0% | 100.0% | 28.4% | 28.7% | 26.4% | 0.0% | 27.8% | ||||||||||||||||||||||||
Operating income (loss) | 4.8% | 0.6% | -100.0% | 2.7% | -1.1% | 0.3% | 0.0% | -0.6% |
Retail Segment
Segment results for Retail include Appliancesmart. Revenue for the 39 weeks ended September 30, 2017 decreased $3,435, or 7.2%, as compared to the prior year period, as a result of decreases in Retail Boxed $2,763 or 8.9%, Retail UnBoxed $836 or 6.0%, Retail Service, Parts and Accessories $437 or 39.0%; partially offset by Extended Warranties, net $428 or 65.6%, and Retail Delivery $173 or 22.0%.
Cost of revenue for the 39 weeks ended September 30, 2017 decreased $2,725 or 7.9%, as compared to the prior year period, as a result of decreases in cost of revenue of Retail Boxed $10, Retail Unboxed $2,137 or 22.3%, Retail Delivery $1,407; partially offset by an increase in Retail Service, Parts and Accessories $829.
Operating income for the 39 weeks ended September 30, 2017 increased $2,659, as compared to the prior year period, as a result of decreased selling, general and administrative expense of $3,371 partially offset by a decrease in gross profit of $712.
Recycling Segment
Segment results for ARCA Recycling, Customer Connexx, ARCA Canadaapproximately $1.7 million, and AAP (through August 15, 2017). Revenue for the 39 weeks ended September 30, 2017 increased by $483, or 1.6%, as compared to the prior year period, as a result of increases in Recycling, Byproducts, Carbon Offset revenue of $1,249 or 6.3%; partially offset by a decrease in Replacement Appliance revenue $766 or 7.7%.
Cost of revenue for the 39 weeks ended September 30, 2017 decreased $2,320 or 10.7%, as compared to the prior year period; as a result of decreases in cost of revenue of Replacement Appliances $529 or 8.1% and Recycling, Byproducts, Carbon Offset $1,791 or 11.8%.
Operating income for the 39 weeks ended September 30, 2017 increased $82, as compared to the prior year period; as a result of increased gross profit of $2,805 partially offset by an increase in selling, general and administrative expenseexpenses of $2,723.approximately $400,000.
Discontinued Operations
Technology Segment
Segment results for Technology includeDiscontinued operations consists of GeoTraq. Results for the 39 weeks ended September 30, 2017 include intangible asset amortization expenseOctober 1, 2022 includes income of approximately $10.2 million, as compared to a loss of approximately $2.8 million for $272. No prior year periodthe 39 weeks ended October 2, 2021. The increase is due to the gain on sale of GeoTraq. Further, the gain associated with the GeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods ending October 1, 2022. As such, the results of the Technology segment have been reclassified and presented as this acquisition was completed August 18, 2017.discontinued operations for the periods ending October 2, 2021.
Liquidity and Capital Resources
Overview
Overview
Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and funds available under (“the MidCap Revolver”), sale of assets and or other refinancing of existing indebtedness will provide sufficient liquidity to fund our operations, our continued investments in store openings and remodeling activities for at least the next 12 months. The Company refinanced and replaced the PNC Bank Revolver loan facility with the MidCap Revolver in May of 2017.
On September 20, 2017 the Company received a written default notice from MidCap Funding Trust X, the Agent representing the Lenders for the MidCap Revolver. The Company strongly disagrees with the Lenders that any Event of Default has occurred and is reserving all of its options with respect to the Loan Agreement. The Company and the Agent are in active discussions for forbearance and resolution of the default, however there can be no assurance the Company and the Agent will be able to agree on terms of the forbearance. The Company is classifying the Mid-Cap Revolver as a current liability until forbearance and resolution of the default is cured.
As of September 30, 2017,October 1, 2022, we had total cash on hand of $1,994 and an additional $3,616 of available borrowing under the MidCap Revolver.approximately $868. As we continue to prepare to begin late-stage clinical development with our pharmaceutical product, JAN101, and potentially pursue strategic transactions to expand and grow our business, we regularly monitor capital market conditions and may raise additional funds through borrowings or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
Based on our current operating plans, we believe that available cash balances, funds available under our credit facility with Gulf Coast, and or other refinancing of existing indebtedness will provide sufficient liquidity to fund our operations, our continued investments in store openings and remodeling activities for at least the next 12 months.
