Williams Industrial Services Group Inc. - Quarter Report: 2019 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from to

Commission File No. 001-16501

Williams Industrial Services Group Inc.

(Exact name of registrant as specified in its charter)


Delaware		73-1541378
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Crescent Centre Parkway, Suite 1240

Tucker, GA 30084

(Address of principal executive offices) (Zip code)

(770) 879-4400

(Registrant’s telephone number, including area code)

N/A

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

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

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

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



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

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

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

As of November 8, 2019, there were 19,057,195 shares of common stock of Williams Industrial Services Group Inc. outstanding.

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

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Part I—FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	3

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	4

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	5

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	7

Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3. Quantitative and Qualitative Disclosures about Market Risk	30

Item 4. Controls and Procedures	30

Part II—OTHER INFORMATION

Item 1. Legal Proceedings	31

Item 1A. Risk Factors	31

Item 5. Other Items	31

Item 6. Exhibits	32

SIGNATURES	33

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Part I—FINANCIAL INFORMATION

Item 1. Financial Statements.

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(in thousands, except share data)	September 30, 2019		December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	2,004	$	4,475
Restricted cash		468		467
Accounts receivable, net of allowance of $193 and $140, respectively		30,514		22,724
Contract assets		12,377		8,218
Other current assets		3,653		1,735
Total current assets		49,016		37,619

Property, plant and equipment, net		285		335
Goodwill		35,400		35,400
Intangible assets		12,500		12,500
Other long-term assets		8,752		1,650
Total assets	$	105,953	$	87,504

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,969	$	2,953
Accrued compensation and benefits		9,233		10,859
Contract liabilities		5,317		3,278
Short-term borrowings		3,898		3,274
Current portion of long-term debt		700		525
Other current liabilities		9,807		5,518
Current liabilities of discontinued operations		342		640
Total current liabilities		40,266		27,047
Long-term debt, net		32,738		32,978
Deferred tax liabilities		2,614		2,682
Other long-term liabilities		4,736		1,396
Long-term liabilities of discontinued operations		4,466		5,188
Total liabilities		84,820		69,291
Commitments and contingencies (Note 9 and 11)
Stockholders’ equity:
Common stock, $0.01 par value, 170,000,000 shares authorized and 19,794,270 and 19,767,605 shares issued, respectively, and 19,057,195 and 18,660,218 shares outstanding, respectively		198		197
Paid-in capital		81,380		80,424
Accumulated other comprehensive loss		(27)		—
Accumulated deficit		(60,409)		(62,397)
Treasury stock, at par (737,075 and 1,107,387 common shares, respectively)		(9)		(11)
Total stockholders’ equity		21,133		18,213
Total liabilities and stockholders’ equity	$	105,953	$	87,504

See accompanying notes to condensed consolidated financial statements.

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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2019		2018		2019		2018
Revenue	$	56,862	$	53,467	$	178,980	$	144,563
Cost of revenue		50,906		43,255		157,150		121,154

Gross profit		5,956		10,212		21,830		23,409

Selling and marketing expenses		63		397		468		1,299
General and administrative expenses		5,091		7,529		16,327		21,645
Restructuring charges		—		1,436		—		3,661
Depreciation and amortization expense		77		192		225		633
Total operating expenses		5,231		9,554		17,020		27,238

Operating income (loss)		725		658		4,810		(3,829)

Interest expense, net		1,511		3,622		4,504		7,397
Other (income) expense, net		(485)		(339)		(1,153)		(844)
Total other (income) expense, net		1,026		3,283		3,351		6,553

Income (loss) from continuing operations before income tax		(301)		(2,625)		1,459		(10,382)
Income tax (benefit) expense		62		215		141		720
Income (loss) from continuing operations		(363)		(2,840)		1,318		(11,102)

Loss from discontinued operations before income tax		(54)		(10,619)		(175)		(14,522)
Income tax (benefit) expense		(97)		17		(845)		(666)
Income (loss) from discontinued operations		43		(10,636)		670		(13,856)

Net income (loss)	$	(320)	$	(13,476)	$	1,988	$	(24,958)

Basic earnings (loss) per common share
Income (loss) from continuing operations	$	(0.02)	$	(0.16)	$	0.07	$	(0.61)
Income (loss) from discontinued operations		—		(0.58)		0.04		(0.76)
Basic earnings (loss) per common share	$	(0.02)	$	(0.74)	$	0.11	$	(1.37)

Diluted earnings (loss) per common share
Income (loss) from continuing operations	$	(0.02)	$	(0.16)	$	0.07	$	(0.61)
Income (loss) from discontinued operations		—		(0.58)		0.03		(0.76)
Diluted earnings (loss) per common share	$	(0.02)	$	(0.74)	$	0.10	$	(1.37)

See accompanying notes to condensed consolidated financial statements.

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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Net income (loss)	$	(320)	$	(13,476)	$	1,988	$	(24,958)
Foreign currency translation adjustment		17		—		(27)		—
Comprehensive income (loss)	$	(303)	$	(13,476)	$	1,961	$	(24,958)

See accompanying notes to condensed consolidated financial statements.

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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)


	Common Shares
	$0.01 Per Share				Paid-in		Accumulated	Treasury Shares
(in thousands, except share data)	Shares		Amount		Capital		Deficit	Shares		Amount		Total
Balance, December 31, 2017	19,360,026	$	193	$	78,910	$	(36,962)	(1,413,640)	$	(14)	$	42,127
Issuance of restricted stock units	167,841		2		(2)		—	—		—		—
Tax withholding on restricted stock units	—		—		(186)		—	(23,161)		—		(186)
Stock-based compensation	—		—		753		—	—		—		753
Net loss	—		—		—		(3,988)	—		—		(3,988)
March 31, 2018	19,527,867	$	195	$	79,475	$	(40,950)	(1,436,801)	$	(14)	$	38,706
Issuance of restricted stock units	187,738		2		(2)		—	308,523		4		4
Tax withholding on restricted stock units	—		—		(140)		—	(100,569)		(2)		(142)
Stock-based compensation	—		—		490		—	—		—		490
Net loss	—		—		—		(7,494)	—		—		(7,494)
June 30, 2018	19,715,605	$	197	$	79,823	$	(48,444)	(1,228,847)	$	(12)	$	31,564
Issuance of restricted stock units	—		—		4		—	38,608		—		4
Tax withholding on restricted stock units	—		—		(31)		—	(10,421)		—		(31)
Stock-based compensation	—		—		250		—	—		—		250
Net loss	—		—		—		(13,476)	—		—		(13,476)
Balance, September 30, 2018	19,715,605	$	197	$	80,046	$	(61,920)	(1,200,660)	$	(12)	$	18,311


							Accumulated
	Common Shares						Other
	$0.01 Per Share				Paid-in		Comprehensive		Accumulated	Treasury Shares
(in thousands, except share data)	Shares		Amount		Capital		Income (Loss)		Deficit	Shares		Amount		Total
Balance, December 31, 2018	19,767,605	$	197	$	80,424	$	—	$	(62,397)	(1,107,387)	$	(11)	$	18,213
Issuance of restricted stock units	—		—		—		—		—	390,901		4		4
Tax withholding on restricted stock units	—		—		(123)		—		—	(50,738)		(2)		(125)
Stock-based compensation	—		—		408		—		—	—		—		408
Foreign currency translation	—		—		—		18		—	—		—		18
Net income	—		—		—		—		303	—		—		303
March 31, 2019	19,767,605	$	197	$	80,709	$	18	$	(62,094)	(767,224)	$	(9)	$	18,821
Issuance of restricted stock units	—		—		—		—		—	19,027		—		—
Tax withholding on restricted stock units	—		—		—		—		—	—		—		—
Stock-based compensation	—		—		482		—		—	—		—		482
Foreign currency translation	—		—		—		(62)		—	—		—		(62)
Net income	—		—		—		—		2,005	—		—		2,005
June 30, 2019	19,767,605	$	197	$	81,191	$	(44)	$	(60,089)	(748,197)	$	(9)	$	21,246
Issuance of restricted stock units	26,665		1		—		—		—	27,391		—		1
Tax withholding on restricted stock units	—		—		(34)		—		—	(16,269)		—		(34)
Stock-based compensation	—		—		223		—		—	—		—		223
Foreign currency translation	—		—		—		17		—	—		—		17
Net income	—		—		—		—		(320)	—		—		(320)
Balance, September 30, 2019	19,794,270	$	198	$	81,380	$	(27)	$	(60,409)	(737,075)	$	(9)	$	21,133

See accompanying notes to condensed consolidated financial statements.

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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended September 30,
(in thousands)	2019		2018
Operating activities:
Net income (loss)	$	1,988	$	(24,958)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Net (income) loss from discontinued operations		(670)		13,856
Deferred income tax provision (benefit)		(68)		608
Depreciation and amortization on plant, property and equipment		225		633
Amortization of deferred financing costs		462		1,475
Loss on disposals of property, plant and equipment		—		210
Bad debt expense		53		(90)
Stock-based compensation		1,114		697
Paid-in-kind interest		—		1,964
Restructuring charges		—		3,661
Changes in operating assets and liabilities, net of businesses sold:
Accounts receivable		(7,843)		(2,860)
Contract assets		(4,159)		2,336
Other current assets		(1,918)		2,453
Other assets		1,404		(1,400)
Accounts payable		8,016		2,021
Accrued and other liabilities		(2,705)		3,643
Contract liabilities		2,039		(4,261)
Net cash provided by (used in) operating activities, continuing operations		(2,062)		(12)
Net cash provided by (used in) operating activities, discontinued operations		(350)		(6,685)
Net cash provided by (used in) operating activities		(2,412)		(6,697)
Investing activities:
Purchase of property, plant and equipment		(178)		(123)
Net cash provided by (used in) investing activities, continuing operations		(178)		(123)
Net cash provided by (used in) investing activities, discontinued operations		—		319
Net cash provided by (used in) investing activities		(178)		196
Financing activities:
Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation		(154)		(351)
Debt issuance costs		—		(1,520)
Proceeds from short-term borrowings		163,040		—
Repayments of short-term borrowings		(162,416)		—
Proceeds from long-term debt		—		33,679
Repayments of long-term debt		(350)		(31,154)
Net cash provided by (used in) financing activities, continuing operations		120		654
Net cash provided by (used in) financing activities, discontinued operations		—		—
Net cash provided by (used in) financing activities		120		654
Net change in cash, cash equivalents and restricted cash		(2,470)		(5,847)
Cash, cash equivalents and restricted cash, beginning of period		4,942		16,156
Cash, cash equivalents and restricted cash, end of period	$	2,472	$	10,309

Supplemental Disclosures:
Cash paid for interest	$	3,527	$	3,555
Cash paid for income taxes, net of refunds	$	—	$	16
Noncash amendment fee related to term loan	$	—	$	4,000

See accompanying notes to condensed consolidated financial statements.

