JanOne Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Sale of Recycling Subsidiaries

Sale of Recycling Subsidiaries

12 Months Ended

Dec. 30, 2023

Discontinued Operations and Disposal Groups [Abstract]

On March 9, 2023, the Company entered into a Stock Purchase Agreement (the “Recycling Purchase Agreement”) with VM7 Corporation, a Delaware corporation (“VM7”), under which it agreed to acquire all of the outstanding equity interests of the Recycling Subsidiaries: (a) ARCA Recycling, (b) ARCA Canada, and (c) Connexx. The principal of VM7 is Virland A. Johnson, our Chief Financial Officer. The sale of all of the outstanding equity interests of the Recycling Subsidiaries to VM7 under the Recycling Purchase Agreement was consummated simultaneously with the execution of the Recycling Purchase Agreement. The Company’s Board of Directors unanimously approved the Recycling Purchase Agreement and the Disposition Transaction. The Recycling Purchase Agreement is retroactively effective as of March 1, 2023.

The economic aspects of the Disposition Transaction are: (i) the Company reduced the liabilities on its consolidated balance sheets by approximately $17.6 million, and includes those liabilities related to the California Business Fee and Tax Division; (ii) the Company will receive not less than $24.0 million in aggregate monthly payments from VM7, which payments are subject to potential increase due to the Recycling Subsidiaries’ future performance; and (iii) during the next five years, the Company may request that VM7 prepay aggregate monthly payments in the aggregate amount of $1 million. The Company also received one thousand dollars for the equity of each of the Recycling Subsidiaries at the closing. Each monthly payment is to be the greater of (a) $140,000 (or $100,000 for each January and February during the 15-year payment period) or (b) a monthly percentage-based payment, which is an amount calculated as follows: (i) 5% of the Recycling Subsidiaries’ aggregate gross revenues up to $2,000,000 for the relevant month, plus (ii) 4% of the Recycling Subsidiaries’ aggregate gross revenues between $2,000,000 and $3,000,000 for the relevant month, plus (iii) 3% of the Recycling Subsidiaries aggregate gross revenues over $3,000,000 for the relevant month. VM7 will receive credit toward the payment of the first monthly payment (March of 2023) for any payments, distributions, or cash dividends paid by any of the Recycling Subsidiaries to the Company on or after March 9, 2023. Additionally, upon settlement of the continuing dispute between ARCA Recycling and the California Business Fee and Tax Division (as to which settlement, there can be no assurance), ARCA Recycling will pay to the Company 50% of the amount of the reduction between the current assessment and any such settlement.

The minimum consideration to be received by the Company from the Disposition Transaction, as discussed above, is $1.6 million per year for 15 years, or $24.0 million in the aggregate, plus cash of $3,000 paid at close. In connection with the Disposition Transaction, the Company used a discount rate of 20% when it valued the aggregate minimum consideration. Management determined that discount rate appropriately addresses any risk that the minimum payments would not be received. The valuation, factoring in that discount rate, yielded a present value of approximately $6.0 million, which, in addition to the $3,000 paid at close, comprises the approximately $6.0 million of net consideration. Additionally, the calculation of the gain on disposition includes the book value in excess of assets disposed of, or approximately $9.8 million.

During the fourth quarter of fiscal 2023, VM7 determined that, after expending significant amounts of time and resources, it was unable to obtain sufficient equity or debt financing to continue the operations of the Recycling Subsidiaries. Accordingly, the Company was advised that the operations of the Recycling Subsidiaries were wound down and, ultimately, ceased. Because the Company did not receive all of the economic benefits of the Disposition Transaction and understand that it will not receive any future benefits of the Disposition Transaction, the Company determined to fully impair the $5.3 million carrying value of the Disposition Transaction on our balance sheet. The Company also determined not to exercise any of its remedies under the Recycling Purchase Agreement so that the Company could maintain its focus on its clinical-stage biopharmaceutical activities. In connection with the shutdown of the Recycling Subsidiaries, because the Company is a guarantor on the Gulf Coast Bank and Trust credit facility (see Note 6), the Company recorded a liability for approximately $1.7 million for estimated liability associated with this facility, which has been offset against the gain on the sale the Recycling Subsidiaries. Further, the Company has recorded additional liabilities, in the amount of approximately $2.0 million, that were originally associated with the sale of the Recycling Subsidiaries and have reverted to the Company, which has been offset against the gain on the sale the Recycling Subsidiaries. See Note 18.

