Orbital Infrastructure Group, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
| 1. | NATURE OF OPERATIONS, BASIS OF PRESENTATION AND COMPANY CONDITIONS |
Nature of Operations
Orbital Infrastructure Group, Inc. f/k/a Orbital Energy Group, Inc. (Orbital Infrastructure Group, "OIG," "The Company") is a diversified infrastructure services company serving customers in the electric power, telecommunications, and renewable markets. The Company’s reportable segments are the Electric Power segment, the Telecommunications segment, and the Renewables segment. In December 2021, the Company announced the planned divestiture of its previously reported Integrated Energy Infrastructure Solutions and Services segment.
The Electric Power segment consists of Front Line Power Construction, LLC based in Houston, Texas (acquired November 17, 2021), Orbital Power, Inc. based in Dallas, Texas, (began operations in Q1 2020) and Eclipse Foundation Group based in Gonzales, Louisiana (began operations in Q1 2021). The segment provides comprehensive infrastructure solutions to customers in the electric power industry. Services performed by Front Line Power and Orbital Power, Inc. generally include but are not limited to the engineering, design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities as well as emergency restoration services. Eclipse Foundation Group, which began operations in January 2021, is a drilled shaft foundation construction company that specializes in providing services to the electric transmission and substation, industrial, telecommunication and disaster restoration market sectors, with expertise performing services in water, marsh and rock terrains.
The Telecommunications segment is made up of Gibson Technical Services, Inc. (“GTS”) (acquired April 13, 2021) and subsidiaries. GTS is an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990 and is the parent of IMMCO, Inc., Full Moon Telecom, LLC, and Coax Fiber Solutions, LLC. IMMCO, Inc. (acquired July 28, 2021), which includes two Indian subsidiaries, is an Atlanta-based, full-service telecom engineering and network design company providing diversified engineering services and customized software solutions to a global customer base since 1992. Full Moon Telecom, LLC (acquired October 22, 2021) is a Florida-based telecommunications service provider that offers an extensive array of wireless service capabilities and experience including Layer 2/Layer 3 Transport, Radio Access Network (“RAN”) Integration, test and turn-up of Small Cell systems and Integration/Commissioning of Distributed Antenna (“DAS”) systems. Coax Fiber Solutions, LLC (acquired March 7, 2022), is based in Georgia. Founded in 2016, Coax Fiber Solutions is a GDOT Certified contractor specializing in Aerial Installation, directional drilling, trenching, plowing, and missile crews for telecommunications, power, gas, water, CCTV, ATMS, and traffic signal cable installation.
The Renewables segment consists of Orbital Solar Services based in Raleigh, North Carolina. Orbital Solar Services provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility-scale solar construction. The Company serves a wide variety of project types, including commercial, substation, solar farms and public utility projects.
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information, which includes condensed consolidated financial statements. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position and results of operations and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The Condensed Consolidated Balance Sheet as of December 31, 2021 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. All intercompany accounts and transactions have been eliminated in consolidation. The results for the interim period are not necessarily indicative of the results to be expected for the remaining quarters or year ending December 31, 2022.
Reconciliation of Cash, Cash Equivalents, and Restricted Cash on Condensed Consolidated Statements of Cash Flows
| | | For the Six Months | |
| (in thousands) | | Ended June 30, | |
| | | 2022 | | | 2021 | |
| Cash and cash equivalents at beginning of period | | $ | 26,865 | | | $ | 3,046 | |
| Restricted cash at beginning of period (1) | | | 1,176 | | | | 1,478 | |
| Cash, cash equivalents and restricted cash at beginning of period | | $ | 28,041 | | | $ | 4,524 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 31,584 | | | $ | 9,626 | |
| Restricted cash at end of period (1) | | | 609 | | | | 1,180 | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 32,193 | | | $ | 10,806 | |
(1) Restrictions on cash at June 30, 2022 and June 30, 2021 relate to collateral for several bank-issued letters of credit for contract guaranties.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to record purchase price allocation for the Company's acquisitions, fair value measurements used in goodwill impairment tests, impairment estimations of long-lived assets, revenue recognition on cost-to-cost type contracts, allowances for uncollectible accounts, valuations of non-cash capital stock issuances, estimates of the incremental borrowing rate for long-term leases, fair value estimates and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Reclassifications
Certain reclassifications have been made to the 2021 classifications in order to conform to the 2022 presentation.
Company Conditions and Sources of Liquidity
The Company has experienced net losses and cash outflows from cash used in operating activities over the past years. As of and for the six months ended June 30, 2022, the Company had an accumulated deficit of $279.4 million, loss from continuing operations of $66.8 million, and net cash used in operating activities of $7.3 million.
As of June 30, 2022, the Company had cash and cash equivalents of $31.6 million available for working capital needs and planned capital asset expenditures and a working capital deficit of $98.9 million, including current maturities of debt. These factors initially raise substantial doubt about our ability to continue as a going concern, but this doubt has been alleviated by the Company’s plans to raise sufficient capital to meet our current obligations over the next twelve months, in addition to the expected recovery of our assets to satisfy liabilities in the normal course of business.
The Company has plans to access additional capital to meet its obligations for the twelve months from the date these financial statements are available to be issued. Historically, the Company has raised additional equity and debt financing to fund its expansion; refer to Note 16 — Notes Payable and Line of Credit. The Company has also funded some of its capital expenditures through long-term financing with lenders and other investors as also described in further detail in Note 16 — Notes Payable and Line of Credit and Note 20 – Subsequent Events. Our ability to raise the additional capital is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price that is favorable to us. As of June 30, 2022, the Company has an effective S-3 shelf registration statement with $69.8 million of aggregate offering value available for the issuance of various types of securities, including common stock, preferred stock, debt securities and/or warrants. Management has demonstrated ability to extend its notes including its seller notes as needed. In addition, although no formal agreements exist, the company has solicited interest from various lenders to potentially raise additional term debt to restructure or refinance its existing notes. While management will look to continue funding future acquisitions, organic growth initiatives and continuing operations by raising additional capital from sources such as sales of its debt or equity securities or notes payable in order to meet operating cash requirements, there is no assurance that management’s plans will be successful.
As the Company continues its progression to build a full-service infrastructure services platform, a successful transition to attaining profitable operations is dependent upon achieving a level of positive cash flows through generating adequate revenue growth to support the Company’s cost structure. For the six months ended June 30, 2022, our revenues have increased by $147.1 million and operating loss has decreased by $23.7 million resulting in an 861% increase and 71% decrease, respectively, compared to the six-month period ended June 30, 2021. The significant increase in revenues and decrease in operating loss during the year was primarily driven by the strategic acquisitions of Front Line Power Construction, LLC, Gibson Technical Services, IMMCO, Inc., and Full Moon Telecom, LLC coupled with organic growth within Orbital Power, Inc. In addition, two large utility scale solar projects were awarded to Orbital Solar Services during the twelve-month period ended December 31, 2021. We anticipate, based on currently proposed plans and assumptions relating to our operations, the Company to generate sufficient revenue growth required to achieve profitability and generate positive cash flows from operations over the next twelve months. No assurance can be made that we will be able to obtain profitability and positive cash flows from our continuing operations.
The Company plans to meet its obligations as they become due over the next twelve months by raising additional capital through equity and debt financing sources and expected positive cash flows generated from operations. Given the considerations, we believe the mitigating effect of management’s plans has alleviated any substantial doubt about the Company’s ability to continue as a going concern.
Sale of Orbital U.K.
On May 11, 2022, the Company completed the sale of its Orbital U.K. operations for the agreed upon amount of 3,000,000 GBP. The Company received 1,575,000 GBP on the settlement date and the remaining 1,425,000 GBP was received within 60 days of the settlement date but after June 30, 2022. The Company could receive additional consideration if certain events transpire during the 12-month restricted period following the settlement date. In addition, the Company will receive a “royalty” of 15% on any sales of the GasPT device related to Snam Rete Gas and/or the Future Billing Methodology (FBM) Project.
Goodwill and Indefinite-lived intangible assets
The Company has Goodwill from acquisitions made in 2020, 2021 and 2022.
The Company tests for impairment of Indefinite-lived intangibles and Goodwill in the second quarter of each year and when events or circumstances indicate that the carrying amount of Goodwill exceeds its fair value and may not be recoverable.
Under current accounting guidance, Orbital Infrastructure Group is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance includes a number of factors to consider in conducting the qualitative assessment.