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WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Business

Effective June 29, 2018, Global Power Equipment Group Inc. changed its name to Williams Industrial Services Group Inc. (together with its wholly owned subsidiaries, “Williams,” the “Company,” “we,” “us” or “our,” unless the context indicates otherwise) to better align its name with the Williams business. Since March 19, 2019, the Company’s stock has traded on the OTCQX® Best Market under the ticker symbol “WLMS.” Williams has been safely helping plant owners and operators enhance asset value for more than 50 years. The Company provides a broad range of construction, maintenance and support services to customers in energy, power and industrial end markets. The Company’s mission is to be the preferred provider of construction, maintenance, and specialty services through commitment to superior safety performance, focus on innovation, and dedication to delivering unsurpassed value to its customers.

Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on a basis consistent with that used in the Annual Report on Form 10-K for the year ended December 31, 2018, filed by the Company with the U.S. Securities and Exchange Commission (“SEC”) on April 1, 2019 (the “2018 Report”). In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, including all normal recurring adjustments, necessary to present fairly the unaudited condensed consolidated balance sheets and statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the periods indicated. All significant intercompany transactions have been eliminated. The December 31, 2018 unaudited condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. These unaudited condensed consolidated interim financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the 2018 Report. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for any interim period are not necessarily indicative of operations to be expected for the full year.

The Company reports on a fiscal quarter basis utilizing a “modified” 4-4-5 calendar (modified in that the fiscal year always begins on January 1 and ends on December 31). However, the Company has continued to label its quarterly information using a calendar convention. The effects of this practice are modest and only exist when comparing interim period results. The reporting periods and corresponding fiscal interim periods are as follows:



Reporting Interim Period	Fiscal Interim Period
	2019	2018
Three Months Ended March 31	January 1, 2019 to March 31, 2019	January 1, 2018 to April 1, 2018
Three Months Ended June 30	April 1, 2019 to June 30, 2019	April 2, 2018 to July 1, 2018
Three Months Ended September 30	July 1, 2019 to September 29, 2019	July 2, 2018 to September 30, 2018

NOTE 2—LIQUIDITY

The Company’s unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes it will be able to meet its obligations and continue its operations during the twelve-month period following the issuance of this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019 (this “Form 10-Q”). These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

The MidCap Facility generally provides adequate liquidity for the Company’s working capital needs. However, due to certain borrowing base eligibility limitations and exclusions within the MidCap Facility, there are instances where the Company would not have sufficient availability under the MidCap Facility to meet its growth working capital requirements. The borrowing base eligibility limitations and exclusions that have the most impact on availability under the MidCap Facility are customer

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concentration limits, exclusion of receivables from the Company’s joint ventures, and exclusion of receivables related to projects on which there is an underlying surety bond.

As of the date of this Form 10-Q, management has concluded that its plan has alleviated the substantial doubt regarding the Company’s ability to continue as a going concern. While management believes that the Company has sufficient resources to satisfy its 2019 working capital requirements, the Company is currently engaged in a process to refinance its existing credit facilities with Centre Lane and MidCap. In addition, the Company intends to file a registration statement on Form S-1 with the SEC for a rights offering to existing holders of the Company’s common stock. However, the Company’s liquidity will be periodically, and for certain intervals, significantly constrained due to the working capital requirements that will be needed to execute its plans to grow the business. In the event the Company is unable to close on the new credit facility through its refinancing process, and are unable to address potential liquidity shortfalls in the future, the Company will need to seek additional funding, which may not be available on reasonable terms, if at all, and may result in management concluding that our liquidity position raises substantial doubt about our ability to continue as a going concern. The risk factors described in the 2018 Report under the heading “Item 1A. Risk Factors,” are still relevant to the Company’s operations.

NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Accounting Standards Codification (“ASC”) Topic 718, “Compensation–Stock Compensation” and applies to all share-based payment transactions to nonemployees in which a grantor acquires goods and services to be used or consumed in a grantor’s own operations by issuing share-based awards. Upon adoption of ASU 2018-07, an entity should only re-measure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. In the first quarter of 2019, the Company adopted ASU 2018-07, which did not have a material impact on its financial position, results of operations and cash flows.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify the tax effects stranded in accumulated other comprehensive income as a result of the enactment of comprehensive tax legislation in December 2017, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), to retained earnings. The Company adopted ASU 2018-02 effective January 1, 2019 and elected not to reclassify the income tax effects stranded in accumulated other comprehensive income to retained earnings and, as a result, there was no impact on the Company’s financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, “Leases” (ASC Topic 842), which, together with its related clarifying ASUs (collectively, “ASU 2016-02”), amended the previous guidance for lease accounting and related disclosure requirements. The new guidance requires the recognition of right-of-use assets and lease liabilities on the balance sheet for leases with terms greater than twelve months or leases that contain a purchase option that is reasonably certain to be exercised. Lessees are required to classify leases as either finance or operating leases. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. For leases with a term of twelve months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. On January 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective method, meaning it has been applied to leases that existed or have been entered into on or after January 1, 2019 without adjusting comparative periods in the financial statements. Please refer to “Note 4–Leases” for further discussion of the adoption and the impact on the Company’s financial statements.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other Internal-Use Software (Subtopic 350-40).” This update aligns the requirements for capitalizing costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software, including hosting arrangements that are service contracts, over the term of the hosting arrangement. Further, this update requires the presentation of the expense in the statement of income, the presentation of the costs on the statement of financial position and the

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classification of payments in the statement of cash flows related to capitalized implementation costs to be treated the same as the fees of the associated hosting arrangement. The update is effective for annual periods beginning after December 15, 2019, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect this ASU will have on its results of operations, financial position and cash flows.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820).” This amendment update modifies disclosure requirements related to fair value measurement and will be effective for fiscal years beginning after December 15, 2019 and interim periods thereafter. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted, and the standard allows for early adoption of any removed or modified disclosures upon issuance of the update, while delaying adoption of the additional disclosures until their effective date. The Company is currently evaluating this guidance to determine the impact it may have on its disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". This update replaces the incurred loss methodology to record credit losses with a methodology which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. The Company will be required to adopt ASU 2016-13 for its annual periods beginning after December 15, 2022, and interim periods within the fiscal years. Early adoption is permitted for periods beginning on or after January 1, 2019. The Company is currently evaluating the effect the adoption may have on its results of operations, financial condition and cash flows.

NOTE 4—LEASES

On January 1, 2019, the Company adopted ASU 2016-02, which amended the previous guidance for lease accounting and related disclosure requirements. The new guidance requires the recognition of right-of-use assets and lease liabilities on the balance sheet for leases with terms greater than twelve months or leases that contain a purchase option that is reasonably certain to be exercised. Lessees are required to classify leases as either finance or operating leases. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.

The Company elected to utilize the package of practical expedients in ASC 842-10-65-1(f) that, upon adoption of ASU 2016-02, allowed entities to (1) not reassess whether any expired or existing contracts are or contain leases, (2) retain the classification of leases (e.g., operating or finance lease) existing as of the date of adoption and (3) not reassess initial direct costs for any existing leases.

The Company adopted ASU 2016-02 using the modified retrospective method, and accordingly, the new guidance was applied to leases that existed as of January 1, 2019. This resulted in the recognition of lease liabilities of $8.7 million and right-of-use-assets of $8.5 million on January 1, 2019, which included the impact of eliminating prior year deferred rent. The adoption of ASU 2016-02 did not have a material impact on the Company’s results of operations or cash flows.

The Company primarily leases office space and related equipment, as well as equipment, modular units and vehicles directly used in providing services to our customers. The Company’s leases have remaining lease terms of one to ten years. Most leases contain renewal options for varying periods, which are at the Company’s sole discretion and included in the expected lease term if they are reasonably certain of being exercised. For leases beginning in 2019 and thereafter, the Company accounts for lease components, such as fixed payments including rent, real estate taxes, and insurance costs, separately from the non-lease components, such as common area maintenance costs.

For leases with terms greater than twelve months, the Company records the related right-of-use assets and lease liabilities at the present value of the fixed lease payments over the term at the commencement date. The Company uses its incremental borrowing rate to determine the present value of the lease as the rate implicit in the lease is typically not readily determinable.

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Short-term leases (leases with an initial term of twelve months or less or leases that are cancelable by the lessee and lessor without significant penalties) are expensed on a straight-line basis over the lease term. The majority of the Company’s short-term leases relate to equipment used in delivering services to its customers. These leases are entered into at agreed upon hourly, daily, weekly or monthly rental rates for an unspecified duration and typically have a termination for convenience provision. Such equipment leases are considered short-term in nature unless it is reasonably certain that the equipment will be leased for a term greater than twelve months.

The components of lease expense for the three and nine months ended September 30, 2019 were as follows:


Lease Cost/(Sublease Income) (in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	1,223	$	3,669
Short-term lease cost		463		1,480
Sublease income		(38)		(86)
Total lease cost	$	1,648	$	5,063

Lease cost related to finance leases was not significant for the three and nine months ended September 30, 2019.

