The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2017
(In thousands)
UNAUDITED AND RESTATED
Note 1: Nature
of Business and Basis of Presentation
Appliance Recycling Centers of America, Inc.
and subsidiaries (“we,” the “Company” or “ARCA”) are in the business of providing turnkey appliance
recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. We also sell new major
household appliances through a chain of Company-owned stores under the name ApplianceSmart
®
. Through our GeoTraq
Inc. (“GeoTraq”) subsidiary, a development stage company, we are engaged in the development, design and, ultimately,
we expect the sale of cellular transceiver modules, also known as Cell-ID modules. GeoTraq is part of a new reporting segment for
our Company – Technology. On August 15, 2017, we sold our 50% interest in a joint venture operating under the name ARCA Advanced
Processing, LLC (AAP”), which recycles appliances from twelve states in the Northeast and Mid-Atlantic regions of the United
States.
The accompanying balance sheet as of December
31, 2016 which has been derived from the audited consolidated financial statements and the unaudited consolidated financial statements
have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United
States of America for interim financial information and Article 8 of Regulation S-X promulgated by the United States Securities
and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, normal and recurring adjustments and accruals considered
necessary for a fair presentation for the periods indicated have been included. Operating results for the 13 Week and 39 Week periods
ended September 30, 2017 and October 1, 2016, are presented in lieu of three month and nine-month periods, respectively. The Company
reports results on a 52-week fiscal basis. The results of operations for any interim period are not necessarily indicative of the
results for the year.
In preparation of the Company’s condensed
consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets
and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot be determined
with precision, actual results could differ significantly from these estimates.
Reincorporation in the State of
Nevada
On March 12, 2018,
Appliance Recycling Centers of America, Inc. (the “Company”) changed its state of incorporation from the State of Minnesota
to the State of Nevada (the “Reincorporation”) pursuant to a plan of conversion, dated March 12, 2018 (the “Plan
of Conversion”). The Reincorporation was accomplished by the filing of (i) articles of conversion (the “Minnesota
Articles of Conversion”) with the Secretary of State of the State of Minnesota and (ii) articles of conversion (the
“Nevada Articles of Conversion”) and articles of incorporation (the “Nevada Articles of Incorporation”)
with the Secretary of State of the State of Nevada. Pursuant to the Plan of Conversion, the Company also adopted new bylaws (the
“Nevada Bylaws”).
These condensed consolidated financial
statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto
for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K, as amended, initially filed
with the SEC on March 31, 2017.
Principles of consolidation
:
The consolidated financial statements include the accounts of Appliance Recycling Centers of America, Inc. and our subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation.
ApplianceSmart, Inc., a Minnesota
corporation, is a wholly owned subsidiary that 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. 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. 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. The operating results
of our wholly owned subsidiaries are consolidated in our financial statements.
AAP is a joint venture that was formed
in October 2009 between ARCA and 4301 Operations, LLC (“4301”). ARCA and 4301 owned a 50% interest in AAP through
August 15, 2017, on which date ARCA sold its 50% interest in AAP. AAP established a regional processing center in Philadelphia,
Pennsylvania at which recyclable appliances are processed. The financial position and results of operations of AAP are consolidated
in our financial statements through August 15, 2017, based on our conclusion that AAP is a variable interest entity due to our
contribution more than 50% of the total equity, subordinated debt and other forms of financial support. We had a controlling financial
interest in AAP and we have provided substantial financial support to fund the operations of AAP since its inception. 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. Note 6 – Sale and deconsolidation of variable interest entity AAP to these condensed 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) that could utilize technology like the technology that emergency 911 location systems currently utilize.
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.
Note 2: Summary
of Significant Accounting Policies
Principles of consolidation
:
The consolidated financial statements
include the accounts of Appliance Recycling Centers of America, Inc. and our subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial
statements include the accounts of Appliance Recycling Centers of America, Inc. and our wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
ApplianceSmart, Inc., a Minnesota
corporation, is a wholly owned subsidiary that 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.
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
more than 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).
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 like the Company’s
existing debt arrangements, unless quoted market prices were available (Level 2 inputs). The carrying amounts of long-term debt
at September 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
September 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 September 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 and amortization expense
was $173 and $302 for the 13 weeks ended September 30, 2017 and October 1, 2016, respectively. Depreciation and amortization expense
was $782 and $936 for the 39 weeks ended September 30, 2017 and October 1, 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 $272 and $0 for the 13 and 39 weeks
ended September 30, 2017 and October 1, 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 $484 and $241 for the 13 weeks ended September 30, 2017 and October 1, 2016, respectively.
Advertising expense totaled $1,227 and $978 for the 39 weeks ended September 30, 2017 and October 1, 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 retail space, warehouse facilities
and office space. These assets and properties are generally leased under noncancelable agreements that expire at various dates
through 2023 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 23).
