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. In the third quarter of 2022, in order to streamline operations, the Eclipse business was integrated into Front Line Power Construction, LLC, and ceased to be a separate business unit.
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 Loganville, 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 Nine Months | |
| (in thousands) | | Ended September 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 | | $ | 27,960 | | | $ | 11,179 | |
| Restricted cash at end of period (1) | | | 609 | | | | 1,176 | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 28,569 | | | $ | 12,355 | |
(1) Restrictions on cash at September 30, 2022 and September 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, cash outflows from cash used in operating activities and a decline in share value over the past years. As of and for the nine months ended September 30, 2022, the Company had an accumulated deficit of $421.4 million, loss from continuing operations of $208.3 million, and net cash used in operating activities of $13.4 million. Further, as of September 30, 2022, the Company had a working capital deficit of $118.7 million, including current maturities of debt, and cash and cash equivalents of $28.0 million available for working capital needs and planned capital asset expenditures. As a result of the foregoing, the Company does not have sufficient liquidity and capital resources to meet its obligations and fund its operations for the twelve months following the issuance of these financial statements. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern.
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. 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 September 30, 2022, the Company has an effective S-3 shelf registration statement for the issuance of various types of securities, including common stock, preferred stock, debt securities and/or warrants in the aggregate of up to $68.8 million. 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.
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 forecasted positive cash flows generated from operations. There can be no assurance that the Company will succeed in executing these plans. If unsuccessful, the Company will not have sufficient liquidity and capital resources to repay its indebtedness when it matures, or otherwise meet its cash requirements over the next twelve months, as noted above.
Restructuring Costs
In September 2022, the Company fully impaired its finance lease equipment related to the Eclipse Foundation Group in the Electric Power segment. These pieces of equipment are drilling specific and at this time, the Company does not plan to use the equipment for the remaining term of the leases. As these leases are non-cancelable and do not include a sub-leasing option, the full finance lease assets related to Eclipse have been removed from the balance sheet and an equal impairment has been recognized in the amount of $4.5 million. Future payments related to these leases will be approximately $5.2 million paid through June 2026.
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 on July 11, 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 had Goodwill from acquisitions made in 2020, 2021 and 2022.
Roll-forward of the Company's goodwill:
| | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| Goodwill - December 31, 2021 | | $ | 70,151 | | | $ | 23,742 | | | $ | 7,006 | | | $ | 100,899 | |
| Acquisition of CFS | | | — | | | | 1,521 | | | | — | | | | 1,521 | |
| IMMCO purchase price allocation adjustment | | | — | | | | 537 | | | | — | | | | 537 | |
| September 30, 2022 - impairment | | | (70,151 | ) | | | (25,800 | ) | | | — | | | | (95,951 | ) |
| Goodwill - September 30, 2022 | | $ | — | | | $ | — | | | $ | 7,006 | | | $ | 7,006 | |
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 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.
During the third quarter of 2022, triggering events were identified which led to performing interim goodwill impairment testing of our reporting units as of September 30, 2022. These events included a further decrease in the Company's market capitalization, the significant loss in the Renewables segment in the third quarter of 2022, interest rate increases and limitations on accessing capital, which raised substantial doubt regarding the Company’s ability to continue as a going concern. The fair value for our reporting units for the interim testing was valued using a market approach. The impairment assessment resulted in a conclusion that goodwill in the Electric Power and Telecommunications reporting units was impaired by $70.1 million and $25.8 million, respectively, during the three months ended September 30, 2022. The impairment assessment also concluded that the fair value of the Renewables reporting unit was in excess of its carrying amount.
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 September 30, 2022 and December 31, 2021, accrued expenses of $30.3 million and $28.3 million, respectively included the following components:
| (in thousands) | | September 30, | | | December 31 | |
| | | 2022 | | | 2021 | |
| Accrued bonding | | $ | 1,631 | | | $ | 167 | |
| Accrued compensation | | | 4,365 | | | | 6,369 | |
| Working capital adjustment on Front Line Power Construction acquisition | | | 4,592 | | | | 14,092 | |
| Accrued interest | | | 4,340 | | | | 2,902 | |
| Accrued taxes payable | | | 148 | | | | 102 | |
| Accrued subcontractor expenses | | | 6,775 | | | | — | |
| Accrued union dues | | | 1,044 | | | | 870 | |
| Accrued vendor invoices and accrued other expenses | | | 7,401 | | | | 3,799 | |
| Total accrued expense | | $ | 30,296 | | | $ | 28,301 | |
Impact of COVID-19 Pandemic and current economic environment
The effects of the COVID-19 pandemic continues to 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 uncertain and variable in the current economic environment including rising interest and inflation rates.
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. The Company sold a portion of the North America business in the third quarter of 2022 at approximately book value of the assets sold. Certain assets and liabilities not sold with the business were reclassified from held for sale to held and used. Remaining assets held for sale at September 30, 2022 include the VE Technology asset of the Company's North America Orbital Gas subsidiary. VE Technology is a gas sampling intellectual property, which provides a superior method of penetrating the gas flow without the associated vortex vibration, thereby making it a ‘‘stand-alone’’ product for thermal sensing (thermowells) and trace-element sampling.
