ALTS 10-Q Quarterly Report April 2, 2016 | Alphaminr
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ALTS 10-Q Quarter ended April 2, 2016

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10-Q 1 a10q-040216.htm 10-Q SEC Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 2, 2016

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 0-19621
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of
incorporation or organization)
41-1454591
(I.R.S. Employer
Identification No.)
175 Jackson Avenue North Suite 102, Minneapolis, Minnesota
(Address of principal executive offices)
55343
(Zip Code)
952-930-9000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No
As of May 9, 2016 , there were outstanding 5,900,818 shares of the registrant’s Common Stock, without par value.



APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
INDEX TO FORM 10-Q


Page
Item 1.

1

PART I.                 FINANCIAL INFORMATION

Item 1. Financial Statements

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 2,
2016
January 2,
2016
ASSETS
(unaudited)

Current assets:


Cash and cash equivalents
$
2,323

$
1,969

Accounts receivable, net of allowance of $97 and $73, respectively
11,006

11,536

Inventories
15,277

16,733

Income taxes receivable
1,441

1,126

Other current assets
1,081

1,350

Deferred income tax assets
1,657

1,657

Total current assets
32,785

34,371

Property and equipment, net
10,817

10,985

Restricted cash
500

500

Other assets
585

596

Deferred income tax assets
327

327

Total assets (a)
$
45,014

$
46,779

LIABILITIES AND SHAREHOLDERS’ EQUITY


Current liabilities:


Accounts payable
$
6,726

$
7,019

Accrued expenses
9,868

8,934

Line of credit
10,412

12,668

Current maturities of long-term obligations
2,732

1,251

Total current liabilities
29,738

29,872

Long-term obligations, less current maturities
3,463

4,506

Other noncurrent liabilities
342

357

Total liabilities (a)
33,543

34,735

Commitments and contingencies




Shareholders’ equity:


Common Stock, no par value; 10,000 shares authorized; issued and outstanding: 5,901 shares
21,504

21,466

Accumulated deficit
(10,028
)
(9,577
)
Accumulated other comprehensive loss
(546
)
(565
)
Total shareholders’ equity
10,930

11,324

Noncontrolling interest
541

720

11,471

12,044

Total liabilities and shareholders’ equity
$
45,014

$
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 $9,263 and $8,856 as of April 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 $3,668 and $2,838 as of April 2, 2016 and January 2, 2016 , respectively.

See Notes to Unaudited Consolidated Financial Statements.

2

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except Per Share Amounts)

Three Months Ended
April 2,
2016
April 4,
2015
Revenues:


Retail
$
16,570

$
17,098

Recycling
6,936

7,823

Byproduct
1,839

2,617

Total revenues
25,345

27,538

Costs of revenues
19,154

21,670

Gross profit
6,191

5,868

Selling, general and administrative expenses
6,978

7,868

Operating loss
(787
)
(2,000
)
Other income (expense):


Interest expense, net
(283
)
(321
)
Other income (expense), net
120

(149
)
Loss before income taxes and noncontrolling interest
(950
)
(2,470
)
Benefit from income taxes
(320
)
(485
)
Net Loss
(630
)
(1,985
)
Net loss attributable to noncontrolling interest
179

285

Net loss attributable to controlling interest
$
(451
)
$
(1,700
)
Loss per common share:


Basic
$
(0.08
)
$
(0.29
)
Diluted
$
(0.08
)
$
(0.29
)
Weighted average common shares outstanding:


Basic
5,901

5,795

Diluted
5,901

5,795

Net loss
$
(630
)
$
(1,985
)
Other comprehensive income (loss), net of tax:


Effect of foreign currency translation adjustments
19

(118
)
Total other comprehensive income (loss), net of tax
19

(118
)
Comprehensive loss
(611
)
(2,103
)
Comprehensive loss attributable to noncontrolling interest
179

285

Comprehensive loss attributable to controlling interest
$
(432
)
$
(1,818
)
See Notes to Unaudited Consolidated Financial Statements.

3

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

Three Months Ended
April 2,
2016
April 4,
2015
Operating activities:


Net loss
$
(630
)
$
(1,985
)
Adjustments to reconcile net loss to net cash and cash equivalents (used in) provided by operating activities:


Depreciation and amortization
325

330

Share-based compensation
38

63

Amortization of debt issuance costs
42

28

Other
—

(5
)
Changes in assets and liabilities:


Accounts receivable
530

1,537

Inventories
1,456

68

Other assets
(153
)
182

Accounts payable and accrued expenses
1,610

1,322

Income taxes receivable/payable
(303
)
(470
)
Net cash flows provided by operating activities
2,915

1,070

Investing activities:


Purchases of property and equipment
(137
)
(82
)
Proceeds from sale of property and equipment
—

5

Other
(4
)
—

Net cash flows used in investing activities
(141
)
(77
)
Financing activities:


Net proceeds (payments) under line of credit
(2,256
)
(967
)
Payments on debt obligations
(138
)
(220
)
Proceeds from issuance of debt obligations
100

325

Proceeds from issuance of common stock
—

24

Payment of debt issuance costs
(125
)
—

Net cash flows used in financing activities
(2,419
)
(838
)
Effect of changes in exchange rate on cash and cash equivalents
(1
)
(120
)
Increase in cash and cash equivalents
354

35

Cash and cash equivalents at beginning of period
1,969

3,523

Cash and cash equivalents at end of period
$
2,323

$
3,558

See Notes to Unaudited Consolidated Financial Statements.








