The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands Except Per Share Amounts)
Note 1: Background
and Basis of Presentation
The accompanying consolidated financial
statements include the accounts of Appliance Recycling Centers of America, Inc., a Nevada corporation, and its subsidiaries (collectively
the “Company” or “ARCA”). The Company has three operating segments for fiscal year 2017 – Retail,
Recycling and Technology, and two operating segments for fiscal year 2016 – Retail, and Recycling.
ARCA is 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.
ARCA’s Recycling segment is comprised
of three entities, ARCA Recycling Inc., ARCA Canada Inc., and Customer Connexx, LLC.
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 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 limited
liability company, is a wholly owned subsidiary formed in October 2016 to provide call center services for electric utility programs.
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. AAP was a joint venture that was formed in October 2009 between
ARCA and 4301 Operations, LLC (“4301”). Both ARCA and 4301 had a 50% interest in AAP. AAP established a regional processing
center in Philadelphia, Pennsylvania, at which the recyclable appliances were processed. AAP commenced operations in February 2010.
The financial position and results of operations of AAP have been consolidated in our financial statements since AAP was formed
in October 2009 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. We had a controlling financial interest
in AAP during the period of October 2009 through August 15, 2017, whereby we provided substantially all of the financial support
to fund the operations of AAP.
On December 30, 2017, we sold our 100%
interest in Appliancesmart Inc. ApplianceSmart, Inc., a Minnesota corporation, was a wholly owned subsidiary that was formed through
a corporate reorganization in July 2011 to hold our retail business of selling new major household appliances through a chain of
Company-owned retail stores under the name ApplianceSmart
®
.
We report on a 52- or 53-week fiscal year.
Both our 2017 fiscal year (“2017”) ended on December 30, 2017, and our fiscal year (“2016”) ended on December
31, 2016, included 52 weeks.
Note 2: Summary
of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Appliance Recycling Centers of America, Inc. and our wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
ARCA Recycling, Inc., 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). As a result of this transaction, GeoTraq became a wholly-owned subsidiary and, therefore, the results of GeoTraq
are included in our consolidated results as of August 18, 2017.
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 December 30, 2017 and December 31, 2016 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 $54 to be adequate to cover any exposure to loss as of
December 30, 2017, and December 31, 2016, 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 December
30, 2017 and December 31, 2016.
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 $750 and $959 for the years ended December 30, 2017, and December 31, 2016, 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 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 $1,397 and $0 for
the years ended December 30, 2017, and December 31, 2016, respectively.
Revenue Recognition
We record revenue in the period when all
of the following requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the sales price is fixed
or determinable, (iii) title, ownership and risk of loss have been transferred to the customer, and (iv) collectability is reasonably
assured. We recognize revenue from appliance sales and appliance accessories in the period the consumer purchases appliance(s),
net of an allowance for estimated returns. We recognize revenue from appliance recycling services when we collect and process the
old appliance. We recognize revenue generated from appliance replacement programs when we deliver the new appliance, collect and
process the old appliance. The delivery, collection and processing activities under our replacement programs typically occur within
one business day and are required to complete the earnings process; there are typically no other performance obligations. We recognize
revenue on extended warranties with retained service obligations on a straight-line basis over the period of the warranty. For
extended warranty arrangements that we sell but others service for a fixed portion of the warranty sales price, we recognize revenue
for the net amount retained at the time of sale of the extended warranty to the consumer. We include shipping and handling charges
to customers in revenue.
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.
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 $1,667 and $1,109 for the years ended December 30, 2017 and December 31, 2016, 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, Ohio, Minnesota, California, Nevada, Georgia and Texas within the United States. Accounts
are insured by the Federal Deposit Insurance Corporation up to $250,000 per institution as of December 30, 2017. At times, balances
may exceed federally insured limits.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued
Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
ASU 2014-09, which supersedes nearly all
existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment
and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is
effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition
methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option
to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09
recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. In August
2015, the FASB issued ASU No. 2015-04,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.
The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities
should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods
within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31,
2016, including interim reporting periods within that reporting period.
In March 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-08,
Revenue
from Contracts with Customers
. The standard addresses the implementation guidance on principal versus agent considerations
in the new revenue recognition standard. The ASU clarifies how an entity should identify the unit of accounting (i.e. the specified
good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements.
Subsequently,
the FASB has issued the following standards related to ASU 2014-09 and ASU No. 2016-08: ASU No. 2016-10,
Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing
(“ASU 2016-10”); ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”);
ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
(“ASU
2016-20”); and, ASU
2017-05—
Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets
(Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
(“ASU 2017-05). The Company must adopt ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-05
with ASU 2014-09 (collectively, the “new revenue standards”). The Company has evaluated the provisions of the new revenue
standards. We will transition to the new revenue standards using the modified retrospective method. We do not anticipate the new
revenue standards will have
a significant impact on our consolidated results of operations, financial condition and cash
flows.
In September, 2014, the FASB issued ASU
No. 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern
. The standard requires an entity’s management to determine whether
substantial doubt exists regarding the entity’s ability to continue as a going concern. The amendments denote how and when
companies are obligated to disclose going concern uncertainties, which are required to be evaluated every interim and annual period.
If management determines that substantial doubt exists, particular disclosures are required. The extent of these disclosures are
dependent upon management’s evaluation of mitigation of the going concern uncertainty. ASU 2014-15 applies prospectively
to annual periods ending after December 15, 2016 and to interim and annual periods thereafter. The Company has adopted this guidance
during its 2017 fiscal year and it did not have a significant impact on its consolidated results of operations, financial condition
and cash flows.
