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.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(In thousands)
Note 1: Nature
of Business and Basis of Presentation
Appliance Recycling Centers of America, Inc.
and subsidiaries (“we,” the “Company” or “ARCA”) are in the business of providing turnkey
appliance recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. Through
our GeoTraq Inc. (“GeoTraq”) subsidiary, a development stage company, we are engaged in the development, design and,
ultimately, we expect the sale of cellular transceiver modules, also known as Cell-ID modules. GeoTraq is part of a new reporting
segment for our Company – Technology. On August 15, 2017, we sold our 50% interest in a joint venture operating under the
name ARCA Advanced Processing, LLC (AAP”), which recycles appliances from twelve states in the Northeast and Mid-Atlantic
regions of the United States. On December 30, 2017, we sold our 100% interest in Appliancesmart Inc., which is a retail business
selling new household appliances through a chain of Company-owned stores under the name ApplianceSmart®.
The accompanying balance sheets as of
June 30, 2018, and December 30, 2017, respectively, which have been derived from the audited consolidated financial statements
and the unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting
principles (“GAAP”) in the United States of America for interim financial information and Article 8 of Regulation
S-X promulgated by the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include
all of the information and notes required by GAAP for complete financial statements. In the opinion of management, normal and
recurring adjustments and accruals considered necessary for a fair presentation for the periods indicated have been included.
Operating results for the 13 Week and 26 Week periods ended June 30, 2018 and July 1, 2017, are presented in lieu of three-month
periods, respectively. The Company reports results on a 52-week fiscal basis. The results of operations for any interim period
are not necessarily indicative of the results for the year.
In preparation of the Company’s
condensed consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts
of assets and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot
be determined with precision, actual results could differ significantly from these estimates.
Reincorporation in the State of
Nevada
On March 12,
2018, Appliance Recycling Centers of America, Inc. (the “Company”) changed its state of incorporation 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”).
These condensed consolidated financial
statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes
thereto for the year ended December 30, 2017, included in the Company’s Annual Report on Form 10-K, as amended, initially
filed with the SEC on June 12, 2018.
Note 2: Summary
of Significant Accounting Policies
Principles of consolidation
:
The consolidated financial statements include the accounts of Appliance Recycling Centers of America, Inc. and our subsidiaries.
All significant intercompany accounts and transactions have been eliminated in 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., a California
corporation, is a wholly owned subsidiary that was formed in November 1991 to provide turnkey recycling services for electric
utility energy efficiency programs. ARCA Canada Inc., a Canadian corporation, is a wholly owned subsidiary that was formed in
September 2006 to provide turnkey recycling services for electric utility energy efficiency programs. Customer Connexx, LLC,
a Nevada Corporation, is a wholly owned subsidiary that was formed in formed in October 2016 to provide call center services for
electric utility programs.
On August 15, 2017, ARCA sold it’s
50% interest in AAP and is no longer consolidating the results of AAP in its consolidated financial statements as of that date.
AAP was a joint venture formed in October 2009 between ARCA and 4301 Operations, LLC (“4301”). ARCA and 4301
owned a 50% interest in AAP through August 15, 2017. The financial position and results of operations of AAP were consolidated
in our financial statements through August 15, 2017, based on our conclusion that AAP is a variable interest entity due to our
contribution in excess of 50% of the total equity, subordinated debt and other forms of financial support. See Note 6 –
Sale and deconsolidation of variable interest entity AAP to these consolidated financial statements.
On August 18, 2017, we acquired GeoTraq.
GeoTraq is a development stage company that is engaged in the development, design, and, ultimately, we expect, sale of cellular
transceiver modules, also known as Cell-ID modules. GeoTraq has created a dedicated Cell-ID transceiver module that we believe
can enable the design of extremely small, inexpensive products that can operate for years on a single charge, powered by standardly
available batteries of diminutive size without the need of recharge. Accordingly, and utilizing Cell-ID technology exclusively,
we believe that GeoTraq will provide an exclusive, low-cost solution and service life that will enable new global markets for
location-based services (LBS).
On December 30, 2017, we sold our 100%
interest in ApplianceSmart, Inc., a Minnesota corporation. Appliancesmart Inc. was formed through a corporate reorganization
in July 2011 to hold our business of selling new major household appliances through a chain of Company-owned retail stores.
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 and long-term 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 goodwill, other intangibles and long-lived assets for
impairment, current portion of notes payable, 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, advances to affiliates 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 long-term debt at June 30, 2018 and December 30, 2017 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 $61 and $61 to be adequate to
cover any exposure to loss as of June 30, 2018, and December 30, 2017, respectively.
Inventories
Inventories, consisting primarily of Appliances,
are stated at the lower of cost, determined on a specific identification basis, 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 obsolete inventory at June 30, 2018 and December 30, 2017.
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 $59 and $263 for the 13 weeks ended June 30, 2018 and July 1, 2017, respectively. Depreciation expense was $120 and $263 for
the 26 weeks ended June 30, 2018 and July 1, 2017, 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 our stores and those stores projected undiscounted cash flows. 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.
Goodwill
The Company accounts for
purchased goodwill and intangible assets in accordance with ASC 350,
Intangibles—Goodwill and Other
. Under ASC
350, purchased goodwill are not amortized; rather, they are tested for impairment on at least an annual basis. Goodwill represents
the excess of consideration paid over the fair value of underlying identifiable net assets of business acquired.
We test goodwill at least annually
on July 1 of each fiscal year or more frequently if events arise or circumstances change that indicate that goodwill may be impaired.
The Company assesses whether goodwill impairment exists using both the qualitative and quantitative assessments. The qualitative
assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company
determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company
elects not to perform a qualitative assessment, a quantitative assessment is performed using a two-step approach required by ASC
350 to determine whether a goodwill impairment exists.
The first
step of the quantitative test is to compare the carrying amount of the reporting unit's assets to the fair value of the reporting
unit. If the fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. If
the carrying amount exceeds the fair value, then the second step is required to be completed, which involves allocating the fair
value of the reporting unit to each asset and liability using the guidance in ASC 805 (“
Business Combinations, A
ccounting
for Identifiable Intangible Assets in a Business Combination
”)
, with the excess being applied
to goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill. The determination
of the fair value of our reporting units is based, among other things, on estimates of future operating performance of the reporting
unit being valued. We are required to complete an impairment test for goodwill and record any resulting impairment losses at least
annually. Changes in market conditions, among other factors, may have an impact on these estimates and require interim impairment
assessments.
When performing the two-step quantitative
impairment test, the Company's methodology includes the use of an income approach which discounts future net cash flows to their
present value at a rate that reflects the Company's cost of capital, otherwise known as the discounted cash flow method ("DCF").
