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 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 the speed at which individual retail stores reach profitability, the volume of appliance sales and the strength of energy conservation recycling programs. 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 and the continued availability of our current line of credit. 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 December 31, 2011.

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 are in the business of selling new major household appliances through a chain of Company-owned stores under the name ApplianceSmart®. We also provide turnkey appliance recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. We operate two reportable segments:
retail and recycling. The retail segment is comprised of income generated through our ApplianceSmart stores, including a portion of our byproduct revenues from collected appliances. Our recycling segment includes all fees charged and costs incurred for 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. As of March 31, 2012, we operated 20 ApplianceSmart stores. Our 20 stores are located in convenient, high-traffic locations in Georgia, Minnesota, Ohio and Texas. In November 2011, we opened a new store in the St. Cloud, Minnesota, market. We plan to open our 21st store in Eden Prairie, Minnesota in the second quarter of 2012. As of March 31, 2012, we operated twelve processing and recycling centers, which are located in California, Colorado, Illinois, Kentucky, Minnesota, North Carolina, Ohio, Pennsylvania, Texas, Washington, Nova Scotia, Canada and Ontario, Canada. During the first quarter of 2012, we opened our eleventh and twelfth processing centers in Nova Scotia and Kentucky.

Our retail segment, operating under the name of ApplianceSmart, 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.

Revenues and earnings in our recycling segment are impacted by seasonal variances, with the both 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, some customers have shifted to marketing their appliance recycling programs year-round.

ARCA Advanced Processing, LLC (AAP) provides appliance recycling services for General Electric, acting through its GE Appliances business component. We believe the AAP model is the future of appliance recycling and expect to open similar centers throughout the United States. We cannot predict when these centers may open or if the appropriate volumes can be obtained to support the AAP model at future locations.

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.

Reporting Period. Operating results for the three months ended March 31, 2012 and April 2, 2011 are presented using 13-week periods. The results of operations for any interim period are not necessarily indicative of the results for the year.

Results of Operations



The following table sets forth our consolidated financial data as a percentage
of total revenues for the three months ended March 31, 2012 and April 2, 2011:



                                                          Three Months Ended
                                                      March 31,        April 2,
                                                         2012            2011
Revenues:
Retail                                                       67.1 %          64.2 %
Recycling                                                    17.9            19.2
Byproduct                                                    15.0            16.6
Total revenues                                              100.0           100.0
Cost of revenues                                             74.1            70.0
Gross profit                                                 25.9            30.0
Selling, general and administrative expenses                 25.6            24.9
Operating income                                              0.3             5.1

Other income (expense):
Interest expense, net                                        (0.9 )          (1.1 )
Other income (expense), net                                   0.1            (0.1 )
Income (loss) before income taxes and
noncontrolling interest                                      (0.5 )           3.9
Provision for (benefit of) income taxes                      (0.3 )           1.5
Net income (loss)                                            (0.2 )           2.4
Net (income) loss attributable to noncontrolling
interest                                                      0.0            (0.2 )
Net income (loss) attributable to controlling
interest                                                     (0.2 )%          2.2 %

The following table sets forth the key results of operations by segment for the three months ended March 31, 2012 and April 2, 2011 (dollars in millions):

                                      Three Months Ended
                               March 31,     April 2,
                                 2012          2011      % Change
Revenues:
Retail                        $      20.1   $     19.6        2.3 %
Recycling                             9.3         10.3       (9.2 )%
Total revenues                $      29.4   $     29.9       (1.7 )%

Operating income (loss):
Retail                        $       0.1   $      0.2      (46.6 )%
Recycling                            (0.0 )        1.4     (102.6 )%
Unallocated corporate costs           0.0         (0.1 )    119.5 %
Total operating income        $       0.1   $      1.5      (94.5 )%

Our total revenues of $29.4 million for the first quarter or 2012 decreased $0.5 million or 1.7% from $29.9 million in the first quarter of 2011. Retail segment revenues increased $0.5 million or 2.3% to $20.1 million compared to $19.6 million in the first quarter of 2012. The increase was primarily related to revenues generated by our St. Cloud, Minnesota store that was not operating in the first quarter of 2011. Recycling segment revenues decreased $1.0 million or 9.2% to $9.3 million compared to $10.3 million in the first quarter of 2011. The decrease in recycling segment revenues is attributed primarily to two factors: (1) lower carbon offset revenues and (2) a 25% volume decrease in our utility programs.

