Item 1. Financial Statements
APPLIANCE RECYCLING
CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
|
|
|
July
2, 2016
|
|
|
|
January
2, 2016
|
|
Current assets:
|
|
|
(unaudited)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,249
|
|
|
$
|
1,969
|
|
Accounts receivable, net of allowance of $28 and $73, respectively
|
|
|
6,656
|
|
|
|
11,536
|
|
Inventories
|
|
|
15,932
|
|
|
|
16,733
|
|
Income taxes receivable
|
|
|
242
|
|
|
|
1,126
|
|
Other current assets
|
|
|
1,073
|
|
|
|
1,350
|
|
Deferred income tax assets
|
|
|
1,301
|
|
|
|
1,657
|
|
Total current assets
|
|
|
27,453
|
|
|
|
34,371
|
|
Property and equipment, net
|
|
|
10,566
|
|
|
|
10,985
|
|
Restricted cash
|
|
|
500
|
|
|
|
500
|
|
Other assets
|
|
|
583
|
|
|
|
596
|
|
Deferred income tax assets
|
|
|
244
|
|
|
|
327
|
|
Total assets (a)
|
|
$
|
39,346
|
|
|
$
|
46,779
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,427
|
|
|
$
|
7,019
|
|
Accrued expenses
|
|
|
8,241
|
|
|
|
8,934
|
|
Line of credit
|
|
|
7,786
|
|
|
|
12,668
|
|
Current maturities of long-term obligations
|
|
|
2,803
|
|
|
|
1,251
|
|
Total current liabilities
|
|
|
26,257
|
|
|
|
29,872
|
|
Long-term obligations, less current maturities
|
|
|
3,270
|
|
|
|
4,506
|
|
Other noncurrent liabilities
|
|
|
402
|
|
|
|
357
|
|
Total liabilities (a)
|
|
|
29,929
|
|
|
|
34,735
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Common Stock, no par value; 10,000 shares authorized; issued and outstanding: 5,951 shares and 5,901 shares, respectively
|
|
|
21,607
|
|
|
|
21,466
|
|
Accumulated deficit
|
|
|
(12,132
|
)
|
|
|
(9,577
|
)
|
Accumulated other comprehensive loss
|
|
|
(522
|
)
|
|
|
(565
|
)
|
Total shareholders’ equity
|
|
|
8,953
|
|
|
|
11,324
|
|
Noncontrolling interest
|
|
|
464
|
|
|
|
720
|
|
|
|
|
9,417
|
|
|
|
12,044
|
|
Total liabilities and shareholders’ equity
|
|
$
|
39,346
|
|
|
$
|
46,779
|
|
(a) Assets of ARCA Advanced Processing,
LLC (AAP), our consolidated variable interest entity that can only be used to settle obligations of AAP were $8,443 and $8,856
as of July 2, 2016 and January 2, 2016, respectively. Liabilities of AAP for which creditors do not have recourse to
the general credit of Appliance Recycling Centers of America, Inc. were $3,414 and $2,838 as of July 2, 2016 and January 2,
2016, respectively.
See Notes to Unaudited Consolidated Financial
Statements.
APPLIANCE RECYCLING CENTERS OF AMERICA,
INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except Per Share Amounts)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
16,096
|
|
|
$
|
17,494
|
|
|
$
|
32,666
|
|
|
$
|
34,592
|
|
Recycling
|
|
|
6,413
|
|
|
|
9,366
|
|
|
|
13,349
|
|
|
|
17,189
|
|
Byproduct
|
|
|
2,247
|
|
|
|
3,304
|
|
|
|
4,086
|
|
|
|
5,921
|
|
Total revenues
|
|
|
24,756
|
|
|
|
30,164
|
|
|
|
50,101
|
|
|
|
57,702
|
|
Costs of revenues
|
|
|
18,320
|
|
|
|
22,287
|
|
|
|
37,474
|
|
|
|
43,957
|
|
Gross profit
|
|
|
6,436
|
|
|
|
7,877
|
|
|
|
12,627
|
|
|
|
13,745
|
|
Selling, general and administrative expenses
|
|
|
7,529
|
|
|
|
7,255
|
|
|
|
14,507
|
|
|
|
15,123
|
|
Operating income (loss)
|
|
|
(1,093
|
)
|
|
|
622
|
|
|
|
(1,880
|
)
|
|
|
(1,378
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(304
|
)
|
|
|
(245
|
)
|
|
|
(587
|
)
|
|
|
(566
|
)
|
Other income (expense), net
|
|
|
(26
|
)
|
|
|
8
|
|
|
|
94
|
|
|
|
(141
|
)
|
Income (loss) before income taxes and noncontrolling interest
|
|
|
(1,423
|
)
|
|
|
385
|
|
|
|
(2,373
|
)
|
|
|
(2,085
|
)
|
Provision for (benefit of) income taxes
|
|
|
758
|
|
|
|
(101
|
)
|
|
|
438
|
|
|
|
(586
|
)
|
Net income (loss)
|
|
|
(2,181
|
)
|
|
|
486
|
|
|
|
(2,811
|
)
|
|
|
(1,499
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
78
|
|
|
|
116
|
|
|
|
257
|
|
|
|
401
|
|
Net income (loss) attributable to controlling interest
|
|
$
|
(2,103
|
)
|
|
$
|
602
|
|
|
$
|
(2,554
|
)
|
|
$
|
(1,098
|
)
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.35
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.43
|
)
|
|
$
|
(0.19
|
)
|
Diluted
|
|
$
|
(0.35
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.43
|
)
|
|
$
|
(0.19
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,929
|
|
|
|
5,801
|
|
|
|
5,915
|
|
|
|
5,798
|
|
Diluted
|
|
|
5,929
|
|
|
|
5,802
|
|
|
|
5,915
|
|
|
|
5,798
|
|
Net income (loss)
|
|
$
|
(2,181
|
)
|
|
$
|
486
|
|
|
$
|
(2,811
|
)
|
|
$
|
(1,499
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation adjustments
|
|
|
24
|
|
|
|
(15
|
)
|
|
|
43
|
|
|
|
(133
|
)
|
Total other comprehensive income (loss), net of tax
|
|
|
24
|
|
|
|
(15
|
)
|
|
|
43
|
|
|
|
(133
|
)
|
Comprehensive income (loss)
|
|
|
(2,157
|
)
|
|
|
471
|
|
|
|
(2,768
|
)
|
|
|
(1,632
|
)
|
Comprehensive loss attributable to noncontrolling interest
|
|
|
78
|
|
|
|
116
|
|
|
|
257
|
|
|
|
401
|
|
Comprehensive income (loss) attributable to controlling interest
|
|
$
|
(2,079
|
)
|
|
$
|
587
|
|
|
$
|
(2,511
|
)
|
|
$
|
(1,231
|
)
|
See Notes to Unaudited Consolidated Financial
Statements.
