JanOne (JAN) - 2019 Q4 - Annual Report

PART I Item 1. Business JanOne Inc. shifted to a pharmaceutical focus on non-addictive pain treatments for PAD, retaining recycling and IoT, facing competition and regulations General Business Overview JanOne Inc. shifted to a pharmaceutical focus in 2019, while retaining ARCA Recycling and GeoTraq IoT, and addressing ApplianceSmart's bankruptcy - JanOne Inc. (formerly Appliance Recycling Centers of America, Inc.) shifted its primary focus to a pharmaceutical company on September 10, 2019, aiming to treat severe pain conditions with non-addictive drugs[15] - The company retains its ARCA Recycling segment, offering appliance recycling and replacement services, and GeoTraq Inc., developing cellular IoT transceiver modules[15] - ApplianceSmart, a former subsidiary, filed for Chapter 11 bankruptcy on December 9, 2019, leading to a $2.9 million valuation allowance for indebtedness owed to JanOne[16] Biotechnology Segment The biotechnology segment, established in 2019, focuses on developing TV1001SR for PAD, with Phase 2b clinical trials planned - JanOne Inc. changed its name from Appliance Recycling Centers of America, Inc. on September 10, 2019, to reflect its new strategic commitment to combating the opioid epidemic through innovative solutions, including revolutionary painkilling drugs[18] - In November 2019, JanOne secured a worldwide, exclusive license for TV1001SR, a treatment for Peripheral Artery Disease (PAD), which affects over 8.5 million people in the U.S. and has a market value of $3.47 billion by 2023[20][21] - The company plans to initiate Phase 2b clinical trials for TV1001SR by the second half of 2020, targeting PAD and PAD-associated pain, and intends to pursue the FDA 505(b)(2) pathway for new drug approval[20] - A manufacturing agreement for TV1001SR was executed with CoreRx Inc. in February 2020[22] Recycling Segment The recycling segment provides environmentally sound appliance disposal services to utilities across North America, operating 13 EPA RAD-compliant centers - ARCA Recycling began in 1976, evolving from a used appliance retailer to providing environmentally sound appliance disposal services by the late 1980s due to stricter environmental regulations[24] - Since 1989, the company has contracted with approximately 400 utilities across North America to offer turnkey appliance recycling services, currently holding contracts with about 180 utilities[25][26] - ARCA operates 13 recycling centers in the U.S. and Canada, using EPA RAD-compliant methods to remove and manage hazardous components like CFC refrigerants and mercury[29][34] Technology Segment GeoTraq Inc. develops patented cellular IoT modules for location-based services, acquired in 2017 to diversify the company's offerings - GeoTraq Inc. was acquired on August 18, 2017, to diversify the company's offerings, becoming a wholly-owned subsidiary[39] - GeoTraq is a Mobile Internet of Things (IoT) technology company designing wireless modules for Location Based Services (LBS) and external sensor connectivity, aiming to address underserved markets with lower costs, extended battery life, and smaller form factors[41][44] - GeoTraq holds Patent No. 10,182,402, covering various operational aspects of its Mobile IoT wireless modules, including interval timers, power control, SMS packetizers, geo-locators, and RF communicators[42] Recent Developments Recent developments include significant operational disruptions and layoffs due to the COVID-19 outbreak, impacting recycling and rent payments - As of the Form 10-K filing date, JanOne temporarily closed its corporate office and call center, idled all recycling processing centers, and laid off 112 of 208 employees since January 1, 2020, due to the COVID-19 outbreak[46] - The company plans to withhold April 2020 rent payments and will evaluate future rent based on the evolving COVID-19 situation and government assistance[46] - Recycling operations continue on a scaled-down basis with on-curb pickup where permitted, while all appliance replacement programs are temporarily suspended[46] Customers and Source of Supply Supply chain relies on third-party API for biotech, utility contracts for recycling, and a single supplier for GeoTraq, which currently has no customers - The Biotechnology segment sources its active pharmaceutical ingredient (API) from a third-party pharmaceutical company[47] - The Recycling segment contracts with utility companies for appliance recycling and replacement services, with contracts typically lasting one to three years and prohibiting the resale of collected appliances or parts[48][49] - GeoTraq currently has no customers and relies on a single supplier for its cellular transceiver modules, sourcing raw materials from various third parties[51] Principal Products and Services Revenue is primarily from recycling and byproduct sales, with biotechnology and technology segments not yet generating customer revenue - As of December 28, 2019, JanOne generated revenue from recycling (fees for collecting/recycling appliances and selling ENERGY STAR® appliances) and byproduct sales (scrap materials like metal and plastics)[52] - The company operated three reportable segments in fiscal year 2019: biotechnology, recycling, and technology. In fiscal year 2018, it operated two: recycling and technology[53] - Neither the biotechnology nor technology segments had any customers or generated revenue as of December 28, 2019[55] Seasonality The recycling business experiences seasonal fluctuations, with higher customer demand and promotional activities in the second and third quarters - The recycling business experiences seasonal fluctuations, with higher customer demand and business surges during the second and third calendar quarters due to promotional activities, which then decline through the fourth and first quarters[54] Competition The company faces intense competition across all segments, from existing drug treatments in biotech to various recycling and IoT technology providers - In biotechnology, JanOne's TV1001SR for PAD-associated pain faces competition from existing treatments like pentoxifylline, ibuprofen, and opioids, though no drugs are specifically indicated for PAD-associated pain[56] - The recycling segment competes with other recycling businesses, energy services management companies, new-appliance retailers, and small hauling/recycling companies, many of which may not properly process hazardous materials[57][58] - GeoTraq operates in a highly competitive Mobile IoT industry, facing numerous competing technologies and constantly changing market dynamics from carriers, manufacturers, and solution