The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands Except Per Share Amounts)
Note 1: Background
and Basis of Presentation
The accompanying consolidated financial
statements include the accounts of Appliance Recycling Centers of America, Inc., a Nevada corporation, and its subsidiaries (collectively
the “Company” or “ARCA”). The Company has two operating segments for fiscal year 2018 – Recycling
and Technology, and the Company had three operating segments for fiscal year 2017 – Retail, Recycling and Technology.
ARCA is in the business of providing turnkey
appliance recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. Through our
GeoTraq Inc. (“GeoTraq”) subsidiary, we are engaged in the development, design and, ultimately, we expect the sale
of cellular transceiver modules, also known as Mobile IoT modules.
ARCA’s Recycling segment is comprised
of three entities, ARCA Recycling Inc., ARCA Canada Inc., and Customer Connexx, LLC.
ARCA Recycling, Inc., a California corporation,
is a wholly owned subsidiary that was formed in November 1991 to provide turnkey recycling services for electric utility efficiency
programs.
ARCA Canada Inc., a Canadian corporation,
is a wholly owned subsidiary that was formed in September 2006 to provide turnkey recycling services for electric utility energy
efficiency programs.
Customer Connexx, LLC, a Nevada limited
liability company, is a wholly owned subsidiary formed in October 2016 to provide call center services for electric utility programs.
On August 15, 2017, we sold our 50% interest
in a joint venture operating under the name ARCA Advanced Processing, LLC (AAP”), which recycles appliances from twelve states
in the Northeast and Mid-Atlantic regions of the United States. AAP was a joint venture that was formed in October 2009 between
ARCA and 4301 Operations, LLC (“4301”). Both ARCA and 4301 had a 50% interest in AAP. AAP established a regional processing
center in Philadelphia, Pennsylvania, at which the recyclable appliances were processed. AAP commenced operations in February 2010.
The financial position and results of operations of AAP had been consolidated in our financial statements since AAP was formed
in October 2009 through August 15, 2017, based on our conclusion that AAP was a variable interest entity due to our contribution
in excess of 50% of the total equity, subordinated debt and other forms of financial support. We had a controlling financial interest
in AAP during the period of October 2009 through August 15, 2017, whereby we provided substantially all of the financial support
to fund the operations of AAP.
On December 30, 2017, we sold our 100%
interest in ApplianceSmart, Inc. ApplianceSmart, Inc., a Minnesota corporation, was a wholly owned subsidiary that was formed through
a corporate reorganization in July 2011 to hold our retail business of selling new major household appliances through a chain of
Company-owned retail stores under the name ApplianceSmart®.
We report on a 52- or 53-week fiscal year.
Our 2018 fiscal year (“2018”) ended on December 29, 2018, and our fiscal year (“2017”) ended on December
30, 2017, each fiscal year 52 weeks in length.
Restatement
During the periods presented, the Company
did not disclose the following potential obligations arising from lease guarantees.
As disclosed and as discussed in Note 7:
Note Receivable – Sale of Discontinued Operations, on December 30, 2017, the Company disposed of its retail appliance segment
and sold ApplianceSmart to the Purchaser. In connection with that sale, as of December 29, 2018, the Company has an aggregate amount
of future real property lease payments of approximately $5,000, which represents amounts guaranteed or which may be owed under
certain lease agreements to third party landlords in which the Company either remains the counterparty, is a guarantor, or has
agreed to remain contractually liable under the lease (“ApplianceSmart Leases”). There are six ApplianceSmart Leases
with Company guarantees, one terminating February 28, 2019, December 31, 2020, April 30, 2021, August 14, 2021, December 31, 2022
and June 30, 2025, respectively.
It cannot be determined either at period
end or on a prospective basis that the Company will incur any loss related to its contractual liability for a maximum potential
amount of future undiscounted lease payments. The following table provides the undiscounted lease payments at the end of each
period:
December 30, 2017
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$7,000
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March 31, 2018
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$6,400
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June 30, 2018
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$5,900
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September 29, 2018
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$5,300
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December 29, 2018
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$5,000
|
The Company evaluated the fair value of
its potential obligation under the guidance of ASC 450: Contingencies and ASC 460: Guarantees. The Company has not recorded any
accrued liability associated with these future guaranteed lease payments as the fair value of the potential liability is immaterial
and it is not probable the Company will have any cash outflow resulting from the guarantee. The fair value was calculated based
on the undiscounted lease payments, a discount rate equivalent to current interest rates associated with the leased real estate
and a remote probability weighting of 1%.
The ApplianceSmart Leases either have the
Company as the contract tenant only, or in the contract reflects a joint tenancy with ApplianceSmart. ApplianceSmart is the occupant
of the ApplianceSmart Leases. The Company does not have the right to use the ApplianceSmart lease assets nor is the Company the
primary obligor of the lease payments, hence capitalization under ASC 840 is not required. The ApplianceSmart Leases have historically
been used by ApplianceSmart for their operations and the consideration has and is being paid by ApplianceSmart historically and
in the future.
Any potential amounts paid out for the
Company obligations and or guarantees under ApplianceSmart Leases would be recoverable to the extent there are assets available
from ApplianceSmart – See Notes 7 and 26. ApplianceSmart Leases are related party transactions. The Company divested itself
of the ApplianceSmart Leases and leaseholds with the sale to Purchaser on December 30, 2017.
Note 2: Summary
of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Appliance Recycling Centers of America, Inc. and our wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
ARCA Recycling, Inc., a California
corporation, is a wholly owned subsidiary that was formed in November 1991 to provide turnkey recycling services for electric
utility energy efficiency programs. ARCA Canada Inc., a Canadian corporation, is a wholly owned subsidiary that was formed in September 2006
to provide turnkey recycling services for electric utility energy efficiency programs. Customer Connexx, LLC, a Nevada Corporation,
is a wholly owned subsidiary that was formed in formed in October 2016 to provide call center services for electric utility programs.
On August 15, 2017, ARCA sold its 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 was a variable interest entity due to our contribution in excess of 50%
of the total equity, subordinated debt and other forms of financial support. See Note 6 – Sale and deconsolidation of variable
interest entity AAP to these consolidated financial statements.
On August 18, 2017, we acquired GeoTraq.
GeoTraq is engaged in the development, design, and, ultimately, we expect, sale of cellular transceiver modules, also known as
Mobile IoT modules. GeoTraq has created a dedicated Mobile IoT 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 Mobile IoT technology exclusively, we believe that GeoTraq will provide
an exclusive, low-cost solution and service life that will enable new global markets for location-based services (“LBS”).
As a result of this transaction, GeoTraq became a wholly-owned subsidiary and, therefore, the results of GeoTraq are included in
our consolidated results as of August 18, 2017.
On December 30, 2017, we sold our 100%
interest in ApplianceSmart, Inc., a Minnesota corporation. ApplianceSmart, Inc. was formed through a corporate reorganization
in July 2011 to hold our business of selling new major household appliances through a chain of Company-owned retail stores.
Reincorporation in the State of
Nevada
On March 12, 2018,
we changed our 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:
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–
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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;
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–
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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;
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–
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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;
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–
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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
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–
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each director and officer of the Minnesota corporation continued to hold his or her respective position with the Nevada corporation.
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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
changed the par value of the Company’s common shares from no par value to a par value of $.001 per common share.
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 other intangibles and long-lived assets for impairment, valuation
allowance against deferred tax assets and estimated useful lives for intangible assets and property and equipment.
Financial Instruments
Financial instruments consist primarily
of cash equivalents, trade and other receivables, notes receivables, and obligations under accounts payable, accrued expenses and
notes payable. The carrying amounts of cash equivalents, trade receivables and other receivables, accounts payable, accrued expenses
and short-term notes payable approximate fair value because of the short maturity of these instruments. The
fair value of the long-term debt is calculated based on interest rates available for debt with terms and maturities similar to
the Company’s existing debt arrangements, unless quoted market prices were available (Level 2 inputs). The carrying amounts
of long-term debt at December 29, 2018 and December 30, 2017 approximate fair value.
Cash and Cash Equivalents
Cash and cash equivalents
consist of highly liquid investments with a maturity of three months or less at the time of purchase. Fair value of cash equivalents
approximates carrying value.
Trade Receivables and Allowance for Doubtful Accounts
We carry unsecured trade receivables at
the original invoice amount less an estimate made for doubtful accounts based on a monthly review of all outstanding amounts. Management
determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s
financial condition, credit history and current economic conditions. We write off trade receivables when we deem them uncollectible.
We record recoveries of trade receivables previously written off when we receive them. We consider a trade receivable to be past
due if any portion of the receivable balance is outstanding for more than ninety days. We do not charge interest on past due receivables.
Our management considers the allowance for doubtful accounts of $29 and $61 to be adequate to cover any exposure to loss as of
December 29, 2018, and December 30, 2017, respectively.
Inventories
Inventories, consisting primarily of appliances,
are stated at the lower of cost, determined on a specific identification basis, or market. We provide estimated provisions for
the obsolescence of our appliance inventories, including adjustment to market, based on various factors, including the age of such
inventory and our management’s assessment of the need for such provisions. We look at historical inventory aging reports
and margin analyses in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded.
The Company does not have a reserve for obsolete inventory at December 29, 2018 and December 30, 2017.
Property and Equipment
Property and Equipment are stated at cost
less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements
that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost
and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of building and improvements
are three to thirty years, transportation equipment is three to fifteen years, machinery and equipment are five to ten years, furnishings
and fixtures are three to five years and office and computer equipment are three to five years. Depreciation expense was $270 and
$750 for the fiscal years ended December 29, 2018 and December 30, 2017, respectively.