Concentration of Credit Risk
The Company maintains cash balances at
several banks in several states including, Minnesota, California, and Nevada within the United States. Accounts are insured by
the Federal Deposit Insurance Corporation up to $250,000 per institution as of September 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.
ASU 2016-02,
Leases (Topic 842)
.
The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing a right to
use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that this
standard will have on our consolidated financial statements.
ASU 2016-04,
Recognition of Breakage
for Certain Prepaid Stored-Value Products
. The standard specifies how prepaid stored-value product liabilities should be derecognized,
thereby eliminating the current and potential future diversity in practice. The ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact
that this standard will have on our consolidated financial statements.
ASU 2016-09,
Compensation- Stock
Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting,
introduces targeted amendments intended
to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies
(including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income
statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they
occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether
the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming
from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise.
Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if
required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain
and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash
flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold
to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies
that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing
activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis,
to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures
when they occur. The ASU is effective for public business entities for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted in any interim or annual period for which the financial statements
have not been issued or made available to be issued. Certain detailed transition provisions apply if an entity elects to early
adopt. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
ASU 2017-09,
Compensation- Stock
Compensation (Topic 718): Scope of Modification Accounting
, clarifies such that an entity must apply modification accounting
to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair
value of the modified award is the same as the fair value of the original award immediately before the modification. The ASU indicates
that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not
required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award
are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of
the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim
periods within those years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the
impact that this standard will have on our consolidated financial statements.
Note 3: Comprehensive
Income
Comprehensive income is the sum of net
income and other items that must bypass the income statement because they have not been realized, including items like an unrealized
holding gain or loss from available for sale securities and foreign currency translation gains or losses. For the 13 weeks ended
September 30, 2017 and October 1, 2016, our comprehensive income is $733 and $1,094, respectively. For the 39 weeks ended September
30, 2017 and October 1, 2016, our comprehensive income (loss) is $5,040 and $(1,417), respectively. Our comprehensive income (loss)
includes foreign currency translation gains and losses, and net loss attributable to non-controlling interest.
Note 4: Reclassifications and Restatements
Our previously issued consolidated financial
statements for quarter and nine months ended September 30, 2017 and year ended December 31, 2016 have been reclassified and restated.
We did not record the deferred tax liability
associated with the purchase of the intangible assets of GeoTraq at time of acquisition. The Company determined that Intangible
asset associated with GeoTraq should have been increased by $10,133, with a corresponding increase to deferred tax liability.
We did not record the beneficial conversion
amount related to the issuance of the Series A convertible preferred shares in the amount of $2,641. The beneficial conversion
feature reduced the Series A convertible preferred and increased additional paid in capital of the same amount $2,641.
We reclassified additional paid in capital
of $12,322 for the issuance of the Series A convertible preferred stock amount less par value of .001 per Series A convertible
preferred share.
We reclassified $22,430 from common stock
to additional paid in capital now that the common stock has a par value of .001 with the Company’s recent reincorporation
in the state of Nevada.
Fiscal Quarter Ended September 30, 2017
|
|
As
|
|
|
|
|
|
|
|
In Thousands
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Change
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
15,748
|
|
|
$
|
10,133
|
|
|
$
|
25,881
|
|
Deferred taxes
|
|
|
1,305
|
|
|
|
(1,305
|
)
|
|
|
–
|
|
Total assets
|
|
|
46,191
|
|
|
|
8,828
|
|
|
|
55,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
–
|
|
|
|
8,828
|
|
|
|
8,828
|
|
Total liabilities
|
|
|
15,353
|
|
|
|
8,828
|
|
|
|
24,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, series A
|
|
|
14,963
|
|
|
|
(14,963
|
)
|
|
|
–
|
|
Common stock
|
|
|
22,437
|
|
|
|
(22,430
|
)
|
|
|
7
|
|
Additional paid in capital
|
|
|
–
|
|
|
|
37,393
|
|
|
|
37,393
|
|
Total liabilities and equity
|
|
|
46,191
|
|
|
|
8,828
|
|
|
|
55,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Statement Changes Thirty Nine Weeks Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock issued
|
|
$
|
14,963
|
|
|
$
|
(2,641
|
)
|
|
$
|
12,322
|
|
Beneficial conversion feature Series A convertible preferred stock
|
|
|
–
|
|
|
|
2,641
|
|
|
|
2,641
|
|
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 engaged in
the development, design, and, ultimately, we expect 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 by the Company for GeoTraq included cash $200, unsecured promissory notes bearing interest at the
annual rate of 1.29%; maturing on August 18, 2018 in the aggregate principal of $800, and 288,588 shares of convertible series
A preferred stock with a final fair value of $14,963. See Note 19 – Series A Preferred Stock to these consolidated financial
statements. In connection with the acquisition, an additional amount was recorded in the amount of $10,133 and an offsetting deferred
tax liability recorded of the same amount, $10,133 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. The Company
elected to early adopt ASU 2017-01 Business Combinations, which clarifies the definition of a business for purposes of applying
ASC 805 Related Parties. The Company has determined that GeoTraq is a single or group of related assets and was not a business
as clarified by ASU 2017-01 at the time of acquisition.
