The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying
notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 29, 2019
(In thousands Except Per Share Amounts)
Note 1: Background
and Basis of Presentation
The accompanying consolidated financial
statements include the accounts of Appliance Recycling Centers of America, Inc., a Nevada corporation, and its subsidiaries (collectively
the “Company” or “ARCA”). The Company has two operating segments – Recycling and Technology.
ARCA provides turnkey appliance recycling
and replacement services for electric utilities and other sponsors of energy efficiency 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.
Note 2: Summary
of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Appliance Recycling Centers of America, Inc. and our wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
ARCA Recycling, Inc., 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.
On August 18, 2017, we acquired GeoTraq.
GeoTraq is engaged in the development, design, and, ultimately, we expect, sale of cellular transceiver modules, also known as
Mobile IoT modules, and associated wireless services. As a result of this transaction, GeoTraq became a wholly-owned subsidiary
and, therefore, the results of GeoTraq are included in our consolidated results as of August 18, 2017.
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 $.001 per share of common stock.
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 assumption
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 June
29, 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
June 29, 2019, and December 29, 2018, respectively.
Inventories
Appliance inventories are stated at the
lower of cost, determined on a specific identification basis, or market. Inventory raw material - chips, are stated at the lower
of average cost or market. We provide estimated provisions for the obsolescence of our appliance inventories, including adjustment
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 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 June 29, 2019 and December 29, 2018.
Right to use asset – Operating Leases
The Company adopted Accounting Standards
Update No. 2016-02,
Leases
(Topic 842) as of December 30, 2018, the beginning of our fiscal year. Using the modified retrospective
approach with transition relief, we recorded operating lease right of use assets and obligations of approximately $2,272 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.
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 lives of building and improvements
are three to thirty years, transportation equipment is three to fifteen years, machinery and equipment are five to ten years, furnishings
and fixtures are three to five years and office and computer equipment are three to five years. Depreciation expense was $24 and
$59 for the 13 weeks ended June 29, 2019 and June 30, 2018, respectively. Depreciation expense was $104 and $120 for the 26 weeks
ended June 29, 2019 and June 30, 2018, respectively.
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:
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A significant decrease in the market price of a long-lived asset (asset group);
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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;
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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;
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An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group);
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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,
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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.
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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.
We performed intangible asset impairment
testing as of June 29, 2019. Based on the testing, there was no impairment of intangibles as of June 29, 2019.
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. Intangible amortization expense is $933 and $932 for the 13 weeks ended June 29, 2019 and June 30, 2018, respectively.
Intangible amortization expense is $1,866 and $1,864 for the 26 weeks ended June 29, 2019 and June 30, 2018, respectively.
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, cooper 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:
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a.
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Identification of the contract, or contracts, with a customer,
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b.
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Identification of the performance obligations in the contract,
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Determination of the transaction price,
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Allocation of the transaction price to the performance obligations in the contract, and
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Recognition of revenue when, or as, we satisfy a performance obligation.
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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.
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 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.
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 June 29, 2019 and December 29, 2018.
Practical Expedients and Exemptions:
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a.
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Taxes collected from customers and remitted to government authorities and that are related to sales of our products are excluded from revenues.
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b.
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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.
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c.
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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.
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Revenue recognized for Company contracts
- $6,835 and $7,396 for the 13 weeks ended June 29, 2019 and June 30, 2018, respectively. Revenue recognized for Company contracts
- $12,506 and $15,218 for the 26 weeks ended June 29, 2019 and June 30, 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 $345 and $211 for the 13 weeks ended June 29, 2019 and June 30, 2018, respectively. Advertising
expense totaled $455 and $367 for the 26 weeks ended June 29, 2019 and June 30, 2018, respectively.
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 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. We adopted ASC 842
Leases
at the beginning of our fiscal year, December 30, 2018. 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 $2,272 Right of Use asset and corresponding
liability. 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.
The Company has no new leases as of June
29, 2019 that are not reflected in the numbers above.
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.
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 31 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 two reportable segments (See Note 25).
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 June 29, 2019. At times, balances may exceed federally insured limits.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09,
Revenue from Contracts with Customers
ASU 2014-09, which supersedes nearly all existing revenue
recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services
are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those
goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and
estimates may be required. The standard is effective for annual periods beginning after December 15, 2016, and interim periods
therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the
standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach
with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote
disclosures). Early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-04,
Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date.
The amendment in this ASU defers the effective date of ASU
No. 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting
periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is
permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that
reporting period.
In March 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-08,
Revenue from Contracts
with Customers
. The standard addresses the implementation guidance on principal versus agent considerations in the new revenue
recognition standard. The ASU clarifies how an entity should identify the unit of accounting (i.e. the specified good or service)
for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements.
Subsequently, the FASB has issued the following
standards related to ASU 2014-09 and ASU No. 2016-08: ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing
(“ASU 2016-10”); ASU No. 2016-12,
Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”); ASU No. 2016-20,
Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
(“ASU 2016-20”); and, ASU
2017-05—
Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying
the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
(“ASU 2017-05).
The Company must adopt ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-05 with ASU 2014-09 (collectively, the “new revenue
standards”). The Company has evaluated the provisions of the new revenue standards. We transitioned to the new revenue standards
using the modified retrospective method effective December 30, 2017 and did not have a significant impact on our consolidated
results of operations, financial condition and cash flows.
In September 2014, the FASB issued ASU
No. 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going Concern
. The standard requires an entity’s management to determine
whether substantial doubt exists regarding the entity’s ability to continue as a going concern. The amendments denote how
and when companies are obligated to disclose going concern uncertainties, which are required to be evaluated every interim and
annual period. If management determines that substantial doubt exists, particular disclosures are required. The extent of these
disclosures is dependent upon management’s evaluation of mitigation of the going concern uncertainty. ASU 2014-15 applies
prospectively to annual periods ending after December 15, 2016 and to interim and annual periods thereafter. The Company has adopted
this guidance during its 2017 fiscal year, and it did not have a significant impact on the disclosures to the consolidated financial
statements.
In September 2015, the FASB issued ASU
No. 2015-16, Business Combinations (Topic 805). Topic 805 requires that an acquirer retrospectively adjust provisional amounts
recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional
amounts, the amendments in the update require that the acquirer recognize adjustments to provisional amounts that are identified
during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to
also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization,
or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been
completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement
or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item
that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as
of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The Company has adopted this guidance
during its 2017 fiscal year and it did not have a significant impact on its consolidated results of operations, financial condition
and cash flows.
ASU 2016-02,
Leases (Topic 842)
.
The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing a right to
use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018, with early adoption permitted. The Company has adopted this guidance during its
first fiscal quarter ending March 30, 2019 and it did have a significant financial impact on its consolidated financial condition.
Adoption did not have a significant financial impact on its consolidated statement of operations and cash flows.
ASU 2017-09,
Compensation- Stock Compensation
(Topic 718): Scope of Modification Accounting
, clarifies such that an entity must apply modification accounting to changes
in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the
modified award is the same as the fair value of the original award immediately before the modification. The ASU indicates that
if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required
to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same
as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified
award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before
the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods
within those years. Early adoption is permitted, including adoption in an interim period. We adopted ASU 2017-09 as of the beginning
of fiscal year 2018 and it did not have a significant impact on its consolidated results of operations, financial condition
and cash flows.
In July 2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivative and Hedging (Topic 815). The
standard is intended to simplify the accounting for certain financial instruments with down round features. This ASU changes the
classification analysis of particular equity-linked financial instruments (e.g. warrants, embedded conversion features) allowing
the down round feature to be disregarded when determining whether the instrument is to be indexed to an entity’s own stock.