Information related to the Company’s right-of-use assets and lease liabilities as of September 30, 2019 was as follows:


Lease Assets/Liabilities (in thousands)	Balance Sheet Classification	September 30, 2019
Lease Assets
Right-of-use assets	Other long-term assets	$	6,349

Lease Liabilities
Short-term lease liabilities	Other current liabilities	$	3,046
Long-term lease liabilities	Other long-term liabilities		3,495
Total lease liabilities		$	6,541

Supplemental information related to the Company’s leases for the nine months ended September 30, 2019 was as follows:


(in thousands)	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash used by operating leases	$	3,696
Right-of-use assets obtained in exchange for new operating lease liabilities		9,701
Right-of-use assets obtained in exchange for new finance lease liabilities		27
Weighted-average remaining lease term - operating leases		2.25 years
Weighted-average remaining lease term - finance leases		4.48 years
Weighted-average discount rate - operating leases		9%
Weighted-average discount rate - finance leases		9%

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Total remaining lease payments under the Company’s operating and finance leases are as follows:


	Operating Leases		Finance Leases
Year Ended December 31,	(in thousands)
Remainder of 2019	$	1,136	$	1
2020		3,060		6
2021		2,208		6
2022		646		6
2023		144		6
Thereafter		1		1
Total lease payments	$	7,195	$	26
Less: interest		(678)		(1)
Present value of lease liabilities	$	6,517	$	25

NOTE 5—CHANGES IN BUSINESS

Restructuring Charges

In 2018, the Company made the decision to relocate its corporate headquarters to Tucker, Georgia and vacated its existing leased office space in Irving, Texas on September 30, 2018. The Company recorded exit costs related to the leased office space and the termination of certain personnel. The balance of the restructuring accrual is included in other current liabilities on the Company’s unaudited condensed consolidated balance sheets.

The following table shows the restructuring activities for the nine months ended September 30, 2019:


	September 30, 2019
(in thousands)		Lease		Severance		Total
Balance, December 31, 2018	$	367	$	2,889	$	3,256
Payments for restructuring		(196)		(2,502)		(2,698)
Balance, September 30, 2019	$	171	$	387	$	558

In March 2019, the Company entered into a short-term sublease of its former headquarters facility in which the rental period is co-terminus with the primary lease, which ends in November 2019. Under the sublease arrangement, the sublessee is obligated to pay the Company sublease payments and the Company recognizes those payments as a reduction of the fixed lease costs. The sublease income was immaterial for each of the three and nine months ended September 30, 2019.

Discontinued Operations

Electrical Solutions

During the fourth quarter of 2017, the Company made the decision to exit and sell its Electrical Solutions segment (which was comprised solely of Koontz-Wagner Custom Controls Holdings LLC (“Koontz-Wagner”), a wholly owned subsidiary of the Company) in an effort to reduce the Company’s outstanding term debt. The Company determined that the decision to exit this segment met the definition of a discontinued operation. As a result, this segment has been presented as a discontinued operation for all periods presented. In connection with the Company’s decision to sell the Electrical Solutions segment, the Company performed an impairment analysis on this segment’s finite- and indefinite-lived intangible assets (customer relationships and trade names, respectively) and determined that their carrying value exceeded their fair value. As a result, in the fourth quarter of 2017, the Company recorded an impairment charge of $9.7 million related to these intangible assets. After the impairment charge, the fair value of this segment’s intangible assets was zero at December 31, 2017. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs. There were no non-recurring fair value re-measurements related to the Electrical Solutions segment during the year ended December 31, 2018 or the three and nine months ended September 30, 2019.

In spite of the Company’s efforts, which included retaining financial advisors to sell all or part of Koontz-Wagner’s operations, inside or outside of a federal bankruptcy or state court proceeding (including Chapter 11 of Title 11 of the U.S. Bankruptcy Code), the proposed disposition did not progress as planned due, primarily, to the absence of viable bids in the sale process, the inability of Koontz-Wagner to fund its ongoing operations or obtain financing to do so, and Koontz-Wagner’s deteriorating

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financial performance. As a result, on July 11, 2018, Koontz-Wagner filed a voluntary petition for relief under Chapter 7 of Title 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of Texas. The filing was for Koontz-Wagner only, not for the Company as a whole, and was completely separate and distinct from the Williams business and operations.

As a result of the July 11, 2018 bankruptcy of Koontz-Wagner, the Company recorded $11.4 million of exit costs, which were included in loss from discontinued operations in the Company’s consolidated statements of operations for the year ended December 31, 2018. These charges consisted of a $4.0 million fee related to a fifth amendment of the Initial Centre Lane Facility, a pension withdrawal liability of $2.9 million related to Koontz-Wagner’s International Brotherhood of Electrical Workers Local Union 1392 multi-employer pension plan, a $1.8 million negotiated settlement of the Company’s guarantee of Koontz-Wagner’s Houston, Texas facility lease agreement and a $2.7 million liability as a result of the Company providing affected Koontz-Wagner employees with 60 days of salary continuation, as well as the difference between each employee’s cost of health care at the time of their employment termination and the cost of continued benefits under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”). The Company satisfied the liability related to the lease guarantee settlement and substantially all of the salary and benefit continuation liability through cash payments by the end of 2018. The pension liability is expected to be satisfied by annual cash payments of $0.3 million each, paid in quarterly installments, over the next twenty years.

Mechanical Solutions

On March 21, 2018, the Company closed on the sale of its office building in Heerlen, Netherlands for $0.3 million, resulting in an immaterial gain on sale, which was reflected in loss from discontinued operations before income tax expense (benefit) in the Company’s unaudited condensed consolidated statement of operations for the nine months ended September 30, 2018.

In connection with the sale of its Mechanical Solutions segment during 2017, the Company entered into a transition services agreement with the purchaser to provide certain accounting and administrative services for an initial period of nine months. During the three and nine months ended September 30, 2019, the Company did not provide services for the purchaser. For the three and nine months ended September 30, 2018, the Company provided less than $0.1 million and $0.3 million, respectively, in services for the purchaser, which was included in general and administrative expenses from continuing operations in the unaudited condensed consolidated statement of operations.

In April 2019, the purchaser of our former Mechanical Solutions segment went into receivership and in connection with this event, the Company recognized a write down to the estimated fair value of its amounts due of $0.2 million in the three months ended March 31, 2019. This charge was included in general and administrative expenses from continuing operations in the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2019. The Company has remaining balances of $0.2 million and $0.8 million included in other current assets and other current liabilities, respectively, on the September 30, 2019 unaudited condensed consolidated balance sheet. Management continues to monitor the status of the bankruptcy proceedings and believes the amounts recorded in its financial statements as of September 30, 2019 materially reflect the fair value of the related asset and liability.

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As of September 30, 2019 and December 31, 2018, the Company did not have any assets related to its Electrical and Mechanical Solutions’ discontinued operations. The following table presents a reconciliation of the carrying amounts of major classes of liabilities of Electrical and Mechanical Solutions’ discontinued operations:



(in thousands)	September 30, 2019		December 31, 2018
Liabilities:
Accrued compensation and benefits	$	—	$	259
Other current liabilities		342		381
Current liabilities of discontinued operations		342		640
Liability for pension obligation		2,726		2,781
Liability for uncertain tax positions		1,740		2,407
Long-term liabilities of discontinued operations		4,466		5,188
Total liabilities of discontinued operations	$	4,808	$	5,828

The following table presents a reconciliation of the major classes of line items constituting the net income (loss) from discontinued operations. In accordance with GAAP, the amounts in the table below do not include an allocation of corporate overhead.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Revenue
Electrical Solutions	$	—	$	3,218	$	—	$	22,259
Total revenue		—		3,218		—		22,259
Cost of revenue
Electrical Solutions		—		4,290		—		24,613
Total cost of revenue		—		4,290		—		24,613

Selling and marketing expenses		—		34		—		207
General and administrative expenses		1		268		15		2,634
Loss on disposal - Electrical Solutions		—		9,274		—		9,274
Loss on disposal - Mechanical Solutions		—		—		—		91
Other		53		(29)		160		(38)
Loss from discontinued operations before income tax		(54)		(10,619)		(175)		(14,522)
Income tax expense (benefit)		(97)		17		(845)		(666)
Income (loss) from discontinued operations	$	43	$	(10,636)	$	670	$	(13,856)

NOTE 6—REVENUE

Disaggregation of Revenue

Disaggregated revenue by type of contract was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Cost-plus reimbursement contracts	$	47,128	$	45,506	$	155,427	$	118,614
Fixed-price contracts		9,734		7,961		23,553		25,949
Total	$	56,862	$	53,467	$	178,980	$	144,563

Disaggregated revenue by the geographic area where the work was performed was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
United States	$	51,858	$	53,467	$	167,960	$	144,563
Canada		5,004		—		11,020		—
Total	$	56,862	$	53,467	$	178,980	$	144,563

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Contract Balances

The Company enters into contracts that allow for periodic billings over the contract term that are dependent upon specific advance billing terms, as services are provided, or as milestone billings based on completion of certain phases of work. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported in the Company’s unaudited condensed consolidated balance sheets as contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported in the Company’s unaudited condensed consolidated balance sheets as contract liabilities. At any point in time, each project in process could have either contract assets or contract liabilities.

The following table provides information about contract assets and contract liabilities from contracts with customers:


(in thousands)	September 30, 2019		December 31, 2018
Costs incurred on uncompleted contracts	$	157,211	$	160,368
Earnings recognized on uncompleted contracts		21,750		28,581
Total		178,961		188,949
Less—billings to date		(171,901)		(184,009)
Net	$	7,060	$	4,940
Contract assets	$	12,377	$	8,218
Contract liabilities		(5,317)		(3,278)
Net	$	7,060	$	4,940

For the three and nine months ended September 30, 2019, the Company recognized revenue of less than $0.1 million and approximately $1.0 million, respectively, that was included in the corresponding contract liability balance at December 31, 2018.

