General
Industrial Services of America, Inc. (herein “ISA,” the “Company,” “we,” “us,” “our,” or other similar terms) is a Louisville, Kentucky-based company that buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used autos in order to sell used auto parts. We purchase, process and sell ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries, 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. The shredding operations were restarted in May 2017, which had previously been idled in May 2015.
We
operate the auto shredder in the normal course of business subject to market conditions and operating needs.
Our non-ferrous scrap recycling operations consist primarily of collecting, sorting and processing various grades of copper, aluminum, stainless steel and brass. Our used automobile yard primarily purchases automobiles so that retail customers can locate and remove used parts for purchase.
On March 26, 2018, the Board appointed Todd L. Phillips as Chief Executive Officer. See
Note 9 - Share-based Compensation and Other Compensation Agreements
in the accompanying Notes to Consolidated Financial Statements for additional information. Mr. Phillips has been the Company's Chief Financial Officer since December 31, 2014 and President since September 30, 2016 and will continue to serve in these roles.
Available Information
We make available, free of charge, through our website www.isa-inc.com, our annual reports on Form 10-K and quarterly reports on Form 10-Q and amendments to those reports as soon as reasonably practicable after we have electronically filed with the Securities and Exchange Commission. We also make available on our website our Board of Directors committee charters, our Business Ethics Policy and Code of Conduct and our Code of Ethics for the CEO, CFO and senior financial officers. Please note that our Internet address is included in this annual report on Form 10-K as an inactive textual reference only. Information contained on our website www.isa-inc.com is not incorporated by reference into this annual report on Form 10-K and should not be considered a part of this report.
The SEC maintains an internet site at
http://www.sec.gov
that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
ISA Recycling Operating Division
We have one segment, our Recycling Segment. Our Recycling Segment
buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used automobiles in order to sell used automobile parts. The Company purchases, processes and sells 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 our facilities. The Company processes ferrous scrap metal through sorting, cutting, baling, and shredding operations. The shredding operations were idled in May 2015 and restarted in May 2017. The non-ferrous scrap recycling operations consist primarily of collecting, sorting and processing various grades of copper, aluminum, stainless steel and brass.
We also operate the ISA Pick.Pull.Save used automobile parts yard, which is considered a product line within the Recycling Segment. We purchase automobiles for the yard through auctions, automobile purchase programs with various suppliers and general scrap purchases. Retail customers locate and remove used parts for purchase from automobiles within the yard. Freon, fuel, tires and certain core automobile parts are also sold to various resellers for additional revenue. All automobiles are sold as scrap metal or used in our shredding operations after a specified time period in the yard.
Ferrous Operations
Ferrous Scrap Purchasing -
We purchase ferrous scrap from two primary sources: (i) industrial and commercial generators of steel and iron; and (ii) scrap dealers, peddlers, and other generators and collectors who sell us steel and iron scrap. Market demand and the composition, quality, size and weight of the materials are the primary factors that determine prices paid to these material providers.
Ferrous Scrap Processing
- We prepare ferrous scrap material for resale through a variety of methods including sorting, cutting, baling and shredding operations. The shredding operations were idled in May 2015 and restarted in May 2017. We produce a number of differently sized, shaped and graded products depending upon customer specifications and market demand.
•
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Sorting
- After purchasing ferrous scrap material, we inspect it to determine how we should process it to maximize profitability. In some instances, we may sort scrap material and sell it without further processing. We separate scrap material for further processing according to its size, composition and grade by using conveyor systems, front-end loaders, crane-mounted electromagnets and claw-like grapples.
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Cutting
- Pieces of over-sized ferrous scrap material, such as obsolete steel girders and used pipe, which are too large for other processing, are cut with hand torches.
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•
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Baling
- We process light-gauge ferrous materials such as clips, sheet iron and by-products from industrial and commercial processes, such as stampings, clippings and excess trimmings, by baling these materials into large, uniform blocks. We use cranes and conveyors to feed the material into a hydraulic press, which compresses the material into uniform blocks.
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•
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Shredding and related metal recovery
- The shredding operations were idled in May 2015 and restarted in May 2017. We shred large pieces of scrap material, such as automobiles and major appliances, in our shredder by hammer mill action into pieces of a workable size that pass through magnetic separators to separate ferrous metal from non-ferrous metals, synthetic foam, fabric, rubber, stone, dirt, etc. The ferrous metal we recover from the shredding process is sold directly to customers or reused in some other metal blend. The residue by-product is usually referred to as “automobile shredder residue” ("ASR") or “shredder fluff." We further separate the ASR into non-ferrous metals and non-metal waste. The non-ferrous metals are sold directly to customers or reused in some other metal blend. We dispose of the non-metal waste, which can reduce the volume of the scrap as much as 25.0%, in a landfill. Revenues from the ferrous and non-ferrous metals related to this shredding and related metal recovery processes are recognized in revenue from ferrous operations in the Consolidated Financial Statements.
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Ferrous Scrap Sales
- We sell processed ferrous scrap material to end-users such as steel mini-mills, integrated steel makers and foundries, and brokers who aggregate materials for other large users. Most customers purchase processed ferrous scrap material through negotiated spot sales contracts, which establish the quantity purchased for the month and the pricing. The price we charge for ferrous scrap materials depends upon market supply and demand, as well as quality and grade of the scrap material. We deliver scrap ourselves or use third party carriers via truck, and/or rail car. Some customers choose to send their own delivery trucks. These trucks are weighed and loaded at one of our sites based on the sales order.
Auto Parts Operations
We operate a single self-service retail parts location. We generate revenue from the sale of parts, cores and scrap. Our location consists of an indoor retail facility combined with a fenced outdoor storage area for autos. We operate our self-service auto parts business under the name of ISA Pick.Pull.Save.
Non-Ferrous Operations
Non-Ferrous Scrap Purchasing
- We purchase non-ferrous scrap from two primary sources: (i) industrial and commercial non-ferrous scrap material providers who generate or sell waste aluminum, copper, brass, stainless steel and other metals; and (ii) peddlers, scrap dealers, generators and collectors who deliver directly to our facilities material that they collect from a variety of sources. We also collect non-ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing retrieval boxes at these sources. We subsequently transport the boxes to our processing facilities.
Non-Ferrous Scrap Processing
- We prepare non-ferrous scrap metals, principally aluminum, copper, brass and stainless steel to sell by sorting, cutting and baling.
