Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

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

 

For the quarterly period ended March 31, 2020

 

or

 

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

 

For the transition period from                 to                

 

Commission File No. 001-16501

Picture 1

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 May 6, 2020, there were 25,324,645 shares of common stock of Williams Industrial Services Group Inc. outstanding.

 

 

 

 

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

Table of Contents

 

 

Part I—FINANCIAL INFORMATION 

3

 

 

Item 1. Financial Statements 

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited) 

3

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (unaudited) 

4

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019 (unaudited) 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited) 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited) 

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited) 

8

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

27

 

 

Item 4. Controls and Procedures 

27

 

 

Part II—OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

28

 

 

Item 1A. Risk Factors 

28

 

 

Item 5. Other Items 

30

 

 

Item 6. Exhibits 

30

 

 

SIGNATURES 

32

 

 

 

 

Table of Contents

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)

 

March 31, 2020

  

December 31, 2019

ASSETS

  

 

 

  

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,705

 

$

7,350

Restricted cash

 

 

468

 

 

468

Accounts receivable, net of allowance of $374 and $377, respectively

 

 

32,662

 

 

38,218

Contract assets

 

 

16,401

 

 

7,225

Other current assets

 

 

2,570

 

 

2,483

Total current assets

 

 

57,806

 

 

55,744

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

274

 

 

273

Goodwill

 

 

35,400

 

 

35,400

Intangible assets

 

 

12,500

 

 

12,500

Other long-term assets

 

 

8,611

 

 

8,549

Total assets

 

$

114,591

 

$

112,466

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

12,941

 

$

16,618

Accrued compensation and benefits

 

 

12,487

 

 

9,318

Contract liabilities

 

 

3,400

 

 

2,699

Short-term borrowings

 

 

6,397

 

 

10,849

Current portion of long-term debt

 

 

875

 

 

700

Other current liabilities

 

 

7,941

 

 

6,408

Current liabilities of discontinued operations

 

 

339

 

 

340

Total current liabilities

 

 

44,380

 

 

46,932

Long-term debt, net

 

 

32,418

 

 

32,658

Deferred tax liabilities

 

 

2,231

 

 

2,198

Other long-term liabilities

 

 

3,337

 

 

4,028

Long-term liabilities of discontinued operations

 

 

4,476

 

 

4,486

Total liabilities

 

 

86,842

 

 

90,302

Commitments and contingencies (Note 9 and 11)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 170,000,000 shares authorized and 25,602,226 and 19,794,270 shares issued, respectively, and 24,903,913 and 19,057,195 shares outstanding, respectively

 

 

252

 

 

198

Paid-in capital

 

 

88,753

 

 

81,964

Accumulated other comprehensive income (loss)

 

 

(36)

 

 

222

Accumulated deficit

 

 

(61,212)

 

 

(60,211)

Treasury stock, at par (698,313 and 737,075 common shares, respectively)

 

 

(8)

 

 

(9)

Total stockholders’ equity

 

 

27,749

 

 

22,164

Total liabilities and stockholders’ equity

 

$

114,591

 

$

112,466

 

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands, except share and per share data)

  

2020

  

2019

Revenue

 

$

66,147

 

$

50,652

Cost of revenue

 

 

59,238

 

 

43,970

 

 

 

 

 

 

 

 Gross profit

 

 

6,909

 

 

6,682

 

 

 

 

 

 

 

Selling and marketing expenses

 

 

138

 

 

240

General and administrative expenses

 

 

6,200

 

 

4,762

Depreciation and amortization expense

 

 

41

 

 

72

Total operating expenses

 

 

6,379

 

 

5,074

 

 

 

 

 

 

 

Operating income

 

 

530

 

 

1,608

 

 

 

 

 

 

 

Interest expense, net

 

 

1,533

 

 

1,474

Other (income) expense, net

 

 

(122)

 

 

(325)

Total other (income) expense, net

 

 

1,411

 

 

1,149

 

 

 

 

 

 

 

Income (loss) from continuing operations before income tax

 

 

(881)

 

 

459

Income tax expense

 

 

48

 

 

64

Income (loss) from continuing operations

 

 

(929)

 

 

395

 

 

 

 

 

 

 

Loss from discontinued operations before income tax

 

 

(54)

 

 

(64)

Income tax expense

 

 