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 | |
| | | September 30, | | | December 31, | |
| (in thousands) | | 2022 | | | 2021 | |
| | | | | | | | | |
| Carrying amounts of the major classes of assets included in discontinued operations: | | | | | | | | |
| | | | | | | | | |
| Trade accounts receivable | | $ | — | | | $ | 2,996 | |
| Inventories | | | — | | | | 530 | |
| Prepaid expenses and other current assets | | | — | | | | 114 | |
| Contract assets | | | — | | | | 1,141 | |
| Assets held for sale, current portion | | | — | | | | 4,781 | |
| Property and equipment | | | — | | | | 42 | |
| Other intangible assets | | | 1,814 | | | | 1,813 | |
| Deposits and other assets | | | — | | | | 43 | |
| Assets held for sale, noncurrent portion | | | 1,814 | | | | 1,898 | |
| Total assets of the disposal group classified as held for sale | | $ | 1,814 | | | $ | 6,679 | |
| | | | | | | | | |
| Carrying amounts of the major classes of liabilities included in discontinued operations: | | | | | | | | |
| | | | | | | | | |
| Accounts payable | | $ | — | | | $ | 1,657 | |
| Contract liabilities | | | — | | | | 1,414 | |
| Operating lease obligations - current portion | | | — | | | | 76 | |
| Accrued expenses | | | — | | | | 1,126 | |
| Liabilities held for sale, current portion | | | — | | | | 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 | | $ | — | | | $ | 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
| (in thousands) | | For the Three Months | | | For the Nine Months | |
| | | Ended September 30, | | | Ended September 30, | |
| Major classes of line items constituting pretax profit of discontinued operations: | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | | | | | |
| Revenues | | $ | 933 | | | $ | 6,097 | | | $ | 7,002 | | | $ | 14,816 | |
| Cost of revenues | | | (938 | ) | | | (4,608 | ) | | | (5,621 | ) | | | (10,418 | ) |
| Selling, general and administrative expense | | | (716 | ) | | | (1,973 | ) | | | (4,124 | ) | | | (6,367 | ) |
| Depreciation and amortization | | | — | | | | (404 | ) | | | — | | | | (1,249 | ) |
| (Provision) recovery of bad debt | | | 25 | | | | 5 | | | | (22 | ) | | | 27 | |
| Interest expense | | | — | | | | — | | | | (13 | ) | | | (2 | ) |
| Gain on extinguishment of PPP loan | | | — | | | | — | | | | — | | | | 779 | |
| Other expense | | | 30 | | | | 234 | | | | 18 | | | | 227 | |
| Pretax income of discontinued operations | | | (666 | ) | | | (649 | ) | | | (2,760 | ) | | | (2,187 | ) |
| Pretax gain on sale of Orbital U.K. | | | — | | | | — | | | | 299 | | | | — | |
| Income tax expense | | | — | | | | — | | | | — | | | | — | |
| Total income from discontinued operations | | $ | (666 | ) | | $ | (649 | ) | | $ | (2,461 | ) | | $ | (2,187 | ) |
Net cash used in operating activities of discontinued operations for the
nine months ended
September 30, 2022 was
$0.8 million.
There was $62 thousand net cash provided by investing activities of discontinued operations for the nine months ended September 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, the measure of progress towards completion is based on units of work completed multiplied by the contractual pricing amounts per unit. 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 exceeds 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 nine months ended September 30, 2022 and 2021 was as follows:
| | | For the Nine Months | |
| | | Ended September 30, | |
| (in thousands) | | 2022 | | | 2021 | |
| Total contract liabilities - beginning of period | | $ | 6,503 | | | $ | 4,873 | |
| Other contract additions, net | | | 1,003 | | | | 720 | |
| Revenue recognized | | | (7,155 | ) | | | (754 | ) |
| Contract settlements | | | — | | | | (3,141 | ) |
| Total contract liabilities - end of period | | $ | 351 | | | $ | 1,698 | |
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 September 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 $198.1 million in the aggregate of future revenue related to remaining performance obligations that are unsatisfied or partially unsatisfied as of September 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 the 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 September 30, 2022 | | | Ended September 30, 2021 | |
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Total | | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utilities | | $ | 35,076 | | | $ | 132 | | | $ | — | | | $ | 35,208 | | | $ | 12,200 | | | $ | — | | | $ | — | | | $ | 12,200 | |
| Telecommunications | | | 532 | | | | 23,932 | | | | — | | | | 24,464 | | | | — | | | | 8,742 | | | | — | | | | 8,742 | |
| Renewables | | | — | | | | — | | | | 39,026 | | | | 39,026 | | | | — | | | | — | | | | 3,880 | | | | 3,880 | |
| Other | | | 1,124 | | | | — | | | | — | | | | 1,124 | | | | — | | | | — | | | | — | | | | — | |
| Total revenues | | $ | 36,732 | | | $ | 24,064 | | | $ | 39,026 | | | $ | 99,822 | | | $ | 12,200 | | | | 8,742 | | | $ | 3,880 | | | $ | 24,822 | |
| | | For the Nine Months | | | For the Nine Months | |
| | | Ended September 30, 2022 | | | Ended September 30, 2021 | |
