JanOne Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Significant Accounting Policies

Significant Accounting Policies

6 Months Ended

Jun. 28, 2014

Trade receivables: 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 $43 and $27 to be adequate to cover any exposure to loss as of June 28, 2014, and December 28, 2013, respectively.

Inventories: Inventories, consisting principally of appliances, are stated at the lower of cost, determined on a specific identification basis, or market and consist of:



	June 28, 2014			December 28, 2013
Appliances held for resale	$	17,116		$	16,449
Processed metals from recycled appliances held for resale	456			380
Less provision for inventory obsolescence	(227		)	(175		)
	$	17,345		$	16,654

We provide estimated provisions for the obsolescence of our appliance inventories, including adjustments to market, 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 agings and margin analysis in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded.

Property and equipment: Property and equipment consists of the following:



	June 28, 2014			December 28, 2013
Land	$	1,140		$	1,140
Buildings and improvements	3,281			3,273
Equipment (including computer software)	21,412			20,561
Projects under construction	91			63
	25,924			25,037
Less accumulated depreciation and amortization	(14,206		)	(13,613		)
	$	11,718		$	11,424

Software development costs: We capitalize software developed for internal use and are amortizing such costs over their estimated useful lives of three years. Costs capitalized were $52 and $39 for the three months ended June 28, 2014, and June 29, 2013, respectively. Costs capitalized were $74 and $63 for the six months ended June 28, 2014, and June 29, 2013, respectively.

Restricted cash: Restricted cash consists of a reserve required by our bankcard processor to cover chargebacks, adjustments, fees and other charges that may be due from us. During the second quarter of 2014, our bankcard processor released the entire reserve.

Product warranty: We provide a warranty for the replacement or repair of certain defective units, which varies based on the product sold. Our standard warranty policy requires us to repair or replace certain defective units at no cost to our customers. We estimate the costs that may be incurred under our warranty and record an accrual in the amount of such costs at the time we recognize product revenue. Factors that affect our warranty accrual for covered units include the number of units sold, historical and anticipated rates of warranty claims on these units, and the cost of such claims. We periodically assess the adequacy of our recorded warranty accrual and adjust the amounts as necessary.

Changes in our warranty accrual are as follows:



	Three Months Ended						Six Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Beginning Balance	$	30		$	42		$	34		$	47
Standard accrual based on units sold	10			15			16			26
Actual costs incurred	(4		)	(4		)	(8		)	(8		)
Periodic accrual adjustments	(5		)	(12		)	(11		)	(24		)
Ending Balance	$	31		$	41		$	31		$	41

Revenue recognition: We recognize revenue from appliance sales in the period the consumer purchases and pays for the appliance, net of an allowance for estimated returns. We recognize revenue from appliance recycling when we collect and process a unit. We recognize revenue generated from appliance replacement programs when we deliver the new appliance and collect and process the old appliance. The delivery, collection and processing activities under our replacement programs typically occur within one business day and are required to complete the earnings process; there are no other performance obligations. We recognize byproduct revenue upon shipment. We recognize revenue on extended warranties with retained service obligations on a straight-line basis over the period of the warranty. On extended warranty arrangements that we sell but others service for a fixed portion of the warranty sales price, we recognize revenue for the net amount retained at the time of sale of the extended warranty to the consumer. As a result of our recycling processes, we are able to produce carbon offsets from the destruction of certain types of ozone-depleting refrigerants. We record revenue from the sale of carbon offsets in the period when all of the following requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the sales price is fixed or determinable, (iii) title, ownership and risk of loss associated with the credits have been transferred to the customer, and (iv) collectability is reasonably assured. These requirements are met upon collection of cash due to the uncertainty around collectability and the involvement of various third parties and partners. We include shipping and handling charges to customers in revenue, which are recognized in the period the consumer purchases and pays for delivery.

Retail segment cost of revenues: Costs of revenues in our retail segment are comprised primarily of the following:


•	Purchase of appliance inventories, including freight to and from our distribution centers;


•	Shipping, receiving and distribution of appliance inventories to our retail stores, including employee compensation and benefits;


•	Delivery and service of appliances, including employee compensation and benefits, after the appliances are sold to the consumer;


•	Early payment discounts and allowances offered by appliance manufacturers; and


•	Inventory markdowns and shortages.