We periodically review our property and
equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation
or amortization periods should be accelerated. We assess recoverability based on several factors, including our intention with
respect to maintaining our facilities and projected discounted cash flows from operations. An impairment loss would be recognized
for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their
projected discounted cash flows.
Intangible Assets
The Company accounts for
intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. Under ASC 350, intangible assets
subject to amortization, shall be reviewed for impairment in accordance with the Impairment or Disposal of Long-Lived Assets in
ASC 360, Property, Plant, and Equipment.
Under ASC 360, long-lived
assets are tested for recoverability whenever events or changes in circumstances (‘triggering event’) indicate that
the carrying amount may not be recoverable. In making this determination, triggering events that were considered included:
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·
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A significant decrease in the market price
of a long-lived asset (asset group);
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·
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A significant adverse change in the extent
or manner in which a long-lived asset (asset group) is being used or in its physical condition;
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·
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A significant adverse change in legal
factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action
or assessment by a regulator;
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·
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An accumulation of costs significantly
in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group);
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·
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A current-period operating or cash flow
loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated
with the use of a long-lived asset (asset group); and,
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·
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A current expectation that, more likely
than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously
estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
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If a triggering event has
occurred, for purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with
other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities. After the asset group determination is completed, a two-step testing is performed. If after identifying
a triggering event it is determined that the asset group’s carrying value may not be recoverable, a recoverability test must
then be performed. The recoverability test is performed by forecasting the expected cash flows to be derived from the asset group
for the remaining useful life of the asset group’s primary asset compared to their carrying value. The recoverability test
relies upon the undiscounted cash flows (excluding interest and taxes) which are derived from the company’s specific use
of those assets (not how a market participant would use those assets); and, are based upon the existing service potential of the
current assets (excluding any improvements that would materially enhance the assets). If the expected undiscounted cash flows exceed
the carrying value, the assets are considered recoverable. If the recoverability test is failed a second fair market value test
is required to calculate the amount of the impairment (if any). This second test calculates the fair value of the asset or asset
group, with the impairment being the amount by which the carrying value exceeds the asset or asset group’s fair value. Under
this test, the financial projections have been created using market participant assumptions and fair value concepts.
We last performed intangible
asset impairment testing as of December 29, 2018. Based on the testing, there was no impairment of intangibles as of December 29,2018.
The Company’s intangible assets consist
of customer relationship intangibles, trade names, licenses for the use of internet domain names, Universal Resource Locators,
or URL’s, software, patent USPTO reference No. 10,182,402, and historical know-how, designs and related manufacturing procedures.
Upon acquisition, critical estimates are made in valuing acquired intangible assets, which include
but are not limited to: future expected cash flows from customer contracts, customer lists, and estimating cash flows from projects
when completed; tradename and market position, as well as assumptions about the period of time that customer relationships will
continue; and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which
are inherently uncertain and unpredictable and, as a result, actual results may differ from the assumptions used in determining
the fair values. All intangible assets are capitalized at their original cost and amortized over their estimated useful
lives as follows: domain name and marketing – 3 to 20 years; software – 3 to 5 years, technology intangibles –
7 years, customer relationships – 7 to 15 years. Intangible amortization expense is $3,730 and $1,397 for the years ended
December 29, 2018, and December 30, 2017, respectively.
Revenue Recognition
We provide replacement appliances and provide
appliance pickup and recycling services for consumers (“end users”) of public utilities, our customers. We receive
as part of our de-manufacturing and recycling process revenue from scrap dealers for refrigerant, steel, plastic, glass, cooper
and other residual items.
We adopted Accounting Standards Update,
or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12
and ASU No. 2016-20, which provide supplementary guidance, and clarifications, effective December 30, 2017. We adopted ASC 606
using the modified retrospective method. The results for the reporting period beginning after December 30, 2017, are presented
in accordance with the new standard, although comparative information for the prior year has not been restated and continues to
be reported under the accounting standards and policies in effect for those periods.
Adoption of the new standard did
not have a significant impact on the current period revenues or on the prior year Consolidated Financial Statements.
No transition adjustment was required to our retained earnings as of December 30, 2017. Under the new standard
revenue is recognized as follows:
We determine revenue recognition through
the following steps:
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a.
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Identification of the contract, or contracts, with a customer,
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b.
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Identification of the performance obligations in the contract,
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c.
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Determination of the transaction price,
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d.
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Allocation of the transaction price to the performance obligations in the contract, and
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e.
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Recognition of revenue when, or as, we satisfy a performance obligation.
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As part of its assessment of each contract,
the Company evaluates certain factors including the customer’s ability to pay, or credit risk. For each contract, the Company
considers the promise to transfer products or services, each of which is distinct, to be the identified performance obligations.
In determining the transaction price, the price stated on the contract is typically fixed and represents the net consideration
to which the Company expects to be entitled per order, and therefore there is no variable consideration. As the Company’s
standard payment terms are less than 90 days, the Company has elected, as a practical expedient, to not assess whether a contract
has a significant financing component. The Company allocates the transaction price to each distinct product or service based on
its relative standalone selling price. The product or service price as specified on the contract is considered the standalone selling
price as it is an observable source that depicts the price as if sold to a similar customer in similar circumstances.
Replacement Product Revenue
We generate revenue by providing replacement appliances.
We recognize revenue at the point in time when control over the replacement product is transferred to the end user, when our performance
obligations are satisfied, which typically occur upon delivery from our center facility and installation at the end user’s
home.
Recycling Services Revenue
We generate revenue by providing pickup
and recycling services. We recognize revenue at the point in time when we have picked up a to be recycled appliance and transfer
of ownership has occurred, and therefore our performance obligations are satisfied, which typically occur upon pickup from
our end user’s home.
Byproduct Revenue
We generate other recycling byproduct revenue
(the sale of copper, steel, plastic and other recoverable non-refrigerant byproducts) as part of our de-manufacturing process.
We recognize byproduct revenue upon delivery and transfer of control of byproduct to a third-party recycling customer, having a
mutually agreed upon price per pound and collection reasonably assured. Transfer of control occurs at the time the customer is
in possession of the byproduct material. Revenue recognized is a function of byproduct weight, type and in some cases volume of
the byproduct delivered multiplied by the market rate as quoted.
Technology Revenue
We currently are not generating any Technology revenue.
Assets Recognized from Costs to Obtain a Contract with a
Customer
We recognize an asset for the
incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one
year. We have concluded that no material costs have been incurred to obtain and fulfill our FASB Accounting Standards
Codification, or ASC 606 contracts, meet the capitalization criteria, and as such, there are no material costs deferred and
recognized as assets on the consolidated balance sheet at December 29, 2018.
Practical Expedients and Exemptions:
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a.
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Taxes collected from customers and remitted to government authorities and that are related to sales
of our products are excluded from revenues.
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b.
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Sales commissions are expensed when incurred because the amortization period would have been one year or less.
These costs are recorded in Selling, General and Administrative expense.
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c.
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We do not disclose the value of unsatisfied performance obligations for (i) contracts with original
expected lengths of one year or less or (ii) contracts for which we recognize revenue at the amount to which we have the right
to invoice for the services performed.
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Revenue recognized for Company
contracts - $32,459 and $36,351 for the 52 weeks ended December 29, 2018 and December 30, 2017, respectively.
Shipping and Handling
The Company classifies shipping and handling
charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.
Advertising Expense
Advertising expense is charged to operations
as incurred. Advertising expense totaled $1,101 and $1,667 for the years ended December 29, 2018 and December 30, 2017, respectively.
Fair Value Measurements
ASC Topic 820, “Fair Value Measurements
and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial
Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement
that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. Level 2
– to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Income Taxes
The Company accounts for
income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and
liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial
reporting bases of the Company's assets and liabilities. Deferred income tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided on deferred taxes if it is determined that it is more likely than
not that the asset will not be realized. The Company recognizes penalties and interest accrued related to income tax liabilities
in the provision for income taxes in its Consolidated Statements of Income.
Significant management
judgment is required to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Company
uses a two-step process to evaluate tax positions. The first step requires an entity to determine whether it is more likely than
not (greater than 50% chance) that the tax position will be sustained. The second step requires an entity to recognize in the financial
statements the benefit of a tax position that meets the more-likely-than-not recognition criterion. The amounts ultimately paid
upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact
the financial statements of the Company in future periods.
Lease Accounting
We lease warehouse facilities and office
space. These assets and properties are generally leased under noncancelable agreements that expire at various dates through 2022
with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally
provide for minimum and, in some cases percentage rent and require us to pay all insurance, taxes and other maintenance costs.
Leases with step rent provisions, escalation clauses or other lease concessions are accounted for on a straight-line basis over
the lease term and includes “rent holidays” (periods in which we are not obligated to pay rent). Cash or lease incentives
received upon entering into certain store leases (“tenant improvement allowances”) are recognized on a straight-line
basis as a reduction to rent expense over the lease term. We record the unamortized portion of tenant improvement allowances as
a part of deferred rent. We do not have leases with capital improvement funding.
Stock-Based Compensation
The Company from time to time grants restricted
stock awards and options to employees, non-employees and Company executives and directors. Such awards are valued based on the
grant date fair-value of the instruments, net of estimated forfeitures. The value of each award is amortized on a straight-line
basis over the vesting period.
Foreign Currency
The financial statements of the Company’s
non-U.S. subsidiary are translated into U.S. dollars in accordance with ASC 830, Foreign Currency Matters. Under ASC 830, if the
assets and liabilities of the Company are recorded in certain non-U.S. functional currencies other than the U.S. dollar, they are
translated at rates of exchange at year end. 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 25).