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Total | | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utilities | | $ | 114,363 | | | $ | 132 | | | $ | — | | | $ | 114,495 | | | $ | 20,297 | | | $ | — | | | $ | — | | | $ | 20,297 | |
| Telecommunications | | | 1,441 | | | | 60,392 | | | | — | | | | 61,833 | | | | — | | | | 14,816 | | | | — | | | | 14,816 | |
| Renewables | | | — | | | | — | | | | 85,770 | | | | 85,770 | | | | — | | | | — | | | | 6,789 | | | | 6,789 | |
| Other | | | 1,891 | | | | — | | | | — | | | | 1,891 | | | | — | | | | — | | | | — | | | | — | |
| Total revenues | | $ | 117,695 | | | $ | 60,524 | | | $ | 85,770 | | | $ | 263,989 | | | $ | 20,297 | | | $ | 14,816 | | | $ | 6,789 | | | $ | 41,902 | |
The following tables present the Company's revenues disaggregated by type of contract:
| | | For the Three Months | | | For the Three Months | |
| | | Ended September 30, 2022 | | | Ended September 30, 2021 | |
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Total | | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost-plus contracts | | $ | 8,672 | | | $ | — | | | $ | — | | | $ | 8,672 | | | $ | 4,940 | | | $ | — | | | $ | — | | | $ | 4,940 | |
| Fixed price contracts | | | 10,768 | | | | 1,551 | | | | 39,026 | | | | 51,345 | | | | 2,385 | | | | 2,159 | | | | 3,880 | | | | 8,424 | |
| Unit price contracts | | | 17,292 | | | | 22,513 | | | | — | | | | 39,805 | | | | 4,875 | | | | 6,583 | | | | — | | | | 11,458 | |
| Total revenues | | $ | 36,732 | | | $ | 24,064 | | | $ | 39,026 | | | $ | 99,822 | | | $ | 12,200 | | | $ | 8,742 | | | $ | 3,880 | | | $ | 24,822 | |
| | | For the Nine Months | | | For the Nine Months | |
| | | Ended September 30, 2022 | | | Ended September 30, 2021 | |
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Total | | | Electric Power | | | Telecommunications | | | Renewables | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost-plus contracts | | $ | 33,282 | | | $ | 112 | | | $ | — | | | $ | 33,394 | | | $ | 7,757 | | | $ | — | | | $ | — | | | $ | 7,757 | |
| Fixed price contracts | | | 34,661 | | | | 6,429 | | | | 85,770 | | | | 126,860 | | | | 3,614 | | | | 3,034 | | | | 6,789 | | | | 13,437 | |
| Unit price contracts | | | 49,752 | | | | 53,983 | | | | — | | | | 103,735 | | | | 8,926 | | | | 11,782 | | | | — | | | | 20,708 | |
| Total revenues | | $ | 117,695 | | | $ | 60,524 | | | $ | 85,770 | | | $ | 263,989 | | | $ | 20,297 | | | $ | 14,816 | | | $ | 6,789 | | | $ | 41,902 | |
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 September 30, 2022 and December 31, 2021, inventory by category is valued net of reserves and consists of:
| | | As of September 30, | | | As of December 31, | |
| (in thousands) | | 2022 | | | 2021 | |
| Raw materials | | $ | 1,198 | | | $ | 1,316 | |
| Work-in-process | | | 210 | | | | 19 | |
| Total inventories | | $ | 1,408 | | | $ | 1,335 | |
The Company has a minority ownership in Virtual Power Systems ("VPS"). The VPS investment basis at September 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 September 30, 2022 under the cost method of accounting for investments.
Operating leases
Consolidated total operating lease costs were $5.2 million for the nine months ended September 30, 2022 and $3.0 million for the nine months ended September 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 September 30, 2022 are as follows for the years ended December 31:
| (in thousands) | | | | |
| 2022 (remaining period) | | $ | 1,437 | |
| 2023 | | | 5,421 | |
| 2024 | | | 4,501 | |
| 2025 | | | 2,953 | |
| 2026 | | | 2,551 | |
| Thereafter | | | 3,905 | |
| Interest portion | | | (3,167 | ) |
| Total operating lease obligations | | $ | 17,601 | |
Total lease cost and other lease information is as follows:
| | | For the Three Months Ended | | | For the Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (in thousands) | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Operating lease cost | | $ | 1,600 | | | $ | 1,157 | | | $ | 4,924 | | | $ | 2,747 | |
| Short-term lease cost | | | 7 | | | | 114 | | | | 78 | | | | 134 | |
| Variable lease cost | | | 111 | | | | 175 | | | | 564 | | | | 478 | |
| Sublease income | | | (129 | ) | | | (129 | ) | | | (387 | ) | | | (372 | ) |
| Total lease cost | | $ | 1,589 | | | $ | 1,317 | | | $ | 5,179 | | | $ | 2,987 | |
| Other information - Operating leases (in thousands) | | For the Nine Months Ended September 30, 2022 | |
| | | 2022 | | | 2021 | |
| Cash paid for amounts included in the measurement of lease obligations: | | | | | | | | |
| Operating cash flows from operating leases (includes discontinued operations) | | $ | (5,800 | ) | | $ | (2,782 | ) |
| Right-of-use assets obtained in exchange for new operating lease obligations | | $ | 3,908 | | | $ | 7,290 | |
| Weighted-average remaining lease term - operating leases (in years) | | | 4.7 | | | | 4.3 | |
| 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.
Financing leases
Consolidated total financing lease costs were $4.6 million and $1.1 million for the nine months ended September 30, 2022 and 2021 and are included in depreciation in cost of sales and interest expense.
