Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the fiscal year ended December 30, 2023, 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 ended December 30, 2023.
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 to JAN 101, including statements relating to the commencement of Phase IIb clinical trials for the treatment of PAD 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 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, 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 now-sold Recycling Subsidiaries (ARCA Recycling, ARCA Canada, and Connexx), we were engaged in the business of recycling major household appliances in North America by providing turnkey appliance recycling and replacement services for utilities and other sponsors of energy efficiency programs. Also, through our now-sold GeoTraq Inc. subsidiary, we were engaged in the development and design of wireless transceiver modules with technology that provides LBS directly from global Mobile IoT networks.
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: On March 19, 2023, the Company entered into a Stock Purchase Agreement with VM7 Corporation under which the it agreed to acquire our recycling segment. The results for this segment for the years ended December 30, 2023 and December 31, 2022 are reported as discontinued operations below.
• Technology: We have suspended all operations for GeoTraq, and, on May 24, 2022, sold substantially all of the GeoTraq assets to an otherwise unrelated third party. The results for this segment for the years ended December 30, 2023 and December 31, 2022 are reported as discontinued operations below.
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Reporting Period. We report on a 52-or 53-week fiscal year. Our 2023 fiscal year ended on December 30, 2023 (“fiscal 2023”). Our 2022 fiscal year ended on December 31, 2022 (“fiscal 2022”).
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 in the 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. 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 $000’s):
Fiscal Year Ended
December 30, 2023 Fiscal Year Ended
December 31, 2022
Statement of Operations Data:
Revenues $ — $ —
Cost of revenues — —
Gross profit — —
Selling, general and administrative expenses 4,746 3,149
Impairment charges 15,100 —
Operating loss (19,846) (3,149)
Interest income, net 2,250 468
Gain on litigation settlement — 1,950
Unrealized loss on marketable securities (926) (631)
Gain on reversal of contingency loss — 637
Other income, net 998 2,124
Net (loss) income before provision for income taxes (17,524) 1,399
Income tax benefit (429) (6,621)
Net (loss) income from continuing operations (17,095) 8,020
Income from discontinued operations 10,254 5,081
Income tax provision for discontinued operations 971 2,109
Net income from discontinued operations 9,283 2,972
Net (loss) income $ (7,812) $ 10,992
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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
December 30, 2023 Fiscal Year Ended
December 31, 2022
Net
Revenue Percent
of Total Net
Revenue Percent
of Total
Revenue
Revenue from discontinued operations $ 3,795 100 % $ 39,611 100 %
Biotechnology — — % — — %
Total revenue $ 3,795 100 % $ 39,611 100 %
Fiscal Year Ended
December 30, 2023 Fiscal Year Ended
December 31, 2022
Gross
Profit Gross
Profit % Gross
Profit Gross
Profit %
Gross Profit
Gross profit from discontinued operations $ (197) (5) % $ 7,619 19 %
Biotechnology — — % — — %
Total gross profit $ (197) (5) % $ 7,619 19 %
Revenue
Revenue decreased by approximately $35.8 million for the fiscal year ended December 30, 2023, as compared to the year ended December 31, 2022. The decrease is due to the disposition of our recycling segment as of March 1, 2023.
Cost of Revenue
Cost of revenue decreased by approximately $28.0 million for the fiscal year ended December 30, 2023, as compared to the year ended December 31, 2022. The decrease is due to the disposition of our recycling segment as of March 1, 2023.
Selling, General and Administrative Expense
Selling, general and administrative expenses from continuing operations increased by approximately $1.6 million for the fiscal year ended December 30, 2023, as compared to the year ended December 31, 2022, primarily due to increased amortization costs relating to the Soin intangibles. Selling, general and administrative expenses from discontinued operations decreased by approximately $7.2 million. The decrease is due to the disposition of our recycling segment as of March 1, 2023.
Impairment Charges
Impairment charges recorded during the fiscal year ended December 30, 2023 were approximately $15.1 million. These charges relate to the full impairment of the VM7 and SPYR notes receivable of approximately $5.3 million and $9.8 million, respectively (See Note 8 of the Consolidated Financial Statements). No impairment charges were recorded during the fiscal year ended December 31, 2022.
Interest Income, net
Interest income, net, increased by approximately $1.8 million for the fiscal year ended December 30, 2023, as compared to the year ended December 31, 2022, primarily due to the accretion of discount in connection with the promissory notes with SPYR and VM7, as well as interest recorded on the note with SPYR.
Gain on Sale of the Recycling Subsidiaries
During the fiscal year ended December 30, 2023, we recorded a gain on the sale of the Recycling Subsidiaries of approximately $12.1 million from discontinued operations. See Note 4 of the Consolidated Financial Statements.
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Gain on Sale of GeoTraq
During the fiscal year ended December 31, 2022, we recorded a gain on the sale of GeoTraq of approximately $9.4 million from discontinued operations. See Note 5 of the Consolidated Financial Statements.
Unrealized Loss on Marketable Securities
Unrealized loss on marketable securities for the fiscal year ended December 30, 2023 was approximately $926,000, as compared to a loss of approximately $631,000 for the fiscal year ended December 31, 2022. An unrealized gain or loss on marketable securities is recorded to mark to fair value securities received in connection to the sale of GeoTraq.
Gain (Loss) on Litigation Settlement, net
For the year ended December 31, 2022, we recorded a gain on litigation settlement from continuing operations of approximately $1.95 million due to the receipt of a payment from Sompo International Companies (“Sompo”) in exchange for a full release in favor of Sompo from liability for both the GeoTraq and SEC-related matters. We recorded a loss on litigation from discontinued operations of approximately $1.0 million due to an accrual of approximately $894,000 for the Skybridge settlement (see Note 19 of the Consolidated Financial Statements for further discussion of this matter), and an accrual of approximately $115,000 for adjudication of the Blackhawk matter.
