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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2016

 

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) 368-1661 

 

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 ☐ No ☒

 

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 ☐ No ☒

 

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 No ☐

 

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 ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

(Check one):

Large accelerated filer ☐

Accelerated filer ☐

 

Non-accelerated filer ☐

Smaller reporting company ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates based on the closing price per share of $1.74 for shares of the registrant’s common stock as reported by the Nasdaq Capital Market as of the last business day of the registrant’s most recently completed second fiscal quarter was $8,890,553. Solely for the purposes of this calculation, shares held by directors, executive officers and 10% owners of the registrant have been excluded. Such exclusion should not be deemed a determination or an admission by the registrant that such individuals are, in fact, affiliates of the registrant.

 

Number of shares of Common Stock, $0.0033 par value, outstanding as of the close of business on March 27, 2017: 8,074,541.

 

 



 

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DOCUMENTS INCORPORATED BY REFERENCE

 

 

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Table of Contents

Page

   
PART I 4
   
Item 1. Business 4
Item 1A. Risk Factors 11
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Mine Safety Disclosures 16
   
PART II 17
   
Item 5. Market for ISA's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Consolidated Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 27
Item 9A. Controls and Procedures 28
Item 9B. Other Information 29
   
PART III 30
   
Item 10. Directors, Executive Officers and Corporate Governance 30
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 39
Item 13. Certain Relationships and Related Transactions, and Director Independence 43
Item 14. Principal Accountant Fees and Services 45
   
PART IV 46
   
Item 15. Exhibits and Consolidated Financial Statement Schedules 46
   
Signatures 47
Index to Exhibits 48
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PART I

 

 

Item 1.

Business.

 

General

 

Industrial Services of America, Inc. (herein “ISA,” the “Company,” “we,” “us,” “our,” or other similar terms) is a Louisville, Kentucky-based company that buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used autos in order to sell used auto parts. Through our Recycling Segment, 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.

 

Before December 4, 2015, we were also a provider of waste services through our Waste Services Segment.  On December 4, 2015, the Company sold substantially all assets of its Waste Services Segment. The Waste Services Segment provided waste management services including contract negotiations with service providers, centralized billing, invoice auditing and centralized dispatching. This segment also rented, leased, sold and serviced waste handling and recycling equipment, such as trash compactors and balers, to end-use customers. The Waste Services Segment has been classified as discontinued operations in this Form 10-K in accordance with the Financial Accounting Standards Board Accounting Standards Codification 205-20-55. Results of discontinued operations are excluded from the consolidated financial information for all periods presented, unless otherwise noted. See Note 15 - Discontinued Operations in the accompanying Notes to Consolidated Financial Statements.

 

Our core business is now focused on the metal recycling industry. 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 while evaluating various options which may include operating the Company's auto shredder.  We will also 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 the accompanying Notes to Consolidated Financial Statements.  See Note 3 - Long Term Debt and Notes Payable to Bank in the accompanying Notes to Consolidated Financial Statements.

 

The Company also announced on October 4, 2016 the Company and Algar mutually agreed to terminate the Management Agreement between us, pursuant to the Agreement to Terminate Management Services among the Company, Algar, and Sean Garber dated as of September 30, 2016.  Effective September 30, 2016, Mr. Garber resigned from all positions with the Company, including as President. Also, on September 30, 2016, the company’s Chief Financial Officer was appointed to serve in the additional role as President.  

 

Additional financial information about our segments can be found in Part II, Item 8, Notes to Consolidated Financial Statements and related notes included elsewhere in this Form 10-K.

 

Available Information

 

We make available, free of charge, through our website www.isa-inc.com, our annual reports on Form 10-K and quarterly reports on Form 10-Q and amendments to those reports as soon as reasonably practicable after we have electronically filed with the Securities and Exchange Commission. We also make available on our website our Board of Directors, committee charters, our Business Ethics Policy and Code of Conduct and our Code of Ethics for the CEO, CFO and senior financial officers. Please note that our Internet address is included in this annual report on Form 10-K as an inactive textual reference only. Information contained on our website www.isa-inc.com is not incorporated by reference into this annual report on Form 10-K and should not be considered a part of this report.

 

Our Response to 2015 and 2016 Commodity Markets and Liquidity Conditions 

 

During 2015, the Company's average selling price per unit of quantity decreased by 49.4% and 24.9% for ferrous and nonferrous material, respectively, compared to 2014. These decreases also led to significantly lower volumes of material available to the Company to buy and sell. Due to these deteriorating metals commodity market conditions, ISA took significant steps to improve liquidity and pay down debt during 2015 and 2016. Despite modest improvements in metal commodity markets during 2016, low prices combined with low volumes present a difficult ongoing metals recycling market. These steps are described below.

 

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On February 27, 2015, the Company closed on the sale of its Seymour, Indiana property. Also, in conjunction with this decision, the Company signed a lease, effective December 1, 2014, to lease a facility in the Seymour area.  See Note 4 - Lease Commitments and Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for further lease information. Proceeds were used to reduce debt and improve liquidity.

 

On April 30, 2015, LK Property Investments, LLC ("LK Property"), an entity principally owned by Daniel M. Rifkin, CEO of MetalX LLC ("MetalX"), (a related party) a scrap metal recycling company headquartered in Waterloo, Indiana, and the principal owner of Recycling Capital Partners, LLC ("RCP") (a related party) purchased a 4.4 acre parcel of real estate located at 6709 Grade Lane, Louisville, KY from ISA Real Estate LLC, a wholly-owned subsidiary of the Company for a purchase price of $1.0 million. The Company realized a loss of $102.0 thousand from this sale. Also on April 30, 2015, the Company entered into a lease agreement with LK Property for a portion of the 4.4 acre parcel.  See Note 4 - Lease Commitments in the accompanying Notes to Consolidated Financial Statements for further lease details. Proceeds were used to reduce debt and improve liquidity.

 

On May 13, 2015, the Company announced the warm idle of the Company’s auto shredder. This action was in response to market conditions, primarily related to ferrous price volatility and lower ferrous volumes. Management will continue to monitor and analyze market conditions and to review the Company’s long-term options for its shredder and related downstream processing operation. The costs of idling were recognized in the 2015 financial statements. As a result of the continued operating losses from the shredder operations, management reviewed the carrying cost of the shredder, including the downstream processing system. The Company recognized an asset impairment charge of approximately $636.6 thousand related to the shredder’s downstream processing system. This charge was recorded in 2015 as an impairment charge on property and equipment within the cost of goods section in the accompanying consolidated statement of operations. As of the date of this report, the shredder remains idled. The Company continues to depreciate the assets associated with the shredder. Working capital, which would otherwise have been utilized in operating the shredder, was used to reduce debt and improve liquidity.

 

In May 2015, ISA Real Estate, LLC sold to SG&D Ventures, LLC ("SG&D"), an entity owned by shareholders of Algar, Inc. ("Algar"), including Sean Garber, at that time the Company’s Vice Chairman of the Board and President, and the President of Algar, an approximately 1-acre parcel of non-essential real estate, located at 7017 Grade Lane, Louisville, KY, for an aggregate purchase price equal to independent third-party appraisal amount of $350.0 thousand. The purchase consideration consisted of $300.0 thousand in cash from the purchaser and a credit of $50.0 thousand against bonus compensation previously accrued but not paid to Algar as described in Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements. The gain on sale of this asset was $1.1 thousand and was recognized during the second quarter of 2015. Proceeds were used to reduce debt and improve liquidity.

 

On November 6, 2015, the Company entered into a Forbearance Agreement and Third Amendment to Credit Agreement (the “Forbearance Agreement”) by and among the Company, certain of the Company’s subsidiaries, and Wells Fargo Bank, National Association ("Wells Fargo"). The Forbearance Agreement amended the Credit Agreement to reduce the Maximum Revolver Amount from $15.0 million to $5.0 million. The Forbearance Agreement also amended the Credit Agreement Maturity Date to March 15, 2016 from June 13, 2019. The Forbearance Agreement increased the interest rate on the outstanding indebtedness by approximately 100 basis points.

 

Pursuant to the terms of the Forbearance Agreement, Wells Fargo agreed that it would forbear, until the Forbearance Termination Date (as defined below), from exercising certain rights and remedies with respect to or arising out of the existence and continuation of certain stipulated events of default under the Credit Agreement between the loan parties and Wells Fargo (as amended by the First Amendment to Credit Agreement dated January 15, 2015, the Second Amendment to Credit Agreement dated January 22, 2015, and the Forbearance Agreement, the “Credit Agreement”).

 

Under the Forbearance Agreement, the Forbearance Termination Date was the earlier to occur of (i) Wells Fargo’s election following the failure of the Loan Parties to satisfy any of the Forbearance Conditions, and (ii) March 15, 2016. 

 

On December 4, 2015, the Company and WESSCO, LLC, a wholly owned subsidiary of ISA ("WESSCO"), entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Compactor Rentals of America, LLC ("Compactor Rentals") pursuant to which the Company sold its “Waste Services Segment,” consisting of substantially all of the assets used in (i) the Company’s commercial, retail and industrial waste and recycling management services business which the Company operated under the name “Computerized Waste Systems” or “CWS,” and (ii) the Company’s equipment sales, rental and maintenance business for the commercial and industrial waste and recycling industry which the Company operated under the name “Waste Equipment Sales and Service Company".

 

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The Company received cash consideration at closing of $7.5 million, less $150.0 thousand retained by Compactor Rentals (the "Holdback"). In connection with the closing of the transaction, the Company entered into a transition services agreement with Compactor Rentals, pursuant to which the Company will provide certain services to Compactor Rentals until March 31, 2017.

 

On April 1, 2016, the Company entered Amendment No. 1 to the Asset Purchase Agreement which extended the deadline for the Company to provide written notice if the Company objected to Compactor Rental’s calculation of the Holdback. On April 15, 2016, the Company entered into Amendment No. 2 to the Asset Purchase Agreement whereby the Company and Compactor Rentals agreed that the Holdback would be retained by Compactor Rentals based on a mutually-agreed upon calculation of working capital. Amendment No. 2 also detailed the parties’ agreement of the following: no indemnification claims would be made by Compactor Rentals arising out of certain matters; certain Compactor Rentals’ representatives did not have knowledge of any additional indemnification claims as of April 15, 2016; and the transition services agreement between the parties would be extended at no cost to Compactor Rentals through March 31, 2017.

 

Compactor Rentals assumed certain liabilities relating to the Waste Services Segment, including but not limited to, current liabilities, warranty liabilities, and post-closing liabilities incurred in connection with transferred contracts.

 

The sale included substantially all of the assets of the Waste Services Segment including, but not limited to, current assets, accounts receivable, tangible personal property, certain leases, inventory, intellectual property, rights under transferred contracts, rights of action and all associated goodwill and other intangible assets associated with the transferred assets.

 

The Asset Purchase Agreement contains a restrictive covenant under which the Company is prohibited from competing with the Waste Services Segment for five years following the closing. 

 

The Company used the proceeds from the transaction to pay transaction expenses, to repay in full the Company’s outstanding indebtedness with Bank of Kentucky, Inc., ("KY Bank") and to repay in full ISA’s term loan from Wells Fargo. The Company also used the proceeds to pay all outstanding amounts on ISA’s $5.0 million revolving line of credit with Wells Fargo which remained available following the closing.

 

On February 29, 2016, the Company entered into a Loan Agreement (the "2016 Loan") with MidCap. The 2016 Loan is secured by substantially all of the assets of the Company. Proceeds from this loan were used to pay transaction expenses and to pay off and close the remaining balance on the Wells Fargo revolving line of credit

 

On March 31, 2017, the Company and each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan with MidCap ("First Amendment"). The First Amendment increased this line of credit from $6.0 million to $8.0 million, subject to the satisfaction of certain borrowing base restrictions and extended the maturity date to February 28, 2020.  

 

Following the MidCap transaction and the First Amendment, the Company believes its liquidity is sufficient to meet projected needs for at least one year. See Note 3 - Long Term Debt and Notes Payable To Bank in the accompanying Notes to Consolidated Financial Statements for further details.

 

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ISA Recycling Operating Division

 

Our Recycling Segment sells processed ferrous and non-ferrous scrap material, including stainless steel, to end-users such as steel mini-mills, integrated steel makers and foundries and refineries. We purchase ferrous and non-ferrous scrap material primarily from industrial and commercial generators of steel, iron, aluminum, copper, stainless steel and other metals as well as from other scrap dealers who deliver these materials directly to our facilities. We process these materials by sorting, cutting and/or baling. Prior to May 2015, we also shredded material.