Concentration of Credit Risk
The Company maintains cash balances at
several banks in several states including, Minnesota, California and Nevada. Accounts are insured by the Federal Deposit Insurance
Corporation up to $250,000 per institution as of December 29, 2018. 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 transitioned to the new revenue standards using the modified retrospective method effective December 30, 2017 and
did not have a significant impact on our consolidated results of operations, financial condition and cash flows.
In September 2014, the FASB issued ASU
No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern. The standard requires an entity’s management to determine whether
substantial doubt exists regarding the entity’s ability to continue as a going concern. The amendments denote how and when
companies are obligated to disclose going concern uncertainties, which are required to be evaluated every interim and annual period.
If management determines that substantial doubt exists, particular disclosures are required. The extent of these disclosures is
dependent upon management’s evaluation of mitigation of the going concern uncertainty. ASU 2014-15 applies prospectively
to annual periods ending after December 15, 2016 and to interim and annual periods thereafter. The Company has adopted this guidance
during its 2017 fiscal year and it did not have a significant impact on the disclosures to the consolidated financial statements.
In September 2015, the FASB issued ASU
No. 2015-16, Business Combinations (Topic 805). Topic 805 requires that an acquirer retrospectively adjust provisional amounts
recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional
amounts, the amendments in the update require that the acquirer recognize adjustments to provisional amounts that are identified
during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to
also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization,
or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been
completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement
or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item
that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as
of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The Company has adopted this guidance
during its 2017 fiscal year and it did not have a significant impact on its consolidated results of operations, financial condition
and cash flows.
ASU 2016-02, Leases
(Topic 842). The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing
a right to use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact
that this standard will have on our consolidated financial statements.
ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business. Under the
current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While
an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs,
outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not
required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set
with their own inputs and processes. The amendments in this Update provide a screen to determine when a set is not a business.
The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated
in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number
of transactions that need to be further evaluated by public business entities applying the amendments in this Update to annual
periods beginning after December 15, 2017, including interim periods within those periods.
ASU 2017-09,
Compensation- Stock Compensation (Topic 718): Scope of Modification Accounting, clarifies such that an entity must apply
modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria
are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification.
The ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award,
the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the
modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification
of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award
immediately before the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017,
including interim periods within those years. Early adoption is permitted, including adoption in an interim period. We adopted
ASU 2017-09 as of the beginning of fiscal year 2018 and it did not have a significant impact on its consolidated results
of operations, financial condition and cash flows.
In July 2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivative and Hedging (Topic 815). The
standard is intended to simplify the accounting for certain financial instruments with down round features. This ASU changes the
classification analysis of particular equity-linked financial instruments (e.g. warrants, embedded conversion features) allowing
the down round feature to be disregarded when determining whether the instrument is to be indexed to an entity’s own stock.
Because of this, the inclusion of a down round feature by itself exempts an instrument from having to be remeasured at fair value
each earnings period. The standard requires that entities recognize the effect of the down round feature on EPS when it is triggered
(i.e., when the exercise price is adjusted downward due to the down round feature) equivalent to the change in the fair value of
the instrument instantly before and after the strike price is modified. An adjustment to diluted EPS calculation may be required.
The standard does not change the accounting for liability-classified instruments that occurred due to a different feature or term
other than a down round feature. Additionally, entities must disclose the presence of down round features in financial instruments
they issue, when the down round feature triggers a strike price adjustment, and the amount of the adjustment necessary. ASU 2017-11
is effective for all fiscal years beginning after December 15, 2018. The Company decided to early adopt ASU 2017-11 and it did
not have a significant impact on its consolidated results of operations, financial condition and cash flows.
Note 3: Comprehensive
Income
Comprehensive income is the sum of net
income and other items that must bypass the income statement because they have not been realized, including items like an unrealized
holding gain or loss from available for sale securities and foreign currency translation gains or losses. For years ended December
29, 2018 and December 30, 2017, our comprehensive income includes foreign currency translation gains and losses.
Note 4: Reclassifications
Certain amounts in the prior year consolidated
financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect
on the previously reported net income or stockholders’ equity. On March 12, 2018, the Company changed its state of incorporation
from Minnesota to Nevada. Nevada requires a stated par value, which the company stated at $.001 per share. Amounts for common stock
and additional paid in capital for fiscal year 2017 have been reclassified to reflect this change of incorporation.
Note 5: Acquisition
of GeoTraq, Inc.
On August 18, 2017, the Company acquired
all of the assets and capital stock of GeoTraq by way of merger. GeoTraq is engaged in the development, design, and, ultimately,
the sale of cellular transceiver modules, also known as Mobile IoT 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 USPTO reference No. 10,182,402 titled “Locator Device
with Low Power Consumption” together with the assignment of intellectual property that included historical know-how, designs
and related manufacturing procedures was $26,097, which included the deferred income tax liability associated with the intangible
asset. Total consideration paid 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 (exact number) of convertible series
A preferred stock with a final fair value of $14,963. See Note 19 – Series A Preferred Stock. In connection with the acquisition,
an additional intangible asset amount was recorded in the amount of $10,134 and an offsetting deferred tax liability recorded of
the same amount, $10,134, to reflect the future tax liability attributable to the GeoTraq asset acquired. There were no other assets
acquired or liabilities assumed.
At the time of the acquisition of GeoTraq,
GeoTraq was a shell company with no business operations, one intangible asset and historical know-how and designs. GeoTraq is in
the development stage. The Company elected to early adopt ASU 2017-01, which clarifies the definition of a business for purposes
of applying ASC 805. The Company has determined that GeoTraq is a single or group of related assets, not a business as clarified
by ASU 2017-01 at the time of acquisition.
Note 6: Sale and
deconsolidation of variable interest entity - AAP
The financial position and results of operations
of AAP had been consolidated in our financial statements since AAP’s inception based on our conclusion that AAP was a variable
interest entity that we controlled due to our contribution in excess of 50% of the total equity, subordinated debt and other forms
of financial support. Since inception we provided substantial financial support to fund the operations of AAP. The financial position
and results of operations for AAP were reported in our recycling segment. On August 15, 2017, we sold our 50% interest in AAP,
and therefore, as of August 15, 2017, we no longer consolidated 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 August 1, 2017 (date of deconsolidation) and December 31,
2016:
Assets
|
|
August 15, 2017
|
|
|
December 31, 2016
|
|
Current assets
|
|
$
|
367
|
|
|
$
|
438
|
|
Property and equipment, net
|
|
|
6,809
|
|
|
|
7,322
|
|
Other assets
|
|
|
93
|
|
|
|
83
|
|
Total assets
|
|
$
|
7,269
|
|
|
$
|
7,843
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,661
|
|
|
$
|
1,388
|
|
Accrued expenses
|
|
|
619
|
|
|
|
523
|
|
Current maturities of long-term debt obligations
|
|
|
729
|
|
|
|
3,558
|
|
Long-term debt obligations, net of current maturities
|
|
|
3,431
|
|
|
|
435
|
|
Other liabilities (a)
|
|
|
–
|
|
|
|
1,126
|
|
Total liabilities
|
|
$
|
7,440
|
|
|
$
|
7,030
|
|
(a)
Other liabilities represent loans and advances between ARCA and AAP that are eliminated in consolidation.
The following table summarizes the operating
results of AAP consolidated in our financial results for the 52 weeks ended December 30, 2017:
|
|
52 Weeks Ended
|
|
|
|
December 30, 2017 (b)
|
|
Revenues
|
|
$
|
1,433
|
|
Gross profit
|
|
|
24
|
|
Operating loss
|
|
|
(848
|
)
|
Net loss
|
|
|
(991
|
)
|
(b)
Operating results for AAP were consolidated in the Company’s operating results from inception of AAP through August 15, 2017,
the date of our 50% equity sale in AAP. We recorded a gain of $81 on the sale and deconsolidation of our 50% equity interest in
AAP. Net Cash outflow arising from deconsolidation of AAP was $35. The Company received $800 in cash consideration for its 50%
equity interest in AAP.
Note 7: Note receivable
– sale of discontinued operations
On December 30, 2017, we signed an agreement
to dispose of our retail appliance segment. ApplianceSmart Holdings LLC (the “Purchaser”), a wholly owned subsidiary
of Live Ventures Incorporated, entered into a Stock Purchase Agreement (the “Agreement”) with the Company and ApplianceSmart,
then a subsidiary of the Company. ApplianceSmart is a retail chain specializing in new and out-of-the-box appliances. Pursuant
to the Agreement, the Purchaser purchased from the Company all the issued and outstanding shares of capital stock (the “Stock”)
of ApplianceSmart in exchange for $6,500 (the “Purchase Price”). The Purchase Price per the Agreement was due and payable
on or before March 31, 2018. As of December 30, 2017, the Company had an amount due from the Purchaser in the amount of $6,500
recorded as a current asset.
Between March 31, 2018 and April 24, 2018,
the Purchaser and the Company negotiated in good faith the method of payment of the remaining outstanding balance of the Purchase
Price. On April 25, 2018, the Purchaser delivered to the Company a promissory note (the “ApplianceSmart Note”) in the
original principal amount of $3,919 (the “Original Principal Amount”), as such amount may be adjusted per the terms
of the ApplianceSmart Note. The ApplianceSmart Note is effective as of April 1, 2018 and matures on April 1, 2021 (the “Maturity
Date”). The ApplianceSmart Note bears interest at 5% per annum with interest and principal payable at the Maturity Date.