These estimated fair values are based on estimates of future cash flows of the businesses. Factors affecting these future cash
flows include the continued market acceptance of the products and services offered by the businesses, the development of new products
and services by the businesses and the underlying cost of development, the future cost structure of the businesses, and future
technological changes. The Company also incorporates market multiples for comparable companies in determining the fair value of
our reporting units. Any such impairment would be recognized in full in the reporting period in which it has been identified.
Intangible Assets
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, and marketing and technology related intangibles. 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, customer relationships – 7 to 15 years. Intangible amortization expense is $932 and $0 for the 13
weeks ended June 30, 2018 and April 1, 2017, respectively. Intangible amortization expense is $1,864 and $0 for the 26 weeks ended
June 30, 2018 and July 1, 2017, respectively.
Revenue Recognition
We record contract revenue with customers
in the period when all of the following requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the
sales transaction price is fixed or determinable, (iii) title, ownership and risk of loss have been transferred to the customer
(iv) allocation of sales price to specific performance obligations, and (v) performance obligations are satisfied.
We recognize revenue and a receivable
per customer upon confirmed and accepted pickup of the to be recycled appliance for appliance recycling services when we collect
and recycle the old appliance. No provision for bad debt is provided at the time of recording revenue given the credit of our
customers. All direct costs are either paid and or accrued for in the period in which the appliance recycling service is provided.
We recognize revenue and a receivable
per customer upon confirmed and accepted delivery of the replacement appliance, and or pickup of the to be recycled appliance.
The delivery of the replacement appliance is one performance obligation and the pickup of the to be recycled appliance is another
performance obligation. Revenue is recorded for each performance obligation. No provision for bad debt is provided at the time
of recording revenue given the credit of our customers. All direct costs are either paid and or accrued for in the period in which
the replacement appliance(s)and program service(s) are provided. Customer’s do not typically have a right to return appliances
sold. The manufacturer’s warranty is the only warranty provided to a customer.
We do not have any contracts with third-party
recycling customers that we sell recycling byproduct or carbon offsets. We recognize the revenue from the sale of carbon offsets
and ozone-depleting refrigerants upon having in writing a mutually agreed upon price per pound, confirmed delivery, verification
of volume and purity of the refrigerant by the buyer and collectability is reasonably assured. Other recycling byproduct revenue
(the sale of copper, steel, plastic and other recoverable non-refrigerant byproducts) is recorded as revenue upon delivery to
the third-party recycling customer for processing, 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. Funds are sent to the Company
by the customer typically by check for the actual weight, type and in some cases volume of the byproduct delivered multiplied
by the market rate as quoted.
The Company has changed its accounting
for revenue recognition for revenue derived from contracts with our customers and the related costs associated with those contracts
effective December 31, 2017 due to the adoption of ASC 606 Revenue from contracts with Customers (“ASC 606”). The
Company adopted the modified retrospective transition method, of making the transition effective December 31, 2017.
The Company has applied ASC 606 and
ASC 340-40 Contracts with Customers (“ASC 340”) to only those contracts that were not completed as of December 31,
2017.
The effect of applying ASC 606 and
ASC 340-40 as of December 31, 2017, requires the Company to (a) determine that amount of revenue and related costs it would have
recognized in the period of adoption if it had continued to apply legacy GAAP in that period and (b) disclose the change for each
financial statement item affected and explain the reasons for those changes that are significant. The Company has determined that
the effect of applying ASC 606 and ASC 340-40 as of December 31, 2017 is immaterial.
For the Quarter ended June 30, 2018
:
Revenue recognized for Company contracts
- $7,396 and $8,609 for the 13 weeks ended June 30, 2018 and July 1, 2017, respectively. Revenue recognized for Company contracts
- $15,218 and $15,000 for the 26 weeks ended June 30, 2018 and July 1, 2017, respectively.
There was no impairment (or credit)
losses on accounts receivable or contract assets related to Company contracts that were recognized in accordance with ASC 310
Receivables or ASC 326-30 Financial Instruments – Credit Losses.
The Company provides replacement appliances
and program services, mainly recycling of aged appliances to Utility customers. The Company operates in twenty-four states within
the continental United States, and two provinces of Canada. The Company does not enter into contracts with for byproduct or carbon
offset revenue. The Company uses a direct sales channel and typically enters into contracts for recycling program services and
replacement appliances lasting a few months up to a couple of years in length. The Company has two reportable segments –
Recycling and Technology. The Technology segment currently is a development segment with no revenue. Contract revenue for the
recycling segment is recorded upon the confirmed delivery and or pickup of the aged appliance for both replacement appliance revenue
and program services revenue. Byproduct revenue is record upon delivery of the byproduct to the customer of the Company’s
choice, one price and terms are agreed too.
The Company does not have any contract
assets or liabilities as of June 30, 2018 and December 30, 2017, respectively.
Performance obligations are typically
satisfied upon confirmed delivery of replacement appliance(s) revenue, pickup of the aged appliance for program services revenue
and delivery to a customer of choice for byproduct revenue. Revenue recorded in the 13 weeks and 26 weeks ended June 30, 2018
related to performance obligations satisfied in the same 13 weeks and 26 weeks ended June 30, 2018.
The Company does not capitalize costs
under ASC 340-40, or use any other method to amortize costs capitalized. There was no balance of capitalized costs at either June
30, 2018 or December 30, 2017, respectively.
The Company has not incurred any impairment
losses in the quarter ended June 30, 2018 related to costs capitalized in accordance with ASC 340-40.
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 $211 and $197 for the 13 weeks ended June 30, 2018 and July 1, 2017, respectively. Advertising
expense totaled $367 and $472 for the 26 weeks ended June 30, 2018 and July 1, 2017, 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 Income.
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 been classified as operating leases, generally
provide for minimum and, in some cases percentage rent and require us to pay all insurance, taxes and other maintenance costs.
Leases with step rent provisions, escalation clauses or other lease concessions are accounted for on a straight-line basis over
the lease term and includes “rent holidays” (periods in which we are not obligated to pay rent). Cash or lease incentives
received upon entering into certain store leases (“tenant improvement allowances”) are recognized on a straight-line
basis as a reduction to rent expense over the lease term. We record the unamortized portion of tenant improvement allowances as
a part of deferred rent. We do not have leases with capital improvement funding.
Stock-Based Compensation.
The Company from time to time grants restricted
stock awards and options to employees, non-employees and Company executives and directors. Such awards are valued based on the
grant date fair-value of the instruments, net of estimated forfeitures. The value of each award is amortized on a straight-line
basis over the vesting period.
