(a) Assets of AAP,
the consolidated variable interest entity, that can only be used to settle obligations of AAP were $7,843 and $8,915 as of December
31, 2016 and January 2, 2016, respectively. Liabilities of AAP, for which creditors do not have recourse to the general credit
of ARCA, were $2,180 and $2,838 as of December 31, 2016 and January 2, 2016, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
1.
Nature of Business and Basis of Presentation
Nature of
business
:
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
®
. In addition, we have
a 50% interest in a joint venture operating under the name ARCA Advanced Processing, LLC (“AAP”), which recycles
appliances in the Northeast and Mid-Atlantic regions of the United States.
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 efficiency programs. Customer
Connexx, LLC, a Nevada limited liability company, is a wholly owned subsidiary formed in October 13, 2016 to provide call
center services for electric utility 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”). Both ARCA and 4301 have a 50% interest in
AAP. AAP established a regional processing center in Philadelphia, Pennsylvania, at which the recyclable appliances are processed.
AAP commenced operations in February 2010. The financial position and results of operations of AAP are consolidated
in our financial statements 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 have a controlling financial interest in AAP
and have provided substantially all of the financial support to fund the operations of AAP since its inception.
Estimates
:
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires our
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Significant items subject to estimates and assumptions include the valuation allowances for accounts receivable,
inventories, deferred tax assets, accrued expenses, and the assumptions we use to value share-based compensation. Actual
results could differ from those estimates.
Fair value of financial instruments
:
The following methods and assumptions are used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents,
accounts receivable and accounts payable:
Due to their nature and short-term maturities, the carrying amounts approximate
fair value.
Short- and long-term
debt:
The fair value of short- and long-term debt approximates carrying value and has been estimated based on discounted cash
flows using interest rates being offered for similar debt having the same or similar remaining maturities and collateral requirements.
No separate comparison of fair values versus
carrying values is presented for the aforementioned financial instruments since their fair values are not significantly different
than their balance sheet carrying amounts. In addition, the aggregate fair values of the financial instruments would not
represent the underlying value of our Company.
Fiscal year
:
We report
on a 52- or 53-week fiscal year. Both our 2016 fiscal year (“2016”) ended on December 31, 2016, and our 2015
fiscal year (“2015”) ended on January 2, 2016, included 52 weeks.
2.
Significant Accounting Policies
Cash and cash equivalents
:
We consider all highly liquid investments purchased with original maturity dates of three months or less to be cash equivalents.
We maintain our cash in bank deposit and money-market accounts, which, at times, exceed federally insured limits. We have
determined that the fair value of the money-market accounts fall within Level 1 of the fair value hierarchy. We have not
experienced any losses in such accounts.
Trade receivables
:
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 $54 and $73 to be adequate to cover any exposure to loss as of December 31, 2016, and January 2, 2016,
respectively.
Inventories
:
Inventories,
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 31, 2016, and January 2, 2016:
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Appliances held for resale
|
|
$
|
16,146
|
|
|
$
|
16,360
|
|
Processed metals to be sold from recycled appliances
|
|
|
139
|
|
|
|
367
|
|
Other
|
|
|
6
|
|
|
|
6
|
|
Total Inventories
|
|
$
|
16,291
|
|
|
$
|
16,733
|
|
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.
Property and equipment
:
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.
Property and equipment consists of the
following as of December 31, 2016 and January 2, 2016:
|
|
Useful Life
(Years)
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Land
|
|
|
–
|
|
|
$
|
1,140
|
|
|
$
|
1,140
|
|
Buildings and improvements
|
|
|
18-30
|
|
|
|
3,780
|
|
|
|
3,714
|
|
Equipment (including computer software)
|
|
|
3-15
|
|
|
|
19,260
|
|
|
|
19,040
|
|
Projects under construction
|
|
|
–
|
|
|
|
204
|
|
|
|
143
|
|
Property and equipment
|
|
|
|
|
|
|
24,384
|
|
|
|
24,037
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(14,268
|
)
|
|
|
(13,052
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
10,116
|
|
|
$
|
10,985
|
|
Depreciation and amortization expense
:
Depreciation and amortization expense related to buildings and equipment from our recycling centers is presented in cost of revenues,
and depreciation and amortization expense related to buildings and equipment from our ApplianceSmart stores and corporate assets,
such as furniture and computers, is presented in selling, general and administrative expenses in the consolidated statements of
operations and comprehensive income (loss). Depreciation and amortization expense was $1,264 and $1,270 for fiscal years
2016 and 2015, respectively. Depreciation and amortization included in cost of revenues was $873 and $846 for fiscal years
2016 and 2015, respectively.
Software development costs
:
We capitalize software developed for internal use and are amortizing such costs over their estimated useful lives of three years.
Costs capitalized were $159 and $118 for fiscal years 2016 and 2015, respectively. Amortization expense on software development
costs was $129 and $117 for fiscal years 2016 and 2015, respectively. Estimated future amortization expense is as follows:
Fiscal year 2017
|
|
$
|
118
|
|
Fiscal year 2018
|
|
|
73
|
|
Fiscal year 2019
|
|
|
24
|
|
|
|
$
|
215
|
|
Impairment of long-lived assets
:
We evaluate long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. We assess impairment based on the estimated future net undiscounted
cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected
future net cash flows be less than the carrying value, we recognize an impairment loss at that time. We measure an impairment
loss by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows or appraisal
of assets) of the long-lived assets. We recognized no impairment charges during fiscal years 2016 and 2015 related to long-lived
assets.
Restricted cash
:
Restricted
cash consisted of a reserve required by our bankcard processor to cover chargebacks, adjustments, fees and other charges that may
be due from us. As of December 31, 2016, we had restricted cash of $500.
