JANONE INC. For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the fiscal year endedDecember 31, 2022 , this "Management's Discussion and Analysis of Financial Condition and Results of Operations" (hereafter referred to as "MD&A") should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Part II, Item 8 of this 10-K for the fiscal year endedDecember 31, 2022 .
Note about Forward-Looking Statements
This Form 10-K includes statements that constitute "forward-looking statements." These forward-looking statements are often characterized by the terms "may," "believes," "projects," "intends," "plans," "expects," or "anticipates," and do not reflect historical facts. Specific forward-looking statements contained in this portion of the Form 10-K include, but are not limited to: (i) statements relating toJAN 101 , JAN101, including statements relating to the commencement of Phase IIb clinical trials for the treatment of PAD in 2021 and the results of those trials, (ii) statements that are based on current projections and expectations about the markets in which we operate, (iii) statements relating to the prospective sale of our Recycling business, (iv) statements about current projections and expectations of general economic conditions, (v) statements about specific industry projections and expectations of economic activity, (vi) statements relating to our future operations and prospects, (vii) statements about future results and future performance, (viii) statements that the cash on hand and additional cash generated from operations, together with potential sources of cash through issuance of debt or equity, will provide the Company with sufficient liquidity for the next 12 months, and (ix) statements that the outcome of pending legal proceedings will not have a material adverse effect on business, financial position and results of operations, cash flow, or liquidity. Forward-looking statements involve risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results, future performance, and capital requirements and cause them to differ materially from those contained in the forward-looking statements include those identified in this Form 10-K under Item 1A "Risk Factors", as well as other factors that we are currently unable to identify or quantify, but that may exist in the future. In addition, the foregoing factors may generally affect our business, results of operations and financial position. Forward-looking statements speak only as of the date the statements were made. We do not undertake and specifically decline any obligation to update any forward-looking statements. Any information contained on our website www.janone.com or any other websites referenced in this Form 10-K are not part of this Form 10-K.
Our Company
We are focused on finding treatments for conditions that cause severe pain and bringing to market drugs with non-addictive pain-relieving properties. In addition, through our subsidiariesARCA Recycling , Connexx, and ARCA Canada, we are engaged in the business of recycling major household appliances inNorth America by providing turnkey appliance recycling and replacement services for utilities and other sponsors of energy efficiency programs. Also, through ourGeoTraq Inc. subsidiary, we have been engaged in the development and 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 endedJanuary 1, 2022 . Consequently, during the year endedJanuary 1, 2022 , the Company took a full write-down of the unamortized portion of theGeoTraq intangible asset of approximately$9.8 million , and, onMay 24, 2022 , we sold substantially all of theGeoTraq assets (see Note 26 to the Consolidated Financial Statements below).
We operate three reportable segments:
•
Biotechnology: Our biotechnology segment is focused on finding treatments for conditions that cause severe pain and bringing to market drugs with non-addictive pain-relieving properties.
•
Recycling: Our recycling segment is a turnkey appliance recycling program. We
receive fees charged for recycling, replacement and additional services for
utility energy efficiency programs and have established 20 Regional Processing
Centers ("RPCs") for this segment throughout the United States and Canada
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•
Technology: We have suspended all operations forGeoTraq , and, onMay 24, 2022 , sold substantially all of theGeoTraq assets. The results for this segment for the years endedDecember 31, 2022 andJanuary 1, 2022 are reported as discontinued operations below.
Reporting Period. We report on a 52-or 53-week fiscal year. Our 2022 fiscal year
ended on
Application of Critical Accounting Policies
Our discussion of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted inthe United States . The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates and assumptions, which are based on historical factors and other factors believed to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions, estimates or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions.ARCA Recycling's critical accounting policies include intangible impairment under ASC 350, revenue recognition under ASC 606, and going concern under ASC 205.