Foreign Currency
The financial statements of the Company’s
non-U.S. subsidiary are translated into U.S. dollars in accordance with ASC 830, Foreign Currency Matters. Under ASC 830, if the
assets and liabilities of the Company are recorded in certain non-U.S. functional currencies other than the U.S. dollar, they
are translated at current rates of exchange. Revenue and expense items are translated at the average monthly exchange rates. The
resulting translation adjustments are recorded directly into accumulated other comprehensive income (loss).
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 24).
Concentration of Credit Risk
The Company maintains cash balances at
several banks in several states including, Minnesota, California, and Nevada within the United States. Accounts are insured by
the Federal Deposit Insurance Corporation up to $250,000 per institution as of June 30, 2018. At times, balances may exceed federally
insured limits.
Recently Issued Accounting Pronouncements
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. We are currently evaluating the impact that this
standard will have on our consolidated financial statements.
ASU 2016-04,
Recognition of Breakage
for Certain Prepaid Stored-Value Products
. The standard specifies how prepaid stored-value product liabilities should be derecognized,
thereby eliminating the current and potential future diversity in practice. The ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the
impact that this standard will have on our consolidated financial statements.
ASU 2016-09,
Compensation- Stock
Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting,
introduces targeted amendments intended
to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies
(including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income
statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which
they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of
whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses
stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they
arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance
if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain
and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash
flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold
to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies
that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing
activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis,
to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures
when they occur. The ASU is effective for public business entities for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted in any interim or annual period for which the financial statements
have not been issued or made available to be issued. Certain detailed transition provisions apply if an entity elects to early
adopt. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
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 are currently evaluating
the impact that this standard will have on our consolidated financial statements.
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 weeks ended
June 30, 2018 and July 1, 2017, our comprehensive income (loss) is $(1,420) and $2,086, respectively. For the 26 weeks ended June
30, 2018 and July 1, 2017, our comprehensive income (loss) is $(2,917) and $4,307. Our comprehensive income includes foreign currency
translation gains and losses, net loss from discontinued operations, and net loss attributable to non-controlling interest.
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 or stockholders’ equity. On March 12, 2018, the Company changed its state of incorporation
from Minnesota to Nevada. Nevada requires a stated par value, which the company stated at $0.001 per share. Amounts for Common
stock and additional paid in capital for December 30, 2017 have been reclassified to reflect this change.
Note 5:
Acquisition
of GeoTraq, Inc.
On August 18, 2017, the Company, entered
into a series of transactions, acquiring all of the assets and capital stock of GeoTraq by way of merger. GeoTraq is a development
stage company that is engaged in the development, design, and, ultimately, the sale of cellular transceiver modules, also known
as Cell-ID modules. As of August 18, 2017, 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 application USPTO reference No. 14724039 titled “Locator
Device with Low Power Consumption” together with the assignment of intellectual property that included historical know-how,
designs and related manufacturing procedures is $26,097, which includes the deferred income tax liability associated with the
intangible asset. Total consideration paid for GeoTraq included cash $200, 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 of convertible series
A preferred stock with a final fair value of $14,963. See Note 19 – Series A Preferred Stock to these consolidated financial
statements. In connection with the acquisition, an additional 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 was a shell company with 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, which clarifies the definition
of a business for purposes of applying ASC 805 Related Parties. 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 6: Sale
and deconsolidation of variable interest entity - AAP
The financial position and results of
operations of AAP have been consolidated in our financial statements since AAP’s inception based on our conclusion that
AAP is a variable interest entity that we controlled due to our contribution in excess of 50% of the total equity, subordinated
debt and other forms of financial support. Since inception we provided substantial financial support to fund the operations of
AAP. The financial position and results of operations for AAP are reported in our recycling segment. On August 15, 2017, we sold
our 50% interest in AAP, and therefore, as of August 15, 2017, no longer consolidate the results of AAP in our financial statements.
The following table summarizes the unaudited
assets and liabilities of AAP consolidated in our financial position as of July 1, 2017:
|
|
July 1, 2017
|
|
Assets
|
|
|
|
Current assets
|
|
$
|
293
|
|
Property and equipment, net
|
|
|
6,933
|
|
Other assets
|
|
|
93
|
|
Total assets
|
|
$
|
7,319
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
2,569
|
|
Accrued expenses
|
|
|
585
|
|
Current maturities of long-term debt obligations
|
|
|
728
|
|
Long-term debt obligations, net of current maturities
|
|
|
3,166
|
|
Other liabilities (a)
|
|
|
289
|
|
Total liabilities
|
|
$
|
7,337
|
|
(a)
Other liabilities represent loans and advances between ARCA and AAP that are eliminated in consolidation.
The following table summarizes the operating
results of AAP consolidated in our financial results for the 13 weeks and 26 weeks ended June 30, 2018, and July 1, 2017, respectively:
|
|
13 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
|
June 30, 2018
|
|
|
July 1, 2017 (b)
|
|
|
|
June 30, 2018
|
|
|
|
July 1, 2017 (b)
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
642
|
|
|
$
|
–
|
|
|
$
|
1,127
|
|
Gross profit
|
|
|
–
|
|
|
|
100
|
|
|
|
–
|
|
|
|
(14
|
)
|
Operating loss
|
|
|
–
|
|
|
|
(236
|
)
|
|
|
–
|
|
|
|
(708
|
)
|
Net loss
|
|
|
–
|
|
|
|
(300
|
)
|
|
|
–
|
|
|
|
(826
|
)
|
(b)
Operating results for AAP were consolidated in the Company’s operating results from inception of AAP through August 15,
2017, the date of our 50% equity sale in AAP. We recorded a gain of $81 on the sale and deconsolidation of our 50% equity interest
in AAP. Net Cash outflow arising from deconsolidation of AAP was $35. The Company received $800 in cash consideration for its
50% equity interest in AAP.
Note 7: Note
receivable – sale of discontinued operations
On December 30, 2017, we signed an agreement
to dispose of our ApplianceSmart 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, Inc. (“ApplianceSmart”), a subsidiary of the Company. ApplianceSmart is a 17-store chain
specializing in new and out-of-the-box appliances with annualized revenues of approximately $65 million. 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 agreement was due and payable on or before March
31, 2018. As of December 30, 2017, the Company had an amount due from ApplianceSmart Holdings LLC a subsidiary of Live Ventures
Incorporated in the sum of $6,500 recorded as a current asset.
Between March 31, 2018 and April 24, 2018,
the Purchaser and the Seller 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 Seller that certain 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 payable monthly in arrears. Ten percent of
the outstanding principal amount will be repaid annually on a quarterly basis, with the accrued and unpaid principal due on the
Maturity Date. ApplianceSmart has agreed to guaranty repayment of the ApplianceSmart Note. The remaining $2,581 of the Purchase
Price was paid in cash by the Purchaser to the Seller. The Purchaser may reborrow funds, and pay interest on such reborrowings,
from the Seller up to the Original Principal Amount. Subsequent to December 30, 2017, ApplianceSmart assumed $1,901 in liabilities
from the Company. For the 26 weeks ended June 30, 2018, the original balance owed to the Company of $6,500, increased with new
borrowings of $1,800 and decreased with repayments of $2,581, and debt assumed of $1,901 represents a net amount due from ApplianceSmart
Holdings LLC, now in the form of a note receivable, in the sum of $3,818 as of June 30, 2018.