39
Cash Flows
During the 39 weeks ended September 30, 2017,October 1, 2022, cash provided byused in operations was $2,363,approximately $2.4 million, compared to cash provided byused in operations of $3,719approximately $3.5 million during the 39 weeks ended October 1, 2016.2, 2021. The decreaseincrease in cash provided byused in operations of $1,356 as compared to the prior year period; was primarily due to a decreaseresults of operations, as discussed above.
Cash used in cash provided by stock compensation expense of $232, change in reserve for inventory obsolescence of $124, gain on sale of property of $5,163, gain on sale of and deconsolidation of variable interest entity AAP of $81; partially offset by non-cash depreciation and amortization of $118, amortization of debt issuance costs of $126, change in reserve for uncollectible accounts $7, change in deferred income taxes of $337 and change in other of $716. Change in net income represented a positive change in operating cash flow of $6,221 offset by uses of cash in working capital accounts of $3,281.
Cash provided by investing activities was $6,323approximately $950,000 and used by investing activities $266$1.6 million, respectively, for the 39 weeks ended September 30, 2017October 1, 2022 and the 39 weeks ended October 1, 2016, respectively. The $6,589 increase in cash provided by investing activities, as compared2, 2021, primarily related to the prior period, is primarily attributable to the proceeds from the salepurchases of property and equipment of $6,785 and a decrease in purchase of property and equipment of $137, proceeds from the sale of our equity investment in AAP of $800 less cash retained by AAP of $157 and other of $22; partially offset by an increase in restricted cash of $798, and cash $200 used to purchase an intangible asset (GeoTraq) net of debt and Series A preferred stock issued.intangibles.
Cash usedprovided by financing activities was $7,675 and $3,705approximately $3.5 million for the 39 weeks ended September 30, 2017 and the 39 weeks ended October 1, 2016, respectively. The $3,970 increase in cash used, as compared2022, and was primarily due to the prior period, was attributable to increased payments under the PNC Revolver of $7,474, debt obligations of $723 and debt issuance costs $359; partially offset by an increase in the proceeds from the issuance of debt obligations of $970 andnew credit facility, as discussed in Note 16 above. Cash provided by financing activities was approximately $7.6 million for the 39 weeks ended October 2, 2021 primarily due to net proceeds received from an increaseequity financing in net borrowing under the MidCap Revolver of $3,616.amount approximately $5.5 million.
Sources of Liquidity
We utilize cash on hand and cash generated from operations and have funds available to us under our revolving loan facility with MidCap Financial Trustfactor certain accounts receivable invoices to cover normal and seasonal fluctuations in cash flows and to support our various growth initiatives. Our cash and cash equivalents are carried at cost and consist primarily of demand deposits with commercial banks.
MidCap Revolver
On September 30, 201726, 2022, the Company entered into a credit facility with Gulf Coast, whereby the Company can obtain financing up to the lesser of $7.0 million or its calculated borrowing base. Gulf Coast has been granted a security interest in substantially all of ARCA Recycling’s assets. The current purchase and December 31, 2016,sale agreement with Gulf Coast automatically renews every two years unless terminated by the parties.
We acknowledge that we continue to face a challenging competitive environment as we continue to focus on our available borrowing capacity under the Credit Agreement is $2,416overall profitability, including managing expenses. We reported net income of approximately $8.1 million and $0, respectively. The weighted average interest ratea net loss of approximately $5.4 million, respectively, for the period39 weeks ended October 1, 2022 and October 2, 2021. In addition, the Company has total current assets of May 10, 2017 through September 30, 2017 was 5.66%. We borrowed $45,099approximately $9.4 million and repaid $41,483total current liabilities of approximately $23.8 million resulting in a net negative working capital of approximately $14.5 millionas of October 1, 2022.
Based on the Credit Agreement duringabove, management has concluded that the period of May 10, 2017 through September 30, 2017, leaving an outstanding balance onCompany is not aware and did not identify any other conditions or events that would cause the Credit Agreement of $3,616 and $0 at September 30, 2017 and December 31, 2016, respectively.Company to not be able to continue business as a going concern for the next twelve months
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, refinance existing indebtedness, conduct our Phase IIb clinical trials, or consummate other strategic investments in our business. Other sources of financing may include stock issuances and additional loans; or other forms of financing. Any financing obtained may 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.
