Orbital Infrastructure Group, Inc. - Quarter Report: 2020 March (Form 10-Q)

 

Table of Contents

 

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 March 31, 2020

 

OR

 

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

 

For the transition period from _______ to ______

 

Commission File Number 0-29923

 

Orbital Energy Group, Inc.

(Exact name of registrant as specified in its charter)

 

Colorado		84-1463284
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

	1924 Aldine Western
	Houston, Texas 77038

 

---

(Address of principal executive offices and zip code)

 

 

(832) 467-1420

(Registrant’s telephone number, including area code)

 

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, or 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 ☐

 

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  ☒

 

There were 30,420,685 shares of the registrant's common stock, par value $0.001 per share, issued and outstanding as of May 20, 2020.

 

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, $0.001 par value.	OEG	Nasdaq Capital Market

 

 

 

INDEX

 

 

		Page
	Part I
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income and Loss (Unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Overview	27
	Results of Operations	28
	Liquidity and Capital Resources	32
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	35
Item 4.	Controls and Procedures	37
	Part II
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds. Common Stock Issued	38
Item 5.	Other Information	38
Item 6.	Exhibits	39
	Exhibit Index	39
	Signatures	40

 

 

		March 31,				December 31,
(in thousands, except share and per share amounts)		2020				2019
		(Unaudited)				(See Note 1)
Assets:
Current Assets:
Cash and cash equivalents		$	6,740			$	23,351
Trade accounts receivable, net of allowance of $52 and $47, respectively			3,853				5,295
Inventories			1,186				1,631
Contract assets			2,716				2,309
Note receivable, current portion			3,000				—
Convertible note receivable			200				—
Prepaid expenses and other current assets			3,866				2,215
Assets held for sale - current			8,344				6,893
Total current assets			29,905				41,694
Property and equipment, less accumulated depreciation of $1,514 and $1,441, respectively			5,323				4,454
Investment in VPS - equity method			4,419				4,865
Right of use assets - Operating leases			6,329				5,524
Other intangible assets, less accumulated amortization of $10,920 and $11,191, respectively			3,714				4,298
Restricted cash			1,027				—
Note receivable			3,322				3,253
Deposits and other assets			990				70
Total assets		$	55,029			$	64,158
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable		$	1,899			$	2,904
Notes payable, current			966				473
Operating lease obligations - current portion			1,082				821
Accrued expenses			2,041				5,159
Contract liabilities			1,849				1,668
Liabilities held for sale, current			5,597				4,970
Total current liabilities			13,434				15,995
Operating lease obligations, less current portion			5,247				4,852
Other long-term liabilities			188				194
Total liabilities			18,869				21,041
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued at March 31, 2020 or December 31, 2019			—				—
Common stock, par value $0.001; 325,000,000 shares authorized; 28,420,685 shares issued and outstanding at March 31, 2020 and 28,383,373 shares issued and outstanding at December 31, 2019			29				29
Additional paid-in capital			170,115				170,106
Treasury stock at cost; 353,063 shares held at March 31, 2020 and December 31, 2019			(413	)			(413	)
Accumulated deficit			(129,615	)			(122,234	)
Accumulated other comprehensive loss			(3,956	)			(4,371	)
Total stockholders' equity			36,160				43,117
Total liabilities and stockholders' equity		$	55,029			$	64,158

 

		For the Three Months
(in thousands, except share and per share amounts)		Ended March 31,
		2020				2019
Revenues		$	5,688			$	5,458
Cost of revenues			5,129				4,271
Gross profit			559				1,187
Operating expenses:
Selling, general and administrative expense			7,192				4,835
Depreciation and amortization			407				406
Research and development			17				52
Provision for (credit to) for bad debt			6				67
Other operating (income) expense			—				(2	)
Total operating expenses			7,622				5,358
Continuing loss from operations			(7,063	)			(4,171	)
Other (expense) income			(1,032	)			249
Interest expense			(11	)			(9	)
Loss from continuing operations before income taxes and equity in net loss of affiliate			(8,106	)			(3,931	)
Net loss of affiliate			(446	)			—
Loss from continuing operations before taxes			(8,552	)			(3,931	)
Income tax benefit			(1,600	)			(174	)
Loss from continuing operations, net of income taxes			(6,952	)			(3,757	)
Discontinued operations (Note 3)
(Loss) income from operations of discontinued power and electromechanical components businesses			(486	)			975
Income tax (benefit) expense			(57	)			221
(Loss) income from discontinued operations, net of income taxes			(429	)			754
Net loss		$	(7,381	)		$	(3,003	)
Basic and diluted weighted average common shares outstanding			28,420,730				28,583,600
Loss from continuing operations per common share - basic and diluted		$	(0.24	)		$	(0.13	)
(Loss) income from discontinued operations - basic and diluted		$	(0.02	)		$	0.02
Loss per common share - basic and diluted		$	(0.26	)		$	(0.11	)

 

		For the Three Months
(in thousands)		Ended March 31,
		2020				2019
Net loss		$	(7,381	)		$	(3,003	)
Other comprehensive income (loss)
Foreign currency translation adjustment			415				92
Comprehensive loss		$	(6,966	)		$	(2,911	)

 

(in thousands, except share amounts)		Common Stock												Treasury Stock
		Shares				Amount				Additional Paid-in Capital				Shares				Amount				Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity
Balance, December 31, 2019			28,736,436			$	29			$	170,106				(353,063	)		$	(413	)		$	(122,234	)		$	(4,371	)		$	43,117
Common stock issued for royalty payments			37,312				—				9				—				—				—				—				9
Net loss for the period ended March 31, 2020			—				—				—				—				—				(7,381	)			—				(7,381	)
Other comprehensive income			—				—				—				—				—				—				415				415
Balance, March 31, 2020			28,773,748			$	29			$	170,115				(353,063	)		$	(413	)		$	(129,615	)		$	(3,956	)		$	36,160

