Quarterly Report (10-q)

Date : 11/19/2019 @ 11:02AM
Source : Edgar (US Regulatory)
Stock : JanOne Inc (JAN)
Quote : 3.29  -0.08 (-2.37%) @ 5:00AM
JanOne share price Chart
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Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 28, 2019

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 0-19621

JANONE INC.

(Exact name of registrant as specified in its charter)

 

Nevada

(State or other jurisdiction of

incorporation or organization)

 

41-1454591

(I.R.S. Employer

Identification No.)

 

 

 

325 E. Warm Springs Road, Suite 102

Las Vegas, Nevada

(Address of principal executive offices)

 

89119

(Zip Code)

 

702-997-5968

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share

 

JAN

 

The NASDAQ Stock Market LLC

(The NASDAQ Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes   No

As of November 11, 2019, there were 1,917,779 outstanding shares of the registrant’s common stock, with a par value of $0.001.

 

 

 


JANONE INC.

 

INDEX TO FORM 10-Q

 

 

 

Page

PART I.  FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

3

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 28, 2019 and December 29, 2018

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the 13 weeks and 39 weeks ended September 28, 2019 and September 29, 2018

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the 39 weeks ended September 28, 2019 and September 29, 2018

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the 13 and 39 weeks ended September 28, 2019 and September 29, 2018

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 3.

Defaults Upon Senior Securities

34

 

 

 

Item 4.

Mine Safety Disclosures

34

 

 

 

Item 5

Other Information

34

 

 

 

Item 6.

Exhibits

35

 

 

 

SIGNATURES

36

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Condensed Consolidated Financial Statements

 

JANONE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

 

 

September 28,

2019

 

 

December 29,

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

638

 

 

$

1,195

 

Trade and other receivables, net

 

 

5,877

 

 

 

5,804

 

Income taxes receivable

 

 

148

 

 

 

101

 

Inventories

 

 

1,727

 

 

 

801

 

Prepaid expenses and other current assets

 

 

854

 

 

 

1,036

 

Total current assets

 

 

9,244

 

 

 

8,937

 

Note receivable - ApplianceSmart Holdings, LLC a subsidiary of Live

   Ventures Incorporated

 

 

2,956

 

 

 

3,837

 

Property and equipment, net

 

 

802

 

 

 

617

 

Right to use asset - operating leases

 

 

2,163

 

 

 

 

Intangible assets, net

 

 

18,193

 

 

 

20,988

 

Deposits and other assets

 

 

285

 

 

 

661

 

Total assets

 

$

33,643

 

 

$

35,040

 

Liabilities and Stockholders' Equity

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,726

 

 

$

3,169

 

Accrued liabilities - other

 

 

1,312

 

 

 

1,118

 

Accrued liability - California Sales Taxes

 

 

4,688

 

 

 

4,722

 

Short term debt

 

 

791

 

 

 

675

 

Lease obligation short term - operating leases

 

 

1,046

 

 

 

 

Total current liabilities

 

 

11,563

 

 

 

9,684

 

Lease obligation long term - operating leases

 

 

1,150

 

 

 

 

Deferred income taxes, net

 

 

1,726

 

 

 

3,549

 

Related party note payable

 

 

2,500

 

 

 

 

Other noncurrent liabilities

 

 

 

 

 

196

 

Total liabilities

 

 

16,939

 

 

 

13,429

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, series A-1 - par value $0.001 per share 2,000,000 authorized,

   259,729 and 288,588 shares issued and outstanding at September 28, 2019 and

   December 29, 2018, respectively

 

 

 

 

 

 

Common stock, par value $0.001 per share, 10,000,000 shares authorized,

   1,917,779 and 1,694,565 shares issued and outstanding at September 28, 2019

   and at December 29, 2018, respectively

 

 

2

 

 

 

2

 

Additional paid in capital

 

 

39,107

 

 

 

38,660

 

