IDSA Industrial Services of America Inc

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PART I – FINANCIAL INFORMATION

ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

	September 30, 2019				December 31, 2018
	(Unaudited)
	(in thousands)
Current assets
Cash and cash equivalents	$	1,112			$	1,044
Income tax receivable	19				16
Accounts receivable – trade after allowance for doubtful accounts of $60.0 thousand in 2019 and 2018	4,415				4,369
Receivables and other assets from related parties (Note 6)	83				91
Inventories (Note 2)	3,990				6,934
Prepaid expenses and other current assets	158				159
Total current assets	9,777				12,613
Net property and equipment	9,276				9,786
Operating lease right-of-use assets (Note 4)	580				—
Operating lease right-of-use assets, related parties (Notes 4 and 6)	4,842				—
Other assets
Deferred income taxes	27				27
Other non-current assets	45				54
Total other assets	72				81
Total assets	$	24,547			$	22,480

    

See accompanying notes to condensed consolidated financial statements.

3

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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

CONTINUED

LIABILITIES AND SHAREHOLDERS' EQUITY

 

	September 30, 2019				December 31, 2018
	(Unaudited)
	(in thousands, except par value and share information)
Current liabilities
Current maturities of long-term debt (Note 3)	$	4,547			$	3,909
Current maturities of long-term debt, related parties (Notes 3 and 6)		—				32
Current maturities of finance lease liabilities (Note 4)		422				352
Current maturities of operating lease liabilities (Note 4)		70				—
Current maturities of operating lease liabilities, related parties (Notes 4 and 6)		164				—
Accounts payable	2,061				2,387
Payables and accrued expenses to related parties (Note 6)	—				2
Other current liabilities	757				566
Total current liabilities	8,021				7,248
Long-term liabilities
Long-term debt, net of current maturities	1,874				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)	544				589
Operating lease liabilities, net of current maturities (Notes 4 and 6)	510				—
Operating lease liabilities, net of current maturities, related parties (Note 4)	4,678				—
Total long-term liabilities	8,610				4,218
Shareholders' equity
Common stock, $0.0033 par value: 20.0 million shares authorized in 2019 and 2018; 8,160,777 and 8,107,865 shares issued and outstanding in 2019 and 2018, respectively	27				27
Additional paid-in capital	25,288				24,133
Stock warrants outstanding	—				1,025
Retained losses	(17,355		)		(14,127		)
Treasury stock at cost, 30,690 shares in 2019 and 2018	(44		)		(44		)
Total shareholders' equity	7,916				11,014
Total liabilities and shareholders' equity	$	24,547			$	22,480

  

See accompanying notes to condensed consolidated financial statements.

4

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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

	For the three months ended								For the nine months ended
	September 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
Revenue from product sales
Revenue from ferrous operations	$	5,065			$	7,738			$	18,683			$	22,786
Revenue from non-ferrous operations		7,738				8,806				22,347				24,413
Revenue from auto parts operations and other revenue		163				254				528				857
Total revenue from product sales		12,966				16,798				41,558				48,056
Inventory write-down		113				—				288				—
Cost of sales for product sales		13,003				16,114				40,994				44,662
Gross (loss) profit		(150	)			684				276				3,394
Selling, general and administrative expenses		1,067				891				3,070				2,710
(Loss) income before other income (expense)		(1,217	)			(207	)			(2,794	)			684
Other income (expense)
Interest expense, including loan fee amortization		(147	)			(292	)			(470	)			(817	)
Gain on the sale of assets		3				—				3				—
Gain on insurance proceeds		—				—				38				487
Other income, net		1				15				1				15
Total other expense, net		(143	)			(277	)			(428	)			(315	)
(Loss) income before income taxes		(1,360	)			(484	)			(3,222	)			369
Income tax provision		—				(7	)			6				13
Net (loss) income	$	(1,360	)		$	(477	)		$	(3,228	)		$	356
Basic (loss) earnings per share	$	(0.17	)		$	(0.06	)		$	(0.40	)		$	0.04
Diluted (loss) earnings per share	$	(0.17	)		$	(0.06	)		$	(0.40	)		$	0.04
Weighted average shares outstanding:
Basic		8,156				8,108				8,124				8,100
Diluted		8,156				8,108				8,124				8,166

See accompanying notes to condensed consolidated financial statements.

5

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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(UNAUDITED)

 

THREE MONTHS ENDED SEPTEMBER 30, 2019 and 2018

	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 July 1, 2019	8,138,555			$	27			$	25,256			$	—			$	(15,995	)		(30,690	)		$	(44	)		$	9,244
Common stock	52,912			—				—				—				—				—			—				—
Share-based compensation	—			—				32				—				—				—			—				32
Net loss	—			—				—				—				(1,360		)		—			—				(1,360		)
Balance as of September 30, 2019	8,191,467			$	27			$	25,288			$	—			$	(17,355	)		(30,690	)		$	(44	)		$	7,916
Balance as of July 1, 2018	8,138,555			$	27			$	24,051			$	1,025			$	(12,945	)		(30,690	)		$	(44	)		$	12,114
Share-based compensation	—				—				41				—			—				—				—			41
Net loss	—				—				—				—			(477		)		—				—			(477		)
Balance as of September 30, 2018	8,138,555			$	27			$	24,092			$	1,025			$	(13,422	)		(30,690	)		$	(44	)		$	11,678

 

NINE MONTHS ENDED SEPTEMBER 30, 2019 and 2018

	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
Common stock	52,912			—				—				—				—				—			—				—
Stock warrants expired	—			—				1,025				(1,025		)		—				—			—				—
Share-based compensation	—			—				130				—				—				—			—				130
Net loss	—			—				—				—				(3,228		)		—			—				(3,228		)
Balance as of September 30, 2019	8,191,467			$	27			$	25,288			$	—			$	(17,355	)		(30,690	)		$	(44	)		$	7,916
Balance as of December 31, 2017	8,119,819			$	27			$	24,028			$	1,025			$	(13,778	)		(30,690	)		$	(44	)		$	11,258
Common stock	18,736				—				—				—			—				—				—			—
Share-based compensation	—				—				64				—			—				—				—			64
Net income	—				—				—				—			356				—				—			356
Balance as of September 30, 2018	8,138,555			$	27			$	24,092			$	1,025			$	(13,422	)		(30,690	)		$	(44	)		$	11,678

 

 

See accompanying notes to condensed consolidated financial statements.