Our total operating income of $0.1 million for the first quarter or 2012 decreased $1.4 million or 94.5% from $1.5 million in the first quarter of 2011. The decrease is attributed primarily to the recycling segment. During the first quarter of 2012 our recycling segment included the following items that were at variance to the first quarter of 2011:

1. A 25% decrease in recycling volumes,

2. Start-up costs related to opening new recycling centers in Nova Scotia, Canada and Louisville, Kentucky,

3. Additional call center expenses,

4. Increased transportation costs per unit, and

5. Margin compression in our utility replacement programs.

Revenues. Revenues for the three months ended March 31, 2012 and April 2, 2011 were as follows (dollars in millions):

Three Months Ended

             March 31,     April 2,
               2012          2011      % Change
Retail      $      19.7   $     19.2        2.8 %
Recycling           5.3          5.7       (8.2 )%
Byproduct           4.4          5.0      (11.2 )%
            $      29.4   $     29.9       (1.7 )%

Retail Revenues. Our retail revenues of $19.7 million for the first quarter of 2012 increased $0.5 million or 2.8% from $19.2 million in the first quarter of 2011. The increase in retail revenues was due primarily to revenues generated by our new store in St. Cloud, Minnesota. Comparable store revenues from ApplianceSmart stores operating during the first quarters of 2012 and 2011 decreased 1.1%, which was better than the retail appliance industry decline of 8.7%.

Recycling Revenues. Our recycling revenues of $5.3 million for the first quarter of 2012 decreased $0.4 million or 8.2% from $5.7 million in the first quarter of 2011. 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 decreased 17.6% to $3.0 million in the first quarter of 2012 compared to $3.6 million in the first quarter of 2011, due primarily to lower

volumes in the our California, Canada and Illinois utility programs. The number of units driving our appliance recycling revenues was down approximately 25% in the first quarter of 2012 compared to the same quarter of the prior year. The decline is the result of our utility customers shifting advertising dollars to the spring and summer months to promote the recycling programs. Replacement program revenues increased 8.1% to $2.3 million in the first quarter of 2012 compared to $2.1 million in the first quarter of 2011, primarily as the result of generating strong volumes from a Washington utility customer's replacement program that was not operating in the first quarter of 2011.

Byproduct Revenues. Our byproduct revenues of $4.4 million for the first quarter of 2012 decreased $0.6 million or 11.2% from $5.0 million in the first quarter of 2011. The decrease in byproduct revenues was primarily the result of lower carbon offset revenues and lower recycling volumes. Byproduct revenues in the first quarter of 2011 included our first transaction related to the sale of carbon offsets, which resulted in $0.4 million of byproduct revenue. We expect to continue to generate carbon offset revenues although the frequency of these transactions will vary based on volume levels and market conditions. Byproduct revenues also include all of the revenues generated by AAP. Revenues from AAP of $2.7 million in the first quarter of 2012 were flat compared to the first quarter of 2011.

Gross Profit. Our gross profit of $7.6 million in the first quarter of 2012 decreased $1.4 million or 15.3% compared to $9.0 million in the first quarter of 2011. Gross profit as a percentage of total revenues decreased to 25.9% for the first quarter of 2012 compared to 30.0% in the first quarter of 2011. The decline in overall gross profit percentage was primarily the result of lower utility program margins. Gross profit percentage for the recycling segment decreased to 23.4% for the first quarter of 2012 compared to 33.1% for the first quarter of 2011, primarily related to the following three factors: (1) a lower level of carbon offset revenues resulted in a 2.9 basis point decrease in the gross profit percentage, (2) increased transportation costs per unit resulted in a 2.5 basis point decrease in the gross profit percentage and (3) the remaining decrease was primarily attributed to generating lower profit margins in our replacement programs due to a combination of price compression and cost increases. Gross profit percentage for the retail segment was 27.0% in the first quarter of 2012 compared to 28.4% in the first quarter of 2011, the decrease was due primarily to a sales shift in our product mix and to a lesser extent cost increases from manufacturers. We are selling a higher level of close-out and factory overrun appliances which typically have a smaller profit margin than special-buy appliances.

