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, 20152018
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) 368-1661366-3452
Securities 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
| 1 |
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
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
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
(Check one): | Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company ☒ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ☒
ý
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
Portions of the registrant's definitive Proxy Statement for the 20162019 Annual Meeting of Shareholders are incorporated by reference into Item 1010. through Item 1414. of Part III of this report.
| 2 |
Table of Contents | ||
Page | ||
| 4 | ||
| Item 1. Business | 4 | |
| Item 1A. Risk Factors | 8 | |
| Item 1B. Unresolved Staff Comments | 12 | |
| Item 2. Properties | 12 | |
| Item 3. Legal Proceedings | 13 | |
| Item 4. Mine Safety Disclosures | 13 | |
| 14 | ||
| Item 5. | Market for | 14 |
| Selected Financial Data | 15 | |
| Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 | |
| Quantitative and Qualitative Disclosures About Market Risk | 22 | |
| 22 | ||
| Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 22 | |
| Controls and Procedures | 23 | |
| Other Information | 23 | |
| 24 | ||
| Directors, Executive Officers and Corporate Governance | 24 | |
| Executive Compensation | 24 | |
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 24 | |
| Certain Relationships and Related Transactions, and Director Independence | 24 | |
| Principal Accountant Fees and Services | 24 | |
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 is 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, refineries and refineries.processors. We purchase ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, iron, aluminum, copper, brass, 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 untilshredding operations. The shredding operations were restarted in May 2015, our shredding operations.2017, which had previously been idled in May 2015. We operate the auto shredder in the normal course of business subject to market conditions and operating needs. 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.
On December 4, 2015,March 26, 2018, 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, suchBoard appointed Todd L. Phillips 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.Chief Executive Officer. See Note 159 - Discontinued OperationsShare-based Compensation and Other Compensation Agreements in the accompanying Notes to Consolidated Financial Statements.
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.
The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and Liquidity Conditions
ISA Recycling Operating Division
We have one segment, our Recycling Segment. Our Recycling Segment buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used automobiles in order to sell used automobile parts. The Company purchases, processes and sells processed ferrous and non-ferrous scrap material, including stainless steel,metal to end-users such as steel mini-mills, integrated steel makers, foundries, refineries and foundries and refineries. We purchaseprocessors. The Company purchases ferrous and non-ferrous scrap materialmetal primarily from industrial and commercial generators of steel, iron, aluminum, copper, brass, stainless steel and other metals, as well as from other scrap dealers and retail customers who deliver these materials directly to our facilities. We process these materials byThe Company processes ferrous scrap metal through sorting, cutting, and/or baling. Prior tobaling, and shredding operations. The shredding operations were idled in 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, fuel, tires and certain core automobile parts are also sold to various resellers for additional revenue. All automobiles are sold as scrap metal or used in our shredding operations after a specified time period in the yard.
| 4 |
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, baling and baling. Prior toshredding operations. The shredding operations were idled in May 2015 we also shredded material.and restarted in May 2017. We produce a number of differently sized, shaped and graded products depending upon customer specifications and market demand.
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 and related metal recovery - InThe shredding operations were idled in May 2015 we warm idled our shredder. Prior to this date, we shreddedand restarted in May 2017. We shred 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 ferrous metal from non-ferrous metals, synthetic foam, fabric, rubber, stone, dirt, etc. The ferrous metal we recoveredrecover from the shredding process wasis sold directly to customers or reused in some other metal blend. The residue by-product is usually referred to as “automobile shredder residue” (ASR)("ASR") or “shredder fluff”.fluff." We disposedfurther separate the ASR into non-ferrous metals and non-metal waste. The non-ferrous metals are sold directly to customers or reused in some other metal blend. We dispose of the non-metal components,waste, which can reduce the volume of the scrap as much as 25.0%, in a landfill. Revenues from the ferrous and non-ferrous metals related to this shredding and related metal recovery processes are recognized in revenue from ferrous operations in the Consolidated Financial Statements.
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.rail car. 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, brass, 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.
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.
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 blending and high-temperature alloys recycling business in 2009.
| 6 |
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.
In May 2017, we restarted our shredding operations.
Currently, 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. 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
We had sales to twoone major customerscustomer that totaled approximately 34.3%21.2% and 16.3% of our net sales for the yearyears ended December 31, 2014. These customers were part of the stainless steel blending2018 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,February 28, 2019, we had 7483 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.
| 7 |
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
We operate in industries that are cyclical and sensitive to general economic conditions, which could have a material adverse effect on our operating results, financial condition and cash flows.
Demand for most of our products is cyclical in nature and sensitive to general economic conditions. The timing and magnitude of the cycles in the industries in which our products are used, including global metal production, are difficult to predict. The cyclical nature of our operations tends to reflect and be amplified by changes in economic conditions, both domestically and internationally, and foreign currency exchange fluctuations. The impact of recent political events, such as tariffs on metal imports, on global economic conditions is currently uncertain. Economic downturns or a prolonged period of slow growth in the industries in which we operate could have a material adverse effect on our results of operations, financial condition and cash flows.
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.
Changes in the availability or price of raw materials and end-of-life vehicles could reduce our sales.
We rely on suppliers for most of our raw material needs. Industry supply conditions generally involve risks, including the possibility of shortages of raw materials, increases in raw material costs and reduced control over delivery schedules. We procure our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metal to us. In periods of declining or lower scrap metal prices, such as the declining price environment we experienced in fiscal 2015 and the first half of fiscal 2016, suppliers may elect to hold scrap metal to wait for higher prices or intentionally slow their metal collection activities, tightening supply. If a substantial number of suppliers cease selling scrap metal to us, we will be unable to recycle metal at desired levels, and our results of operations and financial condition could be materially adversely affected. A slowdown of industrial production in the U.S. may also reduce the supply of industrial grades of metal to the metals recycling industry, resulting in less recyclable metal available to process and market. Increased competition for domestic scrap metal, including as a result of overcapacity in the scrap recycling industry in the U.S. and Canada, may also reduce the supply of scrap metal available to us. Failure to obtain a steady supply of scrap material could both adversely impact our ability to meet sales commitments and reduce our operating margins. Failure to obtain an adequate supply of end-of-life vehicles could adversely impact our ability to attract customers and reduce our parts sales.
| 8 |
Significant decreases in scrap metal prices may adversely impact our operating results.
The timing and magnitude of the cycles in the industries in which we operate are difficult to predict and are influenced by different economic conditions. Purchase prices for scrap metal including end-of-life vehicles and selling prices for recycled scrap metal are subject to market forces beyond our control. While we attempt to respond to changing recycled scrap metal selling prices through adjustments to our metal purchase prices, our ability to do so is limited by competitive and other market factors. As a result, we may not be able to reduce our metal purchase prices to fully offset a sharp reduction in recycled scrap metal sales prices, which may adversely impact our operating income and cash flows. In fiscal 2015 and the first half of fiscal 2016, lower demand for recycled scrap metal relative to demand and competition for supply of unprocessed scrap metal in the domestic market compressed operating margins due to selling prices decreasing at a faster rate than purchase prices for unprocessed scrap metal. During the second half of 2018, ferrous market prices and volumes were challenged by uncertainty created by tariffs and threatened trade wars. Non-ferrous market prices and volumes were similarly impacted by tariffs and threatened trade wars, as well as certain restrictions placed by China on imported metals. In addition, a rapid decrease in selling prices may compress our operating margins due to the impact of average inventory cost accounting, which causes cost of goods sold recognized in the Consolidated Statements of Operations to decrease at a slower rate than metal purchase prices and net selling prices.
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.net realizable value. 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.
Potential limitations on our ability to access capital resources may restrict our ability to operate.
Our operations are capital intensive. Our business also requires substantial expenditures for routine maintenance. While we expect that our cash requirements, including the funding of capital expenditures and debt service, will be financed by internally generated funds or from borrowings under our line of credit, there can be no assurance that this will be the scrap metal recycling inventory experienced in late 2014case. Additional capital expenditures could require financing from external sources. Although we believe we have adequate access to contractually committed borrowings, we could be adversely affected if our lender was unable to honor the contractual commitments or ceased lending. Failure to access our line of credit could restrict our ability to fund operations or make capital expenditures.
The agreement governing our line of credit facility imposes certain restrictions on our business and through 2015 caused managementcontains financial covenants.
Our line of credit facility contains certain restrictions on our business which limit (subject to re-assesscertain exceptions) our ability to, among other things, dispose of collateral, incur certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, sales or asset acquisitions, make distributions and other restricted payments, materially change the carrying valuenature of our inventory. In 2015business, and 2014, we incurred a lower of costengage in transactions with affiliates. These restrictions may affect our ability to operate our business or market inventory write-down of $1.3 million and $1.9 million, respectively.
Our line of credit agreement also requires that are unfavorablewe maintain certain financial and other covenants. Our ability to comply with these covenants may be affected by events beyond our stockholders, ifcontrol, including prevailing economic, financial and industry conditions. Our failure to comply with any of these restrictions or financial covenants could result in an event of default under the lender credit agreement, and permit our lender to cease lending to us and declare all amounts borrowed to be due and payable, together with accrued and unpaid interest. This could require us to refinance our line of credit, which we are able to obtain additional liquidity at all.
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 todebt may increase our liquidity would adversely impactvulnerability to economic or business downturns.
We are vulnerable to higher interest rates because interest expense on our future performance, operationsborrowing 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. Our current line of credit agreement with our lender contains a subjective acceleration clause and results of operations, along with constraining our ability to move forward with any possible acquisitions or other strategic alternatives.
| 9 |
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.
Compliance with environmental laws and regulations that impose limitations on the discharge of pollutants into the airis a significant factor in our business. We are subject to local, state and federal environmental laws and regulations relating to, among other matters:
• | Waste disposal; |
Air emissions;
Waste water and establish standards for the treatment, storagestorm water management and disposal of solidtreatment;
Soil and hazardous wastes. groundwater contamination remediation; and
Employee health and safety.
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 ourany profits.
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,net realizable value, 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 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 operations may be adversely affected by periods of inclement weather, which could decrease the collection and shipment volume of recyclingrecyclable materials.
A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
Cyber-attacks are increasing in their frequency, sophistication and intensity. Cyber-attacks could include the deployment of harmful malware, denial-of-service, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability.We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer and supplier information and unauthorized access to personnel information. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could materially and adversely affect our competitive position, relationships with our customers and suppliers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.
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;
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.
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 |
(2) | See Note |
(3) | See Note |
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.maintain industry standard insurance coverages. We do not expect any major land or building additions will be needed to increase capacity for our operations in the foreseeable future.
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 recordsWe record 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.
Not applicable.
ISA common stock is traded on the NASDAQ Capital Market under the symbol “IDSA”. High and low sales prices of the common stock price are summarized as follows:
| 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 140127 shareholders of record as of December 31, 2015.
Our Board of Directors did not declare any dividends in 20152018 or 2014.
Under our previous Wells FargoMidCap and our current MidCapBank of America 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 20152018 or 2014.2017. There are approximately 133.3 thousand shares still available for repurchase under this program.