(in thousands, except share amounts)		Common Stock
		Shares				Amount				Additional Paid-in Capital				Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity
Balance, December 31, 2018			28,552,886			$	29			$	169,898			$	(123,993	)		$	(4,396	)		$	41,538
Cumulative effect of accounting change (1)			—				—				—				2,888				—				2,888
Balance at January 1, 2019, adjusted			28,552,886				29				169,898				(121,105	)			(4,396	)			44,426
Common stock issued for compensation, services, and royalty payments			29,067				—				40				—				—				40
Net loss for the period ended March 31, 2019			—				—				—				(3,003	)			—				(3,003	)
Other comprehensive income			—				—				—								92				92
Balance, March 31, 2019			28,581,953			$	29			$	169,938			$	(124,108	)		$	(4,304	)		$	41,555

 

		For the Three Months
(in thousands)		Ended March 31,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(7,381	)		$	(3,003	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			154				277
Amortization of intangibles			332				468
Amortization of note receivable discount			(69	)			—
Stock issued and stock to be issued for compensation, royalties and services			3				51
Non-cash loss on equity method investment in VPS			446				—
Provision for bad debt expense			6				106
Deferred income taxes			10				—
Inventory reserve			(113	)			113
Non-cash unrealized foreign currency losses (gains)			1,256				(218	)
Gain on disposal of assets			—				(2	)
(Increase) decrease in operating assets:
Trade accounts receivable			1,502				1,130
Inventories			(1,839	)			82
Contract assets			(480	)			(841	)
Prepaid expenses and other current assets			(875	)			122
Right of use assets - Operating leases			(703	)			283
Deposits and other assets			(874	)			—
Increase (decrease) in operating liabilities:
Accounts payable			301				(279	)
Operating lease liabilities			581				(264	)
Accrued expenses			(245	)			(1,143	)
Refund liabilities			—				177
Contract liabilities			264				220
NET CASH USED IN OPERATING ACTIVITIES			(7,724	)			(2,721	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(1,278	)			(69	)
Working capital adjustment on Power group disposition			(2,804	)			—
Proceeds from sale of property and equipment			—				2
Cash paid for other intangible assets			(4	)			(148	)
Cash paid for convertible notes receivable			(200	)			—
Cash paid for related party note receivable			(3,000	)			—
Cash paid for equity-method Investment			(97	)			(345	)
NET CASH USED IN INVESTING ACTIVITIES			(7,383	)			(560	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from overdraft facility			—				5,272
Payments on overdraft facility			—				(5,681	)
Proceeds from line of credit			—				7,916
Payments on line of credit			—				(7,436	)
Payments on financing lease obligations			(1	)			(1	)
Payments on notes payable			(428	)			—
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(429	)			70
Effect of exchange rate changes on cash			(48	)			25
Net decrease in cash, cash equivalents and restricted cash			(15,584	)			(3,186	)
Cash, cash equivalents and restricted cash at beginning of period			23,351				4,502
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD		$	7,767			$	1,316

		For the Three Months
(in thousands)		Ended March 31,
		2020				2019
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid		$	19			$	65
Interest paid, net of capitalized interest		$	12			$	85
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash item for January 1, 2019 adoption of ASC 842 - establishment of right-of-use assets and offsetting lease obligations		$	—			$	7,703
Financing note payable issued for payment on certain insurance policies		$	921			$	—
Non-cash investment in equity method investment - see note 7		$	—			$	4,933
Common stock issued and to be issued for royalties payable pursuant to product agreements		$	9			$	3
Common stock issued and to be issued for consulting services and compensation in common stock		$	—			$	37
Partial settlement of note receivable via offset against royalty payable netted with (increase) to note receivable from accrued interest		$	—			$	9
Accrued property and equipment purchases at March 31		$	16			$	18
Accrued investment in other intangible assets at March 31		$	—			$	7

 

1.	NATURE OF OPERATIONS, BASIS OF PRESENTATION AND COMPANY CONDITIONS

 

Nature of Operations

Orbital Energy Group Inc. (Orbital Energy Group or "the Company") (formerly known as CUI Global, Inc.) is a platform company composed of one segment, the Energy segment, along with an "Other" category.

 

Prior to the third quarter of 2019, the Company included a second segment named, the Power and Electromechanical segment. This segment is included in Discontinued Operations. See Note 3 - Discontinued Operations and Sale of a Business for more information on the Company's discontinued operations.

 

The Company’s Energy segment consists of the Orbital Gas Systems Ltd. based in Stone, Staffordshire in the United Kingdom, the Orbital Gas Systems, North America, Inc. subsidiary based in Houston, Texas, collectively referred to as "Orbital Gas Systems," and Orbital Power Services based in Dallas, Texas. Orbital Gas Systems has developed a portfolio of products, services and resources to offer a diverse range of personalized gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries. Its proprietary VE® Technology enhances the capability and speed of the Company's GasPT® Technology. VE Technology provides a superior method of penetrating the gas flow without the associated vortex vibration, thereby making it a ‘‘stand-alone’’ product for thermal sensing (thermowells) and trace-element sampling. Orbital Power Services is a full-service building, maintenance and support provider to the electric power distribution, transmission, substation, renewables, and emergency response sectors of North America.

