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 28, 2024, 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 28, 2024.
Note about Forward-Looking Statements
This Form 10-K 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.
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.alt5sigma.com or any other websites referenced in this Form 10-K are not part of this Form 10-K.
Our Company
Through our Fintech segment, we provide next generation blockchain-powered technologies to enable a migration to a new global financial paradigm, and, through our Biotechnology segment, we are focused on finding treatments for conditions that cause chronic pain and bringing to market drugs with non-addictive and non-sedative pain-relieving properties. In addition, through our sale of subsidiaries ARCA Recycling, Connexx, and ARCA Canada and the assets of GeoTraq Inc., we have exited these legacy businesses; Consequently, the results for these businesses are reported as discontinued operations for the years ended December 28, 2024 and December 30, 2023.
We operate three reportable segments:
• Fintech: Our Fintech segment provides next generation blockchain-powered technologies for tokenization, trading, clearing, settlement, payment, and safe-keeping of digital assets
• 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. We have previously announced our intention to capitalize a subsidiary with certain of our biotechnology assets, acquire an additional biotechnology asset, and then engage in a financing of that subsidiary. The short-term intended result of that series of transactions would be for to decouple it from us so that it would operate on a stand-alone basis.
• Corporate and Other: Our Corporate and Other segment consists of certain corporate general and administrative costs.
Reporting Period. We report on a 52- or 53-week fiscal year. Our 2024 fiscal year ended on December 28, 2024 (“fiscal 2024”). Our 2023 fiscal year ended on December 30, 2023 (“fiscal 2023”).
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
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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 28, 2024 Fiscal Year Ended
December 30, 2023
Statement of Operations Data:
Revenue $ 12,532 $ —
Cost of revenue 6,238 —
Gross profit 6,294 —
Selling, general and administrative expenses 13,856 4,746
Impairment charges — 15,100
Operating loss (7,562) (19,846)
Interest (expense) income, net (879) 2,250
Gain on litigation settlement 374 —
Unrealized loss on marketable securities (1,058) (926)
Other income, net (161) 998
Net loss before provision for income taxes (9,286) (17,524)
Income tax benefit (3,041) (429)
Net loss income from continuing operations (6,245) (17,095)
Income from discontinued operations — 10,254
Income tax provision for discontinued operations — 971
Net income from discontinued operations — 9,283
Net loss $ (6,245) $ (7,812)
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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 28, 2024 Fiscal Year Ended
December 30, 2023
Net
Revenue Percent
of Total Net
Revenue Percent
of Total
Revenue
Fintech $ 12,532 100 % $ — — %
Biotech — — % — — %
Corporate and other — — % — — %
Discontinued operations — — % 3,795 100 %
Total revenue $ 12,532 100 % $ 3,795 100 %
Fiscal Year Ended
December 28, 2024 Fiscal Year Ended
December 30, 2023
Gross
Profit Gross
Profit % Gross
Profit Gross
Profit %
Gross Profit
Fintech $ 6,294 50 % $ — — %
Biotech — — % — — %
Corporate and other — — % — — %
Discontinued operations — — % (197) (5) %
Total gross profit $ 6,294 50 % $ (197) (5) %
Revenue
Revenue increased by approximately $8.8 million for the fiscal year ended December 28, 2024, as compared to the year ended December 30, 2023. The increase is due to the acquisition of ALT5 Subsidiary during May 2024, partially offset by no revenue from discontinued operations for the fiscal year ended December 28, 2024.
Gross Profit
Gross profit increased by approximately $6.5 million for the fiscal year ended December 28, 2024, as compared to the year ended December 30, 2023. The increase is due to the acquisition of ALT5 Subsidiary during May 2024, partially offset by no revenue from discontinued operations for the fiscal year ended December 28, 2024.
Selling, General and Administrative Expense
Selling, general and administrative expenses from continuing operations increased by approximately $7.6 million for the fiscal year ended December 28, 2024, as compared to the year ended December 30, 2023, primarily due to the acquisition of ALT5 Subsidiary during May 2024, increased amortization costs relating to the Soin intangibles in our Biotech segment, and increased stock-based compensation expense related to grants of RSU's, as well as costs for professional services in our Corporate and Other segment.
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 9 of the Consolidated Financial Statements). No impairment charges were recorded during the fiscal year ended December 28, 2024.
Interest Income (Expense), net
Interest expense, net, was approximately $880,000 for the fiscal year ended December 28, 2024, as compared to interest income, net, of approximately $2.3 million for the year ended December 30, 2023. The change was primarily due to no longer accreting the discounts in connection with the promissory note with SPYR and the receivable from VM7,
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promissory notes entered into during the year ended December 28, 2024, as well as the acquisition of ALT5 Subsidiary during May 2024.
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.