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
| (Amounts in thousands, except per share data) |
| (Amounts in thousands, except per share data) | ||||||||||||||||||||||||||||||||||||||
| Year ended December 31: | 2015 | 2014 | 2013 | 2012 | 2011 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| 2014 | |||||||||||||||||||||||||
| Total revenue | $ | 46,180 | $ | 110,091 | $ | 136,753 | $ | 194,232 | $ | 277,213 |
| $ | 61,023 |
|
| $ | 54,935 |
|
| $ | 36,505 |
|
| $ | 46,180 |
|
| $ | 110,091 |
| ||||||||||
| Net loss from continuing operations | $ | (9,085 | ) | $ | (8,686 | ) | $ | (13,816 | ) | $ | (6,620 | ) | $ | (3,881 | ) |
| $ | (349 | ) |
| $ | (1,131 | ) |
| $ | (3,230 | ) |
| $ | (9,085 | ) |
| $ | (8,686 | ) | |||||
| Net (loss) income from discontinued operations | $ | 7,320 | $ | 1,413 | * | * | * | |||||||||||||||||||||||||||||||||
Net 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 | ) |
| $ | (0.04 | ) |
| $ | (0.14 | ) |
| $ | (0.40 | ) |
| $ | (1.14 | ) |
| $ | (1.15 | ) | |||||
| Diluted | $ | (1.14 | ) | $ | (1.15 | ) | $ | (1.96 | ) | $ | (0.95 | ) | $ | (0.56 | ) |
| $ | (0.04 | ) |
| $ | (0.14 | ) |
| $ | (0.40 | ) |
| $ | (1.14 | ) |
| $ | (1.15 | ) | |||||
| Earnings (loss) per common share from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
| Basic | 0.92 | 0.19 | * | * | * |
| $ | — |
| $ | — |
| $ | — |
|
| $ | 0.92 |
|
| $ | 0.19 |
| |||||||||||||||||
| Diluted | 0.92 | 0.19 | * | * | * |
| $ | — |
| $ | — |
| $ | — |
|
| $ | 0.92 |
|
| $ | 0.19 |
| |||||||||||||||||
| At year end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
| Total assets | $ | 19,434 | $ | 37,790 | $ | 44,032 | $ | 63,323 | $ | 80,970 |
| $ | 22,480 |
|
| $ | 21,726 |
|
| $ | 20,856 |
|
| $ | 19,434 |
|
| $ | 37,790 |
| ||||||||||
| Current maturities of long-term debt | $ | 20 | $ | 15,911 | $ | 1,597 | $ | 1,687 | $ | 1,821 |
| $ | 3,909 |
|
| $ | 4,877 |
|
| $ | 2,942 |
|
| $ | 20 |
|
| $ | 15,911 |
| ||||||||||
Current maturities of long-term debt, related parties |
| $ | 32 |
|
| $ | 64 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| ||||||||||||||||||||
Current maturities of capital lease obligations |
| $ | 352 |
|
| $ | 300 |
|
| $ | 198 |
|
| $ | — |
|
| $ | — |
| ||||||||||||||||||||
| Long-term debt, net of current maturities | $ | — | $ | — | $ | 16,295 | $ | 23,369 | $ | 26,688 |
| $ | 2,125 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| ||||||||||
Long-term debt, net of current maturities, related parties |
| $ | 1,504 |
|
| $ | 1,536 |
|
| $ | 1,504 |
|
| $ | — |
|
| $ | — |
| ||||||||||||||||||||
Capital lease obligations, net of current maturities |
| $ | 589 |
|
| $ | 819 |
|
| $ | 1,050 |
|
| $ | — |
|
| $ | — |
| ||||||||||||||||||||
The recycling business is highly competitive and is subject to various market and company risks. See Item 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 our future financial condition or results of operations.
On December 4, 2015, the Company sold a majority of its Waste Services Segmentsegment assets. Years 2015 and 2014 have been adjusted to reflect discontinued operations of the Waste Services Segment. Years 2013 through 2011 have not been adjusted for discontinued operations of the Waste Services Segment.
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, “Risk Factors” for items that could affect our financial predictions, forecasts and projections.
General
We buy, process and organizational strategymarket ferrous and consulting services, as our board of directors may reasonably request from time to time.
On March 26, 2018, the Board appointed Todd L. Phillips as Chief Executive Officer. See Note 9 - Share-based Compensation and Other Compensation Agreements in the accompanying Notes to Consolidated Financial Statements for additional information. Mr. Phillips has been our Chief Financial Officer since December 31, 2014 and President since September 30, 2016 and will continue to serve in these roles.
Liquidity and Capital Resources
Cash flows generated from operations and the various borrowing arrangements described below, including our revolving credit facility.facility are significant sources of ongoing liquidity. We have also been able to manage liquidity by deferring certain rent payments made to related parties.parties through October 2017, as well as deferring capital expenditures during 2016 and 2017. See Note 108 - 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, 2015,2018, we held cash and cash equivalents of $0.6$1.0 million.
Credit facilities and notes payable
See Note 1 - Summary of Significant Accounting Policies and General, Note 32 - Long TermLong-term Debt and Notes Payable to Bank, Note 3 - Lease Commitments and Note 8 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for further details on long term debt and notes payable.
The borrowings under the line of credit are classified as short-term obligations under GAAP as the agreement with the lender contains a subjective acceleration clause and requires the Company entered into an interest rate swap agreementto maintain a lockbox arrangement with KY Bank swapping a variable rate based on LIBOR for a fixed rate. This swap agreement covered approximately $2.4 million the lender. However, the contractual maturity date of the line of credit is September 30, 2020. For discussion of the extension of the maturity date and other recent amendments to the Company's credit arrangements, see also Note 1 - Summary of Significant Accounting Policies and General - Subsequent Events in debt, commenced October 17, 2013 and was scheduledthe accompanying Notes to mature on October 1, 2018. The swap agreement fixed our interest rate at 4.74%Consolidated Financial Statements. The swap was settled for $15.0 thousand during 2015.
| 16 |
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 and General 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
Our revenue is primarily generated from contracts with customers. We recognize revenuesnote there have been no credit losses recorded on any receivables or contract assets arising from processed ferrouscontracts with customers for the years ended December 31, 2018 and non-ferrous scrap metal sales2017. The Company elects to use the practical expedient as it relates to significant financing components as the Company expects, at the contract inception, that the period between when title passes tothe Company transfers a promised good and when the customer which generally is upon deliverypays for that good will be one year or less. No contract assets or contract liabilities were recognized as 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 priceDecember 31, 2018 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 and related adjustments 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 the 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) and disposal. 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, 20152018 and 2014.2017.
See also Note 75 - Income Taxes in the accompanying Notes to Consolidated Financial Statements for additional information regarding income taxes and related assets.
| 17 |
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
Year Ended December 31, 2018 Compared 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 revenuesrevenue:
|
|
|
|
|
|
Year ended December 31, | 2018 |
| 2017 | ||
Consolidated Statements of Operations Data: |
|
|
|
|
|
Total revenue | 100.0 | % |
| 100.0 | % |
Total cost of sales | 93.3 | % |
| 94.2 | % |
Selling, general and administrative expenses | 6.0 | % |
| 6.4 | % |
Income (loss) before other income (expense) | 0.7 | % |
| (0.5 | )% |
We had an increase in revenue of $6.1 million, an increase in gross profit of $0.9 million, and an improvement in net loss of $0.8 million for the year ended December 31, 2018 as compared to the same period of 2017. This improvement in operating performance was due in part to the full year benefits in 2018 of the successful restart of the Company's shredder in May 2017 as well as improvements in the Company's ferrous volumes and margins from 2017 to 2018. The restart of the Company's shredder led to favorable sales mix and improved margins. Net loss was further strengthened by a non-recurring insurance settlement gain in the amount of $476.0 thousand during 2018. However, our results were negatively impacted during the third and fourth quarter of 2018 by recent global political events, such as tariffs, trade wars and other pertinent data:
| 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 | )% | |
Total revenue increased $6.1 million or 11.1% to $61.0 million for the year ended December 31, 2018 compared to $54.9 million for the year ended December 31, 2017.
Ferrous revenue increased $6.9 million or 31.3% to $28.7 million for the year ended December 31, 2018 compared to $21.9 million for the year ended December 31, 2017. For the year ended December 31, 2018 compared to the year ended December 31, 2017, the average selling price ("ASP") of ferrous material increased $69 per gross ton, or 22.6%, partially as a result of the shredder restart that led to a favorable shift in the ferrous sales mix and partially due to market improvements during the first six months of 2018. For the year ended December 31, 2018 compared to the year ended December 31, 2017, ferrous material shipments increased 3.7 thousand tons, or 5.0%, despite the negative impact on volumes from the shredder process. The 9.2%inherent nature of the shredding process produces less saleable product volume, but at a higher quality level, thereby increasing the ASP and decreasing the tons of material available to ship. Ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Non-ferrous revenue decreased $0.4 million or 1.2% to $31.2 million for the year ended December 31, 2018 compared to $31.6 million for the year ended December 31, 2017. For the year ended December 31, 2018 compared to the year ended December 31, 2017, the ASP of non-ferrous material increased $0.06 per pound or 5.9%. For the year ended December 31, 2018 compared to the year ended December 31, 2017, non-ferrous material shipments decreased by 1.8 million pounds, or 6.1%. Non-ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Total cost of sales increased $5.2 million or 10.1% to $57.0 million for the year ended December 31, 2018 compared to $51.7 million for the year ended December 31, 2017. The increase was a result of an increase in ferrous material tons shipped and higher average prices on a per-unit basis in our ferrous and non-ferrous operations, offset slightly by a decrease in non-ferrous material shipments.
Total cost of sales as a percentage of revenue in 2015decreased 0.8% for the year ended December 31, 2018 as compared to 2014 is partially due tothe year ended December 31, 2017. This improvement was largely a fixed asset impairment chargeresult of $0.6 million recordeda market-related increase in 2015ASP during 2018 as well as favorable sales mix that resulted from the startup of the shredder in May 2017, as well as a decrease in startup expenses the Company incurred in 2017 due to the May 2015 warm idlerestart of the shredder. However, the primary drivershredder operations. These startup expenses consisted primarily of the increase relates to margin compression the Company faced in 2015 as the ferrous market,repairs and to a lesser extent the nonferrous market, prices declined substantially during 2015.
Selling, general and administrationadministrative ("SG&A") expenses decreased by $2.6 million in 2015 as comparedincreased $145.0 thousand to 2014, mainly due to a decrease in stock option expense of $2.3 million. However, selling, general and administrative expenses as a percentage of revenue in 2015 as compared to 2014 increased 2.6%. This increase is mainly due to substantially lower revenues associated with falling metal prices and the May 2015 warm idle of the shredder.
| 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 | $ | — | ||
Other expense, net was $762.0 thousand for the year ended December 31, 2014, the Company experienced a decrease in the average selling price of ferrous material of $179.63 per gross ton, or 49.4%.
Significant components of other income (expense), in thousands, were as follows:
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, (in thousands) | ||||||||
Description Other Income (Expense) | 2018 |
| 2017 | ||||||
| Interest expense, including loan fee amortization | $ | (1,254 | ) | $ | (848 | ) | |||
| Gain on the sale of assets | — | 27 | |||||||
Gain on insurance proceeds | 476 |
|
| — |
| ||||
Other (expense) income, net | 16 |
| (16 | ) |
| ||||
Total other expense, net | $ | (762 | ) |
|
| $ | (837 | ) |
|
| 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 $25.0provision increased $1.0 thousand to a tax provision of $13.0 thousand in 20152018 compared to a tax expense of $38.0$12.0 thousand in 2014.2017. The effective tax rates including the intangible impairment lossesin 2018 and the deferred tax asset valuation allowance, in 2015 and 20142017 were (0.1)(3.9)% and (0.4)(1.1)%, respectively, based on federal and state statutory rates.
Net loss for the year ended December 31, 2018 was $0.3 million compared to $1.1 million for the same period of 2017, an improvement of $0.8 million or 69.1% as a result of the above-mentioned changes.
Financial Condition at December 31, 20152018 compared to December 31, 2014
Cash and cash equivalents decreased $0.4increased $0.2 million to $0.6$1.0 million as of December 31, 20152018 compared to $1.1$0.8 million as of December 31, 2014.