6

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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(UNAUDITED)

	For the nine months ended
	September 30, 2019				September 30, 2018
	(in thousands)
Cash flows from operating activities
Net (loss) income	$	(3,228	)		$	356
Adjustments to reconcile net (loss) income to net cash from (used in) operating activities:
Inventory write-down	288				—
Depreciation and amortization	1,228				1,571
Share-based compensation expense	130				64
Gain on sale of assets	(3		)		—
Gain from insurance proceeds	(38		)		(487		)
Amortization of loan fees included in interest expense	50				113
Change in assets and liabilities
Receivables	(46		)		(2,282		)
Receivables from related parties	8				44
Inventories	2,656				(669		)
Income tax receivable/payable	(3		)		(15		)
Prepaid expenses and other assets	10				(82		)
Accounts payable	(326		)		622
Payables and accrued expenses to related parties	(2		)		(160		)
Other current liabilities	191				(145		)
Net cash from (used in) operating activities	915				(1,070		)
Cash flows from investing activities
Proceeds from insurance claim, net	38				487
Proceeds from sale of assets	3				—
Purchases of property and equipment	(331		)		(203		)
Net cash (used in) from investing activities	(290		)		284
Cash flows from financing activities
Loan fees capitalized	(33		)		(136		)
Change in checks in excess of bank	—				(7		)
Payments on related party debt	(532		)		(48		)
Payments on finance lease obligations	(274		)		(229		)
Payments on long-term debt	(285		)		—
Proceeds from revolving line of credit, net	567				1,101
Net cash (used in) from financing activities	(557		)		681
Net change in cash and cash equivalents	68				(105		)
Cash and cash equivalents at beginning of period	1,044				841
Cash and cash equivalents at end of period	$	1,112			$	736

7

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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

CONTINUED

Supplemental disclosure of cash flow information:
Cash paid for interest	$	418			$	690
Cash paid for taxes		9				29
Tax refunds received		—				1
Supplemental disclosure of noncash investing and financing activities:
Equipment additions financed by debt		88				69
Equipment additions financed by finance lease obligations		299				134

See accompanying notes to condensed consolidated financial statements.

8

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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.

In September 2018, the Company’s Board of Directors formed a special committee to evaluate growth and strategic options. On August 16, 2019, the special committee recommended and the board unanimously approved the Company entering into a definitive agreement (the “Purchase Agreement”) to sell substantially all of its assets (the “Transaction”) to River Metals Recycling LLC (“River Metals”), a subsidiary of The David J. Joseph Company ("DJJ"), for a purchase price of $23,300,000, less certain payoff amounts relating to taxes, encumbrances, and assumed capital leases, subject to an adjustment up or down based on the net working capital estimated at closing and finally determined following closing. The amount of $600,000 of the purchase price would be held in escrow to satisfy the potential net working capital purchase price adjustment, and the amount of $100,000 of the purchase price would be held in escrow to satisfy liabilities of the Company relating to the Chemetco Superfund site in Hartford, Illinois (see additional information below regarding the Chemetco Superfund in the Commitments and Contingencies section of this footnote). The Purchase Agreement contains negotiated representations, covenants and indemnification provisions by the parties, which are believed to be customary for transactions of this type and size. The indemnification obligations of the Company are subject to a specified deductible and indemnity cap. The Transaction is subject to satisfaction or waiver of closing conditions set forth in the Purchase Agreement, including approval by the Company’s shareholders. The closing of the Transaction is also conditioned on the receipt of the Kentucky Pollutant Discharge Elimination System permit and stormwater compliance agreed order issued by the Kentucky Energy and Environment Cabinet (the "Cabinet") on terms not materially different from those being discussed with the Cabinet as of the date of the Purchase Agreement in connection with the Company’s efforts to ensure future compliance with the stormwater permit at one of its facilities. The Company expects the Transaction to close in late fourth quarter 2019 or early first quarter 2020. The Company’s board of directors also unanimously adopted a Plan of Dissolution (the “Plan of Dissolution”), which contemplates the eventual sale of any remaining assets and a wind down of the Company’s business affairs. Following closing of the Transaction and payment of outstanding liabilities, along with other actions specified in the Plan of Dissolution, including reserving for contingent liabilities, the Company intends to distribute net proceeds from the Transaction and Plan of Dissolution to its shareholders in one or more distribution installments. The Plan of Dissolution is subject to completion of the Transaction and shareholder approval.

On August 6, 2019, the Company received a written notification from The Nasdaq Stock Market LLC ("Nasdaq"), indicating that the Company was not in compliance with the minimum closing bid price requirement set forth in Nasdaq Rules for continued listing on the Nasdaq Capital Market. On September 4, 2019, the Company received written confirmation from the Staff of Nasdaq notifying the Company that it has now met the minimum bid price requirement and has regained compliance under Nasdaq Listing Rule 5550(a)(2) following ten consecutive trading days where the Company’s common stock closed at prices above $1.00, and that Nasdaq considers the matter closed. The Company is now fully compliant with all Nasdaq listing rules.

Liquidity

 

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 borrowing facility with MidCap Business Credit LLC (“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 of certain related party notes to December 31, 2022. See Note 3 – Long-Term Debt and Notes Payable to Bank for discussion of loan arrangements with BofA and MidCap. See Note 6 – Related Party Transactions for discussion of loan arrangements with a related party.

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

During the second quarter of 2019, the Company was out of compliance with its financial covenant related to the Fixed Charge Coverage Ratio (“FCCR”) set forth in the BofA Loan Agreement. On August 14, 2019, the Company entered into a second amendment to the BofA Loan Agreement, through which BofA waived the Company’s breach of the aforementioned covenant through July 31, 2019 and amended the financial covenants for future periods beginning August 1, 2019. During the third quarter of 2019, the Company was projected to be out of compliance with its financial covenant related to Minimum EBITDA for the two months ended September 30, 2019 as set forth in the BofA Loan Agreement, as amended. Effective September 30, 2019, the Company entered into a third amendment to the BofA Loan Agreement through which BofA reset the Minimum EBITDA covenant. The Company was thereby in compliance with its financial covenants as of September 30, 2019. The Company must maintain compliance with its financial covenants in order to continue to borrow under the BofA revolving facility. However, the Company does not expect to be able to deliver the compliance certificate due November 30, 2019 to BofA due to failure to meet the Minimum EBITDA covenant for the three months ended October 31, 2019. See Note 3 – Long-Term Debt and Notes Payable to Bank for discussion of loan arrangement with BofA. Although the Company expects operating cash flow and borrowings under our working capital line of credit to be sufficient to meet our ongoing obligations, we cannot provide assurance that sufficient liquidity can be raised from one or both of these sources, nor can we provide assurance that BofA will continue to reset or waive financial covenant compliance. 

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 September 30, 2019, and the results of operations and changes in cash flows for the quarters ended September 30, 2019 and 2018. Results of operations for the period ended September 30, 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 environmental liabilities including remediation costs, 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.

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 short-term 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 and nine month periods ended September 30, 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.

 

10

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

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 the 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 September 30, 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 September 30, 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, long-term debt 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.

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 the Company's cash is defined as Level 1 and all our debt is defined as Level 2.