APPLIANCE RECYCLING CENTERS OF AMERICA,
INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In Thousands)
|
|
Six Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,811
|
)
|
|
$
|
(1,499
|
)
|
Adjustments to reconcile net loss to net cash and cash equivalents (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
634
|
|
|
|
648
|
|
Share-based compensation
|
|
|
141
|
|
|
|
48
|
|
Deferred tax assets
|
|
|
439
|
|
|
|
–
|
|
Amortization of debt issuance costs
|
|
|
89
|
|
|
|
54
|
|
Other
|
|
|
(37
|
)
|
|
|
(25
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,917
|
|
|
|
(161
|
)
|
Inventories
|
|
|
801
|
|
|
|
544
|
|
Other assets
|
|
|
(145
|
)
|
|
|
(225
|
)
|
Accounts payable and accrued expenses
|
|
|
744
|
|
|
|
1,517
|
|
Income taxes receivable/payable
|
|
|
885
|
|
|
|
(159
|
)
|
Net cash flows provided by operating activities
|
|
|
5,657
|
|
|
|
742
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(193
|
)
|
|
|
(209
|
)
|
Proceeds from sale of property and equipment
|
|
|
–
|
|
|
|
5
|
|
Other
|
|
|
(3
|
)
|
|
|
(46
|
)
|
Net cash flows used in investing activities
|
|
|
(196
|
)
|
|
|
(250
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net payments under line of credit
|
|
|
(4,882
|
)
|
|
|
(133
|
)
|
Payments on debt obligations
|
|
|
(307
|
)
|
|
|
(486
|
)
|
Proceeds from issuance of debt obligations
|
|
|
100
|
|
|
|
356
|
|
Proceeds from issuance of common stock
|
|
|
–
|
|
|
|
24
|
|
Payment of debt issuance costs
|
|
|
(125
|
)
|
|
|
–
|
|
Net cash flows used in financing activities
|
|
|
(5,214
|
)
|
|
|
(239
|
)
|
Effect of changes in exchange rate on cash and cash equivalents
|
|
|
33
|
|
|
|
(135
|
)
|
Increase in cash and cash equivalents
|
|
|
280
|
|
|
|
118
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,969
|
|
|
|
3,523
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,249
|
|
|
$
|
3,641
|
|
See Notes to Unaudited Consolidated Financial
Statements.
APPLIANCE RECYCLING CENTERS OF AMERICA,
INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In Thousands)
|
|
Six Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
213
|
|
|
$
|
355
|
|
Cash receipts for income taxes
|
|
$
|
871
|
|
|
$
|
403
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Debt issuance costs related to credit agreement renewal
|
|
$
|
63
|
|
|
$
|
–
|
|
See Notes to Unaudited Consolidated Financial
Statements.
APPLIANCE RECYCLING CENTERS OF AMERICA,
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
(In Thousands, Except Per Share Amounts)
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
®
. In
addition, we have a 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 for GE Appliances,
a Haier Group Company (“GE”). These appliances include units manufactured by GE as well as by other manufacturers.
The accompanying balance sheet as of
January 2, 2016, which has been derived from 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 three-month and six-month periods ended July 2, 2016 and
July 4, 2015, are presented using 13-week and 26-week periods, respectively. The results of operations for any
interim period are not necessarily indicative of the results for the year.
In preparation of the Company’s 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 financial statements should be read
in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended
January 2, 2016, included in the Company’s Annual Report on Form 10-K filed with the SEC on April 4, 2016.
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. CA 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”) to support ARCA’s agreement, as amended,
with GE. Both ARCA and 4301 have a 50% interest in AAP. GE sells
its recyclable appliances generated from twelve states in the Northeast and Mid-Atlantic regions of the United States to ARCA,
which collects, processes and recycles the appliances. The agreement requires that ARCA will only recycle, and will not sell
for re-use or resale, the recyclable appliances purchased from GE. AAP established a regional processing center in Philadelphia,
Pennsylvania, at which the recyclable appliances are processed. AAP commenced operations in February 2010 and has the
exclusive rights to service the GE agreement as a subcontractor for ARCA. 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, through our contractual agreement with GE, which is material to AAP, and we have provided substantial financial support
to fund the operations of AAP since its inception.
2. Inventories
Inventories, consisting principally of
appliances, are stated at the lower of cost, determined on a specific identification basis, or market and consist of:
|
|
July 2, 2016
|
|
|
January 2, 2016
|
|
Appliances held for resale
|
|
$
|
15,666
|
|
|
$
|
16,360
|
|
Processed metals from recycled appliances held for resale
|
|
|
260
|
|
|
|
367
|
|
Other
|
|
|
6
|
|
|
|
6
|
|
|
|
$
|
15,932
|
|
|
$
|
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 agings 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 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
attributable to controlling interest 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 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 Common Stock at the average market price during the quarter. For both the three months and the
six months ended July 2, 2016, we excluded options and warrants to purchase 754 shares of common stock from the diluted
weighted average share outstanding calculation as the effect of these options and warrants were anti-dilutive. For the three
months and six months ended July 4, 2015, we excluded options and warrants to purchase 507 and 717 shares of common stock
from the diluted weighted average shares outstanding calculation as the effect of these options were anti-dilutive.
4. Share-Based Compensation
We recognized share-based compensation
expense (benefit) of $102 and $(15) for the three months ended July 2, 2016, and July 4, 2015, respectively and $141 and $48
for the six months ended July 2, 2016 and July 4, 2015, respectively.
Based on the value of options outstanding
as of July 2, 2016, estimated future share-based compensation expense is as follows:
Balance of fiscal year 2016
|
|
$
|
59
|
|
Fiscal year 2017
|
|
|
44
|
|
|
|
$
|
103
|
|
The estimate above does not include any
expense for additional options that may be granted and vest during the remainder of 2016 and 2017.
5. Product Warranty
We provide a warranty for the replacement
or repair of certain defective units, which varies based on the product sold. 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 are as
follows:
|
|
Three
Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
July 2,
2016
|
|
|
|
July 4,
2015
|
|
|
|
July 2,
2016
|
|
|
|
July 4,
201
5
|
|
Beginning
Balance
|
|
$
|
39
|
|
|
$
|
28
|
|
|
$
|
42
|
|
|
$
|
30
|
|
Standard accrual based
on units sold
|
|
|
3
|
|
|
|
13
|
|
|
|
9
|
|
|
|
19
|
|
Actual costs incurred
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Periodic accrual adjustments
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
(8
|
)
|
Ending Balance
|
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
33
|
|
6. 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
in excess of 50% of the total equity, subordinated debt and other forms of financial support. We have a controlling financial interest
in AAP through our contractual agreement with GE, which is material to AAP, and we have provided substantial 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 July 2, 2016, and January 2, 2016:
|
|
July 2, 2016
|
|
|
January 2, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
659
|
|
|
$
|
696
|
|
Property and equipment, net
|
|
|
7,701
|
|
|
|
8,077
|
|
Other assets
|
|
|
83
|
|
|
|
83
|
|
Total Assets
|
|
$
|
8,443
|
|
|
$
|
8,856
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable (a)
|
|
$
|
1,809
|
|
|
$
|
1,872
|
|
Accrued expenses
|
|
|
461
|
|
|
|
399
|
|
Current maturities of long-term debt obligations
|
|
|
1,050
|
|
|
|
946
|
|
Long-term debt obligations, net of current maturities
|
|
|
3,337
|
|
|
|
3,439
|
|
Other liabilities (b)
|
|
|
859
|
|
|
|
759
|
|
Total Liabilities
|
|
$
|
7,516
|
|
|
$
|
7,415
|
|
(a)
As of July 2, 2016, AAP has $311 in advances payable to 4301 included in accounts payable.
(b)
Other liabilities represent loans and advances between ARCA and AAP that are eliminated in consolidation.
In April 2016, an officer of
the Company loaned $75 to AAP through the issuance of an 8% promissory note. The note is expected to be repaid with the
collection of carbon offset program revenues in August 2016.
