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FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019


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)


(502) 366-3452

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐


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

 

 

 

(Check one):

Large accelerated filer ☐

Accelerated filer ☐

 

Non-accelerated filer ☐

Smaller reporting company ☒

 


Emerging growth company ☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   


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


Securities registered pursuant to Section 12(b) of the Act:


Title of each class
Trading Symbol
Name of each exchange on which registered
Common, $0.0033 par value
IDSA
The Nasdaq Stock Market


Indicate the number of shares issued and outstanding of each of the issuer’s classes of common stock, as of May 9, 2019: 8,107,865.


1



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES 

​​

 

TABLE OF CONTENTS

Page No.

Part I
FINANCIAL INFORMATION 3
Item 1.
Condensed Consolidated Financial Statements 3
  Condensed Consolidated Balance Sheets - March 31, 2019 (Unaudited) and December 31, 2018 3
  Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2019 and 2018 (Unaudited) 5
  Condensed Consolidated Statement of Shareholders’ Equity - Three Months Ended March 31, 2019 (Unaudited) 6
  Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018 (Unaudited) 7
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 31
Item 4.
Controls and Procedures 31
Part II
OTHER INFORMATION 32
Item 1.
Legal Proceedings 32
Item 1A.
Risk Factors 32
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3.
Defaults upon Senior Securities 32
Item 4.
Mine Safety Disclosures 32
Item 5.
Other Information 32
Item 6.
Exhibits 32
  
2


PART I – FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS


ASSETS

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

(Unaudited)

 

  

 

 

 

                              (in thousands)                              


 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

469

 

 

$

1,044

 

Income tax receivable

 14

 

 

16

 

Accounts receivable  trade after allowance for doubtful accounts of $60.0 thousand in 2019 and 2018

6,344

 

 

4,369

 

Receivables and other assets from related parties (Note 6)

115

 

 

91

 

Inventories (Note 2)

6,211

 

 

6,934

 

Prepaid expenses and other current assets

293

 

 

159

 

Total current assets

13,446

 

 

12,613

 

Net property and equipment

9,538

 

 

9,786

 

Operating lease right-of-use assets (Note 4) 612


Operating lease right-of-use assets, related parties (Notes 4 and 6) 4,921


Other assets

 

 

 

 

 

Deferred income taxes

27

 

 

27

 

Other non-current assets

80

 

 

54

 

Total other assets

107

 

 

81

 

Total assets

$

28,624

 

 

$

22,480

 

 

 

 

 

 

    

See accompanying notes to condensed consolidated financial statements.

3


INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

CONTINUED


LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

   

March 31, 2019

 

December 31, 2018

  

(Unaudited)

 

 

 

(in thousands, except par value and share information)

Current liabilities 

 

 

 

 

 

Current maturities of long-term debt (Note 3)

$

5,482

 

 

$

3,909

 

Current maturities of long-term debt, related parties (Notes 3 and 6)

 

16

 

 

 

32

 

Current maturities of finance lease liabilities (Note 4)

 

360

 

 

 

352

 

Current maturities of operating lease liabilities (Note 4)
68



Current maturities of operating lease liabilities, related parties (Notes 4 and 6)
159



Checks in excess of bank

469

 

 

 

Accounts payable

2,235

 

 

2,387

 

Payables and accrued expenses to related parties (Note 6)

2

 

 

2

 

Other current liabilities

364

 

 

566

 

Total current liabilities

9,155

 

 

7,248

 

Long-term liabilities

 

 

 

 

 

Long-term debt, net of current maturities 

2,049

 

 

2,125

 

Long-term debt, net of current maturities, related parties (Notes 3 and 6)

1,004

 

 

1,504

 

Finance lease liabilities, net of current maturities (Note 4)

496

 

 

589

 

Operating lease liabilities, net of current maturities (Notes 4 and 6) 544


Operating lease liabilities, net of current maturities, related parties (Note 4) 4,762


Total long-term liabilities

8,855

 

 

4,218

 

Shareholders' equity

 

 

 

 

 

Common stock, $0.0033 par value: 20.0 million shares authorized in 2019 and 20188,107,865 shares issued and outstanding in 2019 and 2018

27

 

 

27

 

Additional paid-in capital

24,174

 

 

24,133

 

Stock warrants outstanding

1,025

 

 

1,025

 

Retained losses

(14,568

)

 

(14,127

)

Treasury stock at cost, 30,690 shares in 2019 and 2018

(44

)

 

(44

)

Total shareholders' equity

10,614

 

 

11,014

 

Total liabilities and shareholders' equity

$

28,624

 

 

$

22,480

 

 

 

 

 

 

  

See accompanying notes to condensed consolidated financial statements.

4


INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

 

               



For the three months ended


 

March 31, 2019

 

March 31, 2018

Revenue from product sales 

               

Revenue from ferrous operations

  $ 6,960     $ 7,045  

Revenue from non-ferrous operations

    7,202       7,315

Revenue from auto parts operations and other revenue 

    182       297

Total revenue from product sales 

    14,344       14,657  

Cost of sales for product sales

    13,722       13,445  

Gross profit

    622       1,212

Selling, general and administrative expenses

    939       926  

(Loss) income before other income (expense)

 

 

(317

)

 

 

286

Other income (expense)

               

Interest expense, including loan fee amortization

 

 

(160

)

 

 

(242

)

Gain on insurance proceeds 

     38          

Total other income (expense), net

 

 

(122

)

 

 

(242

)

(Loss) income before income taxes

 

 

(439

)

 

 

44

Income tax provision

    2       8  

Net (loss) income

 

$

(441

)

 

$

36

 

               

Basic (loss) earnings per share

 

$

(0.05

)

 

$

0.00

Diluted (loss) earnings per share

 

$

(0.05

)

 

$

0.00

 

               

Weighted average shares outstanding:

               

Basic

    8,108       8,090  

Diluted

    8,108       8,114  

 

               


See accompanying notes to condensed consolidated financial statements.

5


INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2019

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 


 

Stock Warrants

 

Retained Losses

 

Treasury Stock

 


 

 

Shares

 

Amount

 

Additional Paid-in Capital

Shares

 

Cost

Total Shareholders’ Equity

 

(in thousands, except share information)

Balance as of December 31, 2018

8,138,555

 

 

$

27

 

 

$

24,133

 

 

$

1,025

 

 

$

(14,127

)

 

(30,690

)


$

(44

)

 

$

11,014

 

Share-based compensation

 

 

 

 

41

 

 

 

 

 

 

 

 

 

 

41

 

Net loss

 

 

 

 

 

 



(441

)

 

 

 

 

 

(441

)

Balance as of March 31, 2019

8,138,555

 

 

$

27

  

 

$

24,174

 

 

$

1,025

  

 

$

(14,568

)

 

(30,690

)

 

$

(44

)

 

$

10,614

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

6


INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


THREE MONTHS ENDED MARCH 31, 2019 AND 2018


(UNAUDITED)



For the three months ended  


March 31, 2019

 

March 31, 2018


(in thousands)

Cash flows from operating activities 

 

Net (loss) income 

$

(441

)

 

$

36

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

  

Depreciation and amortization

515

 

 

521

 

Share-based compensation expense

41

 

 

9

 

Gain from insurance proceeds 

(38

)

 

 

 

Amortization of loan fees included in interest expense

27

 

 

32

 

Change in assets and liabilities

 

 

 

Receivables

(1,975

)

 

(1,123

)

Receivables from related parties

(24

)

 

47


Inventories

723



(398

)

Income tax receivable/payable 

2

 

(6

)

Other assets

(160

)

 

(150

)

Accounts payable

(152

)

 

886

Payables and accrued expenses to related parties

 

(124

)

Other current liabilities

(202

)

 

(153

)

Net cash used in operating activities

(1,684

)

 

(423

)

Cash flows from investing activities

 

 

 

 

 

Proceeds from insurance claim, net 

 38

 

 

 

 

Purchases of property and equipment

(179

)

 

(104

)

Net cash used in investing activities 

(141

)

 

(104

Cash flows from financing activities

 

 

 

 

 

Loan fees capitalized

(22

)

 

(94

)

Change in checks in excess of bank

469

 

(108

)

Payments on related party debt 

(516

)

 

(16

)

Payments on finance lease obligations

(85

)

 

(72

)

Payments on long-term debt (94

)



Proceeds from revolving line of credit, net

1,498

 

 

856

 

Net cash from financing activities

1,250

 

566


Net change in cash and cash equivalents

(575

)

 

39

Cash and cash equivalents at beginning of period

1,044

 

 

841

 

Cash and cash equivalents at end of period

$

469

 

 

$

880

 

Supplemental disclosure of cash flow information: 

 

 

 

 

 

Cash paid for interest

$

123

 

 

$

199

 

Cash paid for taxes

 

 

 


14

  

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Equipment additions financed by debt 

 

88

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

7


INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL


Industrial Services of America, Inc. (herein “ISA,” the “Company,” or other similar terms) is a Louisville, Kentucky-based company that buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used autos in order to sell used auto parts. The Company processes and sells ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries, refineries and processors. The Company purchases ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, aluminum, copper, brass, stainless steel and other metals as well as from scrap dealers and retail customers who deliver these materials directly to ISA facilities. The Company processes scrap metal through sorting, cutting, baling, and shredding operations. The non-ferrous scrap recycling operations consist primarily of processing various grades of copper, aluminum, stainless steel and brass. The used automobile operation primarily purchases automobiles so that retail customers can locate and remove used parts for purchase.