Future minimum finance lease obligations at September 30, 2022 are as follows for the years ended December 31:
| (in thousands) | | | | |
| 2022 (remaining period) | | $ | 1,478 | |
| 2023 | | | 5,911 | |
| 2024 | | | 5,342 | |
| 2025 | | | 1,842 | |
| 2026 | | | 893 | |
| Thereafter | | | 48 | |
| Interest portion | | | (1,324 | ) |
| Total financing lease obligations | | $ | 14,190 | |
Total financing lease costs are as follows:
| | | For the Three Months Ended | | | For the Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (in thousands) | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Depreciation of financing lease assets | | $ | 1,319 | | | $ | 657 | | | $ | 3,946 | | | $ | 972 | |
| Interest on lease liabilities | | | 207 | | | | 118 | | | | 672 | | | | 176 | |
| Total finance lease cost | | $ | 1,526 | | | $ | 775 | | | $ | 4,618 | | | $ | 1,148 | |
In addition to the financing lease costs noted above, for the three and nine months ended September 30, 2022, the Company recognized $4.5 million in impairments on outstanding financing leases at Eclipse Foundation Group. See Note 1 for additional information on the impairments.
| Other information - Financing leases | | For the Nine Months Ended September 30, | |
| (in thousands) | | 2022 | | | 2021 | |
| Cash paid for amounts included in the measurement of lease obligations: | | | | | | | | |
| Operating cash flows from financing leases | | $ | (671 | ) | | $ | (177 | ) |
| Cash paid for amounts included in the measurement of lease obligations: | | $ | (3,810 | ) | | $ | (897 | ) |
| Right-of-use assets obtained in exchange for new financing lease obligations | | $ | 1,195 | | | $ | 12,190 | |
| Weighted-average remaining lease term - financing leases (in years) | | | 2.8 | | | | 2.9 | |
| 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 $1.1 million and $2.4 million of expense for RSUs for the three and nine months ended September 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 nine months ended September 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 $1.4 million and $8.0 million of compensation expense in the three and nine months ended September 30, 2021 for partial vesting of the grants. The credit to compensation expense in the first nine 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 September 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 | | | 5,943,197 | | | | 1.33 | |
| Vested | | | (2,222,770 | ) | | | 1.54 | |
| Forfeited | | | (2,139,872 | ) | | | 5.31 | |
| Non-vested shares, September 30, 2022 | | | 4,599,343 | | | $ | 1.50 | |
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 nine months ended September 30, 2022 is as follows:
| Description | Classification | | Exercise Price | | Expiration Date | | Balance December 31, 2021 | | | Warrants Issued | | | Warrants Exercised | | | Warrants Expired | | | Balance September 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 September 30, 2022:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Revenues from external customers | | $ | 36,732 | | | $ | 24,064 | | | $ | 39,026 | | | $ | — | | | $ | 99,822 | |
| Depreciation and amortization (1) | | | 6,975 | | | | 1,315 | | | | 608 | | | | 16 | | | | 8,914 | |
| Interest expense | | | 4,441 | | | | 19 | | | | 1 | | | | 5,253 | | | | 9,714 | |
| Income (loss) from operations | | | (76,606 | ) | | | (23,213 | ) | | | (26,535 | ) | | | (2,356 | ) | | | (128,710 | ) |
| Expenditures for long-lived assets | | | 368 | | | | 396 | | | | 10 | | | | 43 | | | | 817 | |
(1) Depreciation and amortization includes $3.5 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 September 30, 2021:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Revenues from external customers | | $ | 12,200 | | | $ | 8,742 | | | $ | 3,880 | | | $ | — | | | $ | 24,822 | |
| Depreciation and amortization (1) | | | 1,095 | | | | 774 | | | | 614 | | | | 416 | | | | 2,899 | |
| Interest expense | | | 116 | | | | 9 | | | | 256 | | | | 885 | | | | 1,266 | |
| Loss from operations | | | (2,445 | ) | | | (436 | ) | | | (3,605 | ) | | | (4,364 | ) | | | (10,850 | ) |
| Expenditures for long-lived assets (2) | | | 1,391 | | | | 393 | | | | 77 | | | | 41 | | | | 1,902 | |
(1) Depreciation and amortization includes $1.2 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 $3 thousand.
The following information represents selected balance sheet items by segment as of September 30, 2022:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Segment assets | | $ | 184,801 | | | $ | 68,480 | | | $ | 29,765 | | | $ | 19,063 | | | $ | 302,109 | |
| Goodwill | | | — | | | | — | | | | 7,006 | | | | — | | | | 7,006 | |
| Other intangible assets, net | | | 95,287 | | | | 26,960 | | | | 1,606 | | | | — | | | | 123,853 | |
The following information represents segment activity for the nine months ended September 30, 2022:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Revenues from external customers | | $ | 117,695 | | | $ | 60,524 | | | $ | 85,770 | | | $ | — | | | $ | 263,989 | |
| Depreciation and amortization (1) | | | 21,445 | | | | 3,582 | | | | 1,825 | | | | 47 | | | | 26,899 | |
| Interest expense | | | 12,743 | | | | 115 | | | | 5 | | | | 14,703 | | | | 27,566 | |
| Income (loss) from operations | | | (77,621 | ) | | | (21,662 | ) | | | (32,280 | ) | | | (6,642 | ) | | | (138,205 | ) |
| Expenditures for long-lived assets (2) | | | 2,719 | | | | 975 | | | | 19 | | | | 83 | | | | 3,796 | |
(1) Depreciation and amortization includes $10.7 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 nine months ended September 30, 2021:
| (in thousands) | | Electric Power | | | Telecommunications | | | Renewables | | | Other | | | Total | |
| Revenues from external customers | | $ | 20,297 | | | $ | 14,816 | | | $ | 6,789 | | | $ | — | | | $ | 41,902 | |
| Depreciation and amortization (1) | | | 1,944 | | | | 1,389 | | | | 2,319 | | | | 1,281 | | | | 6,933 | |
| Interest expense | | | 175 | | | | 10 | | | | 270 | | | | 2,641 | | | | 3,096 | |
| Loss from operations | | | (11,461 | ) | | | (1,185 | ) | | | (17,178 | ) | | | (14,243 | ) | | | (44,067 | ) |
| Expenditures for long-lived assets (2) | | | 5,532 | | | | 838 | | | | 118 | | | | 808 | | | | 7,296 | |
(1) Depreciation and amortization includes $2.3 million of depreciation expense which was included in cost of revenues in the Condensed Consolidated Statements of Operations and $1.2 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 September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations to enhance transparency about an entity’s use of supplier finance programs. Under the ASU, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a roll-forward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. An entity should also consider whether the existence of a supplier finance program changes the appropriate presentation of the payables in the program from trade payables to borrowings. The amendments in this update are effective for the Company for fiscal periods beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure of roll-forward information, which is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the effect of this new standard, which is not expected to have a material effect on the Company's financial position or results of operations.