 

We also operate the ISA Pick.Pull.Save used automobile parts yard, which is considered a product line within the Recycling Segment. We purchase automobiles for the yard through auctions, automobile purchase programs with various suppliers and general scrap purchases. Retail customers locate and remove used parts for purchase from automobiles within the yard. Fuel, Freon, tires and certain core automobile parts are also sold to various resellers for additional revenue. All automobiles are sold as scrap metal after a specified time period in the yard.

 

Ferrous Operations

 

Ferrous Scrap Purchasing - We purchase ferrous scrap from two primary sources: (i) industrial and commercial generators of steel and iron; and (ii) scrap dealers, peddlers, and other generators and collectors who sell us steel and iron scrap, known as obsolete scrap. Market demand and the composition, quality, size and weight of the materials are the primary factors that determine prices paid to these material providers.

 

Ferrous Scrap Processing - We prepare ferrous scrap material for resale through a variety of methods including sorting, cutting, and baling. Prior to May 2015, we also shredded material. We produce a number of differently sized, shaped and graded products depending upon customer specifications and market demand.

 

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Sorting - After purchasing ferrous scrap material, we inspect it to determine how we should process it to maximize profitability. In some instances, we may sort scrap material and sell it without further processing. We separate scrap material for further processing according to its size, composition and grade by using conveyor systems, front-end loaders, crane-mounted electromagnets and claw-like grapples.

 

Cutting - Pieces of over-sized ferrous scrap material, such as obsolete steel girders and used pipe, which are too large for other processing, are cut with hand torches.

 

Baling - We process light-gauge ferrous materials such as clips, sheet iron and by-products from industrial and commercial processes, such as stampings, clippings and excess trimmings, by baling these materials into large, uniform blocks. We use cranes and conveyors to feed the material into a hydraulic press, which compresses the material into uniform blocks.

 

Shredding - In May 2015, we warm idled our shredder. Prior to this date, we shredded large pieces of ferrous scrap material, such as automobiles and major appliances, in our shredder by hammer mill action into pieces of a workable size that pass through magnetic separators to separate metal from synthetic foam, fabric, rubber, stone, dirt, etc. The metal we recovered from the shredding process was sold directly to customers or reused in some other metal blend. The residue by-product is usually referred to as “automobile shredder residue” (ASR) or “shredder fluff”. We disposed of the non-metal components, which can reduce the volume of the scrap as much as 25.0%, in a landfill.

 

Ferrous Scrap Sales - We sell processed ferrous scrap material to end-users such as steel mini-mills, integrated steel makers and foundries, and brokers who aggregate materials for other large users. Most customers purchase processed ferrous scrap material through negotiated spot sales contracts, which establish the quantity purchased for the month and the pricing. The price we charge for ferrous scrap materials depends upon market supply and demand, as well as quality and grade of the scrap material. We deliver scrap ourselves or use third party carriers via truck, rail car, and/or barge. Some customers choose to send their own delivery trucks. These trucks are weighed and loaded at one of our sites based on the sales order.

 

Auto Parts Operations

 

We operate a single self-service retail parts location. We generate revenue from the sale of parts, cores and scrap. Our location consists of an indoor retail facility combined with a fenced outdoor storage area for autos. We operate our self-service auto parts business under the name of ISA Pick.Pull.Save.

 

Non-Ferrous Operations

 

Non-Ferrous Scrap Purchasing - We purchase non-ferrous scrap from two primary sources: (i) industrial and commercial non-ferrous scrap material providers who generate or sell waste aluminum, copper, stainless steel, other nickel-bearing metals, brass and other metals; and (ii) peddlers, scrap dealers, generators and collectors who deliver directly to our facilities material that they collect from a variety of sources. We also collect non-ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing retrieval boxes at these sources. We subsequently transport the boxes to our processing facilities.

 

Non-Ferrous Scrap Processing - We prepare non-ferrous scrap metals, principally aluminum, copper, brass and stainless steel to sell by sorting, cutting, and baling. Prior to May 2015, we also shredded material.

 

Sorting - Our sorting operations separate and identify non-ferrous scrap by using front-end loaders, grinders, hand torches and spectrometers. Our ability to identify metallurgical composition maximizes margins and profitability. We sort non-ferrous scrap material for further processing according to type, grade, size and chemical composition. Throughout the sorting process, we determine whether the material requires further processing before we sell it.

 

Cutting - Pieces of over-sized non-ferrous scrap material, which are too large for other processing methods, are cut with hand torches.

 

Baling - We process non-ferrous metals such as aluminum cans, sheet and siding by baling these materials into large uniform blocks. We use front-end loaders and conveyors to feed the material into a hydraulic press, which compresses the material into uniform blocks.

 

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Shredding - In May 2015, we warm idled our shredder. Prior to this date, we shredded large pieces of nonferrous scrap material, such as steel drums, copper and aluminum cable, tubing, sheet metal, extrusions, and baled aluminum, in our shredder by hammer mill action into pieces of a workable size that pass through magnetic separators to separate metal from synthetic foam, fabric, rubber, stone, dirt, etc. The metal we recovered from the shredding process was sold directly to customers or reused in some other metal blend. We disposed of the non-metal components, which can reduce the volume of the scrap as much as 25.0%, in a landfill.

 

Non-Ferrous Scrap Sales - We sell processed non-ferrous scrap material to end-users such as foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, steel mini-mills, integrated steel makers, steel foundries and refineries, and brass and bronze ingot manufacturers. Prices for the majority of non-ferrous scrap materials change based upon the daily publication of spot and futures prices on COMEX or the London Metals Exchange. We deliver scrap ourselves or use third party carriers via truck, rail car, and/or barge. Some customers choose to send their own delivery trucks. These trucks are weighed and loaded at one of our sites based on the sales order.

 

Waste Services Operations (Discontinued Operations)

 

On December 4, 2015, we sold substantially all assets of our Waste Services Segment. Our waste services operations were in the business of commercial, retail and industrial waste and recycling management services (operating under the name “Computerized Waste Systems” or “CWS”) and commercial and industrial waste and recycling handling equipment sales, rental and maintenance (operating under the name “Waste Equipment Sales and Service Company” or “WESSCO”). 

 

Company Background

 

ISA was incorporated in 1953 in Florida under the name ALSON MFG. CO. and originally designed and manufactured various forms of electrical products.

 

In 1984, ISA moved into waste handling and disposal equipment sales.

 

In 1985, we began offering solid waste management consultations.

 

We began focusing on ferrous and non-ferrous scrap metal recycling in 1997 and expanded into the stainless steel and high-temperature alloys recycling business in 2009.

 

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In 2012, we opened the ISA Pick.Pull.Save used automobile yard.

 

In 2013, we discontinued blending stainless steel, which is a subset of the stainless steel market.

 

In 2015, as previously discussed, we exited the waste services business and idled our shredder.

 

As of 2016, our primary focus is ferrous and non-ferrous metal recycling, as well as selling used auto parts.

 

Competition

 

The metal recycling business is highly competitive and is subject to significant changes in economic and market conditions. In late 2014 and early 2015, the metal commodity market saw increased volatility. Market prices traded down significantly lower, particularly during 2015. The metal commodity market experienced continued volatility during 2016.  The 2016 metal commodity market finished strong and provided a positive outlook for 2017. Given the strengthening dollar, exports were reduced and steel mills were able to buy large quantities of low-cost scrap. Pricing and proximity to a metal source are the major competitive factors in the metal recycling business. We compete for the purchase and sale of scrap metal with large, well-financed recyclers of scrap metal as well as smaller metal facilities and brokers/dealers. Although we expanded our facilities and increased our processing efficiencies in prior years, certain of our competitors have greater financial, marketing and physical resources. There can be no assurance that we will be able to obtain our desired market share based on the competitive nature of this industry.

 

Dependence on Major Customer

 

In 2016, we had sales to one major customer that totaled approximately 12.5% of our net sales for the year ended December 31, 2016

 

Employees

 

As of March 26, 2017, we had 75 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. 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. We strive to conduct our operations in compliance with applicable laws and regulations. While such amounts expended in the past or that we anticipate spending in the future have not had and are not expected to have a material adverse effect on our financial condition or operations, the possibility remains that technological, regulatory or enforcement developments, the results of environmental studies or other factors could materially alter this expectation.

 

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Item 1A. Risk Factors.

 

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, certain statements about our plans, strategies and prospects. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. Important factors that could cause our actual results to differ materially from our forward-looking statements include those set forth in this Risk Factors section. All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth below. Unless the context requires otherwise, all references to the “Company,” “we,” “us” or “our” include Industrial Services of America, Inc. and subsidiaries.

 

If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.

 

Risks Related to Our Operations

 

Our business has a major involvement in ferrous and non-ferrous metals. This market is extremely competitive and prices are volatile. Changes in prices, demand, including foreign demand, regulation, economic slowdowns or increased competition could result in a reduction of our revenue and consequent decrease in our common stock price.

 

The metal recycling business is highly competitive and is subject to significant changes in economic and market conditions. Metal prices were volatile during 2014 and especially in 2015. Pricing and proximity to a metal source are the major competitive factors in the metal recycling business. Volatility in the metals markets can adversely affect our revenues. Lower prices adversely affect revenues. Additionally, volatility can lower volumes of metal that our suppliers are willing to sell to us. Many companies offer or are engaged in the development of products or the provisions of services that may be or are competitive with our current products or services. Although we expanded our facilities and increased our processing efficiencies in previous years, certain of our competitors have greater financial, technical, manufacturing, marketing, distribution, and other resources and assets than we possess. In addition, the industry is constantly changing as a result of consolidation, which may create additional competitive pressures in our business environment. There can be no assurance that we will be able to maintain our current market share or obtain our desired market share based on the competitive nature of this industry.

 

Volatility in market prices of our scrap metal recycling inventory may cause us to re-assess the carrying value of our inventory and adversely affect our balance sheet.

 

We make certain assumptions regarding future demand and net realizable value in order to assess that we record our ferrous and non-ferrous inventory properly at the lower of cost or market. We base our assumptions on historical experience, current market conditions and current replacement costs. If the anticipated future selling prices of scrap metal and finished steel products should decline due to the cyclicality of the business or otherwise, we would re-assess the recorded net realizable value of such inventory which could result in downward adjustments to reduce the value of such inventory (and increase cost of sales) to the lower of cost or market.

 

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Volatility in market prices of the scrap metal recycling inventory experienced in late 2014 and through 2015 caused management to re-assess the carrying value of our inventory. In 2015 we incurred a lower of cost or market inventory write-down of $1.3 million.  We did not incur a lower of cost or market inventory write-down in 2016 as the market prices of the scrap metal recycling inventory improved in 2016 as compared to 2015.

 

We have limited liquidity and may need to arrange for additional liquidity on terms that are unfavorable to our stockholders, if we are able to obtain additional liquidity at all.

 

Our primary sources of liquidity during 2015 and 2016 were cash flows generated from asset sales, the idling of our auto shredder operation and the refinancing of the Company's working line of credit; in the first quarter of 2017, we extended the maturity date of our line of credit and increased the line of credit from $6.0 million to $8.0 million, subject to the satisfaction of certain conditions as more fully described in the accompany Notes to Consolidated Financial Statements.

 

Influenced primarily by the length and depth of the metals market downturn and the Company's ongoing operating losses, we may not be able to fund our future capital needs, including necessary working capital, funds for capital expenditures or debt service, from operating cash flow. Consequently, we may have to rely on third-party sources to fund our capital needs or we may have to rely on further asset sales or similar actions. We may be unable to obtain third-party financing or conduct asset sales on favorable terms or at all, which could materially and adversely affect our operating results, cash flow and liquidity. Furthermore, we cannot provide assurance that sufficient liquidity can be raised from one or more of these sources or that a desired transaction could be consummated within the period needed to meet certain obligations

 

Our liquidity remains constrained such that it may not be sufficient to meet our cash operating needs in the long-term. Our ability to fund our working capital needs and capital expenditures is limited by the net cash provided by operations, cash on hand and the liquidity available under the credit facility. Additional declines in net cash provided by operations or further decreases in the availability under the credit facility could rapidly exhaust our liquidity. Our inability to increase our liquidity would adversely impact our future performance, operations and results of operations, along with constraining our ability to move forward with any business combinations or other strategic alternatives.