During the three months ended June 30, 2022, the Company completed a quantitative analysis to determine whether it was more likely than not that the fair value of its reporting units were less than their carrying amount, including goodwill. To complete the review, management evaluated the fair value of the Goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. The review of goodwill, prepared as of May 31, 2022, determined that there were not indicators present to suggest that it was more likely than not that the fair value of the reporting units were less than their carrying amounts and thus no impairment was necessary during the quarter ended June 30, 2022. To complete the review, management evaluated the fair value of the Goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. The review of goodwill, prepared as of May 31, 2022, determined that there were not indicators present to suggest that it was more likely than not that the fair value of any of the Company's reporting units was less than its carrying amount and thus no impairment was necessary during the quarter ended June 30, 2022.
The Company did a second goodwill impairment analysis as of June 30, 2022 due to a 42 percent drop in the Company's stock price between May 31, 2022 and June 30, 2022, that caused an overall decrease in the Company’s market capitalization. We performed the interim impairment tests consistent with our approach for annual impairment testing, including similar models, inputs, and assumptions. As a result of the interim impairment testing, no impairment was identified as of June 30, 2022.
Accrued expenses
Accrued expenses are liabilities that reflect expenses on the statement of operations that have not been paid or recorded in accounts payable at the end of the period. At June 30, 2022 and December 31, 2021, accrued expenses of $31.7 million and $28.3 million, respectively included the following components:
| (in thousands) | | June 30, | | | December 31 | |
| | | 2022 | | | 2021 | |
| Accrued bonding | | $ | 1,060 | | | $ | 167 | |
| Accrued compensation | | | 2,940 | | | | 6,369 | |
| Working capital adjustment on Front Line Power Construction acquisition | | | 11,092 | | | | 14,092 | |
| Accrued interest | | | 3,049 | | | | 2,902 | |
| Accrued taxes payable | | | 93 | | | | 102 | |
| Accrued subcontractor expenses | | | 3,823 | | | | — | |
| Accrued union dues | | | 1,072 | | | | 870 | |
| Other accrued expenses | | | 8,611 | | | | 3,799 | |
| Total accrued expense | | $ | 31,740 | | | $ | 28,301 | |
Impact of COVID-19 Pandemic
The effects of the COVID-19 pandemic continues to significantly impact certain aspects and geographies of the global economy due to supply chain, production and other logistical disruptions. While we have continued to operate as a provider of essential services from the onset of the pandemic, during the course of the pandemic our operations and financial results have been adversely impacted by governmental responses to the COVID-19 pandemic, including shut-down orders and limitations on work site practices implemented by governments. The longer-term implications of the COVID-19 pandemic on our financial performance remain highly uncertain and variable. The future impact of COVID-19 will depend on the responses of governmental authorities, customers, suppliers and other third parties, our workforce availability, and the continued impact of COVID-19 on the global economy.
We continue to monitor governmental vaccination and testing standards or requirements related to COVID-19, as well as certain standards and guidance for preventing the spread of COVID-19. While the impact of these standards has lessened in 2022, we continue to monitor changes in these standards that may impact our business.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Our significant accounting policies are detailed in "Note 2 Summary of Significant Accounting Policies" within Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022.
| 3. | DISCONTINUED OPERATIONS AND SALE OF A BUSINESS |
As part of the Company’s stated strategy to transform Orbital Infrastructure Group into a diversified energy infrastructure services platform serving North American energy customers, the Company’s board of directors made the decision to divest of its Orbital Gas subsidiaries. The Orbital Gas subsidiaries provide proprietary gas measurement and sampling technologies and the integration of process control and measuring/sampling systems. They are legacy businesses that are not part of the Company’s strategy of building an infrastructure services company serving the electric power, telecommunications and renewable markets. The disposition of the Orbital Gas subsidiaries will facilitate the Company’s restructuring and cost savings initiatives and are intended to realign and simplify its business structure and better position the Company for future growth and improved profitability. In the fourth quarter of 2021, the Company recorded a $9.2 million impairment related to its U.K. operations to write the value of its investment in the U.K. operations to its expected realizable value of 3 million GBP ($4.1 million on December 31, 2021).
The sale of the U.K. operations closed in May of 2022. The Company could receive additional consideration if certain events transpire during the 12-month restricted period following the settlement date. In addition, the Company will receive a “royalty” of 15% on any sales of the GasPT device related to Snam Rete Gas and/or the Future Billing Methodology (FBM) Project. Remaining assets and liabilities held for sale at June 30, 2022 include assets and liabilities of the Company's North America Orbital Gas subsidiary.
Assets and liabilities held for sale that are included on the Company's balance sheet, relate to the company's discontinued businesses, and are described below.
| | | As of | | | As of | |
| | | June 30, | | | December 31, | |
| (in thousands) | | 2022 | | | 2021 | |
| | | | | | | | | |
| Carrying amounts of the major classes of assets included in discontinued operations: | | | | | | | | |
| | | | | | | | | |
| Trade accounts receivable | | $ | 613 | | | $ | 2,996 | |
| Inventories | | | 353 | | | | 530 | |
| Prepaid expenses and other current assets | | | 167 | | | | 114 | |
| Contract assets | | | 1,178 | | | | 1,141 | |
| Assets held for sale, current portion | | | 2,311 | | | | 4,781 | |
| Property and equipment | | | 42 | | | | 42 | |
| Other intangible assets | | | 1,813 | | | | 1,813 | |
| Deposits and other assets | | | 43 | | | | 43 | |
| Assets held for sale, noncurrent portion | | | 1,898 | | | | 1,898 | |
| Total assets of the disposal group classified as held for sale | | $ | 4,209 | | | $ | 6,679 | |
| | | | | | | | | |
| Carrying amounts of the major classes of liabilities included in discontinued operations: | | | | | | | | |
| | | | | | | | | |
| Accounts payable | | $ | 1,109 | | | $ | 1,657 | |
| Contract liabilities | | | 23 | | | | 1,414 | |
| Operating lease obligations - current portion | | | — | | | | 76 | |
| Accrued expenses | | | 248 | | | | 1,126 | |
| Liabilities held for sale, current portion | | | 1,380 | | | | 4,273 | |
| Operating lease obligations, less current portion | | | — | | | | 85 | |
| Other long-term liabilities | | | — | | | | 9 | |
| Liabilities held for sale, noncurrent portion | | | — | | | | 94 | |
| Total liabilities held for sale | | $ | 1,380 | | | $ | 4,367 | |
Selected data for these discontinued businesses consisted of the following:
Reconciliation of the Major Classes of Line Items Constituting Pretax Income from
Discontinued Operations to the After-Tax Income from Discontinued Operations That Are
Presented in the Condensed Consolidated Statement of Operations
(Unaudited)
| (in thousands) | | For the Three Months | | | For the Six Months | |
| | | Ended June 30, | | | Ended June 30, | |
| Major classes of line items constituting pretax profit of discontinued operations: | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | | | | | |
| Revenues | | $ | 2,083 | | | $ | 4,789 | | | $ | 6,069 | | | $ | 8,719 | |
| Cost of revenues | | | (1,989 | ) | | | (3,095 | ) | | | (4,683 | ) | | | (5,810 | ) |
| Selling, general and administrative expense | | | (1,269 | ) | | | (1,951 | ) | | | (3,408 | ) | | | (4,394 | ) |
| Depreciation and amortization | | | — | | | | (413 | ) | | | — | | | | (845 | ) |
| (Provision) recovery of bad debt | | | 44 | | | | 3 | | | | (47 | ) | | | 22 | |
| Interest expense | | | (6 | ) | | | — | | | | (13 | ) | | | (2 | ) |
| Gain on extinguishment of PPP loan | | | — | | | | 779 | | | | — | | | | 779 | |
| Other expense | | | (4 | ) | | | (7 | ) | | | (12 | ) | | | (7 | ) |
| Pretax income of discontinued operations | | | (1,141 | ) | | | 105 | | | | (2,094 | ) | | | (1,538 | ) |
| Pretax gain on sale of Orbital U.K. | | | 299 | | | | — | | | | 299 | | | | — | |
| Income tax expense | | | — | | | | — | | | | — | | | | — | |
| Total income from discontinued operations | | $ | (842 | ) | | $ | 105 | | | $ | (1,795 | ) | | $ | (1,538 | ) |
Net cash used by operating activities of discontinued operations for the
six months ended
June 30, 2022 was
$0.2 million.
