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, 2017
, 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 purchase, process and sell ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries, refineries and processors. We purchase ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, aluminum, copper, brass, stainless steel and other metals as well as from scrap dealers and retail customers who deliver these materials directly to our facilities. We process scrap metal through our sorting, cutting, baling, and shredding operations. The shredding operations, which had previously been idled in May 2015, were restarted in May 2017. Our non-ferrous scrap recycling operations consist primarily of collecting, sorting and processing various grades of copper, aluminum, stainless steel and brass. Our used automobile yard primarily purchases automobiles so that retail customers can locate and remove used parts for purchase.
Our core business is now focused on the metal recycling industry. During
2016
, we announced that the Company formed a special committee of independent board members to evaluate various growth and strategic options. During the first quarter of
2017
, the special committee concluded its work and reported to the Board. The Board accepted the special committee's recommendation to focus on returning our core recycling business to profitability. We intend to do this by increasing efficiencies and productivity, which included the commercial restart of our auto shredder in the second quarter of
2017
. We operate the auto shredder in the normal course of business subject to market conditions and operating needs. We will also evaluate other various options and remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions.
Liquidity and Capital Resources
Cash flows generated from operations and our revolving credit facility are significant sources of ongoing liquidity. We have also been able to manage liquidity by deferring certain rent payments made to related parties through October 1, 2017, as well as deferring capital expenditures during
2017
. See
Note 6 – Related Party Transactions
in the accompanying Notes to Condensed Consolidated Financial Statements for additional information. We actively manage our working capital and associated cash requirements and continually seek more effective use of cash. As of
June 30, 2018
, we held cash and cash
equivalents
of $
0.7
million. We
drew $
1.9
million
on our revolving credit facility during the
six
month period ended
June 30, 2018
.
We expect operating cash flow and borrowings under our working capital line of credit to be sufficient to meet our ongoing obligations.
Credit facilities and notes payable
See
Note 1 – Summary of Significant Accounting Policies and 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, capital 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 February 28, 2020.
Results of Operations
Six
months ended
June 30, 2018
compared to
six
months ended
June 30, 2017
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
,
|
|
2018
|
|
2017
|
Statements of Operations Data:
|
|
|
|
Total revenue
|
100.0
|
%
|
|
100.0
|
%
|
Total cost of sales
|
91.3
|
%
|
|
93.9
|
%
|
Selling, general and administrative expenses
|
5.8
|
%
|
|
7.1
|
%
|
Income (loss) before other expenses
|
2.8
|
%
|
|
(
1.1
|
)%
|
Total revenue
increased
$
4.7
million or
17.6%
to $
31.3
million in the
six
month period ended
June 30, 2018
compared to $
26.6
million in the same period in
2017
.
Ferrous revenue
increased
$
5.2
million or
52.0%
to $
15.0
million in the
six
month period ended
June 30, 2018
compared to $
9.9
million in the same period in
2017
. For the
six
months ended
June 30, 2018
compared to
six
months ended
June 30, 2017
, the average selling price ("ASP") of ferrous material
increased
$
112
per gross ton, or
41%
, partially as a result of the shredder restart that led to a favorable shift in the ferrous sales mix and partially due to market improvements. For the
six
months ended
June 30, 2018
compared to
six
months ended
June 30, 2017
, ferrous material shipments
increased
1.4
thousand tons, or
4%
, despite the negative impact from the shredder restart. The inherent nature of the shredding process produces less saleable product volume but at a higher quality level, thereby increasing the ASP. Ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Non-ferrous revenue
decreased
$
0.3
million or
1.7%
to $
15.6
million in the
six
month period ended
June 30, 2018
compared to $
15.9
million in the same period in
2017
. For the
six
months ended
June 30, 2018
compared to
six
months ended
June 30, 2017
, the ASP of non-ferrous material
increased
$
0.14
per pound, or
14%
, and non-ferrous material shipments
decreased
by
1.9
million pounds, or
12%
. Non-ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Total cost of sales
increased
$
3.6
million or
14.4%
to $
28.5
million in the
six
month period ended
June 30, 2018
compared to $
25.0
million for the same period in
2017
. The increase was a result of an increase in ferrous material shipments and higher average prices on a per-unit basis in our ferrous and non-ferrous operations, offset slightly by a decrease in non-ferrous material shipments.
