Toggle SGML Header (+)


Section 1: 10-Q (FORM 10-Q)

cui20190930_10q.htm
 

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 September 30, 2020

 

OR

 

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

 

For the transition period from _______ to ______

 

Commission File Number 0-29923

 

Orbital Energy Group, Inc.

(Exact name of registrant as specified in its charter)

 

Colorado

 

84-1463284

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

  1924 Aldine Western  
  Houston, Texas 77038  

 


  (Address of principal executive offices and zip code)  

 

 

(832) 467-1420

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  ☒ NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES  ☒  NO ☐

 

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

 

Large accelerated filer  ☐

Accelerated filer ☐

Non-accelerated filer  ☒

Smaller reporting company ☒

 

Emerging growth company ☐

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐  NO  ☒

 

There were 30,420,685 shares of the registrant's common stock, par value $0.001 per share, outstanding as of November 16, 2020.

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value.

OEG

Nasdaq Capital Market

 

 

 

 

 

INDEX

 

 

 

   

Page

 

Part I

 
     

Item 1.

Financial Statements

2

 

Condensed Consolidated Balance Sheets (Unaudited)

2

 

Condensed Consolidated Statements of Operations (Unaudited)

3

 

Condensed Consolidated Statements of Comprehensive Income and Loss (Unaudited)

4

 

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

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

6

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32
 

Overview

33
 

Results of Operations

33
 

Liquidity and Capital Resources

38

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

41

Item 4.

Controls and Procedures

43
 

Part II

 
     

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds. Common Stock Issued

44

Item 5.

Other Information

44

Item 6.

Exhibits

45
 

Exhibit Index

45
 

Signatures

46

 

1

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Orbital Energy Group, Inc.

 

Condensed Consolidated Balance Sheets

(Unaudited)

   

September 30,

   

December 31,

 

(in thousands, except share and per share amounts)

 

2020

   

2019

 
                 

Assets:

               

Current Assets:

               

Cash and cash equivalents

  $ 4,060     $ 23,351  
Restricted cash - current     2,562        

Trade accounts receivable, net of allowance of $63 and $47 at September 30, 2020 and December 31, 2019, respectively

    12,498       5,290  

Inventories

    1,117       1,631  

Contract assets

    6,090       2,314  

Note receivable, current portion

    44        

Prepaid expenses and other current assets

    4,263       2,215  

Assets held for sale - current

    6,482       6,893  

Total current assets

    37,116       41,694  
                 
                 

Property and equipment, less accumulated depreciation of $1,972 and $1,441 at September 30, 2020 and December 31, 2019, respectively

    5,776       4,454  

Investments

    741       4,865  

Right of use assets - Operating leases

    6,990       5,524  
Goodwill     7,006        

Other intangible assets, net

    14,887       4,298  

Restricted cash

    1,026        

Note receivable

    3,525       3,253  

Deposits and other assets

    1,306       70  

Total assets

  $ 78,373     $ 64,158  
                 

Liabilities and Stockholders' Equity:

               

Current Liabilities:

               

Accounts payable

  $ 16,712     $ 2,904  
Notes payable, current     3,979       473  
Line of credit     451        

Operating lease obligations - current portion

    1,704       821  

Accrued expenses

    5,285       5,159  

Contract liabilities

    8,047       1,668  

Liabilities held for sale, current

    3,894       4,970  
Total current liabilities     40,072       15,995  
Notes payable, less current portion     7,383        

Operating lease obligations, less current portion

    5,282       4,852  
Contingent consideration     720        

Other long-term liabilities

    287       194  
Total liabilities     53,744       21,041  
                 

Commitments and contingencies

               
                 

Stockholders' Equity:

               

Preferred stock, par value $0.001; 10,000,000 shares authorized; no shares issued at September 30, 2020 or December 31, 2019

           

Common stock, par value $0.001; 325,000,000 shares authorized; 30,773,748 shares issued and 30,420,685 shares outstanding at September 30, 2020 and 28,736,436 shares issued and 28,383,373 shares outstanding at December 31, 2019

    31       29  

Additional paid-in capital

    171,344       170,106  

Treasury stock at cost; 353,063 shares held at September 30, 2020 and December 31, 2019

    (413 )     (413 )

Accumulated deficit

    (142,142 )     (122,234 )

Accumulated other comprehensive loss

    (4,191 )     (4,371 )

Total stockholders' equity

    24,629       43,117  
Total liabilities and stockholders' equity   $ 78,373     $ 64,158  

 

See accompanying notes to condensed consolidated financial statements

 

2

Table of Contents

 

 

Orbital Energy Group, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   

For the Three Months

   

For the Nine Months

 

(in thousands, except share and per share amounts)

 

Ended September 30,

   

Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Revenues

  $ 13,615     $ 6,073     $ 27,078     $ 17,793  
                                 

Cost of revenues

    11,261       4,652       23,121       13,464  
                                 

Gross profit

    2,354       1,421       3,957       4,329  
                                 

Operating expenses:

                               

Selling, general and administrative expense

    7,179       4,793       21,158       14,092  

Depreciation and amortization

    1,454       365       3,285       1,154  

Research and development

    6       20       51       123  

Provision for bad debt

    15       (18 )     23       110  

Other operating (income) expense

    23       (11 )     23       (13 )
                                 

Total operating expenses

    8,677       5,149       24,540       15,466  
                                 

Continuing loss from operations

    (6,323 )     (3,728 )     (20,583 )     (11,137 )
                                 

Other income (expense)

    860       (461 )     62       (566 )

Interest expense

    (333 )     (4 )     (469 )     (35 )
                                 

Loss from continuing operations before income taxes and equity in net loss of affiliate

    (5,796 )     (4,193 )     (20,990 )     (11,738 )

Net loss of affiliate

          (354 )     (4,806 )     (710 )