Discontinued operations and assets held
for sale include our retail appliance business ApplianceSmart. Results of operations, financial position and cash flows for this
business are separately reported as discontinued operations for all periods presented. The Company made the decision to sell ApplianceSmart
to eliminate losses and poor financial performance from our retail segment, decrease existing leverage, assign and eliminate long
term lease liabilities for store leases, increase cash balances, enhance shareholder value and focus Company resources on its’
two remaining segments, Recycling and Technology.
FINANCIAL INFORMATION FOR HELD FOR SALE AND DISCONTINUED
OPERATIONS (In Thousands)
|
|
13 Weeks
|
|
|
13 Weeks
|
|
|
26 Weeks
|
|
|
26 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2018
|
|
|
July 1, 2017
|
|
|
June 30, 2018
|
|
|
July 1, 2017
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
15,038
|
|
|
$
|
–
|
|
|
$
|
30,827
|
|
Cost of revenue
|
|
|
–
|
|
|
|
10,308
|
|
|
|
–
|
|
|
|
21,890
|
|
Gross profit
|
|
|
–
|
|
|
|
4,730
|
|
|
|
–
|
|
|
|
8,937
|
|
Selling, general and administrative expense
|
|
|
–
|
|
|
|
3,722
|
|
|
|
–
|
|
|
|
8,007
|
|
Operating (loss) - discontinued operations
|
|
|
–
|
|
|
|
1,008
|
|
|
|
–
|
|
|
|
930
|
|
Other income
|
|
|
–
|
|
|
|
238
|
|
|
|
–
|
|
|
|
238
|
|
Other expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net income - discontinued operations before income tax
provision
|
|
|
–
|
|
|
|
1,246
|
|
|
|
–
|
|
|
|
1,168
|
|
Income tax provision
|
|
|
–
|
|
|
|
394
|
|
|
|
–
|
|
|
|
373
|
|
Net income - discontinued operations,
net of tax
|
|
$
|
–
|
|
|
$
|
852
|
|
|
$
|
–
|
|
|
$
|
795
|
|
Note 8: Receivables
|
|
June 30, 2018
|
|
|
December 30, 2017
|
|
Trade receivables, net
|
|
$
|
5,430
|
|
|
$
|
8,826
|
|
Factored accounts receivable
|
|
|
(471
|
)
|
|
|
–
|
|
Prestige Capital reserve receivable
|
|
|
92
|
|
|
|
–
|
|
Due from Recleim
|
|
|
819
|
|
|
|
819
|
|
Other receivables
|
|
|
94
|
|
|
|
391
|
|
Trade and other receivables, net
|
|
$
|
5,964
|
|
|
$
|
10,036
|
|
For the 13 weeks ended June 30, 2018,
two customers represented more than 10% of our total revenues. For the 13 weeks ended July 1, 2017, one customer represented more
than 10% of our total revenues. For the 26 weeks ended June 30, 2018, two customers represented more than 10% of total revenues.
For the 26 weeks ended July 1, 2017, one customer represented more than 10% of total revenues. As of June 30, 2018, two customers,
each represented more than 10% of our total trade receivables, for a total of 32% of our total trade receivables. As of December
30, 2017, two customers, each represented more than 10% of our total trade receivables, for a total of 25% of our total trade
receivables.
During the 26 weeks ended June 30, 2018
and July 1, 2017, respectively, we purchased appliances for resale from three 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 9: Inventories
Inventories, consisting principally of
appliances, are stated at the lower of cost, determined on a specific identification basis, or net realizable value and consist
of:
|
|
June 30, 2018
|
|
|
December 30, 2017
|
|
Appliances held for resale
|
|
$
|
1,097
|
|
|
$
|
762
|
|
We provide estimated provisions for the
obsolescence of our appliance inventories, including adjustments to net realizable value, based on various factors, including
the age of such inventory and our management’s assessment of the need for such provisions. We look at historical inventory
aging’s and margin analysis in determining our provision estimate. A revised cost basis is used once a provision for
obsolescence is recorded. For the period ended June 30, 2018 and December 30, 2017, there was no inventory obsolescence reserve.
Note 10: Prepaids
and other current assets
Prepaids and other current assets as of June 30, 2018 and December
30, 2017 consist of the following:
|
|
June 30, 2018
|
|
|
December 30, 2017
|
|
Prepaid insurance
|
|
$
|
510
|
|
|
$
|
443
|
|
Prepaid rent
|
|
|
16
|
|
|
|
5
|
|
Prepaid services
|
|
|
400
|
|
|
|
–
|
|
Prepaid vendor draft
|
|
|
295
|
|
|
|
–
|
|
Prepaid other
|
|
|
124
|
|
|
|
58
|
|
|
|
$
|
1,345
|
|
|
$
|
506
|
|
Note 11: Property
and equipment
Property and equipment as of June 30, 2018, and December 30,
2017, consist of the following:
|
|
Useful Life (Years)
|
|
June 30, 2018
|
|
|
December 30, 2017
|
|
Land
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Buildings and improvements
|
|
18-30
|
|
|
156
|
|
|
|
156
|
|
Equipment (including computer software)
|
|
3-15
|
|
|
6,076
|
|
|
|
5,908
|
|
Projects under construction
|
|
|
|
|
29
|
|
|
|
29
|
|
Property and equipment
|
|
|
|
|
6,261
|
|
|
|
6,093
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(5,667
|
)
|
|
|
(5,555
|
)
|
Property and equipment, net
|
|
|
|
$
|
594
|
|
|
$
|
538
|
|
Depreciation and amortization expense
for continuing operations was $59 and $263 for the 13 weeks ended June 30, 2018 and July 1, 2017, respectively. Depreciation and
amortization expense for continuing operations was $120 and $520 for the 26 weeks ended June 30, 2018 and July 1, 2017, respectively.
On January 25, 2017, as disclosed by the
Company in Item 2.01 of its Current Report on Form 8-K filed with the SEC on January 31, 2017, the Company sold its’ Compton,
California facility (the “Compton Facility”) for $7,103 to Terreno Acacia, LLC. The proceeds from the sale paid off
the PNC term loan in the aggregate principal amount of $1,020 that was secured by the property and costs of sale of $325, with
the remaining proceeds of $5,758 paid towards the PNC Revolver (as defined below). The Company recorded a gain on the sale of
property of $5,163. The Company rented the Compton Facility back from Terreno Acacia, LLC after the completion of the sale from
January 26, 2017 through April 10, 2017.