ApplianceSmart provided the Company a guaranty of repayment of the ApplianceSmart Note. On December 26, 2018, the ApplianceSmart
Note was amended and restated to grant ARCA a security interest in the assets of the Purchaser, ApplianceSmart, and ApplianceSmart
Contracting Inc. in exchange for modifying the repayments terms to provide for the payment in full of all accrued interest and
principal on April 1, 2021, the maturity date of the ApplianceSmart Note. On March 15, 2019, the Company entered into agreements
with third parties pursuant to which it agreed to subordinate the payment of indebtedness under the ApplianceSmart Note and the
Company’s security interest in the assets of ApplianceSmart and other related parties in exchange for up to $1,200. The remaining
$2,581 of the Purchase Price was paid in cash by the Purchaser to the Company. The Purchaser may reborrow funds, and pay interest
on such re-borrowings, from the Company up to the Original Principal Amount. Subsequent to December 30, 2017, ApplianceSmart assumed
$1,901 in liabilities from the Company. For the 52 weeks ended December 29, 2018, the original balance owed to the Company of $6,500,
increased with new borrowings of $1,819 and decreased with repayments of $2,581 and debt assumed of $1,901 represents a net amount
due from the Purchaser, now in the form of a note receivable, in the sum of $3,837 as of December 29, 2018.
Discontinued operations include our retail
appliance business ApplianceSmart. Results of operations, financial position and cash flows for this business are separately reported
as discontinued operations for all periods presented. The Company made the decision to sell ApplianceSmart to eliminate losses
and poor financial performance from our retail segment, decrease existing leverage, assign and eliminate long term lease liabilities
for store leases, increase cash balances, enhance shareholder value and focus Company resources on its two remaining segments,
Recycling and Technology.
FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS (In Thousands)
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
|
December 30, 2017
|
|
Revenue
|
|
$
|
56,296
|
|
Cost of revenue
|
|
|
42,252
|
|
Gross profit
|
|
|
14,044
|
|
Selling, general and administrative expense
|
|
|
15,911
|
|
Operating loss - discontinued operations
|
|
|
(1,867
|
)
|
Other income
|
|
|
862
|
|
Other expense
|
|
|
(5
|
)
|
Net loss - discontinued operations before income tax benefit
|
|
|
(1,010
|
)
|
Income tax benefit
|
|
|
270
|
|
Net loss - discontinued operations, net of tax
|
|
$
|
(740
|
)
|
DISCONTINUED OPERATIONS (In Thousands)
As of December 30, 2017 (date of sale)
|
|
At December 30, 2017
|
|
Accounts Receivable
|
|
$
|
2,356
|
|
Inventories
|
|
|
8,836
|
|
Prepaid expenses
|
|
|
173
|
|
Total current assets held for sale
|
|
|
11,365
|
|
Buildings and improvements
|
|
|
2,073
|
|
Equipment
|
|
|
1,756
|
|
Accumulated depreciation
|
|
|
(3,319
|
)
|
Restricted cash
|
|
|
1,298
|
|
Other assets
|
|
|
204
|
|
Total non-current assets held for sale
|
|
|
2,012
|
|
Total assets held for sale - discontinued operations
|
|
$
|
13,377
|
|
Purchase price
|
|
|
6,500
|
|
Loss of sale of assets held for sale
|
|
|
(6,877
|
)
|
Income tax benefit
|
|
|
1,842
|
|
Net loss on sale of assets held for sale and discontinued operations, net of tax
|
|
$
|
(5,035
|
)
|
Note 8: Inventory
Inventories of continuing operations,
consisting principally of appliances, are stated at the lower of cost, determined on a specific identification basis, or market
and consist of the following as of December 29, 2018 and December 30, 2017:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Appliances held for resale
|
|
$
|
801
|
|
|
$
|
762
|
|
We provide estimated provisions for the
obsolescence of our appliance inventories, including adjustments to market, based on various factors, including the age of such
inventory and our management’s assessment of the need for such provisions. We look at historical inventory aging reports
and margin analyses in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded.
Note
9: Prepaids and other current assets
Prepaids and other current assets as of December 29, 2018 and
December 30, 2017 consist of the following:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Prepaid insurance
|
|
$
|
271
|
|
|
$
|
443
|
|
Prepaid rent
|
|
|
–
|
|
|
|
5
|
|
Prepaid consulting fees
|
|
|
265
|
|
|
|
–
|
|
Prepaid other
|
|
|
81
|
|
|
|
58
|
|
|
|
$
|
617
|
|
|
$
|
506
|
|
Note 10: Property
and equipment
Property and equipment of continuing operations as of December
29, 2018 and December 30, 2017 consist of the following:
|
|
Useful Life (Years)
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Buildings and improvements
|
|
18-30
|
|
$
|
67
|
|
|
$
|
156
|
|
Equipment (including computer software)
|
|
3-15
|
|
|
6,049
|
|
|
|
5,908
|
|
Projects under construction
|
|
|
|
|
58
|
|
|
|
29
|
|
Property and equipment
|
|
|
|
|
6,174
|
|
|
|
6,093
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(5,557
|
)
|
|
|
(5,555
|
)
|
Property and equipment, net
|
|
|
|
$
|
617
|
|
|
$
|
538
|
|
Property and equipment are stated at cost.
We compute depreciation using straight-line method over a range of estimated useful lives from 3 to 30 years. We amortize leasehold
improvements on a straight-line basis over the shorter of their estimated useful lives or the underlying lease term. Repair and
maintenance costs are charged to operations as incurred.
Depreciation expense for continuing operations
was $268 and $750 for fiscal years 2018 and 2017, respectively. During 2018, property and equipment with a net book value of $54
was sold resulting in a gain on sale of $5.
Note 11: Intangible
assets
Intangible assets of continuing operations as of December 29,
2018 and December 30, 2017 consist of the following:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Intangible assets GeoTraq, net
|
|
$
|
20,969
|
|
|
$
|
24,699
|
|
Patent
|
|
|
19
|
|
|
|
19
|
|
|
|
$
|
20,988
|
|
|
$
|
24,718
|
|
The useful life and amortization period
of the GeoTraq intangible acquired is seven years. Intangible amortization expense for continuing operations was $3,730 and $1,397
for fiscal years 2018 and 2017, respectively.
Note 12: Deposits
and other assets
Deposits and other assets of continuing
operations as of December 29, 2018 and December 30, 2017 consist of the following:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Deposits
|
|
$
|
561
|
|
|
$
|
411
|
|
Other
|
|
|
100
|
|
|
|
107
|
|
|
|
$
|
661
|
|
|
$
|
518
|
|
Deposits are primarily refundable security deposits with landlords
the Company leases property from.
Note 13: Accrued
liabilities
Accrued liabilities of continuing operations as of December
29, 2018 and December 30, 2017 consist of the following:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Compensation and benefits
|
|
|
567
|
|
|
|
1,061
|
|
Deferred revenue
|
|
|
–
|
|
|
|
300
|
|
Accrued incentive and rebate checks
|
|
|
316
|
|
|
|
285
|
|
Accrued rent
|
|
|
16
|
|
|
|
77
|
|
Accrued interest
|
|
|
–
|
|
|
|
115
|
|
Accrued payables
|
|
|
–
|
|
|
|
129
|
|
Other
|
|
|
219
|
|
|
|
31
|
|
|
|
$
|
1,118
|
|
|
$
|
1,998
|
|
We operate in fourteen states in the U.S.
and in various provinces in Canada. From time to time, we are subject to sales and use tax audits that could result in additional
taxes, penalties and interest owed to various taxing authorities.
As previously disclosed, the California
Board of Equalization (“BOE”) conducted a sales and use tax examination covering the Company’s California operations
for years 2011, 2012 and 2013. The Company believed it was exempt from collecting sales taxes under service agreements with utility
customers that included appliance replacement programs. During the fourth quarter of 2014, the Company received communication from
the BOE indicating they were not in agreement with the Company’s interpretation of the law. As a result, the Company applied
for and, as of February 9, 2015, received approval to participate in the California Board of Equalization’s Managed Audit
Program. The period covered under this program included years 2011, 2012, 2013 and extended through the nine-month period ended
September 30, 2014.
On April 13, 2017 the Company received
the formal BOE assessment for sales tax for tax years 2011, 2012 and 2013 in the amount of $4.1 million plus applicable interest
of $0.5 million related to the appliance replacement programs that we administered on behalf of our customers on which we did not
assess, collect or remit sales tax. The Company has appealed this assessment and continues to engage the services of our existing
retained sales tax experts throughout the appeal process. The BOE tax assessment is subject to protest and appeal and would not
need to be funded until the matter has been fully resolved through the appeal process. The Company anticipates that resolution
of the BOE assessment could take up to two years.
A settlement proposal was filed
on February 22, 2019 and we are awaiting a settlement conference date in an attempt to resolve the matter expeditiously.
Note 14: Line
of credit - PNC Bank
We had a Revolving Credit, Term Loan and
Security Agreement, as amended, (“PNC Revolver”) with PNC Bank, National Association (“PNC”) that provided
us with a $15,000 revolving line of credit. The PNC Revolver loan agreement included a lockbox agreement and a subjective
acceleration clause and as a result we have classified the revolving line of credit as a current liability. The PNC Revolver was
collateralized by a security interest in substantially all of our assets and PNC was also secured by an inventory repurchase agreement
with Whirlpool Corporation solely with respect to Whirlpool purchases only. In addition, we issued a $750 letter of credit in favor
of Whirlpool Corporation. The PNC Revolver required, starting with the fiscal quarter ending April 2, 2016, that we meet a specified
amount of minimum earnings before interest, taxes, depreciation and amortization, and continuing at the end of each quarter thereafter,
that we meet a minimum fixed charge coverage ratio of 1.1 to 1.0. The PNC Revolver loan agreement limited investments that we could
purchase, the amount of other debt and leases that we could incur, the amount of loans that we could issue to our affiliates and
the amount we could spend on fixed assets, along with prohibiting the payment of dividends.