Because of this, the inclusion of a down round feature by itself exempts an instrument from having to be remeasured at fair value
each earnings period. The standard requires that entities recognize the effect of the down round feature on EPS when it is triggered
(i.e., when the exercise price is adjusted downward due to the down round feature) equivalent to the change in the fair value of
the instrument instantly before and after the strike price is modified. An adjustment to diluted EPS calculation may be required.
The standard does not change the accounting for liability-classified instruments that occurred due to a different feature or term
other than a down round feature. Additionally, entities must disclose the presence of down round features in financial instruments
they issue, when the down round feature triggers a strike price adjustment, and the amount of the adjustment necessary. ASU 2017-11
is effective for all fiscal years beginning after December 15, 2018. The Company decided to early adopt ASU 2017-11 and it did
not have a significant impact on its consolidated results of operations, financial condition and cash flows.
Note 3: Comprehensive
Income
Comprehensive income is the sum of net
income and other items that must bypass the income statement because they have not been realized, including items like an unrealized
holding gain or loss from available for sale securities and foreign currency translation gains or losses. For the 13 and 26 weeks
ended June 29, 2019 and June 30, 2018, our comprehensive income includes foreign currency translation gains and losses.
Note 4: 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. On March 12, 2018, the Company reincorporated
from Minnesota to Nevada. The State of Nevada requires a stated par value, which the Company fixed at $.001 per share. On April
22, 2019, the amounts for common stock and additional paid in capital for fiscal year 2018 have been reclassified to reflect a
Reverse Stock Split.
Note 5: Trade
and other receivables
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
Trade receivables, net
|
|
$
|
5,306
|
|
|
$
|
5,064
|
|
Factored accounts receivable
|
|
|
(1,758
|
)
|
|
|
(582
|
)
|
Prestige Capital reserve receivable
|
|
|
214
|
|
|
|
106
|
|
Due from Recleim
|
|
|
819
|
|
|
|
819
|
|
Other receivables
|
|
|
289
|
|
|
|
397
|
|
Trade and other receivables, net
|
|
$
|
4,870
|
|
|
$
|
5,804
|
|
Trade accounts receivable
|
|
$
|
3,623
|
|
|
$
|
3,350
|
|
Un-billed trade receivables
|
|
|
1,712
|
|
|
|
1,743
|
|
A/R Reserve
|
|
|
(29
|
)
|
|
|
(29
|
)
|
Total trade receivables, net
|
|
$
|
5,306
|
|
|
$
|
5,064
|
|
Note 6: Inventory
Appliances held for sale are stated at
the lower of cost, determined on a specific identification basis, or market. Inventory raw material - chips, are stated at the
lower of average cost or market. Total inventory consists of the following as of June 29, 2019 and December 29, 2018:
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
Appliances held for resale
|
|
$
|
818
|
|
|
$
|
801
|
|
Inventory - raw material - chips
|
|
|
200
|
|
|
|
–
|
|
Total inventory
|
|
$
|
1,018
|
|
|
$
|
801
|
|
We provide estimated provisions for the
obsolescence of 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 aging reports and margin analyses
in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded. At June 29,
2019 and December 29, 2018, we do not have an inventory reserve.
Note 7: Prepaids
and other current assets
Prepaids and other current assets as of June 29, 2019 and December
29, 2018 consist of the following:
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
Prepaid insurance
|
|
$
|
585
|
|
|
$
|
271
|
|
Prepaid rent
|
|
|
20
|
|
|
|
–
|
|
Prepaid consulting fees
|
|
|
145
|
|
|
|
265
|
|
Prepaid other
|
|
|
110
|
|
|
|
81
|
|
Total prepaid expenses and other current assets
|
|
$
|
860
|
|
|
$
|
617
|
|
Note 8: Note receivable
– Sale of Discontinued Operations
On December 30, 2017, we signed an agreement
to dispose of our retail appliance segment. ApplianceSmart Holdings LLC (the “Purchaser”), a wholly owned subsidiary
of Live Ventures Incorporated, entered into a Stock Purchase Agreement (the “Agreement”) with the Company and ApplianceSmart,
then a subsidiary of the Company. Pursuant to the Agreement, the Purchaser purchased from the Company all the issued and outstanding
shares of capital stock (the “Stock”) of ApplianceSmart in exchange for $6,500 (the “Purchase Price”).
The Purchase Price per the Agreement was due and payable on or before March 31, 2018. As of December 30, 2017, the Company had
an amount due from the Purchaser in the amount of $6,500 recorded as a current asset. Subsequent to December 30, 2017, ApplianceSmart
assumed $1,901 in liabilities from the Company.
Between March 31, 2018 and April 24, 2018,
the Purchaser and the Company negotiated in good faith the method of payment of the remaining outstanding balance of the Purchase
Price. On April 25, 2018, the Purchaser delivered to the Company a promissory note (the “ApplianceSmart Note”) in the
original principal amount of $3,919 (the “Original Principal Amount”), as such amount may be adjusted per the terms
of the ApplianceSmart Note. The ApplianceSmart Note is effective as of April 1, 2018 and matures on April 1, 2021 (the “Maturity
Date”). The ApplianceSmart Note bears interest at 5% per annum with interest and principal payable at the Maturity Date.
ApplianceSmart provided the Company a guaranty of repayment of the ApplianceSmart Note. The Purchaser may reborrow funds, and pay
interest on such re-borrowings, from the Company up to the Original Principal Amount.
On December 26, 2018, the ApplianceSmart
Note was amended and restated to grant ARCA a security interest in the assets of the Purchaser, ApplianceSmart, and ApplianceSmart
Contracting Inc. in exchange for modifying the repayments terms to provide for the payment in full of all accrued interest and
principal on April 1, 2021, the maturity date of the ApplianceSmart Note.
On March 15, 2019, the Company entered
into agreements with third parties pursuant to which it agreed to subordinate the payment of indebtedness under the ApplianceSmart
Note and the Company’s security interest in the assets of ApplianceSmart in exchange for a prepayment of up to $1,200. ApplianceSmart
paid $1,200 to the Company as follows: $100 on March 29, 2019, $250 on April 5, 2019 and $850 on April 15, 2019, in each case as
principal prepayments on the ApplianceSmart Note – see Note 26.
The outstanding balance of the ApplianceSmart
Note at June 29, 2019 and December 29, 2018 was $2,719 and $3,837, respectively.
Note 9: Property
and Equipment
Property and equipment as of June 29, 2019 and December 29,
2018 consist of the following:
|
|
Useful Life (Years)
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
Buildings and improvements
|
|
18-30
|
|
$
|
68
|
|
|
$
|
67
|
|
Equipment (including computer software)
|
|
3-15
|
|
|
6,267
|
|
|
|
6,049
|
|
Projects under construction
|
|
|
|
|
125
|
|
|
|
58
|
|
Property and equipment
|
|
|
|
|
6,460
|
|
|
|
6,174
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(5,720
|
)
|
|
|
(5,557
|
)
|
Total property and equipment, net
|
|
|
|
$
|
740
|
|
|
$
|
617
|
|
Property and equipment are stated at cost.
We compute depreciation using straight-line method over a range of estimated useful lives from 3 to 30 years. We amortize leasehold
improvements on a straight-line basis over the shorter of their estimated useful lives or the underlying lease term. Repair and
maintenance costs are charged to operations as incurred.