The following table summarizes the operating
results of AAP for the three months and six months ended July 2, 2016, and July 4, 2015:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
Revenues
|
|
$
|
1,695
|
|
|
$
|
2,028
|
|
|
$
|
3,480
|
|
|
$
|
3,878
|
|
Gross profit
|
|
|
319
|
|
|
|
297
|
|
|
|
475
|
|
|
|
303
|
|
Operating loss
|
|
|
(93
|
)
|
|
|
(166
|
)
|
|
|
(364
|
)
|
|
|
(682
|
)
|
Net loss
|
|
|
(159
|
)
|
|
|
(230
|
)
|
|
|
(514
|
)
|
|
|
(800
|
)
|
7. Other Assets
Other assets as of July 2, 2016, and
January 2, 2016, consist of the following:
|
|
|
July 2, 2016
|
|
|
January 2, 2016
|
|
|
Deposits
|
|
|
$
|
423
|
|
|
$
|
416
|
|
|
Cash surrender value
|
|
|
|
102
|
|
|
|
102
|
|
|
Finite intangible assets
|
|
|
|
20
|
|
|
|
40
|
|
|
Goodwill
|
|
|
|
38
|
|
|
|
38
|
|
|
|
|
|
$
|
583
|
|
|
$
|
596
|
|
For the three months ended July 2, 2016,
and July 4, 2015, we recorded amortization expense of $0 and $20, respectively, related to our recycling contract. For the
six months ended July 2, 2016, and July 4, 2015, we recorded amortization expense of $20 and $40, respectively, related to
our recycling contract. For the three months ended July 2, 2016, and July 4, 2015,
we recorded non-cash interest expense of $50 and $26, respectively, related to debt issuance costs. For the six months ended July
2, 2016, and July 4, 2015, we recorded non-cash interest expense of $92 and $54, respectively, related to debt issuance costs.
8.
Accrued Expenses
Accrued expenses as of July 2, 2016,
and January 2, 2016, consist of the following:
|
|
July 2, 2016
|
|
|
January 2, 2016
|
|
Sales tax estimates, including interest
|
|
$
|
4,147
|
|
|
$
|
4,804
|
|
Compensation and benefits
|
|
|
2,083
|
|
|
|
1,446
|
|
Accrued incentive and rebate checks
|
|
|
274
|
|
|
|
293
|
|
Accrued rent
|
|
|
188
|
|
|
|
235
|
|
Warranty expense
|
|
|
33
|
|
|
|
42
|
|
Accrued payables
|
|
|
258
|
|
|
|
749
|
|
Deferred revenue
|
|
|
386
|
|
|
|
413
|
|
Other
|
|
|
872
|
|
|
|
952
|
|
|
|
$
|
8,241
|
|
|
$
|
8,934
|
|
9. 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 10 for further discussion
regarding the Term Loan entered into with PNC. The Revolving Credit Agreement had a stated maturity date of January 24,
2016, and was renewed on January 22, 2016. Our financial covenants were reset in connection with this renewal.
The renewed Revolving Credit
Agreement has a stated maturity of January 31, 2017, if not renewed. 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 April 2, 2016, that we meet a 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
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 22, 2016 renewal, the affiliate loan balance is capped at $1,000 on December 31, 2015, and
thereafter. As of July 2, 2016, we were not in compliance with the fixed charge coverage ratio covenant of the Revolving
Credit Agreement. We are working with PNC to obtain an Amended Credit Agreement. As of January 2, 2016, we were not
in compliance with all covenants under 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 22, 2016, 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 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%). As of July 2, 2016, the outstanding line of credit balance was $7,786 with a weighted average
interest rate of 4.70%, which included both PNC LIBOR and PNC Base Rate loans. As of January 2, 2016, the outstanding
line of credit balance was $12,668 with a weighted average interest rate of 7.25%, which was the PNC Base Rate plus a default premium.
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 July 2, 2016, and January 2, 2016, our available borrowing capacity under the Revolving Credit Agreement was $2,587
and $1,382, respectively.
10. Borrowings
Long-term debt, capital lease and other
financing obligations as of July 2, 2016, and January 2, 2016, consist of the following:
|
|
July 2, 2016
|
|
|
January 2, 2016
|
|
PNC term loan
|
|
$
|
1,148
|
|
|
$
|
1,275
|
|
Susquehanna term loans
|
|
|
3,242
|
|
|
|
3,242
|
|
2.75% note, due in monthly installments of $3, including interest, due October 2024, collateralized by equipment
|
|
|
300
|
|
|
|
319
|
|
Capital leases and other financing obligations
|
|
|
1,547
|
|
|
|
988
|
|
Debt issuance costs, net
|
|
|
(164
|
)
|
|
|
(67
|
)
|
|
|
|
6,073
|
|
|
|
5,757
|
|
Less current maturities
|
|
|
2,803
|
|
|
|
1,251
|
|
|
|
$
|
3,270
|
|
|
$
|
4,506
|
|
On January 24, 2011, we entered into
a $2,550 Term Loan (“Term Loan”) with PNC Bank to refinance 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. If the Revolving Credit Agreement is not renewed, a balloon payment of $1,020 in principal plus interest and additional fees
will be due on January 31, 2017. The Term Loan is collateralized with our California facility located in Compton, California. 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 July 2, 2016, the weighted
average interest rate was 5.28%. As of January 2, 2016, the weighted average interest rate was 7.75%, which was the PNC Base
Rate plus a default rate premium. As of July 2, 2016, the balance due on the Term Loan is classified as current as the maturity
of our credit facility is January 31, 2017.
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 July 2, 2016, and January 2, 2016, the interest rate was 6.00%. 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 one of 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. In February 2016,
an entity controlled by one of the noncontrolling interest holders of AAP loaned AAP $100 through the issuance of an 8% promissory
note. The remaining notes totaling $300 are expected to be repaid with the collection of the carbon offset program revenues by
the end of the third quarter of 2016.
Capital leases and other financing
obligations
:
We acquire certain equipment under capital leases and other financing obligations. The cost of
the equipment was $2,611 and $2,667 as of July 2, 2016, and January 2, 2016, respectively. Accumulated amortization
as of July 2, 2016, and January 2, 2016, was approximately $1,724 and $1,635, respectively. Depreciation and amortization
expense is included in cost of revenues and selling, general and administrative expenses.
11. 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
:
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 approximately $1 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. We are currently awaiting the United States District Court for the
Central District of California's ruling on our motion to dismiss the second amended complaint. This matter has been forwarded to
our insurance carriers and we intend to contest vigorously the claims made in the complaint.
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
$2,000. Although the outcome of this claim is uncertain, we believe that no further amounts are due under the terms of the
agreement and 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 $4.1 million 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.
12.
Income Taxes
Our overall effective tax rate, based on
projected full-year taxable loss, was (33.3)% and (26.2)% for the three months ended July 2, 2016 and July 4, 2015, respectively.
Our overall effective tax rate, based on projected full-year taxable loss, was (20.7)% and (28.1)% for the six months ended July
2, 2016 and July 4, 2015, respectively. The effective tax rate varies from the federal statutory rate of 34% due primarily
to the impact of lower foreign tax rates, state taxes, share-based compensation and the book income (loss) of consolidated AAP
attributable to noncontrolling interest.
We regularly evaluate both positive and
negative evidence related to retaining a valuation allowance against our 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 negative evidence that a valuation
allowance should be maintained against certain deferred tax assets that we do not expect to utilize as of July 2, 2016.
13.
