(a) Assets of ARCA Advanced Processing,
LLC (AAP), our consolidated variable interest entity that can only be used to settle obligations of AAP were $8,116 and $8,856
as of October 1, 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 $2,314 and $2,838 as of October 1, 2016 and January 2,
2016, respectively.
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”).
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 nine month periods ended October 1, 2016 and October 3, 2015, are
presented using 13-week and 39-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. ARCA Canada Inc., a Canadian corporation, is a wholly
owned subsidiary that was formed in September 2006 to provide turnkey recycling services for electric utility energy efficiency
programs. ARCA Recycling, Inc., a California corporation, is a wholly owned subsidiary that was formed in November 1991
to provide turnkey recycling services for electric utility energy efficiency programs. The operating results of our wholly owned
subsidiaries are consolidated in our financial statements.
AAP is a joint venture that was formed in
October 2009 between ARCA and 4301 Operations, LLC (“4301”) to employ advanced technology to refine traditional
appliance recycling techniques to achieve optimal revenue-generating and environmental benefits. ARCA and 4301 have a 50% interest
in AAP. 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 substantial financial
support to fund the operations of AAP since its inception.
2. Inventories
The Company's inventories primarily consist
of appliances, are stated at the lower of cost, determined on a specific identification basis, or market. Process metals include
ferrous and non-ferrous scrap metals, and are valued at the lower of average purchased cost or market based on the specific scrap
commodity.
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
Appliances held for resale
|
|
$
|
16,139
|
|
|
$
|
16,360
|
|
Processed metals from recycled appliances held for resale
|
|
|
203
|
|
|
|
367
|
|
Other
|
|
|
6
|
|
|
|
6
|
|
|
|
$
|
16,348
|
|
|
$
|
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 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 the three months
and nine months ended October 1, 2016, we excluded options and warrants to purchase 641 and 743 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 nine months ended October 3, 2015, we excluded options and warrants to purchase 789 and 750 shares of common stock
from the diluted weighted average shares outstanding calculation as the effect of these options and warrants were anti-dilutive.
4. Share-Based
Compensation
We recognized share-based compensation expense
of $123 and $217 for the three months ended October 1, 2016, and October 3, 2015, respectively and $264 and $265
for the nine months ended October 1, 2016 and October 3, 2015, respectively.
Based on the value of options outstanding as
of October 1, 2016, estimated future share-based compensation expense (benefit) is as follows:
Balance of fiscal year 2016
|
|
$
|
(2
|
)
|
Fiscal year 2017
|
|
|
14
|
|
|
|
$
|
12
|
|
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
|
|
|
Nine Months Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
Beginning Balance
|
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
42
|
|
|
$
|
30
|
|
Standard accrual based on units sold
|
|
|
4
|
|
|
|
12
|
|
|
|
13
|
|
|
|
31
|
|
Actual costs incurred
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Periodic accrual adjustments
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(13
|
)
|
|
|
(12
|
)
|
Ending Balance
|
|
$
|
30
|
|
|
$
|
37
|
|
|
$
|
30
|
|
|
$
|
37
|
|
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 and 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 October 1, 2016, and January 2, 2016:
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
522
|
|
|
$
|
696
|
|
Property and equipment, net
|
|
|
7,511
|
|
|
|
8,077
|
|
Other assets
|
|
|
83
|
|
|
|
83
|
|
Total Assets
|
|
$
|
8,116
|
|
|
$
|
8,856
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable (a)
|
|
$
|
1,496
|
|
|
$
|
1,872
|
|
Accrued expenses
|
|
|
500
|
|
|
|
399
|
|
Current maturities of long-term debt obligations
|
|
|
705
|
|
|
|
946
|
|
Long-term debt obligations, net of current maturities
|
|
|
3,337
|
|
|
|
3,439
|
|
Other liabilities (b)
|
|
|
1,126
|
|
|
|
759
|
|
Total Liabilities
|
|
$
|
7,164
|
|
|
$
|
7,415
|
|
(a)
|
|
As of October 1, 2016, AAP has $431 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. In August 2016, the note was repaid with the collection of carbon offset
program revenues.
