Limbach Holdings, Inc. - Quarter Report: 2020 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-36541

LIMBACH HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware, USA						46-5399422
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1251 Waterfront Place, Suite 201 Pittsburgh, Pennsylvania						15222
(Address of principal executive offices)						(Zip Code)

1-412-359-2100

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

LMB

The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☐

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

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

As of November 11, 2020, there were 7,926,137 shares of the registrant’s common stock, $0.0001 par value per share, outstanding.

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LIMBACH HOLDINGS, INC.

Form 10-Q

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Part I.

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of Septe mber 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and September 30, 2019	2
	Condensed Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and Se ptember 30, 2019	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and September 30, 2019	4
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50

Part II.

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52

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Part I

Item 1. Financial Statements

LIMBACH HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)


(in thousands, except share and per share data)	September 30, 2020		December 31, 2019
ASSETS
Current assets
Cash and cash equivalents	$	39,600	$	8,344
Restricted cash	113		113
Accounts receivable, net	124,839		105,067
Contract assets	68,576		77,188
Income tax receivable	685		494
Other current assets	3,908		4,174
Total current assets	237,721		195,380

Property and equipment, net	20,582		21,287
Intangible assets, net	11,785		12,311
Goodwill	6,129		6,129
Operating lease right-of-use assets	19,533		21,056
Deferred tax asset	4,575		4,786
Other assets	461		668
Total assets	$	300,786	$	261,617

LIABILITIES
Current liabilities
Current portion of long-term debt	$	6,612	$	4,425
Current operating lease liabilities	3,875		3,750
Accounts payable, including retainage	88,962		86,267
Contract liabilities	61,085		42,370
Accrued income taxes	1,959		12
Accrued expenses and other current liabilities	24,508		20,045
Total current liabilities	187,001		156,869
Long-term debt	37,462		38,868
Long-term operating lease liabilities	16,402		18,247
Other long-term liabilities	6,794		763
Total liabilities	247,659		214,747
Commitments and contingencies (Note 15)

STOCKHOLDERS’ EQUITY
Common stock, $0.0001 par value; 100,000,000 shares authorized, 7,894,202 issued and outstanding at September 30, 2020 and 7,688,958 at December 31, 2019	1		1
Additional paid-in capital	57,394		56,557
Accumulated deficit	(4,268)		(9,688)
Total stockholders’ equity	53,127		46,870
Total liabilities and stockholders’ equity	$	300,786	$	261,617

The accompanying notes are an integral part of these condensed consolidated financial statements

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LIMBACH HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
(in thousands, except share and per share data)			(As Recast)				(As Recast)
Revenue	$	163,856	$	148,119	$	437,813	$	414,469
Cost of revenue	139,685		129,746		375,083		358,778
Gross profit	24,171		18,373		62,730		55,691
Operating expenses:
Selling, general and administrative expenses	17,045		16,568		47,596		49,691
Amortization of intangibles	109		149		526		499
Total operating expenses	17,154		16,717		48,122		50,190
Operating income	7,017		1,656		14,608		5,501
Other income (expenses):
Interest expense, net	(2,154)		(1,759)		(6,449)		(4,190)
Gain on disposition of property and equipment	3		17		18		38
Loss on debt extinguishment	—		—		—		(513)
Gain (loss) on change in fair value of warrant liability	(1,371)		525		(1,312)		422
Impairment of goodwill	—		(4,359)		—		(4,359)
Total other expenses	(3,522)		(5,576)		(7,743)		(8,602)
Income (loss) before income taxes	3,495		(3,920)		6,865		(3,101)
Income tax provision (benefit)	970		(942)		1,445		(681)
Net income (loss)	$	2,525	$	(2,978)	$	5,420	$	(2,420)
Earnings Per Share (“EPS”)
Income (loss) per common share:
Basic	$	0.32	$	(0.39)	$	0.69	$	(0.32)
Diluted	$	0.31	$	(0.39)	$	0.68	$	(0.32)
Weighted average number of shares outstanding:
Basic	7,890,074		7,673,517		7,844,587		7,653,372
Diluted	8,107,149		7,673,517		7,969,857		7,653,372

The accompanying notes are an integral part of these condensed consolidated financial statements

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LIMBACH HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Common Stock
(in thousands, except share amounts)	Number of shares outstanding	Par value amount		Additional paid-in capital		Accumulated deficit		Stockholders’ equity
Balance at December 31, 2019	7,688,958	$	1	$	56,557	$	(9,688)	$	46,870
Stock-based compensation	—	—		295		—		295
Shares issued related to vested restricted stock units	104,905	—		—		—		—
Net loss	—	—		—		(52)		(52)
Balance at March 31, 2020	7,793,863	$	1	$	56,852	$	(9,740)	$	47,113
Stock-based compensation	—	—		140		—		140
Shares issued related to vested restricted stock units	59,514	—		—		—		—
Net income	—	—		—		2,947		2,947
Balance at June 30, 2020	7,853,377	$	1	$	56,992	$	(6,793)	$	50,200
Stock-based compensation	—	—		304		—		304
Proceeds related to employee stock purchase plan	—	—		98		—		98
Shares issued related to employee stock purchase plan	30,825	—		—		—		—
Shares issued related to vested restricted stock units	10,000	—		—		—		—
Net income	—	—		—		2,525		2,525
Balance at September 30, 2020	7,894,202	$	1	$	57,394	$	(4,268)	$	53,127


	Common Stock
(in thousands, except share amounts)	Number of shares outstanding	Par value amount		Additional paid-in capital		Accumulated deficit		Stockholders’ equity
Balance at December 31, 2018	7,592,911	$	1	$	54,791	$	(8,424)	$	46,368
Cumulative effect of accounting change - ASC Topic 606	—	—		—		639		639
Cumulative effect of accounting change - ASC Topic 842	—	—		—		(128)		(128)
Stock-based compensation	—	—		367		—		367
Shares issued related to vested restricted stock units	50,222	—		—		—		—
Net income	—	—		—		1,847		1,847
Balance at March 31, 2019 (As Recast)	7,643,133	$	1	$	55,158	$	(6,066)	$	49,093
Stock-based compensation	—	—		515		—		515
Net loss	—	—		—		(1,289)		(1,289)
Balance at June 30, 2019 (As Recast)	7,643,133	$	1	$	55,673	$	(7,355)	$	48,319
Stock-based compensation	—	—		491		—		491
Shares issued related to vested restricted stock units	45,825	—		—		—		—
Net loss	—	—		—		(2,978)		(2,978)
Balance at September 30, 2019 (As Recast)	7,688,958	$	1	$	56,164	$	(10,333)	$	45,832

The accompanying notes are an integral part of these condensed consolidated financial statements

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LIMBACH HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine months ended September 30,
	2020		2019
(in thousands)			(As Recast)
Cash flows from operating activities:
Net income (loss)	$	5,420	$	(2,420)
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization	4,635		4,234
Impairment of goodwill	—		4,359
Provision for doubtful accounts	62		104
Stock-based compensation expense	739		1,373
Noncash operating lease expense	3,033		2,789
Amortization of debt issuance costs	1,620		901
Deferred income tax (benefit) provision	211		(775)
Gain on sale of property and equipment	(18)		(38)
Loss on debt extinguishment	—		513
Gain on change in fair value of warrant liability	1,312		(422)
Changes in operating assets and liabilities:
Accounts receivable	(19,834)		(5,223)
Contract assets	8,612		(15,768)
Other current assets	270		29,733
Accounts payable, including retainage	2,695		(1,406)
Prepaid income taxes	(192)		77
Accrued taxes payable	1,947		63
Contract liabilities	18,715		(6,826)
Operating lease liabilities	(3,229)		(2,789)
Accrued expenses and other current liabilities	8,925		(25,961)
Other long-term liabilities	306		(102)
Net cash provided by (used in) operating activities	35,229		(17,584)
Cash flows from investing activities:
Proceeds from sale of property and equipment	65		148
Advances (to) from joint ventures	(3)		3
Purchase of property and equipment	(1,116)		(2,192)
Net cash used in investing activities	(1,054)		(2,041)
Cash flows from financing activities:
Increase in bank overdrafts	—		6,102
Payments on Credit Agreement term loan	—		(14,335)
Proceeds from Credit Agreement revolver	—		17,500
Payments on Credit Agreement revolver	—		(17,500)
Proceeds from 2019 Revolving Credit Facility	7,250		19,250
Payments on 2019 Revolving Credit Facility	(7,250)		(19,250)
Payments on 2019 Refinancing Term Loan	(1,000)		—
Proceeds from 2019 refinancing Term Loan, net of debt discount	—		38,643
Warrants issued in conjunction with the 2019 Refinancing Term Loan	—		969

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Embedded derivative associated with the 2019 Refinancing Term Loan	—		388
Payments on Bridge Term Loan	—		(7,736)
Payments on finance leases	(1,966)		(1,803)
Payments of debt issuance costs	—		(3,339)
Taxes paid related to net-share settlement of equity awards	(102)		(123)
Proceeds from contributions to Employee Stock Purchase Plan	149		—
Net cash (used in) provided by financing activities	(2,919)		18,766
Increase in cash, cash equivalents and restricted cash	31,256		(859)
Cash, cash equivalents and restricted cash, beginning of period	8,457		1,732
Cash, cash equivalents and restricted cash, end of period	$	39,713	$	873
Supplemental disclosures of cash flow information
Noncash investing and financing transactions:
Right of use assets obtained in exchange for new operating lease liabilities	$	924	$	3,022
Right of use assets obtained in exchange for new finance lease liabilities	2,399		2,685
Right of use assets disposed or adjusted modifying operating lease liabilities	586		1,651
Right of use assets disposed or adjusted modifying finance lease liabilities	(64)		(55)
Interest paid	$	4,817	$	3,091

The accompanying notes are an integral part of these condensed consolidated financial statements

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LIMBACH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 – Organization and Plan of Business Operations

Limbach Holdings, Inc. (the “Company,” “we” or “us”), is a Delaware corporation headquartered in Pittsburgh, Pennsylvania that was formed on July 20, 2016, as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company’s condensed consolidated financial statements include the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC, Limbach Company LLC, Limbach Company LP, Harper Limbach LLC, and Harper Limbach Construction LLC.

We operate in two segments, (i) Construction, in which we generally manage large construction or renovation projects that involve primarily heating, ventilation, and air conditioning (“HVAC”), plumbing, or electrical services, and (ii) Service, in which we provide maintenance or service primarily on HVAC, plumbing or electrical systems. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. The Company's customers operate in several different industries, including healthcare, education, sports and entertainment, infrastructure, government, hospitality, commercial, manufacturing, mission critical, and industrial manufacturing. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States.

Emerging Growth Company

Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement under the Securities Act of 1933, as amended, declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We ceased to qualify as an emerging growth company on December 31, 2019. Accordingly, we are required to comply with new or revised financial accounting standards as a public business entity.

Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown and the possibility of a continued economic recession. In response to the COVID-19 outbreak, national and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain non-essential businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The various governmental actions have been and remain applicable to Limbach's operations in different ways, often varying by state. In some instances, these orders have continued to affect certain projects in our Construction and Service segments into the third quarter of 2020. In limited instances, projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction is considered an essential business and Limbach continued to staff its projects and perform work during each of the nine months ended September 30, 2020 and has seen most of the projects that were in progress at the time the shutdowns commenced have since restarted. As Limbach's operations have been deemed essential, we have taken several measures to combat the COVID-19 downturn. The duration or recurrence of these measures and the impact of COVID-19 is unknown and may be extended, and additional measures may be necessary. The New England region was the only branch where all construction activity was prohibited for a period of time. In addition to project suspensions in the New England region, each of our other branches experienced select project suspensions and were adversely impacted by COVID-19 related regulation. In May, much of the COVID-19 regulations that caused shutdowns of projects in the New England region were lifted and all of the projects that were suspended in that region resumed operations. The other projects that were impacted by similar suspensions in each of our other branches also resumed. In the Service segment, certain branches are currently experiencing a slowdown in some types of work due to COVID-19 restrictions but began to see improvement during the summer months. Our branches are expecting building owners to maintain or retrofit current facilities in lieu of funding larger capital projects.

During the nine months ended September 30, 2020, we took several actions to combat the COVID-19 outbreak induced downturn in our business including, but not limited to, the following:

•Identification of projects that have been shut down and methods for seeking to preserve any contractual entitlement that may exist to recover monetary and time impacts;

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•Establishment of a task force to identify possible types and areas of impact from COVID-19 for both shutdown and continuing operations;

•Examination of the Company's productivity and potential impact on gross profit as a result of COVID-19;

•Implementation of the Company's pandemic response plan;

•Implemented our furlough and work schedule reduction plans, as well as permanent reductions in force;

•Suspended substantially all discretionary, non-essential expenditures, including but not limited to, auto allowances, deferral of rent ranging between 1 and 3 months, 10% salary reduction for a select group of corporate and regional management and cost reduction opportunities identified by our external consultant; and

•Continued our hiring freeze.

During the month of July 2020, with the return of project and service work, we removed the 10% salary reduction for the select group of corporate and regional management, returned auto allowances, reinstated positions, removed schedule reduction plans and discontinued our hiring freeze.

In addition to the above actions taken during the initial impacts of COVID-19, we continue to take steps to minimize the adverse impacts of the COVID-19 pandemic on our business and to protect the safety of our employees and continue to emphasize wearing of masks, more frequent washing of hands and tools, social distancing, and work protocols. Limbach's COVID-19 policy is written based on the best practices provided by the Centers for Disease Control and Prevention (“CDC”) and Occupational Safety and Health Administration for essential workers. Our updated Work From Home Policy, along with the Company's business continuity planning and information technology enhancements have enabled an orderly transition to remote work and facilitated social distancing for salaried employees.