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 and includes byproduct revenue, which is primarily generated through the recycling of appliances. We have
included the results from consolidating AAP in our recycling segment. 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 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:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
16,294
|
|
|
$
|
17,713
|
|
|
$
|
32,943
|
|
|
$
|
34,933
|
|
Recycling
|
|
|
8,462
|
|
|
|
12,451
|
|
|
|
17,158
|
|
|
|
22,769
|
|
Total revenues
|
|
$
|
24,756
|
|
|
$
|
30,164
|
|
|
$
|
50,101
|
|
|
$
|
57,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(487
|
)
|
|
$
|
(20
|
)
|
|
$
|
(437
|
)
|
|
$
|
(636
|
)
|
Recycling
|
|
|
(469
|
)
|
|
|
820
|
|
|
|
(1,232
|
)
|
|
|
(357
|
)
|
Unallocated corporate
|
|
|
(137
|
)
|
|
|
(178
|
)
|
|
|
(211
|
)
|
|
|
(385
|
)
|
Total operating income (loss)
|
|
$
|
(1,093
|
)
|
|
$
|
622
|
|
|
$
|
(1,880
|
)
|
|
$
|
(1,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(10
|
)
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
38
|
|
Recycling
|
|
|
20
|
|
|
|
32
|
|
|
|
87
|
|
|
|
47
|
|
Corporate assets not allocable
|
|
|
46
|
|
|
|
86
|
|
|
|
97
|
|
|
|
124
|
|
Total cash capital expenditures
|
|
$
|
56
|
|
|
$
|
127
|
|
|
$
|
193
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
51
|
|
|
$
|
47
|
|
|
$
|
105
|
|
|
$
|
96
|
|
Recycling
|
|
|
219
|
|
|
|
217
|
|
|
|
454
|
|
|
|
436
|
|
Unallocated corporate
|
|
|
39
|
|
|
|
54
|
|
|
|
75
|
|
|
|
116
|
|
Total depreciation and amortization
|
|
$
|
309
|
|
|
$
|
318
|
|
|
$
|
634
|
|
|
$
|
648
|
|
14. 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.
Entities
will have the option to apply the standard retrospectively to all prior periods presented, or to apply it retrospectively only
to contracts existing at the effective date, with the cumulative effect of the standard recorded as an adjustment to beginning
retained earnings. The updated guidance will be effective for us for the annual reporting period beginning with our fiscal
2018, and interim periods within that year. We will adopt the new provisions of this accounting standard at the beginning of fiscal
year 2018, given that early adoption is not an option. We will further study the implications of this statement in order to evaluate
the expected impact on the consolidated financial statements.
ASU 2015-02, Amendments to the Consolidation Analysis
:
This standard, became effective January 1, 2016 for the Company, provides amended guidance on whether reporting entities
should consolidate certain legal entities, including limited partnerships. We are evaluating the impact of the standard on
the consolidated financial statements.
ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs:
This standard, which will
be effective January 1, 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. Presently, debt issuance costs are reported as an
asset. 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. As of July 4, 2015, we had $0.1 million of
unamortized debt issuance costs. This amount is recorded in other non-current assets on the consolidated balance
sheets.
In July 2015, 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 Dec. 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.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative
from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that
may affect our future results. Our MD&A is presented in seven sections:
·
|
Forward-Looking Cautionary Statements
|
|
·
|
Overview
|
|
·
|
Fiscal 2016 Trends
|
|
·
|
Results of Operations
|
|
·
|
Liquidity and Capital Resources
|
|
·
|
New Accounting Pronouncements
|
|
Forward-Looking and Cautionary Statements
This quarterly report contains statements
that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended
and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements contained in this quarterly report
that are not purely historical or relate to our future operations, performance and results, and anticipated liquidity are forward
looking. These forward-looking statements are based on information available to us on the date of this quarterly report,
but are subject to risks and uncertainties, including, but not limited to, those discussed herein. Our actual results could
differ materially from those discussed in this quarterly report.
The forward-looking statements
contained in this quarterly report, and other written and oral forward-looking statements made by us from time to time, are
subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the
forward-looking statements. Any forward-looking information regarding our operations will be affected primarily by individual
retail stores’ profitability, the volume of appliance sales, the strength of energy conservation recycling programs and
general economic conditions affecting consumer demand for appliances. Any forward-looking information will also be affected
by our continued ability to purchase product from our suppliers at acceptable prices, the ability of individual retail stores
to meet planned revenue levels, the number of retail stores, costs and expenses being realized at higher than expected
levels, our ability to secure an adequate supply of special-buy appliances for resale, the ability to secure appliance
recycling and replacement contracts with sponsors of energy efficiency programs, the ability of customers to supply units
under their recycling contracts with us, the performance of our consolidated variable interest entity, the continued
availability of our current line of credit and the outcome of the pending sales and use tax examination in California.
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 2,
2016 (including the information presented therein under
Risk Factors
), as well as our reports on Forms 10-Q and other
publicly available information. All amounts herein are unaudited.
Overview
Appliance Recycling Centers of America, Inc.
and Subsidiaries (“we,” the “Company” or “ARCA”) are in the business of being the bridge between
utilities or manufacturers to their customers by recycling, replacing, and selling major household appliances in North America.
We are committed to energy efficiency and have been a pioneer in appliance recycling programs. We operate two reportable
segments:
|
·
|
Retail: Our retail segment offers the
latest in innovative appliance from major manufactures. We generate income from the sale of appliances and related services through
18 ApplianceSmart
®
stores in four geographic areas. We have an online presence and also include a portion of
our revenue from byproducts from collected appliances. We have two product lines, new and out-of-the-box that give the large
manufacturers a channel to move their product without disrupting their normal distribution channels.
|
|
|
|
|
·
|
Recycling: Our recycling segment is a turnkey appliance recycling program. We receive fees
charged for recycling, replacement and additional services for utility energy efficiency programs and have established
17 Regional Processing Centers (“RPCs”) for this segment throughout the United States and Canada. Our recycling
segment also includes all income generated from our agreement with GE Appliances, a Haier Group Company
(“GE”). GE sells us recyclable appliances in certain regions of the United States and we collect,
process, and recycle the appliances. These appliances include units manufactured by GE and by other manufacturers. The
agreement requires that we will only recycle, and will not sell for re-use or resale, the recyclable appliances. We
have established Regional Processing Centers (“RPCs”) in Philadelphia and Louisville to support our agreement
with GE. The RPC in Philadelphia is operated by ARCA Advanced Processing, LLC (“AAP”) through a joint
venture agreement between ARCA and 4301 Operations, LLC (“4301”). AAP employs advanced technology to refine
traditional appliance recycling techniques to achieve optimal revenue-generating and environmental benefits. We are also the
exclusive North American distributor for UNTHA Recycling Technology (“URT”), one of the world’s leading
manufacturers of technologically advanced refrigerator recycling systems and recycling facilities for electrical household
appliances and electronic scrap.
|
With more than 850 million major household appliances
currently used in the United States and Canada, ARCA’s business segments are positioned to work together to provide a
full array of appliance-related services. ARCA’s recycling centers maximize materials recycling while protecting
natural resources from the environmentally-damaging substances found in old appliances. We believe we are the future of
appliance sales and recycling to manage a full life cycle that will maximize the economic, environmental and societal
benefits that recycling provides for the next generation.