Note 6: Sale
and deconsolidation of variable interest entity - AAP
The financial position and results of operations
of AAP have been consolidated in our financial statements since AAP’s inception based on our conclusion that AAP is a variable
interest entity that we controlled due to our contribution more than 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:
|
|
December 31, 2016
|
|
Assets
|
|
|
|
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 13 weeks and 39 weeks ended September 30, 2017, and October 1, 2016,
respectively:
|
|
13 Weeks Ended
|
|
|
|
September 30,
2017 (b)
|
|
|
October 1,
2016
|
|
Revenues
|
|
$
|
306
|
|
|
$
|
2,076
|
|
Gross profit
|
|
|
38
|
|
|
|
492
|
|
Operating income (loss)
|
|
|
(140
|
)
|
|
|
79
|
|
Net income (loss)
|
|
|
(165
|
)
|
|
|
24
|
|
|
|
39 Weeks Ended
|
|
|
|
September 30,
2017 (b)
|
|
|
October 1,
2016
|
|
Revenues
|
|
$
|
1,433
|
|
|
$
|
5,557
|
|
Gross profit
|
|
|
24
|
|
|
|
967
|
|
Operating loss
|
|
|
(848
|
)
|
|
|
(285
|
)
|
Net loss
|
|
|
(991
|
)
|
|
|
(490
|
)
|
(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 $157. The Company received $800 in cash consideration for its 50%
equity interest in AAP.
Note 7: Receivables
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Trade receivables, net
|
|
$
|
10,147
|
|
|
$
|
9,258
|
|
Due from Recleim
|
|
|
819
|
|
|
|
–
|
|
Other receivables
|
|
|
1,025
|
|
|
|
1,251
|
|
Trade and other receivables, net
|
|
$
|
11,991
|
|
|
$
|
10,509
|
|
For the 13 weeks ended September 30, 2017,
two customers represented more than 10% of our total revenues. For the 13 weeks ended October 1, 2016, two customers represented
more than 10% of our total revenues. For the 39 weeks ended September 30, 2017, one customer represented more than 10% of our total
revenues. For the 39 weeks ended October 1, 2016, two customers represented more than 10% of our total revenues. As of September
30, 2017, two customers, each represented more than 10% of our total trade receivables, for a total of 27% 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 27% of our
total trade receivables.
During the 13 and 39 weeks ended September
30, 2017 and October 1, 2016, respectively, we purchased appliances for resale from three suppliers. We have and are continuing
to secure other vendors from which to purchase appliances. However, the curtailment or loss of one of these suppliers or any appliance
supplier could adversely affect our operations.
Note 8: Inventories
Inventories, consisting principally of
appliances, are stated at the lower of cost, determined on a specific identification basis, or net realizable value and consist
of:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Appliances held for resale
|
|
$
|
11,219
|
|
|
$
|
16,146
|
|
Processed metals from recycled appliances held for resale
|
|
|
–
|
|
|
|
139
|
|
Other
|
|
|
–
|
|
|
|
6
|
|
|
|
$
|
11,219
|
|
|
$
|
16,291
|
|
We provide estimated provisions for the
obsolescence of our appliance inventories, including adjustments to net realizable value, based on various factors, including the
age of such inventory and our management’s assessment of the need for such provisions. We look at historical inventory aging’s
and margin analysis in determining our provision estimate. A revised cost basis is used once a provision for obsolescence
is recorded. The Company does not have a reserve for obsolete inventory at September 30, 2017 and December 31, 2016.
Note 9: Prepaids
and other current assets
Prepaids and other current assets as of September 30, 2017 and
December 31, 2016 consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Prepaid insurance
|
|
$
|
722
|
|
|
$
|
34
|
|
Prepaid rent
|
|
|
–
|
|
|
|
518
|
|
Prepaid other
|
|
|
169
|
|
|
|
209
|
|
|
|
$
|
891
|
|
|
$
|
761
|
|
Note 10: Property
and equipment
Property and equipment as of September 30, 2017, and December
31, 2016, consist of the following:
|
|
Useful Life (Years)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
|
|
$
|
–
|
|
|
$
|
1,140
|
|
Buildings and improvements
|
|
18-30
|
|
|
2,122
|
|
|
|
3,780
|
|
Equipment (including computer software)
|
|
3-15
|
|
|
7,897
|
|
|
|
19,260
|
|
Projects under construction
|
|
|
|
|
73
|
|
|
|
204
|
|
Property and equipment
|
|
|
|
|
10,092
|
|
|
|
24,384
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(9,098
|
)
|
|
|
(14,268
|
)
|
Property and equipment, net
|
|
|
|
$
|
994
|
|
|
$
|
10,116
|
|
Depreciation and amortization expense was
$173 and $302 for the 13 weeks ended September 30, 2017 and October 1, 2016, respectively. Depreciation and amortization expense
was $782 and $936 for the 39 weeks ended September 30, 2017 and October 1, 2016, respectively.