Loss from continuing operations before taxes

    (5,796 )     (4,547 )     (25,796 )     (12,448 )

Income tax benefit

    (61 )     (1,311 )     (3,211 )     (1,765 )
                                 

Loss from continuing operations, net of income taxes

    (5,735 )     (3,236 )     (22,585 )     (10,683 )
                                 

Discontinued operations (Note 3)

                               

Income from operations of discontinued power and electromechanical businesses including gain on disposal of $14 and $3,631 in the three and nine month periods ended September 30, 2020 and September 30, 2019

    3,403       3,948       3,512       6,236  

Income tax expense

    870       1,024       835       1,133  

Income from discontinued operations, net of income taxes

    2,533       2,924       2,677       5,103  
                                 

Net loss

  $ (3,202 )   $ (312 )   $ (19,908 )   $ (5,580 )
                                 

Basic and diluted weighted average common shares outstanding

    30,430,422       28,691,206       29,761,135       28,636,918  
                                 

Loss from continuing operations per common share - basic and diluted

  $ (0.19 )   $ (0.11 )   $ (0.76 )   $ (0.37 )
                                 

Income from discontinued operations - basic and diluted

  $ 0.08     $ 0.10     $ 0.09     $ 0.18  
                                 

Loss per common share - basic and diluted

  $ (0.11 )   $ (0.01 )   $ (0.67 )   $ (0.19 )

 

See accompanying notes to condensed consolidated financial statements

 

3

Table of Contents

 

 

Orbital Energy Group, Inc.

Condensed Consolidated Statements of Comprehensive Income and Loss

(Unaudited)

 

   

For the Three Months

   

For the Nine Months

 

(in thousands)

 

Ended September 30,

   

Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net loss

  $ (3,202 )   $ (312 )   $ (19,908 )   $ (5,580 )
                                 

Other comprehensive income (loss)

                               

Foreign currency translation adjustment

    (177 )     67       194       236  
Reclassification adjustment     (14 )           (14 )      

Comprehensive loss

  $ (3,393 )   $ (245 )   $ (19,728 )   $ (5,344 )

 

 

See accompanying notes to condensed consolidated financial statements

 

4

Table of Contents

 

 

Orbital Energy Group, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2020 and 2019

(Unaudited)

 

(in thousands, except share amounts)

 

Common Stock

           

Treasury Stock

                         
   

Shares

   

Amount

   

Additional Paid-in Capital

   

Shares

   

Amount

   

Accumulated Deficit

   

Accumulated Other Comprehensive Income (Loss)

   

Total Stockholders' Equity

 
                                                                 

Balance, December 31, 2019

    28,736,436     $ 29     $ 170,106       (353,063 )   $ (413 )   $ (122,234 )   $ (4,371 )   $ 43,117  
                                                                 

Common stock issued for royalty payments

    37,312             9                               9  

Net loss

                                  (7,381 )           (7,381 )

Other comprehensive income

                                        415       415  

Balance, March 31, 2020

    28,773,748     $ 29     $ 170,115       (353,063 )   $ (413 )   $ (129,615 )   $ (3,956 )   $ 36,160  
Common stock issued with acquisition of Reach Construction Group, Inc.     2,000,000       2       1,222                               1,224  
Common stock issued for royalty payments                 4                               4  
Net loss                                   (9,325 )           (9,325 )
Other comprehensive loss                                         (44 )     (44 )
Balance, June 30, 2020     30,773,748     $ 31     $ 171,341       (353,063 )   $ (413 )   $ (138,940 )   $ (4,000 )   $ 28,019  
Common stock issued for royalty payments                 3                               3  
Net loss                                   (3,202 )           (3,202 )
Other comprehensive loss                                         (191 )     (191 )
Balance, September 30, 2020     30,773,748     $ 31     $ 171,344       (353,063 )   $ (413 )   $ (142,142 )   $ (4,191 )   $ 24,629  

 

(in thousands, except share amounts)

 

Common Stock

                                 
   

Shares

   

Amount

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive Income (Loss)

   

Total Stockholders' Equity

 
                                                 

Balance, December 31, 2018

    28,552,886     $ 29     $ 169,898     $ (123,993 )   $ (4,396 )   $ 41,538  
                                                 

Cumulative effect of accounting change (1)

                      2,888             2,888  

Balance at January 1, 2019, adjusted

    28,552,886       29       169,898       (121,105 )     (4,396 )     44,426  

Common stock issued for compensation, services, and royalty payments

    29,067             40                   40  

Net loss

                      (3,003 )           (3,003 )

Other comprehensive income

                            92       92  

Balance, March 31, 2019

    28,581,953     $ 29     $ 169,938     $ (124,108 )   $ (4,304 )   $ 41,555  

Common stock issued for compensation, services, and royalty payments

    50,349             68                   68  

Net loss

                      (2,265 )           (2,265 )

Other comprehensive income

                            77       77  

Balance, June 30, 2019

    28,632,302     $ 29     $ 170,006     $ (126,373 )   $ (4,227 )   $ 39,435  

Common stock issued for compensation, services, and royalty payments

    47,958             43                   43  

Net loss

                      (312 )           (312 )

Other comprehensive income

                            67       67  

Balance, September 30, 2019

    28,680,260     $ 29     $ 170,049     $ (126,685 )   $ (4,160 )   $ 39,233  

 

(1) Represents adjustment to accumulated deficit upon the adoption of Accounting Standards Codification Topic 606.