Note 12: Intangible
assets
Intangible assets as of June 30, 2018, and December 30, 2017,
consist of the following:
|
|
June 30, 2018
|
|
|
December 30, 2017
|
|
Intangible assets GeoTraq, net
|
|
$
|
22,833
|
|
|
$
|
24,699
|
|
Patent
|
|
|
19
|
|
|
|
19
|
|
|
|
$
|
22,852
|
|
|
$
|
24,718
|
|
For the 13 Week and 26 Week periods ended
June 30, 2018, we recorded amortization expense of $932 and $1,864, respectively, related to our finite intangible assets. The
useful life and amortization period of the GeoTraq intangible assets acquired is seven years.
Note 13: Deposits
and other assets
Deposits and other assets as of June 30,
2018, and December 30, 2017, consist of the following:
|
|
June 30, 2018
|
|
|
December 30, 2017
|
|
Deposits
|
|
$
|
247
|
|
|
$
|
411
|
|
Other
|
|
|
114
|
|
|
|
107
|
|
|
|
$
|
361
|
|
|
$
|
518
|
|
Deposits are primarily refundable security deposits with landlords
for the Company’s leased property.
Note 14: Accrued
liabilities
Accrued liabilities as of June 30, 2018,
and December 30, 2017, consist of the following:
|
|
June 30, 2018
|
|
|
December 30, 2017
|
|
Sales tax estimates, including interest
|
|
$
|
4,925
|
|
|
$
|
4,563
|
|
Compensation and benefits
|
|
|
612
|
|
|
|
1,061
|
|
Deferred revenue
|
|
|
–
|
|
|
|
300
|
|
Accrued incentive and rebate checks
|
|
|
53
|
|
|
|
285
|
|
Accrued rent
|
|
|
–
|
|
|
|
77
|
|
Accrued interest
|
|
|
–
|
|
|
|
115
|
|
Accrued payables
|
|
|
–
|
|
|
|
129
|
|
Other
|
|
|
10
|
|
|
|
31
|
|
|
|
$
|
5,600
|
|
|
$
|
6,561
|
|
Sales and Use Tax Assessment
We operate in twenty-three 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 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 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 intends to appeal this assessment and continue 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. The Company anticipates that
resolution of the BOE assessment could take up to two years.
Note 15: Line
of credit - PNC Bank
We had a Revolving Credit, Term Loan and
Security Agreement, as amended, (“PNC Revolver”) with PNC Bank, National Association (“PNC”) that provided
us with a $15,000 revolving line of credit. The PNC Revolver loan agreement included a lockbox agreement and a subjective
acceleration clause and as a result we have classified the revolving line of credit as a current liability. The PNC Revolver was
collateralized by a security interest in substantially all of our assets and PNC was also secured by an inventory repurchase agreement
with Whirlpool Corporation solely with respect to Whirlpool purchases only. In addition, we issued a $750 letter of credit in
favor of Whirlpool Corporation. The PNC Revolver required, starting with the fiscal quarter ending April 2, 2016, that we meet
a specified minimum earnings before interest, taxes, depreciation and amortization, and continuing at the end of each quarter
thereafter, that we meet a minimum fixed charge coverage ratio of 1.1 to 1.0. The PNC Revolver loan agreement limited investments
that we could purchase, the amount of other debt and leases that we could incur, the amount of loans that we could issue to our
affiliates and the amount we could spend on fixed assets, along with prohibiting the payment of dividends.
The interest rate on the PNC Revolver,
as stated in our renewal agreement on January 22, 2016, was PNC Base Rate (as defined below) plus 1.75% to 3.25%, or 1-, 2- or
3-month PNC LIBOR Rate plus 2.75% to 4.25%, with the rate being dependent on our level of fixed charge coverage. The PNC Base
Rate meant, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the interest rate per annum
announced from time to time by PNC as its prime rate, (ii) the Federal Funds Open Rate plus 0.5%, and (iii) the one-month
LIBOR rate plus 100 basis points (1%).
The amount of available revolving borrowings
under the PNC Revolver was based on a formula using accounts receivable and inventories. We did not have access to the full $15,000
revolving line of credit due to such formula, the amount of the letter of credit issued in favor of Whirlpool Corporation and
the amount of outstanding loans owed to PNC by out AAP joint venture.
As discussed above, the Company sold its
the Compton Facility building and land for $7,103. The net proceeds from the sale, after costs of sale and payoff of the Term
Loan (as defined below), were used to reduce the outstanding balance under our PNC Revolver.
On May 1, 2017, the PNC Revolver loan
agreement was amended, and the term was extended through June 2, 2017. The amendment, effective May 2, 2017, also reduced the
maximum amount of borrowing under the PNC Revolver to $6 million. On May 10, 2017 we repaid in full and terminated our existing
Revolving Credit, Term Loan and Security Agreement, as amended, with PNC Bank, National Association on the same date.
The PNC Revolver loan agreement was terminated,
and the PNC Revolver was paid in full on May 10, 2017 with funds from MidCap Financial Trust. See Note 17, long term obligations,
for additional information.
Note 16: Notes
payable – short term
On August 18, 2017, the Company, as part
of its’ acquisition of GeoTraq, issued unsecured promissory notes to the sellers of GeoTraq with interest at the annual
rate of interest of 1.29% maturing on August 18, 2018. The outstanding balance of the notes payable – short term as of June
30, 2018 is $300.
Note 17: Short
term debt
Short term debt, capital lease and other
financing obligations as of June 30, 2018, and December 30, 2017, consist of the following:
|
|
June 30, 2018
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
|
MidCap financial trust asset based revolving loan
|
|
$
|
–
|
|
|
$
|
5,605
|
|
AFCO Finance
|
|
|
556
|
|
|
|
367
|
|
GE 8% loan agreement
|
|
|
482
|
|
|
|
482
|
|
EEI note
|
|
|
101
|
|
|
|
103
|
|
Capital leases and other financing obligations
|
|
|
–
|
|
|
|
30
|
|
Debt issuance costs, net
|
|
|
(493
|
)
|
|
|
(1,010
|
)
|
Total short term debt
|
|
$
|
646
|
|
|
$
|
5,577
|
|
PNC Term Loan
On January 24, 2011, we entered into
a $2,550 Term Loan (“Term Loan”) with the PNC Bank to refinance the mortgage on our Compton Facility. The Term Loan
was payable in 119 consecutive monthly principal payments of $21 plus interest commencing on February 1, 2011 and followed
by a 120th payment of all unpaid principal, interest and fees on February 1, 2021. The PNC Revolver loan agreement required
a balloon payment of $1,020 in principal plus interest and additional fees due on January 31, 2017. The Term Loan was collateralized
by the Compton Facility. As disclosed by the Company in Item 2.01 of the Company’s Current Report on Form 8-K filed with
the SEC on January 31, 2017, the Term Loan was paid off in full on January 25, 2017 when the Compton Facility was sold.