Goodwill
:
We test goodwill
annually for impairment. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances
change that would more-likely-than-not reduce the fair value of an entity below its carrying value. In assessing the recoverability
of goodwill, market values and projections regarding estimated future cash flows and other factors are used to determine the fair
value of the respective assets. If these estimates or related projections change in the future, we may be required to record
impairment charges for these assets. We allocate goodwill to our two reporting segments, retail and recycling. We compare
the fair value of each reporting segment to its carrying amount on an annual basis to determine if there is potential goodwill
impairment. If the fair value of a reporting segment is less than its carrying value, an impairment loss is recorded to the
extent that the fair value of the goodwill within the reporting unit is less than the carrying value of its goodwill. To
determine the fair value of our reporting segments, we generally use a present value technique (discounted cash flow) corroborated
by market multiples when available and as appropriate. The factor most sensitive to change with respect to the discounted
cash flow analyses is the estimated future cash flows of each reporting segment, which is, in turn, sensitive to the estimates
of future revenue growth and margins for these businesses. If actual revenue growth and/or margins are lower than expectations,
the impairment test results could differ. Fair value for goodwill is determined based on discounted cash flows, market multiples
or appraised values as appropriate. As of December 31, 2016 and January 2, 2016, we had goodwill of $38 allocated to our
recycling segment which is presented as a component of other assets on the consolidated balance sheets.
Accounting for leases
:
We conduct the majority of our retail and recycling operations from leased facilities. The majority of our leases require
payment of real estate taxes, insurance and common area maintenance in addition to rent. The terms of our lease agreements
typically range from five to ten years. Most of the leases contain renewal and escalation clauses, and certain store leases
require contingent rents based on factors such as revenue. For leases that contain predetermined fixed escalations of the
minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to
the end of the initial lease term. We record any difference between straight-line rent amounts and amounts payable under
the leases as part of accrued rent in accrued expenses, a portion of which is included in other non-current liabilities.
Cash or lease incentives (tenant allowances) received upon entering into certain store leases are recognized on a straight-line
basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term.
Product warranty
:
We
provide a warranty for the replacement or repair of certain defective appliances. Our standard warranty policy requires us
to repair or replace certain defective units at no cost to our customers. We estimate the costs that may be incurred under
our warranty and record an accrual in the amount of such costs at the time we recognize product revenue. Factors that affect
our warranty accrual for covered units include the number of units sold, historical and anticipated rates of warranty claims on
these units, and the cost of such claims. We periodically assess the adequacy of our recorded warranty accrual and adjust
the amounts as necessary.
Changes in our warranty accrual, presented
as a component of accrued expenses on the consolidated balance sheets, for the fiscal years ended December 31, 2016 and January
2, 2016 are as follows:
|
|
For the fiscal years
ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Beginning balance
|
|
$
|
42
|
|
|
$
|
30
|
|
Standard accrual based on units sold
|
|
|
17
|
|
|
|
45
|
|
Actual costs incurred
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Periodic accrual adjustments
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Ending balance
|
|
$
|
26
|
|
|
$
|
42
|
|
Income taxes
:
We account
for income taxes under the liability method. Deferred tax liabilities are recognized for temporary differences that will
result in taxable amounts in future years. Deferred tax assets are recognized for deductible temporary differences and tax
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance
to reduce our deferred tax assets to the amounts we believe to be realizable. We regularly evaluate both positive and negative
evidence related to either recording or retaining a valuation allowance against our deferred tax assets.
Share-based compensation
:
We recognize share-based compensation expense on a straight-line basis over the vesting period for all share-based awards granted.
We use the Black-Scholes option pricing model to determine the fair value of awards at the grant date. We calculate the expected
volatility for stock options and awards using historical volatility. We estimate a 0%-5% forfeiture rate for stock options
issued to employees and Board of Directors members, but will continue to review these estimates in future periods. The risk-free
rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant.
The expected life represents the period that the stock option awards are expected to be outstanding. The expected dividend
yield is zero as we have not paid or declared any cash dividends on our common stock.
Comprehensive income (loss)
:
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income (loss) but are excluded from net income (loss) as these amounts are recorded directly as an
adjustment to shareholders’ equity. Our other comprehensive income (loss) is comprised of foreign currency translation
adjustments.
Foreign Currency:
The financial
statements of the Company's non-U.S. subsidiary are translated into U.S. dollars in accordance with ASC 830,
Foreign Currency
Matters
. Under ASC 830, if the assets and liabilities of the Company are recorded in certain non-U.S. functional currencies
other than the U.S. dollar, they are translated at current rates of exchange. Revenue and expense items are translated at the average
exchange rates. The resulting translation adjustments are recorded directly into accumulated other comprehensive income (loss).
In addition, due to increases in the Canadian dollar relative to the U.S. dollar we experienced foreign currency transaction gains
included in other expense of approximately $32 in 2016 and foreign currency transaction losses included in other expense of approximately
$380 in 2015.
Revenue
recognition
:
We recognize revenue from appliance sales in the period the consumer purchases and pays for the
appliance, net of an allowance for estimated returns. We recognize revenue from appliance recycling when we collect and
process a unit. We recognize revenue generated from appliance replacement programs when we deliver the new appliance and
collect and process the old appliance. The delivery, collection and processing activities under our replacement programs
typically occur within one business day and are required to complete the earnings process; there are no other performance
obligations. We recognize byproduct revenue upon shipment. We recognize revenue on extended warranties with retained service
obligations on a straight-line basis over the period of the warranty. On extended warranty arrangements that we sell but
others service for a fixed portion of the warranty sales price, we recognize revenue for the net amount retained at the time
of sale of the extended warranty to the consumer. As a result of our recycling processes, we are able to produce carbon
offsets from the destruction of certain types of ozone-depleting refrigerants. We record revenue from the sale of
carbon offsets in the period when all of the following requirements have been met: (i) there is persuasive evidence of an
arrangement, (ii) the sales price is fixed or determinable, (iii) title, ownership and risk of loss associated with the
credits have been transferred to the customer, and (iv) collectability is reasonably assured. These requirements are
met upon collection of cash due to the uncertainty around collectability and the involvement of various third parties and
partners. We include shipping and handling charges to customers in revenue, which are recognized in the period the consumer
purchases and pays for delivery.