•
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Sorting
- Our sorting operations separate and identify non-ferrous scrap by using front-end loaders, grinders, hand torches and spectrometers. Our ability to identify metallurgical composition maximizes margins and profitability. We sort non-ferrous scrap material for further processing according to type, grade, size and chemical composition. Throughout the sorting process, we determine whether the material requires further processing before we sell it.
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•
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Cutting
- Pieces of over-sized non-ferrous scrap material, which are too large for other processing methods, are cut with hand torches.
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Baling
- We process non-ferrous metals such as aluminum cans, sheet and siding by baling these materials into large uniform blocks. We use front-end loaders and conveyors to feed the material into a hydraulic press, which compresses the material into uniform blocks.
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Non-Ferrous Scrap Sales
- We sell processed non-ferrous scrap material either directly or indirectly to end-users or processors such as foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, steel mini-mills, integrated steel makers, steel foundries and refineries, copper wire processors and brass and bronze ingot manufacturers. Prices for the majority of non-ferrous scrap materials change based upon the daily publication of spot and futures prices on COMEX or the London Metals Exchange. We deliver scrap ourselves or use third party carriers via truck and/or rail car. Some customers choose to send their own delivery trucks. These trucks are weighed and loaded at one of our sites based on the sales order.
Company Background
ISA was incorporated in 1953 in Florida under the name ALSON MFG. CO. and originally designed and manufactured various forms of electrical products.
In 1984, ISA moved into waste handling and disposal equipment sales.
In 1985, we began offering solid waste management consultations.
We began focusing on ferrous and non-ferrous scrap metal recycling in 1997 and expanded into the stainless steel blending and high-temperature alloys recycling business in 2009.
In 2012, we opened the ISA Pick.Pull.Save used automobile yard.
In 2013, we discontinued the stainless steel blending and high-temperature alloys recycling business.
In 2015, we exited the waste services business and idled our shredder.
In May 2017, we restarted our shredding operations.
Currently,
our primary focus is ferrous and non-ferrous metal recycling, as well as selling used auto parts.
Competition
The metal recycling business is highly competitive and is subject to significant changes in economic and market conditions. Pricing and proximity to a metal source are the major competitive factors in the metal recycling business. We compete for the purchase and sale of scrap metal with large, well-financed recyclers of scrap metal as well as smaller metal facilities and brokers/dealers.
Dependence on Major Customer
We had sales to one major customer that totaled approximately
21.2
% and
16.3
% of our net sales for the years ended
December 31, 2018
and
2017
, respectively.
Employees
As of February 28, 2019, we had 83 full-time employees. None of our employees are members of a union.
Effect of State and Federal Environmental Regulations
Although we believe that our business model adequately protects us from potential environmental liability, we also continue to use our best efforts to be in compliance with federal, state and local environmental laws. Such compliance has not historically constituted a material expense to us.
The recycling operations are subject to federal, state and local requirements, which regulate health, safety, the environment, zoning and land-use. We strive to conduct our operations in compliance with applicable laws and regulations. While such amounts expended in the past or that we anticipate spending in the future have not had and are not expected to have a material adverse effect on our financial condition or operations, the possibility remains that technological, regulatory or enforcement developments, the results of environmental studies or other factors could materially alter this expectation.
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, certain statements about our plans, strategies and prospects. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. Important factors that could cause our actual results to differ materially from our forward-looking statements include those set forth in this Risk Factors section. All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth below. Unless the context requires otherwise, all references to the “Company,” “we,” “us” or “our” include Industrial Services of America, Inc. and subsidiaries.
If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.
Risks Related to Our Operations
We operate in industries that are cyclical and sensitive to general economic conditions, which could have a material adverse effect on our operating results, financial condition and cash flows.
Demand for most of our products is cyclical in nature and sensitive to general economic conditions. The timing and magnitude of the cycles in the industries in which our products are used, including global metal production, are difficult to predict. The cyclical nature of our operations tends to reflect and be amplified by changes in economic conditions, both domestically and internationally, and foreign currency exchange fluctuations. The impact of recent political events, such as tariffs on metal imports, on global economic conditions is currently uncertain. Economic downturns or a prolonged period of slow growth in the industries in which we operate could have a material adverse effect on our results of operations, financial condition and cash flows.
Our business has a major involvement in ferrous and non-ferrous metals.
This market is extremely competitive and
increased competition could result in a reduction of our revenue and consequent decrease in our common stock price.
The metal recycling business is highly competitive. Pricing and proximity to a metal source are the major competitive factors in the metal recycling business. Many companies offer or are engaged in the development of products or the provisions of services that may be or are competitive with our current products or services. Certain of our competitors have greater financial, technical, manufacturing, marketing, distribution, and other resources and assets than we possess. In addition, the industry is constantly changing as a result of consolidation, which may create additional competitive pressures in our business environment. There can be no assurance that we will be able to maintain our current market share or obtain our desired market share based on the competitive nature of this industry.
Changes in the availability or price of raw materials and end-of-life vehicles could reduce our sales.
We rely on suppliers for most of our raw material needs. Industry supply conditions generally involve risks, including the possibility of shortages of raw materials, increases in raw material costs and reduced control over delivery schedules. We procure our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metal to us. In periods of declining or lower scrap metal prices, such as the declining price environment we experienced in fiscal 2015 and the first half of fiscal 2016, suppliers may elect to hold scrap metal to wait for higher prices or intentionally slow their metal collection activities, tightening supply. If a substantial number of suppliers cease selling scrap metal to us, we will be unable to recycle metal at desired levels, and our results of operations and financial condition could be materially adversely affected. A slowdown of industrial production in the U.S. may also reduce the supply of industrial grades of metal to the metals recycling industry, resulting in less recyclable metal available to process and market. Increased competition for domestic scrap metal, including as a result of overcapacity in the scrap recycling industry in the U.S. and Canada, may also reduce the supply of scrap metal available to us. Failure to obtain a steady supply of scrap material could both adversely impact our ability to meet sales commitments and reduce our operating margins. Failure to obtain an adequate supply of end-of-life vehicles could adversely impact our ability to attract customers and reduce our parts sales.
Significant decreases in scrap metal prices may adversely impact our operating results.