 

11

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

 

In accordance with this guidance, the following table represents our fair value hierarchy for Level 1 and Level 2 financial instruments at September 30, 2019 and December 31, 2018, in thousands: 

		Fair Value at Reporting Date Using
September 30, 2019: unaudited		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs
Assets:		Level 1				Level 2				Total
Cash and cash equivalents		$	1,112			$	—			$	1,112
Liabilities:
Long-term debt		$	—			$	(6,547	)		$	(6,547	)
Long-term debt, related parties			—				(951	)			(951	)

		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 nine month periods ended September 30, 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 could grant equity awards for up to 2.4 million shares of common stock. In accordance with the terms of the LTIP, the last date upon which the Committee could grant new awards was July 1, 2019, the ten-year anniversary of the effective date of the LTIP. The Company has compensated employees and directors by granting stock options and other share-based awards to them. 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.

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.

12

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

The LTIP is administered by a committee selected by the Board consisting of two or more outside members of the Board.  

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.

Commitments and Contingencies 

The Company is currently subject to a claim by the Environmental Protection Agency (EPA) that the Company has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) in the Chemetco superfund matter. Chemetco was a defunct reclamation services supplier that operated in Illinois at what now is a superfund site. The Company previously shipped recycled, non-hazardous metals to Chemetco. The EPA is pursuing Chemetco customers and suppliers for contribution to the site cleanup activities. After paying $10.0 thousand as its portion of preliminary investigation and remediation costs at the site, the Company accrued $50.0 thousand in the quarter ended June 30, 2019, as a reserve against potential environmental liabilities at the site. Due to the limited nature of the Company's involvement in these environmental proceedings and the involvement of many other parties with substantial financial resources in the proceedings, the Company does not anticipate, based on currently available information, that potential environmental liabilities arising from these proceedings are likely to exceed the amount of the Company's reserve by an amount that would have a material effect on the Company's financial condition, results of operations or cash flows. Also, in the quarter ended June 30, 2019, the Company accrued an additional $130.0 thousand with respect to expenditures and other remediation measures anticipated with respect to stormwater permit compliance with Kentucky state environmental regulations. The Company paid related expenses of $38.7 thousand in the quarter ended September 30, 2019. No additional reserves were recorded in the quarter ended September 30, 2019.

Subsequent Events

The Company has evaluated the period from September 30, 2019 through the date the financial statements herein were issued for subsequent events requiring recognition or disclosure in the financial statements and identified the following:

On October 31, 2019, the Company entered into the One Time Waiver of Right of First Refusal (the "Waiver") with 7100 Grade Lane, LLC ("7100 LLC") whereby the Company waives its right of first refusal under the All Net Lease dated October 1, 2017 to purchase the leased premises at 7100 and 7020 Grade Lane if 7100 LLC enters into a bona fide real estate sale contract with River Metals, provided that such sale occurs only in connection with the closing of the Transaction. See Note 6 – Related Party Transactions.

13

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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. 

14

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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. 

During the nine month period ended September 30, 2019, the Company evaluated the NRV of the inventory due to decreases in ferrous market prices. The Company recorded NRV inventory write-downs of $175.0 thousand and $113.0 thousand in the second quarter and third quarter of 2019, respectively. The Company did not have an NRV write-down in the nine month period ended 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 September 30, 2019 and December 31, 2018 consist of the following: 

	September 30, 2019
	(unaudited)				December 31, 2018
	(in thousands)
Raw materials	$	2,366			$	4,485
Finished goods	895				1,284
Processing costs	729				1,165
Total inventories for sale	$	3,990			$	6,934

 

15

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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 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 of certain related party notes to December 31, 2022. See Note 6 – Related Party Transactions for discussion of loan arrangements with a related party.

During the second quarter of 2019, the Company was out of compliance with its financial covenant related to the FCCR set forth in the BofA Loan Agreement.  On August 14, 2019, the Company entered into a second amendment to the BofA Loan Agreement, through which BofA waived the Company’s breach of the aforementioned covenant through July 31, 2019 and amended the financial covenants as more fully described below for future periods beginning August 1, 2019.

Effective September 30, 2019, the Company entered into a third amendment to the BofA Loan Agreement through which BofA reset the Minimum EBITDA covenant. The Company was thereby in compliance with its financial covenants as of September 30, 2019. However, the Company does not expect to be able to deliver the compliance certificate due November 30, 2019 to BofA due to failure to meet the Minimum EBITDA covenant for the three months ended October 31, 2019.

 

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 FCCR covenant as set forth in the 2016 Loan Agreement 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.

 

16

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

 

On March 31, 2017, the Company and each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan with MidCap ("First Amendment"). The First Amendment increased the line of credit from $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.

 

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 and certain of its wholly-owned subsidiaries (collectively, the "Borrowers") 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%. There was no interest expense impact from the pending discontinuation of the LIBOR index that is utilized in our borrowing facility with BofA. Although we do not expect any future material impacts from the LIBOR discontinuation, there can be no assurances that there will not be a material impact to the Company

 

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 Borrowers 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 Borrowers 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 the FCCR set forth in the BofA Loan Agreement, calculated as of the last day of each month for the trailing twelve month period then ended.  

 

17

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

 

The BofA Loan Agreement stated that it 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 (as amended, 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.

On March 1, 2019, the Company entered into Amendment No. 1 to the Loan and Security Agreement and Consent (the “BofA First Amendment”) 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 $2.5 million as of September 30, 2019.

 

During the second quarter of 2019, the Borrowers were out of compliance with their financial covenant related to the FCCR in the BofA Loan Agreement. On August 14, 2019 (the “Amendment No. 2 Effective Date”), the Borrowers, the Guarantors (as defined in the BofA Loan Agreement) signatory thereto and BofA entered into the Waiver and Amendment No. 2 to Loan and Security Agreement (the “BofA Second Amendment”) which waived the Borrower’s breach of the FCCR covenant through July 31, 2019 and amended certain provisions of the Loan Agreement. During the third quarter of 2019, the Company was projected to be out of compliance with its financial covenant related to Minimum EBITDA for the two months ended September 30, 2019 as set forth in the BofA Loan Agreement, as amended. Effective September 30, 2019, the Company entered into a third amendment to the BofA Loan Agreement (the "BofA Third Amendment") through which BofA reset the aforementioned covenant.

The BofA Second Amendment, as modified by the BofA Third Amendment, added the following financial covenants of the Borrowers which apply during the period of time beginning on the Amendment No. 2 Effective Date and ending on the date that is the five months from the Amendment No. 2 Effective Date provided that no Event of Default, as defined in the BofA Loan Agreement, has occurred, and if an Event of Default has occurred, then ending on the date on which the Event of Default is waived by BofA (the "FCCR Conversion Date"): 

Minimum EBITDA. The Borrowers shall maintain a consolidated EBITDA of not less than the following amounts opposite the respective periods set forth below:

Period	Minimum EBITDA
One month ending August 31, 2019	$(100,000)
Two months ending September 30, 2019	$(680,000)
Three months ending October 31, 2019	$377,000
Four months ending November 30, 2019	$617,000
Five months ending December 31, 2019 and, if the FCCR Conversion Date has not occurred, the five months ending on the last day of each month thereafter	$782,000

Capital Expenditures.  At any time before the FCCR Conversion Date, the Borrowers shall not make Capital Expenditures (as defined in the BofA Loan Agreement) in excess of $200.0 thousand in the aggregate.