Depreciation expense was $24 and $59 for
the 13 weeks ended June 29, 2019 and June 30, 2018, respectively. Depreciation expense was $104 and $120 for the 26 weeks ended
June 29, 2019 and June 30, 2018, respectively.
Note 10: Right to Use
Asset – Operating Leases
We adopted ASC 842 as of the beginning
of our fiscal year. The adoption of this new accounting standard required us to recognize a Right of Use Assets for our operating
leases of $2,272. The amount recorded is the present value of all remaining lease payments for leases with terms greater than 12
months. The right of use asset is offset by a corresponding liability. The discount rate is based on an estimate of our incremental
borrowing rate for terms similar to our lease terms at the time of lease commencement. The asset will be amortized over remaining
lease terms. See the Note 2 Lease Accounting.
Note 11: Intangible Assets
Intangible assets as of June 29, 2019 and December 29, 2018
consist of the following:
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
Intangible assets GeoTraq, net
|
|
$
|
19,103
|
|
|
$
|
20,969
|
|
Patent
|
|
|
19
|
|
|
|
19
|
|
Total intangible assets
|
|
$
|
19,122
|
|
|
$
|
20,988
|
|
The useful life and amortization period
of the GeoTraq intangible acquired is seven years. Intangible amortization expense was $933 and $932 for the 13 weeks ended June
29, 2019 and June 30, 2018, respectively. Intangible amortization expense was $1,866 and $1,864 for the 26 weeks ended June 29,
2019 and June 30, 2018, respectively.
On August 18, 2017, the Company acquired
all of the assets and capital stock of GeoTraq by way of merger, the result of which GeoTraq became a wholly-owned subsidiary
of the Company.
The final fair value of the single identifiable
intangible asset acquired in the GeoTraq acquisition is a U.S. patent USPTO reference No. 10,182,402 titled “Locator Device
with Low Power Consumption” together with the assignment of intellectual property that included historical know-how, designs
and related manufacturing procedures was $26,097, which included the deferred income tax liability associated with the intangible
asset. Total consideration paid in connection with the acquisition of GeoTraq consisted of $200 in cash, unsecured promissory notes
bearing interest at the annual rate of 1.29% maturing on August 18, 2018 in the aggregate principal of $800, and 288,588 shares
(exact number) of Series A Preferred Stock (as defined below) with a final fair value of $14,963. See Note 19 – Series A-1
Preferred Stock. In connection with the acquisition, an additional intangible asset amount was recorded in the amount of $10,134
and an offsetting deferred tax liability recorded of the same amount, $10,134, to reflect the future tax liability attributable
to the GeoTraq asset acquired. There were no other assets acquired or liabilities assumed.
At the time of the acquisition of GeoTraq,
GeoTraq had no business operations, one intangible asset and historical know-how and designs. GeoTraq is in the development stage.
The Company elected to early adopt ASU 2017-01
Business Combinations
(Topic 805), which clarifies the definition of a business
for purposes of applying ASC 805. The Company has determined that GeoTraq is a single or group of related assets, not a business
as clarified by ASU 2017-01 at the time of acquisition.
Note 12: Deposits
and other assets
Deposits and other assets as of June 29,
2019 and December 29, 2018 consist of the following:
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
Deposits
|
|
$
|
191
|
|
|
$
|
561
|
|
Other
|
|
|
90
|
|
|
|
100
|
|
Total deposits and other assets
|
|
$
|
281
|
|
|
$
|
661
|
|
Deposits are primarily refundable security deposits with landlords
the Company leases property from.
Note 13: Accrued
Liabilities
Accrued liabilities as of June 29, 2019 and December 29, 2018
consist of the following:
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
Compensation and benefits
|
|
$
|
656
|
|
|
$
|
567
|
|
Accrued incentive and rebate checks
|
|
|
590
|
|
|
|
316
|
|
Accrued rent
|
|
|
–
|
|
|
|
16
|
|
Other
|
|
|
168
|
|
|
|
219
|
|
Total accrued expenses
|
|
$
|
1,414
|
|
|
$
|
1,118
|
|
Note 14: Accrued
Liability – California Sales Tax
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
Accrued liability - CA sales tax
|
|
$
|
4,609
|
|
|
$
|
4,722
|
|
We operate in fourteen states in the U.S.
and in various provinces in Canada. From time to time, we are subject to sales and use tax audits that could result in additional
taxes, penalties and interest owed to various taxing authorities.
As previously disclosed, the California
Board of Equalization (“BOE”) conducted a sales and use tax examination covering the Company’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 BOE 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 California Board of Equalization’s Managed Audit
Program. The period covered under this program included years 2011, 2012, 2013 and extended through the nine-month period ended
September 30, 2014.
On April 13, 2017 the Company received
the formal BOE assessment for sales tax for tax years 2011, 2012 and 2013 in the amount of $4.1 million plus applicable interest
of $0.5 million related to the appliance replacement programs that we administered on behalf of our customers on which we did not
assess, collect or remit sales tax. The Company has appealed this assessment and continues to engage the services of our existing
retained sales tax experts throughout the appeal process. The BOE tax assessment is subject to protest and appeal and would not
need to be funded until the matter has been fully resolved through the appeal process. Upon resolution of the protest and appeal
process, payment of any resulting tax assessment must be made within twenty-four months.
A settlement proposal was filed on February
22, 2019. Representatives of the Company have attended multiple settlement conferences to date and have another scheduled settlement
conference in late August 2019 in an attempt to resolve the matter.
Note 15: Income
Taxes
Our overall effective tax rate was 24.16%
for the 26 weeks ended June 29, 2019, and we recorded a positive tax provision benefit of $1,093 against a pre-provision loss of
$4,492. Our overall effective tax rate was 22.8% for the 26 weeks ended June 30, 2018, and we had a positive tax provision benefit
of $854 against a pre-provision loss of $3,738. The effective tax rates and related provisional tax amounts vary from the U.S.
federal statutory rate due to state taxes, foreign taxes, share-based compensation, valuation allowance, and certain non-deductible
expenses.
We regularly evaluate both positive and
negative evidence related to retaining a valuation allowance against certain deferred tax assets. The realization of deferred tax
assets is dependent upon sufficient future taxable income during the periods when deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. We have concluded based on the weight of evidence that a valuation allowance
should be maintained against certain deferred tax assets that we do not expect to utilize in the near future. The Company continues
to have a full valuation allowance against its Canadian operations.
Note 16: Short Term
Debt
Short term debt and other financing obligations
as of June 29, 2019 and December 29, 2018, consist of the following:
|
|
June 29, 2019
|
|
|
December 29, 2018
|
|
AFCO Finance
|
|
$
|
561
|
|
|
$
|
193
|
|
GE 8% loan agreement
|
|
|
482
|
|
|
|
482
|
|
Debt issuance costs EEI, net
|
|
|
(345
|
)
|
|
|
(419
|
)
|
Total short term debt
|
|
$
|
698
|
|
|
$
|
256
|
|
AFCO Finance
On June 16, 2017, we entered into
a financing agreement with AFCO Credit Corporation (“AFCO”) purchased through Marsh Insurance to fund the annual premiums
due June 1, 2017 on our insurance policies. These policies relate to workers’ compensation and various liability policies
including, but not limited to, General, Auto, Umbrella, Property, and Directors’ and Officers’ insurance. The total
amount of the premiums financed was $1,070 with an interest rate of 3.567%. An initial down payment of $160 was paid on June 16,
2017 and an additional 10 monthly payments of $92 were made beginning July 1, 2017 and ending April 1, 2018. The June 16, 2017
AFCO agreement had a zero balance as of December 29, 2018.
