The accompanying
notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. Nature
of Business and Basis of Presentation
Appliance Recycling Centers of America, Inc.
and subsidiaries (“we,” the “Company” or “ARCA”) are in the business of providing turnkey appliance
recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. We also sell new major
household appliances through a chain of Company-owned stores under the name ApplianceSmart
®
. 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.
The accompanying balance sheet as of April
1, 2017 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 periods ended
April 1, 2017 and April 2, 2016, are presented using 13-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
condensed consolidated financial statements, management is required to make estimates and assumptions that affect reported
amounts of assets and liabilities and related revenues and expenses during the reporting periods. As future events and their
effects cannot be determined with precision, actual results could differ significantly from these estimates.
These condensed consolidated financial
statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes
thereto for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 31, 2017.
Principles of consolidation
:
The consolidated financial statements include the accounts of Appliance Recycling Centers of America, Inc. and our subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation.
ApplianceSmart, Inc., a Minnesota corporation,
is a wholly owned subsidiary that was formed through a corporate reorganization in July 2011 to hold our business of selling
new major household appliances through a chain of Company-owned retail stores. 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. Both ARCA and 4301 have
a 50% interest in AAP. AAP established a regional processing center in Philadelphia, Pennsylvania, at which the recyclable appliances
are processed. AAP commenced operations in February 2010 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 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 net realizable value and consist
of:
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Appliances held for resale
|
|
$
|
13,062
|
|
|
$
|
16,146
|
|
Processed metals from recycled appliances held for resale
|
|
|
114
|
|
|
|
139
|
|
Other
|
|
|
6
|
|
|
|
6
|
|
|
|
$
|
13,182
|
|
|
$
|
16,291
|
|
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’s and margin analysis
in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded.
3. Earnings
per Share
Basic income per common share is computed based
on the weighted average number of common shares outstanding. Diluted income per common share is computed based on the weighted
average number of 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
ended April 1, 2017 and April 2, 2016, we excluded options and warrants to purchase 901 and 513 shares of common stock from the
diluted weighted average shares outstanding calculation as the effect of these options were anti-dilutive.
|
|
Three Months Ended
|
|
|
|
April 1, 2017
|
|
|
April 2, 2016
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to controlling interest
|
|
$
|
2,208
|
|
|
$
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,655
|
|
|
|
5,901
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.33
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to diluted earnings (loss) per share
|
|
$
|
2,208
|
|
|
$
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,655
|
|
|
|
5,901
|
|
Add: Options
|
|
|
–
|
|
|
|
–
|
|
Add: Common Stock Warrants
|
|
|
167
|
|
|
|
–
|
|
Assumed diluted weighted average common shares outstanding
|
|
|
6,822
|
|
|
|
5,901
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.32
|
|
|
$
|
(0.08
|
)
|
4. Share-Based
Compensation
We recognized share-based compensation expense
(benefit) of $23 and $38 for the three months ended April 1, 2017, and April 2, 2016 respectively.
Based on the value of options outstanding as
of April 1, 2017, estimated future share-based compensation expense is as follows:
Balance of fiscal year 2017
|
|
$
|
9
|
|
Fiscal year 2018
|
|
|
0
|
|
|
|
$
|
9
|
|
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, which are included in accrued liabilities.
Changes in our warranty accrual are as follows:
|
|
Three Months Ended
|
|
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Beginning balance
|
|
$
|
26
|
|
|
$
|
42
|
|
Standard accrual based on units sold
|
|
|
4
|
|
|
|
17
|
|
Actual costs incurred
|
|
|
(4
|
)
|
|
|
(16
|
)
|
Periodic accrual adjustments
|
|
|
(4
|
)
|
|
|
(17
|
)
|
Ending balance
|
|
$
|
22
|
|
|
$
|
26
|
|
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 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 April 1, 2017 and December 31, 2016:
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
307
|
|
|
$
|
438
|
|
Property and equipment, net
|
|
|
7,120
|
|
|
|
7,322
|
|
Other assets
|
|
|
83
|
|
|
|
83
|
|
Total assets
|
|
$
|
7,510
|
|
|
$
|
7,843
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,439
|
|
|
$
|
1,388
|
|
Accrued expenses
|
|
|
555
|
|
|
|
523
|
|
Current maturities of long-term debt obligations
|
|
|
734
|
|
|
|
3,558
|
|
Long-term debt obligations, net of current maturities
|
|
|
3,208
|
|
|
|
435
|
|
Other liabilities
|
|
|
289
|
|
|
|
1,126
|
|
Total liabilities
|
|
$
|
7,225
|
|
|
$
|
7,030
|
|
(a)
Other liabilities represent loans and advances between ARCA and AAP that are eliminated in consolidation.