18

 

 

28

Loss from discontinued operations

 

 

(72)

 

 

(92)

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,001)

 

$

303

 

 

 

 

 

 

 

Basic earnings (loss) per common share  

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.05)

 

$

0.02

Income (loss) from discontinued operations

 

 

 —

 

 

 —

Basic earnings (loss) per common share  

 

$

(0.05)

 

$

0.02

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.05)

 

$

0.02

Income (loss) from discontinued operations

 

 

 —

 

 

 —

Diluted earnings (loss) per common share

 

$

(0.05)

 

$

0.02

 

 

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2020

  

2019

 

Net income (loss)

 

$

(1,001)

 

$

303

 

Foreign currency translation adjustment

 

 

(258)

 

 

18

 

Comprehensive income (loss)

 

$

(1,259)

 

$

321

 

 

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

303

 

 —

 

 

 —

 

 

303

Balance, March 31, 2019

 

19,767,605

 

$

197

 

$

80,709

 

$

18

 

$

(62,094)

 

(767,224)

 

$

(9)

 

$

18,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2019

 

19,794,270

 

$

198

 

$

81,964

 

$

222

 

$

(60,211)

 

(737,075)

 

$

(9)

 

$

22,164

Issuance of common stock

 

5,384,615

 

 

54

 

 

6,478

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

6,532

Issuance of restricted stock units

 

423,341

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

80,207

 

 

 1

 

 

 1

Tax withholding on restricted stock units

 

 —

 

 

 —

 

 

(65)

 

 

 —

 

 

 —

 

(41,445)

 

 

 —

 

 

(65)

Stock-based compensation

 

 —

 

 

 —

 

 

376

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

376

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

(258)

 

 

 —

 

 —

 

 

 —

 

 

(258)

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,001)

 

 —

 

 

 —

 

 

(1,001)

Balance, March 31, 2020

 

25,602,226

 

$

252

 

$

88,753

 

$

(36)

 

$

(61,212)

 

(698,313)

 

$

(8)

 

$

27,749

 

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2020

  

2019

Operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(1,001)

 

$

303

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Net loss from discontinued operations

 

 

72

 

 

92

Deferred income tax provision (benefit)

 

 

33

 

 

45

Depreciation and amortization on plant, property and equipment

 

 

41

 

 

72

Amortization of deferred financing costs

 

 

182

 

 

154

Bad debt expense

 

 

 3

 

 

189

Stock-based compensation

 

 

472

 

 

305

Changes in operating assets and liabilities, net of businesses sold:

 

 

 

 

 

 

Accounts receivable

 

 

5,444

 

 

(2,421)

Contract assets

 

 

(9,413)

 

 

(2,923)

Other current assets

 

 

(2)

 

 

(54)

Other assets

 

 

(596)

 

 

403

Accounts payable

 

 

(3,122)

 

 

5,964

Accrued and other liabilities

 

 

4,230

 

 

517

Contract liabilities

 

 

701

 

 

(76)

Net cash provided by (used in) operating activities, continuing operations

 

 

(2,956)

 

 

2,570

Net cash provided by (used in) operating activities, discontinued operations

 

 

(83)

 

 

(212)

Net cash provided by (used in) operating activities

 

 

(3,039)

 

 

2,358

Investing activities:

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(42)

 

 

(68)

Net cash provided by (used in) investing activities, continuing operations

 

 

(42)

 

 

(68)

Financing activities:

 

 

 

 

 

 

Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation

 

 

(65)

 

 

(121)

Proceeds from issuance of common stock

 

 

6,532

 

 

 —

Debt issuance costs

 

 

(442)

 

 

 —

Proceeds from short-term borrowings

 

 

53,460

 

 

42,266

Repayments of short-term borrowings

 

 

(57,913)

 

 

(45,497)

Repayments of long-term debt

 

 

 —

 

 

(88)

Net cash provided by (used in) financing activities, continuing operations

 

 

1,572

 

 

(3,440)

Effect of exchange rate change on cash, continuing operations

 

 

(136)

 

 

 —

Net change in cash, cash equivalents and restricted cash

 

 

(1,645)

 

 

(1,150)

Cash, cash equivalents and restricted cash, beginning of period

 

 

7,818

 

 

4,942

Cash, cash equivalents and restricted cash, end of period

 

$

6,173

 

$

3,792

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

716

 

$

1,092

Noncash amendment fee related to MidCap facility

 

$

150

 

$

 —

 

See accompanying notes to condensed consolidated financial statements.