Results of Operations
The following table sets forth certain statement of operations items from
continuing and discontinued operations and as a percentage of revenue, for the
periods indicated (in
Fiscal Year Ended Fiscal Year Ended
December 31, 2022 January 1, 2022
Statement of Operations Data:
Revenues $ 39,611 100.0 % $ 40,022 100.0 %
Cost of revenues 31,992 80.8 % 31,154 77.8 %
Gross profit 7,619 19.2 % 8,868 22.2 %
Selling, general and administrative
expenses 11,790 29.8 % 12,089 30.2 %
Operating loss (4,171 ) (10.5 )% (3,221 ) (8.0 )%
Gain on debt settlement - 0.0 % 1,799 4.5 %
Interest expense, net (489 ) (1.2 )% (773 ) (1.9 )%
Gain (loss) on litigation settlement 942 2.4 % (1,950 ) (4.9 )%
Gain on settlement of vendor advance
payments - 0.0 % 952 2.4 %
Unrealized loss on marketable securities (631 ) (1.6 )%
- -
Gain on reversal of contingency loss 637 1.6 % - -
Other income, net 630 1.6 % 152 0.4 %
Net loss before provision for income
taxes (3,082 ) (7.8 )% (3,041 ) (7.6 )%
Income tax provision (6,671 ) (16.8 )% 273 0.7 %
Net loss from continuing operations 3,589 9.1 % (3,314 ) (8.3 )%
Income (loss) from discontinued
operations 9,562 24.1 % (13,573 ) (33.9 )%
Income tax provision for discontinued
operations 2,159 5.5 % - -
Net income (loss) from discontinued
operations 7,403 18.7 % (13,573 ) (33.9 )%
Net income (loss) $ 10,992 27.7 % $ (16,887 ) (42.2 )%
55-------------------------------------------------------------------------------- The following tables set forth revenues for key product and service categories, percentages of total revenue and gross profits earned by key product and service categories and gross profit percent as compared to revenues for each key product category indicated (in$000 's): Fiscal Year Ended Fiscal Year Ended December 31, 2022 January 1, 2022 Net Percent Net Percent Revenue of Total Revenue of Total Revenue Recycling and Byproducts$ 23,264 58.7 %$ 21,603 54.0 % Replacement Appliances 16,347 41.3 % 18,419 46.0 % Total Revenue$ 39,611 100.0 %$ 40,022 100.0 % Fiscal Year Ended Fiscal Year Ended December 31, 2022 January 1, 2022 Gross Gross Gross Gross Profit Profit % Profit Profit % Gross Profit Recycling and Byproducts$ 1,548 6.7 %$ 2,897 13.4 % Replacement Appliances 6,071 37.1 % 5,971 32.4 % Total Gross Profit$ 7,619 19.2 %$ 8,868 22.2 % Revenue Revenue decreased by approximately$400,000 , or 1.0%, for the fiscal year endedDecember 31, 2022 as compared to the fiscal year endedJanuary 1, 2022 . Recycling and Byproduct revenue increased by approximately$1.7 million primarily due to stronger demand, partially offset by lower byproduct commodity pricing. Replacement Appliances revenue decreased by approximately$2.1 million or 11.2%, primarily due to decreased sales volume. We generated no revenue from discontinued operations for the years endedDecember 31, 2022 andJanuary 1, 2022 . Cost of Revenue Cost of revenue increased by approximately$840,000 , or 2.7% for the fiscal year endedDecember 31, 2022 as compared to the fiscal year endedJanuary 1, 2022 . Recycling and Byproducts cost of revenue increased by approximately$3.0 million , or 16.1%, which generally aligns with increases in revenue. Replacement Appliances cost of revenue decreased by approximately$2.2 million primarily due to decreases in revenue. Both Replacement Appliances and Recycling and Byproducts cost of revenue were impacted by higher transportation, facilities and labor costs. As no revenue was generated for the years endedDecember 31, 2022 andJanuary 1, 2022 , we did not incur any costs of revenue for these periods.