 

The BofA Second Amendment also amended the FCCR covenant of the Borrowers to apply only after the FCCR Conversion Date as follows:

Fixed Charge Coverage Ratio. At all times after the FCCR Conversion Date, the Borrowers must maintain a FCCR of at least 1.0:1.0, determined as of the last day of each month, commencing  on the last day of the first month after the FCCR Conversion Date, initially for the six month period then ending and thereafter building, by month, to a trailing twelve month basis.

  

18

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NOTE 3 – 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 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 September 30, 2019 and December 31, 2018 consisted of the following:

	September 30,				December 31,
	2019				2018
	(unaudited)
	(in thousands)
Revolving credit facility with Bank of America, see above description for additional details	$	4,213			$	3,646
Bank of America term loan	2,232				2,500
K&R, LLC related party notes (See Note 6 - Related Party Transactions)	120				652
7100 Grade Lane LLC related party note (See Note 6 - Related Party Transactions)	884				884
Equipment notes, see above description for additional details	133				63
Total debt	7,582				7,745
Debt issuance costs	(157		)		(175		)
Total debt and debt issuance costs	7,425				7,570
Less current portion of long-term debt and debt issuance costs	4,547				3,941
Total long-term debt and debt issuance costs	$	2,878			$	3,629

 

The annual contractual maturities of long-term debt for the next five twelve-month periods and thereafter ending September 30 are as follows:

		(in thousands)
2020		$	387
2021		388
2022		5,764
2023		1,034
2024		9
Total		$	7,582

 

The annual contractual maturities of long-term debt table has not been adjusted due to the Company not expecting to be able to deliver the compliance certificate due November 30, 2019 to BofA due to failure to meet the Minimum EBITDA covenant for the three months ended October 31, 2019.

The Company paid and capitalized loan fees in the amount of $32.8 thousand during the nine month period ended September 30, 2019. 

 

19

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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 Company was required to reimburse the lessor for 40% of the property taxes on the parcel during the term. The lease terminated on April 14, 2019. The Company entered into a four month extension that terminated August 15, 2019. The monthly expense during the extension was $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 was 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 $3.0 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 September 30 of each year and thereafter, in thousands, as of September 30, 2019, are as follows:

 

	Related Party			Other			Total
2020	$	450		$	103		$	553
2021		450			103		553
2022		450			103		553
2023		459			99		558
2024		468			96		564
Thereafter		5,229			208		5,437
Total future operating lease payments		7,506			712			8,218
Less: imputed interest		2,664			132			2,796
Present value of lease liabilities		4,842			580			5,422
Less: current portion of operating lease liabilities		164			70			234
Long-term operating lease liabilities	$	4,678		$	510		$	5,188

20

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NOTE 4 – LEASE COMMITMENTS, Continued

Other information related to operating leases is as follows: 

 

		September 30,
		2019
Weighted average remaining lease term (years) *			14.1
Weighted average discount rate			6.0	%

*The Company has included lease renewal options that are reasonably certain of exercise in the calculation of the weighted average remaining lease term.

Total lease expense for the three months ended September 30, 2019 and September 30, 2018 was $198.4 thousand and $161.9 thousand, respectively. Total lease expense for the nine months ended September 30, 2019 and September 30, 2018 was $592.8 thousand and $472.9 thousand, respectively.

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.

The Company entered into a finance lease, effective May 2019, to lease a piece of equipment for use in the Company's operations. The lease is for a period of six years and the payments are $4.8 thousand per month with an interest rate of 5.0% per year. 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 $299.2 thousand.

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

 

		For the three months ended September 30,						For the nine months ended September 30,
		2019			2018			2019			2018
Depreciation expense		$	86		$	74		$	238		$	210
Interest expense			21			26			62			76

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

		September 30,
		2019			2018
Accumulated depreciation		$	957		$	645
Net book value			835			848

21

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NOTE 4 – LEASE COMMITMENTS, Continued

Future minimum lease payments for finance leases for the next five twelve-month periods ending September 30 of each year, in thousands, as of September 30, 2019 are as follows:

	Total			Principal			Interest
2020	$	482		$	422		$	60
2021		294			269			25
2022		102			87			15
2023		86			77			9
2024	75			71			4
2025	41			40			1
	$	1,080		$	966		$	114

NOTE 5 – PER SHARE DATA

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

 

Nine months ended September 30, 2019 compared to nine months ended September 30, 2018:    

	2019				2018
	(in thousands, except per share information)
Basic income (loss) per share
Net income (loss)	$	(3,228	)		$	356
Weighted average shares outstanding	8,124				8,100
Basic income (loss) per share	$	(0.40	)		$	0.04
Diluted income (loss) per share
Net (loss) income	$	(3,228	)		$	356
Weighted average shares outstanding	8,124				8,100
Add dilutive effect of assumed exercising of stock options, RSUs and warrants	—				66
Diluted weighted average shares outstanding	8,124				8,166
Diluted (loss) income per share	$	(0.40	)		$	0.04

 

Three months ended September 30, 2019 compared to three months ended September 30, 2018: 

	2019				2018
	(in thousands, except per share information)
Basic income (loss) per share
Net loss	$	(1,360	)		$	(477	)
Weighted average shares outstanding	8,156				8,108
Basic loss per share	$	(0.17	)		$	(0.06	)
Diluted income (loss) per share
Net loss	$	(1,360	)		$	(477	)
Weighted average shares outstanding	8,156				8,108
Add dilutive effect of assumed exercising of stock options, RSUs and warrants	—				—
Diluted weighted average shares outstanding	8,156				8,108
Diluted loss per share	$	(0.17	)		$	(0.06	)

 

22

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NOTE 6 – RELATED PARTY TRANSACTIONS

During the periods ended September 30, 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 September 30, 2019, the Kletter Family Trust, 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. On October 31, 2019, the Company entered into the One Time Waiver of Right of First Refusal (the "Waiver") with 7100 LLC whereby the Company waives its right of first refusal under the 7100 Lease to purchase the leased premises at 7100 and 7020 Grade Lane if 7100 LLC enters into a bona fide real estate sale contract with River Metals, provided that such sale occurs only in connection with the closing of the Transaction. 

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

As of September 30, 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, 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 was interest free and provided for payments in equal monthly installments of $3.4 thousand. Under the Handler Note, payments commenced on July 1, 2017.  