The preliminary calculation of the gain on sale was approximately $15.8 million. The following table details the final calculation of the gain on sale of the Recycling Subsidiaries, as shown on the income statement (in $000’s):


Total minimum consideration	$	6,023
Payment from buyer	3
Net consideration	$	6,026
Accounts payable	5,323
Accrued liabilities	1,857
Accrued liabilities - California state sales tax	6,320
Lease liabilities	5,285
Debt	2,139
Accumulated other comprehensive loss	(604)
Total disposal of liabilities	20,320
Total consideration	26,346
Cash	145
Accounts receivable	4,884
Inventory	67
Property, plant and equipment	2,767
Intangible assets	732
Right-of-use assets	5,075
Other assets	574
Total disposal of assets	14,244
Total gain on sale	$	12,102

Note 5: GeoTraq

Sale of GeoTraq

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. The aggregate purchase price for the GeoTraq Assets was $13.5 million, payable in cash and shares of SPYR’s common stock. As of the closing of the transaction on May 24, 2022, SPYR issued to the Company 30,000,000 shares of its common stock at $0.03 per share, and delivered a five-year Promissory Note in the principal amount of $12.6 million. The Promissory Note bears simple interest at the rate of 8% per annum, provides quarterly interest payments due the first day of each calendar quarter, and may be prepaid at any time without penalty. Quarterly interest payments may be remitted in either restricted shares of common stock or restricted shares of Series G Convertible Preferred Stock of SPYR, or in cash. The Promissory Note matures on May 24, 2027.

In connection with the Asset Purchase Agreement, the Company employed an independent third-party firm to assess the fair value of the 30,000,000 shares of SPYR stock and the Promissory Note. The assessment determined that the fair market value of the SPYR common stock was approximately $946,000, or approximately $0.032 per share, which was approximately $46,000 greater than the amount of the shares received at close. The Promissory Note was valued at approximately $11.3 million, which was approximately $1.4 million less than the Note issued. Consequently, the Company recorded the shares of SPYR stock at fair market value of $946,000, and recorded a discount offsetting the Promissory Note in the amount of $1.35 million. The discount will be accreted ratably over the term of the Promissory Note, and recorded as interest income. Additionally, approximately $105,000 in GeoTraq inventory was transferred as part of the sale, and was, thus, derecognized.

As of December 31, 2022, based on declining financial trends at SPYR, the Company reviewed the original valuation of the Promissory Note to determine whether a revision of the estimate of the original 10.5% used to discount the note should occur to account for the additional risk the note would not be repaid. In connection with this review, the Company determined that the discount rate should be revised to 14.5%. Consequently, the Company took an additional $1.85 million charge against income for the 13 and 26 weeks ended July 2, 2022, and restated its Quarterly Reports on Form 10-Q for the 13 and 26 weeks ended July 2, 2022, and the 13 and 39 weeks ended October 1, 2022. Additionally, due to the declining financial trends at SPYR, the Company recorded an additional $813,000 charge against income for the year ended

December 31, 2022. No additional charges against income have been recorded by the Company for the year ended December 30, 2023.

The following table illustrates the calculation of the gain on sale of GeoTraq, including the charges to income referenced above, as shown on the income statement (in $000’s):


Purchase price	$	13,500
Discount on note receivable	(4,013)
Premium on shares received	46
Derecognition of GeoTraq inventory	(105)
Gain on sale	$	9,428

At December 30, 2023, the Company performed a qualitative analysis of the SPYR note receivable and concluded that, due to a number of triggering factors, it was probable that SPYR would be unable to fulfill its obligation to repay the principal amount under the promissory note on or before the maturity date. Consequently, as of December 30, 2023, the Company recorded a charge to fully impair the promissory note (see Note 8).