Remaining Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2019:


(in thousands)	Remainder of 2019		2020		2021		Thereafter		Total
Remaining performance obligations	$	52,346	$	130,566	$	99,548	$	108,173	$	390,633

NOTE 7—EARNINGS (LOSS) PER SHARE

As of September 30, 2019, the Company’s 19,057,195 shares outstanding included 307,164 shares of contingently issued but unvested restricted stock. As of September 30, 2018, the Company’s 18,514,945 shares outstanding included 193,589 shares of contingently issued but unvested restricted stock. Restricted stock is excluded from the calculation of basic weighted average shares outstanding, but its impact, if dilutive, is included in the calculation of diluted weighted average shares outstanding.

Basic earnings (loss) per common share are calculated by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted earnings (loss) per common share are based on the weighted average common shares outstanding during the period, adjusted for the potential dilutive effect of common shares that would be issued upon the vesting and release of restricted stock awards and units and stock options, if any.

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Basic and diluted earnings (loss) per common share from continuing operations were calculated as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share data)	2019		2018		2019		2018
Income (loss) from continuing operations	$	(363)	$	(2,840)	$	1,318	$	(11,102)

Basic earnings (loss) per common share:
Weighted average common shares outstanding		18,732,402		18,315,180		18,653,301		18,164,141

Basic earnings (loss) per common share	$	(0.02)	$	(0.16)	$	0.07	$	(0.61)

Diluted earnings (loss) per common share:
Weighted average common shares outstanding		18,732,402		18,315,180		18,653,301		18,164,141

Diluted effect:
Unvested portion of restricted stock units and awards		—		—		323,318		—
Weighted average diluted common shares outstanding		18,732,402		18,315,180		18,976,619		18,164,141

Diluted earnings (loss) per common share	$	(0.02)	$	(0.16)	$	0.07	$	(0.61)

The weighted average number of shares outstanding used in the computation of basic and diluted loss per common share does not include the effect of the following potentially outstanding common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted loss per common share because the effect would have been anti-dilutive.


	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Unvested service-based restricted stock and restricted stock unit awards	196,910	425,036	211,243	1,515
Unvested performance- and market-based restricted stock unit awards	618,482	688,812	618,482	688,812
Stock options	122,000	122,000	122,000	122,000

NOTE 8—INCOME TAXES

The effective income tax rate for continuing operations for the three and nine months ended September 30, 2019 and 2018 was as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Effective income tax rate for continuing operations	(20.6)%	(8.2)%	9.7%	(6.9)%

The effective income tax rate differs from the statutory federal income tax rate of 21% primarily because of the full valuation allowances recorded on the Company’s deferred tax assets.

For the three months ended September 30, 2019, the Company recorded income tax expense from continuing operations of less than $0.1 million compared with income tax expense from continuing operations of $0.2 million in the corresponding period in 2018. For the nine months ended September 30, 2019, the Company recorded income tax expense from continuing operations of $0.2 million compared with income tax expense from continuing operations of $0.7 million in the corresponding period in 2018. The decrease in income tax provision from continuing operations for the three and nine months ended September 30, 2019 compared with the corresponding periods in 2018 was primarily related to a $0.6 million increase in indefinite-lived deferred tax assets related to an interest expense addback under Section 163(j) of the Internal Revenue Code and the post-2017 U.S. net operating loss that can be used to offset indefinitely-lived intangible deferred tax liabilities.

As of September 30, 2019 and 2018, the Company would have needed to generate approximately $276.0 million and $273.3 million, respectively, of future financial taxable income to realize its deferred tax assets.

The Company’s foreign subsidiaries may generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in its operations outside of the U.S. Pursuant to ASC Topic No. 740-30, undistributed earnings of

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foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes. As of September 30, 2019 and 2018, the Company did not have any undistributed earnings in its foreign subsidiaries because all of their earnings were either taxed as deemed dividends or included with the provisional estimate of one-time transition tax as of December 31, 2017.

As of September 30, 2019 and December 31, 2018, the Company provided for a total liability of $2.8 million and $3.4 million, respectively, of which $1.7 million and $2.5 million, respectively, was related to discontinued operations, for unrecognized tax benefits related to various federal, foreign and state income tax matters, which was included in other long-term assets and deferred tax liabilities. If recognized, the entire amount of the liability would affect the effective tax rate. As of September 30, 2019, the Company accrued approximately $1.2 million, of which $0.7 million was related to its discontinued operations, in other long-term liabilities for potential payment of interest and penalties related to uncertain income tax positions.

NOTE 9—DEBT

As of September 30, 2019 and December 31, 2018, the Company had the following debt, net of unamortized deferred financing costs:


(in thousands)	September 30, 2019		December 31, 2018
MidCap Facility	$	3,898	$	3,274
Current portion of New Centre Lane Facility		700		525
Current debt	$	4,598	$	3,799

New Centre Lane Facility		33,862		34,387
Unamortized deferred financing costs		(1,124)		(1,409)
Long-term debt, net	$	32,738	$	32,978

Total debt, net	$	37,336	$	36,777

MidCap Facility

On October 11, 2018, the Company entered into a three-year, $15.0 million Credit and Security Agreement with MidCap Financial Trust (“MidCap”), as agent and as a lender, and other lenders that may be added as a party thereto (the “MidCap Facility”). The MidCap Facility is a secured asset-based revolving credit facility that provides borrowing availability against 85% of eligible accounts receivable and the lesser of 80% of eligible contract assets and $1.0 million, after certain customary exclusions and reserves, and allows for up to $6.0 million of non-cash collateralized letters of credit. The borrowing base eligibility limitations and exclusions that have the most impact on availability under the MidCap Facility are customer concentration limits, exclusion of receivables from the Company’s joint ventures, and exclusion of receivables related to projects on which there is an underlying surety bond. The Company can, if necessary, make daily borrowings under the MidCap Facility with same day funding. The outstanding loan balance under the MidCap Facility is reduced through the daily automated sweeping of the Company’s depository accounts to the lender’s account under the terms of deposit account control agreements. As of September 30, 2019 and December 31, 2018, the Company had $3.9 million and $3.3 million, respectively, outstanding under the MidCap Facility, which was included in short-term borrowings on the unaudited condensed consolidated balance sheets. As of September 30, 2019, the Company had $6.4 million in available borrowings under the MidCap facility.

Borrowings under the MidCap Facility bear interest at the London Interbank Offered Rate (“LIBOR”) plus 6.0% per year, subject to a minimum LIBOR rate of 1.0%, and are payable in cash on a monthly basis.

The Company must pay a customary unused line fee equal to 0.5% per annum of the average unused portion of the commitments under the MidCap Facility, certain other customary administration fees and a minimum balance fee. In addition, while any letters of credit are outstanding under the MidCap Facility, the Company must pay a letter of credit fee equal to 6.0% per annum, in addition to any other customary fees required by the issuer of the letter of credit.

The Company’s obligations under the MidCap Facility are secured by first priority liens on substantially all of its assets, other than the Excluded Collateral (as defined in the MidCap Facility), subject to the terms of an intercreditor agreement, dated as of October 11, 2018 (the “Intercreditor Agreement”), entered into by an affiliate of Centre Lane, as a lender under the New Centre Lane Facility (as defined below), and MidCap, as agent, and to which the Company consented. The Intercreditor Agreement was entered into as required by the MidCap Facility and the New Centre Lane Facility. The first priority liens previously granted by the Company and certain of its wholly owned subsidiaries in favor of the Centre Lane affiliate in connection with

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the New Centre Lane Facility are also subject to the Intercreditor Agreement, which, among other things, specifies the relative lien priorities of the secured parties under each of the MidCap Facility and the New Centre Lane Facility in the relevant collateral. It contains customary provisions regarding, among other things, the rights of the respective secured parties to take enforcement actions against the collateral and certain limitations on amending the documentation governing each of the MidCap Facility and the New Centre Lane Facility. Additionally, it provides secured parties under each of the MidCap Facility and the New Centre Lane Facility the option, in certain instances, to purchase all outstanding obligations of the Company under the other respective loan.

The Company may from time to time voluntarily prepay outstanding amounts under the MidCap Facility, in whole or in part, in a minimum amount of $0.1 million. If at any time the amount outstanding under the MidCap Facility exceeds the borrowing base in effect at such time, the Company must repay the excess amount in cash, cash collateralize liabilities under letters of credit, or cause the cancellation of outstanding letters of credit (or any combination of the foregoing), in an aggregate amount equal to such excess. The Company is also required to repay certain amounts outstanding under the MidCap Facility upon the occurrence of certain events involving the assets upon which the borrowing base is calculated, including receipt of payments or proceeds from the Company’s accounts receivable, certain casualty proceeds in excess of $25,000, and receipt of proceeds following certain asset dispositions. The Company also has certain reimbursement obligations in the event of payments by the agent or a lender against draws under outstanding letters of credit.

In the event the MidCap Facility is terminated (by reason of an event of default or otherwise) 90 days or more prior to the maturity date, the Company will be required to pay a prepayment fee in an amount equal to the aggregate commitment under the MidCap Facility at the time of termination, multiplied by 2.0% in the first year following October 11, 2018, 1.5% in the second year, and 1.0% in the first nine months of the third year.

The MidCap Facility requires the Company to regularly provide financial information to the lenders, and, beginning on December 31, 2018, to maintain certain total leverage and fixed charge coverage ratios and meet minimum consolidated adjusted EBITDA and minimum liquidity requirements (each of which as defined in the MidCap Facility). The Company determined that it was not in compliance with these covenants as of the last day of its third quarter, and accordingly, on November 14, 2019, the Company entered into an amendment to the MidCap Facility that changed the required levels of both financial covenants so that the Company is now in compliance with the MidCap Facility as amended as of September 29, 2019. The Company’s expense related to this amendment was $0.1 million and will be reflected in the consolidated statement of operations for the year ended December 31, 2019.

