FORM
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
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
_______________________________________________________________________________________________________
(Exact Name of Registrant as specified in its Charter)
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Florida |
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59-0712746 |
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(State or other jurisdiction of Incorporation or Organization) |
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(IRS Employer Identification No.) |
7100 Grade Lane
Louisville, Kentucky 40213
(Address of principal executive offices)
(502) 368-1661
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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(Check one): |
Large accelerated filer ☐ |
Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Emerging growth company ☐ |
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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 ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 8, 2017:
| 1 |
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
| 2 |
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
ASSETS
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March 31, 2017 |
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December 31, 2016 |
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(Unaudited) |
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(in thousands) |
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Current assets |
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Cash and cash equivalents |
$ |
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$ |
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Income tax receivable |
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Accounts receivable – trade after allowance for doubtful accounts of $ |
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Receivables from related parties |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Net property and equipment |
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Other assets |
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Deferred income taxes |
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Other non-current assets |
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Total other assets |
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Total assets |
$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
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March 31, 2017 |
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December 31, 2016 |
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(Unaudited) |
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(in thousands, except par value and share information) |
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Current liabilities |
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Current maturities of long-term debt |
$ |
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$ |
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Current maturities of capital lease obligations |
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Checks in excess of bank |
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Accounts payable |
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Payables and accrued expenses to related parties |
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Other current liabilities |
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Total current liabilities |
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Long-term liabilities |
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Long-term debt, related parties |
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Capital lease obligations, net of current maturities |
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Total long-term liabilities |
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Shareholders' equity |
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Common stock, $ |
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Additional paid-in capital |
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Stock warrants outstanding |
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Retained losses |
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Treasury stock at cost, |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
| 4 |
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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For the three months ended |
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March 31, 2017 |
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March 31, 2016 |
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Revenue from product sales |
$ |
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$ |
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Cost of sales for product sales |
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Operating income (loss) |
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Selling, general and administrative expenses |
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Loss before other income (expense) |
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Other income (expense) |
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Interest expense, including loan fee amortization |
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Gain on sale of assets |
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Other income (expense), net |
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Total other income (expense) |
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Loss before income taxes |
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Income tax provision |
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Net loss |
$ |
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$ |
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Basic loss per share |
$ |
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$ |
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Diluted loss per share |
$ |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements.
| 5 |
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2017
(UNAUDITED)
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Common Stock |
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Stock Warrants |
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Retained Losses |
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Treasury Stock |
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Shares |
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Amount |
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Additional Paid-in Capital |
Shares |
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Cost |
Total Shareholders’ Equity |
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(in thousands, except share information) |
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Balance as of December 31, 2016 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Share-based compensation |
— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
— |
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— |
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— |
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— |
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— |
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— |
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Balance as of March 31, 2017 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
| 6 |
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(UNAUDITED)
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For the three months ended |
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March 31, 2017 |
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March 31, 2016 |
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(in thousands) |
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Cash flows from operating activities |
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Net loss |
$ |
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$ |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Bad debt expense |
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Depreciation and amortization |
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Share-based compensation expense |
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Gain on sale of assets |
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Amortization of loan fees included in interest expense |
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Change in assets and liabilities |
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Receivables |
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Receivables from related parties |
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Inventories |
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Income tax receivable/payable |
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Other assets |
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Deferred income taxes |
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Accounts payable |
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Payables to related parties |
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Other current liabilities |
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Net cash used in operating activities |
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Cash flows from investing activities |
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Proceeds from sale of property and equipment |
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Purchases of property and equipment |
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Net cash used in investing activities |
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Cash flows from financing activities |
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Loan fees capitalized |
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Change in bank overdrafts |
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Payments on long-term debt |
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Payments on capital lease obligations |
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Proceeds from revolving line of credit, net |
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Net cash from financing activities |
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Net change in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
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$ |
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| 7 |
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(UNAUDITED)
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For the three months ended |
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March 31, 2017 |
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March 31, 2016 |
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(in thousands) |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
$ |
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$ |
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Cash paid for taxes |
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Supplemental disclosure of noncash investing and financing activities: |
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Conversion of related party payables to long-term debt, related parties |
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See accompanying notes to condensed consolidated financial statements.
| 8 |
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL
Industrial Services of America, Inc. (herein “ISA,” the “Company,” 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 used autos in order to sell used auto parts. The Company purchases, processes and sells ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries and refineries. The Company purchases ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, iron, aluminum, copper, stainless steel and other metals as well as from scrap dealers and retail customers who deliver these materials directly to ISA facilities. The Company processes scrap metal through sorting, cutting, baling, and until May 2015, shredding operations. The non-ferrous scrap recycling operations consist primarily of collecting, sorting and processing various grades of copper, aluminum, stainless steel and brass. The used automobile yard primarily purchases automobiles so that retail customers can locate and remove used parts for purchase.
The Company's core business is now focused on the metal recycling industry. During 2016, the Company announced that the Company formed a special committee of independent board members to evaluate various growth and strategic options. During the first quarter of 2017, the special committee concluded its work and reported to the Board. The Board accepted the special committee's recommendation to focus on returning the core recycling business to profitability. The Company intends to do this by increasing efficiencies and productivity, which includes the commercial restart of the Company's auto shredder in the second quarter of 2017. The Company intends to run the auto shredder in the normal course of business subject to market conditions and operating needs. ISA will also evaluate other various options and remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions.
In connection with the evaluation of strategic alternatives, on September 30, 2016, the Company and Algar, Inc. ("Algar") mutually agreed to terminate the Management Services Agreement between them dated as of December 1, 2013 (the "Management Agreement"), pursuant to the Agreement to Terminate Management Services among the Company, Algar, and Sean Garber dated as of September 30, 2016 (the "Termination Agreement"). See Note 6 - Related Party Transactions for further details.
