The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
1. Nature
of Business and Basis of Presentation
Appliance Recycling Centers of America, Inc.
and subsidiaries (“we,” the “Company” or “ARCA”) are in the business of providing turnkey
appliance recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. We also
sell new major household appliances through a chain of Company-owned stores under the name ApplianceSmart
®
. Through
our GeoTraq Inc. (“GeoTraq”) subsidiary, a development stage company, we are engaged in the development, design and,
ultimately, we expect the sale of cellular transceiver modules, also known as Cell-ID modules. GeoTraq is part of a new reporting
segment for our Company – Technology. On August 15, 2017, we sold our 50% interest in a joint venture operating under the
name ARCA Advanced Processing, LLC (AAP”), which recycles appliances from twelve states in the Northeast and Mid-Atlantic
regions of the United States.
The accompanying balance sheet as of December
31, 2016 which has been derived from the audited consolidated financial statements and the unaudited consolidated financial statements
have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United
States of America for interim financial information and Article 8 of Regulation S-X promulgated by the United States Securities
and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, normal and recurring adjustments and accruals considered
necessary for a fair presentation for the periods indicated have been included. Operating results for the 13 Week and 39 Week periods
ended September 30, 2017 and October 1, 2016, are presented in lieu of three month and nine month periods, respectively.
The Company reports results on a 52-week fiscal basis. The results of operations for any interim period are not necessarily indicative
of the results for the year.
In preparation of the Company’s condensed
consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets
and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot be determined
with precision, actual results could differ significantly from these estimates.
These condensed consolidated financial
statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto
for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K, as amended, initially filed
with the SEC on March 31, 2017.
Principles of consolidation
:
The consolidated financial statements include the accounts of Appliance Recycling Centers of America, Inc. and our subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation.
ApplianceSmart, Inc., a Minnesota
corporation, is a wholly owned subsidiary that was formed through a corporate reorganization in July 2011 to hold our business
of selling new major household appliances through a chain of Company-owned retail stores. ARCA Canada Inc., a Canadian corporation,
is a wholly owned subsidiary that was formed in September 2006 to provide turnkey recycling services for electric utility
energy efficiency programs. ARCA Recycling, Inc., a California corporation, is a wholly owned subsidiary that was formed in
November 1991 to provide turnkey recycling services for electric utility energy efficiency programs. The operating results
of our wholly owned subsidiaries are consolidated in our financial statements.
AAP is a joint venture that was formed
in October 2009 between ARCA and 4301 Operations, LLC (“4301”). ARCA and 4301 owned a 50% interest in AAP through
August 15, 2017, on which date ARCA sold its 50% interest in AAP. AAP established a regional processing center in Philadelphia,
Pennsylvania at which recyclable appliances are processed. The financial position and results of operations of AAP are consolidated
in our financial statements through August 15, 2017, based on our conclusion that AAP is a variable interest entity due to our
contribution in excess of 50% of the total equity, subordinated debt and other forms of financial support. We had a controlling
financial interest in AAP and we have provided substantial financial support to fund the operations of AAP since its inception.
On August 15, 2017, ARCA sold it’s 50% interest in AAP and is no longer consolidating the results of AAP in its consolidated
financial statements as of that date. Note 6 – Sale and deconsolidation of variable interest entity AAP to these condensed
consolidated financial statements.
On August 18, 2017, we acquired GeoTraq.
GeoTraq is a development stage company that is engaged in the development, design, and, ultimately, we expect, sale of cellular
transceiver modules, also known as Cell-ID modules. GeoTraq has created a dedicated Cell-ID transceiver module that we believe
can enable the design of extremely small, inexpensive products that can operate for years on a single charge, powered by standardly
available batteries of diminutive size without the need of recharge. Accordingly, and utilizing Cell-ID technology exclusively,
we believe that GeoTraq will provide an exclusive, low-cost solution and service life that will enable new global markets for location-based
services (LBS) that could utilize technology similar to the technology that emergency 911 location systems currently utilize.
As a result of this transaction,
GeoTraq became a wholly-owned subsidiary and, therefore, the results of GeoTraq are included in our consolidated results as of
August 18, 2017.
2. Inventories
Inventories, consisting principally of
appliances, are stated at the lower of cost, determined on a specific identification basis, or net realizable value and consist
of:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Appliances held for resale
|
|
$
|
11,219
|
|
|
$
|
16,146
|
|
Processed metals from recycled appliances held for resale
|
|
|
–
|
|
|
|
139
|
|
Other
|
|
|
–
|
|
|
|
6
|
|
|
|
$
|
11,219
|
|
|
$
|
16,291
|
|
We provide estimated provisions for the
obsolescence of our appliance inventories, including adjustments to net realizable value, based on various factors, including
the age of such inventory and our management’s assessment of the need for such provisions. We look at historical inventory
aging’s and margin analysis in determining our provision estimate. A revised cost basis is used once a provision for
obsolescence is recorded.