4

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

Three Months Ended
April 2, 2016
April 4, 2015
Supplemental disclosures of cash flow information:


Cash payments for interest
$
213

$
165

Cash payments (receipts) for income taxes
$
(5
)
$
8

Non-cash investing and financing activities:


Debt issuance costs related to credit agreement renewal
$
63

$
—

See Notes to Unaudited Consolidated Financial Statements.

5

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 General Electric Company (“GE”) acting through its GE Appliances business component.  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 periods ended April 2, 2016 and April 4, 2015 , are presented using 13 -week periods.  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 support ARCA’s agreement, as amended, with GE acting through its GE Appliances business component.  Both ARCA and 4301 have a 50% interest in AAP.  Brian Conners, a member of the ARCA Board of Directors, has a controlling interest in 4301. 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.  The term of the agreement is for six years from the first date of appliance collection, which was March 31, 2010.  The term of the agreement with GE was extended via amendments through May 31, 2016. 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. The Company is in the process of negotiating a new agreement with GE, which it expects to be concluded and effective June 1, 2016.


6

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

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:
April 2,
2016
January 2,
2016
Appliances held for resale
$
15,114

$
16,360

Processed metals from recycled appliances held for resale
157

367

Other
6

6

$
15,277

$
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 the three months ended April 2, 2016 , we excluded options and warrants to purchase 803 shares of common stock from the diluted weighted average share outstanding calculation as the effect of these options and warrants was anti-dilutive. For the three months ended April 4, 2015 , we excluded options and warrants to purchase 783 shares of common stock from the diluted weighted average shares outstanding calculation as the effect of these options was anti-dilutive.

4. Share-Based Compensation

We recognized share-based compensation expense of $38 and $63 for the three months ended April 2, 2016 , and April 4, 2015 , respectively.

Based on the value of options outstanding as of April 2, 2016 , estimated future share-based compensation expense is as follows:
Balance of fiscal year 2016
$
99

Fiscal year 2017
44

$
143


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

7

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

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
April 2,
2016
April 4,
2015
Beginning Balance
$
42

$
30

Standard accrual based on units sold
6

6

Actual costs incurred
(4
)
(4
)
Periodic accrual adjustments
(5
)
(4
)
Ending Balance
$
39

$
28


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 April 2, 2016 , and January 2, 2016 :
April 2,
2016
January 2,
2016
Assets


Current assets
$
1,289

$
696

Property and equipment, net
7,891

8,077

Other assets
83

83

Total Assets
$
9,263

$
8,856

Liabilities


Accounts payable (a)
$
1,831

$
1,872

Accrued expenses
1,199

399

Current maturities of long-term debt obligations
1,048

946

Long-term debt obligations, net of current maturities
3,390

3,439

Other liabilities (b)
712

759

Total Liabilities
$
8,180

$
7,415

(a)     As of April 2, 2016, AAP has $299 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 the carbon offset program revenues in May 2016.

8

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

The following table summarizes the operating results of AAP for the three months ended April 2, 2016 , and April 4, 2015 :
Three Months Ended
April 2,
2016
April 4,
2015
Revenues
$
1,715

$
1,850

Gross profit
152

6

Operating loss
(274
)
(516
)
Net loss
(358
)
(570
)
7. Other Assets
Other assets as of April 2, 2016 , and January 2, 2016 , consist of the following:
April 2,
2016
January 2,
2016
Deposits
$
424

$
416

Other
123

142

Goodwill
38

38

$
585

$
596

For the three months ended April 2, 2016 , and April 4, 2015 , we recorded amortization expense of $20 and $20 , respectively, related to our recycling contract. For the three months ended April 2, 2016 , and April 4, 2015 , we recorded non-cash interest expense of $42 and $28 , respectively, related to debt issuance costs.
8. Accrued Expenses
Accrued expenses as of April 2, 2016 , and January 2, 2016 , consist of the following:
April 2,
2016
January 2,
2016
Sales tax estimates, including interest
$
4,764

$
4,804

Compensation and benefits
1,306

1,446

Accrued incentive and rebate checks
282

293

Accrued rent
217

235

Warranty expense
39

42

Accrued payables
247

749

Deferred revenue
2,114

413

Other
899

952

$
9,868

$
8,934

In March 2016, we sold our interest in certain Registry Offset Credits that were approved by the Climate Action Reserve in March 2016 in our carbon offset program for $1,878 . The revenue associated with this transaction and the $165 related costs have been deferred. We expect the revenue associated with this transaction and the related costs will be recognized in the second quarter of 2016.