The interest rate on the PNC Revolver,
as stated in our renewal agreement on January 22, 2016, was PNC Base Rate (as defined below) plus 1.75% to 3.25%, or 1-, 2- or
3-month PNC LIBOR Rate plus 2.75% to 4.25%, with the rate being dependent on our level of fixed charge coverage. The PNC Base Rate
meant, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the interest rate per annum announced
from time to time by PNC as its prime rate, (ii) the Federal Funds Open Rate plus 0.5%, and (iii) the one-month LIBOR
rate plus 100 basis points (1%).
The amount of available revolving borrowings
under the PNC Revolver was based on a formula using accounts receivable and inventories. We did not have access to the full $15,000
revolving line of credit due to such formula, the amount of the letter of credit issued in favor of Whirlpool Corporation and the
amount of outstanding loans owed to PNC by out AAP joint venture.
As discussed above, the Company sold its
the Compton Facility building and land for $7,103. The net proceeds from the sale, after costs of sale and payoff of the Term Loan
(as defined below), were used to reduce the outstanding balance under our PNC Revolver.
On May 1, 2017, the PNC Revolver loan agreement
was amended, and the term was extended through June 2, 2017. The amendment, effective May 2, 2017, also reduced the maximum amount
of borrowing under the PNC Revolver to $6 million. On May 10, 2017 we repaid in full and terminated our existing Revolving Credit,
Term Loan and Security Agreement, as amended, with PNC Bank, National Association on the same date.
The PNC Revolver loan agreement terminated,
and the PNC Revolver was paid in full on May 10, 2017 with funds advanced from MidCap Financial Trust. A letter of credit to Whirlpool
Corporation remained outstanding with PNC backed by restricted cash collateral of $750 as of December 30, 2017. This restricted
cash collateral was transferred with the sale of ApplianceSmart. See Note 17, long term obligations, for additional information.
Note 15: Notes
payable – short term
On August 18, 2017, the Company, as part
of its acquisition of GeoTraq, issued unsecured promissory notes to the sellers of GeoTraq with interest at the annual rate of
interest of 1.29% maturing on August 18, 2018. The original balance of the notes payable – short term was $800. The outstanding
balance of the notes payable – short term as of December 29, 2018 and December 30, 2017 is $0 and $300, respectively. Interest
accrued at December 30, 2017 was included in accrued expenses. See Note 5.
Note 16: Income
taxes
For fiscal year 2018, we recorded an income
tax benefit of $727. For fiscal year 2017, we recorded an income tax benefit of $3,441. As of December 29, 2017, we maintained
a valuation allowance of $407 against our net operating loss carryforwards, foreign tax credits and all deferred tax assets in
Canada, principally net operating losses.
The benefit of income taxes for fiscal
years 2018 and 2017 consisted of the following:
|
|
For the fiscal years ended
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8
|
|
|
$
|
–
|
|
State
|
|
|
511
|
|
|
|
34
|
|
Foreign
|
|
|
–
|
|
|
|
–
|
|
Current tax expense (benefit)
|
|
$
|
519
|
|
|
$
|
34
|
|
Deferred tax expense - domestic
|
|
|
(1,246
|
)
|
|
|
(3,475
|
)
|
Deferred tax expense - foreign
|
|
|
–
|
|
|
|
–
|
|
Benefit of income taxes
|
|
$
|
(727
|
)
|
|
$
|
(3,441
|
)
|
A reconciliation of our benefit of income
taxes with the federal statutory tax rate for fiscal years 2018 and 2017 is shown below:
|
|
For the fiscal years ended
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Income tax expense at statutory rate
|
|
$
|
(1,155
|
)
|
|
$
|
(995
|
)
|
Portion attributable to noncontrolling interest at statutory rate
|
|
|
–
|
|
|
|
–
|
|
State tax expense, net of federal tax effect
|
|
|
771
|
|
|
|
(141
|
)
|
Permanent differences
|
|
|
28
|
|
|
|
55
|
|
Change in tax rates
|
|
|
–
|
|
|
|
(3,107
|
)
|
Change in valuation allowance
|
|
|
(694
|
)
|
|
|
590
|
|
Other
|
|
|
323
|
|
|
|
157
|
|
|
|
$
|
(727
|
)
|
|
$
|
(3,441
|
)
|
Loss before benefit of income taxes and
noncontrolling interest was derived from the following sources for fiscal years 2018 and 2017 as shown below:
|
|
For the fiscal years ended
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
United States
|
|
$
|
(5,500
|
)
|
|
$
|
(2,835
|
)
|
Canada
|
|
|
(835
|
)
|
|
|
(90
|
)
|
|
|
$
|
(6,335
|
)
|
|
$
|
(2,925
|
)
|
The components of net deferred tax assets
(liabilities) as of December 29, 2018 and December 30, 2017, are as follows:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Allowance for bad debts
|
|
$
|
7
|
|
|
$
|
16
|
|
Accrued expenses
|
|
|
998
|
|
|
|
1,107
|
|
Inventory
|
|
|
–
|
|
|
|
80
|
|
Accrued compensation
|
|
|
39
|
|
|
|
23
|
|
Reserves
|
|
|
–
|
|
|
|
4
|
|
Prepaid expenses
|
|
|
(147
|
)
|
|
|
(125
|
)
|
|
|
|
897
|
|
|
|
1,105
|
|
Less: valuation allowance
|
|
|
–
|
|
|
|
–
|
|
Total current deferred tax assets (liabilities)
|
|
|
897
|
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
Long term deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
292
|
|
|
|
1,217
|
|
Capital loss
|
|
|
–
|
|
|
|
–
|
|
Tax credits
|
|
|
256
|
|
|
|
473
|
|
Share-based compensation
|
|
|
271
|
|
|
|
302
|
|
Intangibles
|
|
|
(5,068
|
)
|
|
|
(6,615
|
)
|
Property and equipment
|
|
|
(103
|
)
|
|
|
(72
|
)
|
Deferred rent
|
|
|
12
|
|
|
|
16
|
|
Unrealized losses (gains)
|
|
|
129
|
|
|
|
132
|
|
Section 481(a) adjustment
|
|
|
–
|
|
|
|
(44
|
)
|
Section 163(j) interest
|
|
|
172
|
|
|
|
11
|
|
|
|
|
(4,039
|
)
|
|
|
(4,580
|
)
|
Less: valuation allowance
|
|
|
(407
|
)
|
|
|
(1,102
|
)
|
Total long term deferred tax assets (liabilities)
|
|
|
(4,446
|
)
|
|
|
(5,682
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
(3,549
|
)
|
|
$
|
(4,577
|
)
|
The deferred tax amounts have been classified
in the accompanying consolidated balance sheets as follows:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
–
|
|
|
$
|
–
|
|
Non-current liabilities
|
|
|
3,549
|
|
|
|
4,577
|
|
|
|
$
|
3,549
|
|
|
$
|
4,577
|
|
As of December 29, 2018, the Company has
net operating loss carryforwards of approximately $1.2 million for federal income tax purposes, which will be available to offset
future taxable income. Due to recent tax legislation, these net operating losses are eligible for indefinite carryforward, limited
by certain taxable income limitations. The Company has certain foreign tax credits available but has recorded a full valuation
allowance against these tax credits until the Company has sufficient foreign source income to utilize these credits. The Company
continues to have a full valuation allowance against its Canadian operations. The Company released approximately $0.7 of valuation
allowance related to state net operating losses due to sufficient income in those jurisdictions or otherwise expired.
The Company annually conducts an analysis
of its uncertain tax positions and has concluded that it has no uncertain tax positions as of December 29, 2018. The Company’s
policy is to record uncertain tax positions as a component of income tax expense. The Company was selected for examination by the
IRS for its 2016 tax year. As of March 29, 2019, the IRS has not proposed any adjustments, and the Company is not aware of any
adjustments.
Due to recent tax legislation that occurred
on December 22, 2017 the federal corporate income tax rate was reduced to a flat 21%, which provides a significant income tax benefit
to our Company in future reporting periods. The Company recognized a tax benefit of approximately $3.1 million related to adjusting
our deferred tax balances to reflect the new corporate tax rate.
Note 17: Long term
obligations
Long term debt, capital lease and other
financing obligations as of December 29, 2018 and December 30, 2017, consist of the following:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
|
MidCap financial trust asset based revolving loan
|
|
$
|
–
|
|
|
$
|
5,605
|
|
AFCO Finance
|
|
|
193
|
|
|
|
367
|
|
GE 8% loan agreement
|
|
|
482
|
|
|
|
482
|
|
EEI note
|
|
|
–
|
|
|
|
103
|
|
Capital leases and other financing obligations
|
|
|
–
|
|
|
|
30
|
|
Debt issuance costs MidCap, net
|
|
|
–
|
|
|
|
(442
|
)
|
Debt issuance costs EEI, net
|
|
|
(419
|
)
|
|
|
(568
|
)
|
Total short term debt
|
|
$
|
256
|
|
|
$
|
5,577
|
|
MidCap Financial Trust
On May 10, 2017, we entered into a Credit
and Security Agreement (“Credit Agreement”) with MidCap Financial Trust (“MidCap Financial Trust”), as
a lender and as agent for itself and other lenders under the Credit Agreement. The Credit Agreement provided us with a $12,000
revolving line of credit, which may be increased to $16,000 under certain terms and conditions (the “MidCap Revolver”).
The MidCap Revolver had a stated maturity date of May 10, 2020, if not renewed. The MidCap Revolver was collateralized by a security
interest in substantially all of our assets. The lender was also secured by an inventory repurchase agreement with Whirlpool Corporation
for Whirlpool purchases only. The Credit Agreement required that we meet a minimum fixed charge coverage ratio of 1.00:1.00 for
the applicable measuring period as of the end of each calendar month. The applicable measuring period was (i) the period commencing
May 1, 2017 and ending on the last day of each calendar month from May 31, 2017 through April 30, 2018, and (ii) the twelve-month
period ending on the last day of such calendar month thereafter. The Credit Agreement limited the amount of other debt that we
could incur, the amount we could spend on fixed assets, and the amount of investments that we could make, along with prohibiting
the payment of dividends.