 

The Company's core business is focused on the metal recycling industry. The Company is focused on returning the core recycling business to profitability.  The Company intends to do this by increasing efficiencies and productivity.  ISA will also evaluate other various options and remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions. In September 2018, the Board formed a special committee to evaluate growth and strategic options.


On March 26, 2018, the Board appointed Todd L. Phillips as Chief Executive Officer. See Note 7 – Share-Based Compensation and Other Compensation Agreements.  Mr. Phillips has been the Company's Chief Financial Officer since December 31, 2014 and President since September 30, 2016 and will continue to serve in these roles.

 

Liquidity

 

On June 4, 2018, the Company entered into an amendment to further increase the borrowing availability of its working capital line of credit with MidCap Business Credit LLC ("MidCap"). On November 9, 2018, the Company entered into a Loan and Security Agreement ("BofA Loan Agreement") with Bank of America, N.A. ("BofA"). In connection with entry into the BofA Loan Agreement, the Company repaid in full the remaining balance of the Company's working capital line of credit with MidCap. On March 1, 2019, the Company amended the BofA Loan Agreement, which extended the commitment termination date to September 30, 2022 and released certain reserves previously required by BofA under the BofA Loan agreement, among other things. Also on March 1, 2019, the Company made a $500.0 thousand payment to a related party and extended the termination date to December 31, 2022 related to certain related party notes. See Note 3 – Long-Term Debt and Notes Payable to Bank for discussion of loan arrangements with BofA and MidCap. The Company expects operating cash flow and borrowings under its working capital line of credit to be sufficient to meet its ongoing obligations. 


The borrowings under the working capital line of credit are classified as short-term obligations under generally accepted accounting principles in the United States of America ("GAAP") as the agreement with the lender contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the lender.  However, the contractual maturity date of the revolver is September 30, 2022.    


Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The Accounting Standards Codification ("ASC") as produced by the Financial Accounting Standards Board ("FASB") is the sole source of authoritative GAAP. In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position at March 31, 2019, and the results of operations and changes in cash flows for the quarters ended March 31, 2019 and 2018. Results of operations for the period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the entire year. Additional information, including the audited December 31, 2018 consolidated financial statements and the Summary of Significant Accounting Policies, is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, on file with the Securities and Exchange Commission.


Estimates 

 

In preparing the consolidated financial statements in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, management must make estimates and assumptions. These estimates and assumptions affect the amounts reported for assets, liabilities, revenues and expenses, as well as affecting the disclosures provided. Examples of estimates include the allowance for doubtful accounts, estimates of property tax assessments, estimates of accrued payables, estimates of deferred income tax assets and liabilities, estimates of inventory balances, and estimates of stock option and warrant values. The Company also uses estimates when assessing fair values of assets and liabilities acquired in business acquisitions as well as any fair value and any related impairment charges related to the carrying value of inventory and machinery and equipment and other long-lived assets. Despite the Company’s intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.

 

8


NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued


Principles of Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts, transactions and profits have been eliminated.


Revenue Recognition


The Company's revenue is primarily generated from contracts with customers. The Company notes there have been no credit losses recorded on any receivables or contract assets arising from contracts with customers for the three-month periods ended March 31, 2019 and 2018. The Company elects to use the practical expedient as it relates to significant financing components as the Company expects, at the contract inception, that the period between when the Company transfers a promised good and when the customer pays for that good will be one year or less.


Ferrous and nonferrous revenue


Ferrous and non-ferrous contracts contain one performance obligation which consists of the shipment of a stated quantity of a stated product to be delivered within a stated time frame. Ferrous and non-ferrous revenue contracts are primarily short term contracts, typically completed within 30 days. Ferrous and non-ferrous transaction prices are stated in the contract with no variable considerations present. As ferrous and non-ferrous contracts contain one performance obligation, the total transaction price is allocated to the shipment of materials.  When multiple loads are included in one contract, the stated price per gross ton is applied to the shipment weight in order to determine transaction price. Ferrous and non-ferrous revenue is recognized when the Company satisfies the shipment of materials per the contract. The shipment and delivery of material typically occurs on the same day. No contract assets or contract liabilities were recognized as of March 31, 2019 and 2018.


Revenue from auto parts operations and other revenue


Revenue from auto parts primarily consists of individual transactions by customers who enter the Company’s premises and purchase auto parts by cash or credit card. Related to these sales, a customer may be charged a core charge.  The customer has 30 days to return the core and receive a refund of the core charge. Additionally, customers have the option to separately purchase a warranty related to certain goods purchased.  Total core charges and warranty sales are immaterial, in aggregate accounting for less than 1% of revenue from auto parts operations and other revenue. Sale prices, core charges and warranties are tracked separately and recognized as revenue when the purchase is completed. No contract assets or contract liabilities were recognized as of March 31, 2019 and 2018.


Fair Value 


The Company carries certain of its financial assets and liabilities at fair value on a recurring basis. These financial assets and liabilities are composed of cash and cash equivalents. Long-term debt is carried at cost, and the fair value is disclosed herein. In addition, the Company measures certain assets, such as long-lived assets, at fair value on a non-recurring basis to evaluate those assets for potential impairment. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

In accordance with applicable accounting standards, the Company categorizes its financial assets and liabilities into the following fair value hierarchy:

 

Level 1  Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an active market. Examples of Level 1 financial instruments include active exchange-traded securities.

 

Level 2  Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Examples of Level 2 financial instruments include various types of interest-rate and commodity-based derivative instruments, and various types of fixed-income investment securities. Pricing models are utilized to estimate fair value for certain financial assets and liabilities categorized in Level 2.

 

9


NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued


Level 3 Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are both unobservable in the market and significant to the overall fair value measurement. These inputs reflect management’s judgment about the assumptions that a market participant would use in pricing the asset or liability, and are based on the best available information, some of which is internally developed.

 

When determining the fair value measurements for financial assets and liabilities carried at fair value on a recurring basis, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, ISA looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets, and the Company uses alternative valuation techniques to derive fair value measurements.

 

The Company uses the fair value methodology outlined in the related accounting standards to value the assets and liabilities for cash and debt. All of our cash is defined as Level 1 and all our debt is defined as Level 2.

 

In accordance with this guidance, the following table represents our fair value hierarchy for Level 1 and Level 2 financial instruments at March 31, 2019 and December 31, 2018in thousands: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at Reporting Date Using

 


March 31, 2019: unaudited

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 


Assets:

 

Level 1

 

Level 2

 

Total

Cash and cash equivalents

 

$

469

 

 

$

 

 

$

469

 

Liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

$

 

 

$

(7,672

)

 

$

(7,672

)

Long-term debt, related parties

 


 

 


(957

)

 


(957

)


 

 

Fair Value at Reporting Date Using

 


December 31, 2018:  

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 


Assets:

 

Level 1

 

Level 2

 

Total

Cash and cash equivalents

 

$

1,044

 

 

$

 

 

$

1,044

 

Liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

$

 

 

$

(6,197

)

 

$

(6,197

)

Long-term debt, related parties

 


 

 


(1,430

)

 


(1,430

)

The Company had no transfers in or out of Levels 1 or 2 fair value measurements, and no activity in Level 3 fair value measurements for the three month periods ended March 31, 2019 or 2018

 

Common Stock and Share-based Compensation Arrangements 


The Company has a Long Term Incentive Plan adopted in 2009 ("LTIP") under which it may grant equity awards for up to 2.4 million shares of common stock, which are reserved by the Board of Directors for issuance of equity awards. The Company provides compensation benefits by granting stock options and other share-based awards to employees and directors. The exercise price of each option is equal to the market price of the Company's stock on the date of grant. The maximum term of the option is five years. The plan is accounted for based on FASB’s authoritative guidance titled "ASC 718 - Compensation - Stock Compensation."  The Company recognizes share-based compensation expense for the fair value of the awards, on the date granted, on a straight-line basis over their vesting term (service period). Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on the Company's historical experience and future expectations.

