Orbital Infrastructure Group, Inc. - Quarter Report: 2021 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, 2021

 

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 52,220,786 shares of the registrant's common stock, par value $0.001 per share, outstanding as of May 17, 2021.

 

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

 

 

 

 

 

 

		March 31,				December 31,
(in thousands, except share and per share amounts)		2021				2020
Assets:
Current Assets:
Cash and cash equivalents		$	34,733			$	3,046
Restricted cash - current			153				452
Trade accounts receivable, net of allowance of $1,208 and $1,227 at March 31, 2021 and December 31, 2020, respectively			6,840				8,487
Inventories			974				1,123
Contract assets			4,200				7,860
Note receivable, current portion			520				44
Prepaid expenses and other current assets			3,016				3,786
Total current assets			50,436				24,798
Property and equipment, less accumulated depreciation of $2,484 and $2,158 at March 31, 2021 and December 31, 2020, respectively			8,669				6,395
Investment			1,063				1,063
Right of use assets - Operating leases			9,264				7,054
Goodwill			7,006				7,006
Other intangible assets, net			14,221				13,697
Restricted cash			1,026				1,026
Note receivable			3,091				3,602
Deposits and other assets			170				1,404
Total assets		$	94,946			$	66,045
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable		$	4,141			$	9,913
Notes payable, current			16,798				12,246
Line of credit			—				441
Operating lease obligations - current portion			2,348				1,784
Accrued expenses			4,703				5,882
Contract liabilities			4,024				6,810
Total current liabilities			32,014				37,076
Notes payable, less current portion			8,756				5,056
Operating lease obligations, less current portion			6,636				5,211
Contingent consideration			720				720
Other long-term liabilities			2,720				835
Total liabilities			50,846				48,898
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued at March 31, 2021 or December 31, 2020			—				—
Common stock, par value $0.001; 325,000,000 shares authorized; 46,839,982 shares issued and 46,486,919 shares outstanding at March 31, 2021 and 31,029,642 shares issued and 30,676,579 shares outstanding at December 31, 2020			47				31
Additional paid-in capital			216,527				171,616
Treasury stock at cost; 353,063 shares held at March 31, 2021 and December 31, 2020			(413	)			(413	)
Accumulated deficit			(167,633	)			(149,681	)
Accumulated other comprehensive loss			(4,428	)			(4,406	)
Total stockholders' equity			44,100				17,147
Total liabilities and stockholders' equity		$	94,946			$	66,045

 

		For the Three Months
(in thousands, except share and per share amounts)		Ended March 31,
		2021				2020
Revenues		$	9,491			$	5,688
Cost of revenues			10,797				5,129
Gross profit (loss)			(1,306	)			559
Operating expenses:
Selling, general and administrative expense			14,460				7,192
Depreciation and amortization			1,515				407
Research and development			1				17
(Recovery) provision for bad debt			(19	)			6
Total operating expenses			15,957				7,622
Loss from operations			(17,263	)			(7,063	)
Other income (expense)			63				(1,032	)
Interest expense			(736	)			(11	)
Loss from continuing operations before income taxes and net loss of affiliate			(17,936	)			(8,106	)
Net loss of affiliate			—				(446	)
Loss from continuing operations before income taxes			(17,936	)			(8,552	)
Income tax expense (benefit)			16				(1,600	)
Loss from continuing operations, net of income taxes			(17,952	)			(6,952	)
Discontinued operations (Note 3)
Loss from operations of discontinued power and electromechanical components businesses			—				(486	)
Income tax benefit			—				(57	)
Income from discontinued operations, net of income taxes			—				(429	)
Net loss		$	(17,952	)		$	(7,381	)
Basic and diluted weighted average common shares outstanding			44,564,868				28,420,730
Loss from continuing operations per common share - basic and diluted		$	(0.40	)		$	(0.24	)
Income from discontinued operations - basic and diluted			0.00				(0.02	)
Loss per common share - basic and diluted		$	(0.40	)		$	(0.26	)

 

		For the Three Months
(in thousands)		Ended March 31,
		2021				2020
Net loss		$	(17,952	)		$	(7,381	)
Other comprehensive income (loss)
Foreign currency translation adjustment			(22	)			415
Comprehensive loss		$	(17,974	)		$	(6,966	)

 

(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, 2020			31,029,642			$	31			$	171,616				(353,063	)		$	(413	)		$	(149,681	)		$	(4,406	)		$	17,147
Issuance of common stock via equity raises			15,555,556				16				42,360				—				—				—				—				42,376
Common stock issued for cashless exercises of stock options			214,596				—				—				—				—				—				—				—
Common stock issued and vesting of restricted stock for compensation, services and royalty payments			40,188				—				2,551				—				—				—				—				2,551
Net loss			—				—				—				—				—				(17,952	)			—				(17,952	)
Other comprehensive income			—				—				—				—				—				—				(22	)			(22	)
Balance, March 31, 2021			46,839,982			$	47			$	216,527				(353,063	)		$	(413	)		$	(167,633	)		$	(4,428	)		$	44,100