There was $10 thousand net cash used in investing activities of discontinued operations for the six months ended June 30, 2022.
| 4. | REVENUE FROM CONTRACTS WITH CUSTOMERS |
The Electric Power segment provides full service building, maintenance and support to the electrical power distribution, transmission, substation, and emergency response sectors of North America through Front Line Power, Orbital Power Services and Eclipse Foundation. The Telecommunications segment composed of Gibson Technical Services and subsidiaries provides technical implementation, design, maintenance, emergency and repair support services in the broadband, wireless, and outside plant and building technologies. The Renewables segment, Orbital Solar Services, provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility scale solar and community solar construction.
For our construction contracts, revenue is generally recognized over time. Our fixed price and unit-price construction projects generally use a cost-to-cost input method or an output method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. Revenue is also generally recognized over time as the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Under the output method, progress towards completion is measured based on units of work completed based on the contractual pricing amounts. Under the output method, revenue is determined by actual work achieved. For jobs under the output method, revenue is earned based on each unit in the contract completed. We construct comprehensive revenue calculations based on quantifiable measures of actual units completed multiplied by the agreed upon contract prices per item completed.
For our engineering and network design contracts, revenue is also generally recognized over time. In these jobs, timing of revenue recognition also depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts where the Company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced or for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. As discussed above, these performance obligations use a cost-to-cost input method or output method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date and we are not enhancing a customer-controlled asset, we recognize revenue at the point in time when control is transferred to the customer.
For our service contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term.
For certain of our revenue streams, such as call-out repair and service work, and outage services, that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an input method as the customer receives and consumes the benefits of our performance completed to date.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicates a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.
Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable are recognized in the period when our right to consideration is unconditional. We also assess our customer's ability and intention to pay, which is based on a variety of factors, including our historical payment experience with and the financial condition of our customers.
Payment terms and conditions vary by contract, and are within industry standards across our business lines. Accounts receivable are recognized net of an allowance for doubtful accounts.
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our construction projects when revenue recognized under the output method or input cost-to-cost method exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Also included in contract assets are retainage receivables and amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to both scope and/or price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Condensed Consolidated Balance Sheets.
Contract liabilities from our construction contracts occur when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost or output method measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts and provision for future contract losses for those contracts estimated to close in a gross loss position. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue.
Balances and activity in the current contract liabilities as of and for the six months ended June 30, 2022 and 2021 was as follows:
| | | For the Six Months | |
| | | Ended June 30, | |
| (in thousands) | | 2022 | | | 2021 | |
| Total contract liabilities - beginning of period | | $ | 6,503 | | | $ | 4,873 | |
| Other contract additions, net | | | 3,013 | | | | 776 | |
| Revenue recognized | | | (7,149 | ) | | | (759 | ) |
| Contract settlements | | | — | | | | (3,140 | ) |
| Total contract liabilities - end of period | | $ | 2,367 | | | $ | 1,750 | |
Performance Obligations
Remaining Performance Obligations
Remaining performance obligations represents the transaction price of contracts with customers for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of June 30, 2022, the Company's remaining performance obligations are generally expected to be filled within the next 12 months. For the contracts that are greater than 12 months the Company has approximately $228.5 million in the aggregate of future revenue related to remaining performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2022.
Any adjustments to net revenues, cost of revenues, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks. Changes in estimates of net revenues, cost of revenues and the related impact to operating income are recognized on a cumulative catch-up basis in the period they become known, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations.
Performance Obligations Satisfied Over Time
To determine the proper revenue recognition method for our contracts, we evaluate whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to separate the single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.
For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In cases where we do, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized customer specific solution, and in these cases we typically use output method or the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.
Variable Consideration
The nature of our contracts gives rise to several types of variable consideration. In rare instances, we include in our contract estimates, additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. These amounts are included in our calculation of net revenue recorded for our contracts and the associated remaining performance obligations. Additionally, if the contract has a provision for liquidated damages in the case that the Company misses a timing target, or fails to meet any other contract benchmarks, the Company accounts for those estimated liquidated damages as variable consideration and will adjust revenue accordingly with periodic updates to the estimated variable consideration as the job progresses. Liquidated damages are recognized as variable consideration and are estimated based on the most likely amount that is deemed probable of realization.
Significant Judgments
Our contracts with certain customers may be subject to contract cancellation clauses. Contracts with other cancellation provisions may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations and whether a contract should be accounted for over time or on a completed contract basis. Revenue is recognized for certain projects over time using cost-based input methods, in which significant judgement is required to evaluate assumptions including the amount of total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.
At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their stand-alone selling price are accounted for as a separate contract. For contract modifications where goods and services are not determined to be distinct and sold at their stand-alone selling price, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts will be made accordingly.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. For, example, we consider many of our contracts that coordinate multiple products into an integrated system to be a single performance obligation, while the same products would be considered separate performance obligations if not so integrated.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, our contracts do not include a significant financing component.
The following tables present the Company's revenues disaggregated by the type of customer:
| | | For the Three Months | | | For the Three Months | |
| | | Ended June 30, 2022 | | | Ended June 30, 2021 | |
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Total | | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utilities | | $ | 40,454 | | | $ | — | | | $ | — | | | $ | 40,454 | | | $ | 4,907 | | | $ | — | | | $ | — | | | $ | 4,907 | |
| Telecommunications | | | 472 | | | | 20,364 | | | | — | | | | 20,836 | | | | — | | | | 6,075 | | | | — | | | | 6,075 | |
| Renewables | | | — | | | | — | | | | 32,280 | | | | 32,280 | | | | — | | | | — | | | | 537 | | | | 537 | |
| Other | | | 343 | | | | — | | | | — | | | | 343 | | | | — | | | | — | | | | — | | | | — | |
| Total revenues | | $ | 41,269 | | | $ | 20,364 | | | $ | 32,280 | | | $ | 93,913 | | | $ | 4,907 | | | | 6,075 | | | $ | 537 | | | $ | 11,519 | |
| | | For the Six Months | | | For the Six Months | |
| | | Ended June 30, 2022 | | | Ended June 30, 2021 | |
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Total | | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utilities | | $ | 79,287 | | | $ | — | | | $ | — | | | $ | 79,287 | | | $ | 8,097 | | | $ | — | | | $ | — | | | $ | 8,097 | |
| Telecommunications | | | 909 | | | | 36,460 | | | | — | | | | 37,369 | | | | — | | | | 6,075 | | | | — | | | | 6,075 | |
| Renewables | | | — | | | | — | | | | 46,744 | | | | 46,744 | | | | — | | | | — | | | | 2,908 | | | | 2,908 | |
| Other | | | 767 | | | | — | | | | — | | | | 767 | | | | — | | | | — | | | | — | | | | — | |
| Total revenues | | $ | 80,963 | | | $ | 36,460 | | | $ | 46,744 | | | $ | 164,167 | | | $ | 8,097 | | | $ | 6,075 | | | $ | 2,908 | | | $ | 17,080 | |
The following tables present the Company's revenues disaggregated by type of contract:
| | | For the Three Months | | | For the Three Months | |
| | | Ended June 30, 2022 | | | Ended June 30, 2021 | |
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Total | | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost-plus contracts | | $ | 7,373 | | | $ | — | | | $ | — | | | $ | 7,373 | | | $ | 1,462 | | | $ | — | | | $ | — | | | $ | 1,462 | |
| Fixed price contracts | | | 16,152 | | | | 2,559 | | | | 32,280 | | | | 50,991 | | | | 760 | | | | 875 | | | | 537 | | | | 2,172 | |
| Unit price contracts | | | 17,744 | | | | 17,805 | | | | — | | | | 35,549 | | | | 2,685 | | | | 5,200 | | | | — | | | | 7,885 | |
| Total revenues | | $ | 41,269 | | | $ | 20,364 | | | $ | 32,280 | | | $ | 93,913 | | | $ | 4,907 | | | $ | 6,075 | | | $ | 537 | | | $ | 11,519 | |
| | | For the Six Months | | | For the Six Months | |
| | | Ended June 30, 2022 | | | Ended June 30, 2021 | |
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Total | | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost-plus contracts | | $ | 24,609 | | | $ | 112 | | | $ | — | | | $ | 24,721 | | | $ | 2,816 | | | $ | — | | | $ | — | | | $ | 2,816 | |
| Fixed price contracts | | | 23,894 | | | | 4,878 | | | | 46,744 | | | | 75,516 | | | | 1,230 | | | | 875 | | | | 2,908 | | | | 5,013 | |
| Unit price contracts | | | 32,460 | | | | 31,470 | | | | — | | | | 63,930 | | | | 4,051 | | | | 5,200 | | | | — | | | | 9,251 | |
| Total revenues | | $ | 80,963 | | | $ | 36,460 | | | $ | 46,744 | | | $ | 164,167 | | | $ | 8,097 | | | $ | 6,075 | | | $ | 2,908 | | | $ | 17,080 | |
Inventories consist of work-in-process and finished goods and are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method as a cost flow convention or through the moving average cost method. At June 30, 2022 and December 31, 2021, inventory by category is valued net of reserves and consists of:
| | | As of June 30, | | | As of December 31, | |
| (in thousands) | | 2022 | | | 2021 | |
| Raw materials | | | 1,069 | | | | 1,316 | |
| Work-in-process | | | 8 | | | | 19 | |
| Total inventories | | $ | 1,077 | | | $ | 1,335 | |
The Company has a minority ownership in Virtual Power Systems ("VPS"). The VPS investment basis at June 30, 2022 and December 31, 2021 was $1.1 million and $1.1 million, respectively, as reflected on the condensed consolidated balance sheets. The investment is held at June 30, 2022 under the cost method of accounting for investments.