In September, 2015, the FASB issued ASU
No. 2015-16, Business Combinations (Topic 805). Topic 805 requires that an acquirer retrospectively adjust provisional amounts
recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional
amounts, the amendments in the update require that the acquirer recognize adjustments to provisional amounts that are identified
during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to
also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization,
or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been
completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement
or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item
that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as
of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The Company has adopted this guidance
during its 2017 fiscal year and it did not have a significant impact on its consolidated results of operations, financial condition
and cash flows.
ASU 2016-02,
Leases
(Topic 842)
. The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing
a right to use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018, with early adoption permitted. 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
2016-15,
Statement of Cash Flows (Topic 230): Restricted Cash
(a
consensus of the FASB Emerging Issues Task Force).
ASU 2016-15 clarifies
whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt
prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance
proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions
from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with
aspects of more than one class of cash flows. ASU 2016-15 takes effect in 2018 for public companies. If an entity elects early
adoption, it must adopt all of the amendments in the same period.
We are currently evaluating
the impact that this standard will have on our consolidated financial statements.
ASU
2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
.
Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs.
While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has
outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set
are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired
set with their own inputs and processes. The amendments in this Update provide a screen to determine when a set is not a business.
The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated
in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number
of transactions that need to be further evaluated by public business entities applying the amendments in this Update to annual
periods beginning after December 15, 2017, including interim periods within those periods.
ASU 2017-04,
Intangibles-
Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment
, eliminates step 2 from the goodwill impairment
test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value. An entity may still perform the optional qualitative assessment for a reporting unit to determine if it
is more likely than not that goodwill is impaired. A public business entity that is an SEC filer should prospectively adopt the
ASU for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have adopted this
standard effective with our goodwill impairment test date of July 1, 2017.
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.
In July, 2017, the FASB issued ASU No.
2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivative and Hedging (Topic 815).
The standard is intended to simplify the accounting for certain financial instruments with down round features. This ASU changes
the classification analysis of particular equity-linked financial instruments (e.g. warrants, embedded conversion features) allowing
the down round feature to be disregarded when determining whether the instrument is to be indexed to an entity’s own stock.
Because of this, the inclusion of a down round feature by itself exempts an instrument from having to be remeasured at fair value
each earnings period. The standard requires that entities recognize the effect of the down round feature on EPS when it is triggered
(i.e., when the exercise price is adjusted downward due to the down round feature) equivalent to the change in the fair value of
the instrument instantly before and after the strike price is modified. An adjustment to diluted EPS calculation may be required.
The standard does not change the accounting for liability-classified instruments that occurred due to a different feature or term
other than a down round feature. Additionally, entities must disclose the presence of down round features in financial instruments
they issue, when the down round feature triggers a strike price adjustment, and the amount of the adjustment necessary. ASU 2017-11
is effective for all fiscal years beginning after December 15, 2018. The Company has decided to early adopt ASU 2017-11 and it
did not have a significant impact on its consolidated results of operations, financial condition and cash flows.
Note 3: Comprehensive Income
Comprehensive income is the sum of net
income and other items that must bypass the income statement because they have not been realized, including items like an unrealized
holding gain or loss from available for sale securities and foreign currency translation gains or losses. For our Company, for
years ended December 30, 2017 and December 31, 2016, our comprehensive income includes foreign currency translation gains and losses.
Note 4: Reclassifications
Certain amounts in the prior year consolidated
financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect
on the previously reported net income 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 .001 per share. Amounts for Common stock and additional paid in capital
for fiscal years 2017 and 2016 have been reclassified to reflect this subsequent event.
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%, and maturing on August 18, 2018 in the aggregate principal of $800, and 288,588 shares (exact number) 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, which clarifies the definition of a business for purposes
of applying ASC 805. The Company has determined that GeoTraq is a single or group of related assets, not a business as clarified
by ASU 2017-01 at the time of acquisition.
Note 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 was 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 assets
and liabilities of AAP consolidated in our financial position as of December 31, 2016:
Assets
|
|
December 31, 2016
|
|
Current assets
|
|
$
|
438
|
|
Property and equipment, net
|
|
|
7,322
|
|
Other assets
|
|
|
83
|
|
Total assets
|
|
$
|
7,843
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
1,388
|
|
Accrued expenses
|
|
|
523
|
|
Current maturities of long-term debt obligations
|
|
|
3,558
|
|
Long-term debt obligations, net of current maturities
|
|
|
435
|
|
Other liabilities (a)
|
|
|
1,126
|
|
Total liabilities
|
|
$
|
7,030
|
|
(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 52 weeks ended December 30, 2017, and December 31, 2016, respectively:
|
|
52 Weeks Ended
|
|
|
|
December 30, 2017 (b)
|
|
|
December 31, 2016
|
|
Revenues
|
|
$
|
1,433
|
|
|
$
|
6,697
|
|
Gross profit
|
|
|
24
|
|
|
|
1,305
|
|
Operating loss
|
|
|
(848
|
)
|
|
|
(363
|
)
|
Net loss
|
|
|
(991
|
)
|
|
|
(628
|
)
|
(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: Assets of held for sale – 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 $65,000. 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”). See Note 25. The Purchase Price per agreement is due and payable on
or before March 31, 2018. As of December 30, 2017, the Company has an amount due from ApplianceSmart Holdings LLC a subsidiary
of Live Ventures Incorporated in the sum of $6,500 recorded as a current asset.