 

Our ability to obtain additional liquidity will depend upon a number of factors, including our future performance and financial results and general economic and capital market conditions. We cannot be sure that we will be able to raise additional capital on commercially reasonable terms, or at all.

 

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Due to reduced commodity prices and lower operating cash flows, we may be unable to maintain adequate liquidity and our ability to make interest payments in respect of our indebtedness could be adversely affected.

 

Declines in commodity prices since the beginning of 2014 have caused a reduction in our available liquidity and we may not have the ability to generate sufficient cash flows from operations and, therefore, sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs. We cannot assure you that any of our strategies will yield sufficient funds to meet our working capital or other liquidity needs, including for payments of interest and principal on our debt in the future, and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations.

 

An increase in the price of fuel may adversely affect our business.

 

Our operations are dependent upon fuel, which we generally purchase in the open market on a daily basis. Direct fuel costs include the cost of fuel and other petroleum-based products used to operate our fleet of cranes and heavy equipment, as well as our shredder when it is not idled. We are also susceptible to increases in indirect fuel costs which include fuel surcharges from vendors. When we have experienced increases in the cost of fuel and other petroleum-based products in the past, we were able to pass a portion of these increases on to our customers. However, because of the competitive nature of the industry, there can be no assurance that we will be able to pass on current or future increases in fuel prices to our customers. A significant increase in fuel costs could adversely affect our business, which adverse impact would be magnified if combined with a decrease in revenue caused by a decrease in commodity prices.

 

We could incur substantial costs in order to comply with, or to address any violations under, environmental laws that could significantly increase our operating expenses and reduce our operating income.

 

Our operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials used in the processing of our products. In addition, certain of our operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Material environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations where we disposed of materials from our operations, which could result in future expenditures that we cannot currently estimate and which could reduce our profits.

 

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Our financial statements are based upon estimates and assumptions that may differ from actual results.

 

We have prepared our financial statements in accordance with U.S. generally accepted accounting principles and necessarily include amounts based on estimates and assumptions we made. Actual results could differ from these amounts. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets, valuation allowances for accounts receivable, inventory, lower of cost or market, stock option values, liabilities for potential litigation, claims and assessments, and liabilities for environmental remediation and deferred taxes.

 

We depend on our senior management team and the loss of any member could prevent us from implementing our business strategy.

 

Our success is dependent on the management and leadership skills of our senior management team. The loss of any members of our management team or the failure to attract and retain additional qualified personnel could prevent us from implementing our business strategy and continuing to grow our business at a rate necessary to achieve and maintain future profitability.

 

Our exposure to credit risk could have a material adverse effect on our results of operations and financial condition.

 

Our business is subject to the risks of nonpayment and nonperformance by our customers. Downturns in the economy led to bankruptcy filings by many of our customers in previous years, which could occur again and cause us to recognize more allowances for doubtful accounts receivable. While we believe our allowance for doubtful accounts is adequate, changes in economic conditions or any weakness in the steel and metals industries could cause potential credit losses from our significant customers, which could adversely impact our future earnings or financial condition.

 

Our debt may increase our vulnerability to economic or business downturns.

 

We are vulnerable to higher interest rates because interest expense on our borrowing is based on margins over a variable base rate. We may experience material increases in our interest expense as a result of increases in general interest rate levels. Upon a breach of covenants in our lending facility, our lender could exercise its remedies related to any material breaches, including acceleration of our payments and taking action with respect to its loan security. From time to time, we have relied upon and will rely on borrowings under various credit facilities and from other lenders to operate our business. We may not have the ability to borrow from other lenders to operate our business.

 

Seasonal changes may adversely affect our business and operations.

 

Our operations may be adversely affected by periods of inclement weather, which could decrease the collection and shipment volume of recycling materials.

 

Risks Related to Our Common Stock

 

Future sales of our common stock could depress our market price and diminish the value of your investment.

 

Future sales of shares of our common stock could adversely affect the prevailing market price of our common stock. If our existing shareholders sell a large number of shares, or if we issue a large number of shares, the market price of our common stock could significantly decline. Moreover, the perception in the public market that our existing shareholders and, in particular, Kletter affiliates might sell shares of common stock could depress the market for our common stock.

 

The market price for our common stock may be volatile.

 

In recent periods, there has been volatility in the market price for our common stock. In addition, the market price of our common stock could fluctuate substantially in the future in response to a number of factors, including the following:

 

Our quarterly operating results or the operating results of our operations in the ferrous, non-ferrous and used auto parts industries;

 

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Changes in general conditions in the economy, the financial markets or the ferrous and non-ferrous recycling industry;

 

Loss of significant customers; and

 

Increases in materials and other costs.

 

In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.

 

 

Item 2.

Properties.

 

The following table outlines our principal properties as of December 31, 2016:

 

 

 

 

 

 

 

 

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 S. County Rd 900 W, North Vernon, IN

 

Lease (3)

 

Recycling

 

14.000

 

1617 State Road 111, New Albany, IN

 

Own

 

Recycling

 

1.300

 

 

 

(1)

See Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information related to the 6709 Grade Lane lease.

 

 

(2)

See Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information related to the K&R lease.

 

 

(3)

See Note 4 - Lease Commitments in the accompanying Notes to Consolidated Financial Statements for additional information related to the Seymour/North Vernon lease.

 

These properties total 70.419 acres, which provides adequate space necessary to perform administrative and retail operation processes and store inventory. All facilities are insured. We do not expect any major land or building additions will be needed to increase capacity for our operations in the foreseeable future.

 

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Item 3.

Legal Proceedings.

 

We have litigation from time to time, including employment-related claims, none of which we currently believe to be material.

 

Our operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials used in the processing of our products. In addition, certain of our operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities in material amounts could exist, including cleanup obligations at these facilities or at off-site locations where we disposed of materials from our operations, which could result in future expenditures that we cannot currently estimate and which could reduce our profits. ISA records liabilities for remediation and restoration costs related to past activities when our obligation is probable and the costs can be reasonably estimated. Costs of future expenditures for environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to current operations are expensed as incurred. Such compliance has not historically constituted a material expense to us.

 

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

 

 

 

Item 5.

Market for ISA’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

ISA common stock is traded on the NASDAQ Capital Market under the symbol “IDSA.” High and low sales prices of the common stock price are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

Quarter Ended

 

High

 

Low

 

High

 

Low

March 31

 

$

3.05

 

 

$

0.87

 

 

$

6.00

 

 

$

4.13

 

June 30

 

$

2.78

 

 

$

1.63

 

 

$

4.64

 

 

$

3.36

 

September 30

 

$

2.30

 

 

$

1.32

 

 

$

4.08

 

 

$

3.35

 

December 31

 

$

3.35

 

 

$

1.10

 

 

$

3.52

 

 

$

1.24

 

 

There were approximately 136 shareholders of record as of December 31, 2016.

 

Our Board of Directors did not declare any dividends in 2016 or 2015.

 

Under our previous Wells Fargo and our current MidCap loan agreements, ISA covenants that so long as the lenders remain committed to make any advance or extend any other credit to us, or any obligations remain outstanding, ISA will not declare or pay any dividend or distribution (either in cash or any other property in respect of any stock) or redeem, retire, repurchase or otherwise acquire any of our stock, other than dividends and distributions by our subsidiaries to a parent.

 

On November 15, 2005, our Board of Directors authorized a program to repurchase up to 300.0 thousand shares of our common stock at current market prices. We did not repurchase any shares in 2016 or 2015. There are approximately 133.3 thousand shares still available for repurchase under this program.

 

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Item 6.

Selected Financial Data.

 

Selected Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands, except per share data)

Year ended December 31:

 

2016

 

2015

 

2014

 

2013

 

2012

Total revenue

 

$

36,505

 

 

$

46,180

 

 

$

110,091

 

 

$

136,753

 

 

$

194,232

 

Net loss from continuing operations

 

$

(3,230

)

 

$

(9,085

)

 

$

(8,686

)

 

$

(13,816

)

 

$

(6,620

)

Net income from discontinued operations

 

$

 

 

$

7,320

 

 

1,413

 

 

*

 

 

*

 

Earnings (loss) per common share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.40

)

 

$

(1.14

)

 

$

(1.15

)

 

$

(1.96

)

 

$

(0.95

)

Diluted

 

$

(0.40

)

 

$

(1.14

)

 

$

(1.15

)

 

$

(1.96

)

 

$

(0.95

)

Earnings (loss) per common share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

0.92

 

 

0.19

 

 

*

 

 

*

 

Diluted

 

 

 

0.92

 

 

0.19

 

 

*

 

 

*

 

At year end:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

20,856

 

 

$

19,434

 

 

$

37,790

 

 

$

44,032

 

 

$

63,323

 

Current maturities of long-term debt

 

$

2,942

 

 

$

20

 

 

$

15,911

 

 

$

1,597

 

 

$

1,687

 

Current maturities of capital lease obligations

 

$

198

 

 

$

 

 

$

 

 

$

 

 

$

 

Long-term debt, net of current maturities

 

$

 

 

$

 

 

$

 

 

$

16,295

 

 

$

23,369

 

Long-term debt, net of current maturities, related parties

 

$ 

1,504

 

 

$

 

 

$

 

 

$

 

 

$

 

Capital lease obligations, net of current maturities

 

$

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 future financial condition or results of operations.

 

* On December 4, 2015, the Company sold a majority of its Waste Services Segment assets. Years 2015 and 2014 have been adjusted to reflect discontinued operations of the Waste Services Segment. Years 2013 through 2012 have not been adjusted for discontinued operations of the Waste Services Segment.

 

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with the information set forth under Item 6, “Selected Financial Data” and our consolidated financial statements and the accompanying notes thereto included elsewhere in this report.

 

The following discussion and analysis contains certain financial predictions, forecasts and projections which constitute “forward-looking statements” within the meaning of the federal securities laws. Actual results could differ materially from those financial predictions, forecasts and projections and there can be no assurance that we will achieve such financial predictions, forecasts and projections. Please see Item 1A, “Risk Factors” for items that could affect our financial predictions, forecasts and projections.

 

General

 

Our core business is now focused on the metal recycling industry. 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 while evaluating various options which may include operating the Company's auto shredder.  We will also remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions.

 

Also, on March 31, 2017, the Company entered into an amended credit facility with MidCap, 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 Consolidated Financial Statements.

 

The Company also announced on October 4, 2016 the Company and Algar mutually agreed to terminate the Management Agreement between us, pursuant to the Agreement to Terminate Management Services among the Company, Algar, and Sean Garber dated as of September 30, 2016.  Effective September 30, 2016, Mr. Garber resigned from all positions with the Company, including as President. Also, on September 30, 2016, the company’s Chief Financial Officer was appointed to serve in the additional role as President.  

 

We have operating locations in Louisville, Kentucky, and Seymour and New Albany, Indiana. We do not have operating locations outside the United States. Seymour is used interchangeably with North Vernon herein.

 

Liquidity and Capital Resources

 

Our cash requirements generally consist of working capital, capital expenditures and debt service. Our primary sources of liquidity during 2015 and 2016 were cash flows generated from asset sales, the idling of our auto shredder operation and the refinancing of the Company's working line of credit. These steps are more fully described below and in the accompanying Notes to the Consolidated Financial Statements. Cash flows generated from operations and our revolving credit facility are also significant sources of ongoing liquidity. We have also been able to manage liquidity by deferring certain rent payments made to related parties, as well as deferring capital expenditures. See Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information. We actively manage our working capital and associated cash requirements and continually seek more effective use of cash. As of December 31, 2016, we held cash and cash equivalents of $0.5 million.  We had an outstanding balance of $2.9 million on our revolving credit facility as of December 31, 2016.

 

During 2015 and 2016, the Company experienced significant liquidity challenges related to the severe metal market downturn and associated ISA loan defaults with our then lenders. Management took the below steps. See "Our Response to 2015 and 2016 Commodity Markets and Liquidity Conditions" in Item 1 of this Form 10-K for further discussion of these actions.

 

In February 2015, the Company sold its Seymour, Indiana property and relocated its Seymour operations to a leased facility in the same general geographic area. The proceeds from the sale of this property were used to reduce debt and improve liquidity.