 

The Other category represents the remaining activities that are not included as part of the other reportable segments and primarily represents corporate activity.

 

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information, which includes condensed consolidated financial statements. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position and results of operations and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

 

It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. All intercompany accounts and transactions have been eliminated in consolidation. The results for the interim period are not necessarily indicative of the results to be expected for the remaining quarters or year ending December 31, 2020.

 

 

Reconciliation of Cash, Cash Equivalents, and Restricted Cash on Condensed Consolidated Statements of Cash Flows

 

 

(1) Restrictions on cash at March 31, 2020 and March 31, 2019 relate to collateral for several bank-issued letters of credit for contract guaranties.  

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s impairments and estimations of long-lived assets, revenue recognition on cost-to-cost-method type contracts, inventory valuation, warranty reserves, refund liabilities/returns allowances, valuations of non-cash capital stock issuances, the valuation allowance on deferred tax assets, equity method investment valuation, note receivable interest imputation, and the incremental borrowing rate used in determining the value of right of use assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different conditions.

 

Company Conditions

Orbital Power Services began operations during the first quarter of 2020 and while not certain, is expected to quickly increase revenues to achieve positive cash flows during 2020 based around revenue and earnings growth to break-even and profitable levels. Orbital Gas Systems Ltd. continues to face issues surrounding Brexit and the overall economy in the United Kingdom coupled with continued delays in shipment of GasPTs on a significant European-based project, and the related slower than expected acceptance of this new disruptive technology that have caused a delay in our expected profitability from continuing operations. Orbital Gas Systems, North America, Inc. continues to see improvements in its operations, increasing customer opportunities and is moving toward break-even and profitability. The Company will continue to work to identify cost reductions and efficiencies while at the same time working to grow revenues and margins.

 

The Company had net loss of $7.4 million and cash used in operating activities of $7.7 million during the three months ended March 31, 2020. As of March 31, 2020, the Company's accumulated deficit is $129.6 million.

 

Management believes the Company's present cash flows will meet its obligations for twelve months from the date these financial statements are available to be issued. Including our cash balance, we have $17.4 million of positive working capital primarily related to assets held for sale, trade accounts receivable, notes receivable, prepaid assets, contract assets and our inventory less current liabilities that we will manage in the next twelve months. Considering the above factors management believes the Company can meet its obligations for the twelve-month period from the date the financial statements are available to be issued. Subsequent to March 31, 2020, the Company received loans under the CARES Act Paycheck Protection Program of approximately $1.9 million which will further assist the Company as it continues to operate in 2020 (Note 18. Subsequent Events).

 

COVID-19 Assessment

In March 2020, the World Health Organization categorized the current coronavirus disease (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. While the Company expects the effects of the pandemic to negatively impact its results from operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. The Company has experienced customer delays and extensions for projects, supply chain delays, furloughs of personnel, increased utilization of telework, increased safety protocols to address COVID-19 risks, decreased field service work and other impacts from the COVID-19 pandemic.  The Company is proactively working to adjust its operations to properly reflect the market environment during the immediate pandemic while maintaining sufficient resources for the expected rebound later this year. Events and changes in circumstances arising after March 31, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.

 

Restructuring Charges

During the fourth quarter of 2019, the Company completed the sale of its largest group within the Power and Electromechanical segment. The remaining assets remain held-for-sale. However, in conjunction with that sale, it was concluded that should the remaining power and electromechanical operations not sell, the Company will fulfill its backlog obligations and wind down the remaining operations of CUI-Canada and CUI Japan during 2020. As such, the Company has recorded an accrued liability of $4.0 million Canadian dollars ($2.8 million US dollars at March 31, 2020) for estimated employee termination costs. The termination costs are expected to begin during 2020 based around backlog production and delivery schedule requirements. The lease for the CUI-Canada facility completes during 2020 and the CUI Japan lease includes a four-month notice period to terminate. There were no changes to the restructuring accruals in the three months ended March 31, 2020.

 

 

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - UPDATE

 

Our significant accounting policies are detailed in "Note 2 Summary of Significant Accounting Policies" within Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020. Changes to the Company's accounting policies are discussed below:

 

Adoption of new accounting standards

On January 1, 2020, the Company adopted the guidance under the Financial Accounting Standards Board (the “FASB”) Accounting Standard Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company adopted Topic 326 using the prospective transition method.

 

Prior to adopting Topic 326, the Company reserved for receivables to allow for any amounts that may not be recovered, based on an analysis of prior collection experience, customer credit worthiness and current economic trends. Collectability was determined based on terms of sale, credit status of customers and various other circumstances. We regularly reviewed collectability and established or adjusted the reserve as necessary. Account balances were charged off against the reserve after all means of collection had been exhausted and the potential for recovery was considered remote.

 

Under Topic 326, management recorded an allowance for credit losses related to the collectability of third-party receivables using the historical aging of the receivable balance. Related party receivables between entities under common control are excluded from Topic 326. The collectability was determined based on past events, including historical experience, credit rating, as well as current market conditions and expectations for future market conditions. We will continue to monitor credit ratings and collectability on a quarterly basis. Account balances will be charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company also has contract assets, a convertible note receivable with VPS and a seller note with the buyer of the Company's electronic components business that are subject to the new standard but management determined that an additional credit reserve on those balances was not necessary at this time due to the strong credit worthiness of the counter parties. The allowance for credit losses is as follows:

 

 

On January 1, 2020, the Company adopted the FASB's  ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This adoption did not have a material effect on the Company’s balance sheet, statement of operations or cash flows. 

