Company Quick10K Filing
Quick10K
Industrial Services of America
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.77 8 $6
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
10-Q 2013-09-30 Quarter: 2013-09-30
8-K 2019-10-07 Other Events
8-K 2019-09-04 Other Events
8-K 2019-08-16 Enter Agreement, Other Events, Exhibits
8-K 2019-08-06
8-K 2019-05-14 Earnings, Exhibits
8-K 2019-03-13 Earnings, Exhibits
8-K 2019-03-04 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-03-01 Enter Agreement, Exhibits
8-K 2018-11-09 Enter Agreement, Leave Agreement, Earnings, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-07-09 Sale of Shares, Officers, Exhibits
8-K 2018-06-04 Enter Agreement, Off-BS Arrangement, Exhibits
MSA MSA Safety 3,921
RUN Sunrun 1,748
BOOM Dynamic Materials 642
ESTA Establishment Labs Holdings 408
WLFC Willis Lease Finance 363
PKOH Park Ohio Holdings 343
SHLO Shiloh Industries 105
VIRC Virco Mfgoration 68
HDSN Hudson Technologies 22
MYO Myomo 13
IDSA 2019-09-30
Part I - Financial Information
Item 1: Condensed Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies and General
Note 2 - Inventories
Note 3 - Long-Term Debt and Notes Payable To Bank
Note 4 - Lease Commitments
Note 5 - per Share Data
Note 6 - Related Party Transactions
Note 7 - Share-Based Compensation and Other Compensation Agreements
Note 8 - Legal Proceedings
Note 9 - Financing and Related Matters
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-10.1 ex101_1.htm
EX-10.2 ex102_2.htm
EX-31.1 ex311_3.htm
EX-32.1 ex321_4.htm

Industrial Services of America Earnings 2019-09-30

IDSA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

idsa-20190930.htm
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FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019


OR


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

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From _________ to ________

 

Commission File Number 0-20979

 

INDUSTRIAL SERVICES OF AMERICA, INC.

 

_______________________________________________________________________________________________________

(Exact Name of Registrant as specified in its Charter)

 

 

 

Florida

 

59-0712746

(State or other jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

7100 Grade Lane

Louisville, Kentucky 40213

(Address of principal executive offices)


(502) 366-3452

(Registrant’s Telephone Number, Including Area Code)

 

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


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


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


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐


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

 

 

 

(Check one):

Large accelerated filer ☐

Accelerated filer ☐

 

Non-accelerated filer ☐

Smaller reporting company ☒

 


Emerging growth company ☐


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


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


Indicate the number of shares issued and outstanding of each of the issuer’s classes of common stock, as of November 12, 2019: 8,160,777.


1



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES 

​​

 

TABLE OF CONTENTS

Page No.

Part I
FINANCIAL INFORMATION 3
Item 1.
Condensed Consolidated Financial Statements 3
  Condensed Consolidated Balance Sheets - September 30, 2019 (Unaudited) and December 31, 2018 3
  Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited) 5
  Condensed Consolidated Statement of Shareholders’ Equity - Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited) 6
  Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2019 and 2018 (Unaudited) 7
  Notes to Condensed Consolidated Financial Statements (Unaudited) 9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 37
Item 4.
Controls and Procedures 37
Part II
OTHER INFORMATION 38
Item 1.
Legal Proceedings 38
Item 1A.
Risk Factors 38
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3.
Defaults upon Senior Securities 38
Item 4.
Mine Safety Disclosures 38
Item 5.
Other Information 39
Item 6.
Exhibits 39
  
2


 

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


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 20188,160,777 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


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


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 302019 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


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



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


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 2020The 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.

9


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


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


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, 2018in 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 LTIPThe 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


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




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



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


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


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


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 Amendmentwith 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


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


 

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 oSeptember 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


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