Foreign Currency Exchange Rate Risk.Risk. We currently generate revenues in Canada. The reporting currency for our consolidated financial statements is U.S. dollars. It is not possible to determine the exact impact of foreign currency exchange rate changes; however, the effect on reported revenue and net earnings can be estimated. We estimate that the overall strength of the U.S. dollar against the Canadian dollar had an immaterial impact on the revenues and net income for the 13 Week and 39 Week periodsfiscal year ended September 30, 2017.January 1, 2022. We do not currently hedge foreign currency fluctuations and do not intend to do so for the foreseeable future.
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 have established disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submitcarried out an evaluation, under the Exchange Act is recorded, processed, summarizedsupervision and reported withinwith the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated toparticipation of our management, including our Chief Executive Officer (principalprincipal executive officer)officer (our CEO) and Chief Financial Officer (principalprincipal financial officer)officer (our CFO), to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluatedof the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at September 30, 2017.). Based onupon that evaluation, our Chief Executive Officer
40
principal executive officer and Chief Financial Officerprincipal financial officer concluded that, at September 30, 2017,as of October 1, 2022, the period covered in this report, our disclosure controls and procedures were effective.not effective 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.
Changes in Internal Control overOver Financial Reporting. There were no changes in the Company’s internal control over financial reporting during the quarter ended October 1, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
During the second and third quarters of fiscal 2017, covered by this QuarterlyManagement’s Report on Form 10-Q, we made certain changes to ourInternal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in RuleExchange Act Rules 13a-15(f) underand 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 Exchange Act). We have upgraded to a new accounting system and improved our control structure by adding and makingrisk that controls may become inadequate because of changes in accountingconditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management and staff for each subsidiary company. We do not believe this has materially affected, or is reasonably likely to materially affect,assessed the effectiveness of our internal control over financial reporting.reporting as of October 1, 2022. 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 October 1, 2022.
Management noted material weaknesses in internal control when conducting their evaluation of internal control as of October 1, 2022. (1) Insufficient information technology general controls (“ITGC”) and segregation of duties. It was noted that people who were negotiating a contract, were also involved in approving invoices without proper oversight. Additional controls and procedures are necessary and are being implemented to have check and balance on significant transactions and governance with those charged with governance authority. (2) Inadequate control design or lack of sufficient controls over significant accounting processes. The cutoff and reconciliation procedures were not effective with certain accrued and deferred expenses. (3) Insufficient assessment of the impact of potentially significant transactions, and (4) Insufficient processes and procedures related to proper recordkeeping of agreements and contracts. In addition, contract to invoice reconciliation was not effective with certain transportation service providers. As part of its remediation plan, processes and procedures have been implemented to help ensure accruals and invoices are reviewed for accuracy and properly recorded in the appropriate period. These material weaknesses remained outstanding as of the filing date of this quarterly report on Form 10-Q 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.
41
On November 6, 2015, a complaint was filedThe information in the Minnesota District Court for Hennepin County, Minnesota, by David Grayresponse to this item is included in Note 17, Commitments and Michael Boller, purporting to bring suit derivatively on behalf of the Company against twelve current and former officers and directors of the Company. The complaint alleged that the defendants breached their fiduciary dutiesContingencies, to the Company, and that the defendants have been unjustly enriched as a result thereof. The complaint sought damages, disgorgement, an awardConsolidated Financial Statements included in Part I, Item 1, of attorneys’ fees and other expenses, and an order compelling changes to the Company’s corporate governance and internal procedures. The Company and the other defendants vigorously denied plaintiffs’ allegations, and have not admitted any liability or wrongdoing as part of the settlement. The court made no findings or determinations with respect to the merit of plaintiffs’ claims, and no payment is being made by the Company or the other defendants. The parties have reached a settlement that fully resolves plaintiffs’ claims and provides for the release of all claims asserted in the litigation. On August 2, 2017, the court entered an order granting preliminary approval of the settlement. On September 29, 2017, the court issued an order granting final approval of the settlement. As a condition of the settlement, the Company has agreed to provide certain training to employees in the Company’s accounting department within one year of the settlement. The court also granted an application by plaintiffs’ counsel for attorneys’ fees, to be paid by the Company’s insurance carrier. Other than this award of attorneys’ fees, no payment or other consideration was paid by the Company nor its officers or directors in connection with the settlement.Form 10-Q.