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

9

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

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 April 2, 2016, we were 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 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 April 2, 2016 , the outstanding line of credit balance was $10,412 with a weighted average interest rate of 4.81% , 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 April 2, 2016 , and January 2, 2016 , our available borrowing capacity under the Revolving Credit Agreement was $1,564 and $1,382 , respectively.

10. Borrowings
Long-term debt, capital lease and other financing obligations as of April 2, 2016 , and January 2, 2016 , consist of the following:
April 2,
2016
January 2,
2016
PNC term loan
$
1,211

$
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
311

319

Capital leases and other financing obligations
1,644

988

Debt issuance costs, net
(213
)
(67
)
6,195

5,757

Less current maturities
2,732

1,251

$
3,463

$
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 120 th 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

10

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

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 April 2, 2016, the weighted average interest rate was 5.21% . 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 April 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 April 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 second 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 $2,607 and $2,667 as of April 2, 2016 , and January 2, 2016 , respectively.  Accumulated amortization as of April 2, 2016 , and January 2, 2016 , was approximately $1,693 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

11

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

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 ( $2.5 million net of income tax benefit) in sales tax and interest related to the appliance replacement programs that we administered on behalf of our customers on which we did not assess, collect or remit sales tax. The Company has been working with outside consultants to arrive at our assessment estimate and will continue to engage the services of these sales tax experts throughout the Managed Audit Program process. The sales tax amounts that we will likely be assessed relate to transactions in the period under examination by the BOE. Such assessment, however, will be subject to protest and appeal, and would not need to be funded until the matter has been fully resolved. Resolution could take up to two years.
12. Income Taxes
Our overall effective tax rate, based on projected full-year taxable income (loss), was 34.8% and (19.6)% for the three months ended April 2, 2016 and April 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, the amendment of prior foreign tax returns, 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 April 2, 2016 .

12

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)


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 Interim Chief Executive Officer or Chief Executive Officer have 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.


13

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

The following tables present our segment information for periods indicated:
Three Months Ended
April 2,
2016
April 4,
2015
Revenues:


Retail
$
16,649

$
17,220

Recycling
8,696

10,318

Total revenues
$
25,345

$
27,538

Operating income (loss):


Retail
$
50

$
(616
)
Recycling
(763
)
(1,177
)
Unallocated corporate
(74
)
(207
)
Total operating income (loss)
$
(787
)
$
(2,000
)
Cash capital expenditures:


Retail
$
19

$
29

Recycling
67

15

Corporate assets not allocable
51

38

Total cash capital expenditures
$
137

$
82

Depreciation and amortization:


Retail
$
54

$
49

Recycling
235

219

Unallocated corporate
36

62

Total depreciation and amortization
$
325

$
330

Interest expense:


Retail
$
248

$
54

Recycling
35

199

Unallocated corporate
—

68

Total interest expense
$
283

$
321


As of
April 2,
2016
April 4,
2015
Assets:
Retail
$
17,031

$
15,741

Recycling
20,820

21,985

Corporate assets not allocable
7,163

7,678

Total assets
$
45,014

$
45,404



14

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

14.    Recent Accounting Pronouncements

N ew A ccounting S tandards Not Yet Effective

Recent Accounting Pronouncements- New Accounting Standards:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, “ Revenue from Contracts with Customers ”. The new section will replace Section 605, “ Revenue Recognition ” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company will further study the implications of this statement in order to evaluate the expected impact on its consolidated financial statements.

ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs: This standard, which became effective January 3, 2016 for the Company, requires that debt issuance costs be presented as a direct deduction from the carrying amount of long-term debt on the balance sheet.  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.  The Company adopted this standard in 2016 with a reclassification of $67 of unamortized debt issuance costs to long term debt as of January 2, 2016.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) Related to Simplifying the Measurement of Inventory which applies to all inventory except that which is measured using last-in, first-out (LIFO) or the retail inventory method. Inventory measured using first-in, first-out (FIFO) or average cost is included in the new amendments.  Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.  The amendments will take effect for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period.  We are evaluating the impact of the standard on the consolidated financial statements.

I n February 2016, the FASB issued ASU No. 2016-02, “ Leases .” ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently assessing the effect that ASU No. 2016-02 will have on its results of operations, financial position and cash flows.

