Orbital Infrastructure Group, Inc. - Quarter Report: 2023 March (Form 10-Q)

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Orbital Infrastructure Group, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to condensed consolidated financial statements

Orbital Infrastructure Group, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to condensed consolidated financial statements

Orbital Infrastructure Group, Inc.

Condensed Consolidated Statements of Comprehensive Income and Loss

(Unaudited)

See accompanying notes to condensed consolidated financial statements

Orbital Infrastructure Group, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

Orbital Infrastructure Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to condensed consolidated financial statements

Orbital Infrastructure Group, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

Orbital Infrastructure Group, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Nature of Operations

Orbital Infrastructure Group, Inc. f/k/a Orbital Energy Group, Inc. (Orbital Infrastructure Group, "OIG," "The Company") is a diversified infrastructure services company serving customers in the electric power, telecommunications, and renewable markets. The Company’s reportable segments are the Electric Power segment, the Telecommunications segment, and the Renewables segment. In  December 2021, the Company announced the planned divestiture of its previously reported Integrated Energy Infrastructure Solutions and Services segment. 

The Electric Power segment consists of Front Line Power Construction, LLC based in Houston, Texas (acquired November 17, 2021), Orbital Power, Inc. based in Dallas, Texas, (began operations in Q1 2020) and Eclipse Foundation Group which began operations in Q1 2021. The segment provides comprehensive infrastructure solutions to customers in the electric power industry. Services performed by Front Line Power and Orbital Power, Inc. generally include but are not limited to the engineering, design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities as well as emergency restoration services. Eclipse Foundation Group, which began operations in  January 2021, is a drilled shaft foundation construction company that specializes in providing services to the electric transmission and substation, industrial, telecommunication and disaster restoration market sectors, with expertise performing services in water, marsh and rock terrains. In the third quarter of 2022, in order to streamline operations, the Eclipse business was integrated into Front Line Power Construction, LLC, and ceased to be a separate business unit.

The Telecommunications segment is made up of Gibson Technical Services, Inc. (“GTS”) (acquired  April 13, 2021) and subsidiaries. GTS is an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990 and is the parent of IMMCO, Inc., Full Moon Telecom, LLC, and Coax Fiber Solutions, LLC. IMMCO, Inc. (acquired  July 28, 2021), which includes two Indian subsidiaries, is an Atlanta-based, full-service telecom engineering and network design company providing diversified engineering services and customized software solutions to a global customer base since 1992. Full Moon Telecom, LLC (acquired  October 22, 2021) is a Florida-based telecommunications service provider that offers an extensive array of wireless service capabilities and experience including Layer 2/Layer 3 Transport, Radio Access Network (“RAN”) Integration, test and turn-up of Small Cell systems and Integration/Commissioning of Distributed Antenna (“DAS”) systems. Coax Fiber Solutions, LLC (acquired March 7, 2022), is based in Loganville, Georgia. Founded in 2016, Coax Fiber Solutions is a GDOT Certified contractor specializing in Aerial Installation, directional drilling, trenching, plowing, and missile crews for telecommunications, power, gas, water, CCTV, ATMS, and traffic signal cable installation.

The Renewables segment consists of Orbital Solar Services based in Raleigh, North Carolina. Orbital Solar Services provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility-scale solar construction. The Company serves a wide variety of project types, including commercial, substation, solar farms, and public utility projects.

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information, which includes condensed consolidated financial statements. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position and results of operations and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2022. The Condensed Consolidated Balance Sheet as of  December 31, 2022 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, 2022.

At a special stockholders meeting held April 18, 2023, the Company’s stockholders approved an amendment to the Company’s Certificate of Formation to effect a reverse stock split of the Company’s outstanding common stock at a ratio ranging from any whole number between 10-for-1 and 40-for-1 in order to achieve a minimum bid price of $1.00 per share for a minimum of 10 consecutive trading days, as required for continued listing of the common stock on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). The board of directors authorized a 1-for-40 ratio for the reverse stock split, which became effective on April 21, 2023. The accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

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, 2023.

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

(1) Restrictions on cash at March 31, 2023 and March 31, 2022 relate to collateral for several bank-issued letters of credit for contract guaranties. 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to record purchase price allocations for the Company's acquisitions, fair value measurements used in goodwill impairment tests, impairment estimations of long-lived assets, revenue recognition on cost-to-cost type contracts, allowances for uncollectible accounts, valuations of non-cash capital stock issuances, estimates of the incremental borrowing rate for long-term leases, fair value estimates and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results  may differ from these estimates under different assumptions or conditions.