Testing and inpatient treatment for COVID-19 is covered under our medical plan and fees have been waived since the onset of the pandemic. Counseling is available through our employee assistance plan to assist employees with financial, mental and emotional stress related to the virus and other issues.

Management continues to perform a reforecast of its 2020 and 2021 financial plans on a monthly basis. For the period ended September 30, 2020, we assessed a variety of factors, including but not limited to projects in our Construction and Service segments currently being impacted or delayed, construction industry financial forecasts for the remainder of 2020, and the impact of certain cost-cutting measures implemented during the end of the our first fiscal quarter. Based on these factors we assumed a measured recovery in revenue and gross profit that commenced in May 2020 and returning to normal revenue and gross profit levels in Q4 2020. However, it is difficult to fully identify the nature and extent of the COVID-19 impacts and fully estimate any costs associated with its impacts, particularly as spread of the disease is reportedly increasing again nationally and worldwide during the fourth quarter of 2020. We believe any actual cost impacts are expected to be more readily discernible as projects continue to progress towards completion. Based on management's current reforecast, management projects compliance with the financial covenants associated with its current credit agreements for the next 12 months.

While management has used all currently available information in its forecasts, the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is highly uncertain, cannot be accurately predicted and is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, such as a lengthy or severe recession or any other negative trend in the U.S. or global economy, and any new information that may emerge concerning the COVID-19 outbreak and the actions to contain it or treat its impact. The continued impact on our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, results of operations, financial condition, liquidity and prospects in the near-term and beyond 2020.

Note 2 – Significant Accounting Policies

Basis of Presentation

Condensed Consolidated Financial Statements

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with instructions to the Quarterly Report on Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information

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not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 12, 2020.

Unaudited Interim Financial Information

The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented are unaudited. Also, within the notes to the Condensed Consolidated Financial Statements, we have included unaudited information for these interim periods. These unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. In our opinion, the accompanying unaudited Condensed Consolidated Financial Statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2020, its results of operations for the three and nine months ended September 30, 2020 and its cash flows for the nine months ended September 30, 2020. The results for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.

The Condensed Consolidated Balance Sheet as of December 31, 2019 was derived from our audited financial statements included in our Annual Report on Form 10-K filed with the SEC on May 12, 2020, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements.

Note 3 – Accounting Standards

Recently Adopted Accounting Standards

New Revenue Recognition Standard

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by subsequent ASUs (collectively, “ASC Topic 606”) which amends the existing accounting standards for revenue recognition and establishes principles for recognizing revenue upon the transfer of promised goods or services to customers based on the expected consideration to be received in exchange for those goods or services. Effective December 31, 2019, management adopted ASC Topic 606 for the annual and quarterly periods beginning after January 1, 2019 using a modified retrospective transition approach. The financial information for the three and nine months ended September 30, 2019 has been recast to conform to the new standard.

The adoption of ASC Topic 606 did not have an impact on revenue of our fixed-price and other service contracts. However, it did impact revenue of our construction-type contracts within our construction and service segments specifically in accounting for warranties. For many of our construction-type contracts, we previously included assurance-type warranties in total estimated project costs. Under ASC Topic 606, the estimated cost of satisfying assurance-type warranties is accrued in accordance with the guidance in ASC Topic 460, Guarantees. Upon adoption of ASC Topic 606, we removed estimated and actual warranty costs at the contract level and recognized a warranty liability and expense in direct proportion to the cost-to-cost method progress towards completion of the associated contract, which had a $0.6 million effect on our opening accumulated deficit balance at January 1, 2019.

The Company also offers service-type warranties on certain construction-type projects. These service-type warranties were not accounted for as a separate performance obligation prior to the adoption of ASC Topic 606. Upon adoption of ASC Topic 606, we allocated a portion of the contract's transaction price to the service-type warranty based on its estimated standalone selling price. The accounting for service-type warranties under ASC Topic 606 did not have a material impact on the condensed consolidated financial statements.

In addition, as of January 1, 2019, we began to separately present contract assets and liabilities on the consolidated balance sheets. Contract assets include amounts due under contractual retainage provisions that were previously included in accounts receivable as well as costs and estimated earnings in excess of billings on uncompleted contracts that were previously separately presented. Contract liabilities include billings in excess of costs and estimated earnings on uncompleted contracts that were previously separately presented and provisions for losses. See Note 5 - Contract Assets and Liabilities for further information.

The adoption of ASC Topic 606 had no impact on the cash flows provided by operating activities in the Company's condensed consolidated statements of cash flows.

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Notes 5 and 16 include additional information relating to our adoption of ASC Topic 606. Note 12 includes information regarding our revenue disaggregated by segment.

Refer to the section, Effects of Adoption of ASC 606 and ASC 842 on Condensed Consolidated Financial Statements, below for additional disclosures around the quantitative impacts that the adoption of ASC Topic 606 had on our condensed consolidated financial statements.

New Leasing Standard

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), as amended and supplemented by subsequent ASUs (collectively, “ASC Topic 842”). ASC Topic 842 amends the existing guidance in Accounting Standards Codification (“ASC”) 840, Leases. This ASU requires, among other things, the recognition of lease right-of-use (“ROU”) assets and lease liabilities by lessees for those leases currently classified as operating leases. Effective December 31, 2019, management adopted ASC Topic 606 for the annual and quarterly periods beginning after January 1, 2019 using a modified retrospective transition approach. The financial information for the quarter-ended September 30, 2019 has been recast to conform to the new standard.

The Company elected the package of practical expedients which provides relief from having to reassess (1) whether any expired or existing contracts contain leases, (2) lease classification (as operating or financing) for any expired or existing leases, and (3) initial direct costs for any existing leases. The Company also elected not to separate non-lease components from lease components and did not elect the hindsight practical expedient.

The adoption of ASC Topic 842 had no impact to the Company's condensed consolidated statements of operations or the consolidated cash flows provided by operating and financing activities in the Company's condensed consolidated statements of cash flows.

Refer to Note 13 - Leases for additional information regarding the impact of the adoption of ASC Topic 842 on the Company's financial position.

Additionally, refer to the section, Effects of Adoption of ASC 606 and ASC 842 on Condensed Consolidated Financial Statements, below for additional disclosures around the quantitative impacts that the adoption of ASC Topic 842 had on our condensed consolidated financial statements.

Effects of Adoption of ASC 606 and ASC 842 on Condensed Consolidated Financial Statements

The effect of the changes made to the Company's condensed consolidated September 30, 2019 balance sheet and condensed consolidated statement of operations for the three and nine month periods ended September 30, 2019 for the adoption of ASC Topic 606 and ASC Topic 842 were as follows:

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CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)	Previously Reported Balance as of September 30, 2019(a)		Adjustments due to ASC Topic 606		Adjustments due to ASC Topic 842		Balance as of September 30, 2019 (As Recast)
Assets
Accounts receivable, net (b)	$	143,279	$	(32,339)	$	—	$	110,940
Contract assets	—		79,577		—		79,577
Costs and estimated earnings in excess of billings on uncompleted contracts	45,974		(45,974)		—		—
Other current assets	5,040		9		—		5,049
Operating lease right-of-use assets (c)	—		—		21,714		21,714
Deferred tax asset	5,315		(363)		—		4,952

Liabilities
Contract liabilities	$	—	$	41,991	$	—	$	41,991
Billings in excess of costs and estimated earnings on uncompleted contracts	44,751		(44,751)		—		—
Accrued expenses and other current liabilities	33,530		2,681		—		36,211
Current portion of long-term debt	3,548		—		62		3,610
Current operating lease liabilities (c)	—		—		3,756		3,756
Long-term debt	39,583		—		65		39,648
Long-term operating lease liabilities (c)	—		—		18,753		18,753
Other long-term liabilities	1,958		—		(794)		1,164

Stockholders' Equity
Accumulated deficit	$	(11,194)	$	989	$	(128)	$	(10,333)

(a) Balances as previously reported on the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.

(b) Prior to the adoption of ASC Topic 606, retainage receivable was included within accounts receivable, net.

(c) Prior to the adoption of ASC Topic 842, operating lease right-of-use assets and current and long-term operating lease liabilities were not recorded on the Company's condensed consolidated balance sheets.

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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
	Three months ended September 30, 2019
(in thousands)	Previously Reported(a)		Adjustments due to ASC Topic 606		Adjustments due to ASC Topic 842		As Recast
Revenue
Construction	$	118,076	$	348	$	—	$	118,424
Service	29,692		3		—		29,695
Total revenue	147,768		351		—		148,119
Cost of revenue
Construction	107,474		(193)		—		107,281
Service	22,503		(38)		—		22,465
Total cost of revenue	129,977		(231)		—		129,746
Gross profit	17,791		582		—		18,373
Operating expenses:
Selling, general and administrative expenses	16,568		—		—		16,568
Amortization of intangibles	149		—		—		149
Total operating expenses	16,717		—		—		16,717
Operating income	1,074		582		—		1,656
Other income (expenses):
Interest expense, net	(1,759)		—		—		(1,759)
Gain on disposition of property and equipment	17		—		—		17
Gain on change in fair value of warrant liability	525		—		—		525
Impairment of goodwill	(4,359)		—		—		(4,359)
Total other expenses	(5,576)		—		—		(5,576)
Loss before income taxes	(4,502)		582		—		(3,920)
Income tax benefit	(1,090)		148		—		(942)
Net loss	$	(3,412)	$	434	$	—	$	(2,978)

(a) Balances as previously reported on the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2019.

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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
	Nine months ended September 30, 2019
(in thousands)	Previously Reported(a)		Adjustments due to ASC Topic 606		Adjustments due to ASC Topic 842		As Recast
Revenue
Construction	$	327,675	$	(32)	$	—	$	327,643
Service	86,797		29		—		86,826
Total revenue	414,472		(3)		—		414,469
Cost of revenue
Construction	293,338		(437)		—		292,901
Service	65,909		(32)		—		65,877
Total cost of revenue	359,247		(469)		—		358,778
Gross profit	55,225		466		—		55,691
Operating expenses:
Selling, general and administrative expenses	49,691		—		—		49,691
Amortization of intangibles	499		—		—		499
Total operating expenses	50,190		—		—		50,190
Operating income	5,035		466		—		5,501
Other income (expenses):
Interest expense, net	(4,190)		—		—		(4,190)
Gain on disposition of property and equipment	38		—		—		38
Loss on debt extinguishment	(513)		—		—		(513)
Gain on change in fair value of warrant liability	422						422
Impairment of goodwill	(4,359)		—		—		(4,359)
Total other expenses	(8,602)		—		—		(8,602)
Loss before income taxes	(3,567)		466		—		(3,101)
Income tax benefit	(797)		116		—		(681)
Net loss	$	(2,770)	$	350	$	—	$	(2,420)

(a) Balances as previously reported on the Company's Quarterly Report on Form 10-Q for the nine months ended September 30, 2019.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The guidance is effective for smaller reporting companies on January 1, 2023 with early adoption permitted. The adoption of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. Based on our historical experience, the Company does not expect that this pronouncement will have a significant impact in its financial statements or on the estimate of the allowance for doubtful accounts.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which affects general principles within Topic 740, and is meant to simplify and reduce the cost of accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and simplifies areas including franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, the incremental approach for intraperiod tax allocation, interim period income tax accounting for year-to-date losses that exceed anticipated losses and enacted changes in tax laws in interim periods. The changes are effective for annual periods beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements.

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In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which makes improvements to financial instruments guidance. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. With regard to amendments related to Issue 1, Issue 2, Issue 4 and Issue 5, for public business entities, the amendments are effective upon issuance of this final ASU. With regard to amendments related to Issue 6 and Issue 7, for entities that have not yet adopted the guidance in Update 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. For entities that have adopted the guidance in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We do not expect the adoption of this pronouncement to have a material impact on our condensed consolidated financial statements or presentation thereof.

The FASB also issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. The new guidance provides optional expedients for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material impact on our condensed consolidated financial statements or presentation thereof.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements.

Note 4 – Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable and the allowance for doubtful accounts are comprised of the following:


(in thousands)	September 30, 2020		December 31, 2019
Accounts receivable - trade	$	125,116	$	105,373
Allowance for doubtful accounts	(277)		(306)
Accounts receivable, net	$	124,839	$	105,067

Note 5 – Contract Assets and Liabilities

The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle.

Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings. The components of the contract asset balances as of the respective dates were as follows:


(in thousands)	September 30, 2020		December 31, 2019		Change
Contract assets
Costs in excess of billings and estimated earnings	$	31,235	$	44,315	$	(13,080)
Retainage receivable	37,341		32,873		4,468
Total contract assets	$	68,576	$	77,188	$	(8,612)

Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10%, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion.

Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when either: 1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to

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the billing terms defined in the contract, or 2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings.

The current estimated net realizable value on such claims and unapproved change orders as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $38.0 million and $38.4 million as of September 30, 2020 and December 31, 2019, respectively. The Company anticipates that the majority of such amounts will be approved or executed within one year. The resolution of these claims and unapproved change orders may require litigation or other forms of dispute resolution proceedings.

Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows:


(in thousands)	September 30, 2020		December 31, 2019		Change
Contract liabilities
Billings in excess of costs and estimated earnings	$	60,272	$	40,662	$	19,610
Provisions for losses	813		1,708		(895)
Total contract liabilities	$	61,085	$	42,370	$	18,715

Billings in excess of costs represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue.

Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue.