Effective September 30, 2016, Mr. Garber resigned from all positions with the Company, including as President, and the Board appointed Todd Phillips as President. Mr. Phillips has been the Company's CFO since December 31, 2014 and will continue to serve in that role.
Liquidity
During the first quarter of 2017, the Company amended and extended its working capital line of credit. The Company expects operating cash flow and borrowings under its working capital line of credit to be sufficient to meet its ongoing obligations. Influenced by the scrap metal market downturn from late 2014 through 2016, the Company's sources of liquidity during this time primarily consisted of proceeds from asset and equity sales as well as the idling of the auto shredder and refinancing of its working capital line of credit. Additional information, including the steps the Company took, is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, on file with the Securities and Exchange Commission.
| 9 |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The Accounting Standards Codification ("ASC") as produced by the Financial Accounting Standards Board ("FASB") is the sole source of authoritative GAAP. The information furnished includes all adjustments, which are, in the opinion of management, necessary to present fairly our financial position as of March 31, 2017 and the results of our operations and changes in our cash flows for the periods ended March 31, 2017 and 2016. Results of operations for the period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the entire year. Additional information, including the audited December 31, 2016 consolidated financial statements and the Summary of Significant Accounting Policies, is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, on file with the Securities and Exchange Commission.
Estimates
In preparing the consolidated financial statements in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, 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 deferred income tax assets and liabilities, estimates of inventory balances, 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 the Company’s intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts, transactions and profits have been eliminated.
Fair Value
The Company carries certain of its financial assets and liabilities at fair value on a recurring basis. These financial assets and liabilities are composed of cash and cash equivalents. Long-term debt is carried at cost, and the fair value is disclosed herein. In addition, the Company measures certain assets, such as long-lived assets, at fair value on a non-recurring basis to evaluate those assets for potential impairment. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
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.
| 10 |
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued
Level 3 – Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are both unobservable in the market and significant to the overall fair value measurement. These inputs reflect management’s judgment about the assumptions that a market participant would use in pricing the asset or liability, and are based on the best available information, some of which is internally developed.
When determining the fair value measurements for financial assets and liabilities carried at fair value on a recurring basis, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability. When possible, ISA looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets, and the Company uses alternative valuation techniques to derive fair value measurements.
The Company uses the fair value methodology outlined in the related accounting standards to value the assets and liabilities for cash and debt. All of our cash is defined as Level 1 and all our debt and derivative contracts are defined as Level 2.
In accordance with this guidance, the following table represents our fair value hierarchy for Level 1 and Level 2 financial instruments at March 31, 2017 (in thousands):
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Fair Value at Reporting Date Using |
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Quoted Prices in Active Markets for Identical Assets |
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Significant Other Observable Inputs |
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Assets: |
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Level 1 |
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Level 2 |
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Total |
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Cash and cash equivalents |
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$ |
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$ |
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$ |
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Liabilities: |
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Current maturities of long-term debt |
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$ |
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$ |
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$ |
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Long-term debt, related parties |
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The Company had no transfers in or out of Levels 1 or 2 fair value measurements, and no activity in Level 3 fair value measurements for the three month periods ended March 31, 2017 or 2016.
Common Stock and Share-based Compensation Arrangements
The Company has a Long Term Incentive Plan adopted in 2009 ("LTIP") under which it may grant equity awards for up to
The Company uses the grant date stock price to value the Company's restricted stock units. The fair value of each restricted stock unit is estimated on the date of grant.
The Company uses the Modified Black-Scholes-Merton option-pricing model to value the Company's stock options for each employee stock option award. See Note 7 - Share Based Compensation. Using these option pricing models, the fair value of each stock option award is estimated on the date of grant.
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.
| 11 |
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued
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 the actual forfeiture rate is materially different from the 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 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
Subject to shareholder approval and restrictions on exercisability set forth in a Stock Option Agreement entered into on December 2, 2013 between the Company and Algar (the “Stock Option Agreement”), the Company granted Algar an option to purchase a total of
The Company used the Lattice-Based model to value the Company's stock options for the Algar Options due to market and performance conditions prior to September 30, 2016. See Note 7 - Share Based Compensation. The fair value of the Algar Options was estimated at the end of each quarter for the third and fourth tranches due to ongoing performance conditions. For the first
Other Comprehensive Income
The Company previously entered into interest rate swaps to assist in managing commodity price risk. The effective portions of changes in the fair value of the derivatives were recorded as a component of other comprehensive income. The Company fully settled the previously outstanding interest rate swap in December 2015. During 2016 and 2017, the Company did not use any derivative instruments, including commodity hedges to assist in managing commodity price risk. As such, the Company has no activity in other comprehensive income and has no Condensed Consolidated Statements of Comprehensive Income included in the financial statements.
Subsequent Events
The Company has evaluated the period from March 31, 2017 through the date the financial statements herein were issued for subsequent events requiring recognition or disclosure in the financial statements and identified the following:
On April 26, 2017, certain borrowing base restrictions were satisfied with MidCap Business Credit LLC ("MidCap") which resulted in an increase in availability of $
In May 2017, the Company restarted its auto shredder for commercial production. The Company intends to run the auto shredder in the normal course of business subject to market conditions and operating needs.