Retail
segment cost of revenues
:
Costs of revenues in our retail segment are comprised primarily of the following:
·
|
Purchase of appliance inventories, including freight to and from our distribution centers.
|
·
|
Shipping, receiving and distribution of appliance inventories to our retail stores, including employee compensation and benefits.
|
·
|
Delivery and service of appliances, including employee compensation and benefits, after the appliances are sold to the consumer.
|
·
|
Early payment discounts and allowances offered by appliance manufacturers.
|
·
|
Inventory markdowns.
|
Recycling segment cost of revenues
:
Costs of revenues in our recycling segment are comprised primarily of the following:
·
|
Transportation costs, including employee compensation and benefits, related to collecting appliances for recycling and delivering appliances under our replacement programs.
|
·
|
Purchase of appliance inventories, including freight to our recycling center warehouses, early payment discounts, and warehousing costs for appliances used in our replacement programs.
|
·
|
Occupancy costs related to our recycling centers.
|
·
|
Processing costs, including employee compensation and benefits, related to recycling and processing appliances.
|
Selling, general and administrative
expenses
:
Selling, general and administrative expenses are comprised primarily of the following:
·
|
Employee compensation and benefits related to management, corporate services, and retail sales;
|
·
|
Outside and outsourced corporate service fees including legal expenses and professional service fees;
|
·
|
Occupancy costs related to our retail stores and corporate office;
|
·
|
Advertising costs;
|
·
|
Bank charges and costs associated with credit and debit card interchange fees; and
|
·
|
Other administrative costs, such as supplies, travel and lodging.
|
Advertising expense
:
Our
policy is to expense advertising costs as incurred. Advertising expense was $1,124 and $1,822 for fiscal years 2016 and 2015,
respectively.
Taxes collected from customers
:
We account for taxes collected from customers on a net basis.
Basic and
diluted income (loss) per common share:
Basic income (loss) per common share is computed based on the weighted
average number of common shares outstanding. Diluted income (loss) per common share is computed based on the weighted
average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had
the potentially dilutive common shares 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 (loss) by the weighted average
number of common shares 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 with exercise prices
below average market prices, for the respective fiscal years in which they were dilutive, using the Treasury stock method. We
calculated the number of additional shares by assuming that the outstanding stock options were exercised and that the
proceeds from such exercises were used to acquire common stock at the average market price during the year. For fiscal year
2016, we excluded options and warrants covering 900 common shares from the diluted weighted average share outstanding
calculation as the effect of these options and warrants is anti-dilutive. For fiscal year 2015, we excluded options and
warrants covering 726 common shares from the diluted weighted average share outstanding calculation as the effect of these
options and warrant is anti-dilutive.
A reconciliation of the denominator in
the basic and diluted income (loss) per share is as follows:
|
|
For the fiscal year ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to controlling interest
|
|
$
|
(1,451
|
)
|
|
$
|
(2,717
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
6,054
|
|
|
|
5,833
|
|
Warrants
|
|
|
167
|
|
|
|
–
|
|
Weighted average common shares outstanding - diluted
|
|
|
6,221
|
|
|
|
5,833
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.24
|
)
|
|
$
|
(0.47
|
)
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
(0.47
|
)
|
Recent Accounting Pronouncements- New Accounting Standards
Not Yet Effective:
Revenue from Contracts with Customers:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance creating Accounting Standards Codification
(“ASC”) Section 606, “
Revenue from Contracts with Customers
”. The new section will replace Section
605, “
Revenue Recognition
” and creates modifications to various other revenue accounting standards for specialized
transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International
Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest
of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance is effective
for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early application
is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting
period. The Company will further study the implications of this statement in order to evaluate the expected impact on its consolidated
financial statements.
ASU 2015-03, Simplifying the Presentation
of Debt Issuance Costs:
This standard, which will be effective January 3, 2016 for the Company, requires that debt
issuance costs be presented as a direct deduction from the carrying amount of long-term debt on the balance sheet. The new
guidance aligns the presentation of debt issuance costs with debt discounts and premiums. The standard is to be applied retrospectively
to all prior periods presented. The company has adopted this standard in the fourth quarter of 2016. As of December 31, 2016,
and January 2, 2016, we had $779 and $67, respectively, of unamortized debt issuance costs recorded and/or reclassified as a direct
deduction from the carrying value of long-term debt on our balance sheets.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330) Related to Simplifying the Measurement of Inventory
which applies to all inventory except that which
is measured using last-in, first-out (LIFO) or the retail inventory method. Inventory measured using first-in, first-out (FIFO)
or average cost is included in the new amendments. Inventory within the scope of the new guidance should be measured at the
lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory
measured using LIFO or the retail inventory method. The amendments will take effect for public business entities for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance should be applied
prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. We are
evaluating the impact of the standard on the consolidated financial statements.
I
n February
2016, the FASB issued ASU No. 2016-02, “
Leases
.” ASU No. 2016-02 was issued to increase transparency and comparability
among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability
and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard
retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company
is currently assessing the effect that ASU No. 2016-02 will have on its results of operations, financial position and cash flows.
3.
Variable Interest Entity
The financial position and results of operations
of AAP are consolidated in our financial statements based on our conclusion that AAP is a variable interest entity due to our contribution
of 50% of the total equity, subordinated debt and other forms of financial support. We have a controlling financial interest in
AAP and have provided substantially all of the financial support to fund the operations of AAP since its inception. The financial
position and results of operations for AAP are reported in our recycling segment.
The following table summarizes the assets
and liabilities of AAP as of December 31, 2016 and January 2, 2016:
|
|
December 31,
20
16
|
|
|
January 2,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
438
|
|
|
$
|
696
|
|
Property and equipment, net
|
|
|
7,322
|
|
|
|
8,077
|
|
Other assets
|
|
|
83
|
|
|
|
142
|
|
Total assets
|
|
$
|
7,843
|
|
|
$
|
8,915
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,388
|
|
|
$
|
2,342
|
|
Accrued expenses
|
|
|
523
|
|
|
|
399
|
|
Current maturities of long-term debt obligations
|
|
|
3,558
|
|
|
|
946
|
|
Long-term debt obligations, net of current maturities
|
|
|
435
|
|
|
|
3,498
|
|
Other liabilities (a)
|
|
|
1,126
|
|
|
|
289
|
|
Total liabilities
|
|
$
|
7,030
|
|
|
$
|
7,474
|
|
(a) Other liabilities represent outstanding
loans from ARCA and are eliminated in consolidation.