MidCap Financial Trust
On May 10, 2017, we entered into a Credit
and Security Agreement (“Credit Agreement”) with MidCap Financial Trust (“MidCap Financial Trust”), as
a lender and as agent for itself and other lenders under the Credit Agreement. The Credit Agreement provided us with a $12,000
revolving line of credit, which may have been increased to $16,000 under certain terms and conditions (the “MidCap Revolver”).
The MidCap Revolver had a stated maturity date of May 10, 2020, if not renewed. The MidCap Revolver was collateralized by a security
interest in substantially all of our assets. The lender was also secured by an inventory repurchase agreement with Whirlpool Corporation
for Whirlpool purchases only. The Credit Agreement required that we meet a minimum fixed charge coverage ratio of 1.00:1.00 for
the applicable measuring period as of the end of each calendar month. The applicable measuring period was (i) the period
commencing May 1, 2017 and ending on the last day of each calendar month from May 31, 2017 through April 30, 2018, and (ii) the
twelve-month period ending on the last day of such calendar month thereafter. The Credit Agreement limited the amount of other
debt we could incur, the amount we could spend on fixed assets, and the amount of investments we could make, along with prohibiting
the payment of dividends.
The amount of revolving borrowings available
under the Credit Agreement was based on a formula using receivables and inventories. We did not have access to the full $12,000
revolving line of credit due to the formula using our receivables and inventories and the amount of any outstanding letters of
credit issued by the Lender. The interest rate on the revolving line of credit was the one-month LIBOR rate plus four and one-half
percent (4.50%).
On December 30, 2017, our available borrowing
capacity under the Credit Agreement was $1,031. We borrowed $21,470 and repaid $27,075 on the Credit Agreement during the period
of December 31, 2017 through March 22, 2018, leaving an outstanding balance on the Credit Agreement of $0 and $5,605 at June 30,
2018 and December 30, 2017, respectively.
On September 20, 2017, we received a written
notice of default, dated September 20, 2017 (the “Notice of Default”), from MidCap Funding X Trust (the “Agent”),
asserting that events of default had occurred with respect to the Credit Agreement. The Agent alleged in the Notice of Default
that, as a result of the Company’s recent acquisition of GeoTraq, and the issuance of promissory notes to the stockholders
of GeoTraq in connection with such acquisition, the Borrowers have failed to comply with certain terms of the Loan Agreement,
and that such failure constitutes one or more Events of Default under the Loan Agreement. Specifically, the Notice of Default
states that as a result of the acquisition and related issuance of promissory notes, the Borrowers have failed to comply with
(i) a covenant not to incur additional indebtedness other than Permitted Debt (as defined in the Loan Agreement), without the
Agent’s prior written consent, and a covenant not to make acquisitions or investments other than Permitted Acquisitions
or Permitted Investments (as defined in the Credit Agreement). The Notice of Default also stated that the Borrowers’ failure
to pledge the stock in GeoTraq as collateral under the Credit Agreement and to make GeoTraq a “Borrower “under the
Credit Agreement will become an Event of Default if not cured within the applicable cure period. The Agent reserved the right
to avail itself of any other rights and remedies available to it at law or by contract, including the right to (a) withhold funding,
increase reserves and suspend making further advances under the Credit Agreement, (b) declare all principal, interest and other
sums owing in connection with the Credit Agreement immediately due and payable in full, (c) charge the Default Rate on amounts
outstanding under the Credit Agreement, and/or (d) exercise one or more rights and remedies with respect to any and all collateral
securing the Credit Agreement.
The Agent did not declare the amounts
outstanding under the Credit Agreement to be immediately due and payable but imposed the default rate of interest, which is 5%
in excess of the rates otherwise payable under the Loan Agreement), effective as of August 18, 2017 and continuing until the Agent
notifies the Borrowers that the specified Events of Default have been waived and no other Events of Default exist. The Company
strongly disagreed with the Lenders that any Event of Default had occurred.
On March 22, 2018, the Company terminated
the Credit and Security Agreement (the“Credit Agreement”) by and among the Company and the subsidiaries of the Company
as borrowers (the “Borrowers”), on the one hand, and MidCap Financial Trust, as administrative agent and lender (the
“Lender”), on the other hand, together with the related revolving loan note and pledge agreement. The Company did
not incur any termination penalties as a result of the termination of the Credit Agreement. The Company is classifying the MidCap
Revolver as a current liability until March 22, 2018, at which time the MidCap Revolver was terminated and paid in full. The security
interests held by the Lender in substantially all Company assets were released following termination and payoff on March 22, 2018.
The debt issuance costs of the MidCap Revolver were $546. The un-amortized debt issuance costs recorded as interest expense upon
termination of the Credit Agreement on March 22, 2018 were $395.
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 of $336 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
of $819.
AFCO Finance
On June 16, 2017, we entered into
a financing agreement with AFCO Credit Corporation (“AFCO”) to fund the annual premiums due June 1, 2017 on insurance
policies purchased through Marsh Insurance. 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 is $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 will be made beginning July 1, 2017 and ending April 1, 2018. The June 16,
2017 AFCO agreement has a zero balance as of June 30, 2018.
On July 2, 2018, we entered into another
financing agreement with AFCO to fund the annual premiums on insurance policies due June 1, 2018 purchased through Marsh Insurance.
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 is $556 with
an interest rate of 4.519%. An initial down payment of $56 is due before July 1, 2018 and additional 9 monthly payments of $57
will be made beginning July 1, 2018 and ending March 1, 2019.
The outstanding principal due AFCO at
the end of June 30, 2018 and December 30, 2017 was $556 and $367, respectively.
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 will 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 eight percent 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 30, 2018 and December 30,
2017, was $103. The debt issuance costs of the EEI note are $740. The un-amortized debt issuance costs of the EEI note as of June
30, 2018 and December 30, 2017, are $493 and $568, respectively.
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 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. On October 24, 2017, ARCA filed a motion for partial summary judgment; SA cross-motioned on November 6, 2017. On January
8, 2018, judgment was entered in SA’s favor, which was amended as of February 28, 2018 for a total amount of $613,566.32
including interest and attorneys’ fees. On March 2, 2018, ARCA appealed the judgment to the Minnesota Court of Appeals.
The appeal is in progress.
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 LLC 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 December 3-7, 2018.
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.
We are party from time to time to ordinary
course disputes that we do not believe to be material or have merit. We intend to vigorously defend ourselves against these ordinary
course disputes.