The following table summarizes the operating
results of AAP for the three months and nine months ended April 1, 2017, and April 2, 2016:
|
|
Three Months Ended
|
|
|
|
April 1,
2017
|
|
|
April 2,
2016
|
|
Revenues
|
|
$
|
485
|
|
|
$
|
1,715
|
|
Gross profit
|
|
|
(117
|
)
|
|
|
152
|
|
Operating loss
|
|
|
(475
|
)
|
|
|
(274
|
)
|
Net loss
|
|
|
(511
|
)
|
|
|
(358
|
)
|
7. Property and Equipment
Property and equipment as of April 1, 2017, and December 31, 2016,
consist of the following:
|
|
Useful
Life (Years)
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
|
|
$
|
–
|
|
|
$
|
1,140
|
|
Buildings and improvements
|
|
18-30
|
|
|
2,287
|
|
|
|
3,780
|
|
Equipment (including computer software)
|
|
3-15
|
|
|
18,658
|
|
|
|
19,260
|
|
Projects under construction
|
|
|
|
|
205
|
|
|
|
204
|
|
Property and equipment
|
|
|
|
|
21,150
|
|
|
|
24,384
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(12,888
|
)
|
|
|
(14,268
|
)
|
Property and equipment, net
|
|
|
|
$
|
8,262
|
|
|
$
|
10,116
|
|
Depreciation and amortization expense was $302 and $325 for the
13 weeks ended April 1, 2017 and April 2, 2016, respectively.
On January 25, 2017, the Company sold its’ Compton California
facility for $7,103 to Terreno Acacia, LLC. The proceeds from the sale paid off the PNC term loan that was secured by the property,
in the amount of $1,020, costs of sale of $325 and the difference of $5,758 was paid towards the PNC Revolver loan. The Company
recorded a gain on the sale of property of $5,163. The Company rented the Compton California facility after the sale from January
26, 2017 through April 10, 2017.
8. Other
Assets
Other assets as of April 1, 2017, and
December 31, 2016, consist of the following:
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Deposits
|
|
$
|
428
|
|
|
$
|
453
|
|
Other
|
|
|
192
|
|
|
|
104
|
|
Recycling contract, net
|
|
|
18
|
|
|
|
19
|
|
Goodwill
|
|
|
38
|
|
|
|
38
|
|
|
|
$
|
676
|
|
|
$
|
614
|
|
For the three months ended April 1, 2017 and
December 31, 2016, we recorded amortization expense of $0 and $21, respectively, related to our finite intangible assets.
9. Accrued
Expenses
Accrued expenses as of April 1, 2017, and December 31,
2016, consist of the following:
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Sales tax estimates, including interest
|
|
$
|
4,839
|
|
|
$
|
4,203
|
|
Compensation and benefits
|
|
|
1,713
|
|
|
|
2,431
|
|
Accrued incentive and rebate checks
|
|
|
1
|
|
|
|
358
|
|
Accrued rent
|
|
|
244
|
|
|
|
263
|
|
Warranty
|
|
|
22
|
|
|
|
26
|
|
Accrued payables
|
|
|
859
|
|
|
|
570
|
|
Deferred revenue
|
|
|
357
|
|
|
|
227
|
|
Other
|
|
|
847
|
|
|
|
810
|
|
|
|
$
|
8,882
|
|
|
$
|
8,888
|
|
10. Line
of Credit
We have a Revolving Credit, Term Loan and Security
Agreement, as amended, (“PNC Revolver Credit Agreement”) with PNC Bank, National Association (“PNC”) that
provides us with a $15,000 revolving line of credit. 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 some
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.
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%).