 

In April 2015, the Company sold its property located at 6709 Grade Lane, Louisville, KY to a related party. The proceeds from the sale of this property were used to reduce debt and improve liquidity.

 

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In May 2015, the Company warm idled its auto shredder. The proceeds associated with working capital reductions were used to reduce debt and improve liquidity.

 

Also, in May 2015, the Company sold its property located at 7017 Grade Lane, Louisville, KY to a related party. The proceeds from the sale of this property were used to reduce debt and improve liquidity.

 

In November 2015, the Company entered into a forbearance agreement with Wells Fargo, which required certain actions by the Company.

 

In December 2015, the Company sold substantially all assets of the Company’s Waste Services Segment. Proceeds from the sale of this segment were used to reduce debt and improve liquidity.

 

During 2015, the Company paid down debt by $16.3 million and favorably improved borrowing availability, primarily as a result of the above actions. As more fully described in Note 15 - Discontinued Operations in the accompanying Notes to Consolidated Financial Statements, the Waste Services Segment provided positive operating cash flow that will no longer be available to the Company.

 

On February 29, 2016, the Company refinanced its Wells Fargo debt with a new lender, MidCap Business Credit.

 

On March 31, 2017, the Company entered into the First Amendment to the 2016 Loan, which 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 Consolidated Financial Statements.

 

Credit facilities and notes payable

 

During 2015 the Company had certain loans with KY Bank and, during 2015 and 2016 with 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 above, the Company took steps to pay down debt and increase liquidity.

 

On December 4, 2015, in conjunction with the above-noted sale of substantially all assets of the Company’s Waste Services Segment, the Company paid off the KY Bank loans and certain Wells Fargo loans. As of December 31, 2015, the Company had an outstanding balance of $19.7 thousand to Wells Fargo. On February 29, 2016, the Company closed on new financing with MidCap Business Credit and paid off in full remaining amounts due to Wells Fargo.

 

See Note 1 - Summary of Significant Accounting Policies and Note 3 - Long Term Debt and Notes Payable to Bank in the accompanying Notes to Consolidated Financial Statements for further details on long term debt and notes payable.

 

Swap agreements

 

In October 2013, the Company entered into an interest rate swap agreement with KY Bank swapping a variable rate based on LIBOR for a fixed rate. This swap agreement covered approximately $2.4 million in debt, commenced October 17, 2013 and was scheduled to mature on October 1, 2018. The swap agreement fixed our interest rate at 4.74%. The swap was settled for $15.0 thousand during 2015. As of December 31, 2016, we do not have any swap agreements.

 

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Critical Accounting Policies

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"), we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We believe that we consistently apply judgments and estimates and that such consistent application results in financial statements and accompanying notes that fairly represent all periods presented. However, any errors in these judgments and estimates may have a material impact on our statement of operations and financial condition. Our significant accounting policies are described in Note 1 - Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements. Critical accounting policies, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult and subjective judgments and estimates of matters that are inherently uncertain. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing the consolidated financial statements. 

 

Revenue Recognition

 

We recognize revenues from processed ferrous and non-ferrous scrap metal sales when title passes to the customer, which generally is upon delivery of the related materials. We recognize revenues from services as the service is performed. We recognize revenue on auto parts when title passes to the customer. We accrue sales adjustments related to price and weight differences and allowances for uncollectible receivables against revenues as incurred.

 

Inventory

 

Our inventories primarily consist of ferrous and non-ferrous, including stainless steel, and scrap metals and are valued at the lower of average purchased cost or net realizable value ("NRV") based on the specific identification method based on individual 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 industry methods. We recognize inventory impairment when the NRV, based upon current market pricing, falls below recorded value or when the estimated volume is less than the recorded volume of inventory. We record the loss in cost of sales in the period during which we identified the loss. Prices of commodities we own may be volatile. We are exposed to risks associated with fluctuations in the market price for both ferrous and non-ferrous metals, which are at times volatile. We attempt to mitigate this risk by seeking to rapidly turn our inventories.

 

We make certain assumptions regarding future demand and NRV in order to assess whether inventory is properly recorded at the lower of cost or NRV. We base our assumptions on historical experience, current market conditions and remaining costs of processing (if any). If the anticipated future selling prices of scrap metal and finished steel products should decline, we would re-assess the recorded NRV 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 net realizable value.

 

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, 2016 and 2015.

 

See also Note 7 - Income Taxes in the accompanying Notes to Consolidated Financial Statements for additional information regarding income taxes and related assets.

 

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Stock Incentive Plan

 

We have a Long Term incentive Plan adopted in 2009 under which we may grant equity awards for up to 2.4 million shares of common stock, which are reserved by the board of directors for issuance of equity awards. We account for this plan based on FASB’s authoritative guidance titled "ASC Topic 718 - Compensation - Stock Compensation." We recognize share-based compensation expense for the fair value of the awards, as estimated using the Modified Black-Scholes-Merton Model, on the date granted on a straight-line basis over their vesting term. Compensation expense is recognized only for share-based payments expected to vest. We estimate forfeitures at the date of grant based on our historical experience and future expectations. Under the plan, the maximum term of an option is five years.

 

Results of Operations

 

Prior year balances have been recast to reflect the sale of the Company’s Waste Services Segment in the fourth quarter of 2015 in accordance with the Financial Accounting Standards Board Accounting Standards Codification 205-20-55 within discontinued operations. Results of discontinued operations are excluded from the accompanying results of operations for all periods presented, unless otherwise noted. See Note 15 - Discontinued Operations in the accompanying Notes to Consolidated Financial Statements.

 

The following table presents, for the years indicated, the percentage relationship that certain captioned items in our Consolidated Statements of Operations bear to total revenues and other pertinent data:

 

 

 

 

 

 

Year ended December 31,

2016

 

2015

Consolidated Statements of Operations Data:

 

 

 

 

 

Total revenue

100.0

 %

 

100.0

 %

Total cost of sales

96.1

 %

 

110.5

 %

Selling, general and administrative expenses

12.3

 %

 

8.4

 %

Loss before other income (expense)

(8.4

)%

 

(18.9

)%

 

The 14.4% decrease in cost of sales as a percentage of revenue in 2016 as compared to 2015 is primarily due to significant adverse conditions in 2015 including substantial downward commodity price pressures during 2015 which severely impacted margins, a fixed asset impairment charge of $0.6 million recorded in 2015 due to the May 2015 warm idle of the shredder, and an inventory lower of cost or market adjustment of $1.3 million in 2015 related to a decline in metal commodity market prices. In 2016, the downward pressure on commodity prices eased and the metals market experienced modest stabilization.

 

Selling, general and administrative expenses as a percentage of revenue in 2016 as compared to 2015 increased 3.9%. This increase is mainly due to substantially lower revenues in 2016 associated with lower metal prices and lower revenues in 2016 due to the May 2015 warm idle of the shredder.  Selling, general and administration expenses increased by $0.6 million in 2016 as compared to 2015, mainly due to an increase in stock option expense of $0.2 million, an increase in bonus expense of $0.5 million, offset by a decrease in utilities of $0.1 million. 

 

Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income is net income plus certain other items that are recorded directly to shareholders’ equity. Amounts included in accumulated other comprehensive loss for our derivative instruments are not recorded net of tax in 2015 due to the valuation allowance recorded. Refer to Note 1 – Summary of Significant Accounting Policies - Derivative and Hedging Activities and Note 7 - Income Taxes in the accompanying Notes to Consolidated Financial Statements for additional information about our derivative instruments and valuation allowance, respectively.

 

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Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

Total revenue decreased $9.7 million or 21.0% to $36.5 million in 2016 compared to $46.2 million in 2015. This decrease was primarily due to the May 2015 warm idle of the Company's shredder operations, which despite a portion of volume shifting to the Company's ferrous operations, resulted in a significant decrease in revenue, as well as significant metal commodity price declines and associated volume decreases. Revenue from the Company's shredder operations were $0 million for the year ended December 31, 2016 and $11.9 million for the year ended December 31, 2015, a decrease of $11.9 million. The remaining increase was due primarily to increased ferrous volumes. Nonferrous material shipments decreased by 1.8 million pounds, or 5.3%, along with a decrease in the average selling price of nonferrous material of $0.07 per pound, or 8.2%, for the year ended December 31, 2016 compared to year ended December 31, 2015. For the year ended December 31, 2016 compared to year ended December 31, 2015, the Company experienced a decrease in the average selling price of ferrous material of $23 per gross ton, or 11.1%. For the year ended December 31, 2016 compared to year ended December 31, 2015, the Company experienced an increase in ferrous material shipments of 21.4 thousand tons, or 43.3%. This increase in ferrous material shipments was primarily a result of the May 2015 warm idle of the Company's shredder operations. Due to the idling of the Company's shredder operations, a portion of materials previously sold and classified as shredder shipments during the year ended December 31, 2015 were purchased and sold through the ferrous operations for the year ended December 31, 2016.

 

Total cost of sales decreased $15.9 million or 31.2% to $35.1 million in 2016 compared to $51.0 million in 2015. This decrease was primarily due to the May 2015 warm idling of the Company's shredder operations as well as significant metal commodity price declines and associated scrap metal volume decreases. Cost of sales from the Company’s shredder operations were $1.7 million for the year ended December 31, 2016 compared to $15.8 million for the year ended December 31, 2015, resulting in a $14.1 million decrease. Cost of sales in 2016 for the Company's shredder operations relate primarily to depreciation, which has continued. The remaining decrease in cost of sales relates to lower shipping volumes for non-ferrous and lower metal commodity prices for both ferrous and non-ferrous partially offset by increased ferrous volumes as noted in the above paragraph

 

Total cost of sales as a percent of revenue was lower during the year ended 2016 as compared to the same period in 2015. The metals commodity markets improved during 2016 as compared to the same period in 2015, which, despite lower average selling price, allowed for improved gross margins.

 

In 2015, we incurred a lower of cost or market inventory write-down of $1.3 million, or 2.8% of revenue. Additionally, in 2015, we incurred a $0.6 million lower-of-cost fixed asset write down related to the significant process and strategy changes associated with the ASR process. See Note 1 - Summary of Significant Accounting Policies - Inventories in the accompanying Notes to Consolidated Financial Statements for additional information.

 

Selling, general and administrative ("SG&A") expenses increased $0.6 million or 15.4% to $4.5 million in 2016 compared to $3.9 million in 2015. The increase in SG&A expenses was mainly due to an increase in stock option expense of $0.2 million, an increase in bonus expense of $0.5 million, offset by a decrease in utilities of $0.1 million.

 

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As a percentage of total revenue, selling, general and administrative expenses were 12.3% in 2016 compared to 8.4% in 2015. This increase is a result of the significant revenue decrease from 2015 to 2016 along with increased selling, general and administrative expenses of 15.4%.

 

Interest expense decreased $0.2 million or 26.8% to $0.5 million in 2016 compared to $0.7 million in 2015 which is a result of the significant steps that the Company took during 2015 to reduce debt and improve liquidity.

 

Other income (expense) was expense of $94.0 thousand for the year ended December 31, 2016 compared to expense of $348.0 thousand for the year ended December 31, 2015. This $254.0 thousand change is a result of a $186.0 thousand decrease in interest expense, which is a result of the significant steps that the Company took during 2015 to reduce debt and improve liquidity; a $320.0 thousand decrease in the gain on sale of assets, which was primarily due to a gain during the first quarter of 2015 on the sale of our former Seymour, Indiana location and moving our facility to a leased property in the same general area; along with a $11.0 thousand decrease in other income; an increase in the gain on insurance proceeds of $399.0 thousand. We filed an insurance claim related to six roofs on certain of our buildings due to weather related damage.  In 2016 we received insurance proceeds in the amount of $571.4 thousand related to this claim. We recognized a gain of $399.3 thousand, net of $80.0 thousand impairment write-downs of the related roofs and consulting fees related to the claim.

 

Significant components of other income (expense), in thousands, were as follows:

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended December 31,

Description Other Income (Expense)

2016

 

2015

Income from settlements

$

9.9

 

 

 

$

34.0

 

 

Other

5.8

 

(7.0

)

 

Total other income, net

$

15.7

 

 

 

$

27.0

 

 

 

The income tax expense increased $67.0 thousand to a tax provision of $80.0 thousand in 2016 compared to a tax expense of $13.0 thousand in 2015. The effective tax rates, including the intangible impairment losses and the deferred tax asset valuation allowance, in 2016 and 2015 were (2.5)% and (0.1)%, respectively, based on federal and state statutory rates.