(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			—				—				—				—				—				(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

 

		For the Three Months
(in thousands)		Ended March 31,
		2021				2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(17,952	)		$	(7,381	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			316				154
Amortization of intangibles			1,431				332
Amortization of note receivable discount			(74	)			(69	)
Stock issued and stock to be issued for compensation, royalties and services			2,559				3
Change in fair value related to stock appreciation rights			1,908				—
Amortization of debt discount			140				—
Loss on extinguishment of debt			250				—
Non-cash loss on equity method investment in affiliate			—				446
(Recovery) provision for bad debt			(19	)			6
Deferred income taxes			—				10
Inventory reserve			(72	)			(113	)
Non-cash unrealized foreign currency (gains) losses			(100	)			1,256
Change in operating assets and liabilities:
Trade accounts receivable			1,689				1,502
Inventories			225				(1,839	)
Contract assets			156				(480	)
Prepaid expenses and other current assets			783				(875	)
Right of use assets - Operating leases			(2,209	)			(703	)
Deposits and other assets			—				(874	)
Accounts payable			(4,343	)			301
Operating lease liabilities			1,987				581
Accrued expenses			1,286				(245	)
Contract liabilities			(1,443	)			264
NET CASH USED IN OPERATING ACTIVITIES			(13,482	)			(7,724	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(2,946	)			(1,278	)
Cash paid for working capital adjustment on Power group disposition			—				(2,804	)
Purchase of other intangible assets			(692	)			(4	)
Purchase of convertible notes receivable			—				(200	)
Cash paid for related party note receivable			—				(3,000	)
Purchase of investment			—				(97	)
Proceeds from notes receivable			100				—
NET CASH USED IN INVESTING ACTIVITIES			(3,538	)			(7,383	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit			(441	)			—
Payments on financing lease obligations			(1	)			(1	)
Proceeds from notes payable			9,701				—
Payments on notes payable			(3,238	)			(428	)
Proceeds from sales of common stock			42,376				—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			48,397				(429	)
Effect of exchange rate changes on cash			11				(48	)
Net increase (decrease) in cash, cash equivalents and restricted cash			31,388				(15,584	)
Cash, cash equivalents and restricted cash at beginning of period			4,524				23,351
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD		$	35,912			$	7,767

		For the Three Months
(in thousands)		Ended March 31,
		2021				2020
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid (net refunded)		$	(570	)		$	19
Interest paid		$	499			$	12
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Financing note payable issued for payment on certain insurance policies		$	—			$	921
Accrued property and equipment purchases		$	291			$	16

 

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

 

Nature of Operations

Orbital Energy Group, Inc. (Orbital Energy Group, "OEG," "The Company") is a platform company composed of three segments, the Electric Power and Solar Infrastructure Services segment, the Integrated Energy Infrastructure Solutions and Services segment, and the Other segment. In 2019, the Company divested of most of its previous Power and Electromechanical segment and the remaining portion of that segment was divested in 2020. 

 

The Electric Power and Solar Infrastructure Services segment consists of Orbital Solar Services based in Sanford, North Carolina, Orbital Power Services based in Dallas, Texas, and Eclipse Foundation Group based in Gonzales, Louisiana. The segment provides comprehensive network solutions to customers in the electric power, telecom and solar industries. Orbital Solar Services provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility-scale solar construction. The Company serves a wide variety of project types, including commercial, substation, solar farms and public utility projects. Services performed by Orbital Power Services generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities as well as emergency restoration services, including the repair of infrastructure damaged by inclement weather. Eclipse Foundation Group, which began operations in January 2021, is a drilled shaft foundation construction company that specializes in providing services to the electric transmission and substation (drilled piers), industrial, communication towers and disaster restoration market sectors, with expertise in water, marsh and rock terrains.

 

The Company’s Integrated Energy Infrastructure Solutions and Services segment is made up of Orbital Gas Systems Ltd. (Orbital-UK) and Orbital Gas Systems, North America, Inc. (Orbital North America), collectively referred to as ("Orbital Gas Systems"). Orbital-UK is based in the United Kingdom and Orbital North America is based in Houston, Texas. Orbital Gas Systems is a provider of natural gas infrastructure and advanced technology, including metering, odorization, remote telemetry units (‘‘RTU’’) and provides a diverse range of personalized gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries. GasPT® and VE Technology® products are sold through Orbital Gas Systems.

 

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, 2020. The condensed consolidated balance sheet as of December 31, 2020 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, 2020.

 

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, 2021.

 

 

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

 

 

(1) Restrictions on cash at March 31, 2021 and March 31, 2020 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, valuations of non-cash capital stock issuances, valuation for acquisitions, the valuation allowance on deferred tax assets, 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.