Accumulated other comprehensive loss

 

 

(530

)

 

 

(533

)

Accumulated deficit

 

 

(21,875

)

 

 

(16,518

)

Total stockholders' equity

 

 

16,704

 

 

 

21,611

 

Total liabilities and stockholders' equity

 

$

33,643

 

 

$

35,040

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

3


 

JANONE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(Dollars in thousands, except per share)

 

 

 

For the Thirteen Weeks Ended

 

 

For the Thirty Nine Weeks Ended

 

 

 

September 28,

2019

 

 

September 29,

2018

 

 

September 28,

2019

 

 

September 29,

2018

 

Revenues

 

$

9,790

 

 

$

10,267

 

 

$

23,684

 

 

$

27,553

 

Cost of revenues

 

 

7,226

 

 

 

6,874

 

 

 

18,103

 

 

 

19,598

 

Gross profit

 

 

2,564

 

 

 

3,393

 

 

 

5,581

 

 

 

7,955

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

5,185

 

 

 

5,064

 

 

 

13,466

 

 

 

12,791

 

Operating loss

 

 

(2,621

)

 

 

(1,671

)

 

 

(7,885

)

 

 

(4,836

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(75

)

 

 

(45

)

 

 

(81

)

 

 

(675

)

Other income, net

 

 

6

 

 

 

251

 

 

 

784

 

 

 

341

 

Total other income (expense), net

 

 

(69

)

 

 

206

 

 

 

703

 

 

 

(334

)

Loss from operations before benefit from income taxes

 

 

(2,690

)

 

 

(1,465

)

 

 

(7,182

)

 

 

(5,170

)

Total benefit from income taxes

 

 

732

 

 

 

205

 

 

 

1,825

 

 

 

1,059

 

Net loss

 

$

(1,958

)

 

$

(1,260

)

 

$

(5,357

)

 

$

(4,111

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared - Series A-1 preferred stock

 

$

 

 

$

 

 

$

 

 

$

 

Dividends declared - Common stock

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share

 

$

(1.12

)

 

$

(0.87

)

 

$

(3.16

)

 

$

(2.99

)

Diluted loss per share

 

$

(1.12

)

 

$

(0.87

)

 

$

(3.16

)

 

$

(2.99

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1,741,170

 

 

 

1,445,291

 

 

 

1,695,383

 

 

 

1,376,244

 

Diluted

 

 

1,741,170

 

 

 

1,445,291

 

 

 

1,695,383

 

 

 

1,376,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,958

)

 

$

(1,260

)

 

$

(5,357

)

 

$

(4,111

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation adjustments

 

 

(14

)

 

 

12

 

 

 

3

 

 

 

(25

)

Total other comprehensive income (loss), net of tax

 

 

(14

)

 

 

12

 

 

 

3

 

 

 

(25

)

Comprehensive loss

 

$

(1,972

)

 

$

(1,248

)

 

$

(5,354

)

 

$

(4,136

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

4


 

JANONE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

For the Thirty Nine Weeks Ended

 

 

 

September 28, 2019

 

 

September 29, 2018

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,357

)

 

$

(4,111

)

Adjustments to reconcile net loss to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,046

 

 

 

2,993

 

Amortization of debt issuance costs

 

 

111

 

 

 

553

 

Amortization of right to use assets - operating leases

 

 

33

 

 

 

 

Stock based compensation expense

 

 

447

 

 

 

596

 

Gain on sale of property and equipment

 

 

 

 

 

(2

)

Change in deferred rent

 

 

(48

)

 

 

(6

)

Change in deferred compensation

 

 

(148

)

 

 

92

 

Change in deferred income taxes

 

 

(1,823

)

 

 

(1,148

)

Other

 

 

376

 

 

 

(152

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(93

)

 

 

2,484

 

Income taxes receivable

 

 

(47

)

 

 

 

Prepaid expenses and other current assets

 

 

71

 

 

 