Consolidated total operating lease costs were $3.6 million for the six months ended June 30, 2022 and $1.7 million for the six months ended June 30, 2021 and are included in cost of sales; selling, general and administrative expense; and other income (expense), on the condensed consolidated statement of operations.
Future minimum operating lease obligations at June 30, 2022 are as follows for the years ended December 31:
| (in thousands) | | | | |
| 2022 (remaining period) | | $ | 3,203 | |
| 2023 | | | 5,578 | |
| 2024 | | | 4,569 | |
| 2025 | | | 2,967 | |
| 2026 | | | 2,589 | |
| Thereafter | | | 3,412 | |
| Interest portion | | | (3,037 | ) |
| Total operating lease obligations | | $ | 19,281 | |
Total lease cost and other lease information is as follows:
| | | For the Three Months Ended June 30, | | | For the Six Months Ended June 30, | |
| (in thousands) | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Operating lease cost | | $ | 1,702 | | | $ | 909 | | | $ | 3,325 | | | $ | 1,577 | |
| Short-term lease cost | | | 10 | | | | 34 | | | | 69 | | | | 34 | |
| Variable lease cost | | | 202 | | | | 159 | | | | 453 | | | | 303 | |
| Sublease income | | | (129 | ) | | | (130 | ) | | | (258 | ) | | | (243 | ) |
| Total lease cost | | $ | 1,785 | | | $ | 972 | | | $ | 3,589 | | | $ | 1,671 | |
| Other information - Operating leases (in thousands) | | For the Six Months Ended June 30, | |
| | | 2022 | | | 2021 | |
| Cash paid for amounts included in the measurement of lease obligations: | | | | | | | | |
| Operating cash flows from operating leases (includes discontinued operations) | | $ | (3,166 | ) | | $ | (1,664 | ) |
| Right-of-use assets obtained in exchange for new operating lease obligations | | $ | 3,427 | | | $ | 6,851 | |
| Weighted-average remaining lease term - operating leases (in years) | | | 4.7 | | | | 4.4 | |
| Weighted-average discount rate - operating leases | | | 7.1 | % | | | 6.5 | % |
Variable lease costs primarily include common area maintenance costs, real estate taxes and insurance costs passed through to the Company from lessors.
Future minimum finance lease obligations at June 30, 2022 are as follows for the years ended December 31:
| (in thousands) | | | | |
| 2022 (remaining period) | | $ | 2,933 | |
| 2023 | | | 5,866 | |
| 2024 | | | 5,124 | |
| 2025 | | | 376 | |
| 2026 | | | 310 | |
| Thereafter | | | 14 | |
| Interest portion | | | (1,133 | ) |
| Total financing lease obligations | | $ | 13,490 | |
Total financing lease costs are as follows:
| | | For the Three Months Ended June 30, | | | For the Six Months Ended June 30, | |
| (in thousands) | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Depreciation of financing lease assets | | $ | 1,319 | | | $ | 315 | | | $ | 2,627 | | | $ | 315 | |
| Interest on lease liabilities | | | 226 | | | | 58 | | | | 467 | | | | 58 | |
| Total finance lease cost | | $ | 1,545 | | | $ | 373 | | | $ | 3,094 | | | $ | 373 | |
| Other information - Financing leases | | For the Six Months Ended June 30, | |
| (in thousands) | | 2022 | | | 2021 | |
| Cash paid for amounts included in the measurement of lease obligations: | | | | | | | | |
| Operating cash flows from financing leases | | $ | (466 | ) | | $ | (58 | ) |
| Financing cash flows from financing leases | | $ | (2,470 | ) | | $ | (289 | ) |
| Right-of-use assets obtained in exchange for new financing lease obligations | | $ | 998 | | | $ | 4,752 | |
| Weighted-average remaining lease term - financing leases (in years) | | | 2.6 | | | | 2.8 | |
| Weighted-average discount rate - finance leases | | | 6.5 | % | | | 6.5 | % |
| 8. | STOCK-BASED COMPENSATION AND EXPENSE |
Through December 31, 2021, the Company had been vesting a series of stock appreciation rights (SARS) to be settled in cash to certain executives. The SARS were considered liability-classified awards meaning their fair-values were remeasured at the end of each reporting period using a binomial lattice model and any changes in fair value for the vesting periods to-date were recorded through the income statement with a corresponding liability accrued on the balance sheet. Since December 31, 2021, the SARS have been exchanged for restricted stock units (RSUs) on the modification date of January 14, 2022 as approved by the Board of Directors. To account for this exchange, the company revalued the SARS as of the modification date of January 14, 2022 using the binomial lattice model and recorded changes in the vested value since December 31, 2021 as an adjustment to the income statement. The Company then reclassified the SARS accrued liability to APIC for new RSUs and recognized incremental expense. Shares deemed vested at the modification date were released and issued net of tax in March 2022. The SARS that converted to RSUs, were added to the Company's existing RSU program. The company recorded $0.6 million and $1.3 million of expense for RSUs for the three and six months ended June 30, 2022.
Restricted Stock
In March 2021, the Company granted 3 million restricted shares with an aggregate fair value of $16.4 million with a graded vesting schedule. One-third of which were vested in April 2021, one-third of which were due to vest in April 2022, and one-third of which were due to vest in April 2023. In the three and six months ended June 30, 2022, the Company recorded zero and a net credit of $3.9 million, respectively, to compensation expense related to the forfeiture and partial vesting of these grants compared to $4.6 million and $6.6 million of compensation expense in the three and six months ended June 30, 2021 for partial vesting of the grants. The credit to compensation expense in the first six months of 2022 was due to a reversal of expense related to the forfeiture of the unvested restricted stock upon the termination of an employee as of June 30, 2022.
Restricted Stock Units
| | | Number of restricted shares | | | Weighted-average grant date fair value | |
| | | | | | | | | |
| Non-vested shares, beginning of year | | | 3,018,788 | | | $ | 4.58 | |
| Granted | | | 3,302,872 | | | | 1.88 | |
| Vested | | | (1,439,171 | ) | | | 1.92 | |
| Forfeited | | | (2,116,747 | ) | | | 5.34 | |
| Non-vested shares, June 30, 2022 | | | 2,765,742 | | | $ | 2.17 | |
On April 28, 2022, the Company” entered into a Securities Purchase Agreement with an institutional investor. The Purchase Agreement provides for the sale and issuance by the Company of an aggregate of: (i) 9,000,000 shares of the Company’s common stock, $0.001 par value, (ii) pre-funded warrants to purchase up to 7,153,847 shares of Common Stock and (iii) accompanying warrants to purchase up to 16,153,847 shares of Common Stock. The offering price per share and associated prefunded warrants was $1.30 for the shares and $1.2999 for the prefunded warrants. The prefunded warrants were immediately exercisable, had an exercise price of .0001 and were exercised during the three months ended June 30, 2022.
The accompanying warrants have an exercise price of $1.31, and will be exercisable 6-months after their date of issuance and will expire on the fifth anniversary of the original issuance date.