The amount of revolving borrowings available
under the Credit Agreement was based on a formula using receivables and inventories. We did not have access to the full $12,000
revolving line of credit due to the formula using our receivables and inventories and the amount of any outstanding letters of
credit issued by the Lender. The interest rate on the revolving line of credit was the one-month LIBOR rate plus four and one-half
percent (4.50%).
On December 30, 2017, our available borrowing
capacity under the Credit Agreement was $1,031. The weighted average interest rate for the period of May 10, 2017 through December
30, 2017 was 8.29%. We borrowed $62,845 and repaid $57,240 on the Credit Agreement during the period of May 10, 2017 through December
30, 2017, leaving an outstanding balance on the Credit Agreement of $5,605 at December 30, 2017. The debt issuance costs for the
MidCap Revolver were $546. The un-amortized debt issuance costs for the MidCap Revolver as of December 30, 2017 were $442.
On September 20, 2017, we received a written
notice of default, dated September 20, 2017 (the “Notice of Default”), from MidCap Funding X Trust (the “Agent”),
asserting that events of default had occurred with respect to the Credit Agreement. The Agent alleged in the Notice of Default
that, as a result of the Company’s recent acquisition of GeoTraq, and the issuance of promissory notes to the stockholders
of GeoTraq in connection with such acquisition, the Borrowers had failed to comply with certain terms of the Loan Agreement, and
that such failure constituted one or more Events of Default under the Loan Agreement. Specifically, the Notice of Default stated
that as a result of the acquisition and related issuance of promissory notes, the Borrowers had failed to comply with (i) a covenant
not to incur additional indebtedness other than Permitted Debt (as defined in the Loan Agreement), without the Agent’s prior
written consent, and a covenant not to make acquisitions or investments other than Permitted Acquisitions or Permitted Investments
(as defined in the Credit Agreement). The Notice of Default also stated that the Borrowers’ failure to pledge the stock in
GeoTraq as collateral under the Credit Agreement and to make GeoTraq a “Borrower “under the Credit Agreement would
become an Event of Default if not cured within the applicable cure period. The Agent reserved the right to avail itself of any
other rights and remedies available to it at law or by contract, including the right to (a) withhold funding, increase reserves
and suspend making further advances under the Credit Agreement, (b) declare all principal, interest and other sums owing in connection
with the Credit Agreement immediately due and payable in full, (c) charge the Default Rate on amounts outstanding under the Credit
Agreement, and/or (d) exercise one or more rights and remedies with respect to any and all collateral securing the Credit Agreement.
The Agent did not declare the amounts outstanding
under the Credit Agreement to be immediately due and payable but imposed the default rate of interest, which was 5% in excess of
the rates otherwise payable under the Loan Agreement), effective as of August 18, 2017 and continuing until the Agent notified
the Borrowers that the specified Events of Default have been waived and no other Events of Default exist. The Company strongly
disagreed with the Lenders that any Event of Default had occurred.
On March 22, 2018, the Company terminated
the Credit Agreement, together with the related revolving loan note and pledge agreement. The Company did not incur any termination
penalties as a result of the termination of the Credit Agreement. The Company classified the MidCap Revolver as a current liability
until March 22, 2018, at which time the MidCap Revolver was terminated and paid in full. The security interests held by the Lender
in substantially all Company assets were released following termination and payoff on March 22, 2018.
AFCO Finance
On June 16, 2017, we entered into
a financing agreement with AFCO Credit Corporation (“AFCO”) to fund the annual premiums due June 1, 2017 on insurance
policies purchased through Marsh Insurance. These policies relate to workers’ compensation and various liability policies
including, but not limited to, General, Auto, Umbrella, Property, and Directors’ and Officers’ insurance. The
total amount of the premiums financed was $1,070 with an interest rate of 3.567%. An initial down payment of $160 was paid on June
16, 2017 and an additional 10 monthly payments of $92 were made beginning July 1, 2017 and ending April 1, 2018. The June 16, 2017
AFCO agreement had a zero balance as of December 29, 2018.
On July 2, 2018, we entered into another
financing agreement with AFCO to fund the annual premiums on insurance policies due June 1, 2018 purchased through Marsh Insurance.
These policies related to workers’ compensation and various liability policies including, but not limited to, General, Auto,
Umbrella, Property, and Directors’ and Officers’ insurance. The total amount of the premiums financed was $556 with
an interest rate of 4.519%. An initial down payment of $56 was due before July 1, 2018 with additional monthly payments of: $57
will be made beginning July 1, 2018 and ending September 1, 2018; and $65 will be made beginning October 1, 2018 and ending March
1, 2019.
The outstanding principal due AFCO at December
29, 2018 and December 30, 2017 was $193 and $367, respectively.
GE
On August 14, 2017 as a part of the sale
of the Company’s equity interest in AAP, Recleim LLC, a Delaware limited liability company (“Recleim”), agreed
to undertake, pay or assume the Company’s GE obligations consisting of a promissory note (GE 8% loan agreement) and other
payables which were incurred after the issuance of such promissory note. Recleim has agreed to indemnify and hold ARCA harmless
from any action to be taken by GE relating to such obligations. The Company has an offsetting receivable due from Recleim.
Energy Efficiency Investments LLC
On November 8, 2016, the Company entered
into a securities purchase agreement with Energy Efficiency Investments, LLC, pursuant to which the Company agreed to issue up
to $7,732 principal amount of 3% Original Issue Discount Senior Convertible Promissory Notes of the Company and related common
stock purchase warrants. These notes may be issued from time to time, up to such aggregate principal amount, at the request of
the Company, subject to certain conditions, or at the option of Energy Efficiency Investments, LLC. Interest accrues at the rate
of 8% per annum on the principal amount of the notes outstanding from time to time, and is payable at maturity or, if earlier,
upon conversion of these notes. The principal amount of these notes outstanding at December 29, 2018 and December 30, 2017 was
$0 and $103, respectively. The debt issuance costs of the EEI note are $740 and are being amortized over 60 months. The un-amortized
debt issuance costs of the EEI note as of December 29, 2018 and December 30, 2017 are $419 and $568, respectively.
Note 18: Commitments
and Contingencies
Litigation
On December 29, 2016, ARCA served a Minnesota state court complaint for breach of
contract on Skybridge Americas, Inc. (“SA”), ARCA’s primary call center vendor throughout 2015 and most of 2016.
ARCA seeks damages in the millions of dollars as a result of alleged overcharging by SA and lost client contracts. On January
25, 2017, SA served a counterclaim for unpaid invoices in the amount of approximately $460,000 plus interest and attorneys’
fees. On March 29, 2017, the Hennepin County district court (the “District Court”) dismissed ARCA’s breach of
contract claim based on SA’s overuse of its Canadian call center but permitted ARCA’s remaining claims to proceed.
Following motion practice, on January 8, 2018 the District Court entered judgment in SA’s favor, which was amended as of
February 28, 2018, for a total amount of $613,566.32, including interest and attorneys’ fees. On March 4, 2019, the Minnesota
Court of Appeals (the “Court of Appeals”) ruled and (i) reversed the District Court’s judgment in favor of Skybridge
on the call center location claim and remanded the issue back to the District Court for further proceedings, (ii) reversed the
District Court’s judgment in favor of Skybridge on the net payment issue and remanded the issue to the District Court for
further proceedings, and (iii) affirmed the District Court’s judgment in Skybridge’s favor against ARCA’s claim
that Skybridge breached the contract when it failed to meet the service level agreements. As a result of the decision by the Court
of Appeals, the District Court’s award of interest and attorneys’ fees of $133,867.50, etc. was reversed. At December
29, 2018, ARCA had recorded a liability in the amount of $497,792 and a refundable escrow deposit of approximately $400,000 related
to Skybridge litigation. The District Court is expected to release the escrow funds after a period of 30 days from the Court of
Appeals decision.
On November 15, 2016, ARCA served an arbitration
demand on Haier US Appliance Solutions, Inc., dba GE Appliances (“GEA”), alleging breach of contract and interference
with prospective business advantage. ARCA seeks over $2 million in damages. On April 18, 2017, GEA served a counterclaim for approximately
$337,000 in alleged obligations under the parties’ recycling agreement. Simultaneously with serving its counterclaim in the
arbitration, which is venued in Chicago, GEA filed a complaint in the United States District Court for the Western District of
Kentucky seeking damages of approximately $530,000 plus interest and attorneys’ fees allegedly owed under a previous agreement
between the parties. On December 12, 2017, the court stayed GEA’s complaint in favor of the arbitration. Under the terms
of ARCA’s transaction with Recleim LLC (“Recleim”), Recleim is obligated to pay GEA on ARCA’s behalf the
amounts claimed by GEA in the arbitration and in the lawsuit pending in Kentucky. Those amounts Recleim is obligated to pay have
been paid into escrow pending the outcome of the arbitration. The arbitration is currently scheduled for August 2019 however the
parties have agreed to mediation in advance of the arbitration.
AMTIM Capital, Inc. (“AMTIM”)
acts as our representative to market our recycling services in Canada under an arrangement that pays AMTIM for revenues generated
by recycling services in Canada as set forth in the agreement between the parties. A dispute has arisen between AMTIM and us with
respect to the calculation of amounts due to AMTIM pursuant to the agreement. In a lawsuit filed in the province of Ontario, AMTIM
claims a discrepancy in the calculation of fees due to AMTIM by us of approximately $2.0 million. Although the outcome of this
claim is uncertain, we believe that no further amounts are due under the terms of the agreement and that we will continue to defend
our position relative to this lawsuit.