 

See accompanying notes to condensed consolidated financial statements

 

5

Table of Contents

 

 

Orbital Energy Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   

For the Nine Months

 

(in thousands)

 

Ended September 30,

 
   

2020

   

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (19,908 )   $ (5,580 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation

    573       645  

Amortization of intangibles

    3,043       1,326  

Amortization of note receivable discount

    (214 )      

Stock issued and stock to be issued for compensation, royalties and services

    12       155  

Non-cash loss on equity method investment in affiliate

    4,806       710  
Non-cash fair value gain on equity method investment purchase           (629 )
Gain on sale of business     (14 )     (3,631 )

Provision for bad debt expense

    23       90  

Deferred income taxes

    (1,195 )     (644 )

Inventory reserve

    (185 )     135  

Non-cash unrealized foreign currency losses

    516       614  

Gain on disposal of assets

    23       (13 )

Change in operating assets and liabilities, net of effects of acquisition:

               

Trade accounts receivable

    (3,273 )     1,196  

Inventories

    2,601       (31 )

Contract assets

    (526 )     (891 )

Prepaid expenses and other current assets

    286       362  

Right of use assets - Operating leases

    (1,157 )     743  

Deposits and other assets

    (1,184 )     (248 )

Accounts payable

    351       2,406  

Operating lease liabilities

    1,005       (687 )
Accrued expenses     1,264       (122 )

Refund liabilities

          (367 )
Contract liabilities     3,227       246  
NET CASH USED IN OPERATING ACTIVITIES     (9,926 )     (4,215 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               
Cash paid for acquisition, net of cash received     (2,981 )      

Purchases of property and equipment

    (1,474 )     (278 )

Cash paid for working capital adjustment on Power group disposition

    (2,804 )      
Sale of discontinued operations, net of cash     (227 )      

Proceeds from sale of property and equipment

    94       14  

Purchase of other intangible assets

    (10 )     (269 )

Purchase of convertible notes receivable

    (260 )      

Purchase of investments

    (210 )     (1,615 )
Proceeds from notes receivable           313  
Proceeds from sale of restricted investment           400  
Proceeds from electromechanical components business sale           4,696  

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

    (7,872 )     3,261  
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from overdraft facility

          6,842  

Payments on overdraft facility

          (8,208 )

Proceeds from line of credit

    100       20,889  

Payments on line of credit

    (99 )     (21,188 )

Payments on financing lease obligations

    (3 )     (3 )
Proceeds from notes payable     3,864        

Payments on notes payable

    (1,747 )     (88 )

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

    2,115       (1,756 )
                 

Effect of exchange rate changes on cash

    (20 )     (64 )
Net decrease in cash, cash equivalents and restricted cash     (15,703 )     (2,774 )

Cash, cash equivalents and restricted cash at beginning of period

    23,351       4,502  
                 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD   $ 7,648     $ 1,728  

 

See accompanying notes to condensed consolidated financial statements

 

6

Table of Contents

 

Orbital Energy Group, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Unaudited)

 

   

For the Nine Months

 

(in thousands)

 

Ended September 30,

 
   

2020

   

2019

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Income taxes paid

  $ 103     $ 143  

Interest paid

  $ 268     $ 300  
                 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

               
Non-cash investment in Reach Construction Group, LLC including seller notes, equity issued and contingent consideration.   $ 8,424     $  

Non-cash item for January 1, 2019 adoption of ASC 842 - establishment of right-of-use assets and offsetting lease obligations

  $     $ 7,703  
Financing note payable issued for payment on certain insurance policies   $ 2,329     $  
Non-cash payment on short-term note payable due to insurance policy cancellation   $ 465     $  

Non-cash investment in VPS - see note 7

  $ 585     $ 4,292  

Common stock issued and to be issued for royalties payable pursuant to product agreements

  $ 16     $ 22  

Common stock issued and to be issued for consulting services and compensation in common stock

  $     $ 129  

Partial settlement of note receivable via offset against royalty payable netted with (increase) to note receivable from accrued interest

  $     $ 5  

Accrued property and equipment purchases

  $ 267     $ 8  

Accrued investment in other intangible assets

  $     $ 38  

 

See accompanying notes to condensed consolidated financial statements

 

7

Table of Contents

 

Orbital Energy Group, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.

NATURE OF OPERATIONS, BASIS OF PRESENTATION AND COMPANY CONDITIONS

 

Nature of Operations

Orbital Energy Group Inc. (Orbital Energy Group, "the Company", or "OEG") (formerly known as CUI Global, Inc.) is a platform company composed of three segments, the Integrated Energy Infrastructure Solutions and Services segment, the Electric Power and Solar Infrastructure Services segment, along with an "Other" segment. This is a new segment structure in recognition of the Company's transformation following the disposition of its Power and Electromechanical segment in the third and fourth quarters of 2019, the ramp up of Orbital Power Services in 2020 and the acquisition of Reach Construction Group, LLC (Reach Construction) on April 1, 2020. The following describes the Company's newly reorganized segments.

 

Electric Power and Solar Infrastructure Services Segment

 

The Electric Power and Solar Infrastructure Services segment consists of Reach Construction Group, LLC based in Sanford, North Carolina and Orbital Power Services based in Dallas, Texas.  The segment provides comprehensive network solutions to customers in the electric power and solar industries. Reach Construction Group, LLC provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility scale solar construction. Services performed by Orbital Power Services generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities and emergency restoration services, including the repair of infrastructure damaged by inclement weather, and the energized installation, maintenance and upgrade of electric power infrastructure.

 

Integrated Energy Infrastructure Solutions and Services Segment

 

The Integrated Energy Infrastructure Solutions and Services segment consists of Orbital Gas Systems, North America, Inc. based in Houston, Texas and Orbital Gas Systems, Ltd. based in Stone, Staffordshire in the United Kingdom, collectively referred to as “Orbital Gas Systems.”  Orbital Gas Systems provides a portfolio of products, services and resources to offer a diverse range of personalized gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries. 