The following table summarizes the operating
results of AAP for the three months and nine months ended July 2, 2016, and October 3, 2015:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
Revenues
|
|
$
|
2,076
|
|
|
$
|
1,577
|
|
|
$
|
5,557
|
|
|
$
|
5,455
|
|
Gross profit
|
|
|
492
|
|
|
|
(234
|
)
|
|
|
967
|
|
|
|
69
|
|
Operating income (loss)
|
|
|
79
|
|
|
|
(684
|
)
|
|
|
(285
|
)
|
|
|
(1,366
|
)
|
Net income (loss)
|
|
|
24
|
|
|
|
(748
|
)
|
|
|
(490
|
)
|
|
|
(1,548
|
)
|
7. Other
Assets
Other assets as of October 1, 2016, and
January 2, 2016, consist of the following:
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
Deposits
|
|
$
|
440
|
|
|
$
|
416
|
|
Cash surrender value
|
|
|
102
|
|
|
|
102
|
|
Finite intangible assets
|
|
|
19
|
|
|
|
40
|
|
Goodwill
|
|
|
38
|
|
|
|
38
|
|
|
|
$
|
599
|
|
|
$
|
596
|
|
For the three months ended October 1, 2016,
and October 3, 2015, we recorded amortization expense of $0 and $20, respectively, related to our recycling contract. For
the nine months ended October 1, 2016, and October 3, 2015, we recorded amortization expense of $20 and $60, respectively,
related to our recycling contract.
8. Accrued
Expenses
Accrued expenses as of October 1, 2016,
and January 2, 2016, consist of the following:
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
Sales tax estimates, including interest
|
|
$
|
4,175
|
|
|
$
|
4,804
|
|
Compensation and benefits
|
|
|
1,775
|
|
|
|
1,446
|
|
Accrued incentive and rebate checks
|
|
|
189
|
|
|
|
293
|
|
Accrued rent
|
|
|
204
|
|
|
|
235
|
|
Warranty expense
|
|
|
30
|
|
|
|
42
|
|
Accrued payables
|
|
|
412
|
|
|
|
749
|
|
Deferred revenue
|
|
|
230
|
|
|
|
413
|
|
Other
|
|
|
1,033
|
|
|
|
952
|
|
|
|
$
|
8,048
|
|
|
$
|
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 and is recorded as a current liability.. The Revolving Credit Agreement includes a lockbox
agreement, a subjective acceleration clause and is collateralized by a security interest in substantially all of our assets. PNC
is also secured by an inventory repurchase agreement with Whirlpool Corporation for Whirlpool purchases only in which we 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 October 1, 2016, we were in
compliance with the fixed charge coverage ratio covenant; however, PNC notified us that we exceeded the affiliate loan limitations,
and we have disputed such notice. 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 October 1, 2016, the outstanding line of credit balance was $9,809 with a weighted average interest rate of 8.75%, which
was the PNC Base Rate plus a default premium. 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 October 1, 2016, and January 2, 2016, our available borrowing capacity under the Revolving Credit Agreement was
$3,097 and $1,382, respectively.
10. Borrowings
Long-term debt, capital lease and other financing
obligations as of October 1, 2016, and January 2, 2016, consist of the following:
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
PNC term loan
|
|
$
|
1,084
|
|
|
$
|
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
|
|
|
295
|
|
|
|
319
|
|
Capital leases and other financing obligations
|
|
|
1,100
|
|
|
|
988
|
|
Debt issuance costs, net
|
|
|
(114
|
)
|
|
|
(67
|
)
|
|
|
|
5,607
|
|
|
|
5,757
|
|
Less current maturities
|
|
|
2,297
|
|
|
|
1,251
|
|
|
|
$
|
3,310
|
|
|
$
|
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 October 1, 2016, the weighted average
interest rate was 9.25%, 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. As of October 1, 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 on March 10, 2021 and bear an interest rate of Prime plus 2.75%. As
of October 1, 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. In August 2016, the remaining notes totaling $300 were repaid with the collection of carbon offset program revenues.
For the three months ended October 1,
2016, and October 3, 2015, we recorded non-cash interest expense of $50 and $27, respectively, related to debt issuance costs.
For the nine months ended October 1, 2016, and October 3, 2015, we recorded non-cash interest expense of $142 and $81, respectively,
related to debt issuance costs.
Capital leases and other financing obligations
:
We acquire certain equipment under capital leases and other financing obligations. The cost of the equipment was $2,607 and
$2,667 as of October 1, 2016, and January 2, 2016, respectively. Accumulated amortization as of October 1,
2016, and January 2, 2016, was approximately $1,748 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. On October 21, 2016 the court entered a final judgment to dismiss the class action
complaint with prejudice and the plaintiff has 30 days to appeal the dismissal.