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)
|
|
52 weeks
|
|
|
52 weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Revenue
|
|
$
|
56,296
|
|
|
$
|
63,130
|
|
Cost of revenue
|
|
|
42,252
|
|
|
|
46,824
|
|
Gross profit
|
|
|
14,044
|
|
|
|
16,306
|
|
Selling, general and administrative expense
|
|
|
15,911
|
|
|
|
17,970
|
|
Operating loss - discontinued operations
|
|
|
(1,867
|
)
|
|
|
(1,664
|
)
|
Other income
|
|
|
862
|
|
|
|
141
|
|
Other expense
|
|
|
(5
|
)
|
|
|
(251
|
)
|
Net loss - discontinued operations before income tax benefit
|
|
|
(1,010
|
)
|
|
|
(1,774
|
)
|
Income tax benefit
|
|
|
270
|
|
|
|
475
|
|
Net loss - discontinued operations, net of tax
|
|
$
|
(740
|
)
|
|
$
|
(1,299
|
)
|
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (In Thousands)
As of December 30, 2017 (date of sale), and December 31,
2016
|
|
2017
|
|
|
2016
|
|
Accounts Receivable
|
|
$
|
2,356
|
|
|
$
|
1,538
|
|
Inventories
|
|
|
8,836
|
|
|
|
14,793
|
|
Prepaid expenses
|
|
|
173
|
|
|
|
–
|
|
Total current assets held for sale
|
|
|
11,365
|
|
|
|
16,331
|
|
Buildings and improvements
|
|
|
2,073
|
|
|
|
1,948
|
|
Equipment
|
|
|
1,756
|
|
|
|
1,753
|
|
Accumulated depreciation
|
|
|
(3,319
|
)
|
|
|
(3,148
|
)
|
Restricted cash
|
|
|
1,298
|
|
|
|
500
|
|
Other assets
|
|
|
204
|
|
|
|
221
|
|
Total non-current assets held for sale
|
|
|
2,012
|
|
|
|
1,274
|
|
Total assets held for sale - discontinued operations
|
|
$
|
13,377
|
|
|
$
|
17,605
|
|
Purchase price
|
|
|
6,500
|
|
|
|
|
|
Loss of sale of assets held for sale
|
|
|
(6,877
|
)
|
|
|
|
|
Income tax benefit
|
|
|
1,842
|
|
|
|
|
|
Net loss on sale of assets held for sale and discontinued operations, net of tax
|
|
$
|
(5,035
|
)
|
|
|
|
|
Note 8: Inventory
Inventories of continuing operations, consisting principally
of appliances, are stated at the lower of cost, determined on a specific identification basis, or market and consist of the following
as of December 30, 2017, and December 31, 2016:
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Appliances held for resale
|
|
$
|
762
|
|
|
$
|
974
|
|
Processed metals from recycled appliances held for resale
|
|
|
–
|
|
|
|
139
|
|
Other
|
|
|
–
|
|
|
|
6
|
|
|
|
$
|
762
|
|
|
$
|
1,119
|
|
We provide estimated provisions for the
obsolescence of our appliance inventories, including adjustments to market, based on various factors, including the age of such
inventory and our management’s assessment of the need for such provisions. We look at historical inventory aging reports
and margin analyses in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded.
Note 9: Prepaids and other current assets
Prepaids and other current assets as of December 30, 2017 and
December 31, 2016 consist of the following:
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Prepaid insurance
|
|
$
|
443
|
|
|
$
|
888
|
|
Prepaid rent
|
|
|
5
|
|
|
|
118
|
|
Prepaid other
|
|
|
58
|
|
|
|
134
|
|
|
|
$
|
506
|
|
|
$
|
1,140
|
|
Note 10: Property and equipment
Property and equipment of continuing operations as of December
30, 2017 and December 31, 2016 consist of the following:
|
|
Useful Life (Years)
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Land
|
|
|
|
$
|
–
|
|
|
$
|
1,140
|
|
Buildings and improvements
|
|
18-30
|
|
|
156
|
|
|
|
1,832
|
|
Equipment (including computer software)
|
|
3-15
|
|
|
5,908
|
|
|
|
17,511
|
|
Projects under construction
|
|
|
|
|
29
|
|
|
|
200
|
|
Property and equipment
|
|
|
|
|
6,093
|
|
|
|
20,683
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(5,555
|
)
|
|
|
(11,120
|
)
|
Property and equipment, net
|
|
|
|
$
|
538
|
|
|
$
|
9,563
|
|
Property and equipment are stated at cost.
We compute depreciation using straight-line method over a range of estimated useful lives from 3 to 30 years. We amortize leasehold
improvements on a straight-line basis over the shorter of their estimated useful lives or the underlying lease term. Repair and
maintenance costs are charged to operations as incurred.
Depreciation and amortization expense for
continuing operations was $750 and $959 for fiscal years 2017 and 2016, respectively.
Note 11: Intangible assets
Intangible assets of continuing operations as of December 30,
2017 and December 31, 2016 consist of the following:
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Intangible assets GeoTraq, net
|
|
$
|
24,699
|
|
|
$
|
–
|
|
Patent
|
|
|
19
|
|
|
|
19
|
|
Goodwill
|
|
|
–
|
|
|
|
38
|
|
|
|
$
|
24,718
|
|
|
$
|
57
|
|
The useful life and amortization period of the GeoTraq intangible
acquired is seven years. Intangible amortization expense for continuing operations was $1,397 and $0 for fiscal years 2017 and
2016, respectively.
Note 12: Deposits and other assets
Deposits and other assets of continuing operations as of December
30, 2017 and December 31, 2016 consist of the following:
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Deposits
|
|
$
|
411
|
|
|
$
|
232
|
|
Other
|
|
|
107
|
|
|
|
104
|
|
|
|
$
|
518
|
|
|
$
|
336
|
|
Deposits are primarily refundable security deposits with landlords
the Company leases property from.