We are party from time to time to other
ordinary course disputes that we do not believe to be material.
Other commitments
For discussion related to potential obligations
and or guarantees under ApplianceSmart Leases, see Note 1.
Operating Leases
The Company leases its office space and
recycling centers under non-cancelable operating leases expiring through fiscal year 2022. Rent expense under these leases for
continuing operations was $2,252 and $1,450 for the fiscal years ended December 29, 2018 and December 30, 2017, respectively. Rent
expense may include certain common area charges such as taxes, maintenance, utilities and insurance.
Future minimum annual rental commitments
under noncancelable operating lease agreements as of December 29, 2018 are as follows:
Fiscal year 2019
|
|
$
|
789
|
|
Fiscal year 2020
|
|
|
459
|
|
Fiscal year 2021
|
|
|
129
|
|
Fiscal year 2022
|
|
|
98
|
|
Fiscal year 2023
|
|
|
58
|
|
|
|
$
|
1,533
|
|
Note 19: Series A
Preferred Stock
On August 18,
2017, the Company acquired GeoTraq by way of merger. GeoTraq is engaged in the development, manufacture, and, ultimately, we expect,
sale of cellular transceiver modules, also known as Mobile IoT 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 shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”),
and entered into one-year unsecured promissory notes in the aggregate principal amount of $800.
To accomplish the designation and issuance
of the Series A Preferred Stock, we filed a Certificate of Designation with the Secretary of State of the State of Minnesota.
On November 9, 2017, we filed a Certificate of Correction with the Minnesota Secretary of State. In connection with the Reincorporation,
we filed Articles of Incorporation with the Secretary of State of the State of Nevada on March 12, 2018, and a Certificate of Correction
with the Secretary of State of the State of Nevada on August 7, 2018 (collectively, the “Nevada Articles of Incorporation”).
The following summary of the Nevada Articles of Incorporation does not purport to be complete and is qualified in its entirety
by reference to the provisions of applicable law and to the Nevada Articles of Incorporation, which are filed as Exhibit 3.1 to
the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2018, and as Exhibit 3.1. to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.
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 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 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. On October 23, 2018, at the Company’s 2018 Annual Meeting of Shareholders, the Company’s shareholders
approved of the future conversion of the shares of Series A Preferred Stock into shares of the Company’s common stock.
Redemption
The shares of
Series A Preferred Stock 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.
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 $656 and $272 for the 52 weeks ended December 29, 2018, and December 30, 2017, respectively. There is estimated future
share-based compensation expense as of December 29, 2018 of $20 per month for a total of $265.
Note 21: Shareholders’
Equity
Common Stock: Our Articles
of Incorporation authorize 50 million shares of common stock that may be issued from time to time having such rights, powers, preferences
and designations as the Board of Directors may determine. During fiscal year 2018, 1,390 shares of common stock were granted
and issued in lieu of professional services at a fair value of $920, and EEI converted its outstanding note into 207 shares of
common stock at a fair value of $101. As of December 29, 2018, and December 30, 2017, there were 8,472 and 6,875 shares, respectively,
of common stock issued and outstanding.
Stock options: The 2016 Plan
authorizes the granting of awards in any of the following forms: (i) incentive stock options, (ii) nonqualified stock options,
(iii) restricted stock awards, and (iv) restricted stock units, and expires on the earlier of October 28, 2026, or the date that
all shares reserved under the 2016 Plan are issued or no longer available. The 2016 Plan provides for the issuance of up to 2,000
shares of common stock pursuant to awards granted under the 2016 Plan. Options granted to employees typically vest over two years,
while grants to non-employee directors vest in six months. As of December 29, 2018, 20 options were outstanding under the 2016
Plan. Our 2011 Plan authorizes the granting of awards in any of the following forms: (i) stock options, (ii) stock appreciation
rights, and (iii) other share-based awards, including but not limited to, restricted stock, restricted stock units or performance
shares, and expires on the earlier of May 12, 2021, or the date that all shares reserved under the 2011 Plan are issued or
no longer available. Options granted to employees typically vest over two years, while grants to non-employee directors vest in
six months. As of December 29, 2018, 485 options were outstanding under the 2011 Plan. No additional awards will be granted under
the 2011 Plan after the adoption of the 2016 Plan. Our 2006 Stock Option Plan (the “2006 Plan”) expired on June 30,
2011, but the options outstanding under the 2006 Plan continue to be exercisable in accordance with their terms. As of December
29, 2018, no 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.
No options were issued in fiscal year 2018 and 2017.
Additional information relating to all
outstanding options is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average Exercise
|
|
|
Aggregate Intrinsic
|
|
|
Weighted Average Remaining Contractual
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Value
|
|
|
Life
|
|
Balance December 31, 2016
|
|
|
710
|
|
|
$
|
2.62
|
|
|
$
|
–
|
|
|
|
4.66
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(83
|
)
|
|
|
3.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2017
|
|
|
627
|
|
|
$
|
2.56
|
|
|
$
|
–
|
|
|
|
4.22
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(122
|
)
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2018
|
|
|
505
|
|
|
$
|
2.21
|
|
|
$
|
–
|
|
|
|
3.84
|
|
The weighted average fair value per option
of options granted during fiscal year 2016 was $1.12. We recognized share-based compensation expense related to option grants of
$0 and $32 for fiscal years 2018 and 2017, respectively. The aggregate intrinsic value in the preceding table represents
the total pre-tax intrinsic value, based on our closing stock price of $0.51 on December 29, 2018, which theoretically could have
been received by the option holders had all option holders exercised their options as of that date. As of December 29, 2018,
December 30, 2017 and December 31, 2016, there were no in-the-money options exercisable.
Based on the value of options outstanding
as of December 29, 2018, we do not estimate any future share-based compensation expense for existing options issued. This estimate
does not include any expense for additional options that may be granted and vest in subsequent years.
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. This warrant contains a blocker provision under which EEI
does not have the right to exercise this warrant to the extent that such exercise would result in beneficial ownership by EEI,
together with any of EEI’s affiliates, of more than 4.99% of the number of shares of our Common Stock outstanding immediately
after giving effect to the issuance of shares of Common Stock issuable upon exercise of this warrant (the “Beneficial Ownership
Limitation”). EEI is entitled to, among other things, upon notice to us, increase the Beneficial Ownership Limitation to
9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common
Stock upon exercise of this warrant, with such increase to take effect 61 days after such notice is delivered to us. EEI elected
to increase the Beneficial Ownership Limitation to 9.99% and we elected to waive the 61-day notice period. The fair value
of the EEI warrant was recorded as deferred financing costs and is being amortized over the term of the commitment.
As of December 29, 2018, and
December 30, 2017, we had fully vested warrants outstanding to purchase 24 shares of common stock at a price of $3.55 per
share and expire in May 2020 and 167 shares of common stock at a price of $0.68 per share.
Preferred Stock:
Our Articles of Incorporation authorize two million shares of preferred stock that may be issued from time to time in one or more
series having such rights, powers, preferences and designations as the Board of Directors may determine. In 2018, 288,588
shares (number specific – not rounded) of preferred stock were issued for the Geo Traq acquisition. See Note 19.
Note 22: Earnings
per share
Net earnings per share is calculated using
the weighted average number of shares of common stock outstanding during the applicable period. Basic weighted average common shares
outstanding do not include shares of restricted stock that have not yet vested, although such shares are included as outstanding
shares in the Company’s Consolidated Balance Sheet. Diluted net earnings per share is computed using the weighted average
number of common shares outstanding and if dilutive, potential common shares outstanding during the period. Potential common shares
consist of the additional common shares issuable in respect of restricted share awards, stock options and convertible preferred
stock.
The following table presents the computation
of basic and diluted net earnings per share:
|
|
For the Fifty Two Weeks Ended
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(5,608
|
)
|
|
$
|
5,893
|
|
Net income from discontinued operations, net of tax
|
|
|
–
|
|
|
|
(5,775
|
)
|
Net income (loss)
|
|
$
|
(5,608
|
)
|
|
$
|
118
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continued operations
|
|
$
|
(0.75
|
)
|
|
$
|
0.88
|
|
Basic earnings per share - discontinued operations, net of tax
|
|
|
–
|
|
|
|
(0.86
|
)
|
Basic earnings (loss) per share
|
|
$
|
(0.75
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
7,475
|
|
|
|
6,708
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from continued operations
|
|
$
|
(0.75
|
)
|
|
$
|
0.87
|
|
Diluted earnings per share - discontinued operations, net of tax
|
|
|
–
|
|
|
|
(0.85
|
)
|
Diluted earnings (loss) per share
|
|
$
|
(0.75
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
7,475
|
|
|
|
6,708
|
|
Add: Series A Convertible Preferred Stock
|
|
|
–
|
|
|
|
–
|
|
Add: Common Stock Warrants
|
|
|
–
|
|
|
|
50
|
|
Assumed diluted weighted average common shares outstanding
|
|
|
7,475
|
|
|
|
6,758
|
|
Potentially dilutive securities were excluded
from the calculation of diluted net income per share for years ended December 29, 2018 and December 30, 2017. The weighted average
number of dilutive securities excluded were 651 and 651, respectively for each fiscal year, because the effects were anti-dilutive
based on the application of the treasury stock method. Series A preferred shares issued and outstanding are excluded from dilutive
securities until the conditions for conversion have been satisfied. See Note 19.