 

10


NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued


The Company uses the grant date stock price to value the Company's restricted stock units. The fair value of each restricted stock unit is estimated on the date of grant.


The Company uses the Modified Black-Scholes-Merton option-pricing model to value the Company's stock options for each employee stock option award. See Note 7 – Share-Based Compensation and Other Compensation Agreements. Using these option pricing models, the fair value of each stock option award is estimated on the date of grant.  


There are two significant inputs into the stock option pricing models: expected volatility and expected term. The Company estimates expected volatility based on traded option volatility of the Company's stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company's stock option plans and represents the period of time that stock option awards granted are expected to be outstanding.


The expected term assumption incorporates the contractual term of an option grant, as well as the vesting period of an award. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted. The assumptions used in calculating the fair value of stock-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if factors change and different assumptions are used, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate, the stock-based compensation expense could be significantly different from what was recorded in the current period.


Treasury shares or new shares are issued for exercised options. The Company does not expect to repurchase any additional shares within the following annual period to accommodate the exercise of outstanding stock options.


Under the LTIP, the Company may grant any of these types of awards: non-qualified and incentive stock options; stock appreciation rights; and other stock awards including stock units, restricted stock units, performance shares, performance units and restricted stock. The performance goals that the Company may use for such awards will be based on any one or more of the following performance measures: cash flow; earnings; earnings per share; market value added or economic value added; profits; return on assets; return on equity; return on investment; revenues; stock price; or total shareholder return.


The LTIP is administered by a committee selected by the Board consisting of two or more outside members of the Board. The Committee may grant one or more awards to our employees, including our officers, our directors and consultants, and will determine the specific employees who will receive awards under the plan and the type and amount of any such awards. A participant who receives shares of stock awarded under the plan must hold those shares for six months before the participant may dispose of such shares. 


Gain on Insurance Proceeds


The Company filed an insurance claim related to six roofs on certain of its buildings due to weather related damage.  The Company received insurance proceeds and recorded a gain, net of expenses and consulting fees related to the claim, during 2016 and 2018. The Company received an additional $38.0 thousand in insurance proceeds in the first quarter of 2019 and recorded a gain.


Subsequent Events


The Company has evaluated the period from March 31, 2019 through the date the financial statements herein were issued and noted no subsequent events requiring recognition or disclosure in the financial statements.



11


NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL, Continued


Recent Accounting Standards


Recently Issued Accounting Standards


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


Recently Adopted 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 were effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. On January 1, 2018, the Company adopted ASU 2014-09 using the retrospective approach. The Company noted no financial impact on the Condensed Consolidated Financial Statements as a result of the adoption of this amended guidance. In addition, the adoption of this new accounting standard resulted in increased disclosure, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. See the Revenue Recognition section of Note 1 – Summary of Significant Accounting Policies and General for additional information.


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. This ASU leaves the accounting for the organizations that own the leased assets 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 were 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. On January 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. As of January 1, 2019, the Company recorded a right-of-use asset and a lease liability of approximately $5.6 million on the Condensed Consolidated Balance Sheet. The Company noted no financial impact on the Condensed Consolidated Statement of Operations and the Condensed Consolidated Statement of Cash Flows as a result of the adoption of this amended guidance. In addition, the adoption of this new accounting standard resulted in increased financial statement disclosures to present additional details of its leasing arrangements. The Company used the following practical expedients: (i) the Company has not reassessed whether any expired or existing contracts are, or contain, leases; (ii) the Company has not reassessed the lease classification for any expired or existing leases; and (iii) the Company has not reassessed initial direct costs for any expired or existing leases.  See Note 4 – Lease Commitments for additional information.


No other new accounting pronouncements issued or effective during the reporting period had, or are expected to have, a material impact on our Condensed Consolidated Financial Statements. 


12



NOTE 2 – INVENTORIES

 

The Company's inventories primarily consist of ferrous and non-ferrous scrap metals, and are valued at the lower of average purchased cost or net realizable value ("NRV") based on the specific scrap commodity. Quantities of inventories are determined based on the Company's inventory systems and are subject to periodic physical verification using estimation techniques including observation, weighing and other industry methods. The Company recognizes inventory impairment and related adjustments when the NRV, based upon current market pricing, falls below recorded value or when the estimated volume is less than the recorded volume of the inventory. The Company records the loss in cost of sales in the period during which the loss is identified.

 

Certain assumptions are made regarding future demand and net realizable value in order to assess whether inventory is properly recorded at the lower of cost or NRV. Assumptions are based on historical experience, current market conditions and remaining costs of processing (if any) and disposal. If the anticipated future selling prices of scrap metal and finished steel products should decline, the Company would re-assess the recorded NRV of the inventory and make any adjustments believed necessary in order to reduce the value of the inventory (and increase cost of sales) to the lower of cost or NRV. 


The Company did not have a lower of cost or NRV inventory write-down in the three month periods ended March 31, 2019 and 2018.

 

Some commodities are in saleable condition at acquisition. The Company purchases these commodities in small amounts until it has a truckload of material available for shipment. Some commodities are not in saleable condition at acquisition. These commodities must be sorted, shredded, cut or baled. ISA does not have work-in-process inventory that needs to be manufactured to become finished goods. The Company includes processing costs in inventory for all commodities by weight.

 

Inventories for ferrous and non-ferrous materials as of March 31, 2019 and December 31, 2018 consist of the following: 

 


 


 

 

 

 

 

March 31, 2019

  

 

(unaudited)

 

December 31, 2018

 

(in thousands)

Raw materials

$

4,017


 

$

4,485

 

Finished goods

1,073


 

1,284

 

Processing costs

1,121


 

1,165

 

Total inventories for sale

$

6,211


 

$

6,934

 

 

13


NOTE 3 – LONG-TERM DEBT AND NOTES PAYABLE TO BANK

 

Summary:

 

On March 31, 2017, the Company entered into an amendment to increase its existing line of credit with MidCap, subject to the satisfaction of certain borrowing base restrictions, which were subsequently satisfied, and extend the maturity date more fully described below.


On June 23, 2017, in connection with the purchase of equipment to be used in the operation of the Company's business, the Company issued notes totaling $129.0 thousand principal amount due to a related party. See Note 6 – Related Party Transactions.


On November 9, 2018, the Company entered into the BofA Loan Agreement with BofA and paid off all remaining amounts due to the Company's previous lender MidCap. On March 1, 2019, the Company entered into an amendment, which amended certain terms of the BofA Loan Agreement between the Company and BofA. See Note 6 – Related Party Transactions. In addition, the amendment extended the BofA Loan Agreement’s commitment termination date to September 30, 2022 and released certain reserves previously required by BofA under the BofA Loan Agreement, among other things.

 

MidCap:

 

On February 29, 2016, the Company entered into the 2016 Loan, which, as initially entered into, provided a $6.0 million senior, secured asset-based line of credit with MidCap. The Company could borrow up to the sum of (a) 85% of the value of its eligible domestic accounts receivable; (b) the lesser of (i) $2.5 million and (ii) 75% of the net orderly liquidation value of eligible inventory; and (c) the lesser of (i) $500,000 and (ii) 40% of appraised net forced liquidation value of eligible fixed assets (the "Equipment Sublimit"). The Equipment Sublimit amortizes monthly on a straight line basis over sixty (60) months with no reduction to the overall line of credit availability. As described below, the 2016 Loan was amended on March 31, 2017 and June 4, 2018.

 

Proceeds from this loan were used to pay transaction expenses, pay off and close the remaining balance on the Wells Fargo revolving line of credit and fund working capital requirements. 

 

The interest rate on the 2016 Loan was equal to the prime rate (5.25% as of November 9, 2018) plus 250 basis points (2.50%). In the Event of a Default (as defined in the 2016 Loan Agreement), the interest rate would increase by 300 basis points (3.00%). The 2016 Loan also had a monthly collateral-monitoring fee equal to 27.5 basis points (0.275%) of the average daily balance outstanding, an annual facility fee of 100 basis points (1.00%) and an unused line fee equal to an annual rate of 50 basis points (0.50%) of the average undrawn portion of the 2016 Loan.

 

The 2016 Loan had a maturity date of February 28, 2020 based on the amendment described below. The borrowings under the revolving credit agreement were classified as short-term obligations under GAAP as the agreement with MidCap contained a subjective acceleration clause and required the Company to maintain a lockbox arrangement with the lender.

 

Interest and monthly fees under the 2016 Loan were payable monthly in arrears.

 

The 2016 Loan Agreement contained a minimum line availability covenant equal to $350.0 thousand. This covenant may have been replaced by a Fixed Charge Coverage Ratio ("FCCR") covenant once the Company achieved an FCCR of 1.0x on an annualized basis.

