ITEM
2
: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and the accompanying notes thereto included elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis contains certain financial predictions, forecasts and projections which constitute
“forward-looking statements”
within the meaning of the federal securities laws. Actual results could differ materially from those financial predictions, forecasts and projections and there can be no assurance that we will achieve such financial predictions, forecasts and projections. Factors that could affect financial predictions, forecasts and projections include availability of liquidity, fluctuations in commodity prices and any conditions internal to our major customers, including loss of their accounts and other factors as listed in our Form 10-K for the year ended
December 31, 2018
, as filed with the Securities and Exchange Commission.
General
Industrial Services of America, Inc. (herein “ISA,” the “Company,” “we,” “us,” “our,” or other similar terms) is a Louisville, Kentucky-based company that buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used autos in order to sell used auto parts. We process and sell ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries, refineries and processors. We purchase ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, aluminum, copper, brass, stainless steel and other metals, as well as from scrap dealers and retail customers who deliver these materials directly to our facilities. We process scrap metal through our sorting, cutting, baling, and shredding operations. Our ferrous scrap recycling operations consist primarily of processing various grades of steel.
Our non-ferrous scrap recycling operations consist primarily of processing various grades of copper, aluminum, stainless steel and brass. Our used automobile operation primarily purchases automobiles so that retail customers can locate and remove used parts for purchase
.
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 any 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 issuance of a storm water permit and agreed order on terms not materially different from those currently being discussed with the state agency in connection with our 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.
The Company has been granted a 180-calendar-day compliance period, or until February 3, 2020, to regain compliance with the minimum bid price requirement. During the compliance period, the Company's shares of common stock will continue to be listed and traded on the
Nasdaq
Capital Market.
If the Company does not regain compliance within the allotted compliance period(s), including any extensions that may be granted by
Nasdaq,
Nasdaq
will provide not
ice that the Company's shares of common stock will be subject to delisting. Under such circumstances, the Company would have the right to appeal a determination to delist its common stock, and the common stock would remain listed on the
Nasdaq
Capital Market until the completion of the appeal process.
On March 26, 2018, the Board appointed Todd L. Phillips as Chief Executive Officer. See
Note 7 – Share-Based Compensation and Other Compensation Agreements
in the accompanying Notes to Consolidated Financial Statements for additional information. Mr. Phillips has been the Company's Chief Financial Officer since December 31, 2014 and President since September 30, 2016 and will continue to serve in these roles
.
Liquidity and Capital Resources
Cash flows generated from operations and our revolving credit facility are significant sources of ongoing liquidity.
We actively manage our working capital and associated cash requirements and continually seek more effective use of cash. As of
June 30, 2019
, we held cash and cash
equivalents
of $
0.8
million. We
drew a net $
1.6
million
on our revolving credit facility during the
six
month period ended
June 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 as more fully described in
Note 3 – Long-Term Debt and Notes Payable to Bank
in the accompanying Notes to Consolidated Financial Statements
for future periods beginning August 1, 2019. Although we expect 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. Additionally, we must maintain compliance with our financial covenants in order to continue to borrow under the BofA revolving facility.
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, s
ee also
Note 3 – Long-Term Debt and Notes Payable to Bank
in the accompanying Notes to Consolidated Financial Statements.
Results of Operations
Six
months ended
June 30, 2019
compared to
six
months ended
June 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:
|
|
|
|
|
|
|
Six
months ended
|
|
|
June 30
|
|
|
2019
|
|
|
2018
|
|
Statements of Operations Data:
|
|
|
|
|
|
Total revenue
|
100.0
|
%
|
|
100.0
|
%
|
Total cost of sales
|
98.5
|
%
|
|
91.3
|
%
|
Selling, general and administrative expenses
|
7.0
|
%
|
|
5.8
|
%
|
(Loss) income before other expenses
|
(
5.5
)
|
%
|
|
2.8
|
%
|
Total revenue
decreased
$
2.7
million or
8.5%
to $
28.6
million in the
six
month period ended
June 30, 2019
compared to $
31.3
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
$
1.4
million or
9.5%
to $
13.6
million in the
six
month period ended
June 30, 2019
compared to $
15.0
million in the same period in
2018
. For the
six
months ended
June 30, 2019
compared to
six
months ended
June 30, 2018
, the average selling price ("ASP") of ferrous material
decreased
$
38
per gross ton, or
9.8%
primarily due to prevailing market prices for the underlying commodities sold. For the
six
months ended
June 30, 2019
compared to
six
months ended
June 30, 2018
, ferrous material shipments
increased
0.5
thousand tons, or
1.2%
. This slight increase in shipments was primarily driven by a reduction of inventory levels from December 31, 2018 to June 30, 2019. 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
$
1.0
million or
6.4%
to $
14.6
million in the
six
month period ended
June 30, 2019
compared to $
15.6
million in the same period in
2018
. For the
six
months ended
June 30, 2019
compared to
six
months ended
June 30, 2018
, the ASP of non-ferrous material
decreased
$
0.23
per pound, or
19.2%
due to prevailing market prices for the underlying commodities sold in addition to sales mix. Non-ferrous material shipments
increased
by
2.2
million pounds, or
16.0%
, which partially offset the ASP decrease. 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
$
0.4
million or
1.3%
to $
28.2
million in the
six
month period ended
June 30, 2019
compared to $
28.5
million for the same period in
2018
. The decrease was primarily a result of decreases in material costs of $1.2 million partially offset by increases in labor costs of $
180.0
thousand and inventory processing costs of $
521.7
thousand, both
of which resulted from increased shipment volumes and lower inventory levels
. Further, the Company recorded environmental remediation expenses of $80.0 thousand that are directly related to operations during the second quarter of 2019.