The timing and magnitude of the cycles in the industries in which we operate are difficult to predict and are influenced by different economic conditions. Purchase prices for scrap metal including end-of-life vehicles and selling prices for recycled scrap metal are subject to market forces beyond our control. While we attempt to respond to changing recycled scrap metal selling prices through adjustments to our metal purchase prices, our ability to do so is limited by competitive and other market factors. As a result, we may not be able to reduce our metal purchase prices to fully offset a sharp reduction in recycled scrap metal sales prices, which may adversely impact our operating income and cash flows. In fiscal 2015 and the first half of fiscal 2016, lower demand for recycled scrap metal relative to demand and competition for supply of unprocessed scrap metal in the domestic market compressed operating margins due to selling prices decreasing at a faster rate than purchase prices for unprocessed scrap metal. During the second half of 2018, ferrous market prices and volumes were challenged by uncertainty created by tariffs and threatened trade wars. Non-ferrous market prices and volumes were similarly impacted by tariffs and threatened trade wars, as well as certain restrictions placed by China on imported metals. In addition, a rapid decrease in selling prices may compress our operating margins due to the impact of average inventory cost accounting, which causes cost of goods sold recognized in the Consolidated Statements of Operations to decrease at a slower rate than metal purchase prices and net selling prices.
Volatility in market prices of our scrap metal recycling inventory may cause us to re-assess the carrying value of our inventory and adversely affect our balance sheet.
We make certain assumptions regarding future demand and net realizable value in order to assess that we record our ferrous and non-ferrous inventory properly at the lower of cost or net realizable value. We base our assumptions on historical experience, current market conditions and current replacement costs. If the anticipated future selling prices of scrap metal and finished steel products should decline due to the cyclicality of the business or otherwise, we would re-assess the recorded net realizable value of such inventory which could result in downward adjustments to reduce the value of such inventory (and increase cost of sales) to the lower of cost or
net realizable value
.
Potential limitations on our ability to access capital resources may restrict our ability to operate.
Our operations are capital intensive. Our business also requires substantial expenditures for routine maintenance. While we expect that our cash requirements, including the funding of capital expenditures and debt service, will be financed by internally generated funds or from borrowings under our line of credit, there can be no assurance that this will be the case. Additional capital expenditures could require financing from external sources. Although we believe we have adequate access to contractually committed borrowings, we could be adversely affected if our lender was unable to honor the contractual commitments or ceased lending. Failure to access our line of credit could restrict our ability to fund operations or make capital expenditures.
The agreement governing our line of credit facility imposes certain restrictions on our business and contains financial covenants.
Our line of credit facility contains certain restrictions on our business which limit (subject to certain exceptions) our ability to, among other things, dispose of collateral, incur certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, sales or asset acquisitions, make distributions and other restricted payments, materially change the nature of our business, and engage in transactions with affiliates.
These restrictions may affect our ability to operate our business or execute our strategy and may limit our ability to take advantage of potential business opportunities as they arise.
Our line of credit agreement also requires that we maintain certain financial and other covenants. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our failure to comply with any of these restrictions or financial covenants could result in an event of default under the lender credit agreement, and permit our lender to cease lending to us and declare all amounts borrowed to be due and payable, together with accrued and unpaid interest. This could require us to refinance our line of credit, which we may not be able to do at terms
acceptable to us, or at all.
Our debt may increase our vulnerability to economic or business downturns.
We are vulnerable to higher interest rates because interest expense on our borrowing is based on margins over a variable base rate. We may experience material increases in our interest expense as a result of increases in general interest rate levels. Our current line of credit agreement with our lender contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the lender. Upon a breach of covenants in our lending facility, our lender could exercise its remedies related to any material breaches, including acceleration of our payments and taking action with respect to its loan security. We have relied upon and will rely on borrowings under various credit facilities to operate our business. We may not have the ability to borrow from other lenders to operate our business.
An increase in the price of fuel may adversely affect our business.
Our operations are dependent upon fuel, which we generally purchase in the open market on a daily basis. Direct fuel costs include the cost of fuel and other petroleum-based products used to operate our fleet of cranes and heavy equipment, as well as our shredder when it is not idled. We are also susceptible to increases in indirect fuel costs which include fuel surcharges from vendors. When we have experienced increases in the cost of fuel and other petroleum-based products in the past, we were able to pass a portion of these increases on to our customers. However, because of the competitive nature of the industry, there can be no assurance that we will be able to pass on current or future increases in fuel prices to our customers. A significant increase in fuel costs could adversely affect our business, which adverse impact would be magnified if combined with a decrease in revenue caused by a decrease in commodity prices.
We could incur substantial costs in order to comply with, or to address any violations under, environmental laws that could significantly increase our operating expenses and reduce our operating income.
Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state and federal environmental laws and regulations relating to, among other matters:
•
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Waste water and storm water management and treatment;
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•
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Soil and groundwater contamination remediation; and
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Employee health and safety.
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Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Material environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations where we disposed of materials from our operations, which could result in future expenditures that we cannot currently estimate and which could reduce any profits.
Our financial statements are based upon estimates and assumptions that may differ from actual results.
We have prepared our financial statements in accordance with U.S. generally accepted accounting principles and necessarily include amounts based on estimates and assumptions we made. Actual results could differ from these amounts. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets, valuation allowances for accounts receivable, inventory, lower of cost or net realizable value, stock option values, liabilities for potential litigation, claims and assessments, and liabilities for environmental remediation and deferred taxes.
We depend on our senior management team and the loss of any member could prevent us from implementing our business strategy.
Our success is dependent on the management and leadership skills of our senior management team. The loss of any members of our management team or the failure to attract and retain additional qualified personnel could prevent us from implementing our business strategy and continuing to grow our business at a rate necessary to achieve and maintain future profitability.
Seasonal changes may adversely affect our business and operations.
Our operations may be adversely affected by periods of inclement weather, which could decrease the collection and shipment volume of recyclable materials.
A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
Cyber-attacks are increasing in their frequency, sophistication and intensity. Cyber-attacks could include the deployment of harmful malware, denial-of-service, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability.
We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer and supplier information and unauthorized access to personnel information. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could materially and adversely affect our competitive position, relationships with our customers and suppliers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.
Risks Related to Our Common Stock
Future sales of our common stock could depress our market price and diminish the value of your investment.
Future sales of shares of our common stock could adversely affect the prevailing market price of our common stock. If our existing shareholders sell a large number of shares, or if we issue a large number of shares, the market price of our common stock could significantly decline. Moreover, the perception in the public market that our existing shareholders and, in particular, Kletter affiliates might sell shares of common stock could depress the market for our common stock.