providers[59] Government Regulation Operations are subject to extensive government regulations, including FDA for pharmaceuticals, environmental for recycling, and FCC for IoT technology - Pharmaceutical companies are subject to extensive regulation by agencies like the FDA, requiring data on safety, efficacy, and cGMP compliance for manufacturing, distribution, marketing, and sale[60] - The FDA approval process involves pre-clinical testing, IND application, three phases of human clinical trials, NDA submission, and post-marketing surveillance[63][64][70] - The recycling business is regulated by federal, state, and local governments concerning appliance collection, recycling, and hazardous waste management, including Clean Air Act amendments prohibiting refrigerant venting[84][85] - GeoTraq's Mobile IoT modules are subject to FCC regulations (Parts 15, 20, 22, 24, 27) for RF energy emissions and may require international approvals[88] Employees As of December 28, 2019, JanOne Inc. had 208 employees, with the majority (199) being full-time - As of December 28, 2019, JanOne had 208 employees, with 199 being full-time[89] - JanOne Inc. broadened its business perspective to become a pharmaceutical company focused on non-addictive pain treatments, specifically for Peripheral Arterial Disease (PAD), as of September 10, 2019[15] - The company continues to operate its legacy businesses: ARCA Recycling, which provides turnkey appliance recycling and replacement services, and GeoTraq Inc., which develops cellular transceiver modules and associated wireless services[15] - JanOne acquired a worldwide, exclusive license for TV1001SR, a PAD treatment, in November 2019, and plans to commence Phase 2b clinical trials by the second half of 2020, pursuing the FDA 505(b)(2) pathway[20] - The Biotechnology and Technology segments have not generated any revenue to date, including in the fiscal year ended December 28, 2019[23][45] Item 1A. Risk Factors The company faces significant risks across all segments, including COVID-19 impacts, biotech development uncertainties, commodity price volatility, and principal shareholder control Risks Relating to Our Business Generally General business risks include adverse impacts from COVID-19, potential asset impairment, cost management challenges, and cybersecurity incidents - The COVID-19 outbreak has negatively impacted operations, causing customers to suspend appliance pickup/replacement services and decreasing revenues, with future impacts being highly uncertain[93] - The company's long-lived assets (approximately $20 million as of December 28, 2019) are subject to impairment testing, and failure to achieve sufficient cash flow could result in significant non-cash impairment charges[95] - Failure to effectively manage costs, particularly fixed cost elements, could materially adversely affect profitability, especially given industry competitiveness and price pressures[101] - Cybersecurity incidents, including data breaches or system disruptions, could lead to business disruption, negative publicity, loss of customers, and significant financial liabilities[98][100] Risks Relating to Our Biotechnology Segment Biotechnology risks stem from limited operating history, significant financing needs, uncertain FDA approval, and reliance on licensed patent rights - The biotechnology business has a limited operating history and has not generated revenue, making it difficult for investors to evaluate its technology or prospective operations[110] - The company will require significant additional financing to fund the development of its initial product candidate, SR TV1001, through Phase IIb/IIIa studies and marketing approval[113] - Commercialization success is entirely dependent on obtaining marketing approval from the FDA and foreign regulatory authorities, a process that is expensive, lengthy, and uncertain[130][133] - The business model relies entirely on licensed patent rights for SR TV1001, and the loss of these rights would likely cause the business to fail[114] Risks Relating to Our Recycling Business Recycling business risks include commodity price volatility, reliance on third-party manufacturers, competition, and dependence on utility contracts - Recycling revenues, earnings, and cash flows are subject to significant fluctuations based on commodity prices (steel, aluminum, copper) and demand, particularly from China and Turkey[176] - The company's reliance on third-party manufacturers for replacement appliances, many of which are in China, exposes it to international trade conditions, tariffs, and supply chain disruptions[178][179] - Sales and profitability can fluctuate significantly due to changes in competition, commodity prices, utility program changes, general economic conditions, and weather[182] - The business is highly dependent on obtaining and continuing recycling and appliance replacement contracts with utility companies, which typically have short terms and early termination clauses[190] Risks Relating to Our Technology Business Technology segment risks involve significant operating losses, early development challenges, reliance on third-party manufacturers, and cellular service dependency - GeoTraq has incurred significant operating losses since inception and expects them to continue, with limited financial resources and dependence on external funding to avoid suspending or ceasing operations[199][201] - The company relies on third-party developers and contract manufacturers for its technology and products, exposing it to risks of operational difficulties, quality control issues, and supply chain disruptions[202][203] - GeoTraq's success depends on increasing customer adoption of its technology for asset tracking and theft recovery, which is tied to module sales and recurring subscription fees[206] - The technology is dependent on cellular service providers, and changes in terms of use or network access could impair GeoTraq's customer base and revenue[207][208] Risks Relating to Our Common Stock Common stock risks include control by principal shareholders, potential dilution from future sales, stock price volatility, and no planned dividends - Principal shareholders, Isaac Capital Group, LLC (19.7%) and Timothy Matula (5.7%), control a large percentage of voting stock, potentially influencing corporate decisions, including director elections[223][224] - Future sales of common stock and conversion of Series A Convertible Preferred Stock could negatively affect the stock price and liquidity due to dilution and increased shares outstanding[225] - The company's stock price may be volatile due to variations in financial results, changes in accounting