Note 13: Accrued liabilities
Accrued liabilities of continuing operations as of December
30, 2017 and December 31, 2016 consist of the following:
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Sales tax estimates, including interest
|
|
$
|
4,563
|
|
|
$
|
4,203
|
|
Compensation and benefits
|
|
|
1,061
|
|
|
|
2,431
|
|
Deferred revenue
|
|
|
300
|
|
|
|
227
|
|
Accrued incentive and rebate checks
|
|
|
285
|
|
|
|
358
|
|
Accrued rent
|
|
|
77
|
|
|
|
263
|
|
Accrued interest
|
|
|
115
|
|
|
|
–
|
|
Warranty
|
|
|
–
|
|
|
|
26
|
|
Accrued payables
|
|
|
129
|
|
|
|
570
|
|
Other
|
|
|
31
|
|
|
|
810
|
|
|
|
$
|
6,561
|
|
|
$
|
8,888
|
|
We operate in fourteen states in the U.S.
and in various provinces in Canada. From time to time, we are subject to sales and use tax audits that could result in additional
taxes, penalties and interest owed to various taxing authorities.
As previously disclosed, the California
Board of Equalization (“BOE”) conducted a sales and use tax examination covering the Company’s California operations
for 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 14: 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
amount of 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 terminated,
and the PNC Revolver was paid in full on May 10, 2017 with funds advanced from MidCap Financial Trust. A letter of credit to Whirlpool
Corporation remains outstanding with PNC backed by restricted cash collateral of $750 as of December 30, 2017. This restricted
cash collateral was transferred with the sale of ApplianceSmart. See Note 17, long term obligations, for additional information.
Note 15: 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 original balance of the notes payable – short term
was $800. The outstanding balance of the notes payable – short term as of December 30, 2017 is $300. Interest accrued
is included in accrued expenses. See Note 5.
Note 16: Income taxes
For fiscal year 2017, we recorded an income
tax benefit of $3,441. For fiscal year 2016, we recorded an income tax benefit of $49. As of December 30, 2017, we maintained a
valuation allowance of $1,102 against our net operating loss carryforwards, foreign tax credits and all deferred tax assets in
Canada, principally net operating losses.
The benefit of income taxes for fiscal
years 2017 and 2016 consisted of the following:
|
|
For the fiscal years ended
|
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
–
|
|
|
$
|
12
|
|
State
|
|
|
34
|
|
|
|
36
|
|
Foreign
|
|
|
–
|
|
|
|
–
|
|
Current tax expense (benefit)
|
|
$
|
34
|
|
|
$
|
48
|
|
Deferred tax expense - domestic
|
|
|
(3,475
|
)
|
|
|
(97
|
)
|
Deferred tax expense - foreign
|
|
|
–
|
|
|
|
–
|
|
Benefit of income taxes
|
|
$
|
(3,441
|
)
|
|
$
|
(49
|
)
|
A reconciliation of our benefit of income
taxes with the federal statutory tax rate for fiscal years 2017 and 2016 is shown below:
|
|
For the fiscal years ended
|
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Income tax expense at statutory rate
|
|
$
|
(995
|
)
|
|
$
|
(617
|
)
|
Portion attributable to noncontrolling interest at statutory rate
|
|
|
–
|
|
|
|
107
|
|
State tax expense, net of federal tax effect
|
|
|
(141
|
)
|
|
|
(69
|
)
|
Permanent differences
|
|
|
55
|
|
|
|
20
|
|
Change in tax rates
|
|
|
(3,107
|
)
|
|
|
–
|
|
Change in valuation allowance
|
|
|
590
|
|
|
|
414
|
|
Other
|
|
|
157
|
|
|
|
96
|
|
|
|
$
|
(3,441
|
)
|
|
$
|
(49
|
)
|
Loss before benefit of income taxes and
noncontrolling interest was derived from the following sources for fiscal years 2017 and 2016 as shown below:
|
|
For the fiscal years ended
|
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
United States
|
|
$
|
(2,835
|
)
|
|
$
|
(1,677
|
)
|
Canada
|
|
|
(90
|
)
|
|
|
(137
|
)
|
|
|
$
|
(2,925
|
)
|
|
$
|
(1,814
|
)
|
The components of net deferred tax assets
(liabilities) as of December 30, 2017 and December 31, 2016, are as follows:
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Allowance for bad debts
|
|
$
|
16
|
|
|
$
|
21
|
|
Accrued expenses
|
|
|
1,107
|
|
|
|
1,651
|
|
Inventory
|
|
|
80
|
|
|
|
192
|
|
Accrued compensation
|
|
|
23
|
|
|
|
175
|
|
Reserves
|
|
|
4
|
|
|
|
26
|
|
Prepaid expenses
|
|
|
(125
|
)
|
|
|
(56
|
)
|
|
|
|
1,105
|
|
|
|
2,009
|
|
Less: valuation allowance
|
|
|
–
|
|
|
|
–
|
|
Total current deferred tax assets (liabilities)
|
|
|
1,105
|
|
|
|
2,009
|
|
|
|
|
|
|
|
|
|
|
Long term deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
1,217
|
|
|
|
709
|
|
Capital loss
|
|
|
–
|
|
|
|
104
|
|
Tax credits
|
|
|
473
|
|
|
|
473
|
|
Share-based compensation
|
|
|
302
|
|
|
|
354
|
|
Intangibles
|
|
|
(6,615
|
)
|
|
|
–
|
|
Property and equipment
|
|
|
(72
|
)
|
|
|
(596
|
)
|
Deferred rent
|
|
|
16
|
|
|
|
337
|
|
Unrealized losses (gains)
|
|
|
132
|
|
|
|
600
|
|
Section 481(a) adjustment
|
|
|
(44
|
)
|
|
|
(67
|
)
|
Investments
|
|
|
–
|
|
|
|
(1,269
|
)
|
Other
|
|
|
11
|
|
|
|
(61
|
)
|
|
|
|
(4,580
|
)
|
|
|
584
|
|
Less: valuation allowance
|
|
|
(1,102
|
)
|
|
|
(512
|
)
|
Total long term deferred tax assets (liabilities)
|
|
|
(5,682
|
)
|
|
|
72
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(4,577
|
)
|
|
$
|
2,081
|
|
The deferred tax amounts have been classified
in the accompanying consolidated balance sheets as follows:
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
–
|
|
|
$
|
2,081
|
|
Non-current liabilities
|
|
|
4,577
|
|
|
|
–
|
|
|
|
$
|
4,577
|
|
|
$
|
2,081
|
|
As of December 30, 2017, the Company has
net operating loss carryforwards of approximately $1.3 million for federal income tax purposes, which will be available to offset
future taxable income. Due to recent tax legislation, these net operating losses are eligible for indefinite carryforward, limited
by certain taxable income limitations and Sec. 382 limitations related to changes in control. The Company has certain foreign tax
credits available but has recorded a full valuation allowance against these tax credits until the Company has sufficient foreign
source income to utilize these credits. The Company has state net operating loss carryforwards of approximately $1.0 million, but
has provided a partial valuation allowance of approximately $0.7 million on certain state net operating losses due to sufficient
income in those jurisdictions.