  

The Company granted MidCap a first priority security interest in all of the assets of ISA pursuant to the terms of a Security Agreement. 

 

The Company was allowed to sell or refinance up to $3.0 million in fair market value of real property provided (i) the proceeds from such refinance or sale remained with the Company; and (ii) no event of default existed at the time of such refinance or sale.

 

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 permitted 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.

 

14


NOTE 3 – LONG-TERM DEBT AND NOTES PAYABLE TO BANK, Continued

 

The First Amendment contained a minimum line availability covenant equal to $350.0 thousand, the same as the original 2016 Loan. This covenant was replaced by a FCCR covenant once the Company achieved an FCCR of 1.1x on an annualized basis beginning July 1, 2018 with a result of an increase in availability of $350.0 thousand. The Company paid underwriting fees of $20.0 thousand at closing.


On April 26, 2017, certain borrowing base restrictions were satisfied with MidCap which resulted in an increase in availability of $1.75 million.

 

On June 4, 2018, the Company and each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan with MidCap ("Second Amendment"). The Second Amendment, among other things, increased the Company’s line of credit from $8.0 million to $10.0 million. The Company also entered into a Second Amended and Restated Revolving Note to evidence amounts borrowed from MidCap under the 2016 Loan.  The Company paid fees of $15.0 thousand at closing.


On November 9, 2018, in connection with entry into the BofA Loan Agreement, the Company repaid in full the remaining balance of the Company's revolving line of credit with MidCap. The Company paid to MidCap $106.8 thousand in interest penalties as a result of such termination.


Bank of America:

 

On November 9, 2018, the Company entered into the BofA Loan Agreement that provides for (i) a revolving line of credit in the aggregate principal amount of $10.0 million (subject to a borrowing base), which includes a $1.0 million letter of credit subline (the “Revolving Loan”), and (ii) a term loan in the amount of $2.5 million (the “Term Loan” and together with the Revolving Loan, the “Loans”). 

 

The interest rate on the Revolving Loan is equal to LIBOR plus 2.25% to 2.75%. The interest rate on the Term Loan is equal to LIBOR plus 2.75% to 3.25%. During a continuance of an Event of Default, the interest rate will increase by 2.0%. 

 

Proceeds from the BofA Loan Agreement were used to satisfy the Company’s existing credit facility with Midcap. In addition, proceeds from the Revolving Loan were used to pay fees and transaction expenses associated with the Loans, to pay the Borrowers’ obligations to BofA, and for other corporate purposes of the Borrowers, including working capital.  

 

The Revolving Loan is due and payable in full on the Commitment Termination Date (as defined below), and the Borrowers may prepay the Revolving Loan without premium or penalty. The Term Loan will be repaid by consecutive installments of $89.3 thousand on the first day of each quarter, commencing on January 1, 2019.  On the Commitment Termination Date, all principal, interest, and other amounts with respect to the Term Loan will be due and payable in full. 

 

The Company agreed to pay BofA certain fees in connection with the BofA Loan Agreement, including, without limitation: (i) unused credit line fees, due on the first day of each month and on the Commitment Termination Date, (ii) letter of credit facility fees, payable in monthly arrears on the first day of each month, (iii) a closing fee in the amount of $50,000, due on the Closing Date, and (iv) an administrative fee of $10,000 on the Closing Date and on each anniversary date thereof. In addition, the Company agreed to pay all reasonable fees, costs, and expenses, incurred by BofA in the enforcement of the BofA Loan Agreement and related documents during the continuance of an Event of Default and all legal, accounting, appraisal, consulting, and other fees incurred by BofA in connection with the Loans. 

 

Borrowings under the BofA Loan Agreement are secured by all property of each Borrower. The Company’s obligations are also secured by mortgages upon real estate owned by certain wholly-owned subsidiaries of the Company. 

 

The BofA Loan Agreement requires the Borrowers to comply with certain customary affirmative and negative covenants that, among other things, will restrict, subject to certain exceptions, the ability of the Borrowers to incur indebtedness, grant liens, make investments, engage in acquisitions, mergers or consolidations, and pay dividends and other restricted payments. The BofA Loan Agreement also requires that the Borrowers maintain a certain fixed charge coverage ratio, calculated as of the last day of each month for the trailing twelve month period then ended.  

 

The BofA Loan Agreement will terminate on the earlier of: (i) September 30, 2020, with an option to extend such date to September 30, 2023 upon certain conditions, (ii) the date on which the Borrowers terminate the Revolving Loan pursuant to the BofA Loan Agreement, or (iii) the date on which BofA terminates the Revolving Loan as a result of an Event of Default (the “Commitment Termination Date”).  The Company has the right to terminate the BofA Loan Agreement at any time with 30 days prior written notice. Any notice of termination by the Borrowers will be irrevocable and the Borrowers will make full payment of all obligations on the Commitment Termination Date. The borrowings under the revolving credit agreement are classified as short-term obligations under GAAP as the agreement with BofA contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the lender.


15


NOTE 3 – LONG-TERM DEBT AND NOTES PAYABLE TO BANK, Continued

 

On March 1, 2019, the Company entered into Amendment No. 1 (the "BofA First Amendment") to the Loan and Security Agreement and Consent with BofA, which amended certain terms of the BofA Loan Agreement between the Company and BofA. The BofA First Amendment memorialized BofA’s consent to (i) the Company making a one-time prepayment of principal in an aggregate amount not to exceed $500.0 thousand to K&R, LLC and (ii) the Company amending certain terms of related party notes to K&R, LLC and 7100 Grade Lane, LLC ("Kletter Notes").  See Note 6 – Related Party Transactions. In addition, the BofA First Amendment amended the BofA Loan Agreement’s commitment termination date to be September 30, 2022 and released certain reserves previously required by BofA under the BofA Loan Agreement, among other things. 


The BofA Loan Agreement had availability of $3.6 million as of March 31, 2019.  


Other Debt:

 

Amounts owed to K&R, LLC and 7100 Grade Lane LLC are more fully described in Note 6 – Related Party Transactions.

 

In June 2018, the Company executed a note for $68.9 thousand to purchase equipment to be used in the operation of the Company's business. The note is for a period of five years at an interest rate of 6.0% with a monthly payment of $1.3 thousand.


In March 2019, the Company executed a note for $88.0 thousand to purchase equipment to be used in the operation of the Company's business. The note is for a period of five years at an interest rate of 3.89% with a monthly payment of $1.6 thousand.

 

Debt as of March 31, 2019 and December 31, 2018 consisted of the following:

 

March 31,

 

December 31,

 

2019

 

2018

 

(unaudited)

 

 

 

(in thousands)

Revolving credit facility with Bank of America and MidCap, see above description for additional details

$

5,144

 

 

$

3,646

 

Bank of America term loan 2,411

2,500

K&R, LLC related party notes (See Note 6 - Related Party Transactions)

136

 

 

652

 

7100 Grade Lane LLC related party note (See Note 6 - Related Party Transactions)

884

 

 

884

 

Equipment notes, see above description for additional details

 146

 

 

 63

 

   Total debt

8,721

 

 

7,745

 

Debt issuance costs (170 )
(175 )
   Total debt and debt issuance costs 8,551

7,570
Less current portion of long-term debt and debt issuance costs 5,498

3,941
   Total long-term debt and debt issuance costs

$

3,053

 

 

$

3,629

  

 

The annual contractual maturities of long-term debt (in thousands) for the next five twelve-month periods and thereafter ending March 31 are as follows:




 


2020

 

$

402

 

2021

 

388

 

2022

 

389

 

2023

 

7,521

 

2024

 

21

 

Total

 

$

8,721

  

 

The Company paid and capitalized loan fees in the amount of $22.2 thousand during the three month period ended March 31, 2019

 

16


 

NOTE 4 – LEASE COMMITMENTS


Operating Leases:

 

The Company determines if a contract contains a lease at inception. Material operating leases consist of real estate and operating equipment leases. Generally, the lease term is the minimum of the noncancelable period of the lease term inclusive of reasonably certain renewal periods.


Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the Company's right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets, if any. To determine the present value of lease payments not yet paid, the Company estimates incremental secured borrowing rates corresponding to the maturities of the leases.


Operating lease assets are reflected on the Company's balance sheet within Operating lease right-of-use assets and the related short-term and long-term liabilities are included within Current and Long-term operating lease liabilities, respectively. The Company's lease expense is recognized over the lease term. The Company records lease expense as lease payments are made. The Company considered the impact of straight-line treatment and noted no material difference in any given one year.