(121

)

Inventories

 

 

(919

)

 

 

(168

)

Accounts payable and accrued expenses

 

 

708

 

 

 

2,300

 

Accrued income taxes

 

 

 

 

 

9

 

Net cash provided by (used in) operating activities

 

 

(3,643

)

 

 

3,319

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(436

)

 

 

(197

)

Proceeds from the sale of property and equipment

 

 

 

 

 

2

 

Net payments received from Live Ventures Incorporated note receivable

 

 

881

 

 

 

168

 

Net cash provided by (used in) investing activities

 

 

445

 

 

 

(27

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net payments under line of credit - MidCap Financial Trust

 

 

 

 

 

(5,605

)

Proceeds from issuance of long term debt obligations

 

 

471

 

 

 

562

 

Proceeds from related party note

 

 

2,500

 

 

 

 

Payments on debt obligations

 

 

(355

)

 

 

(819

)

Net cash provided by (used in) financing activities

 

 

2,616

 

 

 

(5,862

)

Effect of changes in exchange rate on cash and cash equivalents

 

 

25

 

 

 

(25

)

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(557

)

 

 

(2,595

)

CASH AND CASH EQUIVALENTS, beginning of period

 

 

1,195

 

 

 

3,313

 

CASH AND CASH EQUIVALENTS, end of period

 

$

638

 

 

$

718

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

71

 

 

$

631

 

Income taxes paid

 

 

44

 

 

 

80

 

Net liabilities assumed by ApplianceSmart

 

 

 

 

 

1,901

 

Right to use asset - operating leases capitalized

 

 

2,272

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

5


 

 

JANONE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

(Dollars in thousands)

 

 

 

Common Stock

 

 

Series A Preferred

 

 

Additional

Paid in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

 

Equity

 

Balance, June 29, 2019

 

 

1,694,565

 

 

$

2

 

 

 

259,729

 

 

$

 

 

$

38,660

 

 

$

(516

)

 

$

(19,917

)

 

$

18,229

 

Share based compensation

 

 

223,214

 

 

 

 

 

 

 

 

 

 

 

 

447

 

 

 

 

 

 

 

 

 

447

 

Other comprehensive income,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

(14

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,958

)

 

 

(1,958

)

Balance, September 28, 2019

 

 

1,917,779

 

 

$

2

 

 

 

259,729

 

 

$

 

 

$

39,107

 

 

$

(530

)

 

$

(21,875

)

 

$

16,704

 

 

 

 

Common Stock

 

 

Series A Preferred

 

 

Additional

Paid in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

 

Equity

 

Balance, June 30, 2018

 

 

1,375,073

 

 

$

1

 

 

 

288,588

 

 

$

 

 

$

37,634

 

 

$

(530

)

 

$

(13,761

)

 

$

23,344

 

Share issuance

 

 

319,492

 

 

 

 

 

 

 

 

$

 

 

 

424

 

 

 

 

 

 

 

 

 

424

 

Share based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

596

 

 

 

 

 

 

 

 

 

596

 

Other comprehensive income,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,260

)

 

 

(1,260

)

Balance, September 29, 2018

 

 

1,694,565

 

 

$

1

 

 

 

288,588

 

 

$

 

 

$

38,654

 

 

$

(518

)

 

$

(15,021

)

 

$

23,116

 

 

 

 

Common Stock

 

 

Series A Preferred

 

 

Additional

Paid in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

 

Equity

 

Balance, December 29, 2018

 

 

1,694,565

 

 

$

2

 

 

 

288,588

 

 

$

 

 

$

38,660

 

 

$

(533

)

 

$

(16,518

)

 

$

21,611

 

Shares cancelled

 

 

 

 

 

 

 

 

(28,859

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share based compensation

 

 

223,214

 

 

 

 

 

 

 

 

 

 

 

 

447

 

 

 

 

 

 

 

 

 

447

 

Other comprehensive income,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,357