Note 19: Income
Taxes
Our overall effective tax rate was 26.8%
for the 26 weeks ended June 30, 2018 and a positive tax provision of $854 against a pre-provision loss of $3,738 for the 26 weeks
ended June 30, 2018, respectively. 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, non-controlling interest, 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 20: Series A
Preferred Stock
On August 18,
2017, the Company acquired GeoTraq by way of merger. GeoTraq is a development stage company that is engaged in the development,
manufacture, and, ultimately, we expect, sale of cellular transceiver modules, also known as Cell-ID modules. As a result of this
transaction, GeoTraq became a wholly-owned subsidiary of the Company. In connection with this transaction, the Company tendered
to the owners of GeoTraq $200,000, issued to them an aggregate of 288,588 shares of the Company’s Series A Convertible Preferred
Stock, and entered into one-year unsecured promissory notes in the aggregate principal amount of $800,000.
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. The following summary of the Series A Preferred Stock and Certificate of Designation does not purport to be complete
and is qualified in its entirety by reference to the provisions of applicable law and to the Certificate of Designation and Certificate
of Correction, which is filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, as amended, for the quarterly
period ended July 1, 2017, and Certificate of Correction, which is filed as Exhibit 3.2. hereto.
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 Convertible 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
Convertible 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. The “conversation
ratio” per share of the Series A Preferred Stock is a ratio of 1:100, meaning every one share of Series A Preferred Stock,
if and when converted into shares of our common stock, converts into 100 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 conversation 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.
Redemption
The shares of
Series A Preferred Stock have no redemption rights.
Preemptive
Rights
Holders of shares
of Series A 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. The holders of Series A 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. Notwithstanding anything to
the contrary herein, the holders of the Series A Preferred Stock may not engage in any vote where the voting power would trigger
any Nasdaq requirement to obtain shareholder approval; provided however the holders do have the right to vote that portion
of their voting power that would not trigger such a requirement. The foregoing voting restriction lapses upon the requisite approval
of the shareholders in compliance with Nasdaq’s shareholder voting requirements in effect at the time of such approval.
Protective
Provisions
Without first
obtaining the affirmative approval of a majority of the holders of the shares of Series A 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 Preferred Stock; (ii) effect an exchange, reclassification, or cancellation of all or a part of the Series A 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 Preferred Stock;
or (iii) alter or change the rights, preferences or privileges of the shares of Series A 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 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 Preferred Stock.
Note 21: Share-based
compensation
We recognized share-based compensation
expense of $0 and $9 for the 13 weeks ended June 30, 2018, and July 1, 2017 respectively. We recognized share-based compensation
expense of $0 and $32 for the 26 weeks ended June 30, 2018, and July 1, 2017 respectively. There is no estimated future share-based
compensation expense as of June 30, 2018. The weighted average fair value per option of options granted during fiscal year 2016
was $1.12. Based on the value of options outstanding as of June 30, 2018, 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.
Note 22: Shareholders’
Equity
Common Stock
: Our Articles
of Incorporation authorize fifty 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 13 weeks and 26 weeks ended June 30, 2018,
respectively, no additional shares of common stock were granted and issued. As of June 30, 2018, and December 30, 2017, there
were 6,875 and 6,875 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 2,000
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 30, 2018, 20 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 30, 2018, 485 options were outstanding under the 2011 Plan. No additional awards will be granted under
the 2011 Plan after the adoption of the 2016 Plan. Our 2006 Stock Option Plan (the “2006 Plan”) expired on June 30,
2011, but the options outstanding under the 2006 Plan continue to be exercisable in accordance with their terms. As of June 30,
2018, 0 options were outstanding to employees and non-employee directors under the 2006 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 with the following weighted-average assumptions for fiscal year 2016. No
options were issued in the 26 weeks ended June 30, 2018 or fiscal year 2017. The expected dividend yield is zero. The expected
stock price volatility is 85.44%. The risk-free interest rate is 2.16%. The expected life of options in years is ten.
Additional information relating to all
outstanding options is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Options
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
Contractual Life
|
|
|
Balance at December 30, 2017
|
|
|
|
627
|
|
|
$
|
2.56
|
|
|
$
|
–
|
|
|
|
4.22
|
|
|
Granted
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
|
(123
|
)
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2018
|
|
|
|
504
|
|
|
$
|
2.21
|
|
|
$
|
–
|
|
|
|
4.84
|
|
The aggregate intrinsic value in the preceding
table represents the total pre-tax intrinsic value, based on our closing stock price of $0.69 on June 29, 2018, which theoretically
could have been received by the option holders had all option holders exercised their options as of that date. As of June
30, 2018, and December 30, 2017, there were no in-the-money options exercisable.
Warrants:
On November
8, 2016, we issued a warrant to Energy Efficiency Investments, LLC (EEI) to purchase 167 shares of common stock at a price of
$0.68 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 $0.63 based on our closing stock price
of $0.95. 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. 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 30, 2018, and December 30,
2017, we had fully vested warrants outstanding to purchase 24 shares of common stock at a price of $3.55 per share and expire
in May 2020 and 167 shares of common stock at a price of $0.68 per share.
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 2017, 288,588
shares (number specific – not rounded) of preferred stock were issued for the GeoTraq acquisition. See Note 5.
Note 23: Earnings
per share
Basic income per common share is computed
based on the weighted average number of common shares outstanding. Diluted income per common share is computed based on the weighted
average number of shares of common stock outstanding adjusted by the number of additional shares that would have been outstanding
had the potentially dilutive shares of common stock been issued. Potentially dilutive shares of common stock include unexercised
stock options and warrants. Basic per share amounts are computed, generally, by dividing net income attributable to shareholders
of the parent by the weighted average number of shares of common stock outstanding. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless their effect is anti-dilutive, thereby reducing the loss
or increasing the income per common share. In calculating diluted weighted average shares and per share amounts, we included
stock options and warrants with exercise prices below average market prices, for the respective reporting periods in which they
were dilutive, using the treasury stock method. We calculated the number of additional shares by assuming the outstanding stock
options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market
price during the quarter. For the 13 weeks and 26 weeks ended June 30, 2018 and July 1, 2017, we excluded options and warrants
to purchase 695 and 734 shares, respectively, of common stock from the diluted weighted average shares outstanding calculation
as the effect of these options were anti-dilutive.