On July 2, 2018, we entered into another
financing agreement with AFCO purchased through Marsh Insurance to fund the annual premiums on insurance policies due June 1, 2018.
These policies related to workers’ compensation and various liability policies including, but not limited to, General, Auto,
Umbrella, Property, and Directors’ and Officers’ insurance. The total amount of the premiums financed was $556 with
an interest rate of 4.519%. An initial down payment of $56 was due before July 1, 2018 with additional monthly payments of: $57
made beginning July 1, 2018 and ending September 1, 2018; and $65 made beginning October 1, 2018 and ending March 1, 2019.
On June 1, 2019 we entered into two other
financing agreements with AFCO purchased through Marsh Insurance to fund annual premiums on insurance policies due June 1, 2019.
These policies related to worker’s compensation and various liability policies including but not limited to, General Auto,
Umbrella, Property, Directors’ and Officers’ insurance. The total amount of the premiums financed in aggregate was
$471 at an annual percentage rate of 4.9%. An initial down payment of $103 was due at signing with additional monthly
payments of $54 due starting on July 1, 2019 and continuing through Mach 1, 2020.
The outstanding principal due AFCO at June
29, 2019 and December 29, 2018 was $561 and $193, respectively.
GE
On August 14, 2017 as a part of the sale
of the Company’s equity interest in AAP, Recleim LLC, a Delaware limited liability company (“Recleim”), agreed
to undertake, pay or assume the Company’s GE obligations consisting of a promissory note (GE 8% loan agreement) and other
payables which were incurred after the issuance of such promissory note. Recleim has agreed to indemnify and hold ARCA harmless
from any action to be taken by GE relating to such obligations. The Company has an offsetting receivable due from Recleim. Recleim
has paid into an escrow account the money to pay the GE 8% loan agreement in full. The money will not be remitted to GE until the
outcome of the arbitration of the legal matter described below.
On November 15, 2016, ARCA served an arbitration
demand on Haier US Appliance Solutions, Inc., dba GE Appliances (“GEA”), alleging breach of contract and interference
with prospective business advantage. ARCA seeks over $2 million in damages. On April 18, 2017, GEA served a counterclaim for approximately
$337,000 in alleged obligations under the parties’ recycling agreement. Simultaneously with serving its counterclaim in the
arbitration, which is venued in Chicago, GEA filed a complaint in the United States District Court for the Western District of
Kentucky seeking damages of approximately $530,000 plus interest and attorneys’ fees allegedly owed under a previous agreement
between the parties. On December 12, 2017, the court stayed GEA’s complaint in favor of the arbitration. Under the terms
of ARCA’s transaction with Recleim LLC (“Recleim”), Recleim is obligated to pay GEA on ARCA’s behalf the
amounts claimed by GEA in the arbitration and in the lawsuit pending in Kentucky. Those amounts have been paid into escrow pending
the outcome of the arbitration. The arbitration is currently scheduled for October 2019.
Energy Efficiency Investments LLC
On November 8, 2016, the Company entered
into a securities purchase agreement with Energy Efficiency Investments, LLC, pursuant to which the Company agreed to issue up
to $7,732 principal amount of 3% Original Issue Discount Senior Convertible Promissory Notes of the Company and related common
stock purchase warrants. These notes may be issued from time to time, up to such aggregate principal amount, at the request of
the Company, subject to certain conditions, or at the option of Energy Efficiency Investments, LLC. Interest accrues at the rate
of 8% per annum on the principal amount of the notes outstanding from time to time, and is payable at maturity or, if earlier,
upon conversion of these notes. The principal amount of these notes outstanding at June 29, 2019 and December 29, 2018 was $0
and $0, respectively. The debt issuance costs of the EEI note are $740 and are being amortized over 60 months. The un-amortized
debt issuance costs of the EEI note as of June 29, 2019 and December 29, 2018 was $345 and $419, respectively.
Note 17: Lease
Obligations
The Company adopted ASC 842
Leases
as of December 30, 2018, the beginning of our fiscal year. Using the modified retrospective approach with transition relief, we
recorded operating lease right of use assets and obligations of approximately $2,272 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. 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. See the
Note 2 on Lease Accounting.
Total present value of lease payments
as of June 29, 2019:
2019
|
|
$
|
604
|
|
2020
|
|
|
1,067
|
|
2021
|
|
|
657
|
|
2022
|
|
|
162
|
|
2023
|
|
|
50
|
|
2024
|
|
|
–
|
|
Total
|
|
|
2,540
|
|
Interest
|
|
|
239
|
|
Present Value of Payments
|
|
$
|
2,301
|
|
Note 18: Commitments
and Contingencies
Litigation
On December 29, 2016, ARCA served a Minnesota
state court complaint for breach of contract on Skybridge Americas, Inc. (“SA”), ARCA’s primary call center vendor
throughout 2015 and most of 2016. ARCA seeks damages in the millions of dollars as a result of alleged overcharging by SA and lost
client contracts. On January 25, 2017, SA served a counterclaim for unpaid invoices in the amount of approximately $460,000 plus
interest and attorneys’ fees. On March 29, 2017, the Hennepin County district court (the “District Court”) dismissed
ARCA’s breach of contract claim based on SA’s overuse of its Canadian call center but permitted ARCA’s remaining
claims to proceed. Following motion practice, on January 8, 2018 the District Court entered judgment in SA’s favor, which
was amended as of February 28, 2018, for a total amount of $613,566, including interest and attorneys’ fees. On March 4,
2019, the Minnesota Court of Appeals (the “Court of Appeals”) ruled and (i) reversed the District Court’s judgment
in favor of Skybridge on the call center location claim and remanded the issue back to the District Court for further proceedings,
(ii) reversed the District Court’s judgment in favor of Skybridge on the net payment issue and remanded the issue to the
District Court for further proceedings, and (iii) affirmed the District Court’s judgment in Skybridge’s favor against
ARCA’s claim that Skybridge breached the contract when it failed to meet the service level agreements. As a result of the
decision by the Court of Appeals, the District Court’s award of interest and attorneys’ fees, etc. was reversed. ARCA
expects that the District Court will issue a new scheduling order providing deadlines for resumed discovery, motion practice, and
alternative dispute resolution, leading to a trial.
On November 15, 2016, ARCA served an arbitration
demand on Haier US Appliance Solutions, Inc., dba GE Appliances (“GEA”), alleging breach of contract and interference
with prospective business advantage. ARCA seeks over $2 million in damages. On April 18, 2017, GEA served a counterclaim for approximately
$337,000 in alleged obligations under the parties’ recycling agreement. Simultaneously with serving its counterclaim in the
arbitration, which is venued in Chicago, GEA filed a complaint in the United States District Court for the Western District of
Kentucky seeking damages of approximately $530,000 plus interest and attorneys’ fees allegedly owed under a previous agreement
between the parties. On December 12, 2017, the court stayed GEA’s complaint in favor of the arbitration. Under the terms
of ARCA’s transaction with Recleim LLC (“Recleim”), Recleim is obligated to pay GEA on ARCA’s behalf the
amounts claimed by GEA in the arbitration and in the lawsuit pending in Kentucky. Those amounts have been paid into escrow pending
the outcome of the arbitration. The arbitration is currently scheduled for August 2019, however the parties have agreed to mediation
in advance of the arbitration.