In 2015, the FASB issued ASU No. 2015-17, " Income Taxes Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for annual and interim periods beginning after December 15, 2016, with either prospective or retrospective application permitted. Early adoption is permitted. The Company plans to adopt this ASU for annual and interim periods beginning after December 15, 2016. The Company is evaluating the potential impact to its financial position and expects to reclassify material amounts of deferred income tax balances from current to noncurrent. The adoption of this standard will not impact its results of operations.





15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.  Other factors that might cause such a difference include, but are not limited to, those discussed in Item 1A “Risk Factors” in our annual report on Form 10-K for the year ended January 2, 2016 .
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our operations and financial condition.  This discussion should be read with the consolidated financial statements appearing in Item 1.
Overview
We operate two reportable segments: recycling and retail.  Our recycling segment includes all income generated from collecting, recycling and installing appliances for utilities and other customers and includes a significant portion of our byproduct revenue, which is primarily generated through the recycling of appliances.  Our recycling segment also includes all income generated from our agreement with General Electric (“GE”) acting through its GE Appliances business component.  GE sells recyclable appliances in certain regions of the United States to us and we collect, process and recycle the appliances.  These appliances include units manufactured by GE as well as by other manufacturers.  The agreement requires that we will only recycle, and will not sell for re-use or resale, the recyclable appliances purchased from GE.  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”). Our retail segment is comprised of income generated from the sale of appliances through ApplianceSmart ® stores and includes a small portion of our byproduct revenues from collected appliances.
Our business components are uniquely positioned in the industry to work together to provide a full array of appliance-related services.  ApplianceSmart operates eighteen company-owned stores, sells new appliances directly to consumers and provides affordable ENERGY STAR ® options for energy efficiency appliance replacement programs.  Our sixteen RPCs process appliances at end of life to remove environmentally damaging substances and produce byproducts for sale in North America.  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.
We believe the GE contract and AAP model are the future of appliance recycling and hope to open similar but smaller centers throughout the United States.  We cannot predict when these centers may open or if the appropriate volumes can be obtained to support the concept at future locations.


16

Revenues and earnings in our recycling segment are impacted by seasonal variances, with the second and third quarters generally having higher levels of revenues and earnings.  This seasonality is due primarily to our utility customers supporting more marketing and advertising during the spring and summer months.  Our customers tend to promote the recycling programs more aggressively during the warmer months because they believe more people want to clean up their garages and basements during that time of the year.  However, the addition of the GE agreement and some customers shifting to marketing their appliance recycling programs year-round has helped to mitigate some seasonality.

Our recycling segment typically operates three types of programs:
1.
Fees charged for collecting and recycling appliances for utilities and other sponsors of energy efficiency programs.
2.
Fees charged for recycling and then providing an incentive to qualified ratepayers to replace old appliances with new ENERGY STAR ® appliances for energy efficiency programs sponsored by utilities.
3.
Income generated through the processing of recyclable appliances purchased at our RPCs by selling the raw material separated during the recycling process.

Over the last three months, recycling-only programs experienced an increase in revenues. At the same time we have experienced declining revenues from certain appliance replacement programs. The primary decline in replacement revenues can be attributed to lower volumes on several of our programs. We anticipate that certain of our replacement programs will increase their volumes in the next few quarters as utility customers are lagging on their stated energy efficiency goals to their respective Utility Commissions. Recycling segment revenues have also experienced declines this year as a result of the decreases in the selling prices of scrap steel and other byproducts that we sell from our recycling activities. The selling price of scrap steel has experienced a slight recovery in most of the markets that we operate in April and so far in May 2016.

Our retail segment is similar to many other retailers in that it is seasonal in nature.  Historically, the fourth quarter is our weakest quarter in terms of both revenues and earnings.  We believe this is primarily because the fourth quarter includes several holidays during which consumers tend to focus less on purchasing major household appliances.

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. During the three months ended April 2, 2016 , the combination of ARCA and AAP recognized no carbon offset revenues compared to $0.2 million during the same period of the prior year. In March 2016, we sold our interest in certain Registry Offset Credits ("ROCs") in our carbon offset program for $1.9 million. The ROCs were approved by the Climate Action Reserve in March 2016 and will become Carbon Credit Offsets ("CCOs") upon approval by the California Air Resource Board. The California Air Resource Board approval process has been delayed, impacting the buyer of these ROCs and the buyer’s fulfillment of the terms of our sale agreement. The revenue associated with this transaction and the $0.2 million related costs have been deferred. We expect that the revenue from this transaction and the related costs will be recognized in the second quarter of 2016, upon completion of the final CCO approval process and related actions, and will contribute to our second quarter results. In addition, we have accumulated refrigerants for destruction under our carbon offset program which is expected to result in further carbon offset revenues of approximately $0.9 million by the end of 2016. We are working toward improving the frequency in which we can destroy the refrigerants we accumulate to improve our cash flow related to our carbon offset program.