 

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

 

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

 

Basis of Presentation

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

 

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

 

8

 

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

 

   

For the Nine Months

 

(in thousands)

 

Ended September 30,

 
   

2020

   

2019

 

Cash and cash equivalents at beginning of period

  $ 23,351     $ 3,979  

Restricted cash at beginning of period (1)

          523  

Cash, cash equivalents and restricted cash at beginning of period

  $ 23,351     $ 4,502  
                 

Cash and cash equivalents at end of period

  $ 4,060     $ 1,728  

Restricted cash at end of period (1)

    3,588        

Cash, cash equivalents and restricted cash at end of period

  $ 7,648     $ 1,728  

 

(1) Restrictions on cash at September 30, 2020 and September 30, 2019 relate to collateral for several bank-issued letters of credit for contract guaranties. Also included in the September 30, 2020 total is $2.3 million of restricted cash held in cash bonds in regards to disputed amounts with a subcontractor.  The Company is working to settle the disputed amounts payable and the funds will release at such time to pay agreed amounts with any excess returning to the Company.

 

Use of Estimates

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

 

Reclassifications

Certain reclassifications related to discontinued operations and assets and liabilities held for sale have been made to the 2019 statement of operations in order to conform to the 2020 presentation.

 

Goodwill

The Company records goodwill associated with its acquisitions of businesses when the consideration paid exceeds the fair value of the net tangible and identifiable intangible assets acquired. Goodwill balances are evaluated for potential impairment on an annual basis. The current guidance requires the Company to perform an annual impairment test of our goodwill or at an interim period if there is an event that occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We are required to perform our annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. We would be required to recognize an impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value up to but not to exceed the amount of the goodwill. Based on management's evaluation, there were no such circumstances at September 30, 2020 that would require us to perform an interim goodwill impairment test. Upon acquisition of Reach Construction Group, Inc., the Company recorded $7.0 million of goodwill. Goodwill was valued as of April 1, 2020 by a third-party valuation expert and was recorded following the recognition of Reach's tangible assets and liabilities and $13.7 million of finite-lived identifiable intangible assets included in the table below. Factors that contributed to the Company's goodwill are Reach Construction's skilled workforce and reputation within its industry. The Company also expects to achieve future synergies between Reach Construction and Orbital Power Services business. These synergies are expected to be achieved in the form of power line work necessary when bringing new solar power sys . There was zero goodwill at December 31, 2019.

 

9

 

Other Intangibles Assets

The following table provides the components of identifiable intangible assets:

 

Finite-lived intangible assets (in thousands)

                 

September 30, 2020

   

December 31, 2019

 

Integrated Energy Infrastructure Solutions and Services Segment

 

Estimated Useful Life (in years)

   

Weighted average remaining amortization period

   

Gross Carrying Amount

   

Accumulated Amortization

   

Identifiable Intangible Assets, less Accumulated Amortization

   

Gross Carrying Amount

   

Accumulated Amortization

   

Identifiable Intangible Assets, less Accumulated Amortization

 

Order backlog

    2           $ 2,868     $ (2,868 )   $     $ 2,938     $ (2,938 )   $  

Trade name - Orbital-UK

    10       2.50       1,542       (1,156 )     386       1,579       (1,066 )     513  

Customer list - Orbital-UK

    10       2.50       5,995       (4,496 )     1,499       6,142       (4,146 )     1,996  

Technology rights

    20       2.80       322       (232 )     90       330       (213 )     117  

Technology-Based Asset - Know How

    12       4.75       2,429       (1,518 )     911       2,488       (1,399 )     1,089  

Technology-Based Asset - Software

    10       2.50       526       (395 )     131       539       (364 )     175  

Computer software

    3 to 5       2.03       708       (457 )     251       717       (331 )     386  

Total Integrated Energy Infrastructure Solutions and Services Segment

                    14,390       (11,122 )     3,268       14,733       (10,457 )     4,276  
                                                                 

Electric Power and Solar Infrastructure Services Segment

                                                               

Customer Relationships

    5       4.50       8,647       (865 )     7,782                    

Trade name - Reach Construction Group

    1       0.50       1,878       (939 )     939                    

Non-compete agreements

    5       4.50       3,212       (321 )     2,891                    

Total Electric Power and Solar Infrastructure Services Segment

                    13,737       (2,125 )     11,612                    
                                                                 

Other category

                                                               

Computer software

    3 to 5       0.84       720       (713 )     7       720       (698 )     22  

Product certifications

    3             36       (36 )           36       (36 )      

Total Other category

                    756       (749 )     7       756       (734 )     22  
                                                                 

Total identifiable other intangible assets

                  $ 28,883     $ (13,996 )   $ 14,887     $ 15,489     $ (11,191 )   $ 4,298  

 

 

The following is the estimated future amortization expense on other intangibles for the remainder of 2020 and the next five years:

(in thousands)        

2020

  $ 1,371  

2021

    3,999  

2022

    3,489  

2023

    2,811  

2024

    2,574  

2025

    643  
Total future amortization   $ 14,887  
10

 

Company Conditions

Reach Construction has seen increasing customer opportunities and significant utility scale solar industry growth that it expects to drive further backlog and revenues during the fourth quarter of 2020 and years to come. Orbital Power Services began operations during the first quarter of 2020 and while not certain, is expected to quickly increase revenues with work progressing under master service agreements with several new customers and looks to begin generating positive cash flows in late 2020. Orbital Gas Systems, Ltd. continues to face issues surrounding COVID-19, Brexit and the overall economy in the United Kingdom. Orbital Gas Systems, North America, Inc. has experienced a significant delay in customer projects and orders related to COVID-19 and the impact of pricing pressure on oil and gas industry customers.  Orbital Gas Systems, North America, Inc. expects to see increased activity begin in the first quarter of 2021 and that is expected to result in profitability in 2021. The Company will continue to work to identify cost reductions and efficiencies while at the same time working to grow revenues and margins.

 

The Company had net loss of $19.9 million and cash used in operating activities of $9.9 million during the nine months ended September 30, 2020. As of September 30, 2020, the Company's accumulated deficit is $142.1 million.