The following table summarizes the operating
results of AAP for fiscal years 2016 and 2015:
|
|
For the fiscal years ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Revenues
|
|
$
|
6,697
|
|
|
$
|
6,838
|
|
Gross profit (loss)
|
|
|
1,305
|
|
|
|
(280
|
)
|
Operating loss
|
|
|
(363
|
)
|
|
|
(2,205
|
)
|
4.
Other Assets
Other assets as of December 31, 2016 and January 2, 2016, consist
of the following:
|
|
Decemb
er 31,
2016
|
|
|
January 2,
2016
|
|
Deposits
|
|
$
|
453
|
|
|
$
|
416
|
|
Other
|
|
|
104
|
|
|
|
122
|
|
Recycling contract, net
|
|
|
19
|
|
|
|
20
|
|
Goodwill
|
|
|
38
|
|
|
|
38
|
|
Total other assets
|
|
$
|
614
|
|
|
$
|
596
|
|
For fiscal years 2016 and 2015, we recorded
amortization expense of $21 and $80, respectively, related to our finite intangible assets.
5.
Accrued Expenses
Accrued expenses as of December 31, 2016 and January 2, 2016,
consist of the following:
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Sales tax estimates, including interest
|
|
$
|
4,203
|
|
|
$
|
4,804
|
|
Compensation and benefits
|
|
|
2,431
|
|
|
|
1,446
|
|
Accrued rebate and incentive checks
|
|
|
358
|
|
|
|
293
|
|
Accrued rent
|
|
|
263
|
|
|
|
235
|
|
Warranty
|
|
|
26
|
|
|
|
42
|
|
Accrued payables
|
|
|
570
|
|
|
|
749
|
|
Deferred revenue
|
|
|
227
|
|
|
|
413
|
|
Other
|
|
|
810
|
|
|
|
952
|
|
Total accrued expenses
|
|
$
|
8,888
|
|
|
$
|
8,934
|
|
6.
Line of Credit
We have a
Revolving Credit, Term Loan and Security Agreement, as amended, (“Revolving Credit Agreement”) with PNC Bank,
National Association (“PNC”) that provides us with a $15,000 revolving line of credit. See Note 7 for further
discussion regarding the Term Loan entered into with PNC. The Revolving Credit Agreement had a stated maturity date of
January 31, 2017, and was amended on January 31, 2017. Our financial covenants were reset in connection with this amendment.
The renewed Revolving Credit Agreement has an amended maturity of May 1, 2017. The Revolving Credit Agreement includes
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 Revolving Credit Agreement is collateralized by a security interest in substantially all of
our assets, and PNC is also secured by an inventory repurchase agreement with Whirlpool Corporation for Whirlpool purchases
only. We also issued a $750 letter of credit in favor of Whirlpool Corporation. The Revolving Credit Agreement
requires, starting with the fiscal quarter ending March 30, 2014, and continuing at the end of each quarter thereafter, that
we meet a minimum earnings before interest, taxes, depreciation and amortization and/or a fixed charge coverage ratio of 1.1
to 1.0. The Revolving Credit Agreement limits investments we can purchase, the amount of other debt and leases we can
incur, the amount of loans we can issue to our affiliates and the amount we can spend on fixed assets, along with prohibiting
the payment of dividends. In the January 31, 2017 amendment, the affiliate loan balance is to be capped at $900 on December
31, 2016, and thereafter. As of December 31, 2016, we were not in compliance with certain covenants of the Revolving Credit
Agreement which were subsequently waived with the January 31, 2017 amendment. As of January 2, 2016, we were not in
compliance with certain covenants of the Revolving Credit Agreement which were subsequently waived with the January 22, 2016
renewal.
The interest
rate on the Revolving Credit Agreement, in our renewal agreement on January 31, 2017, is PNC Base Rate 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 shall mean, 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 at its prime rate, (ii) the Federal Funds Open Rate plus
0.5%, and (iii) the one-month LIBOR rate plus 1%. As of December 31, 2016, the weighted average interest rate was
9.00%, which was the PNC Base Rate plus a default rate premium. As of January 2, 2016, the weighted average interest rate was
7.25%, which was the PNC Base Rate plus a default rate premium. As of December 31, 2016, and January 2, 2016, the outstanding
balance under the Revolving Credit Agreement was $10,333 and $12,668, respectively. As disclosed by the Company in Item 2.01 of its Current Report on Form 8-K filed on January 31, 2017,
the Company sold and leased back its Compton building over an initial lease term of six months which can be terminated with a 30
day notice. The net proceeds from the sale were used to reduce the outstanding balance under our revolving credit agreement to
$5,752. The amount of revolving borrowings under
the Revolving Credit Agreement is based on a formula using accounts receivable and inventories. We may not have access to the
full $15,000 revolving line of credit due to the formula using accounts receivable and inventories, the amount of the letter
of credit issued in favor of Whirlpool Corporation and the amount of outstanding loans between PNC and our AAP joint venture.
As of December 31, 2016, and January 2, 2016, our available borrowing capacity under the Revolving Credit Agreement was
$3,234 and $1,382, respectively.
7.
Borrowings
Long-term debt, capital lease and other financing obligations
as of December 31, 2016 and January 2, 2016 consist of the following:
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
PNC term loan
|
|
$
|
1,020
|
|
|
$
|
1,275
|
|
Susquehanna term loans
|
|
|
3,242
|
|
|
|
3,242
|
|
8.00% notes
|
|
|
582
|
|
|
|
–
|
|
2.75% note, due in monthly installments of $3, including interest, due October 2024, collateralized by equipment
|
|
|
287
|
|
|
|
319
|
|
Capital leases and other financing obligations
|
|
|
567
|
|
|
|
988
|
|
Debt issuance costs, net
|
|
|
(779
|
)
|
|
|
(67
|
)
|
Total debt obligations
|
|
|
4,919
|
|
|
|
5,757
|
|
Less current maturities
|
|
|
2,093
|
|
|
|
1,251
|
|
Long-term debt obligations, net of current maturities
|
|
$
|
2,826
|
|
|
$
|
4,506
|
|
On January 24,
2011, we entered into a $2,550 term loan (“Term Loan”) with PNC Bank to finance the mortgage on our California
facility. The Term Loan is payable as follows, subject to acceleration upon the occurrence of an event of default or
termination of the Revolving Credit Agreement: 119 consecutive monthly principal payments of $21 plus interest commencing on
February 1, 2011, and continuing on the first day of each month thereafter followed by a 120th payment of all unpaid
principal, interest and fees on February 1, 2021. The Term Loan is collateralized with our California facility
located in Compton, California. As disclosed by the Company in Item 2.01 of its Current Report on Form 8-K filed on
January 31, 2017, the Company sold and leased back its Compton building over an initial lease term of six months which can be
terminated with a 30 day notice. The net proceeds from the sale were used to pay down our term loan with PNC Bank, National
Association in full. The Term Loan interest rate is PNC Base Rate plus 2.25% to 3.75%, or 1-, 2- or 3-month PNC LIBOR Rate
plus 3.25% to 4.75% with the rate being dependent on our level of fixed charge coverage. The interest rate will be
fixed for the first half of 2016 at PNC Base Rate plus 3.75%, or 1-, 2- or 3-month PNC LIBOR Rate plus 4.75%. As of December
31, 2016, the weighted average interest rate was 9.50%, which was the PNC Base Rate plus a default rate premium. As of
January 2, 2016, the weighted average interest rate was 7.75%, which was the PNC Base Rate plus a default rate premium.