)

 

 

(5,357

)

Balance, September 28, 2019

 

 

1,917,779

 

 

$

2

 

 

 

259,729

 

 

$

 

 

$

39,107

 

 

$

(530

)

 

$

(21,875

)

 

$

16,704

 

 

 

 

 

Common Stock

 

 

Series A Preferred

 

 

Additional

Paid in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

 

Equity

 

Balance, December 30, 2017

 

 

1,375,073

 

 

$

1

 

 

 

288,588

 

 

$

 

 

$

37,634

 

 

$

(493

)

 

$

(10,910

)

 

$

26,232

 

Share issuance

 

 

319,492

 

 

 

 

 

 

 

 

 

 

 

 

424

 

 

 

 

 

 

 

 

 

424

 

Share based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

596

 

 

 

 

 

 

 

 

 

596

 

Other comprehensive income,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

(25

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,111

)

 

 

(4,111

)

Balance, September 29, 2018

 

 

1,694,565

 

 

$

1

 

 

 

288,588

 

 

$

 

 

$

38,654

 

 

$

(518

)

 

$

(15,021

)

 

$

23,116

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6


 

Note 1: Background

The accompanying consolidated financial statements include the accounts of JanOne Inc., a Nevada corporation, and its subsidiaries (collectively the “Company” or “JanOne”). On September 10, 2019, Appliance Recycling Centers of America, Inc. changed its name to JanOne Inc.

 

The Company has three operating segments – Biotechnology, Recycling and Technology.

During September 2019, JanOne, through its biotechnology segment, became engaged in developing new and innovative solutions for ending the opioid epidemic ranging from digital technologies to educational advocacy.

ARCA Recycling, Inc. (“ARCA Recycling”), provides turnkey recycling services for electric utility energy efficiency programs. ARCA Canada Inc., provides turnkey recycling services for electric utility energy efficiency programs. Customer Connexx, LLC, provides call center services for electric utility programs.

Through our GeoTraq Inc. (“GeoTraq”) subsidiary, we are engaged in the development, design and, ultimately, we expect the sale of cellular transceiver modules, also known as Mobile IoT modules, and associated wireless services.

All data for common stock, options and warrants have been adjusted to reflect the 1-for-5 reverse stock split (which took effect on April 19, 2019) (the “Reverse Stock Split”) for all periods presented. In addition, all common stock prices, and per share data for all periods presented have been adjusted to reflect the Reverse Stock Split.

We report on a 52- or 53-week fiscal year. Our 2018 fiscal year (“2018”) ended on December 29, 2018, and our fiscal year (“2019”) will end on December 28, 2019, each fiscal year is 52 weeks in length.

Reincorporation in the State of Nevada

On March 12, 2018, we reincorporated from the State of Minnesota to the State of Nevada (the “Reincorporation”) pursuant to a plan of conversion dated March 12, 2018 (the “Plan of Conversion”). The Reincorporation was accomplished by the filing of (i) articles of conversion (the “Minnesota Articles of Conversion”) with the Secretary of State of the State of Minnesota and (ii) articles of conversion (the “Nevada Articles of Conversion”) and articles of incorporation (the “Nevada Articles of Incorporation”) with the Secretary of State of the State of Nevada. Pursuant to the Plan of Conversion, the Company also adopted new bylaws (the “Nevada Bylaws”).

The Reincorporation did not affect any of the Company’s material contracts with any third parties, and the Company’s rights and obligations under such material contractual arrangements continue to be rights and obligations of the Company after the Reincorporation. The Reincorporation did not result in any change in headquarters, business, jobs, management, location of any of the offices or facilities, number of employees, assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation) of the Company.

The Reincorporation changed the par value of the Company’s common shares from no par value to a par value of $0.001 per share of common stock.