| 12 |
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 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The Company is evaluating the potential impact of the adoption of ASU 2014-09 on the Condensed Consolidated Financial Statements. The Company does not expect a material impact from the adoption of ASU 2014-09 on the Condensed Consolidated Financial Statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40). The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The amendments are effective for annual periods ending after December 15, 2016, including interim periods within that reporting period. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company adopted ASU 2014-15 in the fourth quarter of 2016 and noted no significant impact from the adoption on the Condensed 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. The Company adopted the standard in the fourth quarter of 2016 and noted no material impact on the Condensed Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2015-17 may be applied either prospectively or retrospectively. The Company adopted the standard in the first quarter of 2017 and noted no material impact on the Condensed 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. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU 2016-02 on the Condensed 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 Condensed Consolidated Financial Statements
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2016-15 should be applied retrospectively. The Company is evaluating the potential impact of ASU 2016-15 on the Condensed Consolidated Financial Statements. The Company does not expect a material impact from the adoption of ASU 2016-15 on the Condensed Consolidated Financial Statements.
| 13 |
NOTE 2 – INVENTORIES
The Company's inventories primarily consist of ferrous and non-ferrous scrap metals, and are valued at the lower of average purchased cost or net realizable value ("NRV") based on the specific scrap commodity. See Impact of Recently Issued Accounting Standards at the end of Note 1. Quantities of inventories are determined based on the Company's inventory systems and are subject to periodic physical verification using estimation techniques including observation, weighing and other industry methods. The Company recognizes inventory impairment and related adjustments when the NRV, based upon current market pricing, falls below recorded value or when the estimated volume is less than the recorded volume of the inventory. The Company records the loss in cost of sales in the period during which 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 NRV. Assumptions are based on historical experience, current market conditions and remaining costs of processing (if any) and disposal. If the anticipated future selling prices of scrap metal and finished steel products should decline, the Company would re-assess the recorded NRV of the inventory and make any adjustments believed necessary in order to reduce the value of the inventory (and increase cost of sales) to the lower of cost or NRV.
The Company did t have a lower of cost-or-NRV inventory write-down in the three month period ended March 31, 2017.
Some commodities are in saleable condition at acquisition. The Company purchases these commodities in small amounts until it has a truckload of material available for shipment. Some commodities are not in saleable condition at acquisition. These commodities must be shredded, torched or baled. ISA does not have work-in-process inventory that needs to be manufactured to become finished goods. The Company includes processing costs in inventory for all commodities by weight.
Inventories for ferrous and non-ferrous materials as of March 31, 2017 and December 31, 2016 consist of the following:
|
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|
|
|
|
March 31, 2017 |
|
|||||
|
|
(unaudited) |
|
December 31, 2016 |
||||
|
|
(in thousands) |
||||||
|
Raw materials |
$ |
|
|
|
$ |
|
|
|
Finished goods |
|
|
|
|
|
||
|
Processing costs |
|
|
|
|
|
||
|
Total inventories for sale |
$ |
|
|
|
$ |
|
|
| 14 |
NOTE 3 – LONG TERM DEBT AND NOTES PAYABLE TO BANK
Summary:
On February 29, 2016, the Company closed on new financings with MidCap and paid off in full remaining amounts due to the Company's previous lender Wells Fargo. Additionally on February 29, 2016, the Company converted certain amounts payable to related parties into unsecured term notes payable to the same related parties as more fully described in Note 6 - Related Party Transactions. On March 31, 2017, the Company entered into an amendment to increase the line of credit, subject to the satisfaction of certain borrowing base restrictions, and extend the maturity date more fully described below.
MidCap:
On February 29, 2016, the Company entered into the 2016 Loan, which, as initially entered into, provided a $
Proceeds from this loan were used to pay transaction expenses, pay off and close the remaining balance on the Wells Fargo revolving line of credit and fund working capital requirements.
The interest rate on the 2016 Loan is equal to the prime rate (
The 2016 Loan has a maturity date of February 28, 2020 based on the amendment fully described below. The borrowings under the revolving credit agreement are classified as short-term obligations under GAAP as the agreement with MidCap contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the lender.
The Company is subject to a prepayment fee of $
Interest and monthly fees under the 2016 Loan are payable monthly in arrears.
The 2016 Loan Agreement contains a minimum line availability covenant equal to $
The Company granted MidCap a first priority security interest in all of the assets of ISA pursuant to a Security Agreement.
The Company is allowed to sell or refinance up to $
| 15 |
NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE TO BANK, Continued
On March 31, 2017, the Company and each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan with MidCap ("First Amendment"). The First Amendment increased the line of credit from $
The amended 2016 Loan had availability of $
Related Party Note:
Amounts owed to K&R, LLC and 7100 Grade Lane, LLC are more fully described in Note 6 - Related Party Transactions.