On March 10,
2011, AAP entered into three separate commercial term loans (“Term Loans”) with Susquehanna Bank, pursuant to the
guidelines of the U.S. Small Business Administration 7(a) Loan Program. The total amount of the Term Loans is
$4,750, split into three separate loans for $2,100, $1,400 and $1,250. The Term Loans mature in ten years and bear an
interest rate of Prime plus 2.75%. As of both December 31, 2016, and January 2, 2016, the interest rate was
6.00%. The total monthly interest and principal payments are $54 and began on July 1, 2011. Borrowings under
the Term Loans are 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 are a guarantor of the Term Loans along with 4301 Operations,
LLC and its owners. In connection with these Term Loans, Susquehanna Bank also has a security interest in the assets of the
Company.
In March of 2015, an entity controlled
by the noncontrolling interest holders of AAP loaned AAP $325 through the issuance of promissory notes. The notes bear interest
at an annual rate of 8%. In May of 2015, one of the March 2015 notes totaling $125 was repaid in full by AAP. The remaining note
totaling $200 was repaid with the revenues expected during the third quarter of 2016 from the disposal of refrigerants through
carbon offset programs.
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. The 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 the Investor. 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 the notes. The principal amount of notes outstanding at December 31, 2016, was $100.
The future annual maturities of borrowings
are as follows:
|
|
ARCA
|
|
|
AAP
|
|
|
Total
|
|
Fiscal year 2017
|
|
$
|
748
|
|
|
$
|
1,037
|
|
|
$
|
1,785
|
|
Fiscal year 2018
|
|
|
18
|
|
|
|
685
|
|
|
|
703
|
|
Fiscal year 2019
|
|
|
9
|
|
|
|
708
|
|
|
|
717
|
|
Fiscal year 2020
|
|
|
–
|
|
|
|
661
|
|
|
|
661
|
|
Fiscal year 2021
|
|
|
103
|
|
|
|
503
|
|
|
|
606
|
|
Total future maturities of borrowings
|
|
$
|
878
|
|
|
$
|
3,594
|
|
|
$
|
4,472
|
|
Capital leases and other financing
obligations
:
We acquire certain equipment under capital leases and other financing obligations. The cost of
such equipment was approximately $2,601 and $2,606 as of December 31, 2016, and January 2, 2016. Accumulated amortization
as of December 31, 2016, and January 2, 2016, was approximately $1,771 and $1,635, respectively. Depreciation and amortization
expense for equipment under capital leases and other financing obligations is included in cost of revenues and selling, general
and administrative expenses.
The following schedule by fiscal year is
the approximate remaining minimum payments required under the capital leases and other financing obligations, together with the
present value as of December 31, 2016:
|
|
ARCA
|
|
|
AAP
|
|
|
Total
|
|
Fiscal year 2017
|
|
$
|
27
|
|
|
$
|
176
|
|
|
$
|
203
|
|
Fiscal year 2018
|
|
|
20
|
|
|
|
161
|
|
|
|
181
|
|
Fiscal year 2019
|
|
|
11
|
|
|
|
76
|
|
|
|
87
|
|
Fiscal year 2020
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total minimum lease and other financing obligation payments
|
|
|
58
|
|
|
|
413
|
|
|
|
471
|
|
Less amount representing interest
|
|
|
3
|
|
|
|
21
|
|
|
|
24
|
|
Present value of minimum payments
|
|
|
55
|
|
|
|
392
|
|
|
|
447
|
|
Less current portion
|
|
|
25
|
|
|
|
283
|
|
|
|
308
|
|
Capital lease and other financing obligations, net of current portion
|
|
$
|
30
|
|
|
$
|
109
|
|
|
$
|
139
|
|
8.
Commitments and Contingencies
Operating leases
:
We lease the majority
of our retail stores and recycling centers under noncancelable operating leases. The leases typically require the payment
of taxes, maintenance, utilities and insurance.
Minimum future rental commitments under noncancelable operating
leases as of December 31, 2016, are as follows:
|
|
ARCA
|
|
|
AAP
|
|
|
Total
|
|
Fiscal year 2017
|
|
$
|
4,618
|
|
|
$
|
464
|
|
|
$
|
5,082
|
|
Fiscal year 2018
|
|
|
3,572
|
|
|
|
467
|
|
|
|
4,039
|
|
Fiscal year 2019
|
|
|
2,355
|
|
|
|
488
|
|
|
|
2,843
|
|
Fiscal year 2020
|
|
|
1,917
|
|
|
|
468
|
|
|
|
2,385
|
|
Fiscal year 2021
|
|
|
2,160
|
|
|
|
28
|
|
|
|
2,188
|
|
Thereafter
|
|
|
1,214
|
|
|
|
–
|
|
|
|
1,214
|
|
Total minimum future rental commitments
|
|
$
|
15,836
|
|
|
$
|
1,915
|
|
|
$
|
17,751
|
|
Rent expense for fiscal years 2016 and
2015 was $4,841 and $5,300, respectively. We have agreements to receive future sublease payments of $655 through September 2019.