3. Earnings
per share
Basic income per common share is computed
based on the weighted average number of common shares outstanding. Diluted income per common share is computed based on the weighted
average number of shares of common stock outstanding adjusted by the number of additional shares that would have been outstanding
had the potentially dilutive shares of common stock been issued. Potentially dilutive shares of common stock include unexercised
stock options and warrants. Basic per share amounts are computed, generally, by dividing net income attributable to shareholders’
of the parent by the weighted average number of shares of common stock outstanding. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless their effect is anti-dilutive, thereby reducing the loss
or increasing the income per common share. In calculating diluted weighted average shares and per share amounts, we included
stock options and warrants with exercise prices below average market prices, for the respective reporting periods in which they
were dilutive, using the treasury stock method. We calculated the number of additional shares by assuming the outstanding stock
options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market
price during the quarter. For the 13 weeks and 39 weeks ended September 30, 2017 and October 1, 2016, we excluded options and
warrants to purchase 651 and 651 shares of common stock from the diluted weighted average shares outstanding calculation as the
effect of these options were anti-dilutive.
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) attributed to shareholders’ of parent
|
|
$
|
770
|
|
|
$
|
1,123
|
|
|
$
|
5,041
|
|
|
$
|
(1,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,655
|
|
|
|
5,991
|
|
|
|
6,655
|
|
|
|
5,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.12
|
|
|
$
|
0.19
|
|
|
$
|
0.76
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to diluted earnings (loss) per share
|
|
$
|
770
|
|
|
$
|
1,123
|
|
|
$
|
5,041
|
|
|
$
|
(1,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,655
|
|
|
|
5,991
|
|
|
|
6,655
|
|
|
|
5,940
|
|
Add: options
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Add: common stock warrants
|
|
|
50
|
|
|
|
–
|
|
|
|
50
|
|
|
|
–
|
|
Assumed diluted weighted average common shares outstanding
|
|
|
6,705
|
|
|
|
5,991
|
|
|
|
6,705
|
|
|
|
5,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.19
|
|
|
$
|
0.75
|
|
|
$
|
(0.24
|
)
|
4. Share-based
compensation
We recognized share-based compensation
expense of $0 and $123 for the 13 weeks ended September 30, 2017, and October 1, 2016 respectively. We recognized share-based compensation
expense of $32 and $264 for the 39 weeks ended September 30, 2017 and October 1, 2016, respectively. There is no estimated future
share-based compensation expense as of September 30, 2017.
5.
Acquisition
of GeoTraq, Inc.
On August 18, 2017, the Company, entered
into a series of transactions, acquiring all of the assets and capital stock of GeoTraq by way of merger. GeoTraq is a development
stage company that is engaged in the development, design, and, ultimately, the sale of cellular transceiver modules, also
known as Cell-ID modules. As of August 18, 2017, GeoTraq became a wholly-owned subsidiary of the Company.
The final fair value of the single
identifiable intangible asset acquired in the GeoTraq acquisition is a U.S. patent application USPTO reference No. 14724039 titled
“Locator Device with Low Power Consumption” together with the assignment of intellectual property that included historical
know-how, designs and related manufacturing procedures is $15,963. Total consideration paid for GeoTraq included cash $200, unsecured
promissory notes bearing interest at the annual rate of 1.29%, and maturing on August 18, 2017 in the aggregate principal of $800,
and 288,588 shares of newly created convertible series A preferred stock with a final fair value of $14,963. See Note 16 –
Series A Preferred Stock to these condensed consolidated financial statements. 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 andesigns. GeoTraq is in
the development stage and has yet to begin operations. The Company has 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.
6. Sale
and deconsolidation of variable interest entity - AAP
The financial position and results of operations
of AAP have been consolidated in our financial statements since AAP’s inception based on our conclusion that AAP is a variable
interest entity that we controlled due to our contribution in excess of 50% of the total equity, subordinated debt and other forms
of financial support. Since inception we provided substantial financial support to fund the operations of AAP. The financial position
and results of operations for AAP are reported in our recycling segment. On August 15, 2017, we sold our 50% interest in AAP, and
therefore, as of August 15, 2017, no longer consolidate the results of AAP in our financial statements.
The following table summarizes the assets
and liabilities of AAP consolidated in our financial position as of December 31, 2016:
Assets
|
|
December 31, 2016
|
|
Current assets
|
|
$
|
438
|
|
Property and equipment, net
|
|
|
7,322
|
|
Other assets
|
|
|
83
|
|
Total assets
|
|
$
|
7,843
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
1,388
|
|
Accrued expenses
|
|
|
523
|
|
Current maturities of long-term debt obligations
|
|
|
3,558
|
|
Long-term debt obligations, net of current maturities
|
|
|
435
|
|
Other liabilities (a)
|
|
|
1,126
|
|
Total liabilities
|
|
$
|
7,030
|
|
(a)
Other liabilities represent loans and advances between ARCA and AAP that are eliminated in consolidation.