AMTIM Capital, Inc. (“AMTIM”)
acts as our representative to market our recycling services in Canada under an arrangement that pays AMTIM for revenues generated
by recycling services in Canada as set forth in the agreement between the parties. A dispute has arisen between AMTIM and us with
respect to the calculation of amounts due to AMTIM pursuant to the agreement. In a lawsuit filed in the province of Ontario, AMTIM
claims a discrepancy in the calculation of fees due to AMTIM by us of approximately $2.0 million. Although the outcome of this
claim is uncertain, we believe that no further amounts are due under the terms of the agreement and that we will continue to defend
our position relative to this lawsuit.
On or about July 22, 2019, Trustee Main/270,
LLC filed a lawsuit against ApplianceSmart, Inc. and ARCA in the Franklin County Common Pleas Court in Columbus, Ohio, alleging,
with respect to ApplianceSmart, default under a lease agreement and, with respect to ARCA, guaranty of lease. The complaint seeks
damages of $1,530,115, attorney fees, and other charges. ARCA is assessing all appropriate defenses to these allegations
and intends to defend itself vigorously. As of June 29, 2019, an accrual of liability is not required in ARCA’s books and
records.
Other Commitments
As previously disclosed and as discussed
in Note 8: Note receivable – Sale of Discontinued Operations, on December 30, 2017, the Company disposed of its retail appliance
segment and sold ApplianceSmart to the Purchaser. In connection with that sale, the Company has an aggregate amount of future real
property lease payments of $4,167,521, which represents amounts guaranteed or which may be owed under certain lease agreements
to third party landlords in which the Company either remains the counterparty, is a guarantor, or has agreed to remain contractually
liable under the lease (“ApplianceSmart Leases”). There are five ApplianceSmart Leases with ARCA guarantees, one terminating
December 31, 2020, April 30, 2021, August 14, 2021, December 31, 2022 and June 30, 2025, respectively.
As of June 29, 2019, it cannot be
determined either at June 29, 2019 or on a prospective basis that the Company will incur any loss related to its guarantees
for a maximum potential amount of future undiscounted lease payments of $4,167,521. The Company does not have any accrued
amount of liability associated with these future guaranteed lease payments. The ApplianceSmart Leases either have ARCA as the
contract tenant only, or in the contract reflects a joint tenancy with ApplianceSmart. ApplianceSmart is the occupant of the
ApplianceSmart Leases. ARCA does not have the right to use the ApplianceSmart lease assets and hence capitalization under ASC
842 is not required. The ApplianceSmart Leases have historically been used by ApplianceSmart for their operations and the
consideration has and is being paid by ApplianceSmart historically and in the future.
Any potential amounts paid out for ARCA
obligations and or guarantees under ApplianceSmart Leases would be recoverable to the extent there were assets available from
ApplianceSmart and added to the ApplianceSmart Note – See Notes 8 and 26. ApplianceSmart Leases are related party
transactions. ARCA divested itself of the ApplianceSmart Leases and leaseholds with the sale to Purchaser on December 30,
2017.
We are party from time to time to other
ordinary course disputes that we do not believe to be material to our financial condition as of June 29, 2019.
Note 19: Series A
Preferred Stock; Exchange for Shares of Series A-1 Preferred Stock
On August 18,
2017, the Company acquired GeoTraq by way of merger a result of which GeoTraq became a wholly-owned subsidiary of the Company.
In connection with this transaction, the Company tendered to the owners of GeoTraq $200 in cash, issued to them an aggregate of
288 shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”), and entered
into one-year unsecured promissory notes in the aggregate principal amount of $800.
To accomplish the designation and issuance
of the Series A Preferred Stock, we filed a Certificate of Designation with the Secretary of State of the State of Minnesota.
On November 9, 2017, we filed a Certificate of Correction with the Minnesota Secretary of State. In connection with the Reincorporation,
we filed Articles of Incorporation with the Secretary of State of the State of Nevada on March 12, 2018, and a Certificate of Correction
with the Secretary of State of the State of Nevada on August 7, 2018 (collectively, the “Nevada Articles of Incorporation”).
The following summary of the Nevada Articles of Incorporation does not purport to be complete and is qualified in its entirety
by reference to the provisions of applicable law and to the Nevada Articles of Incorporation, which are filed as Exhibit 3.1 to
the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2018, and as Exhibit 3.1. to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.
On
June 21, 2019, we filed a Certificate of Designation (the “Series A-1 Certificate of Designation”) of Powers, Preferences,
and Rights of Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred Stock”) with the Nevada Secretary of
State. The Series A-1 Convertible Preferred Stock is being designated pursuant to guidance received from Nasdaq and shall have
virtually all of the same rights, characteristics, and attributes as the Company’s Series A Convertible Preferred Stock,
except as required by the Listing Qualifications staff of The Nasdaq Stock Market LLC (i.e., Section 3.2.5 in respect of voting
rights of the Series A-1 Convertible Preferred Stock and Section 3.2.1(f) in respect of a Triggering Event, as such term is defined
therein, and the formula to be applied in connection therewith), with respect to each of which requirements the Company has already
been in compliance. The filing of the Certificate of Designation was unanimously approved by the Board of Directors on June 18,
2019. The affirmative approval of a majority of the holders of the Series A Convertible Preferred Stock for the exchange of such
shares into shares of Series A-1 Convertible Preferred Stock occurred as of June 19, 2019. The three holders of our Series A Convertible
Preferred Stock are deemed to have exchanged their shares of Series A Convertible Preferred Stock for an equivalent number of shares
of Series A-1 Convertible Preferred Stock, or an aggregate of 259,729 shares. The Series A-1 Certificate of Designation is attached
as Exhibit 3.8 to the Company’s Current Report on Form 8-K filed with the SEC on June 24, 2019.
Except
as described above, the rights, characteristics, and attributes of the Series A-1 Preferred Stock are the same as described below.
Except as described in above and as set forth below, references below to “Series A Preferred Stock” include and shall
be deemed to refer to “Series A-1 Preferred Stock” on and after June 19, 2019.
Dividends
We cannot declare,
pay or set aside any dividends on shares of any other class or series of our capital stock unless (in addition to the obtaining
of any consents required by our Articles of Incorporation) the holders of the Series A Preferred Stock then outstanding shall first
receive, or simultaneously receive, a dividend in the aggregate amount of $1.00, regardless of the number of then-issued and outstanding
shares of Series A Preferred Stock. Any remaining dividends allocated by the Board of Directors shall be distributed in an equal
amount per share to the holders of outstanding common stock and Series A Preferred Stock (on an as-if-converted to common stock
basis pursuant to the Conversion Ratio as defined below).
Liquidation
Rights
Immediately prior
to the occurrence of any liquidation, dissolution or winding up of the Company, whether voluntary of involuntary, all shares of
Series A Preferred Stock automatically convert into shares of our common stock based upon the then-applicable “conversion
ratio” (as defined below) and shall participate in the liquidation proceeds in the same manner as other shares of our common
stock.
Conversion
The Series A Preferred
Stock is not convertible into shares of our common stock except as described below.