 

Reclassifications

Certain reclassifications have been made to the 2020 segment classifications in order to conform to the 2021 presentation.

 

Goodwill

Upon acquisition of Reach Construction Group, LLC, (name changed to Orbital Solar Services) the Company recorded $7.0 million of goodwill. Goodwill was valued as of April 1, 2020 by a third-party valuation expert and was recorded following the recognition of Orbital Solar Service's tangible assets and liabilities and $13.7 million of finite-lived identifiable intangible assets. Factors that contributed to the Company's goodwill are Orbital Solar Service's skilled workforce and reputation within its industry. The Company also expected to achieve future synergies between the Orbital Solar Services and Orbital Power Services businesses. These synergies were expected to be achieved in the form of power line work necessary when bringing new solar power systems online. Management completed a qualitative analysis to determine whether it was more likely than not that the fair value of its reporting unit was less than its carrying amount, including goodwill. To complete the qualitative review, management evaluated the fair value of the Goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. During management's review of goodwill as of March 31, 2021, the Company determined that there were not indicators present to suggest that it was more likely than not that the fair value of the Orbital Solar Services reporting unit was less than its carrying amount and thus no impairment was necessary.  

 

Company Conditions

Orbital Solar Services has seen increasing customer opportunities including its recently announced association with the new Black Sunrise Investment fund. The fund has identified through its investors and others, several projects of scale and for which Orbital Solar Services will be awarded significant work. Orbital Power Services began operations during the first quarter of 2020 with work progressing under master service agreements with several new customers. Eclipse Foundation Group began operations in January 2021 and has begun work on projects for utility customers. Orbital Gas Systems, Ltd. continues to face issues surrounding COVID-19, Brexit and the overall economy in the United Kingdom. Orbital Gas Systems, North America, Inc. has experienced a significant delay in customer projects and orders related to COVID-19 and the impact of pricing pressure on oil and gas industry customers.   

 

The Company had a net loss of $18.0 million, a negative gross margin of  $1.3 million, and cash used in operating activities of $13.5 million during the three months ended March 31, 2021. As of March 31, 2021, our accumulated deficit is $167.6 million and we had working capital of $18.4 million.

 

COVID-19 Assessment and Liquidity

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 can be severe. 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, 2021, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.

 

 

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 continue to manage working capital primarily related to trade accounts receivable, notes receivable, prepaid assets, contract assets and our inventory less current liabilities that we will manage during the next twelve months. In 2020 and the first three months of 2021, the Company has entered into various long and short-term debt agreements (Note 16. Notes Payable). In addition, the Company has secured funding and has an available S-3 registration statement allowing the Company to issue various types of securities including common stock, preferred stock, debt securities and/or warrants, up to an aggregate amount of $150 million. Considering these 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. 

 

The Company’s available capital may be consumed faster than anticipated due to other events, including the length and severity of the global novel coronavirus disease pandemic and measures taken to control the spread of COVID-19, as well as changes in and progress of our development activities and the impact of commercialization efforts due to the COVID-19 pandemic. The Company may seek to obtain additional capital as needed through equity financings, debt or other financing arrangements, but given the impact of COVID-19 on the U.S. and global financial markets, the Company may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to raise additional capital when needed or under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued shares may contain senior rights and preferences compared to currently outstanding common shares.

 

Restructuring Charges

During the fourth quarter of 2019, the Company completed the sale of its largest group within the Power and Electromechanical segment. The Company completed the sale of its Japan operations as of September 30, 2020.  In conjunction with the 2019 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 during 2020. As of December 31, 2020, the Company had remaining an accrued liability for estimated employee termination costs of $0.4 million related to the discontinued operations. The Company paid out an additional $0.2 million of termination benefits in the first three months of 2021 and expect the remaining $0.2 million to be paid out during the remainder of 2021. 

 

Activity in the termination benefit liability in 2021 is as follows:

 

 

 

 

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Our significant accounting policies are detailed in "Note 2 Summary of Significant Accounting Policies" within Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 30, 2021. Changes to the Company's accounting policies are discussed below:

 

Adoption of new accounting standards

On January 1, 2021, the Company adopted ASU No. 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides optional expedients and exceptions related to contract modifications and hedge accounting to address the transitions from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. ASU 2020-04 also temporarily allows hedge relationships to continue without de-designation upon changes due to reference rate reform. The standard is effective upon issuance and can be applied as of March 12, 2020 through December 31, 2022. There is not a material effect on the Company's financial statements due to the Company not having any current financial instruments that are affected by this new guidance.

 

On January 1, 2021, the Company adopted 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 new guidance does not currently have a material impact on the Company's consolidated financial statements due to the Company currently not having any equity-method investments or any derivative instruments.

 

On January 1, 2021, the Company adopted 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 ASU does not have a material impact on the Company's consolidated financial statements.