Fiscal 2016 Trends
Segments
Our retail segment revenues were
down $1.4 million from the three months ended July 2, 2016 over the same period in 2015. There are several economic reasons
as well as downward price pressures of the units by our competitors, this is causing price compression between new
and out-of-box units and consumers are selecting the new units. We have seen an overall decrease in sales of out-of-box
products for the quarter. Historically, as we enter the fourth quarter it is our weakest quarter in terms of both revenues
and earnings. We believe this is primarily because the fourth quarter is not a time for our consumers to purchase
major household appliances.
Our recycling segment typically operates
three types of programs which include:
|
1.
|
Fees charged for collecting and recycling
appliances
|
|
2.
|
Fees charged for recycling and providing
a replacement with an Energy Star appliance
|
|
3.
|
Income from the sale of processing appliances
into raw materials
|
Our recycling segment has decreased revenue
of $4 million from the three months ended July 2, 2016 over the same period in 2015. Despite this we gained over 20 new contracts
with customers in our recycling-only programs and experienced an increase in revenues as of a result with the closure of our largest
competitor. At the same time we have experienced declining revenues from our existing clients as the replacement programs have
slowed. The primary decline in replacement revenues can be attributed to lower volumes on several of our programs as programs were
not renewed with several large customers. We anticipate some of our replacement programs will increase their volumes in the next
quarter as utility customers are lagging on their stated energy efficiency goals. Recycling segment revenues have also experienced
declines this year as a result of the decreases in the selling prices of byproducts chiefly scrap steel. The selling price of scrap
steel has impacted our income as the price of steel experienced a four year low entering 2016 and has had a slight recovery during
the second quarter.
We derive revenues from the sale of carbon
offsets created by the destruction of ozone-depleting CFCs captured at our ARCA and AAP regional processing centers. We expect
to create carbon offsets and derive revenues in the future through the California market but cannot predict the amount or frequency
of carbon offset sales. Carbon offset sales are dependent on market conditions, including demand and acceptable market prices.
In July 2016, we received final
approval by the California Air Resource Board for our Carbon Offset Credits. In August 2016, we received proceeds of
$1.6 million from the sale of those Carbon Offset Credits which will be recognized in the third quarter. A $0.3 million
holdback will be recognized when certain conditions are met with the buyer. We expect additional carbon offset revenues
of approximately $0.6 million by the end of 2016; however, this is dependent on various parties and authorities for approval
and we cannot be certain it will occur in the fourth quarter.
In the second quarter of 2016, we had a
management change which included a signing bonus, severance and additions to the leadership team. This will help drive
positive changes to this organization. These costs increased SGA expense by $0.7 million in the second quarter of 2016 and are
one time charge to earnings.
We monitor specific economic factors such as retail trends,
consumer confidence, manufacturing by the major appliance companies, sales of existing homes and mortgage interest rates as key
indicators of industry demand, particularly in our retail segment. Competition in the home appliance industry is intense
in the four retail markets we serve. This includes competition not only from independent retailers, but also from such major
retailers as Sears, Best Buy, The Home Depot and Lowe’s. We also closely monitor the metals and various other scrap
markets because of the type of components recovered in our recycling process. This includes monitoring the
American
Metal Market
and the regions throughout the U.S. where we have our recycling centers
For the Three Months Ended July 2, 2016
and July 4, 2015
The following table sets forth the key
results of operations by segment for the three months ended July 2, 2016 and July 4, 2015 (dollars in millions):
|
|
Three Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
16.3
|
|
|
$
|
17.7
|
|
|
|
(8.0)%
|
|
Recycling
|
|
|
8.5
|
|
|
|
12.5
|
|
|
|
(32.0)%
|
|
Total revenues
|
|
$
|
24.8
|
|
|
$
|
30.2
|
|
|
|
(17.9)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(0.5
|
)
|
|
$
|
–
|
|
|
|
–
|
|
Recycling
|
|
|
(0.5
|
)
|
|
|
0.8
|
|
|
|
(157.2)%
|
|
Unallocated corporate costs
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
23.0%
|
|
Total operating income (loss)
|
|
$
|
(1.1
|
)
|
|
$
|
0.6
|
|
|
|
(275.7)%
|
|
Our total revenues of $24.8 million for
the three months ended July 2, 2016, decreased $(5.4) million or (17.9) % from $30.2 million for the same period of 2015. The change
in segment revenues was attributed primarily to the following factors:
Retail Segment Revenues
:
·
|
Revenues were down
$1.4 million from the three months ended July 2, 2016 over the same period in 2015. There are several economic reasons as
well as downward price pressures of the units by our competitors, this is causing price compression between new and
out-of-box units and consumers are selecting the new units. We have seen an overall decrease in sales of
out-of-box products for the quarter.
|
Recycling Segment Revenues
·
|
Revenues were down $4.0 million compared with the same period of 2015.
|
·
|
Appliance replacement program revenues decreased by $3.4 million compared with the same period of 2015.
|
·
|
Recycling-only program revenues increased by $0.5 million compared with the same period of 2015.
|
·
|
Byproduct revenues generated from the sale of raw materials and carbon offsets decreased $.9 million compared with the same period of 2015.
|
Retail segment revenues accounted for 65.8%
of total revenues in the three months ended July 2, 2016, compared with 59.2% in the same period of 2015. The decrease in appliance
replacement program and recycling byproduct revenues impacted the overall mix of revenues between the retail and recycling segments
for the three months ended July 2, 2016, compared with same period of 2015. Future revenues and related earnings from energy efficiency
programs, if any, are uncertain and may fluctuate significantly from year to year. Factors impacting future energy efficiency program
revenues and earnings include the type and scope of energy efficiency programs approved by regulatory agencies, competitive bidding,
contract changes, non-renewals and early cancellations.
Recycling segment revenues and retail
segment revenues each include a portion of byproduct revenues. For the three months ended July 2, 2016, and July 4, 2015, the
recycling segment accounted for approximately 91.7% and 93.4%, respectively of the byproduct revenues.
Operating Income
and Loss
Our total operating results declined by $1.7 million to a
$1.1 million loss for the three months ended July 2, 2016 compared with operating income of $0.6 million in the same period
of 2015. The change in segment operating income was attributed primarily to the following factors:
Retail Segment Operating Loss
:
·
|
Operating loss was $0.5 million for the three months ended July 2, 2016, a decline of $0.5 million due to decreased revenue compared with the same period of 2015.
|
Recycling Segment Operating Loss
:
·
|
Operating
loss was $0.5 million for the three months ended July 2, 2016, a decline of $1.3 million compared with the same period
in 2015. The decline is attributed to a decrease in scrap steel byproduct revenue and revenue. The recycling segment
operating loss during the second quarter of 2016 included approximately $0.4 million in expenses related to the startup
efforts for the new contracts and programs. We received these new contracts following the business failure of our
largest competitor JACO Environmental late in 2015. We continue to invest in business development activities as we respond to
customer demands in the industry and work to on-board new customers and programs. We anticipate similar investment levels in
the third quarter of 2016 and improvements in operating income for this segment based on the expected revenue growth.
|
Retail Segment Gross Profit
.
|
·
|
Retail gross profit
decreased by $0.3 million to $4.4 million for the three months ended July 2, 2016 compared with $4.7 million in the same
period of
2015. The
decline was
primarily the result
of lower sales, sales
mix and margin
compression on certain products. Gross profit as a percentage of
related revenues increased to 26.9% for the three months ended July 2, 2016, compared with 26.6% in the same period of
2015.
|
Recycling Segment Gross Profit
.