 

Financial Condition at December 31, 2016 compared to December 31, 2015

 

Cash and cash equivalents decreased $0.1 million to $0.5 million as of December 31, 2016 compared to $0.6 million as of December 31, 2015.

 

Net cash used in operating activities was $3.3 million for the year ended December 31, 2016. The net cash used in operating activities is primarily due to a net loss of $3.2 million, an increase in receivables of $1.7 million, an increase in inventories of $1.0 million, and a decrease in accounts payables of $0.5 million; partially offset by a decrease in receivables from related parties of $58.0 thousand, depreciation of $2.3 million, share-based option expense of $357.0 thousand, and an increase in other current liabilities of $433.0 thousand. The company had $8.0 thousand of capital expenditures in 2016.

 

Net cash from financing activities was $2.7 million for the year ended December 31, 2016. In the year ended December 31, 2016, we received net proceeds from debt of $2.9 million less capitalized loan fees in the amount of $241.0 thousand.

 

Trade accounts receivable after allowances for doubtful accounts increased $1.7 million or 101.4% to $3.4 million as of December 31, 2016 compared to $1.7 million as of December 31, 2015 due to the receipt of customer payments and a decrease in the volume of shipments of ferrous, nonferrous, and stainless steel material during 2016. In general, the accounts receivable balance fluctuates due to the timing of shipments and receipt of customer payments.

 

Inventories consist principally of ferrous and nonferrous scrap materials. We value inventory at the lower of cost or market. Inventory increased $1.0 million or 42.6% to $3.4 million as of December 31, 2016 compared to $2.4 million as of December 31, 2015. This increase is primarily driven by seasonality resulting in increased volumes and inventory levels during the fourth quarter of 2016 compared to the fourth quarter of 2015.

 

We make certain assumptions regarding future demand and net realizable value in order to assess whether inventory is properly recorded at the lower of cost or market. We base our assumptions on historical experience, current market conditions and current replacement costs. Management spent much of 2015 and early 2016 working to assess the Company's automobile shredder residue ("ASR") process. Significant process and strategy changes associated with the ASR process have been made, including the May 2015 warm idle of the shredder. These changes, combined with the significant metals market reduction in demand and prices experienced in late 2014 and through 2015, caused management to perform a lower of cost-or-market assessment which resulted in inventory write-downs of $1.3 million for the year of December 31, 2015.  There was no inventory write-down in 2016.

 

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Inventory aging for the period ended December 31, 2016 (Days Outstanding):

 

 

(in thousands)

Description

 

1 - 30

 

31 - 60

 

61 - 90

 

Over 90

 

Total

Ferrous and non-ferrous materials

 

$

3,011

 

 

$

268

 

 

$

62

 

 

$

96

 

 

$

3,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

2,017

 

 

$

107

 

 

$

74

 

 

$

212

 

 

$

2,410

 

 

Inventory in the "1-30 days" category increased by $1.0 million from December 31, 2015 to December 31, 2016. This increase is primarily due to increased volumes during December 2016 as compared to December 2015.

 

Accounts payable trade decreased $0.5 million or 25.4% to $1.6 million as of December 31, 2016 compared to $2.2 million as of December 31, 2015. The accounts payable balance fluctuates due to timing of purchases from and payments made to our vendors. This decrease is largely a result of improved liquidity which led to quicker payments to the Company's suppliers.

 

Accounts payables and accrued expenses from related parties decreased $1.3 million to $0.6 million as of December 31, 2016 compared to $1.9 million as of December 31, 2015.  This decrease is largely a result of the Company entering into a subordinated, unsecured debt with related parties on February 29, 2016, which converted amounts previously held as related party payables, in the amount of $1.5 million. See Note 10 - Related Party Transactions in the Consolidated Financial Statements for additional information.

 

Working capital increased $0.9 million to $1.7 million as of December 31, 2016 compared to $0.8 million as of December 31, 2015 as a result of the above noted items

 

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Contractual Obligations

 

The following table provides information with respect to our known contractual obligations as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period (in thousands)

Obligation Description:

 

Total

 

Less than year

 

years

 

years

 

More than years

Long-term debt obligations

 

$

4,446

 

 

$

2,942

 

 

$

 

 

$

1,504

 

 

$

 

Operating lease obligations

 

821

 

 

774

 

 

47

 

 

 

 

 

Capital lease obligations

 

1,248

 

 

198

 

 

608

 

 

442

 

 

 

Total

 

$

6,515

 

 

$

3,914

 

 

$

655

 

 

$

1,946

 

 

$

 

 

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. We mitigate the risk by selling our product on a monthly contract basis. Each month we negotiate selling prices for all commodities. Based on these monthly agreements, we determine purchase prices based on a margin needed to cover processing and administrative expenses.

 

We are exposed to commodity price risk, mainly associated with variations in the market price for stainless steel, ferrous and nonferrous metal, and other commodities. The timing and magnitude of industry cycles are difficult to predict and general economic conditions impact the cycles. We respond to changes in recycled metal selling prices by adjusting purchase prices on a timely basis and by turning rather than holding inventory in expectation of higher prices. However, an adverse impact on our financial results may occur if selling prices fall more quickly than we can adjust purchase prices or if levels of inventory have an anticipated net realizable value that is below average cost.

 

Impact of Recently Issued Accounting Standards

 

In May 2014, the FASB issued ASU 2014-09, 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 has not yet assessed the impact of the adoption of ASU 2014-09 on its 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 and noted no significant impact from the adoption on its Consolidated Financial Statements.

 

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 to be presented as an asset and amortized ratably over the term of the arrangement. ASU 2015-03 is effective for reporting periods beginning after December 15, 2015 including interim periods within those annual periods. Early application is permitted, and upon adoption, ASU 2015-03 should be applied on a retrospective basis. The Company adopted ASU 2015-03 and noted no impact from the adoption on its Consolidated Financial Statements.

 

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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 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 does not expect the standard to have a material impact on its 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 Consolidated Financial Statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which provides guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.  ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019.  The Company is evaluating the potential impact of ASU 2016-13 on the Consolidated Financial Statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2016-15 should be applied retrospectively. The Company is evaluating the potential impact of ASU 2016-15 on the Consolidated Financial Statements.

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

N/A - Not required for smaller reporting companies.

 

 

Item 8.

Consolidated Financial Statements and Supplementary Data.

 

Our consolidated financial statements required to be included in this Item 8 are set forth in Item 15 of this report and incorporated herein by reference.

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

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Table of Contents

 

Item 9A.

Controls and Procedures.

 

 

(a)

Disclosure controls and procedures.

 

ISA’s management, including ISA’s principal executive officer and principal financial officer, have evaluated the effectiveness of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) 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, 2016, 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)

Internal controls over financial reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) 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 Internal Control -- Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management assessed the effectiveness of our internal control over financial reporting for the year ended December 31, 2016, and concluded that such internal control over financial reporting was effective as of December 31, 2016.

 

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that require only management’s report in this Annual Report on Form 10-K.

 

 

(c)

Changes to internal control over financial reporting.

 

There were no changes in ISA’s internal control over financial reporting during the year ended December 31, 2016 that have materially affected, or are reasonably likely to affect ISA’s internal control over financial reporting.

 

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Item 9B.

Other Information.

 

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 $6.0 million to $8.0 million and extended the maturity date to February 28, 2020.  As amended, the line of credit permits the Company to borrow an amount under the 2016 Loan equal to the lesser of (A) $8.0 million; and (B)(i) 85% of the value of the Company’s eligible domestic accounts receivable, plus (ii) the lesser of (x) $2.5 million and (y) 75% of the net orderly liquidation value of eligible inventory, plus (iii) the lesser of (x) $400,000 and (y) 40% of appraised net forced liquidation value of eligible fixed assets, plus (iv) the lesser of (x) $1.75 million and (y) 45% of the appraised value of certain properties owned by the Company (subject to MidCap's receipt of any third-party or internal approvals it may require in its discretion), minus (v) any amount which MidCap may require from time to time, pursuant to terms of the agreement, in order to secure amounts owed to MidCap under the agreement.

 

The First Amendment contains a minimum line availability covenant equal to $350.0 thousand, the same as the 2016 Loan.  This covenant may be replaced by a Fixed Charge Coverage Ratio ("FCCR") covenant once the Company has achieved an FCCR of 1.1x on an annualized basis.  The Company paid underwriting fees of $20.0 thousand at closing. 

 

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Table of Contents

 

 PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance.

 

BOARD OF DIRECTORS

 

Set forth below is a list of members of the Board of Directors, together with their ages, all Company positions and offices each person currently holds and the year in which each person joined the Board.

 

 

 

 

 

 

 

 

Name and Principal Occupation with Company

 

Age

 

Year First Became Director

 

 

 

 

 

 

 

 

 

Orson Oliver

 

74

 

 

2005

 

   Chairman of the Board and Interim Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

Albert Cozzi

  

71

 

 

2006

 

   Director

 

 

 

 

 

 

 

 

 

 

 

Vince Tyra  

 

51

 

 

2014

 

   Director

 

 

 

 

 

 

 

 

 

 

 

William Yarmuth

 

65

 

 

2014

 

   Director

 

 

 

 

 

ORSON OLIVER has been our director since 2005, our Chairman of the Board since 2012 and our interim Chief Executive Officer since 2013.  He currently holds an officer position as General Counsel with the A.J. Schneider Company.  He has over thirty-five years of experience in banking and financial consulting. Mr. Oliver began his career in 1968 as an attorney with the U.S. Treasury Department in Washington, D.C.  In 1975, he joined the Bank of Louisville as general counsel.  In 1985, he became president of the Bank of Louisville.  When Branch Banking and Trust Company acquired the Bank of Louisville in 2003, the Bank of Louisville had assets of $1.6 billion and was the largest, locally managed bank in Louisville, Kentucky.  Since his retirement from banking in February 2004, Mr. Oliver has worked as an independent general business consultant for the Al J. Schneider Company, a corporation with a number of large hotels and real estate holdings in the Louisville, Kentucky area. From May 2004 through December 2011, Mr. Oliver also worked as an independent general business consultant for PNC Bank, which is headquartered in Pittsburgh, Pennsylvania.  Mr. Oliver was a member of the Board of Directors of the Al J. Schneider Company from February 2004 through June 2016.  Beginning in 2013, Mr. Oliver also serves as a director of the Bankers' Bank of Kentucky.

 

ALBERT A. COZZI has been our director since 2006.  Since February 2006, Mr. Cozzi has been a partner with Cozzi Consulting Group, a start-up consulting business, marking the re-entry of Mr. Cozzi into the scrap industry following a two-year non-compete agreement he had with his former employers at Metal Management, Inc. From July 1999 to January 2004, Mr. Cozzi served as the chief executive officer of Metal Management, Inc. headquartered in Chicago, Illinois, and one of the largest full service metals recyclers in the United States. From December 1997 to June 1999, Mr. Cozzi served as the president and chief operating officer of Metal Management, Inc. From 1963 to 1997, Mr. Cozzi held various positions with Cozzi Iron & Metal, originally located in Chicago, Illinois, prior to its merger with Metal Management, Inc., including president from 1990 to 1997. Mr. Cozzi received an M.B.A. from the University of Chicago.

 

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VINCE TYRA has been our director since 2014. Mr. Tyra was President of ISCO Industries ("ISCO"), a global, customized piping solutions provider based in Louisville, Kentucky, through 2016.  Prior to his position at ISCO, Mr. Tyra was a Managing Partner at Southfield Capital, a private investment firm based in Greenwich, Connecticut, where he joined in 2007.  Mr. Tyra continues to be an Operating Partner with Southfield Capital, serves on the firm's investment committee and is a board member of various Southfield Capital portfolio companies.  Prior to Southfield Capital, Mr. Tyra was CEO of Broder Bros., Co., a wholesale distributor of imprintable activewear.  Prior to joining Broder, Mr. Tyra served as President of Retail and Activewear at Fruit of the Loom.  Previous to Fruit of the Loom, Mr. Tyra was a principal investor and Executive Vice President of TSM, a Louisville, Kentucky based wholesale distributor of activewear.