The net (overbilling) underbilling position for contracts in process consist of the following:


(in thousands)	September 30, 2020		December 31, 2019
Revenue earned on uncompleted contracts	$	696,558	$	726,215
Less: Billings to date	(725,595)		(722,562)
Net (overbilling) underbilling	$	(29,037)	$	3,653


(in thousands)	September 30, 2020		December 31, 2019
Costs in excess of billings and estimated earnings	$	31,235	$	44,315
Billings in excess of costs and estimated earnings	(60,272)		(40,662)
Net (overbilling) underbilling	$	(29,037)	$	3,653

We recorded revisions in our contract estimates for certain construction projects. For projects having revisions with a material gross profit impact, this resulted in gross profit write downs on five Construction segment projects of $2.4 million for the three months ended September 30, 2020, three of which were within the Southern California region for a total of $1.8 million. We also recorded a $0.4 million material project revision resulting in a gross profit write up on a single Construction segment project within the Southern California region for the three months ended September 30, 2020.

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ups on Construction segment projects for the nine months ended September 30, 2020, each of which had a material gross profit impact, for an aggregate gross profit write down of $7.5 million and $1.6 million, respectively.

For the three months ended September 30, 2019, we recorded revisions in our contract estimates for certain Construction and Service segment projects. Individual Construction segment projects with revisions having a material gross profit impact resulted in gross profit write ups totaling $0.6 million on one Mid-Atlantic region and one New England region project. We also recorded revisions in contract estimates that resulted in project write downs totaling $3.7 million on six Construction segment projects in our Southern California region and one Construction segment project in our New England region.

For the nine months ended September 30, 2019, we recorded revisions in our contract estimates for certain Construction and Service segment projects. Individual Construction segment projects with revisions having a material gross profit impact resulted in gross profit write ups totaling $3.4 million on seven Construction segment projects, including two projects totaling $0.7 million for our Mid-Atlantic region. In addition, one of these project write ups in the amount of $1.4 million resulted from our settlement of a significant Michigan project. Revisions in our contract estimates on one Service segment project resulted in a gross profit write up of $0.2 million on a Mid-Atlantic project. We also recorded revisions in contract estimates that resulted in project write downs totaling $6.5 million on nine Construction segment projects, including seven projects totaling $5.1 million in our Southern California region, one project for $1.0 million in our Western Pennsylvania region and one project for $0.4 million in our Mid-Atlantic region. Revisions in our contract estimates on one Service segment project resulted in a gross profit write down of $0.4 million on a Southern California region project.

Note 6 – Goodwill and Intangibles

Goodwill was $6.1 million at September 30, 2020 and December 31, 2019. The goodwill is associated with the Company's Service segment. Intangible assets are comprised of the following:


(in thousands)	Gross carrying amount		Accumulated amortization		Net intangible assets, excluding goodwill
September 30, 2020
Amortized intangible assets:
Customer Relationships – Service	$	4,710	$	(3,012)	$	1,698
Favorable Leasehold Interests	530		(403)		127
Total amortized intangible assets	5,240		(3,415)		1,825
Unamortized intangible assets:
Trade Name	9,960		—		9,960
Total unamortized intangible assets	9,960		—		9,960
Total amortized and unamortized assets, excluding goodwill	$	15,200	$	(3,415)	$	11,785


(in thousands)	Gross carrying amount		Accumulated amortization		Net intangible assets, excluding goodwill
December 31, 2019
Amortized intangible assets:
Customer Relationships – Service	$	4,710	$	(2,655)	$	2,055
Favorable Leasehold Interests	530		(234)		296
Total amortized intangible assets	5,240		(2,889)		2,351
Unamortized intangible assets:
Trade Name	9,960		—		9,960
Total unamortized intangible assets	9,960		—		9,960
Total amortized and unamortized assets, excluding goodwill	$	15,200	$	(2,889)	$	12,311

The definite-lived intangible assets are amortized over the period the Company expects to receive the related economic benefit, which for customer relationships is based upon estimated future net cash inflows. The Company has previously determined that

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its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry.

Total amortization expense for these amortizable intangible assets was $0.1 million and $0.5 million for the three and nine months ended September 30, 2020 and $0.1 million and $0.5 million for the three and nine months ended September 30, 2019.

As the Company determined that the fair value of its construction reporting unit was below its carrying amount, the Company performed an interim impairment test of September 30, 2019 and recognized a non-cash impairment charge for its construction reporting unit of $4.4 million for the three and nine months ended September 30, 2019. The Company did not recognize any impairment charges on its goodwill or intangible assets for the three and nine months ended September 30, 2020.

Note 7 – Debt

Long-term debt consists of the following obligations as of:


(in thousands)	September 30, 2020		December 31, 2019
2019 Refinancing Term Loan - term loan payable in quarterly installments of principal, (commencing in September 2020) plus interest through April 2022	$	40,000	$	41,000
Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 4.85% to 6.45% through 2025	6,954		6,585
Total debt	46,954		47,585
Less - Current portion of long-term debt	(6,612)		(4,425)
Less - Unamortized discount and debt issuance costs	(2,880)		(4,292)
Long-term debt	$	37,462	$	38,868

Credit Agreement

In 2016, Limbach Facility Services, LLC (“LFS”), a subsidiary of the Company, entered into the Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement consisted of a $25.0 million revolving line of credit (the “Credit Agreement revolver”) and a $24.0 million term loan (the “Credit Agreement term loan”), both with a maturity date of July 20, 2021. The Credit Agreement was collateralized by substantially all assets of LFS and its subsidiaries. Principal payments of $900,000 on the Credit Agreement term loan were due at the end of each quarter, beginning September 30, 2018, through maturity of the loan, with any remaining amounts due at maturity. Outstanding borrowings on both the Credit Agreement term loan and the Credit Agreement revolver bore interest at either the Base Rate (as defined in the Credit Agreement) or LIBOR (as defined in the Credit Agreement), plus the applicable additional margin, payable monthly. Mandatory prepayments were required upon the occurrence of certain events, including, among other things and subject to certain exceptions, equity issuances, changes of control of the Company, certain debt issuances, assets sales and excess cash flow.

The Credit Agreement included restrictions on, among other things and subject to certain exceptions, the Company and its subsidiaries’ ability to incur additional indebtedness, pay dividends or make other distributions, redeem or purchase capital stock, make investments and loans and enter into certain transactions, including selling assets, engaging in mergers or acquisitions and entering into transactions with affiliates. Loans under the Credit Agreement bore interest, at the borrower's option, at either Adjusted LIBOR (“Eurodollar”) or a Base Rate, in each case, plus an applicable margin. The applicable margin with respect to any Base Rate loan was 5.00% per annum and with respect to a Eurodollar loan was 6.00% per annum.

The borrower was required to make principal payments on the Bridge Term Loan in the amount of $250,000 on the last business day of March, June, September and December of each year. The Bridge Term Loan had a maturity date of April 12, 2019. The Bridge Term Loan was guaranteed by the same guarantors (including Limbach Holdings, Inc., Limbach Facility Services LLC, Limbach Holdings LLC, Limbach Company LLC, Limbach Company LP, Harper Limbach LLC and Harper Limbach Construction LLC) and secured (on a pari passu basis) by the same collateral as the other loans under the Credit Agreement.

The equity interests of the Company’s subsidiaries were pledged as security for the obligations under the Credit Agreement. The Credit Agreement included customary events of default, including, among other items, payment defaults, cross-defaults to other indebtedness, a change of control default and events of default with respect to certain material agreements. Additionally, with respect to the Company, an event of default would have been deemed to have occurred if the Company’s securities ceased to be registered with the SEC pursuant to Section 12(b) of the Exchange Act. In case of an event of default, the administrative agent would have been entitled to, among other things, accelerated payment of amounts due under the Credit Agreement, foreclose on the equity of the Company’s subsidiaries, and exercise all rights of a secured creditor on behalf of the lenders.

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The additional margin applied to both the Credit Agreement revolver and Credit Agreement term loan were determined based on levels achieved under the Company’s senior leverage ratio covenant, which reflects the ratio of indebtedness divided by EBITDA for the most recently ended four quarters.

The following is a summary of the additional margin and commitment fees payable on the available revolving credit commitment:


Level	Senior Leverage Ratio	Additional Margin for Base Rate loans		Additional Margin for Libor Rate loans		Commitment Fee
I	Greater than or equal to 2.50 to 1.00	3.00	%	4.00	%	0.50	%
II	Less than 2.50 to 1.00, but greater than or equal to 2.00 to 1.00	2.75	%	3.75	%	0.50	%
III	Less than 2.00 to 1.00, but greater than or equal to 1.50 to 1.00	2.50	%	3.50	%	0.50	%
IV	Less than 1.50 to 1.00	2.25	%	3.25	%	0.50	%

2019 Refinancing Agreement

On April 12, 2019 (the “Refinancing Closing Date”), LFS entered into a financing agreement (the “2019 Refinancing Agreement”) with the lenders thereto and Cortland Capital Market Services LLC, as collateral agent and administrative agent and CB Agent Services LLC, as origination agent (“CB”). The 2019 Refinancing Agreement consists of (i) a $40.0 million term loan (the “2019 Refinancing Term Loan”) and (ii) a new $25.0 million multi-draw delayed draw term loan (the “2019 Delayed Draw Term Loan” and, collectively with the 2019 Refinancing Term Loan, the “2019 Term Loans”). Proceeds from the 2019 Refinancing Term Loan were used to repay the then existing Credit Agreement, to pay related fees and expenses thereof and to fund working capital of the Borrowers (defined below). Management intends for proceeds of the 2019 Delayed Draw Term Loan to be used to fund permitted acquisitions under the 2019 Refinancing Agreement and related fees and expenses in connection therewith.

LFS, a wholly-owned subsidiary of the Company, and each of its subsidiaries are borrowers (the “Borrowers”) under the 2019 Refinancing Agreement. In addition, the 2019 Refinancing Agreement is guaranteed by the Company and LHLLC (each, a “Guarantor”, and together with the Borrowers, the “Loan Parties”).

The 2019 Refinancing Agreement is secured by a first-priority lien on the real property of the Loan Parties and a second-priority lien on substantially all other assets of the Loan Parties, behind the 2019 ABL Credit Agreement (as defined below). The respective lien priorities of the 2019 Refinancing Agreement and the 2019 ABL Credit Agreement are governed by an intercreditor agreement.

2019 Refinancing Agreement - Interest Rates and Fees

The interest rate on borrowings under the 2019 Refinancing Agreement is, at the Borrowers’ option, either LIBOR (with a 2.00% floor) plus 11.00% or a base rate (with a 3.00% minimum) plus 10.00%. At September 30, 2020, the interest rate in effect on the 2019 Refinancing Term Loan was 13.00% and 10.18% at September 30, 2019.

2019 Refinancing Agreement - Other Terms and Conditions

The 2019 Refinancing Agreement matures on April 12, 2022, subject to certain adjustment. Required amortization is $0.4 million per quarter commencing with the fiscal quarter ending September 30, 2020. There is an unused line fee of 2.0% per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there is a make-whole premium on prepayments made prior to the 19-month anniversary of the Refinancing Closing Date. This make-whole provision guarantees that the Company will pay no less than 18 months’ applicable interest to the lenders under the 2019 Refinancing Agreement. The 2019 Refinancing Agreement contains representations and warranties, and covenants which are customary for debt facilities of this type. Unless the Required Lenders (as defined in the 2019 Refinancing Agreement) otherwise consent in writing, the covenants limit the ability of the Company and its restricted subsidiaries to, among other things, (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company’s stockholders, (iii) purchase or redeem the Company’s equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with the Company’s affiliates, (vii) sell assets and (viii) merge or consolidate with, or dispose of substantially all of the Company’s assets to, other companies.

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In addition, the 2019 Refinancing Agreement includes customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company fails to comply with the terms of the 2019 Refinancing Agreement or if other customary events occur.

Furthermore, the 2019 Refinancing Agreement also contains two financial maintenance covenants for the 2019 Refinancing Term Loan, including a requirement to have sufficient collateral coverage of the aggregate outstanding principal amount of the 2019 Refinancing Term Loans and as of the last day of each month for the total leverage ratio of the Company and its Subsidiaries (the “Total Leverage Ratio ”) not to exceed an amount beginning at 4.25 to 1.00 through June 30, 2019, and stepping down to 2.00 to 1.00 effective July 1, 2021. From July 1, 2019 through September 30, 2019, the Total Leverage Ratio may not exceed 4.00 to 1.00. As of August 31, 2019, the Company’s Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 4.61 to 1.00, which did not meet the requirement for such ratio not to exceed 4.00 to 1.00. As of September 30, 2019, the Company’s Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 2.85 to 1.00, which was in compliance with the 4.00 to 1.00 requirement. The lender has waived the event of default arising from this noncompliance as of August 31, 2019, while reserving its rights with respect to covenant compliance in future months. In addition, the parties to the 2019 Refinancing Agreement entered into an amendment which, among other changes, revises the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 through the term of such agreement. The 2019 Refinancing Agreement contains a post-closing covenant requiring the remediation of the Company’s material weakness, as described in Item 9A of its 2018 Annual Report on Form 10-K, no later than December 31, 2020 and to provide updates as to the progress of such remediation, provided that, if such remediation has not been completed on or prior to December 31, 2019, (x) the Company shall be required to pay the post-closing fee pursuant to the terms of the Origination Agent Fee Letter (as defined in the 2019 Refinancing Agreement) and (y) the applicable margin shall be increased by 1.00% per annum for the period from January 1, 2020 until the date at which the material weakness is no longer disclosed or required to be disclosed in the Company’s SEC filings or audited financial statements of the Company or related auditor’s reports. As of December 31, 2019, the Company fully remediated its material weakness and the Company removed from its SEC filings disclosure of such material weakness.