The following table summarizes the operating
results of AAP consolidated in our financial results for the 13 weeks and 39 weeks ended September 30, 2017, and October 1, 2016,
respectively:
|
|
13 Weeks Ended
|
|
|
|
September 30,
2017 (b)
|
|
|
October 1,
2016
|
|
Revenues
|
|
$
|
306
|
|
|
$
|
2,076
|
|
Gross profit
|
|
|
38
|
|
|
|
492
|
|
Operating income (loss)
|
|
|
(140
|
)
|
|
|
79
|
|
Net income (loss)
|
|
|
(165
|
)
|
|
|
24
|
|
|
|
|
39 Weeks Ended
|
|
|
|
|
September 30,
2017 (b)
|
|
|
|
October 1,
2016
|
|
Revenues
|
|
$
|
1,433
|
|
|
$
|
5,557
|
|
Gross profit
|
|
|
24
|
|
|
|
967
|
|
Operating loss
|
|
|
(848
|
)
|
|
|
(285
|
)
|
Net loss
|
|
|
(991
|
)
|
|
|
(490
|
)
|
(b)
Operating results for AAP were consolidated in the Company’s operating results from inception of AAP through August 15,
2017, the date of our 50% equity sale in AAP. We recorded a gain of $81 on the sale and deconsolidation of our 50% equity interest
in AAP. Net Cash outflow arising from deconsolidation of AAP was $157. The Company received $800 in cash consideration for its
50% equity interest in AAP.
7. Property and
equipment
Property and equipment as of September 30, 2017, and December
31, 2016, consist of the following:
|
|
Useful Life (Years)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
|
|
$
|
–
|
|
|
$
|
1,140
|
|
Buildings and improvements
|
|
18-30
|
|
|
2,122
|
|
|
|
3,780
|
|
Equipment (including computer software)
|
|
3-15
|
|
|
7,897
|
|
|
|
19,260
|
|
Projects under construction
|
|
|
|
|
73
|
|
|
|
204
|
|
Property and equipment
|
|
|
|
|
10,092
|
|
|
|
24,384
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(9,098
|
)
|
|
|
(14,268
|
)
|
Property and equipment, net
|
|
|
|
$
|
994
|
|
|
$
|
10,116
|
|
Depreciation and amortization expense was
$173 and $302 for the 13 weeks ended September 30, 2017 and October 1, 2016, respectively. Depreciation and amortization expense
was $782 and $936 for the 39 weeks ended September 30, 2017 and October 1, 2016, respectively.
On January 25, 2017, as disclosed by the
Company in Item 2.01 of its Current Report on Form 8-K filed with the SEC on January 31, 2017, the Company sold its’ Compton,
California facility (the “Compton Facility”) for $7,103 to Terreno Acacia, LLC. The proceeds from the sale paid off
the PNC term loan in the aggregate principal amount of $1,020 that was secured by the property and costs of sale of $325, with
the remaining proceeds of $5,758 paid towards the PNC Revolver (as defined below). The Company recorded a gain on the sale of property
of $5,163. The Company rented the Compton Facility back from Terreno Acacia, LLC after the completion of the sale from January
26, 2017 through April 10, 2017.
8. Intangible assets
Intangible assets as of September 30, 2017, and December 31,
2016, consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Intangible assets GeoTraq, net (See Note 5)
|
|
$
|
15,691
|
|
|
$
|
–
|
|
Recycling contract, net
|
|
|
19
|
|
|
|
19
|
|
Goodwill
|
|
|
38
|
|
|
|
38
|
|
|
|
$
|
15,748
|
|
|
$
|
57
|
|
For the 13 Week and 39 Week periods ended
September 30, 2017, we recorded amortization expense of $272, related to our finite intangible assets. The useful life and amortization
period of the GeoTraq intangible acquired is seven years.
9. Deposits
and other assets
Deposits and other assets as of September
30, 2017, and December 31, 2016, consist of the following:
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Deposits
|
|
|
$
|
600
|
|
|
$
|
453
|
|
|
Other
|
|
|
|
151
|
|
|
|
104
|
|
|
|
|
|
$
|
751
|
|
|
$
|
557
|
|
Deposits are primarily refundable security deposits with landlords
the Company leases property from.
10. Accrued
liabilities
Accrued liabilities as of September 30,
2017, and December 31, 2016, consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Sales tax estimates, including interest
|
|
$
|
4,610
|
|
|
$
|
4,203
|
|
Compensation and benefits
|
|
|
741
|
|
|
|
2,431
|
|
Accrued incentive and rebate checks
|
|
|
192
|
|
|
|
358
|
|
Accrued rent
|
|
|
238
|
|
|
|
263
|
|
Warranty
|
|
|
14
|
|
|
|
26
|
|
Accrued payables
|
|
|
–
|
|
|
|
570
|
|
Deferred revenue
|
|
|
322
|
|
|
|
227
|
|
Other
|
|
|
110
|
|
|
|
810
|
|
|
|
$
|
6,227
|
|
|
$
|
8,888
|
|
Sales and Use Tax Assessment
We operate in twenty-three states in the
U.S. and in various provinces in Canada. From time to time, we are subject to sales and use tax audits that could result in additional
taxes, penalties and interest owed to various taxing authorities.
As previously disclosed, the California
Board of Equalization (“BOE”) conducted a sales and use tax examination covering the Company’s California operations
for 2011, 2012 and 2013. The Company believed it was exempt from collecting sales taxes under service agreements with utility customers
that included appliance replacement programs. During the fourth quarter of 2014, the Company received communication from the BOE
indicating they were not in agreement with the Company’s interpretation of the law. As a result, the Company applied for
and, as of February 9, 2015, received approval to participate in the California Board of Equalization’s Managed Audit Program.