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
:
On March 6, 2015, a complaint was filed in United States District Court for the Central District of California by Jason Feola,
individually and as a representative of a putative class consisting of purchasers of the Company’s common stock between
March 15, 2012 and February 11, 2015, against Appliance Recycling Centers of America, Inc. and certain current and former officers
of the Company. Mr. Feola, pursuant to terms of his retainer agreement with The Rosen Law Firm, certified that he purchased 240
shares of the Company’s common stock for $984 in total consideration. On May 7, 2015, the Company and the individual defendants
were served the complaint. In July 2015, the Company and the individual defendants received an amended complaint. The complaint
alleges that misstatements and omissions occurred in press releases and filings by the Company with the Securities and Exchange
Commission and that these misstatements or omissions constitute violations of Section 20 (a) and Section 10(b) of, and Rule 10b-5
under, the Securities Exchange Act of 1934. In October 2015, the court held a hearing on the Company's motion to dismiss
the complaint. On November 24, 2015, the United States District Court for the Central District of California entered an order
granting the motion to dismiss the amended complaint. The Court’s order provided that the dismissal was without prejudice
and that the plaintiffs may file an amended complaint within 21 days of the issuance of the order. On December 15, 2015, the Company
and the individual defendants were served with a second amended complaint. In May 2016, the court held a hearing on the Company’s
motion to dismiss the second amended complaint. On October 21, 2016 the court entered a final judgement to dismiss the class action
complaint with prejudice.
On November 6, 2015,
a complaint was filed in the Minnesota District Court for Hennepin County, Minnesota, by David Gray and Michael Boller, purporting
to bring suit derivatively and on behalf of the Company against twelve current and former officers and directors of the Company.
The complaint alleges that the defendants breached their fiduciary duties based on substantially similar allegations to those
asserted in Mr. Feola's putative securities class action complaint, and that the defendants have been unjustly enriched as a result
thereof. The complaint seeks damages, disgorgement, an award of attorneys’ fees and other expenses, and an order compelling
changes to the Company’s corporate governance and internal procedures. This matter has been stayed by the court, pursuant
to a stipulation of the parties, until the United States District Court for the Central District of California determines the
legal sufficiency of Mr. Feola's complaint or other specified developments occur in that case. This matter has been submitted
to our insurance carriers.
Given the uncertainty
of litigation and the preliminary stage of these cases, we cannot reasonably estimate the possible loss or range of loss that
may result from these actions. The Company maintains liability insurance policies that may reduce the Company’s exposure,
if any.
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”) 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 agreements between the parties. A dispute has
arisen between AMTIM and us with respect to the calculation of amounts due to AMTIM pursuant to the agreement. In a lawsuit
filed in the province of Ontario, AMTIM claims a discrepancy in the calculation of fees due to AMTIM by us of approximately $2.0
million. Although the outcome of this claim is uncertain, we believe that no further amounts are due under the terms of
the agreement and that we will continue to defend our position relative to this lawsuit.
We are party from
time to time to ordinary course disputes that we do not believe to be material or have merit. We intend to vigorously defend
ourselves against these ordinary course disputes.
Sales and Use Taxes:
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”) is conducting a sales and use tax examination covering the California operations of Appliance
Recycling Centers of America, Inc. (the “Company”) 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 are 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 includes 2011, 2012,
2013 and extends through the nine-month period ended September 30, 2014. At this time, our best estimate of the amount that will
be assessed by the BOE covering all periods under audit is approximately $4.2 million ($2.6 million net of income tax benefit)
in sales tax and interest 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 been working with outside consultants to arrive at our assessment
estimate and will continue to engage the services of these sales tax experts throughout the Managed Audit Program process. The
sales tax amounts that we will likely be assessed relate to transactions in the period under examination by the BOE. Such assessment,
however, will be subject to protest and appeal, and would not need to be funded until the matter has been fully resolved. Resolution
could take up to two years.
9.
Income Taxes
For fiscal year 2016, we recorded an income
tax benefit of $49. For fiscal year 2015, we recorded an income tax benefit of $1,714. As of December 31,
2016, we maintained a valuation allowance of $1,011 against our net operating loss carryforwards, foreign tax credits and
all deferred tax assets in Canada, principally net operating losses. During the second quarter of 2016, we concluded,
based upon the assessment of all available evidence that it was more-likely-than-not that we would not be able to realize a
portion of our U.S. deferred tax assets in the future. As a result, a valuation allowance of $405 was placed
on the overall U.S. net deferred tax asset.