Long term debt as of March 31, 2017 and December 31, 2016 consisted of the following:
|
|
March 31, |
|
December 31, |
||||
|
|
2017 |
|
2016 |
||||
|
|
(unaudited) |
|
|
||||
|
|
(in thousands) |
||||||
|
Revolving credit facility with MidCap, see above description for additional details |
$ |
|
|
|
$ |
|
|
|
K&R, LLC related party note (See Note 6 - Related Party Transactions) |
|
|
|
|
|
||
|
7100 Grade Lane, LLC related party note (See Note 6 - Related Party Transactions) |
|
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||
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|
|
|
|
|
|
||
|
Less current maturities |
|
|
|
|
|
||
|
|
$ |
|
|
|
$ |
|
|
The annual contractual maturities of long term debt (in thousands) for the next five twelve-month periods and thereafter ending March 31 of each year are as follows:
|
|
|
|
|
|
|
2018 |
|
$ |
|
|
|
2019 |
|
|
|
|
|
2020 |
|
|
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
Total |
|
$ |
|
|
The Company paid and capitalized loan fees in the amount of $
| 16 |
NOTE 4 - LEASE COMMITMENTS
Operating Leases:
The Company leases a portion of our Louisville, Kentucky facility from a related party (see Note 6 - Related Party Transactions) under an operating lease expiring December 31, 2017 (the "7100 Lease"). The lease amount is $
As described in Note 1 - Summary of Significant Accounting Policies and General, the Company signed a lease, effective December 1, 2014, to lease a facility in the Seymour, Indiana area. This lease is for a period of
The Company signed a lease, effective October 1, 2014, to lease three cranes for $
The Company previously leased equipment from a related party (see Note 6 - Related Party Transactions) under an operating lease for a monthly payment of $
The Company leased a lot in Louisville, Kentucky for a term that commenced in March 2012 and ended in February 2016. The monthly payment amount from March 2012 through February 2014 was $
On April 30, 2015, the Company entered into a lease agreement with LK Property (see Note 6 - Related Party Transactions), for a portion of the
Future minimum lease payments for operating leases for the next five twelve-month periods ending March 31 of each year, in thousands, as of March 31, 2017 are as follows:
|
|
Related Party |
|
Other |
|
Total |
|
|||
|
2018 |
$ |
|
|
$ |
|
|
$ |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
Future minimum lease payments |
$ |
|
|
$ |
|
|
$ |
|
|
Total lease expense for the three months ended March 31, 2017 and 2016 was $
NOTE 4 - LEASE COMMITMENTS, Continued
Capital Leases:
On May 1, 2016, the Company entered into an amendment to the Crane Lease, whereby the lease is extended through April 30, 2021. Payments are $
Future minimum lease payments for the next five twelve-months periods ending March 31 of each year, in thousands, as of March 31, 2017 are as follows:
|
Total
|
Principal | Interest | ||||||
|
2018
|
$ | $ | $ | |||||
|
2019
|
||||||||
|
2020
|
||||||||
|
2021
|
||||||||
|
2022
|
|
|
||||||
|
|
$ | $ | $ | |||||
NOTE 5 – PER SHARE DATA
The computation for basic and diluted earnings (loss) per share is as follows:
Three months ended March 31, 2017 compared to three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
2016 |
||||
|
|
(in thousands, except per share information) |
||||||
|
Basic loss per share |
|
|
|
||||
|
Net loss |
$ |
( |
) |
|
$ |
( |
) |
|
Weighted average shares outstanding |
|
|
|
|
|
||
|
Basic loss per share |
$ |
( |
) |
|
$ |
( |
) |
|
Diluted loss per share |
|
|
|
||||
|
Net loss |
$ |
( |
) |
|
$ |
( |
) |
|
Weighted average shares outstanding |
|
|
|
|
|
||
|
Add dilutive effect of assumed exercising of stock options and warrants |
|
|
|
|
|
||
|
Diluted weighted average shares outstanding |
|
|
|
|
|
||
|
Diluted loss per share |
$ |
( |
) |
|
$ |
( |
) |
NOTE 6 - RELATED PARTY TRANSACTIONS
During the periods ended March 31, 2017 and 2016, 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 is involved in various transactions with K&R and 7100 LLC, which are wholly-owned by Kletter Holdings LLC, the sole member of which was Harry Kletter, the Company's founder and former Chief Executive Officer. After Mr. Kletter's passing in January 2014, the Company's Chairman of the Board and interim Chief Executive Officer, Orson Oliver, assumed the roles of executor of Mr. Kletter’s estate and President of Kletter Holdings LLC. As of March 31, 2017, Mr. Kletter’s estate, K&R and the Harry Kletter Family Limited Partnership collectively, beneficially own in excess of
The Company leases a portion of the Louisville, Kentucky facility from 7100 LLC (previously from K&R) under an operating lease, the "7100 Lease," expiring December 2017. Additionally, the Company leased equipment from K&R under operating leases that expired May 2016. See Note 4 - Lease Commitments for additional information relating to the rent and lease agreements with K&R. During 2015 and continuing into 2017, the Company deferred a portion of these lease payments. A portion of this deferral was converted into a term note during 2016 as described below.
On September 13, 2013, K&R made a $
As of March 31, 2017 and 2016, the Company had balances related to K&R and 7100 LLC pertaining to refundable lease and property deposits due to and from the Company, rents payable from the Company, notes payable due from the Company, accrued interest 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 $
Algar, Inc. ("Algar"):
Management Services Payments to Algar:
On December 2, 2013, the Company and Algar entered into a Management Services Agreement (the “Management Agreement”). On September 30, 2016 (the "Termination Effective Date"), the Company and Algar mutually agreed to terminate the Management Agreement pursuant to the Termination Agreement. See the details below.
Under the Management Agreement, Algar provided the Company with day-to-day senior executive level operating management services. Algar also provided business, financial, and organizational strategy and consulting services, as the Company’s board of directors reasonably requested from time to time.
In connection with the Management Agreement, the Company's board of directors appointed Sean Garber as President and as a member of the board of directors.
Under the Management Agreement, the Company reimbursed Algar for the portion of Mr. Garber’s salary that was attributable to Algar’s services under the Management Agreement in an amount not exceeding $
NOTE 6 - RELATED PARTY TRANSACTIONS, Continued
For the year ended December 31, 2014, Algar earned a bonus of $
As of the Termination Effective Date, the Company and Algar mutually terminated the Management Agreement. The Termination Agreement provided that in satisfaction of all amounts owed to Algar under the Management Agreement, the Company paid Algar: (i) $
Other transactions with Algar:
During 2016, the Company participated in various other transactions with Algar. The Company sold scrap to Algar, bought scrap from Algar, leased equipment to and from Algar, and provided logistical and IT services to Algar. Related to these transactions, the Company had related income and expense during 2016.
Board of Directors' fees and consulting fees:
The Company pays board and committee fees to non-employee directors. Related to these transactions, the Company has accounts payable balances to the Board of Directors for fees and consulting fees, along with related expense at and as of March 31, 2017 and 2016.