Subject to the
third sentence of this paragraph, each holder of a share of Series A Preferred Stock has the right, exercisable at any time and
from time to time (unless otherwise prohibited by law, rule or regulation, or as restricted below), to convert any or all of such
holder’s shares of Series A Preferred Stock into shares of our common stock at the conversion ratio. After giving effect
to the Reverse Stock Split, the “conversation ratio” per share of the Series A Preferred Stock is a ratio of 1:20,
meaning one share of Series A Preferred Stock, if and when converted into shares of our common stock, converts into 20 shares of
our common stock. One share of Series A-1 Preferred stock converts into 20 shares of our common stock. Notwithstanding anything
to the contrary in the Certificate of Designation, a holder of Series A Preferred Stock may not convert any of such holder’s
shares and we may not issue any shares of our common stock in connection with a conversion that would trigger any Nasdaq requirement
to obtain shareholder approval prior to such conversion or issuance in connection with such conversion that would be in excess
of that number of shares of common stock equivalent to 19.9% of the number of shares of common stock as of August 18, 2017;
provided
,
however
,
that holders of the Series A Preferred Stock may effectuate any conversion and we are obligated to issue shares of common stock
in connection with a conversion that would not trigger such a requirement. The foregoing restriction is of no further force or
effect upon the approval of our stockholders in compliance with Nasdaq’s shareholder voting requirements. Notwithstanding
anything to the contrary contained in the Certificate of Designation, the holders of the Series A Preferred Stock may not effectuate
any conversion and we may not issue any shares of common stock in connection with a conversion until the later of (x) February
28, 2018 or (y) sixty-one days following the date on which our stockholders have approved the voting, conversion, and other potential
rights of the holders of Series A Preferred Stock described in the Certificate of Designation in accordance with the relevant Nasdaq
requirements. On October 23, 2018, at the Company’s 2018 Annual Meeting of Shareholders, the Company’s shareholders
approved of the future conversion of the shares of Series A Preferred Stock into shares of the Company’s common stock.
Redemption
The shares of
Series A Preferred Stock did not have any and the shares of Series A-1 Preferred Stock do not have any redemption rights.
Preemptive
Rights
Holders of shares
of Series A Preferred Stock were not and the holders of shares of Series A-1 Preferred Stock are not entitled to any preemptive
rights in respect to any securities of the Company, except as set forth in the Certificate of Designation or any other document
agreed to by us.
Voting Rights
Each holder of
a share of Series A Preferred Stock has a number of votes as is determined by multiplying (i) the number of shares of Series A
Preferred Stock held by such holder, and (ii) 100. As a result of the exchange of shares of Series A Preferred Stock for shares
of Series A-1 Preferred Stock, each holder of a share of Series A-1 Preferred Stock has a number of votes as is determined by multiplying
(i) the number of shares of Series A-1 Preferred Stock held by such holder and (ii) 17. The holders of Series A-1 Preferred Stock
vote together with all other classes and series of common and preferred stock of the Company as a single class on all actions to
be taken by the common stockholders of the Company, except to the extent that voting as a separate class or series is required
by law.
Protective
Provisions
Without first
obtaining the affirmative approval of a majority of the holders of the shares of Series A-1 Preferred Stock, we may not directly
or indirectly (i) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series
A-1 Preferred Stock; (ii) effect an exchange, reclassification, or cancellation of all or a part of the Series A-1 Preferred Stock,
but excluding a stock split or reverse stock split or combination of the common stock or preferred stock; (iii) effect an exchange,
or create a right of exchange, of all or part of the shares of another class of shares into shares of Series A-1 Preferred Stock;
or (iii) alter or change the rights, preferences or privileges of the shares of Series A-1 Preferred Stock so as to affect
adversely the shares of such series, including the rights set forth in this Designation; provided, however, that we may, without
any vote of the holders of shares of the Series A-1 Preferred Stock, make technical, corrective, administrative or similar changes
to the Certificate of Designation that do not, individually or in the aggregate, materially adversely affect the rights or preferences
of the holders of shares of the Series A-1 Preferred Stock.
Note 20: Share-Based
Compensation
We recognized share-based compensation
expense of $60 and $0 for the 13 weeks ended June 29, 2019 and June 30, 2018, respectively. We recognized share-based compensation
expense of $120 and $0 for the 26 weeks ended June 29, 2019 and June 30, 2018, respectively. There is estimated future share-based
compensation expense as of June 29, 2019 of $20 per month for a total of $145.
Note 21: Shareholders’
Equity
Common Stock
: After giving
effect to the Reverse Stock Split, our Articles of Incorporation authorize 10 million shares of common stock that may be issued
from time to time having such rights, powers, preferences and designations as the Board of Directors may determine. During
the 26 weeks ended June 29, 2019 and June 30, 2018, no shares of common stock were issued. As of June 29, 2019, and December 29,
2018, there were 1,695 and 1,695 shares, respectively, of common stock issued and outstanding.
Stock options
: The 2016 Plan
authorizes the granting of awards in any of the following forms: (i) incentive stock options, (ii) nonqualified stock options,
(iii) restricted stock awards, and (iv) restricted stock units, and expires on the earlier of October 28, 2026, or the date that
all shares reserved under the 2016 Plan are issued or no longer available. The 2016 Plan provides for the issuance of up to 400
shares of common stock pursuant to awards granted under the 2016 Plan. Options granted to employees typically vest over two years,
while grants to non-employee directors vest in six months. As of June 29, 2019, and December 29, 2018, 4 options were outstanding
under the 2016 Plan.
Our 2011 Plan authorizes the granting of
awards in any of the following forms: (i) stock options, (ii) stock appreciation rights, and (iii) other share-based
awards, including but not limited to, restricted stock, restricted stock units or performance shares, and expires on the earlier
of May 12, 2021, or the date that all shares reserved under the 2011 Plan are issued or no longer available. Options granted
to employees typically vest over two years, while grants to non-employee directors vest in six months. As of June 29, 2019, and
December 29, 2018, 97 options were outstanding under the 2011 Plan. No additional awards will be granted under the 2011 Plan after
the adoption of the 2016 Plan.
We issue new common stock when stock options
are exercised. The Company periodically grants stock options that vest based upon the achievement of performance targets. For performance-based
options, the Company evaluates the likelihood of the targets being met and records the expense over the probable vesting period.
The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model. No options were issued in fiscal years 2018 and 2017.
No options were issued in the 26 weeks ended June 29, 2019.
Additional information relating to all
outstanding options is as follows (in thousands, except per share data):
|
|
|
|
|
Weighted
Average
|
|
|
Aggregate
|
|
|
Weighted
Average
Remaining
|
|
|
|
Options
Outstanding
|
|
|
Exercise
Price
|
|
|
Intrinsic
Value
|
|
|
Contractual
Life
|
|
Balance December 30, 2017
|
|
|
125
|
|
|
$
|
12.80
|
|
|
$
|
–
|
|
|
|
4.22
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(24
|
)
|
|
|
19.90
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2018
|
|
|
101
|
|
|
$
|
11.08
|
|
|
$
|
–
|
|
|
|
3.84
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 2019
|
|
|
101
|
|
|
$
|
11.07
|
|
|
$
|
–
|
|
|
|
3.35
|
|
We recognized no share-based compensation
expense related to option grants for the 26 weeks ended June 29, 2019 and June 30, 2018, respectively. The aggregate intrinsic
value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $4.39 on June 29,
2019, which theoretically could have been received by the option holders had all option holders exercised their options as of that
date. As of June 29, 2019, and December 29, 2018, there were no in-the-money options exercisable.
Based on the value of options outstanding
as of June 29, 2019, we do not estimate any future share-based compensation expense for existing options issued. This estimate
does not include any expense for additional options that may be granted and vest in subsequent years.
Warrants:
On November 8,
2016, we issued a warrant to Energy Efficiency Investments, LLC (EEI) to purchase 33 shares of common stock at a price of $3.40
per share. The fair value of the warrant issued was $106 and it was exercisable in full at any time during a term of five years.
The fair value per share of common stock underlying the warrant issued to EEI was $3.15 based on our closing stock price of $4.75.