Reclassifications

Certain reclassifications have been made to the 2022 classifications in order to conform to the 2023 presentation.

Company Conditions and Sources of Liquidity

The Company has experienced net losses, cash outflows from cash used in operating activities and a decline in share value over the past years. As of and for the three months ended March 31, 2023, the Company had an accumulated deficit of $507.3 million, loss from continuing operations of $20.3 million, and net cash provided by operating activities of $0.8 million. Further, as of March 31, 2023, the Company had a working capital deficit of $302.6 million, including current maturities of debt, and cash and cash equivalents of $24.0 million available for working capital needs and planned capital asset expenditures.  As a result of the foregoing, the Company does not have sufficient liquidity and capital resources to meet its obligations and fund its operations for the twelve months following the issuance of these financial statements. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern.

The Company has plans to access additional capital to meet its obligations for the twelve months from the date these financial statements are available to be issued. Historically, the Company has raised additional equity and debt financing to fund its expansion; refer to Note 16 — Notes Payable and Line of Credit. The Company has also funded some of its capital expenditures through long-term financing with lenders and other investors as also described in further detail in Note 16 — Notes Payable and Line of Credit. Our ability to raise the additional capital is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price that is favorable to us. As of March 31, 2023, the Company has an effective S-3 shelf registration statement for the issuance of various types of securities, including common stock, preferred stock, debt securities and/or warrants in the aggregate of up to $64.0 million.

The Company plans to meet its obligations as they become due over the next twelve months by raising additional capital through equity and debt financing sources and forecasted positive cash flows generated from operations. There can be no assurance that the Company will succeed in executing these plans. If unsuccessful, the Company will not have sufficient liquidity and capital resources to repay its indebtedness when it matures, or otherwise meet its cash requirements over the next twelve months, as noted above.

Restructuring Costs

In September 2022, the Company fully impaired its finance lease equipment related to the Eclipse Foundation Group in the Electric Power segment. These pieces of equipment are drilling specific and at this time, the Company does not plan to use the equipment for the remaining term of the leases. As these leases are non-cancelable and do not include a sub-leasing option, the full finance lease assets related to Eclipse were removed from the balance sheet and an equal impairment was recognized in the amount of $4.5 million in the third quarter of 2022. Future payments related to these leases will be approximately $4.4 million paid through June 2026.

Sale of Orbital U.K.

On May 11, 2022, the Company completed the sale of its Orbital U.K. operations for the agreed upon amount of 3,000,000 GBP. The Company received 1,575,000 GBP on the settlement date and the remaining 1,425,000 GBP was received on July 11, 2022. The Company could receive additional consideration if certain events transpire during the 12-month restricted period following the settlement date. In addition, the Company will receive a “royalty” of 15% on any sales of the GasPT device related to Snam Rete Gas and/or the Future Billing Methodology (FBM) Project.

Goodwill and Indefinite-lived intangible assets

The Company had goodwill from acquisitions made in 2020, 2021 and 2022. Goodwill in the Front Line Power and GTS reporting units was impaired in 2022 for $70.2 million and $25.8 million respectively due to triggering events in the third quarter related to a continued decline in the Company's market capitalization, significant losses in the Renewables segment and interest rate increases and limitations on accessing capital, which raised substantial doubt regarding the Company's ability to continue as a going concern. The fair value of the reporting units was valued using a market approach. The impairment assessment concluded that the fair value of the Renewables reporting unit was in excess of its carrying amount, which was negative. After impairments, the Company had $7.0 million of goodwill remaining at December 31, 2022 associated with Orbital Solar Services ("OSS) acquired in 2020. At the same time as the goodwill impairment, the Company assessed the other intangibles in the Renewables segment and determined the Customer relationship intangible was fully impaired and the remaining $4.3 million of book value was written off in the third quarter of 2022.

During the fourth quarter of 2022, triggering events of the same nature led to further valuation of the Company's indefinite-lived intangible assets using a relief from royalties method which resulted in impairment. The impairment assessment included significant assumptions related to revenue growth rates, royalty rates, and discount rates. For the year ended December 31, 2022, management concluded that indefinite-lived intangibles were impaired by $9.3 million dollars primarily attributable to the Front Line and GTS trade names. 