|
·
|
Recycling gross profit of $2.1 million
for the three months ended July 2, 2016 decreased $1.1 million compared with the same period of 2015. We experienced
declines in gross profit as a result of reduction in appliance replacement with existing customers and lower selling prices of
scrap metals. Gross profit as a percentage of related revenues decreased to 24.3% for the three months ended July 2, 2016, compared
with 25.4% for the same period of 2015.
|
For the Six Months Ended
July 2,
2016, and July 4, 2015
The following table sets forth the key
results of operations by segment for the six months ended July 2, 2016, and July 4, 2015 (dollars in millions):
|
|
Six Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
32.9
|
|
|
$
|
34.9
|
|
|
|
(5.7)%
|
|
Recycling
|
|
|
17.2
|
|
|
|
22.8
|
|
|
|
(24.6)%
|
|
Total revenues
|
|
$
|
50.1
|
|
|
$
|
57.7
|
|
|
|
(13.2)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(0.5
|
)
|
|
$
|
(0.6
|
)
|
|
|
31.3%
|
|
Recycling
|
|
|
(1.2
|
)
|
|
|
(0.4
|
)
|
|
|
(245.1)%
|
|
Unallocated corporate costs
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
|
|
45.2)%
|
|
Total operating loss
|
|
$
|
(1.9
|
)
|
|
$
|
(1.4
|
)
|
|
|
(36.4)%
|
|
Our total revenues of $50.1 million for
the six months ended July 2, 2016, decreased $(7.6) million or (13.2)% from $57.7 million for the same period of 2015. The change
in segment revenues was attributed primarily to the following factors:
Retail Segment Revenues
:
·
|
Revenues
were down $2.0 million compared with the same period of 2015. One store moved location in 2015 contributed $1.0 less in
revenue which included an inventory liquidation event in 2015. The market was also soft compared to last year and price
compression is driving average sale price per unit down.
|
Recycling Segment Revenues
:
·
|
Revenues were down $5.6 million for the six month ended July 2, 2016 compared with the same period of 2015.
|
·
|
Appliance replacement program revenues decreased by $6.5 million compared with the same period of 2015.
|
·
|
Recycling only program revenues increased by $1.3 million compared with the same period of 2015.
|
Recycling segment revenues and retail
segment revenues each include a portion of byproduct revenues. For the six months ended July 2, 2016, and July 4, 2015, the
recycling segment accounted for approximately 99.0% of the byproduct revenues for both periods.
Retail segment revenues accounted for
65.8% of total revenues in the six months ended July 2, 2016, compared with 60.5% in the same period of 2015. The decrease in
energy efficiency program and recycling byproduct revenues impacted the overall mix of revenues between the retail and recycling
segments for the six months ended July 2, 2016, compared with same period of 2015. Future revenues and related earnings from our
utility customer energy efficiency programs, if any, are uncertain and may fluctuate significantly from year to year. Factors
impacting future energy efficiency program revenues and earnings include the type and scope of energy efficiency programs approved
by regulatory agencies, competitive bidding, contract changes, non-renewals and early cancellations.
Operating Loss
Our total operating loss of $1.9 million
for the six months ended July 2, 2016, increased $0.5 million compared with operating loss of $1.4 million in the same period of
2015. The change in revenues is the primary reason for the additional operating loss.
Retail Segment Gross Profit
.
Retail gross profit remained the same as $9.1 million in same period of 2015. Gross profit as a percentage of related revenues
increased to 27.5% for the six months ended July 2, 2016, compared with 26.1% in the same period of 2015.
Recycling Segment Gross Profit
.
Recycling gross profit of $3.6 million for the six months ended July 2, 2016 decreased $1.0 million compared with the same period
of 2015. This was due to decrease in revenues and lower scrap prices for products.
Product Lines
Percentages for the three months and six
months ended July 2, 2016 and July 4, 2015 were as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
65.0%
|
|
|
|
58.0%
|
|
|
|
65.2%
|
|
|
|
59.9%
|
|
Recycling
|
|
|
25.9%
|
|
|
|
31.0%
|
|
|
|
26.6%
|
|
|
|
29.8%
|
|
Byproduct
|
|
|
9.1%
|
|
|
|
11.0%
|
|
|
|
8.2%
|
|
|
|
10.3%
|
|
Total revenues
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
Cost of revenues
|
|
|
74.0%
|
|
|
|
73.9%
|
|
|
|
74.8%
|
|
|
|
76.2%
|
|
Gross profit
|
|
|
26.0%
|
|
|
|
26.1%
|
|
|
|
25.2%
|
|
|
|
23.8%
|
|
Selling, general and administrative expenses
|
|
|
30.4%
|
|
|
|
24.0%
|
|
|
|
29.0%
|
|
|
|
26.2%
|
|
Operating income (loss)
|
|
|
(4.4)%
|
|
|
|
2.1%
|
|
|
|
(3.8)%
|
|
|
|
(2.4)%
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1.2)%
|
|
|
|
(0.8)%
|
|
|
|
(1.2)%
|
|
|
|
(1.0)%
|
|
Other income (expense), net
|
|
|
(0.1)%
|
|
|
|
–
|
|
|
|
0.2%
|
|
|
|
(0.2)%
|
|
Income (loss) before income taxes and noncontrolling interest
|
|
|
(5.7)%
|
|
|
|
1.3%
|
|
|
|
(4.8)%
|
|
|
|
(3.6)%
|
|
Provision for (benefit from) income taxes
|
|
|
3.1%
|
|
|
|
(0.3)%
|
|
|
|
0.9%
|
|
|
|
(1.0)%
|
|
Net income (loss)
|
|
|
(8.8)%
|
|
|
|
1.6%
|
|
|
|
(5.7)%
|
|
|
|
(2.6)%
|
|
Net loss attributable to
noncontrolling interest
|
|
|
0.3%
|
|
|
|
0.4%
|
|
|
|
0.5%
|
|
|
|
0.7%
|
|
Net income (loss) attributable to controlling interest
|
|
|
(8.5)%
|
|
|
|
2.0%
|
|
|
|
(5.2)%
|
|
|
|
(1.9)%
|
|
By Product Lines for the Three Months
Ended July 2, 2016 and July 4, 2015
Revenues
. Revenues
for the three months ended July 2, 2016, and July 4, 2015, were as follows (dollars in millions):
|
|
|
Three Months Ended
|
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
|
Retail
|
|
|
$
|
16.1
|
|
|
$
|
17.5
|
|
|
|
(8.0)%
|
|
|
Recycling
|
|
|
|
6.4
|
|
|
|
9.4
|
|
|
|
(31.5)%
|
|
|
Byproduct
|
|
|
|
2.3
|
|
|
|
3.3
|
|
|
|
(32.0)%
|
|
|
|
|
|
$
|
24.8
|
|
|
$
|
30.2
|
|
|
|
(17.9)%
|
|
Retail Revenues
. Our
retail revenues of $16.1 million for the three months ended July 2, 2016, was $1.4 million lower with the same period of 2015.
Recycling Revenues
.
Our recycling revenues of $6.4 million for the three months ended July 2, 2016, decreased $3.0 million, or 31.5%, from $9.4 million
in the same period of 2015. Recycling revenues are comprised of two components: (1) appliance recycling revenues generated
by collecting and recycling appliances for utilities and other sponsors of energy efficiency programs and (2) replacement
program revenues generated by recycling and replacing old appliances with new energy efficient models for programs sponsored by
utility companies. As we have entered new contracts we expect to see more revenue but at the same time several of our large replacement
programs have declined.