In February 2012, various individuals commenced a class action lawsuit against Whirlpool Corporation (“Whirlpool”) and various distributors of Whirlpool products, including Sears, The Home Depot, Lowe’s and us, alleging certain appliances Whirlpool sold through its distribution chain, which includes us, were improperly designated with the ENERGY STAR® qualification rating established by the U.S. Department of Energy and the Environmental Protection Agency. The claims against us include breach of warranty claims, as well as various state consumer protection claims. The amount of the claim is, as yet, undetermined. Whirlpool has offered to fully indemnify and defend its distributors in this lawsuit, including us, and has engaged legal counsel to defend itself and the distributors. We are monitoring Whirlpool’s defense of the claims and believe the possibility of a material loss is remote.
AMTIM Capital Inc. (“AMTIM”) provided management and sales services in respect of our recycling services in Canada, and was paid pursuant to agreements between AMTIM and us. A dispute arose between AMTIM and us with respect to the calculation of amounts due to AMTIM pursuant to the agreements. In a lawsuit filed in the province of Ontario on March 29, 2011, AMTIM claimed a discrepancy in the calculation of fees due to AMTIM by us in excess of $1.6 million. On December 9, 2011 the United States District Court for the District of Minnesota issued a declaratory default judgment to the effect that our method of calculating of the amounts due to AMTIM is correct. Although the Ontario action continues, and its outcome is uncertain, we believe that no further amounts are due under the terms of these agreements and we will continue to defend our position relative to this lawsuit.
On December 29, 2016, ARCA served a Minnesota state court complaint for breach of contract on Skybridge Americas, Inc. (“SA”), ARCA’s primary call center vendor throughout 2015 and most of 2016. ARCA seeks 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 $460,000 plus interest and attorneys’ fees. On March 29, 2017, the Hennepin County district court dismissed ARCA’s claim based on the currency differential between the United States and Canada, but permitted ARCA’s remaining claims to proceed. The parties are currently conducting discovery. On October 24, 2017, ARCA filed a motion for partial summary judgment. ARCA intends to vigorously dispute SA’s counterclaims.
On November 15, 2016, ARCA served an arbitration demand on Haier US Appliance Solutions, Inc, dba GE Appliances (“GEA”), alleging breach of contract and interference with prospective business advantage. ARCA seeks over $2 million in damages. On April 18, 2017, GEA served a counterclaim for approximately $337,000 in alleged obligation under the parties’ recycling agreement. Simultaneously with serving its counterclaim in the arbitration, which is venued in Chicago, GEA filed a complaint in the United States District Court for the Western District of Kentucky seeking damages of approximately $530,000 plus interest and attorneys’ fees allegedly owed under a previous agreement between the parties. On May 31, 2017, ARCA moved to dismiss or stay the Kentucky lawsuit in favor of the pending arbitration. ARCA’s motions have not been ruled upon. Under the terms of ARCA’s transaction with Recleim LLC, Recleim LLC is obligated to pay GEA on ARCA’s behalf the amounts claimed by GEA in the arbitration and in the lawsuit pending in Kentucky.
We are party from time to time to ordinary course disputes that we do not believe to be material or have merit. We intend to vigorously defend ourselves against these ordinary course disputes.
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 factor, 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 SECComplaint, 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 SECComplaint. Refer to Note 17 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 Global 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.
On April 13, 2022, we received a notice from The NASDAQ Stock Market (“Nasdaq”) that we did not presently comply with Nasdaq’s Listing Rule 5550(b)(1) (the “Rule”) that requires a Company to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing. The notice did not have any immediate effect on the listing of our common stock on the Nasdaq Capital Market and we had 45 calendar days from the date of the notice to submit a plan to Nasdaq to regain compliance with Nasdaq’s continued listing rules. We submitted such a plan on May 31, 2022, wherein we discussed the GeoTraq sale (see Note 25) and how that placed the Company back into compliance with the Rule. As of the filing date, we have received no further communication on the matter.
Item 2. Unregistered Sales of Equity Securities and Use of funds
None.