 

COVID-19 Assessment and Liquidity

 

In March 2020, the World Health Organization categorized the current coronavirus disease (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. While the Company expects the effects of the pandemic to negatively impact its results from operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. The Company has experienced customer delays and extensions for projects, supply chain delays, furloughs of personnel, increased utilization of telework, increased safety protocols to address COVID-19 risks, decreased field service work and other impacts from the COVID-19 pandemic.  The Company is proactively working to adjust its operations to properly reflect the market environment during the immediate pandemic while maintaining sufficient resources for the expected rebound later this year. Events and changes in circumstances arising after September 30, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.

 

Management believes the Company's present cash flows will meet its obligations for twelve months from the date these financial statements are available to be issued. Including our cash balance, we continue to manage working capital primarily related to assets held for sale, trade accounts receivable, notes receivable, prepaid assets, contract assets and our inventory less current liabilities that we will manage during the next twelve months. In the three months ended June 30, 2020, the Company received loans under the CARES Act Paycheck Protection Program of approximately $1.9 million which further assisted the Company as it continues to operate in 2020 (Note 16. Notes Payable and Line of Credit). In addition, the Company has secured short term funding and has an available S-3 registration statement allowing the Company to issue various types of securities including common stock, preferred stock, debt securities and/or warrants, up to an aggregate amount of $50 million. Considering these above factors, management believes the Company can meet its obligations for the twelve-month period from the date the financial statements are available to be issued. 

 

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

 

Restructuring Charges

During the fourth quarter of 2019, the Company completed the sale of its largest group within the Power and Electromechanical segment. The Company completed the sale of its Japan operations as of September 30, 2020.  In conjunction with the 2019 sale, it was concluded that should the remaining power and electromechanical operations not sell, the Company will fulfill its backlog obligations and wind down the remaining operations of CUI-Canada during 2020. The lease for the CUI-Canada facility expires in the fourth quarter of 2020 and the Company recorded an accrued liability of $4.0 million Canadian dollars ($3.1 million US dollars at December 31, 2019) for estimated employee termination costs. This accrual was adjusted down by $0.4 million Canadian dollars ($0.3 million US dollars) based on current estimates. The termination costs began to be paid out in the third quarter of 2020 with the majority of the remaining accrual is expected to be paid in the fourth quarter of 2020. All restructuring costs related to CUI-Canada are included in the statement of operations on the line labeled Income from operations of discontinued power and electromechanical businesses.

 

Activity in the termination benefit liability in 2020 is as follows:

 

CUI-Canada termination benefits (in thousands)

       
         

December 31, 2019

  $ 3,073  

Severance accrual adjustments

    (303 )

Severance payouts

    (66 )

Translation

    (76 )

September 30, 2020

  $ 2,628  
         

Estimated total termination benefits paid and to be paid

  $ 2,694  

 

11

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

Adoption of new accounting standards

On January 1, 2020, the Company adopted the guidance under the Financial Accounting Standards Board (the “FASB”) Accounting Standard Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company adopted Topic 326 using the modified-retrospective approach. No cumulative effect adjustment was necessary.

 

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

 

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

 

(in thousands)

 

 As of September 30, 2020

 

Receivables — Third-Party, including retainage receivable

  $ 13,554  

Allowance for Credit Losses

    (63 )

Receivables — Third-Party, net

  $ 13,491  

 

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

 

On January 1, 2020, the Company adopted the FASB's  ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including requiring the disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. 

 

12

 

 

3.

DISCONTINUED OPERATIONS AND SALE OF A BUSINESS

As part of the Company’s previously stated strategy to transform Orbital Energy Group, Inc. into a diversified infrastructure services platform serving North American and U.K. customers, the Company’s Board of Directors made the decision to divest of its Power and Electromechanical businesses. On September 30, 2019, Orbital Energy Group, Inc. entered into an asset sale agreement by and among, CUI, Inc. ("Seller"), a wholly owned subsidiary of the Company ("Parent"), and Back Porch International, Inc. ("Buyer") to sell the Company’s Electromechanical business to a management led group. In November 2019, Orbital Energy Group, Inc. entered into an asset sale agreement by and among, the Seller and Bel Fuse, Inc. to sell the domestic Power supply business. Both sales closed in 2019. On September 30, 2020, the Company sold the CUI Japan operations to Back Porch International for approximately $163 thousand of seller financing. At September 30, 2020, the assets and liabilities of the Company's CUI-Canada subsidiary are included as held for sale with the expectation that the sale of its assets will be completed in 2020.

 

The associated results of operations of the discontinued Power and Electromechanical segment are separately reported as Discontinued Operations for all periods presented on the Condensed Consolidated Statements of Operations. Balance sheet items for the discontinued businesses, from the former Power and Electromechanical segment have been reclassified to assets held for sale within current assets and liabilities held for sale within current liabilities in the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019. Cash flows from these discontinued businesses are included in the Condensed Consolidated Cash Flow statements. See below for additional information on operating and investing cash flows of the discontinued operations. Results from continuing operations for the Company and segment highlights exclude the former Power and Electromechanical segment, which is included in these discontinued operations.