Recycling segment cost of revenues: Costs of revenues in our recycling segment are comprised primarily of the following:


•	Transportation costs, including employee compensation and benefits, related to collecting appliances for recycling and delivering appliances under our replacement programs;


•	Purchase of appliance inventories, including freight to our recycling center warehouses, early payment discounts, and warehousing costs for appliances used in our replacement programs;


•	Cost of recyclable appliances purchased under our GE contract; and


•	Processing costs, including employee compensation and benefits, related to recycling and processing appliances.

Selling, general and administrative expenses: Selling, general and administrative expenses are comprised primarily of the following:


•	Employee compensation and benefits related to management, corporate services, and retail sales;


•	Outside and outsourced corporate service fees;


•	Occupancy costs related to our retail stores and corporate office;


•	Advertising costs;


•	Bank charges and costs associated with credit and debit card interchange fees; and


•	Other administrative costs, such as supplies, travel and lodging.

Share-based compensation: We recognize share-based compensation expense on a straight-line basis over the expected vesting period for share-based awards granted. We use the Black-Scholes option pricing model to determine the fair value of awards at the grant date. We calculate the expected volatility for stock awards using historical volatility. We estimate a 0%-5% forfeiture rate for stock awards issued to all employees and members of the Board of Directors, but will continue to review these estimates in future periods. The risk-free rates for the expected terms of the stock awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life represents the period that the stock awards are expected to be outstanding. The expected dividend yield is zero as we have not paid or declared any cash dividends on our Common Stock. Based on these valuations, we recognized share-based compensation expense of $92 and $55 for the three months ended June 28, 2014, and June 29, 2013, respectively, and $140 and $59 for the six months ended June 28, 2014 and June 29, 2013, respectively.

Based on the value of options outstanding as of June 28, 2014, estimated future share-based compensation expense is as follows:



Fiscal year 2014	215
Fiscal year 2015	191
Fiscal year 2016	113
Fiscal year 2017	15
	$	534

The estimate above does not include any expense for additional options that may be granted and vest during 2014, 2015, 2016 and 2017.

Income taxes: We account for income taxes under the liability method. Deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce our deferred tax assets to the amounts we believe to be realizable. We regularly evaluate both positive and negative evidence related to either recording or retaining a valuation allowance against our deferred tax assets.

Comprehensive income (loss): Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income (loss) but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity. Our other comprehensive income (loss) is comprised of foreign currency translation adjustments.

Basic and diluted income per share: Basic income per common share is computed based on the weighted average number of common shares outstanding. Diluted income per common share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of Common Stock include unexercised stock options and warrants. Basic per share amounts are computed, generally, by dividing net income attributable to controlling interest by the weighted average number of common shares outstanding. Diluted per share amounts assume the conversion, exercise or issuance of all potential Common Stock instruments unless their effect is anti-dilutive, thereby reducing the loss or increasing the income per common share. In calculating diluted weighted average shares and per share amounts, we included stock options and warrants with exercise prices below average market prices, for the respective reporting periods in which they were dilutive, using the treasury stock method. We calculated the number of additional shares by assuming the outstanding stock options were exercised and that the proceeds from such exercises were used to acquire Common Stock at the average market price during the quarter. For the three and six months ended June 28, 2014, we excluded 386 and 375, respectively, options and warrants from the diluted weighted average share outstanding calculation as the effect of these options and warrants were anti-dilutive. For the three and six months ended June 29, 2013, we excluded 612 and 550, respectively, options and warrants from the diluted weighted average shares outstanding calculation as the effect of these options were anti-dilutive.

A reconciliation of the denominator in the basic and diluted income or loss per share is as follows:



	Three Months Ended				Six Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Numerator:
Net income attributable to controlling interest	$	592	$	768	$	1,563	$	952

Denominator:
Weighted average shares outstanding — basic	5,581		5,556		5,579		5,556
Employee stock options	111		—		101		—
Stock warrants	200		153		197		140
Weighted average shares outstanding — diluted	5,892		5,709		5,877		5,696

Income per share:
Basic	$	0.11	$	0.14	$	0.28	$	0.17
Diluted	$	0.10	$	0.13	$	0.27	$	0.17

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

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