The Company annually conducts an analysis
of its uncertain tax positions and has concluded that it has no uncertain tax positions as of December 30, 2017. The Company’s
policy is to record uncertain tax positions as a component of income tax expense. The Company is not under examination by any jurisdiction
as of December 30, 2017.
Due to recent tax legislation that occurred
on December 22, 2017 the federal corporate income tax rate was reduced to a flat 21%, which provides a significant income tax benefit
to our Company in future reporting periods. The Company recognized a tax benefit of approximately $3.1 million related to adjusting
our deferred tax balances to reflect the new corporate tax rate.
Note 17: Long
term obligations
Long term debt, capital lease and other
financing obligations as of December 30, 2017, and December 31, 2016, consist of the following:
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
PNC term loan
|
|
$
|
–
|
|
|
$
|
1,020
|
|
MidCap financial trust asset based revolving loan
|
|
|
5,605
|
|
|
|
–
|
|
AFCO Finance
|
|
|
367
|
|
|
|
–
|
|
Susquehanna term loans
|
|
|
–
|
|
|
|
3,242
|
|
GE 8% loan agreement
|
|
|
482
|
|
|
|
482
|
|
EEI note
|
|
|
103
|
|
|
|
103
|
|
PIDC 2.75% note, due in month installments of $3, including interest, due October 2024
|
|
|
–
|
|
|
|
287
|
|
Capital leases and other financing obligations
|
|
|
30
|
|
|
|
564
|
|
Debt issuance costs, net
|
|
|
(1,010
|
)
|
|
|
(779
|
)
|
Total debt obligations
|
|
|
5,577
|
|
|
|
4,919
|
|
Less current maturities
|
|
|
(5,577
|
)
|
|
|
(2,093
|
)
|
Long-term debt obligations, net of current maturities
|
|
$
|
–
|
|
|
$
|
2,826
|
|
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 provides us with a $12,000
revolving line of credit, which may be increased to $16,000 under certain terms and conditions (the “MidCap Revolver”).
The MidCap Revolver has a stated maturity date of May 10, 2020, if not renewed. The MidCap Revolver is collateralized by a security
interest in substantially all of our assets. The lender is also secured by an inventory repurchase agreement with Whirlpool Corporation
for Whirlpool purchases only. The Credit Agreement requires 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 is (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 limits the amount of other debt we can incur,
the amount we can spend on fixed assets, and the amount of investments we can make, along with prohibiting the payment of dividends.
The amount of revolving borrowings available
under the Credit Agreement is based on a formula using receivables and inventories. We may 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 is the one-month LIBOR rate plus four and one-half
percent (4.50%).
On December 30, 2017 and December 31, 2016,
our available borrowing capacity under the Credit Agreement is $1,031 and $0, respectively. The weighted average interest rate
for the period of May 10, 2017 through December 30, 2017 was 8.29%. We borrowed $62,845 and repaid $57,240 on the Credit Agreement
during the period of May 10, 2017 through December 30, 2017, leaving an outstanding balance on the Credit Agreement of $5,605 and
$0 at December 30, 2017 and December 31, 2016, respectively. The debt issuance costs for the MidCap Revolver are $546. The un-amortized
debt issuance costs for the MidCap Revolver as of December 30, 2017 are $442.
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 alleges 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 states 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.
GE
On August 14, 2017 as a part of the sale
of the Company’s equity interest in AAP, Recleim LLC, a Delaware limited liability company (“Recleim”), agreed
to undertake, pay or assume the Company’s GE obligations consisting of a promissory note (GE 8% loan agreement) and other
payables which were incurred after the issuance of such promissory note. Recleim has agreed to indemnify and hold ARCA harmless
from any action to be taken by GE relating to such obligations. The Company has an offsetting receivable due from Recleim.
AFCO Finance
On June 16, 2017, we entered into
a financing agreement with AFCO Credit Corporation (“AFCO”) to fund the annual premiums 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’. 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 outstanding principal at the end of
December 30, 2017 and December 31, 2016 was $367 and $0, respectively.
Susquehanna Term Loans
On March 10, 2011, AAP entered into
three separate commercial term loans (“BB&T Term Loans”) with Branch Banking Trust Company, as successor to Susquehanna
Bank, (“BB&T”) pursuant to the guidelines of the U.S. Small Business Administration 7(a) Loan Program.