The MidCap Facility also contains customary representations and warranties, as well as customary affirmative and negative covenants. The MidCap Facility contains covenants that may, among other things, limit the Company’s ability to incur additional debt, incur liens, make investments, engage in mergers, dispositions or sale-leasebacks, engage in new lines of business or certain transactions with affiliates and change accounting policies or fiscal year.

Events of default under the MidCap Facility include, but are not limited to, failure to timely pay any amounts due and owing, a breach of certain covenants or any representations or warranties, the commencement of any bankruptcy or other insolvency proceeding, judgments in excess of certain acceptable amounts, certain events related to ERISA matters, impairment of security interests in collateral or invalidity of guarantees or security documents, and a default or event of default under the New Centre Lane Facility or the Intercreditor Agreement.

Upon default, MidCap would have the right to declare all borrowings under the MidCap Facility to be immediately due and payable, together with accrued interest and fees, and exercise remedies under the other Financing Documents (as defined in the MidCap Facility).

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Centre Lane Facilities

In June 2017, the Company refinanced and replaced its then-existing debt with a 4.5-year senior secured term loan facility with an affiliate of Centre Lane Partners, LLC (“Centre Lane”) as Administrative Agent and Collateral Agent, and the other lenders from time to time party thereto (as amended, the “Initial Centre Lane Facility”). The Initial Centre Lane Facility did not provide for working capital borrowings or access to additional letters of credit. These restrictions were addressed when the Company refinanced and replaced the Initial Centre Lane Facility with a new Centre Lane Facility and when it entered into the MidCap Facility discussed above.

On September 18, 2018, the Company refinanced and replaced the Initial Centre Lane Facility with a four-year, $35.0 million senior secured credit agreement with an affiliate of Centre Lane as Administrative Agent and Collateral Agent, and the other lenders from time to time party thereto (the “New Centre Lane Facility”). The New Centre Lane Facility requires payment of an annual administration fee of $25,000. Borrowings under the New Centre Lane Facility bear interest at LIBOR (with a minimum rate of 2.5%) plus 10.0% per year, payable monthly in cash. The Company must repay an amount equal to 0.25% of the original aggregate principal amount of the New Centre Lane Facility in consecutive quarterly installments, beginning on December 31, 2018 through June 30, 2019. The Company must repay an amount equal to 0.5% of the original aggregate principal amount of the New Centre Lane Facility in consecutive quarterly installments, beginning on September 30, 2019.

The Company’s obligations under the New Centre Lane Facility are guaranteed by all of its wholly owned domestic subsidiaries, subject to customary exceptions. The Company’s obligations are secured by first priority security interests on substantially all of its assets and those of its wholly owned domestic subsidiaries. This includes 100% of the voting equity interests of the Company’s domestic subsidiaries and 65% of the voting equity interests of other directly owned foreign subsidiaries, subject to customary exceptions.

Beginning on September 19, 2019, the Company may voluntarily prepay the New Centre Lane Facility at any time or from time to time, in whole or in part, in a minimum amount of $1.0 million of the outstanding principal amount, plus any accrued but unpaid interest on the aggregate principal amount being prepaid, plus a prepayment premium, to be calculated as follows (the “Prepayment Premium”):


	Prepayment Premium as a
	Percentage of Aggregate
Period	Outstanding Principal Prepaid
September 19, 2019 to September 18, 2021		1%
After September 18, 2021		0%

Subject to certain exceptions, the Company must prepay an aggregate principal amount equal to 75% of its Excess Cash Flow (as defined in the New Centre Lane Facility), minus the sum of all voluntary prepayments, within five business days after the date that is 90 days following the end of each fiscal year. The New Centre Lane Facility also requires mandatory prepayment of certain amounts in the event the Company or its subsidiaries receive proceeds from certain events and activities, including, among others, asset sales, casualty events, the issuance of indebtedness and equity interests not otherwise permitted under the New Centre Lane Facility and the receipt of tax refunds or extraordinary receipts in excess of $500,000, plus, in certain instances, the applicable Prepayment Premium, calculated as set forth above.

The New Centre Lane Facility contains customary representations and warranties, as well as customary affirmative and negative covenants. The New Centre Lane Facility contains covenants that may, among other things, limit the Company’s ability to incur additional debt, incur liens, make investments or capital expenditures, declare or pay dividends, engage in mergers, acquisitions and dispositions, engage in new lines of business or certain transactions with affiliates and change accounting policies or fiscal year.

Events of default under the New Centre Lane Facility include, but are not limited to, a breach of any of the financial covenants or any representations or warranties, failure to timely pay any amounts due and owing, the commencement of any bankruptcy or other insolvency proceeding, judgments in excess of certain acceptable amounts, the occurrence of a change in control, certain events related to ERISA matters and impairment of security interests in collateral or invalidity of guarantees or security documents.

Upon a default under the New Centre Lane Facility, the Company’s senior secured lenders would have the right to accelerate the then-outstanding amounts under such facility and to exercise their rights and remedies to collect such amounts, which would include foreclosing on collateral constituting substantially all of the Company’s assets and those of its subsidiaries. However,

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in October 2018, the Company entered into the MidCap Facility, which provides for a secured asset-based revolving credit facility that provides borrowing availability against 85% of eligible accounts receivable and 80% of eligible contract assets; as such, the lenders under the MidCap Facility hold a first priority lien on the Company’s accounts receivable and contract assets.

The Company’s borrowing rate under the New Centre Lane Facility as of September 30, 2019 was 12.5%.

The New Centre Lane Facility requires the Company to regularly provide financial information to the lenders, and, beginning on December 31, 2018, to maintain certain total leverage and fixed charge coverage ratios and meet minimum consolidated adjusted EBITDA and minimum liquidity requirements (each of which as defined in the New Centre Lane Facility). The Company determined that it was not in compliance with these covenants as of the last day of its third quarter, and accordingly, on November 14, 2019, the Company entered into an amendment to the New Centre Lane Facility that changed the required levels of both financial covenants so that the Company is now in compliance with the New Centre Lane Facility as amended as of September 29, 2019. The Company’s expense related to this amendment was $0.3 million and will be reflected in the consolidated statement of operations for the year ended December 31, 2019.

Letters of Credit and Bonds

In line with industry practice, the Company is often required to provide letters of credit and surety and performance bonds to customers. These letters of credit and bonds provide credit support and security for the customer if the Company fails to perform its obligations under the applicable contract with such customer.

The MidCap Facility allows for up to $6.0 million of non-cash collateralized letters of credit at 6.0% interest, of which the Company had $2.9 million outstanding as of September 30, 2019. There were no amounts drawn upon these letters of credit.

In addition, as of September 30, 2019 and December 31, 2018, the Company had outstanding payment and performance surety bonds of $52.8 million and $51.1 million, respectively.

Deferred Financing Costs

Deferred financing costs are amortized over the terms of the related debt facilities using the effective yield method. The following table summarizes the amortization of deferred financing costs related to the Company's debt facilities and recognized in interest expense on the unaudited condensed consolidated statements of operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Initial Centre Lane Facility	$	—	$	1,256	$	—	$	1,475
New Centre Lane Facility		95		—		285		—
MidCap Facility		59		—		177		—
Total	$	154	$	1,256	$	462	$	1,475

The following table summarizes unamortized deferred financing costs on the Company's unaudited condensed consolidated balance sheets:


(in thousands)	Location	September 30, 2019		December 31, 2018
New Centre Lane Facility	Long-term debt, net	$	1,124	$	1,409
MidCap Facility	Other long-term assets		477		654
Total		$	1,601	$	2,063

NOTE 10—FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

ASC 820–Fair Value Measurement defines fair value as the exit price, which is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in the active markets for identical assets and liabilities and the lowest priority to unobservable inputs.

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The Company’s financial instruments as of September 30, 2019 and December 31, 2018 consisted primarily of cash and cash equivalents, restricted cash, receivables, payables and debt instruments. The carrying values of these financial instruments approximate their respective fair values, as they are either short-term in nature or carry interest rates that are periodically adjusted to market rates.

NOTE 11—COMMITMENTS AND CONTINGENCIES

Litigation and Claims

The Company is from time to time party to various lawsuits, claims and other proceedings that arise in the ordinary course of its business. With respect to all such lawsuits, claims and proceedings, the Company records a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that the resolution of any currently pending lawsuits, claims and proceedings, either individually or in the aggregate, will have a material adverse effect on its financial position, results of operations or liquidity. However, the outcomes of any currently pending lawsuits, claims and proceedings cannot be predicted, and therefore, there can be no assurance that this will be the case.

The Company prevailed in a putative shareholder class action, which was captioned Budde v. Global Power Equipment Group Inc. and filed in the U.S. District Court for the Northern District of Texas naming the Company and certain former officers as defendants. This action and another action were filed on May 13, 2015 and June 23, 2015, respectively and, on July 29, 2015, the court consolidated the two actions and appointed a lead plaintiffFollowing the District Court’s dismissal with prejudice on September 11, 2018, Plaintiffs appealed the decision to the United States Court of Appeals for the Fifth Circuit. The Fifth Circuit held oral arguments on August 5, 2019. Just 18 days later, on August 23, 2019, the Fifth Circuit issued a per curiam decision affirming the District Court’s dismissal. Plaintiffs have until November 21, 2019, to petition for certiorari review by the Supreme Court of the United States.

In previous periods, the Company reported that a former operating unit of the Company had been named as a defendant in a limited number of asbestos personal injury lawsuits. Neither the Company nor its predecessors ever mined, manufactured, produced or distributed asbestos fiber, the material that allegedly caused the injury underlying these actions. As of April 2019, all pending asbestos-related litigation against such former operating unit had been dismissed, and there are no longer any such claims outstanding against the unit. Such litigation did not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

NOTE 12—STOCK-BASED COMPENSATION PLANS

During the first nine months of 2019, the Company granted 21,500 service-based restricted stock units and 21,500 market-based restricted stock units, both out of treasury stock, at a grant date fair value of $2.60 per share and $0.75 per share, respectively. The service-based restricted stock units will vest ratably over a period of three years; the market-based restricted stock units will vest, in whole or in part, if the stock price goal is met on or before June 30, 2021. The fair value of the market-based restricted stock units is estimated using the Monte Carlo simulation model.