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 was interest free and provided for payments in equal monthly installments of $2.0 thousand. Under the Crane Note, payments commenced on July 1, 2017.  

The Crane Note and the Handler Note were each secured by a security interest in the subject equipment and any sale proceeds the Company derives from the equipment. As of September 30, 2019, all amounts related to the Crane Note and the Handler Note were paid in full.

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.

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NOTE 6 – RELATED PARTY TRANSACTIONS, Continued

 

LK Property Investments LLC ("LK Property"):

 

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"). 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 Company was required to reimburse the lessor for 40% of the property taxes on the parcel during the term. The lease terminated on April 14, 2019. The Company entered into a four month extension that terminated August 15, 2019. The monthly expense during the extension was $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 was required to reimburse the lessor for 40% of the property taxes on the parcel during the term.

 

MetalX:

 

During 2019, the Company received revenue 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)		38				43
Operating lease right-of-use asset	(4)		4,842				—
Notes payable to related parties	(3)		1,004				1,536
Operating lease liability	(5)		4,842				—
Facility rent expense to related parties	(6)		338				338
Interest expense to related parties	(6)		54				56
LK Property:
Lease deposit to LK Property	(1)	$	3			$	3
Prepaid expenses to related parties	(1)		—				3
Accounts payable to LK Property	(2)		—				2
Rent expense to LK Property*	(6)		41				27
MetalX:
Revenue from product sales to MetalX	(6)		49				—

*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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2019 and December 31, 2018.

(6) Included in the Condensed Consolidated Statements of Operations; amounts are for the nine months ended September 30, 2019 and September 30, 2018.

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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			4.46 years				0.80
Expired		(322	)			4.57			— years				2.51
Outstanding at September 30, 2019		153			$	3.13			2.53 years			$	1.77
Exercisable at September 30, 2019		70			$	4.97			0.55 years			$	2.66

 

In accordance with the terms of the LTIP, the last date upon which the Committee could grant new awards was July 1, 2019, the ten-year anniversary of the effective date of the LTIP.

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 in connection with the executive's employment agreement. 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 in connection with the executive's employment agreement. 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. 

On January 15, 2019, 30.0 thousand options awarded to a former Director with an exercise price of $3.47 and a grant date fair value of $1.98 expired. On May 15, 2019, 292.0 thousand options awarded to former and current Directors with an exercise price of $4.68 and a grant date fair value of $2.57 expired.

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 ("RSUs"):

 

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.

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

 

On June 15, 2016, at the Company's annual meeting, the Company's shareholders approved a one-time stock option exchange for the CFO as an alternative to a direct repricing of options previously granted to the CFO. The stock option exchange allowed the Company to cancel 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. 

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 in connection with the executive's employment 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 an 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 vested on July 9, 2019 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 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 in connection with the executive's employment 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 units (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			2.46 years				1.27
Vested		(53	)		—				1.89
Outstanding at September 30, 2019		168			2.12 years			$	1.69

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

 

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.

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. As of the date of this filing, neither party has provided written notice 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 September 30, 2019 and December 31, 2018, the Company had unrecognized share-based compensation cost related to non-vested stock options in the amount of $66.7 thousand and $37.5 thousand, respectively. As of September 30, 2019 and December 31, 2018, the Company had unrecognized share-based compensation cost related to non-vested RSU awards in the amount of $187.2 thousand and $158.2 thousand, respectively.

Share-based compensation charged to operations relating to stock options and RSU awards was $31.9 thousand and $41.2 thousand for the three months ended September 30, 2019 and September 30, 2018, respectively. Share-based compensation charged to operations relating to stock options and RSU awards was $130.0 thousand and $64.0 thousand for the nine months ended September 30, 2019 and September 30, 2018, respectively.

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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.

 

The Company's operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials used in the processing of the Company's products. In addition, certain of the Company's operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for the Company's 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. See Note 1 – Summary of Significant Accounting Policies and General for additional discussion. 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.  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. The five year warrant expired on June 13, 2019. 

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.

 

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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 and Part II Item 1A "Risk Factors" of the current filing.

 

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.

 

In September 2018, our Board of Directors formed a special committee to evaluate growth and strategic options. On August 16, 2019, the special committee recommended, and the board unanimously approved, the Company entering into a definitive agreement (the “Purchase Agreement”) to sell substantially all of its assets (the “Transaction”) to River Metals Recycling LLC (“River Metals”), a subsidiary of The David J. Joseph Company, for a purchase price of $23,300,000, less certain payoff amounts relating to taxes, encumbrances, and assumed capital leases, subject to an adjustment up or down based on the net working capital estimated at closing and finally determined following closing. The amount of $600,000 of the purchase price would be held in escrow to satisfy the potential net working capital purchase price adjustment, and the amount of $100,000 of the purchase price would be held in escrow to satisfy liabilities of the Company relating to the Chemetco Superfund site in Hartford, Illinois. The Purchase Agreement contains negotiated representations, covenants and indemnification provisions by the parties, which are believed to be customary for transactions of this type and size. The indemnification obligations of the Company are subject to a specified deductible and indemnity cap. The Transaction is subject to satisfaction or waiver of closing conditions set forth in the Purchase Agreement, including approval by our shareholders. The closing of the Transaction is also conditioned on the receipt of the Kentucky Pollutant Discharge Elimination System permit and stormwater compliance agreed order issued by the Kentucky Energy and Environment Cabinet (the "Cabinet") on terms not materially different from those being discussed with the Cabinet as of the date of the Purchase Agreement in connection with the Company’s efforts to ensure future compliance with the stormwater permit at one of its facilities. We expect the Transaction to close in late fourth quarter 2019 or early first quarter 2020. Our board of directors also unanimously adopted a Plan of Dissolution (the “Plan of Dissolution”), which contemplates the eventual sale of any remaining assets and a wind down of the Company’s business affairs. Following closing of the Transaction and payment of outstanding liabilities, along with other actions specified in the Plan of Dissolution, including reserving for contingent liabilities, we intend to distribute net proceeds from the Transaction and Plan of Dissolution to our shareholders in one or more distribution installments. The Plan of Dissolution is subject to completion of the Transaction and shareholder approval.

 

On August 6, 2019, the Company received a written notification from The Nasdaq Stock Market LLC ("Nasdaq"), indicating that the Company was not in compliance with the minimum closing bid price requirement set forth in Nasdaq Rules for continued listing on the Nasdaq Capital Market. On September 4, 2019, the Company received written confirmation from the Staff of Nasdaq notifying the Company that it has now met the minimum bid price requirement and has regained compliance under Nasdaq Listing Rule 5550(a)(2) following ten consecutive trading days where the Company’s common stock closed at prices above $1.00, and that Nasdaq considers the matter closed. The Company is now fully compliant with all Nasdaq listing rules.

 

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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 September 30, 2019, we held cash and cash equivalents of $1.1 million. We drew a net $0.6 million on our revolving credit facility during the nine month period ended September 30, 2019. 