 

WILLIAM YARMUTH has been our director since 2014. Mr. Yarmuth has been the Chairman and Chief Executive Officer at Almost Family Inc. ("Almost Family"), a Louisville, Kentucky-based provider of a range of Medicare-certified home health nursing services to patients in need of recuperative and other care, since 1992.  Mr. Yarmuth has been a director of Almost Family since 1991, when the company acquired National Health Industries, where Mr. Yarmuth was Chairman, President and Chief Executive Officer .

 

Except as disclosed above, none of the other directors holds another directorship in a company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or in a company registered as an investment company under the Investment Company Act of 1940, as amended. None of our directors has any family relationship with any of our other directors or executive officers.

 

On December 2, 2013, the Company and Algar entered into a Management Services Agreement (the “Management Agreement”).  Pursuant to the Management Agreement, the Company agreed that Algar could cause the appointment of up to two members of the Board. In 2014, Algar nominated William Yarmuth and Vince Tyra to serve as board members.  Messrs. Tyra and Yarmuth were recommended for nomination and appointment to the Board by Algar, Inc. in 2016. Messrs. Tyra and Yarmuth were subsequently nominated by the Board for election, and they were elected, by the shareholders at the 2016 annual meeting to hold office until the 2017 annual meeting and until their respective successors have been elected and qualified.

 

Audit Committee

 

The Audit Committee confers with our independent registered public accounting firm regarding the scope and adequacy of annual audits; reviews reports from such independent accountants; and meets with the independent accountants to review the adequacy of our accounting principles, financial controls and policies. The Audit Committee met four (4) times in 2016. The members of the Audit Committee are Messrs. Tyra, Cozzi and Yarmuth. Mr. Tyra is the chairperson of this committee. All current members of the Audit Committee are independent as defined in Rule 5605(a)(2) of the NASDAQ listing standards and the Audit Committee Qualifications of Rule 5605(c)(2). The Board of Directors has determined that Mr. Tyra is qualified as an "audit committee financial expert" based on a thorough review of his education and financial experience and is independent as described in the preceding sentences. Our Audit Committee has a written charter, which is available on our website at www.isa-inc.com under Investors.

 

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Table of Contents

 

EXECUTIVE OFFICERS

 

The following table sets forth certain information with respect to the Company's executive officers.

 

 

 

 

 

 

 

Name

 

Served as an Executive Officer From

 

Age

 

Position with the

Registrant and Other

Principal Occupations

Orson Oliver

 

2013

 

74

 

Mr. Oliver has been our director since 2005, our Chairman of the Board since 2012 and our interim Chief Executive Officer since 2013.  He currently holds an officer position as General Counsel with the A.J. Schneider Company.  He has over thirty-five years of experience in banking and financial consulting. Mr. Oliver began his career in 1968 as an attorney with the U.S. Treasury Department in Washington, D.C.  In 1975, he joined the Bank of Louisville as general counsel.  In 1985, he became president of the Bank of Louisville.  When Branch Banking and Trust Company acquired the Bank of Louisville in 2003, the Bank of Louisville had assets of $1.6 billion and was the largest, locally managed bank in Louisville, Kentucky.  Since his retirement from banking in February 2004, Mr. Oliver has worked as an independent general business consultant for the Al J. Schneider Company, a corporation with a number of large hotels and real estate holdings in the Louisville, Kentucky area. From May 2004 through December 2011, Mr. Oliver also worked as an independent general business consultant for PNC Bank, which is headquartered in Pittsburgh, Pennsylvania.  Mr. Oliver was a member of the Board of Directors of the Al J. Schneider Company from February 2004 through June 2016.  Beginning in 2013, Mr. Oliver also serves as a director of the Bankers' Bank of Kentucky.

 

 

 

 

 

 

 

Todd L. Phillips

 

2014

 

41

 

Mr. Phillips was appointed President in September 2016, was appointed Secretary in June 2016, and continues to be Chief Financial Officer, a position he has held since December 31, 2014. Mr. Phillips joined ISA from CRS Reprocessing, LLC, where he held the positions of Chief Operating Officer and Chief Financial Officer from January 2009 to December 2014.  CRS is a private-equity backed company with operations in the United States, Europe and Asia.  Prior to CRS, Mr. Phillips was Chief Financial Officer at Genscape, Inc. from March 2004 to January 2009, a global information provider to energy commodity traders.  Genscape was backed by private equity firm Oaktree Capital and was honored twice during Mr. Phillips’s tenure as an Inc. 500 company, recognizing Genscape as one of the 500 fastest growing companies in the United States. Mr. Phillips was the corporate controller for Metal Sales Manufacturing Corporation from March 2002 to March 2004.  Mr. Phillips began his career at Arthur Andersen LLP from December 1997 through March 2002 following his graduation from the University of Kentucky.  He is a Certified Public Accountant and holds degrees in accounting and business administration, with a focus on finance, from the University of Kentucky.

 

Section 16(a) Beneficial Ownership Reporting Compliance 

 

Section 16(a) of the Exchange Act requires our directors, certain officers and persons who own more than ten percent (10%) of our outstanding common stock to file with the Securities and Exchange Commission reports of changes in ownership of our common stock held by such persons. Officers, directors and greater than 10% shareholders must furnish us with copies of all forms they file under this regulation. To our knowledge, based solely on a review of the copies of such reports furnished to us and representations from reporting persons that no other reports including Forms 5 were required, all Section 16(a) filing requirements applicable to all of our officer, directors and greater than 10% shareholders were timely complied with during 2016.

 

Code of Ethics

 

The Board of Directors has adopted our Code of Ethics for the Chief Executive Officer and Financial Executives, which is available on our website at www.isa-inc.com under Investors. The Company will post any waivers to the Code of Ethics to our website. Shareholders may communicate directly with the Board of Directors in writing by sending a letter to the Board at: Industrial Services of America, Inc., 7100 Grade Lane, Louisville, KY 40213 or by a secure e-mail via our website at www.isa-inc.com.

 

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Item 11.

Executive Compensation.

 

EXECUTIVE COMPENSATION DISCUSSION

 

In accordance with SEC regulations, the following table summarizes the compensation awarded to, paid to, or earned by: (i) all persons who served as our principal executive officer during 2016, and (ii) our most highly compensated executive officer, other than the principal executive officer, who was serving as an executive officer at December 31, 2016 and (iii) the executive officer for whom disclosure would otherwise have been required who was not serving as an executive officer at December 31, 2016 (collectively the "Named Executive Officers").

 

2016 Summary Compensation Table

 

Name and Principal Position

 

Year

 

Salary

($)

 

Bonus

($)

 

Share-Based 

Compensation

($)

 

Non-Equity

Incentive Plan

Compensation

($)

 

All Other

Compensation

($)

 

 

Total

($)

Orson Oliver

 

2016

 

$

 

 

 $

 

 

 

$

 

 

 

$

 

 

$

52,400

 

 

 

(1)

$

52,400

 

Interim Chief Executive Officer

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,000

 

 

 

(1)

20,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sean Garber

 

2016

 

$

232,512

 

 

 $

 

 

 

$

 

 

 

$

  180,000

 

$

19,061

 

 

 

(2)

$

431,573

 

President (Former)

 

2015

 

250,000

 

 

 

 

 

 

 

 

 

 

 

 

29,747

 

 

 

(2)

279,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Todd L. Phillips

 

2016

 

$

220,000

 

 

 $

 110,000

 

 

$

  189,000

 

 

$

  100,000

 

$

 

 

 

(3)

$

619,000

 

President, Secretary, and Chief Financial Officer

 

2015

 

206,000

 

 

 

 40,000

 

 

 

60,200

 

 

 

 

 

 

 

(3)

306,200

 

 

(1) Mr. Oliver was appointed interim CEO in June 2013.  He does not receive any compensation for serving in this role.  Amounts reflect director's fees earned of $52,400 in 2016 and $20,000 in 2015.

 

(2)  In connection with a management agreement between the Company and Algar, Inc., the Company was required to reimburse Algar for the portion of Mr. Garber’s salary that was attributable to Algar’s services under this management agreement in an amount not to exceed $20.8 thousand per month, or $250.0 thousand per year plus other expenses.  We reimbursed Algar $232.5 thousand for Mr. Garber's salary and $19.1 thousand for expenses incurred by Algar related to the performance of the management agreement during 2016.  As further described below, Algar was also eligible to receive certain bonuses based on improved operating results of the Company.  During 2016 through September 30, 2016, Algar earned and the Company accrued a bonus of $180.0 thousand.  The management agreement was terminated on September 30, 2016.

 

(3Mr. Phillips was appointed President in September 2016, was appointed Secretary in June 2016, and continues to be Chief Financial Officer, a position he has held since December 31, 2014. Amounts shown under Share-Based Compensation represent the grant date fair value of Restricted Stock Units granted on June 15, 2016.  For additional information, see Note 12 - Share Based Compensation in the accompanying Notes to Consolidated Financial Statements. Amounts shown under Bonus represent a discretionary cash bonus awarded to Mr. Phillips during 2016.  Amounts shown under Non-Equity Incentive Plan Compensation represent a retention bonus earned by Mr. Phillips during 2016.  See Annual Incentive Bonuses section below for further detail.

 

Compensation Risk Assessment

We have assessed the incentive compensation policies and practices for our employees and concluded that they do not create risks that are reasonably likely to have a material adverse effect on the Company. The Company’s compensation policies and practices are evaluated to ensure that they do not foster risk-taking above the level of risk associated with the Company’s business model.

 

Interim Chief Executive Officer

 

Orson Oliver does not receive any compensation in connection with his service as our interim Chief Executive Officer.

 

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Management Services Agreement

 

On December 2, 2013, the Company and Algar entered into a Management Services Agreement (the “Management Agreement”).  The term of the Management Agreement was effective December 1, 2013 with a contractual term expiring on December 31, 2016, subject to earlier termination upon mutual agreement or upon circumstances set forth in the agreement. On September 30, 2016 (the "Termination Effective Date"), the Company and Algar mutually agreed to terminate the Management Agreement pursuant to the Termination Agreement.

 

Effective September 30, 2016, pursuant to the Termination Agreement, Mr. Garber resigned from all positions with the Company, including as President.

 

For more information related to the compensation of Mr. Garber as President, see the discussion of the Management Agreement in Note 2 - Management Services Agreement with Algar, Inc. in the accompanying Notes to Consolidated Financial Statements. Other than as required by the Management Agreement, Mr. Garber did not receive any compensation in connection with his service as our President.

 

Under the Management Agreement, we were required to pay Algar a bonus in an amount equal to 10.0% of any year-over-year increase in the Company’s adjusted pre-tax income (as defined) during the term. During 2016 through the Termination Effective Date, Algar earned and the Company accrued a bonus of $180.0 thousand.

 

Compensation Committee

 

The members of the Compensation Committee are Messrs. Cozzi and Yarmuth. The Compensation Committee is responsible for making recommendations to the Board regarding salaries and bonuses that we pay to our executive officers. This committee held one duly called meeting in 2016.  This committee does not have a chairperson.  All functions of the Compensation Committee are performed by the committee as a whole.  However, the Compensation Committee confers with our interim Chief Executive Officer and President to obtain additional input for the committee's decision-making process and recording our processes and procedures for determination of executive and director compensation, including the scope of authority of the Compensation Committee, the extent to which the Compensation Committee may delegate any authority, and any role of executive officers in determining or recommending the amount or form of executive and director compensation.  The Compensation Committee has delegated to our President decisions regarding non executive employee compensation.  None of our executive officers served as a member of the Compensation Committee of another entity.  Our Compensation Committee has a written charter, which is available on our website at www.isa-inc.com under Investors.