Common stock warrants are accounted for in accordance with applicable accounting guidance provided in ASC Topic 815, Derivatives and Hedging - Contracts in Entity's Own Equity (ASC Topic 815), as either derivative liabilities or equity instruments depending on the specific terms of the warrant agreement.
The Company’s warrants are considered to be derivative warrants, are classified as liabilities, and are recorded at fair value. The warrants are subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of change in fair value of warrant liability in the consolidated statements of operations. The Company uses the Black-Scholes pricing model to estimate the fair value of the related derivative warrant liability. The warrants are classified as Level 3 liabilities (see Note 12 for fair value disclosures.)
Warrants outstanding and warrant activity for the six months ended June 30, 2022 is as follows:
| Description | Classification | | Exercise Price | | Expiration Date | | Balance December 31, 2021 | | | Warrants Issued | | | Warrants Exercised | | | Warrants Expired | | | Balance June 30, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrants | Liability | | $ | 1.31 | | April 2027 | | | — | | | | 16,153,847 | | | | — | | | | — | | | | 16,153,847 | |
| Pre-funded warrants | Liability | | $ | 0.0001 | | April 2027 | | | — | | | | 7,153,847 | | | | 7,153,847 | | | | — | | | | — | |
| Total | | | | | | | | — | | | | 23,307,694 | | | | 7,153,847 | | | | — | | | | 16,153,847 | |
Operating segments are defined in accordance with ASC 280-10 as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The measurement basis of segment profit or loss is income (loss) from operations. Management has identified five operating segments based on the activities of the Company in accordance with ASC 280-10. These operating segments have been aggregated into three reportable segments. The three reportable segments are Electric Power, Telecommunications, and Renewables and an Other category.
The Electric Power segment consists of Front Line Power Construction, LLC, Orbital Power, Inc. and Eclipse Foundation Group. The segment provides comprehensive solutions to customers in the electric power industries.
The Telecommunications segment is made up of Gibson Technical Services, Inc. (“GTS”) (acquired April 13, 2021). GTS is an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990 and is the parent of the following companies: IMMCO, Inc., Full Moon Telecom, and Coax Fiber Solutions, LLC.
The Renewables segment consists of Orbital Solar Services based in Raleigh, North Carolina. Orbital Solar Services provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility-scale solar construction. The Company serves a wide variety of project types, including commercial, substation, solar farms and public utility projects.
The Other category is made up primarily of the Company's corporate activities. This category does not include any operating segments and does not generate revenue.
The following information represents segment activity for the three months ended June 30, 2022:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Revenues from external customers | | $ | 41,269 | | | $ | 20,364 | | | $ | 32,280 | | | $ | — | | | $ | 93,913 | |
| Depreciation and amortization (1) | | | 7,495 | | | | 1,176 | | | | 608 | | | | 16 | | | | 9,295 | |
| Interest expense | | | 4,231 | | | | 59 | | | | 2 | | | | 5,521 | | | | 9,813 | |
| Income (loss) from operations | | | (304 | ) | | | 1,075 | | | | (6,173 | ) | | | (2,304 | ) | | | (7,706 | ) |
| Expenditures for long-lived assets | | | 1,407 | | | | 156 | | | | 8 | | | | 5 | | | | 1,576 | |
(1) Depreciation and amortization includes $3.9 million of depreciation expense which was included in cost of revenues in the Condensed Consolidated Statements of Operations.
The following information represents segment activity for the three months ended June 30, 2021:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Revenues from external customers | | $ | 4,907 | | | $ | 6,075 | | | $ | 537 | | | $ | — | | | $ | 11,519 | |
| Depreciation and amortization (1) | | | 633 | | | | 615 | | | | 616 | | | | 423 | | | | 2,287 | |
| Interest expense | | | 58 | | | | — | | | | — | | | | 1,038 | | | | 1,096 | |
| Loss from operations | | | (4,751 | ) | | | (749 | ) | | | (8,248 | ) | | | (3,846 | ) | | | (17,594 | ) |
| Expenditures for long-lived assets (2) | | | 1,220 | | | | 445 | | | | 41 | | | | 49 | | | | 1,755 | |
(1) Depreciation and amortization includes $0.9 million of depreciation expense which was included in cost of revenues in the Condensed Consolidated Statements of Operations and $0.4 million of depreciation and amortization which was included in Other that was discontinued operations.
(2) Includes purchases of property, plant and equipment and other intangible assets. The Other category includes expenditures for discontinued operations of $6 thousand.
The following information represents selected balance sheet items by segment as of June 30, 2022:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Segment assets | | $ | 271,301 | | | $ | 87,759 | | | $ | 42,731 | | | $ | 17,216 | | | $ | 419,007 | |
| Goodwill | | | 70,151 | | | | 25,809 | | | | 7,006 | | | | — | | | | 102,966 | |
| Other intangible assets, net | | | 98,983 | | | | 27,680 | | | | 6,523 | | | | — | | | | 133,186 | |
The following information represents segment activity for the six months ended June 30, 2022:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Revenues from external customers | | $ | 80,963 | | | $ | 36,460 | | | $ | 46,744 | | | $ | — | | | $ | 164,167 | |
| Depreciation and amortization (1) | | | 14,470 | | | | 2,267 | | | | 1,217 | | | | 31 | | | | 17,985 | |
| Interest expense | | | 8,303 | | | | 96 | | | | 3 | | | | 9,450 | | | | 17,852 | |
| Income (loss) from operations | | | (1,017 | ) | | | 1,552 | | | | (5,744 | ) | | | (4,286 | ) | | | (9,495 | ) |
| Expenditures for long-lived assets (2) | | | 2,351 | | | | 579 | | | | 9 | | | | 40 | | | | 2,979 | |
(1) Depreciation and amortization includes $7.3 million of depreciation expense which was included in cost of revenues in the Condensed Consolidated Statements of Operations.
(2) Includes purchases of property, plant and equipment and other intangible assets. The Other category includes expenditures for discontinued operations of $10 thousand.
The following information represents segment activity for the six months ended June 30, 2021:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Revenues from external customers | | $ | 8,097 | | | $ | 6,075 | | | $ | 2,908 | | | $ | — | | | $ | 17,080 | |
| Depreciation and amortization (1) | | | 849 | | | | 615 | | | | 1,705 | | | | 865 | | | | 4,034 | |
| Interest expense | | | 59 | | | | — | | | | 15 | | | | 1,756 | | | | 1,830 | |
| Loss from operations | | | (9,015 | ) | | | (749 | ) | | | (13,574 | ) | | | (9,879 | ) | | | (33,217 | ) |
| Expenditures for long-lived assets (2) | | | 4,141 | | | | 445 | | | | 41 | | | | 767 | | | | 5,394 | |
(1) Depreciation and amortization includes $1.1 million of depreciation expense which was included in cost of revenues in the Condensed Consolidated Statements of Operations and $0.8 million of depreciation and amortization which was included in Other that was discontinued operations.
(2) Includes purchases of property, plant and equipment and other intangible assets. The Other category includes expenditures for discontinued operations of $0.7 million.
The following information represents selected balance sheet items by segment as of December 31, 2021:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Segment assets | | $ | 273,726 | | | $ | 80,800 | | | $ | 28,324 | | | $ | 29,489 | | | $ | 412,339 | |
| Goodwill | | | 70,151 | | | | 23,742 | | | | 7,006 | | | | — | | | | 100,899 | |
| Other intangible assets, net | | | 106,377 | | | | 28,571 | | | | 7,708 | | | | — | | | | 142,656 | |
| 11. | RECENT ACCOUNTING PRONOUNCEMENTS |
In June 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value. It also requires the following disclosures for equity securities subject to the contractual sale restrictions: 1) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet; 2) the nature and remaining duration of the restriction(s); and 3) the circumstances that could cause a lapse in the restriction(s). ASU 2022-03 is effective for the fiscal years and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The guidance should be applied prospectively. ASU 2022-03 is not expected to have a material effect on our consolidated financial statements.