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.
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 class action settlement was preliminarily approved in June 2016 and members
have until March 2017 to opt out of the class or object to the settlement. Whirlpool has offered to fully indemnify and defend
its distributors in this lawsuit. 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.
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 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
For the three months ended October 1, 2016
and October 3, 2015, we did not record a provision for income taxes and recorded a benefit of income taxes of $308, respectively.
For the nine months ended October 1, 2016 and October 3, 2015, we recorded a provision for income taxes of $438 and recorded a
benefit of income taxes of $894, respectively.
Our overall effective tax rate, based on
projected full-year taxable income, was 0% and 22.5% for the three months ended October 1, 2016 and October 3, 2015, respectively.
Our overall effective tax rate, based on projected full-year taxable income (loss), was (44.2)% and 25.9% for the nine months ended
October 1, 2016 and October 3, 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 October 1, 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
|
|
|
Nine Months Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
15,321
|
|
|
$
|
16,430
|
|
|
$
|
48,264
|
|
|
$
|
51,363
|
|
Recycling
|
|
|
12,035
|
|
|
|
11,699
|
|
|
|
29,193
|
|
|
|
34,468
|
|
Total revenues
|
|
$
|
27,356
|
|
|
$
|
28,129
|
|
|
$
|
77,457
|
|
|
$
|
85,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(112
|
)
|
|
$
|
(200
|
)
|
|
$
|
(549
|
)
|
|
$
|
(836
|
)
|
Recycling
|
|
|
1,614
|
|
|
|
(708
|
)
|
|
|
382
|
|
|
|
(1,065
|
)
|
Unallocated corporate
|
|
|
(87
|
)
|
|
|
(200
|
)
|
|
|
(298
|
)
|
|
|
(585
|
)
|
Total operating income (loss)
|
|
$
|
1,415
|
|
|
$
|
(1,108
|
)
|
|
$
|
(465
|
)
|
|
$
|
(2,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
–
|
|
|
$
|
34
|
|
|
$
|
9
|
|
|
$
|
72
|
|
Recycling
|
|
|
20
|
|
|
|
(4
|
)
|
|
|
107
|
|
|
|
43
|
|
Corporate assets not allocable
|
|
|
31
|
|
|
|
33
|
|
|
|
128
|
|
|
|
157
|
|
Total cash capital expenditures
|
|
$
|
51
|
|
|
$
|
63
|
|
|
$
|
244
|
|
|
$
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
151
|
|
|
$
|
142
|
|
Recycling
|
|
|
218
|
|
|
|
216
|
|
|
|
672
|
|
|
|
652
|
|
Unallocated corporate
|
|
|
38
|
|
|
|
57
|
|
|
|
113
|
|
|
|
174
|
|
Total depreciation and amortization
|
|
$
|
302
|
|
|
$
|
319
|
|
|
$
|
936
|
|
|
$
|
968
|
|
14. Recent
Accounting Pronouncements
New Accounting Standards Not Yet Effective
In May 2014, the FASB issued a final standard
on revenue from contracts with customers. The new standard sets forth a single comprehensive model for recognizing and reporting
revenue. The new standard is effective for us in fiscal year 2018 and permits the use of either a retrospective or a cumulative
effect transition method. We are currently assessing the impact of implementing the new guidance on our consolidated financial
statements.
In August 2014, the FASB issued a standard requiring an entity’s management to evaluate whether there is substantial doubt
about an entity’s ability to continue as a going concern within one year after the date of the financial statements. The
guidance also sets forth a series of disclosures that are required in the event the entity’s management concludes that there
is substantial doubt about the entity’s ability to continue as a going concern. The new standard becomes effective for us
in the annual financial statements for fiscal 2016 and requires an ongoing evaluation at each interim and annual period thereafter.
We are currently assessing the effect the new standard will have on our consolidated financial statements.
In February 2016, the FASB issued a standard
that primarily requires organizations that lease assets to recognize the rights and obligations created by those leases on the
Consolidated Balance Sheet. The standard is effective in 2019, with early adoption permitted. We are currently assessing
the effect the new standard will have on our consolidated financial statements.
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.
15. Subsequent
Event
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 November 8, 2016, was $103. On November
10, 2016, we advanced to an officer of the company $75 for a short term note.