On January 25, 2017, as disclosed by the
Company in Item 2.01 of its Current Report on Form 8-K filed with the SEC on January 31, 2017, the Company sold its’ Compton,
California facility (the “Compton Facility”) for $7,103 to Terreno Acacia, LLC. The proceeds from the sale paid off
the PNC term loan in the aggregate principal amount of $1,020 that was secured by the property and costs of sale of $325, with
the remaining proceeds of $5,758 paid towards the PNC Revolver (as defined below). The Company recorded a gain on the sale of property
of $5,163. The Company rented the Compton Facility back from Terreno Acacia, LLC after the completion of the sale from January
26, 2017 through April 10, 2017.
Note 11: Intangible
assets
Intangible assets as of September 30, 2017, and December 31,
2016, consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Intangible assets GeoTraq, net
|
|
$
|
25,824
|
|
|
$
|
–
|
|
Recycling contract, net
|
|
|
19
|
|
|
|
19
|
|
Goodwill
|
|
|
38
|
|
|
|
38
|
|
|
|
$
|
25,881
|
|
|
$
|
57
|
|
For the 13 Week and 39 Week periods ended
September 30, 2017, we recorded amortization expense of $272, related to our finite intangible assets. The useful life and amortization
period of the GeoTraq intangible acquired is seven years.
Note 12: Deposits
and other assets
Deposits and other assets as of September
30, 2017, and December 31, 2016, consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Deposits
|
|
$
|
600
|
|
|
$
|
453
|
|
Other
|
|
|
151
|
|
|
|
104
|
|
|
|
$
|
751
|
|
|
$
|
557
|
|
Deposits are primarily refundable security deposits with landlords
the Company leases property from.
Note 13: Accrued
liabilities
Accrued liabilities as of September 30,
2017, and December 31, 2016, consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Sales tax estimates, including interest
|
|
$
|
4,610
|
|
|
$
|
4,203
|
|
Compensation and benefits
|
|
|
741
|
|
|
|
2,431
|
|
Accrued incentive and rebate checks
|
|
|
192
|
|
|
|
358
|
|
Accrued rent
|
|
|
238
|
|
|
|
263
|
|
Warranty
|
|
|
14
|
|
|
|
26
|
|
Accrued payables
|
|
|
–
|
|
|
|
570
|
|
Deferred revenue
|
|
|
322
|
|
|
|
227
|
|
Other
|
|
|
110
|
|
|
|
810
|
|
|
|
$
|
6,227
|
|
|
$
|
8,888
|
|
Sales and Use Tax Assessment
We operate in twenty-three states in the
U.S. and in various provinces in Canada. From time to time, we are subject to sales and use tax audits that could result in additional
taxes, penalties and interest owed to various taxing authorities.
As previously disclosed, the California
Board of Equalization (“BOE”) conducted 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
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 from MidCap Financial Trust. A letter of credit to Whirlpool Corporation
remains outstanding with PNC backed by restricted cash collateral of $750 as of September 30, 2017. See Note 16, 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 and outstanding balance of the notes payable – short
term as of September 30, 2017 is $800. Interest accrued is included in accrued expenses. See Note 13.
Note 16: Long
term obligations
Long term debt, capital lease and other
financing obligations as of September 30, 2017, and December 31, 2016, consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
PNC term loan
|
|
$
|
–
|
|
|
$
|
1,020
|
|
MidCap financial trust asset based revolving loan
|
|
|
3,616
|
|
|
|
–
|
|
AFCO Finance
|
|
|
639
|
|
|
|
–
|
|
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
|
|
|
36
|
|
|
|
564
|
|
Debt issuance costs, net
|
|
|
(1,030
|
)
|
|
|
(779
|
)
|
Total debt obligations
|
|
|
3,846
|
|
|
|
4,919
|
|
Less current maturities
|
|
|
(3,846
|
)
|
|
|
(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 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 September 30, 2017 and December 31,
2016, our available borrowing capacity under the Credit Agreement is $2,416 and $0, respectively. The weighted average interest
rate for the period of May 10, 2017 through September 30, 2017 was 5.66%. We borrowed $45,099 and repaid $41,483 on the Credit
Agreement during the period of May 10, 2017 through September 30, 2017, leaving an outstanding balance on the Credit Agreement
of $3,616 and $0 at September 30, 2017 and December 31, 2016, respectively. The debt issuance costs for the MidCap Revolver are
$484. The un-amortized debt issuance costs for the MidCap Revolver as of September 30, 2017 are $424.