The market price for our common stock may be volatile.
In recent periods, there has been volatility in the market price for our common stock. In addition, the market price of our common stock could fluctuate substantially in the future in response to a number of factors, including the following:
•
|
Our quarterly operating results or the operating results of our operations in the ferrous, non-ferrous and used auto parts industries;
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•
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Changes in general conditions in the economy, the financial markets or the ferrous and non-ferrous recycling industry;
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•
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Loss of significant customers; and
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•
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Increases in materials and other costs.
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In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.
None.
The following table outlines our principal properties as of
December 31, 2018
:
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Property Address
|
|
Lease or own
|
|
Segment
|
|
Acreage
|
6709 Grade Lane, Louisville, KY
|
|
Lease (1)
|
|
Recycling & Other
|
|
1.326
|
|
7023-7103 Grade Lane, Louisville, KY
|
|
Own
|
|
Recycling
|
|
2.530
|
|
7020/7100 Grade Lane, Louisville, KY
|
|
Lease (K&R) (2)
|
|
Recycling & Other
|
|
14.230
|
|
7110 Grade Lane, Louisville, KY
|
|
Own
|
|
Recycling
|
|
10.723
|
|
7124 Grade Lane, Louisville, KY
|
|
Own
|
|
Recycling
|
|
5.120
|
|
7200-7210 Grade Lane, Louisville, KY
|
|
Own
|
|
Recycling
|
|
15.520
|
|
3409 Camp Ground Road, Louisville, KY
|
|
Own
|
|
Recycling
|
|
5.670
|
|
960 S. County Rd 900 W, North Vernon, IN
|
|
Lease (3)
|
|
Recycling
|
|
14.000
|
|
1617 State Road 111, New Albany, IN
|
|
Own
|
|
Recycling
|
|
1.300
|
|
|
|
(1)
|
See
Note 8 - Related Party Transactions
in the accompanying Notes to Consolidated Financial Statements for additional information related to the 6709 Grade Lane lease.
|
|
|
(2)
|
See
Note 8 - Related Party Transactions
in the accompanying Notes to Consolidated Financial Statements for additional information related to the K&R lease.
|
|
|
(3)
|
See
Note 3 - Lease Commitments
in the accompanying Notes to Consolidated Financial Statements for additional information related to the Seymour/North Vernon lease.
|
These properties total 70.419 acres, which provides adequate space necessary to perform administrative and retail operation processes and store inventory. All facilities maintain industry standard insurance coverages. We do not expect any major land or building additions will be needed to increase capacity for our operations in the foreseeable future.
We have litigation from time to time, including employment-related claims, none of which we currently believe to be material.
Our operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials used in the processing of our products. In addition, certain of our operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities in material amounts could exist, including cleanup obligations at these facilities or at off-site locations where we disposed of materials from our operations, which could result in future expenditures that we cannot currently estimate and which could reduce our profits. We record liabilities for remediation and restoration costs related to past activities when our obligation is probable and the costs can be reasonably estimated. Costs of future expenditures for environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to current operations are expensed as incurred. Such compliance has not historically constituted a material expense to us.
Not applicable.
Item
5
.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ISA common stock is traded on the NASDAQ Capital Market under the symbol “IDSA.”
There were approximately
127
shareholders of record as of
December 31, 2018
.
Our Board of Directors did not declare any dividends in
2018
or
2017
.
Under our previous MidCap and our current Bank of America loan agreements, ISA covenants that so long as the lenders remain committed to make any advance or extend any other credit to us, or any obligations remain outstanding, ISA will not declare or pay any dividend or distribution (either in cash or any other property in respect of any stock) or redeem, retire, repurchase or otherwise acquire any of our stock, other than dividends and distributions by our subsidiaries to a parent.
On November 15, 2005, our Board of Directors authorized a program to repurchase up to
300.0
thousand shares of our common stock at current market prices. We did not repurchase any shares in
2018
or
2017
. There are approximately
133.3
thousand shares still available for repurchase under this program.
|
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(Amounts in thousands, except per share data)
|
Year ended December 31:
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Total revenue
|
|
$
|
61,023
|
|
|
$
|
54,935
|
|
|
$
|
36,505
|
|
|
$
|
46,180
|
|
|
$
|
110,091
|
|
Net loss from continuing operations
|
|
$
|
(
349
|
)
|
|
$
|
(
1,131
|
)
|
|
$
|
(
3,230
|
)
|
|
$
|
(
9,085
|
)
|
|
$
|
(
8,686
|
)
|
Net income from discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,320
|
|
|
$
|
1,413
|
|
Earnings (loss) per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(
0.04
|
)
|
|
$
|
(
0.14
|
)
|
|
$
|
(
0.40
|
)
|
|
$
|
(
1.14
|
)
|
|
$
|
(
1.15
|
)
|
Diluted
|
|
$
|
(
0.04
|
)
|
|
$
|
(
0.14
|
)
|
|
$
|
(
0.40
|
)
|
|
$
|
(
1.14
|
)
|
|
$
|
(
1.15
|
)
|
Earnings (loss) per common share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.92
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.92
|
|
|
$
|
0.19
|
|
At year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
22,480
|
|
|
$
|
21,726
|
|
|
$
|
20,856
|
|
|
$
|
19,434
|
|
|
$
|
37,790
|
|
Current maturities of long-term debt
|
|
$
|
3,909
|
|
|
$
|
4,877
|
|
|
$
|
2,942
|
|
|
$
|
20
|
|
|
$
|
15,911
|
|
Current maturities of long-term debt, related parties
|
|
$
|
32
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current maturities of capital lease obligations
|
|
$
|
352
|
|
|
$
|
300
|
|
|
$
|
198
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt, net of current maturities
|
|
$
|
2,125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt, net of current maturities, related parties
|
|
$
|
1,504
|
|
|
$
|
1,536
|
|
|
$
|
1,504
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Capital lease obligations, net of current maturities
|
|
$
|
589
|
|
|
$
|
819
|
|
|
$
|
1,050
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The recycling business is highly competitive and is subject to various market and company risks. See Item
1
A. - Risk Factors for a discussion of the material risks related to our operations. Due to these risks, past performance is not necessarily indicative of our future financial condition or results of operations.
On December 4, 2015, the Company sold a majority of its Waste Services segment assets. Years 2015 and
2014
have been adjusted to reflect discontinued operations of the Waste Services segment.