7

Table of Contents

WILLIAMS INDUSTRIAL SERVICES GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Business

Williams Industrial Services Group Inc. was incorporated in 2001 under the name “Global Power Equipment Group Inc.” under the laws of the State of Delaware and became the successor to GEEG Holdings, LLC, which was formed as a Delaware limited liability company in 1998. 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, and our stock now trades 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. We provide a broad range of construction, maintenance and support services to customers in energy, power and industrial end markets. Our 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 our 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, 2019, filed by the Company with the U.S. Securities and Exchange Commission (“SEC”) on March 27, 2020 (the “2019 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, 2019 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 2019 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

 

  

2020

  

2019

Three Months Ended March 31

 

January 1, 2020 to March 29, 2020

 

January 1, 2019 to March 31, 2019

Three Months Ended June 30

 

March 30, 2020 to June 28, 2020

 

April 1, 2019 to June 30, 2019

Three Months Ended September 30

 

June 29, 2020 to September 27, 2020

 

July 1, 2019 to September 29, 2019

 

 

NOTE 2—LIQUIDITY

The Company’s unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that 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 months ended March 31, 2020 (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 Company had negative cash flows from operations during the three months ended March 31, 2020 and has historically raised capital to fund its working capital and growth. On January 13, 2020, the Company amended its existing credit facilities with Centre Lane (as defined below) and MidCap (as defined below). As of March 31, 2020, the Company had $5.5 million in available borrowing capacity (see Note 9). In addition, the Company successfully completed its fully backstopped $7.0 million

8

Table of Contents

registered offering of subscription rights to purchase shares of the Company’s common stock to existing holders of the Company’s common stock (the “Rights Offering”), which expired March 2, 2020, pursuant to which the Company issued 5,384,615 shares of its common stock and received net proceeds of $6.6 million. The Company is using the net proceeds from the Rights Offering, combined with the additional borrowing capacity provided by the amended MidCap Facility (as defined below), for working capital and general corporate purposes to fund certain of the Company’s strategic growth initiatives. As a result, management believes that the Company has sufficient resources to satisfy its working capital requirements for at least 12 months following the issuance of these unaudited condensed consolidated financial statements. However, the Company’s liquidity could be periodically, and for certain intervals, constrained due to the working capital requirements that will be needed as it continues to execute its plans to grow the business.

The Company continues to monitor its liquidity and capital resources. If market conditions were to change, and revenue was reduced or operating costs increased, cash flows and liquidity could be significantly reduced.

In December 2019, a novel strain of the coronavirus (“COVID-19”) surfaced in Wuhan, China, which spread globally and was declared a pandemic by the World Health Organization in March 2020. The challenges posed by the COVID-19 pandemic on the global economy increased significantly as the first quarter of 2020 progressed. In response to COVID-19, federal, provincial, state, county and local governments and public health organizations and authorities around the world have implemented a variety of measures intended to control the spread of the virus, including quarantines, “shelter-in-place,” “stay-at-home” and similar orders, travel restrictions, school closures, business curtailments and closures, social distancing and hygiene requirements. The effects of COVID-19 have impacted some of the Company’s projects; for instance, in April 2020, the Company experienced a temporary suspension in projects in New York and a labor reduction for projects in Georgia (see Note 13). Although to date the Company has not experienced materially negative impacts from COVID-19, such as widespread project stoppage or cancellations or a slowdown or cessation of accounts receivables collections, the timing of future contract awards could create gaps in the Company’s project delivery schedule across quarterly periods, and the uncertainty and economic impacts created by the pandemic could cause a temporary decline in demand for the Company’s services. The Company anticipates that its future results of operations, including the results for 2020, will be impacted by the COVID-19 outbreak, but at this time does not expect that the impact from the COVID-19 outbreak will have a material effect on the Company’s liquidity or financial position. However, given the speed and frequency of continuously evolving developments and inherent uncertainty with respect to this pandemic, the Company cannot provide any assurance that such impacts will not grow and become material to its liquidity or financial position.