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, because 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 because 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 has 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
has not declared the amounts outstanding under the Credit Agreement to be immediately due and payable but has imposed the default
rate of interest, which is 5% more than 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 disagrees with the
Lenders that any Event of Default has occurred and is reserving all its options with respect to the Credit Agreement. The Company
and the Agent are in active discussions for forbearance and resolution of the default, however there can be no assurance the Company
and the Agent will be able to agree on terms of the forbearance. The Company is classifying the Mid-Cap Revolver as a current liability
until forbearance and resolution of the default is cured.
GE
On August 14, 2017 as a part of the sale
of the Company’s equity interest in AAP, Recleim LLC, a Delaware limited liability company (“Recleim”), agreed
to undertake, pay or assume the Company’s GE obligations consisting of a promissory note (GE 8% loan agreement) and other
payables of $336 which were incurred after the issuance of such promissory note. Recleim has agreed to indemnify and hold ARCA
harmless from any action to be taken by GE relating to such obligations. The Company has an offsetting receivable due from Recleim
of $818.
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
September 30, 2017 and December 31, 2016 was $639 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 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 September 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 September
30, 2017 and December 31, 2016 are $604 and $715, respectively.
Note 17: Commitments
and Contingencies
Contracts
:
We have
entered into material contracts with three appliance manufacturers. Under the agreements there are no minimum purchase commitments;
however, we have agreed to indemnify the manufacturers for certain claims, allegations or losses with respect to appliances we
sell.
Litigation:
In February 2012, various individuals
commenced a class action lawsuit against Whirlpool Corporation (“Whirlpool”) and various distributors of Whirlpool
products, including Sears, The Home Depot, Lowe’s and us, alleging certain appliances Whirlpool sold through its distribution
chain, which includes us, were improperly designated with the ENERGY STAR® qualification rating established by the U.S. Department
of Energy and the Environmental Protection Agency. The claims against us include breach of warranty claims, as well as various
state consumer protection claims. The amount of the claim is, yet, undetermined. Whirlpool has offered to fully indemnify
and defend its distributors in this lawsuit, including us, and has engaged legal counsel to defend itself and the distributors.
We are monitoring Whirlpool’s defense of the claims and believe the possibility of a material loss is remote.
AMTIM Capital Inc. (“AMTIM”) provided management
and sales services in respect of our recycling services in Canada and was paid pursuant to agreements between AMTIM and us. A dispute
arose between AMTIM and us with respect to the calculation of amounts due to AMTIM pursuant to the agreements. In a lawsuit filed
in the province of Ontario on March 29, 2011, AMTIM claimed a discrepancy in the calculation of fees due to AMTIM by us more than
$1.6 million. On December 9, 2011 the United States District Court for the District of Minnesota issued a declaratory default judgment
to the effect that our method of calculating of the amounts due to AMTIM is correct. Although the Ontario action continues, and
its outcome is uncertain, we believe that no further amounts are due under the terms of these agreements and we will continue to
defend our position relative to this lawsuit.
We are party from time to time to ordinary
course disputes that we do not believe to be material or have merit. We intend to vigorously defend ourselves against these ordinary
course disputes.
Note 18: Income
Taxes
Our overall effective tax rate was 34.4%
for the 39 weeks ended September 30, 2017 and a positive tax provision of $438 against a pre-provision loss of $1,238 for the 39
weeks ended October 1, 2016, respectively. The effective tax rates and related provisional tax amounts vary from the U.S. federal
statutory rate due to state taxes, foreign taxes, share-based compensation, non-controlling interest, valuation allowance, and
certain non-deductible expenses.
We regularly evaluate both positive and
negative evidence related to retaining a valuation allowance against certain deferred tax assets. The realization of deferred tax
assets is dependent upon sufficient future taxable income during the periods when deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. We have concluded based on the weight of evidence that a valuation allowance
should be maintained against certain deferred tax assets that we do not expect to utilize in the near future. The Company continues
to have a full valuation allowance against its Canadian operations.
Note 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 $12,322, including the beneficial conversion feature of $2,641, and entered into one-year unsecured
promissory notes in the aggregate principal amount of $800.
To accomplish
the designation and issuance of the Series A Preferred Stock, we filed a Certificate of Designation with the Secretary
of State of the State of Minnesota. On November 9, 2017, we filed a Certificate of Correction with the Minnesota Secretary of State.
The following summary of the Series A Preferred Stock and Certificate of Designation does not purport to be complete and is
qualified in its entirety by reference to the provisions of applicable law and to the Certificate of Designation and Certificate
of Correction, which is filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, as amended, for the quarterly
period ended July 1, 2017, and Certificate of Correction, which is filed as Exhibit 3.2. hereto.