Total cost of sales as a percent of revenue decreased during the
six
month period ended
June 30, 2018
as compared to the same period in
2017
. This improvement was a result of generally increasing ASP during
2018
as well as favorable sales mix that resulted from the startup of the shredder. This was partially offset by startup expenses the Company incurred due to the restart of the shredder operations in May 2017. These startup expenses consisted primarily of repairs and maintenance expenses, utilities expenses and personnel expenses.
SG&A expenses
decreased
$
0.1
million to $
1.8
million in the
six
month period ended
June 30, 2018
compared to $
1.9
million in the same period in
2017
. SG&A expenses decreased primarily due to
decreases
in property tax expense of $54.7 thousand, landfill expense of $38.9 thousand, labor expense of $33.9 thousand, share based compensation expense of $28.7 thousand, and depreciation expense of $
21.4
thousand, offset by increases in insurance expense of $56.0 thousand, legal expense of $24.2 thousand and utilities expense of $23.1 thousand.
Other income (expense) was expense of $
37.0
thousand for the
six
month period ended
June 30, 2018
compared to expense of $
354.0
thousand for the
six
month period ended
June 30, 2017
. This $
317.0
thousand change is a result of (i) a $
139.0
thousand increase in interest expense, which is a result of the increased outstanding balance on the line of credit, (ii) a decrease in gain on sale of assets of
$
28.0
thousand
and (iii) an
increase
in gain on insurance proceeds of $
487.0
thousand related to an insurance claim filed on six roofs on certain of our buildings.
The income tax provision
increased
$
13.0
thousand to $
20.0
thousand in the
six
month period ended
June 30, 2018
compared to $
7.0
thousand in the same period in
2017
. The effective tax rates in
2018
and
2017
were (
2.6
)% and (
0.2
)%, respectively, based on federal and state statutory rates. Due to recurring operating losses being incurred, at December 31, 2013, we recorded nearly a full valuation allowance, which is continuing through
June 30, 2018
. We also have several state and franchise taxes payable based on gross receipts. The Company is currently under a property tax audit and has accrued an estimate of potential assessments.
Net income for the
six
month period ended
June 30, 2018
was $
833.0
thousand compared to a net loss of $
648.0
thousand for the same period of
2017
. This was an increase of $
1.5
million, or
228.5%
.
Three
months ended
June 30, 2018
compared to
three
months ended
June 30, 2017
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
,
|
|
2018
|
|
2017
|
Statements of Operations Data:
|
|
|
|
Total revenue
|
100.0
|
%
|
|
100.0
|
%
|
Total cost of sales
|
91.0
|
%
|
|
95.0
|
%
|
Selling, general and administrative expenses
|
5.4
|
%
|
|
6.3
|
%
|
Income (loss) before other expenses
|
3.6
|
%
|
|
(
1.3
|
)%
|
Total revenue
increased
$
3.0
million or
22.4%
to $
16.6
million in the
second
quarter of
2018
compared to $
13.6
million in the same period in
2017
.
Ferrous revenue
increased
$
2.7
million or
51.0%
to $
8.0
million in the
second
quarter of
2018
compared to $
5.3
million in the same period in
2017
.
For the
three
months ended
June 30, 2018
compared to
three
months ended
June 30, 2017
, the average selling price ("ASP") of ferrous material
increased
$
111
per gross ton, or
39%
, partially as a result of the shredder restart
that led to a
favorable shift in the ferrous sales mix and partially due to market improvements
. For the
three
months ended
June 30, 2018
compared to
three
months ended
June 30, 2017
, ferrous material shipments
increased
1.0
thousand tons
, or
5%
, despite the negative impact from the shredder restart. The inherent nature of the shredding process produces less saleable product volume but at a higher quality level, thereby increasing the ASP. 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
increased
$
0.4
million or
5.3%
to $
8.3
million in the
second
quarter of
2018
compared to $
7.9
million in the same period in
2017
.