LK Property Investments, LLC:
On April 30, 2015, ISA Real Estate LLC sold to LK Property, an entity principally owned by Daniel M. Rifkin, CEO of MetalX and the principal owner of RCP, a
On April 30, 2015, the Company entered into a lease agreement with LK Property, for a portion of the
MetalX:
During 2017 and 2016, the Company held accounts receivables balances from MetalX related to scrap sales. For additional information regarding MetalX, see Note 9 - Financing and Related Matters.
| 20 |
NOTE 6 - RELATED PARTY TRANSACTIONS, Continued
Related party balances are as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
2016 |
||||
|
K&R, LLC and 7100 LLC: |
|
|
|
|
|
|
||
|
Deposit amounts owed to the Company by related parties |
(1) |
$ |
|
|
|
$ |
|
|
|
Note payable to related parties |
(3) |
|
|
|
|
|
|
|
|
Accrued interest to related parties |
(2) |
|
|
|
|
|
|
|
|
Facility rent payable to related parties |
(2) |
|
|
|
|
|
|
|
|
Equipment rent payable to related parties |
(2) |
|
|
|
|
|
|
|
|
Facility rent expense to related parties |
(4) |
|
|
|
|
|
|
|
|
Equipment rent expense to related parties |
(4) |
|
|
|
|
|
|
|
|
Interest expense to related parties |
(4) |
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Algar, Inc.: |
|
|
|
|
|
|
||
|
Bonus payable to Algar |
(2), (5) |
$ |
|
|
|
$ |
|
|
|
Revenue from scrap sales to Algar |
(4), (6) |
|
|
|
|
|
|
|
|
Revenue from logistical services to Algar |
(4), (6) |
|
|
|
|
|
|
|
|
Revenue from IT services to Algar |
(4), (6) |
|
|
|
|
|
|
|
|
Scrap material purchases from Algar |
(4), (6) |
|
|
|
|
|
|
|
|
Management fee expense |
(4), (6) |
|
|
|
|
|
|
|
|
Bonus expense to Algar |
(4), (6) |
|
|
|
|
|
|
|
|
Other expenses to Algar |
(4), (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Board of Directors: * |
|
|
|
|
||||
|
Accounts payable to the Board of Directors for fees |
(2) |
$ |
|
|
|
$ |
|
|
|
Board of director fee expense |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
LK Property Investments, LLC: |
|
|
|
|
||||
|
Lease deposit to LK Property |
(1) |
$ |
|
|
|
$ |
|
|
|
Rent expense to LK Property** |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Metal X, LLC: |
|
|
|
|
|
|
||
|
Accounts receivable from Metal X |
(1) |
$ |
|
|
|
$ |
|
|
|
Revenue from product sales to Metal X |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Excludes insignificant amount of travel reimbursement.
**Excludes amounts reimbursed to LK Properties for utilities and property tax.
(1) Included in receivable from related parties on the Condensed Consolidated Balance Sheets; balances are as of March 31, 2017 and December 31, 2016.
(2) Included in payable to related parties on the Condensed Consolidated Balance Sheets; balances are as of March 31, 2017 and December 31, 2016.
(3) Included in long-term liabilities on the Condensed Consolidated Balance Sheets; balance is as of March 31, 2017 and December 31, 2016.
(4) Included in the Condensed Consolidated Statements of Operations; balances are for the three months ended March 31, 2017 and March 31, 2016.
(5) The 2016 balance includes the bonus payable amount at December 31, 2016 as this amount was earned on September 30, 2016 while Algar was a related party. The bonus payable was paid on March 31, 2017.
(6) The Company excluded all 2017 balances related to Algar as the related party relationship ended on September 30, 2016.
| 21 |
NOTE 7– SHARE-BASED COMPENSATION AND OTHER COMPENSATION AGREEMENTS
Following is a summary of stock option activity and number of shares reserved for outstanding options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
Cancelled |
|
( |
) |
|
|
|
|
— |
|
|
|
|
||
|
Outstanding at December 31, 2016 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
Outstanding at March 31, 2017 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
Exercisable at March 31, 2017 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
Securities available for grant at March 31, 2017* |
|
|
|
|
|
|
|
|
|
|||||
*
Option Grants:
As described in Note 1 - Summary of Significant Accounting Policies and General and Note 6 - Related Party Transactions, as of December 1, 2013, subject to shareholder approval (which was received during 2014) and vesting provisions, the Company granted options to purchase a total of
In January 2015, the Company awarded options to purchase
Restricted Stock Unit Grants:
On March 25, 2016, our Compensation Committee granted
On March 29, 2016, the Compensation Committee granted
| 22 |
NOTE 7– SHARE-BASED COMPENSATION AND OTHER COMPENSATION AGREEMENTS, Continued
On June 15, 2016, at the Company's annual meeting, the Company's shareholders approved a one-time stock option exchange for the CFO as an alternative to a direct repricing of options previously granted to the CFO. The stock option exchange allowed the Company to cancel
Following is a summary of RSU activity:
|
Restricted Stock Units
|
Number of shares
(in thousands)
|
Weighted Average Remaining Contractual Term
|
Weighted Average Grant Date Fair Value
|
|||||||
|
Outstanding at December 31, 2016
|
|
|
|
$
|
|
|
||||
|
Outstanding at March 31, 2017
|
|
|
|
|
$
|
|
|
|||
Non-Equity Transactions:
Under a retention agreement with the Company's CFO dated March 25, 2016, the Company will pay the CFO bonuses of $
On September 30, 2016, the Company entered into retention agreements ("Retention Agreements") with certain management employees (individually "Staff Member"). Under the Retention Agreement, if the Staff Member remains continuously employed by the Company through and including the date which is the first to occur of: (a) the date of a change in control of the Company; (b) the date the Staff Member is terminated without cause; and (c) December 31, 2017, the Company will pay the Staff Member a bonus in an amount equal to
| 23 |
NOTE 8 - LEGAL PROCEEDINGS
The Company has litigation from time to time, including employment-related claims, none of which the Company currently believes 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 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 9 - FINANCING AND RELATED MATTERS
Securities Purchase Agreement
On June 13, 2014, the Company issued
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 RCP will have the right to designate, and require the Company's Board to appoint, up to
| 24 |
The following discussion and analysis should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and the accompanying notes thereto included elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Statements
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. Factors that could affect financial predictions, forecasts and projections include availability of liquidity, fluctuations in commodity prices and any conditions internal to our major customers, including loss of their accounts and other factors as listed in our Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission.