Dividends
We cannot declare,
pay or set aside any dividends on shares of any other class or series of our capital stock unless (in addition to the obtaining
of any consents required by our Articles of Incorporation) the holders of the Series A Preferred Stock then outstanding shall first
receive, or simultaneously receive, a dividend in the aggregate amount of $1.00, regardless of the number of then-issued and outstanding
shares of Series A Preferred Stock. Any remaining dividends allocated by the Board of Directors shall be distributed in an equal
amount per share to the holders of outstanding common stock and Series A Preferred Stock (on an as-if-converted to common stock
basis pursuant to the Conversion Ratio as defined below).
Liquidation
Rights
Immediately prior
to the occurrence of any liquidation, dissolution or winding up of the Company, whether voluntary of involuntary, all shares of
Series A Convertible Preferred Stock automatically convert into shares of our common stock based upon the then-applicable “conversion
ratio” (as defined below) and shall participate in the liquidation proceeds in the same manner as other shares of our common
stock.
Conversion
The Series A Convertible
Preferred Stock is not convertible into shares of our common stock except as described below.
Subject to the
third sentence of this paragraph, each holder of a share of Series A Preferred Stock has the right, exercisable at any time and
from time to time (unless otherwise prohibited by law, rule or regulation, or as restricted below), to convert any or all of such
holder’s shares of Series A Preferred Stock into shares of our common stock at the conversion ratio. The “conversation
ratio” per share of the Series A Preferred Stock is a ratio of 1:100, meaning every one share of Series A Preferred Stock,
if and when converted into shares of our common stock, converts into 100 shares of our common stock. Notwithstanding anything to
the contrary in the Certificate of Designation, a holder of Series A Preferred Stock may not convert any of such holder’s
shares and we may not issue any shares of our common stock in connection with a conversation that would trigger any Nasdaq requirement
to obtain shareholder approval prior to such conversion or issuance in connection with such conversion that would be in excess
of that number of shares of common stock equivalent to 19.9% of the number of shares of common stock as of August 18, 2017 ;
provided
,
however
,
that holders of the Series A Preferred Stock may effectuate any conversion and we are obligated to issue shares of common stock
in connection with a conversion that would not trigger such a requirement. The foregoing restriction is of no further force or
effect upon the approval of our stockholders in compliance with Nasdaq’s shareholder voting requirements. Notwithstanding
anything to the contrary contained in the Certificate of Designation, the holders of the Series A Preferred Stock may not effectuate
any conversion and we may not issue any shares of common stock in connection with a conversion until the later of (x) February
28, 2018, or (y) sixty-one days following the date on which our stockholders have approved the voting, conversion, and other potential
rights of the holders of Series A Preferred Stock described in the Certificate of Designation in accordance with the relevant Nasdaq
requirements.
Redemption
The shares of
Series A Preferred Stock have no redemption rights.
Preemptive
Rights
Holders of shares
of Series A Preferred Stock are not entitled to any preemptive rights in respect to any securities of the Company, except as set
forth in the Certificate of Designation or any other document agreed to by us.
Voting Rights
Each holder of
a share of Series A Preferred Stock has a number of votes as is determined by multiplying (i) the number of shares of Series A
Preferred Stock held by such holder, and (ii) 100. The holders of Series A Preferred Stock vote together with all other classes
and series of common and preferred stock of the Company as a single class on all actions to be taken by the common stockholders
of the Company, except to the extent that voting as a separate class or series is required by law. Notwithstanding anything to
the contrary herein, the holders of the Series A Preferred Stock may not engage in any vote where the voting power would trigger
any Nasdaq requirement to obtain shareholder approval; provided, however, the holders do have the right to vote that
portion of their voting power that would not trigger such a requirement. The foregoing voting restriction lapses upon the requisite
approval of the shareholders in compliance with Nasdaq’s shareholder voting requirements in effect at the time of such approval.
Protective
Provisions
Without first
obtaining the affirmative approval of a majority of the holders of the shares of Series A Preferred Stock, we may not directly
or indirectly (i) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series
A Preferred Stock; (ii) effect an exchange, reclassification, or cancellation of all or a part of the Series A Preferred Stock,
but excluding a stock split or reverse stock split or combination of the common stock or preferred stock; (iii) effect an exchange,
or create a right of exchange, of all or part of the shares of another class of shares into shares of Series A Preferred Stock;
or (iii) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely
the shares of such series, including the rights set forth in this Designation; provided, however, that we may, without any vote
of the holders of shares of the Series A Preferred Stock, make technical, corrective, administrative or similar changes to the
Certificate of Designation that do not, individually or in the aggregate, materially adversely affect the rights or preferences
of the holders of shares of the Series A Preferred Stock.
Note 20: Share-based
compensation
We recognized share-based compensation
expense of $0 and $123 for the 13 weeks ended September 30, 2017, and October 1, 2016 respectively. We recognized share-based compensation
expense of $32 and $264 for the 39 weeks ended September 30, 2017 and October 1, 2016, respectively. Based on the value of
options outstanding as of September 30, 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.