The period covered under this program included 2011, 2012, 2013 and extended through the nine-month period ended September 30,
2014.
On April 13, 2017 the Company received
the formal BOE assessment for sales tax for tax years 2011, 2012 and 2013 in the amount of $4.1 million plus applicable interest
of $0.5 million related to the appliance replacement programs that we administered on behalf of our customers on which we did not
assess, collect or remit sales tax. The Company intends to appeal this assessment and continue to engage the services of our existing
retained sales tax experts throughout the appeal process. The BOE tax assessment is subject to protest and appeal, and would not
need to be funded until the matter has been fully resolved through the appeal process. The Company anticipates that resolution
of the BOE assessment could take up to two years.
11. Line
of credit - PNC Bank
We had a Revolving Credit, Term Loan and
Security Agreement, as amended, (“PNC Revolver”) with PNC Bank, National Association (“PNC”) that provided
us with a $15,000 revolving line of credit. The PNC Revolver loan agreement included a lockbox agreement and a subjective
acceleration clause and as a result we have classified the revolving line of credit as a current liability. The PNC Revolver was
collateralized by a security interest in substantially all of our assets and PNC was also secured by an inventory repurchase agreement
with Whirlpool Corporation solely with respect to Whirlpool purchases only. In addition, we issued a $750 letter of credit in favor
of Whirlpool Corporation. The PNC Revolver required, starting with the fiscal quarter ending April 2, 2016, that we meet a specified
minimum earnings before interest, taxes, depreciation and amortization, and continuing at the end of each quarter thereafter, that
we meet a minimum fixed charge coverage ratio of 1.1 to 1.0. The PNC Revolver loan agreement limited investments that we could
purchase, the amount of other debt and leases that we could incur, the amount of loans that we could issue to our affiliates and
the amount we could spend on fixed assets, along with prohibiting the payment of dividends.
The interest rate on the PNC Revolver,
as stated in our renewal agreement on January 22, 2016, was PNC Base Rate (as defined below) plus 1.75% to 3.25%, or 1-, 2- or
3-month PNC LIBOR Rate plus 2.75% to 4.25%, with the rate being dependent on our level of fixed charge coverage. The PNC Base Rate
meant, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the interest rate per annum announced
from time to time by PNC as its prime rate, (ii) the Federal Funds Open Rate plus 0.5%, and (iii) the one-month LIBOR
rate plus 100 basis points (1%).
The amount of available revolving borrowings
under the PNC Revolver was based on a formula using accounts receivable and inventories. We did not have access to the full $15,000
revolving line of credit due to such formula, the amount of the letter of credit issued in favor of Whirlpool Corporation and the
amount of outstanding loans owed to PNC by out AAP joint venture.
As discussed above, the Company sold its
the Compton Facility building and land for $7,103. The net proceeds from the sale, after costs of sale and payoff of the Term Loan
(as defined below), were used to reduce the outstanding balance under our PNC Revolver.
On May 1, 2017, the PNC Revolver loan agreement
was amended and the term was extended through June 2, 2017. The amendment, effective May 2, 2017, also reduced the maximum amount
of borrowing under the PNC Revolver to $6 million. On May 10, 2017 we repaid in full and terminated our existing Revolving Credit,
Term Loan and Security Agreement, as amended, with PNC Bank, National Association on the same date.
The PNC Revolver loan agreement terminated
and the PNC Revolver was paid in full on May 10, 2017 with funds from MidCap Financial Trust. A letter of credit to Whirlpool Corporation
remains outstanding with PNC backed by restricted cash collateral of $750 as of September 30, 2017. See Note 13, long term obligations,
for additional information.
12. Notes payable
– short term
On August 18, 2017, the Company, as
part of its’ acquisition of GeoTraq, issued unsecured promissory notes to the sellers of GeoTraq with interest at the annual
rate of interest of 1.29% maturing on August 18, 2018. The outstanding balance of the notes payable – short term as of September
30, 2017 is $800. Interest accrued is included in accrued expenses.