 

 

 

3.	DISCONTINUED OPERATIONS AND SALE OF A BUSINESS

As part of the Company’s previously stated strategy to transform Orbital Energy Group, Inc. into a diversified infrastructure services platform serving North American and U.K. customers, in 2019 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. On September 30, 2020, the Company sold the CUI Japan operations to Back Porch International for approximately $163 thousand. The assets of the Company's CUI-Canada subsidiary were divested in the fourth quarter of 2020. 

 

The associated results of operations of the discontinued Power and Electromechanical segment are separately reported as Discontinued Operations for 2020 on the Condensed Consolidated Statements of Operations. 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 former Power and Electromechanical segment consisted 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. The subsidiaries were providers of power and electromechanical components for Original Equipment Manufacturers (OEMs).

 

Selected data for these discontinued businesses consisted of the following:

 

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

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

Presented in the Condensed Consolidated Statement of Operations

(Unaudited)

 

 

 

 

 

 

There was zero net cash provided by or (used in) investing activities of discontinued operations for the three months ended March 31, 2020.

 

 

 

4.	REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Electric Power and Solar Infrastructure Services segment and Integrated Energy Infrastructure and Services segment

The Electric Power and Solar Infrastructure Services segment provides 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 and Eclipse Foundation Group, and Orbital Solar Services provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility scale solar and community solar construction.

 

The  Integrated Energy Infrastructure Solutions and Services segment subsidiaries, collectively referred to as Orbital Gas Systems, generate their revenue from a portfolio of products, services and resources that offer a diverse range of personalized gas engineering solutions to the gas utilities, power generation, petrochemical, emissions, manufacturing and automotive industries among others. 

 

Orbital Gas Systems accounts for a majority of its contract revenue proportionately over time. For our performance obligations satisfied over time, we recognize 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 our construction contracts, revenue is generally recognized over time. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. 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 Integrated Energy Infrastructure products also depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts where the Company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced or for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. As discussed above, these performance obligations use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date and we are not enhancing a customer controlled asset, we recognize revenue at the point in time when control is transferred to the customer, generally when the product is shipped.

 

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

 

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

 

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 extended warranty and maintenance activities are recognized ratably over the term of the warranty and maintenance period. Extended warranties are not a material portion of our revenue.

 

 

Accounts Receivable, Contract Assets and Contract Liabilities

Accounts receivable are recognized in the period when our right to consideration is unconditional. We also assess our customer's ability and intention to pay, which is based on a variety of factors, including our historical payment experience with and the financial condition of our customers. Payment terms and conditions vary by contract, although our standard terms include a requirement of payment within 30 days. Accounts receivable are recognized net of an allowance for doubtful accounts. 

 

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

 

Contract liabilities from our construction contracts occur when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts and provision for future contract losses for those contracts estimated to close in a gross loss position. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue.

 

Balances and activity in the current contract liabilities as of and for the three months ended March 31, 2021 and 2020 was as follows:

 

 

 

 

⁽¹⁾  For the beginning balance in 2021 and 2020, total contract liabilities included $186 thousand and $192 thousand, respectively that were classified as long term.

⁽²⁾ 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 contracts with customers for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of March 31, 2021, 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 our contracts, we evaluate whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to separate the single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

 

For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In cases where we do, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized customer specific solution, and in these cases we typically use the 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 20% and 35% of revenues for the three month periods ended March 31, 2021 and 2020, 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 typically 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. In rare instances, we include in our contract estimates, additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. These amounts are included in our calculation of net revenue recorded for our contracts and the associated remaining performance obligations. Additionally, if the contract has a provision for liquidated damages in the case that the Company misses a timing target, or fails to meet any other contract benchmarks, we account for those estimated liquidated damages as variable consideration and will adjust revenue accordingly with periodic updates to the estimated variable consideration as the job progresses. Liquidated damages are recognized as variable consideration only when we estimate that they will be a factor in the performance of the contract and are not common.

 

 

Significant Judgments

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

 

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

 

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

 

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

  

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

 

 

 

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

          

 

 

5.	OTHER INTANGIBLE ASSETS

 

In January 2021, the Company completed the acquisition of the VE Technology rights, which it has previously utilized the VE Technology through a licensing agreement with Endet Ltd. Orbital Gas Systems has the existing proprietary knowledge for the marketing, engineering and production of the VE Technology based solutions. The VE Technology, amortized over ten years, is the basis for a patented sampling system product line marketed by Orbital Gas Systems and utilized in many of its integrated solutions.