Total cost of sales as a percent of revenue increased during the
six
month period ended
June 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 $
175.0
thousand.
SG&A expenses
increased
$
184.0
thousand or
10.1%
to $
2.0
million in the
six
month period ended
June 30, 2019
compared to $
1.8
million in the same period in
2018
. For the six month period ended
June 30, 2019
compared to the same period in 2018, labor costs decreased $96.2 thousand, which were more than offset by increases in legal expenses and special committee fees of $145.6 thousand primarily related to costs associated with the special committee's ongoing strategic review and an increase in non-cash shared-based compensation of $67.0 thousand. Further, the Company recorded
environmental remediation expenses of $100.0 thousand that are not directly related to operations during the second quarter of 2019.
Other income (expense) was expense of $
285.0
thousand for the
six
month period ended
June 30, 2019
compared to expense of $
37.0
thousand for the
six
month period ended
June 30, 2019
. This $
248.0
thousand change is a result of (i) a $
201.0
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
$
14.0
thousand in the
six
month period ended
June 30, 2019
to a provision of $
6.0
thousand in the
six
month period ended
June 30, 2019
compared to a provision of $
20.0
thousand in the same period in
2018
. The effective tax rates in
2019
and
2018
were
0.3
% and
2.3
%, 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
June 30, 2019
. We also have several state and franchise taxes payable based on gross receipts.
Net loss for the
six
month period ended
June 30, 2019
was $
1.9
million compared to net income of $
0.8
million for the same period of
2018
. These weakened operating results were primarily driven by market conditions that were less favorable during the
six
month period ended
June 30, 2019
compared to the same period of
2018
. Many of the commodities that we buy and sell experienced strong and rapid price weakening during the first half of 2019, in particular during the second quarter of 2019. ASPs for both ferrous and non-ferrous were substantially lower during the six month period ended June 30, 2019 compared to the same period of 2018. These unfavorable market conditions were primarily driven by substantially lower 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.
Three
months ended
June 30, 2019
compared to
three
months ended
June 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
|
|
June 30
,
|
|
2019
|
|
2018
|
Statements of Operations Data:
|
|
|
|
Total revenue
|
100.0
|
|
%
|
|
100.0
|
%
|
Total cost of sales
|
101.4
|
|
%
|
|
91.0
|
%
|
Selling, general and administrative expenses
|
7.5
|
|
%
|
|
5.4
|
%
|
(Loss) income before other expenses
|
(
8.8
)
|
|
%
|
|
3.6
|
%
|
Total revenue
decreased
$
2.4
million or
14.2%
to $
14.2
million in the
second
quarter of
2019
compared to $
16.6
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
$
1.3
million or
16.8%
to $
6.7
million in the
second
quarter of
2019
compared to $
8.0
million in the same period in
2018
.
For the
three
months ended
June 30, 2019
compared to
three
months ended
June 30, 2018
, the average selling price ("ASP") of ferrous material
decreased
$
63
per gross ton, or
16.0%
primarily
due to prevailing market prices for the underlying commodities sold
. For the
three
months ended
June 30, 2019
compared to
three
months ended
June 30, 2018
, ferrous material shipments remained consistent. Ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Non-f
errous revenue
decreased
$
0.9
million or
10.7%
to $
7.4
million in the
second
quarter of
2019
compared to $
8.3
million in the same period in
2018
. F
or the
three
months ended
June 30, 2019
compared to
three
months ended
June 30, 2018
, the ASP of non-ferrous material
decreased
$
0.25
per pound, or
21.5%
due to prevailing market prices for the underlying commodities sold in addition to sales mix. Non-ferrous
material shipments
increased
by
1.0
million pounds, or
13.3%
, which partially offset the ASP decrease
. 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
$
0.7
million or
4.4%
to $
14.4
million in the
three
month period ended
June 30, 2019
compared to $
15.1
million for the same period in
2018
.
The decrease was primarily a result of decreases in material costs of $1.2 million. The decreases in material costs were offset by increases in labor costs of $
66.1
thousand and inventory processing costs of $
443.0
thousand, both
of which resulted from increased non-ferrous shipment volumes and lower inventory levels
. Further, the Company recorded environmental remediation expenses of $80.0 thousand during the second quarter of 2019.
Total cost of sales as a percent of revenue increased during the
three
month period ended
June 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 $
175.0
thousand and increased non-ferrous volumes.
SG&A expenses
increased
$
171.0
thousand or
19.1%
to $
1.1
million in the
three
month period ended
June 30, 2019
compared to $
0.9
million in the same period in
2018
.