F
or the
three
months ended
June 30, 2018
compared to
three
months ended
June 30, 2017
, the ASP of non-ferrous material
increased
$
0.09
per pound, or
8%
, and non-ferrous
material shipments
decreased
by
0.1
million pounds, or
1%
. Non-ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Total cost of sales
increased
$
2.2
million or
17.3%
to $
15.1
million in the
three
month period ended
June 30, 2018
compared to $
12.9
million for the same period in
2017
. The increase was a result of an increase in ferrous material shipments and higher average prices on a per-unit basis in our ferrous and non-ferrous operations, offset slightly by a decrease in non-ferrous material shipments.
Total cost of sales as a percent of revenue decreased during the
three
month period ended
June 30, 2018
as compared to the same period in
2017
. This improvement was a result of generally increasing ASP during
2018
as well as favorable sales mix that resulted from the startup of the shredder. This was partially offset by startup expenses the Company incurred due to the restart of the shredder operations in May 2017. These startup expenses consisted primarily of repairs and maintenance expenses, utilities expenses and personnel expenses.
SG&A expenses
increased
$
37.0
thousand to $
0.9
million in the
three
month period ended
June 30, 2018
compared to $
0.9
million in the same period in
2017
. S
G&A expenses increased primarily
due
to increases in labor expense of $40.9 thousand, insurance expense of $28.0 thousand and legal expense of $24.2 thousand offset by a decrease in property tax expense of $54.7 thousand.
Other income (expense) was income of $
205.0
thousand for the
three
month period ended
June 30, 2018
compared to expense of $
201.0
thousand for the
three
month period ended
June 30, 2017
. This $
406.0
thousand change is a result of
(i)
an $
80.0
thousand
increase
in interest expense, which is a result of the increased outstanding balance on the line of credit and
(ii) an
increase
in gain on insurance proceeds of $
487.0
thousand related to an insurance claim filed on six roofs on certain of our buildings
.
The income tax provision
increased
from no provision in the three month period ended June 30, 2017, to $
12.0
thousand in the
three
month period ended
June 30, 2018
. The effective tax rates in
2018
and
2017
were (
1.5
)% and (0.0)%
, 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, 2018
. We also have several state and franchise taxes payable based on gross receipts. The Company is currently under a property tax audit and has accrued an estimate of potential assessments.
Net income for the
second
quarter of
2018
was $
797.0
thousand compared to a net loss of $
377.0
thousand for the same period of
2017
. This was an increase of $
1.2
million, or
311.4%
.
Financial condition at
June 30, 2018
compared to
December 31, 2017
Cash and cash equivalents
decreased
$
150.0
thousand to $
691.0
thousand as of
June 30, 2018
from $
841.0
thousand as of
December 31, 2017
.
Net cash used in operating activities was $
2.3
million for the
six
month period ended
June 30, 2018
.
The net cash used in operating activities is primarily
due
to
an increase
in receivables of $
2.0
million,
an increase
in inventories of $
2.9
million,
an increase
in other assets of $
0.2
million, and
a decrease
in payables and accrued expenses to related parties of $
0.2
million. These cash uses in operating activities were
partially offset by
net income of $
833.0
thousand,
an increase
in accounts payable of $
1.6
million, depreciation of $
1.0
million,
a decrease
in receivables from related parties of $
44.0
thousand, and share based compensation expense of $
23.0
thousand.
Net cash from investing activities was $
383.0
thousand for the six month period ended
June 30, 2018
. In the six month period ended June 30, 2018, we recorded a gain from insurance proceeds of $487.0 thousand. The C
ompany
had
$
104.0
thousand
of unfinanced
capital
expenditures in
2018
.
Net cash from financing activities was $
1.8
million for the
six
month period ended
June 30, 2018
. In the
six
month period ended
June 30, 2018
, we received net proceeds from debt of $
1.9
million less capitalized loan fees in the amount of $
109.0
thousand and
an increase
in checks in excess of bank of $
0.2
million.
Accounts receivable trade after allowances for doubtful accounts
increased
$
2.0
million or
48.4%
to $
6.3
million as of
June 30, 2018
compared to $
4.2
million as of
December 31, 2017
due
to increased shipments and commodity price increases. In general, the accounts receivable balance fluctuates
due
to the quantity and timing of shipments, commodity prices and receipt of customer payments.