The aggregate principal amount of the BB&T Term Loans was $4,750, divided into three separate loans with principal amounts
of $2,100; $1,400; and $1,250, respectively. The BB&T Term Loans matured in ten years and bore an interest rate of prime plus
2.75%. Borrowings under the BB&T Term Loans were secured by substantially all of the assets of AAP along with liens on
the business assets and certain personal assets of the owners of 4301 Operations, LLC. We were a guarantor of the BB&T Term
Loans along with 4301 Operations, LLC and its members. In connection with the BB&T Term Loans, BB&T had a security interest
in the recycling equipment assets of the Company. The BB&T Term Loans entered into by AAP were paid in full on August 15, 2017
and BB&T’s security interest in the recycling equipment assets of the Company was terminated and released.
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 December 30, 2017 and December 31,
2016, was $103. The debt issuance costs of the EEI note are $740. The un-amortized debt issuance costs of the EEI note as of December
30, 2017 are $568.
Note 18: Commitments and Contingencies
Litigation
On March 6, 2015, a complaint was filed
in United States District Court for the Central District of California by Jason Feola, individually and as a representative of
a putative class consisting of purchasers of the Company’s common stock between March 15, 2012 and February 11, 2015, against
Appliance Recycling Centers of America, Inc. and certain current and former officers of the Company. Mr. Feola, pursuant to terms
of his retainer agreement with The Rosen Law Firm, certified that he purchased 240 shares of the Company’s common stock for
$984 in total consideration. On May 7, 2015, the Company and the individual defendants were served the complaint. In July 2015,
the Company and the individual defendants received an amended complaint. The complaint alleges that misstatements and omissions
occurred in press releases and filings by the Company with the Securities and Exchange Commission and that these misstatements
or omissions constitute violations of Section 20 (a) and Section 10(b) of, and Rule 10b-5 under, the Securities Exchange Act of
1934. In October 2015, the court held a hearing on the Company's motion to dismiss the complaint. On November 24, 2015, the United
States District Court for the Central District of California entered an order granting the motion to dismiss the amended complaint.
The Court’s order provided that the dismissal was without prejudice and that the plaintiffs could file an amended complaint
within 21 days of the issuance of the order. On December 15, 2015, the Company and the individual defendants were served with a
second amended complaint. In May 2016, the court held a hearing on the Company’s motion to dismiss the second amended complaint.
On October 21, 2016 the court entered a final judgement to dismiss the class action complaint with prejudice.
On November 6, 2015, a complaint was filed
in the Minnesota District Court for Hennepin County, Minnesota, by David Gray and Michael Boller, purporting to bring suit derivatively
on behalf of the Company against twelve current and former officers and directors of the Company. The complaint alleged that the
defendants breached their fiduciary duties to the Company, and that the defendants have been unjustly enriched as a result thereof.
The complaint sought damages, disgorgement, an award of attorneys’ fees and other expenses, and an order compelling changes
to the Company’s corporate governance and internal procedures. The Company and the other defendants vigorously denied plaintiffs’
allegations and have not admitted any liability or wrongdoing as part of the settlement. The court made no findings or determinations
with respect to the merit of plaintiffs’ claims, and no payment is being made by the Company or the other defendants. The
parties have reached a settlement that fully resolves plaintiffs’ claims and provides for the release of all claims asserted
in the litigation. On August 2, 2017, the court entered an order granting preliminary approval of the settlement. On September
29, 2017, the court issued an order granting final approval of the settlement. As a condition of the settlement, the Company has
agreed to provide certain training to employees in the Company’s accounting department within one year of the settlement.
The court also granted an application by plaintiffs’ counsel for attorneys’ fees, to be paid by the Company’s
insurance carrier. Other than this award of attorneys’ fees, no payment or other consideration was paid by the Company nor
its officers or directors in connection with the settlement.
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 parties have selected an arbitrator and the arbitration was deemed to have commenced as of May 29, 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.
Operating Leases
The Company leases its office space and
recycling centers under non-cancelable operating leases expiring through fiscal year 2017. Rent expense under these leases for
continuing operations was $1,450 and $2,062 for the fiscal years ended December 30, 2017 and December 31, 2016, respectively. Rent
expense may include certain common area charges such as taxes, maintenance, utilities and insurance.
Future minimum annual rental commitments
under noncancelable operating lease agreements as of December 30, 2017 are as follows:
Fiscal year 2018
|
|
$
|
1,160
|
|
Fiscal year 2019
|
|
|
636
|
|
Fiscal year 2020
|
|
|
252
|
|
Fiscal year 2021
|
|
|
171
|
|
Fiscal year 2022
|
|
|
92
|
|
Thereafter
|
|
|
–
|
|
|
|
$
|
2,311
|
|
Note 19: 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, issued to them an aggregate of 288,588 shares (number of shares specific – not rounded) of
the Company’s Series A Convertible Preferred Stock valued at $14,964, including the beneficial conversion feature of $2,641,
and entered into one-year unsecured promissory notes in the aggregate principal amount of $800.
In connection
with 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 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 (iv) 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 20: 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 fiscal year 2017, 220 shares of common stock
were granted and issued in lieu of professional services at a fair value of $272. During fiscal year 2016, 50 shares of common
stock were granted from the 2011 Stock Compensation Plan (the “2011 Plan”) to the Company’s CEO and the corresponding
fair value of $62 was included in share-based compensation. 85 shares of common stock were granted from the 2011 Plan to a contractor
in lieu of professional services and the corresponding fair value of $88 was included in selling, general and administrative
expenses. 620 shares of common stock were granted and issued at fair value of $694 for entering into a convertible note
agreement as debt issuance cost. As of December 30, 2017, and December 31, 2016, there were 6,875 and 6,655 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 December 30, 2017, 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 December 30, 2017, 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 December
30, 2017, 123 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 2017. Expected dividend yield zero. Expected stock price volatility 85.44%.