The Company tests for impairment of indefinite-lived intangibles and goodwill in the second quarter of each year and when events or circumstances indicate that the carrying amount of goodwill exceeds its fair value and may not be recoverable. 

Under current accounting guidance, Orbital Infrastructure Group is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance includes a number of factors to consider in conducting the qualitative assessment. 

During the first quarter of 2023, management considered all known events and circumstances that might trigger an impairment of goodwill, noting none. The remaining goodwill of $7.0 million dollars is associated with OSS which has a negative carrying value.

Accrued expenses

Accrued expenses are liabilities that reflect expenses on the statement of operations that have not been paid or recorded in accounts payable at the end of the period. At March 31, 2023 and  December 31, 2022, accrued expenses of $45.2 million and $39.1 million, respectively included the following components:

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, 2022 filed with the SEC on April 7, 2023.

As part of the Company’s stated strategy to transform Orbital Infrastructure Group into a diversified energy infrastructure services platform serving North American energy customers, the Company’s board of directors made the decision to divest of its Orbital Gas subsidiaries. The Orbital Gas subsidiaries provide proprietary gas measurement and sampling technologies and the integration of process control and measuring/sampling systems. They are legacy businesses that are not part of the Company’s strategy of building an infrastructure services company serving the electric power, telecommunications and renewable markets. The disposition of the Orbital Gas subsidiaries will facilitate the Company’s restructuring and cost savings initiatives and are intended to realign and simplify its business structure and better position the Company for future growth and improved profitability. In the fourth quarter of 2021, the Company recorded a $9.2 million impairment related to its U.K. operations to write the value of its investment in the U.K. operations to its expected realizable value of 3 million GBP ($4.1 million on December 31, 2021).

The Company's U.K. operations were divested in May 2022 and most of the assets of the North American operation were divested in the third quarter of 2022. At March 31, 2023 and December 31, 2022, the remaining assets held for sale were the Company's VE Technology intellectual property and certain fixed assets at Eclipse Foundation Group.

Assets held for sale that are included on the Company's balance sheet, relate to the company's discontinued businesses, and are described below. As of March 31, 2023 and December 31, 2022 there were no liabilities held for sale.

Selected data for these discontinued businesses consisted of the following:

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

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

Presented in the Condensed Consolidated Statement of Operations

Net cash provided by investing activities of discontinued operations for the three months ended March 31, 2023 was $0 dollars.

The Electric Power segment provides full service building, maintenance and support to the electrical power distribution, transmission, substation, and emergency response sectors of North America through Front Line Power, and Orbital Power Services. The Telecommunications segment composed of Gibson Technical Services and subsidiaries provides technical implementation, design, maintenance, emergency and repair support services in the broadband, wireless, and outside plant and building technologies.  The Renewables segment, Orbital Solar Services, provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility scale solar and community solar construction.

For our construction contracts, revenue is generally recognized over time. Our fixed price and unit-price construction projects generally use a cost-to-cost input method or an output method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Under the output method, progress towards completion is measured based on units of work completed based on the contractual pricing amounts.  We construct comprehensive revenue calculations based on quantifiable measures of actual units completed multiplied by the agreed upon contract prices per item completed. 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 certain types of over time revenue jobs, the Company utilizes the right-to-invoice practical expedient. In these instances, we have a right to invoice the customer for an amount that corresponds directly with the value transferred to the customer for our performance completed to date. When this practical expedient is used, we recognize revenue based on billing and calculate any additional revenue earned that is unbilled at the period end. We have contracts which have payment terms dictated by daily or hourly rates where some contracts may have mixed pricing terms which include a fixed fee portion. For contracts in which we charge the customer a fixed rate based on the time or materials spent during the project, we recognize revenue in the amount to which we have the right to invoice, which corresponds to the value transferred to the customer. 

For any job where the customer does not simultaneously receive and consume the benefits of our performance as we perform the service, the timing of revenue recognition also depends on the payment terms of the contract. For those contracts for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. As discussed above, these performance obligations use a cost-to-cost input method or output method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date and we are not enhancing a customer-controlled asset, we recognize revenue at the point in time when control is transferred to the customer.

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

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

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

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.

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.

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

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

Balances and activity in the current contract liabilities as of and for the three months ended March 31, 2023 and 2022 was as follows:

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, 2023, the Company's remaining performance obligations are generally expected to be filled within the next 12 months. For the contracts that are greater than 12 months the Company has approximately $142.2 million in the aggregate of future revenue related to remaining performance obligations that are unsatisfied or partially unsatisfied as of March 31, 2023. 