Accounts receivables from related parties
decreased
$
44.0
thousand to $
48.0
thousand as of
June 30, 2018
compared to $
92.0
thousand as of
December 31, 2017
. This decrease was
due
to timing of cash receipts.
Inventories consist principally of ferrous and non-ferrous scrap materials. We value inventory at the lower of cost or net realizable value. Inventory
increased
$
2.9
million, or
56.5%
, to $
8.0
million as of
June 30, 2018
compared to $
5.1
million as of
December 31, 2017
. This increase is primarily driven by higher commodity prices and increased volumes during the
second
quarter of
2018
compared to the fourth quarter of
2017
.
Inventory aging for the period ended
June 30, 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
|
|
$
|
6,028
|
|
|
$
|
1,022
|
|
|
$
|
426
|
|
|
$
|
513
|
|
|
$
|
7,989
|
|
Inventory aging for the period ended
December 31, 2017
(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
|
|
$
|
4,069
|
|
|
$
|
693
|
|
|
$
|
119
|
|
|
$
|
225
|
|
|
$
|
5,106
|
|
Inventory in the
60
days or less categories compared to total inventory
decreased
at
88.2%
as of
June 30, 2018
compared to
93.3%
as of December 31, 2017. Inventory greater than
60
days compared to total inventory
increased
at
11.8%
as of
June 30, 2018
compared to
6.7%
as of
December 31, 2017
.
Accounts payable trade
increased
$
1.6
million
or
91.8%
to $
3.4
million as of
June 30, 2018
compared to $
1.8
million as of
December 31, 2017
. The accounts payable balance fluctuates
due
to timing of purchases from and payments made to our vendors.
Payables and accrued expenses to related parties
decreased
$
167.0
thousand to $
6.0
thousand as of
June 30, 2018
compared to $
173.0
thousand as of
December 31, 2017
. This decrease is largely a result of a decrease in the facility rent payable to related parties of $98
.0
thousand
. See
Note 6 – Related Party Transactions
for additional information.
Working capital
increased
$
1.5
million to $
3.7
million as of
June 30, 2018
compared to $
2.2
million as of
December 31, 2017
as a result of the above noted items.
Contractual Obligations
The following table
provides information with respect to our known contractual obligations for the quarter ended
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
8,549
|
|
|
$
|
77
|
|
|
$
|
8,442
|
|
|
$
|
30
|
|
|
$
|
—
|
|
Operating lease obligations (
1
)
|
3,140
|
|
|
589
|
|
|
1,072
|
|
|
917
|
|
|
562
|
|
Capital lease obligations (
1
)
|
1,025
|
|
|
327
|
|
|
656
|
|
|
42
|
|
|
—
|
|
Total
|
$
|
12,714
|
|
|
$
|
993
|
|
|
$
|
10,170
|
|
|
$
|
989
|
|
|
$
|
562
|
|
|
|
(
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.
|
Impact of Recently Issued Accounting Standards
In May 2014, the FASB issued ASU
2014
-
09
,
Revenue from Contracts with Customers (Topic
606
)
. The amendments in ASU
2014
-
09
affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (
e.g.
, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are 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 November 2015, the FASB issued ASU
2015
-
17
,
Balance Sheet Classification of Deferred Taxes
, which requires that deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. ASU
2015
-
17
was effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Upon adoption, ASU
2015
-17 may be applied either prospectively or retrospectively. The Company adopted the standard in the first quarter of
2017
and noted no material impact on its Condensed Consolidated Financial Statements.
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 primarily because lessees must recognize lease assets and lease liabilities. 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
are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU
2016
-
02
on its Condensed Consolidated Financial Statements and expects to record a right-of-use asset and a lease liability. We do not expect a significant impact on the Company's results of operations.
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.
In
August
201
6
, the FASB issued ASU
2016
-
1
5
,
Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on
eight
specific cash flow issues. ASU
2016
-
15
is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Upon adoption, ASU
2016
-
15
should be applied retrospectively. The Company is evaluating the potential impact of ASU
2016
-
15
on its Condensed Consolidated Financial Statements.
The Company does not expect a material impact from the adoption of ASU
2016
-
15
on the Condensed Consolidated Financial Statements
.
No other new accounting pronouncements issued or effective during the reporting period had, or is expected to have, a material impact on our Condensed Consolidated Financial Statements.