In connection with the 2019 Refinancing Amendment Number One and Waiver, dated November 14, 2019, the parties amended certain provisions of the 2019 Refinancing Agreement, including, among other changes to: (i) require, commencing October 1, 2019, a 3.00% increase in the interest rate on borrowings under the 2019 Refinancing Agreement; (ii) require the approval of CB and, generally, the lenders representing at least 50.1% of the aggregate undrawn term loan commitment or unpaid principal amount of the term loans, prior to effecting any permitted acquisition; (iii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 and thereafter through the term of the 2019 Refinancing Agreement; and (iv) require the liquidity of the loan parties, which is generally calculated by adding (a) unrestricted cash on hand of the Loan Parties maintained in deposit accounts subject to control agreements granting control to the collateral agent for the 2019 ABL Credit Agreement, to (b) the difference between (1) the lesser of (x) $15 million, as adjusted from time to time, and (y) 75% of certain customer accounts resulting from the sale of goods or services in the ordinary course of business minus certain reserves established by the Administrative Agent and (2) the sum of (x) the outstanding principal balance of all revolving loans under the 2019 ABL Credit Agreement plus (y) the aggregate undrawn available amount of all letters of credit then outstanding plus the amount of any obligations that arise from any draw against any letter of credit that have not been reimbursed by the borrowers or funded with a revolving loan under the 2019 ABL Credit Agreement (the “Loan Parties Liquidity”), as of the last day of any fiscal month ending on or after November 30, 2019, of at least $10,000,000. As a condition to executing the 2019 Refinancing Amendment Number One and Waiver, the loan parties will be required to pay a non-refundable waiver fee of $400,000 and a non-refundable amendment fee of $1,000,000 (the “PIK First Amendment Fee”, which shall be paid in kind by adding the PIK First Amendment Fee to the outstanding principal amount of the term loan under the 2019 Refinancing Agreement as additional principal obligations thereunder on and as of the effective date 2019 Refinancing Amendment Number One and Waiver).

2019 Refinancing Agreement - CB Warrants

In connection with the 2019 Refinancing Agreement, on the Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the “CB Warrants”) to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants will be exercisable at any given time will be equal to: (i) the product of (x) the number of shares equal to 2% of the Company’s issued and outstanding shares of common stock on the Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the Refinancing Closing Date through September 30, 2020, no amounts had been drawn on the

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2019 Delayed Draw Term Loan, so no portion of the CB Warrants was exercisable. The CB Warrants may be exercised for cash or on a “cashless basis,” subject to certain adjustments, at any time after the Refinancing Closing Date until the expiration of such warrant at 5:00 p.m., New York time, on the earlier of (i) the five (5) year anniversary of the Refinancing Closing Date, or (ii) the liquidation of the Company.

Accounting for the 2019 Term Loans and CB Warrants

The CB Warrants represent a freestanding financial instrument that is classified as a liability because the CB Warrants meet the definition of a derivative instrument that does not meet the equity scope exception (i.e., the CB Warrants are not indexed to the entity’s own equity). In addition, the material weakness penalty described above was evaluated as an embedded derivative liability and bifurcated from the 2019 Term Loans as it represents a non-credit related embedded feature that provides for net settlement. Both the CB Warrants liability and the embedded derivative liability are required to be initially and subsequently measured at fair value. The initial fair values of the CB Warrants liability and the embedded derivative liability approximated $0.9 million and $0.4 million, respectively, on the Refinancing Closing Date. The Company estimated these fair values by using the Black-Scholes-Merton option pricing model and a probability-weighted discounted cash flow approach.

The CB Warrants liability is included in other long-term liabilities. The Company remeasured the fair value of the CB Warrants liability as of September 30, 2020 and recorded any adjustments as other income (expense). At September 30, 2020 and December 31, 2019, the CB Warrants liability was $1.7 million and $0.4 million, respectively. For the three and nine months ended September 30, 2020, respectively, the Company recorded other expense of $1.4 million and $1.3 million to reflect the change in fair value of the CB Warrants liability. For the three and nine months ended September 30, 2019, the Company recorded other income of $0.5 million and $0.4 million, respectively. At September 30, 2020 and December 31, 2019, the embedded derivative liability was $0.0 million as the Company remediated the material weakness associated with the embedded derivative as of December 31, 2019, and the $0.4 million embedded derivative liability was fully reversed and recorded as other income at that date.

The proceeds for the 2019 Term Loan were first allocated to the CB Warrants liability and embedded derivative liability based on their respective fair values with a corresponding amount of $1.3 million recorded as a debt discount to the 2019 Term Loans. In addition, the Company incurred approximately $2.5 million of debt issuance costs for the 2019 Term Loans that have also been recorded as a debt discount. The combined debt discount from the CB Warrants liability, embedded derivative liability and the debt issuance costs are being amortized into interest expense over the term of the 2019 Term Loans using the effective interest method. The Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $0.1 million and $0.3 million for the three and nine months ended September 30, 2020, respectively, and recorded an additional $0.4 million and $1.1 million of interest expense for the amortization of the debt issuance costs for the three and nine months ended September 30, 2020, respectively.

The Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $0.1 million and $0.2 million for the three and nine months ended September 30, 2019, respectively, and recorded an additional $0.2 million and $0.4 million of interest expense for the amortization of the debt issuance costs for the three and nine months ended September 30, 2019, respectively.

2019 ABL Credit Agreement

On the Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (the “2019 ABL Credit Agreement” and, together with the 2019 Refinancing Agreement, the “Refinancing Agreements”). The 2019 ABL Credit Agreement consists of a $15.0 million revolving credit facility (the “2019 Revolving Credit Facility”). Proceeds of the 2019 Revolving Credit Facility may be used for general corporate purposes. On the Refinancing Closing Date, the Company had nothing drawn on the ABL Credit Agreement and $14.0 million of available borrowing capacity thereunder (net of a $1.0 million reserve imposed by the lender).

The Borrowers and Guarantors under the 2019 ABL Credit Agreement are the same as under the 2019 Refinancing Agreement.

The 2019 ABL Credit Agreement is secured by a second-priority lien on the real property of the Loan Parties (behind the 2019 Refinancing Agreement) and a first-priority lien on substantially all other assets of the Loan Parties.

2019 ABL Credit Agreement - Interest Rates and Fees

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ranging from 2.00% to 2.50%. At September 30, 2020 and September 30, 2019, the interest rates in effect on the 2019 ABL Credit Agreement were 5.25% and 7.00%, respectively.

2019 ABL Credit Agreement - Other Terms and Conditions

The 2019 ABL Credit Agreement matures on April 12, 2022. There is an unused line fee ranging from 0.250% to 0.375% per annum on undrawn amounts.

The 2019 ABL Credit Agreement contains representations and warranties, and covenants which are customary for debt facilities of this type. Unless the Required Lenders otherwise consent in writing, the covenants limit the ability of the Company and its restricted subsidiaries to, among other things, generally, to (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company’s stockholders, (iii) purchase or redeem the Company’s equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with the Company’s affiliates, (vii) sell assets other than in the ordinary course of business or another permitted disposition of assets and (viii) merge or consolidate with, or dispose of substantially all of the Company’s assets to, other companies.

The 2019 ABL Credit Agreement includes customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company fails to comply with the terms of the 2019 ABL Credit Agreement or if other customary events occur.

The 2019 ABL Credit Agreement also contains a financial maintenance covenant for the 2019 Revolving Credit Facility, which is a requirement for the Total Leverage Ratio of the Company and its Subsidiaries not to exceed an amount beginning at 4.00 to 1.00 through September 30, 2019, and stepping down to 1.75 to 1.00 effective July 1, 2021. As of August 31, 2019, the Company’s Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 4.61 to 1.00, which did not meet the requirement for such ratio not to exceed 4.00 to 1.00. As of September 30, 2019, the Company’s Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 2.85 to 1.00, which was in compliance with the 4.00 to 1.00 requirement. The lender has waived the event of default arising from this noncompliance as of August 31, 2019, while reserving its rights with respect to covenant compliance in future months. In addition, the parties to the 2019 ABL Credit Agreement entered into an amendment which, among other changes revises the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 through the term of such agreement.

In connection with the 2019 ABL Credit Amendment Number One and Waiver, the parties amended certain provisions of the 2019 ABL Credit Agreement, including, among other changes to (i) require the approval of the origination agent and, generally, the lenders representing at least 50.1% of the aggregate undrawn revolving loan commitment or unpaid principal amount of the term loans, prior to effecting any permitted acquisition; (ii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 through the term of the 2019 ABL Credit Agreement; and (iii) require the Loan Parties Liquidity as of the last day of any fiscal month ending on or after November 30, 2019, of at least $10,000,000, as described above in the Amendment Number One to 2019 Refinancing Agreement and Waiver. As a condition to executing the 2019 ABL Credit Amendment Number One and Waiver, the loan parties was required to pay a non-refundable waiver fee of $7,500.

Accounting for the 2019 ABL Credit Agreement

As of September 30, 2020 and December 31, 2019, the Company had no amounts drawn on the 2019 ABL Credit Agreement. In addition, the Company incurred approximately $0.9 million of debt issuance costs for the 2019 ABL Credit Agreement that have been recorded as a non-current deferred asset. The deferred asset is being amortized into interest expense over the term of the 2019 Term ABL Credit Agreement using the effective interest method. The Company recorded interest expense of $0.1 million and $0.2 million for the amortization the debt issuance costs for the three and nine months ended September 30, 2020, respectively, and $0.1 million for each of the three and nine months ended September 30, 2019.

Note 8 – Equity

The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $0.0001, and 1,000,000 shares of preferred stock, par value $0.0001.

At September 30, 2020 and December 31, 2019, the Company had outstanding warrants exercisable for 4,576,799 shares of common stock, consisting of: (i) 4,600,000 warrants issued as part of units in its initial public offering, each of which is

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exercisable for one-half of one share of common stock at an exercise price of $11.50 per whole share (“Public Warrants”); (ii) 198,000 warrants, each exercisable for one-half of one share of common stock at an exercise price of $5.75 per half share ($11.50 per whole share) (“Sponsor Warrants”); (iii) 600,000 warrants, each exercisable for one share of common stock at an exercise price of $15.00 per share (“$15 Exercise Price Warrants”); (iv) 631,119 warrants, each exercisable for one share of common stock at an exercise price of $12.50 per share (“Merger Warrants”); and (v) 946,680 warrants, each exercisable for one share of common stock at an exercise price of $11.50 per share (“Additional Merger Warrants”). The Public Warrants, Sponsor Warrants and $15 Exercise Price Warrants were issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer & Trust Company, as warrant agent, and the Company. The Merger Warrants and Additional Merger Warrants were issued to the sellers of LHLLC.

As discussed in Note 7 - Debt above, the Company issued CB Warrants to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. As of September 30, 2020, no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants was exercisable.

On July 21, 2014, a total of 300,000 Unit Purchase Options (“UPOs”) were issued by 1347 Capital to a representative of the underwriter and its designees. The 17,100 UPOs that were outstanding at June 30, 2019 expired on July 21, 2019. Each UPO consisted of one share of common stock, one right to purchase one-tenth of one share of common stock and one warrant to purchase one-half of one share of common stock at an exercise price of $11.50 per full share, exercisable on a cash or cashless basis.

On May 24, 2020 the Board of Directors approved further amendments to the Company's amended and restated Omnibus Incentive Plan to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 500,000, for a total of 1,650,000 shares, and extend the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the Amended Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on July 14, 2020.

See Note 17 - Management Incentive Plans for RSUs granted, vested, forfeited and remaining unvested.

Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (“the ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during consecutive subscription periods at a purchase price of 85% of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $5,000, whichever is less. Each offering period of the ESPP lasts six months, commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15% discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP 500,000 shares are authorized to be issued. In July 2020, the Company issued 30,825 shares of its common stock to participants in the ESPP who contributed to the plan through June 30, 2020. Proceeds related to the ESPP were $0.1 million for the nine months ended September 30, 2020. Stock compensation expense related to the ESPP was $17 thousand for the three and nine months ended September 30, 2020.

Note 9 – Fair Value Measurements

The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

•Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date;

•Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical

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or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and

•Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. We also believe that the carrying value of the 2019 Refinancing Agreement term loan approximates its fair value due to the variable rate on such debt. As of September 30, 2020 and December 31, 2019, the Company determined that the fair value of its 2019 Refinancing Agreement term loan was $40.0 million and $41.0 million, respectively. Such fair value is determined using discounted estimated future cash flows using level 3 inputs.

In connection with the 2019 Refinancing Agreement, on the Refinancing Closing Date, the Company issued to CB and the other lenders under the CB Warrants to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications (refer to Note 7 - Debt). The fair value of the Company’s warrant liability is recorded in the Company’s condensed consolidated financial statements and is determined using the Black-Scholes-Merton option pricing model. The valuation inputs include the quoted price of the Company’s common stock in an active market, volatility and expected life of the warrants, which are Level 3 inputs. Volatility is based on the actual market activity of the Company’s stock. The expected life is based on the remaining contractual term of the warrants and the risk-free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ expected life.

The table below sets forth the assumptions used within the Black-Scholes-Merton option pricing model to value the Company's warrant liabilities as of September 30, 2020:


Stock price	$	10.70
Exercise price	$	7.63
Time until expiration (years)	3.50
Expected volatility	75.0		%
Risk-free interest rate	0.2		%
Expected dividend yield	—		%

Note 10 – Earnings per Share

Diluted EPS assumes the dilutive effect of outstanding common stock warrants, UPOs and RSUs, all using the treasury stock method.


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
(in thousands, except per share amounts)			(As Recast)				(As Recast)
EPS numerator:
Net income (loss)	$	2,525	$	(2,978)	$	5,420	$	(2,420)

EPS denominator:
Weighted average shares outstanding – basic	7,890		7,674		7,845		7,653
Impact of dilutive securities	217		—		125		—
Weighted average shares outstanding – diluted	8,107		7,674		7,970		7,653

EPS:
Basic	$	0.32	$	(0.39)	$	0.69	$	(0.32)
Diluted	$	0.31	$	(0.39)	$	0.68	$	(0.32)

The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted loss per common share:

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	Three months ended September 30,		Nine months ended September 30,
	2020	2019	2020	2019
Out-of-the-money warrants (see Note 8)	4,576,799	4,576,799	4,576,799	4,576,799
Service-based RSUs (See Note 17)	—	114,837	538	83,409
Employee Stock Purchase Plan	8,375	—	4,375	—
Out-of-the-money UPOs (See Note 8)	—	3,903	—	12,590
Total	4,585,174	4,695,539	4,581,712	4,672,798

Note 11 – Income Taxes

The Company is taxed as a C corporation.