 

During the second quarter of 2019, the Company was out of compliance with its financial covenant related to the Fixed Charge Coverage Ratio (“FCCR”) set forth in the BofA Loan Agreement. On August 14, 2019, the Company entered into a second amendment to the BofA Loan Agreement, through which BofA waived the Company’s breach of the aforementioned covenant through July 31, 2019 and amended the financial covenants for future periods beginning August 1, 2019. During the third quarter of 2019, the Company was projected to be out of compliance with its financial covenant related to Minimum EBITDA for the two months ended September 30, 2019 as set forth in the BofA Loan Agreement, as amended. Effective September 30, 2019, the Company entered into a third amendment to the BofA Loan Agreement through which BofA reset the aforementioned covenant. The Company was thereby in compliance with its financial covenants as of September 30, 2019. The Company must maintain compliance with its financial covenants in order to continue to borrow under the BofA revolving facility. However, the Company does not expect to be able to deliver the compliance certificate due November 30, 2019 to BofA due to failure to meet the Minimum EBITDA covenant for the three months ended October 31, 2019. See  Note 3 – Long-Term Debt and Notes Payable to Bank in the accompanying Notes to Consolidated Financial Statements for discussion of loan arrangement with BofA. Although the Company expects operating cash flow and borrowings under our working capital line of credit to be sufficient to meet our ongoing obligations, we cannot provide assurance that sufficient liquidity can be raised from one or both of these sources, nor can we provide assurance that BofA will continue to reset or waive financial covenant compliance. 

 

Credit facilities and notes payable

 

See Note 1 – Summary of Significant Accounting Policies and General, Note 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.

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Results of Operations

Nine months ended September 30, 2019 compared to nine months ended September 30, 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:

	Nine months ended
	September 30
	2019			2018
Statements of Operations Data:
Total revenue	100.0	%		100.0	%
Total cost of sales	99.3	%		92.9	%
Selling, general and administrative expenses	7.4	%		5.6	%
(Loss) income before other expenses	(6.7)	%		1.4	%

Total revenue decreased $6.5 million or 13.5% to $41.6 million in the nine month period ended September 30, 2019 compared to $48.1 million in the same period in 2018. As noted below, this revenue decrease was driven primarily by substantially lower selling prices of both ferrous and non-ferrous commodities.

Ferrous revenue decreased $4.1 million or 18.0% to $18.7 million in the nine month period ended September 30, 2019 compared to $22.8 million in the same period in 2018. For the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, the average selling price ("ASP") of ferrous material decreased $59 per gross ton, or 15.4% primarily due to steady and rapid market price decreases for the underlying commodities sold. These weak market conditions are primarily a result of lower overall finished steel demand and the effects of tariffs and other regulatory measures. For the nine months ended September 30, 2019 compared to nine months ended September 30, 2018, ferrous material shipments decreased 0.5 thousand tons, or 0.8%. This slight decrease in shipments was primarily due to a decrease in ferrous material purchased as market prices rapidly decreased, largely offset by shipments related to destocking activities by the Company. 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 $2.1 million or 8.5% to $22.3 million in the nine month period ended September 30, 2019 compared to $24.4 million in the same period in 2018. For the nine months ended September 30, 2019 compared to nine months ended September 30, 2018, the ASP of non-ferrous material decreased $0.19 per pound, or 16.3% due to a steady decline in market prices for the underlying commodities sold in addition to sales mix. Non-ferrous prices declined due to weak global demand, the impact of Chinese import restrictions and other regulatory measures. Non-ferrous material shipments increased by 2.0 million pounds, or 9.2%, which partially offset the ASP decrease due to shipments associated with destocking activities by the Company. 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 decreased $3.4 million or 7.6% to $41.3 million in the nine month period ended September 30, 2019 compared to $44.7 million for the same period in 2018. The decrease was primarily a result of decreases in material costs of $3.6 million partially offset by increases in labor costs of $146.3 thousand and inventory processing costs of $483.4 thousand, both of which resulted from increased shipment volumes and lower inventory levels, respectively. Further, the Company recorded environmental remediation expenses of $80.0 thousand in cost of sales during the second quarter of 2019.

Total cost of sales as a percent of revenue increased during the nine month period ended September 30, 2019 as compared to the same period in 2018. This increase was related to compressed margins due to a rapid decrease in ASPs for ferrous and non-ferrous material. This rapid decline was much faster than the decline in average buying prices for the same commodities. The decrease in ASP also resulted in an NRV inventory write-down of $288.0 thousand for the nine months ended September 30, 2019 in addition to compressed sales margins.

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SG&A expenses increased $360.0 thousand or 13.3% to $3.1 million in the nine month period ended September 30, 2019 compared to $2.7 million in the same period in 2018.  For the nine month period ended September 30, 2019 compared to the same period in 2018, labor costs decreased $97.1 thousand, which were more than offset by costs of $340.6 thousand associated with the negotiation and execution of the Purchase Agreement, an increase in non-cash shared-based compensation of $66.0 thousand and environmental remediation expenses of $100.0 thousand charged to SG&A during the period.

Other income (expense) was expense of $428.0 thousand for the nine month period ended September 30, 2019 compared to expense of $315.0 thousand for the nine month period ended September 30, 2018. This $113.0 thousand change is a result of (i) a $347.0 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, both of which were due to lower costs of our BofA borrowing facility, offset by an increased outstanding debt balance, and (ii) a $449.0 thousand decrease in insurance gain.  There was no interest expense impact from the pending discontinuation of the LIBOR index that is utilized in our borrowing facility with BofA. Although we do not expect any future material impacts from the LIBOR discontinuation, there can be no assurances that there will not be a material impact to the Company.

The income tax provision decreased $7.0 thousand in the nine month period ended September 30, 2019 to a provision of $6.0 thousand in the nine month period ended September 30, 2019 compared to a provision of $13.0 thousand in the same period in 2018. The effective tax rates in 2019 and 2018 were 0.2% and 3.5%, 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 September 30, 2019. We also have several state and franchise taxes payable based on gross receipts.

Net loss for the nine month period ended September 30, 2019 was $3.2 million compared to net income of $0.4 million for the same period of 2018. These weakened operating results were primarily driven by market conditions that were less favorable during the nine month period ended September 30, 2019 compared to the same period of 2018. Many of the commodities that we buy and sell experienced steady and rapid price weakening during the nine months of 2019, in particular during the second and third quarters of 2019. ASPs for both ferrous and non-ferrous were substantially lower during the nine month period ended September 30, 2019 compared to the same period of 2018. These unfavorable market conditions were primarily driven by substantially lower demand, including mill demand, during the second and third quarters of 2019. Mills were reacting to ongoing international trade disputes, as well as higher than required inventory levels; many mills substantially lowered their buy programs or temporarily idled mills for maintenance to lower inventory levels and de-risk their exposure to the trade disputes.