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. On
April 1, 2017 and December 31, 2016, our available borrowing capacity under the Revolving Credit Agreement was $3,011 and $3.234,
respectively. A total of $750 of Letters of credit was outstanding at April 1, 2017 and December 31, 2016, respectively. The weighted
average interest rate for the period of January 1, 2017 through April 1, 2017 was 9.00%. We borrowed $28,249 and repaid $36,208
on the PNC Revolver during the thirteen weeks ended April 1, 2017, leaving an outstanding balance on the PNC Revolver of $2,374
and $10,333 at April 1, 2017 and December 31, 2016, respectively. As disclosed by the Company in item 2.01 of its current report
on Form 8-K filed on January 31, 2017. The Company sold its Compton, California building and land for $7,103. The net proceeds
from the sale, after costs of sale and payoff of the existing PNC term loan were used to reduce the outstanding balance under
our PNC Revolver.
On May 1, 2017, the PNC Revolver loan and agreement
was amended and extended through June 2, 2017. The amendment effective May 2, 2017 reduced the maximum amount of borrowing under
the PNC Revolver to $6 million. The PNC revolver was paid in full on May 10, 2017 with funds provided by new financing with MidCap
Financial. See Subsequent Events Footnote 15.
11. Borrowings
Long-term debt, capital lease and other financing
obligations as of April 2, 2017, and December 31, 2016, consist of the following:
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
PNC term loan
|
|
$
|
–
|
|
|
$
|
1,020
|
|
Susquehanna term loans
|
|
|
3,242
|
|
|
|
3,242
|
|
8.00% notes
|
|
|
582
|
|
|
|
582
|
|
2.75% note, due in month installments of $3, including interest, due October 2024
|
|
|
278
|
|
|
|
287
|
|
Capital leases and other financing obligations
|
|
|
470
|
|
|
|
567
|
|
Debt issuance costs, net
|
|
|
(678
|
)
|
|
|
(779
|
)
|
Total debt obligations
|
|
|
3,894
|
|
|
|
4,919
|
|
Less current maturities
|
|
|
(1,241
|
)
|
|
|
(2,093
|
)
|
Long-term debt obligations, net of current maturities
|
|
$
|
2,653
|
|
|
$
|
2,826
|
|
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. The Revolving Credit Agreement requires 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 Term Loan was paid off in full on January 25, 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 recycling equipment assets of the Company.
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 the notes outstanding at April 1, 2017 and December 31, 2016, was $100.
Capital leases and other financing obligations
:
We acquire certain equipment under capital leases and other financing obligations. The cost of the equipment was $2,601 and
$2,601 as of April 1, 2017, and December 31, 2016, respectively. Accumulated amortization as of April 1, 2017, and December
31, 2016, was approximately $2,131 and 1,771, respectively. Depreciation and amortization expense is included in cost of
revenues and selling, general and administrative expenses.
12. 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 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 this case, 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.
13. Income
Taxes
Our overall effective tax rate was 38.5%
and (24.5)% for the three months ended April 1, 2017 and April 2, 2016, respectively. The effective tax rate varies from the
U.S. federal statutory rate due to state taxes, foreign taxes, share-based compensation, non-controlling interest, and certain
non-deductible expenses. Deferred income taxes decreased by $477 as a result of the current provision for income taxes.
We regularly evaluate both positive and negative
evidence related to retaining a valuation allowance against certain deferred tax assets. The realization of deferred tax assets
is dependent upon sufficient future taxable income during the periods when deductible temporary differences and carryforwards are
expected to be available to reduce taxable income. We have concluded based on the weight of evidence that a valuation allowance
should be maintained against certain deferred tax assets that we do not expect to utilize in the near future. The Company continues
to have a full valuation allowance against its Canadian operations.