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

Performance Obligations Satisfied Over Time

To determine the proper revenue recognition method for our contracts satisfied over time, we evaluate whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to separate the single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

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

Variable Consideration

The nature of our contracts gives rise to several types of variable consideration. In rare instances, we include in our contract estimates, additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. These amounts are included in our calculation of net revenue recorded for our contracts and the associated remaining performance obligations. Additionally, if the contract has a provision for liquidated damages in the case that the Company misses a timing target, or fails to meet any other contract benchmarks, the Company accounts for those estimated liquidated damages as variable consideration and will adjust revenue accordingly with periodic updates to the estimated variable consideration as the job progresses. Liquidated damages are recognized as variable consideration and are estimated based on the most likely amount that is deemed probable of realization.

Two large solar projects have liquidated damages included within their customer contracts. In the event of a delay in the achievement of project milestones, the contracts specify the dollar amount of delay damages owed each day past the agreed upon milestone date. These delay liquidated damages are capped at 15% of the project contract price. During Q4 2022, the estimated completion dates on these two large solar projects were pushed passed milestone due dates in which the Company is contractually obligated to meet. As a result of these delays, the Company recorded liquidated damages as variable consideration, reducing the contract price on these two projects by a total of $17.1 million in 2022. This reduction in contract price along with additional estimated costs to complete the projects resulted in a catch-up adjustment to reduce revenue recorded year-to-date in 2022 by $21.4 million dollars. The customer on these two solar projects has the right to invoice, but as of May 15, 2023, has not yet sent an invoice for liquidated damages. Although the Company accrued for these liquidated damages in 2022, there is a possibility that some or all of the $17.1 million in liquidated damages could be reversed in future years if the customer does not invoice for these damages or if a legal settlement is reached.

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 table presents the Company's revenues disaggregated by the type of customer:

The following table presents the Company's revenues disaggregated by type of contract:

Inventories consist of raw materials and work-in-process and 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, 2023 and December 31, 2022, inventory by category is valued net of reserves and consists of:

The Company has a minority ownership in Virtual Power Systems ("VPS"). The VPS investment basis at March 31, 2023 and December 31, 2022 was $1.1 million and $1.1 million, respectively, as reflected on the condensed consolidated balance sheets. The investment is held at March 31, 2023 under the cost method of accounting for investments. 

Operating leases

Consolidated total operating lease costs were $1.6 million for the three months ended March 31, 2023 and $1.8 million for the three months ended March 31, 2022 and are included in cost of sales; selling, general and administrative expense; and other income (expense), on the condensed consolidated statement of operations. 

Future minimum operating lease obligations at March 31, 2023 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.

Financing leases

Consolidated total financing lease costs were $1.2 million and $1.5 million for the three months ended March 31, 2023 and 2022 and are included in depreciation in cost of sales and interest expense.

Future minimum finance lease obligations at March 31, 2023 are as follows for the years ended December 31:

Total financing lease costs are as follows:

All common stock share and per share data reflects the reverse stock split effective April 21, 2023, as described in Note 19 Subsequent Events, Reverse stock split.

Through December 31, 2021, the Company had been vesting a series of stock appreciation rights (SARS) to be settled in cash to certain executives. The SARS were considered liability-classified awards meaning their fair-values were remeasured at the end of each reporting period using a binomial lattice model and any changes in fair value for the vesting periods to-date were recorded through the income statement with a corresponding liability accrued on the balance sheet. Since December 31, 2021, the SARS have been exchanged for restricted stock units (RSUs) on the modification date of January 14, 2022 as approved by the Board of Directors. To account for this exchange, the company revalued the SARS as of the modification date of January 14, 2022 using the binomial lattice model and recorded changes in the vested value since December 31, 2021 as an adjustment to the income statement. The Company then reclassified the SARS accrued liability to APIC for new RSUs and recognized incremental expense. Shares deemed vested at the modification date were released and issued net of tax in March 2022. The SARS that converted to RSUs, were added to the Company's existing RSU program. The company recorded $0.6 million of expense for RSUs for the three months ended March 31, 2023.