As a result of the appointment of Mr. Isaac to Chief Executive Officer on May 13, 2016, we anticipate that our selling, general and administrative expense for the second quarter of 2016 will include a one-time charge of approximately $0.6 million as compared to the second quarter of 2015.

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.

17

Reporting Period . Operating results for the three months ended April 2, 2016 , and April 4, 2015 , are presented using 13-week periods.  The results of operations for any interim period are not necessarily indicative of the results for the year.

Sales and Use Taxes Contingency. 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 ( $2.5 million net of income tax benefit) in sales tax and interest related to the appliance replacement programs that we administered on behalf of our customers on which we did not assess, collect or remit sales tax. The Company has been working with outside consultants to arrive at our assessment estimate and will continue to engage the services of these sales tax experts throughout the Managed Audit Program process. The sales tax amounts that we will likely be assessed relate to transactions in the period under examination by the BOE. Such assessment, however, will be subject to protest and appeal, and would not need to be funded until the matter has been fully resolved. Resolution could take up to two years.

Results of Operations
The following table sets forth our consolidated financial data as a percentage of total revenues for the three months ended April 2, 2016 , and April 4, 2015 :
Three Months Ended
April 2,
2016
April 4,
2015
Revenues:


Retail
65.4
%
62.1
%
Recycling
27.4
%
28.4
%
Byproduct
7.2
%
9.5
%
Total revenues
100.0
%
100.0
%
Cost of revenues
75.6
%
78.7
%
Gross profit
24.4
%
21.3
%
Selling, general and administrative expenses
27.6
%
28.6
%
Operating loss
(3.2
)%
(7.3
)%
Other income (expense):


Interest expense, net
(1.1
)%
(1.2
)%
Other income (expense), net
0.5
%
(0.5
)%
Loss before income taxes and noncontrolling interest
(3.8
)%
(9.0
)%
Benefit from income taxes
(1.3
)%
(1.8
)%
Net loss
(2.5
)%
(7.2
)%
Net loss attributable to noncontrolling interest
0.7
%
1.0
%
Net loss attributable to controlling interest
(1.8
)%
(6.2
)%


18

For the Three Months Ended April 2, 2016 , and April 4, 2015
The following table sets forth the key results of operations by segment for the three months ended April 2, 2016 , and April 4, 2015 (dollars in millions):
Three Months Ended
April 2,
2016
April 4,
2015
%
Change
Revenues:



Retail
$
16.6

$
17.2

(3.3
)%
Recycling
8.7

$
10.3

(16.0
)%
Total revenues
$
25.3

$
27.5

(8.1
)%
Operating income (loss):



Retail
$
0.1

$
(0.6
)
108.1
%
Recycling
(0.8
)
(1.2
)
32.9
%
Unallocated corporate costs
(0.1
)
(0.2
)
64.3
%
Total operating loss
$
(0.8
)
$
(2.0
)
59.3
%
Our total revenues of $25.3 million for the three months ended April 2, 2016 , decreased $(2.2) million or (8.1)% from $27.5 million for the same period of 2015. The change in segment revenues was attributed primarily to the following factors:

Retail Segment :
•
Revenues were down $0.6 million when compared with the same period of 2015. Contributing to this decline was lower lower out-of-carton sales.

Recycling Segment :
•
Revenues were down $1.6 million compared with the same period of 2015.
•
Appliance replacement program revenues decreased by $1.3 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 decreased $0.6 million and carbon offset program revenue decreased $0.2 million compared with the same period of 2015.

Recycling segment revenues and retail segment revenues each include a portion of byproduct revenues.  For the three months ended April 2, 2016 , and April 4, 2015 , the recycling segment accounted for approximately 95.6% and 95.3% , respectively of the byproduct revenues.

Retail segment revenues accounted for 65.7% of total revenues in the three months ended April 2, 2016 , compared with 62.5% 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 April 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. In 2016, we have experienced significant gains in new energy efficiency program contracts, primarily in the eastern and mid-western United States, somewhat offset by declines in programs in Southern California in the second quarter. The effect of these contract gains in the first quarter of 2016 has been minimal as the program start dates typically are in the second or early part of the third quarter of 2016.


19

Our total operating loss of $(0.8) million for the three months ended April 2, 2016 , improved $1.2 million compared with operating loss of $2.0 million in the same period of 2015.  The change in segment operating income was attributed primarily to the following factors:

Retail Segment :
•
Operating income improved $0.7 million when compared with the same period of 2015, as we reduced some of our occupancy and other operating expenses $0.4 million and had a $0.3 million improvement in our gross profit.

