UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended
December 31,OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission File Number 0-20979
INDUSTRIAL SERVICES OF AMERICA, INC.
_______________________________________________________________________________________________________
(Exact Name of Registrant as specified in its Charter)
Florida | 59-0712746 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
7100 Grade Lane, Louisville, Kentucky | 40213 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code
(502) 368-1661Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.0033 par value NASDAQ Capital Market
(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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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. Yes ý☒ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one): | Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of the voting and non-voting common equity held by non-affiliates based on the closing price per share of $3.93$1.74 for shares of the registrant’s common stock as reported by the Nasdaq Capital Market as of the last business day of the registrant’s most recently completed second fiscal quarter was $24,459,868.$8,890,553. Solely for the purposes of this calculation, shares held by directors, executive officers and 10% owners of the registrant have been excluded. Such exclusion should not be deemed a determination or an admission by the registrant that such individuals are, in fact, affiliates of the registrant.
Number of shares of Common Stock, $0.0033 par value, outstanding as of the close of business on March 23, 2016: 8,018,932.
____________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
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Table of Contents | Page | |
| PART I | ||
| Item 1. Business | 4 | |
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| 15 | ||
| 16 | ||
| Mine Safety Disclosures | 16 | |
| 17 | ||
| Market for ISA's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 17 | |
| Selected Financial Data | 18 | |
| Management's Discussion and Analysis of Financial Condition and Results of Operations | 19 | |
| Quantitative and Qualitative Disclosures About Market Risk | 27 | |
| Consolidated Financial Statements and Supplementary Data | 27 | |
| Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 27 | |
| Controls and Procedures | 28 | |
| Other Information | 29 | |
| 30 | ||
| Directors, Executive Officers and Corporate Governance | 30 | |
| Executive Compensation | 33 | |
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 39 | |
| Certain Relationships and Related Transactions, and Director Independence | 43 | |
| Principal Accountant Fees and Services | 45 | |
| 46 | ||
| Exhibits and Consolidated Financial Statement Schedules | 46 | |
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Business. |
General
Industrial Services of America, Inc. (herein “ISA,” the “Company,” “we,” “us,” “our,” or other similar terms) is a Louisville, Kentucky-based company that buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys dismantles and sellsused autos in order to sell used auto parts. Prior to December 4, 2015, we were also a provider of waste services through our Waste Services Segment. Our only remaining segment isThrough our Recycling Segment. The Recycling Segment, collects, purchases, processeswe purchase, process and sellssell ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries and refineries. We purchase ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, iron, aluminum, copper, stainless steel and other metals as well as from scrap dealers and retail customers who deliver these materials directly to our facilities. We process scrap metal through our sorting, cutting, baling, and until May 2015, our shredding operations. Our non-ferrous scrap recycling operations consist primarily of collecting, sorting and processing various grades of copper, aluminum, stainless steel and brass. Our used automobile yard primarily purchases automobiles so that retail customers can locate and remove used parts for purchase.
Before December 4, 2015, we were also a provider of waste services through our Waste Services Segment. On December 4, 2015, the Company sold substantially all assets of its Waste Services Segment. The Waste Services Segment provided waste management services including contract negotiations with service providers, centralized billing, invoice auditing and centralized dispatching. This segment also rented, leased, sold and serviced waste handling and recycling equipment, such as trash compactors and balers, to end-use customers. The Waste Services Segment has been classified as discontinued operations in this Form 10-K in accordance with the Financial Accounting Standards Board Accounting Standards Codification 205-20-55. Results of discontinued operations are excluded from the consolidated financial information for all periods presented, unless otherwise noted. See Note 15 - Discontinued Operations in the accompanying Notes to Consolidated Financial Statements.
Our core business is now focused on the metal recycling industry. We intend to achieve steady growth at an acceptable profit, adding to our net worth and providing positive returns for our stockholders. We intend to increase efficiencies and productivity in our core business while remaining alert for possible acquisitions, strategic partnerships, mergers and joint-ventures that would improve our results of operations. On March 2,During 2016, we announced that the Company has formed a special committee of independent board members to participate in the evaluation ofevaluate various growth and strategic options.
The Company also announced on October 4, 2016 the Company and Algar mutually agreed to terminate the Management Agreement between us, pursuant to the Agreement to Terminate Management Services among the Company, Algar, and Sean Garber dated as of September 30, 2016. Effective September 30, 2016, Mr. Garber resigned from all positions with the Company, including as President. Also, on September 30, 2016, the company’s Chief Financial Officer was appointed to serve in the additional role as President.
Additional financial information about our segments can be found in Part II, Item 8, Notes to Consolidated Financial Statements and related notes included elsewhere in this Form 10-K.
Available Information
We make available, free of charge, through our website www.isa-inc.com, our annual reports on Form 10-K and quarterly reports on Form 10-Q and amendments to those reports as soon as reasonably practicable after we have electronically filed with the Securities and Exchange Commission. We also make available on our website our Board of Directors, committee charters, our Business Ethics Policy and Code of Conduct and our Code of Ethics for the CEO, CFO and senior financial officers. Please note that our Internet address is included in this annual report on Form 10-K as an inactive textual reference only. Information contained on our website www.isa-inc.com is not incorporated by reference into this annual report on Form 10-K and should not be considered a part of this report.
Our Response to 2015 and 2016 Commodity Markets and Liquidity Conditions
During 2015, ourthe Company's average selling price per unit of quantity decreased by 49.4%49.4% and 24.9%24.9% for ferrous and nonferrous material, respectively, compared to 2014. These decreases also led to significantly lower volumes of material available to the Company to buy and sell. Due to these deteriorating metalmetals commodity market conditions, during 2015, ISA took significant steps to improve liquidity and pay down debt.debt during 2015 and 2016. Despite modest improvements in metal commodity markets during 2016, low prices combined with low volumes present a difficult ongoing metals recycling market. These steps are described below.
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On February 27, 2015, the Company closed on the sale of its Seymour, Indiana property. During 2014, ISA made the decision to move its Seymour, Indiana facility from a company-owned property to a leased property. In conjunction with this decision, the Company signed an agreement to sell its Seymour facility in 2014. This property was classified as property available for sale on the December 31, 2014 consolidated balance sheet in the amount of $398.0 thousand and was held within the Recycling
On April 30, 2015, LK Property Investments, LLC (LK Property)("LK Property"), an entity principally owned by Daniel M. Rifkin, CEO of MetalX LLC ("MetalX"), (a related party), a scrap metal recycling company headquartered in Waterloo, Indiana, and the principal owner of Recycling Capital Partners, LLC ("RCP") (a related party) purchased a 4.4 acre parcel of real estate located at 6709 Grade Lane, Louisville, KY from ISA Real Estate LLC.,LLC, a wholly-owned subsidiary of the Company for a purchase price of $1.0 million. The Company realized a loss of $102.0 thousand from this sale. Also on April 30, 2015, the Company entered into a lease agreement with LK Property for a portion of the 4.4 acre parcel. See Note 4 - Lease Commitments in the accompanying Notes to Consolidated Financial Statements for further lease details. Proceeds were used to reduce debt and improve liquidity.
On May 13, 2015, the Company announced the warm idle of the Company’s auto shredder. This action was in response to market conditions, primarily related to ferrous price volatility and lower ferrous volumes. Management will continue to monitor and analyze market conditions and to review the Company’s long-term options for its shredder and related downstream processing operation. The costs of idling were recognized in the 2015 financial statements. As a result of the continued operating losses from the shredder operations, management reviewed the carrying cost of the shredder, including the downstream processing system. The Company recognized an asset impairment charge of approximately $636.6 thousand related to the shredder’s downstream processing system. This charge iswas recorded in 2015 as an impairment charge on property and equipment within the cost of goods section in the accompanying consolidated statement of operations. As of the date of this report, the shredder remains idled. The Company continues to depreciate the assets associated with the shredder. Working capital, which would otherwise have been utilized in operating the shredder, was used to reduce debt and improve liquidity.
In May 18, 2015, ISA Real Estate, LLC agreed to sellsold to SG&D Ventures, LLC ("SG&D"), an entity owned by shareholders of Algar, Inc. ("Algar"), including Sean Garber, at that time the Company’s Vice Chairman of the Board and President, and the President of Algar, an approximately 1-acre parcel of non-essential real estate, located at 7017 Grade Lane, Louisville, KY, for an aggregate purchase price equal to independent third-party appraisal amount of $350.0 thousand. The purchase consideration consisted of $300.0 thousand in cash from the purchaser and a credit of $50.0 thousand against bonus compensation previously accrued but not paid to Algar as described in Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements. This transaction closed on May 19, 2015. The gain on sale of this asset was $1.1 thousand.thousand and was recognized during the second quarter of 2015. Proceeds were used to reduce debt and improve liquidity.
On November 6, 2015, the Company entered into a Forbearance Agreement and Third Amendment to Credit Agreement (the “Forbearance Agreement”) by and among the Company, certain of the Company’s subsidiaries, and Wells Fargo Bank, National Association ("Wells Fargo"). The Forbearance Agreement amended the Credit Agreement to reduce the Maximum Revolver Amount from $15$15.0 million to $5$5.0 million. The Forbearance Agreement also amended the Credit Agreement Maturity Date to March 15, 2016 from June 13, 2019. The Forbearance Agreement increased the interest rate on the outstanding indebtedness by approximately 100 basis points.
Pursuant to the terms of the Forbearance Agreement, Wells Fargo agreed that it would forbear, until the Forbearance Termination Date (as defined below), from exercising certain rights and remedies with respect to or arising out of the existence and continuation of certain stipulated events of default under the Credit Agreement between the loan parties and Wells Fargo (as amended by the First Amendment to Credit Agreement dated January 15, 2015, the Second Amendment to Credit Agreement dated January 22, 2015, and the Forbearance Agreement, the “Credit Agreement”).
Under the Forbearance Agreement, the Forbearance Termination Date was the earlier to occur of (i) Wells Fargo’s election following the failure of the Loan Parties to satisfy any of the Forbearance Conditions, and (ii) March 15, 2016.
On December 4, 2015, the Company and WESSCO, LLC, a wholly owned subsidiary of ISA ("WESSCO"), entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Compactor Rentals of America, LLC ("Compactor Rentals") pursuant to which the Company sold its “Waste Services Segment,” consisting of substantially all of the assets used in (i) the Company’s commercial, retail and industrial waste and recycling management services business which the Company operated under the name “Computerized Waste Systems” or “CWS,” and (ii) the Company’s equipment sales, rental and maintenance business for the commercial and industrial waste and recycling industry which the Company operated under the name “Waste Equipment Sales and Service Company."Company".
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The Company received cash consideration at closing of $7.5 million, less $150,000$150.0 thousand retained by Compactor Rentals (the "Holdback"). In connection with the closing of the transaction, the Company entered into a transition services agreement with Compactor Rentals, pursuant to which the Company will be releasedprovide certain services to Compactor Rentals until March 31, 2017.
On April 1, 2016, the Company entered Amendment No. 1 to the Asset Purchase Agreement which extended the deadline for the Company orto provide written notice if the Company objected to Compactor Rental’s calculation of the Holdback. On April 15, 2016, the Company entered into Amendment No. 2 to the Asset Purchase Agreement whereby the Company and Compactor Rentals agreed that the Holdback would be retained by Compactor Rentals in connection withbased on a mutually-agreed upon calculation of working capital. Amendment No. 2 also detailed the parties’ agreement of the following: no indemnification claims would be made by Compactor Rentals arising out of certain matters; certain Compactor Rentals’ representatives did not have knowledge of any working capital adjustment. additional indemnification claims as of April 15, 2016; and the transition services agreement between the parties would be extended at no cost to Compactor Rentals through March 31, 2017.
Compactor Rentals assumed certain liabilities relating to the Waste Services Segment, including but not limited to, current liabilities, warranty liabilities, and post-closing liabilities incurred in connection with transferred contracts.
The sale included substantially all of the assets of the Waste Services Segment including, but not limited to, current assets, accounts receivable, tangible personal property, certain leases, inventory, intellectual property, rights under transferred contracts, rights of action and all associated goodwill and other intangible assets associated with the transferred assets.
The Asset Purchase Agreement contains a restrictive covenant under which the Company is prohibited from competing with the Waste Services Segment for five years following the closing.
The Company used the proceeds from the transaction to pay transaction expenses, to repay in full the Company’s outstanding indebtedness with Bank of Kentucky, Inc., ("KY Bank"), and to repay in full ISA’s term loan from Wells Fargo. The Company also used the proceeds to pay all outstanding amounts on ISA’s $5.0$5.0 million revolving line of credit with Wells Fargo which remained available following the closing. As of December 31, 2015, the revolving line of credit had an amount outstanding of approximately $19.7 thousand.
On February 29, 2016, the Company entered into a Loan Agreement (the "2016 Loan") with MidCap Business Credit, LLC ("MidCap").MidCap. The 2016 Loan is secured by substantially all of the assets of the Company. Proceeds from this loan were used to pay transaction expenses and to pay off and close the remaining balance on the Wells Fargo revolving line of credit.credit.
On March 31, 2017, the Company and each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan with MidCap ("First Amendment"). The First Amendment increased this line of credit from $6.0 million to $8.0 million, subject to the satisfaction of certain borrowing base restrictions and extended the maturity date to February 28, 2020.
Following the MidCap transaction and the First Amendment, the Company believes its liquidity is sufficient to meet projected needs for at least one year. See Note 3 - Long Term Debt and Notes Payable To Bank in the accompanying Notes to Consolidated Financial Statements for further details. Following the MidCap transaction, the Company believes its liquidity is sufficient to meet projected needs for at least one year.
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ISA Recycling Operating Division
Our Recycling Segment sells processed ferrous and non-ferrous scrap material, including stainless steel, to end-users such as steel mini-mills, integrated steel makers and foundries and refineries. We purchase ferrous and non-ferrous scrap material primarily from industrial and commercial generators of steel, iron, aluminum, copper, stainless steel and other metals as well as from other scrap dealers who deliver these materials directly to our facilities. We process these materials by sorting, cutting and/or baling. Prior to May 2015, we also shredded material.
We also operate the ISA Pick.Pull.Save used automobile parts yard, which is considered a product line within the Recycling Segment. We purchase automobiles for the yard through auctions, automobile purchase programs with various suppliers and general scrap purchases. Retail customers locate and remove used parts for purchase from automobiles within the yard. Fuel, Freon, tires and certain core automobile parts are also sold to various resellers for additional revenue. All automobiles are sold as scrap metal after a specified time period in the yard.
Ferrous Operations
Ferrous Scrap Purchasing -
We purchase ferrous scrap from two primary sources: (i) industrial and commercial generators of steel and iron; and (ii) scrap dealers, peddlers, and other generators and collectors who sell us steel and iron scrap, known as obsolete scrap. Market demand and the composition, quality, size and weight of the materials are the primary factors that determine prices paid to these material providers.Ferrous Scrap Processing
- We prepare ferrous scrap material for resale through a variety of methods including sorting, cutting, and baling. Prior to May 2015, we also shredded material. We produce a number of differently sized, shaped and graded products depending upon customer specifications and market demand.| 7 |
• | Sorting - After purchasing ferrous scrap material, we inspect it to determine how we should process it to maximize profitability. In some instances, we may sort scrap material and sell it without further processing. We separate scrap material for further processing according to its size, composition and grade by using conveyor systems, front-end loaders, crane-mounted electromagnets and claw-like grapples. |
• | Cutting - Pieces of over-sized ferrous scrap material, such as obsolete steel girders and used pipe, which are too large for other processing, are cut with hand torches. |
• | Baling - We process light-gauge ferrous materials such as clips, sheet iron and by-products from industrial and commercial processes, such as stampings, clippings and excess trimmings, by baling these materials into large, uniform blocks. We use cranes and conveyors to feed the material into a hydraulic press, which compresses the material into uniform blocks. |
• | Shredding - In May 2015, we warm idled our shredder. Prior to this date, we shredded large pieces of ferrous scrap material, such as automobiles and major appliances, in our shredder by hammer mill action into pieces of a workable size that pass through magnetic separators to separate metal from synthetic foam, fabric, rubber, stone, dirt, etc. The metal we recovered from the shredding process was sold directly to customers or reused in some other metal blend. The residue by-product is usually referred to as “automobile shredder residue” (ASR) or “shredder fluff”. We disposed of the non-metal components, which can reduce the volume of the scrap as much as 25.0%, in a landfill. |
Ferrous Scrap Sales
- We sell processed ferrous scrap material to end-users such as steel mini-mills, integrated steel makers and foundries, and brokers who aggregate materials for other large users. Most customers purchase processed ferrous scrap material through negotiated spot sales contracts, which establish the quantity purchased for the month and the pricing. The price we charge for ferrous scrap materials depends upon market supply and demand, as well as quality and grade of the scrap material. We deliver scrap ourselves or use third party carriers via truck, rail car, and/or barge. Some customers choose to send their own delivery trucks. These trucks are weighed and loaded at one of our sites based on the sales order.Auto Parts Operations
We operate a single self-service retail parts location. We generate revenue from the sale of parts, cores and scrap. Our location consists of an indoor retail facility combined with a fenced outdoor storage area for autos. We operate our self-service auto parts business under the name of ISA Pick.Pull.Save.
Non-Ferrous Operations
Non-Ferrous Scrap Purchasing
- We purchase non-ferrous scrap from two primary sources: (i) industrial and commercial non-ferrous scrap material providers who generate or sell waste aluminum, copper, stainless steel, other nickel-bearing metals, brass and other metals; and (ii) peddlers, scrap dealers, generators and collectors who deliver directly to our facilities material that they collect from a variety of sources. We also collect non-ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing retrieval boxes at these sources. We subsequently transport the boxes to our processing facilities.Non-Ferrous Scrap Processing
- We prepare non-ferrous scrap metals, principally aluminum, copper, brass and stainless steel to sell by sorting, cutting, and baling. Prior to May 2015, we also shredded material.• | Sorting - Our sorting operations separate and identify non-ferrous scrap by using front-end loaders, grinders, hand torches and spectrometers. Our ability to identify metallurgical composition maximizes margins and profitability. We sort non-ferrous scrap material for further processing according to type, grade, size and chemical composition. Throughout the sorting process, we determine whether the material requires further processing before we sell it. |
• | Cutting - Pieces of over-sized non-ferrous scrap material, which are too large for other processing methods, are cut with hand torches. |
• | Baling - We process non-ferrous metals such as aluminum cans, sheet and siding by baling these materials into large uniform blocks. We use front-end loaders and conveyors to feed the material into a hydraulic press, which compresses the material into uniform blocks. |
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• | Shredding - In May 2015, we warm idled our shredder. Prior to this date, we shredded large pieces of nonferrous scrap material, such as steel drums, copper and aluminum cable, tubing, sheet metal, extrusions, and baled aluminum, in our shredder by hammer mill action into pieces of a workable size that pass through magnetic separators to separate metal from synthetic foam, fabric, rubber, stone, dirt, etc. The metal we recovered from the shredding process was sold directly to customers or reused in some other metal blend. We disposed of the non-metal components, which can reduce the volume of the scrap as much as 25.0%, in a landfill. |
Non-Ferrous Scrap Sales
- We sell processed non-ferrous scrap material to end-users such as foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, steel mini-mills, integrated steel makers, steel foundries and refineries, and brass and bronze ingot manufacturers. Prices for the majority of non-ferrous scrap materials change based upon the daily publication of spot and futures prices on COMEX or the London Metals Exchange. We deliver scrap ourselves or use third party carriers via truck, rail car, and/or barge. Some customers choose to send their own delivery trucks. These trucks are weighed and loaded at one of our sites based on the sales order.Waste Services Operations (Discontinued Operations)
On December 4, 2015, we sold substantially all assets of our Waste Services Segment. Our waste services operations were in the business of commercial, retail and industrial waste and recycling management services (operating under the name “Computerized Waste Systems” or “CWS”) and commercial and industrial waste and recycling handling equipment sales, rental and maintenance (operating under the name “Waste Equipment Sales and Service Company” or “WESSCO”). CWS offered a “total package” concept to commercial, retail and industrial customers for their waste and recycling management needs. Combining waste reduction and diversion, and waste equipment technology, CWS created waste and recycling programs tailored to each customer’s needs. The services we offered included locating and contracting with a hauling company and recycler at a reasonable cost for each participating location. CWS did not own waste-transporting trucks or landfills. We designed and developed proprietary computer software that provided our personnel with relevant information on each customer’s locations, as well as pertinent information on service providers, disposal rates, costs of equipment, including installation and shipping, disposal rates and recycling prices.
Company Background
ISA was incorporated in October 1953 in Florida under the name Alson Manufacturing, Inc.
In 1984, ISA moved into waste handling and disposal equipment sales.
In 1985, we began offering solid waste management consultations.
We began focusing on ferrous and non-ferrous scrap metal recycling in 1997 and expanded into the stainless steel and high-temperature alloys recycling business in 2009.
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In 2012, we opened the ISA Pick.Pull.Save used automobile yard.
In 2013, we discontinued blending stainless steel, which is a subset of the stainless steel market.
In 2015, as previously discussed, we exited the waste services business and idled our shredder.
As of 2016, our primary focus is ferrous and non-ferrous metal recycling, as well as selling used auto parts.
Competition
The metal recycling business is highly competitive and is subject to significant changes in economic and market conditions. In late 2014 and early 2015, the metal commodity market saw increased volatility. Market prices traded down significantly lower, particularly during 2015. The metal commodity market experienced continued volatility during 2016. The 2016 metal commodity market finished strong and provided a positive outlook for 2017. Given the strengthening dollar, exports were reduced and steel mills were able to buy large quantities of low-cost scrap. Pricing and proximity to a metal source are the major competitive factors in the metal recycling business. We compete for the purchase and sale of scrap metal with large, well-financed recyclers of scrap metal as well as smaller metal facilities and brokers/dealers. Although we expanded our facilities and increased our processing efficiencies in prior years, certain of our competitors have greater financial, marketing and physical resources. There can be no assurance that we will be able to obtain our desired market share based on the competitive nature of this industry.
Dependence on Major Customer
In 2014,2016, we had sales to twoone major customerscustomer that totaled approximately 34.3%12.5% of our net sales for the year ended December 31, 2014. These customers were part of the stainless steel blending and shredder operations of our business. As a result of our decision in the fourth quarter of 2013 to cease our activity in the stainless steel blending line of business, and due to the May 2015 warm idle of our shredder, the sales to these two customers were de minimis in 2015.
Employees
As of March 3, 2016,26, 2017, we had 7475 full-time employees. None of our employees are members of a union.
Effect of State and Federal Environmental Regulations
Although we believe that our business model adequately protects us from potential environmental liability, we also continue to use our best efforts to be in compliance with federal, state and local environmental laws, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, the Clean Air Act, as amended, and the Clean Water Act.laws. Such compliance has not historically constituted a material expense to us.
The recycling operations are subject to federal, state and local requirements, which regulate health, safety, the environment, zoning and land-use. Federal, state and local regulations vary, but generally govern hauling, disposal and recycling activities and the location and use of facilities and also impose restrictions to prohibit or minimize air and water pollution. In addition, governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose fines in the case of violations, including criminal penalties. The EPA and various other federal, state and local environmental, health and safety agencies and authorities, including the Occupational Safety and Health Administration of the U.S. Department of Labor administer those regulations.
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This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, certain statements about our plans, strategies and prospects. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. Important factors that could cause our actual results to differ materially from our forward-looking statements include those set forth in this Risk Factors section. All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth below. Unless the context requires otherwise, all references to the “Company,” “we,” “us” or “our” include Industrial Services of America, Inc. and subsidiaries.
If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.
Risks Related to Our Operations
Our business has a major involvement in ferrous and non-ferrous metals. This market is extremely competitive and prices are volatile. Changes in prices, demand, including foreign demand, regulation, economic slowdowns or increased competition could result in a reduction of our revenue and consequent decrease in our common stock price.
The metal recycling business is highly competitive and is subject to significant changes in economic and market conditions. Metal prices were volatile during 2014 and especially in 2015.
Pricing and proximity to a metal source are the major competitive factors in the metal recycling business. Volatility in the metals markets can adversely affect our revenues. Lower prices adversely affect revenues. Additionally, volatility can lower volumes of metal that our suppliers are willing to sell to us. Many companies offer or are engaged in the development of products or the provisions of services that may be or are competitive with our current products or services. Although we expanded our facilities and increased our processing efficiencies in previous years,certain of our competitors have greater financial, technical, manufacturing, marketing, distribution, and other resources and assets than we possess. In addition, the industry is constantly changing as a result of consolidation, which may create additional competitive pressures in our business environment. There can be no assurance that we will be able to maintain our current market share or obtain our desired market share based on the competitive nature of this industry.Volatility in market prices of our scrap metal recycling inventory may cause us to re-assess the carrying value of our inventory and adversely affect our balance sheet.
We make certain assumptions regarding future demand and net realizable value in order to assess that we record our ferrous and non-ferrous inventory properly at the lower of cost or market. We base our assumptions on historical experience, current market conditions and current replacement costs. If the anticipated future selling prices of scrap metal and finished steel products should decline due to the cyclicality of the business or otherwise, we would re-assess the recorded net realizable value of such inventory which could result in downward adjustments to reduce the value of such inventory (and increase cost of sales) to the lower of cost or market.
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Volatility in market prices of the scrap metal recycling inventory experienced in late 2014 and through 2015 caused management to re-assess the carrying value of our inventory. In 2015 and 2014, we incurred a lower of cost or market inventory write-down of $1.3 million and $1.9 million, respectively.
We have limited liquidity and may need to arrange for additional liquidity on terms that are unfavorable to our stockholders, if we are able to obtain additional liquidity at all.
Our primary sources of liquidity during 2015 and 2016 were cash flows generated from asset sales, the idling of our auto shredder operation and the refinancing of the Company's working line of credit; in the first quarter of 2017, we extended the maturity date of our line of credit and increased the line of credit from $6.0 million to $8.0 million, subject to the satisfaction of certain conditions as more fully described in the accompany Notes to Consolidated Financial Statements.
Influenced primarily by the length and depth of the metals market downturn and the Company's ongoing operating losses, we may not be able to fund our future capital needs, including necessary working capital, funds for capital expenditures or debt service, from operating cash flow. Consequently, we may have to rely on third-party sources to fund our capital needs or we may have to rely on further asset sales or similar actions. We may be unable to obtain third-party financing or conduct asset sales on favorable terms or at all, which could materially and adversely affect our operating results, cash flow and liquidity. Furthermore, we cannot provide assurance that sufficient liquidity can be raised from one or more of these sources or that a desired transaction could be consummated within the period needed to meet certain obligations
Our liquidity remains constrained such that it may not be sufficient to meet our cash operating needs in the long-term. Our ability to fund our working capital needs and capital expenditures is limited by the net cash provided by operations, cash on hand and the liquidity available under the credit facility. Additional declines in net cash provided by operations or further decreases in the availability under the credit facility could rapidly exhaust our liquidity. Our inability to increase our liquidity would adversely impact our future performance, operations and results of operations, along with constraining our ability to move forward with any possible acquisitionsbusiness combinations or other strategic alternatives.
Our ability to obtain additional liquidity will depend upon a number of factors, including our future performance and financial results and general economic and capital market conditions. We cannot be sure that we will be able to raise additional capital on commercially reasonable terms, or at all.
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Due to reduced commodity prices and lower operating cash flows, we may be unable to maintain adequate liquidity and our ability to make interest payments in respect of our indebtedness could be adversely affected.
Declines in commodity prices since the beginning of 2014 have caused a reduction in our available liquidity and we may not have the ability to generate sufficient cash flows from operations and, therefore, sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs. We cannot assure you that any of our strategies will yield sufficient funds to meet our working capital or other liquidity needs, including for payments of interest and principal on our debt in the future, and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations.
An increase in the price of fuel may adversely affect our business.
Our operations are dependent upon fuel, which we generally purchase in the open market on a daily basis. Direct fuel costs include the cost of fuel and other petroleum-based products used to operate our fleet of cranes and heavy equipment, as well as our shredder when it is not idled. We are also susceptible to increases in indirect fuel costs which include fuel surcharges from vendors. When we have experienced increases in the cost of fuel and other petroleum-based products in the past, we were able to pass a portion of these increases on to our customers. However, because of the competitive nature of the industry, there can be no assurance that we will be able to pass on current or future increases in fuel prices to our customers. According to AAA's Daily Fuel Gauge Report, the nationwide average price for one gallon of regular gasoline in 2015, 2014, and 2013 was $2.40, $3.34, and $3.49, respectively. The national average price of gas in 2015 was the second cheapest annual average of the past ten years. A significant increase in fuel costs could adversely affect our business, which adverse impact would be magnified if combined with a decrease in revenue caused by a decrease in commodity prices.
We could incur substantial costs in order to comply with, or to address any violations under, environmental laws that could significantly increase our operating expenses and reduce our operating income.
Our operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials used in the processing of our products. In addition, certain of our operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Material environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations where we disposed of materials from our operations, which could result in future expenditures that we cannot currently estimate and which could reduce our profits.
| 13 |
Our financial statements are based upon estimates and assumptions that may differ from actual results.
We have prepared our financial statements in accordance with U.S. generally accepted accounting principles and necessarily include amounts based on estimates and assumptions we made. Actual results could differ from these amounts. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets, valuation allowances for accounts receivable, inventory, lower of cost or market, stock option values, liabilities for potential litigation, claims and assessments, and liabilities for environmental remediation and deferred taxes.
We depend on our senior management team and the loss of any member could prevent us from implementing our business strategy.
Our success is dependent on the management and leadership skills of our senior management team. The loss of any members of our management team or the failure to attract and retain additional qualified personnel could prevent us from implementing our business strategy and continuing to grow our business at a rate necessary to achieve and maintain future profitability.
Our exposure to credit risk could have a material adverse effect on our results of operations and financial condition.
Our business is subject to the risks of nonpayment and nonperformance by our customers.
Downturns in the economy led to bankruptcy filings by many of our customers in previous years, which could occur again and cause us to recognize more allowances for doubtful accounts receivable. While we believe our allowance for doubtful accounts is adequate, changes in economic conditions or any weakness in the steel and metals industries could cause potential credit losses from our significant customers, which could adversely impact our future earnings or financial condition.Our debt may increase our vulnerability to economic or business downturns.
We are vulnerable to higher interest rates because interest expense on our borrowing is based on margins over a variable base rate. We may experience material increases in our interest expense as a result of increases in general interest rate levels. Upon a breach of covenants in our lending facility, our lender could exercise its remedies related to any material breaches, including acceleration of our payments and taking action with respect to its loan security. From time to time, we have relied upon and will rely on borrowings under various credit facilities and from other lenders to operate our business. We may not have the ability to borrow from other lenders to operate our business.