For the three month period ended
June 30, 2019
compared to the same period in 2018, labor costs decreased $70.2 thousand, which were more than offset by increases in legal expenses and special committee fees of $108.3 thousand primarily related to costs associated with the special committee's ongoing strategic review, and an increase in non-cash share-based compensation of $35.1 thousand.
Further, the Company recorded
environmental remediation expenses of $100.0 thousand during the second quarter of 2019.
Other income (expense) was expense of $
163.0
thousand for the
three
month period ended
June 30, 2019
compared to income of $
205.0
thousand for the
three
month period ended
June 30, 2018
. This $
368.0
thousand change is a result of
(i)
a $
119.0
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 $
487.0
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
$
8.0
thousand in the
three
month period ended
June 30, 2018
to a provision of $
4.0
thousand in the
three
month period ended
June 30, 2019
compared to a provision of $
12.0
thousand in the same period in
2018
. The effective tax rates in
2019
and
2018
were
0.3
% and
1.5
%
, 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
June 30, 2019
. We also have several state and franchise taxes payable based on gross receipts.
Net loss for the
second
quarter of
2019
was $
1.4
million compared to net income of $
0.8
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 June 30, 2019
compared to the same period of 2018. Many of the commodities that we buy and sell experienced strong and rapid price weakening during the first half of 2019, in particular during the second quarter of 2019. ASPs for both ferrous and non-ferrous were substantially lower during the three month period ended June 30, 2019 compared to the same period of 2018. These unfavorable market conditions were primarily driven by substantially lower 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 dispute
.
Financial condition at
June 30, 2019
compared to
December 31, 2018
Cash and cash equivalents
decreased
$
200.0
thousand to $
0.8
million as of
June 30, 2019
from $
1.0
million as of
December 31, 2018
.
Net cash used in operating activities was $
0.8
million for the
six
month period ended
June 30, 2019
.
The net cash used in operating activities is primarily
due
to net loss of $
1.9
million,
an increase
in receivables of $
1.0
million,
an increase
in other assets of $
134.0
thousand
,
a decrease
in accounts payable of $
676.0
thousand, and
an increase
in other current liabilities of $
129.0
thousand.
These cash uses in operating activities were
partially offset by
a decrease
in inventories of $
1.5
million and
depreciation of $
1.0
million,
amortization of loan fees of $
39.0
thousand
, and share based compensation expense of $
98.0
thousand.
Net cash used in investing activities was $
189.0
thousand for the
six
month period ended
June 30, 2019
. In the
six
month period ended
June 30, 2019
, we recorded a gain from insurance proceeds of $
38.0
thousand. The C
ompany
had
$
227.0
thousand
of unfinanced
capital
expenditures in
2019
.
Net cash from financing activities was $
0.8
million for the
six
month period ended
June 30, 2019
. In the
six
month period ended
June 30, 2019
, we received net proceeds from debt of $
1.6
million less capitalized loan fees in the amount of $
22.0
thousand, made principal payments on debt of $
189.0
thousand, made principal payments to a related party of $
532.0
thousand, and made payments on finance lease obligations of $
175.0
thousand. Additionally, we had checks outstanding in excess of our bank balances of $
155.0
thousand at
June 30, 2019
.
Accounts receivable trade after allowances for doubtful accounts
increased
$
1.0
million or
23.3%
to $
5.4
million as of
June 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
$
1.7
million, or
24.2%
, to $
5.3
million as of
June 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 $
175.0
thousand in the second quarter of 2019.
This decrease was additionally driven by increased volumes during the
second
quarter of
2019
compared to the fourth quarter of
2018
.
Inventory aging for the period ended
June 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
|
|
$
|
3,797
|
|
|
$
|
560
|
|
|
$
|
377
|
|
|
$
|
524
|
|
|
$
|
5,258
|
|
Inventory aging for the period 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
82.9%
as of
June 30, 2019
compared to
76.2%
as of December 31, 2018. Inventory greater than
60
days compared to total inventory
decreased
to
17.1%
as of
June 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
June 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
$
0.7
million or
28.3%
to $
1.7
million as of
June 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
$
2.3
million to $
3.1
million as of
June 30, 2019
compared to $
5.4
million as of
December 31, 2018
as a result of the above noted items. Working capital was negatively impacted by ongoing unfavorable market conditions.
Contractual Obligations
The following table
provides information with respect to our known contractual obligations for the quarter ended
June 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
|
$
|
8,702
|
|
|
$
|
386
|
|
|
$
|
777
|
|
|
$
|
7,539
|
|
|
$
|
—
|
|
Operating lease obligations (
1
)
|
8,355
|
|
|
553
|
|
|
1,106
|
|
|
1,119
|
|
|
5,577
|
|
Finance lease obligations (
1
)
|
1,198
|
|
|
482
|
|
|
493
|
|
|
164
|
|
|
59
|
|
Total
|
$
|
18,255
|
|
|
$
|
1,421
|
|
|
$
|
2,376
|
|
|
$
|
8,822
|
|
|
$
|
5,636
|
|
|
|
(
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.
Recently Adopted Accounting Standards
I
n 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.