Note 23: Major
customers and suppliers
For the fiscal year ended December 29,
2018, one customer represented 10% or more of our total revenues for a combined total of 19%. For the fiscal year ended December
30, 2017, no customer represented more than 10% of our total revenues. As of December 29, 2018, three customers each represented
10% or more of our total trade receivables for a combined total of 38%. As of December 30, 2017, two customers, each represented
more than 10% of our total trade receivables, for a total of 41% of our total trade receivables.
During the fiscal years ended December
29, 2018 and December 30, 2017, 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 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 $40 and $90 for fiscal years 2018 and 2017, respectively.
Note 25: Segment
information
We operate within targeted markets through
two reportable segments for continuing operations: recycling and technology. The recycling segment includes all fees charged and
costs incurred for collecting, recycling and installing appliances for utilities and other customers. The recycling segment also
includes byproduct revenue, which is primarily generated through the recycling of appliances and includes all revenues from AAP
up until the date of deconsolidation August 15, 2017. The nature of products, services and customers for both segments varies significantly.
As such, the segments are managed separately. Our Chief Executive Officer has been identified as the Chief Operating Decision Maker
(“CODM”). The CODM evaluates performance and allocates resources based on sales and income from operations of each
segment. Income (loss) from operations represents revenues less cost of revenues and operating expenses, including certain allocated
selling, general and administrative costs. There are no intersegment sales or transfers. Our retail segment comprised of ApplianceSmart
was sold on December 29, 2018, see Note 7.
The following tables present our segment information for continuing
operations for fiscal years 2018 and 2017:
|
|
Fifty Two Weeks Ended
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
36,794
|
|
|
$
|
41,544
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
Total Revenues
|
|
$
|
36,794
|
|
|
$
|
41,544
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
11,053
|
|
|
$
|
13,145
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
Total Gross profit
|
|
$
|
11,053
|
|
|
$
|
13,145
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
(1,051
|
)
|
|
$
|
1,300
|
|
Technology
|
|
|
(5,046
|
)
|
|
|
(1,531
|
)
|
Total Operating income (loss)
|
|
$
|
(6,097
|
)
|
|
$
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
268
|
|
|
$
|
750
|
|
Technology
|
|
|
3,730
|
|
|
|
1,397
|
|
Total Depreciation and amortization
|
|
$
|
3,998
|
|
|
$
|
2,147
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
668
|
|
|
$
|
894
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
Total Interest expense
|
|
$
|
668
|
|
|
$
|
894
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before provision for income taxes
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
(1,289
|
)
|
|
$
|
5,598
|
|
Technology
|
|
|
(5,046
|
)
|
|
|
(1,531
|
)
|
Total Net income (loss) before provision for income taxes
|
|
$
|
(6,335
|
)
|
|
$
|
4,067
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
13,566
|
|
|
$
|
21,745
|
|
Technology
|
|
|
21,055
|
|
|
|
25,146
|
|
Total Assets
|
|
$
|
34,621
|
|
|
$
|
46,891
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
Recycling
|
|
$
|
19
|
|
|
$
|
19
|
|
Technology
|
|
|
20,969
|
|
|
|
24,699
|
|
Total Intangible Assets
|
|
$
|
20,988
|
|
|
$
|
24,718
|
|
Certain items have been reclassified from prior year for presentation
with no effect to net income.
Note 26: Related
parties
Tony Isaac, the Company’s Chief Executive
Officer, is the father of Jon Isaac, President and Chief Executive Officer of Live Ventures Incorporated and managing member of
Isaac Capital Group LLC, a 15% shareholder of the Company. Tony Isaac, Chief Executive Officer, Virland Johnson, Chief Financial
Officer, Richard Butler, Board of Directors member, and Dennis Gao, Board of Directors member of the Company, are Board of Directors
member, Chief Financial Officer, Board of Directors member, and Board of Directors members of, respectively, Live Ventures Incorporated.
The Company also shares certain executive and legal services with Live Ventures Incorporated. The total services shared were $211
and $30 for fiscal years ending December 29, 2018 and December 30, 2017, respectively. Customer Connexx rents approximately 9,879
square feet of office space from Live Ventures Incorporated at its Las Vegas, NV office. The total rent and common area expense
were $174 and $213 for fiscal years ending December 29, 2018 and December 30, 2017, respectively.
On December 30, 2017, ApplianceSmart Holdings
LLC (the “Purchaser”), a wholly owned subsidiary of Live Ventures Incorporated, entered into a Stock Purchase Agreement
(the “Agreement”) with the Company and ApplianceSmart, Inc. (“ApplianceSmart”), a subsidiary of the Company.
ApplianceSmart is a chain specializing in new and out-of-the-box appliances. Pursuant to the Agreement, the Purchaser purchased
from the Company all the issued and outstanding shares of capital stock (the “Stock”) of ApplianceSmart in exchange
for $6,500 (the “Purchase Price”). Effective April 1, 2018, the Purchaser issued the Company a promissory note (the
“ApplianceSmart Note”) with a three-year term in the original principal amount of $3,919,494 for the balance of the
purchase price. ApplianceSmart is guaranteeing the repayment of the ApplianceSmart Note. On December 26, 2018, the ApplianceSmart
Note was amended and restated to grant ARCA a security interest in the assets of the Purchaser, ApplianceSmart, and ApplianceSmart
Contracting Inc. in exchange for modifying the repayment terms to provide for the payment in full of all accrued interest and principal
on April 1, 2021, the maturity date of the ApplianceSmart Note. On March 15, 2019, the Company entered into subordination agreements
with third parties pursuant to which it agreed to subordinate the payment of indebtedness under the ApplianceSmart Note and the
Company’s security interest in the assets of ApplianceSmart and other related parties in exchange for up to $1,200,000 payable
within 15days of the agreement. In connection with the sale to the Purchaser, ApplianceSmart Inc. incurred $270 of transition fee
expense for fiscal year 2018.
In the Company’s definitive proxy
statement on Schedule 14A filed with the SEC on September 18, 2018 (the “Proxy Statement”), under the caption “Transactions
with Related Parties” the Company disclosed that Tony Isaac, the Company’s Chief Executive Officer, was the sole stockholder
and owner of Negotiart of America, Inc. (“Negotiart of America”), a company that provided consulting services to the
Company. After the filing of the Proxy Statement, it was determined that this was an error and that the foregoing disclosure
was incorrect and that Negotiart of America is a wholly-owned subsidiary of Negotiart, Inc., a Canadian corporation.
Timothy Matula was granted 560,000 shares of common stock at
a market price of $0.64 per share for services to be provided over the period of August 10, 2018 through February 9, 2020 on August
10, 2018. Timothy Matula was formerly a director of the Company.
Note 27: Going concern
In September 2014, the FASB issued ASU
No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern. The standard requires an entity’s management to determine whether
substantial doubt exists regarding the entity’s ability to continue as a going concern. The amendments denote how and when
companies are obligated to disclose going concern uncertainties, which are required to be evaluated every interim and annual period.
If management determines that substantial doubt exists, particular disclosures are required.
We acknowledge that we continue to face
a challenging competitive environment as we continue to focus on our overall profitability, including managing expenses. We reported
an operating loss of $6,097 and a net loss of $5,608 in 2018. In addition, the Company has total current assets of $8,518 and total
current liabilities $9,265 resulting in a net negative working capital of $747.
The Company has available cash balances,
cash generated from operating activities and funds available under the accounts receivable factoring program with Prestige Capital,
to provide sufficient liquidity to fund the entity’s operations, the entity’s continued investments in center openings
and remodeling activities, for at least the next twelve months. The agreement with Prestige Capital allows the company to get advance
funding of 80% of an unpaid customer’s invoice amount within 2 days and the balance less a fee upon ultimate collection in
cash of the invoice. The Company will be able to utilize the available funds under the accounts receivable factoring agreement
to provide liquidity, to pursue acquisitions, and other strategic transactions to expand and grow the business to enhance shareholder
value. Management also regularly monitors capital market conditions to ensure no other conditions or events exist that may materially
affect the Company’s financial conditions and liquidity and the Company may raise additional funds through borrowings or
public or private sales of debt or equity securities, if necessary.
In Item 1A. RISK FACTORS, management has
addressed and evaluated the risk factors that could materially and adversely affect the entity’s business, financial condition
and results of operations, cash flows and liquidity. The Company has determined the risk factors do not materially affect the Company’s
ability to continue as a going concern within one year after the date that the financial statements are issued.
Based on the above, management has concluded
that at December 28, 2018 the Company is not aware and did not identify any other conditions or events that would cause the Company
to not be able to continue business as a going concern for the next twelve months.
Note 28: Subsequent
events
Sears Holdings Management Corp –
Logistics Services
On February 18, 2019, the Company informed
Sears Holdings Management Corp – Logistics Services (“Sears”) that Sears may have overcharged ARCA Recycling
$642 and that it planned on filing a proof of claim with the trustee in the Sears’ bankruptcy against Sears for the overcharged
amount. The Company requested that Sears provide contractual written proof to the contrary supporting their claim for invoices
submitted in excess of the contractually agreed upon amounts for transportation services. Sears provided transportation services
to ARCA Recycling in fiscal years 2013 through 2018. ARCA Recycling has $559 recorded as outstanding and un-paid accounts payable
as of December 30, 2018. The Company is of the opinion that Sears owes ARCA Recycling a net amount due of $83. The overcharged
amount has not been corrected in the consolidated results of the Company through December 30, 2018. The Company is in the process
of preparing to file such proof of claim.
ApplianceSmart Note
On March 15, 2019, the Company entered
into subordination agreements with third parties pursuant to which it agreed to subordinate the payment of indebtedness under the
ApplianceSmart Note and the Company’s security interest in the assets of ApplianceSmart and other related parties in exchange
for up to $1,200,000 payable within 15 days of the agreement.