Net cash fromused in operating activities of $5.0was $0.1 million for the year ended December 31, 2015.2018. The change in net cash fromused in operating activities is adversely impacted byprimarily due to a net loss of $9.1 million. The change$0.3 million, an increase in net cash from operating activities is positively impactedinventories of $1.8 million, an increase in receivables of $0.1 million, and a decrease in payable and accrued expenses to related parties of $171.0 thousand, a decrease in other current liabilities of $199.0 thousand, partially offset by the Company's depreciation and amortization of $2.4$2.1 million, inventory write-down of $1.3 million, along with changesan increase in accounts receivable and inventorypayables of $7.3$0.6 million, and $2.0 million, respectively.
Net cash from investingfinancing activities of $2.1was $0.3 million for the year ended December 31, 2015 primarily a result of $2.1 million in proceeds from the sale of property and equipment during 2015.
Accounts receivable trade after allowances for doubtful accounts decreased $7.3increased $0.1 million or 81.3%3.5% to $1.7$4.4 million as of December 31, 20152018 compared to $8.9$4.2 million as of December 31, 20142017 due to the receipt of customer paymentsincreased shipments and a decrease in the volume of shipments of ferrous, nonferrous, and stainless steel material during 2015.commodity price increases. In general, the accounts receivable balance fluctuates due to the quantity and timing of shipments, commodity prices and receipt of customer payments.
Inventories at 2015 consist principally of ferrous and nonferrousnon-ferrous scrap materials.materials. We value inventory at the lower of cost or market.net realizable value. Inventory decreased $4.3increased $1.8 million or 64.2%35.8% to $6.9 million as of December 31, 2018 compared to $5.1 million as of December 31, 2017. This increase is primarily driven by higher commodity prices and increased volumes during the fourth quarter of 2018 compared to the fourth quarter of 2017.
Inventory aging for the period ended December 31, 2018 (Days Outstanding): | ||||||||||||||||||||
|
| (in thousands) | ||||||||||||||||||
Description |
| 1 - 30 |
| 31 - 60 |
| 61 - 90 |
| Over 90 |
| Total | ||||||||||
Ferrous and non-ferrous materials |
| $ | 4,471 |
|
| $ | 810 |
|
| $ | 890 |
|
| $ | 763 |
|
| $ | 6,934 |
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory aging for the period ended December 31, 2017 (Days Outstanding): | ||||||||||||||||||||
|
| (in thousands) | ||||||||||||||||||
Description |
| 1 - 30 |
| 31 - 60 |
| 61 - 90 |
| Over 90 |
| Total | ||||||||||
Ferrous and non-ferrous materials |
| $ | 4,069 |
|
| $ | 693 |
|
| $ | 119 |
|
| $ | 225 |
|
| $ | 5,106 |
|
Inventory in the 60 days or less categories compared to total inventory decreased to 76.2% as of December 31, 2018 compared to 93.3% as of December 31, 2017. Inventory greater than 60 days compared to total inventory increased to 23.8% as of December 31, 2018 compared to 6.7% as of December 31, 2017. The increase in inventory aging is primarily related to the increase in inventory of $1.8 million and an increase in ferrous inventory due to maintenance activity on our shredder and primary shear during the last quarter of 2018.
Accounts payable trade increased $0.6 million or 33.8% to $2.4 million as of December 31, 20152018 compared to $6.7$1.8 million as of December 31, 2014. This decrease was primarily2017. The accounts payable balance fluctuates due to the May 2015 warm idlingquantity and timing of the Company's shredder operationspurchases from and a lowerpayments made to our vendors.
Payable and accrued expenses to related parties decreased $171.0 thousand to $2.0 thousand of cost or market write-down of $1.3 million primarily relatedDecember 31, 2018 compared 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 | |||
| 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 | ||||||||||
Working capital, defined as current assets less current liabilities, increased $3.1 million from December 31, 2014 to December 31, 2015. 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. The December 31, 2015 balance of $0.2 million is spread across various small items.
| 20 |
Contractual Obligations
The following table provides information with respect to our known contractual obligations for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments due by period (in thousands) | ||||||||||||||||||
Obligation Description: |
| Total |
| Less than 1 year |
| 1 - 2 years |
| 3 - 4 years |
| More than 4 years | ||||||||||
Long-term debt obligations |
| $ | 7,745 |
|
| $ | 402 |
|
| $ | 7,320 |
|
| $ | 23 |
|
| $ | — |
|
Operating lease obligations |
| 2,820 |
|
| 564 |
|
| 1,010 |
|
| 908 |
|
| 338 |
| |||||
Capital lease obligations |
| 941 |
|
| 352 |
|
| 519 |
|
| 56 |
|
| 14 |
| |||||
Total |
| $ | 11,506 |
|
| $ | 1,318 |
|
| $ | 8,849 |
|
| $ | 987 |
|
| $ | 352 |
|
| 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 | $ | — | ||||||||||
On December 28, 2018, the Company signed a purchase contract for two cranes for a combined amount of $592.6 thousand with expected delivery dates of March 2019 and April 2019.
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. in this Form 10-K.
Fluctuating commodity prices affect market risk in our Recycling Segment.business. 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 nonferrousnon-ferrous 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, 2014-09, Revenue from Contracts with Customers (Topic 606)606). The amendments in ASU 2014-092014-09 affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments arewere effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted.On January 1, 2018, the Company adopted ASU 2014-09 using the retrospective approach. The Company has not yet assessednoted no financial impact on the impactConsolidated Financial Statements as a result of the adoption of ASU 2014-09 on its Consolidated Financial Statements.
| 21 |
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The guidance requires an entity to present debt issuance costs in the balance sheet as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts, rather than as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. Debt issuance costs related to revolving credit arrangements, however, will continue
InIn February 2016, the FASB issued ASU No. 2016-02, Leases, to improve financial reporting about leasing transactions. This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.transactions. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”)assets largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.Customers
The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. 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 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. Upon adoption, ASU 2016-15 should be applied retrospectively. The Company adopted the standard in the first quarter of 2018 and noted no material impact from the adoption of ASU 2016-15 on the Consolidated Financial Statements.
No other new accounting pronouncements issued or effective during the reporting period had, or are expected to have, a material impact on our Consolidated Financial Statements.
��
N/A - Not required for smaller reporting companies.
Our consolidated financial statements required to be included in this Item 88. are set forth in Item 1515. of this report and incorporated herein by reference.
None.
(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) promulgated under the Securities Exchange Act of 1934. Based upon their evaluation, our principal executive officer and principal financial officer concluded that, as of
December 31,(b) | Internal |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 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 the 2013 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
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. |
On March 26, 2018, Orson Oliver resigned his position as Interim Chief Executive Officer and the Board appointed Todd L. Phillips as Chief Executive Officer. Mr. Phillips will serve as the Company's principal executive officer and principal financial and accounting officer. Other than the aforementioned, there were no changes in ISA’s internal control over financial reporting during the year ended
December 31,None.
| Name | Served as an Executive Officer From | Age | Position with the Registrant and Other Principal Occupations | |||
| Todd L. Phillips | 2014 | 43 | Mr. Phillips was appointed Chief Executive Officer of the Company in March 2018, President of the Company in September 2016, Secretary in June 2016, and continues to be Chief Financial Officer, a position he has held since December 31, 2014. Mr. Phillips joined the Company 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’ 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. |
The following information is provided as of December 31, 2016, and a cash retention bonus of $125.0 thousand if he remains employed2018 with therespect to our existing compensation plans, including individual compensation arrangements, under which our equity securities are authorized for issuance:
|
|
|
|
|
|
|
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
| Weighted-average exercise price of outstanding options, warrants and rights ($) |
| Number of securities remaining available for future issuance under equity compensation plans |
|
|
|
|
|
|
|
Equity compensation plans approved by security holders |
| 413,041 |
| $4.53 |
| 1,645,311 |
Equity compensation plans not approved by security holders |
| — |
| — |
| — |
Total |
| 413,041 |
| $4.53 |
| 1,645,311 |
The Company as ofhad 111,558 Restricted Stock Units outstanding at December 31, 2017, subject to the terms2018.
(a)(1) The following consolidated financial statements of Industrial Services of America, Inc. are filed as a part of this report: | |
| Page | |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated Balance Sheets as of December 31, | |
| Consolidated Statements of Operations for the years ended December 31, | |
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, | |
| Consolidated Statements of Cash Flows for the years ended December 31, | |
| Notes to Consolidated Financial Statements | |
(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. | |||
Not applicable. |
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 13, 2019 | By : | /s/ | |
Todd L. Phillips, Chief Executive Officer, President and Chief Financial 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/ | Chief Executive Officer,President, Chief Financial Officer and Director | March 13, 2019 | ||
Todd L. Phillips | (Principal Executive | |||
/s/ Vince Tyra | Chairman of the Board | March 13, 2019 | ||
Vince Tyra | ||||
/s/ Albert Cozzi | Director | March 13, 2019 | ||
Albert Cozzi | ||||
/s/ Orson Oliver | Director | March 13, 2019 | ||
Orson Oliver | ||||
/s/ William B. Yarmuth | Director | March 13, 2019 | ||
William B. Yarmuth |
Exhibit Number | ||
Description of Exhibits | ||
** | ||
** | ||
** | 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) | |
** | ||
** | ||
** | ||
** | ||
** | ||
** | ||
** | ||
** | ||
| 27 |
Exhibit Number | ||
Description of Exhibits | ||
** | ||
** | ||
** | ||
** | ||
** | ||
| Exhibit Number | Description of Exhibits | |
| 11 | Statement of Computation of Earnings Per Share (See Note | |
| 21 | List of subsidiaries of Industrial Services of America, | |
| 23 | Consent of Independent Registered Public Accounting Firm. | |
| 31.1 | Rule | |
| Section 1350 Certification of | ||
| 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.
| 31 |
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
Louisville, Kentucky
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
| F-2 | |
| F-8 |
Board of Directors and Shareholders
Industrial Services of America, Inc. and Subsidiaries
Louisville, Kentucky
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Industrial Services of America, Inc. and Subsidiaries (“the Company”) as of December 31, 20152018 and 2014, 2017, and the related consolidated statements of operations, comprehensive income, shareholders’shareholders' equity, and cash flows for the years then ended. These consolidated financial statements areended and the responsibility ofrelated notes (collectively referred to as the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
Basis for Opinion
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. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Mountjoy Chilton MedleyMCM CPAs & Advisors LLP
We have served as the Company's auditor since 2005.
Louisville, Kentucky
March 13, 2019
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 20152018 and 20172014
| 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 | |||
| |||||||
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||
ASSETS | (in thousands) | ||||||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents | $ | 1,044 |
|
| $ | 841 |
|
Income tax receivable | 16 |
|
| — |
| ||
Accounts receivable – trade after allowance for doubtful accounts of $60.0 thousand and $60.0 thousand in 2018 and 2017, respectively | 4,369 |
|
| 4,220 |
| ||
Receivables and other assets from related parties (Note 8) | 91 |
|
| 92 |
| ||
Inventories (Note 1) | 6,934 |
|
| 5,106 |
| ||
Prepaid expenses and other current assets | 159 |
|
| 112 |
| ||
Total current assets | 12,613 |
|
| 10,371 |
| ||
Net property and equipment (Note 1) | 9,786 |
|
| 11,212 |
| ||
Other assets |
|
|
|
|
| ||
Deferred income taxes (Note 5) | 27 |
|
| 27 |
| ||
Other non-current assets | 54 |
|
| 116 |
| ||
Total other assets | 81 |
|
| 143 |
| ||
Total assets | $ | 22,480 |
|
| $ | 21,726 |
|
See accompanying notes to consolidated financial statements.