|
|
For the Thirteen Weeks Ended
|
|
|
For the Twenty Six Weeks Ended
|
|
|
|
June 30, 2018
|
|
|
July 1, 2017
|
|
|
June 30, 2018
|
|
|
July 1, 2017
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(1,409
|
)
|
|
$
|
1,218
|
|
|
$
|
(2,884
|
)
|
|
$
|
3,483
|
|
Net income (loss) from discontinued operations and loss
on sale, net of tax
|
|
|
–
|
|
|
|
845
|
|
|
|
–
|
|
|
|
788
|
|
Net income (loss)
|
|
$
|
(1,409
|
)
|
|
$
|
2,063
|
|
|
$
|
(2,884
|
)
|
|
$
|
4,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continued operations
|
|
$
|
(0.20
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.52
|
|
Basic earnings (loss) per share - discontinued operations
and loss on sale, net of tax
|
|
|
–
|
|
|
|
0.13
|
|
|
|
–
|
|
|
|
0.12
|
|
Basic earnings (loss) per share
|
|
$
|
(0.20
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,875
|
|
|
|
6,655
|
|
|
|
6,875
|
|
|
|
6,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from continued operations
|
|
$
|
(0.20
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.52
|
|
Diluted earnings (loss) per share - discontinued operations
and loss on sale, net of tax
|
|
|
–
|
|
|
|
0.13
|
|
|
|
–
|
|
|
|
0.12
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.20
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,875
|
|
|
|
6,655
|
|
|
|
6,875
|
|
|
|
6,655
|
|
Add: Common Stock Warrants
|
|
|
–
|
|
|
|
32
|
|
|
|
–
|
|
|
|
51
|
|
Assumed diluted weighted average common shares outstanding
|
|
|
6,875
|
|
|
|
6,687
|
|
|
|
6,875
|
|
|
|
6,706
|
|
Note 24: Segment
Information
We operate within targeted markets through
two reportable segments: recycling and technology. The recycling segment is composed of income generated by fees charged and costs
incurred for collecting, recycling and installing appliances for utilities and other customers and includes byproduct revenue,
which are primarily generated through the recycling of appliances. We have included the results from consolidating AAP in our
recycling segment through August 15, 2017. The technology segment is composed of all revenue and costs incurred or associated
with GeoTraq. At this time, GeoTraq is in the development stage and expects to go to market with products and services in the
location-based services market. The nature of products, services and customers for each segment 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 revenues and income from operations of each segment. Income from
operations represents revenues less cost of revenues and operating expenses, including certain allocated selling, general and
administrative costs. There are no inter-segment sales or transfers.
The following tables present our segment
information for periods indicated:
|
|
Thirteen Weeks Ended
|
|
|
Twenty Six Weeks Ended
|
|
|
|
June 30, 2018
|
|
|
July 1, 2017
|
|
|
June 30, 2018
|
|
|
July 1, 2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
8,373
|
|
|
$
|
10,744
|
|
|
$
|
17,286
|
|
|
$
|
18,194
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total Revenues
|
|
$
|
8,373
|
|
|
$
|
10,744
|
|
|
$
|
17,286
|
|
|
$
|
18,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
2,150
|
|
|
$
|
3,989
|
|
|
$
|
4,562
|
|
|
$
|
5,805
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total Gross profit
|
|
$
|
2,150
|
|
|
$
|
3,989
|
|
|
$
|
4,562
|
|
|
$
|
5,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
(390
|
)
|
|
$
|
1,577
|
|
|
$
|
(679
|
)
|
|
$
|
(54
|
)
|
Technology
|
|
|
(1,212
|
)
|
|
|
–
|
|
|
|
(2,485
|
)
|
|
|
–
|
|
Total Operating income
|
|
$
|
(1,602
|
)
|
|
$
|
1,577
|
|
|
$
|
(3,164
|
)
|
|
$
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
59
|
|
|
$
|
247
|
|
|
$
|
120
|
|
|
$
|
504
|
|
Technology
|
|
|
933
|
|
|
|
–
|
|
|
|
1,866
|
|
|
|
–
|
|
Total Depreciation and amortization
|
|
$
|
992
|
|
|
$
|
247
|
|
|
$
|
1,986
|
|
|
$
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
38
|
|
|
$
|
125
|
|
|
$
|
629
|
|
|
$
|
422
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total Interest expense
|
|
$
|
38
|
|
|
$
|
125
|
|
|
$
|
629
|
|
|
$
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
(476
|
)
|
|
$
|
1,276
|
|
|
$
|
(1,253
|
)
|
|
$
|
4,516
|
|
Technology
|
|
|
(1,212
|
)
|
|
|
–
|
|
|
|
(2,485
|
)
|
|
|
–
|
|
Total Net income (loss) before provision for income taxes
|
|
$
|
(1,688
|
)
|
|
$
|
1,276
|
|
|
$
|
(3,738
|
)
|
|
$
|
4,516
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 30,
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
13,451
|
|
|
$
|
21,745
|
|
Technology
|
|
|
22,988
|
|
|
|
25,146
|
|
Total Assets
|
|
$
|
36,439
|
|
|
$
|
46,891
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
19
|
|
|
$
|
19
|
|
Technology
|
|
|
22,833
|
|
|
|
24,699
|
|
Total Goodwill and intangible assets
|
|
$
|
22,852
|
|
|
$
|
24,718
|
|
Note 25: 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 $10 and $0 for the 13 weeks ended June 30, 2018 and July 1, 2017, respectively.
We recognized expense for contributions to the plans of $23 and $15 for the 26 weeks ended June 30, 2018 and July 1, 2017, respectively.
Note 26: Related
Parties
Tony Isaac, the Company’s Chief
Executive Officer, is the father of Jon Isaac, Chief Executive Officer of Live Ventures Incorporated and managing member of Isaac
Capital Group LLC, a 9% 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, Chief
Financial Officer, Board of Directors member, and Board of Directors members of, respectively, Live Ventures Incorporated. The
Company also shares certain executive and legal services with Live Ventures Incorporated. The total services were $50 and $0 for
the 13 weeks ended June 30, 2018 and July 1, 2017, respectively. The total services were $116 and $0 for the 26 weeks ended June
30, 2018 and July 1, 2017, 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 was $37 and $42 for the 13 weeks ended June 30,
2018 and July 1, 2017, respectively. The total rent and common area expense was $82 and $93 for the 26 weeks ended June 30, 2018
and July 1, 2017, respectively. The Company received a transition services fee of $68 and $136 from ApplianceSmart for the 13
weeks and 26 weeks ended June 30, 2018.
On December 30, 2017, 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, Inc. (“ApplianceSmart”), 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”). Effective April 1, 2018, Purchaser
issued the Company a promissory note with a three-year term in the original principal amount of $3,919,494 (exact amount) for
the balance of the purchase price. ApplianceSmart is guaranteeing the repayment of this promissory note. See Note 7.
Note 27: Subsequent
Events
On August 10, 2018, the Company issued
1,315,000 shares of common stock to six different individuals in exchange for the provision of services. The shares were offered
and issued in an offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”) under Section 4(2) of the Securities Act.