Seasonal changes may adversely affect our business and operations.
Our operations may be adversely affected by periods of inclement weather, which could decrease the collection and shipment volume of recycling materials.
Risks Related to Our Common Stock
Future sales of our common stock could depress our market price and diminish the value of your investment.
Future sales of shares of our common stock could adversely affect the prevailing market price of our common stock. If our existing shareholders sell a large number of shares, or if we issue a large number of shares, the market price of our common stock could significantly decline. Moreover, the perception in the public market that our existing shareholders and, in particular, Kletter affiliates might sell shares of common stock could depress the market for our common stock.
The market price for our common stock may be volatile.
In recent periods, there has been volatility in the market price for our common stock. In addition, the market price of our common stock could fluctuate substantially in the future in response to a number of factors, including the following:
• | Our quarterly operating results or the operating results of our operations in the ferrous, non-ferrous and used auto parts industries; |
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• | Changes in general conditions in the economy, the financial markets or the ferrous and non-ferrous recycling industry; |
• | Loss of significant customers; and |
• | Increases in materials and other costs. |
In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.
Properties. |
The following table outlines our principal properties as of December 31, 2015:
Property Address | Lease or own | Segment | Acreage | ||||
6709 Grade Lane, Louisville, KY | Lease (1) | Recycling & Other | 1.326 | ||||
7023-7103 Grade Lane, Louisville, KY | Own | Recycling | 2.530 | ||||
7020/7100 Grade Lane, Louisville, KY | Lease (K&R) (2) | Recycling & Other | 14.230 | ||||
7110 Grade Lane, Louisville, KY | Own | Recycling | 10.723 | ||||
7124 Grade Lane, Louisville, KY | Own | Recycling | 5.120 | ||||
7200-7210 Grade Lane, Louisville, KY | Own | Recycling | 15.520 | ||||
3409 Camp Ground Road, Louisville, KY | Own | Recycling | 5.670 | ||||
960 | Lease (3) | Recycling | 14.000 | ||||
1617 State Road 111, New Albany, IN | Own | Recycling | 1.300 | ||||
(1) | See Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information related to the 6709 Grade Lane lease. |
(2) | See Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information related to the K&R lease. |
(3) | See Note 4 - Lease Commitments in the accompanying Notes to Consolidated Financial Statements for additional information related to the Seymour/North Vernon lease. |
These properties total 70.419 acres, which provides adequate space necessary to perform administrative and retail operation processes and store inventory. All facilities are insured. We do not expect any major land or building additions will be needed to increase capacity for our operations in the foreseeable future.
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Legal Proceedings. |
We have litigation from time to time, including employment-related claims, none of which we currently believe to be material.
Our operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials used in the processing of our products. In addition, certain of our operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities in material amounts could exist, including cleanup obligations at these facilities or at off-site locations where we disposed of materials from our operations, which could result in future expenditures that we cannot currently estimate and which could reduce our profits. ISA records liabilities for remediation and restoration costs related to past activities when our obligation is probable and the costs can be reasonably estimated. Costs of future expenditures for environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to current operations are expensed as incurred. Such compliance has not historically constituted a material expense to us.
Mine Safety Disclosures. |
Not applicable.
Market for ISA’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
ISA common stock is traded on the NASDAQ Capital Market under the symbol “IDSA”.“IDSA.” High and low sales prices of the common stock price are summarized as follows:
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| 2016 |
| 2015 | ||||||||||||
Quarter Ended |
| High |
| Low |
| High |
| Low | ||||||||
March 31 |
| $ | 3.05 |
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| $ | 0.87 |
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| $ | 6.00 |
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| $ | 4.13 |
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June 30 |
| $ | 2.78 |
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| $ | 1.63 |
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| $ | 4.64 |
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| $ | 3.36 |
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September 30 |
| $ | 2.30 |
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| $ | 1.32 |
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| $ | 4.08 |
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| $ | 3.35 |
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December 31 |
| $ | 3.35 |
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| $ | 1.10 |
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| $ | 3.52 |
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| $ | 1.24 |
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| 2015 | 2014 | |||||||||||||||
| Quarter Ended | High | Low | High | Low | ||||||||||||
| March 31 | $ | 6.00 | $ | 4.13 | $ | 5.34 | $ | 2.81 | ||||||||
| June 30 | $ | 4.64 | $ | 3.36 | $ | 6.19 | $ | 4.27 | ||||||||
| September 30 | $ | 4.08 | $ | 3.35 | $ | 6.99 | $ | 4.95 | ||||||||
| December 31 | $ | 3.52 | $ | 1.24 | $ | 6.10 | $ | 3.80 | ||||||||
There were approximately 140136 shareholders of record as of December 31, 2015.
Our Board of Directors did not declare any dividends in 20152016 or 2014.
Under our previous Wells Fargo and our current MidCap loan agreements, ISA covenants that so long as the lenders remain committed to make any advance or extend any other credit to us, or any obligations remain outstanding, ISA will not declare or pay any dividend or distribution (either in cash or any other property in respect of any stock) or redeem, retire, repurchase or otherwise acquire any of our stock, other than dividends and distributions by our subsidiaries to a parent.
On November 15, 2005, our Board of Directors authorized a program to repurchase up to 300.0 thousand shares of our common stock at current market prices. We did not repurchase any shares in 20152016 or 2014.2015. There are approximately 133.3 thousand shares still available for repurchase under this program.
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Selected Financial Data. |
Selected Financial Data
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| (Amounts in thousands, except per share data) | ||||||||||||||||||
Year ended December 31: |
| 2016 |
| 2015 |
| 2014 |
| 2013 |
| 2012 | ||||||||||
Total revenue |
| $ | 36,505 |
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| $ | 46,180 |
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| $ | 110,091 |
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| $ | 136,753 |
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| $ | 194,232 |
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Net loss from continuing operations |
| $ | (3,230 | ) |
| $ | (9,085 | ) |
| $ | (8,686 | ) |
| $ | (13,816 | ) |
| $ | (6,620 | ) |
Net income from discontinued operations |
| $ | — |
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| $ | 7,320 |
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| 1,413 |
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| * |
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| * |
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Earnings (loss) per common share from continuing operations: |
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Basic |
| $ | (0.40 | ) |
| $ | (1.14 | ) |
| $ | (1.15 | ) |
| $ | (1.96 | ) |
| $ | (0.95 | ) |
Diluted |
| $ | (0.40 | ) |
| $ | (1.14 | ) |
| $ | (1.15 | ) |
| $ | (1.96 | ) |
| $ | (0.95 | ) |
Earnings (loss) per common share from discontinued operations: |
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Basic |
| $ | — |
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| $ | 0.92 |
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| $ | 0.19 |
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| $ | * |
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| $ | * |
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Diluted |
| $ | — |
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| $ | 0.92 |
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| $ | 0.19 |
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| $ | * |
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| $ | * |
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At year end: |
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Total assets |
| $ | 20,856 |
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| $ | 19,434 |
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| $ | 37,790 |
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| $ | 44,032 |
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| $ | 63,323 |
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Current maturities of long-term debt |
| $ | 2,942 |
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| $ | 20 |
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| $ | 15,911 |
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| $ | 1,597 |
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| $ | 1,687 |
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Current maturities of capital lease obligations |
| $ | 198 |
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| $ | — |
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| $ | — |
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| $ | — |
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| $ | — |
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Long-term debt, net of current maturities |
| $ | — |
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| $ | — |
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| $ | — |
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| $ | 16,295 |
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| $ | 23,369 |
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Long-term debt, net of current maturities, related parties |
| $ | 1,504 |
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| $ | — |
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| $ | — |
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| $ | — |
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| $ | — |
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Capital lease obligations, net of current maturities |
| $ | 1,050 |
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| $ | — |
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| $ | — |
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| $ | — |
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| $ | — |
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| (Amounts in thousands, except per share data) | ||||||||||||||||||||
| Year ended December 31: | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| Total revenue | $ | 46,180 | $ | 110,091 | $ | 136,753 | $ | 194,232 | $ | 277,213 | ||||||||||
| Net loss from continuing operations | $ | (9,085 | ) | $ | (8,686 | ) | $ | (13,816 | ) | $ | (6,620 | ) | $ | (3,881 | ) | |||||
| Net (loss) income from discontinued operations | $ | 7,320 | $ | 1,413 | * | * | * | |||||||||||||
| Earnings (loss) per common share from continuing operations: | ||||||||||||||||||||
| Basic | $ | (1.14 | ) | $ | (1.15 | ) | $ | (1.96 | ) | $ | (0.95 | ) | $ | (0.56 | ) | |||||
| Diluted | $ | (1.14 | ) | $ | (1.15 | ) | $ | (1.96 | ) | $ | (0.95 | ) | $ | (0.56 | ) | |||||
| Earnings (loss) per common share from discontinued operations: | ||||||||||||||||||||
| Basic | 0.92 | 0.19 | * | * | * | |||||||||||||||
| Diluted | 0.92 | 0.19 | * | * | * | |||||||||||||||
| At year end: | ||||||||||||||||||||
| Total assets | $ | 19,434 | $ | 37,790 | $ | 44,032 | $ | 63,323 | $ | 80,970 | ||||||||||
| Current maturities of long-term debt | $ | 20 | $ | 15,911 | $ | 1,597 | $ | 1,687 | $ | 1,821 | ||||||||||
| Long-term debt, net of current maturities | $ | — | $ | — | $ | 16,295 | $ | 23,369 | $ | 26,688 | ||||||||||
The recycling business is highly competitive and is subject to various market and company risks. See Item 1A.1A. - Risk Factors for a discussion of the material risks related to our operations. Due to these risks, past performance is not necessarily indicative of future financial condition or results of operations.
* On December 4, 2015, the Company sold a majority of its Waste Services Segment assets. Years 2015 and 2014 have been adjusted to reflect discontinued operations of the Waste Services Segment. Years 2013 through 20112012 have not been adjusted for discontinued operations of the Waste Services Segment.
| 18 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read in conjunction with the information set forth under Item 6, “Selected Financial Data” and our consolidated financial statements and the accompanying notes thereto included elsewhere in this report.
The following discussion and analysis contains certain financial predictions, forecasts and projections which constitute “forward-looking statements” within the meaning of the federal securities laws. Actual results could differ materially from those financial predictions, forecasts and projections and there can be no assurance that we will achieve such financial predictions, forecasts and projections. Please see Item 1A,1A, “Risk Factors” for items that could affect our financial predictions, forecasts and projections.
General
Our core business is now focused on the metal recycling industry. We intend to achieve steady growth at an acceptable profit, adding to our net worth and providing positive returns for our stockholders. We intend to increase efficiencies and productivity in our core business while remaining alert for possible acquisitions, strategic partnerships, mergers and joint-ventures that would enhance our profitability. On March 2,During 2016, we announced that the Company has formed a special committee of independent board members to participate in the evaluation ofevaluate various growth and strategic options.
Also, on March 31, 2017, the evaluationCompany entered into an amended credit facility with MidCap, which extended the maturity date of growththe Company's line of credit and strategic options.
The Company also announced on October 4, 2016 the Company and Algar mutually agreed to terminate the Management Agreement between us, pursuant to the Agreement to Terminate Management Services among the Company, Algar, and Sean Garber dated as of September 30, 2016. Effective September 30, 2016, Mr. Garber resigned from all positions with the Company, including as President. Also, on September 30, 2016, the company’s Chief Financial Officer was appointed to serve in the additional role as President.
We have operating locations in Louisville, Kentucky, and Seymour and New Albany, Indiana. We do not have operating locations outside the United States. Seymour is used interchangeably with North Vernon herein.
Liquidity and Capital Resources
Our cash requirements generally consist of working capital, capital expenditures and debt service. Our primary sources of liquidity during 2015 and 2016 were cash flows generated from asset sales, the idling of our auto shredder operation and the refinancing of the Company's working line of credit. These steps are cashmore fully described below and in the accompanying Notes to the Consolidated Financial Statements. Cash flows generated from operations and the various borrowing arrangements described below, including our revolving credit facility.facility are also significant sources of ongoing liquidity. We have also been able to manage liquidity by deferring certain rent payments made to related parties. parties, as well as deferring capital expenditures. See Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information. We actively manage our working capital and associated cash requirements and continually seek more effective use of cash. As of December 31, 2015,2016, we held cash and cash equivalents of $0.6$0.5 million.
During 2015 and 2016, the Company experienced significant liquidity challenges related to the severe metal market downturn and associated ISA loan defaults with our then lenders. Management took the below steps. See Our"Our Response to 2015 and 2016 Commodity Markets and Liquidity ConditionsConditions" in Item 1 of this Form 10-K for further discussion of these actions.
In February 2015, the Company sold its Seymour, Indiana property and relocated its Seymour operations to a leased facility in the same general geographic area. The proceeds from the sale of this property were used to reduce debt and improve liquidity.
In April 2015, the Company sold its property located at 6709 Grade Lane, Louisville, KY to a related party. The proceeds from the sale of this property were used to reduce debt and improve liquidity.
| 19 |
In May 2015, the Company warm idled its auto shredder. The proceeds associated with working capital reductions were used to reduce debt and improve liquidity.
Also, in May 2015, the Company sold its property located at 7017 Grade Lane, Louisville, KY to a related party. The proceeds from the sale of this property were used to reduce debt and improve liquidity.
In November 2015, the Company entered into a forbearance agreement with Wells Fargo, which required certain actions by the Company.
In December 2015, the Company sold substantially all assets of the Company’s Waste Services Segment. Proceeds from the sale of this segment were used to reduce debt and improve liquidity.
During 2015, the Company paid down debt by $16.3$16.3 million and favorably improved borrowing availability, primarily as a result of the above actions. As more fully described in Note 15 - Discontinued Operations in the accompanying Notes to Consolidated Financial Statements, the Waste Services Segment provided positive operating cash flow that will no longer be available to the Company.
On February 29, 2016, the Company refinanced its Wells Fargo debt with a new lender, MidCap Business Credit.
On March 31, 2017, the Company entered into the First Amendment to the 2016 Loan, which provides improved liquidity.
Credit facilities and notes payable
During 2015 the Company had certain loans with KY Bank and, during 2015 and 2016 with Wells Fargo (hereinafter “Wells Fargo”).Fargo. As of December 31, 2014, the Company was in default under the Wells Fargo loans and during the second half of 2015 entered into a Forbearance Agreement with Wells Fargo whereby the due dates on the loans were accelerated and the Company was required to take certain actions.
During 2015, as more fully described above, the Company took steps to pay down debt and increase liquidity.
On December 4, 2015, in conjunction with the above-noted sale of substantially all assets of the Company’s Waste Services Segment, the Company paid off the KY Bank loans and certain Wells Fargo loans. As of December 31, 2015, the Company had an outstanding balance of $19.7$19.7 thousand to Wells Fargo. Subsequent to December 31, 2015,On February 29, 2016, the Company closed on new financing with MidCap Business Credit and paid off in full remaining amounts due to Wells Fargo.
See Note 1 - Summary of Significant Accounting Policies and Note 3 - Long Term Debt and Notes Payable to Bank in the accompanying Notes to Consolidated Financial Statements for further details on long term debt and notes payable.
Swap agreements
In October 2013, the Company entered into an interest rate swap agreement with KY Bank swapping a variable rate based on LIBOR for a fixed rate. This swap agreement covered approximately $2.4$2.4 million in debt, commenced October 17, 2013 and was scheduled to mature on October 1, 2018. The swap agreement fixed our interest rate at 4.74%4.74%. The swap was settled for $15.0$15.0 thousand during 2015.2015. As of December 31, 2016, we do not have any swap agreements.
| 20 |
Critical Accounting Policies
In preparing financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"), we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We believe that we consistently apply judgments and estimates and that such consistent application results in financial statements and accompanying notes that fairly represent all periods presented. However, any errors in these judgments and estimates may have a material impact on our statement of operations and financial condition. Our significant accounting policies are described in Note 1 - Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements. Critical accounting policies, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult and subjective judgments and
Revenue recognition
We recognize revenues from processed ferrous and non-ferrous scrap metal sales when title passes to the customer, which generally is upon delivery of the related materials. We recognize revenues from services as the service is performed. We recognize revenue on auto parts when title passes to the customer. We accrue sales adjustments related to price and weight differences and allowances for uncollectible receivables against revenues as incurred.
Inventory
Our inventories primarily consist of ferrous and non-ferrous, including stainless steel, and scrap metals and are valued at the lower of average purchased cost or market usingnet realizable value ("NRV") based on the specific identification method based on individual scrap commodities.commodity. Quantities of inventories are determined based on our inventory systems and are subject to periodic physical verification using estimation techniques including observation, weighing and other industry methods. We recognize inventory impairment when the market value,NRV, based upon current market pricing, falls below recorded value or when the estimated volume is less than the recorded volume of inventory. We record the loss in cost of sales in the period during which we identified the loss. Prices of commodities we own may be volatile. We are exposed to risks associated with fluctuations in the market price for both ferrous and non-ferrous metals, which are at times volatile. We attempt to mitigate this risk by seeking to rapidly turn our inventories.
We make certain assumptions regarding future demand and net realizable valueNRV in order to assess whether inventory is properly recorded at the lower of cost or market.NRV. We base our assumptions on historical experience, current market conditions and current replacement costs.remaining costs of processing (if any). If the anticipated future selling prices of scrap metal and finished steel products should decline, we would re-assess the recorded net realizable valueNRV of our inventory and make any adjustments we feel necessary in order to reduce the value of our inventory (and increase cost of sales) to the lower of cost or market.
Valuation of long-lived assets
We regularly review the carrying value of certain long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. If an evaluation is required, we compare the estimated future undiscounted cash flows associated with the asset to the asset’s carrying amount to determine if an impairment of such asset is necessary. The effect of any impairment would be to expense the difference between the fair value of such asset and its carrying value.
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. We recognize interest accrued related to unrecognized tax positions in interest expense and penalties in operating expenses, if appropriate. We use the deferral method of accounting for the available state tax credits relating to the purchase of the shredder equipment.
We recognize uncertain income tax positions using the "more-likely-than-not" approach as defined in the ASC.
The amount recognized is subject to estimate and management’s judgment with respect to the most likely outcome for each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. We have no liability for uncertain tax positions recognized as of December 31,See also Note 7 - Income Taxes in the accompanying Notes to Consolidated Financial Statements for additional information regarding income taxes and related assets.
| 21 |
Stock Incentive Plan
We have a Long Term incentive Plan adopted in 2009 under which we may grant equity awards for up to 2.4 million shares of common stock, which are reserved by the board of directors for issuance of equity awards. We account for this plan based on FASB’s authoritative guidance titled "ASC Topic 718 - Compensation - Stock Compensation.
" We recognize share-based compensation expense for the fair value of the awards, as estimated using the Modified Black-Scholes-Merton Model, on the date granted on a straight-line basis over their vesting term. Compensation expense is recognized only for share-based payments expected to vest. We estimate forfeitures at the date of grant based on our historical experience and future expectations. Under the plan, the maximum term of an option is five years.Results of Operations
Prior year balances have been recast to reflect the sale of the Company’s Waste Services Segment in the fourth quarter of 2015 in accordance with the Financial Accounting Standards Board Accounting Standards Codification 205-20-55 within discontinued operations. Results of discontinued operations are excluded from the accompanying results of operations for all periods presented, unless otherwise noted. See Note 15 - Discontinued Operations in the accompanying Notes to Consolidated Financial Statements.
The following table presents, for the years indicated, the percentage relationship that certain captioned items in our Consolidated Statements of Operations bear to total revenues and other pertinent data:
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Year ended December 31, | 2016 |
| 2015 | ||
Consolidated Statements of Operations Data: |
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Total revenue | 100.0 | % |
| 100.0 | % |
Total cost of sales | 96.1 | % |
| 110.5 | % |
Selling, general and administrative expenses | 12.3 | % |
| 8.4 | % |
Loss before other income (expense) | (8.4 | )% |
| (18.9 | )% |
| Year ended December 31, | 2015 | 2014 | |||
| Consolidated Statements of Operations Data: | |||||
| Total revenue | 100.0 | % | 100.0 | % | |
| Total cost of sales | 110.5 | % | 101.3 | % | |
| Selling, general and administrative expenses | 8.4 | % | 5.8 | % | |
| Loss before other income (expense) | (18.9 | )% | (7.2 | )% | |
The 9.2% increase14.4%decrease in cost of sales as a percentage of revenue in 20152016 as compared to 20142015 is partiallyprimarily due to significant adverse conditions in 2015 including substantial downward commodity price pressures during 2015 which severely impacted margins, a fixed asset impairment charge of $0.6$0.6 million recorded in 2015 due to the May 2015 warm idle of the shredder, and an inventory lower of cost or market adjustment of $1.3 million in 2015 related to a decline in metal commodity market prices. In 2016, the downward pressure on commodity prices eased and the metals market experienced modest stabilization.
Selling, general and administrative expenses as a percentage of revenue in 2016 as compared to 2015increased3.9%. This increase is mainly due to substantially lower revenues in 2016 associated with lower metal prices and lower revenues in 2016 due to the May 2015 warm idle of the shredder. However, the primary driver of the increase relates to margin compression the Company faced in 2015 as the ferrous market, and to a lesser extent the nonferrous market, prices declined substantially during 2015.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income is net income plus certain other items that are recorded directly to shareholders’ equity. Amounts included in accumulated other accumulated comprehensive loss for our derivative instruments are not recorded net of tax in 2015 due to the related income tax effects.valuation allowance recorded. Refer to Note 1 – Summary of Significant Accounting Policies - Derivative and Hedging Activities and Note 7 - Income Taxes in the accompanying Notes to Consolidated Financial Statements for additional information about our derivative instruments.
| 22 |
| Total accumulated other comprehensive loss as of 12/31/14 | $ | (10 | ) | |
| Unrealized loss on derivative instruments during 2015 | (5 | ) | ||
| Amounts reclassified from accumulated other comprehensive income during 2015 | 15 | |||
| Total accumulated other comprehensive loss as of 12/31/15 | $ | — | ||
Year Ended December 31 2015, 2016 Compared to Year Ended December 31 2014
Total revenue decreased $63.9 $9.7 million or 58.0%21.0% to $46.2$36.5 million in 20152016 compared to $110.1$46.2 million in 2014. 2015. This decrease was primarily due to the May 2015 warm idlingidle of the Company's shredder operations, andwhich despite a portion of volume shifting to the Company's ferrous operations, resulted in a significant decrease in revenue, as well as significant metal commodity prices. Disruptions during late 2014price declines and early 2015 in the worldwide demand for finished goods metals led to a significant decline in metal commodity prices. This decrease in metal commodity prices also led to significantly lower scrap metal volumes, thereby further reducing revenue.associated volume decreases. Revenue from the Company's shredder operations were $11.9$0 million for the year ended December 31, 2016 and $11.9 million for the year ended December 31, 2015, and $53.6 million for the year ended December 31, 2014, a decrease of $41.7$11.9 million. The remaining decreaseincrease was due primarily due to lower commodity prices and lower sales volume.
Total cost of sales decreased $60.5 $15.9 million or 54.3%31.2% to $51.0$35.1 million in 20152016 compared to $111.5$51.0 million in 2014. 2015. This decrease was primarily due to a decrease in the volume of shipments and the overall price for all commodities shipped for ferrous and nonferrous in 2015 compared to 2014, as well as the May 2015 warm idleidling of the shredder.
Total cost of sales as a decreasepercent of $1.5 million in direct labor costs, employment taxes and fees, and insurance due to fewer average employees onrevenue was lower during the weekly payroll in 2015year ended 2016 as compared to 2014;
In 2015, we incurred a lower of cost or market inventory write-down of $1.3$1.3 million, or 2.8% of revenue.
Selling, general and administrative ("SG&A") expenses decreased $2.6increased $0.6 million or 39.7%15.4% to $3.9$4.5 million in 20152016 compared to $6.4$3.9 million in 2014.2015. The decreaseincrease in SG&A expenses was primarilymainly due to the following:
| 23 |
As a percentage of total revenue, selling, general and administrative expenses were 8.4%12.3% in 20152016 compared to 5.8%8.4% in 2014.2015. This increase is a result of the significant revenue decrease from 20142015 to 2015.
Interest expense decreased $0.2 $0.2 million or 18.1%26.8% to $0.7$0.5 million in 20152016 compared to $0.8$0.7 million in 20142015which is a result of the significant steps that the Company took during 2015 to reduce debt and improve liquidity.
Other income (expense) was expense of $94.0 thousand for the year ended December 31, 2016 compared to expense of $348.0 thousand for the year ended December 31, 2015. This $254.0 thousand change is a result of a $186.0 thousand decrease in interest expense, which is a result of the significant steps that the Company took during 2015 to reduce debt and improve liquidity; a $320.0 thousand decrease in the gain on sale of assets, which was primarily due to lower levelsa gain during the first quarter of debt held2015 on the sale of our former Seymour, Indiana location and moving our facility to a leased property in 2015 as compared to 2014. Thethe same general area; along with a $11.0 thousand decrease in debt relates to principal payments made on existing debt in 2015 and holding a lower balance on the revolving credit facility with lenders in 2015 as compared to 2014.
Significant components of other income (expense), in thousands, were as follows:
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| Fiscal Year Ended December 31, | ||||||||
Description Other Income (Expense) | 2016 |
| 2015 | ||||||
Income from settlements | $ | 9.9 |
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| $ | 34.0 |
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Other | 5.8 |
| (7.0 | ) |
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Total other income, net | $ | 15.7 |
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| $ | 27.0 |
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| Fiscal Year Ended December 31, | |||||||
| Description Other Income (Expense) | 2015 | 2014 | |||||
| Income from settlements | $ | 34.0 | $ | — | |||
| Other | (7.0 | ) | 8.6 | ||||
| Total other income, net | $ | 27.0 | $ | 8.6 | |||
The income tax expense decreased $25.0increased $67.0 thousand to a tax provision of $13.0$80.0 thousand in 20152016 compared to a tax expense of $38.0$13.0 thousand in 2014.2015. The effective tax rates, including the intangible impairment losses and the deferred tax asset valuation allowance, in 20152016 and 20142015 were (0.1)(2.5)% and (0.4)(0.1)%, respectively, based on federal and state statutory rates.
Financial Condition at December 31 2015, 2016 compared to December 31 2014
Cash and cash equivalents decreased $0.4 $0.1 million to $0.6$0.5 million as of December 31, 20152016 compared to $1.1$0.6 million as of December 31, 2014.
Net cash fromused in operating activities of $5.0was $3.3 million for the year ended December 31, 2015. 2016. The change in net cash fromused in operating activities is adversely impacted byprimarily due to a net loss of $9.1 million.$3.2 million, an increase in receivables of $1.7 million, an increase in inventories of $1.0 million, and a decrease in accounts payables of $0.5 million; partially offset by a decrease in receivables from related parties of $58.0 thousand, depreciation of $2.3 million, share-based option expense of $357.0 thousand, and an increase in other current liabilities of $433.0 thousand. The changecompany had $8.0 thousand of capital expenditures in net2016.
Net cash from operatingfinancing activities is positively impacted by the Company's depreciation and amortization of $2.4 million, inventory write-down of $1.3 million, along with changes in accounts receivable and inventory of $7.3 million and $2.0 million, respectively.
Trade accounts receivable after allowances for doubtful accounts decreased $7.3increased $1.7 million or 81.3%101.4% to $1.7$3.4 million as of December 31, 20152016 compared to $8.9$1.7 million as of December 31, 20142015 due to the receipt of customer payments and a decrease in the volume of shipments of ferrous, nonferrous, and stainless steel material during 2015.2016. In general, the accounts receivable balance fluctuates due to the timing of shipments and receipt of customer payments.
Inventories at 2015 consist principally of ferrous and nonferrous scrap materials.materials. We value inventory at the lower of cost or market. Inventory decreased $4.3increased $1.0 million or 64.2%42.6% to $2.4$3.4 million as of December 31, 20152016 compared to $6.7$2.4 million as of December 31, 2014. This decrease was primarily due to the May 2015 warm idling of the Company's shredder operations and a lower of cost or market write-down of $1.3 million primarily related to shredder operations inventory items.
| 2015 | 2014 | ||||||
| Ferrous, and non-ferrous materials | $ | 2,407 | $ | 5,347 | |||
| Other | 3 | 11 | |||||
| Total inventories for sale | 2,410 | 5,358 | |||||
| Replacement parts | — | 1,371 | |||||
| Total inventories | $ | 2,410 | $ | 6,729 | |||
We make certain assumptions regarding future demand and net realizable value in order to assess whether inventory is properly recorded at the lower of cost or market. We base our assumptions on historical experience, current market conditions and current replacement costs. Management spent much of 20142015 and early 20152016 working to assess the Company's automobile shredder residue ("ASR") process. Significant process and strategy changes associated with the ASR process have been made, including the May 2015 warm idle of the shredder. These changes, combined with the significant metals market reduction in demand and prices experienced in late 2014 and through 2015, caused management to perform a lower of cost-or-market assessment which resulted in inventory write-downs of $1.3 million and $1.9$1.3 million for the yearsyear of December 31, 2015 and
Inventory aging for the period ended December 31, 2016 (Days Outstanding): | ||||||||||||||||||||
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| (in thousands) | ||||||||||||||||||
Description |
| 1 - 30 |
| 31 - 60 |
| 61 - 90 |
| Over 90 |
| Total | ||||||||||
Ferrous and non-ferrous materials |
| $ | 3,011 |
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| $ | 268 |
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| $ | 62 |
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| $ | 96 |
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| $ | 3,437 |
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Inventory aging for the period ended December 31, 2015 (Days Outstanding): | ||||||||||||||||||||
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| (in thousands) | ||||||||||||||||||
Description |
| 1 - 30 |
| 31 - 60 |
| 61 - 90 |
| Over 90 |
| Total | ||||||||||
Ferrous and non-ferrous materials |
| $ | 2,017 |
|
| $ | 107 |
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| $ | 74 |
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| $ | 212 |
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| $ | 2,410 |
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| Inventory aging for the period ended December 31, 2015 (Days Outstanding): | ||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Description | 1 - 30 | 31 - 60 | 61 - 90 | Over 90 | Total | |||||||||||||||
| Ferrous and non-ferrous materials | $ | 2,014 | $ | 107 | $ | 74 | $ | 212 | $ | 2,407 | ||||||||||
| Other | 3 | — | — | — | 3 | |||||||||||||||
| Total | $ | 2,017 | $ | 107 | $ | 74 | $ | 212 | $ | 2,410 | ||||||||||
| Inventory aging for the period ended December 31, 2014 (Days Outstanding): | ||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Description | 1 - 30 | 31 - 60 | 61 - 90 | Over 90 | Total | |||||||||||||||
| Ferrous and non-ferrous materials | $ | 3,804 | $ | 250 | $ | 394 | $ | 899 | $ | 5,347 | ||||||||||
| Replacement parts | 1,371 | — | — | — | 1,371 | |||||||||||||||
| Other | — | 1 | 10 | 11 | ||||||||||||||||
| Total | $ | 5,175 | $ | 250 | $ | 395 | $ | 909 | $ | 6,729 | ||||||||||
Inventory in the "Over 90"1-30 days" category decreasedincreased by $0.7$1.0 million from December 31, 20142015 to December 31, 2016. This increase is primarily due to increased volumes during December 2016 as compared to December 2015.