The exercise price may be reduced and the number of shares of common stock that may be purchased under the warrant may be increased
if the Company issues or sells additional shares of common stock at a price lower than the then-current warrant exercise price
or the then-current market price of the common stock. The shares underlying the warrant include legal restrictions regarding the
transfer or sale of the shares. This warrant
contains a blocker provision under which EEI
does not have the right to exercise this warrant to the extent that such exercise would result in beneficial ownership by EEI,
together with any of EEI’s affiliates, of more than 4.99% of the number of shares of our Common Stock outstanding immediately
after giving effect to the issuance of shares of Common Stock issuable upon exercise of this warrant (the “Beneficial Ownership
Limitation”). EEI is entitled to, among other things, upon notice to us, increase the Beneficial Ownership Limitation to
9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common
Stock upon exercise of this warrant, with such increase to take effect 61 days after such notice is delivered to us. EEI elected
to increase the Beneficial Ownership Limitation to 9.99% and we elected to waive the 61-day notice period.
The fair value
of the EEI warrant was recorded as deferred financing costs and is being amortized over the term of the commitment.
As of June 29, 2019, and December 29, 2018,
we had fully vested warrants outstanding to purchase 33 shares of common stock at a price of $3.40 per share and expire in May
2020.
Preferred Stock
:
Our Articles
of Incorporation authorize two million shares of preferred stock that may be issued from time to time in one or more series having
such rights, powers, preferences and designations as the Board of Directors may determine. In August 2017, we issued 288,588 shares
(number specific – not rounded) of Series A convertible preferred stock in connection with the acquisition of GeoTraq. On
June 21, 2019, the shares of Series A-1 Preferred Stock were exchanged for shares of Series A-1 Preferred Stock on a one-for-one
basis. See Note 19.
Note 22: Loss
Per Share
Net loss per share is calculated using
the weighted average number of shares of common stock outstanding during the applicable period. Basic weighted average common shares
outstanding do not include shares of restricted stock that have not yet vested, although such shares are included as outstanding
shares in the Company’s Consolidated Balance Sheet. Diluted net earnings per share is computed using the weighted average
number of common shares outstanding and if dilutive, potential common shares outstanding during the period. Potential common shares
consist of the additional common shares issuable in respect of restricted share awards, stock options and convertible preferred
stock, including the Series A-1 Preferred Stock.
The following table presents the computation
of basic and diluted net loss per share:
|
|
For the Thirteen Weeks Ended
|
|
|
For the Twenty-Six Weeks Ended
|
|
|
|
June 29, 2019
|
|
|
June 30, 2018
|
|
|
June 29, 2019
|
|
|
June 30, 2018
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,371
|
)
|
|
$
|
(1,409
|
)
|
|
$
|
(3,399
|
)
|
|
$
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.81
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(2.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
1,695
|
|
|
|
1,375
|
|
|
|
1,695
|
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.81
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(2.10
|
)
|
Potentially dilutive securities were
excluded from the calculation of diluted net loss per share for the 13 and 26 weeks ended June 29, 2019 and June 30, 2018,
respectively. The weighted average number of dilutive securities excluded were 134 and 139, respectively for each period,
because the effects were anti-dilutive based on the application of the treasury stock method. Shares of Series A-1 Preferred
Stock issued and outstanding are excluded from dilutive securities until the conditions for conversion have been satisfied.
See Note 19.
Note 23: Major
Customers and Suppliers
For the 13 weeks ended June 29, 2019, no
customers represented 10% or more of our total revenues. For the 13 weeks ended June 30, 2018, one customer represented more than
10% of our total revenues for a total of 14%. For the 26 weeks ended June 29, 2019, 1 customer represented 10% or more
of our total revenue for a total of 11%. For the 26 weeks ended June 30, 2018, 2 customers represented 10% or more of our
total revenue for a combined total of 31%. As of June 29, 2019, one customer represented 10% or more of our total trade receivables
for a total of 16%. As of December 29, 2018, three customers represented more than 10% of our total trade receivables, for a total
of 38% of our total trade receivables.
During the 13 weeks and 26 weeks ended
June 29, 2019 and June 30, 2018, we purchased appliances for resale from four suppliers. We have and are continuing to secure other
vendors from which to purchase appliances. However, the curtailment or loss of one of these suppliers or any appliance supplier
could adversely affect our operations.
Note 24: Defined
Contribution Plan
We have a defined contribution salary
deferral plan covering substantially all employees under Section 401(k) of the Internal Revenue Code. We contribute an amount
equal to 10 cents for each dollar contributed by each employee up to a maximum of 5% of each employee’s compensation. We
recognized expense for contributions to the plans of $0 and $10 for the 13 weeks ended June 29, 2019 and June 30, 2018, respectively.
We recognized expense for contributions to the plans of $17 and $23 for the 26 weeks ended June 29, 2019 and June 30, 2018, respectively.
Note 25: Segment
Information
We operate within targeted markets through
two reportable segments for continuing operations: recycling and technology. The recycling segment includes all fees charged and
costs incurred for collecting, recycling and installing appliances for utilities and other customers. The recycling segment also
includes byproduct revenue, which is primarily generated through the recycling of appliances. The nature of products, services
and customers for both segments varies significantly. As such, the segments are managed separately. Our Chief Executive Officer
has been identified as the Chief Operating Decision Maker (“CODM”). The CODM evaluates performance and allocates resources
based on sales and income from operations of each segment. Income (loss) from operations represents revenues less cost of revenues
and operating expenses, including certain allocated selling, general and administrative costs. There are no intersegment sales
or transfers.
The following tables present our segment information for the
13 and 26 weeks ended June 29, 2019 and June 30, 2018:
|
|
Thirteen Weeks Ended
|
|
|
Twenty Six Weeks Ended
|
|
|
|
June 29, 2019
|
|
|
June 30, 2018
|
|
|
June 29, 2019
|
|
|
June 30, 2018
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
7,601
|
|
|
$
|
8,373
|
|
|
$
|
13,894
|
|
|
$
|
17,286
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total Revenues
|
|
$
|
7,601
|
|
|
$
|
8,373
|
|
|
$
|
13,894
|
|
|
$
|
17,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
1,868
|
|
|
$
|
2,150
|
|
|
$
|
3,017
|
|
|
$
|
4,562
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total Gross profit
|
|
$
|
1,868
|
|
|
$
|
2,150
|
|
|
$
|
3,017
|
|
|
$
|
4,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
(1,218
|
)
|
|
$
|
(390
|
)
|
|
$
|
(2,881
|
)
|
|
$
|
(679
|
)
|
Technology
|
|
|
(1,171
|
)
|
|
|
(1,212
|
)
|
|
|
(2,383
|
)
|
|
|
(2,485
|
)
|
Total Operating loss
|
|
$
|
(2,389
|
)
|
|
$
|
(1,602
|
)
|
|
$
|
(5,264
|
)
|
|
$
|
(3,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
21
|
|
|
$
|
59
|
|
|
$
|
99
|
|
|
$
|
120
|
|
Technology
|
|
|
936
|
|
|
|
933
|
|
|
|
1,871
|
|
|
|
1,866
|
|
Total Depreciation and amortization
|
|
$
|
957
|
|
|
$
|
992
|
|
|
$
|
1,970
|
|
|
$
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
14
|
|
|
$
|
38
|
|
|
$
|
6
|
|
|
$
|
629
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total Interest expense
|
|
$
|
14
|
|
|
$
|
38
|
|
|
$
|
6
|
|
|
$
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before benefit from income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
(451
|
)
|
|
$
|
(476
|
)
|
|
$
|
(2,109
|
)
|
|
$
|
(1,253
|
)
|
Technology
|
|
|
(1,313
|
)
|
|
|
(1,212
|
)
|
|
|
(2,383
|
)
|
|
|
(2,485
|
)
|
Total Net loss before benefit from income taxes
|
|
$
|
(1,764
|
)
|
|
$
|
(1,688
|
)
|
|
$
|
(4,492
|
)
|
|
$
|
(3,738
|
)
|
|
|
As of
|
|
|
As of
|
|
|
|
June 29,
|
|
|
December 29,
|
|
|
|
2019
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
14,063
|
|
|
$
|
13,566
|
|
Technology
|
|
|
19,420
|
|
|
|
21,055
|
|
Total Assets
|
|
$
|
33,483
|
|
|
$
|
34,621
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
19
|
|
|
$
|
19
|
|
Technology
|
|
|
19,103
|
|
|
|
20,969
|
|
Total Goodwill and intangible assets
|
|
$
|
19,122
|
|
|
$
|
20,988
|
|
Note 26: Related
Parties
Tony Isaac, the Company’s Chief Executive
Officer, is the father of Jon Isaac, President and Chief Executive Officer of Live Ventures Incorporated and managing member of
Isaac Capital Group LLC, a 15% shareholder of the Company. Tony Isaac, Chief Executive Officer, Virland Johnson, Chief Financial
Officer, Richard Butler, Board of Directors member, and Dennis Gao, Board of Directors member of the Company, are Board of Directors
member, Chief Financial Officer, Board of Directors member, and Board of Directors members, respectively, of Live Ventures Incorporated.