 

Compensation Committee Consultant 

 

In January 2011 the Compensation Committee retained Bostonian Group, a Marsh & McLennan Agency Company, to undertake a market assessment and provide trend information on incentive compensation plans. Bostonian Group used Towers Watson Top Management Report (Services: $100M - $449M), Mercer Executive Compensation Survey (General Industry Less Than $500M), and Salary.com Companalyst Survey (General Industry $200M - $500M) as well as a peer group of companies to determine the benchmark range of competitive salaries and incentives from which to determine the appropriate salaries and incentives for the Company's executives and senior managers. The market composite was calculated from the 25th, 50th and 75th percentiles of the aggregate peer group data and the three published surveys, with each weighted 25%. Bostonian Group also provided a summary of the peer group prevalent compensation practices, including merit increases, promotions, market adjustments, and target cash and equity incentives. Bostonian Group identified the group of public companies as the peer group that was similar to the Company (Avalon Holdings Corp, Casella Waste Systems Inc, Ceco Environmental Corp, Davey Tree Expert Co, Heritage-Crystal Clean Inc, Homeland Security Capital CP, Metalico Inc, Perma-Fix Environmental Svcs, Schnitzer Steel Inds, Team Inc, TRC Cos Inc, Unvl Stainless & Alloy Prods, US Ecology Inc, Versar Inc, Waste Connections Inc, Waste Management Inc, Waste Services Inc, WCA Waste Corp) in one or more of the following ways:

 

 

Operate in the scrap metal, waste management, recycling or related environmental services industries;

 

 

Reported revenue ranging from $36 million to $562 million in their most recent fiscal year; and

 

 

Employ executives in positions similar to those of the Company's senior management.

 

The Compensation Committee subsequently retained a second consultant, RS Finance & Consulting, LLC, to supplement Bostonian Group's data by identifying additional public companies with gross margins and number of employees that were similar to those of the Company, and analyzing the compensation practices of those companies.  At the request of our President, RS Finance & Consulting updated its data in connection with the negotiation of our CFO's employment agreement in 2014.  Since this update, the Compensation Committee has not consulted any third parties on compensation matters.

 

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Table of Contents

 

Executive Employment Agreement and Stock Option Agreements with Chief Financial Officer

 

On December 31, 2014, in connection with the hiring of a new Chief Financial Officer, our then President, Sean Garber, negotiated and we entered into an Executive Employment Agreement with Mr. Phillips having successive one-year terms, which are automatically extended unless earlier terminated by either party in accordance with the agreement.

 

Mr. Phillips' annual base salary increased from an annual rate of $200.0 thousand to an annual rate of $220.0 thousand on July 1, 2015. Mr. Phillips is eligible to receive an annual bonus with a target of 50% of his then-current annual base salary. The Company’s Compensation Committee may determine, in its sole discretion, whether the CFO will receive an annual bonus.

 

At the time of entry into his employment agreement, we entered into two Stock Option Agreements with our CFO, dated December 31, 2014 and January 2, 2015, respectively.  Under these agreements, our CFO received a grant of an aggregate of 170.0 thousand non-incentive stock options which vest over a three-year period, with 1/3 vesting on the first anniversary of the grant date and 1/6 vesting every six months thereafter until the three-year anniversary of the grant date. The stock option agreement dated December 31, 2014 granted our CFO 150.0 thousand stock options at an exercise price per share of $5.97. The stock option agreement dated January 2, 2015 granted our CFO 20.0 thousand stock options at an exercise price per share of $5.71. The exercise price per share of the options is equal to the fair market value of the Company’s common stock on the grant date. These options were cancelled on June 15, 2016.

 

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 Restricted Stock Units ("RSUs") to the CFO.   The RSUs vest as follows if and to the extent that the CFO remains employed by the Company through each of the following dates: (i) on July 1, 2016, 50.00% (45,000) of the RSUs vested and became nonforfeitable; (ii) on December 31, 2016, 12.50% (11,250) of the RSUs vested and became nonforfeitable; (iii) on June 30, 2017, 12.50% (11,250) of the RSUs vest and become nonforfeitable; (iv) on December 31, 2017, 12.50% (11,250) of the RSUs vest and become nonforfeitable; and (v) on June 15, 2018, 12.50% (11,250) of the RSUs vest and become nonforfeitable.  Each RSU represents the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU Agreement and the Plan.  The CFO has continued his employment by the Company through December 31, 2016 and the related 56,250 RSUs have vested and become nonforfeitable.

 

The stock options and one-time stock option exchange were granted pursuant to the Company’s 2009 Long Term Incentive Plan. 

 

Base Salary

 

When determining base salary levels for senior management, we evaluate base salary levels of similar positions in the group of our selected peer companies.  Base salaries reflect an executive's roles and responsibilities and recognize and reward individual skills, experience and sustained job performance. 

 

Under Mr. Phillips’s executive employment agreement, his base salary was $200.0 thousand per year until June 30, 2015, at which time his salary increased to $220.0 thousand per year.

 

Annual Incentive Bonuses

 

The Company's annual incentive compensation plan is a cash-based, pay-for-performance incentive plan.  The plan covers executives and certain other personnel as determined by the Compensation Committee and the Company's President.  The incentive compensation plan rewards the achievement of certain corporate operating and financial targets set by the Compensation Committee at the beginning of each year.

 

The Compensation Committee may also establish individual performance goals for executives and other employees in connection with annual incentive compensation.  The Compensation Committee awarded Mr. Phillips a discretionary bonus earned during 2016 and to be paid in 2017 of $110.0 thousand.

 

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Table of Contents

 

Long Term Incentive Plan

 

Long-term incentive compensation opportunities may be performance-based. Long-term incentives provided by the Company may consist of equity awards based on achievement of certain corporate targets. The Company may award long-term incentives in the form of restricted stock, stock options and other forms of equity incentives as more fully described in the Company's 2009 Long-Term Incentive Plan.  Equity-based performance awards provide an adequate incentive to management to perform well for shareholders.  In addition, equity awards have been an effective means of attracting and retaining management talent.

Long-term incentive plans are designed to ensure that incentive compensation reflects the growth and profitability of the Company.  Each of the equity-based awards offered by the Company is intended to reward specified results. These awards promote a long-term view, reward long-term positive performance of the Company, and are intended to align management's interests with shareholders' interests.

 

Stock Options and Restricted Stock Units

 

The Company awards stock options and RSUs because it believes they serve a valuable purpose in aligning management's interests with shareholders' interests. Because stock options and RSUs generally vest over time, they serve not only as an incentive for superior performance, but also as a retention device. The Company generally receives an income tax deduction when an executive exercises a stock option or when the RSUs vest.

 

Perquisites

 

The Company provides certain members of management various perquisites that are provided by similar companies throughout the industry and include health, dental, vision, life and disability insurance and in the case of some Named Executive Officers, car allowances.  We furnish these benefits to provide an additional incentive for our management and to remain competitive in the general marketplace for managerial talent.

 

Retirement and Other Benefits

The Compensation Committee reviews the overall cost to the Company of the various programs generally when changes are proposed. The Compensation Committee believes the benefits provided by these programs are important factors in attracting and retaining executive officers, including the Named Executive Officers.

 

401(k) Savings Plans

 

Our CFO is eligible to participate in our defined contribution retirement plan under Section 401(k) of the Internal Revenue Code on the same basis as all other eligible employees. Eligible employees may contribute 100.0% of their annual salary to meet the IRS limit of $18,000. In an effort to decrease expenses, we suspended the employee match under the plan for an undetermined period of time effective March 1, 2014.

 Health and Welfare Plan

 

We share or pay for the cost of medical, dental, vision, basic life insurance and disability benefits with all eligible full-time regular employees. Our CFO is eligible to participate in these benefits on the same basis as all other employees, unless otherwise specified in an individual employment contract.

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Table of Contents

 

Compensation Recovery

 

We expect to implement a clawback policy in accordance with the requirements of the Dodd-Frank Act and the regulations that the SEC is expected to issue under that Act. We have elected to wait until the SEC issues guidance about the proper form of a clawback policy before formulating our policy.

 

Termination and Change of Control Agreements

 

CFO Employment Agreement and Retention Agreement

 

If our CFO’s employment is terminated by the Company without “Cause” or due to his resignation for “Good Reason”, he will be entitled to the continued payment of his base salary and COBRA premiums for twelve months following such termination. Our CFO’s receipt of the payments and benefits described in this paragraph is contingent on his execution and non-revocation of a release of claims in favor of the Company.

 

Following the termination of our CFO’s employment with the Company, he is subject to non-competition and non-solicitation covenants, which extend for 12 months following termination of employment.

 

Under a Retention Agreement with our CFO dated as of March 25, 2016, under which we would pay our CFO bonuses of $100.0 thousand and $125.0 thousand on each of December 31, 2016 and December 31, 2017, respectively, as long as he remains employed with the Company on those dates, if our CFO's employment is terminated without Cause or for Good Reason (as defined) during 2017, we are required to pay him an amount equal to $125.0 thousand times the quotient of the number of full months employed in 2017 divided by 12.

 

Outstanding Equity Awards at Fiscal Year-End 2016

 

The following table provides information with respect to outstanding equity awards for each Named Executive Officer as of December 31, 2016.

 

Name

 

Option Awards

 

 

 

 

 

 

Number of Securities

Underlying

Unexercised Options

(#) Exercisable

 

Option

Exercise

Price ($)

 

Option Expiration

Date

 

Number of

Unearned Shares,

Units or Other

Rights That Have

Not Vested (#)

 

Market or Payout

Value of

Unearned Shares,

Units or Other

Rights That Have

Not Vested ($)

Orson Oliver (1) Interim CEO

 

86,000

 

$4.68

 

May 16, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Todd L. Phillips (2) President, Secretary, and Chief Financial Officer

 

 

 

 NA

 

 NA

 

33,750 

 

 60,413

 

 

(1)

Mr. Oliver was awarded 86,000 options to purchase shares of our Common Stock on May 16, 2014. The market value of the stock options is based on a closing price of $4.68 per share on grant date. These shares were fully vested on the grant date.

 

 

(2)

Mr. Phillips has 33,750 RSUs outstanding at December 31, 2016. The RSUs vest as follows if and to the extent that Mr. Phillips remains employed by the Company through each of the following dates: (i) on June 30, 2017, 11,250 RSUs vest and become nonforfeitable; (ii) on December 31, 2017, 11,250 RSUs vest and become nonforfeitable; and (iii) on June 15, 2018, 11,250 RSUs vest and become nonforfeitable. Market value was computed using the Company’s closing stock price on December 30, 2016, the last trading date before the Company’s fiscal year ended, which was $1.79.

 

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Table of Contents

 

2016 Director Compensation Table

 

The following table summarizes the compensation earned by or awarded to each director, other than a Named Executive Officer, during 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

Name

 

Fees Earned or Paid in Cash ($) (1)

 

Option Awards ($)

 

All Other Compensation ($)

 

Total ($)

 

 

 

 

 

 

 

 

 

 

 

 

 

Orson Oliver

 

$

40,000

 

$

 

$

 

$

40,000

Vince Tyra

 

 

60,500

 

 

 

 

 

 

60,500

William Yarmuth

 

 

50,875

 

 

 

 

 

 

50,875

Albert Cozzi

 

 

58,875

 

 

 

 

 

 

58,875

Ronald Strecker

 

 

41,000

 

 

 

 

 

 

41,000

 

 

(1)

The amount reflects fees of $5,000 per Board meeting, $2,000 per Compensation Committee and $2,000 per Audit Committee meeting and retainer and hourly fees payable for Special Committee service for those directors attending in person or video conferencing and assigned to the respective committee. See also the "Executive Compensation Discussion and Analysis" section for a discussion of Orson Oliver's compensation. In addition to serving as our Chairman, Mr. Oliver also serves as our interim CEO.

 

Beginning with the June 2016 Board meeting, the Company revised its Board compensation policy to provide for payments to Board members of $5,000 per Board meeting and $2,000 per committee meeting. For service on the Board’s Special Committee, the Chairman of that committee, Mr. Tyra, receives a monthly retainer of $5,000 per month, and other members, Messrs. Cozzi and Yarmuth, of that committee receive $3,000 per month.

 

The Board held three conference calls during 2016 and received no compensation for those meetings. The Board has not established a policy regarding compensation for telephonic meetings.

 

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Table of Contents

 

Item 12.

Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters.

 

Shares Available for Grant and Options/Warrants Outstanding

 

The following information is provided as of December 31, 2016 with respect to our existing compensation plans, including individual compensation arrangements, under which our equity securities are authorized for issuance:

 

 

 

 

 

 

 

Plan Category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

Weighted-average exercise price of outstanding options, warrants and rights ($)

 

Number of securities remaining available for future issuance under equity compensation plans

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

502,000

 

$4.78

 

1,636,094

Equity compensation plans not approved by security holders

 

 

 

Total

 

502,000

 

$4.78

 

1,636,094

 

The Company had 45,150 Restricted Stock Units outstanding at December 31, 2016.