13. Long term
obligations
Long term debt, capital lease and other
financing obligations as of September 30, 2017, and December 31, 2016, consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
PNC term loan
|
|
$
|
–
|
|
|
$
|
1,020
|
|
MidCap financial trust asset based revolving loan
|
|
|
3,616
|
|
|
|
–
|
|
AFCO Finance
|
|
|
639
|
|
|
|
–
|
|
Susquehanna term loans
|
|
|
–
|
|
|
|
3,242
|
|
GE 8% loan agreement
|
|
|
482
|
|
|
|
482
|
|
EEI note
|
|
|
103
|
|
|
|
103
|
|
PIDC 2.75% note, due in month installments of $3, including interest, due October 2024
|
|
|
–
|
|
|
|
287
|
|
Capital leases and other financing obligations
|
|
|
36
|
|
|
|
564
|
|
Debt issuance costs, net
|
|
|
(1,030
|
)
|
|
|
(779
|
)
|
Total debt obligations
|
|
|
3,846
|
|
|
|
4,919
|
|
Less current maturities
|
|
|
(3,846
|
)
|
|
|
(2,093
|
)
|
Long-term debt obligations, net of current maturities
|
|
$
|
–
|
|
|
$
|
2,826
|
|
PNC Term Loan
On January 24, 2011, we entered
into a $2,550 Term Loan (“Term Loan”) with the PNC Bank to refinance the mortgage on our Compton Facility. The
Term Loan was payable in 119 consecutive monthly principal payments of $21 plus interest commencing on February 1, 2011
and followed by a 120th payment of all unpaid principal, interest and fees on February 1, 2021. The PNC Revolver loan
agreement required a balloon payment of $1,020 in principal plus interest and additional fees due on January 31, 2017. The
Term Loan was collateralized by the Compton Facility. As disclosed by the Company in Item 2.01 of the Company’s Current
Report on Form 8-K filed with the SEC on January 31, 2017, the Term Loan was paid off in full on January 25, 2017 when the
Compton Facility was sold.
MidCap Financial Trust
On May 10, 2017, we entered into a Credit
and Security Agreement (“Credit Agreement”) with MidCap Financial Trust (“MidCap Financial Trust”), as
a lender and as agent for itself and other lenders under the Credit Agreement. The Credit Agreement provides us with a $12,000
revolving line of credit, which may be increased to $16,000 under certain terms and conditions (the “MidCap Revolver”).
The MidCap Revolver has a stated maturity date of May 10, 2020, if not renewed. The MidCap Revolver is collateralized by a security
interest in substantially all of our assets. The lender is also secured by an inventory repurchase agreement with Whirlpool Corporation
for Whirlpool purchases only. The Credit Agreement requires that we meet a minimum fixed charge coverage ratio of 1.00:1.00 for
the applicable measuring period as of the end of each calendar month. The applicable measuring period is (i) the period commencing
May 1, 2017 and ending on the last day of each calendar month from May 31, 2017 through April 30, 2018, and (ii) the twelve-month
period ending on the last day of such calendar month thereafter. The Credit Agreement limits the amount of other debt we can incur,
the amount we can spend on fixed assets, and the amount of investments we can make, along with prohibiting the payment of dividends.
The amount of revolving borrowings available
under the Credit Agreement is based on a formula using receivables and inventories. We may not have access to the full $12,000 revolving line of credit due to the formula using our receivables and inventories and the amount of any outstanding letters of
credit issued by the Lender. The interest rate on the revolving line of credit is the one-month LIBOR rate plus four and one-half
percent (4.50%).
On September 30, 2017 and December 31,
2016, our available borrowing capacity under the Credit Agreement is $2,416 and $0, respectively. The weighted average interest
rate for the period of May 10, 2017 through September 30, 2017 was 5.66%. We borrowed $45,099 and repaid $41,483 on the Credit
Agreement during the period of May 10, 2017 through September 30, 2017, leaving an outstanding balance on the Credit Agreement
of $3,616 and $0 at September 30, 2017 and December 31, 2016, respectively.
On September 20, 2017, we received a written
notice of default, dated September 20, 2017 (the “Notice of Default”), from MidCap Funding X Trust (the “Agent”),
asserting that events of default had occurred with respect to the Credit Agreement. The Agent alleges in the Notice of Default
that, as a result of the Company’s recent acquisition of GeoTraq, and the issuance of promissory notes to the stockholders
of GeoTraq in connection with such acquisition, the Borrowers have failed to comply with certain terms of the Loan Agreement, and
that such failure constitutes one or more Events of Default under the Loan Agreement. Specifically, the Notice of Default states
that as a result of the acquisition and related issuance of promissory notes, the Borrowers have failed to comply with (i) a covenant
not to incur additional indebtedness other than Permitted Debt (as defined in the Loan Agreement), without the Agent’s prior
written consent, and a covenant not to make acquisitions or investments other than Permitted Acquisitions or Permitted Investments
(as defined in the Credit Agreement). The Notice of Default also states that the Borrowers’ failure to pledge the stock in
GeoTraq as collateral under the Credit Agreement and to make GeoTraq a “Borrower “under the Credit Agreement will become
an Event of Default if not cured within the applicable cure period. The Agent has reserved the right to avail itself of any other
rights and remedies available to it at law or by contract, including the right to (a) withhold funding, increase reserves and suspend
making further advances under the Credit Agreement, (b) declare all principal, interest and other sums owing in connection with
the Credit Agreement immediately due and payable in full, (c) charge the Default Rate on amounts outstanding under the Credit Agreement,
and/or (d) exercise one or more rights and remedies with respect to any and all collateral securing the Credit Agreement. The Agent
has not declared the amounts outstanding under the Credit Agreement to be immediately due and payable but has imposed the default
rate of interest, which is 5% in excess of the rates otherwise payable under the Loan Agreement), effective as of August 18, 2017
and continuing until the Agent notifies the Borrowers that the specified Events of Default have been waived and no other Events
of Default exist.