Restricted Stock

In  March 2021, the Company granted 3 million restricted shares with an aggregate fair value of $16.4 million with a graded vesting schedule. One-third of which were vested in  April 2021, one-third of which were due to vest in  April 2022, and one-third of which were due to vest in  April 2023. The Company recorded zero and a net credit of $3.9 million, respectively, to compensation expense related to the forfeiture of these grants in the three months ended March 31, 2023 and March 31, 2022 respectively. The credit to compensation expense in the first three months of 2022 was due to a $5.2 million reversal of expense related to the forfeiture of the unvested restricted stock upon the termination of an employee as of March 31, 2022. 

Restricted Stock Units

All common stock share and per share data reflects the reverse stock split effective April 21, 2023, as described in Note 19 Subsequent Events, Reverse stock split.

On April 28, 2022, the Company entered into a Securities Purchase Agreement with an institutional investor. The Purchase Agreement provides for the sale and issuance by the Company of an aggregate of: (i) 225,000 shares of the Company’s common stock, $0.001 par value, (ii) pre-funded warrants to purchase up to 178,847 shares of Common Stock and (iii) accompanying warrants to purchase up to 403,846 shares of Common Stock. The offering price per share and associated prefunded warrants was $52.00 for the shares and $51.996 for the prefunded warrants. The prefunded warrants were immediately exercisable, had an exercise price of .004 and were exercised during the three months ended June 30, 2022.

The accompanying warrants have an exercise price of $52.40, and will be exercisable 6-months after their date of issuance and will expire on the fifth anniversary of the original issuance date.

Common stock warrants are accounted for in accordance with applicable accounting guidance provided in ASC Topic 815, Derivatives and Hedging - Contracts in Entity's Own Equity (ASC Topic 815), as either derivative liabilities or equity instruments depending on the specific terms of the warrant agreement.

The Company’s warrants are considered to be derivative warrants, are classified as liabilities, and are recorded at fair value. The warrants are subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of change in fair value of warrant liability in the consolidated statements of operations. The Company uses the Black-Scholes pricing model to estimate the fair value of the related derivative warrant liability. The warrants are classified as Level 3 liabilities (see Note 12 for fair value disclosures.)

Warrants outstanding and warrant activity for the three months ended March 31, 2023 is as follows:

Operating segments are defined in accordance with ASC 280-10 as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The measurement basis of segment profit or loss is income (loss) from operations. Management has identified five operating segments based on the activities of the Company in accordance with ASC 280-10. These operating segments have been aggregated into three reportable segments. The three reportable segments are Electric Power, Telecommunications, and Renewables and an Other category. 

The Electric Power segment consists of Front Line Power Construction, LLC, Orbital Power, Inc. and Eclipse Foundation Group. The segment provides comprehensive solutions to customers in the electric power industries. 

The Telecommunications segment is made up of Gibson Technical Services, Inc. (“GTS”) (acquired  April 13, 2021). GTS is an Atlanta-based telecommunications company providing diversified telecommunications services nationally since 1990 and is the parent of the following companies: IMMCO, Inc., Full Moon Telecom, and Coax Fiber Solutions, LLC.

The Renewables segment consists of Orbital Solar Services based in Raleigh, North Carolina. Orbital Solar Services provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility-scale solar construction. The Company serves a wide variety of project types, including commercial, substation, solar farms and public utility projects.

The Other category is made up primarily of the Company's corporate activities. This category does not include any operating segments and does not generate revenue. 

The following information represents segment activity for the three months ended March 31, 2023:

⁽¹⁾  For the Electric Power segment, the Telecommunications segment, and the Renewables segment, depreciation and amortization includes $2.6 million, $0.18 million and $5 thousand respectively, which was included in cost of revenues in the Condensed Consolidated Statement of Operations.

The following information represents segment activity for the three months ended March 31, 2022:

⁽¹⁾   For the Electric Power segment and the Telecommunications segment, depreciation and amortization includes $3.2 million and $0.2 million respectively, which was included in cost of revenues in the Condensed Consolidated Statement of Operations.

⁽²⁾  Includes purchases of property, plant and equipment and other intangible assets. The Other category includes expenditures for discontinued operations of $10 thousand.

The following information represents selected balance sheet items by segment as of  March 31, 2023:

The following information represents selected balance sheet items by segment as of December 31, 2022:

In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects to allow reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period, but it shall be adopted as of the beginning of the fiscal year that includes that interim period. ASU 2023-02 is not expected to have a material effect on our consolidated financial statements.