On October 28, 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance will require entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. This standard was designed to provide consistent recognition and measurement guidance for revenue contracts with customers. Legacy guidance requires entities to record contract assets and contract liabilities acquired to be recorded at fair value. The amendments will be effective for the Company beginning for fiscal years beginning after December 15, 2022. Early adoption is allowed. If an entity early adopts, the entity would be required to apply the new guidance to all acquisitions made in the year of the early adoption. The Company is still reviewing the standard and as of the reporting date of this filing has not elected to early adopt.
| 12. | FAIR VALUE MEASUREMENTS |
The Company’s fair value hierarchy for our financial assets and liabilities as of June 30, 2022 and December 31, 2021 was as follows:
| (in thousands) | | | | | | | | | | | | | | | | |
| June 30, 2022 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Contingent consideration | | $ | — | | | $ | — | | | $ | 720 | | | $ | 720 | |
| Front Line Power Construction Seller Financed debt | | | — | | | | 68,248 | | | | — | | | | 68,248 | |
| Financial instrument liability - related to Syndicated debt | | | — | | | | — | | | | 1,082 | | | | 1,082 | |
| Financial instrument liability - related to Front Line Power Construction seller financed debt | | | — | | | | — | | | | 38,402 | | | | 38,402 | |
| Warrant liabilities | | | — | | | | — | | | | 7,915 | | | | 7,915 | |
| Total liabilities | | $ | — | | | $ | 68,248 | | | $ | 48,119 | | | $ | 116,367 | |
| December 31, 2021 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Contingent consideration | | $ | — | | | $ | — | | | $ | 720 | | | $ | 720 | |
| Front Line Power Construction Seller financed debt | | | — | | | | 86,183 | | | | — | | | | 86,183 | |
| Financial instrument liability | | | — | | | | — | | | | 825 | | | | 825 | |
| Total liabilities | | $ | — | | | $ | 86,183 | | | $ | 1,545 | | | $ | 87,728 | |
| (in thousands) | | Financial Instrument Liability - related to Syndicated debt | |
| Balance at December 31, 2021 | | $ | 825 | |
| Issuance of shares upon partial settlement of financial instrument | | | (2,925 | ) |
| Fair Value adjustments to Financial instrument liability | | | 3,182 | |
| Balance at June 30, 2022 | | $ | 1,082 | |
| (in thousands) | | Financial Instrument Liability - related to FLP seller financed debt | |
| Balance at December 31, 2021 | | $ | — | |
| Fair value of financial instrument liability at inception | | | 26,782 | |
| Fair Value adjustment to Derivative liability | | | 11,620 | |
| Balance at June 30, 2022 | | $ | 38,402 | |
| (in thousands) | | Warrant Liability | |
| Balance at December 31, 2021 | | $ | — | |
| Fair value of warrant liability at inception | | | 27,625 | |
| Exercise of pre-funded warrants | | | (6,939 | ) |
| Fair value adjustment to warrant liability | | | (12,771 | ) |
| Balance at June 30, 2022 | | $ | 7,915 | |
There were no transfers between Level 3 and Level 2 in the three months ended June 30, 2022 as determined at the end of the reporting period.
| 13. | LOSS PER COMMON SHARE |
In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 260 (“FASB ASC 260”), “Earnings per Share,” Basic loss from continuing operations per share, basic income from discontinued operations per share and basic net income (loss) per share that is available to shareholders is computed by dividing the income or loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the respective loss available to common stockholders by the weighted average number of diluted shares outstanding during the period calculated using the treasury stock method. Due to the Company’s loss from continuing operations in the three and six months ended June 30, 2022 and June 30, 2021, the assumed exercise of stock options, warrants and the unvested restricted stock that would otherwise increase diluted shares using the treasury stock method would have had an antidilutive effect and therefore 0.2 million shares related to stock options, 16.2 million warrants outstanding at June 30, 2022 and zero shares of restricted stock were excluded from the computation of diluted net loss per share for the three and six months ended June 30, 2022 and 0.2 million shares related to stock options outstanding at June 30, 2021 were excluded for the three and six months ended June 30, 2021 and 2.0 million shares of restricted stock were excluded from the computation of diluted net loss per share for the six months ended June 30, 2021. Accordingly, diluted earnings (loss) per share for continuing operations, discontinued operations and net income is the same as basic earnings (loss) per share for continuing operations, discontinued operations and net income for the three and six months ended June 30, 2022 and 2021.
| | | For the Three Months | | | For the Six Months | |
| (in thousands, except share and per share amounts) | | Ended June 30, | | | Ended June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Loss from continuing operations, net of income taxes | | $ | (30,094 | ) | | $ | (8,318 | ) | | $ | (66,764 | ) | | $ | (24,627 | ) |
| Income (loss) from discontinued operations, net of income taxes | | | (842 | ) | | | 105 | | | | (1,795 | ) | | | (1,538 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (30,936 | ) | | $ | (8,213 | ) | | $ | (68,559 | ) | | $ | (26,165 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted weighted average number of shares outstanding | | | 95,355,532 | | | | 51,838,830 | | | | 89,292,201 | | | | 48,221,943 | |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations per common share - basic and diluted | | $ | (0.31 | ) | | $ | (0.16 | ) | | $ | (0.75 | ) | | $ | (0.51 | ) |
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| Loss from discontinued operations - basic and diluted | | | (0.01 | ) | | | — | | | | (0.02 | ) | | | (0.03 | ) |
| | | | | | | | | | | | | | | | | |
| Loss per common share - basic and diluted | | $ | (0.32 | ) | | $ | (0.16 | ) | | $ | (0.77 | ) | | $ | (0.54 | ) |
The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company continues to record a full valuation allowance against the Company's U.S. and U.K. net deferred tax assets and a partial valuation allowance on its Canada deferred tax assets as it is not more likely than not that the Company will realize a benefit from these assets in a future period other than a $98 thousand carryback benefit at Canada. In future periods, tax benefits and related deferred tax assets will be recognized when management concludes realization of such amounts is more likely than not.
Total net income tax expense of $0.4 million and $0.6 million were recorded to the income tax provision from continuing operations for the three and six months ended June 30, 2022 resulting in an effective tax rate of (1.3%) and (0.9%), respectively. Income tax expense was primarily due to state minimum taxes and estimated Texas gross receipts taxes.
Total net income tax benefit of $9.0 million and $8.9 million was recorded to the income tax provision from continuing operations for the three and six months ended June 30, 2021, respectively, resulting in an effective tax rate of 51.8% and 26.6%, respectively. The income tax benefit from continuing operations for the three and six months ended June 30, 2021 was as a result of the Company's purchase price allocation related to the April 2021 acquisition of GTS, the Company recorded a $9.0 million deferred tax liability. As a result, the Company recorded a $9.0 million tax benefit for a reduction in prior recorded valuation allowances. All of the Company’s domestic and foreign net deferred tax assets were reduced by a full valuation allowance.
| 15. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The components of accumulated other comprehensive loss are as follows:
| (in thousands) | | As of June 30, 2022 | | | As of December 31, 2021 | |
| Foreign currency translation adjustment | | $ | (505 | ) | | $ | (3,995 | ) |
| Accumulated other comprehensive loss | | $ | (505 | ) | | $ | (3,995 | ) |
In the three months ended June 30, 2022, the Company reclassified $3.6 million related to accumulated foreign currency adjustment from Accumulated Other Comprehensive Loss to net loss as a result of the sale of the Company's U.K operations.