The Company currently cannot predict the ultimate impact of the COVID-19 pandemic on its business, results of operations, financial condition and cash flows, as such impact is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. The Company and its liquidity, as well as its ability to satisfy its working capital requirements, may be adversely affected to some degree by the COVID-19 pandemic. The Company currently believes that the impact of COVID-19 on the Company will not negatively impact its ability to comply with the covenants under its existing credit facilities. However, the Company cannot provide any assurance that the assumptions used to estimate its liquidity requirements will remain accurate due to the unprecedented nature and the unpredictability of the COVID-19 global pandemic and its potential impact on the Company and its customer base. As a consequence, the Company’s estimates of the duration of the pandemic and its impact on the Company’s future earnings and cash flows could change and have a material impact on its results of operations and financial condition.

NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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. In the first quarter of 2020, the Company adopted ASU 2018-15, which did not have a material impact on its financial position, results of operations 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. In the first quarter of 2020, the Company adopted ASU 2018-13,

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which did not have a material impact on its financial statement disclosures.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848).” This guidance is to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). The guidance is effective upon issuance and may be adopted on any date on or after March 12, 2020. The Company is currently evaluating the impact this ASU will have on its results of operations, financial position and cash flows.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes”, which simplifies the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations, and adding guidance to reduce complexity in accounting for income taxes. The update is effective for annual periods beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its results of operations, financial position and cash flows.

 

NOTE 4—LEASES

On January 1, 2019, 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.

The Company primarily leases office space and related equipment, as well as equipment, modular units and vehicles directly used in providing services to its 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 lease term at the lease 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.

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 were as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

Lease Cost/(Sublease Income) (in thousands)

 

2020

 

2019

Operating lease cost

 

$

1,219

 

$

1,227

Short-term lease cost

 

 

835

 

 

306

Sublease income

 

 

 —

 

 

(9)

Total lease cost

 

$

2,054

 

$

1,524

Lease cost related to finance leases was not significant for the three months ended March 31, 2020 and 2019.

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

 

 

 

 

 

 

 

 

 

Lease Assets/Liabilities (in thousands)

 

Balance Sheet Classification

 

March 31, 2020

 

December 31, 2019

Lease Assets 

 

 

 

 

 

 

 

 

Right-of-use assets

 

Other long-term assets

 

$

5,449

 

$

5,743

 

 

 

 

 

 

 

 

 

Lease Liabilities

 

 

 

 

 

 

 

 

Short-term lease liabilities

 

Other current liabilities

 

$

3,389

 

$

2,985

Long-term lease liabilities

 

Other long-term liabilities

 

 

2,253

 

 

2,939

Total lease liabilities

 

 

 

$

5,642

 

$

5,924

 

Supplemental information related to the Company’s leases was as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(dollars in thousands)

 

2020

 

2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash used by operating leases

 

$

1,231

 

 

1,238

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

1,001

 

 

578

Right-of-use assets obtained in exchange for new finance lease liabilities

 

 

 —

 

 

27

Weighted-average remaining lease term - operating leases

 

 

1.83 years

 

 

2.56 years

Weighted-average remaining lease term - finance leases

 

 

3.98 years

 

 

5 years

Weighted-average discount rate - operating leases

 

 

9%

 

 

9%

Weighted-average discount rate - finance leases

 

 

9%

 

 

9%

 

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

 

 

 

 

 

 

 

 

 

Operating Leases

 

Finance Leases

Three Months Ended March 31, 2020

 

(in thousands)

Remainder of 2020

 

$

2,988

 

$

 4

2021

 

 

2,256

 

 

 6

2022

 

 

696

 

 

 6

2023

 

 

145

 

 

 5

2024

 

 

 2

 

 

 1

Thereafter

 

 

 —

 

 

 —

Total lease payments

 

$

6,087

 

$

22

Less: interest

 

 

(467)

 

 

 —

Present value of lease liabilities

 

$

5,620

 

$

22

 

 

NOTE 5—CHANGES IN BUSINESS

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.

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, consisting of a lease guarantee, liability for salary and benefit continuation and a pension withdrawal liability, which were included in loss from discontinued operations in the Company’s consolidated statements of operations for the year ended December 31, 2018. 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

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million each, paid in quarterly installments, which began in 2018 and will continue to be paid over the next twenty years.