 

On January 1, 2020, the Company adopted the FASB's  ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including requiring the disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company currently has a convertible note receivable with VPS that is classified as a level 3 investment that will be subject to the new disclosure requirements. 

 

 

3.	DISCONTINUED OPERATIONS AND SALE OF A BUSINESS

As part of the Company’s stated strategy to transform Orbital Energy Group, Inc. into a diversified energy infrastructure services platform serving North American and U.K. energy customers, the Company’s board of directors made the decision to divest of its Power and Electromechanical businesses. On September 30, 2019, Orbital Energy Group, Inc. entered into an asset sale agreement by and among, CUI, Inc. ("Seller"), a wholly owned subsidiary of the Company ("Parent"), and Back Porch International, Inc. ("Buyer") to sell the Company’s Electromechanical business to a management led group. In November 2019, Orbital Energy Group, Inc. entered into an asset sale agreement by and among, the Seller and Bel Fuse, Inc. to sell the domestic Power supply business. Both sales closed in 2019. At March 31, 2020, the assets and liabilities of the Company's CUI-Canada and CUI Japan subsidiaries are included as held for sale with the expectation that this will complete in 2020.

 

The associated results of operations of the discontinued Power and Electromechanical segment are separately reported as Discontinued Operations for all periods presented on the Condensed Consolidated Statements of Operations. Balance sheet items for the discontinued businesses, from the former Power and Electromechanical segment have been reclassified to assets held for sale within current assets and liabilities held for sale within current liabilities in the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019. Cash flows from these discontinued businesses are included in the Condensed Consolidated Cash Flow statements. See below for additional information on operating and investing cash flows of the discontinued operations. Results from continuing operations for the Company and segment highlights exclude the former Power and Electromechanical segment, which is included in these discontinued operations. The notes to the consolidated financial statements have also been adjusted for the three months ended March 31, 2019 from previous disclosures as a result of the discontinued operations of the Power and Electromechanical segment.

 

The former Power and Electromechanical segment consists of the wholly owned subsidiaries: CUI, Inc. (CUI), based in Tualatin, Oregon; CUI Japan, based in Tokyo, Japan; CUI-Canada, based in Toronto, Canada; and the entity that previously held the corporate building, CUI Properties. All three operating subsidiaries are providers of power and electromechanical components for Original Equipment Manufacturers (OEMs).

 

The Power and Electromechanical segment aggregates its product offerings into two categories: power solutions - including external and embedded ac-dc power supplies, dc-dc converters and basic digital point of load modules and offering a technology architecture that addresses power and related accessories; and components - including connectors, speakers, buzzers, and industrial control solutions including encoders and sensors. These offerings provide a technology architecture that addresses power and related accessories to industries as broadly ranging as telecommunications, consumer electronics, medical and defense.

 

Selected data for these discontinued businesses consisted of the following:

 

Reconciliation of the Major Classes of Line Items Constituting Pretax Income from

Discontinued Operations to the After-Tax Income from Discontinued Operations That Are

Presented in the Condensed Consolidated Statement of Operations

 

(in thousands)

 

 

 

Reconciliation of the Carrying Amounts of Major Classes of Assets and Liabilities of the

Discontinued Operation to Total Assets and Liabilities of the Disposal Group Classified as Held for Sale

 

 

* The assets and liabilities of the disposal group classified as held for sale are classified as current on the March 31, 2020 Condensed Consolidated Balance Sheet because it is probable that the sale will occur and proceeds will be collected within one year.

 

Net cash provided by (used in) operating activities of discontinued operations for the three months ended March 31, 2020 and 2019 was ($1.1 million) and $0.5 million, respectively.

 

Net cash used in investing activities of discontinued operations for the three months ended March 31, 2020 and 2019 was $0 and $0.2 million, respectively.

 

 

4.	REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Energy segment

The Energy segment subsidiaries, collectively referred to as Orbital, generate their revenue from a portfolio of products, services and resources that offer a diverse range of energy infrastructure services including gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries through the Orbital Gas Systems subsidiaries and a full service building, maintenance and support to the electrical power distribution, transmission, substation, renewables, and emergency response sectors of North America through Orbital Power Services.

 

Orbital accounts for a majority of its contract revenue proportionately over time. For performance obligations satisfied over time, the Company recognizes revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.

 

For construction contracts, revenue is generally recognized over time as the Company's performance creates or enhances an asset that the customer controls. The Company's fixed price construction projects generally use a cost-to-cost input method to measure progress towards complete satisfaction of the performance obligation as the Company believes it best depicts the transfer of control to the customer. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.

 

The timing of revenue recognition for Energy products also depends on the payment terms of the contract, as the Company's performance does not create an asset with an alternative use to us. For those contracts which the Company has a right to payment for performance completed to date at all times throughout the Company's performance, inclusive of a cancellation, the Company recognizes revenue over time. As discussed above, these performance obligations use a cost-to-cost input method to measure the Company's progress towards complete satisfaction of the performance obligation as the Company believes it best depicts the transfer of control to the customer. However, for those contracts for which the Company does not have a right, at all times, to payment for performance completed to date, the Company recognizes revenue at the point in time when control is transferred to the customer.

 

For the Company's service contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of the Company's performance as the Company performs the service. For the Company's fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when the Company's inputs are expended evenly, and the customer receives and consumes the benefits of the Company's performance throughout the contract term.

 

For certain of the Company's revenue streams, such as call-out repair and service work, and outage services, that are performed under time and materials contracts, the Company's progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of the Company's performance completed to date.

 

Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.

 

Product-type contracts (for example, sale of GasPT units) for which revenue does not qualify to be recognized over time are recognized at a point in time. Revenues from warranty and maintenance activities are recognized ratably over the term of the warranty and maintenance period.