In June 2022, the FASB issued 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 September 30, 2022 and December 31, 2021 was as follows:
| (in thousands) | | | | | | | | | | | | | | | | |
| September 30, 2022 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Contingent consideration | | $ | — | | | $ | — | | | $ | 720 | | | $ | 720 | |
| Front Line Power Construction Seller Financed debt | | | — | | | | 68,501 | | | | — | | | | 68,501 | |
| Financial instrument liability - related to Syndicated debt | | | — | | | | — | | | | 844 | | | | 844 | |
| Financial instrument liability - related to Front Line Power Construction seller financed debt | | | — | | | | — | | | | 40,085 | | | | 40,085 | |
| Prepaid advance agreement | | | — | | | | 4,666 | | | | — | | | | 4,666 | |
| Warrant liabilities | | | — | | | | — | | | | 5,492 | | | | 5,492 | |
| Total liabilities | | $ | — | | | $ | 73,167 | | | $ | 47,141 | | | $ | 120,308 | |
| 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 exercise and reset of instrument (instrument includes reference price of $0.40 per share at September 30, 2022) | | | (4,361 | ) |
| Fair value adjustments to Financial instrument liability | | | 4,380 | |
| Balance at September 30, 2022 | | $ | 844 | |
| (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 | | | 13,303 | |
| Balance at September 30, 2022 | | $ | 40,085 | |
| (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 | | | (15,194 | ) |
| Balance at September 30, 2022 | | $ | 5,492 | |
See note 16 for more information about the Company's prepaid advance agreement. There were no transfers between Level 3 and Level 2 in the three months ended September 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 nine months ended September 30, 2022 and September 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 September 30, 2022 and 4.6 million shares of restricted stock units were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2022 and 0.2 million shares related to stock options outstanding at September 30, 2021 were excluded for the three and nine months ended September 30, 2021 and 2.3 million shares of restricted stock and restricted stock units were excluded from the computation of diluted net loss per share for the nine months ended September 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 nine months ended September 30, 2022 and 2021.
| | | For the Three Months | | | For the Nine Months | |
| (in thousands, except share and per share amounts) | | Ended September 30, | | | Ended September 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| Loss from continuing operations, net of income taxes | | $ | (141,567 | ) | | $ | (9,498 | ) | | $ | (208,331 | ) | | $ | (34,125 | ) |
| Income (loss) from discontinued operations, net of income taxes | | | (666 | ) | | | (649 | ) | | | (2,461 | ) | | | (2,187 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (142,233 | ) | | $ | (10,147 | ) | | $ | (210,792 | ) | | $ | (36,312 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted weighted average number of shares outstanding | | | 115,637,323 | | | | 62,823,330 | | | | 98,209,495 | | | | 53,142,557 | |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations per common share - basic and diluted | | $ | (1.22 | ) | | $ | (0.15 | ) | | $ | (2.12 | ) | | $ | (0.64 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from discontinued operations - basic and diluted | | | (0.01 | ) | | | (0.01 | ) | | | (0.03 | ) | | | (0.04 | ) |
| | | | | | | | | | | | | | | | | |
| Loss per common share - basic and diluted | | $ | (1.23 | ) | | $ | (0.16 | ) | | $ | (2.15 | ) | | $ | (0.68 | ) |
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. 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 $91 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 $0.2 million and $0.8 million were recorded to the income tax provision from continuing operations for the three and nine months ended September 30, 2022, resulting in an effective tax rate of (0.1%) and (0.4%), respectively. Income tax expense was primarily due to state minimum taxes and estimated Texas gross receipts taxes.