For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

The effective tax rate for the three and nine months ended September 30, 2020 was 27.8% and 21.1%, respectively, and the effective tax benefit rate for the three and nine months ended September 30, 2019 was (24.0)% and (22.0)%, respectively.

No valuation allowance was required as of September 30, 2020 or December 31, 2019.

The Company has recorded a liability for unrecognized tax benefits of $0.5 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively, which were included in accrued expenses and other current liabilities. These unrecognized tax benefits are related to tax positions taken on its various income tax returns in open tax periods.

Note 12 – Operating Segments

The Company determined its operating segments on the same basis that it assesses performance and makes operating decisions. The Company manages and measures the performance of its business in two distinct operating segments: Construction and Service. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on income from operations of the respective segments after the allocation of Corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting, the Company has elected to aggregate all of the construction branches into one Construction reportable segment and all of the service branches into one Service reportable segment. All transactions between segments are eliminated in consolidation. Our Corporate department provides general and administrative support services to our two operating segments. The CODM allocates costs between segments for selling, general and administrative expenses and depreciation expense.

All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. The Company does not have sales outside the United States. The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is not allocated to segments because of the corporate management of debt service including interest.

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Condensed consolidated segment information for the periods presented is as follows:


	Three months ended September 30,
	2020		2019
(in thousands)			(As Recast)
Statement of Operations Data:
Revenue:
Construction	$	130,498	$	118,424
Service	33,358		29,695
Total revenue	163,856		148,119

Gross profit:
Construction	14,848		11,144
Service	9,323		7,229
Total gross profit	24,171		18,373

Selling, general and administrative expenses:(1)
Construction	10,501		10,746
Service	6,240		5,329
Corporate	304		493
Total selling, general and administrative expenses	17,045		16,568
Amortization of intangibles	109		149
Operating income	$	7,017	$	1,656

Operating income for reportable segments	$	7,017	$	1,656
Other expenses:
Impairment of goodwill (Construction)	—		(4,359)
Less unallocated amounts:
Interest expense, net	(2,154)		(1,759)
Gain on sale of property and equipment	3		17
Gain (loss) on change in fair value of warrant liability	(1,371)		525
Total unallocated amounts	(3,522)		(1,217)
Total consolidated income (loss) before income taxes	$	3,495	$	(3,920)

Other Data:
Depreciation and amortization:
Construction	$	1,046	$	954
Service	340		259
Corporate	109		149
Total other data	$	1,495	$	1,362

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	Nine months ended September 30,
	2020		2019
(in thousands)			(As Recast)
Statement of Operations Data:
Revenue:
Construction	$	345,921	$	327,643
Service	91,892		86,826
Total revenue	437,813		414,469

Gross profit:
Construction	38,043		34,742
Service	24,687		20,949
Total gross profit	62,730		55,691

Selling, general and administrative expenses:(1)
Construction	28,700		32,427
Service	18,157		15,890
Corporate	739		1,374
Total selling, general and administrative expenses	47,596		49,691
Amortization of intangibles	526		499
Operating income	$	14,608	$	5,501

Operating income for reportable segments	$	14,608	$	5,501
Other expenses:
Impairment of goodwill (Construction)	—		(4,359)
Less unallocated amounts:
Interest expense, net	(6,449)		(4,190)
Gain on sale of property and equipment	18		38
Loss on debt extinguishment	—		(513)
Gain (loss) on change in fair value of warrant liability	(1,312)		422
Total unallocated amounts	(7,743)		(4,243)
Total consolidated income (loss) before income taxes	$	6,865	$	(3,101)

Other Data:
Depreciation and amortization:
Construction	$	3,108	$	2,929
Service	1,001		807
Corporate	526		498
Total other data	$	4,635	$	4,234

(1)Starting January 1, 2020, the Company changed the methodology in which it presents its corporate selling, general and administrative expenses to the Company's CODM to better reflect the way the business is managed. Under this new methodology, all corporate expenses except for stock-based compensation are allocated to the Company's Construction and Service segments. For comparability purposes, we reclassified our selling, general and administrative expense segment amounts for the three and nine months ended September 30, 2019 to align with this updated allocation methodology.

Note 13 - Leases

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The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets.

The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For our leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with our real estate leases, the Company uses quoted borrowing rates on our secured debt.

The following table summarizes the lease amounts included in our condensed consolidated balance sheets:


(in thousands)	Classification on the Condensed Consolidated Balance Sheets	September 30, 2020		December 31, 2019
Assets
Operating	Operating lease right-of-use assets (a)	$	19,533	$	21,056
Finance	Property and equipment, net (b)	6,747		6,412
Total lease assets		$	26,280	$	27,468

Liabilities
Current
Operating	Current operating lease liabilities	$	3,875	$	3,750
Finance	Current portion of long-term debt	2,612		2,424
Noncurrent
Operating	Long-term operating lease liabilities	16,402		18,247
Finance	Long-term debt	4,342		4,161
Total lease liabilities		$	27,231	$	28,582

(a) Operating lease assets are recorded net of accumulated amortization of $10.9 million at September 30, 2020 and $8.5 million at December 31, 2019.

(b) Finance lease assets are recorded net of accumulated amortization of $5.3 million at September 30, 2020 and $4.7 million at December 31, 2019.

The following table summarizes the lease costs included in our condensed consolidated statements of operations for the three and nine months ended:


		For the Three months ended September 30,				For the Nine months ended September 30,
(in thousands)	Classification on the Condensed Consolidated Statement of Operations	2020		2019		2020		2019
Operating lease cost	Cost of revenue(a)	$	882	$	910	$	2,658	2,577
Operating lease cost	Selling, general and administrative expenses(a)	355		339		1,110		1,010
Finance lease cost
Amortization	Cost of revenue(b)	684		650		2,001		1,833
Interest	Interest expense, net(b)	89		86		269		239
Total lease cost		$	2,010	$	1,985	$	6,038	$	5,659

(a) Operating lease costs recorded in cost of sales includes $0.2 million and $0.1 million of variable lease costs for the three months ended September 30, 2020 and 2019, respectively. No variable lease costs are included in Selling, general and administrative expenses for both the three months ended September 30, 2020 and 2019. Operating lease costs recorded in cost of sales includes $0.5 million of variable lease costs for the nine months ended September 30, 2020 and 2019. In addition, $0.2 million of variable lease costs are included in Selling, general and administrative expenses for the nine months ended September 30, 2020 and 2019.

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(b) Finance lease costs recorded in cost of revenue for the three months ended September 30, 2020 and 2019 includes $0.6 million and $0.7 million of variable leases costs. Finance lease costs recorded in cost of revenue for the nine months ended September 30, 2020 and 2019 includes $1.8 million and $2.1 million of variable lease costs. These variable lease costs consist of fuel, maintenance, and sales tax charges. No variable lease costs for finance leases were recorded in selling, general and administrative expenses.

Future minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of September 30, 2020 were as follows:


Year ending (in thousands):	Finance Leases		Operating Leases
Remainder of 2020	$	789	$	1,200
2021	2,784		4,777
2022	2,256		4,514
2023	1,261		3,516
2024	449		2,917
Thereafter	1		6,451
Total minimum lease payments	$	7,540	$	23,375
Amounts representing interest	(586)
Present value of net minimum lease payments	$	6,954

The following is a summary of the lease terms and discount rates:


	September 30, 2020		December 31, 2019
Weighted average lease term (in years)
Operating	5.71		6.20
Finance	2.91		2.96

Weighted average discount rate
Operating	4.83	%	4.80	%
Finance	5.52	%	5.69	%

The following is a summary of other information and supplemental cash flow information related to finance and operating leases for the nine months ended:


(in thousands)	September 30, 2020		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3,963	$	3,490
Operating cash flows from finance leases	269		239
Financing cash flows from finance leases	1,966		1,803
Right-of-use assets exchanged for lease liabilities:
Operating leases	$	924	$	3,022
Finance leases	2,399		2,685
Right-of-use assets disposed or adjusted modifying operating leases liabilities	$	586	$	1,651
Right-of-use assets disposed or adjusted modifying finance leases liabilities	$	(64)	$	(55)

Note 14 – Self-Insurance

The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $250 thousand and a $4.6 million maximum aggregate deductible loss limit per year.

The components of the self-insurance liability as of September 30, 2020 and December 31, 2019 are as follows:

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(in thousands)	As of September 30, 2020		As of December 31, 2019
Current liability — workers’ compensation and general liability	$	434	$	703
Current liability — medical and dental	482		821
Non-current liability	667		382
Total liability shown in Accrued expenses and other current liabilities	$	1,583	$	1,906
Restricted cash	$	113	$	113

The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month.

Note 15 – Commitments and Contingencies

Legal. The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, and other unrelated parties, all arising in the ordinary courses of business. In the opinion of the Company’s management, the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

LFS and Harper, wholly-owned subsidiaries of the Company, were parties to a lawsuit involving a Harper employee who was alleged to be in the course and scope of his employment at the time the personal car he was operating collided with another car causing injuries to three persons and one fatality. On or about October 12, 2018, the plaintiffs agreed to settle and dismiss the lawsuit in exchange for an aggregate payment of $30.0 million from LFS and Harper, which amounts were paid entirely by the Company’s insurance carriers. The Company will not have any monetary exposure. The $30.0 million amounts due from the Company’s insurance carriers and due to the plaintiffs were included in the captions labeled as other current assets and accrued expenses and other current liabilities, respectively, in the consolidated balance sheet as of December 31, 2018 and were paid in February 2019.

On November 13, 2019, claimant, Lanzo Trenchless Technologies, Inc. - North, filed a Demand for Arbitration in the state of Michigan against the Company's wholly-owned subsidiary, Limbach Company LLC. The demand seeks damages in excess of $0.4 million based upon the allegation that Limbach breached a construction contract by improperly terminating Lanzo’s subcontract, and for withholding payment from Lanzo based upon deficient performance. Limbach has asserted a counterclaim seeking damages caused by Lanzo’s deficient performance. A binding arbitration proceeding is scheduled for January of 2021.

On January 23, 2020, plaintiff, Bernards Bros. Inc., filed a complaint against Limbach Holdings, Inc. in Superior Court of the State of California for the County of Los Angeles against Limbach Holdings, Inc. The complaint alleges that our Southern California operations refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $3.0 million, including alleged increased costs for hiring a different subcontractor to perform the work. The Company is vigorously defending the suit, which is currently set for trial to take place in June or July of 2021.

On April 17, 2020, plaintiff, LA Excavating, Inc., filed a complaint against our wholly-owned subsidiary, Limbach Company LP, and several other parties, in Superior Court of the State of California, for the County of Los Angeles. The complaint seeks damages of approximately $1.0 million for alleged failure to pay contract balances and extra work ordered by Limbach, as well as seeks to enforce payment obligations under payment and stop notice release bonds. The Company disputes the allegations and intends to vigorously defend the suit, which is currently set for trial in November of 2021.

In July of 2020, plaintiff, Kimball Construction Co., Inc., filed a complaint against our wholly-owned subsidiary, Limbach Company LLC in circuit Court for Montgomery County, Maryland. The complaint seeks damages of approximately $1.7 million for alleged failure to pay contract balances and extra work, as well as to enforce payment obligations under a payment bond issued by Limbach's surety provider. The Company disputes the allegations and intends to vigorously defend the suit, which is currently set for trial to take place sometime in the second quarter of 2021.

Surety. The terms of our construction contracts frequently require that we obtain from surety companies, and provide to our customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure our payment and performance obligations under such contracts, and we have agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts,

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and accordingly, our bonding requirements typically increase as the amount of public sector work increases. As of September 30, 2020, the Company had approximately $105.3 million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond.

Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue.

Note 16 – Remaining Performance Obligations

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions.

As of September 30, 2020, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's Construction and Service segment contracts were $407.5 million and $47.6 million, respectively. As of December 31, 2019, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's Construction and Service segment contracts were $504.2 million and $41.9 million, respectively.

We estimate that 26% and 47% of our Construction and Service segment remaining performance obligations as of September 30, 2020, respectively, will be recognized as revenue during 2020, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company's performance is not always under its control.

Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s service agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to backlog is provided in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

Note 17 – Management Incentive Plans

The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose of: (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan provides that the Company may grant options, stock appreciation rights, restricted shares, restricted stock units, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing.

Following the further amendment and restatement of the Omnibus Incentive Plan upon approval of the Company's stockholders on July 14, 2020, the Company has reserved a total of 1,650,000 shares of its common stock for issuance under the Omnibus Incentive Plan. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only.

Service-Based Awards

During the first nine months of 2020, the Company granted 118,633 service-based RSUs to its executives, certain employees, and non-employee directors under the Omnibus Incentive Plan.

The following table summarizes our service-based RSU activity for the nine months ended September 30, 2020:

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	Awards	Weighted-Average Grant Date Fair Value
Unvested at December 31, 2019	328,575	$	7.83
Granted	118,633	3.48
Vested	(167,085)	8.95
Forfeited	(10,109)	6.80
Unvested at September 30, 2020	270,014	$	5.34

Performance-Based Awards

During the first nine months of 2020, the Company granted 96,500 performance-based RSUs (“PRSUs”) to its executives and certain employees under the Omnibus Incentive Plan. The Company will recognize stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of certain performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the three and nine months ended September 30, 2020, the Company recognized $0.1 million of stock-based compensation expense related to outstanding PRSUs. For the three and nine months ended September 30, 2019, the Company did not recognize any stock-based compensation expense related to any outstanding PRSUs.