Unrealized Loss on Marketable Securities
Unrealized loss on marketable securities for the fiscal year ended December 28, 2024 was approximately $1.1 million, as compared to a loss of approximately $925,000 for the fiscal year ended December 30, 2023. An unrealized gain or loss on marketable securities is recorded to mark to fair value securities received in connection to the sale of GeoTraq.
Results of Operations by Segment
The following table sets forth the results of operations by segment (in $000’s):
Fiscal Year Ended December 28, 2024 Fiscal Year Ended December 30, 2023
Fintech Biotech Corporate and other Discontinued Operations Total Fintech Biotech Corporate and other Discontinued Operations Total
Revenue $ 12,532 $ — $ — $ — $ 12,532 $ — $ — $ — $ 3,795 $ 3,795
Cost of revenue 6,238 — — — 6,238 — — — 3,992 3,992
Gross profit 6,294 — — — 6,294 — — — (197) (197)
Selling, general and administrative expense 5,389 2,148 6,206 — 13,743 — 1,531 3,215 1,467 6,213
Impairment charges — — — — — — — 15,100 — 15,100
Gain on sale of ARCA — — — — — — — — (12,102) (12,102)
Operating (loss) income 905 (2,148) (6,206) — (7,449) — (1,531) (18,315) 10,438 (9,408)
Fintech Segment
Our Fintech segment consists of ALT5 Subsidiary, which was acquired during May 2024. Revenue for the fiscal year ended December 28, 2024 was approximately $12.5 million, and gross margin percentage was 50.2%. Operating income for the fiscal year ended December 28, 2024 was approximately $900,000.
Biotech Segment
Our Biotech segment generated no revenue for the fiscal year ended December 28, 2024. Selling, general and administrative expenses increased primarily due to increased amortization costs relating to the Soin intangibles.
Corporate and Other Segment
Our Corporate and Other segment generated no revenue for the fiscal year ended December 28, 2024. Selling, general and administrative expenses increased primarily due to increased stock-based compensation expense related to grants of RSU's, as well as increased costs for professional services.
Discontinued Operations
Discontinued operations consist of our Recycling segment, which was disposed of effective March 1, 2023. We had no discontinued operations for the fiscal year ended December 28, 2024.
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 28, 2024, our cash on hand was approximately $7.2 million. We intend to raise funds to support future development of JAN 123 either through capital raises or structured arrangements, which would include effectuating our previously announced intention to capitalize a subsidiary with certain of our biotechnology assets, acquire an additional biotechnology asset, and then engage in a financing of that subsidiary. The short-term intended result of that series of
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transactions would be for us to own a controlling interest in that subsidiary, but to decouple it from us so that it would operate on a stand-alone basis, although its financial statements would continue to be consolidated with ours for as long as we have a controlling interest.
Our ability to continue as a going concern is dependent upon the success of future capital raises or structured settlements and cash flows from the acquisition of ALT5 Subsidiary 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 28, 2024, cash provided by operations was approximately $1.8 million, compared to cash provided by operations of approximately $855,000 during the fiscal year ended December 30, 2023. Cash provided by operating activities from discontinued operations during the fiscal year ended December 30, 2023 was approximately $2.3 million. We had no discontinued operations during the fiscal year ended December 28, 2024. The change in cash was primarily due to results of operations as discussed above.
Cash provided by investing activities was approximately $5.9 million for the fiscal year ended December 28, 2024, compared to cash used in investing activities of approximately $156,000 for the fiscal year ended December 30, 2023. Cash provided by investing activities for the fiscal year ended December 28, 2024 was related to cash acquired in the acquisition of ALT5 Subsidiary, while cash used in investing activities for the fiscal year ended December 30, 2023 was all associated with discontinued operations and was related to purchases of property and equipment.
Cash provided by financing activities was approximately $6.1 million for the fiscal year ended December 28, 2024, and relates to proceeds from notes payable, proceeds from equity financing and warrants exercised, and proceeds from related party notes payable, partially offset by payments on notes payable, as well as payments on related party notes payable. 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.
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 $6.2 million for the fiscal year ended December 28, 2024, and net loss from continuing operations of approximately $17.1 million for the fiscal year ended December 30, 2023, for the reasons discussed above. Additionally, the Company has total current assets of approximately $35.0 million and total current liabilities approximately of $40.9 million, resulting in a net negative working capital of approximately $5.9 million. Cash provided operations was approximately $1.0 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 acquired ALT5 Subsidiary during May 2024, as discussed above. We may require additional debt financing and/or capital to finance new acquisitions or consummate other strategic investments in our business. We currently expect that the biotechnology subsidiary transaction discussed above will allow us to finance our Phase IIb clinical trials, No assurance can be given any financing obtained may not further dilute or otherwise impair the ownership interest of our existing stockholders or our ownership interest in the to-be-effectuated biotechnology subsidiary.
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Off Balance Sheet Arrangements
At December 28, 2024, we had no off-balance sheet arrangements, commitments or guarantees that require additional disclosure or measurement.