Total net income tax benefit of $2.1 million and $11.0 million was recorded to the income tax provision from continuing operations for the three and nine months ended September 30, 2021, respectively, resulting in an effective tax rate of 18.1% and 24.4%, respectively. The income tax benefit from continuing operations for the three and nine months ended September 30, 2021, was as a result of the release of valuation allowances currently held against the Company’s deferred tax assets as a result of the additional $11.2 million of deferred tax liabilities assumed in the April 2021 and July 2021 acquisitions of GTS and IMMCO. As a result, for the three and nine months ended September 30, 2021 the Company recorded a $2.2 million and $11.2 million tax benefit, respectively, 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 September 30, 2022 | | | As of December 31, 2021 | |
| Foreign currency translation adjustment | | $ | (687 | ) | | $ | (3,995 | ) |
| Accumulated other comprehensive loss | | $ | (687 | ) | | $ | (3,995 | ) |
In the nine months ended September 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 September 30, 2022 | | | As of December 31, 2021 | |
| Syndicated debt (1) | | $ | 104,475 | | | $ | 105,000 | |
| Seller Financed notes payable - Front Line Power Construction, LLC acquisition (2) | | | 69,168 | | | | 86,730 | |
| Note Payable - Financing notes (3) | | | 2,650 | | | | 1,357 | |
| Seller Financed notes payable - Reach Construction Group, LLC acquisition (4) | | | 3,480 | | | | 3,480 | |
| Vehicle and equipment loans (5) | | | 1,752 | | | | 222 | |
| Non-recourse payable agreements (6) | | | 9,610 | | | | 8,269 | |
| Notes payable - Institutional investor (7) | | | 50,006 | | | | 33,922 | |
| Prepaid Advance agreement (8) | | | 4,720 | | | | — | |
| Conditional settlement notes payable agreement (9) | | | 2,500 | | | | 3,000 | |
| Full Moon and CFS - loans to prior owners (10) | | | 31 | | | | 2 | |
| Subtotal | | | 248,392 | | | | 241,982 | |
| Unamortized prepaid financing fees and debt discounts | | | (11,620 | ) | | | (12,603 | ) |
| Total notes payable | | | 236,772 | | | | 229,379 | |
| Less: notes payable, current | | | (129,034 | ) | | | (72,774 | ) |
| Notes payable, less current portion | | $ | 107,738 | | | $ | 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, and commenced 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 at September 30, 2022 on the term notes is 15.45% at September 30, 2022 with a current effective rate of 18.0%. The Company was in compliance with all debt covenants except for a default identified and cured as a subsequent event. See Note 20 for more information on the cured default. |
| | |
| (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. |
| | |
| (3) | The Company has a note payable to First Insurance Funding executed in 2022 for the purposes of financing a portion of the Company's insurance coverage. The note has an annual percentage rate of 3.28% to be paid in ten monthly payments and are set to mature in May 2023. At December 31, 2021, the Company had three notes payable with First Insurance Funding executed in the third and fourth quarter of 2021 for the purpose of financing a portion of the Company's insurance coverage at annual percentage rates ranging from 3.00% to 4.35% all of which are paid off at September 30, 2022. |
| | |
| (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. In 2022, the Company 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. |
| | |
| (5) | Includes vehicle and equipment loans with interest rates ranging from 0% to 9.15%. |
| | |
| (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% and will mature in the first quarter of 2023. |
| (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. This note was paid off in August 2022. 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 $5.3 million at September 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 in November 2022. 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 $16.9 million at September 30, 2022. The Company has not made any payments on this note as of September 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 $12.8 million at September 30, 2022. The Company has not made any payments on this note as of September 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 and July 2022. If the Company failed to make the required payments, the Lender’s sole and exclusive remedy was to require 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 and July 2022 and recorded liquidated damages in other expense in the amount of $2.3 million, which was added to the principal amount of the note. The original agreement also called for a similar debt reduction requirement in August 2022, but this term was later removed by a subsequent agreement. On August 2, 2022, the Company completed a note payable agreement with the institutional investor with a face amount of $8.6 million, a stated interest rate of 9.0%, an estimated effective interest rate of 16.4%, and an original issue discount of $0.6 million. The note payable is payable within eighteen (18) months after the purchase date and the creditor may request payment of up to $0.8 million per month beginning 6 months after initial issuance. The carrying value was $8.2 million at September 30, 2022. The Company has not made any payments on this note as of September 30, 2022. This note also included a debt reduction clause whereby the Company had agreed to make payments on all of its outstanding agreements with the investor totaling at least $4 million for each of the months of October, November and December 2022. If the Company failed to make the required payments, the Lender’s sole and exclusive remedy was to require as liquidated damages, a ten percent (10%) increase to the outstanding balance for such month on this note. The debt reduction provision was superseded by a subsequent agreement. On September 29, 2022, the Company completed a note payable agreement with the institutional investor with a face amount of $5.4 million, a stated interest rate of 9.0%, an estimated effective interest rate of 16.5%, and an original issue discount of $0.4 million. The note payable is payable within eighteen (18) months after the purchase date and the creditor may request payment of up to $0.5 million per month beginning 6 months after initial issuance. The carrying value was $5.0 million at September 30, 2022. The Company has not made any payments on this note as of September 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 February, March and April 2023. If the Company fails to make the required payments, the Lender’s sole and exclusive remedy is to require as liquidated damages, a ten percent (10%) increase to the outstanding balance for such month on this note. |
| | |