Byproduct Revenues
. Our byproduct
revenues of $2.2 million for the three months ended July 2, 2016, decreased $1.0 million compared with the same period of
2015. Byproduct revenues include all of the revenues generated by AAP. The decrease was due primarily to the
decline in steel prices and less units received at our RPC.
Total Gross
Profit
. Our gross profit of $6.4 million for the three months ended July 2, 2016, decreased $1.5 million or
18.3% compared with $7.9 million in the same period of 2015. Gross profit as a percentage of total revenues decreased
to 26.0% for the three months ended July 2, 2016, compared with 26.1% in the same period of 2015. Our gross profit as a
percentage of total revenues for future periods can be affected favorably or unfavorably by numerous factors, including:
1.
|
The mix of retail products we sell.
|
2.
|
The prices at which we purchase product from the major appliance manufacturers and retailers that supply product to us.
|
3.
|
The prices at which we can purchase recyclable appliances for processing at our RPCs.
|
4.
|
The volume of appliances we receive through our utility company energy efficiency programs.
|
5.
|
The volume and price of commodity/byproduct materials we sell.
|
6.
|
The volume and price of carbon offset sales created by the destruction of ozone-depleting refrigerants.
|
Selling, General and Administrative
Expenses
. Our selling, general and administrative (“SG&A”) expenses of $7.5 million for the three
months ended July 2, 2016, was comparable with the same period of 2015. Our SG&A expenses as a percentage of total revenues
increased 30.4% in the three months ended July 2, 2016, compared with 24.0% in the same period of 2015.
Selling expenses of $4.0 million for the
three months ended July 2, 2016, compared with $4.1 in the same period in 2015 due to decrease in direct advertising expense.
General and administrative expenses increased
$0.5 million to $3.6 million for the three months ended July 2, 2016, compared with $3.1 million in the same period of 2015. The
increase was due primarily to a $0.7 million increase in the management change which included signing bonus, severance and two
additional positions.
Interest expense, net
.
Interest expense for the three months ended July 2, 2016, increased $0.1 million compared with the same period of 2015. The
increase was the result raising interest rates by our bank. Our credit agreement ends in January 2017, and we are actively
looking for ways to reduce our costs of debt.
Provision for (benefit from) Income
Taxes
. We recorded a provision for income taxes of $0.8 million for the three months ended July 2, 2016, compared
with a benefit of $0.1 million in the same period of 2015. The provision for income taxes for the three months ended July 2, 2016,
is related primarily to the projected full-year taxable loss in the United States and the decrease in the prior year’s tax
assets.
Noncontrolling Interest
.
Noncontrolling interest represents 4301’s share of AAP’s net income (loss). Under the AAP joint venture agreement,
ARCA and 4301 each have a 50% interest in AAP. AAP reported net loss of $0.2 million for the three months ended July 2, 2016,
of which $0.1 million represented the loss attributable to noncontrolling interest. This is comparable with 2015.
Product Lines for the Six Months Ended
July 2, 2016, and July 4, 2015
Revenues
. Revenues
for the six months ended July 2, 2016, and July 4, 2015, were as follows (dollars in millions):
|
|
|
Six Months Ended
|
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
|
Retail
|
|
|
$
|
32.7
|
|
|
$
|
34.6
|
|
|
|
(5.6)%
|
|
|
Recycling
|
|
|
|
13.3
|
|
|
|
17.2
|
|
|
|
(22.3)%
|
|
|
Byproduct
|
|
|
|
4.1
|
|
|
|
5.9
|
|
|
|
(31.0)%
|
|
|
|
|
|
$
|
50.1
|
|
|
$
|
57.7
|
|
|
|
(13.2)%
|
|
Retail Revenues
. Our
retail revenues of $32.7 million for the six months ended July 2, 2016, decreased $1.9 million, or 5.6%, from $34.6 million for
the same period of 2015. The decrease in retail revenues was due to softness in the market and in same-store sales resulting
from a holiday weekend sales events and the movement of one store to a new location. We are continuing to evaluate underperforming
stores and stores with expiring leases and are considering a range of outcomes from right-sizing the showroom space to closure.
Recycling
Revenues
. Our recycling revenues of $13.3 million for the six months ended July 2, 2016, decreased $3.9
million, or (22.3) %, from $17.2 million in the same period of 2015. Recycling revenues are comprised of two components of
energy efficiency programs: (1) appliance recycling revenues generated by collecting and recycling appliances for
utilities and other sponsors of energy efficiency programs and (2) replacement program revenues generated by recycling
and replacing old appliances with new energy efficient models for programs sponsored by utility companies. Future revenues
from appliance energy efficiency programs, if any, are uncertain and may fluctuate significantly from period to period.
Byproduct
Revenues
. Our byproduct revenues of $4.1 million for the six months ended July 2, 2016, decreased $1.8 million
compared with the same period of 2015. Byproduct revenues include all of the revenues generated by AAP. AAP
revenues of $3.4 million decreased $.4 million compared with the same period of 2015, due primarily to a decline in the
revenues generated from sale of nonferrous scrap metal byproducts compared with the same period of 2015. ARCA experienced a
decrease in byproduct revenues due primarily to lower average byproduct price per unit in certain markets and $1.0 million
lower sales of refrigerants as compared with the same period of fiscal 2015.
Total Gross Profit
.
Our gross profit of $12.6 million for the six months ended July 2, 2016, decreased $1.1 million or 8.1% compared with $13.7 million
in the same period of 2015. Gross profit as a percentage of total revenues increased to 25.2% for the six months ended July
2, 2016, compared with 23.8% in the same period of 2015. Our gross profit as a percentage of total revenues for future periods
can be affected favorably or unfavorably by numerous factors, including:
1.
|
The mix of retail products we sell.
|
2.
|
The prices at which we purchase product from the major appliance manufacturers and retailers that supply product to us.
|
3.
|
The prices at which we can purchase recyclable appliances for processing at our RPCs.
|
4.
|
The volume of appliances we receive through our recycling and utility company energy efficiency programs.
|
5.
|
The volume and price of commodity/byproduct materials.
|
6.
|
The volume and price of carbon offset sales created by the destruction of ozone-depleting refrigerants.
|
Selling, General and
Administrative Expenses
. Our selling, general and administrative (“SG&A”) expenses of $14.5
million for the six months ended July 2, 2016, decreased $0.6 million or 4.1% compared with $15.1 million in the same period
of 2015. Our SG&A expenses as a percentage of total revenues increased to 29.0% in the six months ended July 2, 2016,
compared with 26.2% in the same period of 2015.
Selling expenses decreased $0.5 million
to $8.0 million, or 16.0% of total revenues, for the six months ended July 2, 2016, compared with $8.5 million, or 14.8% of total
revenues, in the same period of 2015. The decrease in selling expenses was due primarily to lower occupancy costs of $0.3
million and lower advertising of $0.2 million.
General and administrative expenses decreased
by $.1 million to $6.5 million for the six months ended July 2, 2016, compared with $6.6 million in the same period of 2015. The
decrease was due to reductions in costs offset by management change.
Interest expense, net
.
Interest
expense for the six months ended July 2, 2016, increased $23,000 compared with the same period of 2015. The increase was the result
of higher interest rate on our line of credit.
Provision for (benefit from) Income
Taxes
. We recorded a provision for income taxes of $0.4 million for the six months ended July 2, 2016, compared with
a benefit of $0.6 million in the same period of 2015. The provision of income taxes for the six months ended July 2, 2016, is related
primarily to a valuation allowance of prior year assets.
Noncontrolling Interest
.