standards, substantial stock sales by existing shareholders, and general economic conditions[228] - The company does not intend to declare dividends on its common stock in the foreseeable future, retaining earnings for business operations and expansion[230] - The COVID-19 outbreak has already materially impacted operations, leading to suspended appliance pickup/replacement services and decreased revenues, with future impacts highly uncertain[93] - The biotechnology business has a limited operating history, no revenue, and requires significant additional financing to fund product development and obtain marketing approval[110][113] - The recycling business is exposed to commodity price fluctuations (steel, aluminum, copper), which can negatively affect operating income and cash flows[176] - GeoTraq has incurred significant operating losses since inception, is in early development stages, and lacks sufficient funds to complete its proposed plan of operation without external financing[199][200][201] - Principal shareholders, Isaac Capital Group, LLC (19.7%) and Timothy Matula (5.7%), hold significant voting power, potentially influencing corporate decisions[223][224] Item 2. Properties JanOne Inc. leases its executive offices in Las Vegas, Nevada, and operates fifteen leased recycling centers across the U.S. and Canada - JanOne's executive offices are located in a leased 11,000 square foot facility in Las Vegas, Nevada[236] - The company leases a total of fifteen recycling center facilities in the U.S. and Canada, with locations including Dartmouth, Santa Fe Springs, Minneapolis, Indianapolis, Franklin, Commerce City, Cudahy, Pittsburgh, Mechanicsburg, Philadelphia, Syracuse, Sacramento, and Norcross[237][238][239] Item 3. Legal Proceedings The company is involved in multiple legal proceedings, including a breach of contract lawsuit, an arbitration award, disputed fees, and a $5.4 million California sales tax assessment - The company is involved in a breach of contract lawsuit against Skybridge Americas, Inc. (SA) for alleged overcharging and lost client contracts, with a counterclaim from SA for unpaid invoices. A trial is scheduled for May 2020[240] - In an arbitration with Haier US Appliance Solutions, Inc. (GEA), the arbitrator ruled partially in favor of GEA, awarding them approximately $125,000 in damages[241] - AMTIM Capital, Inc. claims a discrepancy of approximately $2.0 million in fees due for recycling services in Canada, which the company disputes[242] - JanOne faces a formal assessment from the California Department of Tax and Fee Administration (CDTFA) for $4.1 million in sales tax plus $0.5 million in interest (totaling $5.4 million as of December 28, 2019) related to appliance replacement programs, which is under appeal[244] Item 4. Mine Safety Disclosures The company has no mine safety disclosures to report PART II Item 5. Market for Our Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities JanOne Inc.'s common stock trades on the NASDAQ Capital Market under the symbol 'JAN'. As of March 19, 2020, there were 37 stockholders of record. The company has not paid and does not plan to pay cash dividends on its common stock in the foreseeable future - JanOne Inc. common stock trades on the NASDAQ Capital Market under the symbol 'JAN'[249] - As of March 19, 2020, there were 37 stockholders of record[249] - The company has not paid and does not plan to pay cash dividends on its common stock for the foreseeable future, intending to retain earnings for business operations and expansion[230][249] Item 6. Selected Financial Data This section is marked as 'Not applicable' in the report, indicating no selected financial data is provided Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A covers JanOne's strategic shift, 2019 revenue decrease, increased net loss, impairment charges, and liquidity challenges, including COVID-19 impacts Note about Forward-Looking Statements This section contains forward-looking statements subject to risks and uncertainties, with no obligation for the company to update them - This section contains forward-looking statements characterized by terms like 'may,' 'believes,' 'projects,' 'intends,' 'plans,' 'expects,' or 'anticipates,' which do not reflect historical facts[254] - These statements involve risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied, as detailed in Item 1A 'Risk Factors'[255] - The company does not undertake any obligation to update forward-looking statements[256] Our Company JanOne focuses on biotechnology solutions for the opioid epidemic, alongside its ARCA Recycling and GeoTraq Mobile IoT technology segments - JanOne is focused on developing new solutions for the opioid epidemic through its biotechnology segment, including digital technologies and educational advocacy[257] - The company's Recycling segment (ARCA Recycling, ARCA Canada Inc.) provides turnkey appliance recycling and replacement services for utilities in North America[257][258] - The Technology segment (GeoTraq Inc.) is developing wireless transceiver modules for low-cost, location-based products and services using global Mobile IoT networks[257][258] Reporting Period The company operates on a 52- or 53-week fiscal year, with both 2019 and 2018 periods comprising 52 weeks - The company reports on a 52- or 53-week fiscal year. Fiscal year 2019 ended on December 28, 2019, and fiscal year 2018 ended on December 29, 2018, both being 52 weeks[259] Application of Critical Accounting Policies Financial statements adhere to U.S. GAAP, relying on management estimates and critical policies for intangible impairment, revenue, and going concern - The consolidated financial statements are prepared in conformity with U.S. GAAP, requiring management to make estimates and assumptions that affect reported amounts[260] - Critical accounting policies include intangible impairment under ASC 350, revenue recognition under ASC 606, and going concern under ASC 205[261] Results of Operations Analysis of 2019 vs. 2018 operations shows a revenue decrease, significant increase in net loss, and changes in gross profit by segment Statement of Operations Data (2019 vs. 2018) | Statement of Operations Data: | December 28, 2019 (in thousands) | % of Revenue | December 29, 2018 (in thousands) | % of Revenue | | :---------------------------------- | :------------------------------- | :----------- | :------------------------------- | :----------- | | Revenues | $35,097 | 100.0% | $36,794 | 100.0% | | Cost of revenues | $27,311 | 77.8% | $25,741 | 70.0% | | Gross profit | $7,786 | 22.2% | $11,053 | 30.0% | | Selling, general and administrative expenses | $20,217 | 57.6% | $17,150 | 