The Company leased a portion of its Louisville, Kentucky facility from a related party (see Note 6 - Related Party Transactions) under an operating lease that was due to expire December 31, 2017 (the "7100 Prior Lease"). The lease amount was $53.8 thousand per month. Effective October 1, 2017, the Company entered into a new lease agreement with a related party for the same property (the "7100 Lease") that terminates and replaces the 7100 Prior Lease. The lease is for a period of seven years with rent payments of $37.5 thousand per month for the first five years. For each of the following one year periods, the annual rent increases the lesser of (a) the percentage change in the CPI over the preceding twelve months, or (b) 2% of the previous year's annual rent. The Company has the option to extend the lease for two additional consecutive terms, each such extended term to be for a period of five years. In addition, the Company is responsible for real estate taxes, insurance, utilities and maintenance expense.

 

The Company signed a lease, effective December 1, 2014, to lease a facility in the Seymour, Indiana area. This lease was for an initial period of three years, with the option to extend the lease for three (3) additional three (3) year periods. Rent is $8.0 thousand per month and increases each year by $0.2 thousand per month. The Company exercised the first option to extend the lease. Because ISA exercised the option to renew the lease for a second three year term, at the end of the second three year term, ISA has the option to purchase the property.

  

On April 30, 2015, the Company entered into a lease agreement with LK Property Investments LLC ("LK Property") (see Note 6 - Related Party Transactions), for a portion of the 4.4 acre parcel of real estate located at 6709 Grade Lane, Louisville, Kentucky in the amount of $3.0 thousand per month. The lease terminated on April 14, 2019. The Company entered into a four month extension that terminates August 15, 2019. The monthly payment during the extension is $7.5 thousand per month. The Company paid $30.0 thousand at the time of extension for the aggregate rental due for the entire term of the extension. The Company is required to reimburse the lessor for 40% of the property taxes on the parcel during the term.


On March 3, 2018, the Company entered into a lease agreement to lease a piece of equipment for $0.6 thousand per month. The lease is for a period of five years.


Future minimum lease payments for operating leases for the next five twelve-month periods ending March 31 of each year and thereafter, in thousand, as oMarch 31, 2019, are as follows:

 

 

Related Party

 

Other

 

Total

 

2020

$

450

 

$

103

 

$

553

 

2021

 

450

 

 

103

 

553

 

2022

 

450

 

 

103

 

553

 

2023

 

455

 

 

102

 

557

 

2024

 

464

 

 

 96

 

560

 

Thereafter

 

5,463

 

 

256

 

5,719

 

Total future operating lease payments

 

7,732

 

 

  763

 

 

8,495

  

Less: imputed interest
2,811

151

2,962
Present value of lease liabilities
4,921

612

5,533
Less: current portion of operating lease liabilities
159

68

227
Long-term operating lease liabilities $ 4,762
$ 544
$ 5,306

  


17


NOTE 4 – LEASE COMMITMENTS, Continued


Other information related to operating leases is as follows: 

 



March 31,



2019
Weighted average remaining lease term (years)

14.5
Weighted average discount rate

6.0 %


Total lease expense for the three months ended March 31, 2019 was $173.7 thousand.


Finance Leases


The Company's finance leases are included within Net property and equipment with the related liabilities included within Current and Long-term liabilities.


On May 1, 2016, the Company entered into an amended agreement to lease three cranes (the "Crane Lease"). The Crane Lease expires April 30, 2021. Payments are $14.5 thousand per month for the first twelve months following the amendment date, followed by monthly payments of $31.3 thousand thereafter for the remainder of the lease term. There is no bargain purchase option associated with the Crane Lease. Based on the new lease terms, the Company classified the Crane Lease as a finance lease. At inception, the Company recorded a finance lease obligation of $1.3 million. The Company used a weighted average cost of capital of 9.3% to calculate the finance lease obligation.


The Company entered into a finance lease, effective June 2017, to lease two pieces of equipment for use in the Company's operations. The lease is for a period of six years and the payments are $1.4 thousand per month. The Company has the option to purchase the equipment for a purchase price of $1.00 per item of equipment upon the expiration of the lease. At inception, the Company recorded a finance lease obligation of $75.2 thousand. The Company used a weighted average cost of capital of 10.0% to calculate the finance lease obligation.


The Company entered into a finance lease, effective May 2018, to lease a piece of equipment for use in the Company's operations. The lease is for a period of four years and the payments are $0.6 thousand per month with an interest rate of 5.8% per year. At inception, the Company recorded a finance lease obligation of $24.7 thousand.


The Company entered into a finance lease, effective June 2018, to lease a piece of equipment for use in the Company's operations. The lease is for a period of four years and the payments are $0.7 thousand per month with an interest rate of 5.8% per year. At inception, the Company recorded a finance lease obligation of $29.0 thousand. 


The Company entered into a finance lease, effective July 2018, to lease two pieces of equipment for use in the Company's operations. The lease is for a period of 6 years and 4 months and the payments are $1.4 thousand per month. The Company has the option to purchase the equipment for a purchase price of $1.00 per item of equipment upon the expiration of the lease. At inception, the Company recorded a finance lease obligation of $79.9 thousand. The Company used a weighted average cost of capital of 10.0% to calculate the finance lease obligation.


Depreciation and interest expense for finance leases, in thousands, are as follows:

 


  For the three months ended

March 31,


  2019   2018
Depreciation expense   $ 74   $
67
Interest expense  
21     26


Accumulated depreciation and net book value for finance leases, in thousands, are as follows:


    March 31,  

   2019    2018  
Accumulated depreciation   $
793   $
503  
Net book value     700     857  


18


NOTE 4 – LEASE COMMITMENTS, Continued


Future minimum lease payments for finance leases for the next five twelve-months periods ending March 31 of each year, in thousands, as of March 31, 2019 are as follows:


 
Total 
  Principal    Interest
2020
$ 424 $ 360   $ 64
2021
424     395     29
2022
49     41     8
2023
36     32     4
2024
20    18    2
2025
 10    10    

$ 963   $ 856   $ 107


NOTE 5 – PER SHARE DATA


The computation for basic and diluted income (loss) per share is as follows: 

  

Three months ended March 31, 2019 compared to three months ended March 31, 2018:    

 

 

 

 

 

 

 

 

 

2019

 

2018

 

(in thousands, except per share information)

Basic income (loss) per share

 

 

 

Net income (loss)

$

(441

)

 

$

36

Weighted average shares outstanding

8,108

 

 

8,090

 

Basic income (loss) per share

$

(0.05

)

 

$

0.00

Diluted income (loss) per share

 

 

 

Net income (loss)

$

(441

)

 

$

36

Weighted average shares outstanding

8,108

 

 

8,090

 

Add dilutive effect of assumed exercising of stock options, RSUs and warrants

 

 

24

 

Diluted weighted average shares outstanding

8,108

 

 

8,114

 

Diluted income (loss) per share

$

(0.05

)

 

$

0.00

 

19


NOTE 6 – RELATED PARTY TRANSACTIONS


During the periods ended March 31, 2019 and 2018, the Company was involved in various transactions with related parties. A summary of transactions and related balances are as follows. The table at the end of this note should be used in referencing all below paragraphs.


K&R, LLC ("K&R") and 7100 Grade Lane, LLC ("7100 LLC"):


The Company is involved in various transactions with K&R and 7100 LLC, which are wholly-owned by Kletter Holdings LLC, the sole member of which was Harry Kletter, the Company's founder and former Chief Executive Officer. After Mr. Kletter's passing in January 2014, Orson Oliver assumed the roles of executor of Mr. Kletter’s estate and President of Kletter Holdings LLC. Mr. Oliver was the Company's Chairman of the Board and interim Chief Executive Officer from 2014 until his resignation on March 26, 2018. Mr. Oliver continues to be a member of the Company's Board of Directors. As of March 31, 2019, Mr. Kletter’s estate, K&R and the Harry Kletter Family Limited Partnership, collectively, beneficially own in excess of 20% of the Company's issued and outstanding shares.  


The Company leased a portion of the Louisville, Kentucky facility from 7100 LLC (previously from K&R) under an operating lease, the "7100 Prior Lease," expiring December 2017. Effective October 1, 2017, the Company entered into a new lease agreement with 7100 LLC for the same property (the "7100 Lease") that terminates and replaces the 7100 Prior Lease. See Note 4 – Lease Commitments for additional information relating to the rent and lease agreements with K&R. 


Between 2013 and 2017, the Company borrowed, net of repayments, an amount totaling $1.5 million from K&R and 7100 LLC.  


As of March 31, 2019 and 2018, the Company had balances related to K&R and 7100 LLC pertaining to refundable lease and property deposits due to and from the Company, rents payable from the Company, notes payable due from the Company, accrued interest due from the Company, interest expense, and rent expense.