Accounts payable trade decreased $0.5 million or 25.4% to $1.6 million as of December 31, 2016 compared to $2.2 million as of December 31, 2015. The accounts payable balance fluctuates due to timing of purchases from and payments made to our vendors. This decrease is largely a result of improved liquidity which led to quicker payments to the Company's suppliers.
Accounts payables and accrued expenses from related parties decreased $1.3 million to $0.6 million as of December 31, 2016 compared to $1.9 million as of December 31, 2015. This decrease was primarily dueis largely a result of the Company entering into a subordinated, unsecured debt with related parties on February 29, 2016, which converted amounts previously held as related party payables, in the amount of $1.5 million. See Note 10 - Related Party Transactions in the Consolidated Financial Statements for additional information.
Working capital increased $0.9 million to the May 2015 warm idling of the Company's shredder operations and a lower of cost or market write-down of $1.3 million primarily related to shredder operations inventory items. The December 31, 2015 balance of $0.2 million is spread across various small items.
| 25 |
Contractual Obligations
The following table provides information with respect to our known contractual obligations for the year ended
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| Payments due by period (in thousands) | ||||||||||||||||||
Obligation Description: |
| Total |
| Less than 1 year |
| 1 - 2 years |
| 3 - 5 years |
| More than 5 years | ||||||||||
Long-term debt obligations |
| $ | 4,446 |
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| $ | 2,942 |
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| $ | — |
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| $ | 1,504 |
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| $ | — |
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Operating lease obligations |
| 821 |
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| 774 |
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| 47 |
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| — |
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| — |
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Capital lease obligations |
| 1,248 |
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| 198 |
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| 608 |
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| 442 |
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| — |
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Total |
| $ | 6,515 |
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| $ | 3,914 |
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| $ | 655 |
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| $ | 1,946 |
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| $ | — |
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| Payments due by period (in thousands) | ||||||||||||||||||||
| Total | Less than 1 year | 1 - 2 years | 3 - 5 years | More than 5 years | ||||||||||||||||
| Obligation Description | ||||||||||||||||||||
| Long-term debt obligations | �� | $ | 20 | $ | 20 | $ | — | $ | — | $ | — | |||||||||
| Operating lease obligations | 3,000 | 1,168 | 1,546 | 286 | — | |||||||||||||||
| Deposit from related party | 500 | 500 | — | — | — | |||||||||||||||
| Total | $ | 3,520 | $ | 1,688 | $ | 1,546 | $ | 286 | $ | — | ||||||||||
Inflation and Prevailing Economic Conditions
To date, inflation has not and is not expected to have a significant impact on our operation in the near term. We have no long-term fixed-price contracts and we believe we will be able to pass through most cost increases resulting from inflation to our customers. We are susceptible to the cyclical nature of the commodity business. In late 2014 and during 2015, the metal commodity markets experienced significant disruptions. The Company addressed these conditions through actions that are described Part 1, Item 1.1. in this Form 10-K.
Fluctuating commodity prices affect market risk in our Recycling Segment. We mitigate the risk by selling our product on a monthly contract basis. Each month we negotiate selling prices for all commodities. Based on these monthly agreements, we determine purchase prices based on a margin needed to cover processing and administrative expenses.
We are exposed to commodity price risk, mainly associated with variations in the market price for stainless steel, ferrous and nonferrous metal, and other commodities. The timing and magnitude of industry cycles are difficult to predict and general economic conditions impact the cycles. We respond to changes in recycled metal selling prices by adjusting purchase prices on a timely basis and by turning rather than holding inventory in expectation of higher prices. However, an adverse impact on our financial results may occur if selling prices fall more quickly than we can adjust purchase prices or if levels of inventory have an anticipated net realizable value that is below average cost.
Impact of Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09,
In August 2014, the FASB issued ASU No. 2014-15,
In April 2015, the FASB issued ASU 2015-03,
| 26 |
In July 2015, the FASB issued ASU 2015-11,
In November 2015, the FASB issued ASU 2015-17,
In February 2016, the FASB issued ASU No. 2016-02,
The amendments in ASU 2016-022016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU 2016-022016-02 on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which provides guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company is evaluating the potential impact of ASU 2016-13 on the Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2016-15 should be applied retrospectively. The Company is evaluating the potential impact of ASU 2016-15 on the Consolidated Financial Statements.
Quantitative and Qualitative Disclosures About Market Risk. |
N/A - Not required for smaller reporting companies.
Consolidated Financial Statements and Supplementary Data. |
Our consolidated financial statements required to be included in this Item 8 are set forth in Item 15 of this report and incorporated herein by reference.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| 27 |
Controls and Procedures. |
(a) | Disclosure controls and procedures. |
ISA’s management, including ISA’s principal executive officer and principal financial officer, have evaluated the effectiveness of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)13a-15(e) promulgated under the Securities Exchange Act of 1934.1934. Based upon their evaluation, our principal executive officer and principal financial officer concluded that, as of
(b) | Internal controls over financial reporting. |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f)13a-15(f) and 15d-15(f)15d-15(f) of the Exchange Act). Our internal control over financial reporting includes the process designed by, or under the supervision of, our CEO and CFO, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
▪ | |
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; |
▪ | |
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
▪ | |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Because of its inherent limitations, internal control over financial reporting cannot prevent or detect every potential misstatement. Therefore, even those systems determined to be effective can provide only reasonable assurances with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may decline.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting, based on the framework and criteria established in Internal Control -- Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management assessed the effectiveness of our internal control over financial reporting for the year ended
December 31,This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that require only management’s report in this Annual Report on Form 10-K.
(c) | Changes to internal control over financial reporting. |
There were no changes in ISA’s internal control over financial reporting during the year ended
December 31,| 28 |
Other Information. |
On March 25,31, 2017, the Company and each of its wholly-owned subsidiaries entered into an amendment to the 2016 our Compensation Committee granted 32.0 thousand restricted stock units (“RSUs”Loan with MidCap ("First Amendment"). The First Amendment increased the line of credit from $6.0 million to Todd L. Phillips,$8.0 million and extended the maturity date to February 28, 2020. As amended, the line of credit permits the Company to borrow an amount under the 2016 Loan equal to the lesser of (A) $8.0 million; and (B)(i) 85% of the value of the Company’s Chief Financial Officer (the “CFO”)eligible domestic accounts receivable, plus (ii) the lesser of (x) $2.5 million and (y) 75% of the net orderly liquidation value of eligible inventory, plus (iii) the lesser of (x) $400,000 and (y) 40% of appraised net forced liquidation value of eligible fixed assets, plus (iv) the lesser of (x) $1.75 million and (y) 45% of the appraised value of certain properties owned by the Company (subject to MidCap's receipt of any third-party or internal approvals it may require in its discretion), minus (v) any amount which MidCap may require from time to time, pursuant to terms of the agreement, in order to secure amounts owed to MidCap under the agreement.
The First Amendment contains a minimum line availability covenant equal to $350.0 thousand, the same as the 2016 Loan.This covenant may be replaced by a Fixed Charge Coverage Ratio ("FCCR") covenant once the Company has achieved an FCCR of 1.1x on an annualized basis.The Company paid underwriting fees of $20.0 thousand at closing.
Directors, Executive Officers and Corporate Governance. |
BOARD OF DIRECTORS
Set forth below is a list of members of the Board of Directors, together with their ages, all Company positions and offices each person currently holds and the year in which each person joined the Board.
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| Name and Principal Occupation with Company |
| Age |
| Year First Became Director | |
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| Orson Oliver |
| 74 |
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| 2005 |
| Chairman of the Board and Interim Chief Executive Officer |
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| Albert Cozzi |
| 71 |
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| 2006 |
| Director |
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| Vince Tyra |
| 51 |
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| 2014 |
| Director |
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| William Yarmuth |
| 65 |
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| 2014 |
| Director |
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ORSON OLIVER has been our director since 2005, our Chairman of the Board since 2012 and our interim Chief Executive Officer since 2013.He currently holds an officer position as General Counsel with the A.J. Schneider Company.He has over thirty-five years of experience in banking and financial consulting. Mr. Oliver began his career in 1968 as an attorney with the U.S. Treasury Department in Washington, D.C.In 1975, he joined the Bank of Louisville as general counsel.In 1985, he became president of the Bank of Louisville.When Branch Banking and Trust Company acquired the Bank of Louisville in 2003, the Bank of Louisville had assets of $1.6 billion and was the largest, locally managed bank in Louisville, Kentucky.Since his retirement from banking in February 2004, Mr. Oliver has worked as an independent general business consultant for the Al J. Schneider Company, a corporation with a number of large hotels and real estate holdings in the Louisville, Kentucky area. From May 2004 through December 2011, Mr. Oliver also worked as an independent general business consultant for PNC Bank, which is headquartered in Pittsburgh, Pennsylvania.Mr. Oliver was a member of the Board of Directors of the Al J. Schneider Company from February 2004 through June 2016.Beginning in 2013, Mr. Oliver also serves as a director of the Bankers' Bank of Kentucky.
ALBERT A. COZZI has been our director since 2006.Since February 2006,Mr. Cozzi has been a partner with Cozzi Consulting Group, a start-up consulting business, marking the re-entry of Mr. Cozzi into the scrap industry following a two-year non-compete agreement he had with his former employers at Metal Management, Inc.From July 1999 to January 2004, Mr. Cozzi served as the chief executive officer of Metal Management, Inc. headquartered in Chicago, Illinois, and one of the largest full service metals recyclers in the United States. From December 1997 to June 1999, Mr. Cozzi served as the president and chief operating officer of Metal Management, Inc. From 1963 to 1997, Mr. Cozzi held various positions with Cozzi Iron & Metal, originally located in Chicago, Illinois, prior to its merger with Metal Management, Inc., including president from 1990 to 1997. Mr. Cozzi received an M.B.A. from the University of Chicago.
VINCE TYRA has been our director since 2014. Mr. Tyra was President of ISCO Industries ("ISCO"), a global, customized piping solutions provider based in Louisville, Kentucky, through 2016.Prior to his position at ISCO, Mr. Tyra was a Managing Partner at Southfield Capital, a private investment firm based in Greenwich, Connecticut, where he joined in 2007.Mr. Tyra continues to be an Operating Partner with Southfield Capital, serves on the firm's investment committee and is a board member of various Southfield Capital portfolio companies.Prior to Southfield Capital, Mr. Tyra was CEO of Broder Bros., Co., a wholesale distributor of imprintable activewear.Prior to joining Broder, Mr. Tyra served as President of Retail and Activewear at Fruit of the Loom.Previous to Fruit of the Loom, Mr. Tyra was a principal investor and Executive Vice President of TSM, a Louisville, Kentucky based wholesale distributor of activewear.
WILLIAM YARMUTH has been our director since 2014. Mr. Yarmuthhas been the Chairman and Chief Executive Officer at Almost Family Inc. ("Almost Family"), a Louisville, Kentucky-based provider of a range of Medicare-certified home health nursing services to patients in need of recuperative and other care, since 1992.Mr. Yarmuth has been a director of Almost Family since 1991, when the company acquired National Health Industries, where Mr. Yarmuth was Chairman, President and Chief Executive Officer .
Except as disclosed above, none of the other directors holds another directorship in a company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or in a company registered as an investment company under the Investment Company Act of 1940, as amended. None of our directors has any family relationship with any of our other directors or executive officers.
On December 2, 2013, the Company and Algar entered into a Management Services Agreement (the “Management Agreement”). Pursuant to the Management Agreement, the Company agreed that Algar could cause the appointment of up to two members of the Board. In 2014, Algar nominated William Yarmuth and Vince Tyra to serve as board members.Messrs. Tyra and Yarmuth were recommended for nomination and appointment to the Board by Algar, Inc. in 2016. Messrs. Tyra and Yarmuth were subsequently nominated by the Board for election, and they were elected, by the shareholders at the 2016 annual meeting to hold office until the 2017 annual meeting and until their respective successors have been elected and qualified.
Audit Committee
The Audit Committee confers with our independent registered public accounting firm regarding the scope and adequacy of annual audits; reviews reports from such independent accountants; and meets with the independent accountants to review the adequacy of our accounting principles, financial controls and policies. The Audit Committee met four (4) times in 2016. The members of the Audit Committee are Messrs. Tyra, Cozzi and Yarmuth. Mr. Tyra is the chairperson of this committee. All current members of the Audit Committee are independent as defined in Rule 5605(a)(2) of the NASDAQ listing standards and the Audit Committee Qualifications of Rule 5605(c)(2). The Board of Directors has determined that Mr. Tyra is qualified as an "audit committee financial expert" based on a thorough review of his education and financial experience and is independent as described in the preceding sentences. Our Audit Committee has a written charter, which is available on our website at www.isa-inc.com under Investors.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the Company's executive officers.
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Name |
| Served as an Executive Officer From |
| Age |
| Position with the Registrant and Other Principal Occupations |
Orson Oliver |
| 2013 |
| 74 |
| Mr. Oliver has been our director since 2005, our Chairman of the Board since 2012 and our interim Chief Executive Officer since 2013. He currently holds an officer position as General Counsel with the A.J. Schneider Company. He has over thirty-five years of experience in banking and financial consulting. Mr. Oliver began his career in 1968 as an attorney with the U.S. Treasury Department in Washington, D.C. In 1975, he joined the Bank of Louisville as general counsel. In 1985, he became president of the Bank of Louisville. When Branch Banking and Trust Company acquired the Bank of Louisville in 2003, the Bank of Louisville had assets of $1.6 billion and was the largest, locally managed bank in Louisville, Kentucky. Since his retirement from banking in February 2004, Mr. Oliver has worked as an independent general business consultant for the Al J. Schneider Company, a corporation with a number of large hotels and real estate holdings in the Louisville, Kentucky area. From May 2004 through December 2011, Mr. Oliver also worked as an independent general business consultant for PNC Bank, which is headquartered in Pittsburgh, Pennsylvania. Mr. Oliver was a member of the Board of Directors of the Al J. Schneider Company from February 2004 through June 2016. Beginning in 2013, Mr. Oliver also serves as a director of the Bankers' Bank of Kentucky. |
|
|
|
|
|
|
|
Todd L. Phillips |
| 2014 |
| 41 |
| Mr. Phillips was appointed President in September 2016, was appointed Secretary in June 2016, and continues to be Chief Financial Officer, a position he has held since December 31, 2014. Mr. Phillips joined ISA from CRS Reprocessing, LLC, where he held the positions of Chief Operating Officer and Chief Financial Officer from January 2009 to December 2014. CRS is a private-equity backed company with operations in the United States, Europe and Asia. Prior to CRS, Mr. Phillips was Chief Financial Officer at Genscape, Inc. from March 2004 to January 2009, a global information provider to energy commodity traders. Genscape was backed by private equity firm Oaktree Capital and was honored twice during Mr. Phillips’s tenure as an Inc. 500 company, recognizing Genscape as one of the 500 fastest growing companies in the United States. Mr. Phillips was the corporate controller for Metal Sales Manufacturing Corporation from March 2002 to March 2004. Mr. Phillips began his career at Arthur Andersen LLP from December 1997 through March 2002 following his graduation from the University of Kentucky. He is a Certified Public Accountant and holds degrees in accounting and business administration, with a focus on finance, from the University of Kentucky. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, certain officers and persons who own more than ten percent (10%) of our outstanding common stock to file with the Securities and Exchange Commission reports of changes in ownership of our common stock held by such persons. Officers, directors and greater than 10% shareholders must furnish us with copies of all forms they file under this regulation. To our knowledge, based solely on a review of the copies of such reports furnished to us and representations from reporting persons that no other reports including Forms 5 were required, all Section 16(a) filing requirements applicable to all of our officer, directors and greater than 10% shareholders were timely complied with during 2016.
Code of Ethics
The Board of Directors has adopted our Code of Ethics for the Chief Executive Officer and Financial Executives, which is available on our website at www.isa-inc.com under Investors. The Company will post any waivers to the Code of Ethics to our website. Shareholders may communicate directly with the Board of Directors in writing by sending a letter to the Board at: Industrial Services of America, Inc. 2009 Long Term, 7100 Grade Lane, Louisville, KY 40213 or by a secure e-mail via our website atwww.isa-inc.com.
Executive Compensation. |
EXECUTIVE COMPENSATION DISCUSSION
In accordance with SEC regulations, the following table summarizes the compensation awarded to, paid to, or earned by: (i) all persons who served as our principal executive officer during 2016, and (ii) our most highly compensated executive officer, other than the principal executive officer, who was serving as an executive officer at December 31, 2016 and (iii) the executive officer for whom disclosure would otherwise have been required who was not serving as an executive officer at December 31, 2016 (collectively the "Named Executive Officers").
2016 Summary Compensation Table
Name and Principal Position |
| Year |
| Salary ($) |
| Bonus ($) |
| Share-Based Compensation ($) |
| Non-Equity Incentive Plan Compensation ($) |
| All Other Compensation ($) |
|
| Total ($) | ||||||||||||
Orson Oliver |
| 2016 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| $ | 52,400 |
|
|
| (1) | $ | 52,400 |
|
Interim Chief Executive Officer |
| 2015 |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| 20,000 |
|
|
| (1) | 20,000 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Sean Garber |
| 2016 |
| $ | 232,512 |
|
| $ | — |
|
| $ | — |
|
| $ | 180,000 |
| $ | 19,061 |
|
|
| (2) | $ | 431,573 |
|
President (Former) |
| 2015 |
| 250,000 |
|
|
| — |
|
|
| — |
|
|
| — |
| 29,747 |
|
|
| (2) | 279,747 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Todd L. Phillips |
| 2016 |
| $ | 220,000 |
|
| $ | 110,000 |
|
| $ | 189,000 |
|
| $ | 100,000 |
| $ | — |
|
|
| (3) | $ | 619,000 |
|
President, Secretary, and Chief Financial Officer |
| 2015 |
| 206,000 |
|
|
| 40,000 |
|
|
| 60,200 |
|
|
| — |
| — |
|
|
| (3) | 306,200 |
| |||
(1) Mr. Oliver was appointed interim CEO in June 2013. He does not receive any compensation for serving in this role. Amounts reflect director's fees earned of $52,400 in 2016 and $20,000 in 2015.
(2) In connection with a management agreement between the Company and Algar, Inc., the Company was required to reimburse Algar for the portion of Mr. Garber’s salary that was attributable to Algar’s services under this management agreement in an amount not to exceed $20.8 thousand per month, or $250.0 thousand per year plus other expenses.We reimbursed Algar $232.5 thousand for Mr. Garber's salary and $19.1 thousand for expenses incurred by Algar related to the performance of the management agreement during 2016.As further described below, Algar was also eligible to receive certain bonuses based on improved operating results of the Company. During 2016 through September 30, 2016, Algar earned and the Company accrued a bonus of $180.0 thousand. The management agreement was terminated on September 30, 2016.
(3) Mr. Phillips was appointed President in September 2016, was appointed Secretary in June 2016, and continues to be Chief Financial Officer, a position he has held since December 31, 2014. Amounts shown under Share-Based Compensation represent the grant date fair value of Restricted Stock Units granted on June 15, 2016.For additional information, see Note 12 - Share Based Compensation in the accompanying Notes to Consolidated Financial Statements.Amounts shown under Bonus represent a discretionary cash bonus awarded to Mr. Phillips during 2016. Amounts shown under Non-Equity Incentive Plan Compensation represent a retention bonus earned by Mr. Phillips during 2016.See Annual Incentive Bonuses section below for further detail.
Compensation Risk Assessment
We have assessed the incentive compensation policies and practices for our employees and concluded that they do not create risks that are reasonably likely to have a material adverse effect on the Company. The Company’s compensation policies and practices are evaluated to ensure that they do not foster risk-taking above the level of risk associated with the Company’s business model.
Interim Chief Executive Officer
Orson Oliver does not receive any compensation in connection with his service as our interim Chief Executive Officer.
Management Services Agreement
On December 2, 2013, the Company and Algar entered into a Management Services Agreement (the “Plan”“Management Agreement”). The term of the Management Agreement was effective December 1, 2013 with a contractual term expiring on December 31, 2016, subject to earlier termination upon mutual agreement or upon circumstances set forth in the agreement. On September 30, 2016 (the "Termination Effective Date"), the Company and Algar mutually agreed to terminate the Management Agreement pursuant to the Termination Agreement.
Effective September 30, 2016, pursuant to the Termination Agreement, Mr. Garber resigned from all positions with the Company, including as President.
For more information related to the compensation of Mr. Garber as President, see the discussion of the Management Agreement in Note 2 - Management Services Agreement with Algar, Inc. in the accompanying Notes to Consolidated Financial Statements. Other than as required by the Management Agreement, Mr. Garber did not receive any compensation in connection with his service as our President.
Under the Management Agreement, we were required to pay Algar a Restrictedbonus in an amount equal to 10.0% of any year-over-year increase in the Company’s adjusted pre-tax income (as defined) during the term. During 2016 through the Termination Effective Date, Algar earned and the Company accrued a bonus of $180.0 thousand.
Compensation Committee
The members of the Compensation Committee are Messrs. Cozzi and Yarmuth. The Compensation Committee is responsible for making recommendations to the Board regarding salaries and bonuses that we pay to our executive officers. This committee held one duly called meeting in 2016.This committee does not have a chairperson.All functions of the Compensation Committee are performed by the committee as a whole.However, the Compensation Committee confers with our interim Chief Executive Officer and President to obtain additional input for the committee's decision-making process and recording our processes and procedures for determination of executive and director compensation, including the scope of authority of the Compensation Committee, the extent to which the Compensation Committee may delegate any authority, and any role of executive officers in determining or recommending the amount or form of executive and director compensation.The Compensation Committee has delegated to our President decisions regarding non executive employee compensation.None of our executive officers served as a member of the Compensation Committee of another entity.Our Compensation Committee has a written charter, which is available on our website at www.isa-inc.com under Investors.
Compensation Committee Consultant
In January 2011 the Compensation Committee retained Bostonian Group, a Marsh & McLennan Agency Company, to undertake a market assessment and provide trend information on incentive compensation plans. Bostonian Group used Towers Watson Top Management Report (Services: $100M - $449M), Mercer Executive Compensation Survey (General Industry Less Than $500M), and Salary.com Companalyst Survey (General Industry $200M - $500M) as well as a peer group of companies to determine the benchmark range of competitive salaries and incentives from which to determine the appropriate salaries and incentives for the Company's executives and senior managers.The market composite was calculated from the 25th, 50th and 75th percentiles of the aggregate peer group data and the three published surveys, with each weighted 25%. Bostonian Group also provided a summary of the peer group prevalent compensation practices, including merit increases, promotions, market adjustments, and target cash and equity incentives. Bostonian Group identified the group of public companies as the peer group that was similar to the Company (Avalon Holdings Corp, Casella Waste Systems Inc, Ceco Environmental Corp, Davey Tree Expert Co, Heritage-Crystal Clean Inc, Homeland Security Capital CP, Metalico Inc, Perma-Fix Environmental Svcs, Schnitzer Steel Inds, Team Inc, TRC Cos Inc, Unvl Stainless & Alloy Prods, US Ecology Inc, Versar Inc, Waste Connections Inc, Waste Management Inc, Waste Services Inc, WCA Waste Corp) in one or more of the following ways:
• | Operate in the scrap metal, waste management, recycling or related environmental services industries; |
• | Reported revenue ranging from $36 million to $562 million in their most recent fiscal year; and |
• | Employ executives in positions similar to those of the Company's senior management. |
The Compensation Committee subsequently retained a second consultant, RS Finance & Consulting, LLC, to supplement Bostonian Group's data by identifying additional public companies with gross margins and number of employees that were similar to those of the Company, and analyzing the compensation practices of those companies.At the request of our President, RS Finance & Consulting updated its data in connection with the negotiation of our CFO's employment agreement in 2014. Since this update, the Compensation Committee has not consulted any third parties on compensation matters.
Executive Employment Agreement and Stock Unit GrantOption Agreements with Chief Financial Officer
On December 31, 2014, in connection with the hiring of a new Chief Financial Officer, our then President, Sean Garber, negotiated and we entered into an Executive Employment Agreement (the “RSU Agreement”). Each RSU vestswith Mr. Phillips having successive one-year terms, which are automatically extended unless earlier terminated by either party in accordance with the agreement.
Mr. Phillips' annual base salary increased from an annual rate of $200.0 thousand to an annual rate of $220.0 thousand on March 31, 2016 and represents the rightJuly 1, 2015. Mr. Phillips is eligible to receive onean annual bonus with a target of 50% of his then-current annual base salary. The Company’s Compensation Committee may determine, in its sole discretion, whether the CFO will receive an annual bonus.
At the time of entry into his employment agreement, we entered into two Stock Option Agreements with our CFO, dated December 31, 2014 and January 2, 2015, respectively.Under these agreements, our CFO received a grant of an aggregate of 170.0 thousand non-incentive stock options which vest over a three-year period, with 1/3 vesting on the first anniversary of the grant date and 1/6 vesting every six months thereafter until the three-year anniversary of the grant date. The stock option agreement dated December 31, 2014 granted our CFO 150.0 thousand stock options at an exercise price per share of $5.97. The stock option agreement dated January 2, 2015 granted our CFO 20.0 thousand stock options at an exercise price per share of $5.71. The exercise price per share of the options is equal to the fair market value of the Company’s common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU Agreement and the Plan. The RSUs were granted to the CFO in lieu of other compensation and as partial payment of the CFO’s bonus related to certain milestone accomplishments during 2015 and early 2016. The RSU Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.39. The RSUs have been, and the shares of common stock underlying the RSUs will be, issued in reliance on the exemption from registration provided under Section 4(a)(2) ofgrant date. These options were cancelled on June 15, 2016.
On June 15, 2016, at the Securities Act of 1933, as amended, for transactions not involving any public offering. In addition,Company's annual meeting, the securities were not offered pursuant to a general solicitation, no underwriter participated in the offer and sale of these securities, and no commission or other remuneration was paid or given directly or indirectly in connection therewith.
The stock options and one-time stock option exchange (repricing)were granted pursuant to the Company’s 2009 Long Term Incentive Plan.
Base Salary
When determining base salary levels for senior management, we evaluate base salary levels of similar positions in the group of our selected peer companies.Base salaries reflect an executive's roles and responsibilities and recognize and reward individual skills, experience and sustained job performance.
Under Mr. Phillips’s executive employment agreement, his base salary was $200.0 thousand per year until June 30, 2015, at which time his salary increased to $220.0 thousand per year.
Annual Incentive Bonuses
The Company's annual incentive compensation plan is a cash-based, pay-for-performance incentive plan.The plan covers executives and certain other personnel as determined by the Compensation Committee and the Company's President.The incentive compensation plan rewards the achievement of certain corporate operating and financial targets set by the Compensation Committee at the beginning of each year.
The Compensation Committee may also establish individual performance goals for executives and other employees in connection with annual incentive compensation.The Compensation Committee awarded Mr. Phillips a discretionary bonus earned during 2016 and to be paid in 2017 of $110.0 thousand.
Long Term Incentive Plan
Long-term incentive compensation opportunities may be performance-based. Long-term incentives provided by the Company may consist of equity awards based on achievement of certain corporate targets. The Company may award long-term incentives in the form of restricted stock, stock options and other forms of equity incentives as more fully described in the Company's 2009 Long-Term Incentive Plan.Equity-based performance awards provide an adequate incentive to management to perform well for shareholders.In addition, equity awards have been an effective means of attracting and retaining management talent.
Long-term incentive plans are designed to ensure that incentive compensation reflects the growth and profitability of the Company.Each of the equity-based awards offered by the Company is intended to reward specified results. These awards promote a long-term view, reward long-term positive performance of the Company, and are intended to align management's interests with shareholders' interests.
Stock Options and Restricted Stock Units
The Company awards stock options and RSUs because it believes they serve a valuable purpose in aligning management's interests with shareholders' interests. Because stock options and RSUs generally vest over time, they serve not only as an incentive for superior performance, but also as a retention device. The Company generally receives an income tax deduction when an executive exercises a stock option or when the RSUs vest.
Perquisites
The Company provides certain members of management various perquisites that are provided by similar companies throughout the industry and include health, dental, vision, life and disability insurance and in the case of some Named Executive Officers, car allowances.We furnish these benefits to provide an additional incentive for our management and to remain competitive in the general marketplace for managerial talent.
Retirement and Other Benefits
The Compensation Committee reviews the overall cost to the Company of the various programs generally when changes are proposed. The Compensation Committee believes the benefits provided by these programs are important factors in attracting and retaining executive officers, including the Named Executive Officers.
401(k) Savings Plans
Our CFO is eligible to participate in our defined contribution retirement plan under Section 401(k) of the Internal Revenue Code on the same basis as all other eligible employees. Eligible employees may contribute 100.0% of their annual salary to meet the IRS limit of $18,000. In an effort to decrease expenses, we suspended the employee match under the plan for an undetermined period of time effective March 1, 2014.
Health and Welfare Plan
We share or pay for the cost of medical, dental, vision, basic life insurance and disability benefits with all eligible full-time regular employees. Our CFO is eligible to participate in these benefits on the same basis as all other employees, unless otherwise specified in an individual employment contract.
Compensation Recovery
We expect to implement a clawback policy in accordance with the requirements of the Dodd-Frank Act and the regulations that the SEC is expected to issue under that Act. We have elected to wait until the SEC issues guidance about the proper form of a clawback policy before formulating our policy.
Termination and Change of Control Agreements
CFO Employment Agreement and Retention Agreement
If our CFO’s optionsemployment is terminated by the Company without “Cause” or due to his resignation for “Good Reason”, he will be entitled to the continued payment of his base salary and COBRA premiums for twelve months following such termination. Our CFO’s receipt of the payments and benefits described in this paragraph is contingent on his execution and non-revocation of a release of claims in favor of the Company.