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 20152018 and 20172014
| 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 | |||
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | (in thousands, except par value and share information) | ||||||
Current liabilities |
|
|
|
|
| ||
Current maturities of long-term debt (Note 2) | $ | 3,909 |
|
| $ | 4,877 |
|
Current maturities of long-term debt, related parties (Note 2 and 8) | 32 |
|
| 64 |
| ||
Current maturities of capital lease obligations (Note 3) | 352 |
|
| 300 |
| ||
Bank overdrafts | — |
|
| 148 |
| ||
Accounts payable | 2,387 |
|
| 1,784 |
| ||
Payable and accrued expenses to related parties (Note 8) | 2 |
|
| 173 |
| ||
Income tax payable | — |
|
| 2 |
| ||
Other current liabilities | 566 |
|
| 765 |
| ||
Total current liabilities | 7,248 |
|
| 8,113 |
| ||
Long-term liabilities |
|
|
|
|
| ||
| Long-term debt, net of current maturities (Note 2) | 2,125 | — | |||||
Long-term debt, net of current maturities, related parties (Note 2 and 8) | 1,504 |
|
| 1,536 |
| ||
Capital lease obligations, net of current maturities (Note 3) | 589 |
|
| 819 |
| ||
Total long-term liabilities | 4,218 |
|
| 2,355 |
| ||
Shareholders’ equity |
|
|
|
|
| ||
Common stock, $0.0033 par value: 20.0 million shares authorized in 2018 and 2017; 8,107,865 and 8,089,129 shares issued and outstanding in 2018 and 2017, respectively | 27 |
|
| 27 |
| ||
Additional paid-in capital | 24,133 |
|
| 24,028 |
| ||
Stock warrants outstanding | 1,025 |
|
| 1,025 |
| ||
Retained losses | (14,127 | ) |
| (13,778 | ) | ||
Treasury stock at cost, 30,690 shares in 2018 and 2017 | (44 | ) |
| (44 | ) | ||
Total shareholders’ equity | 11,014 |
|
| 11,258 |
| ||
Total liabilities and shareholders’ equity | $ | 22,480 |
|
| $ | 21,726 |
|
See accompanying notes to consolidated financial statements.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 20152018 and 20172014
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||
| (in thousands, except per share information) | ||||||
Revenue from product sales |
|
|
| ||||
Revenue from ferrous operations | $ | 28,745 |
|
| $ | 21,885 |
|
Revenue from non-ferrous operations |
| 31,226 |
|
|
| 31,620 |
|
Revenue from auto parts operations and other revenue |
| 1,052 |
|
|
| 1,430 |
|
Total revenue from product sales |
| 61,023 |
|
|
| 54,935 |
|
Cost of sales for product sales | 56,962 |
|
| 51,727 |
| ||
Gross profit | 4,061 |
|
| 3,208 |
| ||
Selling, general, and administrative expenses | 3,635 |
|
| 3,490 |
| ||
Income (loss) before other income (expense) | 426 |
| (282 | ) | |||
Other income (expense) |
|
|
|
|
| ||
Interest expense, including loan fee amortization | (1,254 | ) |
| (848 | ) | ||
Gain on sale of assets | — |
|
| 27 |
| ||
Gain on insurance proceeds | 476 |
|
| — |
| ||
Other (expense) income, net | 16 |
| (16 | ) | |||
Total other expense, net | (762 | ) |
| (837 | ) | ||
Loss before income taxes | (336 | ) |
| (1,119 | ) | ||
Income tax provision (Note 5) | 13 |
|
| 12 |
| ||
Net Loss | $ | (349 | ) |
| $ | (1,131 | ) |
|
|
|
| ||||
Net loss per share of common stock: |
|
|
| ||||
Basic loss per share | $ | (0.04 | ) |
| $ | (0.14 | ) |
Diluted loss per share | $ | (0.04 | ) |
| $ | (0.14 | ) |
|
|
|
|
|
|
| |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
Basic |
| 8,102 |
|
|
| 8,078 |
|
Diluted |
| 8,102 |
|
|
| 8,078 |
|
See accompanying notes to consolidated financial statements.
| 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 | |||
AND SUBSIDIARIES
| 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 | ) | ||
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended
December 31,(in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
| Additional Paid-in Capital |
| Stock Warrants |
| Retained Losses |
| Treasury Stock |
|
| ||||||||||||||||||
| Shares |
| Amount |
|
| Shares |
| Cost |
| Total Shareholders' Equity | |||||||||||||||||||
Balance as of December 31, 2016 | 8,105,231 |
|
| $ | 27 |
|
| $ | 23,912 |
|
| $ | 1,025 |
|
| $ | (12,647 | ) |
| (30,690 | ) |
| $ | (44 | ) |
| $ | 12,273 |
|
Common stock | 14,588 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||
Share-based compensation | — |
|
| — |
|
| 116 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 116 |
| ||||||
Net loss | — |
|
| — |
|
| — |
|
| — |
|
| (1,131 | ) |
| — |
|
| — |
|
| (1,131 | ) | ||||||
Balance as of December 31, 2017 | 8,119,819 |
|
| $ | 27 |
|
| $ | 24,028 |
|
| $ | 1,025 |
|
| $ | (13,778 | ) |
| (30,690 | ) |
| $ | (44 | ) |
| $ | 11,258 |
|
Common stock | 18,736 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||
Share-based compensation | — |
|
| — |
|
| 105 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 105 |
| ||||||
Net loss | — |
|
| — |
|
| — |
|
| — |
|
| (349 | ) |
| — |
|
| — |
|
| (349 | ) | ||||||
Balance as of December 31, 2018 | 8,138,555 |
|
| $ | 27 |
|
| $ | 24,133 |
|
| $ | 1,025 |
|
| $ | (14,127 | ) |
| (30,690 | ) |
| $ | (44 | ) |
| $ | 11,014 |
|
See accompanying notes to consolidated financial statements.
| F - 5 |
| Common Stock | Additional Paid-in Capital | Stock Warrants | Retained Earnings | Accumulated Other Comprehensive Loss | 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 | ||||||||||||||
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
| 2018 |
| 2017 | ||||
| (in thousands) | ||||||
Cash flows from operating activities |
|
|
|
|
| ||
Net loss | $ | (349 | ) |
| $ | (1,131 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
| ||
Bad debt expense | — |
|
| 25 |
| ||
Depreciation and amortization | 2,096 |
|
| 2,191 |
| ||
Share-based compensation expense | 105 |
|
| 116 |
| ||
Gain on sale of assets | — |
| (27 | ) | |||
Gain from insurance proceeds | (476 | ) |
| — | |||
Deferred income taxes | — |
|
| — |
| ||
Amortization of loan fees included in interest expense | 273 |
|
| 124 |
| ||
Change in assets and liabilities |
|
|
|
|
| ||
Receivables | (149 | ) |
| (884 | ) | ||
Receivables from related parties | 1 |
|
| 58 |
| ||
Inventories | (1,828 | ) |
| (1,669 | ) | ||
Income tax receivable/payable | (18 | ) |
| 16 | |||
Prepaid expenses and other assets | 15 |
| (95 | ) | |||
Accounts payable | 603 |
| 179 | ||||
Payables and accrued expenses to related parties | (171 | ) |
| (405 | ) | ||
Other current liabilities | (199 | ) |
| 138 |
| ||
Net cash used in operating activities | (97 | ) |
| (1,364 | ) | ||
Cash flows from investing activities |
|
|
|
|
| ||
Proceeds from insurance claim, net | 476 |
|
| — |
| ||
Proceeds from sale of property and equipment | — |
|
| 28 |
| ||
Purchases of property and equipment | (467 | ) |
| (132 | ) | ||
Net cash from (used in) investing activities | 9 |
| (104 | ) | |||
Cash flows from financing activities |
|
|
|
|
| ||
Loan fees capitalized | (306 | ) |
| (125 | ) | ||
Change in bank overdrafts | (148 | ) |
| 69 | |||
| Proceeds from long-term debt | 2,500 | — | |||||
Payments on long-term debt | (7 | ) |
| — | |||
Payments on long-term debt, related parties | (64 | ) |
| (33 | ) | ||
Payments on capital lease obligations | (312 | ) |
| (204 | ) | ||
(Payments) proceeds from revolving line of credit, net | (1,372 | ) |
| 2,076 |
| ||
Net cash from financing activities | 291 |
| 1,783 | ||||
Net change in cash and cash equivalents | 203 |
| 315 | ||||
Cash and cash equivalents at beginning of year | 841 |
|
| 526 |
| ||
Cash and cash equivalents at end of year | $ | 1,044 |
| $ | 841 |
| |
See accompanying notes to consolidated financial statements.
| 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 | — | |||||
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||
| (in thousands) | ||||||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Cash paid for interest | $ | 1,004 |
|
| $ | 755 |
|
Tax refunds received | 1 |
|
| 5 |
| ||
Cash paid for income taxes | 32 |
|
| 2 |
| ||
Supplemental disclosure of noncash investing and financing activities: |
|
|
|
|
| ||
Equipment additions financed by capital lease obligations |
| 134 |
|
|
| 75 |
|
| Equipment financed by debt | 69 | — | |||||
| Equipment financed by related party debt | — | 129 | |||||
See accompanying notes to consolidated financial statements.
December 31, 20152018 and 2017
2014
Nature of Business:Business
Industrial Services of America, Inc. (a Florida corporation)Corporation) and its subsidiaries ("ISA" or the "Company") purchasesbuys, processes and sellsmarkets ferrous and nonferrous materialsnon-ferrous metals and other recyclable commodities at its four Kentucky and Indiana locations. Additionally, ISA operates itsone Pick.Pull.Save used automobile parts yard. All of these activities operate under the Company's Recycling Segment. During 2015, ISA sold substantially all
The Company's core business is focused on the metal recycling industry. The Company is focused on returning the core recycling business to profitability. The Company intends to do this by increasing efficiencies and productivity, which included the commercial restart of its Waste Services Segment assets.auto shredder in the second quarter of 2017. ISA will also evaluate other various options and remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions.
On March 26, 2018, the Board appointed Todd L. Phillips as Chief Executive Officer. See Note 159 - Discontinued Operations for further information. Accordingly, as of December 4, 2015,Share-based Compensation and Other Compensation Agreements. Mr. Phillips has been the Company's operations are solely in the Recycling Segment. Through the Waste Services Segment ("Waste Services" - see Segment information at Note 11), ISA provided products and services to meet the waste management needs of its customers related to ferrous, non-ferrous 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 value to the customer on a standalone basis.
Liquidity
During the amountfirst quarter of $398.0 thousand and was held within the Recycling Segment. Also, in conjunction with this decision,2017, the Company signed a lease, effective December 1, 2014,amended and extended its working capital line of credit with MidCap Business Credit LLC ("MidCap") which extended the contractual maturity date to lease a facility inFebruary 28, 2020 and increased the Seymour area. See Noteborrowing availability. On June 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.
The borrowings under the working capital line of credit are classified as short-term obligations under generally accepted accounting principles in the United States of America ("GAAP") as the agreement with the lender contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the lender. However, the contractual maturity date 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.
Fair Value of Financial Instruments:Instruments
T 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.
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.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.debt. All of ourthe Company's cash is defined as Level 1 and all our debt and derivative contracts areis defined as Level 2.