The Company strongly disagrees with the
Lenders that any Event of Default has occurred and is reserving all of its options with respect to the Credit Agreement. The Company
and the Agent are in active discussions for forbearance and resolution of the default, however there can be no assurance the Company
and the Agent will be able to agree on terms of the forbearance. The Company is classifying the Mid-Cap Revolver as a current liability
until forbearance and resolution of the default is cured.
GE
On August 14, 2017 as a part of the sale
of the Company’s equity interest in AAP, Recleim LLC, a Delaware limited liability company (“Recleim”), agreed
to undertake, pay or assume the Company’s GE obligations consisting of a promissory note (GE 8% loan agreement) and other
payables which were incurred after the issuance of such promissory note. Recleim has agreed to indemnify, and hold ARCA harmless
from any action to be taken by GE relating to such obligations. The Company has an offsetting receivable due from Recleim.
AFCO Finance
On June 16, 2017, we entered into
a financing agreement with AFCO Credit Corporation (“AFCO”) to fund the annual premiums on insurance policies purchased
through Marsh Insurance. These policies relate to workers’ compensation and various liability policies including, but not
limited to, General, Auto, Umbrella, Property, and Directors’ and Officers’. The total amount of the premiums
financed is $1,070 with an interest rate of 3.567%. An initial down payment of $160 was paid on June 16, 2017 and an additional
10 monthly payments of $92 will be made beginning July 1, 2017 and ending April 1, 2018. The outstanding principal at the end of
September 30, 2017 and December 31, 2016 was $639 and $0, respectively.
Susquehanna Term Loans
On March 10, 2011, AAP entered into
three separate commercial term loans (“BB&T Term Loans”) with Branch Banking Trust Company, as successor to Susquehanna
Bank, (“BB&T”) pursuant to the guidelines of the U.S. Small Business Administration 7(a) Loan Program.
The aggregate principal amount of the BB&T Term Loans was $4,750, divided into three separate loans with principal amounts
of $2,100; $1,400; and $1,250, respectively. The BB&T Term Loans matured in ten years and bore an interest rate of prime plus
2.75%. Borrowings under the BB&T Term Loans were secured by substantially all of the assets of AAP along with liens on
the business assets and certain personal assets of the owners of 4301 Operations, LLC. We were a guarantor of the BB&T Term
Loans along with 4301 Operations, LLC and its members. In connection with the BB&T Term Loans, BB&T had a security interest
in the recycling equipment assets of the Company. The BB&T Term Loans entered into by AAP were paid in full on August 15, 2017
and BB&T’s security interest in the recycling equipment assets of the Company was terminated and released.
Energy Efficiency Investments LLC
On November 8, 2016, the Company entered
into a securities purchase agreement with Energy Efficiency Investments, LLC, pursuant to which the Company agreed to issue up
to $7,732 principal amount of 3% Original Issue Discount Senior Convertible Promissory Notes of the Company and related common
stock purchase warrants. These notes will be issued from time to time, up to such aggregate principal amount, at the request of
the Company, subject to certain conditions, or at the option of Energy Efficiency Investments, LLC. Interest accrues at the rate
of eight percent per annum on the principal amount of the notes outstanding from time to time, and is payable at maturity or, if
earlier, upon conversion of these notes. The principal amount of these notes outstanding at September 30, 2017 and December 31,
2016, was $103.
14. Commitments
and Contingencies
Contracts
:
We have
entered into material contracts with three appliance manufacturers. Under the agreements there are no minimum purchase commitments;
however, we have agreed to indemnify the manufacturers for certain claims, allegations or losses with respect to appliances we
sell.
Litigation:
In February 2012, various individuals
commenced a class action lawsuit against Whirlpool Corporation (“Whirlpool”) and various distributors of Whirlpool
products, including Sears, The Home Depot, Lowe’s and us, alleging certain appliances Whirlpool sold through its distribution
chain, which includes us, were improperly designated with the ENERGY STAR® qualification rating established by the U.S. Department
of Energy and the Environmental Protection Agency. The claims against us include breach of warranty claims, as well as various
state consumer protection claims. The amount of the claim is, as yet, undetermined. Whirlpool has offered to fully indemnify
and defend its distributors in this lawsuit, including us, and has engaged legal counsel to defend itself and the distributors.
We are monitoring Whirlpool’s defense of the claims and believe the possibility of a material loss is remote.
AMTIM Capital Inc. (“AMTIM”) provided management
and sales services in respect of our recycling services in Canada, and was paid pursuant to agreements between AMTIM and us. A
dispute arose between AMTIM and us with respect to the calculation of amounts due to AMTIM pursuant to the agreements. In a lawsuit
filed in the province of Ontario on March 29, 2011, AMTIM claimed a discrepancy in the calculation of fees due to AMTIM by us in
excess of $1.6 million. On December 9, 2011 the United States District Court for the District of Minnesota issued a declaratory
default judgment to the effect that our method of calculating of the amounts due to AMTIM is correct. Although the Ontario action
continues, and its outcome is uncertain, we believe that no further amounts are due under the terms of these agreements and we
will continue to defend our position relative to this lawsuit.
We are party from time to time to ordinary
course disputes that we do not believe to be material or have merit. We intend to vigorously defend ourselves against these
ordinary course disputes.
