JANONE INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide a reader of our financial statements
with a narrative from the perspective of our management on our financial
condition, results of operations, liquidity and certain other factors that may
affect our future results. Dollars stated in thousands, except per-share
amounts.
Forward-Looking and Cautionary Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as ''believes,'' ''expects,'' ''may,'' ''will,'' ''should,'' ''seeks,'' ''approximately,'' ''intends,'' ''plans,'' ''estimates'' or ''anticipates'' or similar expressions that concern our strategy, plans or intentions. Any statements we make relating to our future operations, performance and results, and anticipated liquidity are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, including, without limitation, in conjunction with the forward-looking statements included in this Form 10-Q, are disclosed in "Item 1-Business, Item 1A - Risk Factors" of our Form 10-K and Part II, Item 1A of this Form 10-Q. Some of the factors that we believe could affect our results include:
•
the continued effect on the
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our ability to secure additional financing to execute our biotechnology business plan;
•
our ability to obtain the marketing approval for JAN101, our initial drug product candidate;
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the effect that the SEC Complaint has on the Company, if any;
•
the strength of energy conservation recycling programs;
•
our continued ability to purchase product from our suppliers at acceptable prices;
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costs and expenses being realized at higher-than-expected levels;
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our ability to secure an adequate supply of special-buy appliances for resale;
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the ability to secure appliance recycling and replacement contracts with sponsors of energy efficiency programs;
•
the ability of customers to supply units under their recycling contracts with us;
•
the outcome of the sales and use tax examination in
•
general economic conditions affecting consumer demand for appliances.
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 Form 10-K (including the information presented therein
under the caption Risk Factors), together with our Quarterly Reports on Forms
10-Q and other publicly available information. All amounts herein are unaudited.
33
--------------------------------------------------------------------------------Overview
We are focused on finding treatments for conditions that cause severe pain and bringing to market drugs with non-addictive pain-relieving properties. In addition, through our 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, 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 . Further, the gain associated with theGeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods endingOctober 1, 2022 . As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods endingOctober 2, 2021 .
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 18 Regional Processing
Centers ("RPCs") for this segment throughout the United States and Canada .
•
Technology: We have suspended all operations forGeoTraq , and, onMay 24, 2022 , sold substantially all of theGeoTraq assets. Further, the gain associated with theGeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods endingOctober 1, 2022 . As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods endingOctober 2, 2021 .
For the 13 weeks ended
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 (in
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-------------------------------------------------------------------------------- The following tables set forth revenues for key product and service categories, percentages of total revenue and gross profits earned by key product and service categories and gross profit percent as compared to revenues for each key product category indicated (in$000 's): 13 Weeks Ended 13 Weeks Ended October 1, 2022 October 2, 2021 Net Percent Net Percent Revenue of Total Revenue of Total Revenue Recycling and Byproducts$ 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 % Revenue Revenue decreased by approximately$3.5 million , or 29.1%, for the 13 weeks endedOctober 1, 2022 , as compared to the 13 weeks endedOctober 2, 2021 . The decrease is primarily due to reduced replacement volume due to a lack of appliance 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 endedOctober 1, 2022 , as compared to the 13 weeks endedOctober 2, 2021 , due to the factors described above.
Selling, General and Administrative Expense (Restated)
Selling, general and administrative expense decreased by approximately$131,000 , or 4.4%, for the 13 weeks endedOctober 1, 2022 , as compared to the 13 weeks endedOctober 2, 2021 , primarily due to decreases in stock-based compensation, professional fees, amortization expense, and legal fees.
Interest Expense, net
Interest expense, net, decreased by approximately
Unrealized Loss on
For the 13 weeks endedOctober 1, 2022 , an unrealized loss on marketable securities of approximately$270,000 was recorded to mark to fair value securities received in connection to the sale ofGeoTraq . See Note 25 of the unaudited Consolidated Financial Statements. There were no similar transactions for the 13 weeks endedOctober 2, 2021 .
Gain on Settlement of Vendor Advance Payments
For the 13 weeks endedOctober 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 endedOctober 1, 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.
Operating loss by operating segment, is defined as loss before net interest
expense, other income and expense, provision for income taxes (
13 Weeks Ended October 1, 2022 (As restated) 13 Weeks Ended October 2, 2021
Continuing Discontinued Continuing Discontinued
Biotechnology Recycling Operations Operations Total Biotechnology Recycling Operations 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 approximately $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 October 1, 2022, and $182,000 related to employee
costs and professional services related to research for the 13 weeks ended
October 2, 2021 .
Recycling Segment
The recycling segment consists ofARCA Recycling , Customer Connexx, and ARCACanada . Revenue for the 13 weeks endedOctober 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 lack of appliance availability. Recycling and Byproducts revenue decreased by approximately$380,000 primarily due to weakening commodity markets.
Cost of revenue for the 13 weeks ended
Operating loss for the 13 weeks endedOctober 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 ofGeoTraq . There was no activity from discontinued operations for the 13 weeks endedOctober 1, 2022 due to the sale ofGeoTraq during the period endedJuly 2, 2022 . See Note 25 of the unaudited Consolidated Financial Statements. Further, the gain associated with theGeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods endingOctober 1, 2022 . As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods endingOctober 2, 2021 .