In accordance with this guidance, the following tables represent ourthe fair value hierarchy for Level 1 and Level 2 financial instruments, in thousands, at December 31, 20152018 and 2014:2017:
|
| Fair Value at Reporting Date Using |
| ||||||||||||||||||||||
|
| Quoted Prices in Active Markets for Identical Assets |
| Significant Other Observable Inputs |
|
| |||||||||||||||||||
2018: |
| Level 1 |
| Level 2 |
| Total | |||||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Cash and cash equivalents |
| $ | 1,044 |
|
| $ | — |
|
| $ | 1,044 |
| |||||||||||||
Liabilities |
|
|
|
|
|
|
|
| |||||||||||||||||
Long-term debt |
| $ | — |
|
| $ | (6,197 | ) |
| $ | (6,197 | ) | |||||||||||||
Long-term debt, related parties |
|
| — |
|
|
| (1,430 | ) |
|
| (1,430 | ) | |||||||||||||
|
| Fair Value at Reporting Date Using |
| ||||||||||||||||||||||
|
| Quoted Prices in Active Markets for Identical Assets |
| Significant Other Observable Inputs |
|
| |||||||||||||||||||
2017: |
| Level 1 |
| Level 2 |
| Total | |||||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Cash and cash equivalents |
| $ | 841 |
|
| $ | — |
|
| $ | 841 |
| |||||||||||||
Liabilities |
|
|
|
|
|
|
| ||||||||||||||||||
Current maturities of long-term debt |
| $ | — |
|
| $ | (4,877 | ) |
| $ | (4,877 | ) | |||||||||||||
Long-term debt, related parties |
| — |
|
| (1,331 | ) |
| (1,331 | ) | ||||||||||||||||
| 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 haveThe 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 December 31, 20152018 or 2017.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued
Estimates
Estimates:In preparing the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP"),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 property tax assessments, estimates of accrued payables, 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
Principles of Consolidation:Consolidation
The consolidated financial statementsConsolidated 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.
Revenue Recognition
The Company's revenue is primarily generated from contracts with customers. The Company notes there have been no credit losses recorded on any receivables or contract assets arising from contracts with customers for the years ended December 31, 2018 and 2017. The Company elects to use the practical expedient as it relates to significant financing components as the Company expects, at the contract inception, that the period between when the Company transfers a promised good and when the customer pays for that good will be one
Reclassifications:Ferrous and nonferrous revenue
Ferrous and non-ferrous contracts contain one performance obligation which consists of the shipment of a stated quantity of a stated product to be delivered within a stated time frame. Ferrous and non-ferrous revenue contracts are primarily short term contracts, typically completed within 30 days. Ferrous and non-ferrous transaction prices are stated in the contract with no variable considerations present. As ferrous and non-ferrous contracts contain one performance obligation, the total transaction price is allocated to the shipment of materials. When multiple loads are included in one contract, the stated price per gross ton is applied to the shipment weight in order to determine transaction price. Ferrous and non-ferrous revenue is recognized when the Company satisfies the shipment of materials per the contract. The shipment and delivery of material typically occurs on the same day. No contract assets or contract liabilities were recognized as of December 31, 2018 and 2017.
Revenue from auto parts operations and other revenue
Revenue from auto parts primarily consists of individual transactions by customers who enter the Company’s premises and purchase auto parts by cash or credit card. Related to these sales, a customer may be charged a core charge. The customer has 30 days to return the core and receive a refund of the core charge. Additionally, customers have the option to separately purchase a warranty related to certain goods purchased. Total core charges and warranty sales are immaterial, in aggregate accounting for less than 1% of revenue from auto parts operations and other revenue. We haveSale prices, core charges and warranties are tracked separately and recognized as revenue when the purchase is completed. No contract assets or contract liabilities were recognized as of December 31, 2018 and 2017.
Reclassifications
The Company has reclassified certain items within the accompanying Consolidated Financial Statements and these Notes to Consolidated Financial Statements for the prior years and prior quartersyear in order to be comparable with the current presentation. These reclassifications had no effect on previously reported net lossincome (loss) or shareholders' equity.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued
Cash and Cash Equivalents:Equivalents
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:Accounts
Accounts receivable consists primarily of amounts due from U.S. customers from product and brokered sales. The allowance for doubtful accounts totaled $35.0 thousand and $100.0$60.0 thousand at December 31, 20152018 and 2014,2017, 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.
Major Customer
: In 2014, theThe Company had sales to twoa major customerscustomer that totaled approximately 34.3%21.2% and 16.3% of its net sales forfor the yearyears ended December 31, 2014.2018 and 2017, respectively. The accounts receivable balance related to these twothe major customerscustomer was $1.0$1.1 million and $0.8 million as of December 31, 20142018.
We do not have any long-term contracts with customers. We negotiate sale and purchase orders on a result of the Company's decisiondaily and monthly basis in the fourth quarterordinary course 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 previously 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% of consolidated amounts.business.
Inventories
Inventories: OurThe Company's inventories primarily consist of ferrous and non-ferrous scrap metals, including stainless steel, and are valued at the lower of average purchased cost or marketnet realizable value ("NRV") based on the specific scrap 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 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.the loss is identified
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 market. 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.
The Company did not have a lower of cost-or-market assessment which resulted incost or NRV inventory write-downs of approximately $1.3 million and $1.9 millionwrite-down for the years ofended December 31, 20152018 and
2014, respectively.
| F - 11 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued
(Continued)
|
|
|
|
|
| ||
| December 31, 2018 |
| December 31, 2017 | ||||
| (in thousands) | ||||||
Raw materials | $ | 4,485 |
| $ | 3,046 |
| |
Finished goods | 1,284 |
| 1,366 |
| |||
Processing costs | 1,165 |
| 694 |
| |||
Total inventories for sale | $ | 6,934 |
| $ | 5,106 |
| |
| December 31, 2015 | |||||||||||||||
Raw Materials | Finished Goods | Processing Costs | 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 | |||||||||||||||
Raw Materials | Finished Goods | Processing Costs | 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 | |||||||
Property and Equipment:
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 December 31, 20152018 and 20142017 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 | ||||||
|
|
|
|
|
|
|
|
|
|
| Life |
| 2018 |
| 2017 | ||||
|
|
| (in thousands) | ||||||
Land |
|
| $ | 4,993 |
|
| $ | 4,993 |
|
Equipment and vehicles | 1-10 years |
| 27,408 |
|
| 26,738 |
| ||
Office equipment | 1-7 years |
| 1,457 |
|
| 1,457 |
| ||
Building and leasehold improvements | 5-40 years |
| 7,685 |
|
| 7,685 |
| ||
|
|
| $ | 41,543 |
|
| $ | 40,873 |
|
Less accumulated depreciation |
|
| 31,757 |
|
| 29,661 |
| ||
|
|
| $ | 9,786 |
|
| $ | 11,212 |
|
Depreciation expense for the years ended December 31, 20152018 and 20142017 was $2.4$2.1 million and $2.7$2.2 million, respectively. Of the $2.4$2.1 million of depreciation expense recognized in 2015, $2.22018, $2.0 million was recorded in cost of sales, and $0.2 million$51.9 thousand was recorded in general and administrative expense. Of the $2.7 $2.2 million of depreciation expense recognized in 2014, $2.42017, $2.1 million was recorded in cost of sales, and $0.3 million$74.5 thousand was recorded in general and administrative expense.
Certain Banking Expenses:Expenses
The Company has included certain banking expensescosts relating to our loans and loan restructuring within interest expense. The loan fees amortization totaled $242.4$272.7 thousand and $72.9$123.9 thousand for the years ended December 31, 20152018 and 2014,2017, respectively. On November 6, 2015, the CompanyIn 2018 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 December
The Company adjusted the amortization period in 2015 for these certain banking expenses accordingly.includes capitalized loan fees as a reduction of debt.
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.
| F - 12 |
Advertising Expense: Advertising costs are charged to expense in the period the costs are incurred. Advertising expense was $2.4 thousand and $0.5 thousand for the years ended December 31, 2015 and 2014, respectively.
Income Taxes:
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 currentcurrently enacted 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, 20152018 and 2017.2014.
As a policy, the Company recognizes interest accrued related to unrecognized tax positions in interest expense and penalties in operating expenses. 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 75 - Income Taxes for additional information relating to income taxes.
Earnings (Loss) Per Share:Share
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, restricted stock units and warrants.
Common Stock Option Arrangements:
The Company has a Long Term Incentive Plan adopted in 2009 ("LTIP") under which it 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. The Company provides compensation benefits by granting stock options and other share-based awards to employees and 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 ourthe Company's historical experience and future expectations. Subject
The Company uses the grant date stock price to shareholder 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 grant.
| F - 13 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued
The Company uses the Modified Black-Scholes-Merton option-pricing model to value the Company's stock options for each employee stock option award. 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 129 - Share Based Compensation. Share-based Compensation and Other Compensation Agreements. 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.
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 ourthe actual forfeiture rate is materially different from itsthe 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.
The LTIP is administered by a committee selected by the Board 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.shares
Gain on Insurance Proceeds
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Subsequent Events:Events
The Company has evaluated the period from December 31, 20152018 through the date the financial statements herein were issued for subsequent events requiring recognition or disclosure in the financial statements and identified the following events were identified:following:
On February 29, 2016,March 1, 2019, the Company entered into aAmendment No. 1 (the "BofA First Amendment") to the Loan and Security Agreement and Consent with BofA, which amended certain terms of the BofA Loan Agreement with MidCap as more fully described above and in Note 3 - Long Term Debt and Notes Payable to Bank.
On March 21, 2016,1, 2019, 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 owedentered into first amendments 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 inKletter Notes. See Note 108 - 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”). 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued
Impact of Recently Issued Accounting Standards:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2014-09 affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments arewere effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. We have not yet assessedOn January 1, 2018, the Company adopted ASU 2014-09 using the retrospective approach. The Company noted no financial impact on the Consolidated Financial Statements as a result of the adoption of ASU 2014-09 on our Consolidated Financial Statements.
In July 2015, the FASB issued ASU 2015-11, Inventory, which simplifies the measurement principle of inventories valued under the First-In, First-Out ("FIFO") or weighted average methods from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 including interim periods within those annual periods. We do not expect the standard to have a material impact on our Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, to improve financial reporting about leasing transactions. This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.transactions. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”)assets largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.Customers
The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. 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 itsthe Consolidated Financial Statements. As of January 1, 2019, the Company recorded a right-of-use asset and a lease liability of approximately $5.6 million on the Consolidated Balance Sheet. The Company does not expect the changes to have a material impact on the Consolidated Statement of Operations and the Consolidated Statement of Cash Flows. Upon adoption, the Company expects that its financial statement disclosures will be expanded to present additional details of its leasing arrangements.
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. Upon adoption, ASU 2016-15 should be applied retrospectively. The Company adopted the standard in the first quarter of 2018 and noted no material impact from the adoption of ASU 2016-15 on the Consolidated Financial Statements.
No other new accounting pronouncements issued or effective during the reporting period had, or are expected to have, a material impact on the Consolidated Financial Statements.
NOTE 2 - MANAGEMENT SERVICES AGREEMENT WITH ALGAR, INC. (Continued)
Summary:
On February 29, 2016, the Company had certain loans with Fifth Third Bank (Fifth Third) 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 ForbearanceLoan Agreement (the "2016 Loan") with MidCap and paid off all remaining amounts due to the Company's previous lender Wells Fargo whereby the due datesFargo. Additionally on the loans were accelerated andFebruary 29, 2016, the Company was requiredconverted certain amounts payable to take certain actions. During 2015,related parties into unsecured term notes payable to the same related parties as more fully described in Note 18 - Summary of Significant Accounting Policies,Related Party Transactions. On March 31, 2017, the Company took stepsentered into an amendment to pay down debtincrease the line of credit, subject to the satisfaction of certain borrowing base restrictions (which have been satisfied), and increase liquidity. extend the maturity date more fully described below.