Following the termination of our CFO’s employment with the Company, he is subject to non-competition and non-solicitation covenants, which extend for 12 months following termination of employment.
Under a Retention Agreement with our CFO dated as of March 25, 2016, under which we would pay our CFO bonuses of $100.0 thousand and $125.0 thousand on each of December 31, 2016 and December 31, 2017, respectively, as long as he remains employed with the Company on those dates, if our CFO's employment is terminated without Cause or for Good Reason (as defined) during 2017, we are required to pay him an amount equal to $125.0 thousand times the quotient of the number of full months employed in 2017 divided by 12.
Outstanding Equity Awards at Fiscal Year-End 2016
The following table provides information with respect to outstanding equity awards for each Named Executive Officer as of December 31, 2016.
Name |
| Option Awards |
|
|
|
| ||||
|
| Number of Securities Underlying Unexercised Options (#) Exercisable |
| Option Exercise Price ($) |
| Option Expiration Date |
| Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
| Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
Orson Oliver (1) Interim CEO |
| 86,000 |
| $4.68 |
| May 16, 2019 |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Todd L. Phillips (2) President, Secretary, and Chief Financial Officer |
| — |
| NA |
| NA |
| 33,750 |
| 60,413 |
(1) | Mr. Oliver was awarded 86,000 options to purchase shares of our Common Stock on May 16, 2014. The market value of the stock options is based on a closing price of $4.68 per share on grant date. These shares were fully vested on the grant date. |
(2) | Mr. Phillips has 33,750 RSUs outstanding at December 31, 2016. The RSUs vest as follows if and to the extent that Mr. Phillips remains employed by the Company through each of the following dates: (i) on June 30, 2017, 11,250 RSUs vest and become nonforfeitable; (ii) on December 31, 2017, 11,250 RSUs vest and become nonforfeitable; and (iii) on June 15, 2018, 11,250 RSUs vest and become nonforfeitable. Market value was computed using the Company’s closing stock price on December 30, 2016, the last trading date before the Company’s fiscal year ended, which was $1.79. |
2016 Director Compensation Table
The following table summarizes the Company’s next annual meeting of shareholders.compensation earned by or awarded to each director, other than a Named Executive Officer, during 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
| Fees Earned or Paid in Cash ($) (1) |
| Option Awards ($) |
| All Other Compensation ($) |
| Total ($) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Orson Oliver |
| $ | 40,000 |
| $ | — |
| $ | — |
| $ | 40,000 |
Vince Tyra |
|
| 60,500 |
|
| — |
|
| — |
|
| 60,500 |
William Yarmuth |
|
| 50,875 |
|
| — |
|
| — |
|
| 50,875 |
Albert Cozzi |
|
| 58,875 |
|
| — |
|
| — |
|
| 58,875 |
Ronald Strecker |
|
| 41,000 |
|
| — |
|
| — |
|
| 41,000 |
(1) | The amount reflects fees of $5,000 per Board meeting, $2,000 per Compensation Committee and $2,000 per Audit Committee meeting and retainer and hourly fees payable for Special Committee service for those directors attending in person or video conferencing and assigned to the respective committee.See also the "Executive Compensation Discussion and Analysis" section for a discussion of Orson Oliver's compensation.In addition to serving as our Chairman, Mr. Oliver also serves as our interim CEO. |
Beginning with the June 2016 Board meeting, the Company revised its Board compensation policy to provide for payments to Board members of $5,000 per Board meeting and $2,000 per committee meeting. For service on the Board’s Special Committee, the Chairman of that committee, Mr. Tyra, receives a monthly retainer of $5,000 per month, and other members, Messrs. Cozzi and Yarmuth, of that committee receive $3,000 per month.
The Board held three conference calls during 2016 and received no compensation for those meetings. The Board has not established a policy regarding compensation for telephonic meetings.
Security Ownership of Certain Beneficial Owners, |
Shares Available for Grant and Options/Warrants Outstanding
The following information is provided as of December 31, 2016 with respect to our existing compensation plans, including individual compensation arrangements, under which our equity securities are authorized for issuance:
|
|
|
|
|
|
|
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
| Weighted-average exercise price of outstanding options, warrants and rights ($) |
| Number of securities remaining available for future issuance under equity compensation plans |
|
|
|
|
|
|
|
Equity compensation plans approved by security holders |
| 502,000 |
| $4.78 |
| 1,636,094 |
Equity compensation plans not approved by security holders |
| — |
| — |
| — |
Total |
| 502,000 |
| $4.78 |
| 1,636,094 |
The Company had 45,150 Restricted Stock Units outstanding at December 31, 2016.
VOTING SECURITIES
The following table sets forth information regarding beneficial ownership of our common stock as of March 22, 2017 for (i) each of our Named Executive Officers, directors and nominees for director, (ii) each person known to management to own of record or beneficially more than five percent of our outstanding shares, and (iii) all of our executive officers and directors as a group.
|
|
|
|
|
|
|
|
|
|
|
Name |
| Amount and Nature of Beneficial Ownership (1)(2)(3) |
|
|
| Percentage of Class (1) |
|
| ||
|
|
|
|
|
|
|
|
| ||
Orson Oliver 7100 Grade Lane Louisville, KY 40213 |
| 1,951,705 |
|
| (4) |
| 23.92 | % |
| (4) |
|
|
|
|
|
|
|
|
| ||
Todd Phillips |
| 63,805 |
|
|
|
| * |
|
|
|
|
|
|
|
|
|
|
|
| ||
Albert Cozzi |
| 191,752 |
|
| (5) |
| 2.35 | % |
| (5) |
|
|
|
|
|
|
|
|
| ||
William Yarmuth |
| 33,953 |
|
| (6) |
| * |
|
| (6) |
|
|
|
|
|
|
|
|
| ||
Vince Tyra |
| 30,000 |
|
| (7) |
| * |
|
| (7) |
|
|
|
|
|
|
|
|
| ||
Sean Garber |
| 50,670 |
|
|
|
| * |
|
|
|
|
|
|
|
|
|
|
|
| ||
All directors and executive officers as a group |
| 2,321,885 |
|
| (8) |
| 28.01 | % |
| (8) |
|
|
|
|
|
|
|
|
| ||
* denotes less than 1% ownership | ||||||||||
Name and Address |
| Amount and Nature of Beneficial Ownership (1)(2)(3) |
|
|
| Percentage of Class (1) |
|
| ||
|
|
|
|
|
|
|
|
| ||
Other Beneficial Ownership over 5%: | ||||||||||
Recycling Capital Partners, LLC 295 S. Commerce Drive Waterloo, IN 46793 |
| 1,714,286 |
|
| (9) |
| 19.19 | % |
| (9) |
|
|
|
|
|
|
|
|
| ||
Daniel M. Rifkin 295 S. Commerce Drive Waterloo, IN 46793 |
| 1,714,286 |
|
| (9) |
| 19.19 | % |
| (9) |
|
|
|
|
|
|
|
|
| ||
Harry Kletter Family Ltd. Ptnsp 7100 Grade Lane Louisville, KY 40213 |
| 750,000 |
|
| (10) |
| 9.29 | % |
| (10) |
|
|
|
|
|
|
|
|
| ||
K&R, LLC 7100 Grade Lane Louisville, KY 40213 |
| 549,168 |
|
| (10) |
| 6.80 | % |
| (10) |
|
|
|
|
|
|
|
|
| ||
The Estate of Harry Kletter 7100 Grade Lane Louisville, KY 40213 |
| 517,788 |
|
| (10) |
| 6.41 | % |
| (10) |
|
|
|
|
|
|
|
|
| ||
David Russell P.O. Box 280481 Northridge, CA 91328 |
| 802,449 |
|
| (11) |
| 9.90 | % |
| (11) |
|
|
|
|
|
|
|
|
| ||
(1) | The table reflects share ownership and the percentage of such share ownership as of March 22, 2017. We have determined the percentages on the basis of 8,074,541 shares of our Common Stock outstanding and exclusive of 30,690 shares of Common Stock held as Treasury stock. |
(2) | Except as otherwise indicated, each person or entity shown has sole voting and investment power with respect to the shares of common stock beneficially owned by him, her or it. |
(3) | Based upon information furnished to the Company by the named persons, information contained in filings with the SEC, and information in our shareholder records.Under the rules of the SEC, a person is deemed to beneficially own shares over which the person has or shares voting or investment power or has the right to acquire beneficial ownership within 60 days, and such shares are deemed to be outstanding for the purpose of computing the percentage beneficially owned by such person or group. However, we do not consider shares of which beneficial ownership can be acquired within 60 days to be outstanding when we calculate the percentage ownership of any other person. |
(4) | Includes options to purchase 86,000 shares exercisable within 60 days of March 22, 2017 and 3,750 shares held in Trusts for Mr. Oliver's daughter and minor grandchildren for which Mr. Oliver is the trustee.Also includes 517,788 shares held by the Estate of Harry Kletter of which Mr. Oliver is executor, 750,000 shares owned by The Harry Kletter Family Limited Partnership of which Mr. Oliver is general partner, and 549,168 shares owned by K&R, LLC which is controlled by Mr. Oliver. |
(5) | Includes options to purchase 68,000 shares exercisable within 60 days of March 22, 2017. |
(6) | Includes options to purchase 30,000 shares exercisable within 60 days of March 22, 2017. |
(7) | Includes options to purchase 30,000 shares exercisable within 60 days of March 22, 2017. |
(8) | Includes the options described in notes 4 through 10 above to purchase 214,000 shares exercisable within 60 days of March 22, 2017. |
(9) | Based on information set forth on Schedule 13D/A filed with the SEC on October 14, 2014.As sole manager of Recycling Capital Partners, LLC, Daniel M. Rifkin shares voting and dispositive power over these shares.Includes warrants to purchase 857,143 shares exercisable within 60 days of March 22, 2017. |
(10) | Includes 517,788 shares held by the Estate of Harry Kletter of which Mr. Oliver is executor, 750,000 shares owned by The Harry Kletter Family Limited Partnership of which Mr. Oliver is general partner, and 549,168 shares owned by K&R, LLC which is controlled by Mr. Oliver. |
(11) | Based on information obtained via email confirmation on March 23, 2017 from David Russell.Includes options to purchase 30,000 shares exercisable within 60 days of March 22, 2017 and the following beneficially owned shares of our common stock: 375,386 shares held in a trust, 98,645 shares held in custodial accounts for Dr. Russell's adult stepson and minor children, and 167,921 shares held in various retirement plans for Dr. Russell's benefit. |
Certain Relationships and Related Transactions, and Director Independence. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Policies and Procedures for Related Person Transactions
Our Board of Directors has adopted written policies and procedures for the review of any transaction, arrangement, or relationship in which we are a participant, the amount involved exceeds $120,000, and one of our executive officers, directors, director nominees or 5% shareholders (or their immediate family members), each of whom we refer to as a “related person,” has a direct or indirect material interest.
If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our Board. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by our Audit Committee. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction. If advance review and approval is not practicable, the Audit Committee will review, and in its discretion may ratify the related person transaction. The policy also permits the chairman of the Audit Committee to review and, if deemed appropriate, approve proposed related person transactions that arise between Audit Committee meetings, subject to ratification by the Audit Committee at its next meeting. Any related person transactions that are ongoing in nature will be reviewed annually. If the related person at issue is a director of the Company, or a family member of a director, then that director would recuse himself and abstain from voting on the approval of the related person transaction, but may, if so requested by the chair of the Audit Committee, participate in some or all of the committee's discussions of the related person transaction.
A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the Audit Committee after full disclosure of the related person's interest in the transaction.
As appropriate for the circumstances of the related person transaction, the Audit Committee will review and consider the following:
• | The related person's interest in the related person transaction; |
• | The approximate dollar value of the amount involved in the related person transaction; |
• | The approximate dollar value of the amount of the related person's interest in the transaction without regard to the amount of any profit or loss; |
• | Whether the transaction will be undertaken in the ordinary course of our business; |
• | Whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party; |
• | The purpose, and the potential benefits to us, of the transaction; and |
• | Any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction. |
The Audit Committee may approve or ratify the transaction only if it determines that, under all of the circumstances, the transaction is in, and not inconsistent with, our best interests. The Audit Committee may impose any conditions on the related person transaction that it deems appropriate.
Unless the transaction is excluded by the instructions to the SEC's related person transaction disclosure rule, any approved related person transaction would be disclosed in accordance with SEC rules.
The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the Compensation Committee in the manner specified in its charter.
For more information related to related party transactions, see Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements.
Corporate Governance - Director Independence
A majority of our directors are independent.We combined the roles of Chairman of the Board and Chief Executive Officer in 2013.The Board appointed Mr. Oliver as Chairman of the Board in May 2012 due to his legal and financial background as well as his previous work on the Board and as Audit Committee Chairman. On June 14, 2013, the Board appointed Mr. Oliver as interim President and interim Chief Executive Officer, for which he continues to be our interim Chief Executive Officer.Mr. Oliver's legal and financial background as well as his knowledge and experience with the Company make Mr. Oliver capable of effectively identifying strategic priorities and leading the discussion and execution of strategy.Mr. Oliver does not receive any salary from the Company; he receives fees as a director of the Company.We recognize that different Board leadership structures may be appropriate for companies in different situations and believe that no one structure is suitable for all companies at all times. We believe our current Board leadership structure is optimal given its current composition.
The members of the Audit Committee are Messrs. Tyra, Cozzi, and Yarmuth. All current members of the Audit Committee are independent as defined in Rule 5605(a)(2) of the NASDAQ listing standards and the Audit Committee Qualifications of Rule 5605(c)(2).
The members of the Compensation Committee are Messrs. Cozzi and Yarmuth. All current members of the Compensation Committee are independent as defined in Rule 5605(a)(2) of the NASDAQ listing standards and the Compensation Committee Qualifications of Rule 5605(d)(2)(A).
The members of the Nominating Committee are Messrs. Cozzi and Tyra. This committee does not have a chairperson. The Nominating Committee met two (2) times in 2016 One new director nomination was submitted in 2016.Messrs. Cozzi and Tyra are independent as defined in Rule 5605(a)(2) of the NASDAQ listing standards.
Principal Accountant Fees and Services. |
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FEES
The information requiredaggregate fees billed for professional services by Items 10, 11, 12, 13principal accountants Mountjoy Chilton Medley LLP in 2016 and 142015 are as follows:
Audit Fees: $129,325 and $137,015 to principal accountants Mountjoy Chilton Medley LLP for the years ended December 31, 2016 and 2015, respectively, for services rendered for the annual audit of our financial statements and the quarterly reviews of the financial statements included in our quarterly reports on Form 10-Q.
Audit Related Fees: $8,700 and $8,500 to principal accountants Mountjoy Chilton Medley LLP for the annual audit of our 401(k) retirement plan for the years ended December 31, 2016 and 2015, respectively.
Tax Fees: No tax services were provided by principal accountants Mountjoy Chilton Medley LLP for the years ended December 31, 2016 and 2015.
All Other Fees: No other services were provided by principal accountants Mountjoy Chilton Medley LLP for the years ended December 31, 2016 and 2015.
The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services that our independent registered public accountants are to perform, except as described below.
The Audit Committee has established general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and will review such guidelines with the Board of Directors. The full Audit Committee, or will be set forth in its absence, the definitive proxy statement relatingchair of the Audit Committee, may pre-approve non-audit services. No pre-approval is necessary for the provision of non-audit services if (1) the aggregate amount of all such non-audit services constitutes no more than 5% of the total amount of revenues paid by us to the 2016 Annual Meetingregistered public accountants during the fiscal year in which the accountants provide the non-audit services, (2) we did not recognize such services at the time of Shareholders of ISA which isengagement to be filed withnon-audit services, and (3) such services are promptly brought to the Securitiesattention of the Audit Committee and Exchange Commission pursuantapproved prior to Regulation 14A within 120 days after ISA’s year end for the year covered by this report undercompletion of the Securities Exchange Actaudit.Mountjoy Chilton Medley LLP did not provide any such services in 2016.
Exhibits and Consolidated Financial Statement Schedules. (a)(1) The following consolidated financial statements of Industrial Services of America, Inc. are filed as a part of this report: (a)(3) List of Exhibits Exhibits filed with, or incorporated by reference herein, this report are identified in the Index to Exhibits appearing in this report. Each management agreement or compensatory plan required to be filed as exhibits to this Form 10-K pursuant to Item 15(b) is noted by an asterisk (*) in the Index to Exhibits. (b) Exhibits. The exhibits listed on the Index to Exhibits are filed as a part of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDUSTRIAL SERVICES OF AMERICA, INC. Dated: March 31, 2017 By : /s/ Orson Oliver Orson Oliver, Chairman of the Board and Interim Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Orson Oliver Chairman of the Board and Interim Chief Executive Officer March 31, 2017 Orson Oliver (Principal Executive Officer) /s/ Todd L. Phillips President and Chief Financial Officer March 31, 2017 Todd L. Phillips (Principal Financial and Accounting Officer) /s/ Albert Cozzi Director March 31, 2017 Albert Cozzi /s/ Vince Tyra Director March 31, 2017 Vince Tyra /s/ William Yarmuth Director March 31, 2017 William Yarmuth Exhibit Number Description of Exhibits 2.1 ** Asset Purchase Agreement dated as of December 4, 2015, by and among Industrial Services of America, Inc., WESSCO, LLC, and Compactor Rentals of America, LLC. (Attachments and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Industrial Services of America, Inc. hereby undertakes to furnish supplementally copies of any of the omitted attachments and schedules upon request by the U.S. Securities and Exchange Commission.) 2.2 ** Asset Purchase Agreement Amendment No. 1 dated April 1, 2016, by and among Industrial Services of America, Inc., WESSCO, LLC, and Compactor Rentals of America, LLC. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q as filed May 13, 2016) (File No. 0-20979) 2.3 ** Asset Purchase Agreement Amendment No. 2 dated April 15, 2016, by and among Industrial Services of America, Inc., WESSCO, LLC, and Compactor Rentals of America, LLC. (Incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q as filed May 13, 2016) (File No. 0-20979) 3.1 ** Industrial Services of America, Inc. Amended and Restated Articles of 3.2 ** Amended and Restated By-laws of ISA, dated March 4.1 ** Securities Purchase Agreement dated as of June 13, 2014 between the Company and Recycling Capital Partners, LLC. 4.2 ** Registration Rights Agreement dated as of June 13, 2014 between the Company and Recycling Capital Partners, LLC. 4.3 ** Common Stock Purchase Warrant dated as of June 13, 2014 by the Company to Recycling Capital Partners, LLC. 10.1 ** Lease Agreement, dated January 1, 1998, by and between ISA and K 10.2 ** Industrial Services of America, Inc. 2009 Long Term Incentive 10.3 ** Form of Stock Option Agreement issued in connection with the 2009 Long Term Incentive Exhibit Number Description of Exhibits 10.4 ** Management Services Agreement dated as of December 1, 2013, between the Company and Algar, Inc., including the Stock Option Agreement attached thereto as Attachment 10.5 ** Director Designation Agreement dated as of June 13, 2014 between the Company and Recycling Capital Partners, LLC. 10.6 ** Securities Purchase Agreement dated December 31, 2014 between the Company and Todd L. Phillips. 10.7 ** Executive Employment Agreement dated December 31, 2014 between the Company and Todd L. Phillips. (Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed on January 5, 2015) (File No. 0-20979)* 10.8 First Amendment to Executive Employment Agreement, dated February 1, 2017, between the Company and Todd Phillips.* 10.9 ** Stock Option Agreement dated December 31, 2014 between the Company and Todd L. Phillips. (Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K as filed on January 5, 2015) (File No. 0-20979)* 10.10 ** Stock Option Agreement dated January 2, 2015 between the Company and Todd L. Phillips. (Incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K 10.11 ** Offer to Purchase Real Estate dated April 30, 2015 from LK Property Investments, LLC to ISA Real Estate LLC. 10.12 ** Lease Agreement dated April 30, 2015 by and between Industrial Services of America, Inc. and LK Property Investments, LLC. 10.13 ** Stock Purchase Agreement, dated as of August 5, 2015, between Industrial Services of America, Inc. and Algar, Inc. 10.14 ** Loan and Security Agreement dated as of February 29, 2016 between the Company, its subsidiaries and MidCap Business Credit LLC. 10.15 ** Revolving Note made by the Company to the order of MidCap Business Credit LLC in face principal amount of $6,000,000. 10.16 ** Pledge and Security Agreement dated as of February 29, 2016 between the Company, its subsidiaries and MidCap Business Credit LLC. Exhibit Number Description of Exhibits 10.17 ** Guaranty and Suretyship Agreement of the Company’s subsidiaries as guarantors for the benefit of MidCap Business Credit 10.18 ** Term Note, date February 29, 2016, issued by the Company to K&R, LLC. (Incorporated herein by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K as filed on March 25, 2016) (File No. 0-20979) 10.19 ** Term Note, date February 29, 2016, issued by the Company to 7100 Grade Lane, LLC. (Incorporated herein by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K as filed on March 25, 2016) (File No. 0-20979) 10.20 ** Intercreditor and Subordination Agreement, dated February 29, 2016, among the Company and K&R, LLC for the benefit of MidCap Business Credit LLC. (Incorporated herein by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K as filed on March 25, 2016) (File No. 0-20979) 10.21 ** Intercreditor and Subordination Agreement, dated February 29, 2016, among the Company and 7100 Grade Lane, LLC for the benefit of MidCap Business Credit LLC. (Incorporated herein by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K as filed on March 25, 2016) (File No. 0-20979) 10.22 ** Restricted Stock Unit Grant Agreement, dated March 25, 2016, between the Company and Todd L. Phillips. (Incorporated herein by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K as filed on March 25, 2016) (File No. 0-20979)* 10.23 ** Retention Agreement, dated March 25, 2016, between the Company and Todd L. Phillips. (Incorporated herein by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K as filed on March 25, 2016) (File No. 0-20979)* 10.24 ** Restricted Stock Unit Grant Agreement, dated as of June 15, 2016, between Industrial Services of America, Inc. and Todd L. Phillips. (Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K as filed on June 16, 2016) (File No. 0-20979) 10.25 ** Industrial Services of America, Inc. Amended and Restated Long Term Incentive Plan, restated as of June 15, 2016. (Incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K as filed on June 16, 2016) (File No. 0-20979) 10.26 ** Agreement to Terminate Management Services Agreement dated as of September 30, 2016, by and among: (i) Algar, Inc., (ii) Sean Garber, and (iii) Industrial Services of America, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K as filed on October 4, 2016) (File No. 0-20979) 10.27 First Amendment to the Loan and Security Agreement dated as of March 31, 2017 between the Company, its subsidiaries and MidCap Business Credit LLC. 11 Statement of Computation of Earnings Per Share (See Note 9 in the accompanying Notes to Consolidated Financial Statements). 21 List of subsidiaries of Industrial Services of America, Inc. 23 Consent of Independent Registered Public Accounting Firm. 31.1 Rule 31.2 Rule 32.1 Section 1350 Certification of Orson Oliver and Todd L. Phillips for the Form 10-K for the year ended December 31, 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Document 101.DEF XBRL Taxonomy Extension Definitions Document 101.LAB XBRL Taxonomy Extension Labels Document 101.PRE XBRL Taxonomy Extension Presentation Document *Denotes a management contract of ISA required to be filed as an exhibit pursuant to Item 601(b)(10)(iii) of Regulation S-K. **Previously filed. INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES Louisville, Kentucky CONSOLIDATED FINANCIAL STATEMENTS December 31, CONTENTS Board of Directors and Shareholders Industrial Services of America, Inc. and Subsidiaries Louisville, Kentucky We have audited the accompanying consolidated balance sheets of Industrial Services of America, Inc. and Subsidiaries as of December 31, We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Industrial Services of America, Inc. and Subsidiaries as of December 31, Mountjoy Chilton Medley LLP /s/ Mountjoy Chilton Medley LLP Louisville, Kentucky March AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2016 2015 ASSETS (in thousands) Current assets Cash and cash equivalents $ 526 $ 642 Income tax receivable 14 14 Accounts receivable – trade after allowance for doubtful accounts of $35.0 thousand in 2016 and 2015 3,361 1,669 Receivables from related parties (Note 10) 150 208 Inventories (Note 1) 3,437 2,410 Prepaid expenses and other current assets 216 160 Total current assets 7,704 5,103 Net property and equipment (Note 1) 13,068 14,152 Other assets Deferred income taxes (Note 7) 27 97 Other non-current assets 57 82 Total other assets 84 179 Total assets $ 20,856 $ 19,434 See accompanying notes to consolidated financial statements. INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2016 2015 LIABILITIES AND SHAREHOLDERS’ EQUITY (in thousands) Current liabilities Current maturities of long-term debt (Note 3) $ 2,942 $ 20 Current maturities of capital lease obligations (Note 4) 198 — Bank overdrafts 79 — Accounts payable 1,605 2,152 Payable and accrued expenses to related parties (Note 10) 578 1,922 Other current liabilities 627 194 Total current liabilities 6,029 4,288 Long-term liabilities Long-term debt, related parties (Note 3 and 10) 1,504 — Capital lease obligations, net of current maturities (Note 4) 1,050 — Total long-term liabilities 2,554 — Shareholders’ equity Common stock, $0.0033 par value: 20.0 million shares authorized in 2016 and 2015; 8,105,231 and 8,049,622 shares issued in 2016 and 2015, respectively; 8,074,541 and 8,018,932 shares outstanding in 2016 and 2015, respectively 27 27 Additional paid-in capital 23,912 23,555 Stock warrants outstanding 1,025 1,025 Retained losses (12,647 (9,417 Treasury stock at cost, 30,690 shares in 2016 and 2015 (44 (44 Total shareholders’ equity 12,273 15,146 Total liabilities and shareholders’ equity $ 20,856 $ 19,434 See accompanying notes to consolidated financial statements. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended 2016 2015 (in thousands, except per share information) Revenue from product sales $ 36,505 $ 46,180 Cost of sales for product sales 35,086 49,105 Impairment loss, property and equipment — 637 Inventory adjustment for lower of cost or market (Note 1) — 1,283 Total cost of sales 35,086 51,025 Operating income (loss) 1,419 (4,845) Selling, general, and administrative expenses 4,475 3,879 Loss before other income (expense) (3,056 (8,724 Other income (expense) Interest expense, including loan fee amortization (509 ) (695 ) Gain on sale of assets — 320 Gain on insurance proceeds 399 — Other income, net 16 27 Total other expense (94 (348 ) Loss before income taxes (3,150 (9,072 Income tax provision (Note 7) 80 13 Net loss from continuing operations (3,230 (9,085 Income from discontinued operations, net of tax, including gain of $6.0 million in 2015 — 7,320 Net Loss $ (3,230 $ (1,765 ) Net income (loss) per share of common stock: Basic: Continuing operations $ (0.40 $ (1.14 Discontinued operations $ — $ 0.92 Diluted: Continuing operations $ (0.40 $ (1.14 Discontinued operations $ — $ 0.92 Weighted average shares outstanding: Basic 8,048 7,989 Diluted 8,048 7,989 See accompanying notes to consolidated financial statements. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE Years ended 2016 2015 (in thousands) Net loss $ (3,230 ) $ (1,765 ) Other comprehensive income (loss): Unrealized loss on derivative instruments — (5 ) Amounts reclassified from accumulated other comprehensive income — 15 Comprehensive loss $ (3,230 $ (1,755 ) See accompanying notes to consolidated financial statements. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Years ended (in thousands, except share information) Common Stock Additional Paid-in Capital Stock Warrants Retained Losses Accumulated Other Comprehensive Income Treasury Stock Shares Amount Shares Cost Total Shareholders' Equity Balance as of December 31, 2014 8,049,622 $ 27 $ 23,249 1,025 $ (7,652 ) $ (10 ) (93,212 ) (134 ) $ 16,505 Common stock — — 99 — — — 62,522 90 189 Unrealized gain on derivative instruments — — — — — (5 ) — — (5 ) Amounts reclassified from accumulated other comprehensive income — — — — — 15 — — 15 Stock option compensation — — 207 — — — — — 207 Net loss — — — — (1,765 ) — — — (1,765 ) Balance as of December 31, 2015 8,049,622 $ 27 $ 23,555 $ 1,025 $ (9,417 ) $ — (30,690 ) $ (44 ) $ 15,146 Common stock 55,609 — — — — — — — — Share-based compensation — — 357 — — — — — 357 Net loss — — — — (3,230 ) — — — (3,230 ) Balance as of December 31, 2016 8,105,231 $ 27 $ 23,912 $ 1,025 $ (12,647 ) $ — (30,690 ) $ (44 ) $ 12,273 See accompanying notes to consolidated financial statements. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended 2016 2015 (in thousands) Cash flows from operating activities Net loss from continuing operations $ (3,230 ) $ (9,085 ) Adjustments to reconcile net loss to net cash (used in) from operating activities: Depreciation and amortization 2,297 2,354 Inventory write-down — 1,283 Share-based compensation expense 357 207 Impairment loss, property and equipment — 637 Gain on sale of property and equipment — (320 ) Gain from insurance proceeds (399 ) — Deferred income taxes 70 — Amortization of loan fees included in interest expense 130 242 Change in assets and liabilities Receivables (1,692 ) 7,278 Receivables from related parties 58 201 Inventories (1,027 ) 2,029 Income tax receivable/payable — (41 ) Other assets 80 128 Accounts payable (547 ) (470 ) Payables to related parties 160 521 Other current liabilities 433 66 Net cash (used in) from operating activities (3,310 ) 5,030 Cash flows from investing activities Proceeds from insurance claim 479 — Proceeds from sale of property and equipment — 2,117 Purchases of property and equipment (8 ) (21 ) Net cash from investing activities 471 2,096 Cash flows from financing activities Loan fees capitalized (241 ) — Change in bank overdrafts 79 (79 ) Payments on long-term debt (20 ) (16,253 ) Proceeds from long-term debt — 362 Payments on capital lease obligations (37 ) — Proceeds from revolving line of credit, net 2,942 — Net cash from (used in) financing activities 2,723 (15,970 ) Cash flows from discontinued operations Net cash provided by operating activities — 1,783 Net cash provided by investing activities — 6,644 Net cash from discontinued operations — 8,427 Net change in cash and cash equivalents (116 ) (417 ) Cash and cash equivalents at beginning of year 642 1,059 Cash and cash equivalents at end of year $ 526 $ 642 See accompanying notes to consolidated financial statements. INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2016 and 2015 2016 2015 (in thousands) Supplemental disclosure of cash flow information: Cash paid for interest $ 300 $ 532 Tax refunds received 5 2 Cash paid for income taxes 15 58 Supplemental disclosure of noncash investing and financing activities: Increase (decrease) in equipment purchases accrual $ — $ (30 ) Equipment additions financed by capital lease obligations 1,285 — Conversion of related party payables to long-term debt, related parties 1,504 — Common stock issued in exchange for a reduction of accrued but unpaid bonus compensation — 189 Real estate sale proceeds used to offset accrued but unpaid bonus compensation — 50 See accompanying notes to consolidated financial statements. INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Industrial Services of America, Inc. (a Florida corporation) and its subsidiaries ("ISA" or the "Company") purchases and sells ferrous and nonferrous materials at The Company's core business is now focused on the The Company's Response to 2015 and 2016 Commodity Markets and Liquidity The Company took the below steps On February 27, 2015, the Company closed on the sale of its Seymour, Indiana property. On April 30, 2015, LK Property Investments, LLC ("LK Property"), an entity principally owned by Daniel M. Rifkin, CEO of MetalX LLC ("MetalX"), (a related party) a scrap metal recycling company headquartered in Waterloo, Indiana, and the principal owner of Recycling Capital Partners, LLC ("RCP") (a related party) purchased a 4.4 acre parcel of real estate located at 6709 Grade Lane, Louisville, KY from ISA Real Estate On May 13, 2015, the Company announced the warm idle of the Company’s auto shredder. This action was in response to market conditions, primarily related to ferrous price volatility and lower ferrous volumes. Management will continue to monitor and analyze market conditions and to review the Company’s long-term options for its shredder and related downstream processing operation. The costs of idling were recognized in the 2015 financial statements. As a result of the continued operating losses from the shredder operations, management reviewed the carrying cost of the shredder, including the downstream processing system. The Company recognized an asset impairment charge of approximately $636.6 thousand related to the shredder’s downstream processing system. This charge NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In May On November 6, 2015, the Company entered into a Forbearance Agreement and Third Amendment to Credit Agreement (the “Forbearance Agreement”) by and among the Company, certain of the Company’s subsidiaries, and Wells Fargo Bank, National Association ("Wells Fargo"). The Forbearance Agreement amended the Credit Agreement to reduce the Maximum Revolver Amount from Pursuant to the terms of the Forbearance Agreement, Wells Fargo agreed that it would forbear, until the Forbearance Termination Date (as defined below), from exercising certain rights and remedies with respect to or arising out of the existence and continuation of certain stipulated events of default under the Credit Agreement between the loan parties and Wells Fargo (as amended by the First Amendment to Credit Agreement dated January 15, 2015, the Second Amendment to Credit Agreement dated January 22, 2015, and the Forbearance Agreement, the “Credit Agreement”). Under the Forbearance Agreement, the Forbearance Termination Date was the earlier to occur of (i) Wells Fargo’s election following the failure of the Loan Parties to satisfy any of the Forbearance Conditions, and (ii) March 15, 2016. On December 4, 2015, the Company and WESSCO, LLC, a wholly owned subsidiary of ISA ("WESSCO"), entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Compactor Rentals of America, LLC ("Compactor Rentals") pursuant to which the Company sold its “Waste Services Segment,” consisting of substantially all of the assets used in (i) the Company’s commercial, retail and industrial waste and recycling management services business which the Company operated under the name “Computerized Waste Systems” or “CWS,” and (ii) the Company’s equipment sales, rental and maintenance business for the commercial and industrial waste and recycling industry which the Company operated under the name “Waste Equipment Sales and Service Company". The Company received cash consideration at closing of $7.5 million, less On April 1, 2016, the Company entered Amendment No. 1 to the Asset Purchase Agreement which extended the deadline for the Company The sale included substantially all of the assets of the Waste Services Segment including, but not limited to, current assets, accounts receivable, tangible personal property, certain leases, inventory, intellectual property, rights under transferred contracts, rights of action and all associated goodwill and other intangible assets associated with the transferred The Asset Purchase Agreement contains a restrictive covenant under which the Company is prohibited from competing with the Waste Services Segment for five years following the closing. See Note 15 - Discontinued Operations related to the sale of the Waste Services Segment. The Company used the proceeds from the transaction to pay transaction expenses, to repay in full the Company’s outstanding indebtedness with Bank of Kentucky, Inc., ("KY Bank") and to repay in full ISA’s term loan from Wells Fargo. The Company NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) On February 29, 2016, the Company entered into a Loan Agreement (the "2016 Loan") with MidCap Business Credit, LLC ("MidCap"). The 2016 Loan is secured by substantially all of the assets of the Company. Proceeds from this loan were used to pay transaction expenses and to pay off and close the remaining balance on the Wells Fargo revolving line of credit. On March 31, 2017, the Company entered into an amendment to the 2016 Loan to increase the line of credit from $6.0 million to $8.0 million, subject to the satisfaction of certain borrowing base restrictions, and extend the maturity date to February 28, 2020. See Note 3 - Long Term Debt and Notes Payable to Bank for further Liquidity Risk Factors The Company’s primary sources of liquidity during 2015 and 2016 were cash flows generated from asset sales, the Notwithstanding the above, management believes it will have adequate liquidity for at least one Revenue ISA records revenue for its recycling operations upon delivery of the related materials. Revenue for the equipment sales divisions was recorded upon delivery of the equipment to the customer. The Company provided installation and training on all equipment and it charged these costs to the customer, recording revenue in the period the service was provided. The Company was the middleman in the sale of the equipment and not a manufacturer. Any warranty was the responsibility of the manufacturer and therefore, no estimates were made for warranty obligations. Allowances for equipment returns were made on a case-by-case basis. Historically, returns of equipment were not material. The Company's management services group Fair Value of Financial The Company carries certain of its financial assets and liabilities at fair value on a recurring basis. These financial assets and liabilities are composed of cash and cash equivalents and derivative In accordance with applicable accounting standards, the Company categorizes its financial assets and liabilities into the following fair value hierarchy: Level 1 – Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an active market. Examples of Level 1 financial instruments include active exchange-traded securities. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Level 2 – Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Examples of Level 2 financial instruments include various types of interest-rate and commodity-based derivative instruments, and various types of fixed-income investment securities. Pricing models are utilized to estimate fair value for certain financial assets and liabilities categorized in Level 2. Level 3 – Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are both unobservable in the market and significant to the overall fair value measurement. These inputs reflect management’s judgment about the assumptions that a market participant would use in pricing the asset or liability, and are based on the best available information, some of which is internally developed. When determining the fair value measurements for financial assets and liabilities carried at fair value on a recurring basis, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability. When possible, ISA looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets, and the Company uses alternative valuation techniques to derive fair value measurements. The Company uses the fair value methodology outlined in the related accounting standards to value the assets and liabilities for cash, debt and derivatives. All of our cash is defined as Level 1 and all our debt In accordance with this guidance, the following tables represent our fair value hierarchy for Level 1 and Level 2 financial instruments, in thousands, at December 31, Fair Value at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs 2016: Level 1 Level 2 Total Assets: Cash and cash equivalents $ 526 $ — $ 526 Liabilities Current maturities of long term debt $ — $ (2,942 $ (2,942 Long term debt, related parties — (1,171 ) (1,171 ) Fair Value at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs 2015: Level 1 Level 2 Total Assets: Cash and cash equivalents $ 642 $ — $ 642 Liabilities Long term debt $ — $ (20 ) $ (20 ) The Company had no transfers in or out of Levels 1 or 2 fair value measurements. We have had no activity in Level 3, fair value measurements for the years ended NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimates In preparing the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP"), management must make estimates and assumptions. These estimates and assumptions affect the amounts reported for assets, liabilities, revenues and expenses, as well as affecting the disclosures provided. Examples of estimates include the allowance for doubtful accounts, estimates of realizability of deferred income tax assets and liabilities, estimates of inventory balances and values, and estimates of stock option and warrant values. The Company also uses estimates when assessing fair values of assets and liabilities acquired in business acquisitions as well as any fair value and any related impairment charges related to the carrying value of inventory and machinery and equipment, and other long-lived assets. Despite Discontinued Operations Prior year financial statements have been recast to reflect the sale of the Company’s Waste Services Segment assets in the fourth quarter of 2015 in accordance with the Financial Accounting Standards Board Accounting Standards Codification 205-20-55 within discontinued operations. Results of discontinued operations are excluded from the accompanying Notes to Consolidated Financial Statements for all periods presented, unless otherwise noted. See Note 15 - Discontinued Operations. Principles of The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts, transactions and profits have been eliminated. Cash and Cash Cash and cash equivalents includes cash in banks with original maturities of three months or less. Cash and cash equivalents are stated at cost which approximates fair value, which in the opinion of management, are subject to an insignificant risk of loss in value. The Company maintains cash balances in excess of federally insured limits. Accounts Receivable and Allowance for Doubtful Accounts receivable consists primarily of amounts due from customers from product and brokered sales. The allowance for doubtful accounts totaled Major Customer The Company had sales to Inventories: The Company's inventories primarily consist of ferrous and non-ferrous scrap metals, NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Certain assumptions are made regarding future demand and net realizable value in order to assess whether inventory is properly recorded at the lower of cost or Management spent much of 2014 and early 2015 working to assess the Company's automobile shredder residue ("ASR") process. Significant process and strategy changes associated with the ASR process were made. These changes, combined with the significant metals market reduction in market demand and prices experienced in late 2014 and through 2015, caused management to perform a lower of cost-or-market assessment, which resulted in inventory write-downs of Some commodities are in saleable condition at acquisition. Inventories as of December 31, 2016 Raw Materials Finished Goods Processing Costs Total (in thousands) Ferrous and non-ferrous materials $ 2,222 $ 805 $ 410 $ 3,437 December 31, 2015 Raw Materials Finished Goods Processing Costs Total (in thousands) Ferrous and non-ferrous materials $ 1,354 $ 652 $ 404 $ 2,410 Property and Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related property. Property and equipment, in thousands, as of Life 2016 2015 $ 4,993 $ 4,993 1-10 years 26,606 25,363 1-7 years 1,624 1,624 5-40 years 7,708 7,821 $ 40,931 $ 39,801 27,863 25,649 $ 13,068 $ 14,152 Depreciation expense for the years ended December 31, NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Certain Banking The Company has included certain banking Shipping and Handling Fees and Costs Shipping and handling charges incurred by the Company are included in cost of sales and shipping charges billed to the customer are included in revenues in the accompanying consolidated statements of operations. Advertising Advertising costs are charged to expense in the period the costs are incurred. Advertising expense was Derivative and Hedging The Company is exposed to market risk stemming from changes in metal commodity prices, and interest rates. In the normal course of business, the Company actively manages its exposure to interest rate risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. Derivative financial instruments The Company does not enter into any interest rate swap derivative instruments for trading purposes. The Company recognizes as an adjustment to interest expense the differential paid or received on interest rate swaps. The change in the fair value of the interest rate swap, which During 2016 and2015 Income Deferred income taxes are recorded to recognize the tax consequences on future years of differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as “temporary differences,” and for net operating loss carry-forwards subject to an ongoing assessment of realizability. Deferred income taxes are measured by applying current tax laws. The Company uses the deferral method of accounting for available state tax credits relating to the purchase of the shredder equipment. The FASB has issued guidance, included in the ASC, related to the accounting for uncertainty in income taxes recognized in financial statements. The Company recognizes uncertain income tax positions using the "more-likely-than-not" approach as defined in the ASC.The amount recognized is subject to estimate and management’s judgment with respect to the most likely outcome for each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. The Company has no liability for uncertain tax positions recognized as of December 31, As a policy, the Company recognizes interest accrued related to unrecognized tax positions in interest expense and penalties in operating expenses. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings (Loss) Per Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding plus the dilutive effect of stock options and warrants. Accumulated Other Comprehensive Income (Loss) Comprehensive income (loss) is net income (loss) plus certain other items that are recorded directly to shareholders’ equity. Amounts included in accumulated other comprehensive loss for our derivative instruments are not recorded net of tax in Stock Option The Company has a Long Term Incentive Plan adopted in 2009 ("LTIP") under which it may grant equity awards for up to The Company uses the grant date stock price to The Company uses the Modified Black-Scholes-Merton option-pricing model to value the Company's stock options for each employee stock option award. There are two significant inputs into the stock option pricing models: expected volatility and expected term. The Company estimates expected volatility based on traded option volatility of the Company's stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company's stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The expected term assumption incorporates the contractual term of an option grant, as well as the vesting period of an award. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted. The assumptions used in calculating the fair value of stock-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if factors change and different assumptions are used, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what was recorded in the current period. Treasury shares or new shares are issued for exercised options. The Company does not expect to repurchase any additional shares within the following annual period to accommodate the exercise of outstanding stock options. Under the LTIP, the Company may grant any of these types of awards: non-qualified and incentive stock options; stock appreciation rights; and other stock awards including stock units, restricted stock units, performance shares, performance units and restricted stock. The performance goals that the Company may use for such awards will be based on any one or more of the following performance measures: cash flow; earnings; earnings per share; market value added or economic value added; profits; return on assets; return on equity; return on investment; revenues; stock price; or total shareholder return. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The LTIP is administered by a committee selected by the Board Subject to shareholder approval and restrictions on exercisability set forth in a Stock Option Agreement entered into on December 2, 2013 between the The Company used the Lattice-Based model to value the Company's stock options for the Algar Options due to market and performance Subsequent The Company has evaluated the period from As more fully described Impact of Recently Issued Accounting In May 2014, the FASB issued ASU 2014-09, NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In August 2014, the FASB issued ASU No. 2014-15, In April 2015, the FASB issued ASU 2015-03, In July 2015, the FASB issued ASU 2015-11, In November 2015, the FASB issued ASU 2015-17, In February 2016, the FASB issued ASU No. 2016-02, The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU 2016-02 on In June 2016, the FASB issued ASU 2016-13, Financial Instruments - In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2016-15 should be applied retrospectively. The Company is evaluating the potential impact of ASU 2016-15 on the Consolidated Financial Statements. NOTE 2 - MANAGEMENT SERVICES AGREEMENT WITH ALGAR, INC. On December 2, 2013, the Company and Algar entered into a Management Services Agreement (the “Management Agreement”). The term of the Management Agreement was effective December 1, 2013 with a contractual term expiring on December 31, 2016, subject to earlier termination upon mutual agreement or upon circumstances set forth in the agreement. On September 30, 2016 (the "Termination Effective Date"), the Company and Algar mutually agreed to terminate the Management Agreement pursuant to the Termination Agreement. See the details below. Under the Management Agreement, Algar The Management Agreement The Company appointed Sean Garber to the Company’s board of directors on October 15, 2014. Mr. Garber was also appointed Vice Chairman at that time. On December 2, 2013, in connection with the Management Agreement, Mr. Garber, Algar’s Chairman and Chief Executive Officer, formerly served as the Company’s President from 1997 to 2000. Mr. Garber is also Algar’s largest shareholder. Algar is located in Louisville, Kentucky and specializes in the procurement and sale of new and used auto parts as well as automotive and metal recycling. Effective September 30, 2016, pursuant to the Termination Agreement, Mr. Garber resigned from all positions with the Company, including as President, and the Board appointed Todd Phillips as President. Mr. Phillips has been the Company's CFO since December 31, 2014 and will continue to serve in that role. The Company was required to reimburse Algar on a monthly basis for its pre-approved expenses, as defined in the Management Agreement, including expenses associated with the salaries of its executive appointees and employees. Under the Management Agreement, through the Termination Effective Date, the Company reimbursed Algar for the portion of Mr. Garber’s salary that was attributable to Algar’s services under the Management Agreement in an amount not exceeding $20.8 thousand per month, or $250.0 thousand per year plus other expenses. Also, under the Management Agreement, Algar was to be paid a bonus in an amount equal to 10.0% of any year-over-year increase in the Company’s adjusted pre-tax income during the term. See Note 10 - Related Party Transactions for discussion of amounts. Subject to shareholder approval and restrictions on exercisability set forth in a Stock Option Agreement entered into on December 2, 2013 between the Company and Algar (the “Stock Option Agreement”), the Company granted Algar an option to purchase a total of 1.5 million shares of Company common stock at an exercise price per share of $5.00. The Company's shareholders approved the Algar Options on October 15, 2014. On September 30, 2016, the Company and Algar mutually agreed to terminate the Management Agreement. As part of the agreement to terminate the Management Agreement, the Stock Option Agreement was also terminated. None of the options were exercised. In connection with the Management Agreement, Mr. Garber and Orson Oliver, the Company’s interim Chief Executive Officer and Chairman of the NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE TO BANK Summary: During 2014, the Company had certain loans with MidCap: On February 29, 2016, the Company entered into the 2016 Loan with MidCap, which Proceeds from this loan were used to pay transaction expenses, pay off and close the remaining balance on the Wells Fargo revolving line of credit and fund working capital requirements. The interest rate on the 2016 Loan is equal to the prime rate The 2016 Loan has a maturity date of February 28, 2018. The Company is subject to a prepayment fee of Interest and monthly fees under the 2016 Loan are payable monthly in arrears. The 2016 Loan Agreement contains a minimum line availability covenant equal to The Company granted MidCap a first priority security interest in all of the assets of ISA pursuant to a Security Agreement. The Company is allowed to sell or refinance up to On March 31, 2017, the Companyand each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan with MidCap ("First Amendment"). The First Amendment increased the line of credit from $6.0 million to $8.0 million and extended the maturity date to February 28, 2020. As amended, the line of credit permits the Company to borrow an amount under the 2016 Loan equal to the lesser of (A) $8.0 million; and (B)(i) 85% of the value of the Company’s eligible domestic accounts receivable, plus (ii) the lesser of (x) $2.5 million and (y) 75% of the net orderly liquidation value of eligible inventory, plus (iii) the lesser of (x) $400,000 and (y) 40% of appraised net forced liquidation value of eligible fixed assets, plus (iv) the lesser of (x) $1.75 million and (y) 45% of the appraised value of certain properties owned by the Company (subject to MidCap's receipt of any third-party or internal approvals it may require in its discretion), minus (v) any amount which MidCap may require from time to time, pursuant to terms of the agreement, in order to secure amounts owed to MidCap under the agreement. The First Amendment contains a minimum line availability covenant equal to $350.0 thousand, the same as the 2016 Loan.This covenant may be replaced by a Fixed Charge Coverage Ratio ("FCCR") covenant once the Company has achieved an FCCR of 1.1x on an annualized basis.The Company paid underwriting fees of $20.0 thousand at closing. The 2016 Loan had NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE TO BANK Wells Fargo: On June 13, 2014, the Company entered into a senior, secured credit facility (the "Credit Agreement") with Wells Fargo pursuant to which Wells Fargo granted the Company a revolving line of credit of up to $15.0 million (the "Revolving Loan"), up to $1.0 million of which was available to the Company as a sub-facility for letters of credit. As of December 31, 2015, all loans under the credit agreement except the Revolving Loan had been paid in full. The Company was able to borrow up to 85% of the value of its eligible accounts receivable and 65% of the value of eligible inventory under the Revolving Loan. As of December 31, 2015, The Credit Agreement also provided the Company with a secured equipment term loan of $2.8 million (the "Term Loan"). The Company used the proceeds from the Credit Agreement to repay in full its prior credit facility The interest rate on the Revolving Loan was equal to daily three month LIBOR plus three percent (3.00%). The interest rate on the Term Loan was equal to daily three month LIBOR plus three and 25/100 percent (3.25%). In the Event of a Default (as defined in the Credit Agreement) under either the Revolving Loan or the Term Loan, the interest rate would increase by two percent (2.0%). Each of the Revolving Loan and the Term Loan had a maturity date of June 13, 2019. During 2015, the lender temporarily decreased the borrowing base block, thereby increasing the availability of capital under our revolving line of credit by $350,000.The Company was charged $5,000 per week for each week in which it utilized this additional $350,000. The Company was subject to a prepayment fee of up to 2.00% of the maximum Revolving Loan and Term Loan amount in the event the Credit Agreement was terminated or prepaid prior to June 13, 2018.However, Wells Fargo waived these fees as part of the December 4, 2015 and February 29, 2016 payoffs. Interest under the Revolving Loan was payable monthly in arrears. Principal and interest under the Term Loan was payable in sixty (60) monthly installments, with the first payment commencing July 1, 2014, and the final unpaid principal amount, together with all accrued and unpaid interest, charges, fees, or other advances, if any, to be paid on June 13, 2019. As of December 31, 2015, the Company had $0.8 million The Bank of Kentucky: Until December 4, 2015, WESSCO owed amounts under two promissory notes (collectively, the "KY Bank Notes") in favor of KY Bank, one in the amount of$3.0 million (the "Term Note") and one in the amount of$1. 0 million (the "Line of Credit K&R, LLC and 7100 Grade Lane, LLC: Amounts owed to NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE TO BANK Long term debt as of December 31, 2016 2015 (in thousands) Revolving credit facility with MidCap at December 31, 2016 and Wells Fargo at December 31, 2015. See above description for additional details $ 2,942 $ 20 K&R, LLC related party note (See Note 10 - Related Party Transactions) 884 — 7100 Grade Lane, LLC related party note (See Note 10 - Related Party Transactions) 620 — 4,446 20 Less current maturities 2,942 20 $ 1,504 $ — The annual maturities of long term debt, in thousands, for the next five years and thereafter as of 2017 $ 2,942 2018 — 2019 — 2020 1,504 2021 — Total long-term debt $ 4,446 NOTE 4 - LEASE COMMITMENTS Operating Leases: The Company leases a portion of our Louisville, Kentucky facility from a related party (see Note 10 - Related Party Transactions) under an operating lease expiring December 31, As described in Note 1 - Summary of Significant Accounting Policies, the Company signed a lease, effective December 1, 2014, to lease a facility in the Seymour, Indiana area. This lease is for a period of three years. The Company has the option to extend the lease for three (3) additionalthree The Company signed a lease, effective October 1, 2014, to lease three cranes for $28.9 thousand per The Company The Company The Company previously leased office space in Dallas, Texas. The lease The Company leased a lot in Louisville, Future minimum lease payments for operating leases for the next five years ending December 31 of each year, in thousands, as of Related Party Other Total $ 682 $ 92 $ 774 36 — 36 11 — 11 — — — 2021 — — — $ 729 $ 92 $ 821 Total rent expense for the years ended December 31, 2016 and2015 was $982.2 thousand and Capital Leases: On May 1, 2016, the Company entered into an amendment to the Crane Lease, whereby the lease is extended through April 30, 2021. Payments are $14.5 thousand per month for the first twelve months following the amendment date, followed by monthly payments of $31.3 thousand thereafter for the reminder of the lease term. There is no bargain purchase option associated with the Crane Lease. Based on the new lease terms, the Company classified the Crane Lease as a capital lease. At inception, the Company recorded a capital lease obligation of $1.3 million. The Company used a weighted average cost of capital of 9.3% to calculate the capital lease obligation. For the year ended December 31, 2016, the Company recorded $171.3 thousand in depreciation expense and NOTE 4 - LEASE COMMITMENTS (Continued) Future minimum lease payments for the capital lease for the next five years ending December 31 of each year, in thousands, as of December 31, 2016 are as follows: NOTE 5 - PROVISION FOR EMPLOYEE TERMINATIONS AND SEVERANCES For the years ended NOTE 6 - EMPLOYEE RETIREMENT PLAN The Company maintains a defined contribution retirement plan under Section NOTE 7 - INCOME TAXES The income tax provision (benefit), in thousands, consists of the following for the years ended 2016 2015 Federal Current $ — $ — Deferred — — — — State and Local Current 11 13 Deferred 69 — 80 13 $ 80 $ 13 A reconciliation of income taxes at the statutory rate to the reported provision (benefit), in thousands, is as follows: 2016 2015 Federal income tax at statutory rate $ (1,071 ) $ (595 ) State and local income taxes, net of federal income tax effect (48 ) (77 ) Permanent differences 902 — Increase in deferred tax asset valuation allowance 408 716 Other differences (111 ) (31 ) $ 80 $ 13 NOTE 7 - INCOME TAXES (Continued) Significant components of the Company’s deferred tax liabilities and assets, in thousands, as of 2016 2015 Deferred tax liabilities Property and equipment $ (935 ) $ (1,459 ) Gross deferred tax liabilities (935 ) (1,459 ) Deferred tax assets Intangibles and goodwill 2,038 2,286 Accrued property taxes 53 13 Allowance for doubtful accounts 14 14 Inventory capitalization 110 63 Stock options 605 1,147 Federal net operating loss carry forward 4,706 4,176 State net operating loss carry forward 1,658 1,758 State recycling equipment tax credit carry forward 4,593 4,598 Inventory valuation reserve 60 78 Accrued expenses 187 77 Other 11 11 Gross deferred tax assets 14,035 14,221 Valuation allowance (13,073 ) (12,665 ) Net deferred tax assets $ 27 $ 97 At December 31, At December 31, A deferred tax asset valuation allowance is established if it is “more likely than not” that the related tax benefits will not be realized. In determining the appropriate valuation allowance, the Company considers the projected realization of tax benefits based on expected levels of future taxable income, considering recent operating losses, available tax planning strategies, reversals of existing taxable temporary differences and taxable income in the state The recorded valuation allowance, in thousands, consisted of the following at Year Ended December 31, 2016 2015 Valuation allowance, beginning of year $ 12,665 $ 11,949 Increase in deferred tax asset valuation allowance 408 716 Valuation allowance, end of year $ 13,073 $ 12,665 NOTE 8 - CASH AND STOCK DIVIDENDS Under the previous Wells Fargo and the current MidCap loan agreements, the Company covenants that so long as the lender remains committed to make any advance or extend any other credit to us, or any obligations remain outstanding, the Company will not declare or pay any dividend or distribution (either in cash or any other property in respect of any stock) or redeem, retire, repurchase or otherwise acquire any of our stock, other than dividends and distributions by subsidiaries of parent to parent. In NOTE 9 – PER SHARE DATA The computation for basic and diluted loss per share is as follows: 2016 2015 Continuing operations: (in thousands, except per share information) Basic loss per share Net loss $ (3,230 ) $ (9,085 ) Weighted average shares outstanding 8,048 7,989 Basic loss per share $ (0.40 ) $ (1.14 ) Diluted loss per share Net loss $ (3,230 ) $ (9,085 ) Weighted average shares outstanding 8,048 7,989 Add dilutive — — Diluted weighted average shares outstanding 8,048 7,989 Diluted loss per share $ (0.40 ) $ (1.14 ) 2016 2015 Discontinued operations: (in thousands, except per share information) Basic loss per share Net income $ — $ 7,320 Weighted average shares outstanding 8,048 7,989 Basic income per share $ — $ 0.92 Diluted loss per share Net income $ — $ 7,320 Weighted average shares outstanding 8,048 7,989 Add dilutive — — Diluted weighted average shares outstanding 8,048 7,989 Diluted income per share $ — $ 0.92 NOTE 10 - RELATED PARTY TRANSACTIONS During the period ended December 31, K&R and 7100 Grade Lane, LLC ("7100 LLC"): The Company The Company leases a portion of On September 13, 2013, K&R made a As of December 31, 2016 and2015 On February 29, 2016, K&R assigned its interest in the 7100 Lease to another entity, 7100 LLC, also controlled by Mr. Kletter’s estate. At that time, the total amount due to the estate’s various entities, which amounted to approximately Algar, Inc. ("Algar"): Management Services Agreement with Algar: On December 2, Under the Management Agreement, Algar provided the Company with day-to-day senior executive level operating management services. Algar In connection with the Management Agreement, the Under the Management Agreement, NOTE 10 - RELATED PARTY TRANSACTIONS (Continued) For the year As of the Termination Effective Date, the Company and Algar mutually terminated the Management Agreement. The Termination Agreement provides that in satisfaction of all amounts owed to Algar under the Management Agreement, the Company paid Algar: (i) $20,880 on the Termination Effective Date, (ii) an aggregate amount equal to $50,000, paid in three equal monthly installments on the last day of October, November and December 2016 (full amount accrued at September 30, 2016), and (iii) an amount equal to ten percent of the decrease, if any, in reported “Loss before income taxes” for the nine months ended September 30, 2016 as reported on the Condensed Consolidated Statements of Operations in the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2016, (the “3Q 2016 Form 10-Q”) as filed with the U.S. Securities and Exchange Commission, over the Company’s reported “Loss before income taxes” for the nine months ended September 30, 2015 as reported in the 3Q 2016 Form 10-Q (the "Accrued Bonus Payment"). The Accrued Bonus Payment will be payable as follows: subject to the availability of cash under applicable law and loan covenants, the Company will pay the Accrued Bonus Payment to Algar upon the first to occur of March 31, 2017, or the date of closing of a Change of Control Transaction, as defined. The Company accrued $180.0 thousand in bonus expense to Algar for the year ended December 31, 2016 related to the Accrued Bonus Payment. The Termination Agreement also provided for the cancellation of the Stock Option Agreement as of the Termination Effective Date. Mr. Garber and Mr. Oliver terminated the Irrevocable Proxies that were received in connection with the Management Agreement as of the Termination Effective Date. Mr. Garber resigned all offices with the Company and his director position as of the Termination Effective Date. Other transactions with Algar: During Board of Directors' fees and consulting fees: The Company pays board and committee fees to non-employee directors. Additionally, the Company paid financial consulting fees to one of its directors in LK Property Investments, LLC: On April 30, 2015, ISA Real Estate LLC On April 30, 2015, the Company entered into a lease agreement with LK Property, for a portion of the 4.4 acre parcel of real estate located at 6709 Grade Lane, Louisville, Kentucky in the amount of $3.0 thousand per month. The lease terminates on April 14, 2019, but the Company has the right to terminate the lease and vacate the leased premises upon 90 days notice. The Company is required to reimburse the lessor for 40% of the property taxes on the parcel during the term. Metal X, LLC: During SG&D Ventures, In May NOTE 10 - RELATED PARTY TRANSACTIONS (Continued) Related party balances as of and for the years ended December 31, 2016 2015 K&R, LLC and 7100 LLC: Deposit amounts owed to the Company by related parties (1) $ 42 $ 74 Property deposit payable to related parties (2) — 500 Note payable to related parties (3) 1,504 — Accrued interest to related parties (2) 63 — Facility rent payable to related parties (2) 176 821 Equipment rent payable to related parties (2) 15 132 Facility rent expense to related parties (4) 646 646 Equipment rent expense to related parties (4) 25 126 Interest expense to related parties (4) 63 — Algar, Inc.: Accounts receivable from Algar for scrap transactions (1), (5) $ — $ 93 Accounts receivable from Algar for logistical services (1), (5) — 19 Accounts payable to Algar (2), (5) — 28 Bonus payable to Algar (2), (6) 180 189 Revenue from scrap sales to Algar (4), (7) 7 117 Revenue from logistical services to Algar (4), (7) 48 69 Revenue from IT services to Algar (4), (7) 16 23 Scrap material purchases from Algar (4), (7) 1,204 1,225 Management fee expense (4), (7) 238 250 Bonus expense to Algar (4), (7) 180 — Net rental income from Algar (4), (7) 16 — Other expenses to Algar (4), (7) 14 30 Board of Directors: * Accounts payable to the Board of Directors for fees (2) $ 144 $ 250 Board of director fee expense (4) 251 180 Board of director consulting expense (4) — 25 LK Property Investments, LLC: Lease deposit to LK Property (1) $ 3 $ 3 Accounts payable to LK Property (2) — 2 Rent expense to LK Property** (4) 36 24 Loss on the sale of assets to LK Property (4) — (102 ) Metal X, LLC: Accounts receivable from Metal X (1) $ 105 $ 19 Revenue from product sales to Metal X (4) 246 1,905 SG&D Ventures, LLC: Gain on the sale of assets to SG&D (4) $ — $ 1 NOTE 10 - RELATED PARTY TRANSACTIONS (Continued) * Excludes insignificant amount of travel reimbursement. **Excludes amounts reimbursed to LK Properties for utilities and property tax. (1) Included in (2) Included in payable and accrued expenses to related parties on the Consolidated Balance Sheets; balances are as of December 31, 2016 and 2015. (3) Included in long-term liabilities on the Consolidated Balance Sheets; balance (4) Included in the Consolidated Statements of Operations; balances are for the year ended December 31, 2016 and 2015. As discussed above, the Company and Algar mutually agreed to terminate the Management Agreement pursuant to the Termination Agreement on September 30, 2016. Therefore, the Company considers Algar a related party through the termination date. The Company reported the Algar related party balances as follows: (5) The 2016 balances are excluded as Algar was not a related party at December 31, 2016. (6) The 2016 balance includes the bonus payable amount at December 31, 2016 as this amount was earned on September 30, 2016 while Algar was a related party. (7) The 2016 balances include transactions for the nine month period ended September 30, 2016, the period Algar was a related party. NOTE 11 - SEGMENT INFORMATION Prior to December 4, 2015, the Company’s operations included The Company’s Waste Services’ revenues consisted of charges to customers for waste disposal services and equipment sales and lease income. NOTE 12 - SHARE BASED COMPENSATION Following is a summary of stock option activity and number of shares reserved for outstanding options for the years ended December 31, Total Options Number of shares (in thousands) Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Term Weighted Average Grant Date Fair Value Outstanding at December 31, 2014 2,152 $ 5.02 2.70 years $ 2.23 Granted 20 5.71 — 3.01 Outstanding at December 31, 2015 2,172 $ 5.02 1.70 years $ 2.24 Cancelled (1,670 ) $ 5.10 — $ 2.18 Outstanding at December 31, 2016 502 $ 4.78 2.07 years $ 2.43 Exercisable at December 31, 2016 502 4.78 2.07 years $ 2.43 Securities available for grant at December 31, 2016 1,636 Following is a summary of the nonvested options issued and outstanding: Weighted Average Grant Non-Vested Options Number of shares (in thousands) Date Option Fair Value Outstanding at January 1, 2015 990 $ 2.31 Granted 20 3.01 Vested (140 ) 2.95 Forfeited — — Outstanding at December 31, 2015 870 $ 2.22 Cancelled (870 ) 2.22 Outstanding at December 31, 2016 — $ — Option Grants: As described in Note 1 - Summary of Significant Accounting Policies and General and Note 10 - Related Party Transactions, as of December 1, 2013, subject to shareholder approval (which was received during In January 2015, the Company awarded options to purchase 20.0 thousand shares of The weighted average assumptions relating to the valuation of the Company's stock options awarded in 2015 are shown below. There were no stock options awarded in 2016. 