Going concern

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 $1,958 and $1,260 in for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively. We reported a net loss of $5,357 and $4,111 for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively. In addition, the Company has as of September 28, 2019 total current assets of $9,244 and total current liabilities $11,563 resulting in a net negative working capital of $2,319.

The Company has available cash balances and funds available under the accounts receivable factoring program with Prestige Capital to provide sufficient liquidity to fund the entity’s operations, the entity’s continued investments in center openings and remodeling activities, for at least the next twelve months. The Company expects to generate cash from operations for the remainder of fiscal year 2019. The agreement with Prestige Capital allows the Company to get advance funding of 80% of an unpaid customer’s invoice amount within 2 days and the balance less a fee upon ultimate collection in cash of the invoice. The Company will be able to utilize the available funds under the accounts receivable factoring agreement to provide liquidity, to pursue acquisitions, and other strategic transactions to expand and grow the business to enhance shareholder value. Management also regularly monitors capital market conditions to ensure no other conditions or events exist that may materially affect the Company’s financial conditions and liquidity and the Company may raise additional funds through borrowings or public or private sales of debt or equity securities, if necessary.

Based on the above, management has concluded that at September 28, 2019 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.

 

7


 

Note 2: Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information and notes required for complete financial statements prepared in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. However, our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 29, 2018.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on the previously reported net income (loss) or stockholders’ equity.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates made in connection with the accompanying consolidated financial statements include the estimated reserve for doubtful current trade and other receivables, the estimated reserve for excess and obsolete inventory, estimated fair value and forfeiture rates for stock-based compensation, fair values in connection with the analysis of other intangibles and long-lived assets for impairment, valuation allowance against deferred tax assets and estimated useful lives for intangible assets and property and equipment.

Financial Instruments

Financial instruments consist primarily of cash equivalents, trade and other receivables, notes receivables, and obligations under accounts payable, accrued expenses and notes payable. The carrying amounts of cash equivalents, trade receivables and other receivables, accounts payable, accrued expenses and short-term notes payable approximate fair value because of the short maturity of these instruments. The fair value of the long-term debt is calculated based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements, unless quoted market prices were available (Level 2 inputs). The carrying amounts of short-term debt at September 28, 2019 and December 29, 2018 approximate fair value.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Fair value of cash equivalents approximates carrying value.

Trade Receivables and Allowance for Doubtful Accounts

We carry unsecured trade receivables at the original invoice amount less an estimate made for doubtful accounts based on a monthly review of all outstanding amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. We write off trade receivables when we deem them uncollectible. We record recoveries of trade receivables previously written off when we receive them. We consider a trade receivable to be past due if any portion of the receivable balance is outstanding for more than ninety days. We do not charge interest on past due receivables. Our management considers the allowance for doubtful accounts of $29 and $29 to be adequate to cover any exposure to loss as of September 28, 2019, and December 29, 2018, respectively.

8


 

Inventories

Appliance inventories are stated at the lower of cost, determined on a specific identification basis, or net realizable value. Inventory raw material - chips, are stated at the lower of average cost or net realizable value. We provide estimated provisions for the obsolescence of our appliance inventories, including adjustment to net realizable value, based on various factors, including the age of such inventory and our management’s assessment of the need for such provisions. We look at historical inventory aging reports and margin analyses in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded. The Company does not have a reserve for excess or obsolete inventory at September 28, 2019 and December 29, 2018.

Property and Equipment

Property and Equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful life of building and improvements is 18 to 30 years, transportation equipment is 3 to 15 years, machinery and equipment is 5 to 10 years, furnishings and fixtures is 3 to 5 years and office and computer equipment is 3 to 5 years.

We periodically review our property and equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. We assess recoverability based on several factors, including our intention with respect to maintaining our facilities and projected discounted cash flows from operations. An impairment loss would be recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted cash flows.

Intangible Assets

The Company accounts for intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. Under ASC 350, intangible assets subject to amortization, shall be reviewed for impairment in accordance with the Impairment or Disposal of Long-Lived Assets in ASC 360, Property, Plant, and Equipment.