Note 21: Shareholders’
Equity
Common Stock
: Our Articles
of Incorporation authorize fifty million shares of common stock that may be issued from time to time having such rights, powers,
preferences and designations as the Board of Directors may determine. During the 39 weeks ended September 30, 2017, respectively,
no additional shares of common stock were granted and issued. As of September 30, 2017, and December 31, 2016, there were 6,655
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 September 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 September 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 September
30, 2017, 90 options were outstanding to employees and non-employee directors under the 2006 Plan. We issue new common stock when
stock options are exercised. The Company periodically grants stock options that vest based upon the achievement of performance
targets. For performance-based options, the Company evaluates the likelihood of the targets being met and records the expense over
the probable vesting period.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for fiscal year 2016. No
options were issued in the 13 or 39 weeks ended September 30, 2017, 2018. The expected dividend yield is zero. The expected stock
price volatility is 85.44%. The risk-free interest rate is 2.16%. The expected life of options in years is ten.
Additional information relating to all
outstanding options is as follows (in thousands, except per share data):
|
|
Options Outstanding
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life
|
|
Balance at December 31, 2016
|
|
|
710
|
|
|
|
2.62
|
|
|
$
|
–
|
|
|
|
4.66
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(83
|
)
|
|
|
3.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
627
|
|
|
$
|
2.56
|
|
|
$
|
–
|
|
|
|
4.47
|
|
The aggregate intrinsic value in the preceding
table represents the total pre-tax intrinsic value, based on our closing stock price of $1.03 on September 30, 2017, which theoretically
could have been received by the option holders had all option holders exercised their options as of that date. As of September
30, 2017, and December 31, 2016, there were no in-the-money options exercisable.
Warrants:
On November
8, 2016, we issued a warrant to Energy Efficiency Investments, LLC (EEI) to purchase 167 shares of common stock at a price of $0.68
per share. The fair value of the warrant issued was $106 and it was exercisable in full at any time during a term of five years.
The fair value per share of common stock underlying the warrant issued to EEI was $0.63 based on our closing stock price of $0.95.
The exercise price may be reduced and the number of shares of common stock that may be purchased under the warrant may be increased
if the Company issues or sells additional shares of common stock at a price lower than the then-current warrant exercise price
or the then-current market price of the common stock. The shares underlying the warrant include legal restrictions regarding the
transfer or sale of the shares. The fair value of the EEI warrant was recorded as deferred financing costs and is being amortized
over the term of the commitment.
As of September 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.
Series A Convertible Preferred Stock
:
Our
Articles of Incorporation authorize two million shares of preferred stock that may be issued from time to time in one or more series
having such rights, powers, preferences and designations as the Board of Directors may determine. In 2017, 288,588 shares
(number specific – not rounded) of preferred stock were issued for the GeoTraq acquisition. See Note 5 and 19.
Note 22: Earnings
per share
Basic income per common share is computed
based on the weighted average number of common shares outstanding. Diluted income per common share is computed based on the weighted
average number of shares of common stock outstanding adjusted by the number of additional shares that would have been outstanding
had the potentially dilutive shares of common stock been issued. Potentially dilutive shares of common stock include unexercised
stock options and warrants. Basic per share amounts are computed, generally, by dividing net income attributable to shareholders’
of the parent by the weighted average number of shares of common stock outstanding. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless their effect is anti-dilutive, thereby reducing the loss
or increasing the income per common share. In calculating diluted weighted average shares and per share amounts, we included
stock options and warrants with exercise prices below average market prices, for the respective reporting periods in which they
were dilutive, using the treasury stock method. We calculated the number of additional shares by assuming the outstanding stock
options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market
price during the quarter. For the 13 weeks and 39 weeks ended September 30, 2017 and October 1, 2016, we excluded options and warrants
to purchase 651 and 651 shares of common stock from the diluted weighted average shares outstanding calculation as the effect of
these options were anti-dilutive.
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to controlling interest
|
|
$
|
770
|
|
|
$
|
1,123
|
|
|
$
|
5,041
|
|
|
$
|
(1,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,655
|
|
|
|
5,991
|
|
|
|
6,655
|
|
|
|
5,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.12
|
|
|
$
|
0.19
|
|
|
$
|
0.76
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to diluted earnings (loss) per share
|
|
$
|
770
|
|
|
$
|
1,123
|
|
|
$
|
5,041
|
|
|
$
|
(1,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,655
|
|
|
|
5,991
|
|
|
|
6,655
|
|
|
|
5,940
|
|
Add: Common Stock Warrants
|
|
|
50
|
|
|
|
–
|
|
|
|
50
|
|
|
|
–
|
|
Assumed diluted weighted average common shares outstanding
|
|
|
6,705
|
|
|
|
5,991
|
|
|
|
6,705
|
|
|
|
5,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.19
|
|
|
$
|
0.75
|
|
|
$
|
(0.24
|
)
|
Note 23: Segment
Information
We operate within targeted markets through
three reportable segments: retail, recycling and technology. The retail segment is composed of income generated through our ApplianceSmart
stores, which includes appliance sales and byproduct revenues from collected appliances. The recycling segment is composed of income
generated by fees charged and costs incurred for collecting, recycling and installing appliances for utilities and other customers
and includes byproduct revenue, which are primarily generated through the recycling of appliances. We have included the results
from consolidating AAP in our recycling segment through August 15, 2017. The technology segment is composed of all revenue and
costs incurred or associated with GeoTraq. Currently, GeoTraq. is in the development stage and expects to go to market with products
and services in the location-based services market. The nature of products, services and customers for each segment varies significantly.