General
Industrial Services of America, Inc. (herein “ISA,” the “Company,” “we,” “us,” “our,” or other similar terms) is a Louisville, Kentucky-based company that buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used autos in order to sell used auto parts. We purchase, process and sell ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries and refineries. We purchase ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, iron, aluminum, copper, stainless steel and other metals as well as from scrap dealers and retail customers who deliver these materials directly to our facilities. We process scrap metal through our sorting, cutting, baling, and until May 2015, our shredding operations. Our non-ferrous scrap recycling operations consist primarily of collecting, sorting and processing various grades of copper, aluminum, stainless steel and brass. Our used automobile yard primarily purchases automobiles so that retail customers can locate and remove used parts for purchase.
Our core business is now focused on the metal recycling industry. During 2016, we announced that the Company formed a special committee of independent board members to evaluate various growth and strategic options. During the first quarter of 2017, the special committee concluded its work and reported to the Board. The Board accepted the special committee's recommendation to focus on returning our core recycling business to profitability. We intend to do this by increasing efficiencies and productivity, which includes the commercial restart of our auto shredder in the second quarter of 2017. We intend to run the auto shredder in the normal course of business subject to market conditions and operating needs. We will also evaluate other various options and remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions.
On March 31, 2017, the Company amended the terms of its credit facility with MidCap Business Credit LLC ("MidCap") to extend the maturity date of the Company's line of credit and increase the line of credit from $6.0 million to $8.0 million, subject to the satisfaction of certain borrowing base restrictions as more fully described in Note 3 - Long Term Debt and Notes Payable to Bank in the accompanying Notes to Condensed Consolidated Financial Statements. On April 26, 2017, certain borrowing base restrictions were satisfied with MidCap which resulted in an increase in availability of $1.75 million.
The Company also announced on October 4, 2016 the Company and Algar mutually agreed to terminate the Management Agreement between us, pursuant to the Agreement to Terminate Management Services among the Company, Algar, and Sean Garber dated as of September 30, 2016. Effective September 30, 2016, Mr. Garber resigned from all positions with the Company, including as President. Also, on September 30, 2016, the company’s Chief Financial Officer was appointed to serve in the additional role as President.
Liquidity and Capital Resources
Our cash requirements generally consist of working capital, capital expenditures and debt service. Influenced by the scrap metal market downturn from late 2014 through 2016, our sources of liquidity during this time primarily consisted of proceeds from asset and equity sales as well as the idling of the auto shredder and refinancing of our working capital line of credit. Additional information, including the steps the Company took, is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, on file with the Securities and Exchange Commission.
Furthermore, on February 29, 2016, the Company refinanced its Wells Fargo debt with a new lender, MidCap Business Credit. On March 31, 2017, the Company entered into the First Amendment to the 2016 Loan, which extended the maturity date of the Company's line of credit and increased the line of credit from $6.0 million to $8.0 million, subject to the satisfaction of certain borrowing base restrictions as more fully described in the accompanying Notes to Condensed Consolidated Financial Statements.
| 25 |
Cash flows generated from operations and our revolving credit facility are significant sources of ongoing liquidity. We have also been able to manage liquidity by deferring certain rent payments made to related parties, as well as deferring capital expenditures. See Note 6 - Related Party Transactions in the accompanying Notes to Condensed 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 March 31, 2017, we held cash and cash equivalents of $0.5 million. We drew $1.1 million on our revolving credit facility during the three month period ended March 31, 2017.
During the first quarter of 2017, we amended and extended our working capital line of credit. We expect operating cash flow and borrowings under our working capital line of credit to be sufficient to meet our ongoing obligations.
Credit facilities and notes payable
During 2015, the Company had certain loans with KY Bank and Wells Fargo. As of December 31, 2014, the Company was in default under the Wells Fargo loans and during the second half of 2015 entered into a Forbearance Agreement with Wells Fargo whereby the due dates on the loans were accelerated and the Company was required to take certain actions.
During 2015, as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 on file with the Securities and Exchange Commission, the Company took steps to pay down debt and increase liquidity.
See Note 1 - Summary of Significant Accounting Policies and General and Note 3 - Long Term Debt and Notes Payable to Bank in the accompanying Notes to Condensed Consolidated Financial Statements for further details on long term debt and notes payable.