The following table summarizes our PRSU activity for the nine months ended September 30, 2020:


	Awards	Weighted-Average Grant Date Fair Value
Unvested at December 31, 2019	62,307	$	12.62
Granted	96,500	3.67
Vested	—	—
Forfeited	(13,250)	11.31
Unvested at September 30, 2020	145,557	$	6.80

Market-Based Awards

On September 4, 2020, the Compensation Committee (the “Committee”) of the Board of Directors of Limbach Holdings, Inc. (the “Company”) approved amendments to certain restricted stock units initially awarded on August 30, 2017 by the Company to certain employees. Pursuant to the amendment adopted on September 4, 2020, the measurement period was extended to July 16, 2022. In addition to the market performance-based vesting condition, the vesting of such restricted stock unit is subject to continued employment from August 1, 2017 through the later of July 31, 2019 or the date on which the Committee certifies the achievement of the performance goal. The Company has accounted for this amendment as a Type I modification and will recognize approximately $0.2 million of incremental stock-based compensation expense over 1.26 years based on an updated Monte Carlo simulation model.

The following table summarizes our market-based RSU (“MRSUs”) activity for the nine months ended September 30, 2020:


	Awards	Weighted-Average Grant Date Fair Value
Unvested at December 31, 2019	125,000	$	6.58
Granted	—	—
Vested	—	—
Forfeited	(22,500)	6.58
Unvested at September 30, 2020	102,500	$	6.58

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Total recognized stock-based compensation expense amounted to $0.3 million and $0.7 million for the three and nine months ended September 30, 2020, respectively, and $0.5 million and $1.4 million for the three and nine months ended September 30, 2019, respectively. The aggregate fair value as of the vest date of RSUs that vested during the nine months ended September 30, 2020 and 2019 was $0.6 million and $0.9 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $0.8 million at September 30, 2020. These costs are expected to be recognized over a weighted average period of 1.52 years.

Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (“the ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during consecutive subscription periods at a purchase price of 85% of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $5,000, whichever is less. Each offering period of the ESPP lasts six months, commencing on January 1st and July 1st of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15% discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP 500,000 shares are authorized to be issued. In July 2020, the Company issued 30,825 shares of its common stock to participants in the ESPP who contributed to the plan through June 30, 2020. Proceeds related to the ESPP were $0.1 million for the nine months ended September 30, 2020. Stock compensation expense related to the ESPP was $17 thousand for the three and nine months ended September 30, 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in subsequent Quarterly Reports on Form 10-Q. We assume no obligation to update any of these forward-looking statements.

Overview

We are an industry-leading commercial specialty contractor in the areas of heating, ventilation, and air conditioning (“HVAC”), plumbing, electrical and building controls through design and construction of new and renovated buildings, maintenance services, energy retrofits and equipment upgrades for private customers and federal, state, and local public agencies in Florida, California, Massachusetts, New Jersey, Pennsylvania, Delaware, Maryland, Washington, D.C., Virginia, West Virginia, Ohio and Michigan. We operate our business in two segments, (i) Construction, in which we generally manage large construction or renovation projects that involve primarily HVAC, plumbing or electrical services, and (ii) Service, in which we provide facility maintenance or services primarily on HVAC, plumbing or electrical systems. Our branches and corporate headquarters are located in the United States.

JOBS Act

We ceased to qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act on December 31, 2019, at which time we reached the last day of the fiscal year following the fifth anniversary of our initial public offering of common equity securities.

Key Components of Condensed Consolidated Statements of Operations

Revenue

We generate revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to our customers. The duration of our contracts generally ranges from six months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. We believe that our extensive experience in HVAC, plumbing, and electrical projects, and our internal cost review procedures during the bidding process, enable us to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts.

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We generally invoice customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable.

Cost of Revenue

Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of our services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and we expect this fluctuation to continue in future periods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel costs for our administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of our business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act.

Starting January 1, 2020, we changed the methodology in which we present our corporate selling, general and administrative expenses to our CODM (as defined below) to better reflect the way the business is managed. Under this new methodology, all corporate expenses except for stock-based compensation are allocated to our Construction and Service segments. For comparability purposes, we reclassified our selling, general and administrative expense segment amounts for the three and nine months ended September 30, 2019 to align with this updated allocation methodology.

Amortization of Intangibles

Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets, primarily including leasehold interests, customer relationships - Service and backlog - Construction.

Other Income/Expense

Other income/expense, net consists primarily of interest expense incurred in connection with our debt, net of interest income and gains and losses on the sale of property and equipment, changes in fair value of warrant liability and goodwill impairment. Deferred financing costs are amortized to interest expense using the effective interest method.

Income Taxes

We are taxed as a C corporation and our financial results include the effects of federal income taxes which are paid at the parent level.

For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes.

Operating Segments

We manage and measure the performance of our business in two operating segments: Construction and Service. These segments are reflective of how the Company’s Chief Operating Decision Makers (“CODM”) reviews its operating results for the purposes of allocating resources and assessing performance. Our CODM is comprised of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The CODM evaluates performance and allocates resources based on operating income, which is profit or loss from operations before “other” corporate expenses, income tax provision (benefit), if any.

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The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting, the Company has elected to aggregate all of the construction branches into one Construction reportable segment and all of the service branches into one Service reportable segment. All transactions between segments are eliminated in consolidation. Our corporate department provides general and administrative support services to our two operating segments. We allocate costs between segments for selling, general and administrative expenses and depreciation expense. See Note 12 – Operating Segments in the notes to condensed consolidated financial statements.

We do not identify capital expenditures and total assets by segment in our internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is not allocated to segments because of the corporate management of debt service.

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Comparison of Results of Operations for the three months ended September 30, 2020 and 2019

The following table presents operating results for the three months ended September 30, 2020 and 2019 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared below:


	Three months ended September 30,
	2020					2019
						(As Recast)
(in thousands except for percentages)	($)		(%)			($)		(%)
Statement of Operations Data:
Revenue:
Construction	$	130,498	79.6	%		$	118,424	80.0	%
Service	33,358		20.4	%		29,695		20.0	%
Total revenue	163,856		100.0	%		148,119		100.0	%

Gross profit:
Construction	14,848		11.4	%	(1)	11,144		9.4	%	(1)
Service	9,323		27.9	%	(2)	7,229		24.3	%	(2)
Total gross profit	24,171		14.8	%		18,373		12.4	%

Selling, general and administrative:(3)
Construction	10,501		8.0	%	(1)	10,746		9.1	%	(1)
Service	6,240		18.7	%	(2)	5,329		17.9	%	(2)
Corporate	304		0.2	%		493		0.3	%
Total selling, general and administrative expenses	17,045		10.4	%		16,568		11.2	%

Amortization of intangibles (Corporate)	109		0.1	%		149		0.1	%

Operating income (loss):
Construction	4,347		3.3	%	(1)	398		0.3	%	(1)
Service	3,083		9.2	%	(2)	1,900		6.4	%	(2)
Corporate	(413)		—	%		(642)		—	%
Total operating income	7,017		4.3	%		1,656		1.1	%

Other expenses:
Other expenses (Corporate)	(3,522)		(2.1)	%		(1,217)		(0.8)	%
Impairment of goodwill (Construction)	—		—	%		(4,359)		(100.0)	%
Total other expenses	(3,522)		(14.6)	%		(5,576)		(30.3)	%
Total consolidated income (loss) before income taxes	3,495		2.1	%		(3,920)		(2.6)	%
Income tax provision (benefit)	970		0.6	%		(942)		(0.6)	%
Net income (loss)	$	2,525	1.5	%		$	(2,978)	(2.0)	%

(1)As a percentage of Construction revenue.

(2)As a percentage of Service revenue.

(3)Starting January 1, 2020, we changed the methodology in which we present our corporate selling, general and administrative expenses to our CODM to better reflect the way the business is managed. Under this new methodology, all corporate expenses except for stock-based compensation are allocated to our Construction and Service segments. For comparability purposes, we reclassified our selling, general and administrative expense segment amounts for the three months ended September 30, 2019 to align with this updated allocation methodology.

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Revenue


	Three months ended September 30,
	2020	2019	Increase/(Decrease)
		(As Recast)
(in thousands except for percentages)	$	$	$	%
Revenue:
Construction	130,498	118,424	12,074	10.2	%
Service	33,358	29,695	3,663	12.3	%
Total revenue	163,856	148,119	15,737	10.6	%

Revenue for the three months ended September 30, 2020 increased by $15.7 million compared to the revenue for the three months ended September 30, 2019, as recast for the adoption of ASC Topic 606. Construction revenue increased by $12.1 million, or 10.2% while Service revenue increased by $3.7 million, or 12.3%. Construction segment revenue of $130.5 million increased 10.2% driven by growth in the Michigan, Ohio and New England operating regions, mainly as a result of the start of new projects and the continuation of work on existing projects. These increases were partially offset by revenue decreases in the Florida operating region largely due to COVID-19 related project shutdowns, planned reductions in revenue in Southern California and in Eastern Pennsylvania the substantial completion of projects in the third quarter of 2020 as compared to the same prior year quarter. Florida, Mid-Atlantic and Western Pennsylvania regions' Service revenue increased quarter over quarter nearly offset by declines in Service revenue in Michigan. Maintenance contract revenue, a component of Service revenue, remained relatively flat at $3.8 million for both the three months ended September 30, 2020 and 2019.

Gross Profit


	Three months ended September 30,
	2020		2019		Increase/(Decrease)
			(As Recast)
(in thousands except for percentages)	$		$		$	%
Gross Profit:
Construction	14,848		11,144		3,704	33.2	%
Service	9,323		7,229		2,094	29.0	%
Total gross profit	24,171		18,373		5,798	31.6	%
Total gross profit as a percentage of consolidated total revenue	14.8	%	12.4	%

Our gross profit for the three months ended September 30, 2020 increased by $5.8 million compared to our gross profit for the three months ended September 30, 2019. Construction gross profit increased $3.7 million or 33.2%. Service gross profit increased $2.1 million, or 29.0% due to more favorable project pricing. The total gross profit percentage increased from 12.4% for the three months ended September 30, 2019 to 14.8% for the same period ended in 2020, mainly driven by the mix of higher margin Service segment work coupled with slightly higher margins and lower write downs for Construction segment projects.

We recorded revisions in our contract estimates for certain Construction segment projects. For projects having revisions with a material gross profit impact, this resulted in gross profit write downs on five construction projects of $2.4 million for the three months ended September 30, 2020, three of which were within the Southern California region for a total of $1.8 million. We also recorded $0.4 million for material project revisions on Construction segment projects resulting in gross profit write ups for the three months ended September 30, 2020.

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Selling, General and Administrative Expenses


	Three months ended September 30,
	2020		2019		Increase/(Decrease)
			(As Recast)
(in thousands except for percentages)	$		$		$	%
Selling, general and administrative expenses:
Construction	10,501		10,746		(245)	(2.3)	%
Service	6,240		5,329		911	17.1	%
Corporate	304		493		(189)	(38.3)	%
Total selling, general and administrative expenses	17,045		16,568		477	2.9	%

Selling, general and administrative expenses as a percentage of consolidated total revenue	10.4	%	11.2	%

Our total selling, general and administrative (“SG&A”) expenses increased by approximately $0.4 million to $17.0 million for the three months ended September 30, 2020 compared to $16.6 million for the three months ended September 30, 2019. Total SG&A expense increased during the current quarter by $0.5 million due to $2.1 million higher incentive compensation expense compared to the third quarter of 2019 due to higher gross profit offset by $0.5 million of lower payroll expense as compared to third quarter 2019, further offset by $0.4 million related to company-wide reductions in travel and entertainment expenses, a $0.2 million reduction on pre-sale engineering expenses, and a $0.2 million reduction in stock based compensation expense quarter over quarter. Additionally, total SG&A as a percentage of revenues were 10.4% for the three months ended September 30, 2020 and 11.2% for the three months ended September 30, 2019.

Amortization of Intangibles


	Three months ended September 30,
	2020	2019	Increase/(Decrease)
(in thousands except for percentages)	$	$	$	%
Amortization of intangibles (Corporate)	109	149	(40)	(26.8)	%

Total amortization expense for the amortizable intangible assets was $0.1 million for each of the three months ended September 30, 2020 and September 30, 2019, remaining relatively flat year over year.

Other Expenses


	Three months ended September 30,
	2020	2019	Increase/(Decrease)
(in thousands except for percentages)	$	$	$	%
Other income (expenses):
Interest expense, net	(2,154)	(1,759)	(395)	22.5	%
Gain on disposition of property and equipment	3	17	(14)	(82.4)	%
Gain (loss) on fair value of warrant liability	(1,371)	525	(1,896)	(361.1)	%
Total other expenses (Corporate)	(3,522)	(1,217)	(2,305)	189.4	%
Impairment of goodwill (Construction)	—	(4,359)	(4,215)	96.7	%
Total other expenses	(3,522)	(5,576)	(8,416)	150.9	%

Other expenses, consist of interest expense of $2.2 million for the three months ended September 30, 2020 as compared to $1.8 million of interest expense and the recognition of impairment of goodwill on our Construction segment of $4.4 million for the three months ended September 30, 2019. The increase in interest expense was primarily due to the Company's higher interest rates on the refinanced debt obligations at 13.0% in the third quarter of 2020 compared to 10.2% in the third quarter of 2020. The Company also recorded other expense of $1.4 million and other income of $0.5 million to reflect the change in fair value of the CB Warrants liability for the three months ended September 30, 2020 and 2019, respectively.