On December 4, 2015,June 23, 2017, in conjunctionconnection with the salepurchase of substantially all assetsequipment to be used in the operation of the Company’s Waste Services Segment,Company's business, the Company paid off the KY Bank loans and certain Wells Fargo loans. As of December 31, 2015,issued notes totaling $129.0 thousand principal amount due to a related party. See Note 8 - Related Party Transactions.
On November 9, 2018, the Company had an outstanding balance of $19.7 thousand to Wells Fargo. Subsequent to December 31, 2015,entered into the Company closed on new financingBofA Loan Agreement with MidCapBofA and paid off in fullall remaining amounts due to Wells Fargo. the Company's previous lender MidCap.
See Note 1 - Summary of Significant Accounting Policies and belowGeneral - Subsequent Events for further details.
MidCap:
On February 29, 2016, the Company entered into the 2016 Loan which, isas initially entered into, provided a $6$6.0 million senior, secured asset-based line of credit with MidCap. The Company maycould 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 amortizeamortizes monthly on a straight line basis over sixty (60) months with no reduction to the overall line of credit availability.
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 iswas equal to the prime rate (3.5%(5.25% as of February 29, 2016)November 9, 2018) plus 250 basis points (2.50%). In the Event of a Default (as defined in the 2016 Loan Agreement), the interest rate willwould increase by 300 basis points (3.00%). The 2016 Loan also hashad a monthly collateral-monitoring fee equal to 27.5 basis points (0.275%) of the average daily balance outstanding, 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.
The 2016 Loan hashad a maturity date of February 28, 2018.
Interest and monthly fees under the 2016 Loan arewere payable monthly in arrears.
The 2016 Loan Agreement containscontained a minimum line availability covenant equal to $350,000. $350.0 thousand. This covenant may behave been replaced by a Fixed Charge Coverage Ratio ("FCCR") covenant once the Company has achieved aan FCCR of 1.0x1.0x on an annualized basis.
The Company granted MidCap a first priority security interest in all of the assets of ISA pursuant to the terms of a Security Agreement.
The Company iswas allowed to sell or refinance up to $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.
On March 31, 2017, the Companyand each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan hadwith 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 permitted the Company to borrow an outstanding balance atamount under the February 29, 2016 closing dateLoan equal to the lesser of $472.6 thousand(A) $8.0 million; and additional availability(B)(i) 85% of $2.4 million.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.
| F - 16 |
NOTE 2 - 20
(Continued)
On April 26, 2017, certain borrowing base restrictions were equal to the one month LIBOR plus three and one-half percent (3.50%) adjusted automatically on the first daysatisfied with MidCap which resulted in an increase in availability of each month during the term of the KY Bank Notes, which had a final maturity date of October 14, 2019. $1.75 million.
As of December 31, 2014,November 9, 2018, in connection with entry into the interest rate was 3.65%.
Bank 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.America:
On June 13, 2014,November 9, 2018, the Company entered into a senior, secured credit facility (the "Credit Agreement") with Wells Fargo pursuant to which Wells Fargo granted the CompanyBofA Loan Agreement that provides for (i) a revolving line of credit in the aggregate principal amount of up$10.0 million (subject to $15.0 million (the "Revolving Loan")a borrowing base), up towhich includes a $1.0 million letter of which was available to the Company ascredit subline (the “Revolving Loan”), and (ii) 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 and 2014, an availability block that limits borrowings under the revolverterm loan in the amount of $1.6 million and $1.3 million, respectively, is in place.
The interest rate on the Revolving Loan wasis equal to daily three month LIBOR plus three percent (3.00%)2.25% to 2.75%. The interest rate on the Term Loan wasis equal to daily three month LIBOR plus three and 25/100 percent (3.25%)2.75% to 3.25%. In theDuring a continuance of an Event of a Default, (as defined in the Credit Agreement) under eitherinterest rate will increase by 2.0%.
Proceeds from the BofA Loan Agreement were used to satisfy the Company’s existing credit facility with Midcap. In addition, proceeds from the Revolving Loan were used to pay fees and transaction expenses associated with the Loans, to pay the Borrowers’ obligations to BofA, and for other corporate purposes of the Borrowers, including working capital.
The Revolving Loan is due and payable in full on the Commitment Termination Date (as defined below), and the Borrowers may prepay the Revolving Loan without premium or penalty. The Term Loan will be repaid by consecutive installments of $89.3 thousand on the first day of each quarter, commencing on January 1, 2019. On the Commitment Termination Date, all principal, interest, and other amounts with respect to the Term Loan will be due and payable in full.
The Company agreed to pay BofA certain fees in connection with the interest rate would increaseBofA Loan Agreement, including, without limitation: (i) unused credit line fees, due on the first day of each month and on the Commitment Termination Date, (ii) letter of credit facility fees, payable in monthly arrears on the first day of each month, (iii) a closing fee in the amount of $50,000, due on the Closing Date, and (iv) an administrative fee of $10,000 on the Closing Date and on each anniversary date thereof. In addition, the Company agreed to pay all reasonable fees, costs, and expenses, incurred by two percent (2.0%). EachBofA in the enforcement of the RevolvingBofA Loan Agreement and related documents during the Termcontinuance of an Event of Default and all legal, accounting, appraisal, consulting, and other fees incurred by BofA in connection with the Loans.
Borrowings under the BofA Loan had a maturity dateAgreement are secured by all property of June 13, 2019. During 2015,each Borrower. The Company’s obligations are also secured by mortgages upon real estate owned by certain wholly-owned subsidiaries of the lender temporarily decreasedCompany.
The BofA Loan Agreement requires 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 BofA Loan Agreement will terminate on the earlier of: (i) September 30, 2020, with an option to extend such date to September 30, 2023 upon certain conditions, (ii) the date on which the Borrowers terminate the Revolving Loan pursuant to the BofA Loan Agreement, or (iii) the date on which BofA terminates the Revolving Loan as a result of an Event of Default (the “Commitment Termination Date”). The Company has the right to terminate the BofA Loan Agreement at any time with 30 days prior written notice. Any notice of termination by the endBorrowers will be irrevocable and the Borrowers will make full payment of each month, beginningall obligations on the Commitment Termination Date. The borrowings under the revolving credit agreement are classified as short-term obligations under GAAP as the agreement with BofA contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the month ending June 30, 2015lender.
The BofA Loan Agreement had availability 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$4.1 million as of December 31, 2015 and 2014 as a current liability.
| F - 17 |
NOTE 2 - 22
(Continued)Other Debt:
Amounts owed to K&R, LLC and 7100 Grade Lane LLC are more fully described in Note 8 - Related Party Transactions.
In October 2013,June 2018, the Company entered intoexecuted a note for $68.9 thousand to purchase equipment to be used in the operation of the Company's business. The note is for a period of five years at an interest rate swap agreementof 6.0% 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 valuemonthly payment of the liability related to this swap at approximately $10.0$1.3 thousand. The swap was settled for $15.0 thousand during 2015.
Long term debt as of December 31, 20152018 and 20142017 consisted of the following:
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||
| (in thousands) | ||||||
Revolving credit facility with Bank of America and MidCap, see above description for additional details | $ | 3,646 |
|
| $ | 5,018 |
|
| Bank of America term loan | 2,500 | — | |||||
7100 Grade Lane, LLC related party note (See Note 8 - Related Party Transactions) | 884 |
|
| 884 |
| ||
K&R, LLC related party notes (See Note 8 - Related Party Transactions) | 652 |
|
| 716 |
| ||
| Equipment note, see above description for additional details | 63 | — | |||||
Total debt | 7,745 |
|
| 6,618 |
| ||
| Debt issuance costs | (175 | ) | (141 | ) | |||
| Total debt and debt issuance costs | 7,570 | 6,477 | |||||
Less current portion of long-term debt and debt issuance costs | 3,941 |
|
| 4,941 |
| ||
Total long-term debt and debt issuance costs | $ | 3,629 |
|
| $ | 1,536 | |
| 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 | |||||
| $ | — | $ | — | ||||
The annual contractual maturities of long termlong-term debt, in thousands, for the next five years and thereafter as of December 31, 20152018 are as follows:
|
|
|
|
2019 | $ | 402 |
|
2020 | 7,306 |
| |
2021 | 14 |
| |
2022 | 15 |
| |
2023 | 8 |
| |
Total long-term debt | $ | 7,745 |
|
The Company paid and capitalized loan fees in the amount of $305.8 thousand and $124.9 thousand during the years ended December 31, 2018 and 2017, respectively.
| 2016 | $ | 20 | |
| 2017 | — | ||
| 2018 | — | ||
| 2019 | — | ||
| 2020 | — | ||
| Total long-term debt | $ | 20 | |
NOTE 43 - LEASE COMMITMENTS
Operating Leases:
The Company leasesleased a portion of ourits Louisville, Kentucky facility from a related party (see Note 108 - Related Party Transactions) under an operating lease expiringthat was due to expire December 31, 2017. Effective January 1, 2013, the2017 (the "7100 Prior Lease"). The lease amount increased from $48.5 thousand towas $53.8 thousand per month. Effective October 1, 2017, the Company entered into a new lease agreement with a related party for the same property (the "7100 Lease") that terminated and replaced the 7100 Prior Lease. The lease is for a period of seven years with rent payments of $37.5 thousand per month based onfor the first five years. For each of the following one year periods, the annual rent increases the lesser of (a) the percentage change in the CPI index as stated inover the preceding twelve months, or (b) 2% of the previous year's annual rent. The Company has the option to extend the lease agreement. for two additional consecutive terms, each such extended term to be for a period of five years. In addition, the Company is also responsible for real estate taxes, insurance, utilities and maintenance expense.
The Company signed a lease, effective December 1, 2014, to lease a facility in the Seymour, Indiana area. This lease iswas for aan initial period of three years. The Company hasyears, with the option to extend the lease for three (3) additional three (3)(3) year periods. Rent is $8.0$8.2 thousand per month and increases each year by $200$0.2 thousand per month. InThe Company exercised the eventfirst option to extend the lease. Because ISA exercisesexercised 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.
The Company leased a lot in Louisville, 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. AsThis amount was fully repaid in 2017.
On April 30, 2015, the Company entered into a lease agreement with LK Property (see Note 8 - Related Party Transactions), 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 was terminated, future payments are not included inand vacate the future minimumleased 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.
On March 3, 2018, the Company entered into a lease payments table below.
Future minimum lease payments for operating leases for the next five years ending December 31 of each year, in thousands, as of December 31, 20152018 are as follows:
| 2016 | $ | 1,168 | ||
| 2017 | 1,142 | |||
| 2018 | 404 | |||
| 2019 | 286 | |||
| 2020 | — | |||
| Future minimum lease payments | $ | 3,000 | ||
| Related Party |
| Other |
|
| Total |
| ||||
2019 | $ | 461 |
|
| $ | 103 |
|
| $ | 564 |
|
2020 |
| 450 |
|
|
| 103 |
|
| 553 |
| |
2021 |
| 450 |
|
|
| 7 |
|
| 457 |
| |
2022 |
| 450 |
|
|
| 7 |
|
| 457 |
| |
2023 |
| 450 |
|
|
| 1 |
|
| 451 |
| |
2024 |
| 338 |
|
|
| — |
|
| 338 |
| |
Future minimum lease payments | $ | 2,599 |
|
| $ | 221 |
|
| $ | 2,820 |
|
Total rent expense for the years ended December 31, 20152018 and 20142017 was $1,357.4 $648.5 thousand and $981.7$770.7 thousand, respectively.