| 26 |
Results of Operations
The following table presents, for the periods indicated, the percentage relationship that certain captioned items in our Condensed Consolidated Statements of Operations bear to total revenue:
|
|
|
|
|
|
|
|
|
Three months ended |
||||
|
|
March 31, |
||||
|
|
2017 |
|
2016 |
||
|
Statements of Operations Data: |
|
|
|
||
|
Total revenue |
100.0 |
% |
|
100.0 |
% |
|
Total cost of sales |
92.8 |
% |
|
103.0 |
% |
|
Selling, general and administrative expenses |
8.0 |
% |
|
20.0 |
% |
|
Loss before other expenses |
(0.9 |
)% |
|
(22.9 |
)% |
Three months ended March 31, 2017 compared to three months ended March 31, 2016
Total revenue increased $7.0 million or 116.9% to $13.0 million in the first quarter of 2017 compared to $6.0 million in the same period in 2016. The increase was due primarily as a result of higher average selling prices (ASP) coupled with a related increase in nonferrous and ferrous volumes. Nonferrous material shipments increased by 3.3 million pounds, or 56.3%, along with an increase in the ASP of nonferrous material of $0.18 per pound, or 24.5%, for the three months ended March 31, 2017 compared to three months ended March 31, 2016. For the three months ended March 31, 2017 compared to three months ended March 31, 2016, the Company experienced an increase in the ASP of ferrous material of $103 per gross ton, or 66.1%. For the three months ended March 31, 2017 compared to three months ended March 31, 2016, the Company experienced an increase in ferrous material shipments of 5.3 thousand tons, or 41.0%.
Total cost of sales increased $5.9 million or 95.6% to $12.1 million in the three month period ended 2017 compared to $6.2 million for the same period in 2016. The increase in cost of sales is directly related to the increase in revenue.
Total cost of sales as a percent of revenue was lower during the three month period ended 2017 as compared to the same period in 2016. The metals commodity markets improved during the first quarter of 2017 as compared to the same period in 2016, which allowed for improved gross margins.
SG&A expenses decreased $0.2 million to $1.0 million in the three month period ended 2017 compared to $1.2 million in the same period in 2016. As a percentage of revenue, SG&A expenses were 8.0% in 2017 compared to 20.0% in 2016.
SG&A expenses decreased primarily due to a decrease in share based compensation expense of $0.1 million related to share based compensation expense for Algar options and a decrease in amounts paid to Algar for management expense.
Other income (expense) was expense of $153.0 thousand for the three month period ended March 31, 2017 compared to expense of $48.0 thousand for the three month period ended March 31, 2016. This $105.0 thousand change is a result of (i) a $124.0 thousand increase in interest expense, which is a result of the increased outstanding balance on the line of credit and (ii) a $28.0 thousand increase in the gain on sale of assets, which was primarily due to a gain on a vehicle sold during the first quarter of 2017.
| 27 |
The income tax provision increased $6.0 thousand to $7.0 thousand in the three month period ended 2017 compared to $1.0 thousand in the same period in 2016. The effective tax rates in 2017 and 2016 were (2.7)% and (0.1)%, respectively, based on federal and state statutory rates. Due to recurring operating losses being incurred, at December 31, 2013, we recorded nearly a full valuation allowance, which is continuing through March 31, 2017. We also have several state and franchise taxes payable based on gross receipts. The Company is currently under sales tax and property tax audits and has accrued estimates of potential assessments.
Financial condition at March 31, 2017 compared to December 31, 2016
Cash and cash equivalents remained the same at $0.5 million as of March 31, 2017 and December 31, 2016.
Net cash used in operating activities was $0.9 million for the three month period ended March 31, 2017. The net cash used in operating activities is primarily due to a net loss of $0.3 million, an increase in receivables of $0.8 million, an increase in inventories of $0.4 million, an increase in other assets of $0.2 million, and a decrease in other current liabilities of $60.0 thousand; partially offset by a decrease in receivables from related parties of $105.0 thousand, depreciation of $0.6 million, stock option expense of $32.0 thousand, and an increase in accounts payables of $0.2 million. The Company had $54.0 thousand of capital expenditures in 2017.
Net cash from financing activities was $0.9 million for the three month period ended March 31, 2017. In the three month period ended March 31, 2017, we received net proceeds from debt of $1.1 million less capitalized loan fees in the amount of $80.0 thousand.
Accounts receivable trade increased $0.8 million or 24.3% to $4.2 million as of March 31, 2017 compared to $3.4 million as of December 31, 2016 due to a substantial increase in volume in the quarter ended March 31, 2017, as well as modest commodity price increases. In general, the accounts receivable balance fluctuates due to the timing of shipments and receipt of customer payments.
Accounts receivables from related parties decreased $105.0 thousand to $45.0 thousand as of March 31, 2017 compared to $150.0 thousand as of December 31, 2016. This decrease was due to timing of cash receipts.
Inventories consist principally of ferrous and nonferrous scrap materials. We value inventory at the lower of cost or net realizable value. Inventory increased $0.4 million, or 12.4%, to $3.9 million as of March 31, 2017 compared to $3.4 million as of December 31, 2016. This increase is primarily driven by seasonality resulting in increased volumes and inventory levels during the first quarter of 2017 compared to the fourth quarter of 2016.
Inventory aging for the period ended March 31, 2017 (Days Outstanding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except days information) |
||||||||||||||||||
|
Description |
|
1 - 30 |
|
31 - 60 |
|
61 - 90 |
|
Over 90 |
|
Total |
||||||||||
|
Ferrous and non-ferrous materials |
|
$ |
3,406 |
|
|
$ |
326 |
|
|
$ |
55 |
|
|
$ |
76 |
|
|
$ |
3,863 |
|
Inventory aging for the period ended December 31, 2016 (Days Outstanding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except days information) |
||||||||||||||||||
|
Description |
|
1 - 30 |
|
31 - 60 |
|
61 - 90 |
|
Over 90 |
|
Total |
||||||||||
|
Ferrous and non-ferrous materials |
|
$ |
3,011 |
|
|
$ |
268 |
|
|
$ |
62 |
|
|
$ |
96 |
|
|
$ |
3,437 |
|
Inventory in the "1-30 days" category increased by $395.0 thousand from December 31, 2016 to March 31, 2017. This increase is primarily due to increased seasonal volumes during March 2017 as compared to December 2015.