In addition, during the first nine months of 2019, the Company granted 358,613 service-based restricted stock units under the 2015 Equity Incentive Plan at a grant date fair value of $2.35 per share. These service-based restricted stock units vest ratably over a three-year period beginning on March 31, 2020. The fair value of service-based restricted stock units represents the closing price of the Company’s commons stock on the date of grant.

During the first nine months of 2019, the Company also granted cash-based performance awards under the 2015 Equity Incentive Plan valued at $1.7 million. At the Company’s discretion, these performance-based restricted stock awards can be settled in cash or shares. The performance objectives associated with these awards are established by the Compensation Committee of the Board of Directors (the “Compensation Committee”) on an annual basis. For the 2019 performance period, the performance objective is based on the Company’s backlog performance target as of December 31, 2019. Performance objectives for the two succeeding years will be established by the Compensation Committee in the respective performance period. Award payouts range from a threshold of 50% to a maximum of 200% for each respective annual performance period. Because the Company intends to settle the cash-based performance awards that are scheduled vest on March 31, 2020 with shares, the fair value of the cash-based performance awards with an established 2019 performance objective represents the closing price of the Company’s common stock on the date of grant. The fair value of the cash-based performance awards that are scheduled to vest on March 31, 2021 and 2022 will be measured in the year that the respective performance objective is established and approved by the Compensation Committee. The Company recognizes stock-based compensation expense related to its cash-based performance awards based on its determination of the likelihood of achieving the performance

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objective. The Company reassesses the likelihood of meeting the specified performance objective at the end of each reporting period and adjusts compensation expense, as necessary, based on the likelihood of achieving the performance objective. As of September 30, 2019, the Company does not expect any of the unvested cash-based performance awards that are tied to the Company’s December 31, 2019 backlog performance target to ultimately vest. Consequently, the Company reversed $0.3 million of stock-based compensation expense for each of the three and nine months ended September 30, 2019.

During the first nine months of 2019, the Company granted service-based restricted stock awards out of treasury stock totaling 149,639 shares to its five non-employee directors, which vest in four equal annual installments on January 22 of each of 2020, 2021, 2022 and 2023.

Stock-based compensation expense for the three months ended September 30, 2019 and 2018 was $0.1 million and $0.2 million, respectively, and $1.0 and $0.7 million for the nine months ended September 30, 2019 and 2018, respectively, and was included in general and administrative expenses on the Company’s unaudited condensed consolidated statements of operations.

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

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q and its exhibits contain or incorporate by reference various forward-looking statements that express a belief, expectation or intention or are otherwise not statements of historical fact. Forward-looking statements generally use forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other words that convey the uncertainty of future events or outcomes. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any of these forward-looking statements. Except as required by law, we undertake no obligation to further update any such statements, or the risk factors described in our 2018 Report under the heading “Item 1A. Risk Factors,” to reflect new information, the occurrence of future events or circumstances or otherwise. The forward-looking statements in this Form 10-Q do not constitute guarantees or promises of future performance. Forward-looking statements may include information concerning the following, among other items:

our level of indebtedness and our ability to successfully refinance our existing credit facilities;

our ability to make interest and principal payments on our debt and satisfy the financial and other covenants contained in the New Centre Lane Facility and the MidCap Facility;

our ability to engage in certain transactions and activities due to limitations and covenants contained in the New Centre Lane Facility and the MidCap Facility;

our ability to enter into new lending facilities, if needed, and to obtain adequate surety bonding and letters of credit;

our ability to generate sufficient cash resources to continue funding operations, including investments in working capital required to support growth-related commitments that we make to our customers, and the possibility that we will continue to incur further losses from operations in the future;

the possibility that our independent registered public accounting firm may include an explanatory paragraph in its audit opinion that accompanies our financial statements for the year ended December 31, 2019, indicating that our debt covenants and liquidity position raise substantial doubt about our ability to continue as a going concern or that such firm fails to stand for reappointment;

exposure to market risks from changes in interest rates, including changes to LIBOR;

the possibility we may be required to write down additional amounts of goodwill and other indefinite-lived assets;

our material weaknesses in internal control over financial reporting and our ability to implement and maintain effective controls over financial reporting in the future;

changes in our senior management and financial reporting and accounting teams, the ability of such persons to successfully perform their roles, and our ability to attract and retain qualified personnel, skilled workers and key officers;

a failure to successfully implement or realize our business strategies, plans and objectives of management, and liquidity, operating and growth initiatives and opportunities, including our ability to successfully expand our business outside of the U.S., such as our expansion into Canada;

the loss of one or more of our significant customers;

our competitive position;

market outlook and trends in our industry, including the possibility of reduced investment in, or increased regulation of, nuclear power plants;

costs exceeding estimates we use to set fixed-price contracts;

harm to our reputation or profitability due to, among other things, internal operational issues, poor subcontractor performances or subcontractor insolvency;

potential insolvency or financial distress of third parties, including our customers and suppliers;

our contract backlog and related amounts to be recognized as revenue;

our ability to maintain our safety record;

changes in our credit profile and market conditions affecting our relationships with suppliers, vendors and subcontractors;

compliance with environmental, health, safety and other related laws and regulations;

expiration of the Price-Anderson Act’s indemnification authority;

our expected financial condition, future cash flows, results of operations and future capital and other expenditures;

the impact of general economic conditions;

information technology vulnerabilities and cyberattacks on our networks;

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our failure to comply with applicable laws and regulations, including, but not limited to, those relating to privacy and anti-bribery;

our participation in multiemployer pension plans;

the impact of any disruptions resulting from the expiration of collective bargaining agreements;

availability of raw materials and inventories;

the impact of natural disasters and other severe catastrophic events;

future income tax payments and utilization of net operating loss and foreign tax credit carryforwards, including any impact relating to the Tax Act or other tax changes;

future compliance with orders of and agreements with regulatory agencies;

volatility of the market price for our common stock and our stockholders’ ability to resell their shares of common stock;

our ability to pay cash dividends in the future;

the impact of activist shareholder actions;

the impact of future offerings or sales of our common stock on the market price of such stock;

expected outcomes of legal or regulatory proceedings and their expected effects on our results of operations, including future liabilities, fees and expenses resulting from the Koontz-Wagner bankruptcy filing; and

any other statements regarding future growth, future cash needs, future operations, business plans and future financial results.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, including unpredictable or unanticipated factors that we have not discussed in this Form 10-Q. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by the forward-looking statements.

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. Investors should consider the areas of risk and uncertainty described above, as well as those discussed in the 2018 Report under the heading “Item 1A. Risk Factors.” Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and we caution investors not to rely upon them unduly.

The following discussion provides an analysis of the results of continuing operations, an overview of our liquidity and capital resources and other items related to our business. Unless otherwise specified, the financial information and discussion in this Form 10-Q are as of and for the three and nine months ended September 30, 2019 and are based on our continuing operations; they exclude any results of our discontinued operations. Please refer to “Note 5—Changes in Business” to the unaudited condensed consolidated financial statements included in this Form 10-Q for additional information on our discontinued operations.

This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and our audited consolidated financial statements and notes thereto included in the 2018 Report.

Backlog

The services we provide are typically carried out under construction contracts, long-term maintenance contracts and master service agreements. Total backlog represents the dollar amount of revenue expected to be recorded in the future for work performed under awarded contracts. Previously, we reported backlog as orders from fixed-price contracts plus the amount of revenue we expected to receive in the next twelve-month period from cost-plus contracts, regardless of the remaining life of the cost-plus contract. However, we believe that reporting the total revenue expected under awarded contracts is more representative of our expected future revenue.

Revenue estimates included in our backlog can be subject to change as a result of project accelerations, cancellations or delays due to various factors, including, but not limited to, the customer’s budgetary constraints and adverse weather. These factors can also cause revenue to be recognized in different periods and at levels other than those originally projected. Additional work that is not identified under the original contract is added to our estimated backlog when we reach an agreement with the customer as to the scope and pricing of that additional work. Backlog is reduced as work is performed and revenue is recognized, or upon cancellation.

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Backlog is not a measure defined by GAAP, and our methodology for determining backlog may vary from the methodology used by other companies in determining their backlog amounts. Backlog may not be indicative of future operating results and projects in our backlog may be cancelled, modified or otherwise altered by our customers.

The following table summarizes our backlog:


(in thousands)	September 30, 2019		December 31, 2018
Cost plus	$	367,560	$	487,033
Lump sum		23,073		14,571
Total	$	390,633	$	501,604


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Backlog - beginning of period	$	409,019	$	501,604
New awards		11,661		30,844
Adjustments and cancellations, net		26,815		37,165
Revenue recognized		(56,862)		(178,980)
Backlog - end of period	$	390,633	$	390,633

Total backlog as of September 30, 2019 was $390.6 million, compared with $501.6 million at December 31, 2018. The decrease in backlog was primarily due to work that was completed during a nuclear outage and the completion of several projects during the first nine months of 2019. We estimate that approximately $151.3 million, or 38.7% of total backlog at September 30, 2019, will be converted to revenue within the next twelve months. As of December 31, 2018, we estimated that approximately $173.3 million, or 34.6% of total backlog, would convert to revenue in 2019.

