Quarterly report pursuant to Section 13 or 15(d)

Discontinued Operations

v3.23.3
Discontinued Operations
 9 Months Ended
Sep. 30, 2023
Discontinued Operations and Disposal Groups [Abstract]  
Discontinued Operations Discontinued Operations
As of September 30, 2023, the Company discontinued operations of its Recycling and Technology segments as follows:
On March 9, 2023, the Company executed a Stock Purchase Agreement with VM7 Corporation, a Delaware corporation, under which, as of March 1, 2023, the Buyer agreed to acquire all of the outstanding equity interests of (a) ARCA Recycling, Inc., a California corporation, (b) Customer Connexx LLC, a Nevada limited liability company, and (c) ARCA Canada Inc., a corporation organized under the laws of Ontario, Canada (“ARCA Canada”; and, together with ARCA and Connexx, the “Subsidiaries”). The principal of the Buyer is Virland A. Johnson, our Chief Financial Officer. The sale of all of the outstanding equity interests of the Subsidiaries to the Buyer under the Purchase Agreement was consummated simultaneously with the execution of the Purchase Agreement (see Note 18).
On May 24, 2022, the Company entered into an Asset Purchase Agreement with SPYR Technologies Inc., pursuant to which the Company sold to SPYR substantially all the assets and none of the liabilities of its wholly-owned subsidiary GeoTraq Inc. No GeoTraq assets or liabilities were included in discontinued operations at December 31, 2022.
In accordance with the provisions of ASC 205-20, the Company has separately reported the assets and liabilities of the discontinued operations in the consolidated balance sheets. The assets and liabilities have been reflected as discontinued operations in the consolidated balance sheets as of December 31, 2022, and consist of the following:
December 31, 2022
Assets from discontinued operations
Cash and cash equivalents $ 53 
Trade and other receivables, net 7,816 
Inventories 366 
Prepaid expenses and other current assets 377 
Total current assets from discontinued operations 8,612 
Property and equipment, net 1
2,705 
Right of use asset - operating leases 5,290 
Intangible assets, net 2
735 
Deposits and other assets 249 
Total other assets from discontinued operations 8,979 
Total assets from discontinued operations $ 17,591 
Liabilities from discontinued operations
Accounts payable $ 4,423 
Accrued liabilities - other 3
3,278 
Accrued liability - California sales taxes 4
6,264 
Lease obligation short-term - operating leases 1,631 
Short-term debt 5
4,172 
Current portion of note payable 381 
Related party note 233 
Total current liabilities from discontinued operations 20,382 
Lease obligation long-term - operating leases 3,816 
Notes payable - long-term portion 6
1,339 
Long-term portion related party note payable 7
605 
Total noncurrent liabilities from discontinued operations 5,760 
Total liabilities from discontinued operations $ 26,142 
1 The Company’s property and equipment consisted of the following:
Useful Life
(Years)		 December 31, 2022
Buildings and improvements
3-30
 $ 85 
Equipment
3-15
 3,915 
Projects under construction 1,447 
Property and equipment 5,447 
Less accumulated depreciation (2,742)
Total property and equipment, net, from discontinued operations $ 2,705 
Depreciation expense was $0 and $35,000 for the 13 weeks ended September 30, 2023 and October 1, 2022, respectively, and $60,000 and $193,000 for the 39 weeks ended September 30, 2023 and October 1, 2022, respectively.
2 The Company’s intangible assets consisted of the following:
December 31,
2022
Patent and domains $ 19 
Computer software 1,682 
Intangible assets 1,701 
Less accumulated amortization (966)
Total intangible assets $ 735 
Amortization expense was $0 and $42,000 for the 13 weeks ended September 30, 2023 and October 1, 2022, respectively, and $36,000 and $154,000 for the 39 weeks ended September 30, 2023 and October 1, 2022, respectively.
3 The Company’s accrued liabilities consisted of the following:
December 31,
2022
Compensation and benefits $ 685 
Contract liability 290 
Accrued incentive and rebate checks 2,037 
Accrued taxes 219 
Other 47 
Total accrued expenses $ 3,278 
Historically the Company operated its recycling business in fourteen states in the U.S. and in various provinces in Canada. From time to time, the Company is subject to sales and use tax audits that could result in additional taxes, penalties and interest owed to various taxing authorities.
The California Department of Tax and Fee Administration (formerly known as the California Board of Equalization) (“CDTFA”) conducted a sales and use tax examination covering ARCA Recycling’s California operations for years 2011, 2012, and 2013. The Company believed it was exempt from collecting sales taxes under service agreements with utility customers that included appliance replacement programs. During the fourth quarter of 2014, the Company received communication from the CDTFA indicating they were not in agreement with the Company’s interpretation of the law. As a result, the Company applied for and, as of February 9, 2015, received approval to participate in the CDTFA’s Managed Audit Program. The period covered under this program included the years 2011, 2012, and 2013 and extended through the nine-month period ended September 30, 2014.
On April 13, 2017 the Company received the formal CDTFA assessment for sales tax for tax years 2011, 2012, and 2013 in the amount of approximately $4.1 million plus applicable interest of $500,000 related to the appliance replacement programs that the Company administered on behalf of its customers on which it did not assess, collect, or remit sales tax. The Company has appealed this assessment to the CDTFA Appeals Bureau. The appeal remains in process. Interest has continued to accrue until the matter is resolved.