Discontinued Operations

As of December 30, 2023, the Company discontinued operations of its Recycling and Technology segments as follows:

On March 9, 2023, the Company executed a Recycling Purchase Agreement with VM7, under which, as of March 1, 2023, it agreed to acquire all of the outstanding equity interests of the Recycling Subsidiaries, consisting of (a) ARCA Recycling, (b) ARCA Canada, and (c) Connexx. The principal of VM7 is Virland A. Johnson, our Chief Financial Officer. The sale of all of the outstanding equity interests of the Recycling Subsidiaries to VM7 under the Recycling Purchase Agreement was consummated simultaneously with the execution of the Recycling Purchase Agreement. See Note 4. The assets and liabilities for the Recycling Subsidiaries were included in discontinued operations December 31, 2022, but were not included at December 30, 2023.

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 30, 2023 or 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 (in $000’s):


	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 (in $000’s):


	Useful Life (Years)	December 31, 2022
Buildings and improvements	3 - 30	$	69
Equipment	3 - 15	2,556
Projects under construction		1,447
Property and equipment		4,072
Less accumulated depreciation		(1,367)
Total property and equipment, net, from discontinued operations		$	2,705

Depreciation expense was approximately $60,000 and $326,000 for the year ended December 30, 2023 and December 31, 2022, respectively.

2 The Company’s intangible assets consisted of the following (in $000’s):


	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 approximately $36,000 and $229,000 for the year ended December 30, 2023 and December 31, 2022, respectively.

3 The Company’s accrued liabilities consisted of the following (in $000’s):


	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 (in $000’s):


	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 (in $000’s):


	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 (in $000’s):


	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 the ICG Note were approximately $24,767.

7 The Company’s related party debt consisted of the following (in $000’s):


	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 year ended December 30, 2023 and December 31, 2022, respectively, have been reflected as discontinued operations in the consolidated statements of operations and comprehensive income (loss) and consist of the following (in $000’s):


	December 30, 2023		December 31, 2022
Revenues	$	3,795	$	39,611
Cost of revenues	3,992		31,992
Gross profit	(197)		7,619
Operating expenses from discontinued operations:
Selling, general and administrative expenses	1,467		8,652
Gain on sale of ARCA	(12,102)		—
Gain on sale of GeoTraq	—		(9,428)
Total operating expenses from discontinued operations	(10,635)		(776)
Operating income from discontinued operations	10,438		8,395
Other expense from discontinued operations
Interest expense, net	(181)		(957)
Loss on litigation settlement	—		(1,008)
Other expense, net	(3)		(1,349)
Total other expense, net	(184)		(3,314)
Income before provision for income taxes from discontinued operations	10,254		5,081
Income tax provision	971		2,109
Net income from discontinued operations	$	9,283	$	2,972

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 year ended December 30, 2023 and December 31, 2022 have been reflected as discontinued operations in the consolidated statements of cash flows and consist of the following (in $000’s):


	December 30, 2023		December 31, 2022
DISCONTINUED OPERATING ACTIVITIES:
Net income from discontinued operations	9,283		2,972
Depreciation and amortization	96		555
Amortization of debt issuance costs	11		31
Loss on litigation settlement	—		1,009
Amortization of right-of-use assets	52		55

Gain on sale of ARCA, net of cash	(12,248)		—
Gain on sale of GeoTraq	—		(9,428)
Changes in assets and liabilities:
Accounts receivable	2,932		1,482
Inventories	299		738
Prepaid expenses and other current assets	56		583
Accounts payable and accrued expenses	1,837		(454)
Other assets	1		(44)
Net cash provided by (used in) operating activities from discontinued operations	$	2,319	$	(2,501)
DISCONTINUED INVESTING ACTIVITIES:
Purchases of property and equipment	(123)		(808)
Purchase of intangible assets	(32)		(701)
Net cash used in investing activities from discontinued operations	$	(155)	$	(1,509)
DISCONTINUED FINANCING ACTIVITIES:
Proceeds from note payable	5,162		17,545
Payments on related party note	(38)		(162)

Payments on notes payable	(7,336)		(13,390)
Net cash used in (provided by) financing activities from discontinued operations	$	(2,212)	$	3,993
Effect of changes in exchange rate on cash and cash equivalents	(5)		(4)
DECREASE IN CASH AND CASH EQUIVALENTS	(53)		(21)
CASH AND CASH EQUIVALENTS, beginning of period	53		74
CASH AND CASH EQUIVALENTS, end of period	$	—	$	53