Results of Operations

The following summary and discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Revenue	$	56,862	$	53,467	$	178,980	$	144,563
Cost of revenue		50,906		43,255		157,150		121,154
Gross profit		5,956		10,212		21,830		23,409

Selling and marketing expenses		63		397		468		1,299
General and administrative expenses		5,091		7,529		16,327		21,485
Restructuring charges		—		1,436		—		3,661
Restatement expenses		—		—		—		160
Depreciation and amortization expense		77		192		225		633
Total operating expenses		5,231		9,554		17,020		27,238
Operating income (loss)		725		658		4,810		(3,829)

Interest expense, net		1,511		3,622		4,504		7,397
Other (income) expense, net		(485)		(339)		(1,153)		(844)
Income (loss) from continuing operations before income tax		(301)		(2,625)		1,459		(10,382)
Income tax (benefit) expense		62		215		141		720
Income (loss) from continuing operations	$	(363)	$	(2,840)	$	1,318	$	(11,102)

Revenue for the three months ended September 30, 2019 increased $3.4 million, or 6.3%, compared with the corresponding period in 2018. The increase was driven primarily by our recent entry into the nuclear industry in Canada, which contributed $5.0 million in new business revenue. This increase in new business revenue was partially offset by a $1.4 million decrease in revenue generated from our decommissioning projects.

Revenue for the nine months ended September 30, 2019 increased $34.4 million, or 23.8%, compared with the corresponding period in 2018. The increase was driven primarily by a planned utility outage related to our long term maintenance and modification contracts of $16.7 million and $17.5 million from our nuclear project contracts, partially offset by a decrease of

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$10.8 million in revenue from our decommissioning projects and fossil fuel power generation projects. Additionally, our recent entry into the nuclear industry in Canada contributed $11.0 million in new business revenue.

Gross profit for the three months ended September 30, 2019 decreased $4.3 million, or 41.7%, compared with the corresponding period in 2018, while gross margin declined to 10.5% from 19.1%. The decrease in gross margin reflects the impact of the completion of a fixed-price nuclear project in 2018 that contributed $3.3 million in gross profit and the recognition of a $1.3 million loss on a fixed-price fossil fuel project in 2019.

Gross profit for the nine months ended September 30, 2019 decreased $1.6 million, or 6.7%, compared with the corresponding period in 2018, while gross margin declined to 12.2% from 16.2%. The decrease in gross margin was due primarily to the completion of a fixed-price nuclear project in 2018 which contributed $3.4 million in gross profit and the recognition of a $1.3 million loss on a fixed-price fossil project in 2019. These declines were partially offset by gross profits earned from a planned utility outage related to our long term maintenance and modification contracts and other nuclear project contracts.

Operating income for the three months ended September 30, 2019 was relatively unchanged compared with the corresponding period in 2018. The change in operating income was due to a $4.3 million decrease in operating expenses, which was offset by the decrease in gross profit discussed above. For the three months ended September 30, 2019, general and administrative expenses and restructuring charges decreased $2.4 million and $1.4 million, respectively, due to the restructuring efforts undertaken in 2018. Additionally, selling and marketing expenses decreased $0.3 million, as a result of our cost control efforts, and depreciation expense decreased $0.1 million.

Operating income for the nine months ended September 30, 2019 increased $8.6 million compared with the corresponding period in 2018. The increase in operating income was due to a $10.2 million decrease in operating expenses, which was partially offset by the decrease in gross profit discussed above. For the nine months ended September 30, 2019, general and administrative expenses and restructuring charges decreased $5.2 million and $3.7 million, respectively, due to the restructuring efforts undertaken in 2018. Furthermore, selling and marketing expenses decreased $0.8 million, as a result of our cost control efforts, and depreciation expense decreased $0.4 million. The Company also benefited from a $0.2 million decrease in costs related to restatement expenses recognized in 2018 due to the wind-down of restatement activities in conjunction with the March 15, 2017 filing of the Annual Report on Form 10-K for the year ended December 31, 2015, which included the restatement of certain prior period financial results.

General and Administrative Expenses


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2019		2018		2019		2018
Employee-related expenses	$	2,910	$	4,316	$	8,345	$	11,986
Stock-based compensation expense		120		222		1,011		687
Professional fees		1,052		1,262		2,366		4,621
Other expenses		1,009		1,729		4,605		4,191
Total	$	5,091	$	7,529	$	16,327	$	21,485

Total general and administrative expenses for the three months ended September 30, 2019 decreased $2.4 million, or 32.4%, compared with the corresponding period in 2018. For the three months ended September 30, 2019, employee-related expenses decreased $1.4 million due primarily to an overall decrease in ongoing employee and employee-related expenses and a reduction in headcount compared with the corresponding period in 2018. Stock-based compensation expense decreased $0.1 million for the three months ended September 30, 2019, compared with the corresponding period in 2018. Professional fees decreased $0.2 million for the three months ended September 30, 2019, compared with the corresponding period in 2018, primarily because of the completion of our restructuring initiatives. Further, other expenses decreased $0.7 million for the three months ended September 30, 2019, compared with the corresponding period in 2018 primarily due to a $0.2 million decrease in general liability insurance, a $0.1 million decrease in bad debt expense and other cost decreases, none of which were individually significant, compared with the corresponding period in 2018.

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Total general and administrative expenses for the nine months ended September 30, 2019 decreased $5.2 million, or 24.0%, compared with the corresponding period in 2018. Employee-related expenses decreased $3.6 million due primarily to our ongoing employee and employee-related expense management efforts and a reduction in headcount compared with the corresponding period in 2018. The decrease in employee-related expenses was partially offset by costs recognized in connection with the retirement of our former Chief Financial Officer in June 2019, pursuant to the terms of his employment agreement. For the nine months ended September 30, 2019, professional fees decreased $2.3 million compared with the corresponding period in 2018, primarily because of the completion of our restructuring initiatives and becoming current with our SEC reporting obligations. These decreases were partially offset by a $0.3 million increase in stock-based compensation expense and a $0.4 million increase in other expenses. The increase in other expenses was primarily related to a $0.7 million increase in computer equipment expenses, a $0.1 million increase in bad debt expense, a $0.1 million increase in property and other business related taxes and a $0.1 million increase in employee training expenses. These increases in other expenses were partially offset by a $0.2 million decrease in computer software expenses, a $0.3 million decrease in rental expense and other cost decreases, none of which were individually significant, compared with the corresponding period in 2018.

Restructuring Charges


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Lease	$	—	$	418	$	—	$	418
Severance		—		1,018		—		3,243
Total	$	—	$	1,436	$	—	$	3,661

During 2018, we initiated our plan to significantly reduce corporate overhead and staff by consolidating all our administrative activities in our Tucker, Georgia offices. As a result of our restructuring efforts, we incurred $1.0 million and $3.2 million in severance charges for the three and nine months ended September 30, 2018, respectively. We completed our restructuring initiative in December 2018; therefore, we did not incur any restructuring charges for the three and nine months ended September 30, 2019.

Other (Income) Expense, Net


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2019		2018		2019		2018
Interest expense, net	$	1,511	$	3,622	$	4,504	$	7,397
Other income, net		(485)		(339)		(1,153)		(844)
Total	$	1,026	$	3,283	$	3,351	$	6,553

Total other expense, net, for the three months ended September 30, 2019 decreased $2.3 million, or 68.7%, compared with the corresponding period in 2018. Interest expense, net, decreased $2.1 million due to a lower weighted average interest rate on our long-term borrowings, partially offset by higher outstanding debt obligations. The weighted average interest rate on borrowings under the New Centre Lane Facility for the three months ended September 30, 2019 was 12.5% compared with the weighted average interest rate on the Initial Centre Lane Facility of 21.4% in the corresponding period in 2018. The decrease in interest expense was partially offset by a slight increase in other income, net, due to income from our 25% investment in an equity method investment and a foreign currency exchange translation gain related to our Canada operations.

Total other expense, net, for the nine months ended September 30, 2019 decreased $3.2 million, or 48.9%, compared with the corresponding period in 2018. Interest expense, net decreased $2.9 million due to a lower weighted average interest rate on our long-term borrowings, partially offset by higher outstanding debt obligations. The weighted average interest rate on borrowings under the New Centre Lane Facility for the nine months ended September 30, 2019 was 12.5% compared with the weighted average interest rate on the Initial Centre Lane Facility of 21.0% in the corresponding period in 2018. The decrease in interest expense was partially offset by a $0.3 million increase in other income, net, due to income from our 25% investment in an equity method investment and a foreign currency exchange translation gain related to our Canada operations.

Income Tax Expense (Benefit)


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2019		2018		2019		2018
Income tax expense (benefit)	$	62	$	215	$	141	$	720

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Income tax expense for the interim reporting periods is based on estimates of the annual effective tax rate based upon the estimated income during the calendar year, the estimated composition of the income in different jurisdictions, adjusted to reflect the effects of any significant or unusual items which are required to be discretely recognized within the current interim period, if any, in the applicable quarterly periods for settlements of tax audits or assessments and the resolution or identification of tax position uncertainties.

For the three months ended September 30, 2019, the Company recorded income tax expense from continuing operations of less than $0.1 million compared with income tax expense from continuing operations of $0.2 million in the corresponding period in 2018. For the nine months ended September 30, 2019, the Company recorded income tax expense from continuing operations of $0.1 million compared with income tax expense from continuing operations of $0.7 million in the corresponding period in 2018. The difference between our effective tax rate and the federal statutory tax rate for the three and nine months ended September 30, 2019 and 2018 was primarily related to the partial valuation allowance recorded on our U.S. deferred tax assets. The decrease in income tax provision from continuing operations for the three and nine months ended September 30, 2019 compared with the corresponding periods in 2018 was primarily related to the $0.6 million increase in indefinite-lived deferred tax assets related to the interest expense addback under Section 163(j) of the Internal Revenue Code and the post-2017 U.S. net operating loss that can be used to offset indefinitely-lived intangible deferred tax liabilities.

Discontinued Operations

See “Note 5—Changes in Business” to the unaudited condensed consolidated financial statements included in this Form 10-Q for information regarding discontinued operations.