Mechanical Solutions

During the third quarter of 2017, the Company made the decision to exit and sell substantially all of the operating assets and liabilities of its Mechanical Solutions and determined that the decision to exit this segment met the definition of  a discontinued operation. As a result, this segment, including TOG Manufacturing Company, Inc., has been presented as a discontinued operation for all periods presented.

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. In April 2019, the purchaser of the Company’s 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 under the transition services agreement of $0.2 million in the three months ended March 31, 2019. At the time the purchaser went into receivership, the Company also had remaining balances of $0.2 million and $0.8 million included in other current assets and other current liabilities, respectively, on its condensed consolidated balance sheet. In November 2019, the Company executed, and the U.S. Bankruptcy Court for the Northern District of Oklahoma approved, an agreement with the purchaser to settle the disputes related to the remaining asset and liability. As a result, the Company recorded a net gain of $0.4 million, which was included in other (income) expense, net on its consolidated statement of operations for the year ended December 31, 2019.

As of March 31, 2020 and December 31, 2019, 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)

  

March 31, 2020

 

December 31, 2019

Liabilities:

 

 

 

 

 

 

Other current liabilities

 

$

339

 

$

340

Current liabilities of discontinued operations

 

 

339

 

 

340

Liability for pension obligation

 

 

2,688

 

 

2,708

Liability for uncertain tax positions

 

 

1,788

 

 

1,778

Long-term liabilities of discontinued operations

 

 

4,476

 

 

4,486

Total liabilities of discontinued operations

 

$

4,815

 

$

4,826

 

The following table presents a reconciliation of the major classes of line items constituting the net 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 March 31,

(in thousands)

  

2020

  

2019

General and administrative expenses

 

$

 1

 

$

10

Interest expense

 

 

53

 

 

54

Loss from discontinued operations before income tax

 

 

(54)

 

 

(64)

Income tax expense

 

 

18

 

 

28

Loss from discontinued operations 

 

$

(72)

 

$

(92)

 

 

NOTE 6—REVENUE

Disaggregation of Revenue

Disaggregated revenue by type of contract was as follows:  

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2020

 

2019

Cost-plus reimbursement contracts

 

$

60,296

 

$

43,503

Fixed-price contracts

 

 

5,851

 

 

7,149

Total

 

$

66,147

 

$

50,652

 

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

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2020

 

2019

United States

 

$

57,647

 

$

49,204

Canada

 

 

8,500

 

 

1,449

Total

 

$

66,147

 

$

50,652

 

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:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

 

2020

  

2019

Costs incurred on uncompleted contracts

 

$

59,238

 

$

43,403

Earnings recognized on uncompleted contracts

 

 

6,909

 

 

7,265

Total

 

 

66,147

 

 

50,668

Less—billings to date

 

 

(53,146)

 

 

(42,729)

Net

 

$

13,001

 

$

7,939

Contract assets

 

$

16,401

 

$

11,141

Contract liabilities

 

 

(3,400)

 

 

(3,202)

Net

 

$

13,001

 

$

7,939

 

For the three months ended March 31, 2020, the Company recognized revenue approximately $2.8 million that was included in the corresponding contract liability balance at December 31, 2019.

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 March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Remainder of 2020

 

2021

 

2022

 

Thereafter

 

Total

Remaining performance obligations

 

$

154,903

 

$

122,427

 

$

73,991

 

$

117,083

 

$

468,404

 

 

 

NOTE 7—EARNINGS (LOSS) PER SHARE

In March 2020, the Company successfully completed its fully backstopped $7.0 million Rights Offering, which expired March 2, 2020, pursuant to which the Company issued 5,384,615 shares of its common stock and received net proceeds of $6.6 million.

As of March 31, 2020, the Company’s 24,903,913 shares outstanding included 550,857 shares of contingently issued but unvested restricted stock. As of March 31, 2019, the Company’s 19,000,381 shares outstanding included 288,137 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 March 31,

(in thousands, except share data)

  

2020

 

2019

Income (loss) from continuing operations

 

$

(929)

 

$

395

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

20,347,661

 

 

18,514,895

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

(0.05)

 

$

0.02

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

20,347,661

 

 

18,514,895

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

Unvested portion of restricted stock units and awards

 

 

 —

 

 

145,510

Weighted average diluted common shares outstanding

 

 

20,347,661

 

 

18,660,405

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

$

(0.05)

 

$

0.02

 

The weighted average number of shares outstanding used in the computation of basic and diluted earnings (loss) per common share does not include the effect of the following potential outstanding common stock. The effects of the potentially outstanding service-based restricted stock and restricted stock unit awards were not included in the calculation of diluted earnings (loss) per common share because the effect would have been anti-dilutive. The effects of the potentially outstanding performance- and market-based restricted stock unit awards were not included in the calculation of diluted earnings (loss) per common share because the performance and/or market conditions had not been satisfied as of March 31, 2020 and 2019.