| (8) | On August 18, 2022, the Company entered into a Prepaid Advance Agreement (the “PPA”) with YA II PN, Ltd., a Cayman Islands exempt limited partnership (“Yorkville”). In accordance with the terms of the PPA, the Company may request advances of up to $5.0 million from Yorkville (or such greater amount that the parties may mutually agree) (the “Pre-Paid Advance”), with a limitation on outstanding Pre-Paid Advances of $5.0 million and an aggregate limitation on the Pre-Paid Advances of $50.0 million. Each such Pre-Paid Advance will be offset upon the issuance of the Company’s common stock, par value $0.001 per share (“Common Stock”) to Yorkville at a price per share equal to the lower of: (a) a price per share equal to $0.01 above the market price on The Nasdaq Global Select Market (“Nasdaq”) as of the trading day immediately prior to the date of each closing (the “Fixed Price”), or (b) 96% of the lowest daily volume weighted average price of our Common Stock on Nasdaq during the five (5) trading days prior to each conversion date (the “Market Price” and the lower of the Fixed Price and the Market Price shall be referred to as the “Purchase Price”); however, in no event shall the Purchase Price be less than $0.20 per share. The Company elected the fair value option for this agreement with the debt being marked to market on a quarterly basis. The debt had an original issue discount of $150 thousand and with a carrying value of $4.7 million at September 30, 2022. The discount is amortized through interest expense over the life of the loan. The note had an original maturity date of October 27, 2022, which was extended to February 2023 in October 2022. See note 12 for fair value information on this prepaid advance agreement and note 20 related to an extension of the maturity. |
| | |
| (9) | 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 on 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. |
| | |
| (10) | 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. The original maturity date of the line of credit was August 19, 2022, but the maturity date was extended three months to November 2022. At September 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 $40.1 million at September 30, 2022. The change between the original put option value and the value as of September 30, 2022 was recorded as a $13.3 million loss on financial instrument for the nine months ended September 30, 2022, and the change between the June 30, 2022 put option value and the September 30, 2022 value was recorded as a $1.7 million loss on financial instrument for the three months ended September 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 September 30, | |
| Customer | | 2022 | | | 2021 | |
| Customer 1 | | 20 | % | | | <10% | |
| Customer 2 | | | 16 | % | | | <10% | |
| Customer 3 | | 19 | % | | | <10% | |
| Customer 4 | | | 13 | % | | 16 | % |
| Customer 5 | | | 12 | % | | | <10% | |
| Total concentrations | | | 80 | % | | | 16 | % |
| | | For the Nine Months Ended September 30, | |
| Customer | | 2022 | | | 2021 | |
| Customer 1 | | | 14 | % | | | <10% | |
| Customer 2 | | | 21 | % | | | <10% | |
| Customer 3 | | | 18 | % | | | <10% | |
| Customer 4 | | | 14 | % | | | 14 | % |
| Total concentrations | | | 67 | % | | | 14 | % |
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 September 30, | | | As of December 31, | |
| Customer | | 2022 | | | 2021 | |
| Customer 2 | | | 22 | % | | | 30 | % |
| Customer 4 | | 29 | % | | | <10% | |
| Customer 5 | | | 17 | % | | | <10% | |
| Customer 3 | | | <10% | | | | 16 | % |
| Total concentrations | | | 68 | % | | | 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 months ended September 30, 2022, the Company had three supplier concentrations of approximately 14%, 13%, and 11% in the Renewables segment and zero supplier concentrations for the nine months ended September 30, 2022. In the three months ended September 30, 2021, the Company did not have any supplier concentration over 10%. In the nine months ended September 30, 2021, the Company had one supplier concentration at approximately 10% in the Electric Power segment.
Acquisition of Coax Fiber Solutions
Effective March 7, 2022, GTS, an OIG subsidiary included in the Telecommunications segment, 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 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.
Acquisition of IMMCO
Effective July 28, 2021, the Company entered into a share purchase agreement to acquire IMMCO, Inc., an Atlanta-based telecommunications company providing enterprise solutions to the cable and telecommunications industries since 1992. The acquisition was effectuated pursuant to the Share Purchase Agreement (the “Agreement”), with the shareholders of IMMCO (the "Seller"). Orbital Infrastructure Group paid $16 million and issued 874,317 shares of restricted common stock issued to the Seller ($2.0 million estimated fair value as of July 28, 2021) plus a $0.6 million working capital adjustment for a combined total of $18.6 million. Goodwill reflects the excess purchase price over the fair value of net assets. The Company recorded $11.1 million of goodwill as part of this transaction and all of this goodwill is deductible for tax purposes. Acquisition-related expenses incurred during the nine months ended September 30, 2021 for the IMMCO acquisitions were approximately $0.6 million before taxes, which were recognized within the Selling, general and administrative expense line of the Condensed Consolidated Statements of Operations.
The purchase consideration was as follows:
(in thousands)
| Purchase Consideration | | | | |
| | | | | |
| Cash payment | | $ | 16,597 | |
| Fair value of common stock issued to sellers | | | 2,024 | |
| Total | | $ | 18,621 | |
The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated preliminary fair values at the date of acquisition.
(in thousands)
| Purchase price | | $ | 18,621 | |
| | | | | |
| Cash and cash equivalents | | $ | 1,634 | |
| Trade accounts receivable, net | | | 1,254 | |
| Contract assets | | | 1,001 | |
| Prepaid expenses and other current assets | | | 551 | |
| Property and equipment | | | 760 | |
| Intangible, customer relationships | | | 3,800 | |
| Intangible, trade name | | | 1,162 | |
| Intangible, technology know how | | | 1,459 | |
| Other long-term assets | | | 76 | |
| Deferred tax liability | | | (2,090 | ) |
| Liabilities assumed | | | (2,100 | ) |
| Net assets acquired | | | 7,507 | |
| Goodwill | | | 11,114 | |
| Purchase price allocation | | $ | 18,621 | |
| (in thousands) | | | | |
| Revenue from July 28, 2021 acquisition date to September 30, 2021 | | $ | 1,301 | |
| Income from continuing operations, net of income taxes from July 28, 2021 acquisition date to September 30, 2021 | | | 2,189 | * |
* The deferred tax liability recorded at acquisition was offset against the Company's valuation allowance and recorded as a tax benefit in the nine months ended September 30, 2021 within the income tax benefit line of the Condensed Consolidated Statement of Operations and is included in the total.
Acquisition of Gibson Technical Services
Effective April 13, 2021, the Company entered into a share purchase agreement to acquire Gibson Technical Services, an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990. The acquisition was effectuated pursuant to the Share Purchase Agreement (the “Agreement”), dated as of April 13, 2021, between Orbital Infrastructure Group and the shareholders of GTS (the "Seller"). Orbital Infrastructure Group paid $22 million and issued 5,929,267 shares of restricted common stock issued to the Seller ($16.9 million estimated fair value as of April 13, 2021) for a combined total of $38.9 million. Goodwill reflects the excess purchase price over the fair value of net assets. The Company recorded $12.3 million of goodwill as part of this transaction and all of this goodwill is deductible for tax purposes. Acquisition-related expenses incurred during the nine months ended September 30, 2021 were approximately $0.9 million before tax which were recognized within the Selling, general and administrative expense line of the Condensed Consolidated Statements of Operations.