Selling, General and Administrative Expense
Selling, general and administrative expenses from decreased by approximately$300,000 , or 2.5%, for the fiscal year endedDecember 31, 2022 as compared to the fiscal year endedJanuary 1, 2022 , primarily due to lower amortization costs, legal and professional fees and share based compensation, partially offset by an increase in labor costs. Selling, general and administrative expenses from discontinued operations was a gain of approximately$9.4 million for the year endedDecember 31, 2022 , primarily due to the gain on sale ofGeoTraq , and expense of approximately$13.6 million for the year endedJanuary 1, 2022 , primarily due to recording full impairment of theGeoTraq intangible.
Interest Expense, net
Interest expense, net, decreased by approximately$284,000 or 36.7%, for the fiscal year endedDecember 31, 2022 as compared to the fiscal year endedJanuary 1, 2022 primarily due to interest income related to the accretion of discount relating to the SPYR note receivable, and lower interest rates on revolver debt due to the change of credit facility. 56
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Impairment Charges
Impairment charges of approximately$9.8 million from discontinued operations were recorded for the fiscal year endedJanuary 1, 2022 due to the full impairment of ourGeoTraq intangible. This amount is reflected as a component of Net income (loss) from discontinued operations in the table above. See Note 9 of the Consolidated Financial Statements for further discussion of this matter. No impairment charges were recorded for the fiscal year endedDecember 31, 2022 .
Gain on Sale of
During the fiscal year endedDecember 31, 2022 , we recorded a gain on the sale ofGeoTraq of approximately$9.4 million from discontinued operations. See Note 26 of the Consolidated Financial Statements.
Unrealized Loss on
For the fiscal year endedDecember 31, 2022 , an unrealized loss on marketable securities of approximately$631,000 was recorded to mark to fair value securities received in connection to the sale ofGeoTraq . See Note 10 of Consolidated Financial Statements. There were no similar transactions for the fiscal year endedJanuary 1, 2022 .
Gain (Loss) on Litigation Settlement, net
For the year endedDecember 31, 2022 , the Company recorded a gain on litigation settlement of approximately$942,000 due to the receipt of a$1.95 million payment from Sompo International Companies ("Sompo") in exchange for a full release in favor of Sampo from liability for both theGeoTraq andSEC -related matters, partially offset by an accrual of approximately$894,000 for the Skybridge settlement (see Note 17 of the Consolidated Financial Statements for further discussion of this matter), and an accrual of approximately$115,000 for adjudication of the Blackhawk matter. For the year endedJanuary 1, 2022 , the Company recorded a loss on litigation settlement of approximately$2.0 million due to payments made under the terms of a settlement agreement withGregg Sullivan (see Note 17 of the Consolidated Financial Statements for further discussion of this matter).
Gain on Reversal of Contingency Loss
Gain on reversal of continency liabilities of approximately
Other Income, net
Other income, net from continuing operations was approximately$630,000 for the fiscal year endedDecember 31, 2022 as compared to income of approximately$152,000 the fiscal year endedJanuary 1, 2022 . Other income from discontinued operations was approximately$144,000 for the fiscal year endedDecember 31, 2022 , as compared to expense of approximately$96,000 for the fiscal year endedJanuary 1, 2022 . Segment Reporting 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 representatives, 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. As discussed above, we sold our Technology segment,GeoTraq , during the fiscal year endedDecember 31, 2022 , and detail its results as discontinued operations below. 57
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Operating income (loss) by operating segment, is defined as income (loss) before net interest expense, other income and expense, provision for income taxes.
Fiscal Year Ended December 31, 2022 Fiscal Year Ended
Continuing Discontinued Continuing Discontinued
Biotechnology Recycling Operations Operations Total Biotechnology Recycling Operations Operations Total
Revenue $ - $ 39,611 $ 39,611 $ - $ 39,611 $ - $ 40,022 $ 40,022 $ - $ 40,022
Cost of revenue - 31,992 31,992 - 31,992 - 31,154 31,154 - 31,154
Gross profit - 7,619 7,619 - 7,619 - 8,868 8,868 - 8,868
Selling, general and
administrative expense 414 11,376 11,790 10 11,800 1,351 10,738 12,089 3,767 15,856
Impairment charges - - - - - - - - 9,783 9,783
Gain on sale of GeoTraq - (9,428 ) (9,428 ) - - - - -
Operating loss $ (414 ) $ (3,757 ) $ (4,171 ) $ 9,418 $ 5,247 $ (1,351 ) $ (1,870 ) $ (3,221 ) $ (13,550 ) $ (16,771 ) Biotechnology Segment
For the fiscal years endedDecember 31, 2022 andJanuary 1, 2022 , respectively, our biotechnology segment incurred expenses of approximately$414,000 and$1.4 million , related to employee costs and professional services related to research.