Liquidity and Capital Resources

During the nine months ended September 30, 2019, we continued to have significant liquidity constraints. Our principal sources of liquidity are borrowings under the MidCap Facility (as MidCap has dominion over our accounts receivable collection depository bank accounts) and effective management of our working capital. Our principal uses of cash were to pay for labor and subcontract labor, customer contract-related material, operating expenses, restructuring charges from our 2018 restructuring plan, and interest expense on the New Centre Lane Facility and MidCap Facility. See discussion in “Note 2—Liquidity” to the unaudited condensed consolidated financial statements included in this Form 10-Q.

Net Cash Flows

Our net consolidated cash flows, including cash flows related to discontinued operations, consisted of the following:


	Nine Months Ended September 30,
(in thousands)	2019		2018
Cash flows provided by (used in):
Operating activities	$	(2,412)	$	(6,697)
Investing activities		(178)		196
Financing activities		120		654
Net change in cash, cash equivalents and restricted cash	$	(2,470)	$	(5,847)

Cash and Cash Equivalents

As of September 30, 2019, our operating unrestricted cash and cash equivalents decreased by $2.5 million to $2.0 million from $4.5 million as of December 31, 2018. As of September 30, 2019, with the exception of $0.1 million, the operating cash balance of $2.0 million was held in U.S. bank accounts.

Operating Activities

Cash flows used in operating activities were $2.4 million for the nine months ended September 30, 2019, a decrease of $4.3 million compared with the corresponding period in 2018. The improvement in the operating activities use of cash arose primarily from the increased earnings sources and the reduced requirements to support our discontinued operations. Net working capital assets and liabilities were impacted by the timing of customer billings and the effective control of our working capital requirements.

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Investing Activities

Currently, our investing activities do not have a significant impact on our net cash flows.

Financing Activities

The MidCap Facility grants the lender dominion over our depository bank accounts. As such, our weekly borrowings under the MidCap Facility are our primary source of liquidity. During the first nine months of 2019, our borrowings under the MidCap Facility exceeded our repayments from customer cash receipts by $0.6 million. At any point in time, the outstanding balance under the MidCap Facility is a function of the timing of collections of our customer cash receipts and the timing of our cash expenditure needs for the following week for payment of trade payable obligations and payroll and related tax obligations.

Both the MidCap Facility and New Centre Lane Facility require the Company to maintain, among other things, a maximum total leverage ratio and minimum consolidated adjusted EBITDA. The Company determined that it was not in compliance with those covenants as of the last day of its third quarter, and accordingly, on November 14, 2019, the Company entered into amendments to both facilities that changed the required levels of both financial covenants so that the Company is now in compliance with both agreements as amended as of September 29, 2019. The Company’s cumulative expense related to these amendments was $0.4 million and will be reflected in the consolidated statement of operations for the year ended December 31, 2019.

For additional information about our outstanding debt, including our outstanding term loan, please refer to “Note 9—Debt” to the unaudited condensed consolidated financial statements included in this Form 10-Q.

Effect of Exchange Rate Changes on Cash

For the three and nine months ended September 30, 2019, the effect of Canadian foreign exchange rate changes on our cash balances was not material.

Dividends

We have not paid dividends to holders of our common stock since March 2015, and the terms of the New Centre Lane Facility currently restrict our ability to pay dividends. In addition, declaration and payment of future dividends would depend on many factors, including, but not limited to, our earnings, financial condition, business development needs, regulatory considerations and the terms of the New Centre Lane Facility, and is at the discretion of our Board of Directors. We currently have no plan in place to pay cash dividends.

Liquidity Outlook

As noted in our 2018 Form 10-K, overall, we expect liquidity to improve through 2019 as a result of exiting our former loss-generating businesses and reducing our ongoing operating expenses. However, we may experience periodic short-term constraints on our liquidity as a result of the cash flow requirements of specific projects. A high percentage of our cost of service comes from weekly craft labor payrolls, and the lag between incurrence of those payrolls and the subsequent collection of the resulting customer billings results in negative cash flows for that lag period. Although we utilize the MidCap Facility to address those lag period negative cash flows, contract terms restricting customer invoicing frequency, delays in customer payments, and underlying surety bonds negatively impact our availability under the MidCap Facility. Additionally, we anticipate the remaining 2019 cash expenditures related to our 2018 restructuring plan (including payments related to the Koontz-Wagner bankruptcy) will be approximately $0.5 million.

While we believe that we have sufficient resources to satisfy our 2019 working capital requirements, we are currently engaged in a process to refinance our existing credit facilities with Centre Lane and MidCap. The debt refinancing process is expected to be completed by the end of 2019. In addition, we intend to file a registration statement on Form S-1 with the SEC for a rights offering (the “Rights Offering”) to existing holders of our common stock. The Rights Offering is supported by a commitment (the “Backstop Agreement”) with Wynnefield Capital, Inc. (referred to, along with its affiliates, as “Wynnefield”), our largest shareholder, to purchase all unsubscribed shares of common stock in the Rights Offering. We expect to receive aggregate gross proceeds of $7.0 million before fees and expenses from the Rights Offering, supported by the Backstop Agreement, if necessary. We intend that the combined net proceeds from our debt refinancing process and the Rights Offering, after the repayment or refinancing of our existing credit facilities, will be used for working capital to fund certain of our strategic growth initiatives and for general corporate purposes. A condition to the obligations of Wynnefield in the Backstop Agreement will be

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that the Company has consummated the refinancing of its existing credit facilities. In the event that we are unable close on the new credit facility through our refinancing process, do not consummate the Rights Offering, and are unable to address potential liquidity shortfalls in the future, management will need to seek additional funding, which may not be available on reasonable terms, if at all, and may result in management concluding that our liquidity position raises substantial doubt about our ability to continue as a going concern.

Restricted cash balances have remained constant at $0.5 million since the beginning of the year.

For additional information, please refer to “Note 2—Liquidity” to the unaudited condensed consolidated financial statements included in this Form 10-Q.

Off-Balance Sheet Transactions

Our liquidity is currently not dependent on the use of off-balance sheet transactions but, in line with industry practice, we are often required to provide performance and surety bonds to customers and may be required to provide letters of credit. If performance assurances are extended to customers, generally our maximum potential exposure is limited in the contract with our customers. We frequently obtain similar performance assurances from third-party vendors and subcontractors for work performed in the ordinary course of contract execution. However, the total costs of a project could exceed our original cost estimates, and we could experience reduced gross profit or possibly a loss for a given project. In some cases, if we fail to meet certain performance standards, we may be subject to contractual liquidated damages.

As of September 30, 2019, we had a contingent liability for issued and outstanding standby letters of credit, generally issued to secure performance on customer contracts. As of September 30, 2019, we had $2.9 million of outstanding standby letters of credit and there were no amounts drawn upon these letters of credit. In addition, as of September 30, 2019, we had outstanding surety bonds of $52.8 million. Our subsidiaries also provide financial guarantees for certain contractual obligations in the ordinary course of business.

Critical Accounting Policies

On January 1, 2019, we adopted ASU 2016-02. In connection with the adoption, we implemented certain changes to our accounting policies and processes related to lease accounting. For additional information on changes to financial statements, please refer to “Note 3—Recent Accounting Pronouncements” to the unaudited condensed consolidated financial statements included in this Form 10-Q. There were no other material changes to our critical accounting policies as set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2018 Report, during the three and nine months ended September 30, 2019.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 4. Controls and Procedures.

The Company has evaluated, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of September 30, 2019. This is done in order to ensure that information the Company is required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2019, due to the material weaknesses described in “Item 9A. Controls and Procedures” of the Company’s 2018 Report.

To address these control weaknesses, the Company performed additional analysis and performed other procedures in order to prepare the unaudited condensed consolidated financial statements in accordance with GAAP.

Notwithstanding the material weaknesses, management has concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q present fairly, in all material aspects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

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Changes in Internal Control over Financial Reporting

Under the applicable SEC rules, management is required to evaluate any changes in internal control over financial reporting that occurred during each fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As discussed in “Item 9A. Controls and Procedures” of the 2018 Report, we have undertaken a broad range of remedial procedures to address material weaknesses in our internal control over financial reporting. These remedial procedures continued throughout the three months ended September 30, 2019 and will continue throughout the remainder of 2019.

On January 1, 2019, we adopted ASU 2016-02. In connection with the adoption, we implemented certain changes to our processes and controls related to lease accounting. While we continue to implement remediation efforts and design enhancements to our internal control procedures, we believe there were no other changes to our internal control over financial reporting that occurred during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1.Legal Proceedings.

The information included in “Note 5—Changes in Business—Discontinued Operations—Electrical Solutions” and “Note 11—Commitments and Contingencies” to the unaudited condensed consolidated financial statements in this Form 10-Q is incorporated by reference into this Item.

Item 1A.Risk Factors.

Our business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. There have not been any material changes to our risk factors from those reported in our 2018 Report.

Item 5. Other Information

None.

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Item 6.Exhibits.

Exhibit		Description

10.1		Employment Agreement, dated August 12, 2019, between the Company and Charles E. Wheelock (filed as Exhibit 10.5 to our Form 10-Q for the quarter ended June 30, 2019, filed with the Commission on August 14, 2019).*
10.2		Employment Agreement, dated September 30, 2019, between the Company and Randall R. Lay.*♦
10.3		Time-Based Restricted Share Unit Agreement (Inducement Grant), dated September 30, 2019, between the Company and Randall R. Lay.*♦
10.4		Performance-Based Restricted Share Unit Agreement (Inducement Grant), dated September 30, 2019, between the Company and Randall R. Lay.*♦
31.1		Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.♦
31.2		Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.♦
32.1		Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2		Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS		XBRL Instance Document♦
101.SCH		XBRL Taxonomy Extension Schema Document♦
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document♦
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document♦
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document♦
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document♦

*Indicates a management contract or compensatory plan or arrangement.

♦ Filed herewith.

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SIGNATURES

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


	WILLIAMS INDUSTRIAL SERVICES GROUP INC.

Date: November 14, 2019	By:	/s/ Randall R. Lay
		Randall R. Lay
		Senior Vice President and Chief Financial Officer (Duly authorized officer and principal financial and accounting officer of the registrant)