Item
7
.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the information set forth under Item
6
,
“Selected Financial Data”
and our consolidated financial statements and the accompanying notes thereto included elsewhere in this report.
The following discussion and analysis contains certain financial predictions, forecasts and projections which constitute
“forward-looking statements”
within the meaning of the federal securities laws. Actual results could differ materially from those financial predictions, forecasts and projections and there can be no assurance that we will achieve such financial predictions, forecasts and projections. Please see Item
1
A,
“Risk Factors”
for items that could affect our financial predictions, forecasts and projections.
General
We buy, process and market ferrous and non-ferrous metals and other recyclable commodities. We operate one automobile parts yard. We have operating locations in Louisville, Kentucky, and Seymour and New Albany, Indiana. We do not have operating locations outside the United States. Seymour is used interchangeably with North Vernon herein.
On March 26, 2018, the Board appointed Todd L. Phillips as Chief Executive Officer. See
Note 9 - Share-based Compensation and Other Compensation Agreements
in the accompanying Notes to Consolidated Financial Statements for additional information. Mr. Phillips has been our Chief Financial Officer since December 31, 2014 and President since September 30, 2016 and will continue to serve in these roles
.
Liquidity and Capital Resources
Cash flows generated from operations and our revolving credit facility are significant sources of ongoing liquidity. We have also been able to manage liquidity by deferring certain rent payments made to related parties through October 2017, as well as deferring capital expenditures during 2016 and 2017. See
Note 8 - Related Party Transactions
in the accompanying Notes to Consolidated Financial Statements for additional information. We actively manage our working capital and associated cash requirements and continually seek more effective use of cash. As of
December 31, 2018
, we held cash and cash equivalents of $
1.0
million. We paid $
1.4
million, net of draws, on our revolving credit facility during the year ended
December 31, 2018
. We expect operating cash flow and borrowings under our working capital line of credit to be sufficient to meet our ongoing liquidity needs
.
Credit facilities and notes payable
See
Note 1 - Summary of Significant Accounting Policies and General
,
Note 2 - Long-term Debt and Notes Payable to Bank
,
Note 3 - Lease Commitments
and
Note 8 - Related Party Transactions
in the accompanying Notes to Consolidated Financial Statements for details on debt and notes payable, capital 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, 2020. For discussion of the extension of the maturity date and other recent amendments to the Company's credit arrangements, s
ee also
Note 1 - Summary of Significant Accounting Policies and General
- Subsequent Events
in the accompanying Notes to Consolidated Financial Statements
.
Critical Accounting Policies
In preparing financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"), we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We believe that we consistently apply judgments and estimates and that such consistent application results in financial statements and accompanying notes that fairly represent all periods presented. However, any errors in these judgments and estimates may have a material impact on our statement of operations and financial condition. Our significant accounting policies are described in
Note 1 - Summary of Significant Accounting Policies and General
in the accompanying Notes to Consolidated Financial Statements. Critical accounting policies, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult and subjective
judgments and
estimates of matters that are inherently uncertain. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing the consolidated financial statements.
Revenue Recognition
Our revenue is primarily generated from contracts with customers. We note there have been no credit losses recorded on any receivables or contract assets arising from contracts with customers for the years ended
December 31, 2018
and
2017
. The Company elects to use the practical expedient as it relates to significant financing components as the Company expects, at the contract inception, that the period between when the Company transfers a promised good and when the customer pays for that good will be one year or less.
No contract assets or contract liabilities were recognized as of
December 31, 2018
and
2017
.
Inventory
Our 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 our inventory systems and are subject to periodic physical verification using estimation techniques including observation, weighing and other industry methods. We recognize inventory impairment and related adjustments when the NRV, based upon current market pricing, falls below recorded value or when the estimated volume is less than the recorded volume of the inventory. We record the loss in cost of sales in the period during which we identified the loss.
Prices of commodities we own may be volatile. We are exposed to risks associated with fluctuations in the market price for both ferrous and non-ferrous metals, which are at times volatile. We attempt to mitigate this risk by seeking to rapidly turn our inventories.
We make certain assumptions regarding future demand and NRV in order to assess whether inventory is properly recorded at the lower of cost or NRV. We base our assumptions on historical experience, current market conditions and remaining costs of processing (if any) and disposal. If the anticipated future selling prices of scrap metal and finished steel products should decline, we would re-assess the recorded NRV of our inventory and make any adjustments we feel necessary in order to reduce the value of our inventory (and increase cost of sales) to the lower of cost or NRV.
Valuation of long-lived assets
We regularly review the carrying value of certain long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. If an evaluation is required, we compare the estimated future undiscounted cash flows associated with the asset to the asset’s carrying amount to determine if an impairment of such asset is necessary. The effect of any impairment would be to expense the difference between the fair value of such asset and its carrying value.
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. We recognize interest accrued related to unrecognized tax positions in interest expense and penalties in operating expenses, if appropriate. We use the deferral method of accounting for the available state tax credits relating to the purchase of the shredder equipment.
We
recognize uncertain income tax positions using the "more-likely-than-not" approach as defined in the ASC. The amount recognized is subject to estimate and management’s judgment with respect to the most likely outcome for each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. We have no liability for uncertain tax positions recognized as of December 31,
2018
and
2017
.
See also
Note 5 - Income Taxes
in the accompanying Notes to Consolidated Financial Statements for additional information regarding income taxes and related assets.
Stock Incentive Plan
We have a Long Term incentive Plan adopted in
2009
under which we may grant equity awards for up to
2.4
million shares of common stock, which are reserved by the board of directors for issuance of equity awards. We account for this plan based on FASB’s authoritative guidance titled "ASC Topic
718
- Compensation - Stock Compensation.
"
We recognize share-based compensation expense for the fair value of the awards, as estimated using the Modified Black-Scholes-Merton Model, on the date granted on a straight-line basis over their vesting term. Compensation expense is recognized only for share-based payments expected to vest. We estimate forfeitures at the date of grant based on our historical experience and future expectations. Under the plan, the maximum term of an option is
five
years.