46.6% | | Operating loss | $(12,431) | (35.4)% | $(6,097) | (16.6)% | | Interest expense, net | $(1,480) | (4.2)% | $(668) | (1.8)% | | Impairment charges | $(2,992) | (8.5)% | $0 | 0.0% | | Gain on litigation settlement | $694 | 8.9% | $0 | 0.0% | | Other income | $1,048 | 3.0% | $430 | 1.2% | | Net income (loss) before income taxes | $(15,161) | (43.2)% | $(6,335) | (17.2)% | | Benefit from income taxes | $3,197 | 9.1% | $727 | 2.0% | | Net loss | $(11,964) | (34.1)% | $(5,608) | (15.2)% | Revenue and Gross Profit by Segment (2019 vs. 2018) | Category | 2019 Net Revenue (in thousands) | 2019 % of Total | 2018 Net Revenue (in thousands) | 2018 % of Total | | :---------------------- | :------------------------------ | :-------------- | :------------------------------ | :-------------- | | Recycling and Byproducts | $21,445 | 61.1% | $24,742 | 67.2% | | Replacement Appliances | $13,652 | 38.9% | $12,052 | 32.8% | | Total Revenue | $35,097 | 100.0% | $36,794 | 100.0% | | | | | | | | Category | 2019 Gross Profit (in thousands) | 2019 Gross Profit % | 2018 Gross Profit (in thousands) | 2018 Gross Profit % | | :---------------------- | :------------------------------- | :------------------ | :------------------------------- | :------------------ | | Recycling and Byproducts | $3,890 | 18.1% | $7,675 | 31.0% | | Replacement Appliances | $3,896 | 28.5% | $3,378 | 28.0% | | Total Gross Profit | $7,786 | 22.2% | $11,053 | 30.0% | - Net loss increased by $6,356 thousand (113.3%) from $5,608 thousand in 2018 to $11,964 thousand in 2019[280] Segment Performance Segment performance reveals increased operating losses in recycling and technology, with biotechnology incurring initial expenses in 2019 Operating Loss by Segment (2019 vs. 2018) | Segment | 2019 Operating Loss (in thousands) | 2018 Operating Loss (in thousands) | | :---------------- | :------------------------------- | :------------------------------- | | Recycling | $(6,397) | $(1,051) | | Biotechnology | $(1,038) | $0 | | Technology | $(4,996) | $(5,046) | | Total Operating Loss | $(12,431) | $(6,097) | - Recycling segment revenue decreased by $1,697 thousand (4.6%) in 2019, driven by a $3,297 thousand decrease in Recycling and Byproducts revenue (due to lower refrigerant sales and scrap metal prices), partially offset by a $1,600 thousand increase in Replacement Appliance revenue[284] - The Recycling segment's operating loss increased by $5,118 thousand in 2019, primarily due to decreased gross profit and increased selling, general, and administrative expenses[285] - The Biotechnology segment, started in September 2019, incurred $1,038 thousand in expenses related to employee costs and operating licenses[288] Liquidity and Capital Resources The company faces negative working capital but expects sufficient liquidity for 12 months through cash and factoring, despite COVID-19 impacts - As of December 28, 2019, the company had $481 thousand in cash and cash equivalents and negative working capital of $8,734 thousand[290][298] - Cash used in operations was $3,510 thousand in 2019, a decrease from $4,145 thousand provided by operations in 2018, primarily due to increased net loss[293] - The company utilizes a factoring agreement with Prestige Capital Corporation, allowing it to factor accounts receivable up to $11,000 thousand, which terminates in October 2020[297] - Management believes available cash, factoring, and potential refinancing will provide sufficient liquidity for the next 12 months, despite the adverse impact of the COVID-19 outbreak on operations[289][292][300] - JanOne Inc. is engaged in developing solutions for the opioid epidemic through its biotechnology segment, while also operating ARCA Recycling and GeoTraq Inc. for appliance recycling and Mobile IoT technology, respectively[257][258] Key Financial Performance (2019 vs. 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (%) | | :---------------------------------- | :------------------ | :------------------ | :--------- | | Revenues | $35,097 | $36,794 | -4.6% | | Cost of revenues | $27,311 | $25,741 | +6.1% | | Gross profit | $7,786 | $11,053 | -29.6% | | Selling, general and administrative expenses | $20,217 | $17,150 | +17.9% | | Operating loss | $(12,431) | $(6,097) | +103.9% | | Interest expense, net | $(1,480) | $(668) | +121.6% | | Impairment charges | $(2,992) | $0 | N/A | | Gain on litigation settlement | $694 | $0 | N/A | | Other income | $1,048 | $430 | +143.7% | | Net loss before income taxes | $(15,161) | $(6,335) | +139.3% | | Benefit from income taxes | $3,197 | $727 | +340.0% | | Net loss | $(11,964) | $(5,608) | +113.3% | - The company recorded an impairment charge of $2,992 thousand in 2019 due to the ApplianceSmart bankruptcy, with no similar charge in 2018[271] - As of December 28, 2019, the company had negative working capital of $8,734 thousand, but management believes available cash and factoring arrangements will provide sufficient liquidity for the next 12 months[298][299] Item 7A. Quantitative and Qualitative Disclosures About Market Risk JanOne Inc. assesses its market risks, noting no significant interest rate risk on its fixed-rate debt. While generating revenues in Canada, the impact of foreign currency exchange rate changes (U.S. dollar vs. Canadian dollar) was immaterial in 2019, and the company does not currently hedge these fluctuations. The company holds no derivative financial instruments or securities for trading/speculative purposes - The company believes there is no significant interest rate risk related to its short and long-term fixed rate debt[303] - Foreign currency exchange rate changes, specifically the U.S. dollar against the Canadian dollar, had an immaterial impact on revenues and net income for fiscal year 2019[304] - JanOne does not currently hedge foreign currency fluctuations and does not intend to do so in the foreseeable future[304] - The company does not hold any derivative financial instruments or securities for trading or speculative purposes[305] Item 8. Financial Statements and Supplementary Data Audited consolidated financial statements for 2019 and 2018 show increased net loss, negative working capital, and the impact of ASC 842 lease adoption Report of Independent Registered Public Accounting Firm (WSRP, LLC) WSRP, LLC issued an unqualified opinion on 2019 financial statements, noting the adoption of ASC 842, Leases, as a change in accounting principle - WSRP, LLC audited JanOne Inc.'s consolidated financial statements for the year ended December 28, 2019, and issued an unqualified opinion, stating they present fairly, in all material respects, the financial position and results of operations[309] - The audit