4 The Company’s accrual relating to the California sales tax assessment consisted of the following:
December 31,
2022
Accrued liability - CA sales tax assessment $ 4,132 
Accrued liability - interest on CA sales tax assessment 2,132 
Total $ 6,264 
5 The Company’s short-term debt consisted of the following:
December 31,
2022
Gulf Coast Bank and Trust Company $ 4,206 
Gulf Coast Bank and Trust Company loan origination fees (34)
Total $ 4,172 
6 The Company’s long-term debt consisted of the following:
December 31,
2022
KLC Financial $ 1,781 
KLC Financial loan origination fees (61)
Total 1,720 
Less current portion (381)
Total $ 1,339 
Related Party ICG Note
On August 28, 2019, ARCA Recycling entered into and delivered to Isaac Capital Group LLC (“ICG”) a secured revolving line of credit promissory note, whereby ICG agreed to provide ARCA Recycling with a $2.5 million revolving credit facility (the “ICG Note”). The ICG Note originally matured on August 28, 2020. On August 25, 2020, the ICG Note was amended to extend the maturity date to December 31, 2020. On March 30, 2021, ARCA Recycling entered into a Second Amendment and Waiver (the “Second Amendment”) to the ICG Note to further extend the maturity date to August 18, 2021 and waive certain defaults under the ICG Note. The ICG Note bears interest at 8.75% per annum and provides for the payment of interest, monthly in arrears. ARCA Recycling will pay a loan fee of 2.0% on each borrowing made under the ICG Note. In connection with entering into the ICG Note, the Borrower also entered into a security agreement in favor of the Lender, pursuant to which ARCA Recycling granted a security interest in all of its assets to the Lender.
The obligations of ARCA Recycling under the ICG Note are guaranteed by the Company. The foregoing transaction did not include the issuance of any shares of the Company’s common stock, warrants, or other derivative securities. As of January 1, 2022, the balance due on ICG Note was $1.0 million. Beginning in April 2022, the revolving credit facility was converted to a term note that amortized ratably through its maturity date of March 2026. The principal amount of the note was $1.0 million, and was to bear interest at 8.75% per annum. Monthly payments on this note were approximately $24,767. ICG is a record and beneficial owner of 13.6% of the outstanding common stock of the Company. Jon Isaac is the manager and sole member of ICG, and the son of Tony Isaac, the Chief Executive Officer of JanOne and, previously, ARCA Recycling.
7 The Company’s related party debt consisted of the following:
December 31,
2022
Isaac Capital Group LLC $ 838 
Total 838 
Less current portion (233)
Total $ 605 
In accordance with the provisions of ASC 205-20, the Company has not included in the results of continuing operations the results of operations of the discontinued operations in the consolidated statements of operations and comprehensive income (loss). The results of operations for these entities for the 13 and 39 weeks ended September 30, 2023 and October 1, 2022, respectively, have been reflected as discontinued operations in the consolidated statements of operations and comprehensive income (loss) and consist of the following:
13 Weeks Ended 39 Weeks Ended
September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022
Revenues $ —  $ 8,587  $ 3,795  $ 28,449 
Cost of revenues —  7,553  3,992  23,913 
Gross profit —  1,034  (197) 4,536 
Operating expenses from discontinued operations:
Selling, general and administrative expenses $ —  $ 2,248  1,469  6,761 
Gain on sale of GeoTraq —  —  (15,824) (10,241)
Total operating expenses from discontinued operations —  2,248  (14,355) (3,480)
Operating income from discontinued operations —  (1,214) 14,158  8,016 
Other income (expense) from discontinued operations
Interest expense, net —  (280) (181) (698)
Loss on litigation settlement —  —  —  (115)
Other income (expense), net —  (688) (1) (1,685)
Total other income (loss), net —  (968) $ (182) $ (2,498)
Income before provision for income taxes from discontinued operations —  (2,182) 13,976  5,518 
Income tax provision (benefit) (28) 16  3,158  23 
Net income from discontinued operations $ 28  $ (2,198) $ 10,818  $ 5,495 
In accordance with the provisions of ASC 205-20, the Company has separately reported the cash flow activity of the discontinued operations in the consolidated statements of cash flows. The cash flow activity from discontinued operations for the 39 weeks ended September 30, 2023 and October 1, 2022 have been reflected as discontinued operations in the consolidated statements of cash flows and consist of the following:
39 weeks ended
September 30, 2023 October 1, 2022
DISCONTINUED OPERATING ACTIVITIES:
Net income (loss) from discontinued operations 10,818  5,495 
Depreciation and amortization 96  344 
Amortization of debt issuance costs 11  10 
Amortization of right-of-use assets 53  54 
Change in deferred taxes 3,157  — 
Gain on sale of ARCA, net of cash (15,967) — 
Gain on sale of GeoTraq —  (10,241)
Changes in assets and liabilities:
Accounts receivable 2,932  (1,165)
Inventories 299  899 
Prepaid expenses and other current assets 55  248 
Accounts payable and accrued expenses 866  1,692 
Other assets —  (43)
Net cash provided by operating activities from discontinued operations $ 2,320  $ (2,707)
DISCONTINUED INVESTING ACTIVITIES:
Purchases of property and equipment (123) (736)
Purchase of intangible assets (33) (214)
Net cash used in investing activities from discontinued operations $ (156) $ (950)
DISCONTINUED FINANCING ACTIVITIES:
Proceeds from note payable 5,162  4,052 
Payment on related party note (38) (107)
Proceeds from issuance of short-term notes payable (7,291) — 
Payments on notes payable (45) (559)
Net cash used in financing activities from discontinued operations $ (2,212) $ 3,386 
Effect of changes in exchange rate on cash and cash equivalents (5) — 
DECREASE IN CASH AND CASH EQUIVALENTS (53) (271)
CASH AND CASH EQUIVALENTS, beginning of period 53  704 
CASH AND CASH EQUIVALENTS, end of period $ —  $ 433