Recycling gross profit percentages are typically higher than retail gross profit percentages. 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 manufacturers who supply product to us.

3. The volume of appliances we receive through our recycling contracts.

4. The volume and price of byproduct materials.

5. The volume and price of carbon offset sales created by the destruction of ozone-depleting refrigerants.

Selling, General and Administrative Expenses. Our selling, general and administrative ("SG&A") expenses of $7.5 million for the first quarter of 2012 were flat compared the same period of the prior year. Our SG&A expenses as a percentage of total revenues increased to 25.6% in the first quarter of 2012 compared to 24.9% in the first quarter of 2011. Selling expenses decreased $0.2 million to $4.7 million or 16.1% of total revenues in the first quarter of 2012 compared to $4.9 million or 16.1% of total revenues for the first quarter of 2011. The decrease in selling expenses was due primarily to a reduction in advertising expense of $0.3 million and partially offset by a $0.1 million increase in retail store expenses as a result of our new store in St. Cloud, Minnesota. General and administrative expenses for the first quarter of 2012 increased $0.2 million to $2.8 million compared to general and administrative expenses of $2.6 million for the first quarter of 2011. The increase was related primarily recycling segment general and administrative expenses. We incurred start-up costs related to opening new recycling centers in Nova Scotia, Canada and Louisville, Kentucky during the first quarter of 2012. We expect to begin receiving recycling volumes during the second or third quarter. Also, we incurred additional call center expenses related to implementing new call center technologies and programs. We expect to begin realizing annualized costs savings of $40,000 to $80,000 starting in the second or third quarter of 2012. The increase in recycling segment general and administrative expenses was partially offset by a $0.1 million decrease in corporate expenses compared to the first quarter of 2011. As a

percentage of total revenues, general and administrative expenses increased to 9.5% for the first quarter of 2012 compared to 8.8% of total revenues for the first quarter of 2011.

Interest Expense. Our interest expense decreased to $255,000 for the first quarter of 2012 compared to $319,000 for the first quarter of 2011. During the first quarter of 2011, we paid one-time interest charges of $42,000 related to the repayment of debt that was not repeated in the first quarter of 2012.

Provision for Income Taxes. We recorded a $0.1 million benefit from income taxes in the first quarter of 2012 compared to a provision for income taxes of $0.4 million in the first quarter of 2011. The decrease in income tax expense was the result of pre-tax losses in the first quarter of 2012 compared to pre-tax income in the first quarter of 2011.

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 a net loss of $22,000 for the first quarter of 2012, of which $11,000 represented the loss attributable to noncontrolling interest. AAP reported a net income of $126,000 for the first quarter of 2011, of which $63,000 represented the income attributable to noncontrolling interest.

Liquidity and Capital Resources

Summary. Cash and cash equivalents as of March 31, 2012 were $4.0 million compared to $4.4 million as of December 31, 2011. Working capital, the excess of current assets over current liabilities, decreased to $11.2 million as of March 31, 2012 compared to $11.4 million as of December 31, 2011. The slight decrease relates to the mix of current assets as compared to current liabilities.

The following table summarizes our cash flows for the three months ended March 31, 2012 and April 2, 2011 (in millions):

                                                            Three months Ended
                                                          March 31,     April 2,
                                                            2012          2011
Total cash and cash equivalents provided by (used in):
Operating activities                                     $       1.8    $     2.2
Investing activities                                            (0.4 )       (0.6 )
Financing activities                                            (1.9 )       (0.6 )
Effect of exchange rates on cash and cash equivalents            0.1          0.1
Increase in cash and cash equivalents                    $      (0.4 )  $     1.1

Operating Activities. Our net cash provided by operating activities was $1.8 million for the quarter ended March 31, 2012 compared to $2.2 million for the quarter ended April 2, 2011. The decrease in net cash provided by operating activities for the quarter ended March 31, 2012 was related primarily to our decrease in income attributable to controlling interest.