2015 Weighted average grant-date fair value of grants per option $ 3.01 Volatility 60.1 % Risk-free interest rate 2.3 % Expected life (in years) 5 Expected dividend yield 0.0 % RSUs: On March 25, 2016, our Compensation Committee granted 32.0 thousand restricted stock units (“RSUs”) to the Company’s Chief Financial Officer (the “CFO”), under the LTIP pursuant to a Restricted Stock Unit Grant Agreement (the “RSU Agreement”). The RSUs were granted to the CFO in lieu of other compensation and as partial payment of the CFO’s bonus related to certain milestone accomplishments during 2015 and early 2016. The grant date fair value is based on the Company's closing common stock price on the day immediately prior to the date of grant. The grant date fair value was $90.2 thousand and has been recognized as expense in the accompanying Consolidated Statement of Operations. Each RSU vested on April 1, 2016 and represented the right to receive one share of the Company’s common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU Agreement and the Plan. On March 29, 2016, the Compensation Committee granted 11.4 thousand RSUs to an employee under the LTIP pursuant to an RSU agreement. The grant date fair value is based on the Company's closing common stock price on the day immediately prior to the date of grant. The grant date fair value was $32.0 thousand and will be recognized as expense beginning in the second quarter of 2016. Each RSU vests on March 29, 2018 and represents the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU Agreement and the Plan. NOTE 12 – SHARE-BASED COMPENSATION AND OTHER COMPENSATION AGREEMENTS (Continued) On June 15, 2016, at the Company's annual meeting, the Company's shareholders approved a one-time stock option exchange for the CFO as an alternative to a direct repricing of options previously granted to the CFO. The stock option exchange allowed the Company to cancel 170.0 thousand stock options, including 20.0 thousand granted in January 2015, previously granted to the CFO in exchange for the grant of 90.0 thousand RSUs to the CFO. The RSUs vest as follows if and to the extent that the CFO remains employed by the Company through each of the following dates: (i) on July 1, 2016, 50.00% (45,000) of the RSUs vest and become nonforfeitable; (ii) on December 31, 2016, 12.50% (11,250) of the RSUs vest and become nonforfeitable; (iii) on June 30, 2017, 12.50% (11,250) of the RSUs vest and become nonforfeitable; (iv) on December 31, 2017, 12.50% (11,250) of the RSUs vest and become nonforfeitable; and (v) on June 15, 2018, 12.50% (11,250) of the RSUs vest and become nonforfeitable. Each RSU represents the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU Agreement and the Plan. The CFO has continued his employment by the Company through December 31, 2016 and the related 56,250 RSUs have vested and become nonforfeitable. Following is a summary of RSU activity: ) Other Equity Transactions: On August 5, 2015, the Company entered into a Stock Purchase Agreement with Algar, whereby the Company issued 50.7 thousand shares of its common stock to Algar for aggregate consideration equal to $189.0 thousand based on the fair value of our common stock. The consideration was payable in the form of a partial reduction of the Company's See Note 14 - Financing and Related Matters for details on an additional equity transaction. Non-Equity Transactions: Under a retention agreement with the Company's CFO dated March 25, 2016, the Company will pay the CFO bonuses of On September 30, 2016, the Company entered into retention agreements ("Retention Agreements") with certain management employees (individually "Staff Member"). Under the Retention Agreement, if the Staff Member remains continuously employed by the Company through and including the date which is the first to occur of: (a) the date of a change in control of the Company; (b) the date the Staff Member is terminated without cause; and (c) December 31, 2017, the Company will pay the Staff Member a bonus in an amount equal to 25% of the Staff Member's then-current annual base salary. At September 30, 2016, the Company estimated this liability to be $132.7 thousand. The Company will evaluate the liability on an ongoing basis, and will expense the liability through December 31, 2017 unless determined otherwise. The Company has expensed $22.1 thousand for the year ended December 31, 2016. Other: As of December 31, 2016, we had unrecognized Stock compensation charged to operations relating to stock options and RSU awards was NOTE 13 - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS The Company has litigation from time to time, including employment-related claims, none of which the Company currently believes to be material. The Company's operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials used in the processing of NOTE 14 - FINANCING AND RELATED MATTERS Securities Purchase Agreement On June 13, 2014, the Company issued 857,143 shares of the Company's common stock pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement") to RCP, On June 13, 2014, in connection with the Securities Purchase Agreement, the Company and the Investor entered into a Registration Rights Agreement (the "Registration Rights Agreement"), under which the Company (a) prepared and filed a registration statement no later than December 12, 2014 and (b) caused the registration statement to be declared effective by the Securities and Exchange Commission no later than February 1, 2015 for (i) agreed to resales of the common stock issued to the Investor under the Securities Purchase Agreement, and (ii) agreed to resales of any shares of common stock issuable upon exercise of the warrant. The Registration Rights Agreement requires the Company to pay the Investor a loss of liquidity fee for certain periods after February 1, 2015 when the registration statement is not effective or its use is suspended. The Registration Rights Agreement contains customary representations, warranties and covenants, and customary provisions regarding rights of indemnification between the parties with respect to certain applicable securities law liabilities. Director Designation Agreement On June 13, 2014, in connection with the Securities Purchase Agreement, the Company and RCP entered into a Director Designation Agreement (the "Director Designation Agreement") pursuant to which NOTE 15 - DISCONTINUED OPERATIONS As discussed in Note 1 - Summary of Significant Accounting Policies, on December 4, 2015, the Company and WESSCO entered into the Asset Purchase Agreement with Compactor Rentals pursuant to which the Company sold its “Waste Services Segment,” consisting of substantially all of the assets used in (i) the Company’s commercial, retail and industrial waste and recycling management services business which the Company operated under the name “Computerized Waste Systems” or “CWS,” and (ii) the Company’s equipment sales, rental and maintenance business for the commercial and industrial waste and recycling industry which the Company operated under the name “Waste Equipment Sales and Service Company. The Company received cash consideration at closing of $7.5 million, less The sale included substantially all of the assets of the Waste Services Segment including, but not limited to, current assets, accounts receivable, tangible personal property, certain leases, inventory, intellectual property, rights under transferred contracts, rights of action and all associated goodwill and other intangible assets associated with the transferred assets. The Company's policy was to not allocate interest to discontinued The Asset Purchase Agreement contains standard and customary representations, warranties and covenants, including a restrictive covenant under which the Company will be prohibited from competing with the Waste Services Segment for five years following the Financial information for the Waste Services discontinued operations is summarized as follows: NOTE 15 - DISCONTINUED OPERATIONS (Continued) 2015 (in thousands) Revenue from services and product sales $ 7,402 Cost of sales for services 5,486 Selling, general, and administrative expenses 678 Gain on the sale of business 6,031 Gain on the sale of equipment 51 Net income $ 7,320 2015 (in thousands) Cash flows from operating activities Net income from discontinued operations $ 7,320 Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 402 Gain on sale of property and equipment (51 ) Gain on sale of business (6,031 ) Change in assets and liabilities Receivables (103 ) Inventories 10 Other assets 12 Accounts payable 172 Other current liabilities 52 Net cash from operating activities $ 1,783 Cash flows from investing activities Proceeds from sale of property and equipment 76 Proceeds from sale of business, net of disposal costs 7,000 Purchases of property and equipment (432 ) Net cash provided by investing activities $ 6,644 A pro forma summary of continuing operations for the three months ended December 31, 2015 2015 (in thousands, except per share data) Total revenue $ 6,555 Net loss from continuing operations (2,351 ) Net loss 3,680 Net loss from continuing operations per share $ (0.29 ) Net income per share 0.46 Page PageReport of Independent Registered Public Accounting Firm F-1F-1Consolidated Balance Sheets as of December 31, 20152016 and 20142015F-2F-2Consolidated Statements of Operations for the years ended December 31, 20152016 and 20142015F-4F-4Consolidated Statements of Comprehensive IncomeLoss for the years ended December 31, 20152016 and 20142015F-5F-5Consolidated Statements of Shareholders’ Equity for the years ended December 31, 20152016 and 20142015F-6F-6Consolidated Statements of Cash Flows for the years ended December 31, 20152016 and 20142015F-7F-7Notes to Consolidated Financial Statements F-8F-9SIGNATURESJuly 11, 2016SignatureTitleDateJuly 11, 2016July 11, 2016ExhibitNumber2.1**(incorporated(Incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K datedas filed on December 4,7, 2015) (File No. 0-20979).3.1Incorporation are incorporatedIncorporation. (Incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended Decemberas filed on March 31, 20132014) (File No. 0-20979).3,8, 2016. (incorporated(Incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K datedas filed on March 3,8, 2016) (File No. 0-20979).(incorporated(Incorporated herein by reference to Exhibit 4.1 ofto the Company’s Current Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).(incorporated(Incorporated herein by reference to Exhibit 4.2 ofto the Company’s Current Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).(incorporated(Incorporated herein by reference to Exhibit 4.3 ofto the Company’s Current Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).&R, is incorporated&R. (Incorporated herein by reference herein, to Exhibit 10.10 to the Company's Current Report on Form 8-K of ISA,as filed on March 3, 19981998) (File No. 0-20979).Plan (incorporatedPlan. (Incorporated herein by reference to Exhibit 10.57 to the Company's proxy statementProxy Statement on Form DEF 14A as filed on April 30, 2009) (File No. 0-20979).*Plan is incorporatedPlan. (Incorporated herein by reference herein to Exhibit 10.57 of ISA'sto the Company's Annual Report on Form 10-K as filed on April 1, 20132013) (File No. 0-20979).*48 10.4**Promissory Note, dated October 15, 2013, by and between WESSCO, LLC and The Bank of Kentucky, Inc. in the amount of $3,000,000 payable to The Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit 10.1 of the Company's Report on Form 8-K, as filed on October 21, 2013 (File No. 0-20979).10.5**Promissory Note, dated October 15, 2013, by and between WESSCO, LLC and The Bank of Kentucky, Inc. in the amount of $1,000,000 payable to The Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit 10.2 of the Company's Report on Form 8-K, as filed on October 21, 2013 (File No. 0-20979).10.6**Security Agreement, dated as of October 15, 2013, by and among WESSCO, LLC and The Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit 10.3 of the Company's Report on Form 8-K, as filed on October 21, 2013 (File No. 0-20979).ExhibitNumber10.7**Guaranty of Payment, dated as of October 15, 2013, by and among Industrial Services of America, Inc. and The Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit 10.4 of the Company's Report on Form 8-K, as filed on October 21, 2013 (File No. 0-20979).10.8**Assignment of Promissory Note, dated as of October 15, 2013, by and among Industrial Services of America, Inc. and The Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit 10.5 of the Company's Report on Form 8-K, as filed on October 21, 2013 (File No. 0-20979).10.9**Promissory Note, dated October 15, 2013, by and between Industrial Services of America, Inc., and WESSCO, LLC, in the amount of $3,000,000 payable to WESSCO, LLC is incorporated by reference herein to Exhibit 10.6 of the Company's Report on Form 8-K, as filed on October 21, 2013 (File No. 0-20979).10.10**A is incorporatedA. (Incorporated herein by reference herein to Exhibit 10.1 ofto the Company's Current Report on Form 8-K as filed on December 4, 20132013) (File No. 0-20979).*10.11Swap Confirmation, dated October 17, 2013, between WESSCO, LLC and The Bank of Kentucky, Inc. in the notional amount of $3,000,000 (incorporated by reference to Exhibit 10.68 to the Company's Annual Report on Form 10-K, for the year ended December 31, 2013) ( (File No. 0-20979).10.12**(incorporated(Incorporated herein by reference to Exhibit 10.1 ofto the Company’s Current Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).10.13Credit Agreement dated as of June 13, 2014 between the Company and Wells Fargo Bank, National Association. (incorporated by reference to Exhibit 10.2 of the Company’s Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).10.14**Revolving Promissory Note dated as of June 13, 2014 by Industrial Services of America, Inc. in favor of Wells Fargo Bank, National Association. (incorporated by reference to Exhibit 10.3 of the Company’s Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).10.15**Term Promissory Note dated as of June 13, 2014 by Industrial Services of America, Inc. in favor of Wells Fargo Bank, National Association. (incorporated by reference to Exhibit 10.4 of the Company’s Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).10.16**Security Agreement dated as of June 13, 2014 between the Company, its subsidiaries and Wells Fargo Bank, National Association. (incorporated by reference to Exhibit 10.5 of the Company’s Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).10.17**Continuing Guaranty dated as of June 13, 2014 issued by the Company’s subsidiaries to Wells Fargo Bank, National Association. (incorporated by reference to Exhibit 10.6 of the Company’s Report on Form 8-K as filed on June 19, 2014) (File No. 0-20979).10.18**(incorporated(Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed on January 5, 2015) (File No. 0-20979)*dated December 31, 2014)as filed on January 5, 2015) (File No. 0-20979). *10.19Executive Employment Agreement dated December 31, 2014 between the Company and Todd L. Phillips. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated December 31, 2014) (File No. 0-20979). *ExhibitNumberDescription of Exhibits10.20**Stock Option Agreement dated December 31, 2014 between the Company and Todd L. Phillips. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated December 31, 2014) (File No. 0-20979). *10.21**Stock Option Agreement dated January 2, 2015 between the Company and Todd L. Phillips. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated December 31, 2014) (File No. 0-20979). *10.22**Promissory Note, dated January 15, 2015, between WESSCO, LLC and The Bank of Kentucky, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 15, 2015) (File No. 0-20979).10.23**First Amendment to Credit Agreement, dated January 15, 2015 among the Company, its subsidiaries, and Wells Fargo Bank. (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated January 15, 2015) (File No. 0-20979).10.24**Amended and Restated Subordination Agreement, dated January 15, 2015, between WESSCO, LLC and The Bank of Kentucky. (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated January 15, 2015) (File No. 0-20979).10.25**Security Agreement, dated January 15, 2015 between WESSCO, LLC and The Bank of Kentucky, Inc. (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated January 15, 2015) (File No. 0-20979).10.26**Guaranty of Payment, dated January 15, 2015, between the Company and The Bank of Kentucky, Inc. (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated January 15, 2015) (File No. 0-20979).10.27**(incorporated(Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 30,as filed on May 6, 2015) (File No. 0-20979).10.28(incorporated(Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 30,as filed on May 6, 2015) (File No. 0-20979).10.29(incorporated(Incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K datedas filed on August 5,7, 2015) (File No. 0-20979). *10.30Forbearance Agreement and Third Amendment to Credit Agreement, dated November 6, 2015, between the Company, certain of its subsidiaries and Wells Fargo Bank, National Association. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 6, 2015) (File No. 0-20979).10.31**(incorporated(Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 29,as filed on March 2, 2016) (File No. 0-20979).10.32(incorporated(Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 29,as filed on March 2, 2016) (File No. 0-20979).10.33(incorporated(Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated February 29,as filed on March 2, 2016) (File No. 0-20979).ExhibitNumber10.34**LLC. (incorporatedLLC, dated February 29, 2016. (Incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated February 29,as filed on March 2, 2016) (File No. 0-20979).10.3510.3610.3710.3810.3910.4011****13a-14(a)13a-14a Certification of Orson Oliver for the Form 10-K for the year ended December 31, 2015.2016**13a-14(a)13a-14a Certification of Todd L. Phillips for the Form 10-K for the year ended December 31, 2015.201631.3Rule 13a-14(a) Certification of Orson Oliver for the Form 10-K/A for the year ended December 31, 2015.31.4Rule 13a-14(a) Certification of Todd Phillips for the Form 10-K/A for the year ended December 31, 2015.32.1**2015.2016.32.2Section 1350 Certification of Orson Oliver and Todd Phillips for the Form 10-K/A for the year ended December 31, 2015.101.INS51 20152014F -1FINANCIAL STATEMENTSF - 2F - 4F - 5F - 6F - 7F - 852 20152016 and 2014,2015, and the related consolidated statements of operations, comprehensive income,loss, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.20152016 and 2014,2015, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.25, 201631, 2017F - 1 20152014 2015 2014 ASSETS (in thousands) Current assets Cash and cash equivalents $ 642 $ 1,059 Income tax receivable 14 — Accounts receivable – trade (after allowance for doubtful accounts of $35.0 thousand and $100.0 thousand in 2015 and 2014, respectively) (Note 1) 1,669 8,947 Receivables from related parties (Note 10) 208 409 Inventories (Note 1) 2,410 6,729 Prepaid expenses and other current assets 160 535 Assets held for sale, current (Note 15) — 1,183 Total current assets 5,103 18,862 Net property and equipment (Note 1) 14,152 17,563 Other assets Deferred income taxes (Note 7) 97 97 Assets held for sale, non-current (Note 15) — 1,191 Other non-current assets 82 77 Total other assets 179 1,365 Total assets $ 19,434 $ 37,790 See accompanying notes to consolidated financial statements.F-220152014) ) ) ) F - 3 2015 2014 LIABILITIES AND SHAREHOLDERS’ EQUITY (in thousands) Current liabilities Current maturities of long-term debt (Note 3) $ 20 $ 15,911 Bank overdrafts — 79 Accounts payable 2,152 2,622 Income tax payable — 27 Interest rate swap agreement liability (Note 1) — 10 Payable to related parties (Note 10) 1,922 1,640 Liabilities held for sale, current (Note 15) — 868 Other current liabilities 194 128 Total current liabilities 4,288 21,285 Long-term liabilities Long-term debt, net of current maturities (Note 3) — — Total long-term liabilities — — Shareholders’ equity Common stock, $0.0033 par value: 20.0 million shares authorized in 2015 and 2014; 8,049,622 shares issued in 2015 and 2014; 8,018,932 and 7,956,410 shares outstanding in 2015 and 2014, respectively 27 27 Additional paid-in capital 23,555 23,249 Stock warrants outstanding 1,025 1,025 Retained (losses) earnings (9,417 ) (7,652 ) Accumulated other comprehensive loss — (10 ) Treasury stock at cost, 30,690 and 93,212 shares in 2015 and 2014, respectively (44 ) (134 ) Total shareholders’ equity 15,146 16,505 Total liabilities and shareholders’ equity $ 19,434 $ 37,790 See accompanying notes to consolidated financial statements.F-320152016 and 2014) ) ) ) ) ) ) ) ) ) ) ) F - 4 2015 2014 (in thousands, except per share information) Revenue from product sales $ 46,180 $ 110,091 Total revenue 46,180 110,091 Cost of sales for product sales 49,105 109,624 Impairment loss, property and equipment 637 — Inventory adjustment for lower of cost or market (Note 1) 1,283 1,911 Total cost of sales 51,025 111,535 Selling, general, and administrative expenses 3,879 6,438 Total selling, general and administrative expenses 3,879 6,438 Loss before other income (expense) (8,724 ) (7,882 ) Other income (expense) Interest expense, including loan fee amortization (695 ) (849 ) Gain on sale of assets 320 74 Other income 27 9 Total other expense (348 ) (766 ) Loss before income taxes (9,072 ) (8,648 ) Income tax provision (Note 7) 13 38 Net loss from continuing operations (9,085 ) (8,686 ) Income from discontinued operations, net of tax, including gain of $6.0 million in 2015 $ 7,320 $ 1,413 Net Loss $ (1,765 ) $ (7,273 ) Net income (loss) per share of common stock: Basic: Continuing operations $ (1.14 ) $ (1.15 ) Discontinued operations $ 0.92 $ 0.19 Diluted: Continuing operations $ (1.14 ) $ (1.15 ) Discontinued operations $ 0.92 $ 0.19 See accompanying notes to consolidated financial statements.F-4INCOME20152016 and 20142015) F - 5 2015 2014 (in thousands) Net loss $ (1,765 ) $ (7,273 ) Other comprehensive income: Unrealized (loss) gain on derivative instruments (5 ) 61 Amounts reclassified from accumulated other comprehensive income 15 — Comprehensive loss $ (1,755 ) $ (7,212 ) See accompanying notes to consolidated financial statements.F-520152016 and 2014$ $ F - 6 Common Stock Stock Warrants Retained Earnings Treasury Stock Shares Amount Shares Cost Total Balance as of December 31, 2013 7,192,479 $ 24 $ 18,649 — $ (379 ) $ (71 ) (123,212 ) (177 ) $ 18,046 Common stock and warrants 857,143 3 1,952 1,025 — — 30,000 43 3,023 Unrealized gain on derivative instruments — — — — — 61 — — 61 Stock option compensation — — 2,591 — — — — — 2,591 Common shares granted — — 57 — — — — — 57 Net loss — — — — (7,273 ) — — — (7,273 ) Balance as of December 31, 2014 8,049,622 $ 27 $ 23,249 $ 1,025 $ (7,652 ) $ (10 ) (93,212 ) $ (134 ) $ 16,505 Common stock — — 99 — — — 62,522 90 189 Unrealized gain on derivative instruments — — — — — (5 ) — — (5 ) Amounts reclassified from accumulated other comprehensive income — — — — — 15 — — 15 Stock option compensation — — 207 — — — — — 207 Net loss — — — — (1,765 ) — — — (1,765 ) Balance as of December 31, 2015 8,049,622 $ 27 $ 23,555 $ 1,025 $ (9,417 ) $ — (30,690 ) $ (44 ) $ 15,146 See accompanying notes to consolidated financial statements.F-620152016 and 20142015 2015 2014 (in thousands) Cash flows from operating activities Net loss from continuing operations $ (9,085 ) $ (8,686 ) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 2,354 2,683 Inventory write-down 1,283 1,911 Stock option expense 207 2,516 Impairment loss, property and equipment 637 — Gain on sale of property and equipment (320 ) (74 ) Amortization of loan fees included in interest expense 242 73 Change in assets and liabilities Receivables 7,278 1,233 Receivables from related parties 201 (19 ) Inventories 2,029 88 Income tax receivable/payable (41 ) 34 Other assets 128 (460 ) Accounts payable (470 ) (2,712 ) Payables to related parties 521 1,110 Other current liabilities 66 (128 ) Net cash from (used in) operating activities 5,030 (2,431 ) Cash flows from investing activities Proceeds from sale of property and equipment 2,117 82 Purchases of property and equipment (21 ) (45 ) Net cash from investing activities 2,096 37 Cash flows from financing activities Loan fees capitalized — (245 ) Proceeds from sale of common stock and warrants, net — 3,063 Change in bank overdrafts (79 ) (515 ) Proceeds from long-term debt 362 12,500 Payments on long-term debt (16,253 ) (14,481 ) Net cash (used in) from financing activities (15,970 ) 322 Cash flows from discontinued operations Net cash provided by operating activities 1,783 1,832 Net cash provided by investing activities 6,644 (290 ) Net cash from discontinued operations 8,427 1,542 Net change in cash and cash equivalents (417 ) (530 ) Cash and cash equivalents at beginning of year 1,059 1,589 Cash and cash equivalents at end of year $ 642 $ 1,059 Supplemental disclosure of cash flow information: Cash paid for interest $ 532 $ 838 Tax refunds received 2 2 Cash paid for income taxes 58 6 Supplemental disclosure of noncash investing and financing activities: Increase (decrease) in equipment purchases accrual $ (30 ) $ 30 Common stock issued in exchange for a reduction of accrued but unpaid bonus compensation 189 — Real estate sale proceeds used to offset accrued but unpaid bonus compensation 50 — F - 7 See accompanying notes to consolidated financial statements.F-720152014Business:its four Kentucky and Indiana locations. Additionally, ISA operates its Pick.Pull.Save used automobile parts yard. All of these activities operate under the Company's Recycling Segment. During 2015, ISA sold substantially all of itsthe Waste Services Segment assets. See Note 15 - Discontinued Operations for further information. Accordingly, as of December 4, 2015, the Company's operations are solely in the Recycling Segment. ThroughWaste Services Segment ("Waste Services" - see Segment information at Note 11), ISA provided productsmetal recycling industry. During 2016, the Company announced that the Company formed a special committee of independent board members to evaluate various growth and services to meetstrategic options. During the waste management needsfirst quarter of 2017, the special committee concluded its customers related to ferrous, non-ferrouswork and corrugated scrap recycling, management services and waste equipment sales and rental. This segment maintained contracts with retail, commercial and industrial businesses to handle their waste disposal needs, primarily by subcontracting with commercial waste hauling and disposal companies. Each of our segments billed separately for its products or services. Generally, services and products were not bundled for sale to individual customers. The products or services had valuereported to the customerBoard. The Board accepted the special committee's recommendation to focus on a standalone basis.Discontinued Operations:Prior year financial statements have been recastreturning the core recycling business to reflectprofitability. The Company intends to do this by increasing efficiencies and productivity while evaluating various options which may include operating the saleCompany's auto shredder. The Company will also remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions. Also, on March 31, 2017, the Company entered into an amended credit facility with MidCap (see Note 3 - Long Term Debt and Notes Payable to Bank), which extended the maturity date of the Company’s WasteCompany's line of credit and increased the available borrowing capacity of the line of credit, subject to certain borrowing base restrictions and approvals.Segment assetsamong the Company, Algar, and Sean Garber dated as of September 30, 2016. Effective September 30, 2016, Mr. Garber resigned from all positions with the Company, including as President. Also, on September 30, 2016, the company’s Chief Financial Officer was appointed to serve in the fourth quarter of 2015 in accordance with the Financial Accounting Standards Board Accounting Standards Codification 205-20-55 within discontinued operations. Results of discontinued operations are excluded from the accompanying Notes to Consolidated Financial Statements for all periods presented, unless otherwise noted. See Note 15 - Discontinued Operations.Conditions:ourthe Company's average selling price per unit of quantity decreased by 49.4% and 24.9% for ferrous and nonferrous material, respectively, compared to 2014. These decreases also led to significantly lower volumes of material available to the Company to buy and sell. Due to these deteriorating metalmetals commodity market conditions, during 2015, ISA took significant steps to improve liquidity and pay down debt. Thesedebt during 2015 and 2016. Despite modest improvements in metal commodity markets during 2016, low prices combined with low volumes present a difficult ongoing metals recycling market.are described below. During 2014, ISA made the decision to move its Seymour, Indiana facility from a company-owned property to a leased property. In conjunction with this decision, the Company signed an agreement to sell its Seymour facility in 2014. This property was classified as property available for sale on the December 31, 2014 consolidated balance sheet in the amount of $398.0 thousand and was held within the Recycling Segment. Also, in conjunction with this decision, the Company signed a lease, effective December 1, 2014, to lease a facility in the Seymour area. See Note 4 - Lease Commitments for further lease information and Note 10 - Related Party Transactions for further related party details. Proceeds were used to reduce debt and improve liquidity.LLC.,LLC, a wholly-owned subsidiary of the Company, for a purchase price of $1.0 million. The Company realized a loss of $102.0 thousand from this sale. Also on April 30, 2015, the Company entered into a lease agreement with LK Property for a portion of the 4.4 acre parcel. See Note 4 - Lease Commitments for further lease details. Proceeds were used to reduce debt and improve liquidity.iswas recorded in 2015 as an impairment charge on property and equipment within the cost of goods section in the accompanying consolidated statement of operations. As of the date of this report, the shredderF - 8NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)F - 9 On 18, 2015, ISA Real Estate, LLC agreed to sellsold to SG&D Ventures, LLC ("SG&D"), an entity owned by shareholders of Algar, Inc. ("Algar"), including Sean Garber, at that time the Company’s Vice Chairman of the Board and President, and the President of Algar, an approximately 1-acre1-acre parcel of non-essential real estate, located at 7017 Grade Lane, Louisville, KY, for an aggregate purchase price equal to an independent third-party appraisal amount of $350.0 thousand. The purchase consideration consisted of $300.0 thousand in cash from the purchaser and a credit of $50.0 thousand against bonus compensation previously accrued but not paid to Algar as described in Note 10 - Related Party Transactions. This transaction closed on May 19, 2015. The gain on sale of this asset was $1.1 thousand.thousand and was recognized during the second quarter of 2015. Proceeds were used to reduce debt and improve liquidity.