noted a change in accounting principle in 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842)[310] Report of Independent Registered Public Accounting Firm (SingerLewak LLP) SingerLewak LLP issued an unqualified opinion on 2018 financial statements, which were restated to correct lease obligation disclosures - SingerLewak LLP audited JanOne Inc.'s consolidated financial statements for the year ended December 29, 2018, and issued an unqualified opinion[315] - The financial statements for 2018 were restated to correct an error regarding the non-disclosure of potential obligations arising from lease contracts, as detailed in Note 1 and Note 15[316] Consolidated Balance Sheets Consolidated balance sheets show a decrease in total assets and a significant increase in total current liabilities from 2018 to 2019 Consolidated Balance Sheet Highlights (in thousands) | Asset/Liability Category | December 28, 2019 | December 29, 2018 | | :--------------------------------------- | :---------------- | :---------------- | | Cash and cash equivalents | $481 | $1,195 | | Total current assets | $8,839 | $8,937 | | Total assets | $29,034 | $35,040 | | Total current liabilities | $17,573 | $9,684 | | Total liabilities | $18,693 | $13,429 | | Total stockholders' equity | $10,341 | $21,611 | - The company's total assets decreased from $35,040 thousand in 2018 to $29,034 thousand in 2019[322] - Total current liabilities significantly increased from $9,684 thousand in 2018 to $17,573 thousand in 2019, contributing to a negative working capital[322] Consolidated Statements of Operations and Comprehensive Loss Statements of operations show a 4.6% revenue decrease and a more than doubling of net loss from 2018 to 2019 Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | December 28, 2019 | December 29, 2018 | | :---------------------------------- | :---------------- | :---------------- | | Revenues | $35,097 | $36,794 | | Gross profit | $7,786 | $11,053 | | Operating loss | $(12,431) | $(6,097) | | Net loss | $(11,964) | $(5,608) | | Basic loss per share | $(6.78) | $(3.75) | | Diluted loss per share | $(6.78) | $(3.75) | | Comprehensive loss | $(11,964) | $(5,648) | - Revenues decreased by $1,697 thousand (4.6%) from $36,794 thousand in 2018 to $35,097 thousand in 2019[324] - Net loss more than doubled, increasing from $5,608 thousand in 2018 to $11,964 thousand in 2019[324] Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity significantly decreased in 2019 due to net loss, increasing the accumulated deficit, with share-based compensation adding to capital Changes in Stockholders' Equity (in thousands) | Item | December 29, 2018 Balance | Adoption of ASU 842 | Share-based compensation | Shares cancelled | Net loss | December 28, 2019 Balance | | :-------------------------- | :------------------------ | :------------------ | :----------------------- | :--------------- | :------- | :------------------------ | | Common Stock Amount | $2 | $0 | $0 | $0 | $0 | $2 | | Additional Paid in Capital | $38,660 | $0 | $631 | $0 | $0 | $39,291 | | Accumulated Deficit | $(16,518) | $63 | $0 | $0 | $(11,964) | $(28,419) | | Total Stockholders' Equity | $21,611 | $63 | $631 | $0 | $(11,964) | $10,341 | - Total stockholders' equity decreased significantly from $21,611 thousand in 2018 to $10,341 thousand in 2019[326] - The accumulated deficit increased from $(16,518) thousand in 2018 to $(28,419) thousand in 2019, primarily due to the net loss[326] - Share-based compensation added $631 thousand to additional paid-in capital in 2019[326] Consolidated Statements of Cash Flows Cash flow statements indicate a shift to cash used in operations in 2019, with financing activities providing cash, leading to an overall cash decrease Consolidated Statements of Cash Flows (in thousands) | Activity | December 28, 2019 | December 29, 2018 | | :--------------------------------------- | :---------------- | :---------------- | | Net cash provided by (used in) operating activities | $(3,510) | $4,145 | | Net cash provided by (used in) investing activities | $345 | $(172) | | Net cash provided by (used in) financing activities | $2,462 | $(6,109) | | Decrease in cash and cash equivalents | $(714) | $(2,118) | | Cash and cash equivalents, end of period | $481 | $1,195 | - Cash used in operating activities was $3,510 thousand in 2019, a significant shift from $4,145 thousand provided in 2018[329] - Cash provided by financing activities was $2,462 thousand in 2019, primarily from a related party note, contrasting with $6,109 thousand used in 2018[329] - Cash and cash equivalents decreased by $714 thousand in 2019, ending the period at $481 thousand[329] Notes to Consolidated Financial Statements These notes provide detailed disclosures on accounting policies, financial instrument balances, and significant events impacting the consolidated financial statements Note 1: Background and Basis of Presentation This note covers JanOne's reincorporation, ongoing net losses, negative working capital, going concern assessment, and the restatement of 2018 financials - JanOne Inc. reincorporated from Minnesota to Nevada on March 12, 2018, which did not affect material contracts, headquarters, business, or management[337][338] - The company reported net losses of $11,964 thousand in 2019 and $5,608 thousand in 2018, with a negative working capital of $8,734 thousand as of December 28, 2019[340] - Management concluded that the company can continue as a going concern for the next twelve months, relying on available cash and an accounts receivable factoring program[342][343] - The 2018 financial statements were restated to disclose potential obligations from lease guarantees related to the ApplianceSmart sale, which were previously deemed immaterial[344][346] Note 2: Summary of Significant Accounting Policies This note outlines significant accounting policies, including consolidation, ASC 842 lease adoption, intangible asset amortization, and ASC 606 revenue recognition - The consolidated financial statements include JanOne Inc. and its wholly-owned subsidiaries, with all significant intercompany accounts and transactions eliminated[349] - The company adopted ASC 842, Leases, at the beginning of fiscal year 2019, recognizing a Right of Use asset and corresponding liability for operating leases, which had minimal impact on net earnings or cash flows[383][389] - Intangible assets, including customer relationships, trade names, licenses, software, and patents, are capitalized at cost and amortized over their estimated useful lives (3-20 years)[365] - Revenue is recognized in accordance with ASC 606, identifying performance obligations and allocating