Results of Operations
Year Ended
December 31, 2018
Compared to Year Ended
December 31, 2017
The following table presents, for the years indicated, the percentage relationship that certain captioned items in our Consolidated Statements of Operations bear to total revenue:
|
|
|
|
|
|
Year ended December 31,
|
2018
|
|
2017
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
Total revenue
|
100.0
|
%
|
|
100.0
|
%
|
Total cost of sales
|
93.3
|
%
|
|
94.2
|
%
|
Selling, general and administrative expenses
|
6.0
|
%
|
|
6.4
|
%
|
Income (loss) before other income (expense)
|
0.7
|
%
|
|
(
0.5
|
)%
|
We had an increase in revenue of $
6.1
million, an increase in gross profit of $
0.9
million, and an improvement in net loss of $
0.8
million for the year ended December 31, 2018 as compared to the same period of 2017.
This improvement in operating performance was due in part to the full year benefits in 2018 of the successful restart of the Company's shredder in May 2017 as well as improvements in the Company's ferrous volumes and margins from 2017 to 2018. The restart of the Company's shredder led to favorable sales mix and improved margins. Net loss was further strengthened by a non-recurring insurance settlement gain in the amount of $476.0 thousand during 2018.
However, our results were negatively impacted during the third and fourth quarter of 2018 by recent global political events, such as tariffs, trade wars and other global economic events. Ferrous market prices and volumes were negatively impacted by economic stress in Turkey, one of the largest importers of United States ferrous scrap metal. Pricing and volumes were further challenged by uncertainty created by tariffs and threatened trade wars. Non-ferrous market prices and volumes were similarly impacted by tariffs and threatened trade wars, as well as certain restrictions placed by China on imported metals. Although results for the year ended
December 31, 2018
were favorable compared to the year ended
December 31, 2017
, the previously discussed events that occurred during the second half of 2018 had a negative impact on reported results for the year ended
December 31, 2018
.
Total revenue
increased
$
6.1
million or
11.1%
to $
61.0
million for the year ended
December 31, 2018
compared to $
54.9
million for the year ended
December 31, 2017
.
Ferrous revenue
increased
$
6.9
million or
31.3%
to $
28.7
million for the year ended
December 31, 2018
compared to $
21.9
million for the year ended
December 31, 2017
. For the year ended
December 31, 2018
compared to the year ended
December 31, 2017
, the average selling price ("ASP") of ferrous material
increased
$
69
per gross ton, or
22.6%
, partially as a result of the shredder restart that led to a favorable shift in the ferrous sales mix and partially due to market improvements during the first six months of 2018. For the year ended
December 31, 2018
compared to the year ended
December 31, 2017
, ferrous material shipments
increased
3.7
thousand tons, or
5.0%
, despite the negative impact on volumes from the shredder process.
The inherent nature of the shredding process
produces less saleable product volume, but at a higher quality level, thereby increasing the ASP and decreasing the tons of material available to ship. Ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Non-ferrous revenue
decreased
$
0.4
million or
1.2%
to $
31.2
million for the year ended
December 31, 2018
compared to $
31.6
million for the year ended
December 31, 2017
. For the year ended
December 31, 2018
compared to the year ended
December 31, 2017
, the ASP
of non-ferrous material
increased
$
0.06
per pound or
5.9%
. For the year ended
December 31, 2018
compared to the year ended
December 31, 2017
, n
on-ferrous material shipments
decreased
by
1.8
million pounds, or
6.1%
. Non-f
errous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues
.
Total cost of sales
increased
$
5.2
million or
10.1%
to $
57.0
million for the year ended
December 31, 2018
compared to $
51.7
million for the year ended
December 31, 2017
. The increase was a result of an increase in ferrous material tons shipped and higher average prices on a per-unit basis in our ferrous and non-ferrous operations, offset slightly by a decrease in non-ferrous material shipments.
Total cost of sales as a percentage of revenue
decreased
0.8%
for the year ended
December 31, 2018
as compared the year ended
December 31, 2017
. This improvement was largely a result of a market-related increase in ASP during 2018 as well as favorable sales mix that resulted from the startup of the shredder in May 2017, as well as a decrease in startup expenses the Company incurred in 2017 due to the restart of the shredder operations. These startup expenses consisted primarily of repairs and maintenance expenses, utilities expenses and personnel expenses.
Selling, general and administrative ("SG&A") expenses
increased
$
145.0
thousand to $
3.6
million for the year ended
December 31, 2018
as compared to $
3.5
million for the year ended
December 31, 2017
. SG&A as a percentage of revenue decreased to
6.0
% for the year ended December 31, 2018 compared to
6.4
% for the year ended December 31, 2017. This change in SG&A expenses is made up of numerous individually insignificant items. T
he Company is currently under a property tax audit and accrued $100.0 thousand as an estimate of potential assessments during the year ended December 31, 2017.
Other expense, net was $
762.0
thousand for the year ended
December 31, 2018
compared to $
837.0
thousand for the year ended
December 31, 2017
. The $
75.0
thousand change is primarily a result of a $
406.0
thousand
increase
in interest expense, which is a result of the increased outstanding balance on the line of credit and an increase in loan fees amortization, and
an increase
of $
476.0
thousand in the gain on insurance proceeds in 2018 compared to 2017
.
Significant components of other income (expense), in thousands, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
(in thousands)
|
Description Other Income (Expense)
|
2018
|
|
2017
|
Interest expense, including loan fee amortization
|
$
|
(
1,254
|
)
|
|
|
$
|
(
848
|
)
|
|
Gain on the sale of assets
|
|
—
|
|
|
|
|
27
|
|
|
Gain on insurance proceeds
|
|
476
|
|
|
|
|
—
|
|
|
Other (expense) income, net
|
16
|
|
|
|
(
16
|
)
|
|
Total other expense, net
|
$
|
(
762
|
)
|
|
|
$
|
(
837
|
)
|
|
The income tax provision
increased
$
1.0
thousand to $
13.0
thousand in
2018
compared to $
12.0
thousand in
2017
. The effective tax rates in
2018
and
2017
were (
3.9
)% and (
1.1
)%, respectively, based on federal and state statutory rates. Due to recurring operating losses being incurred, we have historically recorded nearly a full valuation allowance, which is continuing through
December 31, 2018
. We also have state and franchise taxes payable based on gross receipts.
Net loss for the year ended
December 31, 2018
was $
0.3
million compared to $
1.1
million for the same period of
2017
,
an improvement
of $
0.8
million or
69.1%
as a result of the above-mentioned changes.
Financial Condition at
December 31, 2018
compared to
December 31, 2017
Cash and cash equivalents
increased
$
0.2
million to $
1.0
million as of
December 31, 2018
compared to $
0.8
million as of
December 31, 2017
.