15. Income
Taxes
Our overall effective tax rate was 34.4%
for the 39 weeks ended September 30, 2017 and a positive tax provision of $438 against a pre-provision loss of $1,238 for the 39
weeks ended October 1, 2016, respectively. The effective tax rates and related provisional tax amounts vary from the U.S. federal
statutory rate due to state taxes, foreign taxes, share-based compensation, non-controlling interest, valuation allowance, and
certain non-deductible expenses.
We regularly evaluate both positive and
negative evidence related to retaining a valuation allowance against certain deferred tax assets. The realization of deferred tax
assets is dependent upon sufficient future taxable income during the periods when deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. We have concluded based on the weight of evidence that a valuation allowance
should be maintained against certain deferred tax assets that we do not expect to utilize in the near future. The Company continues
to have a full valuation allowance against its Canadian operations.
16. Series A Preferred Stock
On August 18,
2017, the Company acquired GeoTraq by way of merger. GeoTraq is a development stage company that is engaged in the development,
manufacture, and, ultimately, we expect, sale of cellular transceiver modules, also known as Cell-ID modules. As a result of this
transaction, GeoTraq became a wholly-owned subsidiary of the Company. In connection with this transaction, the Company tendered
to the owners of GeoTraq $200,000, issued to them an aggregate of 288,588 shares of the Company’s Series A Convertible Preferred
Stock, and entered into one-year unsecured promissory notes in the aggregate principal amount of $800,000.
To accomplish
the designation and issuance of the Series A Preferred Stock, we filed a Certificate of Designation with the Secretary
of State of the State of Minnesota. On November 9, 2017, we filed a Certificate of Correction with the Minnesota Secretary of
State. The following summary of the Series A Preferred Stock and Certificate of Designation does not purport to be complete
and is qualified in its entirety by reference to the provisions of applicable law and to the Certificate of Designation and Certificate
of Correction, which is filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, as amended, for the quarterly
period ended July 1, 2017, and Certificate of Correction, which is filed as Exhibit 3.2. hereto.
Dividends
We cannot declare,
pay or set aside any dividends on shares of any other class or series of our capital stock unless (in addition to the obtaining
of any consents required by our Articles of Incorporation) the holders of the Series A Preferred Stock then outstanding shall first
receive, or simultaneously receive, a dividend in the aggregate amount of $1.00, regardless of the number of then-issued and outstanding
shares of Series A Preferred Stock. Any remaining dividends allocated by the Board of Directors shall be distributed in an equal
amount per share to the holders of outstanding common stock and Series A Preferred Stock (on an as-if-converted to common stock
basis pursuant to the Conversion Ratio as defined below).
Liquidation
Rights
Immediately prior
to the occurrence of any liquidation, dissolution or winding up of the Company, whether voluntary of involuntary, all shares of
Series A Convertible Preferred Stock automatically convert into shares of our common stock based upon the then-applicable “conversion
ratio” (as defined below) and shall participate in the liquidation proceeds in the same manner as other shares of our common
stock.
Conversion
The Series A Convertible
Preferred Stock is not convertible into shares of our common stock except as described below.
Subject to the
third sentence of this paragraph, each holder of a share of Series A Preferred Stock has the right, exercisable at any time and
from time to time (unless otherwise prohibited by law, rule or regulation, or as restricted below), to convert any or all of such
holder’s shares of Series A Preferred Stock into shares of our common stock at the conversion ratio. The “conversation
ratio” per share of the Series A Preferred Stock is a ratio of 1:100, meaning every one share of Series A Preferred Stock,
if and when converted into shares of our common stock, converts into 100 shares of our common stock. Notwithstanding anything to
the contrary in the Certificate of Designation, a holder of Series A Preferred Stock may not convert any of such holder’s
shares and we may not issue any shares of our common stock in connection with a conversation that would trigger any Nasdaq requirement
to obtain shareholder approval prior to such conversion or issuance in connection with such conversion that would be in excess
of that number of shares of common stock equivalent to 19.9% of the number of shares of common stock as of August 18, 2017 ;
provided
,
however
,
that holders of the Series A Preferred Stock may effectuate any conversion and we are obligated to issue shares of common stock
in connection with a conversion that would not trigger such a requirement. The foregoing restriction is of no further force or
effect upon the approval of our stockholders in compliance with Nasdaq’s shareholder voting requirements. Notwithstanding
anything to the contrary contained in the Certificate of Designation, the holders of the Series A Preferred Stock may not effectuate
any conversion and we may not issue any shares of common stock in connection with a conversion until the later of (x) February
28, 2018, or (y) sixty-one days following the date on which our stockholders have approved the voting, conversion, and other potential
rights of the holders of Series A Preferred Stock described in the Certificate of Designation in accordance with the relevant Nasdaq
requirements.
Redemption
The shares of
Series A Preferred Stock have no redemption rights.
Preemptive
Rights
Holders of shares
of Series A Preferred Stock are not entitled to any preemptive rights in respect to any securities of the Company, except as set
forth in the Certificate of Designation or any other document agreed to by us.