 

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

 

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

 

 

Selected data for these discontinued businesses consisted of the following:

 

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

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

Presented in the Condensed Consolidated Statement of Operations

(Unaudited)

 

(in thousands)

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 

Major classes of line items constituting pretax profit (loss) of discontinued operations:

 

2020

   

2019

   

2020

   

2019

 
                                 

Revenues

  $ 8,579     $ 15,472     $ 14,523     $ 49,573  

Cost of revenues

    (5,155 )     (10,157 )     (10,402 )     (32,099 )

Selling, general and administrative expense

    (65 )     (4,735 )     (870 )     (14,068 )

Depreciation and amortization

          (88 )           (300 )

Research and development

          (90 )           (832 )

Recovery of bad debt

          30             20  

Interest expense

          (101 )           (274 )

Other income and (expense) items that are not major classes

    30       (14 )     247       (44 )

Pretax profit of discontinued operations related to major classes of pretax profit

    3,389       317       3,498       1,976  
Pretax gain on sale of electromechanical businesses     14       3,631       14       3,631  
Pretax gain on assets contributed as part of the purchase of investment                       629  

Income tax expense

    870       1,024       835       1,133  

Total income from discontinued operations that is presented in the statement of operations

  $ 2,533     $ 2,924     $ 2,677     $ 5,103  

 

13

 

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

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

(Unaudited)

 

    As of     As of  
   

September 30,

   

December 31,

 

(in thousands)

 

2020

   

2019

 
                 

Carrying amounts of the major classes of assets included in discontinued operations:

               
                 

Trade accounts receivable

  $ 4,488     $ 1,740  

Inventories

    892       3,254  

Prepaid expenses and other current assets

    145       140  

Property and equipment

    265       273  

Right of use assets - Operating leases

    66       391  

Other intangible assets

    351       352  

Deferred tax asset

    275       663  

Deposits and other assets

          80  

Total assets of the disposal group classified as held for sale

  $ 6,482     $ 6,893  
                 

Carrying amounts of the major classes of liabilities included in discontinued operations:

               
                 

Accounts payable

  $ 131     $ 618  

Operating lease obligations - current portion

    74       410  

Accrued expenses

    3,491       3,935  
Contract liabilities     198        

Operating lease obligations, less current portion

          7  

Total liabilities of the disposal group classified as held for sale

  $ 3,894     $ 4,970  

 

* The assets and liabilities of the disposal group classified as held for sale are classified as current on the September 30, 2020 Condensed Consolidated Balance Sheet because it is probable that the sale will occur and proceeds will be collected within one year.

 

Net cash provided by operating activities of discontinued operations for the nine months ended September 30, 2020 and 2019 was $1.9 million and $4.8 million, respectively.

 

Net cash provided by (used in) investing activities of discontinued operations for the nine months ended September 30, 2020 and 2019 was $1 thousand and ($0.4) million, respectively.

 

 

14

 

 

4.

REVENUE FROM CONTRACTS WITH CUSTOMERS

 

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

The Electric Power and Solar Infrastructure Services provides a full service building, maintenance and support to the electrical power distribution, transmission, substation, renewables, and emergency response sectors of North America through Orbital Power Services and Reach Construction Group, LLC provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility scale solar and community solar construction.

 

The  Integrated Energy Infrastructure and Services segment subsidiaries generate their revenue from a portfolio of products, services and resources that offer a diverse range of energy infrastructure services including gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries through the Orbital Gas Systems subsidiaries. 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

15

 

Accounts Receivable, Contract Assets and Contract Liabilities

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

 

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

 

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

 

Activity in the contract liabilities for the nine months ended September 30, 2020 and 2019 was as follows:

 

    As of December 31,  

(in thousands)

 

2019

   

2018

 

Current contract liabilities

  $ 1,668     $ 1,956  

Long-term contract liabilities (1)

    192       129  

Total contract liabilities

  $ 1,860     $ 2,085  

 

   

For the Nine Months

 
   

Ended September 30,

 
   

2020

   

2019

 

Total contract liabilities - beginning of period

  $ 1,860     $ 2,085  
Contract liability additions acquired - Reach Construction     3,349        

Contract additions, net

    4,796       2,370  

Revenue recognized

    (1,758 )     (2,016 )

Translation

    (24 )     (53 )

Total contract liabilities - end of period

  $ 8,223     $ 2,386  

 

   

As of September 30,

 
   

2020

   

2019

 

Current contract liabilities

  $ 8,047     $ 2,222  

Long-term contract liabilities (1)

    176       164  

Total contract liabilities

  $ 8,223     $ 2,386  

 

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

 

16

 

Performance Obligations

Remaining Performance Obligations

Remaining performance obligations represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of September 30, 2020, the Company's remaining performance obligations are generally expected to be filled within the next 12 months.

 

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

 

Performance Obligations Satisfied Over Time

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

 

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

 

Performance Obligations Satisfied at a Point in Time

Revenue from goods and services transferred to customers at a single point in time accounted for 12% and 19% of revenues for the three month periods ended September 30, 2020 and 2019, respectively and 19% and 20% for the nine months ended September 30, 2020 and 2019, respectively. Revenue on these contracts is recognized when the product is shipped and the customer takes control of the product. Determination of control transfer is determined by shipping terms delineated on the customer purchase orders and is generally when shipped.

 

Variable Consideration

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

 

17

 

Significant Judgments

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

 

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

 

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

 

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

  

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

 

   

For the Three Months

   

For the Three Months

 
   

Ended September 30, 2020

   

Ended September 30, 2019

 

(in thousands)

 

Electric Power and Solar Infrastructure Services

   

Integrated Energy Infrastructure Solutions and Services

   

Total

   

Electric Power and Solar Infrastructure Services

   

Integrated Energy Infrastructure Solutions and Services

   

Total

 
                                                 

Revenues recognized at point in time

  $     $ 1,573     $ 1,573     $     $ 1,153     $ 1,153  

Revenues recognized over time

    9,478       2,564       12,042             4,920       4,920  

Total revenues

  $ 9,478     $ 4,137     $ 13,615     $     $ 6,073     $ 6,073  

 

 

 

   

For the Nine Months

   

For the Nine Months

 
   

Ended September 30, 2020

   

Ended September 30, 2019

 

(in thousands)

 

Electric Power and Solar Infrastructure Services

   

Integrated Energy Infrastructure Solutions and Services

   

Total

   

Electric Power and Solar Infrastructure Services

   