Recycling Segment
Our recycling segment consists ofARCA Recycling , Connexx, and ARCA Canada. Revenue decreased by approximately$400,000 , or 1.0%, for the fiscal year endedDecember 31, 2022 as compared to the fiscal year endedJanuary 1, 2022 . Recycling and Byproduct revenue increased by approximately$1.7 million primarily due to stronger demand, partially offset by lower byproduct commodity pricing. Replacement Appliances revenue decreased by approximately$2.1 million or 11.2%, primarily due to decreased sales volume. Cost of revenue increased by approximately$840,000 , or 2.7%, for the fiscal year endedDecember 31, 2022 , as compared to the fiscal year endedJanuary 1, 2022 . Recycling and Byproducts cost of revenue increased by approximately$3.0 million , or 16.1%, which generally aligns with increases in revenue. Replacement Appliances cost of revenue decreased by approximately$2.2 million primarily due to lower appliance costs. Both Replacement Appliances and Recycling and Byproducts cost of revenue were impacted by higher transportation, facilities and labor costs. Operating loss for the fiscal year endedDecember 31, 2022 , increased by approximately$1.9 million as compared to the prior year period. The increase in operating loss was due to a decrease in gross margin and an increase in labor costs, partially offset by decreases in legal and professional fees.
Discontinued Operations
Our discontinued operations consists ofGeoTraq , which was sold during the fiscal year endedDecember 31, 2022 . Operating income for the fiscal year endedDecember 31, 2022 increased by approximately$23.0 million , as compared to the fiscal year endedJanuary 1, 2022 . The increase in operating income is due to the gain on sale of theGeoTraq intangible, in the amount of approximately$9.4 million (see Note 27 to the Consolidated Financial Statements below), as well as the suspension of operations that occurred in connection to the sale.
Liquidity and Capital Resources
Overview
The accompanying financial statements have been prepared under the assumption that we will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As ofDecember 31, 2022 , our cash on hand was$115,000 . We intend to fund operations by using cash on hand, monthly revenues from the sale of our Subsidiaries, and funds received from approved Employee Retention Credits ("ERC's"). Debt recorded, as ofDecember 31, 2022 , belongs to the Subsidiaries, and will no longer impact us as of the date of sale. We intend to raise funds to support future development of JAN 123 either through capital raises or structured arrangements. 58 -------------------------------------------------------------------------------- Our ability to continue as a going concern is dependent upon the success of future capital raises or structured settlements to fund the required testing to obtain FDA approval of JAN 123, as well as to fund our day-to-day operations. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. While we will actively pursue these additional sources of financing, management cannot make any assurances that such financing will be secured.