The benefit of income taxes for fiscal
years 2016 and 2015 consisted of the following:
|
|
For the fiscal years ended
|
|
|
|
December 31, 2016
|
|
|
January 2, 2016
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
12
|
|
|
$
|
(855
|
)
|
State
|
|
|
36
|
|
|
|
(18
|
)
|
Foreign
|
|
|
–
|
|
|
|
(229
|
)
|
Current tax expense (benefit)
|
|
$
|
48
|
|
|
$
|
(1,102
|
)
|
Deferred tax expense — domestic
|
|
|
(97
|
)
|
|
|
(831
|
)
|
Deferred tax expense — foreign
|
|
|
–
|
|
|
|
219
|
|
Benefit of income taxes
|
|
$
|
(49
|
)
|
|
$
|
(1,714
|
)
|
A
reconciliation of our benefit of income taxes with the federal statutory tax rate for fiscal years 2016 and 2015 is shown
below:
|
|
For the fiscal years ended
|
|
|
|
December 31, 2016
|
|
|
January 2, 2016
|
|
Income tax expense at statutory rate
|
|
$
|
(617
|
)
|
|
|
(1,920
|
)
|
Portion attributable to noncontrolling interest at statutory rate
|
|
|
107
|
|
|
|
413
|
|
State tax expense, net of federal tax effect
|
|
|
(69
|
)
|
|
|
(288
|
)
|
Permanent differences
|
|
|
20
|
|
|
|
83
|
|
Change in valuation allowance
|
|
|
414
|
|
|
|
(7
|
)
|
Recognition of tax effect for the cumulative undistributed earnings from Canada
|
|
|
–
|
|
|
|
(16
|
)
|
Other
|
|
|
95
|
|
|
|
21
|
|
|
|
|
(49
|
)
|
|
|
(1,714
|
)
|
Loss
before benefit of income taxes and noncontrolling interest was derived from the
following sources for fiscal years 2016 and 2015 as shown below:
|
|
For the fiscal years ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
United States
|
|
$
|
(1,677
|
)
|
|
$
|
(5,452
|
)
|
Canada
|
|
|
(137
|
)
|
|
|
(194
|
)
|
|
|
$
|
(1,814
|
)
|
|
$
|
(5,646
|
)
|
The components of
net deferred tax assets (liabilities) as of December 31, 2016 and January 2, 2016, are as follows:
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
794
|
|
|
$
|
520
|
|
Federal and state tax credits
|
|
|
476
|
|
|
|
442
|
|
Reserves
|
|
|
240
|
|
|
|
218
|
|
Accrued expenses
|
|
|
2,015
|
|
|
|
1,964
|
|
Share-based compensation
|
|
|
355
|
|
|
|
352
|
|
Accumulated other comprehensive loss
|
|
|
361
|
|
|
|
361
|
|
Property and equipment
|
|
|
8
|
|
|
|
191
|
|
Unrealized Currency Exchange
|
|
|
238
|
|
|
|
–
|
|
Other
|
|
|
161
|
|
|
|
166
|
|
Total deferred tax assets
|
|
|
4,648
|
|
|
|
4,214
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(56
|
)
|
|
|
(89
|
)
|
Property and equipment
|
|
|
(162
|
)
|
|
|
(138
|
)
|
Investments
|
|
|
(1,269
|
)
|
|
|
(1,269
|
)
|
Other
|
|
|
(69
|
)
|
|
|
(137
|
)
|
Total deferred tax liabilities
|
|
|
(1,556
|
)
|
|
|
(1,633
|
)
|
Valuation allowance
|
|
|
(1,011
|
)
|
|
|
(597
|
)
|
Net deferred tax assets
|
|
$
|
2,081
|
|
|
$
|
1,984
|
|
The deferred tax amounts have been classified in the accompanying
consolidated balance sheets as follows:
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Current assets
|
|
$
|
–
|
|
|
$
|
–
|
|
Non-current assets
|
|
|
2,081
|
|
|
|
1,984
|
|
Non-current liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
2,081
|
|
|
$
|
1,984
|
|
In November 2015, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17, “Income Taxes” which simplifies the balance
sheet presentation of deferred income taxes. The Company has adopted the provisions of the standard for its 2016 consolidated financial
statements including retroactive reclassifications of the $1,657 current deferred income tax asset as of January 2, 2016 to a non-current
deferred income tax asset. This reclassification does not have a significant impact on the Company’s consolidated balance
sheet and has no effect on the net loss.
Future utilization
of net operating loss (“NOL”) and tax credit carryforwards is subject to certain limitations under provisions of Section
382 of the Internal Revenue Code (“IRC”). This section relates to a 50 percent change in control over a three-year
period. We believe that the issuance of common stock during 1999 resulted in an “ownership change” under Section 382.
Accordingly, our ability to utilize NOL and tax credit carryforwards generated prior to February 1999 is limited to approximately
$56 per year.
As of December 31, 2016, we had
a foreign tax credit carryforward of $256 and a federal NOL of $209 not subject Section 382 of the IRC. We also
had state NOL carryforwards of $425. The state NOL carryforwards are available to offset future taxable income or
reduce taxes payable through 2030. These state loss carryforwards began expiring in 2011. In Canada, we had federal and provincial
NOL carryforwards of $85.
We recognize the financial statement benefit
of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position.
For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest
benefit that has a greater than 50% percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
As of December 31, 2016 and January 2, 2016, we did not have any material uncertain tax positions.
It is our
practice to recognize interest related to income tax matters as a component of interest expense and penalties as a component
of selling, general and administrative expense. As of December 31, 2016 and January 2, 2016, we had an immaterial
amount of accrued interest and penalties.
We are subject to income taxes in the U.S.
federal jurisdiction, foreign jurisdictions and various state jurisdictions. Tax regulations from each jurisdiction are subject
to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions,
we are no longer subject to U.S. federal, foreign, state or local income tax examinations by tax authorities for the years before
2012. We are not currently under examination by any taxing jurisdiction.
We had no
significant unrecognized tax benefits as of December 31, 2016, that would reasonably be expected to affect our
effective tax rate during the next twelve months.
10.
Shareholders’ Equity
Common Stock
:
During fiscal year 2016, 50 shares of common stock were granted from the 2011 Stock Compensation Plan (the “2011 Plan”)
to the Company’s CEO and the corresponding fair value of $62 was included in share-based compensation. 85 shares of common
stock were granted from the 2011 Plan to a contractor in lieu of professional services. 620 shares of common stock were granted
and issued for entering into a convertible note agreement. During fiscal year 2015, stock options to purchase 13 shares of common
stock were exercised that resulted in cash proceeds of $24 and had an intrinsic value of $10. In 2015, 100 shares of common stock
were granted from the 2011 Plan to the Company's then CEO and the corresponding fair value of $114 was included in share-based
compensation.
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 31, 2016, 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
31, 2016, 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 31,
2016, 206 options were outstanding to employees and non-employee directors under the 2006 Plan. We issue new common stock
when stock options are exercised. The Company periodically grants stock options that vest based upon the achievement of
performance targets. For performance based options, the Company evaluates the likelihood of the targets being met and records
the expense over the probable vesting period.