On February 29, 2016, K&R assigned its interest in the 7100 Lease to another entity, 7100 LLC, also controlled by Mr. Kletter’s estate. At that time, the total amount due to the estate’s various entities, which amounted to approximately $1.5 million and is inclusive of the $500.0 thousand noted above, became a subordinated, unsecured debt (the "Kletter Notes") owed by the Company. A portion of the amount, approximately $620.3 thousand, was owed to K&R, with the remaining amount, approximating $883.8 thousand, owed to 7100 LLC. This amount of $1.5 million represents all net amounts due to Kletter estate entities as of February 29, 2016 with the exception of a $32.0 thousand deposit owed by K&R to the Company. If the Company sells property it owns at 7110 Grade Lane in Louisville, Kentucky, the Company shall make a principal payment to K&R of $500.0 thousand. Otherwise, all remaining principal is due at maturity. The interest rate on the Kletter Notes was 5.0%. The maturity date was December 31, 2020. The Kletter Notes were subject to intercreditor agreements between the respective Note holder and MidCap until November 2018 when the MidCap loans were paid off. 


On March 1, 2019, the Company entered into first amendments to the Kletter Notes. The Company made a prepayment in the amount of $500.0 thousand, increased the interest rate of the Kletter Notes from 5.0% to 7.0% and extended the maturity date of the Kletter Notes from December 31, 2020 to December 31, 2022, among other things. Until maturity on December 31, 2022, the Kletter Notes are subject to intercreditor agreements between the respective Note holder and BofA.


On June 23, 2017, the Company entered into two agreements (referred to as the “Handler Agreement” and the “Crane Agreement”) with K&R, each for the purchase of equipment to be used in the operation of the Company’s business.  


Under the Handler Agreement, the Company purchased a hydraulic scrap handler from K&R for a purchase price of $90.0 thousand, with a $9.0 thousand down payment and a 24-month promissory note ("Handler Note") in the face principal amount of the remaining $81.0 thousand. The Handler Note is interest free and provides for payments in equal monthly installments of $3.4 thousand. Under the Handler Note, payments commenced on July 1, 2017. Upon a default, the Handler Note will bear interest at 1% per annum.


Under the Crane Agreement, the Company purchased a 2011 Komatsu crane from K&R for a purchase price of $60.0 thousand, with a $12.0 thousand down payment and a 24-month promissory note ("Crane Note") in the face principal amount of the remaining $48.0 thousand. The Crane Note is interest free and provides for payments in equal monthly installments of $2.0 thousand. Under the Crane Note, payments commenced on July 1, 2017. Upon a default, the Crane Note will bear interest at 1% per annum.


The Crane Note and the Handler Note are each secured by a security interest in the subject equipment and any sale proceeds the Company derives from the equipment.


The Company entered into an agreement and promissory note (the "Back Rent Agreement"), effective October 1, 2017, to pay 7100 LLC $345.8 thousand for back rent past due and owed under the 7100 Prior Lease with an initial payment of $100.0 thousand paid at the signing of the Back Rent Agreement with six consecutive monthly payments of $41.0 thousand each, beginning November 1, 2017.


20


NOTE 6 – RELATED PARTY TRANSACTIONS, Continued

 

LK Property Investments LLC ("LK Property"):

 

On April 30, 2015, the Company entered into a lease agreement with LK Property, for a portion of the 4.4 acre parcel of real estate located at 6709 Grade Lane, Louisville, Kentucky in the amount of $3.0 thousand per month. The lease terminates on April 14, 2019, but the Company has the right to terminate the lease and vacate the leased premises upon 90 days notice. The Company is required to reimburse the lessor for 40% of the property taxes on the parcel during the term. LK Property is an entity principally owned by Daniel M. Rifkin, CEO of MetalX LLC ("MetalX"), a scrap metal recycling company headquartered in Waterloo, Indiana, and the principal owner of Recycling Capital Partners, LLC ("RCP").

 

MetalX:

 

During 2019, the Company held accounts receivables balances from MetalX related to scrap sales. For additional information regarding MetalX, see Note 9 – Financing and Related Matters.

 

Related party balances, as of the date set forth in the footnotes, are as follows, in thousands:

 

 

 

2019

 

2018

K&R and 7100 LLC:

 

 

 

 

 

 

Deposit amounts owed to the Company by related parties

(1)

42

 

 

42

 

Prepaid expenses to related parties 

(1)

 

43

 

 

 

43

 
Operating lease right-of-use asset (4)
4,921



Notes payable to related parties

(3)

 

1,020

 

 

 

1,536


Operating lease liability (5)
4,921



Facility rent expense to related parties

(6)

 

113

 

 

 

113

 

Interest expense to related parties 

(6)

 

19

     

19

 


 

 

 

 

 

 

LK Property:




 

Lease deposit to LK Property

(1)

3

 

 

3

 

Prepaid expenses to related parties 

(1)

 

3

 

 

 

3

 

Accounts payable to LK Property

(2)

 

2

 

 

 

2

 

Rent expense to LK Property*

(6)

 

9

 

 

 

9

 


 

 

 

 

 

 

MetalX:

 

 

 

 

 

 

Accounts receivable from MetalX

(1)

24

 

 

 

Revenue from product sales to MetalX

(6)

 

24

 

 

 

  

*Excludes amounts reimbursed to LK Property for utilities and property tax.

 

(1) Included in receivable and other assets from related parties on the Condensed Consolidated Balance Sheets; balances are as of March 31, 2019 and December 31, 2018.

(2) Included in payable and accrued expenses to related parties on the Condensed Consolidated Balance Sheets; balances are as of March 31, 2019 and December 31, 2018.

(3) Included in current maturities of long-term debt, related parties and long-term debt, related parties on the Condensed Consolidated Balance Sheets; balance is as of March 31, 2019 and December 31, 2018.

(4) Included in operating lease right-of-use assets, related parties on the Condensed Consolidated Balance Sheets; balances are as of March 31, 2019 and December 31, 2018.

(5) Included in current maturities of operating lease liabilities and operating lease liabilities, related parties on the Condensed Consolidated Balance Sheets; balances are as of March 31, 2019 and December 31, 2018.

(6) Included in the Condensed Consolidated Statements of Operations; amounts are for the three months ended March 31, 2019 and March 31, 2018.


21


NOTE 7 – SHARE-BASED COMPENSATION AND OTHER COMPENSATION AGREEMENTS

 

Following is a summary of stock option activity and number of shares reserved for outstanding options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

Number of shares

(in thousands)

 

Weighted Average Exercise Price per Share

 

Weighted Average Remaining Contractual Term

 

Weighted Average Grant Date Fair Value

Outstanding at December 31, 2017

 

382

 

 

$

4.70

 

 

1.41 years

 

 

$

2.57

 

Issued

 

31

 

2.46

 

 

4.24 years

  

 

1.61

 

Outstanding at December 31, 2018

 

413

 

 

$

4.53

 

 

0.70 years

 

 

$

2.49

 

Issued

 

62

 

 

1.27

 

 

4.96 years

 

 

 

0.80

 

Expired


(30 )

3.47

years


1.98

Outstanding at March 31, 2019

 

445

 

 

$

4.15

 

 

1.12 years

 

 

$

2.29

 

Exercisable at March 31, 2019

 

362

 

 

$

4.74

 

 

0.30 years

 

 

$

2.59

 

Securities available for grant at March 31, 2019*

 

1,474

 

 

 

 

 


 

 

*Securities available for grant include securities available for stock option grants and RSUs.


Option Grants:


On March 28, 2018, the Company awarded options to purchase 31.0 thousand shares of the Company's common stock to its Chief Executive Officer. These options are scheduled to vest over a three year period, with 1/3 vesting on the first anniversary of the grant date and 1/3 every twelve months thereafter until the three year anniversary of the grant date. The exercise price per share of the options is $2.46, the fair value of the underlying common stock as of the grant date. The options expire March 26, 2023. 


On March 15, 2019, the Company awarded options to purchase 62.1 thousand shares of the Company's common stock to its Chief Executive Officer. These options are scheduled to vest over a three year period, with 1/3 vesting on the first anniversary of the grant date and 1/3 every twelve months thereafter until the three year anniversary of the grant date. The exercise price per share of the options is $1.27, the fair value of the underlying common stock as of the grant date. The options expire March 15, 2024. 


The weighted average assumptions relating to the valuation of the Company's stock options awarded in 2019 and 2018 are shown below.