Cash Flows
During the fiscal year endedDecember 31, 2022 , cash used in operations was approximately$3.1 million , compared to cash used in operations of approximately$5.3 million during the fiscal year endedJanuary 1, 2022 . The decrease in cash used in operations was primarily due to changes in deferred tax assets, and changes in assets and liabilities. Cash used in operating activities from discontinued operations during the fiscal year endedDecember 31, 2022 was approximately$10,000 , as compared to approximately$23,000 for the fiscal year endedJanuary 1, 2022 . Cash used in investing activities was approximately$1.5 million for the fiscal year endedDecember 31, 2022 , and was primarily due to purchases of property and equipment and intangibles. Cash used in investing activities of approximately$1.7 million for fiscal year endedJanuary 1, 2022 was primarily due to purchases of property and equipment and intangibles. Cash provided by financing activities was approximately$4.0 million for the fiscal year endedDecember 31, 2022 was primarily due to proceeds net of repayments of approximately$4.1 million from notes payable, partially offset by payments of$162,000 on a related party note. Cash provided by financing activities was approximately$7.4 million for the fiscal year endedJanuary 1, 2022 was primarily due to net proceeds of approximately$5.5 million from an equity financing, and approximately$1.8 million in proceeds from notes payable, net of repayments. Sources of Liquidity We acknowledge that we continue to face a challenging competitive environment as we continue to focus on our overall profitability, including managing expenses. We reported net income of approximately$3.6 million from continuing operations in fiscal 2022, primarily due to a tax benefit of approximately$6.7 million , and a loss from continuing operations of approximately$3.3 million in fiscal 2021. Additionally, the Company has total current assets of approximately$9.2 million and total current liabilities approximately of$23.9 million resulting in a net negative working capital of approximately$14.8 million . Cash used in operations was approximately$3.1 million . In Item 1A. Risk Factors, management has addressed and evaluated the risk factors that could materially and adversely affect the entity's business, financial condition and results of operations, cash flows, and liquidity. The Company has determined that the risk factors do not materially affect the Company's ability to continue as a going concern within one year after the date that the financial statements are issued. Based on the above, management has concluded that the Company is not aware 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 12 months.
Future Sources of Cash; New Acquisitions, Products and Services
We may require additional debt financing and/or capital to finance new acquisitions, refinance existing indebtedness or consummate other strategic investments in our business. Any financing obtained may further dilute or otherwise impair the ownership interest of our existing stockholders.
OnMarch 22, 2023 , 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 361,000 shares of the Company's Common Stock at a purchase price per share of Common Stock of$1.17 . The Offering closed onMarch 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.? 59 -------------------------------------------------------------------------------- The Purchase Agreement contains customary representations, warranties and agreements by the Company and the Purchasers and customary indemnification rights and obligations of the parties. Pursuant to the terms of the Purchase Agreement, the Company has agreed to certain restrictions on the issuance and sale of its shares of Common Stock or Common Stock Equivalents (as defined in the Purchase Agreement) during the 15-day period following the closing of the Offering and certain restrictions on issuing any shares of Common Stock or Common Stock Equivalents in a Variable Rate Transaction (as defined in the Purchase Agreement) for twelve (12) months following the closing of the Offering.H.C. Wainwright & Co., LLC acted as the sole placement agent (the "Placement Agent") for the Company on a "reasonable best efforts" basis in connection with the Offering. In connection with the closing of the Offering, the Placement Agent received an aggregate cash fee of 7.0% of the gross proceeds paid to the Company for the securities, a management fee of 1.0% of the gross proceeds raised in the Offering and reimbursement for accountable expenses incurred by it in connection with the Offering of$20,000 . In addition, the Company granted warrants (the "Placement Agent Warrants") to the Placement Agent, or its designees, to purchase up to an aggregate of 25,270 shares of the Company's common stock. The Placement Agent Warrants have a per-share exercise price of$1.4625 and are exercisable through and includingMarch 24, 2028 . The shares of Common Stock sold in the Offering were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3 (File No. 333-251645), which was initially filed with theSecurities and Exchange Commission onDecember 23, 2020 , and was declared effective onDecember 29, 2020 . The Company will file a prospectus supplement with theSEC in connection with the sale of the Common Stock. The representations, warranties and covenants contained in the Purchase Agreement were made solely for the benefit of the parties to the Purchase Agreement. In addition, such representations, warranties, and covenants (i) are intended as a way of allocating 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 is included with this filing only to provide investors with information regarding the terms of the transaction, and not to provide investors with any other factual information regarding the Company. Stockholders should not rely on the representations, warranties, and covenants or any descriptions thereof as characterizations of the actual 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 warranties may change after the date of the Purchase Agreement, which subsequent information may or may not be fully reflected in public disclosures.
Off Balance Sheet Arrangements
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