The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for
fiscal years 2016 and 2015:
|
|
For the fiscal years
ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
Expected stock price volatility
|
|
|
85.44%
|
|
|
|
84.80%
|
|
Risk-free interest rate
|
|
|
2.16%
|
|
|
|
2.16%
|
|
Expected life of options (years)
|
|
|
10.00
|
|
|
|
10.00
|
|
Additional information relating to all
outstanding options is as follows (in thousands, except per share data):
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted Average Remaining Contractual Life
|
|
Balance at January 3, 2015
|
|
|
905
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
130
|
|
|
|
1.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(12
|
)
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(173
|
)
|
|
|
4.63
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(70
|
)
|
|
|
2.67
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2016
|
|
|
780
|
|
|
|
2.70
|
|
|
$
|
–
|
|
|
|
5.23
|
|
Granted
|
|
|
30
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(51
|
)
|
|
|
0.88
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(49
|
)
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
710
|
|
|
$
|
2.62
|
|
|
$
|
–
|
|
|
|
4.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2016
|
|
|
651
|
|
|
$
|
2.67
|
|
|
$
|
–
|
|
|
|
|
|
The weighted average fair value per option
of options granted during fiscal years 2016 and 2015 was $0.88 and $1.12, respectively. We recognized share-based compensation
expense of $245 and $316 for fiscal years 2016 and 2015, respectively. The aggregate intrinsic value in the preceding table
represents the total pre-tax intrinsic value, based on our closing stock price of $1.12 on December 31, 2016, which theoretically
could have been received by the option holders had all option holders exercised their options as of that date. As of December
31, 2016, there were no in-the-money options exercisable.
Based on the value of options outstanding
as of December 31, 2016, estimated future share-based compensation expense is as follows:
Fiscal year 2017
|
|
$
|
32
|
|
Fiscal year 2018
|
|
|
–
|
|
|
|
$
|
32
|
|
The estimate above does not include any
expense for additional options that may be granted and vest during 2017.
Warrants
:
On November 8, 2016, we issued a warrant to Energy Efficiency Investments, LLC (EEI) to purchase 167 shares of common stock
at a price of $0.68 per share. The fair value of the warrant issued was $106 and it was exercisable in full at any time during
a term of five years. The fair value per share of common stock underlying the warrant issued to EEI was $0.63 based on our closing
stock price of $0.95. The exercise price may be reduced and the number of shares of common stock that may be purchased under the
warrant may be increased if the Company issues or sells additional shares of common stock at a price lower than the then-current
warrant exercise price or the then-current market price of the common stock. The shares underlying the warrant include legal restrictions
regarding the transfer or sale of the shares. The fair value of the EEI warrant was recorded as deferred financing costs and
is being amortized over the term of the commitment.
As of December 31, 2016, we had fully vested
warrants outstanding to purchase 24 shares of common stock at a price of $3.55 per share and expire in May 2020 and 167 share of
common stock at a price of $0.68 per share.
Preferred Stock
:
Our amended 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. To date
no such preferred shares have been issued.
11.
Major Customers and Suppliers
For the fiscal year
ended December 31, 2016, no customer represented more than 10% of our total revenues. For the fiscal year ended January 2, 2016,
no customer represented more than 10% of our total revenues. As of December 31, 2016, two customers, each represented more than
10% of our total trade receivables, for a total of 25% of our total trade receivables. As of January 2, 2016, two customers, each
represented more than 10% of our total trade receivables, for a total of 39% of our total trade receivables.
During the two
fiscal years ended December 31, 2016 and January 2, 2016, we purchased a vast majority of appliances for resale from
three suppliers. We have and are continuing to secure other vendors from which to purchase appliances. However, the
curtailment or loss of one of these suppliers or any appliance supplier could adversely affect our operations.
12.
Segment Information
We operate within targeted markets through
two reportable segments: retail and recycling. The retail segment is comprised of income generated through our ApplianceSmart
stores, which includes appliance sales and byproduct revenues from collected appliances. 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. The nature of products, services and customers for both segments varies significantly. As such, the segments
are managed separately. Our Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”).
The CODM evaluates performance and allocates resources based on sales and income from operations of each segment. Income
from operations represents revenues less cost of revenues and operating expenses, including certain allocated selling, general
and administrative costs. There are no inter-segment sales or transfers.
The decrease in recycling segment revenues
for the fiscal year ended December 31, 2016, presented in the following table was the result of a decrease in revenues related
to appliance replacement programs, recycling programs and a significant decline in byproduct revenues that resulted from decreases
in the prices of the byproducts that we sell.
The following tables present our segment
information for fiscal years 2016 and 2015:
|
|
For the fiscal years ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Revenues:
|
|
|
|
|
|
|
Retail
|
|
$
|
61,551
|
|
|
$
|
65,637
|
|
Recycling
|
|
|
42,038
|
|
|
|
46,202
|
|
Total revenues
|
|
$
|
103,589
|
|
|
$
|
111,839
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(1,646
|
)
|
|
$
|
(1,741
|
)
|
Recycling
|
|
|
1,101
|
|
|
|
(2,363
|
)
|
Total operating income
|
|
$
|
(545
|
)
|
|
$
|
(4,104
|
)
|
Cash capital expenditures:
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
33
|
|
|
$
|
121
|
|
Recycling
|
|
|
342
|
|
|
|
283
|
|
Total cash capital expenditures
|
|
$
|
375
|
|
|
$
|
404
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
216
|
|
|
$
|
197
|
|
Recycling
|
|
|
1,048
|
|
|
|
1,073
|
|
Total depreciation and amortization expense
|
|
$
|
1,264
|
|
|
$
|
1,270
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
251
|
|
|
$
|
437
|
|
Recycling
|
|
|
1,168
|
|
|
|
855
|
|
Total interest expense
|
|
$
|
1,419
|
|
|
$
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
January 2,
2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
17,559
|
|
|
$
|
18,088
|
|
Recycling
|
|
|
24,297
|
|
|
|
28,691
|
|
Total assets
|
|
$
|
41,856
|
|
|
$
|
46,779
|
|
Certain items have been reclassified from prior year for
presentation with no effect to net income.
13.
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 $62 and $84 for fiscal years 2016 and 2015, respectively.
14.
Related Party
Mr. Isaac, the Company’s Chief
Executive Officer, is the father to Jon Isaac CEO of Live Ventures and managing member of Isaac Capital Group, a 9% shareholder
of the Company. The board of directors of the Company and Live Ventures Incorporated have common directors: Tony Isaac, Richard
Butler and Dennis Gao. ARCA Recycling sub-leases call center space from Live Ventures in Las Vegas, NV. Total amount of sublease rent was $35 for year ending December 31, 2016.
15.
Subsequent Event
The Company sold and leased back its Compton building over an initial
lease term of six months which can be terminated with a 30 day notice. The net proceeds from the sale were used to pay down our
term and revolving loans with PNC Bank, National Association.