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Income Taxes

The Company recorded a $1.0 million income tax provision and a $1.0 million income tax benefit for the three months ended September 30, 2020 and 2019, respectively.

The effective tax rate for the three months ended September 30, 2020 was 27.8% and the effective tax benefit rate for the three months ended September 30, 2019 was (24.0)%.

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Comparison of Results of Operations for the nine months ended September 30, 2020 and September 30, 2019

The following table presents operating results for the nine months ended September 30, 2020 and 2019 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared below:


	Nine months ended September 30,
	2020					2019
						(As Recast)
(in thousands except for percentages)	($)		(%)			($)		(%)
Statement of Operations Data:
Revenue:
Construction	$	345,921	79.0	%		$	327,643	79.1	%
Service	91,892		21.0	%		86,826		20.9	%
Total revenue	437,813		100.0	%		414,469		100.0	%

Gross profit:
Construction	38,043		11.0	%	(1)	34,742		10.6	%	(1)
Service	24,687		26.9	%	(2)	20,949		24.1	%	(2)
Total gross profit	62,730		14.3	%		55,691		13.4	%

Selling, general and administrative:(3)
Construction	28,700		8.3	%	(1)	32,427		9.9	%	(1)
Service	18,157		19.8	%	(2)	15,890		18.3	%	(2)
Corporate	739		0.2	%		1,374		0.3	%
Total selling, general and administrative expenses	47,596		10.9	%		49,691		12.0	%

Amortization of intangibles (Corporate)	526		0.1	%		499		0.1	%

Operating income (loss):
Construction	9,343		2.7	%	(1)	2,315		0.7	%	(1)
Service	6,530		7.1	%	(2)	5,059		5.8	%	(2)
Corporate	(1,265)		—	%		(1,873)		—	%
Total operating income	14,608		3.3	%		5,501		1.3	%

Other expenses:
Other expenses (Corporate)	(7,743)		(1.8)	%		(4,243)		(1.0)	%
Impairment of goodwill (Construction)	—		—	%		(4,359)		(100.0)	%
Total other expenses	(7,743)		(1.8)	%		(8,602)		(2.1)	%
Total consolidated income (loss) before income taxes	6,865		1.6	%		(3,101)		(0.7)	%
Income tax provision (benefit)	1,445		0.3	%		(681)		(0.2)	%
Net income (loss)	$	5,420	1.2	%		$	(2,420)	(0.6)	%

(1)As a percentage of Construction revenue.

(2)As a percentage of Service revenue.

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comparability purposes, we reclassified our selling, general and administrative expense segment amounts for the nine months ended September 30, 2019 to align with this updated allocation methodology.

Revenue


	Nine months ended September 30,
	2020	2019	Increase/(Decrease)
		(As Recast)
(in thousands except for percentages)	$	$	$	%
Revenue:
Construction	345,921	327,643	18,278	5.6	%
Service	91,892	86,826	5,066	5.8	%
Total revenue	437,813	414,469	23,344	5.6	%

Revenue for the nine months ended September 30, 2020 increased by $23.3 million compared to the revenue for the nine months ended September 30, 2019, as recast for the adoption of ASC Topic 606. Construction revenue increased by $18.3 million, or 5.6%. The increase in Construction revenue was primarily driven by revenue increases at the Michigan, Ohio and New England regions. These increases were partially offset by revenue decreases in the Florida region due to project shutdowns due to COVID-19 and Western and Eastern Pennsylvania regions due to the substantial completion of projects during the nine months ended September 30, 2020 compared to the same period in the prior year. Ohio, Florida, and Mid-Atlantic regions' Service revenue increased year over year offset by declines in Service revenue in the Michigan and New England regions, resulting in a net Service revenue of $5.1 million. Maintenance contract revenue, a component of Service revenue, was $11.4 million for the nine months ended September 30, 2020 and $11.1 million for the nine months ended September 30, 2019, an increase of $0.3 million year over year.

Gross Profit


	Nine months ended September 30,
	2020		2019		Increase/(Decrease)
			(As Recast)
(in thousands except for percentages)	$		$		$	%
Gross Profit:
Construction	38,043		34,742		3,301	9.5	%
Service	24,687		20,949		3,738	17.8	%
Total gross profit	62,730		55,691		7,039	12.6	%
Total gross profit as a percentage of consolidated total revenue	14.3	%	13.4	%

Our gross profit for the nine months ended September 30, 2020 increased by $7.0 million compared to our gross profit for the nine months ended September 30, 2019. Construction gross profit increased $3.3 million or 9.5% due to revenue growth year over year and more favorable pricing of construction projects. Service gross profit increased $3.7 million, or 17.8% due to more favorable project pricing. The total gross profit percentage increased to 14.3% for the nine months ended September 30, 2020 as compared to 13.4% for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, we recorded revisions in our contract estimates for certain Construction segment projects. We recorded gross profit write downs on eleven Construction segment projects and three gross profit write ups on Construction segment projects for the nine months ended September 30, 2020, each of which had a material gross profit impact, for an aggregate revision of $7.5 million and $1.6 million, respectively.

For the nine months ended September 30, 2019, we recorded revisions in our contract estimates for certain Construction and Service segment projects. Individual projects with revisions having a material gross profit impact resulted in gross profit write ups totaling $3.4 million on seven Construction segment projects, including two projects totaling $0.7 million for our Mid-Atlantic region. In addition, one of these project write ups in the amount of $1.4 million resulted from our settlement of a significant Michigan project. Revisions in our contract estimates on one service project resulted in a gross profit write up of $0.2 million on a Mid-Atlantic project. We also recorded revisions in contract estimates that resulted in project write downs totaling $6.5 million on nine Construction segment projects, including seven projects totaling $5.1 million in our Southern California region, one project for $1.0 million in our Western Pennsylvania region and one project for $0.4 million in our Mid-

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Atlantic region. Revisions in our contract estimates on one Service segment project resulted in a gross profit write up of $0.4 million on a Southern California project.

Selling, General and Administrative Expenses


	Nine months ended September 30,
	2020		2019		Increase/(Decrease)
			(As Recast)
(in thousands except for percentages)	$		$		$	%
Selling, general and administrative expenses:
Construction	28,700		32,427		(3,727)	(11.5)	%
Service	18,157		15,890		2,267	14.3	%
Corporate	739		1,374		(635)	(46.2)	%
Total selling, general and administrative expenses	47,596		49,691		(2,095)	(4.2)	%

Selling, general and administrative expenses as a percentage of consolidated total revenue	10.9	%	12.0	%

Our total SG&A expenses decreased by approximately $2.1 million to $47.6 million for the nine months ended September 30, 2020 compared to $49.7 million for the nine months ended September 30, 2019. Total SG&A expense decreased during the first nine months ended September 30, 2020 by $2.1 million due to reductions of $1.5 million related to company-wide reductions in travel and entertainment expenses, $0.5 million in professional service fees, a $0.6 million of pre-sale engineering expenses, $0.2 million in rent, $0.2 million in accrued expenses and $0.7 million in stock based compensation expense offset by $2.7 million of payroll-related expenses including $2.2 million of increased incentive compensation due to higher earned gross profit year over year. Additionally, total SG&A as a percentage of revenues were 10.9% for the nine months ended September 30, 2020 down from 12.0% for the nine months ended September 30, 2019.

Amortization of Intangibles


	Nine months ended September 30,
	2020	2019	Increase/(Decrease)
(in thousands except for percentages)	$	$	$	%
Amortization of intangibles (Corporate)	526	499	27	5.4	%

Total amortization expense for the amortizable intangible assets was $0.5 million for the nine months ended September 30, 2020 and $0.5 million for the nine months ended September 30, 2019, remaining relatively flat.

Other Expenses


	Nine months ended September 30,
	2020	2019	Increase/(Decrease)
(in thousands except for percentages)	$	$	$	%
Other income (expenses):
Interest expense, net	(6,449)	(4,190)	(2,259)	53.9	%
Gain on disposition of property and equipment	18	38	(20)	(52.6)	%
Loss on debt extinguishment	—	(513)	513	(100.0)	%
Gain (loss) on fair value of warrant liability	(1,312)	422	(1,734)	(410.9)	%
Total other expenses (Corporate)	(7,743)	(4,243)	(3,500)	82.5	%
Impairment of goodwill (Construction)	—	(4,359)	4,359	(100.0)	%
Total other expenses	(7,743)	(8,602)	859	(10.0)	%

Other expenses, consisting primarily of interest expense, were $6.4 million for the nine months ended September 30, 2020 and $4.2 million for the nine months ended September 30, 2019. The increase in interest expense was primarily due to the Company's higher interest rates on the refinanced debt obligations, including debt issuance and discount amortization,

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associated with the 2019 Refinancing Agreement that occurred on April 12, 2019. The Company recorded other expense of $1.3 million to reflect the change in fair value of the CB warrants liability for the nine months ended September 30, 2020. The Company also recorded other expense of $0.5 million for a loss on debt extinguishment also related to the refinancing and $0.4 million in other income to reflect the change in fair value of the CB Warrants liability and $4.4 million for recognition of impairment of goodwill on our Construction segment for the nine months ended September 30, 2019.

Income Taxes

The Company recorded a $1.5 million income tax provision and a $0.7 million income tax benefit for the nine months ended September 30, 2020 and 2019, respectively.

The effective tax rate for the nine months ended September 30, 2020 was 21.1% and the effective tax benefit rate for the nine months ended September 30, 2019 was (22.0)%.

Construction and Service Backlog Information

We refer to our estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue we have recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. Our backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between our backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from our remaining performance obligations as these contracts can be canceled for convenience at any time by us or the customer without considerable cost incurred by the customer. Additional information related to our remaining performance obligations is provided in Note 16 — Remaining Performance Obligations in the accompanying notes to our consolidated financial statements.

Given the multi-year duration of many of our contracts, revenue from backlog is expected to be earned over a period that will extend beyond one year. Many of our contracts contain provisions that allow the contract to be canceled at any time; however, if this occurs, we can generally recover costs incurred up to the date of cancellation.

Construction backlog as of September 30, 2020 was $407.5 million compared to $504.2 million at December 31, 2019. In addition, Service backlog as of September 30, 2020 was $61.8 million compared to $57.0 million at December 31, 2019 as a result of incremental Service sales generated from the Company’s investment in Service sales staff over the past few years. Of the total backlog at September 30, 2020, we expect to recognize approximately $135.5 million by the end of 2020.

Seasonality, Cyclicality and Quarterly Trends

Severe weather can impact our operations. In the northern climates where we operate, and to a lesser extent the southern climates as well, severe winters can slow our productivity on construction projects, which shifts revenue and gross profit recognition to a later period. Our maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for our maintenance services, whereas severe weather may increase the demand for our maintenance and spot services. Our operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year.

Effect of Inflation and Tariffs

The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and the imposition of or increases in tariffs. While it is difficult to accurately measure the impact of inflation and tariffs due to the imprecise nature of the estimates required, we believe these effects of inflation, if any, on our results of operations and financial condition have been immaterial. When appropriate, we include cost escalation factors into our bids and proposals. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on our projects.

Liquidity and Capital Resources

Cash Flows

Our liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders.

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The following table presents summary cash flow information for the periods indicated:


	Nine months ended September 30,
	2020		2019
(in thousands)			(As Recast)
Net cash provided by (used in):
Operating activities	$	35,229	$	(17,584)
Investing activities	(1,054)		(2,041)
Financing activities	(2,919)		18,766
Net increase in cash and cash equivalents	$	31,256	$	(859)

Noncash investing and financing transactions:
Right of use assets obtained in exchange for new operating lease liabilities	$	924	$	3,022
Right of use assets obtained in exchange for new finance lease liabilities	2,399		2,685
Right of use assets disposed or adjusted modifying operating lease liabilities	586		1,651
Right of use assets disposed or adjusted modifying finance lease liabilities	(64)		(55)
Interest paid	$	4,817	$	3,091

Our cash flows are primarily impacted from period to period by fluctuations in working capital. Factors such as our contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact our working capital. In line with industry practice, we accumulate costs during a given month then bill those costs in the current month for many of our contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until we receive payment from our customers (contractual “pay-if-paid” terms). We have not historically experienced a large volume of write-offs related to our receivables and contract assets. We regularly assess our receivables for collectability and provide allowances for doubtful accounts where appropriate. We believe that our reserves for doubtful accounts are appropriate as of September 30, 2020 and December 31, 2019, but adverse changes in the economic environment may impact certain of our customers’ ability to access capital and compensate us for our services, as well as impact project activity for the foreseeable future.

The Company's existing current backlog is projected to provide substantial coverage of forecasted construction revenue for one year from the date of the financial statement issuance. Our current cash balance, together with cash we expect to generate from future operations (inclusive of actions we are taking to reduce costs and spending across our organization, in response to the COVID-19 pandemic) along with borrowings available under our 2019 Refinancing Agreement and 2019 ABL Credit Agreement, is expected to be sufficient to finance our short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. If current economic conditions decline materially from information presently available or if project shutdowns recur in the fourth quarter of 2020 or the first quarter of 2021, the Company could be unable to meet its financial covenants, which would cause an event of default thereby classifying its debt as current. If the lenders were to call the debt, the Company might not have the available working capital to satisfy its outstanding debt obligations.

The following table represents our summarized working capital information:


(in thousands, except ratios)	As of September 30, 2020		As of December 31, 2019
Current assets	$	237,721	$	195,380
Current liabilities	(187,001)		(156,869)

Net working capital	$	50,720	$	38,511
Current ratio*	1.27		1.25

*Current ratio is calculated by dividing current assets by current liabilities.

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As discussed above and in Note 7 to the accompanying condensed consolidated financial statements, as of September 30, 2020, the Company was in compliance with all debt covenants as required by the 2019 Refinancing Credit Agreement.