Net cash
used in
operating activities was $
0.1
million for the year ended
December 31, 2018
. The net cash used in operating activities is primarily due to a net loss of $
0.3
million,
an increase
in inventories of $
1.8
million,
an increase
in receivables of $
0.1
million, and
a decrease
in payable and accrued expenses to related parties of $
171.0
thousand,
a decrease
in other current liabilities of $
199.0
thousand,
partially offset by
depreciation and amortization of $
2.1
million,
an increase
in accounts payables of $
0.6
million, and
share-based option expense of $
105.0
thousand
.
The Company had $
467.0
thousand of cash capital expenditures in
2018
.
Net cash
from
financing activities was $
0.3
million for the year ended
December 31, 2018
. For the year ended
December 31, 2018
, we received proceeds from a term note of $
2.5
million, we made net payments on the line of credit of $
1.4
million less capitalized loan fees in the amount of $
306.0
thousand, and we made payments on capital lease obligations and related party debt of $
312.0
thousand and $
64.0
thousand, respectively
.
Accounts receivable trade after allowances for doubtful accounts
increased
$
0.1
million or
3.5%
to $
4.4
million as of
December 31, 2018
compared to $
4.2
million as of
December 31, 2017
due to increased shipments and commodity price increases. In general, the accounts receivable balance fluctuates due to the quantity and timing of shipments, commodity prices and receipt of customer payments.
Inventories consist principally of ferrous and non-ferrous scrap materials
. We value inventory at the lower of cost or net realizable value. Inventory
increased
$
1.8
million or
35.8%
to $
6.9
million as of
December 31, 2018
compared to $
5.1
million as of
December 31, 2017
.
This increase is primarily driven by higher commodity prices and increased volumes during the fourth quarter of
2018
compared to the fourth quarter of
2017
.
Inventory aging for the period ended December 31, 2018 (Days Outstanding):
|
|
|
(in thousands)
|
Description
|
|
1
-
30
|
|
31
-
60
|
|
61
-
90
|
|
Over
90
|
|
Total
|
Ferrous and non-ferrous materials
|
|
$
|
4,471
|
|
|
$
|
810
|
|
|
$
|
890
|
|
|
$
|
763
|
|
|
$
|
6,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory aging for the period ended December 31, 2017 (Days Outstanding):
|
|
|
(in thousands)
|
Description
|
|
1
-
30
|
|
31
-
60
|
|
61
-
90
|
|
Over
90
|
|
Total
|
Ferrous and non-ferrous materials
|
|
$
|
4,069
|
|
|
$
|
693
|
|
|
$
|
119
|
|
|
$
|
225
|
|
|
$
|
5,106
|
|
Inventory in the 60 days or less categories compared to total inventory decreased to
76.2%
as of December 31, 2018 compared to
93.3%
as of December 31, 2017. Inventory greater than 60 days compared to total inventory increased to
23.8%
as of December 31, 2018 compared to
6.7%
as of December 31, 2017. The increase in inventory aging is primarily related to the increase in inventory of $1.8 million and an increase in ferrous inventory due to maintenance activity on our shredder and primary shear during the last quarter of 2018.
Accounts payable trade
increased
$
0.6
million or
33.8%
to $
2.4
million as of
December 31, 2018
compared to $
1.8
million as of
December 31, 2017
.
The accounts payable balance fluctuates due to quantity and timing of purchases from and payments made to our vendors.
Payable and accrued expenses to related parties
decreased
$
171.0
thousand to $
2.0
thousand of
December 31, 2018
compared to $
173.0
thousand as of
December 31, 2017
. This decrease is largely a result of a decrease in facility rent payable to related parties of $
123.0
thousand.
See
Note 8 - Related Party Transactions
in the Consolidated Financial Statements for additional information.
Working capital, defined as current assets less current liabilities,
increased
$
3.1
million to $
5.4
million as of
December 31, 2018
compared to $
2.3
million as of
December 31, 2017
as a result of the above noted items
.
Contractual Obligations
The following table provides information with respect to our known contractual obligations as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period (in thousands)
|
Obligation Description:
|
|
Total
|
|
Less than
1
year
|
|
1
-
2
years
|
|
3
-
4
years
|
|
More than 4 years
|
Long-term debt obligations
|
|
$
|
7,745
|
|
|
$
|
402
|
|
|
$
|
7,320
|
|
|
$
|
23
|
|
|
$
|
—
|
|
Operating lease obligations
|
|
2,820
|
|
|
564
|
|
|
1,010
|
|
|
908
|
|
|
338
|
|
Capital lease obligations
|
|
941
|
|
|
352
|
|
|
519
|
|
|
56
|
|
|
14
|
|
Total
|
|
$
|
11,506
|
|
|
$
|
1,318
|
|
|
$
|
8,849
|
|
|
$
|
987
|
|
|
$
|
352
|
|
On December 28, 2018, the Company signed a purchase contract for two cranes for a combined amount of $592.6 thousand with expected delivery dates of March 2019 and April 2019.
Inflation and Prevailing Economic Conditions
To date, inflation has not and is not expected to have a significant impact on our operation in the near term. We have no long-term fixed-price contracts and we believe we will be able to pass through most cost increases resulting from inflation to our customers. We are susceptible to the cyclical nature of the commodity business.
Fluctuating commodity prices affect market risk in our business. We mitigate the risk by selling our product on a monthly contract basis. Each month we negotiate selling prices for all commodities. Based on these monthly agreements, we determine purchase prices based on a margin needed to cover processing and administrative expenses.
We are exposed to commodity price risk, mainly associated with variations in the market price for stainless steel, ferrous and non-ferrous metal, and other commodities. The timing and magnitude of industry cycles are difficult to predict and general economic conditions impact the cycles. We respond to changes in recycled metal selling prices by adjusting purchase prices on a timely basis and by turning rather than holding inventory in expectation of higher prices. However, an adverse impact on our financial results may occur if selling prices fall more quickly than we can adjust purchase prices or if levels of inventory have an anticipated net realizable value that is below average cost.
Impact of Recently Issued Accounting Standards
In May 2014, the FASB issued ASU
2014
-
09
,
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 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 November 2015, the FASB issued ASU
2015
-
17
,
Balance Sheet Classification of Deferred Taxes
, which requires that deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. ASU
2015
-
17
was effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Upon adoption, ASU
2015
-17 may be applied either prospectively or retrospectively. The Company adopted the standard prospectively in the first quarter of
2017
and noted no material impact from the adoption on the Consolidated Financial Statements
.