Recycling Segment :
•
Operating loss was lower by $0.4 million compared with the same period of the prior year and is attributed primarily to expense reduction efforts and higher recycling processing fees offset by declines in byproduct revenues that resulted from the lack of carbon offset program revenue in the quarter and the decline in commodity prices in the quarter as compared with the first quarter of 2015. The recycling segment operating profit during the first quarter of 2016 included approximately $0.2 million in expenses related to the start up efforts for the new contracts and programs that resulted from business development activities 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 second quarter of 2016 and improvements in operating income for this segment based on the expected revenue growth and the recovery of scrap steel and other commodity prices so far in the second quarter of 2016.
Revenues .  Revenues for the three months ended April 2, 2016 , and April 4, 2015 , were as follows (dollars in millions):
Three Months Ended
April 2,
2016
April 4,
2015
% Change
Retail
$
16.6

$
17.1

(3.1
)%
Recycling
6.9

7.8

(11.3
)%
Byproduct
1.8

2.6

(30.8
)%
$
25.3

$
27.5

(8.1
)%
Retail Revenues .  Our retail revenues of $16.6 million for the three months ended April 2, 2016 , declined approximately $0.5 million when compared with the same period of 2015.  The majority of the decline was in the sale of out-of-carton merchandise. 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 $6.9 million for the three months ended April 2, 2016 , decreased $0.9 million , or 11.3% , from $7.8 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.  Appliance recycling revenues increased to $2.9 million for the three months ended April 2, 2016 , compared with $2.4 million in the same period of 2015, due primarily to an increase in recycling fees charged to customers.  Appliance replacement program revenues decreased 25.3% to $4.0 million in the three months ended April 2, 2016 , compared with $5.4 million in the same period of 2015, due primarily to lower volume of deliveries for several of our programs. Future revenues from energy efficiency programs, if any, are uncertain and may fluctuate significantly from period to period.
Byproduct Revenues .  Our byproduct revenues of $1.8 million for the three months ended April 2, 2016 , decreased $0.8 million compared with the same period of 2015.  AAP byproduct revenues of $1.3 million decreased $0.5 million compared with the same period of 2015, due primarily to $0.2 million lower carbon offset program revenues and $0.4 million decline in the revenues generated from sale of scrap steel and nonferrous metal byproducts. ARCA experienced a decrease in revenues from byproduct of $0.3 million, due primarily to a decline in the revenues generated from sale of scrap steel and nonferrous metal byproducts, in the first quarter of fiscal 2016 as compared with the same period of fiscal 2015.
Total Gross Profit .  Our gross profit of $6.2 million for the three months ended April 2, 2016 , increased $0.3 million or 5.0% compared with $5.9 million in the same period of 2015.  Gross profit as a percentage of total revenues increased to 24.4% for the

20

three months ended April 2, 2016 , compared with 21.3% 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.

Retail Segment Gross Profit . Retail gross profit increased by $0.3 million to $4.7 million compared with $4.4 million in the same period of 2015. The increase was primarily the result of sales mix and margin improvements on certain products. Gross profit as a percentage of related revenues increased to 28.1% for the three months ended April 2, 2016 , compared with 25.7% in the same period of 2015.

Recycling Segment Gross Profit . Recycling gross profit of $1.6 million for the three months ended April 2, 2016 increased $0.2 million compared with the same period of 2015. AAP and ARCA realized an increase of $0.4 million in recycling fees charged to customers offset by declines in gross profit as a result of lower selling prices of scrap metals recorded in the quarter ended April 2, 2016. Gross profit as a percentage of related revenues increased to 18.4% for the three months ended April 2, 2016 , compared with 13.9% in the same period of 2015.
Selling, General and Administrative Expenses .  Our selling, general and administrative (“SG&A”) expenses of $7.0 million for the three months ended April 2, 2016 , was $0.9 million less when compared with the same period of 2015.  Our SG&A expenses as a percentage of total revenues increased to 27.6% in the three months ended April 2, 2016 , compared with 28.6% in the same period of 2015.

Selling expenses of $4.0 million was $0.3 million less when compared with the same period of 2015. The decrease was due primarily to a decrease in retail advertising and occupancy costs.

General and administrative expenses decreased $0.6 million to $2.9 million for the three months ended April 2, 2016 , compared with $3.5 million in the same period of 2015. The decrease was due primarily to a $0.6 million decrease in center and corporate expenses related to professional fees and facilities expense.
Interest expense, net . Interest expense for the three months ended April 2, 2016 was comparable with the same period of 2015. Interest expense would have been higher by approximately $0.1 million but for a reduction in estimated interest in connection with an accrued liability.

Provision for (benefit from) Income Taxes .  We recorded a benefit for income taxes of $0.3 million for the three months ended April 2, 2016 , compared with a benefit of $0.5 million in the same period of 2015.
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 $358,000 for the three months ended April 2, 2016 , of which $179,000 represented the loss attributable to noncontrolling interest. AAP reported net loss of $570,000 for the three months ended April 4, 2015 , of which $270,000 represented the loss attributable to noncontrolling interest.