Investing Activities. Our net cash used in investing activities was $0.4 million for the quarter ended March 31, 2012 compared to $0.6 million for the quarter ended April 2, 2011. Net cash used in investing activities for the quarter ended March 31, 2012 was related entirely to capital expenditures. The net cash used in investing activities for the quarter ended April 2, 2011 was primarily due to capital expenditures to complete the URT installation at AAP, which was partially offset by the release of a $0.4 million deposit required by our credit card processor in 2009.

Financing Activities. Our net cash used in financing activities was $1.9 million for the quarter ended March 31, 2012 compared to $0.6 million for the quarter ended April 2, 2011. Net cash used in financing activities for the quarter ended March 31, 2012 was related primarily to repayment of borrowings under our line of credit and long-term debt obligations. Net cash used in financing activities for the quarter ended April 2, 2011 was related primarily to payment of $0.6 million in debt issuance costs. For the quarter ended April 2, 2011 we received proceeds of $9.4 million from the issuance of debt and repaid $9.4 million on our other debt obligations and line of credit.

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. We believe, based on the anticipated sales per retail store, the anticipated revenues from our recycling contracts

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. Our total capital requirements for the next twelve months will depend upon, among other things as discussed below, the number and size of retail stores operating during the period, the recycling volumes generated from recycling contracts during the period and our needs related to AAP. Currently, we have 20 retail stores and 12 recycling centers, including AAP, in operation. 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. 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 credit agreement.

Outstanding Indebtedness. On January 24, 2011, we entered into a Revolving Credit, Term Loan and Security Agreement ("Revolving Credit Agreement") with PNC Bank, National Association ("PNC") that provides us with a $15.0 million revolving line of credit and a $2.55 million Term Loan. The Term Loan is described later in this section. The Revolving Credit Agreement has a stated maturity date of January 24, 2014, if not renewed. 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 interest rate on the revolving line of credit is PNC Base Rate plus 1.75%, or 1-, 2- or 3-month PNC LIBOR Rate plus 2.75%. 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 ˝ of 1%, and (iii) the one month LIBOR rate plus 100 basis points (1%). As of March 31, 2012, the outstanding balance under the Revolving Credit Agreement was $9.0 million with a weighted average interest rate of 3.32%, which included both PNC LIBOR Rate and PNC Base Rate loans. As of December 31, 2011, the outstanding balance under the Revolving Credit Agreement was $10.7 million with a weighted average interest rate of 3.72%, which included both PNC LIBOR Rate and PNC Base Rate loans. 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 $15.0 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 March 31, 2012 and December 31, 2011, our available borrowing capacity under the Revolving Credit Agreement was $5.2 million and $3.5 million, respectively. The Revolving Credit Agreement requires, starting with the fiscal quarter ending April 2, 2011 and continuing at the end of each quarter thereafter, that we meet a minimum fixed charge coverage ratio of 1.10 to 1.00, measured on a trailing twelve-month basis. The fixed charge coverage ratio for the quarter ended March 31, 2012 was 9.4 to 1.00. The fixed charge coverage ratio for the fiscal year ended December 31, 2011 was 10.10 to 1.00. 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. As of March 31, 2012 and December 31, 2011, we were in compliance with all the covenants of the Revolving Credit Agreement.

On January 24, 2011, we entered into a $2,550 term loan with PNC Bank to refinance the existing mortgage on our California facility. The term loan is payable as follows, subject to acceleration upon the occurrence of an event of default or termination of the Revolving Credit Agreement: 119 consecutive monthly principal payments of $21 plus interest commencing on February 1, 2011 and continuing on the first day of each month thereafter followed by a 120th payment of all unpaid principal, interest and fees on February 1, 2021. The term loan is collateralized with our California facility located in Compton, California. The term loan bears interest at PNC Base Rate plus 2.25%, or 1-, 2- or 3-month PNC LIBOR Rate plus 3.25%. As of March 31, 2012 and December 31, 2011, the interest rate was 5.50% for both periods.

On March 10, 2011, ARCA Advanced Processing, LLC 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 Loan matures in ten years and bears an interest rate of Prime plus 2.75%. As of March 31, 2012 and December 31, 2011, the interest rate was 6.00% for both periods. Borrowings under the Term Loans are secured by substantially all of the assets of AAP along with liens on the . . .