NOTE 3 - LEASE COMMITMENTS, Continued
Capital Leases:
On May 1, 2016, the Company entered into an amended agreement to lease three cranes (the "Crane Lease"). The Crane Lease expires April 30, 2021. Payments were $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.
The Company entered into a capital lease, effective June 2017, to lease two pieces of equipment for use in the Company's operations. The lease is for a period of six years and the payments are $1.4 thousand per month. The Company has the option to purchase the equipment for a purchase price of $1.00 per item of equipment upon the expiration of the lease. At inception, the Company recorded a capital lease obligation of $75.2 thousand. The Company used a weighted average cost of capital of 10.0% to calculate the capital lease obligation.
The Company entered into a capital lease, effective May 2018, to lease a piece of equipment for use in the Company's operations. The lease is for a period of four years and the payments are $0.6 thousand per month with an interest rate of 5.8% per year. At inception, the Company recorded a capital lease obligation of $24.7 thousand.
The Company entered into a capital lease, effective June 2018, to lease a piece of equipment for use in the Company's operations. The lease is for a period of four years and the payments are $0.7 thousand per month with an interest rate of 5.8% per year. At inception, the Company recorded a capital lease obligation of $29.0 thousand.
The Company entered into a capital lease, effective July 2018, to lease two pieces of equipment for use in the Company's operations. The lease is for a period of 6 years and 4 months and the payments are $1.4 thousand per month. The Company has the option to purchase the equipment for a purchase price of $1.00 per item of equipment upon the expiration of the lease. At inception, the Company recorded a capital lease obligation of $79.9 thousand. The Company used a weighted average cost of capital of 10.0% to calculate the capital lease obligation.
Depreciation and interest expense for capital leases, in thousands, are as follows:
| For year ended | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Depreciation expense | $ | 284 | $ | 264 | ||||
| Interest expense | 98 | 114 | ||||||
Accumulated depreciation and net book value for capital leases, in thousands, are as follows:
Future minimum lease payments for the capital lease for the next five years ended
Total | Principal | Interest | |||||||||
| 2019 | $ | 424 | $ | 352 | $ | 72 | |||||
| 2020 | 424 | 386 | 38 | ||||||||
| 2021 | 143 | 133 | 10 | ||||||||
| 2022 | 39 | 34 | 5 | ||||||||
| 2023 | 24 | 22 | 2 | ||||||||
| 2024 | 15 | 14 | 1 | ||||||||
Total | $ | 1,069 | $ | 941 | $ | 128 | |||||
| F - 20 |
NOTE 64 - EMPLOYEE RETIREMENT PLAN
The Company maintains a defined contribution retirement plan under Section 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 matching expense under the plan for the years ended December 31, 20152018 and 2014 was $0.0 thousand and $6.6 thousand, respectively.2017.
NOTE 75 - INCOME TAXES (Continued)
The income tax provision (benefit), in thousands, consists of the following for the years ended
December 31,
|
|
|
|
| ||||||||||
| 2015 | 2014 | 2018 |
| 2017 | ||||||||||
| Federal |
|
|
|
|
| |||||||||
| Current | $ | — | $ | — | $ | — |
|
| $ | — |
| |||
| Deferred | — | — | — |
|
| — |
| |||||||
| — | — | — |
|
| — |
| ||||||||
| State and Local |
|
|
|
|
| |||||||||
| Current | 13 | 38 | 13 |
|
| 12 |
| |||||||
| Deferred | — | — | — |
|
| — |
| |||||||
| 13 | 38 | 13 |
|
| 12 |
| ||||||||
| $ | 13 | $ | 38 | $ | 13 |
|
| $ | 12 |
| ||||
A reconciliation of income taxes at the statutory rate to the reported provision (benefit), in thousands, is as follows:
|
|
|
|
| ||||||||||
| 2015 | 2014 | 2018 |
| 2017 | ||||||||||
| Federal income tax at statutory rate | $ | (595 | ) | $ | (2,460 | ) | $ | (71 | ) |
| $ | (380 | ) | |
| State and local income taxes, net of federal income tax effect | (77 | ) | (221 | ) | 2 |
| (52 | ) | ||||||
| Permanent differences | — | — | 2 |
|
| 2 |
| |||||||
| Increase in deferred tax asset valuation allowance | 716 | 3,035 | ||||||||||||
Tax reform legislation | 920 |
|
| 1,736 |
| |||||||||
Decrease in deferred tax asset valuation allowance | (779 | ) |
| (1,258 | ) | |||||||||
| Other differences | (31 | ) | (316 | ) | (61 | ) |
| (36 | ) | |||||
| $ | 13 | $ | 38 | $ | 13 |
|
| $ | 12 |
| ||||
NOTE 75 - INCOME TAXES, (Continued)
Significant components of the Company’s deferred tax liabilities and assets, in thousands, as of
December 31,
|
|
|
|
| ||||||||||
| 2015 | 2014 | 2018 |
| 2017 | ||||||||||
| Deferred tax liabilities |
|
|
|
|
| |||||||||
| Property and equipment | $ | (1,459 | ) | $ | (2,131 | ) | $ | — |
| $ | (300 | ) | ||
| Gross deferred tax liabilities | (1,459 | ) | (2,131 | ) | — |
| (300 | ) | ||||||
| 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 | ||||||||||||
State recycling equipment tax credit carry forward | 4,586 |
|
| 4,590 |
| |||||||||
| Federal net operating loss carry forward | 4,176 | 3,920 | 2,980 |
|
| 3,901 |
| |||||||
| State net operating loss carry forward | 1,758 | 1,659 | 1,791 |
|
| 1,787 |
| |||||||
| State recycling equipment tax credit carry forward | 4,598 | 4,604 | ||||||||||||
| Interest rate swap | — | 4 | ||||||||||||
| Inventory valuation reserve | 78 | — | ||||||||||||
Intangibles and goodwill | 1,014 |
|
| 1,178 |
| |||||||||
Stock options | 441 |
|
| 424 |
| |||||||||
| Accrued expenses | 77 | 223 | 119 | 160 | ||||||||||
Interest expense limitation | 47 |
|
| — |
| |||||||||
Property and equipment | 38 |
|
| — |
| |||||||||
Inventory capitalization | 23 |
|
| 72 |
| |||||||||
Allowance for doubtful accounts | 16 |
|
| 16 |
| |||||||||
Accrued property taxes | 6 |
|
| 6 |
| |||||||||
| Other | 11 | 11 | 2 |
|
| 8 |
| |||||||
| Gross deferred tax assets | 14,221 | 14,177 | 11,063 |
|
| 12,142 |
| |||||||
| Valuation allowance | (12,665 | ) | (11,949 | ) | (11,036 | ) |
| (11,815 | ) | |||||
| Net deferred tax assets | $ | 97 | $ | 97 | $ | 27 |
|
| $ | 27 |
| |||
At December 31, 2015,2018, 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
At December 31, 2015,2018, the Company had a Federal net operating loss ("NOL") carry forward of $12.3$14.6 million which expires beginning in 2033.2034. The Company also has state NOL carry forwards of $26.9$29.3 million as of December 31, 2015.2018. The majority of the state NOL carry forwards relates to losses in Kentucky and expire beginning in 2031.
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 inand carry back years.provisions. As of December 31, 2015,2018, 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.
On December 22, 2017, the President of the United States signed the Tax Cuts and Jobs Act tax reform legislation into law. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the rate of 35 percent to 21 percent. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities. This revaluation resulted in an addition of $0.9 million and $1.7 million to income tax expense in continuing operations for the year ended December 31, 2018 and 2017, respectively, before change to the valuation allowance and a corresponding reduction in the deferred tax asset. The other provisions of the Tax Cuts and Jobs Act did not have a material impact on the Consolidated Financial Statements.
NOTE 5 - INCOME TAXES, Continued
The recorded valuation allowance, in thousands, consisted of the following at
December 31,
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | ||||||
|
| 2018 |
| 2017 | ||||
Valuation allowance, beginning of year |
| $ | 11,815 |
|
| $ | 13,073 |
|
Decrease in deferred tax asset valuation allowance |
| (779 | ) |
| (1,258 | ) | ||
Valuation allowance, end of year |
| $ | 11,036 |
|
| $ | 11,815 |
|
| 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 | ||||
NOTE 86 - CASH AND STOCK DIVIDENDS
Under the previous Wells FargoMidCap and the current MidCapBank of America 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 –7 - PER SHARE DATA
The computation for basic and diluted loss per share is as follows:
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||
(in thousands, except per share information) | |||||||
Basic loss per share |
|
|
|
|
| ||
Net loss | $ | (349 | ) |
| $ | (1,131 | ) |
Weighted average shares outstanding | 8,102 |
|
| 8,078 |
| ||
Basic loss per share | $ | (0.04 | ) |
| $ | (0.14 | ) |
Diluted loss per share |
|
|
|
|
| ||
Net loss | $ | (349 | ) |
| $ | (1,131 | ) |
Weighted average shares outstanding | 8,102 |
|
| 8,078 |
| ||
Add dilutive | — |
|
| — |
| ||
Diluted weighted average shares outstanding | 8,102 |
|
| 8,078 |
| ||
Diluted loss per share | $ | (0.04 | ) |
| $ | (0.14 | ) |
| 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 | |||
NOTE 108 - RELATED PARTY TRANSACTIONS
During the periodperiods ended December 31, 20152018 and 2014,2017, 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.
K&R, LLC ("K&R") and 7100 Grade Lane, LLC ("7100 LLC"):
The Company 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, our 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. Mr. Oliver was the Company's Chairman of the Board and Interim Chief Executive Officer from 2014 until his resignation on March 26, 2018. Mr. Oliver continues to be a member of the Company's Board of Directors. As of December 31, 2015,2018, 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.
The Company leasesleased a portion of ourthe Louisville, Kentucky facility from 7100 LLC (previously from K&R&R) under an operating lease (the "7100 Prior Lease"),expiring December 2017. Effective October 1, 2017, the Company entered into a new lease agreement with 7100 LLC for the same property (the "7100 Lease"). Additionally, that terminates and replaces the Company leases equipment from K&R under operating leases that expired November 2015 and expire May 2016. 7100 Prior Lease. See Note 43 - Lease Commitments for additional information relating to the rent and lease agreements with K&R. 7100 LLC.
During 2014,2015 and to a lesser extent 2015,continuing into 2017, the Company deferred a portion of these lease payments.
On September 13, 2013, K&R made a $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.
As of December 31, 20152018 and 2014, 2017, the Company had balances related to K&R and 7100 LLC pertaining to refundable lease and property deposits rentsdue to and from the Company, prepaid expenses, notes payable to K&R,due from the Company, interest expense, and rent expense.
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 $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%)5.0%. Interest will accrueaccrued until April 30, 2017, at which time interest will beis paid monthly. Until maturity on December 31, 2020, the Kletter Notes are subject to intercreditor agreements between the respective Note holder and MidCap. as due. 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.
On November 9, 2018, in connection with the Management Agreement.
On June 23, 2017, the Company entered into a Stock Purchasetwo agreements (referred to as the "Handler Agreement" and the "Crane Agreement") with K&R, each for the purchase of equipment to be used in the operation of the Company's business.
Under the Handler Agreement, with Algar, whereby the Company issued 50.7purchased a hydraulic scrap handler from K&R for a purchase price of $90.0 thousand, shares of its common stock to Algar for aggregate consideration equal to $189.0with a $9.0 thousand based on the fair value of our common stock. The consideration was payabledown payment and a 24-month promissory note ("Handler Note") in the form of a reductionface principal amount of the Company’s $378.0remaining $81.0 thousand. The Handler Note is interest free and provides for payments in equal monthly installments of $3.4 thousand. Under the Handler Note, payments commenced on July 1, 2017. Upon a default, the Handler Note will bear interest at 1% per annum.