 

 

Accounts Receivable, Contract Assets and Contract Liabilities

Accounts receivable are recognized in the period when the Company's right to consideration is unconditional. Accounts receivable are recognized net of an allowance for doubtful accounts. A considerable amount of judgment is required in assessing the likelihood of realization of receivables.

 

The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from the Company's construction projects when revenue recognized under the cost-to-cost measure of progress exceed the amounts invoiced to the Company's customers, as the amounts have been earned in direct alignment with revenue recognition, but not yet eligible to be billed under the terms of the Company's contracts. Such amounts are recoverable from the Company's customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Also included in contract assets are amounts the Company seeks or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to both scope and/or price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). The Company's contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Condensed Consolidated Balance Sheets.

 

Contract liabilities from the Company's construction contracts occur when amounts invoiced to the Company's customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from the Company's customers on certain contracts. Contract liabilities decrease as the Company recognizes revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when the Company expects to recognize such revenue.

 

Activity in the contract liabilities for the three months ended March 31, 2020 and 2019 was as follows:

 

 

 

 

⁽¹⁾ Long-term contract liabilities are included in Other long-term liabilities on the Condensed Consolidated Balance Sheets.

 

 

Performance Obligations

Remaining Performance Obligations

Remaining performance obligations represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of March 31, 2020, the Company's remaining performance obligations are generally expected to be filled within the next 12 months.

 

Any adjustments to net revenues, cost of revenues, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks. Changes in estimates of net revenues, cost of revenues and the related impact to operating income are recognized on a cumulative catch-up basis in the period they become known, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. For separately priced extended warranty or product maintenance performance obligations, when estimates of total costs to be incurred on the performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.

 

Performance Obligations Satisfied Over Time

To determine the proper revenue recognition method for contracts for the Company's Energy segment, the Company evaluates whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to separate the single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

 

For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In cases where we do, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized customer specific solution, and in these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

 

Performance Obligations Satisfied at a Point in Time

Revenue from goods and services transferred to customers at a single point in time accounted for 35% and 21% of revenues for the three month periods ended March 31, 2020 and 2019, respectively.  Revenue on these contracts is recognized when the product is shipped and the customer takes control of the product. Determination of control transfer is determined by shipping terms delineated on the customer purchase orders and is generally when shipped.

 

Variable Consideration

The nature of our contracts gives rise to several types of variable consideration, including new product returns and scrap return allowances primarily in the discontinued operations of the Power and Electromechanical segment. In rare instances in our Energy segment, we include in our contract estimates, additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include new product introduction and scrap return estimates in our calculation of net revenue when there is a basis to reasonably estimate the amount of the returns. These estimates are based on historical return experience, anticipated returns and our best judgment at the time. These amounts are included in our calculation of net revenue recorded for our contracts and the associated remaining performance obligations.

 

 

Significant Judgments

Our contracts with certain customers may be subject to contract cancellation clauses. Contracts with other cancellation provisions may require judgment in determining the contract term, including the existence of material rights, transaction price and identifying the performance obligations and whether a contract should be accounted for over time or on a completed contract basis. Revenue is recognized for certain integration systems over time using cost-based input methods, in which significant judgement is required to evaluate assumptions including the amount of total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.

 

At times, customers may request changes that either amend, replace or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts require the changes to be accounted for as a separate contract or as a modification. Generally, contract modifications containing additional goods and services that are determined to be distinct and sold at their stand-alone selling price are accounted for as a separate contract. For contract modifications where goods and services are not determined to be distinct and sold at their stand-alone selling price, the original contract is updated and the required adjustments to revenue and contract assets, liabilities, and other accounts will be made accordingly.

 

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately rather than together may require significant judgment. For, example, we consider many of our contracts that coordinate multiple products into an integrated system to be a single performance obligation, while the same products would be considered separate performance obligations if not so integrated.

 

In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined that, our contracts do not include a significant financing component.

  

The following tables present the Company's revenues disaggregated by timing of revenue recognition for the Energy segment:

 

 

The following tables present the Company's revenues disaggregated by region:           

 

 

 

5.

DEPOSITS

 

The Company has utilized the VE Technology through a licensing agreement with Endet Ltd. for several years. Orbital Gas Systems has the existing proprietary knowledge for the marketing, engineering and production of the VE Technology based solutions. The VE Technology is the basis for a patented sampling system product line marketed by Orbital Gas Systems and utilized in many of its integrated solutions.

 

During the three months ended the Company entered into an agreement to acquire the intellectual property rights and know-how associated with the VE Technology including patents for 1.5 million GBP, or approximately $1.8 million. The completion of the acquisition will be upon final payment towards this agreement. As of March 31, 2020, the Company owes a remaining 750 thousand GBP which is currently scheduled for payment on July 31, 2020.  The $0.9 million paid in the first three months of 2020 is held in Deposits on the balance sheet.

 

6.	INVENTORIES

 

Inventories consist of raw materials, work-in-process and finished goods and are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method as a cost flow convention or through the moving average cost method. At March 31, 2020 and December 31, 2019, accrued liabilities included $0.1 million and $0.2 million of accrued inventory payable, respectively. At March 31, 2020 and December 31, 2019, inventory by category is valued net of reserves and consists of:

 

 

 

 

7.	INVESTMENTS

During the three months ended March 31, 2016, Orbital Energy Group's investment in Test Products International, Inc. ("TPI"), was exchanged for a note receivable from TPI of $0.4 million, which was the carrying value of the investment, earning interest at 5% per annum, through maturity. The Company recorded interest income on the note of $0 and $4 thousand, for the three months ended March 31, 2020 and 2019, respectively. The interest receivable was settled on a quarterly basis via a non-cash offset against the finders-fee royalties earned by TPI on GasPT sales. Any remaining finders-fee royalties balance was offset against the note receivable quarterly. The Company received full payment on the note during the second quarter of 2019.