 

 

 

 

 

Three Months Ended March 31,

 

2020

 

2019

Unvested service-based restricted stock and restricted stock unit awards

1,188,564

 

257,109

Unvested performance- and market-based restricted stock unit awards

550,016

 

636,957

Stock options

 —

 

122,000

 

 

 

NOTE 8—INCOME TAXES

The effective income tax expense (benefit) rate for continuing operations for the three months ended March 31, 2020 and 2019 was as follows:

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2020

 

2019

Effective income tax rate for continuing operations

 

(5.4)%

 

13.9%

 

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

For the three months ended March 31, 2020, the Company recorded income tax expense from continuing operations of less than $0.1 million, or (5.4%) of pretax loss from continuing operations compared with income tax expense from continuing operations of $0.1 million, or 13.9% of pretax income from continuing operations in the corresponding period in 2019. The decrease in income tax provision from continuing operations for the three months ended March 31, 2020, compared with the corresponding periods in 2019 was primarily the result of the $0.1 million decrease in indefinite-lived intangible deferred tax liabilities, partially offset by the increase in indefinitely-lived deferred tax assets related to the interest expense addback under Section 163 (j) of the Internal Revenue Code and the post-2017 US net operation loss.

As of March 31, 2020 and 2019, the Company would have needed to generate approximately $269.2 million and $277.8 million, respectively, of future financial taxable income in order 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 740-30. Undistributed earnings of foreign

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subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes. As of March 31, 2020 and 2019, 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 a one-time transition tax as of December 31, 2017.

As of March 31, 2020 and 2019, the Company provided for a total liability of $2.8 million and $3.4 million, respectively, of which $1.8 million and $2.5 million, respectively, related to discontinued operations for unrecognized tax benefits related to various federal, foreign and state income tax matters, which were included in long-term deferred tax assets and other long-term liabilities. If recognized, the entire amount of liability would affect the effective tax rate. As of March 31, 2020, the Company accrued approximately $1.3 million, of which $0.8 million related to discontinued operations, in other long-term liabilities for potential payment of interest and penalties related to uncertain income tax positions.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The CARES Act did not have a material impact on the Company’s unaudited condensed consolidated financial condition or results of operations as of and for the three months ended March 31, 2020. However, the Company plans to defer the timing of federal estimated tax payments and employer payroll taxes as permitted by the CARES Act.

NOTE 9—DEBT

As of March 31, 2020, the Company was in compliance with all debt covenants. After considering the current and potential effect that the significant decline in the prices of natural gas and crude oil and the uncertainty created by the COVID-19 pandemic may have on the industry, the Company currently expects to remain in compliance with its debt covenants. However, the Company cannot provide any assurance that the assumptions used to estimate its liquidity requirements will remain accurate due to the unprecedented nature and the unpredictability of the COVID-19 global pandemic. As a consequence, the Company’s estimates of the duration of the pandemic and its impact on the Company’s future earnings and cash flows could change and have a material impact on its results of operations and financial condition, including negatively affecting the Company’s ability to remain in compliance with its debt covenants.

The following table provides information about the Company’s debt, net of unamortized deferred financing costs:

 

 

 

 

 

 

 

(in thousands)

  

March 31, 2020

  

December 31, 2019

MidCap Facility

 

$

6,397

 

$

10,849

Current portion of New Centre Lane Facility

 

 

875

 

 

700

Current debt

 

$

7,272

 

$

11,549

 

 

 

 

 

 

 

New Centre Lane Facility

 

$

33,513

 

$

33,687

Unamortized deferred financing costs

 

 

(1,095)

 

 

(1,029)

Long-term debt, net

 

$

32,418

 

$

32,658

 

 

 

 

 

 

 

Total debt, net

 

$

39,690

 

$

44,207

 

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 (as amended, the “MidCap Facility”). The MidCap Facility is a secured asset-based revolving credit facility that provides borrowing availability against the sum of 85% of eligible accounts receivable plus 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 Company can, if necessary, make daily borrowings under the MidCap Facility with twenty-four to forty-eight hour 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.