 

In 2020, 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 British pounds ("GBP"), or approximately $1.8 million. The completion of the acquisition was made upon the final payment towards this agreement. In June 2020, the parties to the agreement mutually agreed to extend the payments until January 15, 2021 in consideration of the financial consequences created by the COVID-19 pandemic in exchange for a technology fee of an additional 100,000 GBP. As of March 31, 2021, the Company paid the remaining 500,000 GBP in January 2021. The $1.9 million paid was recorded as an intangible asset upon making the final payment in January 2021 with $0.7 million paid in 2021 and $1.2 million reclassified from long-term deposits.

 

 

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, 2021 and December 31, 2020, accrued liabilities included $0.2 million and $0.1 million of accrued inventory payable, respectively. At March 31, 2021 and December 31, 2020, inventory by category is valued net of reserves and consists of:

 

 

 

 

 

7.	INVESTMENTS

 

As of March 31, 2021, the Company had a minority ownership in Virtual Power Systems ("VPS"). Prior to the third quarter of 2020, based on its equity ownership and that the Company maintains a board seat and participated in operational activities of VPS, the Company maintained significant influence to account for the investment as an equity-method investment. 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 balance. During the three months ended March 31, 2020, the Company recorded a $0.4 million loss on its equity method investment in VPS. The VPS investment basis at March 31, 2021 and December 31, 2020 was $1.1 million and $1.1 million, respectively, as reflected on the consolidated balance sheets. With the decrease in ownership percentage following a Q3 2020 equity raise by VPS and additional board seats placed, OEG no longer has sufficient influence to recognize the investment under the equity method. The investment is held at March 31, 2021 under the cost method of accounting for investments. 

 

The Company made a purchase of a convertible note receivable for $200 thousand from VPS in the three months ended March 31, 2020, which is reflected in investing cash flows on the consolidated statement of cash flows.

 

 

8.

LEASES

 

Consolidated total lease costs were $0.8 million for the three months ended March 31, 2021 and is included in cost of sales; selling, general and administrative expense; and other income (expense), on the condensed consolidated statement of operations.

 

Future minimum operating lease obligations at March 31, 2021 are as follows for the years ended December 31:

 

 

 

Total lease cost and other lease information is as follows:

 

 

 

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 current stock option plan was approved in 2020 following the expiration of its previous stock option plan in 2018. The Company did not issue any stock options during the three months ended March 31, 2021 or 2020. 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, 2020 and filed with the SEC on March 30, 2021. For the three months ended March 31, 2021 and 2020, the Company recorded stock-based compensation expense of $2.6 million and $3 thousand, respectively. Stock-based payments for compensation, services and royalties for the three months ended March 31, 2021 is summarized below.

 

 

 

(1)  The cashless exercise consisted of an exercise of 552,663 shares for which 338,067 of those share options were returned to the Company in return for the 214,596 shares issued. Expense related to these stock options were recorded in prior periods as they were fully vested.

(2)  In March 2021, the Company granted 3 million restricted shares for employee compensation with an aggregate fair value of $16.4 million with a graded vesting schedule. One-third of which were vested and issued in April 2021, one third of which will vest in April 2022, and one-third of which will vest in April 2023. The Company recorded $2.0 million in compensation expense related to the partial vesting of these grants in the three months ended March 31, 2021, and will record the remaining $14.4 million of stock-based compensation related to these shares over the remaining vesting period. 

(3)  The Company granted 80,000 fully vested shares to four directors in March. These shares were issued in April 2021.

(4)  The Company granted 2,292 fully vested shares for the payment of accrued royalties. These shares will be issued in May 2021.

 

In addition to stock-based compensation settled in stock, the Company also has cash settled stock appreciation rights ("SARs") which were granted in June 2020 as described in the Company's Form 10-K filed March 30, 2021. Accrued SARs at March 31, 2021 and December 31, 2020 were $2.6 million and $0.6 million, respectively and were recorded in accrued expenses within the condensed consolidated balance sheets. Vesting expense for the three months ended March 31, 2021 was $1.9 million and was recorded within selling, general and administrative expense within the condensed consolidated statements of operations. 

 

 

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 three reportable segments. The three reportable segments are Electric Power and Solar Infrastructure Services, Integrated Energy Infrastructure Solutions and Services, and Other.

 

The Electric Power and Solar Infrastructure Services segment consists of Orbital Solar Services based in Sanford, North Carolina, Orbital Power Services based in Dallas, Texas, and Eclipse Foundation Group based in Gonzales, Louisiana. The segment provides comprehensive network solutions to customers in the electric power, telecom and solar industries. 

 

The Integrated Energy Infrastructure Solutions and Services segment is focused on the operations of Orbital Gas Systems Ltd. in the UK and Orbital Gas Systems, North America, Inc. which includes gas related test and measurement systems, including the GasPT.

 

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. The Company sold the remaining portions of the Power and Electromechanical segment in 2020.

 

The following information represents segment activity for the three months ended March 31, 2021:

 

 

 

⁽¹⁾ For the Electric Power and Solar Infrastructure segment, depreciation and amortization includes $0.2 million, which was included in cost of revenues in the Condensed Consolidated Statements of Operations.