Noncontrolling interest represents 4301’s share of AAP’s net income (loss). Under the AAP joint venture agreement,
ARCA and 4301 each have a 50% interest in AAP. AAP reported net loss of $0.5 million for the six months ended July 2, 2016,
of which $0.3 million represented the loss attributable to noncontrolling interest. AAP reported net income of $0.8 million for
the six months ended July 4, 2015, of which $0.4 million represented the income attributable to noncontrolling interest.
Liquidity and Capital Resources
Summary
.
Cash and
cash equivalents as of July 2, 2016, were $2.2 million compared with $2.0 million as of January 2, 2016. Working
capital, the excess of current assets over current liabilities, decreased to $1.2 million as of July 2, 2016, compared with
$4.5 million as of January 2, 2016. The decrease was primarily the result of the classification of the term loan with
PNC as a current liability and operating losses.
The following table summarizes our cash
flows for the six months ended July 2, 2016, and July 4, 2015 (in millions):
|
|
Six Months Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
Total cash and cash equivalents provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
5.7
|
|
|
$
|
0.7
|
|
Investing activities
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
Financing activities
|
|
|
(5.2
|
)
|
|
|
(0.2
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
–
|
|
|
|
(0.1
|
)
|
Increase in cash and cash equivalents
|
|
$
|
0.3
|
|
|
$
|
0.1
|
|
Operating
Activities
. Our net cash provided by operating activities was $5.7 million for the six months ended July 2,
2016, compared with $0.7 million for the six months ended July 4, 2015. The increase of cash generated from operating
activities was primarily the result of $4.9 million in cash from operations through the collection of trade receivables and
$0.9 million through the collection of tax receivables in 2016. In
2015, offsetting the losses to date we generated $2.0 million in cash from operations through the collection
of receivables.
Investing
Activities
. We used approximately $0.2 million of cash and used $0.3 million for investing
activities for the six months ended July 2, 2016, and the six months ended July 4, 2015, respectively. The use of cash for
the purchase of equipment was $0.2 million in both six months ended July 2, 2016, and the six months ended July 4, 2015.
Financing Activities
.
Our net cash used in financing activities was $5.2 million for the six months ended July 2, 2016, compared with $0.2 million for
the six months ended July 4, 2015. Net cash used in financing activities for the six months ended July 2, 2016, was related
primarily to net payments under our line of credit and the repayment of long-term debt obligations offset by approximately $5.2
million in cash provided in AAP. Net cash used in financing activities for the six months ended July 4, 2015, was also related
primarily to net payments under our line of credit and the repayment of long-term debt obligations offset with $0.4 million of
new debt.
Sources of
Liquidity
.
Our principal sources of liquidity are cash from operations and borrowings under our
revolving line of credit. Our principal liquidity requirements consist of long-term debt obligations, capital expenditures
and working capital. Our total capital requirements for the next twelve months will depend upon, among other things, the
number and size of ApplianceSmart stores operating during the period, the volumes generated from recycling and appliance
replacement contracts during the period and our needs related to AAP. Currently, we have eighteen ApplianceSmart stores and
seventeen recycling centers, including AAP, in operation. Approximately $1.5 million of our cash at the end of the July 2, 2016
is held in Canadian banks.
We believe, based on the anticipated revenues
from our recycling and appliance replacement contracts, the anticipated sales per retail store, and our anticipated gross profit,
that our cash balance, anticipated funds generated from operations and our revolving line of credit will be sufficient to finance
our operations, long-term debt obligations and capital expenditures through at least the next twelve months. We may need additional
capital to finance our operations if our revenues are lower than anticipated, our expenses are higher than anticipated or we pursue
new opportunities. If our Revolving Credit, Term Loan and Security Agreement, as amended, (“Revolving Credit Agreement”)
with PNC Bank, National Association (“PNC”) is not renewed on the stated maturity date of January 31, 2017 or PNC accelerates
the maturity date of our Revolving Credit Agreement, we would need to seek a replacement credit facility. We believe that we have
adequate collateral to support a replacement facility if needed. Sources of additional financing, if needed in the future, may
include further debt financing or the sale of equity (Common or Preferred Stock) or other financing opportunities. There can be
no assurance that such additional sources of financing will be available on terms satisfactory to us or permitted by our Revolving
Credit Agreement.
Outstanding
Indebtedness
. 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 $15.0 million
revolving line of credit. The Revolving Credit Agreement had a stated maturity date of January 24, 2016, and was
renewed on January 22, 2016. Our financial covenants were reset in connection with this renewal. The renewed Revolving
Credit Agreement has a stated maturity of January 31, 2017, if not renewed. 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 $750,000 letter of credit in favor of Whirlpool Corporation. The Revolving Credit Agreement requires, starting with
the fiscal quarter ended April 2, 2016, that we meet a 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 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 22, 2016 renewal, the affiliate loan balance is capped at $1.0 million on December
31, 2015, and thereafter. As of July 2, 2016, we were not in compliance with all the covenants of the Revolving
Credit Agreement. As of January 2, 2016, we were not in compliance with all covenants under the Revolving Credit
Agreement, which was subsequently waived with the January 22, 2016 renewal.
The interest rate on the revolving line
of credit 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 July 2, 2016, the outstanding
line of credit balance was $7.8 million with a weighted average interest rate of 4.70%, which included both PNC LIBOR Rate and
PNC Base Rate loans. As of January 2, 2016, the outstanding line of credit balance was $12.7 million with a weighted
average interest rate of 7.25%, which was the PNC Base Rate plus a default premium.
The amount of borrowings available
under the Revolving Credit Agreement is based on a formula using accounts receivable and inventories. We may not have access
to the full $15.0 million 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 July 2, 2016, and January 2, 2016, our available borrowing capacity under the Revolving Credit
Agreement was $2.6 million and $1.4 million, respectively.
On January 24, 2011, we entered
into a $2.55 million Term Loan (“Term Loan”) with PNC Bank to refinance 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 $21,000 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. If the Revolving Credit Agreement is not renewed, a balloon payment of
$1,020,000 in principal plus interest and additional fees will be due on January 31, 2017. The Term Loan is collateralized
with our California facility located in Compton, California. The 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%. 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 July 2, 2016, the weighted average interest rate was 5.28%.
As of January 2, 2016, the weighted average interest rate was 7.75% which was the PNC Base Rate plus a default rate premium.
As of July 2, 2016, the balance due on the Term Loan is classified as current as the maturity of our credit facility is
January 31, 2017.
On
March 10, 2011, ARCA Advanced Processing, LLC entered into three separate commercial term loans (“AAP 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 AAP Term Loans is $4.75 million, split into three separate loans for $2.1 million, $1.4 million and $1.25 million.
The AAP Term Loans mature in ten years and bear an interest rate of Prime plus 2.75%. As of July 2, 2016, and January 2,
2016, the interest rate was 6.00%. Borrowings under the AAP 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 AAP Term Loans along with 4301 Operations, LLC and its owners.
In
March 2015, an entity controlled by one of the noncontrolling interest holders of AAP loaned AAP $325,000 through the issuance
of promissory notes. The notes bear interest at an annual rate of 8%. In May 2015, one of the March 2015 notes totaling $125,000
was repaid in full by AAP. In February 2016, an entity controlled by one of the noncontrolling interest holders of AAP loaned AAP
$100,000 through the issuance of an 8% promissory note. The remaining notes totaling $300,000 are expected to be repaid with the
collection of the carbon offset program revenues by the end of the third quarter of 2016.