$15$15.0 million to $5$5.0 million. The Forbearance Agreement also amended the Credit Agreement Maturity Date to March 15, 2016 from June 13, 2019. The Forbearance Agreement increased the interest rate on the outstanding indebtedness by approximately 100 basis points.$150,000 $150.0 thousand retained by Compactor Rentals (the "Holdback"). In connection with the closing of the transaction, the Company entered into a transition services agreement with Compactor Rentals, pursuant to which the Company will be releasedprovide certain services to Compactor Rentals until March 31, 2017.orto provide written notice if the Company objected to Compactor Rental’s calculation of the Holdback. On April 15, 2016, the Company entered into Amendment No. 2 to the Asset Purchase Agreement whereby the Company and Compactor Rentals agreed that the Holdback would be retained by Compactor Rentals in connection withbased on a mutually-agreed upon calculation of working capital. Amendment No. 2 also detailed the parties’ agreement of the following: no indemnification claims would be made by Compactor Rentals arising out of certain matters; certain Compactor Rentals’ representatives did not have knowledge of any working capital adjustment. additional indemnification claims as of April 15, 2016; and the transition services agreement between the parties would be extended at no cost to Compactor Rentals through March 31, 2017. Compactor Rentals assumed certain liabilities relating to the Waste Services Segment, including but not limited to, current liabilities, warranty liabilities, and post-closing liabilities incurred in connection with transferred contracts.assets.In connection with the closing of the transaction, the Company entered into a transition services agreement with Compactor Rentals, pursuant to which the Company will provide certain services to Compactor Rentals for up to six months following the closing.F - 9NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)F - 10 details. Followingdetails.MidCap transaction,idling of our auto shredder operation and the refinancing and availability of the Company's working line of credit. Influenced primarily by the length and depth of the metals market downturn and the Company's ongoing operating losses, the Company believes itsmay not be able to fund future capital needs, including necessary working capital, funds for capital expenditures or debt service, from operating cash flow. Consequently, the Company may have to rely on third-party sources to fund capital needs or may have to rely on further asset sales or similar actions. The Company may be unable to obtain third-party financing or conduct asset sales on favorable terms or at all, which could materially and adversely affect our operating results, cash flow and liquidity. Furthermore, the Company cannot provide assurance that sufficient liquidity is sufficientcan be raised from one or more of these sources or that a desired transaction could be consummated within the period needed to meet projected needscertain obligations.year.year beyond the date this Form 10-K is issued. This determination is based on the following: improved operating results in recent months, operating and cash flow projections for 2017 and 2018, and the amended credit facility with MidCap which extends the maturity date to February 28, 2020 and increases the borrowing availability, subject to certain borrowing base restrictions and approvals as described in Note 3 - Long Term Debt and Notes Payables to Bank.Recognition:OurSee Note 15 - Discontinued Operations for further details.provides ourprovided customers with evaluation, management, monitoring, auditing and cost reduction consulting of our customers’ non-hazardous solid waste removal activities. The Company recognizesrecognized revenue related to the management aspects of these services when it deliversdelivered the services. The Company recordsrecorded revenue related to this activity on a gross basis because the Company iswas ultimately responsible for service delivery, hashad discretion over the selection of the specific service provided and the amounts to be charged, and iswas directly obligated to the subcontractor for the services provided. ISA iswas an independent contractor. If the Company discoversdiscovered that third party service providers havehad not performed, either by auditing of the service provider invoices or communications from our customers, then the service delivery dispute iswas resolved directly with the third party service supplier. Revenue from equipment rental iswas recognized monthly as earned. See Note 15 - Discontinued Operations for further details.Instruments: The Company estimates the fair value of our financial instruments using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, prepayments and other factors. Changes in assumptions or market conditions could significantly affect these estimates. As of December 31, 2015, the estimated fair value of our debt instruments approximated book value. The fair value of our debt approximates its carrying value because the majority of our debt bears a floating rate of interest based on the LIBOR rate. There is no readily available market by which to determine fair value of our fixed term debt; however, based on existing interest rates and prevailing rates as of each year end, the Company has determined that the fair value of our fixed rate debt approximates book value.TheInstrumentsinstruments.instruments (for part of 2015). Long-term debt is carried at cost, and the fair value is disclosed herein. In addition, the Company measures certain assets, such as long-lived assets, at fair value on a non-recurring basis to evaluate those assets for potential impairment. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.F - 12 F - 10NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)and derivative contracts areis defined as Level 2.20152016 and 2014:2015:) ) Fair Value at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 2015: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 642 $ — $ — $ 642 Liabilities Long term debt $ — $ (20 ) $ — $ (20 ) Fair Value at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 2014: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 1,059 $ — $ — $ 1,059 Liabilities Long term debt $ — $ (15,911 ) $ — $ (15,911 ) Derivative contract - interest rate swap — (10 ) — (10 ) We have or 2014.F - 11NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Consolidation:ConsolidationReclassifications: We have reclassified certain items within the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements for the prior years and prior quarters in order to be comparable with the current presentation. These reclassifications had no effect on previously reported net loss or shareholders' equity.Equivalents:Accounts:$35.0$35.0 thousand and $100.0$35.0 thousand at December 31, 20152016 and 2014,2015, respectively. OurThe determination of the allowance for doubtful accounts includes a number of factors, including the age of the balance, estimated settlement adjustments, past experience with the customer account, changes in collection patterns and general economic and industry conditions. Interest is not normally charged on receivables, nor do we normally requireis collateral for receivables.receivables normally required. Potential credit losses from our significant customers could adversely affect our results of operations or financial condition. While we believe ourthe Company believes the allowance for doubtful accounts is adequate, changes in economic conditions or any weakness in the steel and metals industry could adversely impact our future earnings. In general, we considerthe Company considers accounts receivable past due which are 30 to 60 days after the invoice date. We chargeLosses are charged off losses to the allowance when we deemit is deemed further collection efforts will not provide additional recoveries. In 2014, thetwoa major customerscustomer that totaled approximately 34.3%12.5% of its net sales forfor the year ended December 31, 2014.2016. The accounts receivable balance related to these twothe major customerscustomer was $1.0$0.4 million as of December 31, 2014These customers There were part of the stainless steel blending and shredder operations of our business. As a result of the Company's decision in the fourth quarter of 2013 to cease the activity in the stainless steel blending line of business, and due to the May 2015 warm idle of the shredder, the sales and accounts receivable balances for these two previouslyno major customers were de minimis in 2015. Additionally, there were no customers as of December 31, 2015 with sales and accounts receivable that were greater than 10%10% of consolidated amounts. Our including stainless steel, and are valued at the lower of average purchased cost or marketnet realizable value ("NRV") based on the specific scrap commodity. See Impact of Recently Issued Accounting Standards at the end of Note 1. Quantities of inventories are determined based on our inventory systems and are subject to periodic physical verification using estimation techniques including observation, weighing and other common industry methods. We recognizeThe Company recognizes inventory impairment and related adjustments when the market value,NRV, based upon current market pricing, falls below recorded value or when the estimated volume (quantity) is less than the recorded volume of the inventory. We recordThe Company records the loss in cost of sales in the period during which we identify a loss.F - 14 We make certainmarket. We base our assumptionsNRV. Assumptions are based on historical experience, current market conditions and current replacement costs.remaining costs of processing (if any) and disposal. If the anticipated future selling prices of scrap metal and finished steel products should decline, wethe Company would re-assess the recorded net realizable value ("NRV")NRV of ourthe inventory and make any adjustments we feelbelieved necessary in order to reduce the value of ourthe inventory (and increase cost of sales) to the lower of cost or market.approximately $1.3 million and $1.9$1.3 million for the yearsyear ended of December 31, 2015 and 2014, respectively.We purchaseThe Company purchases these commodities in small amounts until we haveit has a truckload of material available for shipment. Some commodities are not in saleable condition at acquisition. These commodities must be shredded, torched shredded or baled. We doISA does not have work-in-process inventory that needs to be manufactured to become finished goods. We includeThe Company includes processing costs in inventory for all commodities by weight.F - 12NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)20152016 and 20142015 consist of the following: December 31, 2015 Total (in thousands) Ferrous and non-ferrous materials $ 1,354 $ 649 $ 404 $ 2,407 Other — 3 — 3 Total inventories $ 1,354 $ 652 $ 404 $ 2,410 December 31, 2014 Total (in thousands) Ferrous and non-ferrous materials $ 3,827 $ 1,043 $ 477 $ 5,347 Other — 11 — 11 Total inventories for sale 3,827 1,054 477 5,358 Replacement parts 1,371 — — 1,371 Total inventories $ 5,198 $ 1,054 $ 477 $ 6,729 For the year ended December 31, 2014, replacement parts included in inventory were depreciated over a one-year life when placed in service and were used by the Company within the one-year period as these parts wear out quickly due to the high-volume and intensity of the shredder function. As of December 31, 2015, due to the idling of the shredder, the Company has reclassified the replacement parts inventory to long term property and equipment. Other inventory includes fuel and baling wire.Equipment:20152016 and 20142015 consist of the following: Life 2015 2014 Land $ 4,993 $ 5,745 Equipment and vehicles 1-10 years 25,363 25,181 Office equipment 1-7 years 1,624 2,057 Building and leasehold improvements 5-40 years 7,821 8,602 $ 39,801 $ 41,585 Less accumulated depreciation 25,649 24,022 $ 14,152 $ 17,563 20152016 and 20142015 was $2.3 million and $2.4 million, respectively. Of the $2.3 million of depreciation expense recognized in 2016,$2.2 million was recorded in cost of sales, and$0.1 million was recorded in general and $2.7 million, respectively.administrative expense. Of the $2.4 million of depreciation expense recognized in 2015, $2.2 million was recorded in cost of sales, and $0.2 million was recorded in general and administrative expense. Of the $2.7 millionExpenses:expensescosts relating to our loans and loan restructuring within interest expense. The loan fees amortization totaled $242.4$130.1 thousand and $72.9$242.4 thousand for the years ended December 31, 20152016 and 2014,2015, respectively. On November 6, 2015, the Company and Wells Fargo entered into a forbearance agreement that changed the maturity date of the debt related to these certain banking expenses to March 15, 2016. Additionally, on DecemberF - 13NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):Expense:$2.4$0.8 thousand and $0.5$2.4 thousand for the years ended December 31, 20152016 and 20142015, respectively.Activities:currentlypreviously used by us consist of interest rate swap contracts. Derivative financial instruments are accounted for under the provisions of the FASB's authoritative guidance titled “ASC 815 - Derivatives and Hedging.” Under these standards, derivatives are carried on the balance sheet at fair value. OurThe Company's interest rate swaps arewere designated as a cash flow hedge, and the effective portions of changes in the fair value of the derivatives arewere recorded as a component of other comprehensive income or loss and arewere recognized in the statement of operations when the hedged item affectsaffected earnings. Ineffective portions of changes in the fair value of cash flow hedges arewere recognized in gain or loss on derivative liabilities. Cash flows related to derivatives arewere included in operating activities.iswas established as an effective hedge, iswas included in other comprehensive income. The Company includes the required disclosures for interest rate swaps in Note 3 – Long Term Debt and Notes Payable to Bank. and 2014, we did not use derivative instruments in the form of commodity hedges to assist in managing our commodity price risk. We do not enter into any commodity hedges for trading purposes. As of December 31, 2015, we do not have any interest rate swap instruments.Taxes:20152016 and 20142015.The tax years 2012 through 2015 remain open to examination by the Internal Revenue Service and certain state taxing jurisdictions to which the Company is subject. See also Note 7 - Income Taxes for additional information relating to income taxes.Share:ShareF - 14NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):20142015 due to the valuation allowance recorded. See Note 7 - Income Taxes for additional information relating to the valuation allowance. There are no amounts included in accumulated other comprehensive loss for derivative instruments in 2015. See Note 7 - Income Taxes for additional information relating to the valuation allowance.Statement of Cash Flows: The statements of cash flows have been prepared using a definition of cash that includes deposits with original maturities of three months or less.Arrangements:directors.directors. The exercise price of each option is equal to the market price of ourthe Company's stock on the date of grant. The maximum term of the option is five years. The plan is accounted for based on FASB’s authoritative guidance titled "ASC 718 - Compensation - Stock Compensation." The Company recognizes share-based compensation expense for the fair value of the awards, on the date granted, on a straight-line basis over their vesting term.term (service period). Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on our historical experience and future expectations. Subjectshareholder approval and restrictionsvalue the Company's restricted stock units. The fair value of each restricted stock unit is estimated on exercisability set forth in a Stock Option Agreement entered into on December 2, 2013 between the Company and Algar (the “Stock Option Agreement”), the Company granted Algar an option to purchase a totaldate of 1.5 million shares (in four tranches) of Company common stock (the "Algar Options") at an exercise price per share of $5.00. The Algar Options were not issued under the LTIP. The Company's shareholders approved the Algar Options on October 15, 2014.The Company uses the Lattice-Based model to value the Company's stock options for the Algar Options due to market and performance conditions. See Note 12 - Share Based Compensation. Using these option pricing models, the fair value of each employee stock option award is estimated on the date of grant. Additionally, the fair value of the Algar Options is estimated at the end of each quarter for two of the tranches due to ongoing performance conditions. For the first two tranches, the performance conditions were met.F - 17 initially our Compensation Committee, and consisting of two or more outside members of the Board. The Committee may grant one or more awards to our employees, including our officers, our directors and consultants, and will determine the specific employees who will receive awards under the plan and the type and amount of any such awards. A participant who receives shares of stock awarded under the plan must hold those shares for six months before the participant may dispose of such shares.F - 15NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)For determiningshares. grant date fair valueCompany and Algar (the “Stock Option Agreement”), the Company granted Algar an option to purchase a total of performance-based1.5 million shares (in four tranches) of Company common stock awards granted(the "Algar Options") at an exercise price per share of $5.00. The Algar Options were not issued under the LTIP,LTIP. The Company's shareholders approved the Algar Options on October 15, 2014. On September 30, 2016, the Company has assumed thatand Algar mutually agreed to terminate the Management Agreement between them dated as of December 1, 2013. As part of the agreement to terminate the Management Agreement, the Stock Option Agreement was also terminated. See Note 10 - Related Party Transactions for further details.targets for awards granted in a specific year will be achieved, and the Company has assumed that performance targets for future years will not be achieved.conditions prior to September 30, 2016. See Note 12 - Share Based on these assumptions, the Company uses the closing per share stock price on the date the contract is signed to calculate award values for recording purposes. These calculated amounts reflect the aggregate grant dateCompensation. The fair value of the stock awards computed in accordance with ASC Topic 718.Algar Options was estimated at the end of each quarter for the third and fourth tranches due to ongoing performance conditions. For the first two tranches, the conditions for vesting were met.Events:20152016 through the date the financial statements herein were issued, for subsequent events requiring recognition or disclosure in the financial statements and the following events wereevent was identified:On February 29, 2016, the Company entered into a Loan Agreement with MidCap as above and in Note 3 - Long Term Debt and Notes Payable to Bank.On February 29, 2016,Bank, on March 31, 2017, the Company and each of its wholly-owned subsidiaries entered into an unsecured term note with K&R, LLC in the amount of $620.3 thousand and an unsecured term note with 7100 Grade Lane, LLC, in the amount of $883.8 thousand, both of which are related parties. Each term note has an interest rate of 5.00% and a maturity date of December 31, 2020. These notes replace amounts owed to K&R, LLC and 7100 Grade Lane, LLC of the same amounts. As of December 31, 2015, these amounts were shown as current related party liabilities. See Note 10 - Related Party Transactions for additional information.On March 21, 2016, the Company paid Algar $171.0 thousand, which represented amounts owed to Algar for accounts payable and bonus payable. Subsequent to this payment, the remaining amount owed to Algar was $46.0 thousand solely related to bonus payable. Additionally, on March 21, 2016, Algar paid the Company $146.0 thousand, which represented all amounts owedamendment to the Company through March 21, 2016. The Company's amounts due to and due from Algar as of December 31, 2015 are further discussed in Note 10 - Related Party Transactions.On March 25, 2016 our Compensation Committee granted 32.0 thousand restricted stock units (“RSUs”) to Todd L. Phillips, the Company’s Chief Financial Officer (the “CFO”), under the Industrial Services of America, Inc. 2009 Long Term Incentive Plan (the “Plan”) pursuant to a Restricted Stock Unit Grant Agreement (the “RSU Agreement”Loan with MidCap ("First Amendment"). Each RSU vests on March 31, 2016 and represents the right to receive one share of the Company’s common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU Agreement and the Plan. The RSUs were granted to the CFO in lieu of other compensation and as partial payment of the CFO’s bonus related to certain milestone accomplishments during 2015 and early 2016.Further, on March 25, 2016, the Company entered into a Retention Agreement with the CFO whereby the CFO will receive a cash retention bonus of $100.0 thousand if he remains employed with the Company as of December 31, 2016, and a cash retention bonus of $125.0 thousand if he remains employed with the Company as of December 31, 2017, subject to the terms and conditions set forth in the Retention Agreement.Additionally, the Company plans to submit a proposal to the shareholders to approve a one-time stock option exchange for the CFO as an alternative to a direct repricing of options previously granted to the CFO. The stock option exchange, if approved by the shareholders, would allow the Company to cancel 170.0 thousand stock options previously granted to the CFO in exchange for the grant of 90.0 thousand RSUs to the CFO. The Company expects to seek shareholder approval for the stock option exchange (repricing) of the CFO’s options at the Company’s next annual meeting of shareholders.Standards:Early application is not permitted. We haveThe Company has not yet assessed the impact of the adoption of ASU 2014-09 on ourthe Consolidated Financial Statements.Statements.F - 18 F - 16NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)includingand interim periods within that reporting period.thereafter. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company expectsadopted ASU No. 2014-15 and noted no material impact fromon the adoption of ASU 2014-15 on our Consolidated Financial Statements.willmay continue to be presented as an asset and amortized ratably over the term of the arrangement. ASU 2015-03 is effective for reporting periods beginning after December 15, 2015 including interim periods within those annual periods. Early application is permitted, and upon adoption, ASU 2015-03 should be applied on a retrospective basis. We do not expect the standard to have aThe Company adopted ASU No. 2015-03 and noted no material impact on ourthe Consolidated Financial Statements.We do not expectThe Company adopted the standard to have ain the fourth quarter of 2016 and noted no material impact on ourthe Consolidated Financial Statements.We doThe Company does not expect the adoption of this guidance to have a material impact on ourthe Consolidated Financial Statements.Customers.itsthe Consolidated Financial Statements.FStatements.17Credit Losses, which provides guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company is evaluating the potential impact of ASU 2016-13 on the Consolidated Financial Statements.F - 19 (Continued)NOTE 2 - MANAGEMENT SERVICES AGREEMENT WITH ALGAR, INC.providesprovided the Company with day-to-day senior executive level operating management services. Algar also providesprovided business, financial, and organizational strategy and consulting services, as the Company’s board of directors may reasonably requestrequested from time to time.givesgave Algar the right to appoint the Company’s President and one additional executive officer of the Company. The Company is required to reimburse Algar on a monthly basis for its pre-approved expenses, as defined in the Management Agreement, including expenses associated with the salaries of its executive appointees and employees. The Management Agreement also providesprovided that the Company’s board of directors will increase tobe increased up to seven members. The Company and Algar have also agreed that Algar, subject to certain limitations and Nasdaq listing requirements, may cause the appointment of up to two members to the board of directors, one of whom will serve as Vice Chairman.UnderAlgar will be paid a bonus in an amount equal to 10.0% of any year-over-year increase in the Company’s pre-tax income during the term. See Note 10 - Related Party Transactions for discussionboard of amounts. The termdirectors appointed Mr. Garber as President. Mr. Garber replaced Orson Oliver who had been serving as interim President. As of the Management Agreement is effective December 1, 2013 and extends through December 31, 2016, subjectMr. Oliver continues to earlier termination upon mutual agreement or upon circumstances set forth inserve as the agreement.Subject to shareholder approvalCompany’s Chairman and restrictions on exercisability set forth in a Stock Option Agreement entered into on December 2, 2013 between the Company and Algar (the “Stock Option Agreement”), the Company granted Algar an option to purchase a total of 1.5 million shares of Company common stock at an exercise price per share of $5.00. The first 375.0 thousand share options vested and became exercisable on December 1, 2013. The second 375.0 thousand share options vested and became exercisable after the market price of our Common Stock reached $6.00 per share during 2014. The third 375.0 thousand share options vest and become exercisable only if and after the market price of our Common Stock reaches $8.00 per share or Company revenue following an acquisition increases by $90.0 million; these conditions have not been met as of December 31, 2015. The fourth 375.0 thousand share options vest and become exercisable only if and after the market price of our Common Stock reaches $9.00 per share or Company revenue following an acquisition increases by $120.0 million; these conditions have not been met as of December 31, 2015.Subject to the terms and conditions set forth in the Stock Option Agreement, the options shall become immediately exercisable for all 1.5 million option shares upon the first to occur of any of the following: (i) the termination of Algar's services under the Management Agreement by the Company without cause; (ii) the termination of Algar's services under the Management Agreement by Algar for good reason; or (iii) upon the occurrence of a change in control (with such vesting and expiration timed to give Algar the right to exercise the options immediately before the expiration triggered by the change in control). All rights of Algar will terminate with respect to the options and Algar will have no further rights under the Stock Option Agreement if Algar's Services under the Management Agreement are terminated by the Company for cause, by Algar without good reason, or the Management Agreement is terminated automatically for legal or regulatory reasons.The options shall expire and be of no further force or effect on the earlier of (i) the closing of a change of control transaction, (ii) immediately upon termination of Algar's services under the Management Services Agreement by the Company for cause or by Algar without good reason, (iii) immediately if the issuance of the options is not ratified by the Company's shareholders at a special meeting, (iv) upon the expiration of the term of the Management Agreement, or (v) three years after the date of the Stock Option Agreement. At the annual meeting of shareholders of the Company on October 15, 2014, shareholders approved the issuance of these options. See also Note 12 - Share Based Compensation for additional information about the accounting for these and other options outstanding.Seaninterim Chief Executive Officer. boardBoard of directors,Directors, received an Irrevocable Proxy from each of Harry Kletter, K & R, LLC (K&R) and the Harry Kletter Family Limited Partnership (collectively, “Kletter”), which providesprovided Mr. Oliver and Mr. Garber joint voting authority over the shares owned by Kletter, approximately 25.7%27.0% of the Company’s issued and outstanding common stock. AsF - 18NOTE 2 - MANAGEMENT SERVICES AGREEMENT WITH ALGAR, INC. (Continued) have entered into a separate agreement in which, among other things, they agreeagreed to vote their proxies in favor of matters approved by the Company’s board of directors.UnderMr. Garber and Mr. Oliver terminated the Management Agreement, the Company and Algar have agreed to use their best efforts to effect a business combination between them as soon as is reasonably practicable. As of December 31, 2015, the Company and Algar have not effected a business combination transaction between them. A special committee of independent Board members is considering such a combination in connection with its review of the Company's growth and strategic options.On December 2, 2013,Irrevocable Proxies that were received in connection with the Management Agreement as of the Company’s boardTermination Effective Date.F - 20 Under the Management Agreement, the Company is required to reimburse Algar for the portion of Mr. Garber’s salary that is attributable to Algar’s services under the Management Agreement in an amount not to exceed $20.8 thousand per month, or $250.0 thousand per year. The Company appointed Mr. Garber to the Company’s board of directors on October 15, 2014. Mr. Garber was also appointed Vice Chairman at that time.F - 19Contents(Continued)NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE TO BANKPrior to and duringFifth Third Bank (Fifth Third)Wells Fargo and certain loans with KY Bank. During 2014, the Company paid off the Fifth Third loans with new loans from Wells Fargo (hereinafter “Wells Fargo”). As of December 31, 2014, the Company was in default under the Wells Fargo loans and during the second half of 2015 entered into a Forbearance Agreement with Wells Fargo whereby the due dates on the loans were accelerated and the Company was required to take certain actions. During 2015, as more fully described in Note 1 - Summary of Significant Accounting Policies and General, the Company took steps to pay down debt and increase liquidity. On December 4, 2015, in conjunction with the sale of substantially all assets of the Company’s Waste Services Segment, the Company paid off the KY Bank loans and certain Wells Fargo loans. As of December 31, 2015, the Company had an outstanding balance of $19.7 thousand to Wells Fargo. Subsequent to December 31, 2015,Additionally, on February 29, 2016, the Company closed on new financing with MidCap and paid off in full remaining amounts due to Wells Fargo. Additionally on February 29, 2016, the Company converted certain amounts payable to related parties into unsecured term notes payable to the same related parties as more fully described in Note 10 - Related Party Transactions. See Note 1 - Summary of Significant Accounting Policies and below for further details.iswas a $6$6.0 million senior, secured asset-based line of credit with MidCap. The Company may borrow up to the sum of (a) 85% of the value of its eligible domestic accounts receivable; (b) the lesser of (i) $2.5 million, and (ii) 75% of the net orderly liquidation value of eligible inventory; and (c) the lesser of (i) $500,000, and (ii) 40% of appraised net forced liquidation value of eligible fixed assets (the "Equipment Sublimit"). The Equipment Sublimit shall amortize monthly on a straight line basis over sixty (60) months with no reduction to the overall line of credit availability.(3.5%(3.75% as of February 29, 2016)January 23, 2017) plus 250 basis points (2.50%).In the Event of a Default (as defined in the 2016 Loan Agreement), the interest rate will increase by 300 basis points (3.00%).The 2016 Loan also has a monthly collateral-monitoring fee equal to 27.5 basis points (0.275%) of the average daily balance, an annual facility fee of 100 basis points (1.00%) and an unused line fee equal to an annual rate of 50 basis points (0.50%) of the average undrawn portion of the 2016 Loan.$120,000 in the event$120.0 thousand if the 2016 Loan is terminated or prepaid prior tobefore the one year anniversary of the loan. The Company is subject to a prepayment fee of $60,000 in the event$60.0 thousand if the 2016 Loan is terminated or prepaid subsequent toafter the one year anniversary of the loan. The $60,000$60.0 thousand fee is reduced to zero if the 2016 Loan is refinanced by an FDIC insured institution after eighteen months from February 29, 2016.F - 21 $350,000. $350.0 thousand. This covenant may be replaced by a Fixed Charge Coverage Ratio ("FCCR") covenant once the Company has achieved a FCCR of 1.0x1.0x on an annualized basis.