The purchase consideration was as follows:
| (in thousands) | | | | |
| Purchase Consideration | | | | |
| | | | | |
| Cash payment | | $ | 22,000 | |
| Fair value of common stock issued to sellers | | | 16,932 | |
| Total | | $ | 38,932 | |
The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated preliminary fair values at the date of acquisition.
| Purchase price | | $ | 38,932 | |
| | | | | |
| Cash and cash equivalents | | $ | 610 | |
| Trade accounts receivable | | | 7,871 | |
| Contract assets | | | 1,686 | |
| Contingent receivable | | | 1,424 | |
| Prepaid expenses and other current assets | | | 408 | |
| Property and equipment | | | 3,795 | |
| Right of use assets - Operating leases | | | 860 | |
| Intangible, customer relationships | | | 16,075 | |
| Intangible, trade name | | | 6,388 | |
| Intangible, non-compete agreements | | | 385 | |
| Other long-term assets | | | 123 | |
| Deferred tax liability | | | (9,048 | ) |
| Liabilities assumed | | | (3,984 | ) |
| Net assets acquired | | | 26,593 | |
| Goodwill | | | 12,339 | |
| Purchase price allocation | | $ | 38,932 | |
| (in thousands) | | | | |
| Revenue from April 13, 2021 acquisition date to September 30, 2021 | | $ | 13,515 | |
| Income from continuing operations, net of income taxes from April 13, 2021 acquisition date to September 30, 2021 | | | 9,224 | * |
* The deferred tax liability recorded at acquisition was offset against the Company's valuation allowance and recorded as a tax benefit in the nine months ended September 30, 2021 within the income tax benefit line of the Condensed Consolidated Statement of Operations and is included in the total.
The table below summarizes the unaudited condensed pro forma information of the results of operations of Orbital Infrastructure Group, Inc. for the three and nine months ended September 30, 2021 as though the acquisitions of GTS and IMMCO had been completed as of January 1, 2020.
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30 | |
| | | 2021 | | | 2021 | |
| Gross revenue | | $ | 31,462 | | | $ | 69,867 | |
| Loss from continuing operations, net of income taxes | | $ | (13,919 | ) | | $ | (41,876 | ) |
| 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 their 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 September 30, 2022, the total amount of the outstanding performance and payment bonds was approximately $38.4 million. In addition, the Company had letters of credit outstanding of $1.4 million as of September 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.
Financial Instrument Liabilities
Seller Financed debt - financial instrument
To the extent that the fair value of the shares of common stock previously issued to Tidal Power are less than $4.00 per share upon expiration of the restriction period in November 2022, the Company has agreed to pay additional consideration to Tidal Power so that the value of Tidal Power's shares of common stock 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 in November 2023 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. The fair value of this liability at September 30, 2022 was $40.1 million. See Note 12 for additional information on this financial instrument.
Syndicated debt - subscription agreement financial instrument
To the extent that the Company issues shares of its common stock at a price less than the current reference price, the Company is obligated to issue additional shares to the syndicated lenders based on formulas included in their subscription agreements. When additional shares are issued to the lenders the reference price is reset. The reference price was $0.40 at September 30, 2022. The financial instrument liability had a fair value of $0.8 million at September 30, 2022. See Note 12 for additional information on this financial instrument and Note 20 for additional issuances and changes to the reference price related to the subscription agreement following the September 30, 2022 reporting date.
Orbital Solar Services potential liquidated damages.
On October 23, 2022, Orbital Solar Services had a project completion milestone due that was not met. Contractually, liquidated damages may be incurred at $150,000 per day related to this milestone. In aggregate, delay-related liquidated damages cannot exceed a cap of $9.4 million specific to this contract. Liquidated damages are due and payable within 15 days of invoice per the language in the contract. As of November 14, 2022, the project milestone has not been completed and we have not been invoiced.
New home office facility lease
On October 6, 2022, the Company signed a lease for its new home office in Houston, Texas. The lease is for 46 months and commences at $7 thousand per month.
Cured default on syndicated debt
In November 2022, The Company resolved a dispute with the Syndicated lenders whereby the Syndicated lenders deemed the Company to be in default of its credit agreement due to the Company using proceeds from Front Line Power's operations to pay down $9.5 million of the Company's working capital adjustment with the sellers of Front Line Power. As part of a consent agreement with the lenders, the Company agreed to pay the lenders in a paid-in-kind amount of $10.5 million, which was added to the Syndicated debt balance and included $1.0 million of interest calculated from the first intercompany advance that the Company made.
Extension of prepaid advance maturity date
The maturity date for the Company's prepaid advance, which had a fair value of $4.7 million at September 30, 2022, was extended to February 28, 2023 from its original maturity date of October 27, 2022 for additional consideration of $52,500.
Shares issued to lenders of the Company's syndicated debt as part of the Company's subscription agreement with those lenders
On November 7, 2022, the Company issued the lenders of the Company's syndicated debt an additional 3,325,010 shares, which dropped the subscription agreement's reference price from $0.40 at September 30, 2022 to $0.30 and on November 10, the Company issued the same lenders an additional 3,685,971 shares, which set a new reference price of $0.2349 for the subscription agreement. See Note 16 for more information about the Company's syndicated debt, and note 12 and 19 for information on the financial instrument liability related to the subscription agreement.