For the 39 weeks ended
Results of Operations (Restated)
The following table sets forth certain statement of operations items and as a
percentage of revenue, for the periods indicated (in
36
--------------------------------------------------------------------------------
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 (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 %
Revenue
Revenue decreased by approximately $940,000 , or 3.2%, for the 39 weeks ended
October 1, 2022 , as compared to the 39 weeks ended October 2, 2021 . The decrease
is primarily due to reduced replacement volume due to a lack of appliance
availability, and weakening commodity markets, partially offset by increased
recycling volume.
Cost of Revenue
Cost of revenue increased by approximately $765,000 , or 3.3%, for the 39 weeks
ended October 1, 2022 , as compared to the 39 weeks ended October 2, 2021 , due to
the factors described above.
37
--------------------------------------------------------------------------------Selling, General and Administrative Expense (Restated)
Selling, general and administrative expense decreased by approximately$525,000 , or 5.7%, for the 39 weeks endedOctober 1, 2022 , as compared to the 39 weeks endedOctober 2, 2021 , primarily due to decreases in stock-based compensation, professional fees, amortization expense, and legal fees.
Interest Expense, net (Restated)
Interest expense, net, decreased by approximately
Gain on Sale of
During the 39 weeks endedOctober 1, 2022 , we recorded a gain on the sale ofGeoTraq of approximately$10.2 million . See Note 25 of unaudited Condensed Consolidated Financial Statements. Further, the gain associated with theGeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods endingOctober 1, 2022 . As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods endingOctober 2, 2021 .
Unrealized Loss on
For the 39 weeks ended
Gain on Litigation Settlement, net
Gain on litigation settlement includes 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$115,000 to finalize theBlackhawk settlement.
Gain on Reversal of Contingency Loss
Gain on reversal of continency loss reverses approximately
Gain on Settlement of Vendor Advance Payments
For the 39 weeks endedOctober 2, 2021 , a portion of the vendor advance payments were settled, which resulted in a gain of approximately$952,000 . There were no similar transactions for the 39 weeks endedOctober 1, 2022 .
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.
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 loss by operating segment, is defined as loss before net interest
expense, other income and expense, provision for income taxes (
39 Weeks Ended October 1, 2022 (As restated) 39 Weeks Ended October 2, 2021
Continuing Discontinued Continuing Discontinued
Biotechnology Recycling Operations Operations Total Biotechnology Recycling Operations 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$1.2 million related to employee costs and professional services related to research for the 39 weeks endedOctober 1, 2022 andOctober 2, 2021 , respectively.
Recycling Segment
The recycling segment consists ofARCA Recycling , Customer Connexx, and ARCACanada . Revenue for the 39 weeks endedOctober 1, 2022 , decreased by approximately$940,000 , or 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
Operating loss for the 39 weeks ended
Discontinued Operations
Discontinued operations consists ofGeoTraq . Results for the 39 weeks endedOctober 1, 2022 includes income of approximately$10.2 million , as compared to a loss of approximately$2.8 million for the 39 weeks endedOctober 2, 2021 . The increase is due to the gain on sale ofGeoTraq . Further, the gain associated with theGeoTraq disposition (Technology segment) has been restated and presented as discontinued operations for the periods endingOctober 1, 2022 . As such, the results of the Technology segment have been reclassified and presented as discontinued operations for the periods endingOctober 2, 2021 .
Liquidity and Capital Resources
Overview
As ofOctober 1, 2022 , we had total cash on hand of 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 withGulf 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 endedOctober 1, 2022 , cash used in operations was approximately$2.4 million , compared to cash used in operations of approximately$3.5 million during the 39 weeks endedOctober 2, 2021 . The increase in cash used in operations was primarily due to results of operations, as discussed above. Cash used in investing activities was approximately$950,000 and$1.6 million , respectively, for the 39 weeks endedOctober 1, 2022 and the 39 weeks endedOctober 2, 2021 , primarily related to purchases of property and equipment and intangibles. Cash provided by financing activities was approximately$3.5 million for the 39 weeks endedOctober 1, 2022 , and was primarily due to the proceeds from the new credit facility, as discussed in Note 16 above. Cash provided by financing activities was approximately$7.6 million for the 39 weeks endedOctober 2, 2021 primarily due to net proceeds received from an equity financing in the amount approximately$5.5 million .
Sources of Liquidity
We utilize cash on hand and factor 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. OnSeptember 26, 2022 , the Company entered into a credit facility withGulf 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 ofARCA Recycling's assets. The current purchase and sale agreement withGulf 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 overall profitability, including managing expenses. We reported net income of approximately$8.1 million and a net loss of approximately$5.4 million , respectively, for the 39 weeks endedOctober 1, 2022 andOctober 2, 2021 . In addition, 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 as ofOctober 1, 2022 . 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 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. Any financing obtained may further dilute or otherwise impair the ownership interest of our existing stockholders.
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