 

 

 

2019

 



2018
Weighted average grant-date fair value per option $ 0.80
$ 1.61
Volatility

77.00 %

80.40 %
Risk-free interest rate

2.40 %

2.59 %
Expected life (in years)

5.00


5.00
Expected dividend yield    
%

%


Restricted Stock Unit Grants:

 

On March 29, 2016, the Compensation Committee granted 11.4 thousand RSUs to an employee under the LTIP pursuant to an RSU agreement. The grant date fair value is based on the Company's closing common stock price on the day immediately prior to the date of grant. The grant date fair value was $32.0 thousand and the expense was recognized beginning in the second quarter of 2016. Each RSU vested on March 29, 2018 and represented the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU Agreement and the Plan.


On June 15, 2016, at the Company's annual meeting, the Company's shareholders approved a one-time stock option exchange for the CFO as an alternative to a direct repricing of options previously granted to the CFO. The stock option exchange allowed the Company to cancel 170.0 thousand stock options, including 20.0 thousand granted in January 2015, previously granted to the CFO in exchange for the grant of 90.0 thousand RSUs to the CFO. The RSUs vested over a period ending June 15, 2018. Each RSU represented the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU Agreement and the Plan. The CFO continued his employment with the Company through the end of the agreement and the related 90.0 thousand RSUs vested and became nonforfeitable. 


22


NOTE 7 – SHARE-BASED COMPENSATION AND OTHER COMPENSATION AGREEMENTS, Continued

 

On March 28, 2018, the Company granted an aggregate of 18.0 thousand RSUs to six employees under the LTIP pursuant to RSU agreements. The grant date fair value is based on the Company's closing common stock price on the date one day prior to grant. The grant date fair value was $44.3 thousand and was recognized as expense beginning in the second quarter of 2018. Each RSU vests on March 26, 2021 and represents the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU agreements and the LTIP.


On March 28, 2018, the Company granted 40.6 thousand RSUs to the CEO under the LTIP pursuant to an RSU agreement. The grant date fair value is based on the Company's closing common stock price on the date one day prior to grant. The grant date fair value was $100.0 thousand and was recognized as expense beginning in the second quarter of 2018. Each RSU vests on March 26, 2021 and represents the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU agreement and the LTIP. 


On July 9, 2018, the Compensation Committee of the Board of Directors of the Company granted each of the four non-employee directors 13.2 thousand RSUs in accordance with a RSU Grant Agreement pursuant to the Company's 2009 LTIP, as amended. The grants followed the election of the non-employee directors at the annual meeting of shareholders of the Company on July 9, 2018. The grant date fair value is based on the Company's closing common stock price on the date one day prior to grant. The grant date fair value was $100.0 thousand and was recognized as expense beginning in the first quarter of 2018. Each RSU vests on July 9, 2019 and represents the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU agreement and the LTIP.


On March 15, 2019, the Company granted an aggregate of 30.0 thousand RSUs to six employees under the LTIP pursuant to RSU agreements. The grant date fair value is based on the Company's closing common stock price on the date one day prior to grant. The grant date fair value was $38.1 thousand and will be recognized as expense beginning in the second quarter of 2019. Each RSU vests on March 15, 2022 and represents the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU agreements and the LTIP.


On March 15, 2019, the Company granted 78.7 thousand RSUs to the CEO under the LTIP pursuant to an RSU agreement. The grant date fair value is based on the Company's closing common stock price on the date one day prior to grant. The grant date fair value was $100.0 thousand and will be recognized as expense beginning in the second quarter of 2019. Each RSU vests on March 15, 2022 and represents the right to receive one share of the Company's common stock upon the vesting of the RSU, subject to the terms and conditions set forth in the RSU agreement and the LTIP. 


Following is a summary of RSU activity:

Restricted Stock Units
 
Number of shares
(in thousands)
 
Weighted Average Remaining Contractual Term
 
Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017

23


0.35 years


$
2.37

Granted

112


1.43 years



2.19

Vested

(23
)

years



2.37

Outstanding at December 31, 2018
 
112

 
1.43 years

 
$
2.19

Granted
 
109
 
 
2.96 years
 
 
 
1.27
 
Outstanding at March 31, 2019
 
220

 
2.06 years

 
$
1.74


Non-Equity Transactions:


Under a retention agreement with the Company's CFO dated March 25, 2016, the Company agreed to pay the CFO a bonus of $125.0 thousand on December 31, 2017 as long as he remained employed with the Company on that date. The December 31, 2017 bonus of $125.0 thousand was paid during the three month period ended March 31, 2018. 


On September 30, 2016, the Company entered into retention agreements ("Retention Agreements") with certain management employees (individually "Staff Member"). Under the Retention Agreements, if the Staff Member remained continuously employed by the Company through and including the date which is the first to occur of: (a) the date of a change in control of the Company; (b) the date the Staff Member is terminated without cause; and (c) December 31, 2017, the Company agreed to pay the Staff Member a bonus in an amount equal to 25% of the Staff Member's then-current annual base salary. The Company paid the retention amounts of $135.9 thousand during the three month period ended March 31, 2018.


23


NOTE 7 – SHARE-BASED COMPENSATION AND OTHER COMPENSATION AGREEMENTS, Continued

 

On March 26, 2018, the Board appointed Todd L. Phillips as CEO of the Company. In connection with Mr. Phillips’ appointment as CEO, the Company entered into an Amended and Restated Employment Agreement with Mr. Phillips on March 26, 2018 (the “Employment Agreement”). The Employment Agreement is effective as of January 1, 2018, with the one year initial term ending on December 31, 2018. After expiration of the initial term, the term will be automatically extended for additional 12-month periods thereafter if neither party gives written notice to the other within 30 days before expiration of the original 12-month period or any renewal period thereafter of that party’s desire to terminate the Employment Agreement. Pursuant to the Employment Agreement, Mr. Phillips will earn an annual base salary of $300,000, subject to adjustment by the Board. Mr. Phillips will be eligible to receive an annual performance-based bonus that provides him an opportunity to earn a target bonus equal to 50% of his then-current base salary. Pursuant to the Employment Agreement, Mr. Phillips is also entitled to receive annual equity compensation awards, consisting of RSUs and Options. Each award will consist of (A) that number of RSUs equal in Value (as defined in the Employment Agreement) on the date of the grant to 33.33% of Mr. Phillips’ base salary, and (B) that number of Options equal in Value (as defined in the Employment Agreement) on the date of the grant to 16.67% of Mr. Phillips’ base salary. The RSUs will be subject to three year cliff vesting, with the entire award vesting 36 months from the grant date. The Options will vest over a three year period, with 1/3 vesting on each annual anniversary of the grant date. The exercise price per share of the Options will be equal to the fair market value of the Company’s common stock on the grant date.


Other:


As of March 31, 2019 and December 31, 2018, the Company had unrecognized share-based compensation cost related to non-vested stock options in the amount of $83.0 thousand and $37.5 thousand, respectively. As of March 31, 2019 and December 31, 2018, the Company had unrecognized share-based compensation cost related to non-vested RSU awards in the amount of $259.3 thousand and $158.2 thousand, respectively.


Share-based compensation charged to operations relating to stock options and RSU awards was $41.0 thousand and $9.0 thousand for the three months ended March 31, 2019 and March 31, 2018, respectively.


24


NOTE 8 – LEGAL PROCEEDINGS

 

The Company has litigation from time to time, including employment-related claims, none of which the Company currently believes to be material.

 

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

 

NOTE 9 – FINANCING AND RELATED MATTERS

 

Securities Purchase Agreement

 

On June 13, 2014, the Company issued 857,143 shares of the Company's common stock pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement") to RCP, an investment entity principally owned by Daniel M. Rifkin, the founder and CEO of MetalX, for an aggregate purchase price of $3.0 million. Pursuant to the Securities Purchase Agreement, the Company also issued to RCP a five year warrant to purchase 857,143 additional shares of the Company's common stock, exercisable 6 months after the date of the Securities Purchase Agreement for an exercise price of $5.00 per share and expiring June 13, 2019. The net proceeds were allocated between common stock and warrants based on the relative fair value of the common stock and the warrants. The Securities Purchase Agreement provides RCP with preemptive rights and a right of first refusal with respect to future securities offerings by the Company. The Company used the proceeds from the Securities Purchase Agreement for general corporate purposes including debt reduction, growth initiatives, capital expenditures, and review of potential acquisitions. 


On June 13, 2014, in connection with the Securities Purchase Agreement, the Company and RCP entered into a Registration Rights Agreement (the "Registration Rights Agreement"), under which the Company (a) prepared and filed a registration statement no later than December 12, 2014 and (b) caused the registration statement to be declared effective by the Securities and Exchange Commission no later than February 1, 2015 for (i) agreed to resales of the common stock issued to the Investor under the Securities Purchase Agreement, and (ii) agreed to resales of any shares of common stock issuable upon exercise of the warrant.