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Three months ended September 30, 2019 compared to three months ended September 30, 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
	September 30,
	2019			2018
Statements of Operations Data:
Total revenue	100.0	%		100.0	%
Total cost of sales	101.2	%		95.9	%
Selling, general and administrative expenses	8.2	%		5.3	%
(Loss) income before other expenses	(9.4)	%		(1.2)	%

Total revenue decreased $3.8 million or 22.8% to $13.0 million in the third quarter of 2019 compared to $16.8 million in the same period in 2018. As noted below, this revenue decrease was driven primarily by substantially lower selling prices of both ferrous and non-ferrous commodities.

Ferrous revenue decreased $2.7 million or 34.5% to $5.1 million in the third quarter of 2019 compared to $7.7 million in the same period in 2018. For the three months ended September 30, 2019 compared to three months ended September 30, 2018, the average selling price ("ASP") of ferrous material decreased $115 per gross ton, or 30.9% primarily due to steady and rapid market price decreases for the underlying commodities sold. These weak market conditions are primarily a result of overall lower finished steel demand and the effects of tariffs and other regulatory measures. For the three months ended September 30, 2019 compared to three months ended September 30, 2018, ferrous material shipments decreased 1.0 thousand tons, or 4.7% due to a decrease in ferrous material purchased as market prices rapidly decreased largely offset by shipments related to destocking activities by the Company. 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 $1.1 million or 12.1% to $7.7 million in the third quarter of 2019 compared to $8.8 million in the same period in 2018.  For the three months ended September 30, 2019 compared to three months ended September 30, 2018, the ASP of non-ferrous material decreased $0.12 per pound, or 11.0% due to a steady decline in market prices for the underlying commodities sold. Non-ferrous prices declined due to weak global demand, the impact of Chinese import restrictions and other regulatory measures. Non-ferrous material shipments decreased by 0.2 million pounds, or 1.8%, due to prevailing market prices for the underlying commodities sold. 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 decreased $3.0 million or 18.6% to $13.1 million in the three month period ended September 30, 2019 compared to $16.1 million for the same period in 2018. The decrease was primarily a result of decreases in material costs of $1.2 million related to the decrease in revenue, depreciation of $259.2 thousand and repairs and maintenance expense of $154.1 thousand. 

 

Total cost of sales as a percent of revenue increased during the three month period ended September 30, 2019 as compared to the same period in 2018. This increase was related to compressed margins due to decreased ASPs for ferrous and non-ferrous material as well as the results of an NRV inventory write-down of $113.0 thousand and increased non-ferrous volumes.  

SG&A expenses increased $176.0 thousand or 19.8% to $1.1 million in the three month period ended September 30, 2019 compared to $0.9 million in the same period in 2018. For the three month period ended September 30, 2019 compared to the same period in 2018. The increase was primarily related to costs of $195.0 thousand associated with the negotiation and execution of the Purchase Agreement.

 

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Other income (expense) was expense of $143.0 thousand for the three month period ended September 30, 2019 compared to expense of $277.0 thousand for the three month period ended September 30, 2018. This $134.0 thousand change is a result of a $145.0 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, both of which were due to lower costs of our BofA borrowing facility, offset by an increased outstanding debt balance. There was no interest expense impact from the pending discontinuation of the LIBOR index that is utilized in our borrowing facility with BofA. Although we do not expect any future material impacts from the LIBOR discontinuation, there can be no assurances that there will not be a material impact to the Company.

The income tax provision increased $7.0 thousand in the three month period ended September 30, 2018 to no provision for the three month period ended September 30, 2019 compared to a provision of $7.0 thousand in the same period in 2018. The effective tax rates in 2019 and 2018 were 0.0% and 1.4%, 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 September 30, 2019. We also have several state and franchise taxes payable based on gross receipts.  

 

Net loss for the third quarter of 2019 was $1.4 million compared to net loss of $0.5 million for the same period of 2018.  These weakened operating results were primarily driven by market conditions that were less favorable during the three month period ended September 30, 2019 compared to the same period of 2018. Many of the commodities that we buy and sell experienced steady and rapid price weakening during the first half of 2019, an continued to weaken into the third quarter of 2019. ASPs for both ferrous and non-ferrous were substantially lower during the three month period ended September 30, 2019 compared to the same period of 2018. These unfavorable market conditions were primarily driven by substantially lower demand, including mill demand, during the second quarter of 2019. Mills were reacting to ongoing international trade disputes, as well as higher than required inventory levels; many mills substantially lowered their buy programs or temporarily idled mills for maintenance to lower inventory levels and de-risk their exposure to the trade disputes.

 

Financial condition at September 30, 2019 compared to December 31, 2018

 

Cash and cash equivalents increased $68.0 thousand to $1.1 million as of September 30, 2019 from $1.0 million as of December 31, 2018.

 

Net cash from operating activities was $0.9 million for the nine month period ended September 30, 2019. The net cash from operating activities is primarily due to a decrease in inventories of $2.7 million, an increase in other current liabilities of $191.0 thousand, depreciation of $1.2 million, amortization of loan fees of $50.0 thousand, and share based compensation expense of $130.0 thousand. The net cash from operating activities was partially offset by a net loss of $3.2 million and a decrease in accounts payable of $326.0 thousand. 

 

Net cash used in investing activities was $290.0 thousand for the nine month period ended September 30, 2019. In the nine month period ended September 30, 2019, the Company had $331.0 thousand of unfinanced capital expenditures in 2019 offset partially by a gain from insurance proceeds of $38.0 thousand

 

Net cash used in financing activities was $0.6 million for the nine month period ended September 30, 2019. In the nine month period ended September 30, 2019, we received net proceeds from the line of credit of $0.6 million less capitalized loan fees in the amount of $33.0 thousand which was offset by principal payments on debt of $285.0 thousand, principal payments to a related party of $532.0 thousand, and payments on finance lease obligations of $274.0 thousand. 

 

Accounts receivable trade after allowances for doubtful accounts increased $46.0 thousand or 1.1% to $4.4 million as of September 30, 2019 compared to $4.4 million as of December 31, 2018. 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 decreased $2.9 million, or 42.5%, to $4.0 million as of September 30, 2019 compared to $6.9 million as of December 31, 2018. Due to decreases in the ferrous market prices during 2019, we recorded an NRV inventory write-down of $288.0 thousand in nine months ended September 30, 2019. The inventory decrease largely relates to lower volumes which are a result of lower market prices and lower per unit buy prices.