transaction prices based on standalone selling prices, with revenue recognized upon transfer of control[367][368] Note 3: Trade and other receivables Trade and other receivables, net, increased in 2019, primarily driven by a significant rise in factored accounts receivable Trade and Other Receivables (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :-------------------------- | :---------------- | :---------------- | | Trade receivables, net | $7,226 | $5,064 | | Factored accounts receivable | $(2,165) | $(582) | | Prestige Capital reserve receivable | $415 | $106 | | Due from Recleim | $913 | $819 | | Other receivables | $189 | $397 | | Total trade and other receivables, net | $6,578 | $5,804 | - Total trade and other receivables, net, increased from $5,804 thousand in 2018 to $6,578 thousand in 2019[398] - Factored accounts receivable significantly increased from $(582) thousand in 2018 to $(2,165) thousand in 2019[398] Note 4: Note receivable This note details the ApplianceSmart Note, its amendment, and the $2.992 million impairment charge due to ApplianceSmart's Chapter 11 bankruptcy - On December 30, 2017, the company sold its retail appliance segment, ApplianceSmart, for $6,500 thousand, with a promissory note (ApplianceSmart Note) of $3,919 thousand issued on April 1, 2018, maturing April 1, 2021[399][400] - The ApplianceSmart Note was amended on December 26, 2018, to grant JanOne a security interest in ApplianceSmart's assets[402] - ApplianceSmart filed for Chapter 11 bankruptcy on December 9, 2019, leading to JanOne recording a $2,992 thousand impairment charge for the outstanding indebtedness[404] Note 5: Inventory Total inventory increased in 2019, primarily due to appliances held for resale and raw material chips, valued at the lower of cost or net realizable value Inventory Composition (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :---------------------- | :---------------- | :---------------- | | Appliances held for resale | $1,148 | $801 | | Raw material - chips | $200 | $0 | | Total inventory | $1,348 | $801 | - Total inventory increased from $801 thousand in 2018 to $1,348 thousand in 2019, primarily due to an increase in appliances held for resale and the addition of raw material chips[405] - Inventories are stated at the lower of cost or net realizable value, with estimated provisions for obsolescence based on age and management assessment[405] Note 6: Prepaids and other current assets Prepaids and other current assets decreased in 2019, mainly due to the full amortization of debt issuance costs related to a terminated agreement Prepaids and Other Current Assets (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :---------------------- | :---------------- | :---------------- | | Prepaid insurance | $282 | $271 | | Prepaid consulting fees | $0 | $265 | | Prepaid other | $74 | $81 | | Debt issuance costs, net | $0 | $419 | | Total | $356 | $1,036 | - Total prepaids and other current assets decreased from $1,036 thousand in 2018 to $356 thousand in 2019, mainly due to the full amortization of debt issuance costs[406] - Debt issuance costs of $419 thousand related to an agreement with Energy Efficiency Investments, LLC (EEI) were fully amortized during fiscal year 2019 following the termination of the agreement[407] Note 7: Property and equipment Net property and equipment increased in 2019, with depreciation expense decreasing compared to the prior year Property and Equipment, Net (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :-------------------------- | :---------------- | :---------------- | | Buildings and improvements | $69 | $67 | | Equipment | $2,314 | $2,166 | | Projects under construction | $120 | $58 | | Less accumulated depreciation | $(2,179) | $(2,080) | | Property and equipment, net | $324 | $211 | - Net property and equipment increased from $211 thousand in 2018 to $324 thousand in 2019[408] - Depreciation expense was $99 thousand in 2019, down from $268 thousand in 2018[408] Note 8: Intangible assets Net intangible assets decreased in 2019 due to amortization, with GeoTraq acquisition assets valued at $26.097 million Intangible Assets (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :-------------------------- | :---------------- | :---------------- | | Intangible assets GeoTraq | $26,096 | $26,096 | | Patents and domains | $23 | $19 | | Computer software | $4,167 | $3,883 | | Less accumulated amortization | $(12,581) | $(8,604) | | Total intangible assets, net | $17,705 | $21,394 | - Net intangible assets decreased from $21,394 thousand in 2018 to $17,705 thousand in 2019[409] - Intangible amortization expense was $3,977 thousand in 2019, compared to $3,730 thousand in 2018[409] - The GeoTraq acquisition included a U.S. patent and intellectual property valued at $26,097 thousand, with a seven-year useful life, and an associated deferred income tax liability of $10,134 thousand[410] Note 9: Deposits and other assets Total deposits and other assets decreased in 2019, primarily reflecting a reduction in refundable security deposits with landlords Deposits and Other Assets (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :---------------- | :---------------- | :---------------- | | Deposits | $195 | $561 | | Other | $77 | $100 | | Total | $272 | $661 | - Total deposits and other assets decreased from $661 thousand in 2018 to $272 thousand in 2019, primarily due to a reduction in deposits[412] - Deposits primarily consist of refundable security deposits with landlords[412] Note 10: Leases The company adopted ASC 842, recognizing $1.6 million in Right of Use assets and liabilities for operating leases with a 24-month weighted average term - The company adopted ASC 842, Leases, recognizing $1,600 thousand in Right of Use Assets and corresponding liabilities for operating leases with terms greater than 12 months[413][414] Present Value of Lease Payments (in thousands) | Year | Amount | | :--- | :----- | | 2020 | $1,161 | | 2021 | $705 | | 2022 | $162 | | 2023 | $50 | | Total | $2,078 | | Less interest | $(149) | | Present value of payments | $1,929 | - The weighted average lease term for operating leases is 24 months, with a weighted average discount rate of 8%[390] Note 11: Accrued liabilities Total accrued liabilities significantly increased in 2019, driven by higher contract liabilities, incentive checks, and accrued guarantees Accrued Liabilities (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :-------------------------- | :---------------- | :---------------- | | Compensation and benefits | $809 | $567 | | Contract liability | $515 | $0 | | Accrued incentive and rebate checks | $988 | $316 | | Accrued rent | $228 | $16 | | Accrued guarantees | $767 | $0 | | Other | $631 | $219 | | Total | $3,938 | $1,118 | - Total accrued liabilities significantly increased from $1,118 thousand in 2018 to $3,938 thousand in 2019, driven by increases in contract liability, accrued incentive/rebate checks, and accrued guarantees[418] Note 12: Accrued liability – California sales tax The accrued California sales tax liability increased to $5.438 million in 2019, stemming from a CDTFA assessment currently under appeal - The accrued liability for California sales tax increased from $4,722 thousand in 2018 to $5,438 thousand in 2019[422] - This liability stems from a CDTFA assessment for sales tax (2011-2013) on appliance replacement programs, totaling $4,132 thousand plus approximately $500 thousand in interest (totaling $5.4 million as of December 28, 2019) related to appliance replacement programs, which is under appeal[244][421] Note 13: Income taxes The income tax benefit significantly increased in 2019 due to higher net loss, with federal net operating loss carryforwards available indefinitely Income Tax Benefit (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :-------------------------- | :---------------- | :---------------- | | Current tax expense | $(80) | $(519) | | Deferred tax benefit - domestic | $3,277 | $1,246 | | Benefit of income taxes | $3,197 | $727 | - The company recorded an income tax benefit of $3,197 thousand in 2019, a significant increase from $727 thousand in 2018, primarily due to the increased net loss before taxes[279][423] - As of December 28, 2019, the company had federal net operating loss carryforwards of approximately $6,600 thousand, eligible for indefinite carryforward with certain limitations[424] - Net deferred tax assets (liabilities) shifted from $(3,549) thousand in 2018 to $(270) thousand in 2019, with a valuation allowance of $(786) thousand in 2019[424] Note 14: Short term debt Total short-term debt decreased in 2019, following the termination of the MidCap Revolver and an escrow arrangement for the GE loan Short Term Debt (in thousands) | Category | December 28, 2019 | December 29, 2018 | | :---------------- | :---------------- | :---------------- | | AFCO Finance | $155 | $193 | | GE 8% loan agreement | $125 | $482 | | Total short term debt | $280 | $675 | - Total short term debt decreased from $675 thousand in 2018 to $280 thousand in 2019[427] - The MidCap Revolver, a $12,000 thousand revolving line of credit, was terminated and paid in full on March 22, 2018[428][429] - The GE 8% loan agreement balance of $125 thousand is subject to an escrow arrangement with Recleim LLC, pending the outcome of arbitration[433][434] Note 15: Commitments and Contingencies This note details ongoing legal commitments and contingencies, including lawsuits, arbitration awards, disputed fees, and lease guarantees - The company is involved in a breach of contract lawsuit with Skybridge Americas, Inc., with a trial expected after further proceedings[435] - In an arbitration with GE Appliances, GEA was awarded approximately $125 thousand in damages[436] - AMTIM Capital, Inc. claims approximately $2,000 thousand in disputed fees for Canadian recycling services[437] - As of December 28, 2019, the company had an accrued liability of $767 thousand for future real property lease payments under ApplianceSmart Leases, which were guaranteed by JanOne[440][441] Note 16: Series A Preferred Stock Details on Series A Convertible Preferred Stock issued during the GeoTraq acquisition, including its conversion ratio and shareholder approval - The company issued 288,588 shares of Series A Convertible Preferred Stock (later Series A-1 Preferred Stock) as part of the GeoTraq acquisition on August 18, 2017[448][450] - Series A-1 Preferred Stock holders have a conversion ratio of 1:20 (1 preferred share to 20 common shares), subject to Nasdaq shareholder approval requirements[454] - Shareholders approved the conversion rights of Series A-1 Preferred Stock into common stock on October 23, 2018[454] Note 17: Shareholders' Equity Shareholders' equity details include common shares outstanding, stock options, share-based compensation expense, and outstanding warrants - As of December 28, 2019, there were 1,919,048 shares of common stock issued and outstanding, with 224,483 shares issued as compensation in 2019[455] - Total outstanding stock options were 44,400 as of December 28, 2019, with a weighted average exercise price of $13.31 and a remaining contractual life of 3.00 years[460] - Share-based compensation expense was $631 thousand in 2019 and $656 thousand in 2018[460] - As of December 28, 2019, there were 33,363 warrants outstanding to purchase common stock at $3.40 per share, expiring in May 2020[461] Note 18: Loss per share Basic and diluted loss per share increased in 2019, with potentially dilutive securities excluded due to their anti-dilutive effect Loss Per Share (2019 vs. 2018) | Metric | December 28, 2019 | December 29, 2018 | | :--------------------------------------- | :---------------- | :---------------- | | Net loss | $(11,964) | $(5,608) | | Basic loss per share | $(6.78) | $(3.75) | | Diluted loss per share | $(6.78) | $(3.75) | | Weighted average common shares outstanding, basic and diluted | 1,763,670 | 1,494,941 | - Basic and diluted loss per share increased from $(3.75) in 2018 to $(6.78) in 2019[463] - Potentially dilutive securities (337,492 in 2019 and 422,851 in 2018) were excluded from diluted EPS calculation as their effect was anti-dilutive[463] Note 19: Major customers and suppliers The company has customer concentration risks, with one customer accounting for 13% of revenues, and relies on a few key suppliers - In 2019, one customer accounted for 13% of total revenues, down from 19% in 2018[464] - As of December 28, 2019, three customers collectively represented 49% of total trade receivables, compared to 38% from three customers in 2018[464] - The company purchased appliances for resale from three suppliers in both 2018 and 2019, and the loss of any major supplier could adversely affect operations[465] Note 20: Defined contribution plan The company operates a 401(k) defined contribution plan, with contributions and associated expenses increasing in 2019 - The company has a 401(k) defined contribution plan, contributing 10 cents for each dollar contributed by employees up to 5% of compensation[466] - Expense for contributions to the plan was $61 thousand in 2019, up from $40 thousand in 2018[466] Note 21: Segment information Segment information details performance across Biotechnology, Recycling, and Technology, highlighting increased operating losses in recycling