The Registration Rights Agreement requires the Company to pay RCP a loss of liquidity fee for certain periods after February 1, 2015 when the registration statement is not effective or its use is suspended. The Registration Rights Agreement contains customary representations, warranties and covenants, and customary provisions regarding rights of indemnification between the parties with respect to certain applicable securities law liabilities.

 

Director Designation Agreement

 

On June 13, 2014, in connection with the Securities Purchase Agreement, the Company and RCP entered into a Director Designation Agreement (the "Director Designation Agreement") pursuant to which RCP will have the right to designate, and require the Company's Board to appoint, up to two directors (each, a "Designated Director"). As of the date of this report, RCP had the right to designate one director. A Designated Director will hold office until (i) his or her term expires and such Designated Director's successor designated by RCP has been appointed or (ii) such Designated Director's earlier death, disability, disqualification, resignation or removal, and RCP shall have the right to appoint any successor to such Designated Director. RCP's designation rights terminate at such time that RCP and its affiliates collectively hold less than 5% of the Company's outstanding common stock. Pursuant to the Director Designation Agreement, the Company and RCP agreed that the designation and appointment of the Designated Director nominees will not violate applicable law and will not cause the Company to become delisted from any securities exchange or other trading market.

 

25


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and the accompanying notes thereto included elsewhere in this report.

 

Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis contains certain financial predictions, forecasts and projections which constitute “forward-looking statements” within the meaning of the federal securities laws. Actual results could differ materially from those financial predictions, forecasts and projections and there can be no assurance that we will achieve such financial predictions, forecasts and projections. Factors that could affect financial predictions, forecasts and projections include availability of liquidity, fluctuations in commodity prices and any conditions internal to our major customers, including loss of their accounts and other factors as listed in our Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission.

 

General


Industrial Services of America, Inc. (herein “ISA,” the “Company,” “we,” “us,” “our,” or other similar terms) is a Louisville, Kentucky-based company that buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used autos in order to sell used auto parts. We process and sell ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries, refineries and processors. We purchase ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, aluminum, copper, brass, stainless steel and other metals, as well as from scrap dealers and retail customers who deliver these materials directly to our facilities. We process scrap metal through our sorting, cutting, baling, and shredding operations. Our ferrous scrap recycling operations consist primarily of processing various grades of steel. Our non-ferrous scrap recycling operations consist primarily of processing various grades of copper, aluminum, stainless steel and brass. Our used automobile operation primarily purchases automobiles so that retail customers can locate and remove used parts for purchase.


Our core business is focused on the metal recycling industry. We are focused on returning the core business to profitability. The Company intends to do this by increasing efficiencies and productivity. We will also evaluate other various options and remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions. In September 2018, the Company's Board of Directors formed a special committee to evaluate growth and strategic options.


On March 26, 2018, the Board appointed Todd L. Phillips as Chief Executive Officer. See Note 7 – Share-Based Compensation and Other Compensation Agreements in the accompanying Notes to Consolidated Financial Statements for additional information. Mr. Phillips has been the Company's Chief Financial Officer since December 31, 2014 and President since September 30, 2016 and will continue to serve in these roles.


Liquidity and Capital Resources

 

Cash flows generated from operations and our revolving credit facility are significant sources of ongoing liquidity. We actively manage our working capital and associated cash requirements and continually seek more effective use of cash. As of March 31, 2019, we held cash and cash equivalents of $0.5 million. We drew a net $1.5 million on our revolving credit facility during the three month period ended March 31, 2019. We expect operating cash flow and borrowings under our working capital line of credit to be sufficient to meet our ongoing obligations. 


Credit facilities and notes payable

 

See Note 1 – Summary of Significant Accounting Policies and GeneralNote 3 – Long-Term Debt and Notes Payable to Bank and Note 4 – Lease Commitments in the accompanying Notes to Condensed Consolidated Financial Statements for further details on debt and notes payable, finance and operating leases and related party obligations.


The borrowings under the line of credit are classified as short-term obligations under GAAP as the agreement with the lender contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the lender.  However, the contractual maturity date of the line of credit is September 30, 2022. For discussion of the extension of the maturity date and other recent amendments to the Company's credit arrangements, see also Note 3 – Long-Term Debt and Notes Payable to Bank in the accompanying Notes to Consolidated Financial Statements.

26


Results of Operations


Three months ended March 31, 2019 compared to three months ended March 31, 2018


The following table presents, for the periods indicated, the percentage relationship that certain captioned items in our Condensed Consolidated Statements of Operations bear to total revenue:

 

 


 

 

 

 

 

Three months ended

 

March 31,

 

2019

 

2018

Statements of Operations Data:

 

 

 

Total revenue

100.0


%

 

100.0

 %

Total cost of sales

95.7


%

 

91.7

 %

Selling, general and administrative expenses

6.5


%

 

6.3

 %

(Loss) income before other expenses 

(2.2

) %

 

2.0

 %


Total revenue decreased $0.3 million or 2.1% to $14.3 million in the first quarter of 2019 compared to $14.7 million in the same period in 2018


Ferrous revenue decreased $85.0 thousand or 1.2% to $7.0 million in the first quarter of 2019 compared to $7.0 million in the same period in 2018 For the three months ended March 31, 2019 compared to three months ended March 31, 2018, the average selling price ("ASP") of ferrous material decreased $11 per gross ton, or 3.0% primarily due to prevailing market prices for the underlying commodities sold. For the three months ended March 31, 2019 compared to three months ended March 31, 2018, ferrous material shipments increased 0.5 thousand tons, or 2.6%. Ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.

 

Non-ferrous revenue decreased $0.1 million or 1.5% to $7.2 million in the first quarter of 2019 compared to $7.3 million in the same period in 2018 For the three months ended March 31, 2019 compared to three months ended March 31, 2018, the ASP of non-ferrous material decreased $0.20 per pound, or 16.9% due to prevailing market prices for the underlying commodities sold. Non-ferrous material shipments increased by 1.2 million pounds, or 19.2%. Non-ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.


Total cost of sales increased $0.3 million or 2.1% to $13.7 million in the three month period ended March 31, 2019 compared to $13.4 million for the same period in 2018. The increase was a primarily a result of increases in labor costs of $113.8 thousand, inventory processing costs of $78.7 thousand and repairs and maintenance of $79.4 thousand, all of which resulted from increased ferrous and non-ferrous volumes.

 

Total cost of sales as a percent of revenue increased during the three month period ended March 31, 2019 as compared to the same period in 2018. This increase was also a result of increased ferrous and non-ferrous volumes.  

 

SG&A expenses remained consistent at $0.9 million in the three month period ended March 31, 2019 compared to $0.9 million in the same period in 2018

 

27


Other income (expense) was expense of $122.0 thousand for the three month period ended March 31, 2019 compared to expense of $242.0 thousand for the three month period ended March 31, 2018. This $120.0 thousand change is a result of (i) an $82.0 thousand decrease in interest expense, which is a result of a decrease in the interest rate on the line of credit and a decrease in loan fees amortization expense offset by an increased outstanding debt balance,  and (ii) a $38.0 thousand increase in insurance gain.

 

The income tax provision decreased $6.0 thousand in the three month period ended March 31, 2018 to a provision of $2.0 thousand in the three month period ended March 31, 2019 compared to a provision of $8.0 thousand in the same period in 2018. The effective tax rates in 2019 and 2018 were 0.5% and 18.2%, respectively, based on federal and state statutory rates. Due to recurring operating losses being incurred, at December 31, 2013, we recorded nearly a full valuation allowance, which is continuing through March 31, 2019. We also have several state and franchise taxes payable based on gross receipts.  

 

Net loss for the first quarter of 2019 was $441.0 thousand compared to a net income of $36.0 thousand for the same period of 2018.  Although we incurred lower interest costs, these savings were more than offset by lower margins resulting from market conditions that were less favorable during the first quarter of 2019 compared to the same period of 2018 as evidenced by the lower ASP for both ferrous and non-ferrous. These unfavorable market conditions caused by, among other items, mill outages, weaker mill order books and softer export activity, are ongoing to date in the second quarter of 2019, which will likely adversely affect second quarter 2019 financial results. For example, ferrous market prices have decreased approximately $55 per ton since the end of the first quarter 2019 to the date of this filing.

 

Financial condition at March 31, 2019 compared to December 31, 2018

 

Cash and cash equivalents decreased $575.0 thousand to $469.0 thousand as of March 31, 2019 from $1.0 million as of December 31, 2018.

 

Net cash used in operating activities was $1.7 million for the three month period ended March 31, 2019. The net cash used in operating activities is primarily due to net loss of $441.0 thousand, an increase in receivables of $2.0 million, an increase in other assets of $160.0 thousand, a decrease in accounts payable of $152.0 thousand, and a decrease in other current liabilities of $202.0 thousand.