| 16. | NOTES PAYABLE AND LINE OF CREDIT |
Notes payable is summarized as follows:
| (in thousands) | | As of June 30, 2022 | | | As of December 31, 2021 | |
| Syndicated debt (1) | | $ | 104,737 | | | $ | 105,000 | |
| Seller Financed notes payable - Front Line Power Construction, LLC acquisition (2) | | | 69,168 | | | | 86,730 | |
| Note Payable - Financing notes (3) | | | 156 | | | | 1,357 | |
| Seller Financed notes payable - Reach Construction Group, LLC acquisition (4) | | | 3,480 | | | | 3,480 | |
| Vehicle and equipment loans (5) | | | 1,648 | | | | 222 | |
| Non-recourse payable agreements (6) | | | 15,864 | | | | 8,269 | |
| Notes payable - Institutional investor (7) | | | 38,070 | | | | 33,922 | |
| Conditional settlement notes payable agreement (8) | | | 2,500 | | | | 3,000 | |
| Full Moon and CFS - loans to prior owners (9) | | | 31 | | | | 2 | |
| Subtotal | | | 235,654 | | | | 241,982 | |
| Unamortized prepaid financing fees and debt discounts | | | (14,043 | ) | | | (12,603 | ) |
| Total long-term debt | | | 221,611 | | | | 229,379 | |
| Less: notes payable, current | | | (117,589 | ) | | | (72,774 | ) |
| Notes payable, less current portion | | $ | 104,022 | | | $ | 156,605 | |
| (1) | On November 17, 2021, the Company entered into a credit agreement and associated documents (the “Credit Agreement”) with Alter Domus (US), LLC (“Alter Domus”), as administrative agent and collateral agent and various lenders (the “Lenders”) in order to enable the Company to finance the acquisition of Front Line Power Construction, LLC. The Lenders made a Term Loan to Front Line in the initial principal amount of $105,000,000 for the purposes of financing the acquisition and the associated expenses. The term loan initially bears interest at the three-month Adjusted LIBOR Rate, plus the Applicable Margin, of which 2.5% may be paid in-kind. The Term Loan shall be repaid in consecutive quarterly installments of $262,500, commencing on June 30, 2022. The Credit Agreement provides for mandatory prepayments on the occurrence of events such as sales of assets, Consolidated Excess Cash Flow and Excess Receipts during the term. The credit agreement provides for prepayment premiums (initially 5% on prepayments made in the first 30 months of the term, declining to 1% in the final year of the term). The Term Loan matures on November 17, 2026, subject to acceleration on Events of Default. Interest rate on the term notes is 13.95% at June 30, 2022 with an effective rate of 16.4%. |
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| (2) | On November 17, 2021, the Company entered into two unsecured promissory notes, one with Kurt A Johnson, Jr, for $34,256,000 and the second for $51,384,000 with Tidal Power Group LLC. These promissory notes bear an interest rate of 6% per annum and as modified on April 29, 2022, $20 million was paid on May 6, 2022, $15 million is due on December 31, 2022, and the remaining balance is due on May 31, 2023. On December 10, 2021, Kurt A Johnson Jr. received an additional unsecured promissory note in the principal sum of $1,090,000 also with a 6% per annum interest rate in exchange for a reduction of shares issued to Mr. Johnson of 400,000. This note was paid off as part of the May 6, 2022 payment. Additionally in a Q1 2022 amendment to the note, the Company also agreed to reduce the restriction period under the Tidal Lockup letter from two years to one year and to the extent that if the value of the shares previously issued to Tidal Power were less than $4.00 per share upon expiration of the restriction period, the Company has agreed to pay additional consideration to Tidal Power so that the value of Tidal Power's shares are equal to no less than $28,852,844. For the Johnson lockup letter, the Company agreed to pay additional consideration to Mr. Johnson upon expiration of the restriction period so that the value of his stock consideration is no less than $17,635,228, which is equal to $4.00 per common share. Any shortfall would be made up by issuing Mr. Johnson additional common shares. |
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| (3) | The Company has two notes payable to First Insurance Funding executed in 2021 for the purposes of financing a portion of the Company's insurance coverage. The notes have an annual percentage rate of 4.35% to be paid in ten monthly payments and are set to mature in July and September of 2022. |
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| (4) | Includes two seller-financed notes payable, one for $5 million and the second for $1.5 million. In August 2021, the $5 million note was amended from its original 18-month term; the Company paid $1 million in cash and exchanged 155,763 shares of common stock in exchange for an additional $1 million reduction in principal. The new loan had a face value of $2.0 million at a rate of 6% per annum and was recorded based on an estimated market interest rate of 10% per annum with an original issue discount of $48 thousand. The second seller financed note payable is due 36-months from the April 1, 2020 acquisition date. Both notes had an original stated interest rate of 6% per annum. The Company recently filed and served a Federal Civil Complaint asserting various causes-of-action against the holder of the note, including misrepresentations made during the course of negotiating this transaction. Based on that complaint, the evidence contained therein, and the conduct described, the Company reasonably believes that it owes no additional compensation as a result of this transaction. |
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| (5) | Includes vehicle and equipment loans with interest rates ranging from 0% to 9.15%. |
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| (6) | The Company entered into a non-recourse agreement with C6 which was originated in November 2021 with a face amount of $9.5 million. The Company received net cash proceeds of $6.9 million. The Company recorded a liability of $9.5 million and a debt discount of $2.6 million. Under the terms of the agreement, for the first 12 weeks, the Company made weekly payments of $148 thousand and for the final 20 weeks, the Company was to make payments of $384 thousand. The agreement had no stated interest rate, but the discount and loan origination fees were being amortized based on an 89% interest rate. In April, 2022, the Company took out three non-recourse agreements with C6 Capital for the sale of future revenues in the combined amount of $20.2 million. The Company received approximately $13.3 million after the deduction of an original issue discount and upfront fees. In April 2022, the Company used part of the proceeds from these non-recourse agreements to pay off the non-recourse C6 note of $4.2 million that was on the balance sheet as of March 31, 2022 and recorded a loss on extinguishment of $0.4 million. The loans vary in length from 26 to 48 weeks. The Company paid off the smallest of the three notes in June 2022 and recorded a loss on extinguishment of $0.1 million. Discounts on the remaining agreements are being amortized based on an effective interest rate of 88%. |
| (7) | On March 23, 2021, the Company completed a note payable agreement with an institutional investor with a face amount of $10.7 million, a stated interest rate of 9.0%, an estimated effective interest rate of 19.6%, and an original issue discount of $1.0 million. The carrying value was $1.6 million at June 30, 2022. The note payable is payable within eighteen (18) months after the purchase date and the creditor may request payment of up to $1 million per calendar month beginning 6 months after initial issuance. On May 11, 2021, the Company completed a note payable agreement with the institutional investor with a face amount of $10.7 million, a stated interest rate of 9.0% per annum, and estimated effective interest rate of 19.6% at inception, and a combined original issue discount and unamortized prepaid fees of $1.0 million and a carrying value of $7.6 million at June 30, 2022. The net proceeds were to be used for working capital, future acquisitions and general corporate purposes. Beginning six (6) months from the purchase price date, investor has the right, in its sole and absolute discretion, to redeem all or any portion of the Note (such amount, the “Redemption Amount”) subject to the maximum monthly redemption amount of $1 million per calendar month, by providing Company with a “Redemption Notice," and is payable in full within 18 months of issuance. On December 20, 2021, the Company completed a note payable agreement with the institutional investor with a face amount of $16.1 million, a stated interest rate of 9.0%, an estimated effective interest rate of 16.3%, and an original issue discount of $1.1 million. The note payable is payable within eighteen (18) months after the purchase date and the creditor may request payment of up to $1.5 million per month beginning 6 months after initial issuance. The carrying value was $16.4 million at June 30, 2022. The Company has not made any payments on this note as of June 30, 2022. On June 9, 2022, the Company completed a note payable agreement with the institutional investor with a face amount of $10.7 million, a stated interest rate of 9.0%, an estimated effective interest rate of 16.4%, and an original issue discount of $0.7 million. The note payable is payable within eighteen (18) months after the purchase date and the creditor may request payment of up to $1.0 million per month beginning 6 months after initial issuance. The carrying value was $11.2 million at June 30, 2022. The Company has not made any payments on this note as of June 30, 2022. This note also includes a debt reduction clause whereby the Company has agreed to make payments on all of its outstanding agreements with the investor totaling at least $4 million for each of the months of June, July and August 2022. If the Company fails to make the required payments, the Lender’s sole and exclusive remedy shall be to receive, as liquidated damages, a ten percent (10%) increase to the Outstanding Balance for such month on this note. The Company failed to meet the debt reduction requirement in June 2022 and recorded liquidated damages in other expense in the amount of $1.1 million. The Company agreed to make payments in shares of common stock and recorded a total loss of $1.5 million on the exchanges due to the Company issuing shares at a lower price than the current market price on the dates of exchange. |
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| (8) | In October 2020, the Company entered into a conditional settlement agreement with a subcontractor to make payments of $3.5 million at zero interest over three years. The Company made a $0.5 million payment in the fourth quarter of 2021. The Company made a $150,000 payment in February 2022, and a $350,000 payment in March 31, 2022. The Company is scheduled to make a $1 million payment by November 2022 and the final $1.5 million payment by November 2023. |
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| (9) | Represents Coax Fiber Solutions and Full Moon Telecom, LLC opening balance sheet loans to prior Coax Fiber Solutions and Full Moon Telecom, LLC owners. |
Line of Credit
On August 19, 2021, the Company's GTS subsidiary entered into a $4.0 million variable rate line of credit agreement. Interest accrues at a rate of 2.05% over the Daily Simple Secured Overnight Financing Rate ("SOFR") index rate. At June 30, 2022 the Company had an outstanding balance on the line of credit of $4.0 million with zero dollars available for borrowing.