Risk-free interest rate 2.16%. Expected life of options in years, ten.
Additional information relating to all
outstanding options is as follows (in thousands, except per share data):
|
|
Options Outstanding
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life
|
|
Balance January 2, 2016
|
|
|
780
|
|
|
$
|
2.70
|
|
|
$
|
–
|
|
|
|
5.23
|
|
Granted
|
|
|
30
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(51
|
)
|
|
|
0.88
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(49
|
)
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
710
|
|
|
|
2.62
|
|
|
$
|
–
|
|
|
|
4.66
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(83
|
)
|
|
|
3.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2017
|
|
|
627
|
|
|
$
|
2.56
|
|
|
$
|
–
|
|
|
|
4.22
|
|
The weighted average fair value per option
of options granted during fiscal year 2016 was $1.12. We recognized share-based compensation expense related to option grants of
$32 and $245 for fiscal years 2017 and 2016, respectively. The aggregate intrinsic value in the preceding table represents
the total pre-tax intrinsic value, based on our closing stock price of $1.04 on December 29, 2017, which theoretically could have
been received by the option holders had all option holders exercised their options as of that date. As of December 30, 2017,
December 31, 2016 and January 2, 2016, there were no in-the-money options exercisable.
Based on the value of options outstanding
as of December 31, 2017, we do not estimate any future share-based compensation expense for existing options issued. This estimate
does not include any expense for additional options that may be granted and vest in subsequent years.
Warrants:
On November 8,
2016, we issued a warrant to Energy Efficiency Investments, LLC (EEI) to purchase 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 December 30, 2017, and December 31,
2016, 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 Geo Traq acquisition. See Note 19.
Note 21: Earnings per share
Net earnings per share is calculated using
the weighted average number of shares of common stock outstanding during the applicable period. Basic weighted average common shares
outstanding do not include shares of restricted stock that have not yet vested, although such shares are included as outstanding
shares in the Company’s Consolidated Balance Sheet. Diluted net earnings per share is computed using the weighted average
number of common shares outstanding and if dilutive, potential common shares outstanding during the period. Potential common shares
consist of the additional common shares issuable in respect of restricted share awards, stock options and convertible preferred
stock.
The following table presents the computation
of basic and diluted net earnings per share:
|
|
For the fiscal year ended
|
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
5,893
|
|
|
$
|
(152
|
)
|
Net loss from discontinued operations and loss on sale, net of tax
|
|
|
(5,775
|
)
|
|
|
(1,299
|
)
|
Net income (loss)
|
|
$
|
118
|
|
|
$
|
(1,451
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic income (loss) per share from continued operations
|
|
$
|
0.88
|
|
|
$
|
(0.03
|
)
|
Basic loss per share - discontinued operations and loss on sale, net of tax
|
|
|
(0.86
|
)
|
|
|
(0.21
|
)
|
Basic income (loss) per share
|
|
$
|
0.02
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,708
|
|
|
|
6,054
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share from continued operations
|
|
$
|
0.87
|
|
|
$
|
(0.03
|
)
|
Diluted loss per share - discontinued operations and loss on sale, net of tax
|
|
|
(0.85
|
)
|
|
|
(0.21
|
)
|
Diluted income (loss) per share
|
|
$
|
0.02
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,708
|
|
|
|
6,054
|
|
Add: Options
|
|
|
–
|
|
|
|
–
|
|
Add: Common Stock Warrants
|
|
|
50
|
|
|
|
167
|
|
Assumed diluted weighted average common shares outstanding
|
|
|
6,758
|
|
|
|
6,221
|
|
Potentially dilutive securities were excluded
from the calculation of diluted net income per share for years ended December 30, 2017 and December 31, 2016. The weighted average
number of dilutive securities excluded were 651 and 900, respectively for each fiscal year, because the effects were anti-dilutive
based on the application of the treasury stock method. Series A preferred shares issued and outstanding are excluded from dilutive
securities until the conditions for conversion have been satisfied. See Note 19.
Note 22: Major customers and suppliers
For the fiscal year ended December 30,
2017, no customer represented more than 10% of our total revenues. For the fiscal year ended December 31, 2016, no customer represented
more than 10% of our total revenues. As of December 30, 2017, two customers, each represented more than 10% of our total trade
receivables, for a total of 41% of our total trade receivables. As of December 31, 2016, two customers, each represented more than
10% of our total trade receivables, for a total of 25% of our total trade receivables.
During the two fiscal years ended December
30, 2017 and December 31, 2016, we purchased a vast majority of 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 23: 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 $90 and $62 for fiscal years 2017 and 2016, respectively.
Note 24: Segment information
We operate within targeted markets through
two reportable segments for continuing operations: recycling and technology. The recycling segment includes all fees charged and
costs incurred for collecting, recycling and installing appliances for utilities and other customers. The recycling segment also
includes byproduct revenue, which is primarily generated through the recycling of appliances and includes all revenues from AAP
up until the date of deconsolidation August 15, 2017. The nature of products, services and customers for both segments varies significantly.
As such, the segments are managed separately. Our Chief Executive Officer has been identified as the Chief Operating Decision Maker
(“CODM”). The CODM evaluates performance and allocates resources based on sales and income from operations of each
segment. Income from operations represents revenues less cost of revenues and operating expenses, including certain allocated selling,
general and administrative costs. There are no intersegment sales or transfers. Our retail segment comprised of ApplianceSmart
was sold on December 30, 2017, see Note 7.