 

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Inventory aging for the period ended September 30, 2019 (Days Outstanding):

		(in thousands, except days information)
Description		1 - 30				31 - 60				61 - 90				Over 90				Total
Ferrous and non-ferrous materials and auto parts		$	2,940			$	453			$	63			$	534			$	3,990

 

Inventory aging for the year ended December 31, 2018 (Days Outstanding):

		(in thousands, except days information)
Description		1 - 30				31 - 60				61 - 90				Over 90				Total
Ferrous and non-ferrous materials and auto parts		$	4,471			$	810			$	890			$	763			$	6,934

 

Inventory in the 60 days or less categories compared to total inventory increased to 85.0% as of September 30, 2019 compared to 76.2% as of December 31, 2018. Inventory greater than 60 days compared to total inventory decreased to 15.0% as of September 30, 2019 compared to 23.8% as of December 31, 2018. The changes in inventory aging are primarily related to (i) a decrease in inventory as of September 30, 2019 compared to December 31, 2018 and (ii) maintenance activity on our shredder and primary shear during the last quarter of 2018. 

 

Accounts payable trade decreased $0.3 million or 13.7% to $2.1 million as of September 30, 2019 compared to $2.4 million as of December 31, 2018. The accounts payable balance fluctuates due to timing of purchases from and payments made to our vendors.

 

Working capital decreased $3.6 million to $1.8 million as of September 30, 2019 compared to $5.4 million as of December 31, 2018 as a result of the above noted items as well as operating losses incurred during the period.  

 

Contractual Obligations

 

The following table provides information with respect to our known contractual obligations for the quarter ended September 30, 2019.

	Payments due by period (in thousands)
	Total				Less than 1 year				1 - 2 years				3 - 4 years				More than 4 years
Obligation Description:
Long-term debt obligations	$	7,582			$	387			$	6,152			$	1,043			$	—
Operating lease obligations (1)	8,218				553				1,106				1,122				5,437
Finance lease obligations (1)	1,080				482				396				161				41
Total	$	16,880			$	1,422			$	7,654			$	2,326			$	5,478

(1)	See Note 4 – Lease Commitments and Note 6 – Related Party Transactions for detailed information related to the Company's operating and capital lease obligations.

 

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.

  

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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 in the accompanying Notes to Consolidated Financial Statements 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. 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. 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 in the accompanying Notes to Consolidated Financial Statements 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.  

 

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

N/A - Not required for smaller reporting companies.

 

ITEM 4: CONTROLS AND PROCEDURES

 

(a) Disclosure controls and procedures.

 

ISA’s management, including ISA’s principal executive officer and principal financial officer, have evaluated the effectiveness of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934. Based upon this evaluation, our principal executive officer and principal financial and accounting officer concluded that, as of September 30, 2019, ISA’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that ISA files under the Exchange Act with the Securities and Exchange Commission (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to ISA’s management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure.

 

(b) Changes to internal control over financial reporting.

 

There have been no changes in ISA's internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, ISA's internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

The Company is currently subject to a claim by the Environmental Protection Agency (“EPA”) that the Company has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) in the Chemetco superfund matter. Chemetco was a defunct reclamation services supplier that operated in Illinois at what now is a superfund site. The Company previously shipped recycled, non-hazardous metals to Chemetco. The EPA is pursuing Chemetco customers and suppliers for contribution to the site cleanup activities. After paying $10,000 as its portion of preliminary investigation and remediation costs at the site, the Company accrued $50,000 in the quarter ended June 30, 2019, as a reserve against potential environmental liabilities at the site. Due to the limited nature of the Company's involvement in these environmental proceedings and the involvement of many other parties with substantial financial resources in the proceedings, the Company does not anticipate, based on currently available information, that potential environmental liabilities arising from these proceedings are likely to exceed the amount of the Company's reserve by an amount that would have a material effect on the Company's financial condition, results of operations or cash flows. Also, in the quarter ended June 30, 2019, the Company accrued an additional $130,000 with respect to expenditures and other remediation measures anticipated with respect to stormwater permit compliance with Kentucky state environmental regulations. The Company paid related expenses of $38.7 thousand in the quarter ended September 30, 2019. No additional reserves were recorded in the quarter ended September 30, 2019.

Item 1A. Risk Factors.

There have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K, for the fiscal year ended December 31, 2018 other than as discussed below.

We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.

As of September 30, 2019, the Company's revolving facility is indexed to the London Interbank Offered Rate (“LIBOR”). Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021. The Federal Reserve Bank of New York and various other authorities have commenced the publication of reforms and actions relating to alternatives to U.S. dollar LIBOR. Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have a material adverse impact on the availability of financing, including LIBOR-based loans, and on our financing costs.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None. 

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

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Item 5. Other Information.

On November 9, 2018, the Company and certain of its wholly-owned subsidiaries (collectively, the "Borrowers") entered into the BofA Loan Agreement. On March 1, 2019, the Borrowers and BofA amended the BofA Loan Agreement (the "First Amendment"), 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.

During the second quarter of 2019, the Borrowers were out of compliance with their financial covenant related to the FCCR in the BofA Loan Agreement. On August 14, 2019 (the “Amendment No. 2 Effective Date”), the Borrowers, the Guarantors (as defined in the BofA Loan Agreement) signatory thereto and BofA entered into the Waiver and Amendment No. 2 to Loan and Security Agreement (the “BofA Second Amendment”) which waived the Borrower’s breach of the FCCR covenant through July 31, 2019 and amended certain provisions of the Loan Agreement.

During the third quarter of 2019, the Company was projected to be out of compliance with its financial covenant related to Minimum EBITDA for the two months ended September 30, 2019 as set forth in the BofA Loan Agreement, as amended. Effective September 30, 2019, the Borrowers and BofA entered into the Amendment No. 3 to Loan and Security Agreement and Consent (the “BofA Third Amendment”) on November 12, 2019 through which BofA reset the aforementioned covenant. 

The BofA Second Amendment, as modified by the BofA Third Amendment, added the following financial covenants of the Borrowers which apply during the period of time beginning on the Amendment No. 2 Effective Date and ending on the date that is the five months from the Amendment No. 2 Effective Date provided that no Event of Default, as defined in the BofA Loan Agreement, has occurred, and if an Event of Default has occurred, then ending on the date on which the Event of Default is waived by BofA (the "FCCR Conversion Date"): 

Minimum EBITDA. The Borrowers shall maintain a consolidated EBITDA of not less than the following amounts opposite the respective periods set forth below:

Period	Minimum EBITDA
One month ending August 31, 201	$(100,000)
Two months ending September 30, 2019	$(680,000)
Three months ending October 31, 2019	$377,000
Four months ending November 30, 2019	$617,000
Five months ending December 31, 2019 and, if the FCCR Conversion Date has not occurred, the five months ending on the last day of each month thereafter	$782,000

The foregoing description of the BofA Third Amendment does not purport to be complete and is qualified in its entirety by reference to the BofA Third Amendment, a copy of which is attached as Exhibit 10.1 to this Quarterly Report on Form 10-Q, and incorporated herein by reference.

Item 6. Exhibits.

See Index to Exhibits.

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