Voting Rights
Each holder of
a share of Series A Preferred Stock has a number of votes as is determined by multiplying (i) the number of shares of Series A
Preferred Stock held by such holder, and (ii) 100. The holders of Series A Preferred Stock vote together with all other classes
and series of common and preferred stock of the Company as a single class on all actions to be taken by the common stockholders
of the Company, except to the extent that voting as a separate class or series is required by law. Notwithstanding anything to
the contrary herein, the holders of the Series A Preferred Stock may not engage in any vote where the voting power would trigger
any Nasdaq requirement to obtain shareholder approval;
provided
,
however
, the holders do have the right
to vote that portion of their voting power that would not trigger such a requirement. The foregoing voting restriction lapses upon
the requisite approval of the shareholders in compliance with Nasdaq’s shareholder voting requirements in effect at the time
of such approval.
Protective
Provisions
Without first
obtaining the affirmative approval of a majority of the holders of the shares of Series A Preferred Stock, we may not directly
or indirectly (i) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series
A Preferred Stock; (ii) effect an exchange, reclassification, or cancellation of all or a part of the Series A Preferred Stock,
but excluding a stock split or reverse stock split or combination of the common stock or preferred stock; (iii) effect an exchange,
or create a right of exchange, of all or part of the shares of another class of shares into shares of Series A Preferred Stock;
or (iii) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely
the shares of such series, including the rights set forth in this Designation; provided, however, that we may, without any vote
of the holders of shares of the Series A Preferred Stock, make technical, corrective, administrative or similar changes to the
Certificate of Designation that do not, individually or in the aggregate, materially adversely affect the rights or preferences
of the holders of shares of the Series A Preferred Stock.
17. Segment
Information
We operate within targeted markets through
three reportable segments: retail, recycling and technology. The retail segment is composed of income generated through our ApplianceSmart
stores, which includes appliance sales and byproduct revenues from collected appliances. The recycling segment is composed of income
generated by fees charged and costs incurred for collecting, recycling and installing appliances for utilities and other customers
and includes byproduct revenue, which are primarily generated through the recycling of appliances. We have included the results
from consolidating AAP in our recycling segment through August 15, 2017. The technology segment is composed of all revenue and
costs incurred or associated with GeoTraq. At this time, GeoTraq. is in the development stage and expects to go to market with
products and services in the location based services market. The nature of products, services and customers for each segment varies
significantly. As such, the segments are managed separately. Our Chief Executive Officer has been identified as the Chief Operating
Decision Maker (“CODM”). The CODM evaluates performance and allocates resources based on revenues and income from operations
of each segment. Income from operations represents revenues less cost of revenues and operating expenses, including certain allocated
selling, general and administrative costs. There are no inter-segment sales or transfers.
The following tables present our segment
information for periods indicated:
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
13,678
|
|
|
$
|
15,102
|
|
|
$
|
44,334
|
|
|
$
|
47,769
|
|
Recycling
|
|
|
11,806
|
|
|
|
12,254
|
|
|
|
30,171
|
|
|
|
29,688
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total revenues
|
|
$
|
25,484
|
|
|
$
|
27,356
|
|
|
$
|
74,505
|
|
|
$
|
77,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
3,996
|
|
|
$
|
4,089
|
|
|
$
|
12,933
|
|
|
$
|
13,149
|
|
Recycling
|
|
|
4,433
|
|
|
|
4,362
|
|
|
|
10,238
|
|
|
|
7,929
|
|
Technology
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total gross profit
|
|
$
|
8,429
|
|
|
$
|
8,451
|
|
|
$
|
23,171
|
|
|
$
|
21,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
308
|
|
|
$
|
(112
|
)
|
|
$
|
2,110
|
|
|
$
|
(549
|
)
|
Recycling
|
|
|
1,092
|
|
|
|
1,527
|
|
|
|
166
|
|
|
|
84
|
|
Technology
|
|
|
(272
|
)
|
|
|
–
|
|
|
|
(272
|
)
|
|
|
–
|
|
Total operating income (loss)
|
|
$
|
1,128
|
|
|
$
|
1,415
|
|
|
$
|
2,004
|
|
|
$
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
42
|
|
|
$
|
46
|
|
|
$
|
131
|
|
|
$
|
151
|
|
Recycling
|
|
|
131
|
|
|
|
256
|
|
|
|
651
|
|
|
|
785
|
|
Technology
|
|
|
272
|
|
|
|
–
|
|
|
|
272
|
|
|
|
–
|
|
Total depreciation and amortization
|
|
$
|
445
|
|
|
$
|
302
|
|
|
$
|
1,054
|
|
|
$
|
936
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
15,285
|
|
|
$
|
17,559
|
|
Recycling
|
|
|
15,721
|
|
|
|
24,297
|
|
Technology
|
|
|
15,185
|
|
|
|
–
|
|
Total assets
|
|
$
|
46,191
|
|
|
$
|
41,856
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
2
|
|
|
$
|
–
|
|
Recycling
|
|
|
55
|
|
|
|
57
|
|
Technology
|
|
|
15,691
|
|
|
|
–
|
|
Total intangible assets
|
|
$
|
15,748
|
|
|
$
|
57
|
|
18. Subsequent
Events
None.