 

As of March 31, 2020, the Company' had a 20.58% ownership percentage with Virtual Power Systems ("VPS"). Based on current accounting guidance, the Company records its share of VPS's income or loss under the equity method of accounting. Under the equity method of accounting, results are not consolidated, but the Company records a proportionate percentage of the profit or loss of VPS as an addition to or a subtraction from the VPS investment asset. The VPS investment basis at March 31, 2020 was $4.4 million as reflected on the consolidated balance sheets. The Company made a purchase of a convertible note receivable for $200 thousand from VPS in the three months ended March 31, 2020.

 

 

A summary of the unaudited financial statements of the affiliate as of March 31, 2020 is as follows (in thousands):

 

 

 

 

8.

LEASES

 

Effective January 1, 2019, the Company implemented the new accounting guidance on leases found in ASC 842, Leases. 

 

Orbital-UK has a number of operating leases on vehicles, equipment, and accommodations for visiting personnel. During the three months ended March 31, 2020, the monthly combined rent on these leases was approximately $22 thousand.

 

For Orbital Gas Systems - North America, the Company rents office and warehouse space in Houston, Texas through December 2022. During the three months ended March 31, 2020, rent expense on this lease was approximately $30 thousand per month. The lease includes two options to renew the term for periods of five years each at the then prevailing market rate per rentable square foot for the premises.

 

For Orbital Power Services, the Company rents office and facility space in the Dallas area in two separate leases that have three and four year terms. Rent expense is approximately $4 thousand per month for each lease. In addition, the Company has operating leases on 18 trucks that commenced in the first three months of 2020. Total monthly rent expense on the Company's trucks is approximately $25 thousand.

 

The Company rents office and warehouse space in Tualatin, Oregon. This space is currently being partially sublet and the remaining portion of the space is currently being marketed for additional sublease. The net monthly rent expense after sublease was approximately $29 thousand in the three months ended March 31, 2020. The Company expects to be able to sublease the remaining leased portion of the building. In the three months ended March 31, 2020, the Company entered into a lease for office space in Lake Oswego, Oregon for approximately $4 thousand per month.

 

Consolidated rental expense was $0.3 million for the three months ended March 31, 2020 and is included in cost of sales and selling, general and administrative expense, on the condensed consolidated statement of operations.

 

Future minimum operating lease obligations at March 31, 2020 are as follows for the years ended December 31:

 

 

Total lease cost and other lease information is as follows:

 

 

 

* Includes $7.7 million recorded at the date of implementation of ASC 842 on January 1, 2019 less $1.5 million later reclassified to assets held for sale at our discontinued operations.

 

Variable lease costs primarily include common area maintenance costs, real estate taxes and insurance costs passed through to the Company from lessors.

 

9.	STOCK-BASED PAYMENTS FOR COMPENSATION, SERVICES AND ROYALTIES

 

The Company records its stock-based compensation expense on options issued in the past under its stock option plans and the Company also issues stock for services and royalties. The Company's stock option plans expired in 2018. A detailed description of the awards under these plans and the respective accounting treatment is included in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and filed with the SEC on March 30, 2020. For the three months ended March 31, 2020 and 2019, the Company recorded stock-based expense of $3 thousand and $51 thousand, respectively.

 

 

 

10.	SEGMENT REPORTING

Operating segments are defined in accordance with ASC 280-10 as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The measurement basis of segment profit or loss is income (loss) from operations. Management has identified three operating segments based on the activities of the Company in accordance with ASC 280-10. These operating segments have been aggregated into two reportable segments. The two reportable segments are Energy and Other. The Company’s Energy segment consists of the Orbital Gas Systems Ltd. based in Stone, Staffordshire in the United Kingdom, Orbital Gas Systems, North America, Inc. subsidiary based in Houston, Texas, collectively referred to as "Orbital Gas Systems" and Orbital Power Services based in Dallas, Texas. Orbital Gas Systems has developed a portfolio of products, services and resources to offer a diverse range of personalized gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries. Its proprietary VE® Technology enhances the capability and speed of the Company's GasPT® Technology. VE Technology provides a superior method of penetrating the gas flow without the associated vortex vibration, thereby making it a ‘‘stand-alone’’ product for thermal sensing (thermowells) and trace-element sampling. Orbital Power Services is a full-service building, maintenance and support provider to the electrical power distribution, transmission, substation, renewables, and emergency response sectors of North America.

 

The Other segment represents the remaining activities that are not included as part of the other reportable segments and represent primarily corporate activity. In 2019, the Company sold its domestic power and electromechanical businesses and reclassified the income of the former Power and Electromechanical segment to income from discontinued operations. Unsold portions of the segment were reclassified to assets held for sale. The three months ended March 31, 2019 has been reclassified to reflect this change, with assets held for sale included in the Other category.

 

The following information represents segment activity for the three months ended March 31, 2020:

 

 

(1) For the Energy segment, depreciation and amortization includes $79 thousand, which was included in cost of revenues in the Condensed Consolidated Statements of Operations.

⁽²⁾  Includes purchases of property, plant and equipment and the investment in other intangible assets. The Other category includes expenditures for discontinued operations.