Liquidity and Capital Resources
Summary . Cash and cash equivalents as of April 2, 2016 , were $2.3 million compared with $2.0 million as of January 2, 2016 .  Working capital, the excess of current assets over current liabilities, decreased to $3.0 million as of April 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 decreased borrowings under our line of credit related to operating activities.



21

The following table summarizes our cash flows for the three months ended April 2, 2016 , and April 4, 2015 (in millions):
Three Months Ended
April 2,
2016
April 4,
2015
Total cash and cash equivalents provided by (used in):


Operating activities
$
2.9

$
1.1

Investing activities
(0.1
)
(0.1
)
Financing activities
(2.4
)
(0.8
)
Effect of exchange rates on cash and cash equivalents
—

(0.1
)
Increase in cash and cash equivalents
$
0.4

$
0.1

Operating Activities .  Our net cash provided by operating activities was $2.9 million for the three months ended April 2, 2016 , compared with net cash provided by operating activities of $1.1 million for the three months ended April 4, 2015 .  The higher amount of cash generated from operating activities was primarily the result of $1.3 million lower loss in 2016 as compared to 2015. In 2016, we also generated $3.5 million in cash from operations through the decrease in accounts receivable and inventory and increases in accounts payable and accrued expenses.
Investing Activities .  We used approximately $0.1 million of cash for investing activities for the three months ended April 2, 2016 , and April 4, 2015, primarily related to the purchase of equipment.
Financing Activities .  Our net cash used in financing activities was $2.4 million for the three months ended April 2, 2016 , compared with net cash used in financing activities of $0.8 million for the three months ended April 4, 2015 .  Net cash used in financing activities for the three months ended April 2, 2016 , was related primarily to the repayment of net borrowings under our line of credit and repayments of long-term debt obligations offset by $0.1 million in cash provided in AAP for loans provided by certain certain shareholders of AAP. Net cash used in financing activities for the three months ended April 4, 2015 , was also related primarily to net payments under our line of credit and the repayment of long-term debt obligations offset by $0.3 million in cash provided in AAP for loans provided by certain certain shareholders of AAP.
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 sixteen recycling centers, including AAP, in operation. Approximately $1.4 million of our cash at the end of the April 2, 2016 is held in Canadian banks and we expect that we will use approximately $0.6 million of this to settle certain accrued expenses in the second quarter of 2016.

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

22

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 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 April 2, 2016, we were 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 April 2, 2016 , the outstanding line of credit balance was $10.4 million with a weighted average interest rate of 4.81% , 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 April 2, 2016 , and January 2, 2016 , our available borrowing capacity under the Revolving Credit Agreement was $1.6 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 April 2, 2016, the weighted average interest rate was 5.21%. 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 April 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 April 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 second quarter of 2016.


23

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk and Impact of Inflation
Interest Rate Risk . We do not believe there is any significant risk related to interest rate fluctuations on our long-term fixed-rate debt.  There is interest rate risk on the line of credit, PNC Term Loan and Susquehanna Bank Term Loans, since our interest rate floats.  The outstanding balance on our floating rate loans as of April 2, 2016 , was approximately $14.9 million.  Based on average floating rate borrowings of $16.0 million, a hypothetical 100 basis point change in the applicable interest rate would have caused our interest expense to change for the three months ended April 2, 2016 , by approximately $40,000.

Foreign Currency Exchange Rate Risk. We currently generate revenues in Canada.  The reporting currency for our consolidated financial statements is U.S. dollars.  It is not possible to determine the exact impact of foreign currency exchange rate changes; however, the effect on reported revenue and net earnings can be estimated.  We estimate that the U.S. dollar against the Canadian dollar had an immaterial impact on revenues and net income for the three months ended April 2, 2016 .  We do not currently hedge foreign currency fluctuations and do not intend to do so for the foreseeable future.
We do not hold any derivative financial instruments nor do we hold any securities for trading or speculative purposes.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure.
Our management, including our Interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at April 2, 2016 . Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, at April 2, 2016 , our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting
During the first quarter of fiscal 2016 , covered by this Quarterly Report on Form 10-Q, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




24

PART II.        Other Information

Item 1.    Legal Proceedings
On March 6, 2015, a complaint was filed in United States District Court for the Central District of California by Jason Feola, individually and as a representative of a putative class consisting of purchasers of the Company’s common stock between March 15, 2012 and February 11, 2015, against Appliance Recycling Centers of America, Inc. and certain current and former officers of the Company.  Mr. Feola, pursuant to terms of his retainer agreement with The Rosen Law Firm, certified that he purchased 240 shares of the Company’s common stock for $984 in total consideration. On May 7, 2015, the Company and the individual defendants were served the complaint. In July 2015, the Company and the individual defendants received an amended complaint. The complaint alleges that misstatements and omissions occurred in press releases and filings by the Company with the Securities and Exchange Commission and that these misstatements or omissions constitute violations of Section 20 (a) and Section 10(b) of, and Rule 10b-5 under, the Securities Exchange Act of 1934.  In October 2015, the court held a hearing on the Company's motion to dismiss the complaint. On November 24, 2015, the United States District Court for the Central District of California entered an order granting the motion to dismiss the amended complaint. The Court’s order provided that the dismissal was without prejudice and that the plaintiffs could 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 January 2016, we filed a motion to dismiss the second amended complaint and expect a court hearing on the motion to dismiss to be held in May 2016. 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 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.