Gain on Reversal of Contingency Loss
For the year ended December 31, 2022, we recorded a gain on reversal of contingency liabilities of approximately $637,000 relating to guarantees of ApplianceSmart leases that no longer exist as a result of ApplianceSmart's emergence from bankruptcy. See Note 19 of the Consolidated Financial Statements.
Other Income, net
Other income, net, from continuing operations was approximately $998,000 for the fiscal year ended December 30, 2023 as compared to income of approximately $2.1 million for the fiscal year ended December 31, 2022. Other expense, net, from discontinued operations was approximately $180,000 for the fiscal year ended December 30, 2023, as compared to expense of approximately $1.3 million for the fiscal year ended December 31, 2022.
Segment Reporting
We report our business in the following segments: Biotechnology and discontinued operations. We expect revenues and profits for our biotechnology segment to be driven by the development of pharmaceuticals that treat the root cause of pain but are non-opioid painkillers. We include Corporate expenses within the Biotechnology segment. As discussed above, we sold our Technology segment, GeoTraq, during the fiscal year ended December 31, 2022, and our Recycling segment in March 2023, and detail those results as discontinued operations below.
Operating 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 30, 2023 Fiscal Year Ended December 31, 2022
Biotechnology Discontinued Operations Total Biotechnology Discontinued Operations Total
Revenue $ — $ 3,795 $ 3,795 $ — $ 39,611 $ 39,611
Cost of revenue — 3,992 3,992 — 31,992 31,992
Gross profit — (197) (197) — 7,619 7,619
Selling, general and administrative expense 4,746 1,467 6,213 3,149 8,652 11,801
Impairment charges 15,100 15,100 —
Gain on sale of ARCA — (12,102) (12,102) — — —
Gain on sale of GeoTraq — — — — (9,428) (9,428)
Operating (loss) income (19,846) 10,438 (9,408) (3,149) 8,395 5,246
Biotechnology Segment
For the fiscal years ended December 30, 2023 and December 31, 2022, respectively, our Biotechnology segment incurred operating expenses of approximately $10.1 million and $3.1 million. The increase is primarily related to the $5.3 million
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full impairment of the VM7 note receivable from the Recycling Subsidiaries transaction, as well as increased amortization costs relating to the Soin intangibles.
Discontinued Operations
Discontinued operations consists of our Recycling segment, which was disposed of effective March 1, 2023, and our Technology segment, which was disposed of during May 2022. Operating income for the fiscal year ended December 30, 2023 increased by approximately $2.0 million, as compared to the fiscal year ended December 31, 2022. The increase in operating income is primarily due to the gain on sale of the Recycling Subsidiaries of approximately $12.1 million during fiscal 2023, partially offset by the gain on the sale of the GeoTraq intangible, in the amount of approximately $9.4 million during the year ended December 31, 2022, as well as reduced operating expenses for the year ended December 30, 2023 due to the sale of the Recycling Subsidiaries.
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 of December 30, 2023, our cash on hand was approximately $5,000. We intend to raise funds to support future development of JAN 123 either through capital raises or structured arrangements.
Our ability to continue as a going concern is dependent upon the success of future capital raises or structured settlements to fund the required testing to obtain FDA approval of JAN 123, 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 ended December 30, 2023, cash used in operations was approximately $855,000, compared to cash used in operations of approximately $557,000 during the fiscal year ended December 31, 2022. Cash provided by operating activities from discontinued operations during the fiscal year ended December 30, 2023 was approximately $2.3 million, as compared to cash used in operating activities of approximately $2.5 million for the fiscal year ended December 31, 2022. The changes in cash was primarily due to results of operations as discussed above.
Cash used in investing activities was approximately $156,000 and $1.5 million, respectively, for the fiscal years ended December 30, 2023 and December 31, 2022. Cash used in investing activities was all associated with discontinued operations and was related to purchases of property and equipment.
Cash provided by financing activities was approximately $777,000 for the fiscal year ended December 30, 2023. Cash used in financing activities from discontinued operations for the fiscal year ended December 30, 2023 was approximately $2.2 million and was primarily due to the repayment of debt obligations in the amount of approximately $7.3 million, partially offset by proceeds from the issuance of debt obligations of approximately $5.1 million. Cash used by financing activities was approximately $14,000 for the fiscal year ended December 31, 2022. Cash provided by financing activities from discontinued operations for fiscal year ended December 31, 2022 was approximately $4.0 million, and was primarily due to proceeds from the issuance of notes payable of approximately $17.5 million, partially offset by payments on notes payable of approximately $13.4 million, and payment on related party debt of approximately $162,000.
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 a net loss of approximately $7.7 million from continuing operations for the fiscal year ended December 30, 2023, and net income from continuing operations of approximately $8.0 million for the fiscal year ended December 31, 2022, for the reasons discussed above. Additionally, the Company has total current assets of approximately $350,000 and total current liabilities approximately of $5.6 million, resulting in a net negative working capital of approximately $5.2 million. Cash used in operations was approximately $855,000.
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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 will require additional debt financing and/or capital to finance new acquisitions, conduct our Phase IIb clinical trials, or consummate other strategic investments in our business. No assurance can be given any financing obtained may not further dilute or otherwise impair the ownership interest of our existing stockholders.
Off Balance Sheet Arrangements
At December 30, 2023, we had no off-balance sheet arrangements, commitments or guarantees that require additional disclosure or measurement.