Cash Flows Provided by (Used in) Operating Activities

Cash flows provided by operating activities were $35.2 million for the nine months ended September 30, 2020 compared to cash flows used in operating activities of $17.6 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, cash provided by operating activities was significantly impacted by a $18.7 million increase in contract liabilities, $8.6 million related to our contract assets reflecting the shift from an underbilled to an overbilled position consistent with our renewed focus on project cash flows, $8.9 million related to accrued expenses and other current liabilities and an increase in accounts payable, including retainage of $2.7 million. These cash inflows were offset by an increase of $19.8 million in accounts receivable.

Cash flows used in operating activities were $17.6 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2019, our cash usage in operating activities was significantly impacted by a $5.2 million increase in accounts receivable, a $1.4 million decrease in accounts payable, including retainage, a $6.8 million decrease in contract liabilities, and a $15.8 million increase in contract assets. The accounts receivable increase of $5.2 million is due to high September 2019 billings in our New England region for which cash had not yet been collected. The $15.8 million decrease in contract assets was due to newly commenced projects without significant progress as of the end of the third quarter of 2019. The increase in contract liabilities of $6.8 million is primarily due to a combination of 2019 unbilled costs incurred on Southern California region and Mid-Atlantic region Construction projects, on which claims and change orders were pending. The significant decreases in other current assets and accrued expenses and other current liabilities are primarily attributable to the $30.0 million lawsuit settlement payments referenced in Note 14 to the accompanying Condensed Consolidated Financial Statements. The settlement of this matter was entirely covered by the Company's insurance carriers.

Non-cash charges for depreciation and amortization were $4.6 million for the nine months ended September 30, 2020 and $4.2 million for the nine months ended September 30, 2019.

Cash Flows Used in Investing Activities

Cash flows used in investing activities were $1.1 million for the nine months ended September 30, 2020 and $2.0 million for the nine months ended September 30, 2019. The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements.

Cash Flows Provided by (Used in) Financing Activities

Cash flows used in financing activities were $2.9 million for the nine months ended September 30, 2020. Cash provided by financing activities was $18.8 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, we borrowed and repaid $7.3 million on the 2019 Revolving Credit Facility, made a $1.0 million principal payment on the 2019 Refinancing Term Loan and made capital lease payments of $2.0 million. The Company also received $0.1 million in proceeds from contributions related to the Employee Stock Purchase Plan and paid $0.1 million in taxes related to net share settlement of equity awards.

For the nine months ended September 30, 2019, we both borrowed and repaid a total of $17.5 million on the Credit Agreement revolver (as defined below), and another $19.3 million on the 2019 Revolving Credit Facility. The Company also borrowed $38.6 million, net of discount, on its 2019 Refinancing Term Loan, which was used to repay, in its entirety, $14.3 million on the Credit Agreement Term Loan, $7.7 million on the Bridge Term Loan and $10.5 million on the Credit Agreement Revolver. The Company also recorded fair values of the CB Warrants liability and the embedded derivative liability which approximated $0.9 million and $0.4 million, respectively, on the Refinancing Closing Date. The Company also made capital lease payments of $1.8 million and payments of $3.3 million related to debt issuance costs for our April 2019 Refinancing Agreement. For the nine months ended September 30, 2019, the Company's bank overdraft increased by $6.1 million, representing an increase in the Company's short-term obligation to its bank. Bank overdrafts represent outstanding checks in excess of cash on hand with a specific financial institution as of any balance sheet date.

Debt and Other Obligations

Credit Agreement

In 2016, Limbach Facility Services, LLC, (“LFS”), a subsidiary of the Company, entered into the Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement consisted of a $25.0 million revolving line of credit (the “Credit

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Agreement revolver”) and a $24.0 million term loan (the “Credit Agreement term loan”), both with a maturity date of July 20, 2021. The Credit Agreement was collateralized by substantially all assets of LFS and its subsidiaries. Principal payments of $900,000 on the Credit Agreement term loan were due at the end of each quarter, beginning September 30, 2018, through maturity of the loan, with any remaining amounts due at maturity. Outstanding borrowings on both the Credit Agreement term loan and the Credit Agreement revolver bore interest at either the Base Rate (as defined in the Credit Agreement) or LIBOR (as defined in the Credit Agreement), plus the applicable additional margin, payable monthly. Mandatory prepayments were required upon the occurrence of certain events, including, among other things and subject to certain exceptions, equity issuances, changes of control of the Company, certain debt issuances, assets sales and excess cash flow.

The Credit Agreement included restrictions on, among other things and subject to certain exceptions, the Company and its subsidiaries’ ability to incur additional indebtedness, pay dividends or make other distributions, redeem or purchase capital stock, make investments and loans and enter into certain transactions, including selling assets, engaging in mergers or acquisitions and entering into transactions with affiliates. Loans under the Credit Agreement bore interest, at the borrower’s option, at either Adjusted LIBOR (“Eurodollar”) or a Base Rate, in each case, plus an applicable margin. The applicable margin with respect to any Base Rate loan was 5.00% per annum and with respect to a Eurodollar loan was 6.00% per annum.

The following is a summary of the additional margin and commitment fees payable on the available revolving credit commitment:


Level	Senior Leverage Ratio	Additional Margin for Base Rate loans		Additional Margin for Libor Rate loans		Commitment Fee
I	Greater than or equal to 2.50 to 1.00	3.00	%	4.00	%	0.50	%
II	Less than 2.50 to 1.00, but greater than or equal to 2.00 to 1.00	2.75	%	3.75	%	0.50	%
III	Less than 2.00 to 1.00, but greater than or equal to 1.50 to 1.00	2.50	%	3.50	%	0.50	%
IV	Less than 1.50 to 1.00	2.25	%	3.25	%	0.50	%

2019 Refinancing Agreement

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2019 Refinancing Agreement - Interest Rates and Fees

The interest rate on borrowings under the 2019 Refinancing Agreement is, at the Borrowers’ option, either LIBOR (with a 2.00% floor) plus 11.00% or a base rate (with a 3.00% minimum) plus 10.00%. At September 30, 2020 and 2019, the interest rates in effect on the 2019 Refinancing Term Loan were 13.00% and 10.18%, respectively.

2019 Refinancing Agreement - Other Terms and Conditions

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In connection with the 2019 Refinancing Amendment Number One and Waiver, the parties amended certain provisions of the 2019 Refinancing Agreement, including, among other changes to: (i) require, commencing October 1, 2019, a 3.00% increase in the interest rate on borrowings under the 2019 Refinancing Agreement; (ii) require the approval of CB and, generally, the lenders representing at least 50.1% of the aggregate undrawn term loan commitment or unpaid principal amount of the term loans, prior to effecting any permitted acquisition; (iii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 and thereafter through the term of the 2019 Refinancing Agreement; and (iv) require the liquidity of the loan parties, which is generally calculated by adding (a) unrestricted cash on hand of the Loan Parties maintained in deposit accounts subject to control agreements granting control to the collateral agent for the 2019 ABL Credit Agreement, to (b) the difference between (1) the lesser of (x) $15 million, as adjusted from time to time, and (y) 75% of certain customer accounts resulting from the sale of goods or services in the ordinary course of business minus certain reserves established by the Administrative Agent and (2) the sum of (x) the outstanding principal balance of all revolving loans under the 2019 ABL Credit Agreement plus (y) the aggregate undrawn available amount of all letters of credit then outstanding plus the amount of any obligations that arise from any draw against any letter of credit that have not been reimbursed by the borrowers or funded with a revolving loan under the 2019 ABL Credit Agreement (the “Loan Parties Liquidity”), as of the last day of any fiscal month ending on or after November 30, 2019, of at least $10,000,000. As a condition to executing the 2019 Refinancing Amendment Number One and Waiver, the loan parties will be required to pay a non-refundable waiver fee of $400,000 and a non-refundable amendment fee of $1,000,000 (the “PIK First Amendment Fee”, which shall be paid in kind by adding the PIK First Amendment Fee to the outstanding principal amount of the term loan under the 2019 Refinancing Agreement as additional principal obligations thereunder on and as of the effective date 2019 Refinancing Amendment Number One and Waiver).

2019 Refinancing Agreement - CB Warrants

In connection with the 2019 Refinancing Agreement, on the Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the “CB Warrants”) to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants will be exercisable at any given time will be equal to: (i) the product of (x) the number of shares equal to 2% of the Company’s issued and outstanding shares of common stock on the Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the Refinancing Closing Date and September 30, 2020, no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants was exercisable. The CB Warrants may be exercised for cash or on a “cashless basis,” subject to certain adjustments, at any time after the Refinancing Closing Date until the expiration of such warrant at 5:00 p.m., New York time, on the earlier of (i) the five (5) year anniversary of the Refinancing Closing Date, or (ii) the liquidation of the Company.

Accounting for the 2019 Term Loans and CB Warrants

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The Company also recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $0.1 million and $0.2 million for the three and nine months ended September 30, 2019, respectively, and recorded an additional $0.2 million and $0.4 million of interest expense for the amortization of the debt issuance costs for the three and nine months ended September 30, 2019, respectively.

2019 ABL Credit Agreement

The Borrowers and Guarantors under the 2019 ABL Credit Agreement are the same as under the 2019 Refinancing Agreement.

2019 ABL Credit Agreement - Interest Rates and Fees

The interest rate on borrowings under the 2019 ABL Credit Agreement is, at the Borrowers’ option, either LIBOR (with a 2.0% floor) plus an applicable margin ranging from 3.00% to 3.50% or a base rate (with a 3.0% minimum) plus an applicable margin ranging from 2.00% to 2.50%. At September 30, 2020, the interest rate in effect on the 2019 ABL Credit Agreement was 5.25% and 7.0% at September 30, 2019.

2019 ABL Credit Agreement - Other Terms and Conditions

The 2019 ABL Credit Agreement matures on April 12, 2022. There is an unused line fee ranging from 0.250% to 0.375% per annum on undrawn amounts.

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requirement. The lender has waived the event of default arising from this noncompliance as of August 31, 2019, while reserving its rights with respect to covenant compliance in future months. In addition, the parties to the 2019 ABL Credit Agreement entered into an amendment which, among other changes revises the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 through the term of such agreement.

Accounting for the 2019 ABL Credit Agreement

At September 30, 2020, the Company had total irrevocable letters of credit in the amount of $3.4 million under its self-insurance program as compared to $3.3 million at December 31, 2019.

The following table reflects our available funding capacity as of September 30, 2020:


(in thousands)
Cash & cash equivalents			$	39,600
Credit agreement:
Revolving credit facility	$	14,000
Outstanding revolving credit facility	—
Outstanding letters of credit	(3,405)
Net credit agreement capacity available			10,595
Total available funding capacity			$	50,195

Cash Flow Summary

Management continues to devote additional resources to its billing and collection efforts, which has resulted in positive cash flow from operating activities for the nine months ended September 30, 2020. Management continues to expect that growth in its service business, which is less sensitive to the cash flow issues presented by large construction projects, will positively impact our cash flow trends.

Provided that the Company’s lenders continue to provide working capital funding, we believe based on the Company's current reforecast that our current cash and cash equivalents of $39.6 million as of September 30, 2020, cash payments to be received from existing and new customers, and availability of borrowing under the revolving line of credit under our 2019 Refinancing Agreement (pursuant to which we had $14.0 million of availability as of September 30, 2020) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. See Note 1 - Organization and Plan of Business Operations.

Surety Bonding

In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and

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external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As of September 30, 2020 and December 31, 2019, the Company had approximately $105.3 million and $116.0 million in surety bonds outstanding, respectively. We believe that our $700.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity.

Insurance and Self-Insurance

We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The non-current portion of the liability is included in other long-term liabilities on the Condensed Consolidated Balance Sheets.

We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as a current liability in accrued expenses and other current liabilities.

The components of the self-insurance liability are reflected below as of September 30, 2020 and December 31, 2019:


(in thousands)	September 30, 2020		December 31, 2019
Current liability – workers’ compensation and general liability	$	434	$	703
Current liability – medical and dental	482		821
Non-current liability	667		382
Total liability	$	1,583	$	1,906
Restricted cash	$	113	$	113

The restricted cash balance represents cash set aside for the funding of workers’ compensation and general liability insurance claims. This amount is replenished when depleted, or at the beginning of each month.

Multiemployer Pension Plans

We participate in approximately 40 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers.

An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP.

We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the

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relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as of September 30, 2020, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

As a result of the COVID-19 pandemic, certain employees began working remotely in March 2020 and continue to do so. Notwithstanding these changes to the working environment, we have not identified any material changes in our internal control over financial reporting. We will continue to monitor and assess the COVID-19 situation to determine any potential impact on the design and operating effectiveness of our internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

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Part II

Item 1. Legal Proceedings

See Note 15 Commitments and Contingencies for further information regarding legal proceedings.

Item 1A. Risk Factors

There have been no material changes to our risk factors previously disclosed in Part I, Item 1A of our 2019 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


Exhibit						Description
3.1						Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016).
3.2						Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016).
3.3						Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016).
3.4						Bylaws (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (file No. 333-195695), filed with the U.S. Securities and Exchange Commission on June 30, 2014).
31.1						Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2						Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1						Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2						Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS						XBRL Instance Document.
101.SCH						XBRL Taxonomy Extension Schema Document.
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB						XBRL Taxonomy Extension Label Linkbase Document.
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF						XBRL Taxonomy Extension Definition Document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			LIMBACH HOLDINGS, INC.

			/s/ Charles A. Bacon, III
			Charles A. Bacon, III
			Chief Executive Officer
			(Principal Executive Officer)

			/s/ Jayme L. Brooks
			Jayme L. Brooks
			Chief Financial Officer
			(Principal Financial and Accounting Officer)
Date: November 12, 2020