In 2007, we entered into an agreement with AMTIM Capital, Inc. (“AMTIM”) to act 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 agreement 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 against us, AMTIM claims a discrepancy of approximately $2.0 million in the calculation of fees due to AMTIM by us.  We commenced an action in the U.S. District Court for a determination of the parties’ rights under the agreement.  AMTIM started its own action in Ontario, Canada, against us for amounts it claims are due pursuant to the agreement.  We moved the Canadian court for a stay of that action pending the U.S. action.  AMTIM requested the U.S. District Court to stay the U.S. action pending resolution of the Canadian court action.  AMTIM’s motion was denied by the U.S. District Court and as a result, we obtained a default judgment against AMTIM approving the manner in which we have historically calculated fees due to AMTIM.  Shortly thereafter, the Canadian court dismissed our motion to stay the Canadian action.  We thereafter sought dismissal of the Canadian action for lack of jurisdiction of the Canadian courts.  That motion was denied by the Canadian court.  We appealed that denial and the Canadian appellate court upheld the denial indicating the Company’s position

25

may support a dismissal ruling on other grounds.  We moved for dismissal on such other grounds and the Canadian lower court denied that motion.  The Company, thereafter, appealed that decision to the Ontario appellate court.  The appellate court denied the Company’s appeal, allowing the case to go forward to trial.  The Company thereafter petitioned the Supreme Court of Canada for review of the lower appellate court's decision which petition was denied. The case will now proceed to trial in the Canadian Courts. Although the outcome 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 other ordinary course disputes that we do not believe to be material.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.    Defaults Upon Senior Securities
None

Item 5.    Other Information
On May 16, 2016, the Board of Directors of the Company approved the appointment of Tony Isaac, a director and interim Chief Executive Officer, to serve as the Company’s Chief Executive Officer.

Mr. Isaac, age 61, has served as a director of the Company since May 18, 2015 and as interim Chief Executive Officer since February 26, 2016. He has served as Financial Planning and Strategist/Economist of Live Ventures, Inc. (NASDAQ: LIVE), a company providing specialized online marketing solutions to small-to-medium sized local business that boost customer awareness and merchant visibility, since July 2012. He is the Chairman and Co-Founder of Isaac Organization, a privately held investment company. Mr. Isaac has invested in various companies, both private and public from 1980 to present. Mr. Isaac’s specialty is negotiation and problem-solving of complex real estate and business transactions. Mr. Isaac has served as a director of Live Ventures, Inc. since December 2011. Mr. Isaac graduated from Ottawa University in 1981, where he majored in Commerce and Business Administration and Economics.

The Company has agreed to pay Mr. Isaac a base salary at the rate of $550,000 per year, effective as of the date he was appointed interim Chief Executive Officer. In connection with his appointment as Chief Executive Officer, Mr. Isaac received a stock grant of 50,000 shares of common stock under the Company's 2011 Stock Compensation Plan, and will receive an inducement bonus in the aggregate amount of $550,000, payable in cash in equal installments on June 30, 2016 and October 31, 2016. The Company intends to enter into an employment agreement with Mr. Isaac having a term of three years and incorporating the terms described above and other terms and incentives that may be agreed upon by the Company and Mr. Isaac.

There are no transactions in which Mr. Isaac has an interest requiring disclosure under Item 404(a) of Regulation S-K.

26


Item 6.    Exhibits

Exhibit
Number
Description
31.1+
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†
Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†
Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**
The following materials from our Quarterly Report on Form 10-Q for the three-month period ended April 2, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Consolidated Statements of Cash Flows, (iv) the Notes to Consolidated Financial Statements, and (v) document and entity information.
+ Filed herewith.
† Furnished herewith.
**
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

27

SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized.
Appliance Recycling Centers of America, Inc.
(Registrant)
Date:
May 17, 2016
By:
/s/ Tony Isaac
Tony Isaac
Chief Executive Officer
(Principal Executive Officer)
Date:
May 17, 2016
By:
/s/ Jeffery P. Ostapeic
Jeffery P. Ostapeic
Chief Financial Officer
(Principal Financial and Accounting Officer)

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TABLE OF CONTENTS