Under the Crane Agreement, the Company purchased a 2011 Komatsu crane from K&R for a purchase price of $60.0 thousand, accrued but unpaid bonus compensation due to Algar, leavingwith a remainder of $189.0$12.0 thousand down payment and a 24-month promissory note ("Crane Note") in the accrued but unpaid bonus compensation. For additional information seeface principal amount of the remaining $48.0 thousand. The Crane Note 12 - Share Based Compensation.
The Crane Note and the Handler Note are each secured by a security interest in the subject equipment and proceeds the Company derives from the equipment.
NOTE 108 - RELATED PARTY TRANSACTIONS, (Continued)Continued
The Company sold scrapentered into an agreement and promissory note (the "Back Rent Agreement"), effective October 1, 2017, to Algar, bought scrap from Algar,pay 7100 LLC $345.8 thousand for back rent past due and provided logistical and IT servicesowed under the 7100 Prior Lease with an initial payment of $100.0 thousand paid at the signing of the Back Rent Agreement with six consecutive monthly payments of $41.0 thousand each, beginning November 1, 2017. All amounts related 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 expenseBack Rent Agreement have been paid as of December 31, 20152018.
See Note 1 - Summary of Significant Accounting Policies and 2014.
Board of Directors' fees and consulting fees:
The Company pays board and committee fees to non-employee directors. Additionally,Effective October 1, 2017, the Company paid financial consulting feesrevised its Board compensation policy to oneprovide an annual retainer of its directors in 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$50.0 thousand per Board member, an additional $10.0 thousand annual retainer to the Boardchairman of Directorsthe audit committee, and an additional $5.0 thousand annual retainer to the chairman, if any, of other standing committees. Additional fees may be paid to directors for service on non-standing committees. Director fees and consultingare to be paid in quarterly installments, in advance upon the first day of each quarter. No additional fees along with related expense at and asare to be paid for individual meeting attendance. In addition, each director will receive an annual grant of December 31, 2015 and 2014.
LK Property Investments, 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 2015 and 2014,2017, 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 1411 - Financing and Related Matters.
SG&D Ventures, LLC.
|
|
|
|
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||
K&R, LLC and 7100 LLC: |
|
|
|
|
| ||||
Deposit amounts owed to the Company by related parties | (1) |
| $ | 42 |
|
| $ | 42 |
|
Prepaid expenses to related parties | (1) |
| 43 |
|
| 43 |
| ||
Notes payable to related parties | (3) |
| 1,536 |
|
| 1,600 |
| ||
Facility rent payable to related parties | (2) |
| — |
|
| 123 |
| ||
Facility rent expense to related parties | (4) |
| 450 |
|
| 597 |
| ||
Interest expense to related parties | (4) |
| 75 |
|
| 75 |
| ||
|
|
|
|
|
| ||||
Board of Directors: * |
|
|
|
|
| ||||
Accounts payable to the Board of Directors for fees | (2) |
| $ | — |
|
| $ | 50 |
|
Board of director fee expense | (4) |
| 257 |
|
| 200 |
| ||
| Board portion of share-based compensation expense | (4) | 50 | — | ||||||
|
|
|
|
|
| ||||
LK Property Investments, LLC: |
|
|
|
|
| ||||
Lease deposit to LK Property | (1) |
| $ | 3 |
|
| $ | 3 |
|
Prepaid expenses to LK Property | (1) |
| 3 |
|
| 3 |
| ||
Accounts payable to LK Property | (2) | 2 | — | ||||||
Rent expense to LK Property** | (4) |
| 36 |
|
| 36 |
| ||
|
|
|
|
|
| ||||
Metal X, LLC: |
|
|
|
|
| ||||
Accounts receivable from Metal X | (1) |
| $ | — |
|
| $ | 1 |
|
Revenue from product sales to Metal X | (4) |
| — |
|
| 188 |
| ||
| 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 | $ | — | |||||
NOTE 8 - RELATED PARTY TRANSACTIONS, Continued
* Excludes insignificant amount of travel reimbursement.
**Excludes amounts reimbursed to LK Properties for utilities and property tax.
| (1) | Included in receivable and other assets from related parties on the Consolidated Balance Sheets; balances are as of December 31, 2018 and 2017. |
| (2) | Included in payables and accrued expenses to related parties on the Consolidated Balance Sheets; balances are as of December 31, 2018 and 2017. |
| (3) | Included in current maturities of long-term debt, related parties and long-term debt related parties on the Consolidated Balance Sheets; balance is as of December 31, 2018 and 2017. |
| (4) | Included in the Consolidated Statements of Operations; balances are for the year ended December 31, 2018 and 2017. |
NOTE 119 - SEGMENT INFORMATION
Following is a summary of stock option activity and number of shares reserved for outstanding options for the years ended December 31, 20152018 and 2014:2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016 |
| 502 |
|
| $ | 4.78 |
|
| 2.07 years |
|
| $ | 2.43 |
|
Cancelled |
| (30 | ) |
| 5.40 |
|
| — |
|
| 2.85 |
| ||
Expired |
| (90 | ) |
| 4.94 |
|
| — |
|
| 1.71 |
| ||
Outstanding at December 31, 2017 |
| 382 |
|
| $ | 4.70 |
|
| 1.41 years |
|
| $ | 2.57 |
|
Issued |
| 31 |
|
| 2.46 |
|
| 4.24 years |
|
|
| 1.61 |
| |
Outstanding at December 31, 2018 |
| 413 |
|
| $ | 4.53 |
|
| 0.70 years |
|
| $ | 2.49 |
|
Exercisable at December 31, 2018 |
| 382 |
|
| $ | 4.70 |
|
| 0.41 years |
|
| $ | 2.57 |
|
Securities available for grant at December 31, 2018* |
| 1,645 |
|
|
|
|
|
|
| |||||
| 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 | |||||||||||||
*Securities available for grant include securities available for stock option grants and RSUs.
Following is a summary of the nonvested options issued and outstanding:
|
|
|
|
|
|
|
|
|
| Number of shares |
| Weighted Average Grant | |||
Non-Vested Options |
| (in thousands) |
| Date Option Fair Value | |||
Outstanding at December 31, 2017 |
| — |
|
| $ | — |
|
Granted | 31 | 1.61 | |||||
Outstanding at December 31, 2018 |
| 31 |
|
| $ | 1.61 |
|
| 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 | ||||
| F - 26 |
NOTE 9 - SHARE-BASED COMPENSATION AND OTHER COMPENSATION AGREEMENTS, Continued
Option Grants:
On January 16, 2014,March 28, 2018, the Company awarded options to purchase 30.031.0 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.
The weighted average assumptions relating to the valuation of the Company's stock options awarded in 20152018 are shown below.
| 2015 | 2014 |
|
| 2018 |
| ||||||
| Weighted average grant-date fair value of grants per option | $ | 3.01 | $ | 2.26 | $ | 1.61 | |||||
| Volatility | 60.1 | % | 60.9 | % | 80.40 | % | |||||
| Risk-free interest rate | 2.3 | % | 2.2 | % | 2.59 | % | |||||
| Expected life (in years) | 5 | 3 | 5.00 | ||||||||
| Expected dividend yield | — | % | — | % |
| — | % | ||||
Restricted Stock Unit Grants:
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.
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 vested over a period ending June 15, 2018. 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 continued his employment with the Company through the end of the agreement and the related 90.0 thousand RSUs vested and became nonforfeitable.
On March 28, 2018, the Company granted an aggregate of 18.0 thousand RSUs to six employees under the LTIP pursuant to RSU agreements. The grant date fair value is based on the Company's closing common stock price on the date one day prior to grant. The grant date fair value was $44.3 thousand and was recognized as expensed beginning in the second quarter of 2018. Each RSU vests on March 26, 2014, we received $126.92021 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 agreements and the LTIP.
On March 28, 2018, the Company granted 40.6 thousand fromRSUs to the CEO 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 date one day prior to grant. The grant date fair value was $100.0 thousand and was recognized as expensed beginning in the second quarter of our2018. Each RSU vests on March 26, 2021 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 LTIP.
NOTE 9 - SHARE-BASED COMPENSATION AND OTHER COMPENSATION AGREEMENTS, Continued
On July 9, 2018, the Compensation Committee of the Board of Directors of the Company granted each of the four non-employee directors 13,228 RSUs in accordance with a RSU Grant Agreement pursuant to the Company's 2009 LTIP, as amended. The grants followed the election of the non-employee directors at the annual meeting of shareholders of the Company on July 9, 2018. The grant date fair value is based on the Company's closing common stock price on the date one day prior to grant. The grant date fair value was $100.0 thousand and was recognized as expense beginning in the third quarter of 2018. Each RSU vests on July 9, 2019 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 LTIP.
Following is a summary of RSU activity:
Restricted Stock Units | Number of shares (in thousands) | WA Remaining Contractual Term | WA Grant Date Fair Value | |||||||||
Outstanding at December 31, 2016 | 45.1 | 1.05 | $ | 2.23 | ||||||||
| Vested | (22.5 | ) | — | 2.36 | ||||||||
Outstanding at December 31, 2017 | 22.6 | 0.35 | years | $ | 2.37 | |||||||
| Granted | 111.6 | 1.43 | 2.19 | |||||||||
| Vested | (22.6 | ) |
| — | 2.37 | |||||||
Outstanding at December 31, 2018 | 111.6 | 1.43 | years | $ | 2.19 | |||||||
Non-Equity Transactions:
Under a retention agreement with the Company's CFO dated March 25, 2016, the Company agreed to pay the 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 exercised 30.0remained employed with the Company on those dates. The December 31, 2016 bonus of $100.0 thousand share options.
On August 5, 2015,September 30, 2016, the Company entered into a Stock Purchase Agreementretention agreements ("Retention Agreements") with Algar, wherebycertain management employees (individually "Staff Member"). Under the Retention Agreements, if the Staff Member remained continuously employed by the Company issued 50.7 thousand sharesthrough and including the date which is the first to occur of: (a) the date of its common stocka change in control of the Company; (b) the date the Staff Member is terminated without cause; and (c) December 31, 2017, the Company agreed to Algar for aggregate considerationpay the Staff Member a bonus in an amount equal to $189.0 thousand based on the fair value of our common stock. The consideration was payable in the form of a reduction25% of the Company's $378.0Staff Member's then-current annual base salary. The Company paid the retention amounts of $135.9 thousand accrued but unpaid bonus compensation due to Algar pursuant toduring the Management Services Agreement betweenthree month period ended March 31, 2018.
On March 26, 2018, the Company and Algar, dated December 1, 2013, leaving a remaining balanceBoard appointed Todd L. Phillips as CEO of $189.0 thousand in the accrued but unpaid bonus compensation. See Note 10 - Related Party Transactions.
Other:
As of December 31, 2015,2018 and 2017, we had unrecognized stock-basedshare-based compensation cost related to non-vested optionRSU awards in the amount of $356.5 thousand. The amount of unrecognized stock-based compensation cost related to the Algar options is $1.5$195.7 thousand and will fluctuate based on changes in option value at the end of each quarter.
Share-based compensation charged to operations relating to stock options and RSU awards was $0.2 million$105.0 thousand and $2.5 million$116.0 thousand for the years ended December 31, 20152018 and 2014,2017, respectively.
NOTE 1310 - 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 our 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.
NOTE 1411 - 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, (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.
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 the 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 - 29 |
| 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 | |
| 2015 | 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 | ) | ||
| 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 | ) | ||||