⁽²⁾  Includes purchases of property, plant and equipment and other intangible assets. 

 

 

The following information represents selected balance sheet items by segment as of March 31, 2021:

 

 

 

 

 

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

 

 

 

⁽¹⁾ For the Electric Power and Solar Infrastructure Services 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 other intangible assets. The Other category includes expenditures for discontinued operations.

 

 

 

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

 

 

 

 

The following represents revenue by country:

 

 

 

 

11.	RECENT ACCOUNTING PRONOUNCEMENTS

 

There were no recent accounting pronouncements for which the Company determined would be material to its balance sheet or statement of operations. 

 

12.	FAIR VALUE MEASUREMENTS

 

The Company’s fair value hierarchy for its contingent consideration and convertible note payable as of March 31, 2021 and December 31, 2020 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 the three months ended March 31, 2021 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. This note was increased by $60 thousand from accrued interest and transition services provided by the Company. The $260 thousand note was converted to equity in VPS during Q3 2020 and accounted for as a cost method investment.  

 

 

13.	LOSS PER COMMON SHARE

 

In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 260 (“FASB ASC 260”), “Earnings per Share,” Basic loss from continuing operations per share, basic income from discontinued operations per share and basic net income (loss) per share that is available to shareholders is computed by dividing the income or loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the respective loss available to common stockholders by the weighted average number of diluted shares outstanding during the period calculated using the treasury stock method. Due to the Company’s loss from continuing operations in the three months ended March 31, 2021 and March 31, 2020, the assumed exercise of stock options and the unvested restricted stock that would otherwise increase diluted shares using the treasury stock method would have had an antidilutive effect and therefore 0.2 million shares related to stock options outstanding at March 31, 2021 and 3 million shares of restricted stock were excluded from the computation of diluted net loss per share for the three months ended March 31, 2021 and 0.8 million shares related to stock options outstanding at March 31, 2020 were excluded for the three months ended March 31, 2020. 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, 2021 and 2020.

 

 

 

 

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.

 

Net income tax expense of $16 thousand was recorded to the income tax provision from continuing operations for the three months ended March 31, 2021, resulting in an effective tax rate of 0.1%. The income tax expense from continuing operations for the three months ended March 31, 2021 was due to domestic state minimum taxes. All of the Company’s domestic and foreign net deferred tax assets were reduced by a full valuation allowance.

 

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.

 

 

 

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)	Note payable with an original balance for $1.4 million to First Insurance Funding was executed in July 2020 by the Company for the purposes of financing a portion of the Company's insurance coverage. The Note has an annual percentage rate of 3.35% with nine monthly payments of approximately $159 thousand and will be paid off by April 1, 2021. The Company financed two additional insurance policies in the fourth quarter of 2020 for $0.1 million and $0.4 million, respectively. The smaller of which will mature in April 2021 and the other of which will mature in September 2021, and for which had annual interest rates of 3.35% and 4.35%, respectively.
(2)	On April 30, 2020 and May 2, 2020, the Company 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 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% per annum with payments deferred. The Loans may be prepaid at any time prior to maturity with no prepayment penalties.
(3)	Includes two seller financed notes payable, one for $5 million and the second for $1.5 million. The $5 million note was amended from its original 18-month term to provide for installments of $1 million paid on March 3, 2021, a second $1 million payment to be made on October 31, 2021 and a final principal payment of $3 million on March 31, 2022.  The original payment terms called for the full $5 million principal to be paid no later than November 1, 2021 without separate installments. The second seller financed note payable is due 36-months from the April 1, 2020 acquisition date. Both notes have an interest rate of 6% per annum.
(4)	Includes vehicle and equipment loans with interest rates ranging from 6.79% to 8.99%.
(5)	To refinance an earlier non-recourse note and to provide the Company with additional capital, the Company took out two non-recourse agreements with C6 Capital for the sale of future revenues in the total amount of $3.5 million. These agreements had no stated interest rate and the original issue discount including upfront fees are being amortized using an effective interest rate of approximately 117%. After combined weekly payments of approximately $54 thousand for the first four weeks, the combined payments increased to approximately $116 thousand until June 2021. As of March 31, 2021, the future payments for these financing agreements was approximately $1.2 million ($1.1 million net of discount).
(6)	On November 13, 2020, the Company completed a Securities Purchase Agreement with an institutional investor, pursuant to which the Company agreed to issue to the Investor an unsecured convertible instrument in the principal amount of $2.2 million (the “Convertible Security” or “Note”) to purchase shares of the Company’s common stock, $0.001 par value per share (the “Common Stock”) against the payment of the applicable consideration therefore. Upon the closing on November 13, 2020, the Company received gross proceeds of $2.2 million before fees and other expenses associated with the transaction, including but not limited to, a $0.2 million original issue discount payable to the Investor. The net proceeds received by the Company was used primarily for working capital, debt repayment and general corporate purposes. The Note is payable in full within eighteen (18) months after the purchase price date in accordance with the terms set forth in the Note and accrues interest on the outstanding balance at the rate of ten percent (10%) per annum from the Purchase Price Date until the Note is paid in full. All interest shall compound daily and shall be payable in accordance with the terms of the Note. Company has the right to prepay all or any portion of the outstanding balance in an amount equal to 115% multiplied by the portion of the outstanding balance to be prepaid. The creditor may request payment of up to $250 thousand per month beginning 6 months after initial issuance. Original issue discount is amortized over the expected life of the investment at an effective interest rate of approximately 29%. The Company elected the fair value option for this note and as a result did not bifurcate any potential embedded derivatives. In February 2021, the Company negotiated modified terms which effectively removed the convertible option from the note and the Company recorded a $250 thousand loss on extinguishment and its carrying value was $2.3 million at March 31, 2021. See Note 12 for more information on the fair value of this note payable. On March 23, 2021, the Company completed a second note payable with the same institutional investor with a face amount of $10.7 million, a stated interest rate of 9.0%, an estimated effective interest rate of 19.6% an original issue discount of $1.0 million and a carrying value of $9.7 million at March 31, 2021. The note payable is payable within eighteen (18) months after the purchase date and the creditor may request payment of up to $1 million per month beginning 6 months after initial issuance.