Accounts payable trade increased $0.2 million or 13.6% to $1.8 million as of March 31, 2017 compared to $1.6 million as of December 31, 2016. The accounts payable balance fluctuates due to timing of purchases from and payments made to our vendors. This decrease is largely a result of improved liquidity which led to quicker payments to the Company's suppliers.
Accounts payables and accrued expenses from related parties decreased $0.1 million to $0.4 million as of March 31, 2017 compared to $0.6 million as of December 31, 2016. This decrease is largely a result of a decrease in the bonus payable to Algar of $180.0 thousand. See Note 6 - Related Party Transactions for additional information
| 28 |
Working capital increased $0.1 million to $1.8 million as of March 31, 2017 compared to $1.7 million as of December 31, 2016 as a result of the above noted items.
Contractual Obligations
The following table provides information with respect to our known contractual obligations for the quarter ended March 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
$ |
5,539 |
|
|
$ |
— |
|
|
$ |
4,035 |
|
|
$ |
1,504 |
|
|
$ |
— |
|
|
Operating lease obligations (1) |
626 |
|
|
588 |
|
|
38 |
|
|
— |
|
|
— |
|
|||||
|
Capital lease obligations (1)
|
1,233 |
|
|
254 |
|
|
623 |
|
|
356 |
|
|
— |
|
|||||
|
Total |
$ |
7,398 |
|
|
$ |
842 |
|
|
$ |
4,696 |
|
|
$ |
1,860 |
|
|
$ |
— |
|
|
(1)
|
See Note 4 - Lease Commitments and Note 6 - Related Party Transactions for detailed information related to the Company's operating and capital lease obligations.
|
On February 29, 2016, the Company entered into a subordinated, unsecured debt with related parties, which converted amounts previously held as related party payables, in the amount of $1.5 million. See Note 6 - Related Party Transactions for additional information.
On May 1, 2016, the Company entered into an amendment to a previous operating lease, whereby the lease is extended through April 30, 2021. Based on the new lease terms, the Company classified the amended lease as a capital lease. At inception, the Company recorded a capital lease obligation of $1.3 million. As of March 31, 2017, the Company has recorded $64.2 thousand in depreciation expense and $28.9 thousand in interest expense related to the capital lease. See Note 4 - Lease Commitments for additional information.
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 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The Company is evaluating the potential impact of the adoption of ASU 2014-09 on the Condensed Consolidated Financial Statements. The Company does not expect a material impact from the adoption of ASU 2014-09 on the Condensed Consolidated Financial Statements.
| 29 |
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40). The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The amendments are effective for annual periods ending after December 15, 2016, including interim periods within that reporting period. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company adopted ASU 2014-15 in the fourth quarter of 2016 and noted no significant impact from the adoption on its Condensed 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. The Company adopted the standard in the fourth quarter of 2016 and noted no material impact on its Condensed Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2015-17 may be applied either prospectively or retrospectively. The Company adopted the standard in the first quarter of 2017 and noted no material impact on its Condensed 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. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU 2016-02 on its Condensed 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 Condensed Consolidated Financial Statements
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2016-15 should be applied retrospectively. The Company is evaluating the potential impact of ASU 2016-15 on its Condensed Consolidated Financial Statements. The Company does not expect a material impact from the adoption of ASU 2016-15 on the Condensed Consolidated Financial Statements.
| 30 |
N/A - Not required for smaller reporting companies.
(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 March 31, 2017, ISA’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that ISA files under the Exchange Act with the Securities and Exchange Commission (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to ISA’s management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure.
(b) Changes to internal control over financial reporting.
There were no changes in ISA’s internal control over financial reporting during the three months ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect ISA’s internal control over financial reporting.
| 31 |
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 products. In addition, certain of the 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 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.
There have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K, for the fiscal year ended December 31, 2016. You should carefully consider the risk factors in our 2016 Form 10-K, which could materially affect our business, financial condition or future results.
None.
None.
Not applicable.
None.
See Index to Exhibits.
| 32 |
SIGNATURES
Pursuant to the requirements 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. |
|
Date: |
May 12, 2017 |
|
By /s/ Orson Oliver |
|
|
|
|
Orson Oliver |
|
|
|
|
Chairman of the Board and Interim Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
Date: |
May 12, 2017 |
|
By /s/ Todd L. Phillips |
|
|
|
|
Todd L. Phillips, President and Chief Financial Officer |
|
|
|
|
(Principal Financial and Accounting Officer) |
| 33 |
INDEX TO EXHIBITS
|
|
||
|
|
|
|
|
Exhibit Number |
|
Description of Exhibits |
|
10.1 |
** |
First Amendment to Executive Employment Agreement, dated February 1, 2017, between the Company and Todd Phillips (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K as filed on March 31, 2017)(File No. 0-20979)* |
|
10.2 |
** |
First Amendment to the Loan and Security Agreement dated as of March 31, 2017 between the Company, its subsidiaries and MidCap Business Credit LLC (incorporated by reference to Exhibit 10.27 of the Company’s Annual Report on Form 10-K as filed on March 31, 2017)(File No. 0-20979) |
|
31.1 |
|
Rule 13a-14(a) Certification of Orson Oliver for the Form 10-Q for the quarter ended March 31, 2017. |
|
31.2 |
|
Rule 13a-14(a) Certification of Todd L. Phillips for the Form 10-Q for the quarter ended March 31, 2017. |
|
32.1 |
|
Section 1350 Certification of Orson Oliver and Todd L. Phillips for the Form 10-Q for the quarter ended March 31, 2017. |
|
101.INS |
|
XBRL Instance Document - the instance document does not appear in the Interactive Data File as the XBRL tags are embedded within the Inline XBRL 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.
| 34 |