and consistent losses in technology - JanOne operates three reportable segments: Biotechnology (started Sept 2019), Recycling, and Technology, managed separately based on business type, customers, and management responsibility[467] Segment Performance (2019 vs. 2018, in thousands) | Metric | Recycling 2019 | Biotechnology 2019 | Technology 2019 | Total 2019 | Recycling 2018 | Biotechnology 2018 | Technology 2018 | Total 2018 | | :--------------------------------------- | :------------- | :----------------- | :-------------- | :--------- | :------------- | :----------------- | :-------------- | :--------- | | Revenues | $35,097 | $0 | $0 | $35,097 | $36,794 | $0 | $0 | $36,794 | | Gross profit | $7,786 | $0 | $0 | $7,786 | $11,053 | $0 | $0 | $11,053 | | Operating loss | $(6,397) | $(1,038) | $(4,996) | $(12,431) | $(1,051) | $0 | $(5,046) | $(6,097) | | Total Assets | $11,505 | $0 | $17,529 | $29,034 | $13,985 | $0 | $21,055 | $35,040 | | Total Intangible Assets | $465 | $0 | $17,240 | $17,705 | $425 | $0 | $20,969 | $21,394 | - The Recycling segment's operating loss increased significantly from $(1,051) thousand in 2018 to $(6,397) thousand in 2019[469] - The Technology segment consistently reported operating losses of approximately $(5,000) thousand in both 2019 and 2018[469] Note 22: Related parties Related party transactions include shared services with Live Ventures, an impairment charge on the ApplianceSmart note, and a revolving credit line with Isaac Capital Group - Tony Isaac (CEO) is the father of Jon Isaac (CEO of Live Ventures Incorporated and managing member of Isaac Capital Group LLC, a >5% stockholder). Several JanOne directors and officers also serve on Live Ventures' board[470] - JanOne shares executive, accounting, and legal services with Live Ventures, totaling $193 thousand in 2019 and $211 thousand in 2018[470] - ARCA Recycling entered into a $2,500 thousand secured revolving line of credit with Isaac Capital Group, LLC on August 28, 2019, bearing 8.75% interest and guaranteed by JanOne[476] - The ApplianceSmart Note, owed by a subsidiary of Live Ventures, resulted in a $2,992 thousand impairment charge due to ApplianceSmart's bankruptcy filing[474] Note 23: Subsequent events Subsequent events include the material operational impact of the COVID-19 outbreak and a litigation settlement for $800 thousand - The global COVID-19 outbreak in March 2020 has materially impacted operations, leading to suspended appliance pickup/replacement services and decreased revenues, with future impacts highly uncertain[479] - On March 23, 2020, the company settled litigation with a former professional services provider, receiving $800 thousand and exchanging mutual releases[480] - The consolidated financial statements include the accounts of JanOne Inc. and its wholly-owned subsidiaries, with three operating segments in 2019 (Biotechnology, Recycling, Technology) and two in 2018 (Recycling, Technology)[331] - The company reported a net loss of $11,964 thousand for fiscal year 2019, an increase from $5,608 thousand in 2018[324][340] - As of December 28, 2019, total current assets were $8,839 thousand and total current liabilities were $17,573 thousand, resulting in a net negative working capital of $8,734 thousand[322][340] - The company adopted ASC 842, Leases, at the beginning of fiscal year 2019, recognizing a $1,600 thousand Right of Use asset and corresponding liability, with a $63 thousand adjustment to retained earnings[310][383][413][414] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures There were no changes in or disagreements with accountants on accounting and financial disclosures to report Item 9A. Controls and Procedures As of December 28, 2019, JanOne Inc.'s management concluded that its disclosure controls and procedures and internal control over financial reporting were not effective. Material weaknesses identified include insufficient IT general controls and segregation of duties, inadequate control design over significant accounting processes (e.g., cutoff and reconciliation of accrued/deferred expenses), insufficient assessment of significant transactions, and inadequate recordkeeping for agreements and contracts. The company is implementing remediation plans to address these weaknesses - As of December 28, 2019, the company's disclosure controls and procedures were not effective[482] - Management concluded that internal control over financial reporting was not effective as of December 28, 2019, based on the COSO 2013 framework[485] - Material weaknesses include insufficient IT general controls and segregation of duties, inadequate control design over significant accounting processes (e.g., cutoff and reconciliation of accrued/deferred expenses), insufficient assessment of significant transactions, and inadequate recordkeeping for agreements and contracts[486] - The company is implementing remediation plans to ensure accruals and invoices are reviewed for accuracy and properly recorded[486] Item 9B. Other Information In response to the COVID-19 pandemic, JanOne Inc. temporarily closed its corporate office and call center, idled all recycling processing centers, and laid off 112 of its 208 employees since January 1, 2020. The company intends to inform landlords of non-payment of April 2020 rent and will evaluate future rent payments based on the evolving situation. Recycling operations continue on a scaled-down basis, while replacement programs are suspended - Due to the COVID-19 virus, JanOne temporarily closed its corporate office and call center, and idled all recycling processing centers in the U.S. and Canada[490] - Since January 1, 2020, the company has laid off 112 of its 208 employees[490] - The company plans to inform landlords of non-payment of April 2020 rent and will assess future rent payments based on the evolving COVID-19 situation and government actions[490] - Recycling operations continue on a scaled-down basis with on-curb pickup where legally allowed, but all replacement programs are temporarily suspended[490] PART III Item 10. Directors, Executive Officers, and Corporate Governance JanOne Inc.'s leadership includes directors Richard D. Butler, Jr., Nael Hajjar, Eric Bolling (President), Tony Isaac (CEO), and Virland A. Johnson (CFO). Dennis (De) Gao resigned as a director in January 2020 and was replaced by John Bitar. The Board has an Audit Committee, Compensation Committee, and Governance Committee, all primarily composed of independent non-employee directors. The company maintains a Code of Ethics applicable to its directors, officers, and senior executives Directors and Executive Officers as of December 28, 2019 | Name | Positi