 

 

(7)

In October 2020, the Company entered into a conditional settlement agreement with a subcontractor to make payments of $3.5 million at zero interest over three years. In January 2021, the Company entered into a conditional settlement agreement with a subcontractor to make payments of $1.4 million over approximately 5 months at 12% annual interest rate with the final payment on or before June 30, 2021. There is $1.0 million outstanding on this note at March 31, 2021.

 

 

 

17.	CONCENTRATIONS

 

The Company's major product lines are energy infrastructure services including natural gas infrastructure solutions and services through Orbital Gas Systems; 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 and Eclipse Foundation Group; and engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility scale solar construction through Orbital Solar 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, 2021 or three months ended March 31, 2020.

 

18.	OTHER EQUITY TRANSACTIONS

 

S-3 registration

The Company filed an S-3 registration statement on July 17, 2020 containing a prospectus that was effective in September 2020. The Company utilized this filing in January 2021 to issue common stock for $45 million before costs of $2.6 million for net proceeds of $42.4 million in two separate equity raises. The Company has used and plans to use the remaining funds for general corporate purposes, which may include operating expenses, working capital to improve and promote our commercially available products and service offerings, advance product and service offering candidates, future acquisitions or share repurchases, expand our market presence and commercialization, general capital expenditures and satisfaction of debt obligations. The Company filed a new S-3 shelf registration in January 2021, which, as amended, became effective in April 2021. With this filing, Orbital Energy Group may from time to time issue various types of securities, including common stock, preferred stock, debt securities and/or warrants, up to an aggregate amount of $150 million.

 

 

 

19.	ACQUISITION OF REACH CONSTRUCTION GROUP, LLC

 

Effective April 1, 2020, the Company entered into an equity purchase agreement to acquire 100% of the assets of Reach Construction Group, LLC (Renamed "Orbital Solar Services"), an, industry-leading solar construction company. Headquartered in Sanford, NC, Orbital Solar Services is an engineering, procurement and construction (“EPC”) company with expertise in the renewable energy industry. The acquisition was effectuated pursuant to the Equity Purchase Agreement (the “Agreement”), dated as of April 1, 2020, between Orbital Energy Group and Brandon S. Martin (the "Seller").  Orbital Energy Group issued 2,000,000 shares of restricted common stock issued to the Seller ($1.2 million estimated fair value as of April 1, 2020) along with two seller notes for a combined total of $35 million (Adjusted to $6.5 million following preliminary working capital adjustment as of April 1, 2020) and an earn-out not in excess of $30 million ($0.7 million estimated fair value as of April 1, 2020.) The seller notes were subject to a $28.5 million preliminary working capital adjustment.

 

The purchase consideration is as follows:

 

(in thousands)

 

 

 

The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated preliminary fair values at the date of acquisition.

 

(in thousands)

 

 

 

 

20.	COMMITMENTS AND CONTINGENCIES

 

Off-Balance Sheet Arrangements

 

Performance and Payment Bonds and Parent Guarantees

In the ordinary course of business, Orbital Energy Group and its subsidiaries are required by certain customers to provide performance and payment bonds for contractual commitments related to its projects. These bonds provide a guarantee to the customer that the Company will perform under the terms of a contract and that the Company will pay its subcontractors and vendors. If the Company fails to perform under a contract or to pay its subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for expenses or outlays it incurs. Certain bonds are for open-ended contracts with multiple work orders so the value may increase as the work progresses and more work orders are started. The bonds will remain in place as the Company completes projects and resolves any disputed matters with the customers, vendors and subcontractors related to the bonded projects. As of March 31, 2021 the total amount of the outstanding performance and payment bonds was approximately $1.9 million. The estimated cost to complete bonded projects was approximately $0.9 million as of March 31, 2021.  