Integrated Energy Infrastructure Solutions and Services

   

Total

 
                                                 

Revenues recognized at point in time

  $     $ 5,078     $ 5,078     $     $ 3,617     $ 3,617  

Revenues recognized over time

    13,904       8,096       22,000             14,176       14,176  

Total revenues

  $ 13,904     $ 13,174     $ 27,078     $     $ 17,793     $ 17,793  

 

 

18

 

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

 

   

For the Three Months

   

For the Three Months

 
   

Ended September 30, 2020

   

Ended September 30, 2019

 

(in thousands)

 

Electric Power and Solar Infrastructure Services

   

Integrated Energy Infrastructure Solutions and Services

   

Total

   

Electric Power and Solar Infrastructure Services

   

Integrated Energy Infrastructure Solutions and Services

   

Total

 
                                                 

North America

  $ 9,478     $ 1,184     $ 10,662     $     $ 2,365     $ 2,365  

Europe

          2,939       2,939             3,686       3,686  

Other

          14       14             22       22  

Total revenues

  $ 9,478     $ 4,137     $ 13,615     $     $ 6,073     $ 6,073  

 

 

 

   

For the Nine Months

   

For the Nine Months

 
   

Ended September 30, 2020

   

Ended September 30, 2019

 

(in thousands)

 

Integrated Energy Infrastructure Solutions and Services

   

Electric Power and Solar Infrastructure Services

   

Total

   

Integrated Energy Infrastructure Solutions and Services

   

Electric Power and Solar Infrastructure Services

   

Total

 
                                                 

North America

  $ 13,904     $ 5,574     $ 19,478     $     $ 6,159     $ 6,159  

Europe

          7,443       7,443             11,538       11,538  

Other

          157       157             96       96  

Total revenues

  $ 13,904     $ 13,174     $ 27,078     $     $ 17,793     $ 17,793  

 

 

 

5.

DEPOSITS

 

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

 

During the nine months ended September 30, 2020 the Company entered into an agreement to acquire the intellectual property rights and know-how associated with the VE Technology including patents for 1.5 million GBP, or approximately $1.8 million. The completion of the acquisition will be upon final payment towards this agreement. In June 2020, the parties to the agreement mutually agreed to extend the payments until January 15, 2021 in consideration of the financial consequences created by the COVID-19 pandemic in exchange for a technology fee of an additional 100,000 GBP. As of September 30, 2020, the Company owes the remaining 500,000 GBP which is scheduled to be made on January 15, 2021. The $1.2 million paid to date in the first nine months of 2020 is held in deposits and other assets on the condensed consolidated balance sheets.

 

6.

INVENTORIES

 

Inventories consist of raw materials, work-in-process and finished goods and are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method as a cost flow convention or through the moving average cost method. At September 30, 2020 and December 31, 2019, accrued liabilities included $0.1 million and $0.2 million of accrued inventory payable, respectively. At September 30, 2020 and December 31, 2019, inventory by category is valued net of reserves and consists of:

 

   

As of September 30,

   

As of December 31,

 

(in thousands)

 

2020

   

2019

 

Finished goods

  $ 362     $ 434  

Raw materials

    233       244  

Work-in-process

    522       953  

Total inventories

  $ 1,117     $ 1,631  

 

19

 

 

7.

INVESTMENTS

During the three months ended March 31, 2016, Orbital Energy Group's investment in Test Products International, Inc. ("TPI"), was exchanged for a note receivable from TPI of $0.4 million, which was the carrying value of the investment, earning interest at 5% per annum, through maturity. The Company recorded interest income on the note of $0 for the three months ended September 30, 2020 and 2019. The Company recorded interest income on the note of $0 and $8 thousand, for the nine months ended September 30, 2020 and 2019, respectively. The interest receivable was settled on a quarterly basis via a non-cash offset against the finders-fee royalties earned by TPI on GasPT sales. Any remaining finders-fee royalties balance was offset against the note receivable quarterly. The Company received full payment on the note during the second quarter of 2019.

 

As of September 30, 2020, the Company' had a 10.55% ownership percentage with Virtual Power Systems ("VPS"). Prior to the third quarter of 2020, based on its equity ownership and that the Company maintains a board seat and participates in operational activities of VPS, the Company maintained significant influence to account for the investment as an equity-method investment. Under the equity method of accounting, results are not consolidated, but the Company records a proportionate percentage of the profit or loss of VPS as an addition to or a subtraction from the VPS investment asset balance. The VPS investment basis at September 30, 2020 and December 31, 2019 was $0.7 million and $4.9 million as reflected on the consolidated balance sheets. The Company recorded a $4.8 million loss on its equity-method investment in the six months ended June 30, 2020. With the decrease in ownership percentage following a Q3 2020 equity raise by VPS and additional board seats placed, OEG no longer has sufficient influence to recognize the investment under the equity method. The investment is held as of September 30, 2020 under the cost method of accounting for investments. During the nine months ended September 30, 2019, the Company recorded a $0.7 million loss on its equity method investment in VPS. The loss during the six months ended June 30, 2020 included a $3.5 million impairment that was recorded due to identified other than temporary impairment on the value of the investment.

 

The Company made a purchase of a convertible note receivable for $200 thousand from VPS in the three months ended March 31, 2020, which was increased to $260 thousand in the second quarter of 2020 via payments made to VPS and accrued interest recorded by the Company as part of the transition agreement between the Company and VPS. VPS chose to convert the note receivable to equity in the third quarter of 2020. In addition, the Company made additional cash investments of $0.1 million and a $0.3 million non-cash inventory investment in VPS during the third quarter of 2020 in exchange for additional equity.

 

20

 

 

8.

LEASES

 

Consolidated total lease costs were $1.5 million for the nine months ended September 30, 2020 and is included in cost of sales; selling, general and administrative expense; and other income (expense), on the condensed consolidated statement of operations.