Item 3. Defaults Upon Senior Securities
None.
On September 20, 2017, Appliance Recycling Centers of America, Inc. (the “Company”) received a written notice of default, dated September 20, 2017 (the “Notice of Default”), from MidCap Funding X Trust (the “Agent”), asserting that events of default had occurred with respect to that certain Credit and Security Agreement dated May 10, 2017 (the “Loan Agreement”), by and among the Agent and certain other Lenders (the “Lenders”), and the Company and certain of its subsidiaries (the “Borrowers”). The Agent alleges in the Notice of Default that, as a result of the Company’s recent acquisition of GeoTraq Inc. (“GeoTraq”), and the issuance of promissory notes to the stockholders of GeoTraq in connection with such acquisition, the Borrowers have failed to comply with certain terms of the Loan Agreement, and that such failure constitutes one or more Events of Default under the Loan Agreement. Specifically, the Notice of Default states that as a result of the acquisition and related issuance of promissory notes, the Borrowers have failed to comply with (i) a covenant not to incur additional indebtedness other than Permitted Debt (as defined in the Loan Agreement), without the Agent’s prior written consent, and a covenant not to make acquisitions or investments other than Permitted Acquisitions or Permitted Investments (as defined in the Loan Agreement). The Notice of Default also states that the Borrowers’ failure to pledge the stock in GeoTraq as collateral under the Loan Agreement and to make GeoTraq a “Borrower “under the Loan Agreement will become an Event of Default if not cured within the applicable cure period. The Agent has reserved the right to avail itself of any other rights and remedies available to it at law or by contract, including the right to (a) withhold funding, increase reserves and suspend making further advances under the Loan Agreement, (b) declare all principal, interest and other sums owing in connection with the Loan Agreement immediately due and payable in full, (c) charge the Default Rate on amounts outstanding under the Loan Agreement, and/or (d) exercise one or more rights and remedies with respect to any and all collateral securing the Loan Agreement. The Agent has not declared the amounts outstanding under the Loan Agreement to be immediately due and payable but has imposed the default rate of interest, which is 5% in excess of the rates otherwise payable under the Loan Agreement), effective as of August 18, 2017 and continuing until the Agent notifies the Borrowers that the specified Events of Default have been waived and no other Events of Default exist.Item 4. Mine Safety Disclosures
None.
The Company strongly disagrees with the Lenders that any Event of Default has occurred and is reserving all of its options with respect to the Loan Agreement. The Company and the Agent are in active discussions for forbearance and resolution of the default, however there can be no assurance the Company and the Agent will be able to agree on terms of the forbearance.42
Item 5. Other Information.
None.
43
Index to Exhibits
Exhibit Number | Exhibit Description | Form |
| File Number |
| Exhibit Number |
| Filing Date | ||
10.28 |
| Asset Purchase Agreement between JanOne Inc. and SPYR Technologies Inc., dated May 24, 2022 |
| 8-K |
| 0-19621 |
| 10.28 |
| 05/31/22 |
|
|
|
|
|
|
|
|
|
|
|
10.29 |
| Promissory Note of SPYR Technologies Inc. in favor of JanOne Inc., dated May 24, 2022 |
| 8-K |
| 0-19621 |
| 10.29 |
| 05/31/22 |
|
|
|
|
|
|
|
|
|
|
|
10.92 |
|
| 8-K |
| 0-19621 |
| 10.92 |
| 09/28/22 | |
|
|
|
|
|
|
|
|
|
|
|
10.93 |
| Guaranty to Gulf Coast Bank and Trust by JanOne Inc., dated as of September 21, 2022. |
| 8-K |
| 0-19621 |
| 10.93 |
| 09/28/22 |
|
|
|
|
|
|
|
|
|
|
|
10.94 |
| Debt Subordination Agreement by Isaac Capital Group, dated as of September 21, 2022. |
| 8-K |
| 0-19621 |
| 10.94 |
| 09/28/22 |
|
|
|
|
|
|
|
|
|
|
|
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.
† Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10)(iv).
† Furnished herewith.
44
** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.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: | April 25, 2023 | By: | /s/ Tony Isaac | |
Tony Isaac | ||||
Chief Executive Officer | ||||
(Principal Executive Officer) |
Date: | April 25, 2023 | By: | /s/ Virland |
Virland | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |
45