 

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Table of Contents

 

VOTING SECURITIES

 

The following table sets forth information regarding beneficial ownership of our common stock as of March  22, 2017 for (i) each of our Named Executive Officers, directors and nominees for director, (ii) each person known to management to own of record or beneficially more than five percent of our outstanding shares, and (iii) all of our executive officers and directors as a group.

 

 

 

 

 

 

 

 

 

 

 

Name

 

Amount and Nature of

Beneficial Ownership (1)(2)(3)

 

 

 

Percentage of Class (1)

 

 

 

 

 

 

 

 

 

 

 

Orson Oliver 

7100 Grade Lane 

Louisville, KY 40213

 

1,951,705

 

 

(4)

 

23.92

%

 

(4)

 

 

 

 

 

 

 

 

 

Todd Phillips 

 

63,805

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

Albert Cozzi 

 

191,752

 

 

(5)

 

2.35

%

 

(5)

 

 

 

 

 

 

 

 

 

William Yarmuth 

 

33,953

 

 

(6)

 

*

 

 

(6)

 

 

 

 

 

 

 

 

 

Vince Tyra 

 

30,000

 

 

(7)

 

*

 

 

(7)

 

 

 

 

 

 

 

 

 

Sean Garber

 

 50,670

 

 

 

 

 *

 

 

 

 

 

 

 

 

 

 

 

 

All directors and executive officers as a group

 

2,321,885

 

 

(8)

 

28.01

%

 

(8)

 

 

 

 

 

 

 

 

 

* denotes less than 1% ownership

 

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Table of Contents

 

 Name and Address

 

Amount and Nature of

Beneficial Ownership (1)(2)(3)

 

 

 

Percentage of Class (1)

 

 

 

 

 

 

 

 

 

 

 

Other Beneficial Ownership over 5%:

Recycling Capital Partners, LLC

295 S. Commerce Drive

Waterloo, IN  46793

 

1,714,286

 

 

(9)

 

19.19

%

 

(9)

 

 

 

 

 

 

 

 

 

Daniel M. Rifkin

295 S. Commerce Drive

Waterloo, IN  46793

 

1,714,286

 

 

(9)

 

19.19

%

 

(9)

 

 

 

 

 

 

 

 

 

Harry Kletter Family Ltd. Ptnsp

7100 Grade Lane

Louisville, KY 40213

 

750,000

 

 

(10)

 

9.29

%

 

(10)

 

 

 

 

 

 

 

 

 

K&R, LLC 7100 Grade Lane

Louisville, KY 40213

 

549,168

 

 

(10)

 

6.80

%

 

(10)

 

 

 

 

 

 

 

 

 

The Estate of Harry Kletter

7100 Grade Lane

Louisville, KY 40213

 

517,788

 

 

(10)

 

6.41

%

 

(10)

 

 

 

 

 

 

 

 

 

David Russell 

P.O. Box 280481 

Northridge, CA 91328

 

802,449

 

 

 (11)

 

9.90

%

 

(11)

 

 

 

 

 

 

 

 

 

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Table of Contents

 

(1)



The table reflects share ownership and the percentage of such share ownership as of March 22, 2017. We have determined the percentages on the basis of 8,074,541 shares of our Common Stock outstanding and exclusive of 30,690 shares of Common Stock held as Treasury stock.

 

(2)

 

Except as otherwise indicated, each person or entity shown has sole voting and investment power with respect to the shares of common stock beneficially owned by him, her or it.

 

(3)



Based upon information furnished to the Company by the named persons, information contained in filings with the SEC, and information in our shareholder records.  Under the rules of the SEC, a person is deemed to beneficially own shares over which the person has or shares voting or investment power or has the right to acquire beneficial ownership within 60 days, and such shares are deemed to be outstanding for the purpose of computing the percentage beneficially owned by such person or group. However, we do not consider shares of which beneficial ownership can be acquired within 60 days to be outstanding when we calculate the percentage ownership of any other person.

 

(4)



Includes options to purchase 86,000 shares exercisable within 60 days of March 22, 2017 and 3,750 shares held in Trusts for Mr. Oliver's daughter and minor grandchildren for which Mr. Oliver is the trustee.  Also includes 517,788 shares held by the Estate of Harry Kletter of which Mr. Oliver is executor, 750,000 shares owned by The Harry Kletter Family Limited Partnership of which Mr. Oliver is general partner, and 549,168 shares owned by K&R, LLC which is controlled by Mr. Oliver.

 

(5)

 

Includes options to purchase 68,000 shares exercisable within 60 days of March 22, 2017.

 

(6)

 

Includes options to purchase 30,000 shares exercisable within 60 days of March 22, 2017.

 

(7)

 

Includes options to purchase 30,000 shares exercisable within 60 days of March 22, 2017.

 

(8)

 

Includes the options described in notes 4 through 10 above to purchase 214,000 shares exercisable within 60 days of March 22, 2017.

 

(9)



Based on information set forth on Schedule 13D/A filed with the SEC on October 14, 2014.  As sole manager of Recycling Capital Partners, LLC, Daniel M. Rifkin shares voting and dispositive power over these shares.  Includes warrants to purchase 857,143 shares exercisable within 60 days of March 22, 2017.

 

(10)



Includes 517,788 shares held by the Estate of Harry Kletter of which Mr. Oliver is executor, 750,000 shares owned by The Harry Kletter Family Limited Partnership of which Mr. Oliver is general partner, and 549,168 shares owned by K&R, LLC which is controlled by Mr. Oliver.

 

(11)



Based on information obtained via email confirmation on March 23, 2017 from David Russell.  Includes options to purchase 30,000 shares exercisable within 60 days of March 22, 2017 and the following beneficially owned shares of our common stock: 375,386 shares held in a trust, 98,645 shares held in custodial accounts for Dr. Russell's adult stepson and minor children, and 167,921 shares held in various retirement plans for Dr. Russell's benefit.

 

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Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Policies and Procedures for Related Person Transactions

 

Our Board of Directors has adopted written policies and procedures for the review of any transaction, arrangement, or relationship in which we are a participant, the amount involved exceeds $120,000, and one of our executive officers, directors, director nominees or 5% shareholders (or their immediate family members), each of whom we refer to as a “related person,” has a direct or indirect material interest.

 

If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our Board. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by our Audit Committee. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction. If advance review and approval is not practicable, the Audit Committee will review, and in its discretion may ratify the related person transaction. The policy also permits the chairman of the Audit Committee to review and, if deemed appropriate, approve proposed related person transactions that arise between Audit Committee meetings, subject to ratification by the Audit Committee at its next meeting. Any related person transactions that are ongoing in nature will be reviewed annually. If the related person at issue is a director of the Company, or a family member of a director, then that director would recuse himself and abstain from voting on the approval of the related person transaction, but may, if so requested by the chair of the Audit Committee, participate in some or all of the committee's discussions of the related person transaction.

 

A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the Audit Committee after full disclosure of the related person's interest in the transaction.

 

As appropriate for the circumstances of the related person transaction, the Audit Committee will review and consider the following:

 

 

The related person's interest in the related person transaction;

 

 

The approximate dollar value of the amount involved in the related person transaction;

 

 

The approximate dollar value of the amount of the related person's interest in the transaction without regard to the amount of any profit or loss;

 

 

Whether the transaction will be undertaken in the ordinary course of our business;

 

 

Whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party;

 

 

The purpose, and the potential benefits to us, of the transaction; and

 

 

Any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction.

 

The Audit Committee may approve or ratify the transaction only if it determines that, under all of the circumstances, the transaction is in, and not inconsistent with, our best interests. The Audit Committee may impose any conditions on the related person transaction that it deems appropriate.

 

Unless the transaction is excluded by the instructions to the SEC's related person transaction disclosure rule, any approved related person transaction would be disclosed in accordance with SEC rules.

 

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The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the Compensation Committee in the manner specified in its charter.

 

For more information related to related party transactions, see Note 10 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements.

 

Corporate Governance - Director Independence

 

A majority of our directors are independent.  We combined the roles of Chairman of the Board and Chief Executive Officer in 2013.  The Board appointed Mr. Oliver as Chairman of the Board in May 2012 due to his legal and financial background as well as his previous work on the Board and as Audit Committee Chairman. On June 14, 2013, the Board appointed Mr. Oliver as interim President and interim Chief Executive Officer, for which he continues to be our interim Chief Executive Officer.  Mr. Oliver's legal and financial background as well as his knowledge and experience with the Company make Mr. Oliver capable of effectively identifying strategic priorities and leading the discussion and execution of strategy.  Mr. Oliver does not receive any salary from the Company; he receives fees as a director of the Company.   We recognize that different Board leadership structures may be appropriate for companies in different situations and believe that no one structure is suitable for all companies at all times. We believe our current Board leadership structure is optimal given its current composition.

 

The members of the Audit Committee are Messrs. Tyra, Cozzi, and Yarmuth. All current members of the Audit Committee are independent as defined in Rule 5605(a)(2) of the NASDAQ listing standards and the Audit Committee Qualifications of Rule 5605(c)(2).

 

The members of the Compensation Committee are Messrs. Cozzi and Yarmuth. All current members of the Compensation Committee are independent as defined in Rule 5605(a)(2) of the NASDAQ listing standards and the Compensation Committee Qualifications of Rule 5605(d)(2)(A).

 

The members of the Nominating Committee are Messrs. Cozzi and Tyra. This committee does not have a chairperson. The Nominating Committee met two (2) times in 2016 One new director nomination was submitted in 2016. Messrs. Cozzi and Tyra are independent as defined in Rule 5605(a)(2) of the NASDAQ listing standards.

 

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Item 14.

Principal Accountant Fees and Services.

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FEES

 

The aggregate fees billed for professional services by principal accountants Mountjoy Chilton Medley LLP in 2016 and 2015 are as follows:

 

Audit Fees: $129,325 and $137,015 to principal accountants Mountjoy Chilton Medley LLP for the years ended December 31, 2016 and 2015, respectively, for services rendered for the annual audit of our financial statements and the quarterly reviews of the financial statements included in our quarterly reports on Form 10-Q.

 

Audit Related Fees:  $8,700 and $8,500 to principal accountants Mountjoy Chilton Medley LLP for the annual audit of our 401(k) retirement plan for the years ended December 31, 2016 and 2015, respectively. 

 

Tax Fees:  No tax services were provided by principal accountants Mountjoy Chilton Medley LLP for the years ended December 31, 2016 and 2015.

 

All Other Fees: No other services were provided by principal accountants Mountjoy Chilton Medley LLP for the years ended December 31, 2016 and 2015.

 

The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services that our independent registered public accountants are to perform, except as described below.

 

The Audit Committee has established general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and will review such guidelines with the Board of Directors. The full Audit Committee, or in its absence, the chair of the Audit Committee, may pre-approve non-audit services. No pre-approval is necessary for the provision of non-audit services if (1) the aggregate amount of all such non-audit services constitutes no more than 5% of the total amount of revenues paid by us to the registered public accountants during the fiscal year in which the accountants provide the non-audit services, (2) we did not recognize such services at the time of engagement to be non-audit services, and (3) such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit. Mountjoy Chilton Medley LLP did not provide any such services in 2016.

 

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PART IV

 

 

Item 15.

Exhibits and Consolidated Financial Statement Schedules.

 

(a)(1) The following consolidated financial statements of Industrial Services of America, Inc. are filed as a part of this report:

 

 

  Page
Report of Independent Registered Public Accounting Firm F-1
   
Consolidated Balance Sheets as of December 31, 2016 and 2015 F-2
   
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015 F-4
   
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016 and 2015 F-5
   
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016 and 2015 F-6
   
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 F-7
   
Notes to Consolidated Financial Statements F-9
   

(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.

 

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

INDUSTRIAL SERVICES OF AMERICA, INC.

 

 

 

 

Dated:

March 31, 2017

By :

/s/ Orson Oliver

 

 

 

 

 

 

 

Orson Oliver, Chairman of the Board and Interim Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

 

 

 

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ Orson Oliver

 

Chairman of the Board and Interim Chief Executive Officer

 

March 31, 2017

Orson Oliver

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ Todd L. Phillips

 

President and Chief Financial Officer

 

March 31, 2017

Todd L. Phillips

 

(Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

/s/ Albert Cozzi

 

 Director

 

 March 31, 2017

Albert Cozzi