 

The following information represents selected balance sheet items by segment as of March 31, 2020:

 

 

⁽¹⁾ The Other category includes assets held for sale related to the Company's discontinued operations, which include $0.4 million of other intangible assets.

 

The following information represents segment activity for the three months ended March 31, 2019:

 

 

⁽¹⁾ The Other category included depreciation and amortization of discontinued operations.

⁽²⁾ Includes purchases of property, plant and equipment and the investment in other intangible assets. The Other category includes expenditures for discontinued operations.

 

 

The following information represents selected balance sheet items by segment as of March 31, 2019:

 

 

⁽¹⁾ The Other category includes assets held for sale related to the Company's discontinued operations, which includes $13.1 million of goodwill and $8.3 million of other intangible assets.

 

The following represents revenue by country:

 

 

 

 

11.	RECENT ACCOUNTING PRONOUNCEMENTS

In January 2020, the FASB issued Accounting Standards Update ("ASU") 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives, and is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. The amendments in ASU 2020-01 are effective for the Company's 2021 fiscal year, including interim periods. The Company does not expect a material impact of this ASU on its consolidated financial statements and currently expects to adopt the standard in 2021.

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is guidance intended to simplify various aspects related to accounting for income taxes, eliminate certain exceptions within ASC 740 and clarify certain aspects of the current guidance to promote consistency among reporting entities. The pronouncement is effective for the Company's 2021 fiscal year, including interim periods. The Company does not expect a material impact of this ASU on its consolidated financial statements and currently expects to adopt the standard in 2021.

 

 

12.	FAIR VALUE MEASUREMENTS

 

The Company’s fair value hierarchy for its cash equivalents and marketable securities as of March 31, 2020 and December 31, 2019, respectively, was as follows:

 

 

 

Changes in Fair Value Measurements

Using Significant Unobservable Inputs (Level 3)

 

 

There were no transfers between Level 3 and Level 2 in 2019 as determined at the end of the reporting period.

 

In the three months ended March 31, 2020, the Company invested $200 thousand in a convertible note receivable with VPS. In the future, this note will be evaluated as a level 3 investment in a debt security. The fair value of the investment at March 31, 2020 is estimated to be the same as its current carrying value with no gains recorded since acquisition. This valuation was determined by the fact that other investors invested during the quarter at substantially the same terms and at the same price as our investment. The inputs used to measure the convertible note are classified as Level 3 within the valuation hierarchy. The valuation is not supported by market criteria and reflects the Company’s internal analysis. Since the valuation is not supported by market criteria, the valuation is completely dependent on unobservable inputs. 

 

 

13.	LOSS PER COMMON SHARE

 

In accordance with FASB Accounting Standards Codification Topic 260 (“FASB ASC 260”), “Earnings per Share,” Basic loss from continuing operations per share, Basic income from discontinued operations per share and basic net income (loss) per share that is available to shareholders is computed by dividing the income or loss by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the respective income (loss) available to common stockholders by the weighted average number of diluted shares outstanding during the period calculated using the treasury stock method. Due to the Company’s loss from continuing operations in the three months ended March 31, 2020 and March 31, 2019, the assumed exercise of stock options using the treasury stock method would have had an antidilutive effect and therefore 0.8 million shares related to stock options were excluded from the computation of diluted net loss per share for the three months ended March 31, 2020 and 0.9 million shares were excluded for the three months ended March 31, 2019. Accordingly, diluted earnings (loss) per share for continuing operations, discontinued operations and net income is the same as basic earnings (loss) per share for continuing operations, discontinued operations and net income for the three months ended March 31, 2020 and 2019.

 

 

 

14.	INCOME TAXES

 

The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company continues to record a full valuation allowance against the Company's U.S. and foreign net deferred tax assets as it is not more likely than not that the Company will realize a benefit from these assets in a future period. In future periods, tax benefits and related deferred tax assets will be recognized when management concludes realization of such amounts is more likely than not.

 

Total net income tax benefit of $1.7 million for the three months ended March 31, 2020 is being allocated under ASC 740-20-45-7 to more than one financial statement component other than continuing operations.

 

A net income tax benefit of $1.6 million was recorded to the income tax provision from continuing operations for the three months ended March 31, 2020, resulting in an effective tax rate of 18.7%. A net income tax benefit of $57 thousand was recorded to the income tax provision from discontinued operations for the three ended March 31, 2020.  The income tax benefit from continuing operations for the three ended March 31, 2020 was due to application of ASC 740-20-45-7, domestic state minimum taxes and benefits from refundable tax credits from our United Kingdom operations.  All of the Company’s USA and the foreign net deferred tax assets were reduced by a valuation allowance.

 

A net income tax benefit of $0.2 million was recorded to the income tax provision from continuing operations for the three months ended March 31, 2019, resulting in an effective tax rate of (4.4%). A net income tax expense of $0.2 million was recorded to the income tax provision from discontinued operations for the three months ended March 31, 2019. The income tax expense for the three months ended March 31, 2019 includes taxes on profitable foreign operations and domestic state minimum taxes. The Company has provided a full valuation on existing deferred tax assets in the United States and United Kingdom.

 

 

 

15.	ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss are as follows:

 

 

 

16.	NOTES PAYABLE

 

Notes payable is summarized as follows:

 

 

(1)

Two notes payable for $374 thousand and $921 thousand to First Insurance Funding were executed in November 2019 and February 2020 by CUI Global for the purposes of financing a portion of the Company's insurance coverage. Note 1 has an annual percentage rate of 4.85% with ten monthly payments of approximately $38 thousand and will be paid off by September 1, 2020, and Note 2 has an annual percentage rate of 4.85% with ten monthly payments of approximately $94 thousand and will be paid off by November 20, 2020.