Under ASC 360, long-lived assets are tested for recoverability whenever events or changes in circumstances (‘triggering event’) indicate that the carrying amount may not be recoverable. In making this determination, triggering events that were considered included:

 

A significant decrease in the market price of a long-lived asset (asset group);

 

A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition;

 

A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator;

 

An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group);

 

A current period operating, or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); and,

 

A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.

If a triggering event has occurred, for purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. After the asset group determination is completed, a two-step testing is performed. If after identifying a triggering event it is determined that the asset group’s carrying value may not be recoverable, a recoverability test must then be performed. The recoverability test is performed by forecasting the expected cash flows to be derived from the asset group for the remaining useful life of the asset group’s primary asset compared to their carrying value. The recoverability test relies upon the undiscounted cash flows (excluding interest and taxes) which are derived from the company’s specific use of those assets (not how a market participant would use those assets); and, are based upon the existing service potential of the current assets (excluding any improvements that would materially enhance the assets). If the expected undiscounted cash flows exceed the carrying value, the assets are considered recoverable. If the recoverability test is failed a second fair market value test is required to calculate the amount of the impairment (if any). This second test calculates the fair value of the asset or asset group, with the impairment being the amount by which the carrying value exceeds the asset or asset group’s fair value. Under this test, the financial projections have been created using market participant assumptions and fair value concepts.

There was no impairment of intangibles as of June 29, 2019 based on the annual intangible asset impairment test performed as of that date.

9


 

The Company’s intangible assets consist of customer relationship intangibles, trade names, licenses for the use of internet domain names, Universal Resource Locators, or URL’s, software, patent USPTO reference No. 10,182,402, and historical know-how, designs and related manufacturing procedures. Upon acquisition, critical estimates are made in valuing acquired intangible assets, which include but are not limited to: future expected cash flows from customer contracts, customer lists, and estimating cash flows from projects when completed; tradename and market position, as well as assumptions about the period of time that customer relationships will continue; and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from the assumptions used in determining the fair values. All intangible assets are capitalized at their original cost and amortized over their estimated useful lives as follows: domain name and marketing – 3 to 20 years; software – 3 to 5 years, technology intangibles – 7 years, customer relationships – 7 to 15 years.

Revenue Recognition

We provide replacement appliances and provide appliance pickup and recycling services for consumers of public utilities, our customers. We receive as part of our de-manufacturing and recycling process revenue from scrap dealers for refrigerant, steel, plastic, glass, copper and other residual items.

We adopted Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, which provide supplementary guidance, and clarifications, effective January 1, 2018. We adopted ASC 606 using the modified retrospective method. The results for the reporting period beginning after January 1, 2018, are presented in accordance with the new standard, although comparative information for the prior year has not been restated and continues to be reported under the accounting standards and policies in effect for those periods.

Adoption of the new standard did not have a significant impact on the current period revenues or on the prior year Consolidated Financial Statements. No transition adjustment was required to our retained earnings as of January 1, 2018. Under the new standard revenue is recognized as follows:

We determine revenue recognition through the following steps:

 

a.

Identification of the contract, or contracts, with a customer,

 

b.

Identification of the performance obligations in the contract,

 

c.

Determination of the transaction price,

 

d.

Allocation of the transaction price to the performance obligations in the contract, and

 

e.

Recognition of revenue when, or as, we satisfy a performance obligation.

As part of its assessment of each contract, the Company evaluates certain factors including the customer’s ability to pay, or credit risk. For each contract, the Company considers the promise to transfer products or services, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the price stated on the contract is typically fixed and represents the net consideration to which the Company expects to be entitled per order, and therefore there is no variable consideration. As the Company’s standard payment terms are less than 90 days, the Company has elected, as a practical expedient, to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product or service based on its relative standalone selling price. The product or service price as specified on the contract is considered the standalone selling price as it is an observable source that depicts the price as if sold to a similar customer in similar circumstances.