 

Additionally, from time to time, we guarantee certain obligations and liabilities of our subsidiaries that may arise in connection with, among other things, contracts with customers, equipment lease obligations, and contractor licenses. These guarantees may cover all of the subsidiary’s unperformed, undischarged and unreleased obligations and liabilities under or in connection with the relevant agreement. For example, with respect to customer contracts, a guarantee may cover a variety of obligations and liabilities arising during the ordinary course of the subsidiary’s business or operations, including, among other things, warranty and breach of contract claims, third-party and environmental liabilities arising from the subsidiary’s work and for which it is responsible, liquidated damages, or indemnity claims.

 

Contingent Liabilities

Orbital Energy Group, Inc. is occasionally party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, negligence or gross negligence and/or property damages, wage and hour and other employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief.

 

Regarding all lawsuits, claims and proceedings, Orbital Energy Group, Inc. records a reserve when it is probable that a liability has been incurred and the loss can be reasonably estimated. Other than the reserve on the item described below, the Company currently has no such reserves. In addition, Orbital Energy Group, Inc. discloses matters for which management believes a material loss is at least reasonably possible. Except as otherwise stated below, none of these proceedings are expected to have a material adverse effect on Orbital Energy Group, Inc.’s consolidated financial position, results of operations or cash flows. In all instances, management has assessed the matter based on current information and made a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may prove materially inaccurate, and such judgment is made subject to the known uncertainties of litigation.

 

21.	SUBSEQUENT EVENTS

 

Acquisition

Orbital Energy Group, Inc. (NASDAQ: OEG) (“OEG” or “Company”) entered into and closed upon a Share Purchase Agreement dated April 13, 2021 (“SPA”) by and among the Company and the owners of the capital stock of Gibson Technical Services, Inc. (“GTS”).  GTS is an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990 and will become a wholly owned subsidiary of the Company.

 

Subject to the terms and conditions set forth in the SPA, the base purchase price for 100% of the equity ownership of GTS is $48,000,000, with the consideration structured as follows:

 

●

$22,000,000 in cash paid at closing; and

 

●

4,651,162 shares of restricted common stock issued to the GTS shareholders with an aggregate value of $26,000,000 based upon a per share value of $5.59. Of the newly issued shares, 2,232,569 of the shares are subject to a one (1) year restricted period and 2,418,593 are subject to a two (2) year restricted period.

 

●	The SPA provides for the issuance of additional shares of OEG restricted common stock to the GTS shareholders valued at $5.59 as a post-closing adjustment for the excess net working capital above a 2-1 ratio within 45 days after the closing date of April 13, 2021.

 

The SPA contains various customary representations, warranties and covenants. In connection with the SPA, the Company entered into employment agreements with three (3) key employees of GTS with base compensation agreements ranging from $165,000 to $300,000, plus incentive compensation arrangements tied to the performance of GTS.

 

Debt Agreement

On May 11, 2021, Orbital Energy Group, Inc. (the “Company”) completed a Note Purchase Agreement (the “Purchase Agreement”), by and between the Company and an institutional investor (the “Investor”), pursuant to which the Company agreed to issue to the Investor an unsecured instrument in the principal amount of $10,715,000 (the “Note”). Upon the closing on May 11, 2021, the Company received gross proceeds of $10,715,000, before fees and other expenses associated with the transaction, including but not limited to, a $700,000 original issue discount payable to the Investor. The net proceeds received by the Company will be used primarily for working capital, future acquisitions, and general corporate purposes.

 

The Note is payable in full within eighteen (18) months after the purchase price date in accordance with the terms set forth in the Note and accrues interest on the outstanding balance at the rate of nine percent (9%) per annum from the Purchase Price Date until the Note is paid in full. All interest shall compound daily and shall be payable in accordance with the terms of the Note. The Company has the right to prepay all or any portion of the outstanding balance in an amount equal to 115% multiplied by the portion of the outstanding balance to be prepaid.

 

Beginning six (6) months from the purchase price date, Investor has the right, in its sole and absolute discretion, to redeem all or any portion of the Note (such amount, the “Redemption Amount”) subject to the maximum monthly redemption amount of $1,000,000 per calendar month, by providing Company with a “Redemption Notice."

 

The Note Purchase Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company, other obligations of the parties thereto, and termination provisions.

 

The foregoing does not purport to be a complete description of the Note Purchase Agreement and is qualified in its entirety by reference to the full text of such documents and attachments which are attached as Exhibits to this Report and are incorporated by reference herein.