In March 2023, the FASB issued ASU 2023-01, Leases (Topic) 842: Common Control Arrangements. Topic 842 requires that entities determine whether a related-party arrangement between entities under common control is a lease. If the arrangement is determined to be a lease, an entity must classify and account for the lease on the same basis as an arrangement with an unrelated party. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period, but it shall be adopted as of the beginning of the fiscal year that includes that interim period. ASU 2023-01 is not expected to have a material effect on our consolidated financial statements.

In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations to enhance transparency about an entity’s use of supplier finance programs. Under the ASU, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a roll-forward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. An entity should also consider whether the existence of a supplier finance program changes the appropriate presentation of the payables in the program from trade payables to borrowings. The amendments in this update were effective for the Company for fiscal periods beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure of roll-forward information, which is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company did not identify any supplier finance program obligations and the new standard did not have an effect on the Company's financial position or results of operations.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value. It also requires the following disclosures for equity securities subject to the contractual sale restrictions: 1) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet; 2) the nature and remaining duration of the restriction(s); and 3) the circumstances that could cause a lapse in the restriction(s). ASU 2022-03 is effective for the fiscal years and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The guidance should be applied prospectively. ASU 2022-03 is not expected to have a material effect on our consolidated financial statements.

On October 28, 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. This standard was designed to provide consistent recognition and measurement guidance for revenue contracts with customers. Legacy guidance requires entities to record contract assets and contract liabilities acquired to be recorded at fair value. The amendments were effective for the Company for fiscal years beginning after December 15, 2022. The Company has not completed any business combinations since the effective date of the new standard therefor, there is no impact on the Company's financial position or results of operations.

The Company’s fair value hierarchy for our financial liabilities as of March 31, 2023 and December 31, 2022 was as follows:

See note 16 for more information about the Company's prepaid advance agreement. There were no transfers between Level 3 and Level 2 in the three months ended March 31, 2023 as determined at the end of the reporting period.

All common stock share and per share data reflects the reverse stock split effective April 21, 2023, as described in Note 19 Subsequent Events, Reverse stock split.

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, 2023 and March 31, 2022, the assumed exercise of stock options, warrants and the unvested restricted stock that would otherwise increase diluted shares using the treasury stock method would have had an antidilutive effect and therefore 5 thousand shares related to stock options, 0.4 million warrants outstanding at March 31, 2023 and 87 thousand shares of restricted stock units were excluded from the computation of diluted net loss per share for the three months ended March 31, 2023 and 5 thousand shares related to stock options outstanding at  March 31, 2022 were excluded for the three months ended March 31, 2022 and zero shares of restricted stock and restricted stock units were excluded from the computation of diluted net loss per share for the three months ended March 31, 2022.  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, discontinuing operations and net loss for the three months ended  March 31, 2023 and 2022.

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

Total net income tax expense of $0.5 million and $0.2 million were recorded to the income tax provision from continuing operations for the three months ended March 31, 2023, and March 31, 2022, respectively, resulting in an effective tax rate of (2.7%) and (0.7%), respectively.  Income tax expense was primarily due to state minimum taxes.

The components of accumulated other comprehensive loss are as follows:

Notes payable is summarized as follows:

Line of Credit

On  August 19, 2021, the Company's GTS subsidiary entered into a $4.0 million variable rate line of credit agreement. Interest accrues at a rate of 2.05% over the Daily Simple Secured Overnight Financing Rate ("SOFR") index rate. In November 2022, the maturity date for the line of credit was extended to November 2023. At March 31, 2023 the Company had a $4.0 million outstanding balance on the line of credit and zero dollars were available for borrowing. Collateral on the line of credit includes inventory, accounts receivable, equipment and general intangibles. The line of credit agreement includes certain affirmative covenants, all of which the Company was in compliance with as of March 31, 2023.

The Company’s major product lines in 2022 and 2023 were electric power transmission and distribution maintenance and service, utility-scale solar construction projects and telecommunications maintenance and service.

The Company had the following revenue concentrations by customer greater than 10% of consolidated revenue:

The Company did not have geographic revenue concentrations outside the U.S.A. greater than 10% of consolidated revenue.

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

The Company did not have geographic concentrations outside of the U.S.A. greater than 10% of gross trade accounts receivable.

For the three months ended March 31, 2023, the Company had no supplier concentrations.  For the three months ended March 31, 2022, the Company had one supplier concentration of approximately 12% in the Renewables segment.