 

 

17.	CONCENTRATIONS

 

The Company's major product lines are energy infrastructure services including natural gas infrastructure and high-tech solutions through Orbital Gas Systems and full-service building, maintenance and support to the electrical power distribution, transmission, substation, renewables, and emergency response sectors of North America through Orbital Power Services. The Company had the following revenue concentrations by customer greater than 10% of consolidated revenue:

 

 

 

The Company had the following geographic revenue concentrations outside the U.S.A. greater than 10% of consolidated revenue:

 

 

 

 

The Company had the following gross trade accounts receivable concentrations by customer greater than 10% of gross trade accounts receivable:

 

 

 

The Company had the following geographic concentrations of gross trade accounts receivable outside of the U.S.A. greater than 10% of gross trade accounts receivable:

 

 

 

There were no supplier concentrations greater than 10% during the three months ended March 31, 2020 and 2019.

 

 

18.	OTHER EQUITY TRANSACTIONS

 

The following shares issued during the three months ended March 31, 2020 were recorded in expense using the grant-date fair value of the stock:

 

 

(1) Related royalty expense recorded in prior periods.

 

19.	SUBSEQUENT EVENTS

 

On April 1, 2020, the Company entered into an Equity Purchase Agreement dated April 1, 2020 to acquire the assets of Reach Construction Group, LLC, an industry-leading solar construction company. Headquartered in Apex, NC, Reach Construction Group (“Reach”) is an engineering, procurement and construction (“EPC”) company with expertise in the renewable energy industry. At acquisition, Reach held contractual backlog for 2020 exceeding $100 million. The acquisition is expected to be accretive to Orbital Energy Group’s consolidated results for fiscal year 2020.

 

The purchase price for the acquisition of the assets was as follows:

 

Restricted Common Stock. 2,000,000 shares ($1.7 million as of April 1, 2020) of restricted common stock issued to the Seller. The Securities were issued pursuant to the exemption provided by Section 4(a)(2) of the Securities Act of 1933 as an offering which is not a public offering because the securities were issued to one individual who was an accredited investor. Restrictions on the shares are for twelve months and following those twelve months, the shares will become unrestricted common shares of the Company.

18-Month Seller Note. A $5 million subordinated promissory note, yielding 6% interest, interest payable quarterly, maturing 18 months following the Closing,

3-Year Seller Note. A $30 million subordinated promissory note, yielding 6% interest, interest payable quarterly, with $15 million of principal due 2 years following the Closing and the remaining principal and accrued but unpaid interest due 3 years following the Closing (subject to the Company’s use of commercially reasonable efforts to prepay, if possible),

Earn-Out. An amount not in excess of an aggregate of $30,000,000 payable over a maximum term of ten years to begin after repayment of the 3-Year Seller Note at a rate of 50% of the Adjusted EBITDA above $20 million.

 

On April 30, 2020 and May 2, 2020, Orbital Energy Group, Inc. (the “Company”) and its subsidiaries entered into unsecured loans in the aggregate principal amount of approximately $1.9 million (the “Loans”) pursuant to the Paycheck Protection Program (the “PPP”), sponsored by the Small Business Administration (the “SBA”) as guarantor of loans under the PPP. 

 

The Loans, and interest accrued thereon, is forgivable, partially or in full, if certain conditions are met.

 

The Loans are evidenced by four promissory notes, three with Bank of America, NA which are dated as of April 30, 2020 and one with Dogwood State Bank dated May 2, 2020 (the “Notes”). The Bank of America Notes mature two years from funding date of the Notes and the Dogwood State Bank Note matures two years from the Note date.  Each of the Notes bear interest at a fixed rate of 1.0 percent per annum with payments deferred for the first six months. The Loans may be prepaid at any time prior to maturity with no prepayment penalties. 

 

The foregoing summary is only a summary of certain provisions of the Notes and is qualified in its entirety by the full text of the Notes, which are included as an exhibit to this Form 10-Q.

 

On or about May 6, 2020, Orbital Energy Group (“OEG”) entered into a Transition Services Agreement with Virtual Power Systems(“VPS”). The agreement calls for OEG to provide certain very specific services to VPS from OEG’s Canadian manufacturing facility. All such services terminate on or before November 30, 2020. Included in the services to be provided are: (1) delivery of certain hardware (ICE Block & ICE Switch) units previously ordered by VPS; (2) maintenance of certain identified employees working at the Canadian Facility; (3) resolution of, and termination costs for certain identified employees working at the Canadian Facility; (4) de minimum design and engineering services necessary to deliver the ICE Block technology; (5) customer service as necessary to deliver and commission the ICE Block technology; and, (6) specific warehouse and office space through and to November 30, 2020 or until the closure of the Canadian Facility, whichever is sooner.

 

In exchange for these transition services, OEG shall receive an $800,000 convertible note payable by VPS pursuant to a convertible promissory note and issued under that certain Amended and Restated 2019 Note Purchase Agreement between OEG and the other parties thereto, dated on or around November 28, 2019, as amended to date.  OEG made this strategic investment into VPS after considerable debate and analysis. The Company believes in the long-term viability of VPS, which has been enhanced by the recent appointment of well-know, industry-expert, Dean Nelson, as VPS’s CEO. Mr. Nelson has generated significantly more interest in the VPS solutions throughout the datacenter industry, including Enterprise, Colocation and Hyperscale facilities. Specifically, Mr. Nelson is negotiating with several Fortune 100 and Fortune 500 operators for deployment of our ICE Block technology including the VPS Software.