The following tables present our segment information for continuing
operations for fiscal years 2017 and 2016:
|
|
Year Ended
|
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
41,544
|
|
|
$
|
40,459
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
Total Revenues
|
|
$
|
41,544
|
|
|
$
|
40,459
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
13,145
|
|
|
$
|
12,359
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
Total Gross profit
|
|
$
|
13,145
|
|
|
$
|
12,359
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
1,300
|
|
|
$
|
1,119
|
|
Technology
|
|
|
(1,531
|
)
|
|
|
–
|
|
Total Operating income
|
|
$
|
(231
|
)
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
750
|
|
|
$
|
959
|
|
Technology
|
|
|
1,397
|
|
|
|
–
|
|
Total Depreciation and amortization
|
|
$
|
2,147
|
|
|
$
|
959
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
894
|
|
|
$
|
1,168
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
Total Interest expense
|
|
$
|
894
|
|
|
$
|
1,168
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before provision for income taxes
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
5,598
|
|
|
$
|
(40
|
)
|
Technology
|
|
|
(1,531
|
)
|
|
|
–
|
|
Total Net income (loss) before provision for income taxes
|
|
$
|
4,067
|
|
|
$
|
(40
|
)
|
|
|
As of
|
|
|
As of
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
Recycling
|
|
$
|
21,745
|
|
|
$
|
24,251
|
|
Technology
|
|
|
25,146
|
|
|
|
–
|
|
Total Assets
|
|
$
|
46,891
|
|
|
$
|
24,251
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
19
|
|
|
$
|
57
|
|
Technology
|
|
|
24,699
|
|
|
|
–
|
|
Total Goodwill and intangible assets
|
|
$
|
24,718
|
|
|
$
|
57
|
|
Certain items have been reclassified from prior year for presentation
with no effect to net income.
Note 25: 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 $30 for the year ending December
30, 2017. 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 $213 for the year ending December 30, 2017.
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.
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”). 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 26: Subsequent events
ApplianceSmart, Inc. Financing
As previously announced by Appliance Recycling
Centers of America, Inc. (the “Company” or “ARCA”), on December 30, 2017, ApplianceSmart Holdings LLC,
a wholly-owned subsidiary of Live Ventures Incorporated (the “Purchaser”), entered into a Stock Purchase Agreement
(the “Agreement”) with the Company (the “Seller”) and ApplianceSmart, Inc. (“ApplianceSmart”),
a wholly owned subsidiary of the Seller. Pursuant to the Agreement, the Purchaser purchased (the “Transaction”) from
the Seller all of the issued and outstanding shares of capital stock of ApplianceSmart in exchange for $6,500 (the “Purchase
Price”). The Purchaser was required to deliver the Purchase Price, and a portion of the Purchase Price was delivered, to
the Seller prior to March 31, 2018. 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.
MidCap Financial Termination of Credit
and Security Agreement
On March 22, 2018, Appliance Recycling
Centers of America, Inc. terminated a Credit and Security Agreement (the “Credit Agreement”) of MidCap Financial Trust
together with the related revolving loan note and pledge agreement. ARCA has no further obligations (financial or otherwise) to
MidCap Financial Trust and did not incur any termination penalties as a result of the termination of the Credit Agreement.
Prestige Capital
On March 26, 2018, Appliance Recycling
Centers of America, Inc. (“ARCA”) entered into a purchase and sale agreement with Prestige Capital Corporation (“Prestige
Capital”), whereby from time to time ARCA can factor certain accounts receivable to Prestige Capital up to a maximum advance
and outstanding balance of $7,000. Discount fees ultimately paid depend upon how long an invoice and related amount is outstanding
from ARCA’s customer. Prestige Capital has been granted a security interest in all ARCA accounts receivable. The term of
the purchase and sale agreement is six months from March 26, 2018.
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”).
The Reincorporation was previously
submitted to a vote of, and approved by, the Company’s stockholders at its 2017 Annual Meeting of Stockholders held on November
21, 2017 (the “Annual Meeting”). Upon the effectiveness of the Reincorporation:
|
–
|
the affairs of the Company ceased to be governed by the Minnesota Business Corporation Act, the Company’s existing Articles of Incorporation and the Company’s existing Bylaws, and the affairs of the Company became subject to the Nevada Revised Statutes, the Nevada Articles of Incorporation and the Nevada Bylaws;
|
|
–
|
each outstanding share of the Minnesota corporation’s common stock and Series A Preferred Stock converted into an outstanding share of the Nevada corporation’s common stock and Series A Preferred Stock, respectively;
|
|
–
|
each outstanding option to acquire shares of the Minnesota corporation’s common stock converted into an equivalent option to acquire, upon the same terms and conditions (including the vesting schedule and exercise price per share applicable to each such option), the same number of shares of the Nevada corporation’s common stock;
|
|
–
|
each employee benefit, stock option or other similar plan of the Minnesota corporation continued to be an employee benefit, stock option or other similar plan of the Nevada corporation; and
|
|
–
|
each director and officer of the Minnesota corporation continued to hold his or her respective position with the Nevada corporation.
|
Certain rights of the Company’s
stockholders were also changed as a result of the Reincorporation, as described in the Company’s Definitive Proxy Statement
on Schedule 14A for the Annual Meeting filed with the Securities and Exchange Commission on October 25, 2017, under the section
entitled “Proposal 3 – Approval of the Reincorporation of the Company from the State of Minnesota to the State of Nevada
– Significant Differences Related to State Law”, which description is incorporated in its entirety herein by reference.
The Reincorporation did not affect
any of the Company’s material contracts with any third parties, and the Company’s rights and obligations under such
material contractual arrangements continue to be rights and obligations of the Company after the Reincorporation. The Reincorporation
did not result in any change in headquarters, business, jobs, management, location of any of the offices or facilities, number
of employees, assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation) of the Company.
The Reincorporation did affect the
par value of the Company’s common shares from no par value to a par value of .001 per common share.