$3$3.0 million in fair market value of real property provided (i) the proceeds from such refinance or sale remain with the Company; and (ii) no event of default exists at the time of such refinance or sale.an outstanding balance at the February 29, 2016 closing date of $472.6 thousand and additional availability of $2.4 million.F - 22 F - 20Table of ContentsThe Bank of Kentucky:On October 15, 2013, WESSCO signed two promissory notes (collectively, the "KY Bank Notes") in favor of KY Bank, one in the amount of $3.0 million (the "Term Note") and one in the amount of $1.0 million (the "Line of Credit Note"). The Company used the proceeds from the Term Note to pay $3.0 million against the Company’s loan from Fifth Third Bank. WESSCO used the Line of Credit Note to purchase additional equipment. The Company signed a $3.0 million demand promissory note (the “Company Note”) in favor of WESSCO in exchange for the proceeds of WESSCO’s Term Note. All amounts under the KY Bank Notes have been repaid as of December 4, 2015.During 2014, the draw period of the Line of Credit Note expired and the outstanding balance automatically converted into a term note ("Line of Credit Term Note") with a five year term. As of December 31, 2015 and 2014, $0.0 thousand and $0.6 million were outstanding on this Line of Credit Term Note. On January 15, 2015, the Company signed a new line of credit ("2015 Line of Credit Note") in the amount of $1.0 million with KY Bank in order to purchase additional equipment. The draw period for the 2015 Line of Credit Note was set to expire on January 14, 2016. All amounts under the KY Bank loans were repaid on December 4, 2015.As security for the KY Bank Notes, WESSCO provided KY Bank a first priority security interest in all of its assets, including the Company Note, pursuant to a Security Agreement (the “Security Agreement”). The KY Bank Notes imposed a Fixed Charge Coverage Ratio Covenant on WESSCO under which: (i) the sum of (a) WESSCO’s earnings before interest, taxes, depreciation, rent, and interest expense, less distributions and (b) unfunded capital expenditures, divided by (ii) the sum of (x) the current portion of long term debt due for the period, (y) interest expense and (z) rent expense was required to be at least 1.15 to 1 at all times. The interest rate on the KY Bank Notes and the Company Note were equal to the one month LIBOR plus three and one-half percent (3.50%) adjusted automatically on the first day of each month during the term of the KY Bank Notes, which had a final maturity date of October 14, 2019. As of December 31, 2014, the interest rate was 3.65%.The principal under the Term Note was payable in sixty (60) monthly installments as follows: $45.3 thousand for the first year, $47.5 thousand for the second year, $49.9 thousand for the third year, $52.4 thousand for the fourth year, and $54.4 thousand for the eleven months of the final year. Interest was calculated as noted above and paid each month. The first payment commenced November 1, 2013, and the final unpaid principal amount of $60.0 thousand, together with all accrued and unpaid interest, charges, fees, or other advances, if any, was to be paid on November 1, 2018. As of December 31, 2015, the outstanding principal balance on the Term Note was $0.0 million.With respect to the Line of Credit Note, WESSCO requested advances up to $1.0 million for twelve (12) months after the effective date of the Line of Credit Note (the "Draw Period"). Advances were limited to eighty percent (80%) of the purchase price for equipment. Advances made to WESSCO that were repaid were eligible to be re-borrowed during the Draw Period. During the Draw Period, interest-only payments in the amount of all accrued and unpaid interest on the principal balance of the Line of Credit Note were made monthly. The total of all advances, less any repayments, through the end of the Draw Period, were equal to the principal balance of the Line of Credit Note, and no further advances were made after the Draw Period. At the conclusion of the Draw Period, the principal and interest were payable in sixty (60) monthly installments that commenced on the first day of the month immediately following the end of the Draw Period. Any unpaid principal amount due, together with all accrued and unpaid interest, charges, fees, or other advances, if any, were paid. As of December 31, 2015 and 2014, the outstanding principal balance on the Line of Credit Note was $0.0 thousand and $577.0 thousand, respectively.WESSCO could not make demand for payment of the Company Note before December 31, 2016. As of December 4, 2015, this note has been cancelled.F - 21NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE TO BANK (Continued)and 2014, an availability block that limits borrowings under the revolver in the amount of $1.6 million and $1.3 million, respectively, iswas in place.with Fifth Third Bank (the "Prior Credit Agreement").The Credit Agreement contained customary covenants, including a minimum EBITDA covenant, a capital expenditure covenant, and a fixed charge coverage ratio covenant, measured monthly on a trailing twelve month basis at the end of each month, beginning with the month ending June 30, 2015 of not less than 1.25 to 1.00. As of December 31, 2015 and 2014, the Company was not in compliance with our bank financial covenants. Under GAAP, all of the Company’s debt was required to be classified in the accompanying balance sheets as of December 31, 2015 and 2014 as a current liability.under our existing credit facilities that it could use.The Company and each of its wholly-owned subsidiaries, other than WESSCO, granted Wells Fargo a first priority security interest in all of their assets pursuant to a Security Agreement, and each of the Company's subsidiaries guaranteed the Company's obligationsavailable under the Revolving Loan. All amounts outstanding on the Revolving Loan were paid on February 29, 2016.Agreement pursuantNote"). Additionally, on January 15, 2015, the Company signed a new line of credit ("2015 Line of Credit Note") in the amount of $1.0 million with KY Bank in order to a Continuing Guaranty; provided that WESSCO's guarantee was subordinated to its obligations topurchase additional equipment. The draw period for the 2015 Line of Credit Note expired on January 14, 2016. All amounts under the KY Bank (described above), pursuantloans were repaid on December 4, 2015.a subordination agreement among Wessco, Wells FargoK&R, LLC and the KY Bank. The Company paid fees7100 Grade Lane, LLC are more fully described in 2014 totaling $245.0 thousand related to the Credit Agreement.FNote 10 - 22Related Party Transactions. Swap agreementsIn October 2013, the Company entered into an interest rate swap agreement with KY Bank swapping a variable rate based on LIBOR for a fixed rate. This swap agreement covers approximately $2.4 million in debt, commenced October 17, 2013 and was scheduled to mature on October 1, 2018. The swap agreement fixes our interest rate at 4.74%. At December 31, 2014, the Company recorded the estimated fair value of the liability related to this swap at approximately $10.0 thousand. The swap was settled for $15.0 thousand during 2015.The Company entered into the swap agreements for the purpose of hedging the interest rate market risk for the respective notional amounts and forecasted amounts. See Note 1 – Summary of Significant Accounting Policies – Derivative and Hedging Activities for additional information about these derivative instruments.Our long20152016 and 20142015 consisted of the following: 2015 2014 (in thousands) Revolving credit facility with Wells Fargo. See above description for additional details. $ 20 $ 10,453 Note payable to Wells Fargo in the original amount of $2.8 million secured by shredder system assets and other Recycling equipment. See above description for additional details. — 2,520 Note payable to the KY Bank in the original amount of $3.0 million secured by all WESSCO assets. See above description for additional details. — 2,361 Revolving credit facility converted to term loan with the Bank of Kentucky, Inc. See above description for additional details. — 577 20 15,911 Less current maturities 20 15,911 $ — $ — 20152016 are as follows:2016 $ 20 2017 — 2018 — 2019 — 2020 — Total long-term debt $ 20 F - 23 (Continued)NOTE 4 - LEASE COMMITMENTS2017. Effective January 1, 2013, the2017 (the "7100 Lease"). The lease amount increased from $48.5 thousand tois $53.8 thousand per month based on the CPI index as stated in the lease agreement.month. In addition, the Company is also responsible for real estate taxes, insurance, utilities and maintenance expense.The (3) (3) year periods.Rent is $8.0 thousand per month and increases each year by $200$0.2 thousand per month. In the event ISA exercises the option to renew the lease for a second three-yearthree-year term, at the end of the second three-yearthree-year term, ISA has the option to purchase the property.month. month (the "Crane Lease"). This lease is for a period of five years. signed a lease, effective December 1, 2010, to leasepreviously leased equipment from a related party (see Note 10 - Related Party Transactions) under an operating lease for a monthly payment of $5.5$5.5 thousand. The lease expired November 2015 and is now operating month to month.signed a lease, effective December 1, 2010, to leasepreviously leased equipment from a related party (see(see Note 10 - Related Party Transactions) under an operating lease that expires May 2016 for a monthly payment of $5.0 thousand.was renewed effective October 1, 2014 for a period of six months with monthly payments of $1.0 thousand. The lease was not renewed as ofexpired April 15, 2015.KYKentucky for a term that commenced in March 2012 and ended in February 2016. The monthly payment amount from March 2012 through February 2014 was $3.5 thousand. Beginning March 2014, the monthly payment amount increased to $3.8 thousand for the remaining term. As of August 31, 2015, the Company entered into a settlement to abandon the leased property and pay the remaining balance of scheduled payments over a 19 month period, ending March 31, 2017. As the lease was terminated and obligation recorded, future payments remaining of $11.4 thousand are not included in the future minimum lease payments table below. 2015, 2016 are as follows:2016 $ 1,168 2017 1,142 2018 404 2019 286 2020 — Future minimum lease payments $ 3,000 2014 was $1,357.4 thousand, respectively.$981.7$78.7 thousand respectively.in interest expense related to the Crane Lease. The net book value of the cranes leased was $1.1 million at December 31, 2016. Principal Interest $ 308 $ 198 $ 110 375 290 85 375 318 57 375 349 26 94 93 1 $ 1,527 $ 1,248 $ 279 20152016 and 2014,2015, the Company expensed $9.9$0 thousand and $35.8$9.9 thousand, respectively, for costs related to employee terminations and severances.401(k)401(k) of the Internal Revenue Code which covers substantially all employees. Beginning January 1, 2013, eligible Eligible employees may contribute up to 100.0% of their annual salary up to meet the IRS limit of $17.5 thousand.limits. Under the plan, the Company matches 25.0% of each eligible employee’s voluntary contribution up to 6.0% of their gross salary. The Company also offers an additional discretionary match for eligible employees who contribute 7.0% - 10.0% of their weekly wages. In an effort to decrease expenses, the Company suspended the employee match under the plan for an undetermined period of time effective March 1, 2014. TheThere was no expense under the plan for the years ended December 31, 20152016 and 2014 was $0.0 thousand and $6.6 thousand, respectively.F - 26 F - 24Table of Contents (Continued)NOTE 7 - INCOME TAXES20152016 and 2014:2015: 2015 2014 Federal Current $ — $ — Deferred — — — — State and Local Current 13 38 Deferred — — 13 38 $ 13 $ 38 2015 2014 Federal income tax at statutory rate $ (595 ) $ (2,460 ) State and local income taxes, net of federal income tax effect (77 ) (221 ) Permanent differences — — Increase in deferred tax asset valuation allowance 716 3,035 Other differences (31 ) (316 ) $ 13 $ 38 F - 2520152016 and 20142015 are as follows: 2015 2014 Deferred tax liabilities Property and equipment $ (1,459 ) $ (2,131 ) Gross deferred tax liabilities (1,459 ) (2,131 ) Deferred tax assets Intangibles and goodwill 2,286 2,535 Accrued property taxes 13 13 Allowance for doubtful accounts 14 41 Inventory capitalization 63 83 Stock options 1,147 1,084 Federal net operating loss carry forward 4,176 3,920 State net operating loss carry forward 1,758 1,659 State recycling equipment tax credit carry forward 4,598 4,604 Interest rate swap — 4 Inventory valuation reserve 78 — Accrued expenses 77 223 Other 11 11 Gross deferred tax assets 14,221 14,177 Valuation allowance (12,665 ) (11,949 ) Net deferred tax assets $ 97 $ 97 2015,2016, the Company had deferred recycling equipment state tax credit carry forwards of $4.6 million relating to our shredder purchase which do not expire. This tax credit is limited to our Kentucky state income tax liability which includes the Limited Liability Entity Tax, which is based on gross receipts or gross profits. The Company used the available state tax credits of $7.4$3.0 thousand and $16.4$7.4 thousand in 2016 and 2015, and 2014, respectively.2015,2016, the Company had a Federal net operating loss ("NOL") carry forward of $12.3$13.8 million which expires beginning in 2033. The Company also has state NOL carry forwards of $26.9$26.8 million as of December 31, 2015.2016. The majority of the state NOL carry forwards relates to losses in Kentucky and expire beginning in 2031.inand carry back years.provisions. As of December 31, 2015,2016, management determined that only the state recycling equipment tax credit carry forwards would be realized to the extent of $97.0$27 thousand and reserved all other net deferred tax assets by increasing the related valuation allowance. The state tax credit carry forwards have been reduced to their net realizable value based upon estimates of future gross profits and utilization of the credit in the foreseeable future.20152016 and 2014:2015:F - 28 Year Ended December 31, 2015 2014 Valuation allowance, beginning of year $ 11,949 $ 8,914 Increase in deferred tax asset valuation allowance 716 3,035 Valuation allowance, end of year $ 12,665 $ 11,949 20152016 and 2014,2015, the Board of Directors did not declare a cash or stock dividend. 2015 2014 Continuing operations: (in thousands, except per share information) Basic loss per share Net loss $ (9,085 ) $ (8,686 ) Weighted average shares outstanding 7,989 7,559 Basic loss per share $ (1.14 ) $ (1.15 ) Diluted loss per share Net loss $ (9,085 ) $ (8,686 ) Weighted average shares outstanding 7,989 7,559 Add dilutive effect of assumed exercising of stock options and warrants — — Diluted weighted average shares outstanding 7,989 7,559 Diluted loss per share $ (1.14 ) $ (1.15 ) 2015 2014 Discontinued operations: (in thousands, except per share information) Basic loss per share Net loss $ 7,320 $ 1,413 Weighted average shares outstanding 7,989 7,559 Basic loss per share $ 0.92 $ 0.19 Diluted loss per share Net loss $ 7,320 $ 1,413 Weighted average shares outstanding 7,989 7,559 Add dilutive effect of assumed exercising of stock options and warrants — — Diluted weighted average shares outstanding 7,989 7,559 Diluted loss per share $ 0.92 $ 0.19 F - 27 (Continued)NOTE 10 - RELATED PARTY TRANSACTIONS20152016 and 20142015, the Company was involved in various transactions with related parties. A summary of transactions and related balances are as follows. The table at the end of this note should be used in referencing all below paragraphs.wasis involved in various transactions with K&R and 7100 LLC, which isare wholly-owned by Kletter Holdings LLC, the sole member of which was Harry Kletter, ourthe Company's founder and former Chief Executive Officer. After Mr. Kletter's passing in January 2014, ourthe Company's Chairman of the Board and interim Chief Executive Officer, Orson Oliver, assumed the roles of executor of Mr. Kletter’s estate and President of Kletter Holdings LLC.LLC. As of December 31 2015,, 2016, Mr. Kletter’s estate, K&R and the Harry Kletter Family Limited Partnership collectively, beneficially own in excess of 20% of the Company's issued and outstanding shares.ourthe Louisville, Kentucky facility from 7100 LLC (previously from K&R&R) under an operating lease, the "7100 Lease,"expiring December 2017 (the "7100 Lease").2017. Additionally, the Company leasesleased equipment from K&R under operating leases that expired November 2015 and expire May 2016.2016. See Note 4 - Lease Commitments for additional information relating to the rent and lease agreements with K&R.During 2014,2015 and to a lesser extent 2015,continuing into 2016, the Company deferred a portion of these lease payments.$500.0$500.0 thousand refundable, non-interest bearing deposit with the Company related to K&R's potential purchase of the Company's formerly owned real property located at 1565 East 4th Street in Seymour, Indiana. The Company was permitted and has used the deposited funds for general corporate purposes. K&R did not acquire the property. Under the Company's lending arrangements, a refund of the deposit to K&R mustwould have to be approved by the Company's lenders. and 2014, , the Company had balances related to K&R and 7100 LLC pertaining to refundable lease and property deposits due to and from the Company, rents payable to K&R,from the Company, notes payable due from the Company, accrued interest due from the Company, interest expense, and rent expense. $1,504.0$1.5 million and is inclusive of the $500.0 thousand noted above, became a subordinated, unsecured debt (the "Kletter Notes") owed by the Company.Company. A portion of the amount, approximately $620.3 thousand, is owed to K&R, with the remaining amount, approximating $883.8$883.8 thousand, is owed to 7100 LLC.Interest will accrue monthly at a per annum rate of five percent (5.00%). Interest will accrue until April 30, 2017, at which time interest will be paid monthly. Until maturity on December 31, 2020, the Kletter Notes are subject to intercreditor agreements between the respective Note holder and MidCap. This amount of $1,504.0 thousand$1.5 million represents all net amounts due to Kletter estate entities as of February 29, 2016 with the exception of a $32.0 thousand deposit owed by K&R to the Company. If the Company sells property it owns at 7110 Grade Lane itin Louisville, Kentucky, the Company shall make a principal payment to K&R of $500.0 thousand. Otherwise, all remaining principal is due at maturity.See Note-2013, the Company and Algar entered into a Management Services Agreement (the “Management Agreement”). On September 30, 2016 (the "Termination Effective Date"), the Company and Algar mutually agreed to terminate the Management Agreement pursuant to the Termination Agreement. See the details below.Inc. for details relatingalso provided business, financial, and organizational strategy and consulting services, as the Company’s board of directors reasonably requested from time to time.Stock OptionCompany's board of directors appointed Sean Garber as President and as a member of the board of directors. and Mr. Garber's appointment as President.As of December 31, 2015 and 2014, the Company expensed management fees toreimbursed Algar for the portion of Mr. Garber'sGarber’s salary along with other management fees in connection withthat was attributable to Algar’s services under the Management Agreement.Agreement in an amount not exceeding $20.8 thousand per month, or $250.0 thousand per year plus other expenses. Also, under the Management Agreement, Algar was to be paid a bonus in an amount equal to 10.0% of any year-over-year increase in the Company’s adjusted pre-tax income during the term. The term of the Management Agreement was effective December 1, 2013 and originally expired on December 31, 2016, subject to earlier termination upon mutual agreement or upon circumstances set forth in the agreement. On September 30, 2016, the Company and Algar mutually agreed to terminate the Management Agreement.F - 30 endingended December 31, 2014, Algar earned a bonus of $428.0 thousand.thousand that was accrued by ISA. This amount was reduced by $50.0 thousand related to the real estate sale to SG&D Ventures, LLC described below. The bonus payable was further reduced on August 5, 2015, in 2015 when the Company entered into a Stock Purchase Agreement with Algar, whereby the Company issued 50.7 thousand shares of its common stock to Algar for aggregate consideration equal to $189.0 thousand based on the fair value of ourthe Company's common stock. The consideration was payable in the form of a reduction of the Company’s $378.0 thousand accrued but unpaid bonus compensation due to Algar leaving a remainderas of $189.0August 5, 2015. During the year ended December 31, 2016, the Company paid Algar the remaining $189.0 thousand inrelated to the accrued but unpaid bonus compensation. For additional information see Note 12 - Share Based Compensation.F - 28NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)20152016 and 2014,2015, the Company participated in various other transactions with Algar. The Company sold scrap to Algar, bought scrap from Algar, and provided logistical and IT services to Algar. Related to these transactions, the Company has accounts receivable balances from Algar, an accounts payable balance to Algar, along with related income and expense as of December 31, 2016 and2015 and 2014. 2015 and 2014. All director compensation during 2015 was deferred and the Company plans to pay subsequent to December 31, 2015. Related to these transactions, the Company has accounts payable balances to the Board of Directors for fees and consulting fees, along with related expense at and as of December 31, 2016 and2015 and 2014.agreed to sellsold to LK Property, an entity principally owned by Daniel M. Rifkin, CEO of MetalX and the principal owner of RCP, a4.4 acre parcel of real estate, located at 6709 Grade Lane, Louisville, Kentucky, for a purchase price of $1.0 million. The Company used the proceeds from the sale primarily for debt reduction and working capital. The loss on sale of this asset was $102.0 thousand. See Note 14 - Financing and Related Matters for discussion related to Mr. Rifkin.20152016 and 2014,2015, the Company sold scrap material to MetalX and held accounts receivables balances from MetalX related to scrap sales.For additional information regarding MetalX, see Note 14 - Financing and Related Matters.LLC.OnLLC:18, 2015, ISA Real Estate LLC agreed to sellsold to SG&D, Ventures, LLC (SG&D), an entity owned by shareholders of Algar, including Mr. Garber, an approximately 1-acre parcel of non-essential real estate, located at 7017 Grade Lane, Louisville, Kentucky, for an aggregate purchase price equal to independent third-party appraisal amount of $350.0 thousand. The Company received this appraisal before the sale. The purchase consideration consisted of $300.0 thousand in cash from SG&D and a credit of $50.0 thousand against bonus compensation previously accrued but not paid to Algar.Algar as described above. The gain on sale of this asset was $1.1 thousand.F - 31 F - 29Table of Contents20152016 and 20142015 are as follows, in thousands: 2015 2014 K&R, LLC: Deposit amounts owed to the Company by K&R (1) $ 74 $ 74 Property deposit payable to K&R (2) 500 500 Facility rent payable to K&R (2) 821 462 Equipment rent payable to K&R (2) 132 116 Facility rent expense to K&R 646 646 Equipment rent expense to K&R 126 126 Algar, Inc.: Accounts receivable from Algar for scrap transactions (1) $ 93 $ 80 Accounts receivable from Algar for logistical services (1) 19 5 Accounts payable to Algar (2) 28 39 Bonus payable to Algar (2) 189 428 Revenue from scrap sales to Algar 117 442 Revenue from logistical services to Algar 69 59 Revenue from IT services to Algar 23 7 Scrap material purchases from Algar 1,225 1,542 Management fee expense 250 250 Bonus expense to Algar — 428 Other expenses to Algar 30 109 Board of Directors: * Accounts payable to the Board of Directors for fees (2) $ 250 $ 55 Accounts payable to the Board of Directors for consulting fees (2) — 40 Board of director fee expense 180 100 Board of director consulting expense 25 15 LK Property Investments, LLC: Lease deposit to LK Property (1) $ 3 $ — Accounts payable to LK Property (2) 2 — Loss on the sale of assets to LK Property (102 ) — Rent expense to LK Property** 24 — Metal X, LLC: Accounts receivable from Metal X (1) $ 19 $ 250 Revenue from product sales to Metal X 1,905 1,982 SG&D Ventures, LLC: Gain on the sale of assets to SG&D $ 1 $ — receivablereceivables from related parties on balance sheetssheetsis as of December 31, 2016 and 2015.F - 33 20152016 and 2014:2015:Total Options Number of shares (in thousands) Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Term Weighted Average Grant Date Fair Value Outstanding at January 1, 2014 180 $ 4.59 — $ 1.38 Granted 2,062 5.02 — 2.26 Exercised (30 ) 4.23 — 1.05 Expired (60 ) 4.23 — 1.05 Outstanding at December 31, 2014 2,152 $ 5.02 2.7 years $ 2.23 Granted 20 $ 5.71 — $ 3.01 Outstanding at December 31, 2015 2,172 $ 5.02 1.7 years $ 2.24 Exercisable at December 31, 2015 1,302 4.95 1.9 years $ 2.25 Available for grant at December 31, 2015 1,603 F - 31NOTE 12 – SHARE BASED COMPENSATION (Continued)Non-Vested Options Number of shares (in thousands) Weighted Average Grant Date Option Fair Value Outstanding at January 1, 2014 — $ — Granted 2,062 2.26 Vested (1,072 ) 2.21 Forfeited — — Outstanding at December 31, 2014 990 $ 2.31 Granted 20 3.01 Vested (140 ) 2.95 Forfeited — — Outstanding at December 31, 2015 870 $ 2.22 2014)2014) and vesting provisions, the Company granted options to purchase a total of 1.5 million shares of its Common Stockcommon stock to Algar Inc. at a per share exercise price of $5.00 $5.00 pursuant to athe Management Services Agreement (the "Management Agreement").Agreement. At the annual meeting of shareholders of the Company onOctober 15, 2014, shareholders approved the issuance of these options. The first 375.0 thousand share options vested and became exercisable on December 1, 2013.2014. The second 375.0 thousand share options vested and became exercisable after the market price of our Common Stockthe Company's common stock reached $6.00$6.00 per share during 2014.2014. The third 375.0 thousand share options vestwould have vested and become exercisable only if and after the market price of our Common Stock reachesthe Company's common stock reached $8.00 per share or Company revenue following an acquisition increasesincreased by $90.0 million; these conditions have not been met as of December 31, 2015.million. The fourth 375.0 thousand share options vestwould have vested and become exercisable only if and after the market price of our Common Stock reachesthe Company's common stock reached $9.00 per share or Company revenue following an acquisition increases by $120.0 million; these conditions have not been metmillion.On September 30, 2016, the Company and Algar mutually agreed to terminate the Management Agreement between them dated as of December 31, 2015. 1, 2013. In connection with the termination of the Management Agreement, the Stock Option Agreement was also terminated. See Note 2 - Management Services Agreement with Algar, Inc. for additional information relating to the Management Agreement and the related Stock Option Agreement.On January 16, 2014, the Company awarded options to purchase 30.0 thousand shares of its stock to a new independent director at a per share exercise price of $3.47, the fair value as of grant date. These options were fully vested when awarded and are outstanding as of December 31, 2015. The options expire January 15, 2019.As of May 16, 2014, the Company awarded options to purchase 292.0 thousand shares of its stock to its directors at a per share exercise price of $4.68, the fair value as of grant date. These options were fully vested when awarded and are outstanding as of December 31, 2015. The options expire May 15, 2019.As of October 15, 2014, the Company awarded options to purchase 30.0 thousand shares of its stock to each to the three new directors for a total of 90.0 thousand shares at a per share exercise price of $5.40, the fair value as of the grant date. These options vested October 14, 2015 and are outstanding as of December 31, 2015. These options expire in October 2019.As of December 31, 2014, the Company awarded options to purchase 150.0 thousand shares of its stock to its CFO. These options vest over a three-year period, with 1/3 vesting on the first anniversary of the grant date and 1/6 vesting every six months thereafter until the three year anniversary of the grant date. The options expire December 30, 2019. The per share exercise price is $5.97, the fair value as of the grant date.itsthe Company's common stock to its CFO.Chief Financial Officer. These options were scheduled to vest over a three-yearthree-year period, with 1/1/3 vesting on the first anniversary of the grant date and 1/1/6 vesting everysix months thereafter until thethree year anniversary of the grant date. The options expire January 1, 2019. Theexercise price per share exercise price isof the options was $5.71, the fair value of the underlying common stock as of the grant date.F - 32F - 34 2015 2014 Weighted average grant-date fair value of grants per option $ 3.01 $ 2.26 Volatility 60.1 % 60.9 % Risk-free interest rate 2.3 % 2.2 % Expected life (in years) 5 3 Expected dividend yield — % — % Number of shares (in thousands) WA Grant Date Fair Value — $ — Granted 133.4 0.35 years 2.32 Vested 2.36 45.1 $ 2.23 On June 26, 2014, we received $126.9 thousand from one of our directors as he exercised 30.0 thousand share options. $378.0 thousand accrued but unpaid bonus compensation due to Algar pursuant to the Management Services Agreement between the Company and Algar, dated December 1, 2013, leaving a remaining balance of $189.0 thousand in the accrued but unpaid bonus compensation. Algar. See Note 10 - Related Party Transactions.On December 31, 2014, the Company entered into a Securities Purchase Agreement with an officer whereby the Company issued 8.2 thousand shares of Common Stock to the officer for an aggregate offering price of $40.0 thousand. This agreement was in connection with this officer accepting employment with the Company.In December 2014, the Company issued 3.7 thousand shares of stock to six employees at a fair value of $16.6 thousand. These stock grants were issued in lieu of cash bonuses that were earned by the employees during 2014.RSUs:See Note 1 - SummarySignificant Accounting Policies - Subsequent Events for additional information related to issuance of RSUs subsequent to December 31, 2015.Other:As$100.0 thousand and $125.0 thousand on each of December 31, 2015,2016 and December 31, 2017, respectively, as long as he remains employed with the Company on those dates. The CFO remained employed with the Company as of December 31, 2016 and the Company accrued $100.0 thousand related to the 2016 retention bonus. If the CFO's employment is terminated without cause during 2017, the Company is required to pay him an amount equal to $125.0 thousand times the quotient of the number of full months employed in 2017 divided by 12.stock-basedshare-based compensation cost related to non-vested optionRSU awards in the amount of $356.5$142.0 thousand. The amount of unrecognized stock-based compensation cost related to the Algar options is $1.5 thousand and will fluctuate based on changes in option value at the end of each quarter.$0.2$0.4 million and $2.5$0.2 million for the years ended December 31, 20152016 and 2014,2015, respectively.F - 36 Ourour products. In addition, certain of ourthe Company's operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of the Company's facilities have been in operation for many years and, over time, the Company and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities in material amounts could exist, including cleanup obligations at these facilities or at off-site locations where the Company disposed of materials from its operations, which could result in future expenditures that the Company cannot currently estimate and which could reduce its profits. The Company records liabilities for remediation and restoration costs related to past activities when its obligation is probable and the costs can be reasonably estimated. Costs of future expenditures for environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to current operations are expensed as incurred. Such compliance has not historically constituted a material expense to the Company.(the "Investor"), an investment entity principally owned by Daniel M. Rifkin, former president of OmniSource Corporation and the founder and CEO of MetalX, LLC for an aggregate purchase price of $3.0$3.0 million. Pursuant to the Securities Purchase Agreement, the Company also issued to the InvestorRCP a five-yearfive-year warrant to purchase 857,143 additional shares of the Company's common stock, exercisable 6 months after the date of the Securities Purchase Agreement for an exercise price of $5.00 per share and expiring June 13, 2019. The net proceeds were allocated between common stock and warrants based on the relative fair value of the common stock and the warrants. The fair value of the warrants was estimated using a pricing model similar to that used for stock options. The Securities Purchase Agreement provides the InvestorRCP with preemptive rights and a right of first refusal with respect to future securities offerings by the Company. The Company used the proceeds from the Securities Purchase Agreement for general corporate purposes including debt reduction, growth initiatives, capital expenditures, and review of potential acquisitions. Costs of $104.5 thousand related to the Securities Purchase Agreement have been netted against the proceeds in the statement of shareholders' equity.Director Designation Agreementthe InvestorRCP will have the right to designate, and require the Company's Board to appoint, up to two directors (each, a "Designated Director"). As of the date of this report, the InvestorRCP had the right to designate one director. A Designated Director will hold office until (i) his or her term expires and such Designated Director's successor designated by the InvestorRCP has been appointed or (ii) such Designated Director's earlier death, disability, disqualification, resignation or removal, and the InvestorRCP shall have the right to appoint any successor to such Designated Director. The Investor'sRCP's designation rights terminate at such time that the InvestorRCP and its affiliates collectively hold less than 5% of the Company's outstanding common stock. Pursuant to the Director Designation Agreement, the Company and the InvestorRCP agreed that the designation and appointment of the Designated Director nominees will not violate applicable law and will not cause the Company to become delisted from any securities exchange or other trading market.F - 37 F - 34Table of Contents (Continued)NOTE 15 - DISCONTINUED OPERATIONS$150,000 retained by Compactor Rentals$150.0 thousand which will be released to the Company orwas retained by Compactor Rentals in connection with any working capital adjustment.adjustments. Compactor Rentals assumed certain liabilities relating to the Waste Services Segment, including but not limited to, current liabilities, warranty liabilities, and post-closing liabilities incurred in connection with transferred contracts. The transaction expenses related to the sale were $350.0$350.0 thousand and a gain of $6,031.0 thousand$6.0 million was recorded.operations.closing.Assets held for sale, current on the accompanying consolidated balance sheet at December 31, 2014 includes $398.0 thousand related to property available for sale. closing. 2014 in thousands ASSETS Current assets Accounts receivable - trade, net $ 737 Inventories 48 Total current assets 785 Net property and equipment 1,179 Other assets 12 Total Assets $ 1,976 LIABILITIES Current liabilities Accounts payable $ 828 Other current liabilities 40 Total current liabilities $ 868 F - 352015 2014 (in thousands) Revenue from services and product sales $ 7,402 $ 7,313 Cost of sales for services 5,486 5,188 Selling, general, and administrative expenses 678 746 Gain on the sale of business 6,031 — Gain on the sale of equipment 51 34 Net income $ 7,320 $ 1,413 2015 2014 (in thousands) Cash flows from operating activities Net income from discontinued operations $ 7,320 $ 1,413 Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 402 436 Gain on sale of property and equipment (51 ) (34 ) Gain on sale of business (6,031 ) — Change in assets and liabilities Receivables (103 ) 223 Inventories 10 6 Other assets 12 168 Accounts payable 172 (352 ) Other current liabilities 52 (28 ) Net cash from operating activities $ 1,783 $ 1,832 Cash flows from investing activities Proceeds from sale of property and equipment 76 57 Proceeds from sale of business, net of disposal costs 7,000 — Purchases of property and equipment (432 ) (347 ) Net cash provided by (used in) investing activities $ 6,644 $ (290 ) and 2014 assuming the Waste Services Segment was sold at the beginning of the quarter is as follows (unaudited):F - 39 2015 2014 (in thousands, except per share data) Total revenue $ 6,555 $ 26,619 Net loss from continuing operations (2,351 ) (6,503 ) Net income (loss) 3,680 (6,503 ) Net loss from continuing operations per share $ (0.29 ) $ (0.82 ) Net income (loss) per share 0.46 (0.82 ) F - 36