14. 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
|
|
|
|
April 1,
2017
|
|
|
April 2,
2016
|
|
Revenues:
|
|
|
|
|
|
|
Retail
|
|
$
|
15,789
|
|
|
$
|
16,668
|
|
Recycling
|
|
|
7,450
|
|
|
|
8,677
|
|
Total revenues
|
|
$
|
23,239
|
|
|
$
|
25,345
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Retail
|
|
|
4,207
|
|
|
|
4,686
|
|
Recycling
|
|
|
1,816
|
|
|
|
1,505
|
|
Total gross profit
|
|
|
6,023
|
|
|
|
6,191
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(78
|
)
|
|
$
|
63
|
|
Recycling
|
|
|
(1,631
|
)
|
|
|
(850
|
)
|
Total operating loss
|
|
$
|
(1,709
|
)
|
|
$
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
45
|
|
|
$
|
54
|
|
Recycling
|
|
|
257
|
|
|
|
271
|
|
Total depreciation and amortization
|
|
$
|
302
|
|
|
$
|
325
|
|
|
|
|
|
|
|
|
|
|
Interest Expenses
|
|
|
|
|
|
|
|
|
Retail
|
|
|
1
|
|
|
|
248
|
|
Recycling
|
|
|
296
|
|
|
|
35
|
|
Total interest expenses
|
|
|
297
|
|
|
|
283
|
|
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Total Assets
|
|
|
|
Retail
|
|
$
|
5,666
|
|
|
$
|
17,559
|
|
Recycling
|
|
|
28,889
|
|
|
|
24,297
|
|
|
|
$
|
34,555
|
|
|
$
|
41,856
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
–
|
|
|
$
|
–
|
|
Recycling
|
|
|
56
|
|
|
|
56
|
|
|
|
$
|
56
|
|
|
$
|
56
|
|
15. Subsequent Events
MidCap Financing
On May 10, 2017, Appliance Recycling
Centers of America, Inc. and its subsidiaries (“we”) entered into a Credit and Security Agreement (“Credit Agreement”)
with MidCap Financial Trust, as a Lender and as Agent for itself and other lenders under the Credit Agreement (the “Lender”).
The Credit Agreement provides us with a $12 million revolving line of credit, which may be increased to $16 million under certain
terms and conditions. The Credit Agreement has a stated maturity date of May 10, 2020, if not renewed. The Credit Agreement is
collateralized by a security interest in substantially all of our assets. The Lender is also secured by an inventory repurchase
agreement with Whirlpool Corporation for Whirlpool purchases only. The Credit Agreement requires that we meet a minimum fixed charge
coverage ratio of 1.00:1.00 for the applicable measuring period as of the end of each calendar month. The applicable measuring
period is (i) the period commencing May 1, 2017 and ending on the last day of each calendar month from May 31, 2017 through
April 30, 2018, and (ii) the twelve-month period ending on the last day of such calendar month thereafter. The Credit Agreement
limits the amount of other debt we can incur, the amount we can spend on fixed assets, and the amount of investments we can make,
along with prohibiting the payment of dividends.
The amount of revolving borrowings available
under the Credit Agreement is based on a formula using receivables and inventories. We may not have access to the full $12 million
revolving line of credit due to the formula using our receivables and inventories and the amount of any outstanding letters of
credit issued by the Lender. As of May 10, 2017, the outstanding balance under the Credit Agreement was $2,700 and our available
borrowing capacity was $3,017. The interest rate on the revolving line of credit is the one month LIBOR rate plus four and one-half
percent (4.50%). As of May 10, 2017, the interest rate was .98856%.
In connection with this Credit Agreement,
we paid off and terminated our existing Revolving Credit, Term Loan and Security Agreement, as amended, with PNC Bank, National
Association on the same date.
Sales and Use Tax Assessment
We operate in twenty-three states in the U.S.
and in various provinces in Canada. From time to time, we are subject to sales and use tax audits that could result in additional
taxes, penalties and interest owed to various taxing authorities.
As previously disclosed, the California Board
of Equalization (“BOE”) conducted a sales and use tax examination covering the 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 were not in agreement with the Company’s interpretation
of the law. As a result, the Company applied for and, as of February 9, 2015, received approval to participate in the California
Board of Equalization’s Managed Audit Program. The period covered under this program included 2011, 2012, 2013 and extended
through the nine-month period ended September 30, 2014.
On April 13, 2017 the Company received the
formal BOE assessment for sales tax for tax years 2011, 2012 and 2013 in the amount of $4.1 million plus applicable interest of
$0.5 million related to the appliance replacement programs that we administered on behalf of our customers on which we did not
assess, collect or remit sales tax. The Company will appeal this assessment and continue to engage the services of our existing
retained sales tax experts throughout the appeal process. The BOE tax assessment is subject to protest and appeal, and would not
need to be funded until the matter has been fully resolved through the appeal process. Resolution could take up to two years.