Replacement Product Revenue

We generate revenue by providing replacement appliances. We recognize revenue at the point in time when control over the replacement product is transferred to the customer, when our performance obligations are satisfied, which typically occur upon delivery from our center facility and installation at our customer’s consumers home.

Recycling Services Revenue

We generate revenue by providing pickup and recycling services. We recognize revenue at the point in time when we have picked up a to be recycled appliance and transfer of ownership as occurred, when our performance obligations are satisfied, which typically occur upon pickup from our customers consumer’s home.

10


 

Byproduct Revenue

We generate other recycling byproduct revenue (the sale of copper, steel, plastic and other recoverable non-refrigerant byproducts) as part of our de-manufacturing process. We recognize byproduct revenue upon delivery and transfer of control of byproduct to a third-party recycling customer, having a mutually agreed upon price per pound and collection is reasonably assured. Transfer of control occurs at the time the customer is in possession of the byproduct material. Revenue recognized is a function of byproduct weight, type and in some cases volume of the byproduct delivered multiplied by the market rate as quoted.

Technology Revenue

We currently are not generating any revenue in our Technology segment.

 

Biotechnology Revenue

We currently are not generating any revenue in our Biotechnology segment.

Deferred Revenue

Receivables are recognized in the period we ship the product or provide the service. Payment terms on invoiced amounts are based on contractual terms with each customer. When we receive consideration, or such consideration is unconditionally due, prior to transferring goods or services to the customer under the terms of a sales contract, we record deferred revenue, which represents a contract liability. We recognize deferred revenue as net sales once control of goods and/or services have been transferred to the customer and all revenue recognition criteria have been met and any constraints have been resolved. We defer the product costs until recognition of the related revenue occurs.

Assets Recognized from Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. We have concluded that none of the costs we have incurred to obtain and fulfill our FASB Accounting Standards Codification, or ASC 606 contracts, meet the capitalization criteria, and as such, there are no costs deferred and recognized as assets on the consolidated balance sheets at September 28, 2019 and December 29, 2018.

Practical Expedients and Exemptions:

 

a.

Taxes collected from customers and remitted to government authorities and that are related to sales of our products are excluded from revenues.

 

b.

Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations.

 

c.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with original expected lengths of one year or less or (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for the services performed.

Revenue recognized for Company contracts - $8,891 and $9,963 for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively. Revenue recognized for Company contracts - $21,397 and $26,710 for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively. Byproduct revenue is non-contract revenue and amounts for Byproduct revenue have been excluded from Revenue recognized for Company contracts for all periods presented.

Shipping and Handling

The Company classifies shipping and handling charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.

Advertising Expense

Advertising expense is charged to operations as incurred. Advertising expense totaled $168 and $226 for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively. Advertising expense totaled $623 and $593 for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.

11


 

Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows: Level 1 - inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. Level 2 – to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Income Taxes

The Company accounts for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company's assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided on deferred taxes if it is determined that it is more likely than not that the asset will not be realized. The Company recognizes penalties and interest accrued related to income tax liabilities in the provision for income taxes in its Consolidated Statements of Operations.

Significant management judgment is required to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Company uses a two-step process to evaluate tax positions. The first step requires an entity to determine whether it is more likely than not (greater than 50% chance) that the tax position will be sustained. The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion. The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements of the Company in future periods.