 

Future minimum operating lease obligations at September 30, 2020 are as follows for the years ended December 31:

 

(in thousands)

       

2020

  $ 565  

2021

    2,024  

2022

    1,714  

2023

    800  

2024

    626  

Thereafter

    2,684  

Interest portion

    (1,427 )

Total operating lease obligations

  $ 6,986  

 

21

 

Total lease cost and other lease information is as follows:

 

      For the Three Months Ended September 30,     For the Nine Months Ended September 30,  

(in thousands)

 

2020

   

2019

   

2020

   

2019

 

Operating lease cost

  $ 511     $ 238     $ 1,321     $ 768  

Short-term lease cost

    41       52     $ 117       160  

Variable lease cost

    102       32     $ 295       86  

Sublease income

    (78 )     (3 )   $ (254 )     (9 )

Total lease cost

  $ 576     $ 319     $ 1,479     $ 1,005  

 

Other information (in thousands)

 

For the Nine Months Ended September 30,

 
   

2020

   

2019

 

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

               

Operating cash flows from operating leases (includes discontinued operations)

  $ (1,622 )   $ (950 )

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

  $ 1,546     $ 6,268

*

Weighted-average remaining lease term - operating leases (in years)

    5.6       7.7  

Weighted-average discount rate - operating leases

    6.6 %     6.3 %

 

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

 

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

 

 

9.

STOCK-BASED PAYMENTS FOR COMPENSATION, SERVICES AND ROYALTIES

 

The Company records its stock-based compensation expense on options issued in the past under its stock option plans and the Company also issues stock for services and royalties. The Company's stock option plans expired in 2018. A detailed description of the awards under these plans and the respective accounting treatment is included in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and filed with the SEC on March 30, 2020. For the nine months ended September 30, 2020 and 2019, the Company recorded stock-based expense of $12 thousand and $155 thousand, respectively.

 

22

 

 

10.

SEGMENT REPORTING

 

Operating segments are defined in accordance with ASC 280-10 as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The measurement basis of segment profit or loss is income (loss) from operations. With the Company's purchase of Reach Construction Group, LLC in April 2020, the Company revised its segment structure. Management has identified five operating segments based on the activities of the Company in accordance with ASC 280-10. These operating segments have been aggregated into three reportable segments. The three reportable segments are the Electric Power and Solar Infrastructure Services segment, the Integrated Energy Infrastructure Solutions and Services segment, and Other.

 

A new segment named the Electric Power and Solar Infrastructure Services segment was formed that includes the Reach Construction Group based in Sanford, North Carolina and the Company's 2020 start-up, Orbital Power Services based in Dallas, Texas. Reach Construction Group, LLC provides engineering, procurement and construction (“EPC”) services that support the development of renewable energy generation focused on utility scale solar construction. Orbital Power Services, which was formerly part of the Energy segment, commenced operations in the first quarter of 2020 providing full-service building, maintenance and support services to the electrical power distribution, transmission, substation, renewables, and emergency response sectors of North America.

 

The former Energy segment has been renamed the Integrated Energy Infrastructure Solutions and Services segment and consists of Orbital Gas Systems, Ltd. based in Stone, Staffordshire in the United Kingdom, and Orbital Gas Systems, North America, Inc. based in Houston, Texas, collectively referred to as "Orbital Gas Systems." Orbital Gas Systems has developed a portfolio of products, services and resources to offer a diverse range of personalized gas engineering solutions to the gas utilities, power generation, emissions, manufacturing and automotive industries.

 

The Other segment represents the remaining activities that are not included as part of the other reportable segments and represent primarily corporate activity. In 2019, the Company sold its domestic power and electromechanical businesses and reclassified the income of the former Power and Electromechanical segment to income from discontinued operations. Unsold portions of the segment were reclassified to assets held for sale. The information for three and nine months ended September 30, 2019 has been reclassified to reflect this change, with assets held for sale included in the Other segment.

 

The following information represents segment activity for the three months ended September 30, 2020:

 

(in thousands)

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

Other

   

Total

 

Revenues from external customers

  $ 9,478     $ 4,137     $     $ 13,615  

Depreciation and amortization (1)

    1,197       373       11       1,581  

Interest expense

    108       2       223       333  

Loss from operations

    (2,220 )     (1,827 )     (2,276 )     (6,323 )

Expenditures for long-lived assets (2)

    76       5       7       88  

 

(1) For the Electric Power and Solar Infrastructure segment, depreciation and amortization includes $127 thousand, which was included in cost of revenues in the Condensed Consolidated Statements of Operations.

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

 

The following information represents segment activity for the nine months ended September 30, 2020:

 

(in thousands)

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

Other

   

Total

 

Revenues from external customers

  $ 13,904     $ 13,174     $     $ 27,078  

Depreciation and amortization (1)

    2,477       1,109       30       3,616  

Interest expense

    237       3       229       469  

Loss from operations

    (7,293 )     (5,291 )     (7,999 )     (20,583 )

Expenditures for long-lived assets (2)

    1,380       24       80       1,484  

 

(1) For the Electric Power and Solar Infrastructure segment, depreciation and amortization includes $331 thousand, which was included in cost of revenues in the Condensed Consolidated Statements of Operations.

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

 

23

 

The following information represents selected balance sheet items by segment as of September 30, 2020:

 

(in thousands)

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

Other

   

Total

 

Segment assets (1)

  $ 40,133     $ 17,801     $ 20,439     $ 78,373  

Goodwill

    7,006                   7,006  

Other intangible assets, net

    11,612       3,268       7       14,887  

 

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

 

The following information represents segment activity for the three months ended September 30, 2019:

 

(in thousands)

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

Other

   

Total

 

Revenues from external customers

  $     $ 6,073     $     $ 6,073  

Depreciation and amortization (1)

</