Debt Modifications
In the first quarter of 2022, the Company entered into a loan modification on the Front Line Seller Financed notes payable. In order to extend the maturity date of these loans from the original maturity date of May 16, 2022, the Company agreed to reduce the restriction period on the stock granted to one of the sellers from two years to one and guarantee a $4.00 stock value upon the expiration of the restriction period. The stock price guarantee was valued as a put option and the additional expected cost of the debt from the put option was determined to be an extinguishment of debt for which the Company recorded a $26.2 million loss on extinguishment and a new financial instrument valued at $26.8 million. The put option was re-valued at $38.4 million at June 30, 2022 and the change between the original put option value and the value as of June 30, 2022 was recorded as an $11.6 million loss on financial instrument for the three and six months ended June 30, 2022.
The Company’s major product lines in 2021 and 2022 were electric power transmission and distribution maintenance and service, utility-scale solar construction projects and telecommunications maintenance and service.
The Company had the following revenue concentrations by customer greater than 10% of consolidated revenue:
| | | For the Three Months Ended June 30, | |
| Customer | | 2022 | | | 2021 | |
| Customer 1 | | 22 | % | | | <10% | |
| Customer 2 | | | 19 | % | | | <10% | |
| Customer 3 | | 15 | % | | | <10% | |
| Customer 4 | | | 14 | % | | 15 | % |
| Customer 7 | | | <10% | | | 13 | % |
| Customer 8 | | | <10% | | | 11 | % |
| Customer 9 | | | <10% | | | 12 | % |
| Total concentrations | | | 70 | % | | | 51 | % |
| | | For the Six Months Ended June 30, | |
| Customer | | 2022 | | | 2021 | |
| Customer 1 | | | 25 | % | | | <10% | |
| Customer 2 | | | 11 | % | | | <10% | |
| Customer 3 | | | 17 | % | | | <10% | |
| Customer 4 | | | 14 | % | | | 10 | % |
| Customer 5 | | | <10% | | | | 15 | % |
| Customer 6 | | | <10% | | | | 14 | % |
| Total concentrations | | | 67 | % | | | 39 | % |
The Company did not have geographic revenue concentrations outside the U.S.A. greater than 10% of consolidated revenue.
The Company had the following gross trade accounts receivable concentrations by customer greater than 10% of gross trade accounts receivable:
| | | As of June 30, | | | As of December 31, | |
| Customer | | 2022 | | | 2021 | |
| Customer 1 | | | 28 | % | | | 30 | % |
| Customer 4 | | 14 | % | | | <10% | |
| Customer 2 | | | 14 | % | | | <10% | |
| Customer 3 | | | <10% | | | | 16 | % |
| Total concentrations | | | 56 | % | | | 46 | % |
The Company did not have geographic concentrations outside of the U.S.A. greater than 10% of gross trade accounts receivable.
For the three and six months ended June 30, 2022, the Company had one supplier concentration of approximately 19% and 12%, respectively, in the Renewables segment and in the three and six months ended June 30, 2021, the Company had one supplier concentration of approximately 16% and 13%, respectively, in the Electric Power segment.
Acquisition of Coax Fiber Solutions
Effective March 7, 2022, GTS, an OIG subsidiary, entered into a share purchase agreement to acquire Coax Fiber Solutions (CFS), a Georgia based GDOT Certified contractor specializing in Aerial Installation, directional drilling, trenching, plowing, and missile crews for telecommunications, power, gas, water, CCTV, ATMS, and traffic signal cable installation. GTS paid $0.8 million and issued 125,000 shares of restricted common stock to the Seller to purchase CFS with the stock valued at $146,000. Goodwill reflects the excess purchase price over the fair value of net assets. The Company recorded preliminary opening balance items of $0.4 million of current assets, $0.5 million of fixed assets, $1.5 million of goodwill, and $1.5 million of liabilities as part of this transaction. The company is currently in the process of finalizing the allocation of the purchase price for this acquisition.
| 19. | COMMITMENTS AND CONTINGENCIES |
Off-Balance Sheet Arrangements
Performance and Payment Bonds and Parent Guarantees
In the ordinary course of business, Orbital Infrastructure Group and its subsidiaries are required by certain customers to provide performance and payment bonds for contractual commitments related to its projects. These bonds provide a guarantee to the customer that the Company will perform under the terms of a contract and that the Company will pay its subcontractors and vendors. If the Company fails to perform under a contract or to pay its subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for expenses or outlays it incurs. Certain bonds are for open-ended contracts with multiple work orders so the value may increase as the work progresses and more work orders are started. The bonds will remain in place as the Company completes projects and resolves any disputed matters with the customers, vendors and subcontractors related to the bonded projects. As of June 30, 2022 the total amount of the outstanding performance and payment bonds was approximately $77.1 million. In addition, the Company had letters of credit outstanding of $1.4 million as of June 30, 2022.
Additionally, from time to time, we guarantee certain obligations and liabilities of our subsidiaries that may arise in connection with, among other things, contracts with customers, equipment lease obligations, and contractor licenses. These guarantees may cover all of the subsidiary’s unperformed, undischarged and unreleased obligations and liabilities under or in connection with the relevant agreement. For example, with respect to customer contracts, a guarantee may cover a variety of obligations and liabilities arising during the ordinary course of the subsidiary’s business or operations, including, among other things, warranty and breach of contract claims, third-party and environmental liabilities arising from the subsidiary’s work and for which it is responsible, liquidated damages, or indemnity claims.
Contingent Liabilities
Orbital Infrastructure Group, Inc. is occasionally party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, negligence or gross negligence and/or property damages, wage and hour and other employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief.
Regarding all lawsuits, claims and proceedings, Orbital Infrastructure Group, Inc. records a reserve when it is probable that a liability has been incurred and the loss can be reasonably estimated. In addition, Orbital Infrastructure Group, Inc. discloses matters for which management believes a material loss is at least reasonably possible. None of these proceedings are expected to have a material adverse effect on Orbital Infrastructure Group, Inc.’s consolidated financial position, results of operations or cash flows. In all instances, management has assessed the matter based on current information and made a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may prove materially inaccurate, and such judgment is made subject to the known uncertainties of litigation.
Name Change
Effective August 1, 2022, Orbital Energy Group (OEG) has rebranded to Orbital Infrastructure Group (OIG) to align with the Company's infrastructure strategy, and its continued expansion and market diversification. The Company now trades on the Nasdaq under the updated ticker symbol "OIG". In addition to rebranding the Company, OIG has relocated its corporate domicile from the State of Colorado to Texas.
Note Payable agreement
On August 2, 2022, Orbital Infrastructure Group, Inc. completed a Note Purchase Agreement (the “Purchase Agreement”), by and between the Company and an institutional investor (the “Investor”), pursuant to which the Company agreed to issue to the Investor an unsecured instrument in the principal amount of $8.6 million (the “Note”). Upon the closing on August 2, 2022, the Company received gross proceeds of $8.0 million, before fees and other expenses associated with the transaction, including but not limited to, a $560,000 original issue discount payable to the Investor plus $15,000 to cover investor's legal fees. The net proceeds received by the Company will be used primarily for working capital, future acquisitions, and general corporate purposes.
The Note is payable in full within eighteen (18) months after the purchase price date in accordance with the terms set forth in the Note and accrues interest on the outstanding balance at the rate of nine percent (9%) per annum from the Purchase Price Date until the Note is paid in full. All interest shall compound daily and shall be payable in accordance with the terms of the Note. The Company has the right to prepay all or any portion of the outstanding balance in an amount equal to 115% multiplied by the portion of the outstanding balance to be prepaid.
Beginning six (6) months from the purchase price date, Investor has the right, in its sole and absolute discretion, to redeem all or any portion of the Note (such amount, the “Redemption Amount”) subject to the maximum monthly redemption amount of $800,000 per calendar month, by providing Company with a “Redemption Notice."
The Note Purchase Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company, other obligations of the parties thereto, and termination provisions.
Beginning in the month of October 2022 and for each of the following three months thereafter, the Company will be obligated to reduce the aggregate debt balance with the investor by $4.0 million per month. The penalty for not meeting the required debt reduction is a 10% increase to the outstanding balance of the loan.
The foregoing does not purport to be a complete description of the Note Purchase Agreement and is qualified in its entirety by reference to the full text of such documents and attachments which are attached as Exhibits to this Report on Form 8-K and are incorporated by reference herein.