Lease Accounting

We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) at the beginning of our fiscal year, December 30, 2018, using the modified retrospective approach with transition relief. This accounting standard requires all lessees to record the impact of leasing contracts on the balance sheet as a right to use asset and corresponding liability. This is measured by taking the present value of the remaining lease payments over the lease term and recording a right to use asset (“ROU”) and corresponding lease obligation for lease payments. Rent expense is realized on a straight-line basis and the lease obligation is amortized based on the effective interest method. Adoption of this standard resulted in the recognition of a $1,900 Right of Use asset and corresponding liability and made no adjustments to retained earnings. Adoption of the new standard did not materially impact our consolidated net earnings or cash flows.  The amounts recognized reflect the present value of remaining lease payments for all leases that have a lease term greater than 12 months. The discount rate used is an estimate of the Company’s incremental borrowing rate based on information available at lease commencement. In considering the lease asset value, the Company considers fixed and variable payment terms, prepayments and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised

In considering the lease asset value, the Company considers fixed or variable payment terms, prepayments and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company uses an estimate of its incremental borrowing rate based on information available at lease commencement in determining present value of lease payments.

We lease warehouse facilities and office space. These assets and properties are generally leased under noncancelable agreements that expire at various dates through 2022 with various renewal options for additional periods. The agreements, which have and continue to be classified as operating leases, generally provide for base rent and require us to pay all insurance, taxes and other maintenance costs. The Company’s operating leases are exclusively for building space in the different cities we have operations. The lease terms typically last from 2-3 years with some being longer or shorter depending on needs of the business and the lease partners. The Company has also engaged in month to month leases for parking spaces that the Company has elected to expense as incurred. Our lease agreements do not include variable lease payments. Our lessors do offer options to extend lease terms as leases expire and management evaluates against current rental markets and other strategic factors in making the decision to renew. When leases are within 6 months of being renewed, management will estimate probabilities of renewing for an additional term based on market and strategic factors and if the probability is more likely than not that the lease will be renewed, the financials will assume the lease is renewed under the lease renewal option.

The operating leases we have do not contain residual value guarantees and do not contain restrictive covenants. The Company currently has one sublease in Ontario, Canada.

12


 

Leases accounted under ASC 842 were determined based on analysis of the lease contracts using lease payments and timing as documented in the contract. Non lease contracts were also evaluated to understand if the contract terms provided for an asset that we controlled and provided us with substantially all the economic benefits. We did not observe any contracts with embedded leases. Lease contracts were reviewed, and distinctions made between non lease and lease payments. Only payments related to the lease of the asset were included in lease payment calculations. Management uses an estimation of its incremental borrowing rate at lease commencement over similar terms as the lease contracts in determining the present value of its lease obligations.

Adopting the new lease standard had minimal impact on consolidated earnings and cash flows. The weighted average lease term for operating leases is 27 months and the weighted average discount rate is 8%.

Earnings Per Share

Earnings per share is calculated in accordance with ASC 260, “Earnings Per Share”. Under ASC 260 basic earnings per share is computed using the weighted average number of common shares outstanding during the period except that it does not include unvested restricted stock subject to cancellation. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants, options, restricted shares and convertible preferred stock. The dilutive effect of outstanding restricted shares, options and warrants is reflected in diluted earnings per share by application of the treasury stock method. Convertible preferred stock is reflected on an if-converted basis.

Segment Reporting

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a Company’s management organizes segments within the Company for making operating decisions and assessing performance. The Company determined it has three reportable segments.

Concentration of Credit Risk

The Company maintains cash balances at several banks in several states including, Minnesota, California and Nevada. Accounts are insured by the Federal Deposit Insurance Corporation up to $250 per institution as of September 28, 2019. At times, balances may exceed federally insured limits.

Recently Issued Accounting Pronouncements

Credit Losses

 

In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new approach to estimate credit losses on certain types of financial instruments based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact of adopting this new accounting standard on our Consolidated Financial Statements and related disclosures.

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Note 3: Trade and other receivables

 

 

 

September 28,

2019

 

 

December 29,

2018

 

Trade receivables, net

 

$

6,839

 

 

$

5,064

 

Factored accounts receivable

 

 

(2,397

)

 

 

(582

)

Prestige Capital reserve receivable

 

 

451

 

 

 

106

 

Due from Recleim

 

 

819