The Company also shares certain executive and legal services with Live Ventures Incorporated. The total services shared were $52
and $50 for the 13 weeks ended June 29, 2019 and June 30, 2018, respectively. The total services shared were $99 and $116 for the
26 weeks ended June 29, 2019 and June 30, 2018, respectively. Customer Connexx rents approximately 9,879 square feet of office
space from Live Ventures Incorporated at its Las Vegas, NV office. The total rent and common area expense were $45 and $37 for
the 13 weeks ended June 29, 2019 and June 30, 2018, respectively. The total rent and common area expense were $44 and $82 for the
26 weeks ended June 29, 2019 and June 30, 2018, respectively.
On December 30, 2017, Purchaser entered
into the Agreement with the Company and ApplianceSmart. Pursuant to the Agreement, the Purchaser purchased from the Company all
of the Stock of ApplianceSmart in exchange for the Purchase Price. Effective April 1, 2018, the Purchaser issued the ApplianceSmart
Note with a three-year term in the original principal amount of $3,919 for the balance of the purchase price. ApplianceSmart is
guaranteeing the repayment of the ApplianceSmart Note.
On December 26, 2018, the ApplianceSmart
Note was amended and restated to grant ARCA a security interest in the assets of the Purchaser, ApplianceSmart, and ApplianceSmart
Contracting Inc. in exchange for modifying the repayment terms to provide for the payment in full of all accrued interest and principal
on April 1, 2021, the maturity date of the ApplianceSmart Note.
On March 15, 2019, the Company entered
into subordination agreements with third parties pursuant to which it agreed to subordinate the payment of indebtedness under the
ApplianceSmart Note and the Company’s security interest in the assets of ApplianceSmart and other related parties in exchange
for up to $1,200 payable within 15 days of the agreement. ApplianceSmart can re-borrow up to the principal amount of the Note,
$3,919. ApplianceSmart paid $1,200 to the Company as follows: $100 on March 29, 2019, $250 on April 5, 2019 and $850 on April 15,
2019, in each case as principal payments on the ApplianceSmart Note. In connection with the sale to the Purchaser, ApplianceSmart
Inc. incurred $0 and $68 of transition fee expense for the 13 weeks ended June 29, 2019 and June 30, 2018, respectively. ApplianceSmart
Inc. incurred $0 and $135 of transition fee expense for the 26 weeks ended June 29, 2019 and June 30, 2018, respectively. See -
Other Commitments for details about ARCA obligated and or guaranteed lease commitments.
As previously disclosed and as discussed
in Note 8: Note receivable – Sale of Discontinued Operations, on December 30, 2017, the Company disposed of its retail appliance
segment and sold ApplianceSmart to the Purchaser. In connection with that sale, the Company has an aggregate amount of future real
property lease payments of $4,167,521, which represents amounts guaranteed or which may be owed under certain lease agreements
to third party landlords in which the Company either remains the counterparty, is a guarantor, or has agreed to remain contractually
liable under the lease (“ApplianceSmart Leases”). There are five ApplianceSmart Leases with ARCA guarantees, one terminating
December 31, 2020, April 30, 2021, August 14, 2021, December 31, 2022 and June 30, 2025, respectively.
As of June 29, 2019, it cannot be determined
either at June 29, 2019 or on a prospective basis that the Company will incur any loss related to its’ guarantees for a maximum
potential amount of future undiscounted lease payments of $4,167,521. The Company does not have any accrued amount of liability
associated with these future guaranteed lease payments. The ApplianceSmart Leases either have ARCA as the contract tenant only,
or in the contract reflects a joint tenancy with ApplianceSmart. ApplianceSmart is the occupant of the ApplianceSmart Leases. ARCA
does not have the right to use the ApplianceSmart lease assets and hence capitalization under ASC 842 is not required. The ApplianceSmart
Leases have historically been used by ApplianceSmart for their operations and the consideration has and is being paid by ApplianceSmart
historically and in the future.
Any amounts paid out for ARCA obligations
and or guarantees under ApplianceSmart Leases would be recoverable to the extent there were assets available from ApplianceSmart
and added to the ApplianceSmart Note – See Note 8. ARCA divested itself of the ApplianceSmart Leases and leaseholds with
the sale to Purchaser on December 30, 2017.
Note 27: Going Concern
In September 2014, the FASB issued ASU
No. 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern
. The standard requires an entity’s management to determine whether
substantial doubt exists regarding the entity’s ability to continue as a going concern. The amendments denote how and when
companies are obligated to disclose going concern uncertainties, which are required to be evaluated every interim and annual period.
If management determines that substantial doubt exists, particular disclosures are required.
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
an operating loss of $6,097 and a net loss of $5,608 in 2018. We reported an operating loss of $5,264 and a net loss of $3,399
for the first 26 weeks of fiscal year 2019. In addition, the Company has as of June 29, 2019 total current assets of $8,349 and
total current liabilities $11,547 resulting in a net negative working capital of $3,198.
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.
In Item 1A. Risk Factors in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 29, 2018, as amended (the “Form 10-K”) management has
addressed and evaluated the risk factors described therein that could materially and adversely affect the entity’s business,
financial condition and results of operations, cash flows and liquidity. The Company has determined the risk factors do not materially
affect the Company’s ability to continue as a going concern within one year after the date that the financial statements
are issued.
Based on the above, management has concluded
that at June 29, 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.
Note 28: Subsequent
Events
Lawsuit – Trustee Main/270, LLC
On or about July 22, 2019, Trustee Main/270,
LLC filed a lawsuit against ApplianceSmart, Inc. and ARCA in the Franklin County Common Pleas Court in Columbus, Ohio, alleging,
with respect to ApplianceSmart, default under a lease agreement and, with respect to ARCA, guaranty of lease. The complaint seeks
damages of $1,530,115, attorney fees, and other charges. ARCA is assessing all appropriate defenses to these allegations
and intends to defend itself vigorously.