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). As of March 31, 2020 and December 31, 2019, the Company was in compliance with all four financial covenants.

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On January 13, 2020, the Company entered into the Third Amendment to the MidCap Facility (the “MidCap Amendment”) to, among other things, extend the maturity date of the revolving loan facility by one year to October 11, 2022 and increase the maximum available principal amount of revolving loans by $10.0 million to $25.0 million. The MidCap Amendment also changed the leverage ratio requirement to a “net” leverage ratio, enabling the Company to net unrestricted cash and cash equivalents in excess of $2.5 million against its Total Debt (as defined in the MidCap Facility) when determining the total net leverage ratio; amended the calculation of consolidated adjusted EBITDA; revised the required levels of the total net leverage ratio and minimum consolidated adjusted EBITDA for certain future periods; required the payment of a $150,000 amendment fee; increased the monthly collateral management fee and a certain prepayment fee; and made certain other changes to the MidCap Facility, in each case subject to the terms and conditions of the MidCap Amendment.

As of March 31, 2020, and December 31, 2019, the Company had $6.4 million and $10.8 million, respectively, outstanding under the MidCap Facility, which was included in short-term borrowings on the unaudited condensed consolidated balance sheets. As of March 31, 2020, the Company had $5.5 million in available borrowings under the MidCap Facility.

Borrowings under the MidCap Facility bear interest at LIBOR plus 6.0% per year, subject to a minimum LIBOR rate of 1.0%, which is 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 (as amended, the “Intercreditor Agreement”), entered into by an affiliate of Centre Lane Partners, LLC (“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  Centre Lane in connection with 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. It additionally 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 facility.

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 principal 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 deferred loan origination 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 two years following October 11, 2018, 1.5% in the third year, and 1.0% thereafter.

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

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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).

Centre Lane Facilities

On September 18, 2018, the Company refinanced and replaced its 4.5 year senior secured term loan 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 (as amended, 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, which is 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 0.50% 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 directly owned foreign subsidiaries.

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

January 13, 2020 to January 13, 2021

 

 

2%

January 14, 2021 to January 13, 2022

 

 

1%

After January 13, 2022

 

 

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.

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). As of March 31, 2020 and December 31, 2019, the Company was in compliance with all of its financial covenants.

On January 13, 2020, the Company entered into a Third Amendment to the New Centre Lane Facility (“New Centre Lane Amendment”) that, among other things, redefined and changed the minimum leverage ratio requirement to a minimum net

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leverage ratio and changed the minimum consolidated Adjusted EBITDA and minimum liquidity requirements. In addition, the New Centre Lane Amendment increased the Prepayment Premium to 2% beginning on January 13, 2020 and to 1% beginning January 14, 2021 and thereafter. The New Centre Lane Amendment also waived the requirement to prepay future cash proceeds generated from the Company’s Rights Offering and any event of default that would otherwise result from the failure to pay such amounts. The Company’s expense related to the New Centre Lane Amendment was $0.2 million and is included in general and administrative expenses on the condensed consolidated statement of operations in this Form 10-Q for the three months ended March 31, 2020.

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. The Company’s borrowing rate under the New Centre Lane Facility as of both March 31, 2020 and December 31, 2019 was 12.5%.

Letters of Credit and Bonds

In line with industry practice, the Company is often required to provide letters of credit and payment and performance surety 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 provides a sub-facility for up to $6.0 million of non-cash collateralized letters of credit at 6.0% interest, of which the Company had $0.9 million and $1.8 million outstanding as of March 31, 2020 and December 31, 2019, respectively. There were no amounts drawn upon these letters of credit.

In addition, as of March 31, 2020 and December 31, 2019, the Company had outstanding payment and performance surety bonds of $59.9 million and $59.3 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 March 31,

(in thousands)

 

2020

 

2019

New Centre Lane Facility

 

$

110

 

$

95

MidCap Facility

 

 

72

 

 

59

Total

 

$

182

 

$

154

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

 

 

 

 

 

 

 

 

 

(in thousands)

    

Location

    

March 31, 2020