I
n 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
.
T
he amendments in ASU
2016
-
02
are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU 2016-02 on its Consolidated Financial Statements. As of January 1, 2019, the Company expects to record a right-of-use asset and a lease liability of approximately $5.6 million on the Consolidated Balance Sheet. The Company does not expect the changes to have a material impact on the Consolidated Statement of Operations and the Consolidated Statement of Cash Flows. Upon adoption, the Company expects that its financial statement disclosures will be expanded to present additional details of its leasing arrangements
.
In June 2016, the FASB issued ASU
2016
-
13
,
Financial Instruments - Credit Losses
, which provides guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU
2016
-
13
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company is evaluating the potential impact of ASU
2016
-
13
on the Consolidated Financial Statements
.
I
n August 2016, the FASB issued ASU
2016
-
15
,
Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on
eight
specific cash flow issues. ASU
2016
-
15
is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Upon adoption, ASU
2016
-
15
should be applied retrospectively. The Company adopted the standard in the first quarter of 2018 and noted no material impact from the adoption of ASU
2016
-
15
on the Consolidated Financial Statements
.
No other new accounting pronouncements issued or effective during the reporting period had, or are expected to have, a material impact on our Consolidated Financial Statements.
Item
7
A.
Quantitative and Qualitative Disclosures About Market Risk
N/A - Not required for smaller reporting companies.
Item
8
.
Financial Statements and Supplementary Data
Our consolidated financial statements required to be included in this Item
8
. are set forth in Item
15
. of this report and incorporated herein by reference.
Item
9
.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
|
|
(a)
|
Disclosure controls and procedures.
|
ISA’s management, including ISA’s principal executive officer and principal financial officer, have evaluated the effectiveness of our “disclosure controls and procedures,” as such term is defined in Rule
13
a-
15
(e) promulgated under the Securities Exchange Act of
1934
. Based upon their evaluation, our principal executive officer and principal financial officer concluded that, as of
December 31, 2018
, ISA’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that ISA files under the Exchange Act with the Securities and Exchange Commission (
1
) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (
2
) is accumulated and communicated to ISA’s management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure.
|
|
(b)
|
Internal control over financial reporting.
|
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules
13
a-
15
(f) and
15
d-
15
(f) of the Exchange Act). Our internal control over financial reporting includes the process designed by, or under the supervision of, our CEO and CFO, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
▪
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
|
▪
|
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
▪
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
|
Because of its inherent limitations, internal control over financial reporting cannot prevent or detect every potential misstatement. Therefore, even those systems determined to be effective can provide only reasonable assurances with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may decline.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting, based on the framework and criteria established in the
2013
Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management assessed the effectiveness of our internal control over financial reporting for the year ended
December 31, 2018
, and concluded that such internal control over financial reporting was effective as of
December 31, 2018
.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that require only management’s report in this Annual Report on Form 10-K.
|
|
(c)
|
Changes to internal control over financial reporting.
|
On March 26, 2018, Orson Oliver resigned his position as Interim Chief Executive Officer and the Board appointed Todd L. Phillips as Chief Executive Officer. Mr. Phillips will serve as the Company's principal executive officer and principal financial and accounting officer. Other than the aforementioned, there were no changes in ISA’s internal control over financial reporting during the year ended
December 31, 2018
that have materially affected, or are reasonably likely to affect ISA’s internal control over financial reporting.
None.
NOTE 2 - LONG-TERM DEBT AND NOTES PAYABLE TO BANK
Summary:
On February 29, 2016, the Company entered into a Loan Agreement (the "2016 Loan") with MidCap and paid off all remaining amounts due to the Company's previous lender Wells Fargo. Additionally on February 29, 2016, the Company converted certain amounts payable to related parties into unsecured term notes payable to the same related parties as more fully described in
Note 8 - Related Party Transactions
. On March 31, 2017, the Company entered into an amendment to increase the line of credit, subject to the satisfaction of certain borrowing base restrictions (which have been 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 8 - 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.
See
Note 1 - Summary of Significant Accounting Policies and General
- Subsequent Events for discussion of the BofA First Amendment to the BofA Loan Agreement.
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 March 31, 2017.
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
1.0
x
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 remain with the Company; and (ii) no event of default exists 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
.
NOTE 2 - 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 2016 Loan.
This covenant was replaced by a Fixed Charge Coverage Ratio ("FCCR") covenant once the Company achieved an FCCR of
1.1
x 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.
As of 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. T
he 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.
The BofA Loan Agreement had
availability of
$
4.1
million as of
December 31, 2018
.
NOTE 2 - LONG-TERM DEBT AND NOTES PAYABLE TO BANK, Continued
Other Debt:
Amounts owed to K&R, LLC and 7100 Grade Lane LLC are more fully described in
Note 8 - Related Party Transactions
.
In 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.
Long term debt as of
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
Revolving
credit facility with Bank of America and MidCap, see above description for additional details
|
$
|
3,646
|
|
|
$
|
5,018
|
|
Bank of America term loan
|
2,500
|
|
|
—
|
|
7
100 Grade Lane, LLC related party note
(See Note 8 - Related Party
Transactions)
|
884
|
|
|
884
|
|
K&R, LLC related party notes
(See Note 8 - Related Party Transactions)
|
652
|
|
|
716
|
|
Equipment note, see above description for additional details
|
63
|
|
|
—
|
|
Total debt
|
7,745
|
|
|
6,618
|
|
Debt issuance costs
|
(
175
|
)
|
|
(
141
|
)
|
Total debt and debt issuance costs
|
7,570
|
|
|
6,477
|
|
Less current portion of long-term debt and debt issuance costs
|
3,941
|
|
|
4,941
|
|
Total long-term debt and debt issuance costs
|
$
|
3,629
|
|
|
$
|
1,536
|
|
The annual contractual maturities of long-term debt, in thousands, for the next
five
years and thereafter as of
December 31, 2018
are as follows:
|
|
|
|
2019
|
$
|
402
|
|
2020
|
7,306
|
|
2021
|
14
|
|
2022
|
15
|
|
2023
|
8
|
|
Total long-term debt
|
$
|
7,745
|
|
The Company paid and capitalized loan fees in the amount of $
305.8
thousand and $
124.9
thousand during the years ended
December 31, 2018
and
2017
, respectively.