As such, the segments are managed separately. Our Chief Executive Officer has been identified as the Chief Operating Decision Maker
(“CODM”). The CODM evaluates performance and allocates resources based on revenues and income from operations of each
segment. Income from operations represents revenues less cost of revenues and operating expenses, including certain allocated selling,
general and administrative costs. There are no inter-segment sales or transfers.
The following tables present our segment
information for periods indicated:
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
13,678
|
|
|
$
|
15,102
|
|
|
$
|
44,334
|
|
|
$
|
47,769
|
|
Recycling
|
|
|
11,806
|
|
|
|
12,254
|
|
|
|
30,171
|
|
|
|
29,688
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total revenues
|
|
$
|
25,484
|
|
|
$
|
27,356
|
|
|
$
|
74,505
|
|
|
$
|
77,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
3,996
|
|
|
$
|
4,089
|
|
|
$
|
12,933
|
|
|
$
|
13,149
|
|
Recycling
|
|
|
4,433
|
|
|
|
4,362
|
|
|
|
10,238
|
|
|
|
7,929
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total gross profit
|
|
$
|
8,429
|
|
|
$
|
8,451
|
|
|
$
|
23,171
|
|
|
$
|
21,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
308
|
|
|
$
|
(112
|
)
|
|
$
|
2,110
|
|
|
$
|
(549
|
)
|
Recycling
|
|
|
1,092
|
|
|
|
1,527
|
|
|
|
166
|
|
|
|
84
|
|
Technology
|
|
|
(272
|
)
|
|
|
–
|
|
|
|
(272
|
)
|
|
|
–
|
|
Total operating income (loss)
|
|
$
|
1,128
|
|
|
$
|
1,415
|
|
|
$
|
2,004
|
|
|
$
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
42
|
|
|
$
|
46
|
|
|
$
|
131
|
|
|
$
|
151
|
|
Recycling
|
|
|
131
|
|
|
|
256
|
|
|
|
651
|
|
|
|
785
|
|
Technology
|
|
|
272
|
|
|
|
–
|
|
|
|
272
|
|
|
|
–
|
|
Total depreciation and amortization
|
|
$
|
445
|
|
|
$
|
302
|
|
|
$
|
1,054
|
|
|
$
|
936
|
|
|
|
September 30, 2017
|
|
|
December 31,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
15,285
|
|
|
$
|
17,559
|
|
Recycling
|
|
|
15,721
|
|
|
|
24,297
|
|
Technology
|
|
|
24,013
|
|
|
|
–
|
|
Total assets
|
|
$
|
55,019
|
|
|
$
|
41,856
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
–
|
|
|
$
|
–
|
|
Recycling
|
|
|
57
|
|
|
|
57
|
|
Technology
|
|
|
25,824
|
|
|
|
–
|
|
Total intangible assets
|
|
$
|
25,881
|
|
|
$
|
57
|
|
Note 24: Defined
Contribution Plan
We have a defined contribution salary deferral
plan covering substantially all employees under Section 401(k) of the Internal Revenue Code. We contribute an amount equal to 10
cents for each dollar contributed by each employee up to a maximum of 5% of each employee’s compensation. We recognized expense
for contributions to the plans of $25 and $15 for the 13 weeks ended September 30, 2017 and October 1, 2016, respectively. We recognized
expense for contributions to the plans of $44 and $84 for the 39 weeks ended September 30, 2017 and October 1, 2016, respectively.
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 $4 and $0 for the 13 weeks
ended September 30, 2017 and October 1, 2016, respectively. The total services were $12 and $0 for the 39 weeks ended September
30, 2017 and October 1, 2016, respectively. Customer Connexx rents approximately 9,879 square feet of office space from Live Ventures
Incorporated at its Las Vegas, NV office. The total rent and common area expense was $40 and $0 for the 13 weeks ended September
30, 2017 and October 1, 2016, respectively. The total rent and common area expense was $120 and $0 for the 39 weeks ended September
30, 2017 and October 1, 2016, respectively.
Note 26: Subsequent
Events
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.